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Splunk (SPLK) Up 25.9% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Splunk (SPLK - Free Report) . Shares have added about 25.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Splunk due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Splunk Reports Loss in Q1, Revenues Up Y/Y

Splunk reported first-quarter fiscal 2022 non-GAAP loss of 91 cents per share, which missed the Zacks Consensus Estimate by 26.4% and widened from 56 cents in the year-ago quarter.

Revenues increased 15.7% year over year to $502.1 million and beat the consensus mark by 1.9%.

Quarter in Details

License revenues (28.5% of revenues) were $143.3 million, down 3.4% year over year. Cloud services revenues (38.6% of revenues) surged 72.9% year over year to $194 million. Maintenance & service revenues (32.8% of revenues) fell 5% to $164.8 million.

Notably, Cloud represented 56% of total software bookings in the reported quarter, higher than 51% in the previous quarter and 44% in the year-ago quarter. Splunk has been benefiting from partnerships with Alphabet and Amazon’s cloud offerings, namely Google Cloud and AWS.

 Splunk ended the quarter with total annual recurring revenues (“ARR”) of $2.47 billion, up 39% year over year. Cloud ARR soared 82.7% year over year to $877 million.

The company ended fiscal first quarter with 537 customers generating ARR greater than $1 million, up 46% year over year. Moreover, Splunk had 203 customers with Cloud ARR greater than $1 million, up 99% year over year.

Notable clients in the reported quarter included Bank of New Zealand, Chipotle, CVS Health, CyberCX (Australia), Deloitte Canada, E-Halsomyndigheten (Sweden), Fastweb (Italy), Florida Department of Economic Opportunity, PRISMA Health, SCI Shared Resources, Sharp Healthcare, UVM Medical, TDC Net and ISTAT (Italy).

Remaining performance obligation (“RPO”) was $2.47 billion, up 7.9% year over year. The company expects to recognize $1.21 billion (indicating a 21.2% year-over-year increase) of this RPO as revenues over the next 12 months.

Operating Details

Non-GAAP gross margin contracted 440 basis points (bps) from the year-ago quarter to 71.5% due to greater proportion of cloud revenue contribution. Splunk’s non-GAAP cloud gross margin expanded 140 bps from the year-ago quarter to 60.3%

Non-GAAP operating expenses, as a percentage of revenues, increased to 106.9% from 101.6% in the year-ago quarter. Research & development and sales & marketing expenses expanded 520 bps and 50 bps year over year, respectively. General and administrative expenses declined 40 bps.

Non-GAAP operating loss was $177.6 million compared with loss of $111.1 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Apr 30, 2021, cash & cash equivalents, including investments, were $1.86 billion compared with $1.87 billion as of Jan 31, 2021.

Net cash flow from operating activities was $70.7 million compared with the year-ago quarter’s net cash flow from operating activities of $46 million and the sequential quarter’s net cash used in operating activities of $23.8 million.

The company's free cash flow was $69.8 million at the end of the first quarter compared with the year-ago quarter’s free cash flow of $31.3 million and the previous quarter’s outflow of $32.6 million.

Guidance

For second-quarter fiscal 2022, Splunk expects revenues in the range of $550 million to $570 million. Non-GAAP operating margin is likely to be -25%.

Moreover, total ARR is expected between $2.59 billion and $2.61 billion. Cloud ARR is expected to be between $950 million and $960 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -26.48% due to these changes.

VGM Scores

At this time, Splunk has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Splunk has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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