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Splunk (SPLK) Down 0.2% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Splunk . Shares have lost about 0.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Splunk due for a breakout? 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 drivers.

Splunk’s Q2 Earnings Beat Estimates, Revenues Up Y/Y

Splunk reported second-quarter fiscal 2022 non-GAAP loss of 62 cents per share, which beat the Zacks Consensus Estimate by 10.14% and widened from 33 cents in the year-ago quarter.

Revenues increased 23.2% year over year to $605.7 million and beat the consensus mark by 7.74%.

Quarter in Details

License revenues (36.3% of revenues) were $219.6 million, up 24.2% year over year. Cloud services revenues (35.9% of revenues) surged 72.7% year over year to $217.4 million. Maintenance & service revenues (27.9% of revenues) fell 10.7% to $168.7 million.

Notably, Cloud represented 54% of total software bookings in the reported quarter, lower than 56% in the previous quarter but higher than 53% 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 $2.63 billion, up 36.7% year over year. Cloud ARR soared 71.8% year over year to $976 million.

The company ended the fiscal second quarter with 582 customers generating ARR greater than $1 million, up 47% year over year. Moreover, Splunk had 234 customers with Cloud ARR greater than $1 million, up 100% year over year.

Notable clients in the reported quarter included Arlo Technologies, Chartis Group LLC, Fujitsu, Hiscox Underwriting Group Services Limited, Intel Corporation, N-able Technologies, Inc., Norwegian Labour and Welfare Administration (NAV), and Rover Group, Inc.

Remaining performance obligation (“RPO”) was $1.92 billion, up 10% year over year.

Operating Details

Non-GAAP gross margin contracted 320 basis points (bps) from the year-ago quarter to 75.1% due to greater proportion of cloud revenue contribution. Splunk’s non-GAAP cloud gross margin expanded 150 bps from the year-ago quarter to 60.7%

Non-GAAP operating expenses, as a percentage of revenues, increased to 95% from 91.2% in the year-ago quarter. Research & development and general and administrative expenses expanded 320 bps and 330 bps year over year, respectively. Sales & marketing expenses declined 270 bps.

Non-GAAP operating loss was $120.8 million compared with loss of $63 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Jul 31, 2021, cash & cash equivalents, including investments, were $2.49 billion compared with $1.86 billion as of Apr 30, 2021.

Net cash flow used in operating activities was $55.9 million compared with the year-ago quarter’s net cash flow used in operating activities of $170.07 million and the sequential quarter’s net cash flow from operating activities of $70.7 million.

Free cash outflow was $59.4 million at the end of the fiscal second quarter compared with the year-ago quarter’s free cash outflow of $181.3 million and the previous quarter’s cash flow of $69.9 million.

Guidance

For third-quarter fiscal 2022, Splunk expects revenues in the range of $625 million to $650 million. Non-GAAP operating margin is likely to be between -15% and -20%.

Moreover, total ARR is expected between $2.8 billion and $2.825 billion. Cloud ARR is expected to be between $1.1 billion and $1.11 billion.

For full-year fiscal 2022, Splunk expects revenues in the range of $2.53 billion to $2.6 billion. Non-GAAP operating margin is likely to be between -14% and -17%.

Moreover, total ARR is expected between $3.08 billion and $3.13 billion. Cloud ARR is expected to be between $1.3 billion and $1.33 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -29.52% due to these changes.

VGM Scores

At this time, Splunk has a poor Growth Score of F, a grade with the same score on the momentum front. 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 F. 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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