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Why Is Splunk (SPLK) Down 9.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Splunk (SPLK - Free Report) . Shares have lost about 9.5% in that time frame, underperforming 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 Q1 Loss Narrower Than Expected, Revenues Up Y/Y

Splunk reported relatively healthy first-quarter fiscal 2023 results (ended Apr 30, 2022) with year-over-year improvement in the bottom line and top line. The company expects this growth momentum to continue, given its customer-centric approach amid transformation to a cloud-based entity.

GAAP loss in the reported quarter was $304.3 million or a loss of $1.90 per share compared with a loss of $471 million or a loss of $2.81 per share in the year-ago quarter. The narrower loss in the quarter was primarily attributable to top-line growth. Non-GAAP loss in the reported quarter was 32 cents, narrower than the Zacks Consensus Estimate of a loss of 72 cents. The company had reported a loss of 91 cents per share in the year-earlier quarter.

Total revenues in first-quarter fiscal 2023 improved to $674.1 million from $502.1 million in the prior year, beating the consensus estimate of $628 million. Splunk benefited from strong execution across its platform, observability and security businesses as organizations partnered with it to secure their business infrastructure.

Quarter in Detail

License revenues (27.6% of total revenues) were $185.8 million, up 29.7% year over year. Cloud services revenues (47.9%) surged 66.4% to $322.9 million, driven by strong customer demand and bookings momentum. Maintenance and service revenues (24.5%) increased 0.3% to $165.3 million.

Splunk ended the quarter with total annual recurring revenues (ARR) of $3.21 billion, up 30% year over year. Cloud ARR soared 60% to $1.4 billion.

The company ended the quarter with 317 customers generating Cloud ARR greater than $1 million, up 70% year over year. It had 690 customers with a total ARR of more than $1 million, up 28%, 329 customers of which had a cloud ARR of $1 million, up 62% year over year.

Non-GAAP gross margin improved to 74.7% from 71.5%, owing to higher revenues. Non-GAAP Cloud services gross margin expanded 730 basis points to 67.6%.

Cash Flow & Liquidity

In first-quarter fiscal 2023, the company generated $143.3 million of cash from operating activities compared with $70.7 million a year ago. Free cash flow was $137.7 million compared with $66.7 million in the prior year. As of Apr 30, 2022, it had $814 million in cash and cash equivalents with $3,866.2 million of senior notes.

Guidance

For the second quarter of fiscal 2023 (ending Jul 31, 2022), Splunk expects total revenues in the range of $735-$755 million. Non-GAAP operating margin is likely to be within -8% to -11%.

For fiscal 2023 (ending Jan 31, 2023), the company expects total revenues to be between $3.3 billion and $3.35 billion, up from $3.25 billion and $3.3 billion expected earlier. Non-GAAP operating margin is anticipated to be around 2%, up from prior projections of 0-2%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -5.05% due to these changes.

VGM Scores

Currently, Splunk has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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. Notably, Splunk has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Splunk belongs to the Zacks Internet - Software industry. Another stock from the same industry, Zoom Video Communications (ZM - Free Report) , has gained 10% over the past month. More than a month has passed since the company reported results for the quarter ended April 2022.

Zoom Video reported revenues of $1.07 billion in the last reported quarter, representing a year-over-year change of +12.3%. EPS of $1.03 for the same period compares with $1.32 a year ago.

For the current quarter, Zoom Video is expected to post earnings of $0.92 per share, indicating a change of -32.4% from the year-ago quarter. The Zacks Consensus Estimate has changed +5.6% over the last 30 days.

Zoom Video has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.


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