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Why Is Splunk (SPLK) Down 14.3% 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 14.3% 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 its most recent earnings report in order to get a better handle on the important drivers.

Splunk Outpaces Q2 Earnings and Revenue Estimates

Splunk reported relatively healthy second-quarter fiscal 2023 results (ended Jul 31, 2022) with year-over-year improvement in the top line. The company is improving the resilience and security of its critical system and driving efficiencies within its own internal operation.

GAAP loss in the reported quarter was $209.7 million or a loss of $1.30 per share compared with a loss of $384 million or a loss of $2.34 per share in the year-ago quarter. The narrower loss in the quarter was primarily attributable to top-line growth. Non-GAAP income in the reported quarter was 9 cents per share, beating the Zacks Consensus Estimate of a loss of 37 cents.

Total revenues in second-quarter fiscal 2023 improved to $798.8 million from $605.7 million in the prior year, beating the consensus estimate of $747 million. Splunk is benefiting from healthy customer engagement, evident from the consistently high net retention and competitive win rates alongside solid momentum with large orders overall. One of New Zealand’s largest banks expanded its use of Splunk Cloud after using ITSI and enterprise security across the business.

Quarter in Detail

License revenues (35.3% of total revenues) were $281.7 million, up 28.3% year over year. Cloud services revenues (43.4%) surged 59.3% to $346.4 million, driven by the continued adoption of its cloud platform. Maintenance and service revenues (21.3%) increased 1.1% to $170.6 million.

Splunk ended the quarter with total annual recurring revenues (ARR) of $3.33 billion, up 27% year over year. Cloud ARR soared 55% to just over $1.5 billion.

The company had 723 customers with ARR greater than $1 million, up 24% year over year, and 352 of these customers had Cloud ARR of more than $1 million, up 50%.

GAAP gross margin improved to 74.1% from 69.7% year over year, owing to higher revenues. GAAP Cloud services gross margin expanded 960 basis points to 64.5%.

Cash Flow & Liquidity

During the first six months of fiscal 2023, the company generated $124.7 million of cash from operating activities compared with $14.7 million a year ago. Free cash flow was $113.1 million compared with $5.2 million in the prior year. As of Jul 31, 2022, it had $747.9 million in cash and cash equivalents with $3,870.2 million of net convertible senior notes.

Guidance

For the third quarter of fiscal 2023 (ending Oct 31, 2022), Splunk expects total revenues in the range of $835-$855 million. Non-GAAP operating margin is likely to be within 6% to 8%.

For fiscal 2023 (ending Jan 31, 2023), the company expects total revenues to be between $3.35 billion and $3.4 billion, up from $3.3 billion and $3.35 billion expected earlier. Non-GAAP operating margin is anticipated to be around 8%, up from prior projection of 2%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

The consensus estimate has shifted 15.6% due to these changes.

VGM Scores

At this time, Splunk has a strong Growth Score of A, a grade with the same score on the momentum front. 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 upward for the stock, and the magnitude of these revisions looks promising. Notably, Splunk has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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