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Splunk Inc. (SPLK - Free Report) reported better-than-expected second-quarter fiscal 2018 results, which also improved year over year.

The company’snon-GAAP earnings surged 60% year over year to 8 cents per share and beat the Zacks Consensus Estimate of 6 cents.

Revenues increased 31.6% year over year to $279.9 million and exceeded the Zacks Consensus Estimate of $268.7 million. The year-over-year growth was primarily driven by strong product portfolio and expanding clientele.

Revenues from cloud business which more than doubled over last year stood at $21.3 million, while overall software revenues, which include license and cloud grew 30% year over year. Total billings increased 32% year over year to $303 million. Reportedly, the company added more than 500 new customers in the quarter.

Shares of Splunk have gained 27.8% year to date, significantly outperforming the 15.7% rally of the industry it belongs to.

Product Highlights

Splunk announced a number of new and updated versions of existing products this quarter, which include Splunk Insights for AWS Cloud Monitoring and Splunk Insights for Ransomware.

The company released new versions of Splunk Enterprise 6.6 and Splunk Cloud, Splunk Enterprise Security (ES) 4.7 and Splunk Add-on for Microsoft Cloud Services in Splunkbase.

Moreover, the company along with Booz Allen Hamilton announced the private beta of Booz Allen Cyber4Sight for Splunk.

Margins

Non-GAAP gross margin contracted 120 basis points (bps) from the year-ago quarter to 82.6%.

The company reported non-GAAP operating income of $14.7 million in the quarter compared with the operating income of $8.2 million reported in the year-ago period.

The company’s non-GAAP operating margin of 5.2% increased 130 bps on a year-over-year basis.

Balance Sheet

While exiting the quarter, the company had cash and cash equivalents of $419.8 million, compared with $421.3 million as of Jan 31, 2017.

Cash flow from operations in the quarter was $23.2 million compared with $18.3 million in the year-ago period. The company’s free cash flow came in at $20.3 million in the quarter.

Guidance

For third-quarter fiscal 2018, Splunk expects revenues in the range of $307-$309 million. Non-GAAP operating margin is likely to be around 8%.

Buoyed by encouraging second-quarter results, the company increased its full year 2018 revenue and billings guidance. The company now expects revenues in the range of $1.210-$1.215 billion, up from the prior guidance of $1.195 billion. Billings are now anticipated to be $1.450 billion compared with the previous guidance of $1.425 billion.

The company reaffirmed its earlier non-GAAP operating margin guidance of 8% for fiscal 2018.

Splunk Inc. Price, Consensus and EPS Surprise

Splunk Inc. Price, Consensus and EPS Surprise | Splunk Inc. Quote

Our Take

Splunk’s focus to strengthen its product pipeline in order to benefit from the growing data and analytics market is a key growth driver. The company's market opportunity is growing on the back of its software, which is traditionally used for IT operational intelligence, security, fraud-detection, app analytics and other related cases.

Splunk is well poised to benefit from the ongoing shift to modern analytics-based security information and event management (SIEM) from a traditional structured data legacy-based one - which drove large security orders for the company. We believe the company’s launch of “Splunk Insights for Ransomware” will help it to increase its customer base further.

The growing adoption is further substantiated by the recent report of International Data Corporation (IDC), the world's leading IT analyst firm. Splunk has been ranked number one in worldwide IT Operations Analytics (ITOA) as well as Event and Log Management software market shares for 2016.

However, increasing investments in research and development coupled with higher operating costs are anticipated to be a drag on profitability. As Splunk continues to explore and expand into new markets, sales and marketing expenditures are also predicted to rise significantly, thereby hurting margins.

Also, growing competition from established players such as International Business Machines (IBM - Free Report) , SAP, Amazon (AMZN - Free Report) and Microsoft (MSFT - Free Report) , all of which are vying to get a bigger share of the market, is a concern.

Zacks Rank

Splunk carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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