Splunk Is Ready For The Long Run
22 November 2019
Splunk Inc. (SPLK), a significant position in our Artificial Intelligence, Innovation, and Security and Space certificates, reported results for the company’s fiscal third quarter on the 21st of November. The company posted 3Q revenue of $626mn, topping analysts’ consensus of $604.12mn, and adjusted EPS of $0.58, beating expectations of $0.54 per share. Latest quarters’ topline has been consistently growing at rates within the 30%-40% range. In addition, Splunk upgraded its guidance to revenue to approximately $2.35bn for FY2020, up from $2.30bn.
Splunk’s Annual Recurring Revenue (+53% from 3Q19) is benefiting from the recent shift to a subscription revenue model reaching $1.439bn during the 3Q20. The change on how its customers are invoiced is temporarily negatively affecting its free cash flow (-162mn reported vs -131.5mn expected in the quarter) as clients are billed through term licenses for SaaS subscriptions instead of paying upfront for perpetual licenses.
The move to a subscription model is becoming more and more common in the industry. It permits customers to lower initial upfront costs while increasing retention rates, despite reducing cash flows in the short term. When this change goes through, we expect free cash flow to be positively affected and follow the healthy growth both the top and the bottom lines are showing.
The company has grown tremendously as a leader in machine log analytics. It is one of the few pure-players working on making machine data accessible, usable and valuable to everyone. Its rapid growth is based on capturing big data, indexing, management, and visualization capabilities. In October 2019, the company closed the acquisition of SignalFx, strengthening its position in the market for real-time monitoring and metrics for cloud infrastructure, microservices and applications. Observability and Application Performance Monitoring (APM) for organizations are thus added to its product offering.
Data management and application monitoring are penetrating more and more into
corporations’ needs. Given the latest developments of the company, we see Splunk as the leading pure player capable of capturing the robust growth characterizing this market.
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