Splunk - Solid Third Quarter And Decent Outlook Send Shares Slightly Higher

| About: Splunk Inc. (SPLK)

Shares of Splunk (SPLK) rose more than 2% in after hours trading on Thursday. The company which collects and analyzes data for companies across the globe, announced its third quarter results of its fiscal 2013 after the market close.

Third Quarter Results

Splunk reported third quarter revenues of $52.0 million, up 67% compared to last year. Revenues were driven by a 56% increase in license revenues which came in at $34.6 million. Maintenance revenues almost doubled to $17.5 million. Revenues rose 16.9% on a quarterly basis, and came in ahead of consensus estimates of $46.8 million.

The company reported a GAAP operating loss of $5.4 million, for a negative margin of 10.3%. This compares to a loss of $3.0 million last year. Net losses came in at $5.5 million, with GAAP diluted losses per share coming in at $0.06 per share.

Non-GAAP operating losses came in at $0.7 million. The non-GAAP accounting basis excludes $4.7 million in stock-based compensation expenses. Non-GAAP losses came in at $0.01 per share, beating analysts consensus by a penny.

CEO and Chairman Godfrey Sullivan commented on the results, "We are pleased to welcome more than 350 new Enterprise customers to the Splunk family and also want to recognize the many customers who expanded their use of Splunk software during the quarter. Our license revenues where the result of broad adoption by our customers in financial services, technology, telecommunications and government sectors."


For the current fourth quarter of its fiscal 2013, Splunk expects revenues to come in between $58 and $60 million. This represents a 13.5% increase in revenues on a quarterly basis. The outlook represents a 36.5% increase in revenues on an annual basis.

Splunk expects non-GAAP operating margins to come in between 3 and 4%, which compares to a negative margin of 1.3% during the third quarter.

For the full year of its fiscal 2013, Splunk now expects revenues to come in between $192 and $194 million. Non-GAAP operating margins are expected to come in between minus 1 and minus 2%.


Splunk ended its third quarter with $273.3 million in cash and equivalents. The company operates without the assumption of debt, for a considerable net cash position.

Factoring in a 2% jump in after hours trading, the market values Splunk at roughly $2.96 billion. Given the strong cash balance, the market values operating assets at roughly $2.7 billion.

Based on the full year outlook, Splunk's operating assets are valued at roughly 14 times its fiscal 2013s annual revenues. The company expects to report a full year loss.

Some Historical Perspective

Splunk went public in April of this year. Shares were eventually sold to the public at $17 per share, up significantly from its preliminary offer price range of $11-$13 per share. Shares quickly doubled to levels around $36 in the days after the offering. Shares fell back to $27 after the company reported its first quarterly results as a public company, but recovered to highs of $39 in September. Splunk's shares are currently exchanging hands around $31 per share.

Between its fiscal 2009 and its current 2013, revenues grew from $18.2 million to an estimated $193 million this year. Splunk has been reporting annual losses in each year since its existence.

Investment Thesis

Splunk had a decent third quarter, beating consensus estimates on both revenue and earnings expectations. Despite the beat, revenue growth is slowing down. Revenues grew 19.6% on a quarterly basis in the second quarter. Quarterly revenue growth came in at 16.9% in the third quarter, and is expected to slow down to 13.5% on a quarterly basis in the fourth quarter.

Growth was partially driven by the addition of new customers including Daimler AG, Kohl's, Newell Rubbermaid and Vodafone Australia, among others. Splunk released the latest version of its Splunk Enterprise flagship product. The GA version of Splunk Storm, the company's cloud service, was also released during the quarter.

I reiterate my investment stance for Splunk. At the presentation of the second quarter earnings, I argued that an investment can not be justified from a traditional valuation standpoint. Despite the insane valuation, at 14 times this year's annual revenues, the company is not an obvious short candidate. Given the rather limited valuation of $2.7 billion for its operating assets, an acquisition by a cash-rich technology company with cloud ambitions, remains a very real possibility.

For those investors being bearish about valuations in the cloud industry, I would urge investors to evaluate the prospects of Workday (WDAY). Shares of the company trade at even higher revenue multiples compared to Splunk, and the greater market capitalization makes a possible acquisition of the company less likely.

Disclosure: I am short WDAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.