Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Splunk (NASDAQ:SPLK) continue to set fresh highs. The software platform which allows users to monitor and analyze their data reported its first quarter results for its fiscal year of 2014 on Thursday the 30th of May after the close.

Unlike other cloud-based and technology firms, Splunk was hardly impacted by weak corporate spending in the first quarter. Investors remain confident amidst a solid growth in revenue and prospects for margin expansion.

First Quarter Results

Splunk generated first quarter revenues of $57.2 million, up 54% on the year before. Revenues comfortably beat consensus estimates of $54.1 million.

While revenues continued to grow, operating losses were increasing from $6.2 million last year to $15.7 million over the past quarter. Net losses narrowed from $20.5 million to $16.1 million as last year's losses were heavily impacted by a $14.1 million charge due to the valuation of preferred stock warrants.

GAAP losses per share came in at $0.16. Splunk reported non-GAAP losses of $0.06 per share which came in line with expectations.

Splunk signed some 350 new enterprise customers during the quarter bringing the total worldwide client base to 5,600.

CEO and Chairman Godfrey Sullivan commented on the developments in the first quarter, "We are off to a strong start in the first quarter and I'm pleased with our new customer acquisition and financial performance. Years of investment and product innovation have resulted in recognition that Splunk is disrupting the enterprise software space."

A Detailed Look At The Results

License revenues rose by 48.3% to $36.2 million while maintenance and service revenues rose by 64.3%.

Gross profits came in at 88.3% of total revenues down 20 basis points on the year. Margin pressure is largely explained by the outperformance of maintenance and service revenues which carry higher cost of sales compared to license revenues which essentially cost nothing to produce.

The company stepped up its research & development efforts. Spending on this line item rose by 350 basis points to 25.3% of total revenues. The company increased spending on selling, general and administrative expenses by 720 basis points to 72.2% of total revenues.

One bright spot were selling, general and administrative costs as theyfell by 10 basis points to 18.3% of total revenues.

Looking Into 2014

For the current second quarter, Splunk anticipates to generate revenues of $61-$63 million. Based on the midpoint of the guidance, this implies that revenues are expected to increase by 8.4% on the quarter and 39.3% on the year. On average, analysts were looking for second quarter revenues of $61.7 million.

Non-GAAP margins are expected to come in between minus 4 and minus 6%, which compared to non-GAAP operating margins of minus 9.2% over the past quarter.

For the full year of 2014, Splunk expects to generate annual revenues of $266-$274 million, up from a previously guided $260 to $270 million. Non-GAAP margins are expected to come in around the break-even level.

Analysts expected that Splunk would raise its revenue guidance a bit more. Full year revenue consensus estimates stood at $270.4 million.

Valuation

Splunk ended its first quarter with $331.3 million in cash and equivalents. As the firm operates without the assumption of debt, Splunk holds a solid net cash position.

For its fiscal year of 2013, Splunk generated annual revenues of $199.0 million, up 64.5% on the year. Net losses more than tripled to $36.7 million in the meantime.

Following the favorable results, Splunk is exchanging hands at $45 per share, valuing the firm at $4.6 billion. This values operating assets of the firm around $4.3 billion. As such, Splunk's operating assets are valued at 22 times 2012's annual earnings.

Given the lack of profitability and the investments still required to grow the business, Splunk does not pay a dividend at the moment.

Some Historical Perspective

Shares of Splunk made their public debut in April of 2012. Shares were sold to the general public at $17 per share, which was up significantly from a preliminary price range of $11-$13 per share.

Since the start of 2013, shares have witnessed a steady but strong rally. Shares have risen more than 60% in 2013 alone, exchanging hands around its all time highs at $47 per share.

Between its fiscal 2010 and 2014, Splunk has seen incredible growth. Revenues rose from merely $35 million in 2009 to an expected $270 million this year. The company has reported losses in each of its past years.

Investment Thesis

Splunk's products remain among the hottest developments in the "big data" theme. The range of its applications is diverse as large companies struggle to use data for security prevention, analysis of customers demand,and streamlining of internal processes.

Key clients which either subscribed or upgraded their products with Splunk over the past quarter were Bank of New York Mellon, Level 3 Communications and Nordstrom, among others.

Market research firm Gartner recently mentioned that Splunk is one of the fastest growing names in the new generation of IT operations management market vendors. Complex log files and data can be readily converted into visualization tools aiding business decisions.

Besides gaining new customers and increasing the revenues from current users, overseas expansion represents a massive opportunity. The company generated merely 21% of its first quarter revenues abroad. This was up 200 basis points on the year before as European, Middle East and African revenues were up 74%, while the APAC region nearly doubled its revenues.

Strong growth is important for the future backlog as internal investigations of Splunk reveal that customers of Splunk spend 5 times the initial purchase amount in the three years following their initial purchase.

Overall investors are relieved with the solid outlook and the strength over the past quarter, when many competitors saw some weakness which was being attributed to general macro weakness and federal budget costs.

I can only complement Splunk's management with the great applications and services which really spur revenue growth. The growth outlook is solid as the company expects to report improvements in non-GAAP margins for the remainder of the year. The outlook implies that the company expects to report positive non-GAAP operating margins in the third and fourth quarter of the year.

While the valuation seems extremely high, I remain hesitant to short. The limited capitalization of the firm and interesting developments could spur interest of large names. Earlier this year Splunk was already tied to a possible acquisition by IBM (NYSE:IBM).

For this reason alone, I remain on the sidelines.

Source: Splunk - Investors Are Comforted By Solid Revenue Growth And Margin Recovery