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Shares of Splunk (SPLK) make another move higher, marking the fact that shares have almost doubled in 2013 alone. Investors appreciate the rapid growth, accompanied with continued operating margin improvement.

Yet I remain cautious. On the back of the outstanding operational achievements, the current valuation has become way too rich for my taste.

Second-Quarter Results

Splunk generated second-quarter revenues of $66.9 million, up 50% on the year before, thereby comfortably beating consensus estimates of $63 million.

The company reported GAAP operating losses of $13.3 million, while non-GAAP losses came in at $0.8 million. Non-GAAP losses came in at $0.01 per share, while GAAP losses came in at $0.13 per share.

Analysts were looking for non-GAAP losses of $0.03 per share. CEO and Chairman Godfrey Sullivan commented on the past quarter developments:

This past quarter marked a milestone for Splunk as we expanded the breadth of our product offerings beyond core Splunk Enterprise and premium apps by adding the beta version of Hunk: Splunk Analytics for Hadoop. We are pleased to welcome more than 400 new customers who are joining the Splunk family at an exciting time as we transition to a multi-product company.

Looking Into The Results

The potential for operating leverage in Splunk's business model remains incredible as gross margins are sky-high, especially on license revenues where they are above 99%.

Overall gross margins rose by 35 basis points to 88.9% of total revenues, which are simply unprecedented margins.

Selling, general and administrative expenses rose by a full 9 percent points to 108.8% of total revenues. As a result of growing revenues and widening negative operating margins, net losses tripled to $13.7 million.

Outlook

For the current third quarter, Splunk anticipates revenues to come in between $69 and $71 million. Non-GAAP operating margins are seen between flat and minus 2%. The guidance implies that revenues are seen up 35% on the year before, and up 5% compared with the second quarter.

Full-year revenues are seen between $275 and $281 million, with the guidance being upped from a previously guided $266 to $274 million. Non-GAAP operating margins are seen around flat. As such fourth-quarter revenues could come in around $84 million, up 29% on the year before.

Consensus estimates for full-year revenues stood at $275.4 million.

Valuation

Splunk ended its second quarter with $347.1 million in cash and equivalents. The company operates without the assumption of debt, for a solid net cash position.

Revenues for the first six months of the year came in at $124.1 million, up 52% on the year before. Net losses increased to $29.8 million in the meantime.

Factoring in gains of 10% in pre-market trading, the market values Splunk at $5.5 billion, or its operating assets around $5.15 billion. This values operating assets of the firm at 18 times annual revenues.

Splunk does not pay a dividend at the moment.

Some Historical Perspective

Shares of Splunk were eventually sold to the general public in April of 2012. Shares were sold at $17 per share, far above the preliminary $11-$14 price range. Shares immediately moved into their 30s but fell back to their high-20s at the end of 2012.

Since the start of the year, shares have seen an impressive run-up. Exchanging hands at $53 per share, they have nearly doubled in just 8 months.

Between the calendar year of 2009 and 2012, Splunk has increased its annual revenues from merely $35 million to $199 million last year. At the same time, losses kept increasing to almost $37 million over the past year.

Investment Thesis

Splunk had a decent quarter in which it added another 400 customers, bringing the total count to 6,000. Despite the slower guided year-on-year revenue guidance, Splunk forecasts more new customers and enterprise deals in the remainder of the year, adding to future revenues.

Internal predictions from Splunk reveal that customers will spend 5 times the initial purchase amount in three years following their initial purchase. Therefore news about customer additions and deal wins are even more important compared with your "average" cloud or data-analytics company.

Back in June of this year, I last took a look at Splunk's prospects. I concluded that investors were comforted by solid revenue growth and margin improvements. The second quarter was excellent with notably revenues coming in ahead of consensus estimates. GAAP losses kept narrowing on a sequential basis.

I continue to applaud management with the great results as the company is moving forward to break even. Due to the high valuation, I remain hesitant to go long. The combination of a valuation at 18 times annual revenues and a slowdown in year-on-year revenue growth in the remainder of the year makes me hesitant.

Still I won't initiate a short given the limited free float of the company and the rather modest market capitalization, which could always spur merger and acquisition activity. Yet growth might pick up after the major release of Splunk Enterprise in the remainder of the year and the beta program of the much promising Hunk program.

I remain on the sidelines.

Source: Splunk - Outstanding Performance, Fresh Highs