Splunk (SPLK) provides various software applications that collect and index data regardless of format or source which enables users to search, correlate, analyze, monitor and understand real-time visibility into and about their operations. Customers, for instance, may be looking to maximize IT systems performance, analyze customer purchase trends, or improve efficiency and safety of vehicle fleets.
Strong Growth Story
SPLK is a growth story that is still in its early stages. The company, which IPOed in April of 2012, added 350 new corporate customers in Q1 and bested that by gaining 400 new clients during its Q2 which ended July 31st. While Enterprise Security is becoming a main driver of sales and currently represents over 30% of sales - up from 20% YoY, SPLK continues to expand its product portfolio. In the near future, the company will release a new version of Splunk Enterprise solutions, additional expanded cloud offerings and perhaps most exciting for driving business, a "plug and play" analytics application for Hadoop called "Hunk".
"Land and Expand" Strategy
Historically, clients have initially engaged SPLK to develop specific troubleshooting applications but now many of those clients are re-engaging on more of an enterprise adoption basis. So while the company continues to add new clients at high growth rate, existing clients are realizing value and increasing their utilization across multiple business and operational lines.
Robust Customer Adoption
SPLK's customer base has expanded to over 6,000 clients worldwide. Of these, approximately 200 of the Fortune 500 are engaged with Splunk at some level. SPLK had strong new deal flow and Q2 revenue grew 50% YoY. While average deal size remains consistently around $35k, the company reported that there were 163 deals that were over $100k in size. These larger cases generally represent Enterprise Adoption Agreements (EAAs) which are designed to enable broad adoption of Splunk application software within a given enterprise. These EAAs are perpetual commitments by clients that are usually in the 7-figure range but contain provisions which require them to be deferred and treated ratably in terms of revenue recognition over the course of a set period of time - typically 3 years. In other words, these sales create a stream of revenue off of a single sale that will be recognized by the company over the course of several quarters or years.
Commitment to Growing Sales
Most growth companies invest heavily in sales infrastructure and SPLK is no different. The company added 15 new account reps to its sales force in Q2, bringing total headcount in sales to 189 and management expects to have 210-220 reps in the field by year-end. Management has indicated a learning curve of 9-12 months for new reps to be fully productive and estimates that due to new additions to staff over the past year or so, only 50% are current at that fully productive level. The trajectory of the sales staff buildup however implies billings per productive rep are down 15% year over year. However, much of this can be attributed to a strategy put in place earlier this year of increasing the number of specialized product sales reps, as well as adding a dedicated renewal team. This strategy, while it does not show up on the "production per rep" metric, has increased renewal rates from the mid 80% range 18 months ago, to 94% in Q2.
Q2 By The Numbers
Driven by strong customer license sales, Splunk, Inc. recently posted a solid Q2 with revenue coming in well above consensus at $66.9 million, a 50% increase from Q2 of last year.
- License revenue and billings were $43.2 million, growing 43% versus the same period last year.
- The company reported a GAAP operating loss of $13.3 million or $0.13/share.
- Non-GAAP operating loss was $800,000 or $0.01/share.
- The company had operating cash flow of $6.3 million and FCF of $4.3 million.
Turning to the balance sheet, SPLK finished Q2 with the $347 million in cash, $40.7 million in accounts receivable and no debt.
During its earnings call, the company said it expected revenues of between $69 million and $71million for the third quarter and raised full year revenue guidance to $275-$281 million (from $266-$274 million). The company expects Q3 non-GAAP operating margin of between -2% and 0% and still expects full year non-GAAP operating margin to break even, implying Q4 non-GAAP operating margin to be net-positive.
Key Value Drivers
- Driven by investments in its sales force, Splunk continues to win new customers at a robust rate.
- As the sales force matures it will become even more productive.
- The company continues to penetrate existing customers' budgets, as Enterprise Adoption Agreement license bookings are +60% YoY.
- Clients are increasingly coming to SPLK for proactive solutions like web and business analytics vs. troubleshooting.
- SPLK has reported revenue, on average, 8% above the high end of guidance. If this trend continues, it implies Q3 revenues of about $77 million (vs. high end of guidance at $71 million).
While the stock, at $61.98, is trading at an all-time high, strong sales growth and healthy margins support that price. Since the latest earnings and investors call took place well into Q3, management had plenty of clarity for its current quarter revenue guide. Still, +35% YoY seems light given the ramp in sales capacity and roll-out of a broader product portfolio so I anticipate room for further upside. SPLK isn't a value play, so investors waiting to get in at a lower price may well find themselves empty-handed.