Splunk - Tough Times Continue For Beaten Down Investors

Jun. 2.14 | About: Splunk Inc. (SPLK)


Splunk's shareholders suffer another sell-off, shares are down more than 60% from their highs.

Operational growth remains impressive, yet operating losses and stock-based compensation continue to increase.

The latest sell-off does not automatically translate into a buying opportunity.

Investors in Splunk (NASDAQ:SPLK) continue to witness devastating losses with shares now trading down more than 60% from their recent highs which were set less than three months ago.

The company develops great solutions for its customers, is showing rapid growth yet losses and runaway momentum have driven the negative momentum recently. I continue to be very cautious, and don't think the latest sell-off automatically translates into a buying opportunity.

First Quarter Headlines

Splunk reported first quarter revenues for its fiscal 2015 which came in at $85.9 million, up 50% on the year before, and ahead of consensus estimates at $80.5 million.

The company reported a rapid increase in its net losses which more than tripled to $50.8 million. GAAP losses came in at $0.43 per share.

Based on non-GAAP metrics, Splunk reported a loss of $0.04 per share with of course stock-based compensation being the major driver behind the discrepancy between both metrics. Analysts were looking for a loss of six cents.

Looking Into The Results

Splunk's license revenues rose by 41% to $51.3 million. Direct costs of these revenues are incredibly low resulting in extremely high gross margins of 99.85%. The company signed up some 400 new customers during the quarter to end the quarter serving 7,400 customers across the globe.

Maintenance and service revenues were up by 64.8% to $34.6 million with gross margins coming in at 59.3% of revenues. This meant that margins were down more than seven percent points compared to last year.

The expense management has been disappointing with operating costs growing much quicker than topline revenue growth, increasing by 84% compared to last year. Research and development expenses as well as general and administrative expenses each more than doubled compared to last year.

The company ¨spent¨ $43.2 million in stock-base compensation over the past quarter. With over a 1,000 employees this comes down to an average stock-based compensation of $43,000 for this quarter alone!

Second Quarter Outlook

For the second quarter, Splunk now anticipates revenues between $92 and $94 million, ahead of consensus estimates at $91.5 million. This implies that growth is seen between 38 and 41% on an annual basis.

Non-GAAP margins are seen between negative 2 and negative 4 percent.

For the full year revenues are seen between $402 and $410 million which compares to a previous guidance of revenues of $400 million. Non-GAAP margins are seen around zero, consistent with the company's own guidance.

Valuing Splunk

Splunk ended the quarter with $827 million in cash, equivalents and short term investments. The company does not have any debt outstanding.

Trading around $42 per share the company is valued at $4.9 billion which values operating assets at $4.1 billion. This values operating assets of the company at around 10 times annual revenues as seen for this year.

Splunk does not pay a dividend at the moment.

Great Product, Good Company, Lousy Stock

Splunk's solutions look amazing in their ability to generate operational intelligence. Data and information from virtually any source can be searched, monitored and analyzed in real-time.

The growth opportunities in this area are huge with companies being able to boost operational excellence at relatively low costs. The rapid growth and exciting products attract staff to work for the company. Another big plus is the average of more than $43,000 in stock-based compensation for a period of just three months.

Still I am not excited about the slowing revenue growth in combination with widening losses. Worse, increased stock-based compensation results in quicker dilution with the stock price having suffered lately. This implies that Splunk has to award more shares to its workers to keep them happy.

Shares of Splunk peaked at over $100 earlier this year on the back of runaway momentum. After a 60% correction, shares still trade at 10 times forward revenues while the company is not even close to breaking-even on a GAAP basis.

For this reason, I continue to shun the shares as momentum is still negative and the fundamentals still can't provide support at the moment. I would argue that it is late in the game to initiate a short position as momentum players and a shift in market sentiment could easily result in a sharp rebound in the company's shares.

I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.