Gone Splunking - A Lesson In How To Destroy Capital

| About: Splunk Inc. (SPLK)

Summary

Splunk is a software company that focuses on providing solutions for big data.

Splunk has destroyed shareholder capital.

Maybe they will make it up in volume.

Business owner: "I lose money on everything I sell"

Banker: "Then how do you make money?"

Business Owner: "I make it up on volume."

Splunk (NASDAQ:SPLK) is an American multinational corporation based in San Francisco, California, that produces software for searching, monitoring and analyzing machine-generated big data via a web-style interface. Splunk was founded in 2003 and went public in 2012. They have yet to show profits. In fact, losses and dilution continue to grow which are extremely worrisome. I remember my father telling me a story about a business one of his friends was trying to get off the ground. He told me "a company that loses money for a year is a business. A company that loses money for two years is a hobby." Well maybe he was a bit short-sighted as it can sometimes take many profitless years to produce a profit, but Splunk has been around for over 16 years and they still haven't found a path to profitability. In fact, they went from a loss of $11 million in 2011 to a loss of $287 million in 2015. Their trailing 12 month loss is a staggering $340 million.

It is very accurate to state that their revenues have been growing at an incredible rate; the CAGR over the last 4 years from 2011 to 2015 was 53%! The problem is that R&D and SG&A have grown at a combined rate greater than revenues - a staggering 61%. This gives the company increasing operating and net losses. If revenues were growing at a huge clip and expenses were growing, but at a slower rate than revenues, this may make sense, but they are increasing losses each year they stay in business.

SPLUNK

2012-01

2013-01

2014-01

2015-01

2016-01

CAGR

TTM

Revenues

121

199

303

451

668

53%

793

R&D

24

42

76

151

215

73%

257

SG&A

94

158

269

448

627

61%

719

Total OPEX

118

200

345

599

842

63%

976

Operating Income

-9

-22

-78

-216

-288

138%

-333

Net Income

-11

-37

-79

-217

-279

124%

-340

Shares

21

80

105

120

127

130

EBITA

-7

-17

-72

-203

-268

149%

-307

Click to enlarge

· Chart built by author using data from Morningstar.com

In addition to losses that Splunk can't seem to get a handle on, they continue to dilute existing shareholders. From Q2'15 to Q216 (July 31, 2015 to July 31, 2016) they increased the outstanding shares from 126.6 million to 133 million, an increase of 5.06%. Let's pretend that instead of issuing shares to pay employees they would have paid cash to employees. Since they issued 6.4 million shares and the price right now is around $60 per share this equates to another ~$384 million in costs. If this $384 million was included in SG&A they would have a lost another $384 million to the already large operating loss of $333 million over the last 12 months. This would bring the total operating loss to over 90%; $717 million on $793 million in revenues.

In addition to the massive losses and dilution that continue to grow, quarter over quarter and especially year over year revenue comps continue to decrease. As you can see, year over year revenue growth has gone down from 50% in Q3 '15 down to 43% last quarter. It will be very interesting to see what the results for Q3 will be when they release them in November given that the $174 million in revenues in Q3 '15 will be a tough comp. If they continue to see deceleration in revenues it could be a sort of "watch-out-below" moment for the stock since Splunk's stock price seems to be levitating based upon their ability to grow their topline.

Splunk

Q2 '16

Q1 '16

Q4 '15

Q3 '15

Q2 '15

Q1 '15

Q4 '14

Q3 '14

Quarterly Revenues

212,753

185,952

220,024

174,420

148,326

125,665

147,392

116,029

Q/Q Change

14%

-15%

26%

18%

18%

-15%

27%

Y/Y Change

43%

48%

49%

50%

Click to enlarge

· Numbers come from 8-K filings and calculations by the author.

Splunk currently has a market cap of $8 billion and an enterprise value of $7 billion. They have an extremely clean balance sheet with loads of cash so there is no imminent threat of bankruptcy due to their continuing losses, but it will be extremely interesting to watch how the stock continues to trade if they can't find a way to become profitable and continue to destroy shareholder capital.

Disclosure: I/we 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.