A Different Take On Splunk

Apr. 27, 2018 5:23 PM ETSplunk Inc. (SPLK)11 Comments
Yves Sukhu profile picture
Yves Sukhu
1.97K Followers

Summary

  • Splunk offered investors a bullish outlook on its recent FY '18 earnings call and during its Analyst Day in March.
  • In spite of strong top-line growth, there are multiple risks surrounding the company's go-forward strategy, which are revealed via analysis of the earnings call and Analyst Day presentation/discussion.
  • These risks may severely impact revenue and margin performance, undercutting Splunk's operating structure in the process.
  • Analysts must do more to challenge Splunk in terms of its risk profile in order to provide investors with a balanced perspective.

1.0 Overview and Index

Not too long ago, Splunk (NASDAQ:SPLK) announced its Q4 FY '18 and full-year FY '18 results, and those results were generally received gleefully by analysts and investors alike. Jim Cramer, for example, hosted Splunk's CEO, Doug Merritt, on "Mad Money" and suggested that Splunk is still in the "early innings" in terms of growth.

On March 27, 2018, the company held an Analyst Day to discuss its performance, forecast, and strategy moving forward. Broadly, the company laid out a revenue goal of $2 BB by FY '20, with non-GAAP operating margin growth along the way. Its underlying strategy - again, broadly speaking - revolves around a transition to subscription-based licensing, additional market penetration, sales coverage, and growing the company's cloud business.

In this article, I attack elements of Splunk's outlook and strategy based on irregularities/risks that I believe are exposed through an analysis of the earnings call discussion, the Analyst Day presentation/discussion, and the company's financial data.

The last article I published on Seeking Alpha - nearly eight months ago - discussed my reasoning against a Cisco (CSCO) acquisition of Splunk. For reasons beyond the scope of this article, I actually hesitated to publish it. Ultimately, I did publish, and it elicited, shall we say, a strong reaction. With most sentiment around Splunk fervently bullish, I expect this article and its decidedly bearish tone might evoke a similar reaction.

So be it. I reiterate from the prior article that I don't believe Splunk is in its early innings of growth anymore, contrary to the position held by Mr. Cramer. That view, coupled with the risks I discuss herein, led me to recommend that existing investors think carefully about their position.

As this article became a bit longer than I originally expected, I divided it into numbered sections. While

This article was written by

Yves Sukhu profile picture
1.97K Followers
I have a background in enterprise software. From time to time, I stray from the technology sector to write about companies that I think are worthy long-term investments.

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

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