Splunk: Huge Growth, But Ultimately Price Matters More

| About: Splunk Inc. (SPLK)
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After the close, Splunk (NASDAQ:SPLK) reported earnings that beat estimates, sending the stock soaring more than 12%. The stock results were significantly different than the results following Splunk's first public company report back in June (see Splunk Gets Splattered on Earnings).

The company provides the engine for big data. The software collects, indexes and harnesses the machine-generated big data coming from the websites, applications, servers, networks and mobile devices that power business. Splunk software enables organizations to monitor, search, analyze, visualize and act on massive streams of real-time and historical machine data.

The big data theme continues to surge, as revenue grew 71%. Splunk is leading the development of software to help enterprises analyze all the data created in the connected world. The key, though, is whether a company forecasting $185M in revenue and no profits for fiscal year 2013 is worth nearly $4B.

Q2 2012 Highlights

The company reported the following highlights for Q2 2012:

  • Total revenue was $44.5 million, up 71% year-over-year.
  • License revenue was $30.2 million, up 61% year-over-year.
  • GAAP operating loss was $4.5 million; GAAP operating margin was negative 10.2%. Non-GAAP operating loss was $0.7 million; non-GAAP operating margin was negative 1.5%.
  • GAAP net loss was $4.6 million, and included $3.9 million in non-cash, stock-based compensation expenses. Non-GAAP net loss was $0.7 million.
  • GAAP loss per share was $0.05 based on a 95.5 million weighted-average share count. Non-GAAP loss per share was $0.01.
  • Operating cash flow was $3.8 million, with free cash flow of $2.2 million.

Deferred revenue hit $54M, and contributed to the company being free cash flow positive. Along with the IPO proceeds, Splunk now has nearly $270M of cash on the balance sheet.

Financial Outlook

The company is providing the following guidance for its fiscal third quarter 2013 (ending October 31, 2012):

  • Total revenue is expected to be between $45 million and $47 million.
  • Non-GAAP operating margin is expected to be between negative 4% and negative 5%.

The company is updating its previous guidance for its fiscal year 2013 (ending January 31, 2013):

  • Total revenue is now expected to be between $183 million and $186 million (was previously $174 million to $177 million as of May 31, 2012).
  • Non-GAAP operating margin is expected to be between negative 2% and negative 3% (was previously negative 4% to negative 5% as of May 31, 2012).

While good to see the company guide revenue and operating margin upwards, it is still disconcerting to see a negative operating margin.

Follow On Offering

The company had a follow-on offering back on July 19, when existing shareholders exited the stock at $28.85. While not surprising that early investors wanted to exit the stock at these valuations, it has to be concerning to existing investors that those investors sold 11,744,064 shares, plus an option to sell another 1,761,609 shares.

The total value equals $380M, so the investors weren't just raising a few dollars. Even more interesting was the desire to exit the stock near the lows.

After hours, the stock is already trading over $34, suggesting new investors are getting in long after the big guys were willing to dump a significant amount of shares.


The company mentioned a very interesting fact on the earnings conference call. The fully diluted shares exceed 115M. This amount is considerably above the 95M used for the earnings report, with the company having negative earnings. That last number is also used for calculating the market cap, providing a very different view of reality.

The updated share count would value the company at over $3.9B, based on the after hours quotes. Naturally, the share count depends on whether the stock options eventually get executed, but with the stock surging to $34, that seems very likely.

As a comparative valuation example, Pandora Media (NYSE:P) has a similar growth path over the next five years, yet the stock trades at half of Splunk's valuation. Yet that company has more than double the revenue, and a clearer path to earnings next year.

The major take away is that Splunk could grow revenue at 50% over the next three years, but revenue would still only reach around $400M. The stock could remain virtually flat and still trade at 10x revenue.


The company has huge potential that's hardly been tapped yet, but ultimately, the stock price has to matter. Big data is a hot sector, and Splunk is leading the revolution. The market currently values the stock based on fully diluted shares at 16x revenue expectations for next year.

With expectations for breakeven earnings in fiscal year 2014 (ends April 2014), it will be virtually impossible to derive a calculation that suggests this stock could surge to a $5-6B valuation. Absent any expectation for the valuation moving to those levels, Splunk doesn't provide a lot of return for taking on the huge risk that any negative report crushes the stock.

Disclaimer: Please consult your financial advisor before making any investment decision.

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.