June 15, 2024

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Why Is Splunk (SPLK) Down 25.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Splunk (SPLK). Shares have lost about 25.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Splunk due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Splunk’s Q4 Earnings Gain on Cloud and Software Revenues

Splunk reported fourth-quarter fiscal 2020 non-GAAP earnings of 96 cents per share, which matched the Zacks Consensus Estimate and increased 3.2% year over year.

Revenues rose 27.2% year over year to $791.2 million and beat the Zacks Consensus Estimate by 0.9%. The year-over-year upside was driven by greater utilization of Splunk’s products by existing customers and new customer wins.

Quarter in Details

License revenues (65.4% of revenues) were $517.5 million, up 25.9% year over year. Maintenance & service revenues (34.6% of revenues) rose 29.7% to $273.6 million.

Software revenues jumped 33% from the year-ago quarter to $617 million. Splunk stated that 99% of software bookings were either term or cloud.

Remaining performance obligation (RPO) was $1.8 billion, up 43.2% year over year. The company expects to recognize $1 billion (indicating a 23% year-over-year increase) of this RPO as revenues over the next 12 months.

RPO bookings grew 23% year over year to $1.14 billion.

Cloud revenues soared 86% from the year-ago quarter to $99 million on the back of increased utilization of cloud-based services. Management expects cloud’s contribution to grow 50% over the next few years. In the reported quarter, Cloud ARR was $442 million.

The company continues its successful transition to a subscription or renewable model, which is evident from the fact that Splunk met its 75% transition rate for fiscal 2020 in fiscal 2019 itself. However, this transition is a headwind for the perpetual business, which is declining rapidly. Elimination of perpetual licenses increased renewable mix to 99% in the fourth quarter.

Splunk added 450 new enterprise customers in the fourth quarter. The company had 221 orders worth more than $1 million in total contract value, up 23.4% from 179 in the year-ago period.

Splunk’s Data-to-Everything Platform including new products such as Data Fabric Search (DFS), Data Stream Processor (DSP) and Splunk Mission Control, launched in the third quarter, witnessed rapid adoption in the reported quarter.

Operating Details

Non-GAAP gross margin contracted 90 basis points (bps) from the year-ago quarter to 86.7% due to greater proportion of cloud revenue contribution. Splunk’s long-term cloud gross margin target is 70% or more.

Non-GAAP operating expenses, as a percentage of revenues, expanded 170 bps on a year-over-year basis to 62.6%. Research & development (R&D) expanded 270 bps, general and administrative (G&A) expanded 130 bps while sales & marketing (S&M) expenses decreased 230 bps year over year, respectively.

Non-GAAP operating profit was $190.9 million, up 14.7% from the year-ago quarter. Operating margin contracted 260 bps on a year-over-year basis to 24.1%.

Fourth Quarter Developments

Splunk announced the expansion of its footprint to 11 global innovation hubs in locations across Canada, Poland, Singapore, the United Kingdom and the United States.

Balance Sheet & Cash Flow

As of Jan 31, 2020, cash & cash equivalents, including investments, were $778.6 million compared with $873.5 million reported in the previous quarter.

Cash outflow from operations was $58.8 million due to rapid growth of the multi-year term and cloud contracts.

Guidance

For first-quarter fiscal 2021, Splunk expects revenues of $450 million. Non-GAAP operating margin is likely to be negative 25%.

For fiscal 2021, Splunk anticipates revenues of $2.6 billion. Non-GAAP operating margin is expected to be approximately breakeven. The company expects ARR growth in the range of mid 40% for fiscal 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -60.75% due to these changes.

VGM Scores

At this time, Splunk has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It’s no surprise Splunk has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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