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Splunk (SPLK) Down 18.3% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Splunk (SPLK). Shares have lost about 18.3% 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 catalysts.

Splunk's Q2 Loss Wider Than Expected, Revenues Decline

Splunk reported second-quarter fiscal 2021 non-GAAP loss of 33 cents per share, which was wider than the Zacks Consensus Estimate of a loss of 32 cents. The company had reported non-GAAP earnings of 30 cents per share in the year-ago quarter.

Revenues decreased 4.8% year over year to $491.7 million and missed the Zacks Consensus Estimate by 6.3%.

Quarter in Details

License revenues (36% of revenues) were $176.8 million, down 36.7% year over year.

Cloud services revenues (25.6% of revenues) increased 78.7% year over year to $125.9 million on the back of increased utilization of cloud-based services. Maintenance & service revenues (38.4% of revenues) rose 13.3% to $189 million.

Notably, Cloud represented 53% of total software bookings for second-quarter fiscal 2021.

Remaining performance obligation (RPO) was $1.75 billion, up 42% year over year. The company expects to recognize $1 billion (indicating a 37% year-over-year increase) of this RPO as revenues over the next 12 months.

Splunk ended the period with total annual recurring revenues (ARR) of $1.93 billion, up 50% year over year, comprising $568 million from cloud and $1.36 billion from term license and maintenance contracts.

Splunk added new enterprise customers in the second quarter. Yale New Haven Health System became a new Splunk customer after a trial of its Remote Work Insights offering.

Additionally, California Polytechnic State University expanded the use of Splunk Cloud and Splunk Enterprise Security to better address increased phishing activity brought on by coronavirus outbreak.

Moreover, Chicago Public School, the third largest school district in the United States, further expanded on Splunk Cloud to help support its shift to remote learning.

The company ended the fiscal second quarter with 396 customers with ARR greater than $1 million, which compared with 274 in the second quarter of last year.

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

Operating Details

Non-GAAP gross margin contracted 590 basis points (bps) from the year-ago quarter to 78.4% due to greater proportion of cloud revenue contribution. Splunk’s non-GAAP cloud gross margin expanded 790 bps from the year-ago quarter to 15.1%

Non-GAAP operating expenses, as a percentage of revenues, expanded to 91.2% from 75.2% in the year-ago quarter. Research & development (R&D) expanded 850 bps, general and administrative (G&A) expanded 140 bps while sales & marketing (S&M) expenses expanded 610 bps year over year, respectively.

Non-GAAP operating loss was $63 million against an operating income of $46.6 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Jul 31, 2020, cash & cash equivalents, including investments, were $1.4 billion compared with $922.5 million reported in the previous quarter.

Guidance

For third-quarter fiscal 2021, Splunk expects revenues in the range of $600 million to $630 million. Non-GAAP operating margin is likely to be between 2% and 5%.

The company withdrew its previous guidance for fiscal 2021 due to coronavirus-related uncertainties.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 16.11% due to these changes.

VGM Scores

Currently, Splunk has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth 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 upward for the stock, and the magnitude of these revisions looks promising. Notably, Splunk has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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