My Brief Reviews Nov – Update

My Brief Reviews Nov – Update
When I published my brief reviews, several days ago, it was meant to be a post-earnings review. However Splunk, which is on a Jan, Apr, Jul, Oct schedule hadn’t reported yet. They now have.

Here’s what I wrote last weekend about Splunk:

Nov 2016 – Splunk (SPLK) - My Review
This is a relatively new position for me, but it was a MF RB recommendation a couple of years ago, and Bert recently wrote it up. Splunk licenses software that helps businesses monitor their performance. For example, its software helps companies to analyze shoppers’ behavior, fleet performance, and website security threats, among other things. It collects, indexes, and analyzes unstructured machine data, which makes it a natural for all the data to come with the Internet of Things. Revenue in fiscal 2011 thru 2016 (Jan) went


 66
121
199
303
451
668

That’s a ten-bagger on revenues in five years! While earnings are miniscule, free cash flow grew from $7 million to $104 million in that same time period. They are on a Jan, Apr, July, Oct calendar and the Oct quarter isn’t out yet, but July revenue was up 44%. They are the top dog in what they do and no one does it better. As of 2014 they already had over two-thirds of the Fortune 100 as customers.

Splunk has a somewhat unique pricing model in that users buy a license for a fixed amount of data to go through software indexers, and then must pay overage charges when additional data goes through. Every year, the volume of data rises at most enterprises by as much as 50%. The bet that Splunk is making is that the huge costs associated with customer acquisition are going to be amortized over the years, over a substantially higher amount of revenue than that which is being currently reported (and with no further costs of acquisition). This is very different than companies that depend on selling more seats to each customer for organic growth. That’s a difficult sell. Splunk doesn’t care how many seats you have, just how much data is being analyzed. And that keeps going up.

Splunk was new and my smallest position, at 3%, when I wrote these reviews in September, but it’s now up to 4.6% of my portfolio.

Bert wrote about it in March and again in August.

And here are my notes on the Oct quarter results:

Financial Highlights
Total revenues - $245 million, up 40%.
License revenues - $140 million, up 34%.
Adj operating income - $16.7 million;
Adj operating margin - 6.8%.
Adj earnings – 12 cents, up from 5 cents.
Operating cash flow - $45.3 million
Free cash flow - $32.3 million

Our market opportunity is tremendous. Splunk provides the market leading platform that powers Operational Intelligence to enable customers to cost effectively get value from machine data. We make it easier to collect and analyze ever larger volumes and varieties of data to help our customers gain more insights and value from Splunk solutions. Our passionate customers and their innovations with the Splunk platform are at the core of our success.

Business Highlights:

Signed nearly 500 new enterprise customers. New and Expansion Customers Include: BMW, Dow Jones, Educational Testing Services, Emirates Airlines, Florida State University, Garanti Bank (Turkey), Monash University (Australia), Rackspace, State of Maine, University of Illinois, University of Miami, U.S. Department of Homeland Security, U.S. Department of State, Yahoo Japan, and Zendesk.

Introduced the Talk to Splunk with Amazon Alexa App, enabling Splunk to interface with Amazon Alexa by way of a custom Alexa skill and thereby achieving a Natural Language interface for Splunk.

Announced investments in two companies – Acalvio and Insight Engines – to further drive innovation and extend the power and reach of the Splunk platform.

Cisco and Splunk joined forces to highlight their eight-year partnership, together delivering integrated solutions for thousands of organizations around the globe.

• Highlighted the strong partnership between Amazon Web Services (AWS) and Splunk focused on driving customer success in the cloud.

• Ansible by Red Hat introduced the Ansible Tower App for Splunk, a new app developed to ingest all data associated with Ansible deployments, inventories and jobs and deliver this visibility to teams involved in app delivery.

• Splunk received three Cisco® Partner Summit awards – one Global award and two country awards in the U.S.

• Splunk was named by Glassdoor as one of the top-rated public cloud company employers.

• Splunk Cloud was named the 2016 Best Big Data Analytics Solution in the Cloud & DevOps World Awards, which honor excellence and innovation in cloud computing.

• Splunk was named to Database Trends and Applications’ annual Big Data 50 awards.

Events:
• Hosted .conf2016, the 7th annual Splunk Worldwide Users’ Conference in Orlando, with over 4,500 Splunk enthusiasts.
• Hosted SplunkLive! events in cities worldwide, including Auckland, Santa Clara, Denver, Nashville, Shanghai and Stockholm.

Financial Outlook

Guidance for the Jan quarter:
• Total revenues - $287 million at midpoint.
• Non-GAAP operating margin is expected to be between 8% and 9%.

Updated guidance for its fiscal year 2017 (ending next quarter):
Total revenues - $931 million at midpoint (up from previous estimate of $912 million a quarter ago), and up 39% from the year before.
Adj operating margin is expected to be between 5% and 6%.

My take: Looks very good. This quarter dropped the PE from about 300 to about 200 (still ridiculous but dropping fast).

Hope this was helpful
Saul

27 Likes

One thing that kept me away from splunk was their high stock compensation. It has always been High and this quarter was no different. It is at 43% of revenue. The stock compensation has grown 42% YoY. Just something to think about.

Andy

8 Likes