SPLK anyone?

Hi Folks,

I’m considering SPLK. I’ve known about them for a long time, and just remembered they were an RB rec from a few years ago. And now that I’m getting really interested in cloud-based companies, I remembered that I’ve loved Splunk as a product/company for many, many years having had a small exposure to it as a user for a very (really way too short) small time back in 2007ish (It’s apparently changed a ridiculous amount since I last looked, as you’d expect).

But before I did in, I was curious if anyone else here has done a deep dive on it, even it it’s a little dusty. It would be good to see someone else’s thoughts, especially if it’s been a while, and compare those ideas to the present.




If you click the “Additional Info” link on the right you can see Saul’s monthly summaries. He owned Splunk for a time, until somewhere in 2017. I’m sure someone with better search skills can find specific posts from the board members in the '16-'17 time frame.

I bought into Splunk in Feb '17 and am still holding. Up ~87% for me since so I have not done a deep dive on the ‘keep or replace’ decision yet as I pare my holdings down from ~59 to something more concentrated.

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You can search for specific stock discussions via Google:


For the more cheeky link, http://lmgtfy.com/?q=site%3Afool.com+%22Saul%27s+Investing%2…


Thanks IR doc, that’s a great way to search: As I understand it you just enter

site:fool.com “Saul’s Investing” SPLK

on Google, and enter whatever subject you want (here it’s SPLK).

It works.

Thanks again


I was curious if anyone else here has done a deep dive on it, even it it’s a little dusty. It would be good to see someone else’s thoughts, especially if it’s been a while, and compare those ideas to the present.

Here are my notes, quite a bit out of date. Again, I’m not sure why I exited this one either, but I think it had gone nowhere in a long time and were paying enormous amounts of stock based comp, but my timing was bad, and I think I remember that they took off shortly after I sold. Sorry, it’s a lot of notes. Probably too long to post in one post and I may have to use two or three.

Splunk SPLK

May 2014 – Original Recommendation that got me interested
Why Buy
• A massive influx of data during the next decade provides a huge opportunity.
• The disruptive pricing model gives it excellent operating leverage.
• Customers love the platform and tend to stick with it.
Key Data
• Headquarters: San Francisco
• Website: www.splunk.com
• Market Cap: $5.44 billion
• Cash/Debt: $898 million / $0
• Revenue (2011/'12/'13): $121 million / $199 million / $303 million
• Earnings (2011/'12/'13): ($11 million) / ($37 million) / ($79 million)
• Recent Price: $46

A New Way to Dig Into Big Data
Splunk licenses software that helps businesses monitor their performance. Its software is already being used to understand shoppers’ behavior, fleet performance, and website security threats. And with the Internet of Things, there’s going to be lots more data for Splunk to interpret.
As a bit of background, for years, huge companies like Oracle, SAP, and IBM made a killing by building application-specific systems to analyze structured sets of data. Think of it like collecting the daily returns of individual companies (structured data) and compiling it into information about your portfolio’s performance (application-specific). This is useful in certain cases, but it requires a company to define a very specific task for the data and to have a big budget to customize the data to specific needs.
Splunk offers its clients a different way to dig into data. The company collects, indexes, and analyzes unstructured machine data, which is generated farther upstream than the more application-specific numbers. Machine data is unfiltered but contains important bits of information, such as a member ID number or the length of time someone had to wait to get a customer agent on the line. It can come from any device capable of collecting and transmitting digital signals, such as cellphones, traffic lights, airplanes, and even elevators . (Splunk shows machine data in action in this fun tutorial video.) Machine data is messy, and it’s a chore to make sense of. But Splunk has built a niche in deciphering it and presenting it in a user-friendly way.
Having access to this data creates a better view of how a company’s business is operating. That gives Splunk’s software a strong, two-part value proposition. First, companies save money because of reduced downtime, and lower overall cost than the application-specific systems. But they can also improve their decision-making thanks to Splunk’s real-time insights that can monitor almost any part of their business.
Growth and Financials - We think Splunk is in the perfect position to ride the IoT incoming data wave. It already does $300 million in annual revenue and has more than 7,000 customers, claiming more than two-thirds of the Fortune 100 as clients.
Impressive as that is, Splunk just getting started. Its pricing model is to offer its software as a free trial for 60 days and then license and charge based on peak indexing capacity. As customers collect and interpret bigger sums of data, they pay more in fees to Splunk.
This model is helping Splunk disrupt the industry. Smaller businesses don’t have the manpower or the budget to use a fully customized data solution from the likes of Oracle, but Splunk offers them a more efficient solution at a lower cost. Splunk’s individual license revenues might be small at first, but they’ll grow alongside its clients’ businesses as the software gets used for more functions. With time, customers become more familiar with the platform, which makes them less likely to abandon Splunk for a competitor.
This gives Splunk a fair amount of operational leverage. While revenue has more than quadrupled in the past three years (an impressive feat itself), free cash flow has increased tenfold. Splunk now generates more than 20% of revenue as cash. It spends liberally to attract new customers, but the cost to maintain those relationships should decrease with time. Watch for their margins to keep improving as more businesses adopt the platform.
Fiscal 2014 Fiscal 2013 Fiscal 2012 Fiscal 2011
Revenue 303 199 121 66
Net Income ($79.0) ($36.7) ($11.0) ($3.8)
Cash from Operations $73.8 $46.6 $14.6 $8.4
Capital Expenditures ($9.3) ($9.1) ($8.2) ($1.5)
Free Cash Flow 64.5 37.5 6.4 6.9
Free Cash Flow Margin 21.3% 18.8% 5.3% 10.4%
(Look above at Cash from Operations and Free Cash Flow)
Lastly, it’s creating a network effect to retain its customers. It gives tech departments free software-development kits so they can customize their solutions. It also manages online communities for users to build their own open-source applications and answer one another’s questions. Three-quarters of the questions on Splunk Answers are answered by non-Splunk employees, a testament to their base of highly engaged users.
That growing network effect, along with Splunk’s high switching costs, resulted in an enviable 94% customer renewal rate for the most recent quarter.
Risks and When We’d Sell - Splunk’s stock never trades cheap. It’s priced at 18 times trailing revenue. As with other hot-shot stocks, Splunk will need to continue to execute, both in adding new users and keeping existing ones, to justify its pricey multiple.
What’s more, customers’ IT budgets are only so big, so Splunk need to ensure that its solutions are the very best. Expect to see heavy competition from all directions: customized enterprise software providers (such as IBM or Intel), business intelligence providers (such as Qlik), and even web analytics providers (like Google). We’ll want to see Splunk continue to invest heavily in R&D and sales and marketing to stay relevant and to woo new customers from competitors.
There’s one final risk in investing in Splunk: The vast majority of its business is tied to its operational intelligence platform. Because of this concentration, any extended downtime or a security breach in that service could do short-term damage to the company’s reputation. In the longer term, if Splunk’s intellectual property were to show signs of becoming obsolete or irrelevant, we’d have to reconsider this investment.
The Foolish Bottom Line - Splunk is growing quickly in a risky new market with vast potential. It will surely attract competition, but Splunk is a step ahead of anyone else in operational intelligence, and its fantastic renewal rates give it sound footing. As companies tap into the Internet of Things, they’ll need outstanding software to help them make sense of the new data, so now is a great time for you to start a position in Splunk.

March 2016 – Bert’s Take - Is the share price outrageous?
It’s been in an extended downtrend since last summer and is 36% lower than 5 months ago.

It continues to beat consensus significantly and raises guidance almost continuously.

It has a unique and perhaps under-appreciated business model that will, over time, lead to significant levels of product revenue without additional costs.

While there are plenty of competitors, the specific solution set that Splunk offers is simply not offered by large or formidable competitors.

The level of stock-based comp is disquieting and will undoubtedly cause many potential investors to avoid it.

What’s going on with Splunk’s share price?
Splunk announced the results of its Jan 2016 fiscal year in Feb. The results were a blowout. And yet, the shares basically have done nothing to reflect the strength of the quarter or the forward guidance. The shares are still down by 36% since they made their 2015 high.

Yes, the shares still are highly valued, but far less so than at any time in the 4 years that it has been public.

Yes, Splunk will not make GAAP profits for some time to come, but it is certainly starting to generate a meaningful amount of cash.

I think it is time to examine some of the negative arguments that have apparently been weighing on the shares and try to present the case that Splunk shares are significantly undervalued at their current price. A controversial thesis? Yes, but I see a lot to like in both the company and the stock!

How to play Big Data analytics? You’ve heard a lot about Big Data for the past several years. Some will say, it’s outrageously valued both in absolute terms and relative to its peers! But when you really look closer, the objection seems to shrivel before your eyes.

Splunk is, and is likely to remain, the leader in what it does which is to "make machine data accessible, usable and valuable to everyone.” The key is in the words “useable” and “valuable.” Basically, Splunk is all about data analytics, and the ability to actually get value from all of the multiple data sources that flow into modern enterprises, but which are totally useless unless they can be catalogued, indexed, and used, as part of a predictive analytics platform. The flagship product also has features that, in combination with other cybersecurity platforms, can help determine if the data being indexed has in some way been corrupted.

Splunk has never been a cheap stock. However, its cheaper today than they have been at any time since it went public back in 2012. It spends an enormous amount of money on sales and marketing. It really did spend 82% of its revenues on sales and marketing last year, up from 76% the year before.

The people who run Splunk are neither fools or knaves, nor have agendas that are opposed to shareholder values. On the surface, it seems scarcely credible that Splunk would spend 82% of its current revenues on sales and marketing. So, why has it elected to pursue what seems like such a ruinous strategy? Basically, the reason why it is comfortable with that kind of spend rate is that the customers it lands today will almost inevitably spend several times or multiple times their initial purchase on Splunk over the years.

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 without any additional acquisition costs. I will discuss the pricing model in a bit more detail later on, but that model is one of the reasons why Splunk is likely to be one of the more profitable enterprise software vendors over the next decade.

In its last quarter, ASPs more than doubled from year-earlier levels. The basic reason for the steep rise in ASPs is an option called Enterprise Adoption Agreements (EAA), which, in return for much higher fixed prices, does away with overage pricing. EAAs cost far more than standard Splunk licenses, and while their adoption is very far from universal, they led to record number of large deals last quarter.

That being said, Splunk still booked 53% of its business on ratable contracts last quarter, a record. While the EAAs might seem to put a limit on growth of fees, in point of fact, data volumes and use cases are growing so fast that they typically slop over the contractual limits of the EAAs.

If we look back on the decisions to spend a fortune on S&M and to use non-GAAP measures in measuring profitability, the tactics were correct and have led to great results for investors!

Splunk’s biggest competitors are really not Oracle or IBM, but homemade data logs that produce primitive analytics. As a user, you could go out and buy pieces of software from loads of different vendors to do what Splunk does and attempt to build a Big Data analytics solution internally. Most Big Data projects fail because of this.

What Splunk does is relatively complex in that it takes several quite different processes and integrates them into a single, easy-to-use application. There used to be a variety of software companies which were organized on doing pieces of what Splunk does.

The amount of data that needs to be filed, cataloged, and used keeps growing exponentially. That hasn’t changed. One customer started with a license that was in the range of $40,000 and has now signed an EAA for in excess of $10 million. It seems Whatever Splunk paid to onboard that customer was really worth the cost. The cost of selling became negligible.

Gartner says the the amount of data generated will double every two years. There are very few areas in enterprise software that have such a powerful demand engine undergirding growth.

It is important to understand what Splunk does that is different from the stack vendors. First of all, Splunk is data source neutral. It doesn’t matter whose software the data is coming from.

But, of course, the biggest issue is one of speed. The stack vendors are simply not set up to index data nearly as fast. Splunk spends a huge proportion of revenues on R&D. What it has gained is technology that dramatically reduces the number of filers necessary to index the transactions. On the call, management spoke to reducing the required number of filers by 60% in two years. Other vendors simply haven’t tried to spend the money necessary to create solutions that do what Splunk and its far smaller peers are trying to do.

When it first started, I wondered how it would do a job better that others who had been at it for a decade or more. But it is quite evident that Splunk has simply been eating the lunch of the BI vendors in the data indexing space, and more and more users are realizing that they ought to be indexing and analyzing all of their data.

Simply put
Splunk does not have the competitors that you’d expect.

The market continues to expand at breakneck speed, and

The torrent of data is rising rapidly.

But don’t Tableau and Qlik also play in the Big Data space?
Think of it this way. Tableau and Qlik want to put their software on every desktop. Splunk wants all of the data of an organization to be processed by its (Splunk’s) software. They aren’t analogous. The goal of both the companies is to develop apps that allow desktop users to visualize the data and to create usable graphs and charts of various kinds to visually represent data as part of decision support systems. The software that Tableau and Qlik sell is not designed to index data, it isn’t designed to ensure that the data being charted comes from pure sources, and that threats to the data have been statistically analyzed. The issue really is that while Tableau and Qlik are focused on visualization on the desktop as a core strength, Splunk’s core competency is in data analytics and data security. There isn’t a one-for-one match.

For Qlik and Tableau to grow, they have to sell more and more seats. To me, trying to get more and more users within an organization to be able to visualize data is really counter-intuitive. I do not think it is necessary or even desirable for every knowledge worker in an organization to deal with data visualization. It is far better left to data analysts and professionals than being “democratized.”

For Splunk to grow, the enterprise has to use more data. No one cares how many desktops use the software, pricing is based on how much data is indexed per day. It is simply far, far, more simple to tell a user that the volume of data flowing through the Splunk indexers has doubled or trebled or, and that it is time to get a new license.

At this point, 70% of Splunk’s revenues are coming from existing customers who are developing more use cases and processing more data. The customers themselves do the selling. I do not think something like that will ever happen in the market for data visualization tools. If Splunk never sold another new account, it would continue to grow for some years, and it would be far more profitable. If either Qlik or Tableau stopped selling, they would destroy their financial models, within a brief span.That’s why Splunk is far less likely to blow up than these “competitors”.

How does Splunk compete with its rivals, and why will it continue to maintain competitive advantages?
I think Splunk is a company that really lacks direct competition from the larger software vendors. It maintains it has an 85% win rate, and they feel that an 85% win rate is a sign that they are simply not engaged with all of the potential customers who could use its product.

Splunk actually partners with many of the companies that you might think of as potential competitors. For example, at this time, Amazon is probably its most important partner, and it has strategic relationships with both Cisco and EMC. All of those companies might be thought of as potential competitors, but they are partners instead, and real partners in the sense that the Splunk solutions are part of solutions sold by those companies, whose salesmen get both quota credit and normal commissions for selling Splunk’s solutions. Splunk does face competitors, but most of them are companies you have never heard of before and are unlikely to hear of in the future.

Even large companies have limitations on all of the development projects they can undertake. I think it is relatively obvious that the priorities of large competitors these days is to improve their cloud offerings and not to worry so much about adjacent markets. The major takeaway in considering competitors is that, for a variety of reasons, none of them is likely to derail Splunk’s overall strategy anytime soon.

But isn’t Splunk still expensive, and why does it have such a minimal level of even non-GAAP profitability?
It doesn’t enjoy the specific benefits that I see in subscription models that generate lots of cash and lots of recurring revenues. It has offered a cloud alternative to its on-premise software for a couple of years, and it partners with AWS and others, where it provides its partners with tools that users want. But so far, the major revenue stream is license revenue, which made for 61% of total revenues last year. The percentages are changing, but not precipitously. In the prior year, it got 63% of its revenues from licenses. We really don’t know precisely the percent of cloud revenues, and it is certainly less than half the revenues not coming from licenses, as services still makes up the preponderant share.

Splunk is growing its top line rapidly, and it has lots of momentum. But other companies in other spaces are growing rapidly as well. I think the underappreciated and not-so-secret sauce in its business model is its ratable model (proportionate to usage). Last quarter, 53% of its deals were done on its ratable model. Splunk has a variety of ratable options, but the standard contract allows users to designate sources from which data can come, and then indexes the data so it can be analyzed. A typical Enterprise license will specify how much data a user can index per calendar day. Enterprise licenses are standard software on-premise licenses modified to provide for a fixed level of indexing volume. If more data goes through the indexers, the user has to pay tiered fees.

Given the growth in the volume of data generated by most enterprises, it is almost inevitable that users wind up paying significant overage fees at some point during the course of their agreements. Not all customers pay overage fees, of course, as they may have purchased adequate capacity initially, or more likely they have been pushed into EAAs. And we don’t know the volume of overage fees, but we know it is substantial. For example, a customer who wasn’t yet consuming the maximum data-throughput actually came back to re-up a year early, and significantly upped their data levels, leading to a very large sale that was unexpected by the sales people.

The growth in data volumes is basically a force of nature at this point, and investing in Splunk will certainly provide investors with the most direct correlation to the rapid rise in aggregate data volumes.

One thing that the ratable model does is to delay the timing of some revenues. When users elect to buy more data throughput than they actually use, Splunk does not account for all the revenue immediately, even if it is billed and paid for. While it has nothing like the deferred revenue balances that subscription vendors have, it has seen some increase in deferred revenues that are in in operating cash flow.

Splunk’s EAAs are very tiered, and the company has reduced the entry level into the new tiers to accelerate the adoption of its software into more use cases. As a result, it is even hard to hazard a guess as to how valuable new customers are going to be. With Splunk, almost all of its customers are going to consume more data over time than they signed up for. They will either start paying substantial overage fees or renegotiate their license to allow them to consume more data. It is the extremely rapid growth in revenues per customer over time, that has led Splunk to spend so much of its money on sales and marketing. If one looks at sales and marketing on a static basis, the 82% expense ratio is extraordinarily high. But if one looks at the revenue dynamics engendered through customer acquisition, investors would actually want Splunk to spend more on S&M than it does, since it will generate so much additional revenues from the new customers that it captures. It is this phenomena that makes the shares look like a bargain.

Obviously, the people who run Splunk are not unmindful of these concerns. There are some signs that the company is beginning to rein in the growth of its S&M expense growth, although, admittedly, not much. It will be a balancing act between growing the user base to take advantage of the overage fees and in improving profitability.

Management guidance for the current year is for 32% overall revenue growth, and while that rate was a significant increase in guidance at the time it was given, it means growth in the current fiscal year is to adj operating margins in the current year of 5%, up from 3.8% in the prior year. But this will never be a margin story until it ceases to be a hyper-growth story. The plan is to increase operating margins by about 1-2 percentages points per year. That is even a bit better than it sounds, as it will gradually be getting a higher proportion of its revenues from subscriptions, which will depress short-term revenues and margins.

Stock-based comp is not a minor item. Stock-based comp was $283 million last year, which was over 40% of revenues. At least that was down a bit from the 47% that was recorded for fiscal 2015. I imagine that over time, the company will continue to reduce its stock-based comp as a percentage of total revenues, but it would be foolhardy indeed to expect such expenses to be less than 20% of revenues for the foreseeable future.

Splunk’s other operating expenses are far greater than one might expect. G&A is 18% of revenues. That is at least 50% above what would be considered normal for its size. R&D is an extraordinary 32% of revenues. Most software companies spend half of that or less. So, there is really loads of operating leverage lying in plain view at Splunk. It is really a question of when and at what rate it chooses to pull the profitability levers.

Splunk is starting to generate a significant level of cash flow. For the year, they generated $156 million in operating cash flow, up 51% from the prior year. Most of the cash flow is coming from a significant increase in the deferred revenue balance, up 48%, reflecting both the nascent cloud revenue stream, and more deferred revenues coming from EAAs, where some of the revenue is deferred until the customers fully utilize the capacity that they have bought.

The company’s free cash flow was $104 million last year. Free cash flow was depressed last year due to one-time capex facility purchases, including their SF headquarters. It will be similarly depressed in the current year because of the build-out of their Silicon Valley campus. Normalized expenses for capex are unlikely to exceed $20 million/year after this year for the foreseeable future.

Splunk has a lengthy record of beating and raising estimates, and I believe it will continue to do so. Overall top line growth should continue to exceed 30%, absent any pronounced swing to cloud deployments. There is so much potential leverage in the business model that, at least for the next few years, EPS will be more a matter of company choice than anything else. Splunk is forecasting adj EPS of 28 cents this year, and that is up 25% since before the earnings release last month. I would be surprised if the real numbers weren’t significantly greater, although they will not enough to make this any kind of a value stock.

Some final thoughts
How much do you value a company with a unique business model that is growing at 30%+ and ought to be able to continue to do so for at least another several years? How much is the built-in future revenue from overage fees worth to an investor? How much is their potentially enormous operating leverage worth to investors? And to what extent should the shares be penalized for its excessive use of stock-based comp?

Some are going to look at the level of stock-based comp and be completely turned off. Others are going to be really enamored with the huge future revenue potential. And some are going to wonder how long Splunk can exist in a hot market without attracting far more formidable competitors.

It spends an extraordinary amount on compensation, even by the standards of a software company. A rough estimate is that it spent over $400,000 per employee last year. That is probably 1/3rd higher than typical employment costs go at software companies. Most of that extra amount is stock-based compensation. I think the combination of more profit-focused financial management, coupled with a rising proportion of revenues coming from overage payments will change that over time.

I am not suggesting that Splunk shares are cheap. But they are significantly cheaper than they have ever been since they went public, and the outlook for what they do has more promise than it ever has. The shares are quite volatile, and they aren’t defensive. But, in my opinion, Splunk is the best way to play the continued data explosion that seemingly has no end point in sight. Disclosure: I have no plans to initiate any positions within the next 72 hours.
Follow SPLK
Aug 2016 – Bert’s Take after earnings
Splunk beat revenue and EPS estimates.
The shares dropped 10% because it didn’t raise Q3 guidance above consensus (it did raise full-year guidance) due to more ratable bookings. There were a couple of downgrades by some less observant analysts.
It almost certainly significantly beat its bookings target for the quarter.
It has developed a wide range of use cases that immunize its results from the possible slowdown in spending for IT enterprise security.
How was Splunk’s Q2? - Well, it was really quite good, although some didn’t understand the vagaries of accounting and revenue reporting that were hallmarks of the quarter. I initially wrote about Splunk in March. The stock price was $47 and they got to $65+ before the earnings fall. The shares are labile. That being said, they have appreciated 29% in the past 5 months even after the sharp pullback. I’m writing another article because of the pullback that appears to be due to a totally misunderstood quarter. In point of fact, the growth of the company’s business has actually increased noticeably since my initial article, to where it is actually a better value now than it was then.
Revenues were up by 43% and they actually made a little money non-GAAP and generated a bit of free cash flow, although all of that is a product of stock-based comp. The growth in license revenues was 32%, which was clearly considered by some as a kind of a speed bump. The realities are that it was anything but that, but it was the cause of the share price reaction - and so far as it goes, the opportunity for investors.
The earnings actually were an upside - although at these levels, that is not the most important consideration. Revenues increased by 13% sequentially, which is probably not the shabbiest of results, especially as they beat the top end of the prior revenue forecast by 5%. They increased the number of new customer signings by more than 10% from Q1 to Q2. License revenues increased by 15% sequentially and services revenues increased by 14% sequentially.
Gross margins fell from 83% to 69%, although that wasn’t really a function of any pricing or expense pressures, as I will discuss below. R&D expense was flat at 31% compared to 32%. Sales and marketing came in at 70% compared to 76% in the year earlier quarter. General and administrative dropped from 20% of revenues to 16% year on year. Stock-based compensation increased by 39% year on year and increased by 5% sequentially. At least a bit of relative progress.
It is building a rather costly South Bay campus. Although they haven’t told us the exact cost of the building, it would appear to be in the range of $30-35 million
So where do people think there is a problem?
They provided guidance for next quarter of $229 million of revenue, with a non-GAAP operating margin of 5-6%. Basically, these estimates were unchanged. Investors have been habituated to quarterly beats and raises, and this was not that. They did raise guidance for the full year that will end on January 31, 2017, by about $18 million - 2% more or less, about half of it relating to the Q2 beat and the other half because of more rapid growth.
Splunk is a hybrid company in the sense that it offers both on-premises and cloud product models. It is really not feasible for any company to forecast the rate of its cloud transition on a quarterly basis - I defy any company to have an unbroken string of successful forecasts of cloud/on-prem mix. And Q2 was a quarter in which the cloud proportion of orders significantly exceeded the prior forecast. Cloud bookings were double the level that had been expected. Since what had been expected was pretty healthy growth to start with, the actual result was in excess of 150% growth.
Splunk has been assiduous in developing relationships with the three major cloud suppliers, i.e., Amazon, Microsoft, and Alphabet, in terms of integrating with their cloud offerings. Given the enormous growth of cloud deployments at all of those 3 companies, it is not particularly surprising that more of Splunk’s deployments are choosing ratable deployments. It has forecast lower percentages of ratable bookings in 2H than it has just reported; to a certain extent, the integration this company has with the large cloud suppliers may militate against that forecast. I really don’t have that quality of crystal ball.
Cloud bookings do a few things, none of them unique to Splunk. The revenues from cloud bookings flow into services and not license. The revenues that flow into services are far less than the revenues that would have flowed into license, and the change in the mix from license that has mid-90%'s gross margins to services that has gross margins of around 80% puts pressure on gross margins. As I have written many times, in the long term, cloud bookings will produce more revenue and more margin than a comparable level of on-prem bookings, but the crossover point is 3-4 years, after which the headline numbers will show material improvement.
Splunk just started offering a cloud version of its solution 2.5 years ago. If it were actually to show the kind of cloud bookings growth it showed last quarter, it would almost inevitably take at least another several years before the crossover point became visible - but I doubt the results of Q2 can ever again be repeated. (Honestly folks, the quarter wasn’t just good - it was spectacularly good, despite what the share price might be saying).
Depending on one’s point of view, it is surprising, disappointing or a significant opportunity to see analysts who do not understand the difference between on-prem and subscription billings or just how much more a cloud booking is worth than an on-prem booking. And to the extent that other observers are confused about the inevitable result on gross margins due to a swing from on-prem to subscription, it’s is an even greater opportunity.
As long as other investors misapprehend that very basic fact, there are great opportunities to trade against that misapprehension. Just how substantial is the misapprehension?
It is pretty standard for a perpetual license to cost about 3X-3.5X the cost of a single-year subscription. The perpetual license usually carries a 20% maintenance charge. Much of the time, users elect to buy subscriptions one year at a time. Sometimes the users will pay for several years in advance to secure a fixed (discounted) price. But often, users only pay once a year.
Splunk, for many reasons, doesn’t quantify bookings. That is unfortunate, but not new for them. But 4 of the company’s 10 largest transactions were based on subscription terms. All of those transactions were greater than $1 million. The math is such that just those 4 transactions would have subtracted $12 million from on-premise license revenues in this last quarter. I think if analysts had seen that $12 million in the headlines, the share price reaction, and frankly the questions on the call, would have been far different.
We would have to know the average length of the signed subscription contracts as well as their value to calculate just how strong the quarter was for Splunk - but the fact is that subscription bookings were double expectations and were 47% of the value of transactions. It might be noted that this was the second quarter in the fiscal year in which their subscription business more than doubled.
Cloud revenue, as opposed to cloud bookings, has a way to go before it will be separately disclosed. It will need to be more than 10% of reported revenues, and that probably will not be seen until later this year or in the next fiscal year. The CEO said he was not completely pleased by the percentage of business that is coming from Enterprise Adoption Agreements (EAA). But that has more to do with sales management than sales generation.
Far from derailing, this train is traveling safely and at very high speed, and the speed was as high or higher than it has ever been in Q2.
Why are some of the other security vendors are seeing far more difficult comparison?
I think it is far harder to provide a great answer to that question. A user swing to understanding broad-based security analytics is important. One thing to note is that Splunk is rated the leading vendor in what is called the Security Information and Event Management (SIEM) space. So, part of the reason is probably competitive. Splunk does security analytics better than its competitors, and that seems to be what customers are looking to have these days. It has had a fair amount of success with using the analytics as part of a fraud and risk management solution, even though the products it sells are not really labeled to do that. It has actually been labeled the best fraud protection product for two years running without having a specifically labeled fraud protection product.
Another factor is that the average Splunk customer has 168 independent products, and the ability of the Splunk solution to provide seamless insight in what’s happening across that landscape has been a demand driver as well.
It is worth noting that while most investors tend to lump Splunk in with all of the other vendors of IT security solutions, users look at the log data for other purposes besides just security. Without going through all of the use cases customers actually look for, less than 50% is for security. Some common use cases relate to looking at host details and comparing hosts in terms of their efficiency. Many users essentially use Splunk to proactively detect performance issues and take proactive steps to prevent those issues from impacting end users.
Overall, Splunk gives IT admins insight into the performance of their networks. Cybersecurity threat management is a relatively newish application. There are many applications that are built on top of the data that one can derive from the Splunk engine, and they do lots of different things. But optimizing IT ops is probably one of the primary demand drivers, and Splunk’s engine does that as well as anything else that is apparently on the market. In all, what is important is that the correlation between Splunk’s revenue growth and the growth of overall IT security spending is nowhere as close as might be thought, and the fact that some IT security vendors have had disappointing quarters hasn’t impacted Splunk’s business, and is unlikely to do so in the near future.
I might say that Splunk takes care of requirements that have existed for a very long time in a totally new way, and users apparently feel these new ways of identifying cybersecurity threats are more valuable or better address compliance issues than the traditional firewall solutions. But I think it is a mistake to try to assign any one demand driver to the success it is enjoying.
It has a significant level of sales momentum that grew in Q2, that its pipeline is strong, that its Q2 linearity was a bit better than normal and that its competitive position remains at the absolute top of the heap. Users like the value they get from Splunk, and if that value isn’t quite security or any other single category, there isn’t any issue with demand.


Part 2 of my old notes:

After Friday’s 10% share price pullback, Splunk has an enterprise value of $7 billion based on 138 million outstanding shares, including full dilution. The EV/S is 6X.
It is forecasting EPS of about 30 cents this year, and the consensus for next year’s earnings is around 50 cents. No one is buying these shares because of the company’s short-term profitability. “Normal” profitability is years in the future, and the number of years in the future is a function of when growth moderates significantly and the company decides to rein in sales and marketing spend particularly. Splunk has a projected business model with 25% operating margins. They spend 70% of revenues on sales and marketing. On a non-GAAP basis, the spend ratio is still 52%.
They forecast a cash flow from operations margin of 23%. That implies $210 million this year. Given the construction of the new HQ, free cash flow is at around $160 million. That is a free cash flow yield of 2.3%. Using estimates for FY 2018, when management will have finished its major real estate investment, CFFO margins should rise by 200+ basis points, leading to CFFO for the year of about $300 million and free cash flow of $280 million. That is a free cash flow yield of 4%, not that unreasonable, considering its growth. Is the current share price a gift? Hardly so. Does it represent a decent entry point? I think it does, and I urge investors to take advantage of the pullback. The analysts who cover this name are likely to figure out soon enough that this past quarter was one of the stronger ones that Splunk has had, and that the future looks encouraging as well.
The investment case for Splunk

  1. The 2nd quarter was a significant beat .
  2. The shares declined by 10% in the wake of the earnings, based on significant misapprehensions regarding the state of demand for the company’s products.
  3. This misapprehension was entirely due to a misunderstanding on the impact that Splunk’s shift to ratable revenues is having on the P&L.
  4. While Splunk neither forecasts nor reports specific license bookings, almost certainly based on the information at hand, bookings were an all-time record and significantly above their prior forecast.
  5. It continued a slow but steady improvement in profitability, cutting expense ratios for all operating expense categories.
  6. It continues to take business from legacy vendors of what are known as Security Enterprise and Information Management (SIEM) solutions.
  7. Its results are less correlated to IT enterprise security spending than might be commonly supposed.
  8. It has strong relationships with the 3 major cloud vendors, and enterprises moving workloads to those vendors frequently add Splunk as their log analysis tool of choice.
    SPLK shares are, perhaps, expensive for some. And, with the rapid migration of Splunk demand to ratable purchasing solutions, its story is a bit more complex. But even with that migration, the company still was able to raise full-year guidance. I think it behooves investors to take advantage of the share price impact to initiate or add to positions in SPLK.
    Disclosure: I am long SPLK. (In March he hadn’t yet taken a position).

Oct 2016 - Seeking Alpha article
The leader in the nascent and rapidly growing IT Operations Analytics market.
Also a leader in Security Information and Event Management.
At 6.75x FY18 sales, Splunk is inexpensively trading given its growth outlook.
Splunk provides software that enables institutions to monitor, search, analyze and visualize massive streams of real-time and historical machine data (big data) coming from a variety of sources.
Following their Q2 earnings release, investors worried about the “declining” gross margin – 79%. To put the GM in perspective, Splunk’s GM is at the upper end of the range for software vendors and investors’ concerns are overblown as the company is investing in staff to support sales that are growing over 40%.
I see GM continuing to decline on higher maintenance and service expense, primarily because of continued investment in salary and benefits meant to augment future sales. The divergence between expectations and actual GM performance could create buying opportunities.
Over the next three years, it’s mission-critical that Splunk continues to maintain its leadership position within IT operations analytics and capture the growth opportunity that lies ahead. That means sacrificing some GM. The IT operations analytics market crossed $1B in sales during 2014, and is forecasted to grow at an average of 19% per year through 2019. It grew 37.5% in 2015 with Splunk capturing the largest share of the market at 28.5%. If it can grow at about the rate of its core market in that specific product category and gain traction in its secondary markets, then investors could be looking at 25%+ sales growth through 2019.
Splunk is positioned in Gartner’s leader quadrant for Security Information and Event Management alongside IBM and LogRhythm. Splunk’s advantage is partly attributable to its position within IT operations; the security attachment is a smooth transition because Splunk Enterprise is already installed. The knock on Splunk is its predefined correlations for user monitoring and reporting, relative to the richer content of use cases provided by competitors. Nonetheless, it has launched a successful and highly rated attachment to Splunk Enterprise.
While Splunk faces challenges in terms of improving its profitability, its leading position within the nascent IT operations analytics industry and its leadership position within SIEM outweigh declining profitability while the company remains in high growth mode. Consequently, I see Splunk as trading inexpensively relative to the industry on a forward P/S basis with sales expected to increase by 36% in FY18.
Additionally, the average estimate for FY17 sales is $914 million, pricing in a substantial slowing of revenue growth during the back half of the year; I see sales coming in at $942M, which is still at a slower rate of growth than the first half of the year heading into the seasonally strong time of year. Simply stated, Splunk should easily be able to beat sales expectations in Q3 and Q4.
Cloud, Security and Intelligence Help Drive Growth
Splunk has grown from almost half a billion dollars in sales during FY15 to almost $1B of sales in FY17. While license sales have been phenomenal, growth is really being driven by maintenance and services, including the as-a-service offerings. Granted, profitability over the period has deteriorated; in my view it‘s operating inefficiently because it is challenging to right-size a company that is growing at the rapid pace that Splunk is growing. I expect an improved profitability picture when the pace of growth slows and management gets a better feel for demand; for example, Splunk Cloud is growing at twice the pace that leadership envisioned.
For FY17, I see revenue growing 41% to $942, which is above the estimates. That comes with an 80% gross margin and a -45% operating margin. For FY18, I’m forecasting sales of $1.28B (+36% y/y) with a gross margin of 76% and an operating margin of -45%. Leadership does need to tighten up on operating expenditure by squeezing more out of the R&D and sales budgets.
I’m forecasting deteriorating cash flows from operations, but CFO will be enough to cover capital expenditure. The key thing here is that if management doesn’t reign in the expenditure as a percentage of sales, then there is an adverse impact to CFO. That will have longer-term adverse implications, but at the same time, Splunk has quite a growth engine going right now and that should be priority number one.
There is plenty of cash on the balance sheet and no debt. I don’t expect management to issue debt any time soon because given the growth profile, there really isn’t a need to make a large strategic investment and the cost of debt could be punitive given the profitability profile. Share repurchases aren’t likely for the foreseeable future.

Fresh Bull Market and Cheap Shares. Splunk should be starting a new primary bull market after undergoing a primary bear market that lasted from FY14-FY16

Splunk doesn’t generate GAAP profits yet. On a P/S basis, It is trading at a 30% premium to industry. But the industry’s 5-year revenue CAGR is 15%, with Splunk’s being 59%.

Oct 2016 – MF RB Best Buy Now
Splunk has a role in business intelligence. But it has so many more possibilities. This data-mining platform already lets users delve into everything from shopper behavior to network security, and the burgeoning Internet of Things offers an exponential opportunity. In its most recent quarter it added over 500 new subs, driving 43% top-line growth. For now, a lot of that growth is coming from companies that want to look at the unstructured machine data produced across servers and networks — often asking questions that enterprise software can’t answer. But multiply that opportunity by every sensor, RFID tag, electrical meter, car chip, and so on. Splunk mostly charges customers by the data-indexing capacity they use, so more data is more money. And the volume of data in the world is going nowhere but up.
Nov 2016 - 3 Cisco Partner Summit awards –
Splunk was recognized as Global Partner of the Year, as well as an Outstanding Solutions Partner and Public Sector Consultant Partner of the Year.
Nov 2016 – Oct quarter results

Financial Highlights
Total revenues - $245 million, up 40% from $174 million.
License revenues - $140 million, up 34% from $104 million.
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. We provide 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 our solutions. Our passionate customers and their innovations with our 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 U., Garanti Bank (Turkey), Monash U. (Australia), Rackspace, State of Maine, U. of Illinois, U. of Miami, U.S. Dept of Homeland Security, U.S. Department of State, Yahoo Japan, and Zendesk.
Introduced Talk to Splunk with Amazon Alexa, enabling Splunk to interface with Amazon Alexa and thereby achieving a Natural Language interface for Splunk. (Wow!)
• 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
• Glassdoor named us as one of the top-rated public cloud company employers.
• Splunk Cloud was named the 2016 Best Big Data Analytics Solution in the Cloud
• Hosted the 7th annual Splunk Worldwide Users’ Conf. with over 4,500 Splunk enthusiasts.
• Hosted SplunkLive! events in cities worldwide, including 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).
Adj operating margin is expected to be between 5% and 6%.
My take: Looks very good.

And here’s a cautionary view from Seeking Alpha
For three long years, Splunk has traded virtually sideways. The stock rose to over $100 on over-optimism following the IPO, but never got back there.

Now at $60 following FQ3 results, Splunk has too high a market cap, highlighting the problem plaguing them all along.

The biggest issue facing Splunk is one often faced by fast growing companies. Revenue growth in excess of 40% isn’t supportable long-term, and the market doesn’t like decelerating growth.

The FQ3 results repeated the theme of the last year. Quarterly results and guidance beat analyst estimates, but the absolute growth remains on a downward path. Revenue growth recently peaked out at 50% a year ago.

They had revenue growth of 40% this quarter, but guided to only 30% growth for the current quarter. Sure, they typically beat estimates by somewhere near $15 million. A similar beat for next quarter would produce revenue of $300 million to generate growth of 36%. When a huge beat is tied to a 4% reduction in the growth rate, the stock usually has a problem rallying.

Splunk does have some promising numbers. Free cash flow hit $32 million in the quarter, up 50% from a year ago. It should easily beat the $104 million generated last year.

The problem though is that at a stock price of $60, the market cap tops $8 billion. Revenues will be under $1 billion this year. Due to license revenue, earnings aren’t necessary beneficial to analyze, but even free cash flows of $150 million for the year leaves the stock aggressively priced at over 50x free cash flow.

Splunk has been trapped in a tight range for years now. A rally above $60 could occur, but one has to question how far the stock goes as the valuation reaches $10 billion at only $74.

Jan 2017 – Rated #1 by IDC
Ranked 1st in Operations Analytics software market share for 2016 for the 2nd year in a row, it had the top market share with 28.5%.
According to the report “Splunk achieved rapid growth driven by expansion in log management and analysis capabilities. The number of data sources, data volumes, and use cases continued to expand driving increased customer adoption. It has invested in solutions for Hadoop, mobile, real-time wire, and security. It supports pre-packaged content and visualization for a variety of use cases including. This is making Splunk-based analytics available to an increasing variety of IT and business users.”
Splunk Enterprise and Splunk Cloud enable organizations to consolidate silos of machine data, and to use analytics to improve IT service health, reduce costs, resolve problems faster and drive critical business decisions. Splunk IT Service Intelligence, built on the powerful Splunk platform, is a machine learning-powered monitoring solution that employs analytics to help organizations find root cause faster, and lower mean-time-to-resolution.

Jan 2017 – My review
I read through this whole document and Splunk looks good to me. Not a sure thing, and excessive stock based comp is worrisome, but I may add a little.

Jan 2017 – Bert’s update - Splunk: different states of matter
At Splunk’s annual meeting some thought it presented an ambiguous picture about revenue growth.
It’s had a difficult time forecasting - it can’t forecast the timing of large deals and thus has over-attained in dramatic fashion.
It’s been undergoing a transition to cloud that has impacted gross margins and is probably retarding revenue growth - although the raw numbers remain fantastic.
Use cases for machine data continue to expand exponentially.
It continues to dramatically outclass the competition based on all manner of surveys in its machine data space.
Splunk sees and indexes all data. It’s a data engine that operates without gray areas, without shadows and without clouds. That is not a bad definition of its functionality. It’s a far less appropriate definition of the performance of its shares and how many observers view the company. Issues that have held back the shares have included concerns about profitability and the potential for slowing growth. I am far less concerned about some dramatic decrease in the company’s growth rate than I am in the cadence of its path to profitability.
Because of its growth and recent stock price weakness, the shares have reached a relatively attractive valuation. And it is likely to see a far better share price performance and positive alpha after the quarterly report in Feb shows that it’s not really seeing any material growth slowdown.
Recently there have been observerswho believed that their analyst meeting reduced guidance for the coming year. The forecast revenues for the upcoming fiscal year at $1.175 billion would be 26% growth, and far down from 40% this year. That kind of growth would not be greeted well.
But given their track record for guidance guidance, I wouldn’t use those numbers as serious estimates. I expect the company will beat estimates for the current quarter and will raise guidance for next year. Percent growth is moderating a bit as it crosses the $1 billion level. But how much is growth moderating? My guess is not much, and not anywhere close to what is forecast.
Probably the most significant investment issue for has been the growth of stock-based compensation, which has been out of control. The numbers speak for themselves. The number of shares is up 40%-plus in four years.
Splunk has acknowledged that they need to manage and reduce stock based comp expense to levels that do not produce such ongoing and massive dilution. But so far, acknowledging the issue and acting to curtail share grants have been two different things. About the best that can be said is that stock based comp growth is beginning to grow at rates below that of splunk’s revenue increases.
Splunk shares are up 7.60% today while I’m writing this article. It’s basically due to the valuation that Cisco is paying for an acquisition. Splunk has a market capitalization of $7.6 billion and an enterprise value of $6.6 billion. Based on consensus for revenues for the fiscal year that starts in less than a week, the EV/S is 5.6x, perhaps half of what Cisco is paying for Appdynamics. Personally, I think that growth opportunity in the SIEM space (Splunk’s core functionality) is significantly greater than that in Appdynamics’ space, but one can never know precisely what animates specific acquisitions.
Splunk shares are now likely to be seen by many as a potential takeover target at valuations far above recent values. That’s probably not an unreasonable speculation, although I certainly have no idea as to when or whether it might be acquired.
Splunk shares have a reasonably positive First Call rating. The consensus price target is $71, more than 30% above the current price. I think it will have to start achieving some real expense management even in the midst of its pivot to cloud revenue sources. (Their transition to the cloud is a separate discussion. It won’t be nearly as dramatic as it has been for other companies, and because of the nature of what splunk does. It will always have a hybrid cloud model. It has already lost about 5% of gross margin because of the transition. Ultimately gross margins will rise back to pre-cloud levels.)
Splunk is nearing the end of its fiscal 2017 with results coming out soon. Let’s look at their growth drivers and see if there is a reason to believe that they might be waning and if concerns are valid.
Setting the stage
In Fiscal 2016 (the 2015 year) revenue was up 48% and that growth was consistent throughout the year with 49% growth in Q4. At the start of this fiscal year, the company provided guidance for $880 million, which was growth of 32%. It also forecast that non-Gaap margins would be about 5%.
Coming into the end of the year, the current consensus is that it will achieve 39% growth for the year, which will then decline to 27% next year. Last quarter, they had 41% growth. Through nine months, revenue growth has been 43.5%. My guess is that the results for Q4 will again be substantially greater than guidance and the consensus.
The current consensus of 31% for the current quarter is ridiculously low. I wouldn’t take any forecast that Splunk provides as being its best estimate as to what revenues might be, but rather something like the minimum revenues that are contractually committed.
Currently guidance is for revenues that will decline sequentially. Does that seem terribly likely? Just to compare, last year Q3 to Q4 revenue rose 26% sequentially. There is no sign that demand has broken down or that it is shifting to some lower gear of growth or sales execution.
Oh by the way, it’s going to beat the 5% non-Gaap operating margin forecast as well. It is now forecasting 6%. Splunk’s revenue growth is slowing, but by a far lower rate than some observers imagine. Most of the slowing really is a function of more revenues moving to the cloud, which over time will actually contribute to growth.
What are the demand drivers for Splunk’s solutions and who does it have to beat to remain in a growth mode?
As mentioned earlier, the market into which splunk sells its software is called SIEM. Splunk has been the leader in the space for several years. An adjacent market in which it has been come entrenched is IT Service Intelligence (ITSI). It has built modules that are oriented to insuring that it services are delivered without interruption, and that anomalies are tagged before they cause problems. Much like locating a cancer before there are any visible symptoms.
It is rated #1 in worldwide IT operations analytics for the second year in a row. Its market share in the space is 28.5%. There is no evidence that its market position is deteriorating. If it is going to experience materially slowing growth it will be because the markets into which it sells are slowing and because itis unable to develop additional use cases for its software.
Splunk has been developing additional use cases for its log monitoring software since it has been public and probably before that. It is part of the way the company operates. Most recently it has developed a series of products that that develop information about anomalies in the usage of data and are designed to be a part of a security fabric.
It has a wide variety of tools that try to extract value out of all the machine data being created. it has solutions that provide analytics for hadoop. It has tools that allow users to make marketing and promotional decisions in real time. It can provide analysis of the data that is being received through IOT sources.
Splunk’s solutions are used to diagnose operational issues through correlations, and it provides proactive warnings by detecting patterns and anomalies. I can’t even try to describe all of the use cases it has developed in the past several years. But the conclusion that one can readily draw is that the demand environment hasn’t deteriorated, it isn’t likely to deteriorate, and that the concerns about that subject are dramatically overblown. Splunk is likely to continue to grow revenues above 30% for several more years to come. Growth will really be a function of their ability to manage the growing size of the business and to start to achieve some economies at scale.
Profitability and cash flow - the reasons why companies are in business
Splunk has a very long way to go in order to become a profitable company based on GAAP standards, although it does generate positive cash flow. Last quarter, it converted a Gaap operating loss margin of 37% to a non-Gaap reported profit of 7%. Most of this difference was through the exclusion of stock-based comp expense and I believe that Splunk has gone beyond the limits of what most investors find acceptable.
Their largest area of stock based comp is in R&D. However, while its level of stock based comp is quite elevated, giving sbc has become a typical strategy these days for companies that are trying to hire to increase their R&D. Splunk’s strategy calls for rapid expansion of its sets of solution and to do so it needs to increase R&D substantially. It won’t be easy to control the sbc that will be necessary to attract R&D developers in what is a very tight labor market. In Q3, their Gaap expense for R&D reached 35% of revenues, compared to 32% the year earlier. Stock based comp was actually 52% of the gaap spend on R&D. It seems obvious that Splunk will have to reform its financial management in the near term in order to start down a path to profitability accepted by most investors. Interestingly, not a single question on the conference call was addressed to that subject.
Last quarter it spent $167 million or 68% of reported revenues on S&M. That was better than the year before when it was 74%, but no one imagines that any company can spend much beyond 30%-40% of revenue on S&M and make Gaap profits.
Why does a company at this stage of growth spend such an incredible portion of revenues on S&M? It is pretty simple really. While some focused on the revenue forecast, a better slide to look at would have been the one in which Splunk provided a cohort analysis of its customers. Five years after initial purchase, the users in the 2011 and 2012 cohorts had increased their bookings by 5x, and increased their data usage 8x. The data usage upcharges clearly carry essentially 100% gross margins. With 87% of license bookings coming from existing customers, management faces a dilemma in trying to balance growth opportunities and profitability and thus far has come down on the side of growth.
Given just how substantially customers increase their consumption over the years, it is not all that surprising that Splunk has chosen to spend an extraordinary amount to acquire customers and for R&D for additional solutions with which to attract prospective users. From an investor standpoint, it is making a decision to maximize longer term returns in a burgeoning space, but doing so will delay and elongate the path to profitability for several years.
When land and expand works, and it works in spades for Splunk, the logical strategy IS to spend lots of money to secure landings. As it happens, the average order size is only $50-$60,000. Capturing customers of that size is going to be relatively expensive, and it will take time before the customers captured will turn into whales, so it’s a reason as to why the path to profitability will be long and arduous.
Overall, operating expenses were 117% of revenues in fiscal Q3 compared to 124% the year before and to 122% of revenues through the first nine months of the fiscal year. There is progress, just not dramatic progress that is going to lead to significant earnings anytime soon.
Despite the losses, it has generated a meaningful level of Cash Flow, but more than all of the cash flow is a product of stock based comp, although some cash flow comes from the increase in deferred revenues. As it pivots to receiving more revenue from ratable sources such as the cloud, it seems likely that deferred revenues will rise more rapidly than heretofore but overall significant cash flow growth has to be driven by profits. Deferred revenues will never be substantial relative to total revenue generation.
How will splunk deal with its conundrum
I think that for the most part it will continue to trade off margin for revenue growth. On analyst day it forecast that it would grow by 25%-30% annually over the next three years and that non-Gaap margins will reach 12%-14%. Those numbers are actually somewhat better than they might seem. As it will be transitioning more of its revenue to the cloud, and as, at least initially, the cloud has brought down gross margins by 4% to 6%, and it has probably lopped a few points off reported growth as well (although the cloud and perpetual license growth both over-performed last quarter). Splunk is situated at a strong growth nexus that, if anything, is getting stronger, and it seems to have a dominant competitive position within its target spaces.
Splunk sees its TAM as $55 billion and this year it will have $1 billion in billings. It is not going to sacrifice its swing at a market of that size to achieve better profitability - not this year, next year or any time soon. I assume the dilution will slow down from 6% or 7% per year to a more modest rate as time goes on, but it is going to remain a factor because of how Splunk grows.
For the most part new customer growth has been relatively modest. The strategy has to be to sell new customers lots more products than the initial purchase, and of course to enjoy the increased revenues that come more or less automatically with increasing data usage. And the strategy has to be to sell larger initial orders and to achieve rising asps. That can only be done by expanding the use cases for machine data and that means that R&D spend increases are unlikely to slow much in the near future. Thus, Gaap margin growth and substantial Free Cash Flow margins are not likely to be in evidence prior to 2020 or so.
I think that Splunk will grow faster, or develop a higher cloud portion of revenues, than it is forecasting. But it won’t able to do that AND have the kind of substantial profitability that investors want. There are several kinds of investment. Splunk is one of those where profitability is going to take a back seat to growth. Disclosure: I have no positions in Splunk, and no plans to initiate any within the next 72 hours.


Part 3 of my old notes:

Feb 2017 – Jan quarter results

Total revenues - $306.5 million, up 39%.
License revenues - $190.5 million, up 35%.
Adj op income - $35.8 million;
Adj op margin - 11.7%.
Adj earnings - 25 cents, up from 11 cents.
Op cash flow - $102.5 million
Free cash flow - $84.4 million.
Full Year
Total revenues - $950.0 million, up 42%.
License revenues - $547 million, up 35%.
Adj operating margin - 6.2%.
Op cash flow - $202 million
Free cash flow - $156.5 million.
It is early in our data and analytics journey – it is a big market with a tremendous opportunity that we are uniquely positioned to win. We are confident in our long-term strategy to become the ubiquitous machine data platform for our customers.
Fourth Quarter 2017 and Recent Business Highlights:
• Splunk was ranked number one in worldwide IT Operations Analytics (ITOA) software market share for 2016 by IDC for the second year in a row.
• Splunk won the award for Best SIEM for Splunk Enterprise Security (Splunk ES) and was named Security Vendor of the Year in the Computing Security Excellence Awards 2016.
• Splunk was named a finalist in CRN’s 2016 Products of the Year
• Splunk ES was named Best Enterprise Security Solution at the 2017 SC Awards.
• Splunk won 2016 Governance Team of the Year
• Hosted over 1,100 attendees at Splunk GovSummit 2016
• Hosted SplunkLive! events in Beijing, Columbus, Long Beach, New Brunswick, Santa Clara, Shanghai, Taipei and Utrecht (Netherlands). Presentations can be found on the SplunkLive! Website.
For the quarter
• Total revenues - $231 million t0 $233 million.
• Adj operating margin negative 2% to negative 4%.
For the fiscal year (ending January 31, 2018):
• Total revenues are expected to be approximately $1.185 billion (up from $1.175 billion in prior guidance).
• Cloud revenues $85 million.
• Adj operating margin 8%.
Conference call:
As pleased as I am with our progress, we remain in the early stages of our addressable market. We have a unique opportunity to establish Splunk as the standard for our customers and their data analytics and will continue our focus investments in our product portfolio, our field groups, and the cloud.
In that context, customer adoption is ramping. Historically, more than 70% of our quarterly license bookings have come from up-sells to existing customers. At our Analyst Day, we updated this to 80% on a full-year basis, reflecting the increasing adoption of Splunk by our customers. (That’s amazing!)
Turning to overall ratable mix, which includes term and cloud transactions, we realized 45% of software sales in Q4 and 46% for the full year, both in line with our expectations. Going forward and as I laid out in January, our plan is to transition our business model to 75% subscription by fiscal 2020.
With the long-term nature of this objective and considering the highly variable quarterly mix, we’ll be updating you annually as it relates to subscription mix targets and performance. Again, for next year or fiscal 2018, we expect 50% of the business to be subscription.
Turning to margins, which are all non-GAAP, quarterly gross margin was 85% consistent sequentially and 4% lower than a year ago, reflecting the expansion of our cloud business.
As we’ve discussed in the past, we’re in the early stages of our cloud offering and gross margin from cloud is low at these small sizes. Specifically, in fiscal 2017 cloud lowered gross margin by 5%. As we scale that business, the impact from cloud margin headwind will diminish over time as you’d expect.

Feb 2017 – Splunk Enterprise Security (Splunk ES) won the Excellence Award for Best Enterprise Security Solution.
Winners in the Excellence Award category of the SC Awards were selected by a panel of IT security experts from both the private and public sector. During the judging process, each finalist went through a rigorous evaluation that included in-depth analysis, analyst reports and/or product reviews. (That seems pretty impressive)
Mar 2017 – Splunk, provider of the leading software platform for real-time Operational Intelligence, today announced it was chosen as a Leader in Forrester’s Security Analytics Platforms report.
For this report, Forrester evaluated Splunk Enterprise and Splunk Enterprise Security. Splunk received a 5.0 out of 5.0 in 17 criteria, including real-time monitoring, infrastructure, log management, scalability, and dashboard and reporting.

Mar 2017 – I asked Bert
Hi Bert, Splunk seems to me to be a great company with a big future and I’m puzzled that you haven’t taken a position in it. What holds you back from Splunk, if I may ask?
Bert responded:
Yes Splunk is a great company and if I had room for more names in my portfolio, it would surely be there. If you want my advice - own it! I have followed it since the time of its IPO and what it does and how it does it (SIEM) is a big deal for most users these days and it continues to develop use cases.

Mar 2017 – MF Article by CMF FrankDip
A change of direction could lead to near-term volatility
Management has said that this is a transition year for the company. I give them a lot of credit for realizing the changes they are making may negatively impact results in the short term, and for being willing to share that information with investors. Here’s what we’ve learned.
What does Splunk do? It makes software for analyzing machine data. Machine data is one of the fastest growing and most pervasive segments of big data, generated by websites, applications, servers, networks, mobile devices and the like. By monitoring and analyzing everything from customer clickstreams and transactions to network activity and call records – and more, Splunk turns machine data into valuable insights no matter what business you’re in. It’s what they call operational intelligence.

Splunk started fiscal year 2018 in Feb. In the fiscal year just ended revenue was up 42% to $950 million. It guided for 25% growth and $1.185 billion in revenue for the current year and targeted $2 billion in sales by fiscal 2020.
To achieve the goals, it’s taking a step backward to take two steps forward. What is changing?
There are two fundamental changes that the company is making. One is related to product direction and the other is related to reorganizing the sales team to meet the new product strategy.
Product changes: It sells both perpetual license agreements and subscriptions, also known as software as a service, or SaaS. It wants to move to selling more subscriptions as this will produce a steadier and more predictable income stream. The chart below shows subscription bookings as a percent of total bookings by fiscal year. By fiscal 2020, they hope to have 75% of bookings from subscriptions,.

Sales team changes: The sales force is facing myriad changes this year. Everything from its organizational structure to its account focus and incentive plan are changing. Pair that with having to learn about new products and change sales habits, and you have the possibility of a chaotic fiscal 2018.
Account and organizational changes: Splunk is reducing the number of direct accounts each sales rep serves down to 25. In comparison, three years ago, each rep had 75 customers to serve. All other accounts will be moved to the third-party distribution channel. The new structure will require a far greater knowledge of strategic selling for the account sales reps. Each salesperson has fewer accounts and will be expected to have the time to fully develop the sales potential of the customer by selling at higher levels of management and across all departments.
Incentive plan changes: Up til now the sales incentive plan was skewed toward selling perpetual licenses and away from selling software subscriptions, the opposite of management’s goal. So the plan has been changed. Changing financial incentives to create a change in behavior can be tricky. They will have to keep a sharp eye out to see how it effects results and if any tweaking to the plan is required.
They also wants salespeople to sell more cloud-based subs as opposed to the on-premises subs. By selling more cloud-based products, the company can expand its market from just managing data within a customer’s firewall. Ideally they’d sell a hybrid subscription that will encompass data both on-site and in the cloud. The chart below shows the company’s cloud bookings in relation to overall subscription bookings.

Moving beyond low-hanging fruit
Splunk needs to expand beyond selling to customers that are familiar with Splunk – the low-hanging fruit. To do so requires salespeople to break out of their comfort level and sell to more departments within current customers, create relationships at higher levels within a customer’s executive suite, and find altogether new accounts. This takes training, time, effort, and skill.
At the end of January, Splunk had 13,000 customers. The plan is to grow the customer base to 20,000 by the end of fiscal year 2020.
Final thoughts on the transition year
It is important to recognize that this is not easy. It is not a sure thing. If Splunk hits some speed bumps this year, it may miss quarterly guidance, which could very well result in a hit to the share price. By understanding the complexity of what the company is doing beforehand, you can keep things in perspective and avoid selling shares if it simply misses guidance. In fact, if you believe in its long-term prospects, a shortfall in a given quarter may give you the opportunity to add to your holdings at a discount.

Apr 2017 - Splunk Cloud Launches on AWS Marketplace
Splunk, provider of the leading software platform for real-time Operational Intelligence, announced support for SaaS Contracts in AWS Marketplace. The new globally available API capability enables seamless procurement and deployment of Splunk Cloud. The automated and accelerated purchasing process for Splunk Cloud via AWS Marketplace ensures fast time-to-value for customers leveraging Splunk solutions to gain real-time security, operational and cost management insights across their Amazon Web Services (AWS) and hybrid environment.
The U. of San Francisco is a customer: “Ensuring the privacy of student, faculty and staff data is of critical importance. Adopting Splunk has enabled our small IT team to protect against increasingly sophisticated threats”.
AWS Marketplace streamlines customer adoption of technology such as Splunk Cloud via a consolidated purchase environment and integration with their AWS accounts, which have terms already established. AWS Marketplace SaaS Contracts simplifies the process even further by enabling customers to prepay for Splunk Cloud based on expected usage tiers through contracts up to one year in length. The Splunk Cloud cost is integrated into the customer’s AWS bill once they subscribe, resulting in a consolidated, easy to process bill. By the end of the first half of 2017, Splunk will offer term-based pricing for extended contract terms for up to three years in length, offering specific discounts for longer contract duration purchases.
“Splunk is an innovative software platform that many of our customers rely on to drive efficiency and visibility across their entire infrastructure, and now customers will be able to purchase multi-year SaaS contracts through AWS Marketplace for the first time,” said the VP of AWS Marketplace. “Our customers want easy-to-deploy SaaS solutions like Splunk Cloud to drive data-driven operational efficiencies and speed innovation, with the long-term contracts now possible via AWS Marketplace, they can experience even greater cost savings.”
By offering support for SaaS Contracts on AWS Marketplace at launch, we are excited to collaborate with AWS on this latest go-to-market method for bringing Splunk Cloud to the 100,000 current active AWS customer base.

Apr 2017 - AWS DevOps Competency achieved
Splunk has achieved the AWS DevOps Competency by demonstrating proven experience, technical proficiency and success in helping businesses implement continuous integration and continuous delivery practices. Splunk has obtained several other AWS Competencies, including Government, Big Data, Security and IoT.

May 2017 – Another Award
Has been named to the LinkedIn Top Companies list, which recognizes the 50 best companies in the US at attracting and keeping top talent. Splunk is hiring around the world in all departments.

May 2017 – Apr quarter results
First Quarter 2018 Financial Highlights
• Total revenues were $242.4 million, up 30%.
Remember, we have no foreign exchange exposure to our revenue line as we denominate revenue globally in U.S. dollars.

• Adj operating loss was $2.8 million; Adj op margin was -1.2%.
• Adj loss per share was 1 cent.
• Operating cash flow was $41.4 million
• Free cash flow of $35.8 million.
• Signed nearly 500 new enterprise customers. New and expansion customers include: Alabama Dept of Trans, Airport Authority Hong Kong, California Dept of Social Services, Lockheed Martin, Lloyd’s Bank, Merck KGaA (Germany), UK Ministry of Defence, U of North Carolina at Chapel Hill and U.S. Navy.

• Announced Splunk’s position as a Leader in The Forrester Wave™: Security Analytics Platforms. Forrester awarded Splunk Enterprise Security with the highest possible scores.
• Splunk ES received a 5-Star review from SC Magazine, which noted Splunk as an analytics-driven SIEM with straightforward functionality at a very reasonable price.
• Splunk won three awards in TechWorld’s techies 2017: Best Security Technology of the Year, Best Cloud Technology of the Year and the Grand Prix Award.
• Splunk was named a winner in The Cloud Awards in the category of Best Hybrid Cloud Solution.
Financial Guidance
• Total revenues $268 million.
• Adj op margin 4%.
Updating previous guidance for the fiscal year
• Total revenues $1.195 billion (up from previous guidance of $1.185).
• Adj op margin 8% (unchanged from prior guidance).

My Take – Looked great to me. All those awards mean something! The key is that Subscription Revenue (Maint and Serv) topped License Revenue for the first time, and that was the goal of their whole reorganization.

Jun 2017 – Bear’s Summary
We’ve heard a lot about big data. Heck, with TLND and HDP, I’ve said a lot already. Talend integrates your systems, Hortonworks helps you store, process, and analyze data in Hadoop databases. Splunk is a little broader. It captures and organizes data in real time, then identifies patterns. There are a lot of use cases: application management, analytics, and even security. From my admittedly limited vantage point, it sure seems Splunk is really becoming a very big fish in the big data pond. (data lake?)

I increased my Splunk position mightily in May in anticipation of a great beat and raise earnings report. Well, I also increased it after earnings. That was basically my reaction. I was very pleased that recurring revenue increased 48% YoY – that’s a fantastic pace and it’s not slowing down. I was also very happy to add more shares even cheaper (at a PS around 8.5). This is a rare discount in an expensive market.

June 2017 – Bert’s Deep Dive (again)
Can Splunk shares escape their kennel?
Splunk shares have been in the doghouse for 2 years.
Its last quarter was greeted with investor disapproval sending the shares down a bit more.
It is a long way from achieving GAAP profitability.
Concerns exist about potentially slowing growth.
It is in the midst of what some describe as a messy transition to a model that is dependent on both the cloud and term subscriptions for revenue.
Can Splunk produce a quarter that investors and analysts like?
That really is not as rhetorical a headline as might seem to be the case. On balance, a case could be made that its last results were not terrible and even a bit promising, but that it missed some metrics such as license revenue, and the shares were punished for what seems like the dozenth time. Overall, they are down 15% from before earnings.
The shares have reacted poorly to at least the last four earnings releases. Indeed, it is one of the few tech names not to have risen the past year. I think this under-performance has made it investible, although with some healthy skepticism. On balance, after considering both the positives and negatives, I think the shares at current levels are worth buying. They come with issues such as the dilution from stock based comp and concerns about slowing growth. The issue about dilution from stock based comp is real enough; slowing growth is a very overdone concern in my view.
I have not had the easiest of times in finding a suitable investment within the cyber-security space. Even though growth in the space may have declined to a degree, it is still a focus of user spending priorities and will probably continue to be so indefinitely. Splunk occupies a specific niche with cyber-security.
I have been rather dubious in terms of Splunk, almost since the IPO. I have always wondered about the use cases for log management. But the space has come into its own, and some of the newer use cases for the technology will probably lead to a higher level of growth for a longer period than many observers currently credit. And that is basically why I have changed my mind about the shares.
It is a leader in its space, which is called SIEM (Security Information and Event Management) and its space remains hot. The latest Gartner rates Splunk #1 in its space, followed by IBM. Splunk has been ranked the strongest vendor in the space for the last several years, and there is nothing on the horizon that suggests that either the SIEM space or Splunk’s competitive position in cyber-security is going to be soon disrupted.
One interesting element in the evaluation of the SIEM space is a study by IDC to the effect that users are focussing in Cyber Security on services like SIEM, that provide warning of threats before the attacks actually takes place. Gartner says that 60% of information security budgets will be for rapid detection and response approaches by 2020, up from 20% in 2015. It thus suggests that a company like Splunk might be able to sustain 30% growth for several years, something significantly different that what is assumed today in the consensus or by most investors.
It is now transitioning from a primarily on-prem model to one based on cloud and subscription use of its software. It is this transition, and its effect on reported numbers, that seems to upset some analysts. Revenues from the cloud doubled last quarter which, indeed, is why Maintenance and Services revenues jumped so sharply. But the rise in Subscription revenue caused License revenue growth to fall, and that lead to what was considered to be a miss of bookings expectations. The so-called miss in bookings metrics really wasn’t much.
One thing that has remained is that Splunk hasn’t managed to break the habit of handing out stock based comp to all and sundry. The bad habit is still there and still a reason that there are many investors who will not buy the shares. And yet the case could be made, that expressed in terms of its growth and its percent of revenues, even sb comp is starting to show less unfavorable trends. Investors seem a bit more concerned about profitability in recent months than has heretofore been the case. Has Splunk gotten the message?
Inside the company’s latest quarterly report and outlook
Revenues increased by 30% year on year. License revenue was up 18%, while the Maintenance and Services revenue, now the larger of the two, grew by 48%.
The gross margin comparison was impacted by the mix shift. Margin pressure is likely to continue as more revenues come from a SaaS product consumption model and while users use different pricing plans to eliminate the capacity charges for file indexing.
Splunk is achieving a measure of expense discipline. All of the following numbers are GAAP. R&D costs increased by 6%. Even S&M expense showed a relatively moderate growth of 20% while G&A costs rose by 14%.
As a whole, the ratio of operating expense to revenues improved by about 15%, although it continues to spend more on opex than it generates in terms of gross margin. Operating expenses fell from 131% to 116% of revenues. Progress, but hardly rapid enough progress for many investors. Adj operating margin of negative 0.7% exceeded its prior projection of 3 months earlier of negative 3%.
The positive operating cash flow (CFFO) has been a product of stock-based comp which represents more than 2X the reported CFFO. CFFO increased modestly year on year while stock based comp was essentially flat. It is reasonable to imagine that the deferred revenue line will grow more rapidly than was the case in Q1, and will have a positive impact on cash flow for the year.
Last year, the increase in deferred revenues was about 88% of CFFO. Most of the increase was seen in Q4. I think that there will be a similar seasonal pattern this year in which half or more of the cash flow takes place in Q4, driven by the increase in deferred revenues.
Splunk raised guidance somewhat for the current quarter and for the entire fiscal year. That said, according to the guidance, top line growth is forecast to decline to 26% for the full year, compared to the 30% growth just reported, and to the 42% growth last year.
Why does it take a 30% growth in revenues to keep operating loss from rising?
The frustration with this company’s shares has been its inability to achieve any kind of a path to substantial profitability despite its strong top-line growth performance. Many companies try to balance their opportunities for top-line growth with the need to provide shareholders some kind of visible returns. The CEO, Doug Merritt, said, “We are early in the market when you consider the significant growth in the amount of data being generating. We are investing and growing field coverage and demand generation activities that will drive our continued penetration in our markets, accelerate customer acquisition and ultimately lead to all customers extracting more meaningful insights from their data.”
I think the operative words here are “early stage” and “invest more.” And that presents investors with a conundrum, I think. It is forecasting that over the next three years, it will see its operating margins grow from the current level of 8% forecast for this fiscal year to 13% in fiscal 2020 (ends 1/31/20). That is a very slow creep over a 3-year span. Indeed, given that the GAAP loss margin last quarter was a negative 36%, it seems almost 100% certain that the company will still be making GAAP losses in fiscal 2020. That very slow cadence is clearly a negative for a certain class of investors.
Part of the issue in terms of profitability is the transition to ratable revenue sources. It is forecasting that this year about 50% of software bookings will consist of term licenses and cloud-related subscription models. It is forecasting that this proportion will reach 75% by fiscal 2020. This transition, whose impact is probably reaching its apogee in terms of negatively impacting year over year comparisons this year and the next year, is pressuring both overall reported revenue growth and gross margins. At some point, the impact will reverse and lead to higher margins as subscription renewals make up a higher proportion of revenue, but when that might be and how that will translate into the long-term business model cannot be precisely forecast at this point.
Splunk is forecasting a modest level of adjusted profit this year. It is forecasting that it will have 143 million fully diluted shares outstanding in Q2, and that is up 4.3% from the weighted average shares outstanding last quarter. That jump is primarily related to calculating weighted average shares when adj income is positive; the further jump forecast for the balance of the year of 2 million shares a quarter or about 1.4%, relates to the dilution caused by stock based comp.
The article cited earlier suggests that stock based comp has been holding back the share price. Certainly, it hasn’t been a positive. On the other hand, I have to suggest that the increase in outstanding shares at 4%-5% per year is not terribly different than that of many other enterprise IT vendors whose shares have done much better.
It seems likely that Splunk is going to have to use more cash and less share based comp to attract employees, simply because it has not seen any increase in its share price.
Why does the company have to grow at such a high rate to achieve so little profitability improvement? The answers would seem to relate to 1) the transition to recurring revenue, which means the “real” growth is quite a bit greater than its reported rate, and 2) the use of more cash compensation instead of stock grants…
What were analysts concerned about the most last quarter?
In a word, the significant slowdown in license revenue growth. I am perplexed in trying to figure out why analysts appear to rate the same kinds of transitions by different companies so differently. It is a hallmark of these transitions to see license revenue growth either decline or crater.
In addition to the concerns bout the transition, analysts seem very concerned with a perceived growth slowdown. Is Splunk’s growth really slowing? I have to wondering why analysts were concerned about slowing growth after the last quarter, which, after all, was above prior expectations, and by the forecast for the balance of the year, which was increased.
There probably is a slowdown in percentage growth of some modest amount, which has more to do with insuring the company grows efficiently. If Splunk uses its channel effectively and achieves the results it expects in its EMEA region, that percentage slowdown is going to be far less than the fears of some observers.
Management mentioned initiatives in IT Service Intelligence (ITSI) which uses analytics to help IT best manage its resources, and in what is called UBA which is the acronym for User Behavior Analytics that can help identify cyber attacks before they are really underway. Both initiatives are starting to drive significant revenue growth and are being included in a rising proportion of larger deals.
As mentioned above, this is the capability that is now receiving the most attention from users, and which is likely to prolong the higher rate of growth in the market for longer than many investors might otherwise imagine.
I do believe that the Q1 results were substantially misread, and if anything, the shares ought to have gone up rather than down. And therein lies an opportunity. By that I mean that while Splunk shares are hardly in the value category, they are significantly less valued than they have been since they first went public.
It has forecast full year Adj EPS of about 52 cents. That is down from prior estimates, primarily because it is now forecasting an adjusted tax rate of 27%. The consensus rises to 78 cents for fiscal year '19. My own model forecasts Adj EPS of about $1.20 in fiscal 2020 (calendar 2019). That would be a P/E of 48X.
It will still not be GAAP profitable at that point. On the other hand, it seems likely that it could enjoy several additional years of growth significantly greater than 20%.
While Splunk till now has not been a cash flow story, I think that is likely to change. It generated CFFO last year of $201 million with free cash flow of $157 million.
It saw 17% growth in cash flow in Q1. With bookings targets now raised, and the cadence of cloud bookings rising at a triple digit pace, I think it is not implausible to forecast that CFFO will be able to rise 25% this current year, It seems realistic to anticipate free cash flow at $210 million. That would create a free cash flow yield of just less than 3%. I think it is reasonable that free cash flow is likely to grow faster than earnings, mainly because of the likely significant growth of deferred revenues as cloud bookings increase substantially as a proportion of the total over the coming years. I think by the end of the 3 year period, free cash flow could reach between $325 million and $350 million which would be a substantial free cash flow yield of almost 5% on the current $7 billion + of enterprise value.
I think that recommending Splunk shares is a close-run call. On the negative side, stock based comp is still elevated, although showing positive trends. And the growth in adjusted operating margins is certainly not forecast to be moving upward at any great level. In addition, the transition to higher levels of ratable revenue sources have made for “messy” quarters with license revenue growth decelerating. Further, the European sales model is very much a work in progress.
But on the other side of the equation, I like the expansion in terms of new use cases which is growing the TAM significantly and consistently. I certainly see no change in the competitive landscape. And the Gartner survey as to what users wish to see in security solutions is certainly a factor to be considered in forecasting consistent top-line growth at levels greater than are currently embedded in the consensus.
The shares, while not a bargain, are reasonably valued based on the growth cadence that I think itmakes sense to forecast. I haven’t taken a step into the shares yet, but look forward to doing so in the future.
Disclosure: I may initiate a long position in the next 72 hours.

July 2017 - Splunk and Booz Allen Hamilton announce cyber intelligence service to manage advanced threats with greater precision and speed

Aug 2017 – July quarter results
Total revenues - $280 million, up 32%.
Total billings - $303 million, up 32%.
Adj operating profit - $14.7 million;
Adj operating margin - + 5.2%.
Adj earnings per share were 8 cents.
Operating cash flow was $23.2 million
Free cash flow was $20.3 million.
I am pleased with the solid sales execution in Q2, particularly our results in EMEA. As I traveled across Europe, Asia and North America over the last two months, I was excited to see businesses, governments and universities adopting Splunk across multiple departments and use cases. Customer success and product innovation are at the heart of what we do.
Signed over 500 new customers.
New and Expansion Customers Include: Athenahealth, Carnegie Mellon University, Carnival Cruise Lines, Department of Homeland Security, Harvard Business School, State of Montana, Swisscom Uber, Verizon Enterprise Solutions.
Splunk named the market share leader in the Worldwide IT Operations Analytics Software Market by IDC.
Splunk named the market share leader in the Worldwide IT Event and Log Management Software Market by IDC.
Guidance - Quarter ending October 31
Total revenues - $308 million.
Adj operating margin - 8%.
Guidance – Fiscal year ending January 31
Total billings - $1.450 billion (up from $1.425 billion in prior guidance)
Total revenues $1.210 to $1.215 billion (up from $1.195 billion per prior guidance provided on May 25, 2017).
Adj operating margin 0 8% (unchanged from prior guidance).

Conference call notes:
Our macro environment continues to be strong. We’re still early on the Splunk adoption journey even within our largest accounts, and we continue to vigorously pursue those opportunities. I look forward to a great second-half of this year.

Splunk’s platform is the best solution to enable customers to harness this largely unstructured data to make it to use real-time decisions. There is no other solution on the market today that does all that we do. And Splunk enables our customers to extract more insights from their ever-increasing amounts of data.

Our goal is to become the standard for machine data in every account, a ubiquitous machine data platform solving our customers’ big data challenges and IT operations and application delivery and security compliance and fraud, as well as business analytics and the Internet of Things. These markets are going through a shift to an analytics and machine learning-based approach, where Splunk is uniquely positioned to lead this change and deliver for our customers.

gross margin was 83%

Cash flow from operations was $23 million, free cash flow was $20 million, and we ended the quarter with about $1.1 billion in total cash and investments

Oct 2017
Splunk acquires IT analytics company
Splunk aquiring select assets from IT analytic company Rocana in an all-cash deal. Splunk will get Rocana’s technology and IP assets and a number of technical employees will join Splunk.
Splunk acquires data security company
Splunk acquires SignalSense, developer of machine learning-based data collection and breach detection solutions. The cash financing came from Splunk’s balance sheet. The aquire-hire will have SignalSense’s team joining Splunk’s Products division in Seattle.

Needham initiates at a Buy and a $95 price target.
Analyst Jack Andrews calls Splunk an open-ended tech growth story as customer use of the company’s software inspires continued and growing use.
Nov 2017 – Oct quarter results
• Total revenues - $329 million, up 34%
• Total billings - $382 million, up 38%
• Adj op margin - 9.8%.
• Adj earnings - 17 cents.
• Op cash flow - $52 million
• Free cash flow - $47 million.
I’m proud of our global performance for the quarter and our increased outlook through the rest of the year.

• Over 450 new enterprise customers.
• New and Expansion Customers Include: 21st Century Fox, Arizona State University, Atlassian, Blackbaud, Cincinnati Children’s Hospital Medical Center, Daimler, Defense Health Agency, Derbyshire Fire & Rescue, Johns Hopkins University, Nutanix, Purdue University, SAS, Smithsonian Institution, Texas Dept of Transportation, U.S. Army, U.S. Dept of Homeland Security Data Center, Yahoo! JAPAN
• A new suite of solutions and expanded machine learning capabilities .
• Advancements in machine learning and support to accelerate monitoring and alerting by at least 20x.
• Enabling customers to create and load their own machine learning models to identify anomalies and threats via a new software kit (SDK).
• Announced Splunk Enterprise Security (ES) Content Update
• Announced Splunk Essentials for Fraud Detection, a free Splunk app on how to use Splunk to identify and investigate different types of fraud.
• Acquired selected assets of Rocana Inc., a company providing analytics solutions for the IT market, to extend Splunk’s IT operations leadership.
• Acquired SignalSense Inc., a company offering cloud-based advanced data collection and breach detection solutions, further advancing Splunk’s machine learning capabilities.
• Named to Fortune Magazine’s inaugural Future 50 list, which highlights the most forward-looking, innovative companies in the world.
• Named to the 2017 Technology Fast 500 for the fifth consecutive year. Sponsored by Deloitte, the list recognizes 500 of the fastest-growing companies in North America.
• Listed as a “Vendor to Watch” in the Gartner 2017 Magic Quadrant for Digital Marketing Analytics.
• Total revenues $389 million
• Adj operating margin is expected to be approximately 16%.
Updating previous guidance for fiscal year 2018 (ending January 31, 2018):
• Total billings - $1.485 billion (was $1.450 billion).
• Total revenues - $1.240 and $1.241 billion (was $1.213)
• Adj operating margin - 8.5% (was 8%).
The company is providing the following guidance for its fiscal year 2019 (ending January 31, 2019):
• Total revenues - $1.550 billion.
• Adj operating margin 10.5%
Also their stock-based compensation was really markedly decreased. That was always what kept Bert out :

           2017Q3    2018Q2    2018Q3
SBC        105       182.4     84.1
Revenue    244.8     280       328.7
S/R Ratio  43%       65%       26%


I bought into Splunk in Feb '17 and am still holding. Up ~87%

Is it just me or is it crazy to think that 87% in 16 months not good enough. Maybe its just market conditions, but NASDAQ is up 50% for this year alone and Saul and company are up ~200% since Jan 17. Tells me theres better places for my money, if you have the time and desire to do the work.

Don’t get me wrong, ~87% is great for the time invested, but there were better places for money.

Not sure what future guidance will be, but the space is competitive.

My notes from a couple months ago (without recent info) showed that their rev growth was declining (~33% to 28.5%), not the best for investors (but good for stock compensation and employees), 12.6% P/S which is high for the growth (imo), and increasing shares combined with higher SGA made me pass at the time.


NASDAQ is up 50% for this year alone

According to this site the Nasdaq is up just under 12% in 2018.


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NASDAQ is up 50% for this year alone

This is how rumors get started, NASDAQ is up just over 10% YTD.

Even if you look at the last 12 months, it’s up about 23%. Where did you get over 50%?


Don’t get me wrong, ~87% is great for the time invested, but there were better places for money.

There will always, always, always be better places for money over a given time period. We can decide to always second-guess ourselves or just do the best we can at any given time. If our best is up 87% every 16 months, then we’re doing pretty good. The NASDAQ is up about 35% since Feb. 2017, so Splunk has more than doubled it. That’s great!

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Wow! Thanks for all that info Saul!

I’ve been away from the boards for the past week or so due to time constraints. I can’t wait to dig into this and see how things compare to present day!

Thanks again!