Splunk, Inc. Gains Steam in the Cloud, Boosts Full-Year Guidance

By Markets Fool.com

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Image source: Splunk, Inc.

Splunk Inc. (NASDAQ: SPLK) released fiscal second-quarter 2017 results Thursday after the market close. Though the operational-intelligence software specialist remains unprofitable as it prioritizes top-line growth, it also exceeded revenue expectations for the seventh consecutive quarter, and increased its full-year revenue outlook.

Splunk's headline numbers

More specifically, quarterly revenue grew 43.4% year over year, to $212.8 million, including 31.5% growth in license revenue, to $115.7 million, and a 60.8% increase in maintenance and services revenue, to $97.1 million.

Based on generally accepted accounting principles (GAAP), Splunk generated an operating loss of $83.6 million, good for operating margin of negative 39.3% and a net loss of $86.6 million, or $0.65 per share. On an adjusted (non-GAAP) basis, which adds perspective by excluding items like stock-based compensation, Splunk achieved operating income of $8.2 million, operating margin of 3.9%, and net income of $7.3 million, or $0.05 per share.

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By comparison, as I noted in my earnings preview earlier this week, Splunk's guidance called for significantly lower fiscal Q2 revenue between $198 million and $200 million, and adjusted operating margin between 2% and 3%. And though we don't pay much attention to Wall Street's demands, analysts' consensus estimates predicted that Splunk would deliver revenueof $200.5 million and adjusted earnings of just $0.03 per share.

Digging deeper

Splunk continued to plow resources into both sales and marketing (up 34.4% year over year, to $150.2 million) and research and development (up 39.2% year over year, to $67.2 million). That said, both figures represented a notable deceleration from spending in the two categories last quarter when it raised some analysts' eyebrows because sales and marketing and R&D climbed 42.3% and 50.7%, respectively, year over year.

To its credit, Splunk's investments continue to bear fruit.

"We had a solid Q2 and our success continues to come from a combination of our existing customers expanding across multiple use cases and from adding more than 500 new customers," explained Splunk CEO Doug Merritt. "We were pleased to see strength across each of our core markets, the continued adoption of the Splunk platform and increased cloud momentum."

Among those new and expanded customer relationships in Q2 were the City of Los Angeles, Fruit of the Loom, Hulu, Priceline.com, Subway, Texas Roadhouse, Uber, and Yelp.On the partnership front, Splunk's platforms were also featured this quarter in Accenture's new Cyber Defense Platform, which integrates Splunk Enterprise and Splunk Enterprise Security with Palo Alto Networks and Tanium.

On the product front, Splunk released Splunk App for AWS 4.2 during the quarter, allowing Splunk Enterprise and Splunk Cloud customers to manage multiple Amazon Web Services accounts and regions seamlessly from one device. In addition, Amazon EC2 Container Service added Splunk's native logging driver to its newest version, simplifying implementation of a comprehensive monitoring solution for running containers -- which are a sort of standardized unit of software development that "contain" everything that software applications need to run-- at scale.

Looking forward

For the current quarter, Splunk anticipates revenue between $228 million and $230 million -- roughly in line with Wall Street's forecasts -- and adjusted operating margin between 5% and 6%. You can bet, however, that analysts will likely boost their expectations going forward given Splunk's propensity for under promising and over delivering.

Finally, for the full fiscal year, Splunk now expects revenue between $910 million and $914 million -- an increase from previous guidance of $892 million to $896 million -- and reiterated its previous outlook for full-year adjusted operating margin of roughly 5%.

In the end, this was indeed another strong performance from Splunk as it continues to invest in taking market share and growing revenue in these early stages of its long-term story. I think investors should be more than pleased with its progress on that front.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Splunk, and Texas Roadhouse. The Motley Fool recommends Accenture, Palo Alto Networks, and Yelp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.