Machine data specialist Splunk (NASDAQ: SPLK) reported fiscal second-quarter 2019 results that exceeded expectations, and the stock rallied by double-digits as a result. The need to make sense of digital information is on the rise, helping Splunk strengthen its position as must-have software for today's enterprise. It's been a great run for the company in the last year, but its growth story is just getting started.
The most important metric for the software company right now is its revenue growth. Concerns that sales were "slowing" cropped up in the first quarter, but the current quarter's 39% headline represented an acceleration from the 37% at the beginning of the year. Also, the company signed up 550 new enterprise clients, handily topping the 460 brought on board at last report.
Some of the names joining Splunk's platform included Southeast Asia's ride-sharing service Grab, LabCorp, the U.S. Ministry of Defense, and Amazon. The e-retail and cloud-computing giant was using Splunk piecemeal in various parts of its empire, but in the second quarter, it decided to sign an enterprise contract to use the data-parsing service across its whole business. That's a big win for Splunk -- and a vote of confidence in the value it brings to the table.
Deals like these bode well for the company's continued strong growth. Recurring and renewable revenue, much of it in the form of software-as-a-service (SaaS), now makes up 72% of Splunk's total annual top-line, and it should reach 75% by year end -- a full year ahead of management's goal. While only a portion of subscription-based revenue is recognized up front, as Splunk brings more enterprises on board, it will enjoy more revenue later as customers pay their recurring bills.
What about the bottom line?
While sales are on a tear, the profit picture is a different story. Splunk has its foot on the gas to maximize its potential, and that means it's sacrificing the bottom line for now. Most of the elevated expense is related to sales force investment, which manifests itself as stock-based compensation. When you back that figure out, Splunk actually operates at a profit.
The good news is that management has regularly reminded investors that this year would be a "cash trough" as it doubled down on efforts to support its transition to a higher recurring revenue model. Yet Splunk achieved free cash flow of $102 million through the first two quarters of the fiscal year. That's nearly double what it was last year, and management expects that number to continue to trend higher.
Just the beginning?
Management has been very pleased with the early results from its new acquisitions, VictorOps and Phantom. Cybersecurity orchestration, monitoring, and forensics are a natural fit for the company's software, and Splunk could end up being a major disruptor in this space. Billions of devices getting hooked up to the internet is also a beneficial trend for the company, and new use cases for the Internet of Things and app development are still being discovered. In the company's second-quarter earnings conference call, management said new product and beta testing releases are forthcoming.
As for guidance, full-year revenue estimates were bumped up to $1.685 billion (previously $1.645 billion). That's good for a 33% increase over last year, and it keeps the company on pace to hit $2 billion in annual revenue by 2020. With the amount of digital data around the world on the rise, Splunk looks like one of the best ways to profit from the trend.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Splunk. The Motley Fool owns shares of and recommends Amazon and Splunk. The Motley Fool has a disclosure policy.