Splunk (SPLK) Combines Solid Demand With Cost Containment Efforts To Blow Out Estimates Again

1:55 pm Monday, November 28th, 2022

Despite experiencing a more cautious spending approach from its customers, Splunk (SPLK) still crushed 3Q23 top and bottom-line estimates and raised its FY23 outlook for revenue, Non-GAAP operating margin, and free cash flow. The data analytics and cybersecurity company, which is currently operating without a full-time CFO, drove its strong results through its cloud-based business transformation efforts and through robust margin expansion. On that note, SPLK’s cloud gross margin increased by a whopping eight percentage points from last year to 72% this quarter.

Heading into the earnings report, there was concern that macroeconomic uncertainties were pressuring demand and causing customers to slow their cloud migrations and expansions. Recall that last quarter, CEO Gary Steele disclosed that some customers were opting for shorter-term commitments as they tightened their IT budgets. Consequently, SPLK ratcheted its FY23 Cloud ARR guidance lower to approximately $1.8 bln from $2.0 bln.

While SPLK wasn’t completely spared from these challenges, as evidenced by its dollar-based net retention rate slipping a bit to 127% from 129% last quarter, the company fared much better than many had anticipated.

Although the resilient demand picture may be garnering the most attention, SPLK’s expense management also stands out and is a major factor behind its huge EPS beat and improved FY23 guidance. For the quarter, total operating expenses decreased by 2% to $747.8 mln as the company homed in on opportunities to lower labor, travel, and real estate costs. Looking ahead, SPLK is confident that it can drive even greater cost savings, especially in regard to hiring, leading it to raise its FY23 Non-GAAP operating margin guidance to 12-13% from 8%.

Overall, demand held up quite well in Q3, particularly from SPLK’s existing customers, which generated strong term license sales. Business conditions have softened across the cloud software landscape, but SPLK’s cybersecurity, observability, and data analysis applications are receiving prioritization in many companies’ IT budgets. Along with SPLK’s heightened focus on profitability, this favorable positioning could keep this streak of huge EPS beats going, which now stands at five consecutive quarters.