Splunk(SPLK) In A Funk As Downgraded Cloud ARR Guidance Overshadows Upside Quarterly Results
2:37 pm Thursday, August 25th, 2022
For the fifth consecutive quarter, big data company Splunk (SPLK) easily surpassed EPS and revenue expectations, demonstrating that its transition to a cloud-based model is taking hold and is yielding solid results. Nowhere is this more evident than in SPLK’s cloud revenue growth rate and its cloud dollar-based net retention rate, which came in at +59% and 129%, respectively, for Q2.
As the company’s cloud migration progresses, its margins are also improving at a rapid pace, leading to significant strides in profitability. Driven by the increasing scale and elasticity of its cloud platform, along with some expense optimization efforts, SPLK’s non-GAAP operating margin swung to a positive 3.6% from (8.5%) in the year-earlier quarter.
Unfortunately, all of this good news is being overshadowed by the company’s reduced FY23 outlook for total ARR (annual recurring revenue) and cloud ARR. Arguably, ARR is the most important metric for SPLK since it’s a good gauge for the health of its subscription-based business. It’s viewed as an accurate predictor of future growth because it measures the amount of revenue that a company expects to be repeatable.
Although Palo Alto Networks (PANW) isn’t necessarily a direct competitor of SPLK’s, its impressive quarterly report from earlier in the week highlighted the resiliency and strength of cybersecurity.
Steel insisted during the earnings call that new customer wins remained healthy and consistent relative to the first half of the year. However, it’s likely that concerns about market share losses are creeping into some investors’ minds.
On that note, Nutanix (NTNX), which is a primary competitor of SPLK’s, reports earnings next Wednesday. If NTNX provides an upbeat outlook, then those market share concerns will gain more traction.
SPLK has come a long way over the past couple of years. The company’s cloud products are better aligned with customers’ needs, it has a more predictable revenue stream, and its margins are moving in the right direction. One disappointing quarter doesn’t change that, and the company’s longer-term outlook still looks compelling. In this market environment, though, companies aren’t afforded the benefit of the doubt, as illustrated by the stock’s plunge lower.
