News Item #1: Software company Splunk (NASDAQ: SPLK) on Wednesday said its revenues rose 33% in the second quarter to $517 million, driven by the strong demand for its software that helps firms analyze internal data.
The top-line was primarily lifted by a 46% improvement in software revenues during the quarter.
The San Francisco, California-based big data firm reported earnings of 30 cents per share, compared to 8 cents per share a year ago. Read the full Earnings News on Alpha Street.
News Item #2: Splunk also announced today a definitive agreement to acquire SignalFx, a SaaS leader in real-time monitoring and metrics for cloud infrastructure, microservices and applications.
Under the terms of the agreement, Splunk will acquire SignalFx for a total purchase price of approximately $1.05 billion, subject to adjustment, to be paid approximately 60% in cash and 40% in Splunk common stock. The acquisition is expected to close in the second half of fiscal 2020, subject to customary closing conditions and regulatory reviews. Read the full press release on Yahoo.
Analyst Take: It’s not often that I provide a research note on two different news items, but it is also not very often that a company reports earnings and announces a billion dollar acquisition on the same day. If they can do it, I can do.
As far as earnings, Splunk is certainly in their ascent phase as company once again outperformed on both revenue and earnings, nearly tripling their EPS versus last year. The street reacted well by pushing the stock up 6%.
However, the numbers only told part of the story. What impressed me most about this quarter’s performance is their migration toward a more predictable revenue streams and their rapid acquisition of enterprise customers.
A Migration Toward Renewable Services
While this isn’t brand new news, it is important to note that Splunk has shifted its business model and now has about 85% of their customers setup on a renewable revenue model. This, of course has had a negative impact to operating cash flow, but from a long term stand point it smooths the company’s revenues and committed customers to longer term investments. This was an important move that I liken to Microsoft shifting customers off a licensing model, which came with inherent risks but has paid off handsomely.
500 New Enterprise Customers
Splunk, while they sound like a hip new startup, is a maturing company that had 450 customers all the way back in 2008. However, in the last quarter they added more customers than that increasing their tally by 500 taking the company’s current customer count north of 17,500.
The Acquisition of Signal FX
With the rapid proliferation of data, we are seeing massive growth and investment in supporting infrastructure. Analytics play a key role in monitoring that infrastructure to enable the greatest level of performance and returns on those assets. Splunk has existing strengths in monitoring IT Assets, however, Signal FX has been built for the rapidly growing Cloud Native environment. This will enable Splunk to more successfully support deployments and monitoring of cloud driven deployments running microservices and containers supported by orchestrated environments and serverless functionality (Is serverless really serverless?)
In short, the two companies bridge any gaps between on-prem, hybrid and cloud native environments. It’s a smart play and it instantly extends Splunk’s capabilities to support the IT environment of the future.
A Look ahead
Splunk is incredibly well positioned for continued growth. Today’s earnings beat and their large haul of new enterprise customers in the last quarter both tell a strong narrative that Splunk is on solid footing. The surprise acquisition of Signal FX that was announced on earnings day also shows the company’s ambition to grow through inorganic growth when it expands to or enhances the company’s current real-time monitoring capabilities. This isn’t their first acquisition by any means, but it is one of the most well known names in real-time cloud infrastructure monitoring and it instantly will yield an expansion in customers, revenues and capabilities.
I believe continued growth seems to be the most likely path for the company over the next 4 quarters. I’m also interested in watching to see if they become an acquisition target as “Big Tech” continues to look for rapid expansion and competency in AI and Analytics.
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Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.