One of the old "Cloud Kings" that had fallen on hard times of late, Splunk (SPLK) had a big "news" night on Wednesday evening, less than a month after the Wall Street Journal had reported that Cisco Systems (CSCO) had made a run at the firm, but that the topic was no longer under discussion. The firm reported better than expected fourth quarter financial performance, and finally named a new CEO. The firm had gone months with Chairman of the Board Graham Smith pinch hitting as interim CEO as the search carried on toward a conclusion.
For the fourth quarter, Splunk posted GAAP EPS of a loss of $0.88 per share, better than expectations as this includes or rather does not adjust for stock-based compensation, amortization of intangible assets, restructuring charges, or non-cash interest related expenses related to convertible senior notes. On an adjusted basis, the firm posted EPS of $0.67, which crushed it. Splunk also generated $901.119M in revenue, easily beating Wall Street (by more than $100M) and good enough for year over year growth of 20.9%.
A New Boss
Splunk also announced that Gary Steele had been appointed as new Chief Executive Officer of the firm, and to the Board of Directors, effective April 11th. Steele comes with over 30 years of experience and a track record in scaling SaaS operations, while growing multi-billion dollar enterprises. Steel was the founding CEO of Proofpoint, leading that firm from start-up to a publicly traded SaaS provider to some major large-cap clients. Prior to that, Steele had been CEO of Portera and held leadership positions at Sybase, Sun Microsystems, and Hewlett-Packard (HPE) .
On the hire, Graham Smith said, "Gary is a visionary leader whose software and cybersecurity expertise, deep understanding of SaaS and recurring revenue models, and unwavering commitment to driving innovation and customer success on a global scale will be invaluable to Splunk on our path to $5B (in annual revenue) and beyond." In response, Steele said... "Splunk has incredible talent and an innovative and customer-centric ethos. I can't wait to get started and earn the right to call myself a Splunker." Smith will return to his sole role of Chairman as soon as Steele joins the company.
Beyond The Headlines
For the quarter, Cloud ARR (annual recurring revenue) increased 65% to $1.34B. Total ARR increased 32% to $3.12B. Cloud Revenue increased 69% to $289M. Total customers generating cloud ARR greater than $1M increased 70% to 317. Total customers generating total ARR greater than $1M increased 32% to 675.
For the full year, Cloud revenue increased 70% to $944M. Total revenue generated increased 20% to $2.67B. Operating cash flow printed at $128M, producing $117M in free cash flow.
During the quarter, Splunk joined the U.S. Cybersecurity and Infrastructure Security Agency's Joint Cyber Security Collaborative, and won the Naval Information Warfare Systems Command Award.
Guidance
For the current quarter, Splunk sees revenue of $615M to $635M, which brings the low end of the range above the $609M that Wall Street had been looking for. Adjusted operating margin is expected to land in between -20% and -25%.
For the full year, Cloud ARR is seen at a minimum of $2B, with total ARR at a rough $3.9B. Total revenue is projected at $3.25B to $3.3B versus consensus view of just a hair over $3B. Adjusted operating margin for the year in its entirety is seen landing in between 0% and +2%. Operating cash flow is expected to print at or above $400M.
Balance Sheet
Over the past 12 months, the firm's net cash position is down, not a lot, to $1.714B, This reduction is more than offset by an increase in accounts receivable, bringing current assets up slightly to $3.276B. Current liabilities add up to $2.098B, which is up fairly significantly, driven by growth in deferred revenue. At a current ratio of 1.56, I don't see a brewing problem in Splunk meeting all short to medium term obligations. Total assets of $5.79B, which is down small still does outweigh total liabilities less equity of $5.568B. That total liability less equity number is up 30% from a year ago, driven by growth in net convertible senior notes. I know this is common Wall Street practice. You know that this kind of non-current action on the balance sheet, though it won't matter today or even this year, makes me uncomfortable.
Wall Street
By my count, six sell-side analysts rated at five stars by TipRanks have opined on Splunk since the quarterly results were released and the new CEO announced. We have three "buy" or "buy equivalent" ratings and three "hold" or "hold equivalent" ratings. The average target price of the six is an even $147. The high target across these six is $175 (Matthew Hedberg of RBC Capital), while the low is $130 (Gregg Moskowitz of Mizuho Securities).
The Chart
At first glance, there is something to like about this chart. The stock is anything but technically overbought. It would appear that if the stock can take and then hold the 50 day SMA at $117.52 and the 21 day EMA at $118.35, then a serious run can be made at the 200 day SMA ($134.81) and the 38.2% Fibonacci retracement level ($132.65) of the November into December selloff. By the time SPLK gets there, those two levels of resistance could be close to melding into one.
My problem with this chart is the action experienced since December. Let me show you what I mean...
Do you see the foundation of a basing pattern that formed a flat base? Not really, right? Do you see a "rising wedge"? I think I do. A rising wedge for the new kids, is a bearish pattern even though the underlying security rises as the pattern builds. The explosive move more often than not when you see either a rising or a falling wedge is in the opposite direction.
My Thinking
For two reasons... the possible rising wedge above and the lack of an attractive (my opinion) long-term balance sheet, I would consider SPLK to be a trader, and not an investment, at least not until we see the new CEO Gary Steele in action. It's not that I don't think that Splunk can succeed, it's just that they are going to have to show me that they can.
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