5 Splunk Analysts Break Down SaaS Company's Q1 Earnings, Guidance

Shares of cloud-based data analytics company Splunk Inc. SPLK retreated Thursday following the release of its first-quarter results.

The Splunk Analysts: Needham analyst Jack Andrews maintained a Buy rating on Splunk and lowered the price target from $265 to $198.

Rosenblatt Securities analyst Blair Abernethy maintained a Buy rating and $196 price target.

Raymond James analyst Robert Majek maintained an Outperform rating and lowered the price target from $195 to $150.

JMP Securities analyst Erik Suppiger reiterated a Market Perform rating and maintained a $160 price target.

RBC Capital Markets analyst Matthew Hedberg maintained an Outperform rating and $200 price target.

Margin Impact Stemmed From Transitory Factors, Needham Says

Splunk reported solid quarterly results, with revenues exceeding consensus estimates and Cloud annual recurring revenue maintaining a high rate of growth, Needham analyst Andrews said.

The operating loss was wider than expected and margins declined, partly due to transitory factors that should not sustain through fiscal year 2022, the analyst said.

Operating cash flows and margins are still expected to ramp as the company overcomes headwinds related to annual invoicing from upfront cash collection, he said.

The significant investments Splunk has made in its solutions will likely lead to a highly differentiated offering and continued strong organic ARR growth, he added.

"The combination of ramping OCF and a growing ARR renewal base provide us greater optimism for SPLK to be revalued as a cloud company," Andrews said.

Rosenblatt's Key Takeaways From Splunk's Q1:

Splunk issued guidance for only its forward quarter, citing the uncertainty driven by its ongoing shift to a subscription model and its Cloud offering, Rosenblatt analyst Abernethy said.

Revenue guidance for the second quarter was above Rosenblatt's previous estimates, with order growth expected at a healthy year-over-year rate of 35%, the analyst said.

Specifically, the analyst expects revenues of $550 million to $570 million, and total ARR to grow from $2.47 billion in the first quarter to $2.59 billion to $2.61 billion.

On the first-quarter results, the analyst noted that Cloud ARR grew 83% year-over-year to $877 million, representing 36% of total ARR and, importantly, 56% the company's total bookings in the quarter. This, according to the analyst, suggests the company's Cloud offering is continuing to gain traction with both new and existing customers.

The company also reported a healthy 129% Cloud net retention rate, Abernethy noted. It expects to see strong contract renewals in fiscal year 2022, driving further recurring revenue growth, he added.

"Given the ongoing strong end-market demand for Observability and Security solutions and its new Cloud-based offerings, we see Splunk as having continued tailwinds, and now expect it to deliver 35% ARR growth in FY22," according to Rosenblatt. 

Related Link: 3 Top Cloud Software Picks From Goldman Sachs Among 12 Initiations

Splunk A Well-Positioned Platform, RayJay Says

Splunk will have to make investors more comfortable that recent sales/executive turnover and competitors taking some workloads are not issues, RayJay analyst Majek said.

At some point, management will need to issue full-year guidance & reinstate long-term targets to "re-prove" that they have model visibility, the analyst said.

Splunk, according to the analyst, can overcome these issues over time and remain positive long-term, given his view that the company is a well-positioned IT platform that caters to a wide range of use cases.

Relative to other software vendors, Splunk is attractively valued given its asset quality and growth profile, the analyst added.

JMP On Splunk's Growing Cloud Mix

Splunk's target of cloud-based bookings representing 80%-90% of total subscription revenues in the long run will help elevate its valuation multiple, as this contribution level will compel investors to value it as a SaaS provider, JMP analyst Suppiger said.

High-value customers — defined as customers with ARR over $1 million — and customers with over $1 million in cloud ARR were up significantly year-over-year, the analyst said. 

"We believe there will be further room for expansion when the salesforce is aligned to a consumption-based metric as management indicated is a component of future initiatives," he said. 

The growing cloud mix, which is a testament to the success of the model transition, generated some near-term pressure on margins, the analyst said. A greater proportion of revenues from cloud contribution creates a drag on total gross margin in the near term, he added.

JMP expects this to be offset by the long-term growth flywheel benefits from the cloud model. Cloud gross margins, according to the analyst, will likely improve from the current 60% level to 70%, exiting fiscal year 2022.

RBC Sees Solid Print, Conservative Guidance From Spunk

Splunk delivered a solid print against negative investor expectations, RBC analyst Hedberg said. The model transition to Cloud/SaaS remains well underway, with more than half of software bookings now from the Cloud, he added.

"Maintaining a high cloud growth trajectory and building cash flow/margins will be key from here with several new key executives on board to help drive the transformation," Hedberg wrote in the note.

The outlook, according to the analyst, reflects the mix-shift and likely remains conservative.

SPLK Price Action

Splunk shares lost 9.54% Thursday, closing at $111.98. 

Related Link: Splunk Has New Street-High Price Target: Wells Fargo Says Growth Underappreciated