Splunk's Improved Margins Likely Support Shares In Current Environment, Analysts Say

Needham analyst Mike Cikos reiterated a Buy on Splunk Inc SPLK and reduced the price target from $118 to $100.

Splunk's 3Q earnings release demonstrated the model's substantial leverage, where the company's Revenue outperformance and expense controls drove an Operating Margin of 21.3% compared to guidance for 6%-8%. 

Revenue during the quarter beat the midpoint of guidance by 10% due to upfront revenue recognition from a more significant share of Term License revenue in the mix.

Splunk lift the FY23 Operating Margin guide to 12%-13% from 8%. Cikos emphasized the transition to a Single-seller model implemented at the start of 4QFY23. He also focused on building Free Cash Flow generation in FY24 from improved profitability and customers' annual upfront billing.

BMO analyst Keith Bachman retained Outperform and reduced the price target from $120 to $100. Splunk's on-prem business continues to outperform, growing 54% Y/Y, while cloud migrations and expansions have been delayed.

 Total FY23 ARR guidance was maintained though it cut cloud ARR guidance. The spotlight, however, goes to Splunk's impressive operating margin beat, reflecting the success of management's efficiency strategy announced last quarter. 

The margin improvements will help support the shares in the current environment, particularly with relatively steady aggregate ARR growth. 

Mizuho analyst Gregg Moskowitz reiterated Neutral with a $100 price target. SPLK again reported an excellent revenue upside in 3Q, driven by a higher mix of term licenses. 

Margins were also much better than expected, benefiting from many cost-savings initiatives. SPLK's cloud business remains under pressure and once again lowered its full-year cloud ARR guide. 

The shares are trading 9% higher AH, mainly due to SPLK's significantly improved profitability. More broadly, the valuation is still generally depressed, although he also believes SPLK faces significant competitive challenges and remains concerned about whether it can consistently execute.

Raymond James analyst Adam Tindle maintained Market Perform. The 3Q results showed more of the same business trends, as revenue upside in the quarter came mainly from existing customers extending Term licenses (legacy products). 

In contrast, the Cloud business (next-gen product) experienced deal pushouts and modestly reduced forward guidance for this segment. Strong cost controls led to a sizable profitability upside as streamlining the organization under new leadership continues.

Price Action: SPLK shares traded higher by 15.60% at $89.77 on the last check Thursday.