The Street Reaction To Splunk's Q2

Splunk Inc SPLK reported Thursday its second-quarter results, which consisted of a top-and-bottom-line beat and encouraging guidance. Here's a summary of how some of the Street's top analysts reacted to the print.

The Analysts

• Morgan Stanley's Melissa Franchi maintains an Equal-weight rating on Splunk with a price target lifted from $109 to $110.
• Wells Fargo's Philip Winslow maintains at Outperform, price target lifted from $135 to $145.
• Barclays' Raimo Lenschow maintains at Overweight, unchanged $127 price target.
• Baird's Rob Oliver maintains at Outperform, price target lifted from $120 to $127.
• Raymond James' Michael Turits maintains at Outperform, price target lifted from $127 to $129.
• Oppenheimer's Shaul Eyal maintains at Outperform, unchanged $130 price target.
• William Blair's David Griffin maintains at Outperform, no assigned price target.

Shares of Splunk hit a new 52-week high of $126.02 Friday and were trading higher by more than 16 percent on the day.

Morgan Stanley: Cash Flow Concerns

Splunk's second-quarter report showed a "clearer view" of solid fundamentals and momentum, including a 43 percent software revenue growth, 36 percent license revenue growth while billings growth accelerate year-over-year by 35 percent, Franchi said in a note. Management's commentary during the conference call gives the impression there will be minimal upside to its free cash flow guidance of $275 million.

Splunk's stock is already trading at 35 times 2019 free cash flow estimates and the analyst's new $110 price target is based on a 28 times multiple on 2023 estimated free cash flow (discounted back at 11 percent), which is mostly in-line with the group average.

Wells Fargo: Large Deals In Focus

Splunk's earnings signals its ability to secure big contract wins as evident by 61 deals of over $1 million being signed in the quarter, Winslow said in a note. This marks an increase of nearly 42 percent from the first quarter and comes at a time when management made adjustments to sales force incentives.

Encouragingly, term and cloud transactions accounted for 72 percent of total bookings in the first half of the fiscal year and the company is on track to hit its target of 75 percent renewable mix earlier than previously expected.

Barclays: Strategy 'Clearly Paying Off'

Splunk's strategy surrounding products and account coverage is "clearly paying off" based on the 550 total account adds in the quarter of which 61 were for more than $1 million, Lenschow said in a note. Another potential catalyst can be introduced as soon as early October when the company hosts its annual user conference which could detail new product releases.

Related Link: Splunk Is A Security 'Must-Have,' Wedbush Says In Upgrade

Baird: Changes In Products

Management's investments in changes to products like Essentials, Insights and Cloud are paying off, Oliver said in a note. For example, Insights and Essentials combined for 25,000 customer downloads and these are targeted offerings that minimize customers time to value while increasing the pace of adoption for Splunk Enterprise.

Raymond James: Duration A Tailwind

Based on Turits' estimates, Splunk will see a benefit in the second quarter from contract duration, the analyst wrote in a note. Specifically, contract duration is likely to extend to 35 months (versus management's guidance of 33 months in the first half of the year) from 25 months in the same period a year ago. This will likely result in an 8-percent tailwind to billings and revenue, which would imply a 27-percent year-over-year normalized billings growth.

Oppenheimer: Cloud Business

Splunk's management said during its post-earnings conference call the cloud business is seeing robust momentum and is tracking above its 65 percent target for subscription/renewable revenue mix, Eyal said in a note. In fact, management highlighted its revenue mix is tracking closer to next year's target of 75 percent.

Overall, the company's unique platform makes it unique positioned to take advantage of the acceleration in global data creation which should result in margin expansion along with operating leverage and efficiency gains.

William Blair: Encouraging Guidance

Splunk's third-quarter guidance came in $2.3 million ahead of what the Street was expecting although its operating margin guidance of 13 percent was 180 basis short of what was expected, Griffin said in a note. However, the margin shortfall isn't a concern because the impact from ASC 606 on expense linearity throughout the year has been hard to model.