Expect A Strong Q3 Report Out Of Splunk

Jack Andrews of D.A. Davidson expects above-consensus numbers from Splunk Inc SPLK when it reports its third-quarter results on November 29.

Expectations

Andrews projects non-GAAP EPS of $0.09, above consensus at $0.08. The analyst sees third quarter revenue to grow 34.5 percent year-over-year to $234.6 million, higher than consensus estimate of $230.3 million and guidance of $228 million–$230 million.

By segment, Andrews expects license revenue to grow 24 percent to $129.2 million and maintenance & services to grow 50 percent to $105.4 million.

The analyst noted that Splunk has managed to beat consensus revenue estimates in all of the last 17 quarters and exceeding EPS estimates in 15 of the last 17.

“While the consensus revenue estimate implies an 8.2 percent sequential increase from FY2Q17, we note the average sequential revenue increase from FY2Q to FY3Q over the previous four years has been 16.6 percent,” Andrews wrote in a note.

Potential Negatives

That said, the analyst pointed out that license revenue mix may cause short-term volatility, given the increasingly ratable nature of Splunk’s revenue.

Further, the bears are watching the forex impact on the top line, as about 30 percent of the company’s revenue is generated internationally. In particular, a strengthening USD would make Splunk's software costlier for overseas customers.

Rating And Final Justification

However, Andrews reiterated his Buy rating and $83 price target.

“We note that SPLK's increasing mix shift towards cloud revenue (i.e. ratable revenue recognition) may increasingly serve to limit the "magnitude of the beat" in FY3Q17 and beyond. Nonetheless, moving beyond these shifting optics, our view is that SPLK remains one of the few more open-ended growth stories in technology,” Andrews added.

Shares of Splunk closed Tuesday’s trading at $59.77. At last check, however, Splunk had sunk 2.12 percent to $58.50.