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Splunk Q1 earnings, outlook tops estimates

Splunk (SPLK) continued its strong momentum from the prior quarter reporting better-than-expected results on the top and bottom line for the first quarter. The big data analysis firm’s Q2 and full-year outlook also surpassed estimates. Despite solid Q1 results, the share price was down 3% in the extended hours of trading.

The company’s stock has increased 23% this year as the Q4 results topped estimates and the firm raised its full-year outlook. Post the earnings announcement the share price touched a new 52-high level of $143.70 in March.

Solid Q1 Performance

Revenue soared 36% to $425 million and adjusted income per share came in at 2 cents. Analysts were expecting revenues of $395.38 million and loss of 14 cents per share. The company also last quarter guided revenues of about $395 million. First quarter results surpassed estimates comfortably by a broad margin.

Splunk is shifting from a hosted model towards a cloud-based subscription model, which is expected to bring in stable revenues. The transition seems to be working well for the firm as the software revenues increased 54% to $265 million.

Adjusted operating loss contracted to $7.8 million, compared to $14.7 million reported last year. As a result, operating margins narrowed to a negative 1.8% over 4.7% loss in the prior year period. The adjusted operating margin came in much better than the company’s prior guidance of negative 8%.

Free cash flow saw a significant drop of 73% due to an increase in investments. Operating cash flow also was down to $35 million compared to $76.5 million as a result of increased stock-based compensation, debt issuance costs, and deferred commissions.

Slowing Customer Additions

New customer additions came in lower over the prior year and last quarter, which is a concern for investors. Splunk added 400 new clients compared to 460 last year and 600 in the previous quarter. The company’s client base has grown consistently over the last decade from 450 at the fiscal 2008 end to 17,500 at the end of January this year.

The data analysis provider also has acquired firms like Rocana, SignalSense, Drastin, Phantom, and VictorOps over the past two years to augment its service offerings, which has helped it to compete with its peers and expand its client base.

Splunk has entered into strategic partnerships with firms like Amazon Web Services (AWS), Cisco Systems (CSCO), Symantec (SYMC) and Accenture (ACN). These deals are expected to bring in more clients and expand its service offerings across the globe, which is going to be accretive to earnings in the near future.

Upbeat Outlook

Splunk seems to be more optimistic and confident about the business environment. For the second quarter, revenue is forecasted to be about $485 million, surpassing $479 million expected by the street. Adjusted operating margin is anticipated at nearly 3%.

For the full year, revenue is now revised upwards to $2.25 billion compared to $2.20 billion provided last quarter. The sales outlook is in line with analysts’ expectation of $2.22 billion. Non-GAAP operating margin is forecasted at 14%, unchanged from the prior outlook.

Past Performance

In the fourth quarter, sales grew 35.3% to $622.1 million aided by improving demand for its products across the board, adding 600 new clients. However, earnings plummeted by 95.7% to 1 cent per share due to rising expenses and costs, while adjusted earnings jumped by 40.9% to $0.93 per share. Q4 results surpassed estimates on both the top and bottom line.

Splunk’s peer Zillow (ZG) earlier this month reported a 51% jump in revenues with 181 million unique monthly users. Nutanix (NTNX) is slated to report its earnings on May 30.

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