Machine Learning Data Specialist Splunk Reaffirm Guidance as CFO Leaves to Join Arm

Machine data analytics specialist Splunk announced CFO Jason Child will depart to become the CFO at Arm Ltd, which has been planning to go public via Softbank after NVIDIA’s $40 bln bid to acquire the company fell apart. SPLK reaffirmed its Q3 revenue guidance of $835-$855 mln, and all of its guidance for FY23. Less than one year ago Splunk’s former CEO, Doug Merritt unexpectedly stepped down while the company was struggling to find its footing amid a major business model transition to a SaaS model accelerating with cloud driving.

Splunk Index

The shift migrating its on-premise products to a cloud-based platform has been moving along for Splunk and Child played a meaningful part in that conversion after Merritt left. This news comes just a month after since the company’s Q2 earnings report on August 24 where SPLK stock has plunged by nearly 30%. The software company processes machine data to extract insights for its users and as such it relies on being on the edge and on top of things for its customers. Customer retention is therefore critical in not just current revenue but future revenue also.

It stands to reason his departure could create a distraction as the company looks to get back on track after cutting its FY23 total ARR and cloud ARR guidance last quarter. It was a confidence factor for the stock today that they reaffirmed guidance. During that August earnings conference call, Gary Steele, who was appointed CEO last March, explained that Q2 total ARR and cloud ARR missed internal expectations due to a slowing number of cloud migrations and expansions as customers tightened their spending.

The does seem to be confidence that the leadership of SPLK is stable with Steele at the helm, who has effectively steered the company towards a cloud-based model. Prior to Steele’s appointment as CEO, cloud ARR represented roughly 35% of total ARR. As of 2Q23, that figure stood at approximately 45% of the total ARR.

While the CFO transition could create a short-term disturbance, it shouldn’t impede SPLK’s transformation progress in a substantial way.

The accelerated shift to the cloud means that cloud revenue growth leads the way. Shifting to the cloud comes with significantly higher upfront infrastructure costs than traditional software due to the need to build cloud hosting capabilities. This is the main reason why net loss per share nearly doubled from last year and why SPLK is no longer profitable on an annual basis compared to years prior.

SPLK’s potential in SPLK’s data collection services as at the front of class. Machine data is outputted in an unstructured format that makes analysis nearly impossible without proper tools. SPLK offers solutions to extract insights out of complex data and does so with a pricing model that only charges its customers on the volume of data it processes. This pricing model has already displaced several competitors, as companies grow tired of surprise fees each month.

Reaffirmed Guidance

A reaffirm of guidance today can be viewed as a relief and easing investors’ anxieties.

  • SPLK reaffirmed its Q3 revenue guidance of $835-$855 mln, and all of its guidance for FY23.
  • Revenue of $3.35-$3.40 bln,
  • Total ARR of approximately $3.65 bln,
  • Cloud ARR of approximately $1.8 bln,
  • Non-GAAP operating margin of roughly 8%,
  • Free cash flow of at least $400 mln.

Bottom line, a lack of profitability for a formerly consistently profitable company is a slight concern. The belief, or hope, is profitability should continue to improve, as transitioning to the cloud requires heavy scaling. As indicated by doubling its large cloud customers, SPLK is on its way to doing just that.

Splunk is confident in the eventual closing of delayed transactions in the pipeline, but when they close remains uncertain. Despite the challenging environment, momentum in its cloud business remained strong. Cloud was nearly 50% of total software bookings last quarter, and cloud ARR was up strongly. Overall, it was a very difficult quarter and guidance for Splunk. We are not sure we agree with Splunk’s take that the shortfall is all based on macro factors.

With macroeconomic growth concerns rising around the globe with central banks raising interest rates, worries about a further deceleration in IT spending are also intensifying. The fact that SPLK reaffirmed its guidance in this increasingly challenging climate encouraged investors.

Not subject to huge US dollar pressures

A big positive for Splunk is its relatively smaller international exposure, particularly to Europe, which is encountering fierce economic headwinds related to energy and currency pressures. The Soaring US dollar has been hurting many US companies exporting their services. In FY22 (ending Jan. 31), revenue in the U.S. accounted for nearly 70% of total revenue, and no country outside of the U.S. accounted for more than 10% of total revenue.

About Splunk

Splunk Inc. (NASDAQ: SPLK) helps organizations ask questions, get answers, take actions and achieve business outcomes from their data. Organizations use market leading Splunk solutions with machine learning to monitor, investigate and act on all forms of business, IT, security, and Internet of Things data.

Join millions of passionate users and try Splunk for free today. Splunk, Splunk>, Listen to Your Data, The Engine for Machine Data, Splunk Cloud, Splunk Light and SPL are trademarks and registered trademarks of Splunk Inc. in the United States and other countries. All other brand names, product names, or trademarks belong to their respective owners. © 2018 Splunk Inc. All rights reserved

Source: Splunk

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