Total revenue growth remained strong, at 51.9% year over year to $101.5 million, 9.7% ahead of our forecast. Splunk doubled the license capacity for entry-level customers and lowered the price of Splunk Cloud by 33% during the quarter, helping to drive sales growth and keep the company apace with new competitors. We view these pricing moves as responses to customer feedback and competitive threats, but we still view Splunk as a leader in the event management analysis market.
Profitability was mixed. The company posted a larger-than-expected GAAP operating loss ($60.3 million, or $0.51 per share) as operating expenses and stock compensation were all significantly higher than our forecast and well above the year-ago period. On a non-GAAP basis, Splunk actually posted a net profit of $1.1 million, or $0.01 a share, ahead of our $0.01 loss per share estimate.
This was a strong quarter for Splunk, but price cuts show that the firm is being forced to react to competitive pressures. We believe Splunk remains a strong competitor and thus far has proved nimble enough to respond to competition in both pricing and product features.
Finding a Niche in Big Data
With the ability to quickly collect, assimilate, and analyze machine data, Splunk’s disruptive products help customers make sense of massive amounts of constantly generated information.
A growing number of electronic devices, software applications, and other assorted technology are designed and deployed to help users throughout all organizations. Virtually every electronic device and website generates data, recording activities and information including status updates, interactions, transactions, and alerts. Splunk’s products give a customer real-time visibility and analytics about these devices, applications, and websites and how they affect the organization and its operations. While customers primarily use Splunk for security and event monitoring, the company’s proprietary data engine also allows users to mine data for critical operational and strategic insights.
We believe Splunk’s products give previously unavailable real-time insights into a wide variety of devices and the massive amounts of data they generate. Traditional business intelligence and data vendors like CA and Oracle require extensive customization with access limited to specific types of data, but Splunk offers a bird’s-eye view from the perspective of almost anything with machine-to-machine or machine-to-human interactions. As customers analyze the data, we believe they will incorporate their insights into mission-critical workflows.
Splunk faces challenges despite its disruptive technology. The biggest of these is the Big Data trend itself: Enormous sums of money are being spent to collect and analyze massive amounts of data, and if benefits prove illusory, spending will cool. However, with sources estimating that data will grow at a 45% compound annual rate through 2020, we believe the explosion of data and the drive to understand the insights buried within will continue to drive spending in the short term. If Splunk is successful in transforming into a data platform from its humble roots as a machine data monitoring tool, we think that should keep the firm relevant no matter the fortunes of the Big Data trend.
Tech Advantage and Growth Not Enough for a Moat Yet
We do not believe Splunk currently possesses an economic moat. While the firm has a modest technological advantage and continues to increase revenue at a blistering rate, it has yet to turn a profit, and both its business and industry acceptance of its technology remain nascent. Given Splunk’s ability to tie into myriad customer systems, applications, and devices, and the complexity of the data sets captured, we believe it can increase switching costs over time. The firm is trying to transform itself into a data platform, rather than a point solution, which would tie it into more traditional customer data streams such as structured transaction data and workflows. Splunk’s strategy includes offering its product as a service and a growing developer network that has created hundreds of apps that use Splunk’s data platform. The early results of this strategy are largely unknown, but we believe the success of Splunk’s products underpinning a data platform would be the key to constructing an economic moat.
Rapid Innovation, Rivals Present Risk
Splunk has been able to quickly increase market share in the burgeoning field of Big Data and related analytics. Its proprietary and disruptive technology has given it a leg up on traditional business intelligence and database vendors like BMC, CA
, and SAP
. While these old-line technology stalwarts race to catch up, Splunk continues to expand its installed base, winning converts to its data aggregation and analytical tools. Currently, we do not believe any competitors possess comparable tools. Nevertheless, the rapid pace of technological innovation and the vast resources of competitors consign Splunk to a high enterprise risk rating.