UPDATED 17:01 EDT / AUGUST 25 2016

NEWS

Splunk beats earnings forecasts, raises outlook, but investors want more

Big Data software company Splunk Inc. beat earnings forecasts for the seventh quarter in a row and hiked its outlook for the rest of the year, but it wasn’t enough to please investors.

The company, which sells cloud-based software for analyzing real-time data generated by the likes of customer clickstreams and computer network activity, reported second-quarter profits before onetime and other expenses of 5 cents a share, well over analysts’ average forecast of 3 cents. Revenues for the quarter, which ended July 31, jumped 43 percent, to $212.8 million, easily beating analysts’ estimates of $200.5 million.

The San Francisco-based company also hiked third-quarter forecasts to between $228 million and $230 million, close to analysts’ consensus of $228.9 million. It also significantly raised its fiscal 2017 revenue forecast to a range of $910 million to $914 million, from previous guidance of $892 million to $896 million and analysts’ consensus of $897 million.

But investors were disappointed that Splunk didn’t issue an even more bullish third-quarter outlook. Shares fell about 6 percent in after-hours trading. Shares had risen 1.4 percent, to $65.10 a share, before the results were announced. The stock stands 11 percent higher than at the start of the year.

The company said it continued to draw new customers, such as The Priceline Group and Subway IP Inc., from a wide variety of industries. Chief Executive Doug Merritt (pictured) said it saw both existing customers using Splunk for new use cases as well as more than 500 new customers.

Orders for Splunk’s cloud service were especially strong, doubling from last year, Merritt said during the earnings conference call, translating to a run rate of $100 million this year. Uber, for one, tripled its use of Splunk services. One reason for the greater cloud revenues, Merritt said, is that the company’s sales representatives are learning how to sell cloud services better.

Overall, Merritt added, “We are very early in capturing our full potential.”

One issue with investors is that the new revenue model of the cloud and a newer “ratable” model of recognizing revenues of a software contract over a period of years makes revenues more difficult to estimate. “It appears strong growth trends remain on track as we can qualitatively drive math that adds 12 point of growth in excess of our 26% license bookings growth estimate,” Citi Research analyst Walter Pritchard wrote in a note to clients.  “However, with two levels of abstraction to get there (ratable and cloud assumptions), trajectory of the business is more opaque, a tough set-up for an expensive stock.”

The 13-year-old company also continues to rack up net losses, with an $83.6 million loss, or 65 cents a share. That’s thanks to continued heavy investment in research and development and sales and marketing efforts.

One key question is what new products the company will offer, said George Gilbert (@ggilbert41), an analyst with Wikibon Research, owned by the same company as SiliconANGLE. “What applications will they choose to build beyond security that they can sell to a business buyer, rather than a general application framework to the IT department?” he said.

More generally, especially as it expands its product offerings to reach new customers and get existing customers to use Splunk more widely, Gilbert said, the company may need to hire a larger direct-sales force. That’s expensive and could push the prospect for profits further into the future. “The concern is that they’re investing all the growth in revenues back into sales and R&D, so investors don’t know the true profitability potential of the business,” he said.

Photo from Splunk

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