Splunk Closes Out Fiscal 2023 With a Mixed Quarter as Tough Macro Affects Outlook; Maintain FVE

We are maintaining our $120 fair value estimate for Splunk SPLK after the firm reported a mixed quarter with a strong fourth quarter showing offset by light guidance for the upcoming year. While the near-term macro outlook remains dreary as customers look to optimize and mute their IT spending, we continue to view Splunk as a healthy business with a strong enterprise-heavy customer base. We forecast a strong rebound in demand for Splunk’s solutions as the macro environment normalizes and client spending on IT solutions returns. With shares trading around 3% down after hours to about $100, we believe the firm is trading at a discount for long-term investors willing to stomach near-term volatility.

Fourth-quarter sales came in at $1.25 billion, up 39% year over year and significantly ahead of management’s prior guidance. With a tough macro backdrop, Splunk customers are delaying their transition to Splunk’s cloud solutions and instead spending on legacy on-premises software license solutions. With the delays in cloud transitions, Splunk’s cloud net retention rate fell 400 points sequentially to 123%. Similarly, due to macro tightness and customers delaying their cloud migrations, cloud bookings made up only 58% of overall software bookings, down from 63% a year ago.

On the profitability front, Splunk’s adjusted operating margin clocked in at 38%, improving from 16% a year ago. This rapid expansion in margins was due to the revenue outperformance mentioned above and an effort from Splunk to tone down operating spend amid a tough macro environment.

Splunk issued weak top-line guidance for the April quarter in the range of $710 million-$725 million, up approximately 6% at the midpoint. Non-GAAP operating margin is expected to be in the range of negative 3% and negative 5% as the firm seeks to invest in research and sales in anticipation of a demand rebound as the macro environment normalizes.