Splunk Earnings: Robust Sales and Improved Profitability Underpin a Strong Period for the Firm

We are maintaining our $125 fair value estimate for narrow-moat Splunk SPLK after the firm clocked in another strong quarter ahead of our above-consensus forecasts. The company continues to emphasize financial discipline amid macroeconomic uncertainty, resulting in another quarter of strong operating margins. We believe that while near-term macro headwinds have depressed demand for Splunk’s solutions and top-line growth, the long-term demand outlook for Splunk remains robust. With strong enterprise penetration and an economic moat built upon high switching costs, we continue to view Splunk as a strong player in the security and observability end-markets. With shares trading up sharply following the earnings report, we see Splunk’s shares as fairly valued.

Second-quarter sales came in at $911 million, up 14% year over year and marginally ahead of our prior estimate of $899 million. As customers delay their cloud transitions, this has a knock-on effect on Splunk’s cloud solutions. Cloud revenue for the quarter was $445 million, up 29% year over year, growing at a significantly slower pace than it did throughout fiscal 2023. Relatedly, the delays in cloud transitions also affected Splunk’s cloud net retention rate which was 116% for the quarter, down from 129% a year ago and 120% last quarter.

On the profitability front, Splunk’s continued focus on operational discipline helped the firm expand its adjusted operating margins to 16.7% for the second quarter, improving dramatically from 3.6% a year ago. We model continued improvement in operating margins throughout the second half of the year as the firm tones down operating spend as a portion of sales in a tough macro environment.