Splunk (SPLK) Q3 Earnings: What to Expect

Machine data analytics company Splunk (SPLK) will report third quarter fiscal 2021 earnings results after the closing bell Wednesday. The company has had a tough few quarters to say the least. While, Splunk understands customer behavior and can assess online end-to-end business transactions, the pandemic has caused enterprises to rethink their security and cloud solutions.

The company has seen its stock price fall almost 25% over the past thirty days, against a 3.5% gain for the S&P 500 during that span. And if you’ve bought and only held the stock over the past nine months and one year, your shares have lost 18% and 37%, respectively, trailing the S&P 500 index in each time frame. The market has seemingly begun to re-assess Splunk’s growth potential and valuation. In that vein, the stock price — now trading at just 10 times revenue — appears more reasonable with fiscal 2022 revenue growth estimates calling for 22%.

With specialties in the realm of security operating, infrastructure management, and IT teams, Splunk covers three rapidly growing verticals. Splunk Platform and Splunk Solutions are the company’s s two main products. The former provides companies with real-time data collection, indexing, and reporting via data management processes. The latter has three overarching themes: Security and threat detection, IT visibility to predict outages and Observability as a cloud-only service.

The company has not received credit for its diversification and growth trajectory as it is in the process of a business model transition. It’s also encouraging that the company coming off a quarter during which revenue grew 23% year over year, accelerating seven percentage points sequentially. But for the stock to reverse course, the management team on Wednesday will need to convince a skeptical market that Splunk can continue to reaccelerate its growth rate and capture market share.

For the quarter that ended October, Wall Street expects the Splunk to lose 50 cents per share on revenue of $650.64 million. This compares to the year-ago quarter when the loss was 7 cents per share on revenue of $558.57 million. For the full year, ending January, the company is projected to lose $1.92 per share, wider than the last year's loss of 55 cents per share, while revenue of $2.58 billion would rise 15.7% year over year.

The projected full-year loss is one reason the stock has been punished over the past year. Splunk must show that can return to profit growth much sooner than anticipated. One way the company can deliver this message is by outlining the company’s total addressable market (TAM) which is poised to expand in the quarters and years ahead. Estimates suggests that the Splunk's TAM could grow 40%, or close to $114 billion in the next two years, compared to $81 billion in 2020.

As noted, its revenue rose in the second quarter. But the company issued downbeat revenue guidance which sent the shares lower. Q2 revenue was up 23% year over year to $605.7 million, topping analyst estimates by $42.4 million. Adjusted loss per share of 62 was seven cents better than analysts expected. Annual recurring revenue was $2.63 billion, higher than the $2.61 billion consensus, while Cloud ARR was up 72% year over year to $217 million, above consensus of $212 million.

All told, unlike previous quarters, expectations are more reasonable for the top and bottom line numbers the company might reveal. A revenue and profit beat, and perhaps upside guidance, is in order. Splunk's outlook and its billings forecast for 2022 will be the most closely-watched aspects of the report.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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