Splunk Stock falls as large data group reduces its cash flow forecast

Text size

Splunk

stocks sank, losing nearly a tenth of their value, after the big data analytics company released strong quarterly results, but surprised Wall Street by reducing its cash flow forecast for the first time. set of the year.

The company is accelerating the evolution of its business model towards subscriptions and the abandonment of more traditional perpetual licenses for software. Many enterprise software companies have experienced similar changes, which generally resulted in a period of disordered financial results.

That seems to be happening at Splunk (symbol: SPLK), but the situation has been further complicated by the news – also disclosed by management on Wednesday – that the company is buying SignalFX, a cloud-based application performance monitoring company, for 1 , $ 5.0 billion cash and shares.

For its second fiscal quarter ended July 31, Splunk achieved sales of $ 517 million, up 33% from the previous year, which is well above the consensus of Street, which was $ 488.4 million. Non-GAAP earnings of 30 cents per share were more than double the 12 cents expected by analysts.

On the face of it, the financial projections of management seemed good. For the third quarter, Splunk is expecting a turnover of $ 600 million, ahead of the $ 580.5 million expected by Street. For the past year, Splunk has increased its revenue forecast by $ 2.3 billion, up from $ 2.3 billion.

But – and this is a big but – the company said that she was now seeing a cash flow from operations for the year 2020 negative $ 300 million. That's $ 550 million compared to the initial projection of $ 250 million.

Splunk announced that it would stop selling new perpetual licenses as of November 1st and that it expects these licenses to represent only 1% of the total value of the contracts in the second half-year, compared to 10% in the first half.

The company previously predicted that 15% of the value of the contract would come from perpetual licenses, William Blair analyst David Griffin observed in a research note Thursday morning. Griffin stated that "since the total value of indefinite-term contracts is invoiced and collected in cash, the lower contribution creates a significant barrier to cash flow. front.

Moness Crespi Hardt Analyst Brian White wrote in a research note that although Splunk's results far exceeded expectations, the teleconference that followed the news was "surprisingly painful" when attention turned towards the issue of cash flow. He still repeated the company's purchase rating and suggested investors take advantage of weak stock.

Splunk has a lot of fans on Wall Street. There are 43 analysts following the company, but no sales rating. And most analysts remain supportive of the title, albeit slightly distorted by the cash situation.

Wedbush analyst Steve Koenig wrote that, while investors may have been shocked by the cash flow problem, "management clearly aims to maintain customer adoption, the appropriateness of technologies and markets, as well as long-term value creation, "he said.

The unpleasant surprise over the cash flow overshadowed the information on the company's acquisitions. Splunk buys SignalFx for $ 1.05 billion, 60% in cash and 40% in shares. At the end of the quarter, Splunk's balance sheet was approximately $ 2.6 billion in cash and current investments. The transaction is expected to be finalized during the second half of the current fiscal year.

Headquartered in San Mateo, California, SignalFX raised $ 178.5 million in venture capital from a group of investors including Andreessen Horowitz, General Catalyst, CRV and Tiger Global.

Splunk shares fell $ 10.74, or 8.4%, to $ 117.72 on Thursday morning.

Write to Eric J. Savitz at [email protected]