Things that go Splunk in the night: We're 2 years ahead of cloud mix sales forecasts thanks to pandemic, yells data cruncher

But all that glitters is not cloud as losses widen

The pandemic has sped up Splunk's forecast cloud biz mix by two years, with subscription sales now accounting for half of total software bookings. Sadly – for management – the big data cruncher's losses are widening.

The scores for Splunk's Q2 financials for the period ended 31 July came in last night: total revenues shrank 5 per cent year-on-year to $491.65m, which CFO Jason Childs said was "reflecting [a] substantially higher cloud mix".

Within that top-line figure, licence sales fell 36 per cent to $176.8m; cloud services went up 79 per cent to $125.8m; and maintenance and services went up by $20m on a year ago to $188.97m.

Annual recurring revenue for cloud was up 89 per cent to $568m and total ARR grew 50 per cent $1.93bn. The quarter ended for Splunk with 396 customers with an ARR greater than $1m, compared to 274 in Q2 of fiscal 2020.

"Cloud momentum continues to accelerate. And for the first time in our history, our cloud-based products drove over half of total software bookings, far outpacing expectations," CEO Doug Merritt told analysts.

A year ago, cloud accounted for 36 per cent of Splunk's turnover, leaping to 44 per cent in Q1, and 53 per cent in Q2.

The CEO said the software-as-a-service growth spurt signals that 60 per cent of Splunk's business will be cloud-based by the close of this financial year, rather than the previously forecast end of FY 2023.

"The current macro environment is playing a role here too as more and more organisations accelerate their move to cloud-based services in response to the pandemic," Merritt added.

Many trends seen in Q1 had continued or accelerated, he said. "Although some customers remain hesitant to commit to long-term contracts, especially for larger orders, many existing customers continue to expand their use of Splunk."

The COVID-19 disease, as we all know, forced businesses into a new way of working, resulting in the "rapid expansion of distance learning, tele-health, online retail and remote work, all generating new kinds of data and metrics and all powered by digital technologies."

Total operating expenses for the quarter went up 18 per cent to $599m with more spent on R&D, sales, marketing, general, and admin. All this, coupled with interest expenses, led to a pre-tax loss of $260m versus a pre-tax loss of $95.24m in the prior year.

Clearly, all that glitters is not cloud.

The business develops software deployed to search, monitor, and examine customers' sprawling datasets via a web interface. Splunk then squeezes out reports, alerts, graphs, and visualisations, as well as dashboards to help make sense of the data.

Like other tech vendors with a growing cloud component, Splunk is weathering the economic crisis relatively well. But Merritt warned things won't be all plain sailing.

"We definitely don't see a super clean, clear rosy picture going forward," he told analysts. "What we saw throughout Q2 and especially towards the end of Q2 is significantly more scrutiny on any spend at all, on all deals."

There were instances where the "economic buyers" – the CIO or "significant senior exec" – had a purchase order ready to go only to be told by the board that the CEO or CFO "wants to review it again".

"I think it's very pollyannaish for people to think that the fundamental dislocations we're seeing with COVID are not going to be felt through the economy in one or the other, with the chaos of the election, with stimulus variability, I think we'd all be pretty surprised if we had a super neat V [shaped recovery] and we were marching toward a positive beat around Q4, Q1, Q2."

Splunk came in below this quarter's revenue forecast of $520m and expects Q3 to be between $600m to $630m, versus $626m in Q3 of fiscal 2020. ®


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