To The Moon

[Part 2 of 5] $Splunk(SPLK)$Management and Business Direction

Just a few weeks into his CEO role, Gary Steele wrote a letter to investors in Splunk's 2022 Annual Report. He comes with nearly 20 years of experience from a cybersecurity business. As a founder and previous leader of Proofpoint Inc, he managed to IPO the company at $13 in April 2012 before eventually getting it acquired by Thoma Bravo at $176 per share, valuing the company at $12.3 billion which is about 9.5 times of its 2021 revenue. Based on his experience, it can signal that Splunk, as a data platform, is most likely to focus on cybersecurity-related data and perhaps, to form a similar exit strategy for the company.

Along with a new CEO, Splunk has also appointed Jason Lee as the CISO. He has 20 years of experience in information security and operating mission-critical services. Prior to the current stint, he has served as CISO of $Zoom(ZM)$since June 2020. He was previously the Senior Vice President of Security Operations at Salesforce and held various senior leadership roles at $Microsoft(MSFT)$. He will be overseeing all facets of global security to protect Splunk employees and customers. To tout itself as a best choice for managing and analysing cybersecurity data, it has to lead by example and ensure that Splunk is a secured platform.

In the first half for the year ended 31 January 2023, Splunk achieved a revenue of $1.47 billion. The full year revenue guidance is expected to be between $3.35 billion and $3.4 billion. Assuming that Splunk can deliver the expected revenue for the full year, it will be at least a 25.3% increase from the previous year. This will be a slight improvement from the previous YoY growth rate of 20%. There are currently 723 customers that have a total annual recurring revenue of more $1 million.

In the first six months of the fiscal year, it is noted that the percentage of cost of sales on revenue is 28%, an increase of 1% from 27%. Cost per dollar of sales is expected to continue to rise due to inflationary pressures. However, operating revenue growth rate is outpacing the operating cost growth rate. Overall, operating cashflow for the full year is expected to reach $420 million. This would be a 228% increase from the previous fiscalyear.

Spunk has more than doubled its investing cashflow spending from $333.8 million for the previous to $730.6 million in just the first half of this fiscal year. Purchases of marketable securities made up a bulk of its cash outflow in this segment. Financing cash outflow is likely to stay within range. It is $74.9 million for the first half of this fiscal year versus $136.7 million for the whole of last year.

As of July 2022, the company has negative equity value of $4.24 due to lower assets reported and higher long term liabilities as compared to last year. Convertible senior notes worth $3.87 billion form the largest proportion of its long term liabilities. This is the first time since Jan 2012 that the company is facing this issue. It is a red flag that the estimated equity value per share is negative as of the end of the first half of the fiscal year, signalling financial distress. Excessive debt has been incurred to cover the accumulated losses over the years. Investors putting money into this company should stay cautious of its financial health and watch its performance for the full year.

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