Splunk Inc. (SPLK) reported fiscal second-quarter 2015 loss of 50 cents per share, much wider than the Zacks Consensus Estimate of a loss of 33 cents and the year-ago quarter loss of 13 cents per share. The wider loss was primarily on account of a significant increase in operating expenses.

Shares however surged 9.2% ($4.16) in after-hours trading following the results. This jump in share prices was primarily attributable to robust revenue growth exhibited by the company in the quarter as well as an increase in revenue guidance for fiscal 2015.

Revenues

Revenues surged 51.9% year over year to $101.5 million, comfortably beating the Zacks Consensus Estimate of $94.0 million. Strong license sales and maintenance & services revenues primarily drove the better-than-expected year-over-year result.

License sales (61.1% of revenues) jumped 43.8% year over year to $62.1 million. Maintenance & services revenues (38.9% of revenues) increased 66.6% from the year-ago quarter to $39.5 million.

Adoption and implementation of its products within enterprises is helping the company to generate more revenues. The company also added 500 new customers, which resulted in more than 7,900 customers worldwide.

The clientele includes the likes of Dell, Dropbox, Nordstrom, NASDAQ, Overstock.com (OSTK) University of Washington, Chinese University of Hong Kong and the U.S. Department of Health and Human Services.

During the quarter, the company announced the availability of the Splunk app for Stream. This uses the Cloudometer technology that makes it easier for customers to get wireless data into all sorts of Splunk products.

Moreover, the quarter also witnessed the launch of the Splunk app for enterprise security as well as the Splunk mobile app.

During the quarter, Splunk entered into a partnership with Syncsort to deliver machine data insights from mainframe systems.

Further, the company announced the industry’s first 100% uptime service level agreement for Splunk cloud and a free Splunk Online Sandbox to give customers a trial experience of Splunk cloud almost instantly.

Margins

Gross margin contracted 370 basis points (bps) from the year-ago quarter to 82.5%, primarily due to an unfavorable product mix. License gross margin contracted 340 bps on a year-over-year basis, while maintenance & services contracted 30 bps in the quarter.

Splunk continues to spend on research & development (R&D), which jumped 110.9% year over year to $34.2 million in the quarter. Sales & marketing (S&M) expense surged 79.2% from the prior-year quarter to $80.0 million. General & administrative expense increased 174.3% year over year to $32.7 million.

The sharp jump in operating expenses (up 101.8% year over year) hurt profitability in the quarter. Operating loss (including stock-based compensation) was $59.2 million compared with a loss of $13.3 million in the year-ago quarter.

Net loss (including stock-based compensation) was $59.6 million compared with a loss of $13.7 million in the year-ago quarter.

Splunk Inc - Earnings Surprise | FindTheBest

Balance Sheet and Cash Flow

Splunk exited the first quarter with $645.4 million in cash & cash equivalents compared with $667.7 million at the end of the prior quarter. Cash flow from operations was $9.3 million, while free cash flow was $6.4 million.

Guidance

For the third quarter of 2015, Splunk expects revenues in the range of $105 million to $107 million. Non-GAAP operating margin is expected to be approximately 1%.

For fiscal 2015, revenues are likely to be in the range of $423 to $428 million (up from the prior outlook of $402 million to $410 million). Non-GAAP operating margin is expected to be approximately 1% (up from the prior outlook of breakeven).

Our Take

We believe that Splunk’s strong product pipeline will continue to boost top-line growth. However, increasing investments for R&D and higher operating costs are expected to be a drag on profitability in the near term. As Splunk continues to explore and expand into new markets, S&M expenditure is expected to increase significantly, thereby hurting margins in the near term.

Moreover, the company continues to face tough competition from established players such as International Business Machines (IBM) and Oracle (ORCL), which remains an overhang on the stock.

Splunk has a Zacks Rank #3 (Hold).

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