Shares of Splunk (SPLK) rose 5% today and hit a new all-time high of $148.14. Last Friday, the stock surged more than 10% after the company reported total revenue for the October quarter that beat guidance by 4.3%. Top-line expansion in fiscal Q3 was driven by 40% growth in software revenue. The stock has rebounded 38% from the September low of $107.16.
Splunk, a provider of business analytics and monitoring software, continues to see new use cases and penetrate new departments across its customer base of 19,000, including more than 90 of the Fortune 100. In FQ3, total revenue rose 30% to $626.3 million, coming in well above the consensus estimate of $604.1 million. Per-share earnings of 58 cents topped the consensus by four cents. Gross margin of 85.8% rose 130 basis points year over year.
Splunk’s cloud (subscription) revenue jumped 78% to $80 million. Cloud annual recurring revenue (ARR) of $368 million rose 86%, an acceleration from growth of 81% in FQ2.
Total remaining performance obligations (RPO) rose 52% to $1.45 billion, with current RPO gaining 41% to $862 million. RPO bookings growth of 42% was a sharp acceleration from FQ2’s growth rate of 19%. Even excluding the contribution from the recently completed acquisition of SignalFx, adjusted RPO bookings growth of 35% represented healthy acceleration. Current RPO bookings of $738 million were up 42%.
In FQ3, Splunk closed 134 deals with total contract value over $1 million, up 21% from the year-ago quarter. The public sector vertical was a standout in the quarter, as the company booked several 8-figure orders with U.S. government agencies.
Splunk’s renewable software mix of 92% in FQ3 was up from 82% in the year-ago period. On November 1, Splunk ended all new perpetual sales, so the renewable mix is on its way to 100%.
Given the shift to a renewable model, Splunk introduced total ARR—the annualized run rate of active subscriptions, term licenses and maintenance contracts—as a key metric that will show the company’s durable growth. At the end of October, total ARR stood at $1.44 billion, up 53% year over year. Looking ahead to fiscal 2021, the company is forecasting total ARR growth in the mid-40% range.
In September, Splunk introduced new pricing that enables customers to better control costs related to data ingestion. Management says early customer response to the new initiative, which helps alleviate some headwinds related to high prices, has been positive. The new pricing approach is beneficial because it has the potential to drive more data into the Splunk ecosystem from existing customers, increase new customer adoption and soften competitive pressure, according to Raymond James.
As part of the new predictive pricing program, predefined pricing tiers allow customers to control and manage budgets around data. Infrastructure-based pricing lets customers purchase Splunk Enterprise based on compute capacity required to run the software on-premises and in the cloud.
Splunk also unveiled new Rapid Adoption packages (starting at $10,000) that help customers get started with the most common IT and security operations use cases. Customers that don’t want to change their current licensing model can stick with data-ingestion pricing.
Following the release of FQ3 results, Wall Street price targets for Splunk got a boost, with a number of bullish firms now clustering in the $165 to $175 range. SunTrust took its target up to $175 from $160, calling out the accelerated growth in cloud ARR. The firm says Splunk’s new total ARR metric should ease investor concerns amid the transition to a recurring revenue model. Also, new pricing expands Splunk’s use cases, while the recent FedRAMP certification for Splunk Cloud will drive public sector deals, according to SunTrust.
Morgan Stanley maintained its Splunk price target of $169, saying the bounce back in current RPO bookings shows the strength of the core business, while the company’s new total ARR metric should give investors a clearer picture of underlying growth. Splunk’s FY’23 goal of roughly $1 billion in operating cash flow should help investors see through the near-term negative impact of shortening invoice duration, says Morgan Stanley.
Jefferies lifted its target to $165 from $157, pointing out that Splunk’s new pricing options are already yielding larger deal sizes, alleviating a long-term pushback on the stock. Wedbush raised its target to $162 from $153, calling out the stock’s attractive valuation relative to the company’s growth profile. At recent prices, Splunk trades at 8 times the FY’21 consensus revenue estimate of $2.82 billion (representing growth of 22%).