Quick Summary

Splunk (SPLK) sells software that helps companies analyze vast amounts of unstructured data (logs, machine data, etc.) and gather business intelligence from it. Clients use Splunk tools to create graphs and charts, search logs for issue resolution, plan resource needs based on usage, and monitor application uptime and performance. Splunk indexes unstructured data, making it easy to generate insights from enormous amounts of log and machine-generated data. About 50% of revenue is from software licenses, 25% from cloud offering subscriptions, and the remainder from maintenance and support contracts.

Does The Company Have Recurring And/Or Rising Revenues?

YES. Splunk's 3-year average annual revenue growth has been impressive at 35%, but most of that was driven by a traditional on-premises license-and-maintenance software model. Splunk is transitioning to a self-hosted, cloud model. Currently, about 25% of revenues are from cloud, but nearly 50% of bookings, which Splunk is targeting for 75% within the next year or two. Cloud subscription models are more attractive, as they represent fully recurring revenue and eliminate contract renewal haggling. However, this transition will make revenue growth appear sub-par in the near term, as in a license model all revenue is recognized up front, as opposed to amortized in subscriptions. Longer-term, the explosion in connected devices, SaaS software offerings (both business and consumer), and exponential growth in machine data will drive 20%+ revenue growth rates into this cloud model for Splunk. Therefore, we feel it has both a rising and recurring revenue model.

Does The Company Have Durable Competitive Advantages?

SOMEWHAT. Like most enterprise software, there are SWITCHING COSTS involved in Splunk's software. It is used to create dashboards and graphs that are critical to ongoing operations and is a key tool in diagnosing and debugging problems as well. Splunk's proprietary query language has been mastered by thousands of engineers. As a result, changing vendors would be quite disruptive. Splunk has maintenance renewal rates exceeding 95%, which we expect will translate into similar renewal rates for cloud subscriptions. That said, there is a lot of competition in this space, and since Splunk is mostly a real-time tool that reads machine-generated data, switching it out is not hugely daunting as there is no large, proprietary data set to move.

GreenDot Rating: YELLOW

Splunk is a strong YELLOW (somewhat attractive) business. Long-term trends towards e-commerce, work-from-anywhere, and on-demand anything all favor continuing growth in SaaS applications, which means continuing growth in machine data that needs to be analyzed. Splunk is the clear leader for this, ranked #1 in Gartner's infrastructure software rankings. This should ensure growth, and the transition to a cloud model makes revenue recurring as well. Since it becomes a key part of operations, Splunk is also difficult to switch out of - but not as difficult as something like an ERP or CRM that manages user-generated proprietary data. That is the only thing keeping Splunk from a GREEN rating.