Big Data Is Helping Splunk Continue Its March Higher

Data analytics company Splunk (NASDAQ: SPLK) released guidance-topping results for the first quarter of its fiscal year 2019 on May 24 and raised its revenue predictions for the full year. The stock has more than doubled in the last year and a half, but the growth of big data could help its run continue.

A new way to measure growth

New customer additions have been and will continue to be a key measure of the company’s success. The goal is to grow the customer base to 20,000 by the end of 2020, about a 25% increase from the current count. But it’s about more than just a number. The size of new deals will increase in importance now that Splunk is pushing for $2 billion in annual revenues.

To that end, a new metric was introduced by the company in its most recent report: the number of new million-dollar-plus deals. For the first quarter, there were 43 of them. That compares to 35 in the same period a year ago.

This new measurement shows that, in spite of its meteoric growth in recent years, Splunk is still early in its growth story. Given the size of the data analytics industry — which has doubled since Splunk went public in 2012 and is expected to continue growing by double digits in the foreseeable future — signing big contracts is a must. Management said it believes it remains on track to hit its 2020 customer and revenue goals, so look to this new metric to gain importance in subsequent quarters.

Image source: Getty Images.

Profitability is coming soon

Despite a compelling story, many investors may shy away from Splunk because it is not yet a profitable enterprise. However, that may be about to change, at least as far as Splunk is concerned.

Adjusted operating profit margin, which backs out certain items like stock-based compensation, was -4.7% in the first quarter. Last year, that margin was -9.2%. For the next quarter, management said it thinks adjusted operating margin will be 2%, and 11.5% for the full year.

While paying employees with new shares of the company will likely continue to pull the unadjusted bottom line into the red, it looks like profitability is right around the corner. At least investors now know the company has the ability to pay its operating bills out of pocket.

Cross-selling a new acquisition is showing early positive signs

Another key to Splunk’s growth has been the security industry. Enterprises have been using data analysis to spot anomalies in their digital systems and stop security breaches. To boost its presence there, Splunk purchased security orchestration, automation, and response (SOAR) outfit Phantom Cyber Corporation during the last quarter for $350 million.

Keeping a business secure against cyberthreats is increasingly complex and difficult. Phantom’s technology helps tie all the pieces involved in cybersecurity together. Adding Splunk’s data-parsing tech to the mix can help strengthen those automation services even more. Splunk hopes that buying Phantom will help increase the pace of new customer adoption of its services.

However, Phantom may also help increase the scope of existing customer relationships though it was too early for management to provide specifics in the recent conference call. Given how many organizations use Splunk to analyze their fast-growing amounts of data to increase operating efficiency, it could make sense to double the service as a security measure. Thus, that cross-selling opportunity could also feed into the aforementioned million-dollar-deal measure, pushing smaller relationships into that more meaningful metric as the company looks to hit its ambitious goals in the next couple of years.

Overall, Splunk’s start of its new fiscal year was a very good one. With big data only getting bigger, and the need to make sense of that information also increasing in importance, Splunk looks like a good investment.

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Nicholas Rossolillo owns shares of Splunk. The Motley Fool owns shares of and recommends Splunk. The Motley Fool has a disclosure policy.

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