Splunk (SPLK) Q3 Earnings To Benefit From Portfolio Strength

Splunk (NASDAQ:SPLK) is set to report third-quarter 2019 results on Nov 29.

The company delivered average four-quarter positive earnings surprise of 28.1%. In the last reported quarter, the company's earnings of 8 cents per share topped the Zacks Consensus Estimate by 3 cents per share.

Revenues increased 38.6% year over year to $388.3 million and came ahead of the Zacks Consensus Estimate of $358 million. The increase in revenues was driven by greater utilization of Splunk’s products by existing customers and new customer wins.

For the third quarter, Splunk expects revenues between $430 million and $432 million.

The Zacks Consensus Estimate for the quarter to be reported is pegged at 31 cents per share, indicating year-over-year increase of 82.4%. Further, the consensus mark for revenues is pegged at $432.3 million, up roughly 31.5% from the year-ago quarter.

Let’s see how things are shaping up for the upcoming announcement.

Splunk Inc. Price and EPS Surprise

Splunk Inc. Price and EPS Surprise | Splunk Inc. Quote

Factors Likely to Influence Q3 Results

Splunk is focused on acquisitions to expand its portfolio. The company acquired VictorOps in the second quarter to address the needs of DevOps, which is a rapidly growing domain of software engineering. This acquisition is expected to expand the company's customer base in the to-be reported quarter.

The company continues to innovate to boost its revenues and announced the availability of Splunk for Industrial Internet of Things (IoT) in the to-be reported quarter. This will help industrial organizations to cut costs and improve performance by expanding access to the data that powers connected devices.

In the last reported quarter, Splunk witnessed momentum in its cloud business, with revenues increasing 90% year over year. This was primarily driven by increased utilization of cloud-based services. Notably, the company expects this momentum to boost revenues in the to-be reported quarter.

Moreover, the company’s customer base continues to expand. It added more than 550 new customers in the last reported quarter. The company had 61 orders of $1 million in the second quarter compared with 43 in the first quarter, which was a significant positive.

The company is expected to benefit from the accelerating transition to a subscription or renewable model, which is evident from the fact that Splunk is expected to meet its 75% transition rate for fiscal 2020 in fiscal 2019.

Moreover, Splunk witnessed an increase in the number of renewable terms contracts in the last reported quarter, which is a tailwind.

However, the perpetual business is declining rapidly and is expected to hurt the top line in the to-be reported quarter.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or #5) are best avoided.

Splunk has a Zacks Rank #3 and an Earnings ESP of +10.94%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks with a Favorable Combination

Here are some companies, which, per our model, have the right combination of elements to post an earnings beat this quarter:

lululemon athletica inc. (NASDAQ:LULU) has an Earnings ESP of +4.89% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Science Applications International Corporation (NYSE:SAIC) has an Earnings ESP of +0.44% and a Zacks Rank #3.

AutoZone, Inc. (NYSE:AZO) has an Earnings ESP of +3.02% and a Zacks Rank #2.

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