Narrow-moat Splunk (SPLK) reported solid second-quarter results, with the top line exceeding both our expectations and guidance, driven entirely by upside in term license revenue. As data volumes rise and cyber threats become increasingly complex and frequent, we view Splunk’s unique comprehensive data platform as increasingly aligning with evolving customer demands. In the quarter, Splunk Observability, IT, and Security Clouds were launched--with the intent of enhancing efficiency and visibility into customers’ tech infrastructure. We believe accelerating demand combined with the success of workload pricing positions Splunk to realize sustained growth and competitive wins as the cloud transition continues apace. Although we expect increasing cloud penetration and an evolving product suite to lead to healthy long-term growth, we are maintaining our fair value estimate for Splunk at $164 per share due to near-term cloud transition-related top-line pressures. With shares rising to $160 in the aftermarket, we view shares as fairly valued.
Second-quarter revenue grew 23% year over year to $605.7 million as Splunk experienced broad-based product adoption and increasing cloud traction, highlighted by a doubling in the number of customers with cloud annual recurring revenue, or ARR, in excess of $1.0 million. As the cloud transition progresses and cloud revenue is recognized ratably over time, Splunk continues to face top-line pressure. While this was compounded by falling contract durations in previous quarters, the second quarter’s normalization of duration contributed to top-line growth and better aligns RPO and bookings momentum. We expect topline growth and margin expansion to persist as Splunk moves through the latter part of the cloud transition. Second-quarter cloud revenue grew 73% year over year, with cloud ARR up 72% over the same period. This contributed to a 37% increase in total ARR.
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