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Splunk Continues Effective Transition to Cloud

We are raising our fair value estimate for the narrow-moat company.

Narrow-moat Splunk SPLK reported strong fourth-quarter results that surpassed our expectations. The firm's cloud transition continues to be a success, with cloud products making up over half of all software bookings in the latest quarter; Splunk is now a cloud-first company. In addition, Splunk closed several sizable deals that had slipped in the third quarter as a result of pandemic-related headwinds, and management stressed that they are no longer seeing similar impacts on the timing of deal closures. This is in line with our long-term view as we expected such delays to be temporary and still see healthy growth in the cloud alongside an expanding robust product set supporting the firm's long-term prospects. As a result of strong execution combined with the time value of money, we are raising are fair value estimate for Splunk to $212 from $208. With shares trading at $150 after hours, we recommend investors capitalize on the firm's discounted price and consider investing. Fourth-quarter revenue declined 6% year over year, with full year revenue down 5% to $2.23 billion over the same period. This was mainly a result of volatility in adoption of term licenses due to the pandemic as well as the firm's transition to the cloud. As cloud revenue is recognized ratably over time rather than up-front (as with term licenses), Splunk has been facing top-line pressure for some time. However, we expect that as the cloud transition matures, the firm should see predictable, subscription-like revenue streams. Fourth-quarter cloud revenue increased 72% year over year, with full-year cloud revenue up 77% year over year to $554 million. Cloud ARR came in at $810 million for the quarter, increasing 83% year over year. This contributed to a 41% increase in total ARR. Even though management has withdrawn long-term guidance, healthy growth in cloud adoption has Splunk still on track to wrap up the cloud transition sooner than previously expected.

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