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What’s Driving Splunk’s Free Cash Flow?

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May. 29 2018, Updated 7:31 a.m. ET

Factors influencing free cash flow growth

Splunk (SPLK) has continued to generate strong free cash flow, driven by high-value deals and a growing customer base. In the last three years, the company has signed 14 deals above $10 million at an average of more than four deals per year, and has won 541 contracts worth more than $1 million. Its number of contracts is increasing every year.

Splunk has added ~6,400 customers in the last three years at an average of more than 2,100 per year, highlighting the growing popularity of the company’s products across various industries. Given its lower capital expenditure and there being no sign of it enhancing investors’ wealth through capital returns, the company’s free cash flow may rise going forward.

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The advantage of higher free cash flow

The graph above shows how Splunk’s free cash flow has grown over the last five years, buoyed by deferred revenue growth due to large contract wins. At the end of fiscal 2018, the company’s free cash flow rose year-over-year to ~$242 million from $156 million. Splunk has generated free cash flow at an average of $131 million per year.

In comparison, peer Teradata (TDC) has produced average free cash flow of ~$413 million per year, despite driving shareholders’ wealth through regular share repurchases.

However, Splunk’s strong free cash flow has maintained its acquisition spree. Recently, the company bought Phantom Cyber for $350 million. In October 2017, Splunk bought SignalSense, a privately held technology company delivering cloud-based advanced data collection. In the last five years, the company has invested ~$584 million in the acquisition. To stay competitive, Splunk is also putting its excess cash toward new product development.

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