What Drove Splunk’s Shares Lower Last Week?

Splunk stock fell 11% last week

Shares of Splunk (SPLK) fell over 11% last week. The stock fell 7.3% on May 24, 2019, to close trading at $119.30. Splunk shares fell after the company reported its first-quarter earnings results on May 23, 2019.

Splunk reported revenue of $425 million in the first quarter, a rise of 36% YoY (year-over-year). Splunk’s adjusted EPS were $0.02, way above its earnings of -$0.07 in the previous year’s quarter.

What Drove Splunk’s Shares Lower Last Week?

Wall Street expected Splunk to post sales of $396.0 million with EPS of -$0.14 in the first quarter. Splunk also forecast sales of $485 million in the second quarter and $2.25 billion in fiscal 2020—higher than Wall Street’s revenue forecast of $479.4 million for the second quarter and $2.22 billion for 2020. So why did Splunk shares fall despite its earnings and revenue beats?

Cash flow concerns

While Splunk easily beat Wall Street earnings and revenue estimates in the first quarter, it provided robust guidance for the second quarter and 2020 as well. However, investors were concerned about Splunk’s cash flow metrics.

Splunk is now focused on transitioning toward a subscription-based business, which means a significant percentage of its revenue will be recurring in nature, leading to higher renewable software bookings and affecting its deferred sales.

Splunk’s enterprise customers will now be invoiced annually, as is the case with subscription contracts. In comparison, Splunk had previously received payments up front in the case of perpetual contracts. While subscription revenue will lead to a stable base of recurring revenue for Splunk, it will also affect the company’s operating cash flow in the near term.