Splunk Inc. (SPLK) reported a better-than-expected second quarter of 2013. The data monitoring and analyzing software solutions provider posted a loss of 5 cents per share, narrower than the Zacks Consensus Estimate of a loss of 6 cents. Shares were up 15.6% ($4.75) in after-hours trading.

Quarter Details

Revenue growth was impressive in the reported quarter, which jumped 73.2% year over year to $44.5 million, well ahead of the Zacks Consensus Estimate of $40.0 million.

The strong growth was primarily driven by a 61% annual surge in license revenue (68% of the total revenue) and 98% year-over-year jump in maintenance and services revenue (32% of the total revenue).

International operations contributed 20% of the total revenue in the quarter. Customer base were approximately 1,600 at the end of the quarter.

In the reported quarter, Splunk signed deals with more than 400 new customers. Splunk continues to experience strong growth in its existing customer base as more than 71% of the quarter’s license booking came from them.

In the second quarter, Splunk signed 98 orders worth more than $100,000, compared with 65 in the prior-year quarter and 73 in the previous quarter. Renewal rate was 91% higher than the management’s guided range of 85% to 90%.

Splunk continues to increase its sales personnel, ending the quarter with 117 quota carriers compared with 101 in the previous quarter. Of the newly added 16 quota carriers, 10 were overseas.

Gross profit soared 73.3% year over year to $39.8 million. Gross margin expanded 110 basis points to 89.6%, primarily driven by strong performance from the high margin license business.

Splunk continues to invest in research & development (“R&D”), which jumped 73.5% year over year to $9.4 million in the quarter. Sales & marketing (“S&M”) expense surged 69.2% from the prior-year quarter to $27.7 million, while general & administrative expense (G&A) increased 63.0% year over year to $7.2 million.

This strong surge in expense line items had a negative impact on profitability in the quarter. Operating loss (including stock-based compensation) was $4.5 million compared with $3.3 million in the prior-year quarter.

Net loss (including stock-based compensation) was $4.6 million or 5 cents per share compared with net loss of $3.3 million or 17 cents per share in the year-ago quarter.

Splunk exited the second quarter with $268.3 million in cash & cash equivalents. Cash flow from operations was $3.8 million in the quarter.

Guidance

Splunk expects revenue in the range of $45.0 million to $47.0 million for the third quarter of 2013. The company raised its full year revenue and non-GAAP operating margin guidance. Splunk now expects revenue to be in the range of $183.0 million to $186.0 million (from $174.0 million to $177.0 million) for the full year 2013. Operating margin is expected to be in the range of negative 2.0% to 3.0% (was previously negative 4% to 5.0%).

Our Take

Splunk’s revenue growth is expected to benefit from a strong growth in user base, higher renewal rates and expansions into new markets. We believe that Splunk’s strong product pipeline will also boost top-line growth going forward.

However, increasing investments on product development are expected to drag profitability in the near term. As Splunk continues to explore and expand into new markets, sales & marketing expenditure is expected to increase significantly, thereby hurting margins going forward.

We are Neutral on Splunk over the long term (6-12 months). Currently, Splunk has a Zacks #3 Rank, which implies a Hold rating over the short term.

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