IPOs, Initial Public Offerings: pre & post IPO

Splunk (SPLK)

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May 30 update:  quote
Some brokerages have SPLK as a buy with a a $40 price target. Others have it as a hold. When the overall market heads down SPLK gets weak. It’s hard to swim upstream. On the other hand, I think SPLK’s CEO is low-balling wall street with his estimates for the year.

If you don’t like the market you might want to lighten up, because tech valuations will probably contract in a weaker global market.

If so, that’s good for upcoming IPOs, which may then be priced more reasonably.

May 14th update:
SPLK traded as high as $32.95.  Looks like the tech scare based on Cisco’s IT comments abated.  We know some of you made some trading profits on SPLK, whose revenue stream is more diversified than just IT spending.

Also, some brokerage analysts are putting a ‘neutral’ on SPLK.  IPOdesktop believes SLPK’s public sales estimates are conservative.  Reminds us of how Linkedin low-balled the street with estimates and them came in higher.  IPOdesktop believes it’s ok to to nibble on SPLK now.   Today Merrill Lynch came out with a buy and a price target of $39.

May 11:  tech stock downturn in process…

  • Cisco Slides On Ugly Outlook; Rivals, Suppliers Hit; How Low Can It Go?, May 10 here
  • Cisco’s CEO, John Chambers Scares Investors On Conference Call, May 10 here
  • Intel CEO plays down concerns about tech spending, May 10 here

UPDATE CONCLUSION:  wait to buy SPLK, although this may be a trading opportunity depending on your risk/reward preferences quote

UPDATE buy recommendation, May 8, 2012
IPOdesktop believes SPLK is a speculative intermediate-term ( 6 months) buy around $33 for several reasons.

(1) Leader in ‘big data’ with recurring revenues based on customer usage.
(2) ‘Seeding’ program with 3700 customers — usage increases as customers understand benefits
(3) Profitable in the January quarter after deducting stock compensation charges
(4) Appears to be significant support at the $32 level.

SPLK will always seem expensive by standard valuation metrics.  quote
————————————–
Update:  Monday, April 16 price range raised to $11-$13 from $8-$10.

Based in San Francisco, California, Splunk (proposed SPLK) scheduled a $122 million IPO with a market capitalization of $833 million at a price range mid-point of $9 for Friday, April 20, 2012.  S-1

Managers, Joint Managers:  Morgan Stanley; Credit Suisse; J.P. Morgan; BofA
Co Managers:  UBS; Pacific Crest; Cowen.

SUMMARY
SPLK provides an innovative software platform that enables organizations to gain real-time operational intelligence (including optimization routines) by harnessing the value of their data.

SPLK software collects and indexes data at massive scale, regardless of format or source, and enables users to quickly and easily search, correlate, analyze, monitor and report on this data, all in real-time.

For the year ended January 2012 year revenue increased 83% to $121 million.  Gross margin was 91%.

Pre-IPO grade-score summary
. Many IPOs in today’s environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook
is more favorable
Glossary of IPO Analysis terms

SPLK SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

3

2

2

C, 9

VALUATION

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing Jan qtr

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Splunk (SPLK)

$833

6.7

-42

8.2

8.3

15%

QUARTERLY

Quarterly results

Oct, ’10

Jan, ’10

April, ’11

July ’11

Oct ’11

Jan ’12

Revenues ($mm)

$16

$23

$21

$26

$31

$43

Revenue increase over prior qtr

44%

-9%

24%

19%

39%

Gross profit % of revenue

90%

90%

90%

89%

90%

92%

Loss ($mm)

-$1.4

-$1.8

-$2.2

-$3.9

-$3.6

-$1.3

Loss ($mm) % of revenue

-9%

-8%

-10%

-15%

-12%

-3%

Profit (loss) non-GAAP*

-$1.0

-$1.4

-$1.7

-$3.2

-$2.5

$0.2

% of rev non-GAAP profit (loss)*

-6%

-6%

*.08

-12%

-8%

1%

*excludes stock compensation

RECOMMENDATION
Buy SPLK on the IPO.

BUSINESS
SPLK provides an innovative software platform that enables organizations to gain real-time operational intelligence (including optimization routines) by harnessing the value of their data.

SPLK software collects and indexes data at massive scale, regardless of format or source, and enables users to quickly and easily search, correlate, analyze, monitor and report on this data, all in real-time.

The software is designed to help users in various roles, including IT and business professionals, quickly analyze machine data and realize real-time visibility into and intelligence about their organization’s operations.

SPLK currently provides Splunk for Enterprise Security and Splunk for PCI (payment card industry) Compliance and have made available, through a controlled preview, Splunk for VMware.

SPLK was incorporated in California in October 2003 and was reincorporated in Delaware in May 2006.

MARKET
International Data Corporation estimates that the volume of digital information created and replicated worldwide will grow approximately 45% annually from 1.8 trillion gigabytes in 2011 to 7.9 trillion gigabytes in 2015.

Machine data (SPLK’s segment) is one of the fastest growing components of this digital information and comes in an increasing number of formats.

The applications, servers, network devices, mobile phones, desktop computers, laptops and various other systems and devices that comprise an organization’s IT infrastructure are continuously generating information in a variety of disparate formats relating to application and system performance, user activity, configuration changes, transactions, security alerts, error messages and other time-series information.

CUSTOMERS
As of January 31, 2012, SPLK had over 3,700 customers, including a majority of the Fortune 100.

Some of SPLK’s largest customers include Autodesk, Bank of America, Comcast, Etsy, Harvard University, Viacom and Zynga.

RECURRING REVENUE MODEL
Usage fee: SPLK bases license fees on the estimated daily data indexing capacity customers require.

Software fee:  SPLK generally recognizes the license fee portion of software upfront. As a result, the timing of when SPLK enters into large perpetual licenses may lead to fluctuations in revenues and operating results because expenses are largely fixed in the short-term.

Prospective customers can download a trial software version that provides a full set of features but limited data indexing capacity. Following the 60-day trial period, prospective customers can purchase a license for the product or continue using the product with reduced features and limited data indexing capacity.

MARKET OPPORTUNITY
While SPLK believes that there is a significant market opportunity for software that provides operational intelligence, this market is largely new and unproven.

As a result, SPLK often must educate prospective customers about the value of products, which can result in lengthy sales cycles, particularly for larger prospective customers, as well as the incurrence of significant marketing expenses.

Prospective customers may view purchases of our software as discretionary when compared to more traditional IT applications, and as a result, our sales may be adversely affected by downturns in general economic conditions more quickly and dramatically than other software providers.

SEASONAL
In general SPLK achieves 40% of its yearly revenue in the first half, 60% second half, and the 4th quarter is usually the strongest.

INTELLECTUAL PROPERTY
As of March 31, 2012, SPLK had two issued U.S. patents covering its machine data technology. SPLK also had one provisional patent application pending and eleven utility patent applications pending for examination in the United States.

SPLK also had six utility patent applications pending for examination in non-U.S. jurisdictions, and eight pending Patent Cooperation Treaty utility patent applications, all of which are counterparts of SPLK’s U.S. utility patent applications.

COMPETITION
SPLK competes against a variety of large software vendors and smaller specialized companies, open source initiatives and custom development efforts, which provide solutions in the specific markets we address. Principal competitors include:

. IT departments of potential customers which have undertaken custom software development efforts to analyze and manage their machine data;
. Security and systems management vendors, including BMC Software, CA, Compuware, HP, IBM, Intel, Microsoft and Quest Software;
. Web analytics vendors, including Adobe Systems, Google, IBM and Webtrends;
. Business intelligence vendors, including EMC, IBM, Oracle and SAP;
. Companies targeting the big data market by commercializing open source software, such as Hadoop; and
. Small specialized vendors, which provide complementary solutions in enterprise data analytics, data warehousing and big data technologies that may compete with our software.

EMPLOYEES
As of January 31, 2012, SPLK had 463 employees.

PRE-IPO OWNERS
Venture capital firms own 70% of SLPK pre-IPO and include Sevn Rosen (20.4%), August Capital (20.4%), JK & B Capital (17.6%) and Ignition Partners (12.1%)

USE OF PROCEEDS
SPLK expects to net $101 million from the sale of 12.5 million shares.  Shareholders intend to sell 1 million shares.

SPLK allocated the IPO proceeds to working capital and general corporate purposes.

FINANCIALS

Splunk (SPLK) SPLK, C, 9

Post IPO shares: 93mm

Machine-generated data platform

Jan fiscal

San Francisco, CA

2010

2011

2012

IPO Mkt

Revenues ($mm)

$35

$66

$121

Cap (mm)

Gross profit % of revenue

91%

90%

91%

$833

Sales & Marketing % of rev

69%

60%

62%

@$9

S&M % of gross profit

76%

67%

68%

Loss ($mm)

-$8

-$4

-$11

Loss % of revenue

-21%

-6%

-9%

Non-GAAP operating loss*

-$6

-$2

-$5

% of rev non-GAAP op loss

-17%

-3%

-4%

*excludes stock compensation
Quarterly results

Oct, ’10

Jan, ’10

April, ’11

July ’11

Oct ’11

Jan ’12

Revenues ($mm)

$16

$23

$21

$26

$31

$43

Revenue increase over prior qtr

44%

-9%

24%

19%

39%

Gross profit % of revenue

90%

90%

90%

89%

90%

92%

Loss ($mm)

-$1.4

-$1.8

-$2.2

-$3.9

-$3.6

-$1.3

Loss ($mm) % of revenue

-9%

-8%

-10%

-15%

-12%

-3%

Profit (loss) non-GAAP*

-$1.0

-$1.4

-$1.7

-$3.2

-$2.5

$0.2

% of rev non-GAAP profit (loss)*

-6%

-6%

*.08

-12%

-8%

1%

*excludes stock compensation
SPLK SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

3

2

2

C, 9

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing Jan qtr

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Splunk (SPLK)

$833

6.7

-42

8.2

8.3

15%

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