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Splunk SPLK IPO Note April 2012

Splunk SPLK IPO Note April 2012

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Splunk SPLK IPO analysis.
Splunk SPLK IPO analysis.

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Published by: Research2Zero on Jul 17, 2012
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PRE-IPO NOTE: SPLUNK (SPLK $11 - $13

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AN INTERESTING TECHNOLOGY HIDDEN BEHIND (EMPTY?) SUITS SPLUNK MAKES DATA LOGFILE ANALYSIS COOL AGAIN
Kris Tuttle April 16, 2012

SUMMARY Splunk is going after a significant opportunity in the analysis of machine-generated data to provide new ways to solve common information-based business problems. The proliferation of computers and increases in their power and storage sizes is expanding the problem space rapidly. Looking at machine-generated data is a very horizontal and fundamental way to analyze what’s going on in any system. These tend to fall into three general categories: 1) web/business intelligence, 2) application and operations management and 3) information security and compliance. There have been scores of companies analyzing log files in the past but Splunk is the first to try and build a significant company (although not the first public one) around it. Many have focused on niche markets like reducing fees from companies like Amazon for web services, or the phone company for calling and data charges. There have been successful general-purpose log file analytics companies in the past. WebTrends (founded in 1995) focused on website log files and grew rapidly with the “Web 1.0” into a public company in 1999 which was acquired by NetIQ for a little over $1B in 2001. Subsequently this was acquired and merged into the private equity/software conglomerate Attachmate. The combination of unstructured data, machine-generated data, sensor networks and embedded intelligence does beg for more comprehensive data gathering and analysis methods. The lack of metadata, taxonomies, common integration methods across many levels of information abstraction means that log file analysis is the one universally applicable, if somewhat primitive tool to have on hand. The virtues of the Splunk story have been partially hidden behind an overly slick management presentation style for the benefit of the IPO roadshow. The increased proposed price range is above our intrinsic valuation of $10.33. The current IPO market has been pushing valuations of small software companies to unreasonable levels and this may happen to Splunk. We expect to see more competition in this space as there are quite a few players with the capability to put forth credible alternatives to what Splunk is selling today. POSITIVES, NEUTRALS AND NEGATIVES     For common application and infrastructure management the analysis of log files is becoming a popular and refreshing approach that makes tool selection easier and in some cases less expensive. This is a fairly large existing market as evidenced by firms including CA, BMC, Compuware and Quest Software. Revenue growth has in excess of 80% including for the most recent fiscal year. Revenue for the year ended January 2012 reached $121M. Increased use of the internet and more unstructured data is making the log file approach more appealing as the pace of change and variety of data types outstrips any structured approach. Looking even longer term we expected a massive increase in the user of sensors and device level intelligence which will only compound the complexity of the problem and increase demand for tools that can turn this data into meaningful intelligence. Splunk is in a strong position to attack these emerging opportunities. The company may be overdoing their “big corporate” image in preparing for the public markets. The CEO presentation in particular seems out of step with the technical and cultural background of Splunk. Management discusses “significant leverage” in the financial model but fails to provide targets. So far revenue growth has come with a fairly high sales and marketing cost (61% of sales for FY 2012.) While typical for many companies at this stage it will be important for the company to show increasing sales productivity in future quarters. 1 April 16, 2012

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Splunk IPO Note

Our IV model has average revenue growth of over 40% and applies a 30x multiple to a long term operating margin level of 17%. VMW.33 which makes it unattractive on a fundamental basis in the near term. RHT and TIBX are probably the closest in terms of a business model and their operating margins range from 12% to 19% with an average at 15%. It’s also possible that Splunk could be acquired in the heat of this battle but the proposed valuation is already fairly high. The actual model is included on the next page. There is also a small peer analysis sheet to illustrate the operating margins of different companies. Splunk IPO Note . If “operational intelligence” catches on then Splunk will face at least ½ dozen larger and serious competitors. which will bring more machine data and event processing data into the Tibco information management framework. Tibco just closed the acquisition of LogLogic.  Competition is probably the biggest factor that will impact the investment case in the next year or two. The proposed pricing range of $11 to $13 is now above our intrinsic valuation of $10. BMC.

206 1.3 35% -$10 -53.0% $104.8% $5.0 90.4 13.0 80.37 96 -$1 $238 $83 $321 $3.0% -$104 $129 100 -$1 $900 $130 $1.9 21.0% $39.0% 21.0% $223.7% 34% 22% 19% -11% 25% 42% 27.8% $8.201 10.2% 11.170 119 857 961 LTM Growth 36.35 16.7 $159.0% $71. Quest Software Inc.19 $35.25 73.428 673 1.4% 61.6 12.031 $10.5 167.8% $901 $176 106 $9 2017 $325. Inc.1% 94.1% 12.0 $95.0% 50.1% -2.7% $1.8% $1.3 47.0% $33.1% 30.4% $2.267 3. TIBCO Software Inc.1% $17.55 93.663 3. SolarWinds.0 13.8 -4.INTRINSIC VALUATION & PEER GROUP Splunk SPLK 16-Apr-12 Jan YE License Revenue Maintenance YoY Change $ Total Revenue YoY Growth COGS % COGS $ Gross Profit Gross Margin S&M% S&M$ R&D% R&D$ G&A% G&A$ Operating Expenses % Operating Expenses $ Operating Margin Operating Income Taxes Tax Rate Net Income Net Margin Market Value Using P/E Cash Position Shares (M) Period Share Price PV of MV 4 Years Out PV of Cash 4 Years Out PV MV + Cash PV Value Per Share 29 -$5 -$97 $75 -$22 -$0.0% $211.0 $240 35.6 16.207 LTM Rev 2.5% $23.3 31.5 6.8 $15.0% 47.98 $26.767 2.2% 10.2 $18 102.0% $46.7% -$170 $132 98 -$2 $515 $100 $615 $6.0% $33.0% $81 $28.3 Splunk IPO Note .0% $134.265 819 2.4 18.37 $112.211 5.0% $161.6 2.7 57.6% $11.31 57% 63% -23% -21% -4% 13% 16.0% $300.33 15% Intrinsic Value Up/Downside $132 $0 35% 30 15% Cash Debt Tax Rate P/E Multiple Discount Rate 2% $846 Avg.0% $164.0 $70.3 35% $52 11.5 -77.70 97.9% -$294 2010 $27 $8 16.2% 10.7 35% $3 1.6% $7.6% 72.0 56.74 29 -$10 -$59 $73 $14 $0.1% 88.7% 24.7% $39.6 15.7 $121 82.0 $475 23.5 90.5 5.5 18.3 11.5% 31.904 5.5% 19.5 13.49 $23.3 90.6% 91.8% -$7 -$2.1% 10.3% 10. Inc.9% 4.8% 0.2% $39. Inc.3% $94 $132 102 $1 2015 $210.7 24. Dilution Cap (M) SPLK Nasdaq 44% $9.2% 60.2 17.4% TEV / Revenue 9.18 $39.7% $62.2% 16.3% $8.3 12.2% -$9 -$3.4 8.0% 59.9% 79.2 5.7% -$144 2011 $50.29 2013 $125.4% 10.11 $48. Demandware.3 $66 89.6% $118.2% 15.0% 70.2 7.4% 65.3% $19.60 88.0 $177 46.0 $385 26.6% $30.6% 0.3% 1 year change 19% 31% 1% 31% 3 month change 54% 34% 14% 39% TEV 21.8% 6.5 90. LogMeIn. Inc.9% $24. Citrix Systems.0% $5 $1.33 2014 $170.0% $52.4% $8.20 $27.9% 18.5 11.4% $3.5 35% -$5 -50.6% -$137 $9 2008 $8 $1 2009 $15 $3 9.0 $305 27.575 $228 108 $15 $10.1 35% -$2 -3.3 $32.4 19.7 $59.com.5 90.4% Gross Margin 78.1% $14.7 17.787 1. Inc.7% $4.6% 68.6% $6.0% 54.0 65.1% $1.1% -$62 2012 $88.5 -83.4 90. inc VMware.8% -$3 -$1.5% Oper Margin -0.1% -$7 -$2.0% 56.48 $75. Inc.1% 12.0% $61. Red Hat.9% 60.0 $216.6 89.8% 31.2 2.7 54.0% $51.5% 89.2 35% $30 7. Inc.0 $150.0% $47.1% $6.0 $16.0% $192.0 63.7% 84.5% 9.6 35% -$5 -13.5 $7.0% $43.0 $120.3% 9.9 35% -$3 -2.2 14.0% -$5 -$1. BMC Software Inc.5 $274.0% -$15 -$5.5 35% $14 4.3 $31.9 13.0% $30.7 90.3 15.3% 85.12 $60.0% $253.8 $35 92.43 $33.8% 17.5 16.5% 20. Average Ticker CRM VMW CTXS RHT GWRE DWRE SWI N BMC LOGM QSFT TIBX Price $159.0% $24.0% $38.2% 22.6% 10.0 $52.0% 76.0 9.6 161.49 $38.6 $109.65 83.4% 83.00 94 Ticker Exchange Rev Growth Current Price Shares Out Software Peer Analysis 16-Apr-12 COMPANY salesforce.0% $26.0% 53.1 -7.133 203 57 198 236 2.49 94 -$2 $54 $75 $129 $1.1% $14.0 35% -$6 -4.2 14.4% 10.1 -21.80 19.5 $427.4% 8.0 90.0% $21 $7.5 83.0% $346. Guidewire Software.5 111.8% $74.20 78.752 13.8 17.6% $416 $146 104 $4 2016 $265.9 94.6% 95.8% 18.0% $17.613 43. NetSuite Inc.6 2.6 6.0% $46 $16.4 84.5% -13.6 -3.5 $346.1 24.

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