Starboard takes a stake in Splunk. Here’s how the activist investor may help boost margins

Enterprise: Splunk is a number one supplier of utility software program that collects and analyzes knowledge from digital techniques to assist organizations establish safety threats and monitor IT infrastructure. The corporate can take vital quantities of unstructured knowledge from varied techniques and give you insights that assist alert IT groups to potential failures or breaches.

Inventory Market Worth: $13.9B ($85.67 per share)

Share Possession: almost 5.0%

Common Price: n/a

Activist Commentary: Starboard is a really profitable activist investor and has intensive expertise serving to firms concentrate on operational effectivity and margin enchancment. Starboard additionally has a profitable monitor report within the data know-how sector. In 48 prior engagements, it has a return of 34.45% versus 13.57% for the S&P 500 over the identical interval.

Starboard views Splunk as a possibility to personal a top quality and sticky enterprise at a lovely valuation with the potential for vital worth creation by a greater stability of progress and profitability. Splunk’s software program is mission vital for many firms, and it has a extremely recurring enterprise with roughly 22,000 prospects, together with 95 of the Fortune 100 firms. Splunk has a number one market share and is taken into account the “gold commonplace” within the log administration and safety markets.

Over the previous a number of years, Splunk has been present process a posh enterprise transition. The corporate has been going from a perpetual license to subscription-based mannequin, resulting in detrimental free money circulate as they transitioned to an annual invoicing mannequin in 2019. It’s close to the tip of this transition. In 2022, it started producing constructive free money circulate for the primary time for the reason that transition started.

This can be a typical Starboard funding – an organization with robust top-line progress and enviable market place that wants assist with optimizing progress and margins. Typically this requires a change in administration. Properly, excellent news for Starboard and different shareholders: That is already taking place.

In November 2021, CEO Doug Merritt stepped down. In March 2022, Splunk introduced it will appoint Gary Steele, founding CEO of Proofpoint, to the helm. Splunk is now trying to find a brand new CFO. Steele has a historical past of operational execution. In August 2021, Thoma Bravo purchased Proofpoint at all-time excessive costs. Starboard believes that there’s vital alternative for the brand new administration workforce to enhance operational efficiency.

Know-how firms like this are typically in contrast on a progress plus profitability metric. Splunk presently has a 17% progress charge and an 11% working margin, giving it a mixed 28, versus a peer median of 47. Starboard believes that Splunk’s working margins can get to a minimum of 30% (friends are presently at 26%) and income progress can exceed 20% (friends are at 21%), which might put it proper up there with the peer median. Starboard believes that attaining this might double the corporate’s valuation. 

With a brand new administration workforce, it isn’t as pressing that Starboard get board seats instantly. They may probably work with Splunk as an energetic shareholder. In the event that they do go on the board within the quick time period, it will likely be as a result of the corporate invitations them on after seeing how worthwhile Starboard will be and has been in conditions like this. If this doesn’t occur by Feb. 16 — when the shareholder director nomination window opens — and there’s no marked enchancment in operations, we are going to probably see Starboard make director nominations.

Whereas that is clearly an operational engagement for Starboard, it have to be famous that there’s one other alternative to create shareholder worth right here. When an activist takes a place at an organization, it places that firm in pseudo-play with potential acquirers usually popping out of the woodwork. It’s doable that one thing like that would occur right here. In February, when Splunk had an $18.4 billion market cap, the Wall Road Journal reported that Cisco made a $20-plus billion provide to amass the corporate. You’ll assume that their curiosity degree has piqued slightly with Splunk now buying and selling at a $12.7 billion market cap.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and he’s the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire can be the creator of the AESG™ funding class, an activist funding type targeted on bettering ESG practices of portfolio firms.