A New Change Could Get This 'Snowball' Business Rolling

The explosion of data in today's digital world makes life convenient and streamlined... But it also leaves us open to new threats...

We're increasingly dependent on cloud devices for storing sensitive information on the Internet. Everything from personal information like birthdays and bank accounts to private data to keep companies running their day-to-day operations.

Prior to the outbreak early last year, our personal and work lives were slowly but surely creeping into the cloud. But the coronavirus pandemic accelerated trends that were already in place.

With everyone working from home, businesses had to invest heavily in cloud technology to store data from workers scattered across the country.

It's great for streamlining operations and keeping things up and running. The cloud offers convenience... By storing information somewhere other than your home computer or network, it frees up storage space to complete other tasks. For businesses, that's huge.

But this technology also comes with a new risk...

All of the information is now stored in one central location. And as corporations electronically house more data off-site, nefarious characters see an opportunity to profit. They know if they can break down the vault doors of these server farms, there's a veritable treasure trove of information waiting on the other side.

And that means that businesses need someone to protect this information. That's where today's company comes into play...

Splunk (Nasdaq: SPLK) makes software that analyzes data generated by machines.

Splunk is named after the word "spelunking," meaning the exploration of caves. Its software helps customers mine for nuggets of information in vast amounts of data collected across corporate and government networks... including searching for and finding security threats.

Splunk's software uses artificial intelligence and machine learning to read, search, and monitor data as it's collected. It provides immediate reports and alerts to management when it sees a problem. The software also provides data-visualization tools that give insight into the data collected.

With Splunk's software, customers can extract valuable information from masses of data in real-time so they can solve problems immediately. That's why the company's motto is "turn data into doing."

The software can be used to analyze any type of data. But Splunk breaks its software tools down into these three types:

• Security – detects and prevents breaches.

• Information Technology ("IT") – helps IT staff predict and find network outages and improve network performance.

• Observability – helps developers write better software and quickly identify problems across any of a company's systems.

When Splunk started out, it only sold IT solutions. It began selling security software about seven years ago. Today, security makes up more than half of its sales.

Splunk's customers include more than 90 of the Fortune 100 companies and span more than 130 countries. International customers brought in nearly half of the company's sales last year. And the need for its services just keeps growing.

The company's position is strengthened by its symbiotic relationship with the large public cloud service providers like Amazon (AMZN) and Google (GOOGL). Amazon Web Services and Google Cloud bring their new customers to Splunk. And Splunk is one of Amazon Web Services' top 20 customers by total volume.

And now, it's changing the way it's doing business...

Back in 2015, all of the company's software sales were what's known as "perpetual licenses." These licenses give customers the right to use the software forever. Customers install the software on their computers, which is why it's also sometimes called "on-premises software."

Under the perpetual-license software model, customers make large, upfront payments plus smaller annual maintenance fees for troubleshooting help and the rights to receive future software improvements.

But now, it's transitioning to a Software as a Service (SaaS) model. With SaaS, the software is stored in the cloud... It's installed on remote computers in giant server farms and accessed over the Internet. So it doesn't have to be installed at thousands of customer sites. And customers don't own it... They rent it, paying for it over time as they use it.

The SaaS model lowered the cost of software and made it available to many more customers. And it made software much easier to install and begin using.

This is a better model for Splunk...

SaaS revenue builds like a snowball rolling downhill. Companies add new customers each year, while existing customers continue paying their SaaS fees, year after year. The snowball gets bigger as existing customers expand their use of the software over time, paying for more users or additional products.

Splunk's software lies at the heart of several massive, ongoing trends: cybersecurity, big data, and the Internet of Things. And now, it's transitioning to a SaaS model, which should enhance its growth. Those trends should fuel further gains in the shares.

Sometimes investing is simple.