In its second earnings call as a public company, big data and Hadoop distribution company Cloudera (NYSE:CLDR) reported a solid quarter. Revenue increased 39%, with core subscription revenue growing 46%. The company added 45 new Global 8000 clients in the quarter, bringing its total to 522. The all-important net retention rate was a strong 140%, meaning existing customers spent 40% more with Cloudera than last year, on average. Subscription gross margin increased from 83% to 85%, showing leverage in the business model.
As with rival Hortonworks (NASDAQ:HDP), Cloudera is benefiting from the secular tailwind of big data and machine learning at large enterprises. During the conference call with analysts, executives gave several reasons for the quarter's impressive results and talked about how Cloudera is investing in the future. Here's what investors need to know.
On buying talent
On the earnings call, Cloudera announced the acquisition of Fast Forward Labs, a small consulting firm with expertise in machine learning and artificial intelligence (AI). The move is part of Cloudera's strategy to make a subscription more attractive to companies than building their own solutions in-house.
Cloudera's and Hortonworks' solutions are built on open-source technology. That makes their solutions dynamic enough to keep pace with rapid innovation, but also means the companies must retain differentiated knowledge.
On acquisition strategy, management pointed to its acquisition of Sense two years ago, which resulted in Cloudera's new Data Science Workbench product released earlier this year. Speaking about Fast Forward, Cloudera founder and Chief Strategy Officer Mike Olsen said [transcript via Seeking Alpha]:
Strategically, this is pretty big deal. This is a very, very rare skill set. [Fast Forward founder] Hilary Mason and her team are world-class. And developing the expertise that large enterprises require is going to be both hugely valuable and very difficult.
CEO Thomas Reilly had interesting things to say about Hortonworks' new partnership with IBM (NYSE: IBM), as well as the much-ballyhooed Watson offering:
When we compete against IBM, we’re competing against IBM Watson. And what Watson is now doing is they’re merely positioning Hortonworks as the key cloud storage and reserving most of the high value, the analytic workloads and machine learnings for the Watson family, and that’s where we compete against those machine learning analytic workloads.
Clearly, there is a strong rivalry going on between Cloudera, which believes its proprietary software is the way to go, and Hortonworks, which likes to differentiate itself as a truly open-source support solution. However, Cloudera did point out the reason I like the prospects of both companies: industry consolidation.
With IBM dropping out (at least on the Hadoop layer), there are only four remaining Hadoop distributors: Cloudera, Hortonworks, MapR (which is still private), and Amazon. That means there is room for all to succeed, since the Hadoop-related market is growing so strongly.
Management also pointed to some secret sauce behind the company's strong growth -- Cloudera itself! Much like the old Hair Club for Men CEO saying he's not just the CEO but also a client, Cloudera uses its own software to find and anticipate deficiencies as well as opportunities in expanding its product portfolio.
That's a strong message for customers, and why 45% of revenue comes from customers who now spend over $1 million per year with Cloudera.
On sales leverage
Management gave positive commentary on the company's operating leverage. For the quarter, sales and marketing as a percentage of sales was only 55%, compared with 70% in the year-ago quarter. Research and development was 33% of revenue, also down significantly from 39% last year. Cash flow from operations for the first half of the year improved to negative $18 million, down from negative $52 million a year ago.
The only costs that rose as a percentage of revenue were general and administrative expenses, due to new costs associated with being a public company. Moreover, the company donated $1 million in IPO proceeds to the Cloudera Foundation, an organization started by the company that seeks big data uses for charitable endeavors, from treating terminal diseases to combating child trafficking.
Cloudera stock had a big run-up leading into its earnings, appreciating from a low of $15.40 per share up into the low $20s, and as of this writing sits at roughly $18.80. That equates to a valuation of about 7.6 times sales, which is more expensive than Hortonworks at 5.3 times sales. However, with a consolidating industry that is growing by leaps and bounds, the future looks bright for both companies.