Cloudera (CLDR) investors were treated to a highly unpleasant 40% sell-off on April 4, after the big data specialist reported fourth-quarter 2018 earnings. While the quarter came in rather strong, guidance for the upcoming year completely whiffed, with management guiding for a huge deceleration in subscription revenue growth. That, combined with a forecast for continued operating losses and cash burn made investors run for the hills. Here's why things look rocky.
The fourth quarter actually came in fairly strong for Cloudera. Revenue was up 42% to $103.5 million, beating analyst estimates by almost $5 million, and non-GAAP earnings per share of negative $0.10 beat analyst expectations by $0.13. Even more impressive, core subscription revenue surged 50% in the quarter, and non-GAAP gross subscription margin expanded to 86%, 200 basis points higher than the year-ago quarter.
The net expansion rate, which is sort of like the software equivalent of same- store sales, was 136%, which means the average customer spent 36% more with Cloudera than in the year-ago period.
So what was the problem? All of those growth numbers are projected to slow down rapidly in the current year. For fiscal 2019, which ends Jan. 31, 2019, the company expects only 20% total revenue growth; 24% revenue subscription growth; non-GAAP net loss per share of ($0.62) to ($0.59); and continued cash burn of $35 million to $40 million. For a money-losing company, that kind of rapid decline in the growth rate (42% to 20%) is rather shocking, and resulted in the huge sell-off.
What's going on?
Cloudera management was adamant that the slowdown wasn't due to any erosion of the end market demand for its open-source big data analytics services, and did not mention any particular competitive pressures either. Rather, the company attributed the slowdown to a change in its sales force processes.
According to management, Cloudera's sales force has been more focused on landing new customers, rather than its larger, existing customers. In fact, the company exceeded its own targets for new customer acquisition in the fourth quarter, but these customers tended to be smaller, and without the potential expansion of the larger cohort. The company now claims that it is using its own big data technology to allocate its sales team toward the highest-return clients in the most promising industries, whether these be existing customers or new leads.
On that note, the company is looking for a new head of sales, and will be retraining its sales staff, and management also believes these process changes will contribute to the slowdown in the first half of the current year.
Why this is bad
The explanation given by management is fairly concerning for several reasons. One, Cloudera has a "land and expand" business model, where I (and apparently others) had assumed that the bulk of Cloudera's sales force, which is the company's largest operating expense, was deployed toward landing, new customers, and that the expand would come from increased usage without much extra effort. Apparently, the "expand" part of the equation actually requires more sales and marketing than previously thought.
In addition, the slowing net expansion rate incorporates customer churn, so a slowing expansion rate could mean customers are leaving for competitors. In contrast to Cloudera, competitor Hortonworks guided to 30% growth in the coming year, significantly better than Cloudera's 20% projection, suggesting that Hortonworks (HDP) and its new partner, IBM, may be winning over Cloudera's customers (though this is not necessarily the case).
About nine months ago, I wrote that Hortonworks was a better buy than Cloudera, as Hortonworks had just signed that new partnership deal with IBM, and Cloudera was more expensive on a price-to-sales basis at that time. Now, it looks as though Hortonworks is better-positioned and Cloudera's valuation has come down to roughly the same level as Hortonworks at 5.5 times sales.
Of course, Hortonworks stock dropped after Cloudera's report as well, but only about 5.8%, as fears about end-market demand seeped in. Still, I'm holding onto my Hortonworks shares for the moment, in case it's winning more share over Cloudera, and in case the market is as big as some believe.
Cloudera shareholders have reason to be concerned, whether the slowdown can be attributed to end-market demand or tougher competition.