Big-data specialist Cloudera (CLDR) recently delivered its first earnings report since the company announced its planned merger with rival Hortonworks (HDP) back in October. Both companies' stocks have been beaten down in the marketwide sell-off, but Cloudera's recent earnings report sent both companies' shares back up (at least, initially).
The reason for the optimism? Cloudera beat expectations for both revenue and profit, reporting a smaller loss than expected, as it reaped the fruits of the new strategy to focus on higher-profit customers earlier this year. Still, some lingering concerns remain about the combined company's future.
More efficient growth for Cloudera
For the quarter, Cloudera's revenue grew 25%, with core subscription revenue up an even stronger 28%. The GAAP (generally accepted accounting principles) loss from operations was $26.4 million, only about half of last year's third-quarter losses. Operating cash flow came in at negative $6.8 million, but would have been near breakeven without $6 million worth of merger-related costs.
These profitability figures were better than expected, reflecting Cloudera's revamped sales strategy to focus only on customers more likely to expand their spending over time. That strategy seems to be working, as the net expansion rate grew 127% in the quarter, meaning that existing customers, on average, spent 27% more this year with Cloudera than last year. That's a tick below last quarter's 128% net expansion rate, but it's still strong, and better than management had forecast at the beginning of the year.
Management was quick to tout 33 new customers that spend more than $100,000 each per year (it added 63 total new customers in the quarter). That brought the $100,000-plus cohort to 601. This group of big spenders accounts for over 90% of Cloudera's subscription revenue. The company also had 74 customers that each spent over $1 million, accounting for 52% of revenue.
In addition, management reiterated its enthusiasm for the upcoming merger with Hortonworks. CFO Jim Frankola said during the company's conference call with analysts: "I've done big acquisitions at IBM. I've done mergers of equals before in software companies. By far, this is going faster and better than anything I've ever been associated with." The ease of integration is because both companies operate from the same open-source code base, and employees of both companies already know each other due to their specialized industry in Silicon Valley.
Still, for all the optimism, there are still a few lingering investor concerns, like: "Why the need to merge?"
Cloudy competitive concerns
Cloudera and Hortonworks have built their businesses selling service subscriptions for the Apache Hadoop open-source platform. Open source means that anyone can use and contribute to the underlying software code. That makes the underlying technology more dynamic and innovative, but it's also a different model from the traditional proprietary software model. Open source means other cloud companies can, theoretically, build their own offerings upon the same code base as Hortonworks and Cloudera, then sell it along with their public cloud bundles.
The Cloudera-Hortonworks hookup still remains a "show me" story to many. Both companies, while still growing over 20%, have experienced deceleration this year. On the third-quarter conference call, Craig-Hallum analyst Chad Bennett said: "I think a big trepidation here is 'net new' [customers] is going to kind of fall off a map, because they're just gonna bypass you and move straight to the cloud guys."
CEO Tom Reilly responded:
[Customers] do not like the cost [of cloud]. They do not like the lock-in that it poses. They suddenly are stuck with one public cloud provider and all that they have to offer. And so they're moving workloads back into a private cloud or across multiple clouds to avoid that lock-in, and have leverage over those infrastructure costs ... Customers are coming to our platform ... And it's our hybrid cloud capabilities that are winning.
Cloudera and Hortonworks are selling customers on a unified platform that works across all of the major public clouds, on-premise data centers, and private clouds. Their theory is that it makes sense to have a cloud-neutral platform for your big-data warehousing and analytics.
That does seem to have merit. After all, the company did acquire 63 new customers in the quarter. If customers were leaving for, say, Amazon's Elastic MapReduce, I don't think Cloudera and Hortonworks would be adding as many customers. Still, since this is advanced technology, the future picture remains fairly uncertain.
But Cloudera and Hortonworks are well-positioned in an exciting part of the market -- big-data analytics powered by open-source software. IBM's planned acquisition of Red Hat seems to validate that open-source enterprise software is the way of the future. However, who wins in this future -- when code can be widely shared among competitors -- remains uncertain. We'll see how Cloudera-Hortonworks executes post-merger in 2019.