Cloudera (CLDR) investors got a rude awakening after the company's recent fourth-quarter earnings release. The open-source big data specialist posted headline results and guidance that left investors wanting, sending shares plummeting 20% the next day.
But is the big drop a big opportunity?
Revenue came in at $144.5 million in the fourth quarter of fiscal 2019, whereas analysts were expecting $209.2 million -- a huge miss. In addition, the company's guidance for $835 million to $855 million of revenue in fiscal 2020 fell far short of the $965 million that Cloudera projected in its S-4 merger document last fall.
While the headlines look bad, there's an awful lot of noise going on beneath these numbers, mostly involving accounting issues surrounding the integration of Hortonworks, which officially merged with Cloudera on Jan. 3. Sales disruption expected over the next two quarters and an accounting change are throwing off this year's numbers quite a bit.
After going through the presentation details, I think Cloudera's sell-off could be overdone.
Check out the latest earnings call transcript for Cloudera.
Cloudera's short-term results will be affected by merger "dis-synergies," which the company expects to negatively affect revenue by about $52 million in the upcoming fiscal year (which ends in January 2020). This is odd -- usually one expects to hear about revenue synergies, such as cross-selling opportunities.
Those are likely to come eventually, but over the next two quarters, revenue will be negatively affected as Cloudera's product and sales teams work to integrate the two companies. On the conference call with analysts, Chief Financial Officer Jim Frankola said:
So the revenue dis-synergies are associated with the act of putting together two companies. So you are merging two fields. You are implementing new processes. You are implementing new systems. It takes time to do all that, and that's time that is taken away from the normal management of the business.
In addition to the integration distraction, an accounting difference between Cloudera and Hortonworks will further detract from revenue in fiscal 2020. Prior to the merger, Hortonworks had an average billings duration of 19 weeks, while Cloudera had a shorter billings duration of 13 weeks. Postmerger, Cloudera will transition Hortonworks over to its billings schedule, which will decrease the amount of deferred revenue Hortonworks is bringing in. The one-time adjustment will reduce fiscal 2020 revenue by $62 million.
Combined, these two factors will decrease fiscal 2020 revenue by about $114 million, which explains most of the shortfall between the prior forecast of $965 million and the updated guidance of about $845 million.
What's the real growth?
With all the comings and goings, Cloudera management unveiled a new metric for investors: annualized recurring revenue, or ARR. The company defines ARR as:
... Cloudera quarterly GAAP subscription revenue adjusted to (1) add Hortonworks' quarterly results, (2) subtract Hortonworks' post-merger results (in the case of Q4 fiscal 2019 only), (3) reverse the effects of purchase price adjustments, and (4) subtract non-recurring partner revenue and subscription revenue with certain related parties, multiplied by four quarters to annualize.
Basically, ARR is the "core" recurring subscription revenue of the combined companies. ARR should always be lower than total revenue, as the combined company also earns services revenue. However, services revenue is lumpier and related to individual projects and only made up 15% of revenue last year.
In fiscal year 2019, the combined company grew ARR 24%, pretty much in line with targets. Cloudera guided for that to dip to just 18% to 21% growth in fiscal 2020; but management expects ARR growth to return to 20% to 25% after the integration is behind it. The company still predicts that it will surpass $1 billion in revenue in fiscal 2021 (calendar 2020), with a 10% operating cash flow margin -- a significant improvement from negative 4% this year.
But is it a buy?
Though Cloudera projects that it will post negative operating cash flow for the coming year, it currently trades at just a 3.6 times forward price-to-sales ratio. That's pretty inexpensive for a high-growth enterprise software company.
The combined companies also have yet to fully release the Cloudera Data Platform (CDP) product, which incorporates the best of Hortonworks and Cloudera into a single enterprise platform. This product should come out this year. The CDP will give enterprises an end-to-end view of all their data, from the edge across all public and private clouds to on-premise data centers.
The CDP offering has a lot of potential, but it's not available yet. If it catches on and the company can grow 20% to 25% next year, Cloudera could end up being a bargain at these levels...even if profits are still a couple years out.