Since the start of the year, shares of cloud software company Cloudera (NYSE: CLDR) have been cut in half. Since the beginning of June alone, the stock is down about 40% on the heels of the fiscal 2020 first-quarter report and the announcement that CEO Tom Reilly is parting ways with the company.
Cloudera has been one of the poorer cloud-based computing picks the last couple years, grossly underperforming both the market and the technology sector overall since it made its public debut. The most recent sell-off may be overdone, but there are good reasons for having a healthy dose of pessimism.
A drab quarterly showing
Reilly leaving may come as a surprise to some, but it's obvious that it's high time to transition to a new era for the company. Reilly had oversight when Cloudera was still a start-up-stage business, helped take it public, and also oversaw the merger with former peer Hortonworks late in 2018.
When looking at the numbers from the 2020 first quarter, though, Cloudera needs to stop operating like a high-growth outfit and start figuring out how to deliver value to shareholders. Bear in mind that all of these numbers include Hortonworks, which brought in less than 25% the revenue Cloudera did at the time of the combination.
|Metric||Three Months Ended April 30, 2019||Three Months Ended April 30, 2018||YOY Increase (Decrease)|
|Revenue||$187.5 million||$103.5 million||81%|
|Gross profit margin||67.3%||67.8%||(0.5 p.p.)|
|Total operating expenses||$230.0 million||$121.8 million||89%|
|Adjusted earnings/(loss) per share||($0.25)||($0.44)||N/A|
Data source: Cloudera. YOY = year over year. P.p. = percentage point.
In other words, much of the above top-line expansion was because of adding Hortonworks, not because Cloudera posted much in the way of explosive growth. In fact, on an annualized basis, the combined data businesses posted 21% expansion in recurring revenue. On one hand, that's nothing to balk at. However, it's far less growth than either company was posting before they were married. As fellow contributor Timothy Green pointed out, skyrocketing expenses are supposed to equate to more growth with promise of payoff later. There's no sign of that happening right now at Cloudera.
Image source: Getty Images.
Overoptimistic assumptions are obvious in hindsight
The biggest pain point, though, was the outlook. Revenue in the second quarter is expected to be $180 million to $183 million -- lower than the first quarter -- and full-year recurring revenues should be flat to up 10%. That's quite the cool-off from years past. Losses will keep mounting along the way, which means the company's cash stockpile of just $107 million at the end of the last quarter isn't very safe. Funding via debt (which would add to losses) or issuing more stock (which dilutes ownership for existing shareholders) may become a consideration sooner rather than later.
In the meantime, there's a lot of competition out there in the big data industry. Google parent Alphabet and salesforce.com, for example, both announced their own respective data tool acquisitions. A new data platform that uses Cloudera and Hortonworks' combined abilities won't launch until later this summer. In the meantime, many customers are reportedly taking the wait-and-see approach before renewing contracts.
Cloudera's leadership expects to return to north of 20% growth after this period of transition, but as I said last fall when the two companies announced they were tying the knot, the expense outlay just doesn't add up at this point. I fear that Reilly's successor will have the unenviable task of creating double-digit sales growth and aggressively cutting costs. That's a tall order, and explains Cloudera's dwindling stock price. A rebound could be in the cards if the new data platform yields quick returns, but with ample alternatives out there, it's not a long-term turnaround story I'm interested in betting on. There are better investments in the big data technology world at this juncture.
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