Why I'm Neutral On Cloudera Inc. Ahead Of Fourth Quarter Earnings
Summary
- Cloudera has a strong customer base.
- Annual revenues have shown strong growth.
- Margins are high but quarterly growth has reached a ceiling.
Cloudera Inc. (NYSE:CLDR) will release its fourth quarter earnings on March 10th. This article will discuss the recent earnings trend and why I would remain neutral on the stock until further information emerges.
Cloudera has a strong customer base
Cloudera is an enterprise data cloud company that arrived on the stock exchange with an IPO on the 28th of April 2017. The stock floated at a price of $15.00 but now trades at $8.78. The stock has been on a good run since June 2019, where it ran from $5.70 to $12.00, before a recent pullback. Since 2010, the company has raised a $1 billion through 12 funding rounds with the latest being in April 2018.
One of the attractions to the company is a strong user base of blue-chip customers. The company boasts "8/10 of top global banking enterprises", for example, and key names on the list include the Bank of England, Mastercard, Santander, and Credit Suisse. This is a sign that the company has a good product and they now need to leverage that technology and expertise to increase profitability. Banking is the only sector the company operates in, and they also have top telco and pharma companies onboard, alongside government and manufacturing customers.
Annual revenues have shown strong growth.
The fourth quarter earnings release is expected to deliver a year-on-year increase in earnings on higher revenues when it reports on March 10. Analysts are expecting a quarterly loss of $0.04 per share, which would be a +73% change on the year. Revenues are expected to be $201.70 million, up 39.6% from the year-ago quarter.
Annual revenues are growing steadily at Cloudera with 188% growth since 2016. Cost of revenue has grown only 81% in that same period.
Although the company is losing money each quarter, it is spending half of its revenue on research and development costs, with further expenses in sale and marketing as it seeks to grow its subscriber base and recurring revenues.
Margins are high but quarterly growth has reached a ceiling
The most attractive part about Cloudera's outlook is a 70% gross margin. This will keep a lid on future expenses in areas such as staffing, and if revenues continue to grow, then earnings should soon outweigh costs.
The only headwind to that call would be the recent stall in quarterly revenue growth. The company saw 25% revenue growth in two consecutive quarters before a 4% gain and a flat month. The analyst expectations for Cloudera's fourth quarter of $201 million are again just a slight increase on the $198 million seen in the third quarter.
The company needs to capitalize on heavy sales and R&D spending to show that it can continue to grow subscription revenues at a stronger pace and bring the company into profit.
Conclusion
Cloudera's customer base makes the opportunity attractive, and the company should be able to leverage those big names easily to attract new partners. Annual revenues have been strong in the company but a recent slowdown in quarterly revenues is showing a ceiling for short-term customer attraction. The company's profitability is being weighed on by spending on sales and research and development costs, so they need to start accelerating revenues to take advantage of the high margins in their products.
For this reason, I would be neutral on the company until it can show a return to stronger revenue growth. An opportunity may arise to pick up the company's stock at lower levels over the next one or two quarters, which would bring the company more in line with the current earnings picture.
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Comments (14)
I don't see what products or technologies Cloudera has that anyone would be willing to pay top dollar for. Take Amazon. They probably have cloud services that correspond to most of Cloudera's technologies and why would they be interested in the on-prem aspects of Cloudera. Take Impala, for instance, Cloudera's SQL-on-Hadoop product. Sometime ago, I did a lengthy product evaluation for the purpose of selecting a technology for a 100PB HDFS cluster and where the finalists were Impala and Presto. Presto won. And guess what, Amazon's Athena service is based on Presto. They basically took the source code for Presto, which is freely available as open source and turned it into a cloud service. The source code for Impala is also freely available, so I guess they could have used that code, but why pay Cloudera as much as a penny in either scenario? Similarly, I don't see how Cloudera would be a particularly compelling acquisition for either Oracle or Microsoft. As for Cloudera surviving as an independent company, unlikely. Computing is going to the cloud and the major cloud providers have services that are integrated with the rest of the infrastructure and that most likely obviate the need to use Cloudera's technologies there.
