Cloudera’s IPO – Do investors still have high hopes for big data?
Cloudera Inc. filed for an Initial Public Offering (IPO) a week ago to raise up to $200 million in its long-awaited public debut.
Cloudera considered IPO back in 2013, according to CEO Tom Reilly, but chose to stay private longer to show more sustainable financial performance. The company took in over $1 billion of private funding, including $740 million investment from Intel in March 2014.
The right time seems to have come for a technology IPO, with Snap, MuleSoft and Alteryx having primed the market. The public offering is expected to value Cloudera at $4.1 billion, which is similar to the valuation of its most recent funding round in 2014. Current beneficial market conditions along with Cloudera’s financials and competitive position suggest that Cloudera may price equally or at a modest discount to its past-private valuation.
Looking closer at Cloudera’s data, we have compared the company to Alteryx and MuleSoft that have recently gone public and to Hortonworks and Box, which made for a successful IPO several years ago and later dropped in value. The table below shows selected financial metrics on these companies.
MuleSoft’s current market capitalization is double its private valuation in 2015. The company trades at a revenue multiple of 16, having shown in its S-1 filings a 70% sales increase and a 24% net loss, decreased from last year. Another enterprise data analytics firm Alteryx is now trading at an 11 revenue multiple and has pursued a $0.91 billion valuation, flat from its last private round.
Cloudera in its S-1 filings has indicated a 57% growth in revenue and a 8% decrease in net loss. These metrics are in line with those of k and MuleSoft and should have a positive impact on Cloudera’s future capitalization. However, Cloudera’s direct competitor Hortonworks trades at a 1.7 revenue multiple, while its market capitalization is an only half of the private valuation. The cloud storage company Box has also lost in value since its IPO in 2015 and is priced at a 6 revenue multiple.
It can be concluded that IPOs give the technology companies a higher or equal valuation than the private rounds, however as the firms struggle to meet profitability and growth targets their share price significantly drops.
Cloudera is inevitably compared to its primary competitor Hortonworks, which was first to go public among the three big data companies: Cloudera, Hortonworks and MapR. In the first day of trading, Hortonworks’s share price jumped from $16 to $26. However, later its share price dropped by more than 60% and stood at $9.81 as of last Friday's close.
It remains to be seen if Hortonworks’s negative performance will cast a shadow on Cloudera’s IPO, as these Hadoop vendors differ in their business models. While Hortonworks’s source of revenue is support services only, Cloudera uses professional services and training only to supplement its primary revenue stream, paid subscriptions, - which account for 77% of sales.
The chart below shows the quarter-on-quarter evolution of Cloudera’s revenue and non-GAAP operating loss in 2015-16.
Cloudera has shown a sustainable rise in revenue, quarter-on-quarter since the start of 2015. Its total revenue and gross profit increased by 57% and 92%, respectively, last year.
Moreover, its non-GAAP operating loss as a percentage of sales dropped from 97% in Q2’15 to 46% by Q4’2016. Nevertheless, Cloudera’s operating expenses continue to grow as the company pursues “land and expand” strategy. The increase in general and administrative expenses as well as in sales and marketing expenses is justified by high customer acquisition costs incurred as Cloudera scales its business internationally to gain a market share in the increasingly competitive field.
The chart below tracks the company’s cost structure over the past two years.
The big data software provider is not expected to become profitable in the foreseeable future. However, as many technology companies focus on growth rather than profitability, such financial performance is not out of place. Positive profitability trend and high pace of customer acquisition serve as a sufficient metric of short-term performance.
As to customer base, Cloudera targets the largest 8,000 corporate enterprises (Global 8000) and large public sector organizations, a lucrative segment attractive to most enterprise software companies. Cloudera has significantly increased its client base from 152 of Global 8000 it had in 2014 to 495 by January 2017. With the outreach to existing Intel customers, capital infusion from the upcoming IPO and growing partner ecosystem, the company is expected to steadily grow in the big data arena.
Nevertheless, as the market matures and year-over-year growth gradually slows, the California-based software vendor will be challenged to maintain its competitive advantage. In the long term, the company aspires to replace traditional enterprise data warehouses. Therefore, it faces intense competition both from enterprise technology companies like IBM and Oracle, and from cloud providers like Amazon and Microsoft, which are bolstering their business intelligence offerings. Although the threat from technology giants, for now, is unlikely to have any implication on Cloudera’s IPO, it is an important factor in its long-term capitalization.
Currently, Intel, which is Cloudera’s primary strategic technology partner, has a 22% stake in the company prior to the IPO. Cloudera CEO Tom Reilly owns 6.1%, while co-founder and Chief Strategic Officer Mike Olson owns 4.4% and CFO Jim Frankola holds a 1% stake.
Accel Partners was the Series A investor in Cloudera and has a 16.3% pre-IPO stake in the company, followed by Greylock Partners, who led the Series B and owns 12.5%. Other investors include Meritech Capital Partners, T.Rowe Price, Google Ventures, In-Q-Tel and Ignition Partners.
In summary, we think that Cloudera may price equally or at a modest discount to its past-private valuation. However, the company long term position is vulnerable to the threat of new entrants and technologies.
Sources & Notes:
- Cloudera, Mulesoft and Alteryx S-1 Filings
- Hortonworks and Box 10-K Filings
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