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Has Cloudera Turned a Corner?

Cloudera (NYSE: CLDR) is a relatively young tech company that offers big-data processing and machine learning through an open-source software framework called Hadoop. Using Cloudera's Hadoop-based tools, enterprises can mine vast amounts of data that otherwise would be overwhelming to traditional solutions.

Since its initial public offering in April 2017, Cloudera's stock hasn't lived up to the promise of other hot software IPOs. The stock currently sits just below $18, which is below where it closed on its first day of trading a year and a half ago. Problems were compounded earlier this year when the company's growth decelerated sharply, indicating the market may not be as receptive to its offerings as previously thought. The stock plunged immediately thereafter.

But on its past earnings call, Cloudera made a few announcements that got investors excited again, sending shares up almost 25% the next day. Has the company turned itself around?

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In its report, Cloudera reported a successful execution of its new sales strategy, outlined on its previous April 2018 call with analysts. On that call, Cloudera guided toward growth in the 20% range, lagging not only the prior year's 41% growth, but also that of its primary publicly owned competitor Hortonworks (NASDAQ: HDP).

Cloudera said it was retooling its sales focus to go after only large, high-value clients that have the propensity to buy many products. The company dialed back its target market to around 5,000 companies, below the previous target of around 8,000. That sort of profit-focused strategy is what you might like to see from a more mature company, but Cloudera is a relatively small, high-growth software company, so the dialed-back top-line growth was somewhat concerning.

But on the recent call, management claimed this new strategy was working, pointing to a gain of 30 more customers that now spend over $100,000 at an annual run rate. That's up 5.6% just from the prior quarter.

That boosted revenue 23%, with the core subscription revenue growing an even stronger 26%. Non-GAAP (generally accepted accounting principles) gross margin expanded 200 basis points to 87%, from 85% a year ago. While not exactly knocking it out of the park, the more efficient sales process led to greater-than-expected profitability, as non-GAAP net loss was only $0.08 per share, half of what analysts were expecting.

"Disruptive" new products

While greater profitability is good, the big post-earnings news was really the introduction of what management called "disruptive" new products for the $16 billion data warehousing market.

Data warehousing is the practice of aggregating a company's data from an array of different databases and other sources so that it can be processed and analyzed on a huge scale. Traditionally, warehousing has been dominated by giant companies such as IBM, Oracle, and Teradata. In addition, a new start-up called Snowflake has begun offering data warehousing in the cloud, and raised money this January at a valuation of $1.5 billion.

Cloudera, which already ran its software in others' data warehouse infrastructures, is now following in the footsteps of Snowflake by offering its own warehousing services. In August, the company unveiled the Cloudera Data Warehouse, as well the Altus Data Warehouse, which is sold as a PaaS (platform as a service). Cloudera also unveiled Cloudera Workload XM software, which helps customers manage these massive workloads and run analytics.

Management gave a very impressive-sounding endorsement of the product. In contrast to Snowflake's, which is cloud-only, Cloudera's offering will operate seamlessly from public clouds to traditional on-premise data centers and private clouds. Cloudera's legacy offerings were already offered on-premise, so Cloudera's product will enable clients to move between infrastructures, all without having to copy data into multiple data stores.

Investor interest is piqued

Cloudera's new data warehousing product likely is what got investors so excited. The $16 billion data warehousing market is much bigger than Cloudera's trailing-12-month revenue of just $411 million. Young tech companies are mostly valued on growth potential, and Cloudera, though more efficient, is still posting losses. So an investment in Cloudera is dependent on your view of how much money it can make from these "disruptive" new warehouse products or others like them.

While there is definitely potential here, keep in mind that the company is up against formidable competitors. You should tread carefully after the stock's big move up.

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Billy Duberstein owns shares of Hortonworks and IBM. His clients may own shares of some of the companies mentioned. The Motley Fool owns shares of ORCL and has the following options: long January 2020 $30 calls on ORCL. The Motley Fool recommends TDC. The Motley Fool has a disclosure policy.

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