As reported by Stephanie Condon at the close of business yesterday, Cloudera reported a strong Q1 that came in ahead of analyst expectations. We were interested to see whether Cloudera's post-merger recovery that has spanned the last three quarters would make it through the pandemic acid test. But the bigger issue is the implications for software companies that sell to large enterprises.
To recap, a year ago, Cloudera's earnings and share prices were on the skids. Big on Data bro Andrew Brust gave a blow by blow telling of Cloudera's near-death saga in his account last fall. Under then-CEO Tom Reilly, the company was over-optimistic that it would get through the post-merger downturn sooner, but with Q1 2020 results under water, Reilly headed for the exit. Fast forward to now, the headline is double-digit improvements, 12% in overall revenue and 22% in recurring (subscription) revenue. Given how dismal the Q1 2020 results were, we'd expect Cloudera to do better compared to when we were questioning their survival.
Instead, the question going into yesterday's earnings results was whether Cloudera could sustain the recovery of the last three quarters in the wake of the global economy suffering a huge downturn in the wake of the. 2021 Q1 earnings were relatively flat compared to 2020 Q4, which ended just before the pandemic hit. Flat results might not be great, but in uncertain times, it's preferable to declines.
Over the past three quarters, the narrative has been that of a company reborn. The next-generation Cloudera Data Platform (CDP) was unveiled, providing a cloud-native rethinking of a platform that combined elements of pre-merger Cloudera and Hortonworks Hadoop offerings, and successfully buried the "zoo animals" of discrete Hadoop projects under common binaries to hide their complexity. The new platform got a receptive audience amongst the base, with the result that Cloudera suffered relatively few customer defections. More importantly, on the operations side, the company got its act together by taking a more systematic approach to securing renewals, which comprise the lion's share of Cloudera's land-and-expand business.
So, the company, which executed well over the past year, didn't get stopped by the coronavirus pandemic. Actually, as CEO Rob Bearden admitted during the earnings call, there was a pause in the business pipeline when the shutdowns began in March. But by April, renewals picked up again.
Part of Cloudera's fortunes are serendipitous. Its business is concentrated in the Global 2000, and, aside from oil and gas, its big verticals are not the ones most hurt by the pandemic, such as transportation, travel, or hospitality. Not surprisingly, Cloudera's biggest vertical is financial services, and thanks to stronger capitalization laws, banking and capital markets firms are in far better shape heading into this downturn versus 2008-2009.
But the larger significance of Cloudera's Q1 results is about long-term enterprise software investments. Unless a company is in truly dire straits – and the upheavals of the financial crisis of 2008-2009 come to mind – these investments are not likely to get cancelled overnight.
That's even more true if the customer relationships are deep-seated. Cloudera's customers have already sunk hundreds of thousands, if not millions of dollars into their investments over the years. Sure it would cost a lot more if they were to suddenly shift gears such as moving to AutoML point solutions, but this is not about stranded investments. It's about longer-term investments to deepen insight from data. The core of Cloudera's customer base has bought into their vision of a multi-purpose data platform that handles everything from streaming to analytics to machine learning. If anything, the current pandemic has placed an even greater premium on data-driven decisions. There are parallels with organizations deeply invested in long-fuse enterprise application projects, especially with the Global 2000. And that has implications for the Oracles, SAPs, and Salesforces of the world.
What is notable in Cloudera's Q1 2021 numbers is that the one area that declined was in services, which dropped nearly 30% from what was supposed to be a bad quarter a year ago. In part, Bearden attributed that to the fact that Cloudera's customers have more mature installations of the legacy platforms, and if they're going to migrate eventually to CDP, they are not as likely to engage more services in the short run. But he pointed to a broader phenomenon, which is in an economic downturn, enterprises may continue existing projects but either cut back or slow down on new ones that would require services.
There's a broader parable for tech companies here. In challenging or uncertain economic climates, some enterprises will make riverboat gambles on new projects that could give them competitive edge when the economy recovers – just as Wal-Mart for instance, doubled down on expanding its retail empire during recessions of 1990 and 2008 while rival retailers were retrenching. But most are likely to double down on established projects until the coast clears. For Cloudera, that's been a good thing.