Cloudera's Costs Are Out of Control

Fast-growing software-as-a-service companies generally spend a high percentage of their revenue on sales and marketing. Part of the reason sales and marketing spending often eats up 30%, 40%, or even 50% of revenue is because subscription revenue is recognized over time, while the costs to win customers are mostly recognized up front.

Heavy sales and marketing spending isn't a problem if it's efficiently creating new customers and driving existing customers to spend more. But that's not at all the case at Cloudera (NYSE: CLDR). The cloud data analytics company slashed its full-year guidance and ousted its CEO on Wednesday when it reported its first-quarter results. With minimal organic growth expected this year, its bloated cost structure is a big problem and cost-cutting may be inevitable.

"Egregiously high"

Cloudera spent $119.4 million on sales and marketing in the first quarter. That's a whopping 63.7% of revenue. The company posted a net loss of $103 million on $187.5 million of revenue.

To be fair, this total includes some one-off expenses related to the merger with Hortonworks. Excluding these expenses, sales and marketing ate up 47% of revenue, according to CFO Jim Frankola on the earnings call.

That's not too far off from the spending of other notable software-as-a-service companies:

The problem is that Cloudera's spending isn't translating into growth. While the company's total revenue will grow substantially this year thanks to the Hortonworks acquisition, Cloudera's new guidance calls for annualized recurring revenue, a metric that accounts for preacquisition Hortonworks contracts, to grow by just 0% to 10%. At the low end of that range, Cloudera's growth will flatline this year despite spending so much on sales and marketing.

During the earnings call, analyst Chad Bennett from Craig-Hallum didn't mince words:

Frankola responded by saying that the expected growth this year isn't what was initially anticipated, but that long-term growth in excess of 20% annually is still supported by secular trends. Cloudera is working to launch its new CDP platform, which will integrate components from both Cloudera and Hortonworks. The company has "retained the level of investment that would allow us to develop CDP, public cloud, private cloud and be able to sell it and build pipeline over the course of this year."

The unexpected departure of CEO Tom Reilly, who will leave the company at the end of July, suggests that the company's problems run deeper than customers waiting for the new platform to renew their contracts. Cloudera's churn rate rose sharply in the first quarter, which means that customers are abandoning the platform at an elevated rate. And other cloud companies, like Pivotal Software, are running into similar problems signing deals, suggesting that customers are pulling back for reasons that aren't company-specific.

Cloudera is betting that its new platform will reignite growth when it launches sometime this summer. If it doesn't, the new CEO will likely be forced to cut costs. Cost-cutting and growth stocks don't mix, so that would represent a big hit to the company's growth story.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Box, MongoDB, Salesforce.com, and Twilio. The Motley Fool has a disclosure policy.