Cloudera Whatsapp

August 13, 2013

Michael Pachter Steve Koenig (213) 688-4474 (415) 274-6801 [email protected] [email protected]

PRISM … Progress Report for Internet and Social Media

In This Issue: Cloudera, WhatsApp

Cloudera

 Big Data analysis firm founded by four tech veterans from Facebook, Yahoo, Google and Oracle.

 Developed applications based on open source Apache Hadoop to process large data sets.  Has raised $141 million over five rounds of funding. Annual revenue estimated at $100 million.

 Market expected to grow at 54% CAGR over next five years.

 Mobile instant messaging service with 250 million global monthly active users.  Subscription-based revenue model; no advertisements or virtual goods.

 Mostly self-funded, with only $8 million raised in four years.

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Cloudera

Cloudera offers scalable and efficient data storage and analytics solutions to companies in the enterprise, Internet and government sectors. The company, based in Palo Alto, was launched in 2008 by three top engineers from Google, Yahoo, and Facebook (Christophe Bisciglia, Amr Awadallah, and Jeff Hammerbacher, respectively) who joined former Oracle executive Michael Olson to address problems inherent in analyzing large volumes of data quickly. Since 2008, Cloudera has gained widespread adoption, bringing open-source Apache Hadoop (highly available distributed object-oriented platform) and distributed storage to companies of all sizes. Its revenue is estimated to be in the range of $100 million annually, and employee headcount was 320 in February of this year (according to The Register).

Product Hadoop, created by Doug Cutting, a Cloudera employee who named the technology after his child's stuffed elephant, is an open source Java framework that was created from Google’s MapReduce and Google File System papers; it enables distributed parallel processing of huge amounts of data across inexpensive commodity servers. According to Cloudera, much of the data produced globally is unstructured and was virtually unusable in any meaningful or systematic way until the development of Hadoop. With Hadoop, users can consolidate data – structured, unstructured, log, picture, audio, email and other communication – from disparate systems and analyze information as though all of the data were on the same platform in the same format.

Hadoop supports distributed applications running on large clusters of computers processing enormous amounts of data. This differs from prevailing centralized computing systems, because the bottleneck that previously existed when transferring massive amounts of data from storage to processing is removed. As a result, Hadoop enables companies to leverage large volumes of preexisting data to better understand customers, markets, operations, products and relationships through distributed parallel processing. The platform has been especially popular with social networks and other Internet companies because of the vast amounts of data these firms generate and the low cost of Hadoop processing systems.

According to a study by eBay, the global volume of corporate data doubles every 1.2 years, and prior storage platforms could not scale to meet the rising demand for more efficient and cost-effective data management needs. Subsequently, distributed processing has grown increasingly important, placing increased emphasis on the monitoring of IT system performance. According to CEO Olson, current relational enterprise data warehouse (EDW) costs are close to $20,000/TB, compared to $1,000/TB to $2,000/TB for Hadoop clusters, including hardware (via InformationWeek). We believe that Hadoop’s downward pressure on pricing provides a significant catalyst as companies shift their reliance away from EDW to Hadoop clustering for extract, transform and load (ETL) needs, business intelligence and analytics, and reporting. Cloudera’s ability to easily scale and integrate with virtually every data storage platform on almost any hardware is a central reason for its adoption by large enterprises.

Business Model Cloudera has monetized its software by developing Cloudera Enterprise, a commercial software and support package offering that caters to enterprise customers with large amounts of data. Cloudera Enterprise includes CDH (Cloudera’s Distribution for Apache Hadoop), the industry’s most popular means of deploying Hadoop. The company offers customers an annual per-node subscription license to Cloudera Manager and technical support that allows a host of services to manage and analyze its data. Although the company does not provide official pricing, it told The Register packages range between $2,000 and $4,000 per node depending on features. A free version of Cloudera Enterprise offers limited functionality and caps the number of managed nodes at 50. Cloudera’s Desktop Management platform allows copying and browsing of data files stored on a cluster as well as creating, running and saving jobs for reuse and/or customization. The Desktop Management platform also monitors Hadoop cluster performance.

Financials

Cloudera does not release financial figures, but an article by Date Round Amount Investors GigaOm suggested that the Mar-09 Series A $5 million Accel, SV Angel, Diane Greene, Qi Lu, etc. company generated approximately Jun-09 Series B $6 million Accel, Greylock $100 million in revenue in 2012 and has grown approximately Oct-10 Series C $25 million Meritech, Accel, Greylock tenfold since 2009. The company Nov-11 Series D $40 million In-Q-Tel, Ignition, Accel, Greylock, Meritech was valued at $700 million in its latest round of financing in Dec-12 Series E $65 million Accel, Greylock, Ingnition, In-Q-Tel, Meritech December 2012 (according to an article by AllThingsD). The investment was led by Accel Partners and included existing shareholders Greylock Partners, Ignition Partners Meritech and In-Q-Tel. Previous rounds are listed above.

In Chairman Olson’s company blog post announcing Reilly as the new CEO, Olson said he expected the company to stay independent. Business Insider has suggested that the hiring of Reilly was a sign that the firm was preparing to go public. Other news outlets have expressed similar opinions, including Forbes and VentureBeat. In an interview with The Register, Vice President of Products Charles Zedlewski said that the company was “steadily moving out of the startup phase.”

Market

The market for Big Data solutions is expected to grow rapidly over the next five years. Transparency Market Research estimates that the global Big Data analysis market was worth $6.3 billion in 2012 and will grow to $48.3 billion by 2018 at a CAGR of 40.5%. Over 50% of this market came from software and services. The largest contributing sectors were healthcare, financial services and government; healthcare is expected to be the fastest growing. The market for Hadoop is also growing quickly with a 54.7% CAGR. In 2012, Hadoop’s addressable market was around $1.5 billion, and is expected to grow to $20.9 billion in 2018 (according to Transparency). This should allow Cloudera to grow for the next several years. Although adoption of Hadoop and other open-source software products has gained momentum among large enterprises, many companies are still wary of implementing them on a large scale, preferring proprietary commercial software instead. Many industries are still evaluating the use cases around Hadoop. To increase market penetration Cloudera must work closely with current and prospective clients to determine Hadoop’s optimal fit within their respective data ecosystems.

Competition While Cloudera competes with more mainstream data storage and analytics providers, its main competitors are Hortonworks, a company formed by Yahoo in 2011, and MapR, a San Jose, California-based startup. Hortonworks received $50 million in new funding in June 2013 to accelerate application development. MapR received $32 million in March 2013, bringing its total funding to $61 million. Since Cloudera was an innovator in the Hadoop space and maintains several of the platform’s early designers and programmers, it should prove difficult to for new entrants to upstage the incumbent, which has accumulated over 150 customers (according to The Register) including eBay, Groupon, Rackspace, ComScore, Trulia, Samsung, LinkedIn, Facebook, and Twitter. The interest in Hadoop and other big data platforms has spurred bigger tech companies such as Oracle, IBM, Hewlett Packard, EMC, and Dell to form partnerships with firms like Cloudera. In January 2012, Oracle and Cloudera announced a partnership to provide an Apache Hadoop distribution and tools for Oracle’s newly announced Big Data Appliance. Other competitors include Google’s BigQuery, KarmaSphere and EMC.

Technology

The Hadoop Distributed File System (HDFS) breaks incoming files into blocks and stores each block in distinct locations. The replication of data across the cluster eliminates the need for RAID (redundant array of inexpensive disks) storage. When data processing is performed, the machine that can most efficiently perform the task will be given the process. In addition to manual failover in 2012, Hadoop has since added high availability (HA) capabilities by introducing automatic failover – if a machine encounters

Source: Company Data performance issues and/or fails, HFDS continues to operate the cluster by shifting work to the remaining nodes, enabling the server to

be failed over to a backup. HA, automatic failover and redundancy features therefore reduce intervention by systems administrators and ultimately lowers IT maintenance costs.

Cloudera offers an enterprise solution, Cloudera Enterprise, which combines structured and unstructured data and allows companies to access and use previously unavailable metadata information across the IT environment. Cloudera Enterprise also provides the ability to create comprehensive views of customer behavior at a fraction of what competing storage and analytics companies charge. According to former COO Mike Dunn, “in the old data management world you had to know the question you wanted answered; so you formatted the question, loaded the data, turned the crank and got an answer . . . . With Hadoop, you don't ask a particular question. You let the data tell you what the question should be."

In October 2012 the company introduced Cloudera Impala, a native distributed SQL Query engine built on Google’s Dremmel architecture that replaces slower, command-line driven, batch- oriented processing through MapReduce. Queries can be made over trillion-entry databases in a matter of seconds. The highly scalable feature addresses the previous difficulties Hadoop systems had with data extraction.

This past July Cloudera acquired Myrrix, a London-based startup that specializes in machine learning, which is becoming a large contributor to corporate generated data. GigaOm has suggested that the company will need to continue to build industry-specific expertise in the future in order to develop more specific applications for its Hadoop platform. Myrrix founder Sean Owen is now Cloudera’s Director of Data Science in England. Architectural view of Impala. Source: Cloudera

Leadership In June 2013, Mike Olson gave up the position of CEO and became the Chairman of the Board and Chief Strategy Officer. Before being recruited by Hammerbacher to help found Cloudera, Olson was a Vice President at Oracle. He was previously CEO of startup SleepyCat Software, which was acquired by Oracle in 2006. Tom Reilly, who previously oversaw security information software at HP after its acquisition of ArcSight and is a long-time leader in private tech companies, took over as CEO. Reilly had been the CEO of ArcSight, leading it through an initial public offering, and later through its $1.5 billion acquisition by HP. He was also the CEO of Trigo Technologies when it was acquired by IBM in 2004. Aside from leading Cloudera, Reilly also maintains board position of several private technology firms.

Co-founder Jeff Hammerbacher is the company’s Chief Scientist. Hammerbacher came to know the value of Hadoop while piloting database systems at Facebook as the manager of the company’s data team. Amr Awadallah, Cloudera’s Chief Technology Officer, was previously Vice President of Product Intelligence Engineering at Yahoo. Awadallah came to Yahoo through its acquisition of his startup VivaSmart. COO Kirk Dunn was formerly CEO of PowerFile and Bang Networks. Cloudera’s Chief Financial Officer, Jim Frankola, had been CFO of Ariba and later Yodlee.

Four-year-old WhatsApp is an application development company that produces WhatsApp Messenger, a cross-platform mobile instant messaging (IM) app. The company was founded in Santa Clara, California by two former Yahoo employees, Jan Koum and Brian Acton. WhatsApp Messenger provides a free alternative to SMS texting, which was rapidly growing in popularity at the time. Unlike SMS texting, which relies on broadband connectivity, the service can operate on a Wi-Fi connection as well.

During their time at Yahoo, the two founders developed a distaste for the extensive use of advertising. In an interview with AllThingsD, Koum discussed the tension between serving users and serving advertisers: “The user experience would always lose, because you always had to provide a service to the advertiser.” Koum and Acton wanted to retain an experience that was completely focused on the user; from the beginning, the app was designed to be simple and ad-free, and the founders have maintained that philosophy.

Product Initially created for the iPhone, WhatsApp is now platform-agnostic, allowing users of every major mobile operating system – including legacy Symbian – to send messages to each other. The company emphasizes the app’s clean and simple design: no log-in is required as the account is tied to the phone number of the device on which it is downloaded. In this sense, customers use the service much the same way they would use a texting application: the app is always connected, and uses the phone’s contact list to find people that also use the service. The original interface replicated SMS texting as much as possible to promote simplicity and a familiar user experience. According to Koum, this differentiated the app from incumbents like Skype and Yahoo, who took a desktop-first approach (via Financial Times). The service was updated over time to create a richer experience than SMS texting with the ability to send videos and update the user’s location. Although the expanded features have made WhatsApp more like a social network, the company does not collect any information on its users.

User growth has been steady and adoption widespread. The user base stands at 250 million monthly active users, according to a June 2013 article by The Wall Street Journal. This is greater than the 200 million MAU that Twitter claimed in December 2012, and nearly as many as Skype, which claimed 280 million MAU in October 2012. According to the Financial Times, the application has had long stints on the list of top-20 downloads in many countries including Germany, India, Indonesia, Brazil, Taiwan and the UK. This popularity has upset many cellular carriers, who reap large profits from SMS texting services. Research firm Ovum estimates that messaging apps such as WhatsApp cost carriers $23 billion in 2012 (via The Wall Street Journal). This has led several carriers to strike deals with WhatsApp in order to take back revenue. For example, some carriers sell special packages to users that provide the application with unlimited data WhatsApp User interface connection.

WhatsApp has had security issues in the past. In May 2012, German security website The H published a report exposing a vulnerability in the app that enabled hackers to hijack user accounts easily. The company responded by updating the software to transmit messages in an encrypted format. In September 2012, web developer Sam Granger posted on his blog (republished by Business Insider) reporting that WhatsApp’s software uses a simplistic method of authenticating devices that leaves it vulnerable to simple hacks.

Business Model The company’s revenue model is straightforward. The app is free to download and free for the first year of use; customers pay $0.99 per year thereafter (prior to July, the app cost a one-time fee of $0.99 to download in Apple’s App Store, with no subscription fees). WhatsApp does not include advertising anywhere in the interface, so it does not collect ad revenue. Many competing applications charge for upgraded service or virtual goods within their application. Asian Internet companies Naver and Tencent, which provide messaging services, earn millions of dollars per year in this way, but WhatsApp has elected not to adopt the freemium model. The

company monetizes its business in part from agreements struck with carriers. Aside from the prior example, the structures of these agreements are unknown and the amount of revenue undisclosed.

Financials

WhatsApp has had only a single round of funding in April 2011, receiving $8 million from Sequoia Capital. Reports suggest that the dearth of funding is not due to lack of investor interest, but because the company founders have made no fundraising efforts. According to an article by GigaOm, CEO Koum claimed the investment was unsolicited and was accepted on a strategic basis rather than out of necessity. Because the application was monetized and successful from the start, it has been largely self-funded. In the GigaOm article, Koum said this has allowed the company to focus on product and not capitalization efforts.

The firm has also expressed no interest in being acquired. According to an article by The Wall Street Journal, the founders have been offered buy-outs from Facebook, Google and Tencent. Business Insider indicates that some investors believe the company is worth over $1 billion. Regardless, Koum and Acton have turned down any offers to be bought out. The company does not disclose financial figures, but has been monetizing millions of active users for the last few years. The company’s expenses are likely relatively small, with only one office and a small staff of about 40. According to the Spanish website El Pais, most of the technical development is done in Russia, where talented developers are cheaper (according to Business Insider). WhatsApp does not advertise, and it uses commodity hardware (according to GigaOm). According to data from Priori, WhatsApp for iPhone was downloaded 1.23 million times globally in the month of June 2013 (when it still cost $0.99 to download). This translates to $1.22 million for the month and an annual run-rate of $14.64 million. It is possible that WhatsApp makes more than this from Android users, as Google’s mobile OS is more popular globally, and customers have always been charged annually. The company has also been striking deals with mobile carriers around the world. No specific values for these deals have been announced, but The Wall Street Journal describes them as “lucrative.”

Although the founders have opposed acquisition and shown little interest in funding, when asked about the possibility of an IPO, Koum and Acton did not reject the idea, saying only that they were focused on growing (according to El Pais).

Market

The market for instant messaging (also called direct messaging) has experienced a resurgence in popularity since 2010 as users have migrated from costly SMS texting in favor of web-based Monthly Active Users alternatives that are typically free to use. Instant messaging, in its original form, was developed as a speedy alternative to email and (Millions) was typically offered concurrently with email services by companies such as AOL, Yahoo and Microsoft. Between 2007 and 2010, IM 900 usage dropped sharply as social networks and SMS grew in 800 popularity. A study in the UK revealed that the portion of online time spent instant messaging fell from 14% in 2007 to 5% in 2010. A 700 similar study by Online Publishers Association indicated that usage of email and IM dropped 8% between 2003 and 2009 (via BBC 600 Magazine). At that time, Internet connectivity was still rare on mobile devices. With the recent proliferation of smartphones and 500 data plans, more consumers have the option of using IM for 400 messaging on the go. 300 The result has been rapid growth in mobile IM app users. China’s Tencent and South Korea’s Naver have seen the popularity of their 200 respective instant messaging offerings grow steadily. Tencent’s QQ 100 messaging service, by far the most popular in China, includes 798 million active monthly users (according to an article by Polygon). 0 Naver’s service Line, which is most popular in Japan, reached 200 WhatsApp Twitter Skype Kik QQ million registered users in July 2013, just two years after launch (according to TechCrunch). Indian mobile IM app Hike has grown to 1 billion monthly messages in just four months of existence (via Source: Company Data, Wedbush TechCrunch).

This growth has prompted new entries into the space, as well as increased efforts from incumbent players. In an article by The Wall Street Journal, Facebook’s Director of Product Management, Peter Deng, claimed that today 75% of his time is spent thinking about mobile messaging, whereas two years ago it was given little focus. Facebook included a messaging feature on its platform in 2010 and,

in 2011, released a standalone mobile IM application. It has added more features in recent months, including stickers and the Chat Heads feature from the Facebook Home operating system. Google has tied its instant messaging system – Google Talk – into the Hangouts feature of Google+. In doing so, it included emoji icons as well. Both services include video chat and group messaging. The social network Path updated its app with direct messaging in March 2013; virtual goods for the feature quickly became the company’s main source of revenue (via TechCrunch). Other competitors include Viber, Kik and Apple’s iMessage.

The increased popularity has also caught the attention of investors. WhatsApp’s lone outside investor is Sequoia Capital. In a May 2013 interview with TechCrunch, Sequoia partner Aaref Hilaly voiced his opinion on the opportunity for messaging applications: “What’s your real social graph? Is it the people you communicate with and spend time with, or is it the 100 people you barely know on Facebook? We think it’s pretty clearly the first of those, and that’s what mobile messaging apps like WhatsApp capture.” Other firms like WhatsApp appeal to venture investors as well. Google Ventures and True Ventures have backed messaging app Just.me, which launched in April 2013 with email and cloud storage features (via Business Insider). True Ventures also invested in MessageMe this past March. Canadian startup Kik – which provides an IM service among other offerings – has been funded by Union Square and Spark Capital. It is worth pointing out that Sequoia Capital may be more knowledgeable than most venture capitalists on the subject of mobile communication. The firm is also an investor in Onavo, a mobile intelligence service that markets mobile data usage apps that can gather valuable information on the habits of mobile users.

WhatsApp is currently the dominant player in Brazil, Russia and most of Europe. Its penetration is growing in the U.S., where IM is more fragmented. Developing nations do not have legacy applications like AOL Instant Messenger or Yahoo Messenger; many users in the U.S. still cling to these services or use apps that are packaged with other offerings like Facebook or Google. Outside of the largest Asian markets (China, Korea and Japan), WhatsApp is largely reported as the global leader in Internet messaging apps, described by The Wall Street Journal as a “juggernaut.”

Messaging service market share by region. Source: Onavo

Leadership CEO Jan Koum, a 36-year old Ukrainian, worked for Yahoo for several years as an engineer before leaving the company in 2008. He recruited former co-worker Brian Acton, 40, then Vice President of Engineering at Yahoo, to help him develop WhatsApp in 2009. The two are extremely private, refusing to give interviews until 2011, and rarely giving them since. Their utilitarian attitude and dedication to privacy permeates their product as well as the public image of the company. Business Development is handled by Neeraj Arora, previously a senior member of the corporate development team at Google.

Last Week’s News

FireEye files S-1 in preparation for IPO. SEC.gov has posted the Form S-1 statement for cyber-security firm FireEye Inc. Financial statements show rapid expansion over the past several years, with revenues growing from $11.8 million in 2010 to $83.3 million in 2012, though the company turned an operating loss for each of the last three years. Net cash from operations was positive for 2011 and 2012. The firm will seek $175 million.

Wayfair acquires DwellStudio, estimates 2012 sales of $1 billion. DwellStudio has been acquired by online home goods retailer Wayfair for an undisclosed amount. DwellStudio designs furniture, bath products and other décor, and is typically found in high-end stores. Wayfair has been expanding its own portfolio of brands, which also includes Joss & Main and AllModern.com. According to a report by VentureBeat, Wayfair is expected to reach $1 billion in sales for 2013. It is the second largest retailer of home goods in the US.

Uber job openings indicate further global expansion. Even as it pushes into Asia-Pacific cities, Uber seems primed to expand into other untapped markets as well. A report by The Next Web indicates that job postings on the company’s website show openings in untouched markets like South Africa, Kenya, Peru, Chile, Lebanon, Dubai and Qatar. Also listed were new markets in regions that have already seen penetration, such as Belgium, Moscow, New Zealand, India and Tokyo. Uber rushing to establish a global first-mover advantage as well-funded competitors continue to pop-up.

Spotify reports revenue doubles, losses widen. MarketWatch has reported that Spotify’s 2012 revenue increased from 2011, although its losses increased. The Stockholm, Sweden-based music streaming company more than doubled its annual revenue to €434.7 million from €190.4 million in 2011. Losses widened to €58.7 million from 2011’s €45.4 million.

SpaceX secures contract for Canadian satellite launches. SpaceX has announced that it has signed a contract with Canadian space company MacDonald Dettwiler & Associates to provide launch packages for the largest space program in Canadian history. The project will place three satellites in orbit by 2018, and will use SpaceX’s Falcon 9 rocket. This is the second contract that SpaceX has secured with MacDonald Dettwiler & Associates. Financial details of the contract were not provided. (According to VentureBeat)

Uber fund raising in progress, scores regulatory win. Bloomberg reports that black car-hailing service Uber is in the process of securing a financing round that will total hundreds of millions of dollars. The cash will be used to fund expansion into China, as well as continue entering other Asian markets. According to CEO Travis Kalanick, the cost of the service could become lower than the cost of owning a car in some Asian cities. The company will need extensive resources to navigate the regulations of various nations.

Fab.com will lay off European employees as it transitions away from flash sales. According to AllThingsD, online storefront Fab.com plans to lay off approximately 100 individuals at its Berlin headquarters, equaling about 15% of its 696 employees. 36 other people are being asked to transfer to the company’s New York City headquarters. The lay offs come in response to Fab’s transition away from flash sales and into a more sustainable business model with traditional online purchases and self-branded merchandise. According to CEO Jason Goldberg, the nature of the flash sales model necessitated redundant positions in the NYC and Berlin offices. As the company changes strategy, the duplicated positions will not be required. Currently, Fab is still hiring for more than 70 positions.

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Covered Companies Mentioned in this Report (priced intra-day August 5, 2013)

COMPANY TICKER RATING PRICE PRICE TARGET Google GOOG Neutral $903.44 $860.00 Facebook FB Outperform $38.98 $39.00 eBay EBAY Outperform $52.47 $51.00 Oracle ORCL Neutral $32.72 $34.00

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