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When Hadoop purveyor Hortonworks (HDP) filed a registration statement with the US Securities and Exchange Commission for a $100 million secondary stock offering last month, jaws dropped.
Though the move wasn’t altogether unexpected, the timing and the urgency surrounding it seemed suspicious. It spooked Wall Street and prompted a sell-off.
“We believe it will be incumbent on HDP during its roadshow to show why this offering, announced in this way, at this time should not be interpreted as evidence of serious difficulty," Richard Kugele, senior analyst at Needham & Co wrote in a research note at the time.
And while Santa Clara, Calif.-based Hortonworks might have liked to respond to Kugele and others immediately — to point out that it ended 2015 with $96.9 million in cash and investments on its balance sheet, that its growth measured in the triple digits, percentage-wise, and that it was managing its spending — it couldn’t because it hadn't yet reported on 2015 or set expectations for 2016.
That changed after the closing bell rang on NASDAQ yesterday afternoon.
Let the Numbers Tell the Story
Hortonworks CEO Rob Bearden told analysts, investors and anyone else tuning in to the company’s earnings call that its subscription support revenue rose 196 percent in Q4 2015 vs. Q4 2014 — a growth rate that few companies, regardless of industry, can make. Bearden also reported Hortonworks had doubled its customer base from 400 to 800 in the same period and that more than half of the Fortune 500 now use HDP.
Not bad for a company that isn’t yet five years old.
In other words, Hortonworks wasn’t running out of cash as some had speculated. Instead it saw how volatile the market was getting and wanted to raise extra funding before conditions got worse. They had an ambitious business plan to execute on, after all.
“You can’t predict global markets and Wall Street likes you to have cash on your balance sheet,” Shaun Connolly, vice president of corporate strategy, Hortonworks, told CMSWire. (It’s worth noting that conditions in global markets and in the tech world, specifically, have gotten worse — data sweethearts like Tableau and LinkedIn have lost around half of their value in the past 10 days.)
And while some critics might suggest that Hortonworks simply spend less money, now is the time to win the market, said Connolly. “We’re growing even faster than we initially forecasted and we’re bringing on new customers at a rapid pace.”
Hortonworks' market opportunity has grown substantially since the time of the IPO as well. Consider that late last year it brought an entirely new line of business to market, Hortonworks DataFlow (HDF), which grew from last summer’s acquisition of Onyara, an Internet of Everything play.
With it, Hortonworks not only gained an entirely new revenue stream, but it also now has the only 100 percent open solution for managing databases inside and outside the datacenter. HDP is for data at rest, HDF is for data in motion.
Business Model is Working
While Hortonworks competitors MapR and Cloudera, who sell (at least some) proprietary software and/or even patent their products, argue that a 100 percent open source business model isn’t commercially viable in the big data space (or at anywhere other than at Red Hat, for that matter), Hortonworks begs to differ.
“We are fully convinced that our model works, we are showing that it works. We are consistently over-achieving against plan,” Connolly told CMSWire.
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While we’ve already covered Hortonworks’ revenue and customer growth, the earnings report also revealed that its spending a lot to win business. Its net loss for the fourth quarter was $50.2 million, which is less than the net loss for the same period a year ago of $90.6 million.
The company is, however, growing its footprint once it lands. Hortonworks net expansion rate grew 159 percent in 2015, meaning that for each dollar customers were spending last year, the same customers are now spending $1.59.
But, perhaps, the most noteworthy part of yesterday’s earnings call, or at least what seems to have excited traders the most, was Bearden's statement about when the company would begin to break even, “But make no mistake, we’re manically focused on achieving adjusted EBITDA breakeven and anticipate doing so by the end of 2016.”
Not Just the Money
While that will be an important financial milestone for Hortonworks and the Hadoop marketplace, it might prove even more profound to the open source community in which Hortonworks is deeply invested (note that it employs 200 Apache committers).
“Open source is powering the age of data. The era of closed and proprietary is dead,” said Connolly.
And while Connolly won’t point to competitors who started out as open source zealots and then flipped the switch because they no longer believed in the commercial viability of that model, he did offer this, “You can’t just hop into a DeLorean and go back to the future,” he said.
In fact, EMC spinoff Pivotal had to learn the hard way that proprietary software is near-impossible to sell to companies who are transforming their businesses around data.
Public Too Soon?
Companies who are executing for rapid growth and burning cash to win headcount, usually do so in the privacy of the pre-IPO stage. Does Hortonworks wish the world didn’t know that it was spending more money that it earns at this stage (Hortonworks reported a net loss of $179.1 million on revenue of $121.9 million for 2015)?
Connolly said “no” when we asked him that question. “We’re open, we’re public and we’re proud.”
That means Hortonworks customers and partners get to see exactly what they’re buying, who they are doing business with and their every move. For the team at Hortonworks, it means dealing with whatever comes at them, under the spotlight, where everyone can see.
