Posted on Friday, Dec 18th 2015
Sometimes a good offering is not sustainable enough to maintain a Unicorn status. Palo Alto-based Hortonworks (Nasdaq: HDP) is one such example of a unicorn turning into a unicorpse* and then barely working its way back to its IPO valuation. The company is well known for its Hadoop offerings. But after being valued at over a billion dollars, it lost its stature last year. The company has managed to recover some lost ground, and is trading just shy of the billion dollar mark. Like I said earlier, the company needs to deliver with real performance, not just promise, at this point.
Hortonworks was set up with the mission of making Hadoop the technological foundation of the modern enterprise data architecture. The company relied on an advanced YARN technology to eliminate processing of data in silo sets and instead leveraging simultaneous processing of mixed workloads. It relies on the open source Hadoop framework for its platform. While Hortonworks’s core platform is available for free to users, it earns revenues by selling software support subscriptions and providing additional value-added services like training and consulting. This is the traditional commercial open source model.
Hortonworks has seen strong revenue growth so far. Revenues for the fiscal year 2014 grew 91% to $46 million with billings growing 134% to $87.1 million. But it continues to suffer losses. Net loss reduced from $63.1 per share in 2013 to $24.16 per share in 2014.
Till 2014, Hortonworks was venture funded with $248 million raised from investors including Vertex Venture Capital, Accel Partners, Texas Atlantic Capital, Hewlett-Packard, Tenaya Capital, Dragoneer Investment Group, Index Ventures, Benchmark, Yahoo!, and Passport Capital. It had achieved a billion dollar valuation back in July 2014 when it raised $50 million at a valuation of $1 billion. Prior to listing, Hortonworks’s investors were worried about its earnings and its valuation was slaughtered to nearly half at $592 million in the IPO filings. In December 2014, it raised $100 million by listing the stock on Nasdaq at a valuation of $1.1 billion.
Conditions appear to be improving for Hortonworks. For the recently reported quarter, revenues grew 159% to $33.1 million and beat market’s expectations of $30.7 million. Deferred revenue increased 89% to $90.1 million and gross billings grew 104% to $43.8 million. The company continues to report losses though. For the quarter, it reported a loss of $0.74 per share compared with the Street’s expectation of a loss of $0.83 per share.
By segment, support services revenues grew from $8.13 million last year to $21.74 million and professional services revenues grew from $4.63 million to $11.3 million.
Hortonworks expects to end the current quarter with revenues of $32 million-$34 million compared with the market’s expectation of $33.2 million.
Of late, Hortonworks has been growing through acquisitions and partnerships. In August this year, it announced the acquisition of Onyara, Inc., a key Apache NiFi contributor. Through the acquisition, Hortonworks’s customers will be able to automate and secure data flows and to collect, conduct, and curate real-time business insights and actions derived from data-in-motion. Hortonworks has already introduced Hortonworks DataFlow that utilizes Onyara’s technology.
Last quarter, Hortonworks also announced a partnership with ManTech and B23 to accelerate the development of an open-source cyber security analytic platform OpenSoc. OpenSoc will help in rapidly detecting and responding to advanced security threats.
Last month, Hortonworks’s valuation had crashed even further. The company’s stock was trading at a 52-week low of $15.75, translating to a valuation of $737 million. It has recovered significantly since and is currently trading at $21.81 with a market capitalization of $981 million. It had touched a 52-week high of $29.83 in January this year taking it to a valuation of $1.4 billion.
But despite the increase in stock price this month the underlying concerns about Hortonworks’s business model remain. Analysts are worried about the open-source nature of their platform and to cater to the market, Hortonworks offers its platform entirely for free. To turn in profits though, Hortonworks should look at Cloudera’s business model. Cloudera offers a hybrid open-source model where the basic platform is available for free, but premium products, add-on modules, support, and annual subscriptions are available for a premium price. As Cloudera’s management has rightly pointed out,
Over time enterprises will realize that a high-quality support offering has unique value and is worth a premium. In the pre-open-source software world this was clouded by inflated software licensing fees that subsidized support costs. As licensing fees now shrink, enterprises still need just as much vendor attention, including bugfixes and development of new features.
Payment for that needs to come from somewhere, and it will gradually shift from software licensing fees to support subscriptions. But that change won’t happen overnight and may never be total, so in the interim, it may be wise to adopt a hybrid strategy like Cloudera’s.
For now, Hortonworks relies on a subscription-based revenue model for its training and support. It earns 65% of its revenues this way. According to market reports, subscription-based support models are loss-making initially as customers require higher level of support in the earlier stages of implementation. Unfortunately, by the time the level of support needed reduces, most customers choose to back out of support services as well. If Hortonworks wants to ensure that it continues to stay above the billion dollar valuation mark and deliver a stock price that is rising, not falling, it will need to revisit its business model as the market will not get behind a continuously loss making enterprise.
OpenSource is great when funded by gobs of venture capital. In the public market, monetization matters, profits matter. Free is no longer looked upon with the same forgiving eyes as VCs would.
* The term Unicorpse was first coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.
This segment is a part in the series : Billion Dollar Unicorns
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