Hortonworks, Big Data, and Big Money

So the Hadoop market has finally had its first IPO. Hortonworks’ successful $100 million IPO reflects pent-up demand for those outside the Silicon Valley venture community to get a piece of the action in the fast emerging Hadoop space. Excluding established BI/analytics players who extended their wares to support Hadoop, until now VCs had all the fun. Significantly, Hortonworks and New Relic both conducted successful IPOs that saw share prices surging 40% on the same day that the Dow otherwise went south.

This all comes during a period where there’s been an unquestioned surge in Big Data, and technology investments in general. Before the IPO, all three Hadoop pure plays raised nearly $1 billion in venture funding during this calendar year, and add to that about another $300 million for NoSQL players MongoDB, DataStax, and Couchbase (if you start the clock last fall). In retrospect, what’s interesting about the Hortonworks IPO is not the size, because at $100 million, it’s dwarfed by previous rounds of venture financing.

From our seat way back in the peanut gallery, it appears that Hortonworks IPO was about making a statement that the loss-driven vendor’s business – and Hadoop as a whole – is becoming investment-grade. And we believe it was about getting first in line while the iron was still hot.

This is very much a greenfield market, as almost all sales are new, with few being competitive replacements. It is a high growth market; Hortonworks alone reported YoY tripling of 3x in subscription sales as of the end of Q3 2014. That drops a broad hint on prospective growth: With the overall Hadoop paid installed base (all vendors) at 1000 – 1500 (depending on whether you count paid sandboxes in the cloud), there’s still a lot of virgin market out there. But the flipside of this is the heavy investment, both in product development and building a global go-to-market network from scratch. Looking at the Hortonworks S-1, those two areas gobbled up most of the reported $80 million losses for the first three quarters of this calendar (and fiscal) year.

We don’t expect that Hadoop pure plays (or at least those that haven’t been acquired) will be profitable for at least another 2 – 3 years.

As we’ve noted before, we’re bullish on Hadoop as a pillar of the data platform market in the short run, where we expect sales to grow geometrically, and in the long run, where it joins SQL, NoSQL, and real-time streaming platforms as part of the data ecosystem that enterprises are expected to manage. But we’re concerned over the midterm, where the expectations of capital collide with the realities of greenfield markets. There is growth, but also start-up expense.

Hortonworks’ numbers have been well-known ever since the filing of the S-1 back last month. Admittedly, it is not unusual for high growth companies to IPO while still in the red. But Hortonworks is not the hottest company in its field, but one of three hot companies. They happened to be the one that IPO’d first. Nonetheless, there were several red flags:
* The revenue base is too narrow, being concentrated in its top three customers. Admittedly, the revenue base is getting more diversified, but even this year, the top three customers still accounted for over a third of business.
* The business is too low margin, with over 40% of sales coming from professional services (subscriptions are more profitable and for a product company, a more reliable growth indicator).

Hortonworks states that gross billings is a more reliable trending indicator of their business, as it recognizes revenues that subscription-based accounting normally defers; with that added in, its business the first three quarters of this year is roughly 25% higher. And as of the end of Q3 2014, it is reporting $47.7 million deferred revenue + $17.3 million backlog.

While we’re happy that Hadoop has finally made it to NASDAQ and congratulate Hortonworks for its strong first day showing, our wish is that the company had deferred this offering by another 6 – 12 months to show a more diversified business.