Last week, many observers were surprised when Hortonworks’ S-1 for an initial public offering (IPO) was filed. And there are good reasons to be surprised. Why now? CEO Rob Bearden told VentureWire not long ago that he expected to exit 2014 “at a strong $100 million run rate” in preparation for a 2015 IPO. What changed? Perhaps one answer to that question might be answered by asking another question: for whom?
Is the filing is for Hortonworks to help with cash? That is not obvious. The filing is listed as being for an offering of $100M. In the context of other fundraising activities by Hadoop vendors – with Cloudera’s $900M or so of a few months ago at the top of the list – it will hardly create a war chest suitable for out-expanding its competitors aggressively. And there are cheaper and easier ways to raise $100M in Silicon Valley than an IPO.
In fact, a look at the numbers – now public for the first time because of the filing – makes it all the more puzzling. Hortonworks’ $33.4 million in revenue for the nine months ending Sept. 30 was up sharply from last year, only its second full year since HDP went GA in June 2012. Revenue for the last quarter was $12M. It was barely up over the prior quarter (also $12M), so things are actually a bit flat. But expenses are several times that – $29M and $41M respectively, so the gap is widening. Put another way, losses are growing faster than revenues are, at an accelerating rate. That $100M, plus the $111M the company has in cash now, gives it a year or two’s worth of runway to improve matters. Presumably, that’s the bet. But why only $100M if it seems possible that more could be available?
Is it for Hortonworks’ investors? Let’s see who they are. Here’s a table of their stakes (a table stakes stakes table, if you will):
Benchmark and Index are successful funds, and it’s unlikely they are in a hurry to cash in on their investment. Yahoo might care, but urgency seems unlikely, particularly after the Alibaba windfall. There is little reason to think HP is driving this. Teradata? OK, if they were betting on Hortonworks as the key element in their big data strategy, maybe they have decided to hedge, but it’s hard to imagine they really feel the need to worry about this – and they’ve already hedged by announcing a new partnership with Cloudera. They have a fair number of joint customers with MapR as well, so one can’t rule then out as a future partner too. Teradata’s role here is not likely to be the motivating factor.
Personal gain? Doubtful. The stakes owned by Hortonworks’ CEO and President are nice and will certainly help them – but there is no obvious reason for them to have accelerated this for their own gain, even if they could do so.
Is it to help build the market for Hadoop? This seems to have been the party line on general motivation till now. But they are one vendor among several, some truly megavendors and some similar in size – and evidently in prospects – for the near term. They are major contributors to the open source code in the Apache stack and driving substantial innovation. Being able to keep paying engineers (R&D is 28% of expenses, and has doubled over the past year) is a good use of funds – and $100M will fund a couple of years at the current run rate, which one might expect to level off a bit. But it won’t be the only use of funds: sales and marketing is 48%, and more is better. Still, let’s face it, because of Hortonworks’ business model, everything they build is Apache open source code. Their R&D spend enables their competitors too. It won’t separate them quickly and dramatically from the pack any better to have much more spending on either or both.
It’s been 10 years since the first Google paper on MapReduce. Hortonworks will be the first new public company descending from that and they want HDP as symbol. They were formed 3 years after Cloudera, so they can at least grab the Hadoop label for themselves. But with an open source stack, value is likely to be determined by how well the company is seen to run, how many customers it has, how likely the revenue of the company is to track growth in Hadoop usage at those and at new customer sites, etc. Hortonworks’ business is services and support. Nether is particularly high margin. Nor is it clear how customer spending on either or both will scale with their Hadoop usage.
Hortonworks’ 3 largest customers (Yahoo, Teradata, and Microsoft) account for 37.4% of its revenue – and two are investors. The biggest is Microsoft, at 22.4% now – it was 55.3% for the year ended April 30, 2013. That sort of concentration never makes investors too happy, and though it is declining it’s still sizable. The Microsoft deal, like all others, is renewable – it expires in July 2015. And like Teradata, Microsoft has added other partnerships to what was an exclusive with Hortonworks till recently. Is the possible “window” closing a reason to accelerate the IPO? According to Fortune magazine, to actually list in the 2014 calendar year, this was basically the last week for Hortonworks to make the S-1 public (due to a combination of holidays and regulatory waiting periods).
Ultimately, it’s unlikely that Hortonworks will be alone as a public company for long. MapR told the Wall Street Journal they want to IPO next year, and they claim to have more customers, high margins and “efficient cash management.” Cloudera says they “are not ready yet” though they have lower rate of losses, and also claim more customers. At the end of the day, the answer may be rather simple. And again, answering a question with a question: if not now, when? There may not be a better time.