Hadoop technology distributor Hortonworks (NASDAQ:HDP) had a positive earnings report this month, sending the stock up roughly 25% since its Aug. 3 release. The company operates as one of only a few Hadoop distributors, and is thus well-positioned in the fast-growing industries of big data processing and open-source software.
Revenue came in at $61.8 million, up a strong 41.7% year over year and $4.2 million above analyst estimates, while non-GAAP net losses came in at $0.44, beating expectations by $0.05. While those losses may seem large, Hortonworks is investing heavily to embed its technology in large enterprises' data science architectures going forward. As the revenue number shows, that is a potentially exciting area. Here are some highlights from the recent earnings report and conference call with analysts that show what Hortonworks' management wants investors to know about the quarter and its future.
Big IBM deal signed
Hortonworks signed a landmark deal with IBM (NYSE:IBM) in the quarter. As part of the deal, IBM will sell Hortonworks Data Platform (HDP) and Hortonworks DataFlow (HDF) as the architecture underneath IBM's Data Science Experience and Big SQL applications, and Hortonworks' sales force will resell those IBM applications as its de facto data science platforms to its customers.
During the conference call, CEO Robert Bearden said the IBM partnership "exemplifies yet another proof point that HDP has become the leading big data platform."
This is a big deal, as it both narrows the competition (by eliminating IBM's efforts at its own Hadoop distribution) and gives Hortonworks a powerful new partner. Management was particularly excited about a new Apache application called Atlas that the two companies are working on around data governance. Given the increased focus on cybersecurity, that seems to be a promising new venture.
Moreover, the financial effects from the collaboration will not even be seen until 2018. That means this quarter's 42% growth did not include any real effect from the new partnership.
HDF catching on
Management also had positive things to say about Hortonworks DataFlow, a 2-year-old application for "data in motion," which is becoming especially relevant for the Internet of Things. HDF collects and processes purchase, sensor, and asset data in real time and feeds it into customers' "data lakes" or other streaming data applications.
This quarter, eight of the 10 largest deals inked by Hortonworks included HDF, along with its core HDP product (for "data at rest"). Management was optimistic on the prospects for new applications that could be driven by HDF capabilities, calling it a "huge game-changer." Bearden also claimed HDF is "the only end-to-end platform that collects, curates, analyzes and can process data in real time from the point of origin through its entire life cycle."
Management pointed to several use cases for HDF, including retail, manufacturing, insurance underwriting, and utilities. Real-time processing capability is becoming more essential than ever in today's general business climate, where speed and real-time decision-making is essential. That's why the company is spending so heavily to establish leadership.
Cash flow headed to breakeven
One of the potential drawbacks to Hortonworks is that it is still earnings- and cash-flow-negative, and its mere $72 million in cash (with an extra $30 million revolving credit facility) is low enough that there's a chance the company may have to raise excess capital at some point. This quarter, the company's non-GAAP net loss was $28.6 million, and its operating cash flow was a better-but-still-negative $11.7 million. These numbers showed improvement over last year's $41.5 million net loss and negative $14.1 million operating cash flow, but are still well in the red.
Management pointed out that even though sales grew over 40% and gross margins expanded, the company's operating expenses barely increased, from $68.6 million to $70.4 million, showing the operating leverage in the business model. Management also reiterated its guidance of being operating cash flow breakeven by the fourth quarter of 2017.
However, investors should remember that operating cash flow backs out stock-based compensation, which continues to be fairly high, and is a real expense. So while the company may become "cash flow breakeven" soon and may not have to raise additional money, shareholders will still continue to be diluted due to employee stock compensation.
Hortonworks delivered a strong quarter and seems to be carving out a good position as the Hadoop partner of choice for large enterprise companies such as IBM. As long as the company keeps its spending in check and continues to execute, the future seems bright.