UPDATED 18:12 EDT / FEBRUARY 08 2018

BIG DATA

Hortonworks turns cash flow-positive as customers sign bigger deals, but investors balk

Updated:

Big-data company Hortonworks Inc. continues to make steady progress in its effort to convince skeptics — at least some of them — that a pure open-source business model can work in today’s software market.

The company today reported total revenue of $75 million in the fourth quarter of 2017, up 44 percent from a year ago. Total 2017 revenue rose 42 percent from 2016, to nearly $262 million.

More importantly for investors, the company logged its first operating cash flow in its history: $6.4 million. That means that, for the first time, Hortonworks isn’t burning shareholder investments.

However, investors on Friday knocked shares down by 9 percent on a choppy day for the overall market that eventually closed up about 1.4 percent. The swoon was on top of a 3 percent decline in Hortonworks’ shares Thursday on a day when the Dow Jones Industrial Average plummeted 4 percent, or more than 1,000 points.

The issue may be a less-than-certain forecast for operating cash flow for this year. In 2017, the company still used operating cash for the year, but the deficit fell more than 60 percent to just under $30 million from $82.4 million the previous year.

Executives said they expect the company to be operating cash flow-positive in 2018 and beyond. However, on the earnings call, Chief Financial Officer Scott Davidson sounded less than completely confident. “We’re just sort of driving for the goal to be positive for the year, without sort of a discrete number,” he said, citing investments the company wants to make to pursue more business. “Ideally, I think, Q1 will be positive, Q2 will then probably dip negative, Q3 and Q4 tends to be more flattish.”

Still, underlining its confidence, the company raised revenue guidance for the current quarter and full year. First-quarter revenues are now expected to come in at about $75 million, versus a consensus estimate of about $73 million. For the full year, the company forecasting revenue of between $322 million $327 million, with improvements in operating margins.

On the analysts call, executives appeared to deemphasize the company’s roots in the big-data management framework Hadoop and stress the more strategic nature of its new customer engagements. “We have evolved from the leading Hadoop provider focused on the big data market to the leading global data management platform company with over 1,300 customers throughout the world,” said Chief Executive Rob Bearden.

The company said it closed 20 deals of more than $1 million in the quarter, which is more than twice as many as last year. Average deal size of $207,000 was the largest of any quarter in 2017. Net expansion rate — an indication of additional spending by renewing customers — rose 122 percent over the trailing four-quarter period.

New platforms

Executives spent much of their time talking up the strategic value of the Hortonworks DataFlow streaming analytics platform — which just got a major upgrade — and the new Hortonworks DataPlane Service, a cloud offering for managing data in multiple “data lakes” and other data repositories.

“DataPlane accelerates HDP and HDF opportunities, and also some of our cloud revenue based on the hybrid architecture it enables,” Bearden said. “We are seeing significant interest in DPS for 2018 and beyond.”

Another factor that has yet to make much of an impact on the bottom line is the growing partnership with IBM Corp., under which Hortonworks became IBM’s preferred Hadoop distribution and a migration target for customers moving away from IBM’s Open Platform. “We spent much Q3 operationalizing that partnership and saw some benefit in the fourth quarter, but anticipate further benefit throughout 2018 and 2019,” Bearden said.

As the most prominent company trying to build a sustainable business on the back of a pure open-source business model, Hortonworks’ financial progress has been watched closely. To achieve its stated goal of becoming cash flow-positive on an ongoing basis, the company has chosen to deliberately forgo some opportunities, said Davidson.

“We’ve been driving for breakeven, in part, to prove that the 100 percent open-source model actually works and can be monetized,” he said. “We want to grow as fast as we can, but we still want to maintain the fiscal discipline we’ve shown.”

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