Hold Off On Hortonworks IPO

| About: Hortonworks (HDP)
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Hortonworks’ $78 million Nasdaq IPO is scheduled for this Friday, 12.12.2014. The firm will offer 6 million shares. Lead underwriters are Goldman Sachs, Credit Suisse, RBC Capital Markets.

Hortonworks is a primary support company to Apache Hadoop, an open source, big data platform. Revenue is generated exclusively by subscription and support fees.

Yahoo! and Benchmark Capital, who own 19.6% and 18.7% stakes, respectively; Hewlett-Packard also holds a ~5% stake.

Despite big-name supporters and customers, HDP's losses have increased. We suggest investors consider holding off on this IPO.

Hortonworks (NASDAQ:HDP), one of the primary support companies specializing in the "Apache Hadoop platform," is scheduled to IPO on Nasdaq this Friday, 12.12.2014, and plans to raise $78 million.

Hortonworks will offer 6M shares in the price range of $12-$14. If HDP prices at the midpoint of this range, the company will have a market capitalization of $538 million.

Lead underwriters: Goldman Sachs, Credit Suisse, RBC Capital Markets

Underwriters: Pacific Crest Securities, Wells Fargo Securities, Blackstone Capital Markets

HDP previously filed with the SEC in June 2014.

Company Overview: Supplying development and support services for the open source big data platform Apache Hadoop

Palo Alto, CA-based business software company Hortonworks supplies development and support services for the open source big data platform Apache Hadoop. Hortonworks was founded in 2011 by a private consortium, led by Yahoo! (YHOO) and Benchmark Capital, who own 19.6% and 18.7% stakes, respectively. Hewlett-Packard (NYSE:HPQ) also holds a 5.9% stake.

Hadoop is critical for big data processing as it distinguishes and distributes data for storage and processing into blocs, which are amongst the nodes in data clusters on commodity hardware. As a free, open source platform, companies such as Hortonworks supply support and service on a customized basis; new code often must be written to add to the existing code base. The vendor's business model determines how best to monetize the platform.

Microsoft, Yahoo!, and Teradata: Largest Customers, Stakeholders

The three largest Hortonworks customers are Microsoft (NASDAQ:MSFT), Yahoo! (YHOO), and Teradata (NYSE:TDC), who owns an 8.3% stake in Hortonworks as well. These three account for 37.4% of Hortonworks' sales, with Microsoft in the lead, presently accounting for 22.4% of sales (reduced from over 55% in 2013). The Microsoft contract is annually renewable and currently is set to expire in July 2015.

Increasing Sales, Increasing Losses

Hortonworks' reported the following figures in its balance sheet and statement of earnings, dated September 30, 2014.

Revenues: $33,388,000

Net Income (Loss): ($86,732,000)

Total Assets: $160,335,000

Total Stockholders' Equity (Deficit): ($167,322,000)

Hortonworks' posted revenue sales increases between the first 3 quarters of 2014 vs. last year, with $33.4 million, up from $16 million. However, losses increased as well: -$48 million jumped to -$86 million as of September 2014.

Conclusion: Consider Holding Off

Despite big-name customers and increasing revenues, Hortonworks' costs have also ballooned. As their primary obstacle to red ink is in keeping subscription revenues ahead of support personnel costs, the company is at the mercy of its service and support subscription base. Competitors have criticized the Hortonworks' business model as unsustainable, lacking proprietary software.

Decreasing Microsoft sales are also of concern.

With a strong underwriting team, the IPO could see an initial spike, but warning signs are already out for a bumpy ride.

We suggest investors consider holding off.

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.