Ticker HCP, scheduled for December 9
Assumed $70 share price with estimated net proceeds of $1.164B to Hashicorp.
Estimated 181M shares outstanding at IPO, fully diluted is about 188M
TTM revenue 286M
YoY growth of 50% in the last 9 months, so it is supposedly hypergrowth.
Hashicorp offers an open source software stack that enables organizations to automate cloud infrastructure.
I don’t know anything about tech, but it seems this Hashicorp stuff is widely used:
Users have downloaded their products 100 million times in fiscal 2021.
Approximately 11,500 organizations have downloaded at least one product since inception.
Hashicorp products have been downloaded by approximately 79% of the Fortune 500 as of October 31, 2021.
They have 222599 Github stars, rank 22. https://gitstar-ranking.com/organizations
Q: What is the need that this company fills?
A: There continues to be a ‘shift among corporations going from static on-premises infrastructure to a dynamic/distributed cloud infrastructure’. Apparently, ‘existing procedures to manage this infrastructure and shift to cloud is inconsistent/inefficient with linear ticket driven workflows.’ Development teams often have to ‘file tickets against many different internal teams to provision infrastructure, request credentials to systems, update networks, and deploy their applications. This results in significant friction across these teams, increases costs and risks, and reduces productivity.’
‘Hashicorp’s products aim to connect, secure, and run applications/infrastructure across multiple public/private clouds: Zero Trust architecture, fully automated networking that is application oriented, rather than host oriented.
Hashicorp provides a single, comprehensive, integrated portfolio of products that spans all critical components of cloud infrastructure automation instead of a fragmented environment with dozens of vendors targeting application platforms.’
Hashicorp is platform agnostic. More than 75% of organizations are using a multi-cloud adoption model, and Hashicorp has been recognized as a partner of the year by Microsoft and Google; they accelerate cloud adoption by “creating a consistent set of workflows across private data centers and the public cloud, enabling rapid cloud migration.”
My two questions to the techies on this board:
1. Does all this stuff above mean that, once adopted, Hashicorp is ‘mission critical’ to its customers?
2. If adopted by customers, will Hashicorp products typically be used by its customers for a long time (at least several years)?
Moving on: This company is not truly founder led.
The company was founded in 2012. It was founded by Mitchell Hashimoto and Armon Dadgar. Armon Dadgar serves as the CTO currently.
However, Mitchell Hashimoto resigned from the board of directors earlier this year in July 2021. The CEO has been David McJannet since Dec 2015. This CEO doesn’t have a very impressive background to my untrained-non-tech-world eyes. Before joining Hashicorp, he was just an executive at a venture capital firm…in any case, commercialization of its products began in 2016, literally the very second that this venture capital guy joined as CEO.
Combined TAM for their four primary products (named Terraform, Vault, Consul, Nomad): $41.7B in 2021, estimated to become $72.5B by end of 2026.
GO TO MARKET STRATEGY
“open core, self service, direct sales, partner ecosystem”
As they are open source, it’s noted that “all contributors are required to sign a contributor license agreement that grants HashiCorp exclusive license to distribute any accepted contribution commercially.”
They first allow potential customers to ‘self’ adopt (self serve and open source. Allows Hashicorp to identify initial use cases).
Next they land (sales teams will target and sign customers for subscription contracts to gain access to more product features/support).
Then they expand (upsell/encourage increase usage) and extend (Cross sell additional products).
The average DNBRR in the last twelve months is >120% which might reflect some success in this.
They target large enterprise customers. Customers with $100,000 or greater ARR represented 82% and 87% of revenue for the nine months ended October 31, 2020 and 2021, respectively.
Maybe a network effect: they had over 1,700 providers and integrations and more than 800 partners, including over 190 independent software vendors, as of October 31, 2021
And, as of October 31, 2021, over 44% of customers with $100,000 or greater ARR were licensing more than one product.
Throughout the S1, they try to emphasize that they are in ‘early stages’ of growth.
HOW THEY MAKE MONEY
They make money through subscription revenue, usage based pricing, and one time fees.
1.) Subscription revenue from licensing and product usage (primarily the Terraform and Vault products, which currently comprise 85% of revenue)
2.) Hashicorp also earns money through consumption based revenue on their Hashicorp Cloud Platform (HCP).
This HCP was released in 2019.
This HCP is available on all leading cloud providers and ‘represents a significant growth opportunity for our business, particularly as an increasing number of our customers are looking for a fully managed offering.’ As of 10/31/21, it comprises 6.7% of revenue.
3.) ‘professional services’ revenue. This is a fixed fee basis service that self serve customers can purchase to help training and speed up deployment of Hashicorp products.
Why is license revenue decreasing QoQ at times???
There is clearly some kind of seasonality/crazy fluctuation in growth for some quarters.
There is definitely deceleration of YoY growth in licensing, support, and professional revenue. (Overall revenue growth rate is falling from 75% in FY20-FY21 to 50% for FY21-FY22)
Cloud revenue is accelerating, although from a VERY tiny base.
Gross margins of cloud revenue is terrible. Notably, the S1 states that “during the 12 months ended January 31, 2021, there was a negative margin on cloud-hosted services due to investment in headcount to grow HCP.”
Strong DNBRR >120% with robust growth of TOTAL customers…but the growth rate of ARR >$100K customers is decelerating!
Not typed in my spreadsheet, but also to note is GAAP operating margin has been getting worse over the last 3 quarters: -12%, -23%, -33%
OTHER THINGS I DON’T LIKE
1.) The S1 states that business has been highly seasonal, “with the highest percentage of our sales occurring in our fiscal fourth quarter due to increased buying patterns of our enterprise customers prior to the end of the year and a lower percentage of our sales in our second fiscal quarter due to the summer vacation slowdown that impacts many of our customers. We expect these seasonal trends to continue.” Well I’m not so sure about what they say with 4th vs 2nd quarter …because just looking at the revenue stream growth QoQ it’s all over the freaking map from any quarter in any year!
2.) So they noted that the pandemic last year had negatively impacted their operations, even though they were a remote-first company at founding in 2012! They say the pandemic “negatively impacted in-person conferences, the length and variability of our sales cycles, the rate of sales to new customers, our international operations, and the hiring and onboarding of new employees across the organization.”
But, the pandemic also led to existing and potential customers accelerating transitions to the cloud…right?
In any case, the net result I’m seeing is that growth rates across the board in 2021 are decelerating intensely from 2020, with the exception of the Hashicorp Cloud Platform revenue.
3.) How much can large enterprises spend on this kind of stuff?
THere is no mention of customers with >$1 million ARR anywhere in the S1. Is this because Hashicorp is too early stage in growth, or because almost no one spends that much money for cloud adoption processes?
4.) As cloud becomes a larger portion of revenue, the overall gross margin profile will become lower, due to their lower gross margin on cloud-hosted services. And they explicitly state in the S1 they hope cloud grows faster so it can boost their growth…(From S1: “We believe HCP represents a significant growth opportunity for our business. We expect HCP to continue to grow and represent an increasing percentage of our total revenue over time”)
5.) Valuation. If this prices at $70/share and $13B market cap, that’s TTM P/S ratio of 45 and NTM P/S ratio of 39 (at annual revenue run rate of 328M).
6.) Stock will likely be very volatile.
Estimated 181M shares outstanding at IPO, fully diluted is about 188M
The S1 indicates that existing 5% holders (venture capital folks) will own 59.4% of shares outstanding at IPO.
Executive officers and directors will own 30.6% of shares outstanding at IPO.
Existing stockholders will own 92.5% of all shares and new investors who buy in will own 7.5%…WOW! that is going to be an incredibly low float. I bet it will be a very volatile stock pre-lockup and during lockup expiry.
7.) Open source software, so any competitor can design their own competing product with less overhead/lead time that Hashicorp had to already endure.
Their current competition, from S1:
Internal IT teams sometimes attempt to “do it themselves” using open-source software.
For companies that adopt single cloud solution (however, more than 75% of organizations are using a multi-cloud adoption model), in-house offerings by AWS, GCP, Azure and legacy point product providers (Red hat, Cyberark, VMware, IBM). They compete also with open source Google Istio.
Question to tech folks: is Hashicorp an ‘undisputed leader’ or some kind of disruptor in what they’re doing for cloud adoption? Is it a greenfield opportunity? Or are these listed competitors already dominant in the market?
I’m not putting this stock in my portfolio.
Despite a strong DBNRR >120%, I’m seeing decelerating YoY growth rates, complicating multiple revenue streams, crazy fluctuating seasonality, low gross margins that are changing all the time for the cloud revenue product (which they are relying on to juice growth), no sign that enterprise customers can reliably spend a lot (no metric on customers with >$1M ARR), not founder led, and worsening operating margins (GAAP).