I would not think it likely that the market will mature quite as rapidly as the author expects, or that HDP gets to a 25% spend ratio on SG&A in the next 2-3 years.
I was not clear when I talked about the two-year time frame. It was a thought experiment. The two-year growth is very visible, however, there is a much bigger runway of growth is available. The big data (Hadoop) addressable market is pegged at anywhere between 1T to 2T, of which in my opinion HDP can compete in about $10 to 20B. At the current run rate of losses if you project 5 years, while growth will be excellent, but we are projecting $1B losses. There is no cash flow in that growth to cover that. But the company is really in a very good long-term growth business.
HDP being a public company it has 4 choices in front of it.
One, Industry consolidation can help for sure, but there are only 3 viable players, how much more consolidation we are looking at? Two, continue to grow, incur losses and fund it through dilution, which I think is not viable given their current market cap, & valuation, note every company gets investor permission like Amazon. Third, taken out by a bigger company, who can leverage their existing sales infrastructure and reduce the costs significantly and make it profitable/ break-even immediately, while growing very fast. Lastly, HDP voluntarily slows down growth, where it can grow profitably.
The fourth model is what I described, it is a bit of a dream scenario. I do think HDP will slow growth enough to be able to fund the growth but not to the level that they want to get profitable right away. The more realistic scenario is someone acquires HDP and slashes its sales cost.
almost 80% of HDP’s revenues come from long term software-like agreements with customers
separately, this Q1, the company had 25% revenue through professional services vs 75% subscription revenue. Q4 it was 35%, and the last Q1 it was 33%. I still think Q1 doesn’t’ show the natural progression, rather a bit of anomaly. I haven’t looked into it, rather thought will visit that if the trend doesn’t reverse in the second quarter.
On the distinction without a difference, being 100% open-source has a value proposition but it is also very easy for the customer to move away. On the other hand, when you add 20% of proprietary software around 80% open source, you create stickiness. How much of value is debatable. But that is little more than “distinction without a difference”.
While SGA is going to be required for the growth, as their installed base grows, some amount of organic growth will start kicking in, i.e., existing accounts will grow, and this will require lot less SGA or in other words higher margin growth. I would model at least existing accounts growing 3 to 5% for next 5 years easy and depending on the accounts 10% growth is achievable. I think the real sweet spot is getting to $700 to $800M revenue rate where the company can get breakeven or some sort of adjusted profitability.