Hortonworks, the true HORROR!

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Hortonworks, the true HORROR!

Some posters have tried to deny to themselves just how bad the situation is with Hortonworks, the real HORROR.

Let’s start with some 2016 figures:
They recognized Revenue of $184.5 million.
They had GAAP losses of $251.7 million or $4.40 per share

Do you realize what that means? It means they spent $184.5 million PLUS $251.7 million!!!

So they recognized revenue of $184.5 million and SPENT $436.2 million!!!

Let’s say that their growth comes in WAY better than guidance, and they grow revenue at a little over 40% both this year and next, and double their revenue in two years. Let’s just say… That would be $369 million (so after two years, and after doubling, revenue still wouldn’t come close to covering THIS YEAR’s expenses).

And let’s say they have REMARKABLE expense restraint, and over the two years, while they are growing revenue by 100%, they only grow expenses by 60%! (Everyone would congratulate them if they did that).

Let’s see: $436.2 times 1.6, so in two years expenses will equal $697.6 million!!!

And we figured doubling revenue to $369 million two years from now. Their $698 million expenses, minus $369 million revenue, means they’d have $329 million losses two years from now.

So in two years their losses will grow about 31%, from the current $252 million to $329 million, even allowing for doubling revenue and reducing expenses as a percent of revenue by 40%. If either of those remarkable assumptions doesn’t come through they will lose even more.

Just as a reality check, in 2016 their revenue DID increase 51%, and their total loss DID grow by 40% from $179 million to $252 million. It didn’t go down even with that 51% increase in revenue.

Now that’s interesting: with a 40% growth in net loss, they only showed a 6% growth in loss per share (from $4.13 to $4.40, year over year). How can that be? Well they are hiding the magnitude of their loss per share by inflating their shares so much, so there is less growth in loss for each share!

How much are they inflating? Chris pointed out that they gave out $99 million in stock based compensation. That’s stock based comp for an astounding 54% of revenue! Fifty-four percent of revenue!!!

Now they can’t keep diluting the stock like that forever, but what happens if they stop diluting their shares so much by giving out so much stock based compensation? Think about it! With the same growth in net losses, and without dilution of shares, their growth in loss per share would be much larger than it is now…And if they paid their employees in dollars instead of diluting the stock, non-GAAP expenses would rise to meet GAAP expenses, and non-GAAP losses would rise at an even faster RATE than GAAP losses.

So they are trapped:
They can’t ever get even close to breakeven and GAAP losses will continue to rise to extraordinary levels.
They can’t continue to dilute like this, but they can’t stop either.

And now they have a management crisis and fired their head of sales, on top of already slowing growth.

Do you really want to stay in this stock?

Best,

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board

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(deletes HDP from watch list)

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(deletes HDP from watch list)

The only hope would be that they get acquired.

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The only hope would be that they get acquired

I have talked about the profitability issue and some scenarios of future HDP direction in this thread… http://discussion.fool.com/i-would-not-think-it-likely-that-the-…

“The more realistic scenario is someone acquires HDP and slashes its sales cost.”

I have noted at that time their SGA cost is too high and not sustainable, especially the bert article attributed their high operating cost to R&D incorrectly.

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And let’s say they have REMARKABLE expense restraint, and over the two years, while they are growing revenue by 100%, they only grow expenses by 60%! (Everyone would congratulate them if they did that).

I’m not so sure about that. Note that, while super high, total operating expense hasn’t grown in the last 5 quarters. Sure spending 110M/quarter is a lot when your revenue is 40M (back in Mar16). It’s even a lot now when revenue will be 60M. But if they double from here, to a quarterly revenue of 120M…suddenly they’re profitable.

That’s assuming they hold expenses where they are, and continue to grow rapidly, but I don’t think that’s impossible.

Bear

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They had GAAP losses of $251.7 million or $4.40 per share

You’re using GAAP now?

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You’re using GAAP now?

I don’t usually, but they are using soooooooo much SBC and sooooooo much dilution, that I felt I had to to make clear what was happening. Because that much dilution can’t continue, and reducing it will bring non-GAAP expenses and thus loss much more into line with GAAP. But, if you want non-GAAP, even after that massive SBC and dilution they still lost $2.48 per share. That’s fairly enormous.

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Saul,
Thanks for your thoughts on HDP. You have an amazing talent of getting out before big drops on your holdings. I figure that caution is warranted and so took profits today +1.30 and +.12 on my 2 buys.
I will watch how they report and reassess.

Rob

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Because that much dilution can’t continue…

Clearly you have not been paying attention to the DRYS saga.

OK, apples and oranges. But I could not help but think of DRYS when I read that.

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Hey Saul,

Long time lurker, first time poster here. Thanks for all you have done to help guys like me as we grow and figure this stuff out. I think I speak for many when I say I don’t think we can ever repay you, but maybe we can pay it forward like you have, and this board has been great for that.

My question is, it seems like you knew ALL of this months ago. You sold HDP in April, and Bert talked you back into it. None of the numbers you posted here should be shocking, it seems like everyone has known this stuff since before the IPO!

You even posted:

"However, HDP, is involved in Hadoop initiatives much deeper than anyone else, and they incur significant cost on that, but that is not recognized as “enterprise software” building because most of their work goes towards “open source”. While HDP model is slightly different from “enterprise software” companies, I think HDP margin’s can change dramatically. In the last Qtr HDP incurred $57m loss vs $54M revenue or 100% of revenue.

I think there is a land grab happening in Big data, “hadoop” world. So every player is investing or spending heavily on SGA. Once the market matures, say in a year or two, they should be able to cut off SGA significantly and it should come down to 20% to 25% of revenue.

Next R&D, which is about 50% of revenue, could scale down to 15% to 20%. So between SGA and R&D there are lot of levers for the company to pull and become profitable. But they will not be doing that for at least another 2 years. I expect in 2 years they could do $300 m in revenue and 20% operating margin. Depending on the dilution they could potentially make anywhere between 50 cents to $1. If they are profitable and $1 earnings and 10% revenue growth, is 15 to 20 x valuation too much? That is 50% to 100% from today’s share price. There are lot of risks here. But it is possible. Between their ability to grow revenue very fast and accumulated loss of $700 million, HDP has a floor underneath its share price."

You knew they had quarterly losses of 100% of revenue, but you still saw optimism! I get that you only want to hold so many positions, and there can be better places for your time and money…but have you really changed that much from what you wrote just 2 months ago? Do you no longer see a floor on the share price? It seems like the 4 scenarios Kingran posted in response to that are all still very much in play.

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My question is, it seems like you knew ALL of this months ago.

Hi Epictitus, Actually I knew it but I had never put it together the way Chris and I did in that discussion we had on the board. I think I relied too much on Bert’s enthusiasm, and I was lazy. For example, I knew they had a lot of stock based comp but people always complain about sbc in tech companies and I didn’t pay attention to how much of an outlier they are until Chris posted the facts. I knew they had dilution but I didn’t realize how much. I knew they were burning cash and had large losses but the stock was going up. I knew they had huge adjusted losses per share every quarter, but they seemed to be coming down. Well I sold out twice, but bought back in because Bert liked it so much, but I kept my position small. I was fooled by the deferred revenue, which in reality is just a drop in the bucket, compared with their losses. And I never really looked hard at all the numbers and how bad they really were, until they had this management shake-up and possible growth problem. Mea Culpa. As I said, I was lazy and never really put it together. When a company is growing fast, and has a lot of deferred revenue, but is selling at an extraordinarily low P/S ratio, there’s GOT to be some major reasons, but again, I was lazy. However, now I think, “Why would I want to be in a company that recognized revenue of $184.5 million and SPENT $436.2 million? Can I find another big data company, that also has subscription revenue which is recurring, that doesn’t look like this potential disaster? Of course I can.” Fortunately, anyone who was in it since I got in did quite well, so what more can I say.

Saul

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I knew they had a lot of stock based comp but people always complain about sbc in tech companies and I didn’t pay attention to how much of an outlier they are until Chris posted the facts. I knew they had dilution but I didn’t realize how much.

Thanks for your honest answer. I think sometimes we buy some and then dig in deeper later. Sometimes we realize that we shouldn’t have bought and sometimes we realize that the company deserves more of our investment dollars.

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As I said, I was lazy and never really put it together

You are quite frank with yourself.

This is a very interesting trait.

Might be a big part of your secret sauce.

Cheers
Qazulight

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Saul,

That took a lot of work. Have you ever considered publishing such thoughts on SA?

Seems like a good article just missing the opportunity for widest dissemination.

In fact, such a bearish article could cause market sentiment to wane for HDP. Are you now considering a short position?

Thanks,
Scott

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This is a very interesting trait.

Likewise, he acts on his conviction. Whether buying or selling, he makes up his mind and pulls the trigger. I like the courage of acting on one’s conviction.

Cheers to that!

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My question is, it seems like you knew ALL of this months ago.

To show that I wasn’t totally taken in and asleep at the switch, here’s an email I found that I had sent to Bert back on Dec 17, more than seven months ago.

Bert, …I took a starter position in Horton after reading your write-up. That pushed me to look more deeply at it. What am I missing??? I see that in each of the past three quarters their loss was greater than the year before. And, we’re not talking about a Shopify-like symbolic loss of 1% or 2% of revenue. For Horton the loss is of the same order of magnitude as revenue. That’s massive! And Horton isn’t growing nearly as fast as Shopify. How do you imagine Horton will reach break even within a year? Even with deferred revenue? And not need a cash raise? Granted I’m not really tech knowledgeable, but that sounds a bit overly optimistic to me. I really don’t understand how it will be possible. Sorry to be questioning your judgement on this but I’m puzzled.
Saul

At the time he reassured me about rapid growth in bookings and deferred revenue. Since the management shake-up he exited too.

Saul

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That took a lot of work. Have you ever considered publishing such thoughts on SA?

Hi Scott, If you put my name in on Seeking Alpha you’ll see that I wrote two articles back in 2012, long before I started this board. Not my thing. I prefer a board like this among friends.

Are you now considering a short position?

Are you kidding! I’d be scared out of my mind to short anything. Which is why I never have (and never will). The market can stay irrational much longer than I could stay solvent. And I’m well aware that I make mistakes at times, and a mistake in a short position would be suicide.

Saul

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Because that much dilution can’t continue…

Clearly you have not been paying attention to the DRYS saga.

Hi jHawker, You piqued my curiosity and I cast a glance at the company on Yahoo and see that the price per share has fallen from $50,000,000 in 2013 to $1.04 now. There must have been quite a saga of amazing dilution and splits. Do you want to tell us about it?
Saul

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This WSJ article sums it up well, I think:

https://www.wsj.com/articles/a-shipping-companys-bizarre-sto…

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You piqued my curiosity and I cast a glance at the company on Yahoo and see that the price per share has fallen from $50,000,000 in 2013 to $1.04 now

The stock was never really at $50K. That is more of a psuedo-valuation reflecting the reverse splits. But since there has been massive dilution, that valuation isn’t real either. The actual all-time high was about $125 a share in October 2007.

I do not know the whole story. There are many articles about it on SA. I have just started digging into it, myself.

Anyway, apparently the owner decided to raise capital by creating and selling stock. I think that the target was around $250 million. I think that a few ships have been purchased from some of this capital.

Of course, this dilution killed stock price. So the owner has been going through a series of reverse splits to prop the value back up. And then after each split, he sell more new shares. Recent reverse split history is as follows:

3/11/16 …25:1
8/15/16 …4:1
11/1/16 …15:1
1/23/17 …8:1
4/11/17 …4:1
5/11/17 …7:1
6/22/17 …5:1
7/21/17 …7:1

If you compound those reverse splits, it is pretty amazing. Through this he has raised a lot of capital and bought a few new ships, but destroyed massive amounts of value. There are a couple of other shipping companies playing this same game (TOPS).

People get pulled in thinking that each split is the last and the selling will stop and that the stock will bottom and then based on the book value and short squeezes (there is a huge short volume on DRYS) that it will rocket up beyond what was seen in the spike last November.

Many more details to this story than what I have indicated here. This is not even a Cliff notes version. But the amount of dilution is incredible. Interesting story. Pretty amazing what can be done in a supposedly legal manner. Shareholders have sued to try to stop the dilution, but have been unsuccessful.

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