Hortonworks Investors Can Breathe a Sigh of Relief, for Now

Hortonworks (NASDAQ: HDP) shareholders had a lot to smile about in 2017, with the stock up a staggering 142%. The Hadoop and big-data specialist reported another great quarter on its recent earnings release, with revenue growing 44% year over year, and deferred revenue -- an important metric for subscription-based companies -- growing 48%. The company's net expansion rate, which is how much existing customers spent this year versus last year, came in at a solid 122%. The company also signed bigger deals, with 20 new deals over $1 million this quarter, compared with nine such deals in the year-ago quarter.

While all of these were positive, one number, in particular, stood out that had me, as a shareholder, breathing a sigh of relief.

Cash is king

This was the first quarter in which the company generated positive operating cash flow, which is very important for Hortonworks for two reasons.

One, Hortonworks, like competitor Cloudera (NYSE: CLDR), is chasing what management believes to be a $49 billion market in big-data services. It's why both are spending large sums on sales and support to acquire customers, show them how to use their open-source solutions, and keep them happy. So both companies still generate huge losses, but back those numbers up with strong revenue growth.

But while Cloudera is still flush with cash from its initial public offering in 2017, Hortonworks had only $72.5 million left in cash and short-term investments on its balance sheet, which seems like a lot, but really isn't when you are burning through cash every quarter. Therefore, it was a relief to see the company generate over $6 million in operating cash flow in the fourth quarter, and guide for positive operating cash flow for the full year 2018. Management said:

The second reason this milestone is important is that management had guided to positive operating cash flow throughout 2017, so it was great to see the company achieve the target on schedule. In contrast with some management teams that continually adjust their previous views, this gave Hortonworks' team credibility, which is important when assessing a young growth company.

But risks remain

Despite the very positive fourth quarter and positive cash flow, Hortonworks' stock sold off almost 9% the day after the release. That may be due to a few things.

Firstly, Hortonworks' stock had gone up a lot over the past year, so the market was expecting good results. Secondly, management's full-year 2018 guidance was for only 25% revenue growth, a big step down from this year's 42%. That guidance was partly affected by an accounting rule change for subscription companies (which is too boring to discuss here). But even with the adjustment, the growth guidance amounted to around 30%, which would still mark a deceleration. Still, it should be noted that the company handily beat its 2017 guidance it issued this time last year ($261.8 million vs. initial guidance of $235 million to $240 million).

Third, the company makes significant operating losses because, like a lot of tech companies, it has significant stock-based compensation costs. So even though the company predicts positive operating cash flow, that's very different from unadjusted GAAP earnings. On that front, management predicts 2018 operating margins of negative 52% to negative 48%. That's an improvement over last quarter's negative 61%, but still leaves doubters plenty of reason to be skeptical on future profitability.

I'm an optimist

Despite the drop in shares, I'm positive for the moment on Hortonworks. It's riskier than other companies that, you know, generate profits, but as one of only four major Hadoop distributors, it should be able to capture its share of this large and growing market, and last quarter showed a continuation of that positive trend.

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Billy Duberstein owns shares of Hortonworks. The Motley Fool has a disclosure policy.