S-1/A 1 d748349ds1a.htm AMENDMENT NO. 1 TO FORM S-1 Prepared by R.R. Donnelley Financial -- Amendment No. 1 to Form S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on December 1, 2014.

Registration No. 333-200044

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Hortonworks, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   37-1634325

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3460 W. Bayshore Road

Palo Alto, California 94303

408.916.4121

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Robert Bearden

Chief Executive Officer

Hortonworks, Inc.

3460 W. Bayshore Road

Palo Alto, California 94303

408.916.4121

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Craig M. Schmitz, Esq.

Richard A. Kline, Esq.

Bradley C. Weber, Esq.

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, California 94025

650.752.3100

 

David M. Howard, Esq.

Vice President, Legal

Hortonworks, Inc.

3460 W. Bayshore Road

Palo Alto, California 94303

650.388.9775

 

John L. Savva, Esq.

Sullivan & Cromwell LLP

1870 Embarcadero Road

Palo Alto, California 94303

650.461.5600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨      Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities

to be Registered

 

Amount to be

Registered(1)

 

Proposed

Maximum

Aggregate

Offering Price

per Share(2)

 

Proposed

Maximum

Aggregate
Offering Price(2)

  Amount of
Registration Fee(3)

Common Stock, $0.0001 par value per share

 

6,900,000

  $14.00  

$96,600,000

  $11,225

 

 

(1) Includes 900,000 shares of common stock that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended. Includes offering price of additional shares that the underwriters have the option to purchase.
(3) The registrant previously paid a $11,620 registration fee with the initial filing of this registration statement.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated December 1, 2014.

            Shares

LOGO

Hortonworks, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Hortonworks, Inc. All of the 6,000,000 shares of common stock are being sold by the company.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00. Hortonworks has applied to list the common stock on the NASDAQ Global Select Market under the symbol “HDP.”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, we may elect to comply with certain reduced public company reporting requirements in future reports after the completion of this offering.

Passport Capital, LLC, an affiliate of existing stockholders of Hortonworks, has entered into a stock purchase agreement with us pursuant to which funds affiliated with Passport will purchase 486,486 shares of our common stock at a price per share equal to the initial public offering price in a private placement to close immediately subsequent to the closing of this offering.

 

 

See “Risk Factors” on page 15 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $                    $                

Proceeds, before expenses, to Hortonworks

   $                    $                

 

(1) See “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than 6,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 900,000 shares from Hortonworks at the initial price to the public less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2014.

 

Goldman, Sachs & Co.   Credit Suisse   RBC Capital Markets
Pacific Crest Securities   Wells Fargo Securities   Blackstone Capital Markets

 

 

Prospectus dated                     , 2014.


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LOGO

Hortonworks®

Enabling the Data-First Enterprise


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     15   

Special Note Regarding Forward-Looking Statements

     39   

Industry and Market Data

     41   

Use of Proceeds

     41   

Dividend Policy

     42   

Capitalization

     43   

Dilution

     46   

Selected Consolidated Financial Data

     49   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52   

Business

     74   

Management

     92   

Executive Compensation

     100   

Certain Relationships and Related Party Transactions

     112   

Principal Stockholders

     120   

Description of Capital Stock

     123   

Shares Eligible for Future Sale

     130   

Certain Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     134   

Underwriting

     138   

Validity of Common Stock

     143   

Experts

     143   

Additional Information

     143   

Index to Consolidated Financial Statements

     F-1   

 

 

Neither we nor any of the underwriters have authorized anyone to provide any information or to make any representations other than as contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and provide no assurance as to the reliability of, any information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms “Hortonworks,” “the company,” “we,” “us” and “our” in this prospectus refer to Hortonworks, Inc. and its consolidated subsidiaries.

Overview

Our mission is to establish Hadoop as the foundational technology of the modern enterprise data architecture.

We seek to advance the market adoption of Hadoop and provide enterprises with a new data management solution that enables them to harness the power of big data to transform their businesses through more effective and efficient management of their valuable data assets. A Hadoop cluster combines commodity servers with local storage and an open source software distribution to create a reliable distributed compute and storage platform for large data sets scalable up to petabytes, or PBs, with thousands of servers or nodes.

Our solution is an enterprise-grade data management platform built on a unique distribution of Apache Hadoop and powered by YARN, the next generation computing and resource management framework. We continuously drive innovation in the Apache community with a mission to further Hadoop’s development for enterprises of all types and sizes. Our platform deeply integrates with key data center technologies to support best-of-breed data architectures and enables our customers to collect, store, process and analyze increasing amounts of existing and new data types in a way that augments rather than replaces their existing data center infrastructure.

We employ a differentiated approach in that we are committed to serving the Apache Software Foundation open source ecosystem and to sharing all of our product developments with the open source community. We support the community for open source Hadoop, and employ a large number of core committers to the various Enterprise Grade Hadoop projects. We believe that keeping our business model free from architecture design conflicts that could limit the ultimate success of our customers in leveraging the benefits of Hadoop at scale is a significant competitive advantage. We are recognized as a leader in Hadoop by Forrester Research based on the strengths of our current offering and our strategy.

We were founded in 2011, and during 2012 we launched our Enterprise Grade Hadoop platform, the Hortonworks Data Platform for which we provide support subscriptions and professional services. As of September 30, 2014, we had 233 support subscription customers (which we generally define as an entity with an active support subscription) and 292 total customers, including professional services customers, across a broad array of company sizes and industries. We have entered into contracts to establish strategic relationships with Hewlett-Packard Company, Microsoft Corporation, Rackspace Hosting, Inc., Red Hat, Inc., SAP AG, Teradata Corporation and Yahoo! Inc. focused on tightly integrated development, marketing and support strategies to maximize the success of our solutions. Consistent with our open source approach, we generally make the Hortonworks Data Platform available free of charge and derive the predominant amount of our revenue from customer fees from support subscription offerings and professional services.

 

 

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We have achieved significant growth in recent periods. For the years ended April 30, 2012 and 2013, our revenue was $1.6 million and $11.0 million, respectively. Effective May 1, 2013, we changed our fiscal year end from April 30 to December 31. For the eight months ended December 31, 2012 and 2013, our revenue was $4.8 million and $17.9 million, respectively. For the nine months ended September 30, 2013 and 2014, our revenue was $15.9 million and $33.4 million, respectively. For the twelve months ended September 30, 2014, our revenue was $41.5 million. For the years ended April 30, 2012 and 2013, our gross billings were $11.8 million and $17.6 million, respectively. For the eight months ended December 31, 2012 and 2013, our gross billings were $9.7 million and $29.1 million, respectively. For the nine months ended September 30, 2013 and 2014, our gross billings were $24.4 million and $53.2 million, respectively. For the twelve months ended September 30, 2014, our gross billings were $65.7 million. We experienced net losses of $11.5 million and $36.6 million for the years ended April 30, 2012 and 2013, respectively, $19.7 million and $46.2 million for the eight months ended December 31, 2012 and 2013, respectively, $48.4 million and $86.7 million for the nine months ended September 30, 2013 and 2014, respectively, and $101.5 million for the twelve months ended September 30, 2014. See “Selected Consolidated Financial Data—Key Metric – Gross Billings” for more information and a reconciliation of gross billings to total revenue, the most directly comparable GAAP financial measure, and an explanation of why management uses this non-GAAP financial measure.

Industry Background

Major technology innovations such as social media, mobile and cloud computing, new web-based applications, such as Software-as-a-Service, or SaaS, and the Internet of Things, in which devices with sensors and actuators transmit increasing amounts of data automatically, have created an always-on, constantly connected society that is putting increasing pressure on enterprise data center infrastructure. The increase in volume, velocity and variety of data is creating significant challenges to enterprise data management resources and is disrupting the way enterprises design their data infrastructure.

Enterprises are not only inundated with increasing amounts of data but also struggle with managing more types of data that are less easily managed by traditional data center architectures. Historically, enterprises focused primarily on managing data from dedicated and disparate data center systems and were able to utilize relational database management systems optimized for analyzing preselected, structured data stored within isolated silos.

The variety of data, including new unstructured data types such as clickstream data, geo-location data, sensor and machine data, sentiment data, server log data and other data generated by emails, documents and other file types, is fueling the exponential growth in the aggregate amount of data that has the potential to be captured and managed by the enterprise to drive business value. The higher volume, velocity and variety of context-rich data have historically not been captured, managed or analyzed by the enterprise.

As a result of the limitations of traditional data center architectures, enterprises are seeking new technologies to collect, store and access this data in a cost-effective manner, and to gain more actionable insight from their increasingly complex and growing data stores. Enterprises need to upgrade their data center architectures to enable themselves to bring large volumes of data under management and to process and analyze multiple types of data in innovative ways.

Hadoop was originally developed in the early 2000s. Partnering with the Apache Hadoop community, Yahoo! led major innovations in the technology to help tackle big data challenges and operate its business at scale. The traditional Hadoop offering (i.e., Hadoop Version 1.x) is largely a batch system that enables users to manage data at scale, but requires siloed computing clusters by

 

 

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application with pre-selected data sets, thus limiting accessibility, interoperability and overall value. Incremental attempts to improve traditional Hadoop focused on bolting on data warehousing and analytics functionality as well as basic levels of security and operations management. This innovation demonstrated the early promise of Hadoop in enabling enterprises to address their big data requirements, but traditional Hadoop still lacks the breadth of functionality and resiliency that would enable it to be deployed more broadly by enterprises in production use cases.

To improve on this early functionality, Hortonworks engineers created the initial architecture for YARN and developed the technology for it within the Apache Hadoop community, leading to the release of YARN in October 2013. This technology advancement transformed Hadoop (i.e., Hadoop Version 2.x) into a platform that allows for multiple ways of interacting with data, including interactive structured query language, or SQL, processing, real-time processing and online data processing, along with its traditional batch data processing. YARN eliminates the need to silo data sets and enables a single cluster to store a wide range of shared data sets on which mixed workloads can simultaneously process with predictable service levels. YARN is designed to serve as a common data operating system that enables the Hadoop ecosystem to natively integrate applications and leverage existing technologies and skills while extending consistent security, governance and operations across the platform. With these capabilities, YARN can facilitate mainstream Hadoop adoption by enterprises of all types and sizes for production use cases at scale.

Our Opportunity

Enterprises are facing an increasing need to adopt big data strategies that will help them modernize their data center architectures, control costs and transform their businesses to succeed in an increasingly digital world. Inherent in this shift is a move from the post-transaction, reactive analysis of subsets of data to a new model of pre-transaction, interactive insights across a comprehensive and integrated dataset. We believe that enterprises that successfully adopt a big data strategy will succeed, whereas enterprises that fail to implement a modern data architecture will struggle to sustain competitive advantages.

We believe that an enterprise-grade Hadoop solution must meet certain requirements to create and accelerate widespread market adoption and enable the modern data center architecture. We refer to this set of requirements as Enterprise Grade Hadoop, and believe they include:

 

    capability to centrally manage new and existing data types;

 

    ability to run multiple applications on a common data architecture;

 

    high availability and enterprise-grade security, management and governance;

 

    interoperability with new and existing data center infrastructure investments;

 

    stability and dependability;

 

    scalability and affordability;

 

    predictive and real-time analytic capability; and

 

    deployment flexibility.

We believe that only with a platform that addresses each of these needs will enterprises be able to transform their businesses by adopting a modern data architecture that solves their increasing data management requirements. Enterprise Grade Hadoop is fundamental to this architectural shift and can turn what was traditionally viewed as a cost center into a revenue generator by enabling new business applications that harness the power of big data. According to Allied Market Research, the global Hadoop market spanning hardware, software and services is expected to grow from $2.0 billion in 2013 to $50.2 billion by 2020, representing a compound annual growth rate, or CAGR, of 58%.

 

 

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Our Solution

We are a leading provider and distributor of an enterprise-grade Hadoop solution that is enabling a re-platforming of data center architectures to harness the power of big data for the enterprise. We provide support subscription offerings and related professional services around the Hortonworks Data Platform, which is our open source software distribution of Apache Hadoop. We developed the Hortonworks Data Platform to address the limitations of traditional Hadoop. The Hortonworks Data Platform provides the following benefits:

 

    Maximizes data access to drive business transformation.    Our solution integrates all data types into “data lakes” that allow our customers to increase the scope and quality of their data management. Our solution breaks down traditional data silos and allows enterprises to store and process their data in native formats and enables the combination of multiple context-rich data types.

 

    Common data operating system that powers big data applications.    The Hortonworks Data Platform leverages the benefits of YARN to create a common data operating system that natively integrates with Hadoop. Our solution also enables new and existing applications to integrate seamlessly with Hadoop.

 

    Purpose-built for the enterprise.    We engineer and certify Apache Hadoop with a focus on extending traditional Hadoop with the robust capabilities required by the enterprise such as high availability, governance, security, provisioning, management and performance monitoring.

 

    Rigorously tested and hardened for deployment at scale.    Our strategic relationships with leading cloud scale companies enable us to test and harden our platform in the most demanding production environments, assuring high quality and resilient releases at scale. We deliver value to support subscription customers by reducing implementation risk, accelerating time-to-value and helping these customers scale more rapidly.

 

    Enables best-of-breed data center architectures.    We designed our data management platform to be fully open and integrate with new and existing investments in data center infrastructure. Our solution is designed to work with new big data technologies that are complementary to Hadoop.

 

    Compelling return on investment.    Our solution enables our customers to modernize their data architectures while leveraging existing investments and increased use of commodity hardware. For example, the annual cost of managing a raw terabyte, or TB, of data with our platform and commodity hardware can be 10 to 100 times less expensive than using high-end storage arrays.

 

    Real-time, predictive and interactive analytics.    Our solution enables our customers to move from post-transaction, reactive analysis of subsets of data stored in silos to a world of pre-transaction, interactive insights across all data with the potential to enhance competitive advantages and transform businesses.

 

    Superior deployment flexibility.    Our focus on deep integration with existing data center technologies enables the leaders in the data center to easily adapt and extend their platforms. We are differentiated in our ability to natively support deployments across Linux, Windows, hardware appliances and public and private cloud platforms.

We are committed to serving the Apache Software Foundation open source ecosystem and to sharing all of our product developments with the open source community. We support the community for open source Hadoop, and employ a large number of core committers to the various Enterprise

 

 

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Grade Hadoop projects. This commitment allows us to drive the innovation of Hadoop’s core open source technology, define a roadmap for the future, ensure predictable and reliable enterprise quality releases and provide comprehensive, enterprise-class support.

Our Strategy

We intend to grow our business by focusing on the following strategies:

 

    continue to innovate and extend Hadoop’s enterprise data platform capabilities;

 

    establish Hadoop as the industry standard for the modern enterprise data architecture and Hortonworks as the trusted Enterprise Grade Hadoop provider;

 

    continue to support and foster growth in the Hadoop ecosystem;

 

    focus on renewing and extending existing customer deployments;

 

    grow our sales force directly and indirectly through our reseller and original equipment manufacturer, or OEM, partners;

 

    grow our customer base across new vertical markets and geographies;

 

    pursue selective acquisitions to further enhance and build out the critical components of the Hortonworks Data Platform; and

 

    continue international expansion.

Concurrent Private Placement

In December 2014, we entered into a stock purchase agreement with Passport Capital, LLC, or Passport, pursuant to which funds affiliated with Passport will purchase 486,486 shares of our common stock at a price per share equal to the initial public offering price in a private placement to close immediately subsequent to the closing of this offering.

Risks Affecting Us

Our business is subject to numerous risks and uncertainties, including those highlighted in “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

    We have a history of losses, and we may not become profitable in the future.

 

    We have a limited operating history, which makes it difficult to predict our future results of operations.

 

    We do not have an adequate history with our support subscription offerings or pricing models to accurately predict the long-term rate of support subscription customer renewals or adoption, or the impact these renewals and adoption will have on our revenues or results of operations.

 

    Because we derive substantially all of our revenues and cash flows from supporting the Hortonworks Data Platform and services and training related to it, failure of these offerings to satisfy customer requirements or to achieve increased market acceptance would harm our business, results of operations, financial condition and growth prospects.

 

    Our success is highly dependent on our ability to penetrate the existing market for open source distributed data platforms as well as the growth and expansion of the market for open source distributed data platforms.

 

 

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    If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed.

 

    If we are unable to effectively compete, our business and operating results could be harmed.

 

    The competitive position of the Hortonworks Data Platform depends in part on its ability to operate with third-party products and services, including those of our partners, and, if we are not successful in maintaining and expanding the compatibility of the Hortonworks Data Platform with such products and services, our business will suffer.

 

    If open source software programmers, many of whom we do not employ, do not continue to develop and enhance open source technologies, we may be unable to develop new technologies, adequately enhance our existing technologies or meet customer requirements for innovation, quality and price.

 

    Our subscription-based business model may encounter customer resistance or we may experience a decline in the demand for our offerings.

Corporate Information

We were incorporated in Delaware in April 2011. Our principal executive offices are located at 3460 W. Bayshore Road, Palo Alto, California 94303, and our telephone number is (408) 916-4121. Our website address is www.hortonworks.com. Information contained on or that can be accessed through our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.

“Hortonworks” is our registered trademark in the United States and in certain other jurisdictions. “Hadoop” is a registered trademark of the Apache Software Foundation. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These provisions include:

 

    a requirement to have only two years of audited financial statements and only two years of related management’s discussion and analysis;

 

    an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

 

    an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure about our executive compensation arrangements; and

 

    exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or stockholder approval of any golden parachute arrangements.

We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large

 

 

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accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of this offering. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 

 

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THE OFFERING

 

Common stock offered by us

6,000,000 shares

 

Common stock sold by us in the concurrent private placement

Immediately subsequent to the closing of this offering, funds affiliated with Passport will purchase from us in a private placement 486,486 shares of our common stock at a price per share equal to the initial public offering price. Based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover of this prospectus, this would be equal to $6.3 million in additional proceeds to us. We will receive the full proceeds and will not pay any underwriting discounts or commissions with respect to the shares that are sold in the private placement. The sale of these shares to the funds affiliated with Passport will not be registered in this offering and will be subject to a lock-up for 180 days after the date of this prospectus. We refer to the private placement of these shares of common stock as “the concurrent private placement”.

 

Common stock to be outstanding after this offering and the concurrent private placement

41,367,451 shares

 

Option to purchase additional shares from us

We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 900,000 shares from us.

 

Use of proceeds

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering and the concurrent private placement will be approximately $75.2 million (or approximately $86.0 million if the underwriters’ option to purchase additional shares in this offering is exercised in full), based upon an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

We intend to use the net proceeds of this offering and the concurrent private placement for working capital or other general corporate purposes, including funding our growth strategies

 

 

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discussed in this prospectus. These uses include the expansion of our sales organization, international expansion, further development of the Hortonworks Data Platform and general and administrative matters. We may also use a portion of the net proceeds to acquire complementary businesses, products, services, technologies or other assets.

 

  See “Use of Proceeds” for additional information.

 

Concentration of Ownership

Upon completion of this offering and the concurrent private placement, our executive officers and directors, and their affiliates, will beneficially own, in the aggregate, approximately 52.7% of our outstanding shares of common stock.

 

Proposed NASDAQ Global Select Market trading symbol

“HDP”

The number of shares of our common stock that will be outstanding after this offering and the concurrent private placement is based on 34,880,965 shares outstanding as of September 30, 2014, including the conversion into common stock of 21,949,525 shares of preferred stock upon the completion of this offering, and excludes:

 

    13,740,630 shares of our common stock issuable upon the exercise of options to purchase common stock that were outstanding as of September 30, 2014, with a weighted average exercise price of $7.39 per share (which excludes 2,593,644 restricted shares issued under the 2011 Stock Option and Grant Plan that are included in the number of shares of our common stock that will be outstanding after the completion of this offering and the concurrent private placement);

 

    337,499 shares of our common stock issuable upon the exercise of options to purchase common stock granted after September 30, 2014, with a weighted average exercise price of $19.76 per share;

 

    7,112,336 shares of our common stock reserved for future issuance under our 2014 Stock Option and Incentive Plan, which will become effective upon completion of this offering, which contains provisions that automatically increase its share reserve each year and includes 1,112,336 shares of common stock that were reserved under our 2011 Stock Option and Grant Plan;

 

    2,500,000 shares of our common stock reserved for issuance under our 2014 Employee Stock Purchase Plan, which will become effective upon the completion of this offering and contains provisions that automatically increase its share reserve each year;

 

    3,250,000 shares of our common stock issuable upon the exercise of a warrant to purchase shares of our Series A preferred stock outstanding as of September 30, 2014, with an exercise price of $0.005 per share that will be exercisable for common stock upon the completion of this offering; and

 

   

476,368 shares of our common stock, subject to further adjustment in the event that we sell any additional shares of Series D preferred stock or warrants to purchase Series D preferred

 

 

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stock prior to the completion of this offering or other liquidation event, issuable upon the exercise of a warrant to purchase shares of our common stock with an exercise price of $8.46, per share.

Except as otherwise indicated, all information in this prospectus assumes:

 

    a one-for-two reverse split of our common stock and a proportional adjustment to the conversion ratio of our convertible preferred stock that was effected on November 25, 2014;

 

    the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 21,949,525 shares of our common stock, the conversion of which will occur upon the completion of this offering;

 

    the issuance of 486,486 shares of our common stock to funds affiliated with Passport upon the closing of the concurrent private placement;

 

    the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering; and

 

    no exercise by the underwriters of their option to purchase up to an additional 900,000 shares of our common stock from us in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our historical financial data. Commencing with the fiscal year ended December 31, 2013, we changed our fiscal year end from April 30 to December 31. We have derived the summary consolidated statement of operations data for the years ended April 30, 2012 and 2013 and the eight months ended December 31, 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statement of operations data for the nine months ended September 30, 2013 and 2014 and the eight months ended December 31, 2012 and the summary consolidated balance sheet data as of September 30, 2014 from our unaudited interim and comparative transition period consolidated financial statements included elsewhere in this prospectus. The unaudited interim and comparative transition period consolidated financial statements reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the full year or any other period. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Year Ended April 30,     Eight Months Ended
December 31,
    Nine Months Ended
September 30,
 
    2012     2013     2012     2013     2013     2014  
    (In thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

           

Support subscription

  $ 1,276      $ 7,739      $ 3,643      $ 11,415      $ 10,212      $ 19,190   

Professional services

    370        3,259        1,135        6,450        5,726        14,198   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total support subscription and professional services revenue(1)

    1,646        10,998        4,778        17,865        15,938        33,388   

Cost of revenue:

           

Cost of support subscription

    421        5,071        2,880        3,720        4,995        2,875   

Cost of professional services

    974        5,862        3,053        9,990        8,493        19,125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue(2)

    1,395        10,933        5,933        13,710        13,488        22,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    251        65        (1,155     4,155        2,450        11,388   

Operating expenses:(2)

           

Sales and marketing

    2,589        17,187        8,403        21,357        21,584        44,553   

Research and development

    6,881        12,070        6,768        14,621        13,752        26,270   

General and administrative

    2,384        7,598        3,487        14,368        15,583        17,634   

Contribution of acquired technology to the Apache Software Foundation

                                       3,971   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    11,854        36,855        18,658        50,346        50,919        92,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (11,603     (36,790     (19,813     (46,191     (48,469     (81,040

Interest and other income

    84        215        159        152        159        381   

Other expense

    (1     (52     (49     (129     (56     (7,269
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense (benefit)

    (11,520     (36,627     (19,703     (46,168     (48,366     (87,928

Income tax expense (benefit)

    1        11        8        45        34        (1,196
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (11,521   $ (36,638   $ (19,711   $ (46,213   $ (48,400   $ (86,732
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, basic and diluted(3)

  $ (74.30   $ (30.29   $ (16.96   $ (18.18   $ (28.74   $ (20.80
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share of common stock, basic and diluted(3)

    155,052        1,209,750        1,161,880        2,541,800        1,684,167        4,169,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock, basic and diluted(4)

    $ (2.68     $ (2.62     $ (3.71
   

 

 

     

 

 

     

 

 

 

Weighted average shares used in computing pro forma net loss per share of common stock, basic and diluted(4)

      13,651,154          17,639,090          23,361,541   
   

 

 

     

 

 

     

 

 

 

 

 

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(1) Total support subscription and professional services revenue for the eight months ended December 31, 2013 and nine months ended September 30, 2014 includes contra-revenue adjustments recognized for equity securities issued to an affiliate of AT&T, which is a customer, as follows:

 

     Eight Months
Ended
December 31,
    Nine Months
Ended
September 30,
    Twelve Months
Ended
September 30,
 
   2013     2014     2014  

Gross support and subscription and professional services revenue:

      

Support subscription

   $ 11,782      $ 21,151      $ 26,768   

Professional services

     6,465        14,277        17,188   
  

 

 

   

 

 

   

 

 

 

Total support subscription and professional services revenue

     18,247        35,428        43,956   

Contra-support subscription and professional services revenue:

      

Support subscription

     (367     (1,961     (2,328

Professional services

     (15     (79     (93
  

 

 

   

 

 

   

 

 

 

Total contra-support subscription and professional services revenue

     (382     (2,040     (2,421

Net support subscription and professional services revenue:

      

Support subscription

     11,415        19,190        24,440   

Professional services

     6,450        14,198        17,095   
  

 

 

   

 

 

   

 

 

 

Total net support subscription and professional services revenue

   $ 17,865      $ 33,388      $ 41,535   
  

 

 

   

 

 

   

 

 

 

 

(2) Stock-based compensation was allocated as follows:

 

     Year Ended April 30,      Eight Months Ended
December 31,
     Nine Months Ended
September 30,
 
         2012              2013              2012              2013              2013              2014      

Cost of revenue

   $ 14       $ 45       $ 44       $ 132       $ 83       $ 320   

Research and development

     140         244         140         468         327         1,146   

Sales and marketing

     18         234         110         321         270         978   

General and administrative

     150         239         122         406         342         3,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 322       $ 762       $ 416       $ 1,327       $ 1,022       $ 5,492   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3) See Note 11 to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.
(4) See Note 12 to our consolidated financial statements for an explanation of the method used to calculate pro forma basic and diluted net loss per share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.

 

     As of September 30, 2014  
     Actual     Pro Forma(1)     Pro Forma as
Adjusted(2)
 
     (In thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents and short-term investments

   $ 111,614      $ 111,614      $ 189,151 (3) 

Working capital

     90,470        90,470        165,634   

Property and equipment, net

     2,201        2,201        2,201   

Long-term investments

     15,316        15,316        15,316   

Total assets

     160,335        160,335        235,499   

Deferred revenue

     47,720        47,720        47,720   

Additional paid-in capital

     13,947        266,558        341,722   

Accumulated deficit

     (181,104     (181,104     (181,104

Total stockholders’ equity (deficit)

     (167,322     85,292        160,456   

 

 

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(1) The pro forma column in the consolidated balance sheet data table above reflects the automatic conversion of all outstanding shares of our convertible preferred stock as of September 30, 2014 into an aggregate of 21,949,525 shares of our common stock which conversion will occur upon the completion of this offering, as if such conversion had occurred on September 30, 2014.
(2) The pro forma as adjusted column in the consolidated balance sheet table above gives effect to (i) the pro forma adjustments set forth in footnote 1 above, (ii) the sale and issuance by us of 6,000,000 shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (iii) the sale of 486,486 shares of our common stock to be purchased from us by funds affiliated with Passport in the concurrent private placement at an assumed offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. The pro forma as adjusted information set forth above is illustrative only and does not take into consideration the impact of capitalized offering costs. We capitalized $3.24 million of our offering costs as of September 30, 2014 in connection with the preparation of the registration statement of which this prospectus forms a part, of which $0.87 million remained unpaid as of September 30, 2014.
(3) Pro forma as adjusted cash and cash equivalents and short-term investments reflects $2.37 million of deferred offering costs that had been paid as of September 30, 2014.

The pro forma as adjusted information presented in the consolidated balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of our pro forma as adjusted cash and cash equivalents and short-term investments, working capital, total assets, additional paid-in capital and total stockholders’ equity (deficit) by approximately $6.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. An increase or decrease by one million shares in the number of shares offered by us would increase or decrease, as applicable, the amount of our pro forma as adjusted cash and cash equivalents and short-term investments, working capital, total assets, additional paid-in capital and total stockholders’ equity (deficit) by approximately $12.1 million, assuming that the initial public offering price of $13.00 per share, remains the same and after deducting estimated underwriting discounts and commissions.

Yahoo! Preferred Stock Warrant

In July 2011, we issued a warrant to purchase 6,500,000 shares of Series A preferred stock at an exercise price of $0.005 per share to Yahoo!, a related party. Upon consummation of the offering, the warrant will be exercisable for 3,250,000 shares of our common stock and the fair value of the warrant will be recognized as a reduction in revenue up to the cumulative amount of revenue recognized to date from Yahoo!, which was approximately $3.3 million as of September 30, 2014, and any excess of such fair value over such cumulative revenue will be recognized in cost of sales, in the quarter in which the offering is consummated. The reduction in revenue and increase in cost of sales resulting from vesting of the warrant is estimated at $42.2 million in the aggregate (comprised of $3.3 million as a reduction in revenue and $38.9 million as an increase in cost of sales), assuming that the offering had been consummated on September 30, 2014, based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and would result in an increase of $42.2 million in additional paid-in capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.” The warrant will not have an impact on our revenue or expenses in periods subsequent to the period in which this offering is consummated.

 

 

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Key Metric – Gross Billings

We have included gross billings, a non-GAAP financial measure, in this prospectus because it is a key measure used by our board of directors and management to monitor our near term cash flows and manage our business. Gross billings is calculated as total revenue plus the change in deferred revenue for the same period. As we have not yet established vendor-specific objective evidence of fair value for our support subscriptions, we recognize revenue ratably over the period beginning when both the support subscription and professional services have commenced for customers with agreements that purchase both a support subscription and professional services. Most of our customer agreements include both support subscription and professional services. The accounting treatment for such agreements causes our revenue to trail the impact of these customer agreements and creates significant deferred revenue balances.

We have provided a reconciliation between total revenue, the most directly comparable GAAP financial measure, and gross billings in the table below. We believe gross billings provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our board of directors and management.

 

     Year Ended
April 30,
    Eight Months
Ended
December 31,
    Nine Months
Ended
September 30,
    Twelve Months
Ended
September 30,
 
     2012      2013     2012     2013     2013     2014     2014  
     (in thousands)  

Gross billings:

               

Total revenue

   $ 1,646       $ 10,998      $ 4,778      $ 17,865      $ 15,938      $ 33,388      $ 41,535   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred revenue, end of period

     10,148         16,730        15,096        27,928        23,573        47,720        47,720   

Less: Total deferred revenue, beginning of period

             (10,148     (10,148     (16,730     (15,096     (27,928     (23,573
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total change in deferred revenue

     10,148         6,582        4,948        11,198        8,477        19,792        24,147   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross billings

   $ 11,794       $ 17,580      $ 9,726      $ 29,063      $ 24,415      $ 53,180      $ 65,682   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be harmed. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business

We have a history of losses, and we may not become profitable in the future.

We have incurred net losses in each year since our inception, including net losses of $11.5 million in the year ended April 30, 2012, $36.6 million in the year ended April 30, 2013 and $46.2 million in the eight months ended December 30, 2013. As a result, we had an accumulated deficit of $181.1 million at September 30, 2014. These losses and our accumulated deficit will be further increased as a result of the accounting for the Yahoo! preferred stock warrant described in “Prospectus Summary—Yahoo! Preferred Stock Warrant.” Because the market for our solution is rapidly evolving and has not yet reached widespread adoption, it is difficult for us to predict our future results of operations. We may not achieve sufficient revenue to attain and maintain profitability. We expect our operating expenses to increase over the next several years as we hire additional personnel, particularly in sales and marketing, expand and improve the effectiveness of our distribution channels, and continue to invest in the development of the Hortonworks Data Platform. In addition, as we grow and as we become a newly public company, we will incur additional significant legal, accounting and other expenses that we did not incur as a private company. As a result of these increased expenses, we will have to generate and sustain increased revenue to be profitable in future periods. Any failure by us to sustain or increase profitability on a consistent basis could cause the value of our common stock to decline.

We have a limited operating history, which makes it difficult to predict our future results of operations.

We were incorporated in 2011 and introduced our first solution in 2012. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth has been inconsistent, has benefited from transactions with related parties and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenues could decline for a number of reasons, including slowing demand for our support subscription offerings and our professional services, increasing competition, a decrease in the growth of our overall market, or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth (each of which we use to plan our business) are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

We do not have an adequate history with our support subscription offerings or pricing models to accurately predict the long-term rate of support subscription customer renewals or adoption, or the impact these renewals and adoption will have on our revenues or results of operations.

We have limited experience with respect to determining the optimal prices for our support subscription offerings. As the market for open source distributed data platforms matures, or as new

 

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competitors introduce new products or services that compete with ours, we may be unable to attract new support subscription customers at the same price or based on the same pricing model as we have used historically. Moreover, large support subscription customers, which are the focus of our sales efforts, may demand greater price concessions. As a result, in the future we may be required to reduce our prices, which could harm our revenues, gross margins, financial position and cash flows. Furthermore, while the terms of our support subscription agreements limit the number of supported nodes or the size of supported data sets, such limitations may be improperly circumvented or otherwise bypassed by certain users.

We expect to derive a significant portion of our revenue from renewals of existing support subscription agreements. As a result, achieving a high renewal rate of our support subscription agreements will be critical to our business. Our support subscription customers have no obligation to renew their support subscriptions after the expiration of the initial subscription period, and may renew for fewer elements of our support subscription offerings or on different pricing terms. We have limited historical data with respect to rates of support subscription customer renewals, and to date, the majority of our support subscription agreements have not reached the end of their original term, so we cannot accurately predict support subscription customer renewal rates. Our support subscription customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their dissatisfaction with our pricing or the Hortonworks Data Platform and their ability to continue their operations and spending levels. If our support subscription customers do not renew their support subscriptions on similar pricing terms, our revenues may decline and our business could suffer. In addition, over time the average term of our contracts could change based on renewal rates or for other reasons.

Because we derive substantially all of our revenues and cash flows from supporting the Hortonworks Data Platform and services and training related to it, failure of these offerings to satisfy customer requirements or to achieve increased market acceptance would harm our business, results of operations, financial condition and growth prospects.

We derive and expect to continue to derive substantially all of our revenues and cash flows from customer fees for support subscription offerings and professional services in support of the Hortonworks Data Platform. As such, the market acceptance of the Hortonworks Data Platform is critical to our continued success. Demand for the Hortonworks Data Platform is affected by a number of factors beyond our control, including market acceptance of open source distributed data platforms by referenceable accounts for existing and new use cases, the continued enhancement of the Hortonworks Data Platform to incorporate features and functionality desired by our support subscription customers, the timing of development and release of new products by our competitors, technological change and growth or contraction in our market. We expect the proliferation of unstructured data to lead to an increase in the data storage and processing demands of our customers, and the Hortonworks Data Platform may not be able to perform to meet those demands. If we are unable to continue to meet support subscription customer requirements or to achieve more widespread market acceptance of the Hortonworks Data Platform, our business, results of operations, financial condition and growth prospects will be harmed.

Our success is highly dependent on our ability to penetrate the existing market for open source distributed data platforms as well as the growth and expansion of the market for open source distributed data platforms.

The market for Hadoop and open source distributed data platforms is relatively new, rapidly evolving and unproven. Our future success will depend in large part on Hadoop’s ability to penetrate the existing market for open source distributed data platforms, as well as the continued growth and expansion of the market for open source distributed data platforms. It is difficult to predict support subscription customer adoption and renewal rates, support subscription customer demand for our

 

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offerings, the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing market and any expansion of the market depends on a number of factors, including the cost, performance and perceived value associated with our offerings, as well as support subscription customers’ willingness to adopt an alternative approach to data storage and processing. Furthermore, many potential support subscription customers have made significant investments in legacy data storage and processing software and may be unwilling to invest in new solutions. If the market for open source distributed data platforms fails to grow or expand or decreases in size, our business would be harmed.

If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed.

In addition to our direct sales force and our website, we use strategic partners, such as distribution partners and resellers, to sell our support subscription offerings and our professional services. We expect that sales through partners will continue to grow as a proportion of our revenues for the foreseeable future.

Our agreements with our partners are generally non-exclusive, meaning our partners may offer customers the products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our support subscription offerings and our professional services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our support subscription offerings and our professional services may be harmed. Our partners may cease marketing our support subscription offerings or professional services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our results of operations.

Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships with our partners, and in helping our partners enhance their ability to independently sell our support subscription offerings and our professional services. If we are unable to maintain our relationships with these partners, or otherwise develop and expand our indirect distribution channel, our business, results of operations, financial condition or cash flows could be harmed.

If we are unable to effectively compete, our business and operating results could be harmed.

We face substantial competition from Hadoop distribution vendors such as Cloudera and MapR Technologies, as well as enterprise software and infrastructure vendors that offer Hadoop distributions such as IBM Corporation, Oracle Corporation and Pivotal Software, Inc. Further, other established system providers not currently focused on Hadoop, including traditional data warehouse solution providers such as Teradata Corporation, SAP SE and EMC Corporation, or open source distributed data platform providers, including non-relational NoSQL database providers such as MongoDB Inc. and DataStax, Inc., may expand their products and services to compete with us. Additionally, some potential customers may elect to implement and support Hadoop deployments internally. Some of the companies that compete with us, or that may compete with us in the future, have greater name recognition, substantially greater financial, technical, marketing and other resources, the ability to devote greater resources to the promotion, sale and support of their solutions, more extensive customer bases and broader customer relationships and longer operating histories than we have.

We expect competition to increase as other companies continue to evolve their offerings and as new companies enter our market. Increased competition is likely to result in pricing pressures on our support subscription offerings and our professional services, which could negatively impact our gross

 

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margins. If we are unable to effectively compete, our revenue could decline and our business, operating results and financial condition could be adversely affected.

The competitive position of the Hortonworks Data Platform depends in part on its ability to operate with third-party products and services, including those of our partners, and, if we are not successful in maintaining and expanding the compatibility of the Hortonworks Data Platform with such products and services, our business will suffer.

The competitive position of the Hortonworks Data Platform depends in part on its ability to operate with products and services of third parties, including software companies that offer applications designed for various business intelligence applications, software services and infrastructure, and it must be continuously modified and enhanced to adapt to changes in hardware, software, networking, browser and database technologies. In the future, one or more technology companies, whether our partners or otherwise, may choose not to support the operation of their software, software services and infrastructure with the Hortonworks Data Platform, or the Hortonworks Data Platform may not support the capabilities needed to operate with such software, software services and infrastructure. In addition, to the extent that a third party were to develop software or services that compete with ours, that provider may choose not to support the Hortonworks Data Platform. We intend to facilitate the compatibility of the Hortonworks Data Platform with various third-party software, software services and infrastructure offerings by maintaining and expanding our business and technical relationships. If we are not successful in achieving this goal, our business, financial condition and results of operations may suffer.

If open source software programmers, many of whom we do not employ, do not continue to develop and enhance open source technologies, we may be unable to develop new technologies, adequately enhance our existing technologies or meet customer requirements for innovation, quality and price.

We rely to a significant degree on a number of independent open source software programmers, or Hadoop committers and contributors, to develop and enhance Apache Hadoop and its related technologies. Additionally, members of the corresponding Apache Software Foundation Project Management Committees, many of whom are not employed by us, are primarily responsible for the oversight and evolution of the codebases of Hadoop and its related technologies. If the Hadoop committers and contributors fail to adequately further develop and enhance open source technologies, or if the Project Management Committees fail to oversee and guide the evolution of Hadoop-related technologies in the manner that we believe is appropriate to maximize the market potential of our offerings, then we would have to rely on other parties, or we would need to expend additional resources, to develop and enhance our offerings. We cannot predict whether further developments and enhancements to these technologies would be available from reliable alternative sources. In either event, our development expenses could be increased and our technology release and upgrade schedules could be delayed. Delays in developing, completing or delivering new or enhanced offerings could cause our offerings to be less competitive, impair customer acceptance of our offerings and result in delayed or reduced revenue for our offerings.

Our subscription-based business model may encounter customer resistance or we may experience a decline in the demand for our offerings.

We provide our support subscription offerings under annual or multi-year subscriptions. A support subscription generally entitles a support subscription customer to a specified scope of support, as well as security updates, fixes, functionality enhancements and upgrades to the technology and new versions of the software, if and when available, and compatibility with an ecosystem of certified hardware and software applications. We may encounter support subscription customer resistance to this distribution model or support subscription customers may fail to honor the terms of our support

 

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subscription agreements. To the extent we are unsuccessful in promoting or defending this distribution model, our business, financial condition, results of operations and cash flows could be harmed.

Demand for our offerings may fluctuate based on numerous factors, including the spending levels and growth of our current and prospective support subscription customers, and general economic conditions. In addition, our support subscription customers generally undertake a significant evaluation process that may result in a prolonged sales cycle. We spend substantial time, effort and money on our sales efforts, including developing and implementing appropriate go-to-market strategies and training our sales force and ecosystem partners in order to effectively market new solutions, without any assurance that our efforts will produce any sales. The purchase of our offerings may be discretionary and can involve significant expenditures. If our current and prospective support subscription customers cut costs, then they may significantly reduce their enterprise software expenditures.

As technologies and the markets for our offerings change, our subscription-based business model may no longer meet the needs of our support subscription customers. Consequently, we may need to develop new and appropriate marketing and pricing strategies for our solutions. If we are unable to adapt our business model to changes in the marketplace or if demand for our solutions declines, our business, financial condition, results of operations and cash flows could be harmed.

If we are unable to expand sales to existing customers, our growth could be slower than we expect and our business and results of operations may be harmed.

Our future growth depends in part upon expanding sales of our support subscription offerings and our professional services to our existing customers. If our existing customers do not purchase additional support subscription offerings and professional services, our revenues may grow more slowly than expected, may not grow at all or may decline. Additionally, increasing incremental sales to our current customer base requires increasingly sophisticated and costly sales efforts. There can be no assurance that our efforts will result in increased sales to existing customers and additional revenues. If our efforts to expand sales to our existing customers are not successful, our business and operating results would be harmed.

Revenue from our largest customers has accounted for a significant percentage of our revenues, and the loss of one or more of our significant customers would harm our business.

A significant portion of our revenue has been concentrated among a relatively small number of large customers. For example, Microsoft Corporation historically accounted for 55.3% of our total revenue for the year ended April 30, 2013, 37.8% of our total revenue for the eight months ended December 31, 2013 and 22.4% of our total revenue for the nine months ended September 30, 2014. The revenue from our three largest customers as a group accounted for 71.0% of our total revenue for the year ended April 30, 2013, 50.5% of our total revenue for the eight months ended December 31, 2013 and 37.4% of our total revenue for the nine months ended September 30, 2014. While we expect that the revenue from our largest customers will decrease over time as a percentage of our total revenue as we generate more revenue from other customers, we expect that revenue from a relatively small group of customers will continue to account for a significant portion of our revenue, at least in the near term. Our customer agreements generally do not contain long-term commitments from our customers, and our customers may be able to terminate their agreements with us prior to expiration of the term. For example, the current term of our agreement with Microsoft expires in July 2015, and automatically renews thereafter for two successive twelve-month periods unless terminated earlier. The agreement may be terminated by Microsoft prior to the end of its term. Accordingly, the agreement with Microsoft may not continue for any specific period of time.

We may not be able to continue our relationships with any of our largest customers on the same or more favorable terms in future periods or our relationships may not continue beyond the terms of our

 

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existing contracts with them. Our revenue and operating results would suffer if, among other things, any of our largest customers were to renegotiate, terminate, renew on less favorable terms or fail to renew their agreements with us.

Our future results of operations may fluctuate significantly, and our recent results of operations may not be a good indication of our future performance.

Our revenue and results of operations could vary significantly from period to period as a result of various factors, many of which are outside of our control. At the beginning of each quarter, we do not know the number of support subscriptions that we will enter into during the quarter. In addition, the contract value of our support subscriptions varies substantially among customers, and a single, large support subscription in a given period could distort our results of operations. Comparing our revenue and results of operations on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.

We may not be able to accurately predict our future revenue or results of operations on a quarterly or longer-term basis. We base our current and future expense levels on our operating plans and sales forecasts, and our operating costs are expected to be relatively fixed in the short-term. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenue, and even a small shortfall in revenue in a quarter could harm our financial results for that quarter and cause our financial results to fall short of analyst expectations, which could cause the market price of our common stock to decline substantially.

In addition to other risk factors described in this “Risk Factors” section, factors that may cause our results of operations to fluctuate from quarter to quarter include:

 

    the timing of new customer contracts for support subscription offerings and professional services, and the extent to which we earn additional revenue from existing customers as they expand their deployment of the Hortonworks Data Platform;

 

    the renewal rates of our customers;

 

    changes in the competitive dynamics of our market;

 

    customers delaying purchasing decisions in anticipation of new software or software enhancements;

 

    the timing of satisfying revenue recognition criteria and our ability to obtain vendor-specific objective evidence of fair value, or VSOE, for our support subscription offerings;

 

    our ability to control costs, including our operating expenses;

 

    the proportion of revenue attributable to larger transactions as opposed to smaller transactions and the impact that a change in such proportion may have on the overall average selling price of our support subscription offerings;

 

    the proportion of revenue attributable to support subscription offerings and professional services, which may impact our gross margins and operating income;

 

    the reduction or elimination of support of the Apache Hadoop Project by the Apache Software Foundation, migration of Hadoop technology to an organization other than the Apache Software Foundation, or any other actions taken by the Apache Software Foundation or the Apache Hadoop Project that may impact our business model;

 

    changes in customers’ budgets and in the timing of their purchasing decisions;

 

    the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; and

 

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    general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate.

Many of these factors are outside of our control, and the variability and unpredictability of such factors could result in our failing to meet or exceed our financial expectations for a given period. We believe that quarter-to-quarter comparisons of our revenue, results of operations and cash flows may not necessarily be indicative of our future performance.

Our sales cycle is long and unpredictable, particularly with respect to large support subscription customers, and our sales efforts require considerable time and expense.

Our results of operations may fluctuate, in part, because of the resource-intensive nature of our sales efforts, the length and variability of the sales cycle of our support subscription offerings and the difficulty in making short-term adjustments to our operating expenses. Our results of operations depend in part on sales to large support subscription customers and increasing sales to existing customers. The length of our sales cycle, from initial evaluation to payment for our support subscription offerings is generally six to nine months, but can vary substantially from customer to customer. Our sales cycle can extend to more than a year for some customers. It is difficult to predict exactly when, or even if, we will make a sale to a potential customer or if we can increase sales to our existing customers. As a result, large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or delay of one or more large transactions in a quarter could impact our results of operations for that quarter and any future quarters for which revenue from that transaction is lost or delayed. As a result of these factors, it is difficult for us to forecast our revenues accurately in any quarter. Because a substantial proportion of our expenses are relatively fixed in the short term, our results of operations will suffer if revenue falls below our expectations in a particular quarter, which could cause the price of our common stock to decline.

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan or maintain high levels of service and our financial results could be negatively impacted.

We have increased our number of full-time employees from 171 at December 31, 2012 to 524 at September 30, 2014 and have increased our revenue from $4.8 million in the eight months ended December 31, 2012 to $17.9 million in the eight months ended December 31, 2013. Our recent growth and expansion has placed, and our anticipated growth may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to continue to expand our overall business, customer base, headcount and operations. Continued growth increases the challenges involved in:

 

    recruiting, training and retaining sufficient skilled technical, marketing, sales and management personnel;

 

    preserving our culture, values and entrepreneurial environment;

 

    developing and improving our internal administrative infrastructure, particularly our financial, operational, compliance, recordkeeping, communications and other internal systems;

 

    managing our international operations and the risks associated therewith;

 

    maintaining high levels of satisfaction with our solutions among our customers; and

 

    effectively managing expenses related to any future growth.

If we fail to manage our growth effectively, our business, results of operations and financial condition could suffer.

 

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Our future success depends in large part on the growth of the market for big data applications, and an increase in the desire to store and process big data, and we cannot be sure that the market for big data applications will grow as expected or, even if such growth occurs, that our business will grow at similar rates, or at all.

Our ability to increase the adoption of the Hortonworks Data Platform, increase sales of support subscription offerings and professional services, and grow our business depends on the increased adoption of big data applications by enterprises. While we believe that big data applications can offer a compelling value proposition to many enterprises, the broad adoption of big data applications also presents challenges to enterprises, including developing the internal expertise and infrastructure to manage big data applications effectively, coordinating multiple data sources, defining a big data strategy that delivers an appropriate return on investment and implementing an information technology infrastructure and architecture that enables the efficient deployment of big data solutions. Accordingly, our expectations regarding the potential for future growth in the market for big data applications, and the third-party growth estimates for this market in this prospectus, are subject to significant uncertainty. If the market for big data applications does not grow as expected, our business prospects may be adversely affected. Even if the market for big data applications increases, we cannot be sure that our business will grow at a similar rate, or at all.

Because of the characteristics of open source software, there are few technological barriers to entry into the open source market by new competitors and it may be relatively easy for competitors, some of which may have greater resources than we have, to enter our markets and compete with us.

One of the characteristics of open source software is that anyone may modify and redistribute the existing open source software and use it to compete in the marketplace. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. It is possible for competitors with greater resources than ours to develop their own open source software, including software based on one or more components of Hadoop or the Hortonworks Data Platform, potentially reducing the demand for our solutions and putting price pressure on our support subscription offerings and our professional services. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure or the availability of new open source software will not result in price reductions, reduced operating margins and loss of market share, any one of which could harm our business, financial condition, results of operations and cash flows.

Our software development and licensing model could be negatively impacted if the Apache License, Version 2.0 is not enforceable or is modified so as to become incompatible with other open source licenses.

The Hortonworks Data Platform has been provided under the Apache License 2.0. This license states that any work of authorship licensed under it, and any derivative work thereof, may be reproduced and distributed provided that certain conditions are met. It is possible that a court would hold this license to be unenforceable or that someone could assert a claim for proprietary rights in a program developed and distributed under it. Any ruling by a court that this license is not enforceable, or that open source components of the Hortonworks Data Platform may not be reproduced or distributed, may negatively impact our distribution or development of all or a portion of the Hortonworks Data Platform. In addition, at some time in the future it is possible that Apache Hadoop may be distributed under a different license or the Apache License 2.0 may be modified, which could, among other consequences, negatively impact our continuing development or distribution of the software code subject to the new or modified license. Further, full utilization of the Hortonworks Data Platform may depend on applications and services from various third parties, and in the future these applications or services may not be available to our customers on commercially reasonable terms, or at all, which could harm our business.

 

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We do not currently have vendor-specific objective evidence of fair value for support subscription offerings, and we may offer certain contractual provisions to our customers that result in delayed recognition of revenue under GAAP, which could cause our results of operations to fluctuate significantly from period-to-period in ways that do not correlate with our underlying business performance.

In the course of our selling efforts, we typically enter into sales arrangements pursuant to which we provide support subscription offerings and professional services. We refer to each individual product or service as an “element” of the overall sales arrangement. These arrangements typically require us to deliver particular elements in a future period. We apply software revenue recognition rules under U.S. generally accepted accounting principles, or GAAP. In certain cases, when we enter into more than one contract with a single customer, the group of contracts may be so closely related that they are viewed under GAAP as one multiple-element arrangement for purposes of determining the appropriate amount and timing of revenue recognition. As we discuss further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenue Recognition,” because we do not have VSOE for our support subscription offerings, and because we may offer certain contractual provisions to our customers, such as delivery of support subscription offerings and professional services, or specified functionality, or because multiple contracts signed in different periods may be viewed as giving rise to multiple elements of a single arrangement, we may be required under GAAP to defer revenue to future periods. Typically, for arrangements providing for support subscription offerings and professional services, we have recognized as revenue the entire arrangement fee ratably over the subscription period, although the appropriate timing of revenue recognition must be evaluated on an arrangement-by-arrangement basis and may differ from arrangement to arrangement. If we are unexpectedly required to defer revenue to future periods for a significant portion of our sales, our revenue for a particular period could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

Because we recognize revenue from subscriptions for our services over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our results of operations.

We generally recognize subscription revenue from support subscription customers ratably over the term of their subscription agreements, which are generally 12 months, with some support subscription customers having subscription agreements with longer terms. As a result, much of the revenue we report in each quarter is deferred revenue from subscription agreements entered into during previous quarters. Consequently, a decline in the value of new support subscription agreements entered in any one quarter will not necessarily be fully reflected in the revenue we record in that quarter and will harm our revenue in future quarters. In addition, we may be unable to adjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our services may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new support subscription customers must be recognized over the applicable subscription term.

Any failure to offer high-quality support subscription offerings may harm our relationships with our support subscription customers and results of operations.

Once the Hortonworks Data Platform is deployed, our support subscription customers depend on our software support organization to resolve technical issues relating to the deployment. We may be unable to respond quickly enough to accommodate short-term increases in support subscription customer demand for support subscription offerings. We also may be unable to modify the format of our support subscription offerings to compete with changes in offerings provided by our competitors. Increased support subscription customer demand for our support subscription offerings, without

 

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corresponding revenues, could increase costs and harm our results of operations. In addition, our sales process is highly dependent on our business reputation and on positive recommendations from our existing support subscription customers. Any failure to maintain high-quality support subscription offerings, or a market perception that we do not maintain high-quality support subscription offerings, could harm our reputation, our ability to sell our support subscription offerings to existing and prospective support subscription customers and our results of operations.

If we fail to comply with our customer contracts, our business could be harmed.

Any failure by us to comply with the specific provisions in our customer contracts could result in the imposition of various penalties, which may include termination of contracts, forfeiture of profits and suspension of payments. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless of its accuracy, may damage our business and affect our ability to compete for new contracts. If our customer contracts are terminated, or if our ability to compete for new contracts is adversely affected, our business, financial condition, results of operations and cash flows could be harmed.

The Hortonworks Data Platform may contain defects that may be costly to correct, delay market acceptance of our solutions and expose us to claims and litigation.

Despite our testing procedures, errors, including security vulnerabilities or incompatibilities with third-party software and hardware, have been and may continue to be found in the Hortonworks Data Platform after deployment. This risk is increased by the fact that much of the code in the Hortonworks Data Platform is developed by independent parties over whom we may not exercise supervision or control. If errors are discovered, we may have to make significant expenditures of capital and devote significant technical resources to analyze, correct, eliminate or manage them, and we may not be able to successfully do so in a timely manner, or at all. Errors and failures in the Hortonworks Data Platform could result in a loss of, or delay in, market acceptance of our enterprise technologies, loss of existing or potential customers and delayed or lost revenue and could damage our reputation and our ability to convince enterprise users of the benefits of the Hortonworks Data Platform.

In addition, errors in the Hortonworks Data Platform could cause system failures, loss of data or other adverse effects for our customers who may assert warranty and other claims for substantial damages against us. Although our agreements with our customers often contain provisions that seek to limit our exposure to such claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. While we seek to insure against these types of claims, our insurance policies may not adequately limit our exposure to such claims. These claims, even if unsuccessful, could be costly and time consuming to defend and could harm our business, financial condition, results of operations and cash flows.

Incorrect or improper implementation or use of the Hortonworks Data Platform could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects.

The Hortonworks Data Platform is deployed in a wide variety of technology environments, including in large-scale, complex technology environments, and we believe our future success will depend at least in part on our ability to support such deployments. Hadoop itself is technically very complicated, and it is not easy to maximize the value of the Hortonworks Data Platform without proper implementation and training. We often must assist our customers in achieving successful implementations for large, complex deployments. If our customers are unable to implement the Hortonworks Data Platform successfully, or in a timely manner, customer perceptions of our company and the Hortonworks Data Platform may be impaired, our reputation and brand may suffer, and

 

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customers may choose not to renew their subscriptions or increase their purchases of our support subscription offerings or professional services.

Our customers and partners may need training in the proper use of and the variety of benefits that can be derived from the Hortonworks Data Platform to maximize its potential. The Hortonworks Data Platform may perform inadequately if it is not implemented or used correctly or as intended. The incorrect or improper implementation or use of the Hortonworks Data Platform, our failure to train customers on how to efficiently and effectively use the Hortonworks Data Platform, or our failure to provide effective support subscription offerings or professional services to our customers, may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our support subscription offerings and professional services.

Interruptions or performance problems associated with our technology and infrastructure may harm our business and results of operations.

Our website and internal technology infrastructure may experience performance issues due to a variety of factors, including infrastructure changes, human or software errors, website or third-party hosting disruptions or capacity constraints due to a number of potential causes, including technical failures, natural disasters or fraud or security attacks. If our security is compromised, our website is unavailable or our users are unable to download the Hortonworks Data Platform or order support subscription offerings or professional services within a reasonable amount of time or at all, our business could be harmed. We expect to continue to make significant investments to maintain and improve website performance and to enable rapid releases of new features and applications for the Hortonworks Data Platform. To the extent that we do not effectively upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and results of operations may be harmed.

In addition, we rely on SaaS technologies from third parties in order to operate critical functions of our business, including financial management services from NetSuite Inc., customer relationship management services from salesforce.com, Inc. and lead generation management services from Marketo, Inc. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted, our processes for managing sales of our support subscription offerings and professional services and supporting our customers could be impaired, and our ability to generate and manage sales leads could be weakened until equivalent services, if available, are identified, obtained and implemented, all of which could harm our business and results of operations.

We depend on our executive officers and other key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could harm our business.

Our success depends largely upon the continued services of our executive officers and other key employees, including many Hadoop committers. We rely on our leadership team in the areas of research and development, operations, security, marketing, sales, support and general and administrative functions, and on individual contributors in our research and development. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of our key employees or executive officers could harm our business.

 

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In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for such personnel in the San Francisco Bay Area, where our headquarters is located, and in other locations where we maintain offices, is intense, especially for engineers experienced in designing and developing software and Apache Hadoop applications and experienced sales professionals. The Apache Hadoop Project relies on Hadoop committers for the project’s technical management. While we currently employ a large number of Hadoop core committers and innovators, one becomes a committer by invitation only. As a result, the market to hire such individuals is very competitive. If our employees who are Hadoop core committers terminate their employment with us, we could lose our ability to innovate the core open source technology, define the roadmap for the future of Hadoop, distribute predictable and reliable enterprise quality releases, and provide comprehensive support to our customers. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, it may harm our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.

If we do not effectively expand and train our sales force, we may be unable to add new customers or increase sales to our existing customers and our business will be harmed.

We continue to be substantially dependent on our sales force to obtain new customers and to drive additional use cases among our existing customers. We believe that there is significant competition for sales personnel, including enterprise sales representatives and sales engineers, with the skills and technical knowledge that we require. In particular, there is significant demand for sales engineers with Hadoop expertise. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow rapidly, a large percentage of our sales force will have relatively little experience working with us, our support subscription offerings and our business model. If we are unable to hire and train sufficient numbers of effective sales personnel, or our sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business will be harmed.

If we are not successful in expanding our international business, we may incur additional losses and our revenue growth could be harmed.

Our future results depend, in part, on our ability to expand into international markets. We also have a number of distributor and reseller relationships for our support subscription offerings and professional services in international markets. Our ability to expand internationally will depend upon our ability to deliver functionality and foreign language translations that reflect the needs of the international clients that we target. Our ability to expand internationally involves various risks, including the need to invest significant resources in such expansion, and the possibility that returns on such investments will not be achieved in the near future or at all in these less familiar competitive environments. We may also choose to conduct our international business through strategic alliances. If we are unable to identify strategic alliance partners or negotiate favorable alliance terms, our international growth may be harmed. In addition, we have incurred and may continue to incur

 

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significant expenses in advance of generating material revenues as we attempt to establish our presence in particular international markets.

Expanding our business internationally will also require significant attention from our management and will require us to add additional management and other resources in these markets. Our ability to expand our business, attract talented employees and enter into strategic alliances in an increasing number of international markets requires considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems, commercial infrastructures and technology infrastructure. If we are unable to grow our international operations in a timely manner, we may incur additional losses and our revenue growth could be harmed.

As we expand internationally, our business will become more susceptible to risks associated with international operations.

We principally sell our offerings through sales personnel in the United States, France, Germany, India, the Netherlands and the United Kingdom and currently have operations in the United States and in London, United Kingdom. We also have a development team in Kiev, Ukraine and a number of distributor and reseller relationships for our support subscription offerings and our professional services in other international markets. Conducting international operations subjects us to risks that we have not generally faced in the United States. These risks include:

 

    fluctuations in currency exchange rates;

 

    unexpected changes in foreign regulatory requirements;

 

    potentially different pricing environments and longer sales cycles;

 

    difficulties in managing the staffing of international operations;

 

    potentially adverse tax consequences, including the complexities of foreign value-added tax systems, restrictions on the repatriation of earnings and changes in tax rates;

 

    dependence on strategic alliance partners to increase client acquisition;

 

    the burdens of complying with a wide variety of foreign laws and different legal standards;

 

    increased financial accounting and reporting burdens and complexities;

 

    political, social and economic instability abroad, particularly with our development team in Ukraine;

 

    laws and business practices favoring local competitors;

 

    terrorist attacks and security concerns in general; and

 

    reduced or varied protection for intellectual property rights in some countries.

The occurrence of any one of these risks could harm our international business and, consequently, our results of operations. Additionally, operating in international markets requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to operate in other countries will produce desired levels of revenue or profitability.

 

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We have made strategic acquisitions in the past and intend to do so in the future. If we are unable to find suitable acquisitions or partners, or to achieve expected benefits from such acquisitions or partnerships, our business, financial condition, results of operations and prospects could be harmed.

As part of our ongoing business strategy to expand our suite of solutions and acquire new technology, from time to time we engage in discussions with third parties regarding, and enter into agreements relating to, possible acquisitions, strategic alliances and joint ventures. In May 2014, we acquired new technology, know-how and solutions through our acquisition of XA Secure, a data security company. There may be significant competition for acquisition targets in our industry, or we may not be able to identify suitable acquisition candidates, negotiate attractive terms for acquisitions or complete acquisitions on expected timelines, or at all. If we are unable to complete strategic acquisitions or do not realize the expected benefits of the acquisitions we do complete, our business, financial condition, results of operations and prospects could be harmed.

Even if we are able to complete acquisitions or enter into alliances and joint ventures that we believe will be successful, such transactions are inherently risky. Significant risks associated with these transactions, include:

 

    failing to achieve anticipated synergies, including with respect to complementary software or services;

 

    losing key employees of the acquired businesses;

 

    integration and restructuring costs, both one-time and ongoing;

 

    maintaining sufficient controls, policies and procedures;

 

    diversion of management’s attention from ongoing business operations;

 

    establishing new informational, operational and financial systems to meet the needs of our business;

 

    our inability to maintain the key business relationships and the reputations of the businesses we acquire;

 

    uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;

 

    our dependence on unfamiliar affiliates and partners of the companies we acquire;

 

    insufficient revenue to offset our increased expenses associated with acquisitions;

 

    potentially incurring accounting charges as we transition an acquired company to our open-source business model;

 

    our responsibility for the liabilities of the businesses we acquire; and

 

    unanticipated and unknown liabilities.

If we are not successful in completing acquisitions in the future or do not realize the expected benefits of the acquisitions we do complete, we may be required to reevaluate our acquisition strategy. We also may incur substantial expenses and devote significant management time and resources in seeking to complete acquisitions, some of which may ultimately not be consummated or not result in expected benefits. The occurrence of any of these acquisition-related risks could harm our business, financial condition, results of operations and prospects.

Our continued success depends on our ability to maintain and enhance strong brands.

We believe that the brand identities that we have developed have contributed significantly to the success of our business. We also believe that maintaining and enhancing our brands is important to

 

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expanding our customer base and attracting talented employees. In order to maintain and enhance our brands, we may be required to make further investments that may not be successful. Maintaining our brands will depend in part on our ability to remain a leader in open source technology and our ability to continue to provide high-quality offerings. If we fail to promote and maintain our brands, or if we incur excessive costs in doing so, our business, financial condition, results of operations and cash flows may be harmed.

Our efforts to protect our intellectual property rights may not be adequate to prevent third parties from misappropriating our intellectual property rights in our know-how, software and trademarks.

We have developed proprietary methodologies, know-how and software related to software development, testing and quality assurance. Failure to adequately protect and defend our intellectual property rights in these areas may diminish the value of the Hortonworks Data Platform, impair our ability to compete effectively and harm our business.

In addition, the protective steps we have taken in the past may be inadequate to protect and deter misappropriation of our trademark rights. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our trademark rights in a timely manner. We have registered trademarks in the United States and the European Community and have trademark applications pending in Canada. Effective trademark protection may not be available in every country in which we offer or intend to distribute our solutions. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights. Failure to adequately protect our trademark rights could damage or even destroy one or more of our brands and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.

We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies can dedicate substantially greater resources to enforce their intellectual property rights, and to defend claims that may be brought against them, than we can. We have received, and we and the Apache Hadoop Project may in the future receive, notices that claim we have misappropriated, misused, or infringed other parties’ intellectual property rights, and, to the extent Hadoop gains greater market visibility, we and the Apache Hadoop Project face a higher risk of being the subject of intellectual property infringement claims.

Any intellectual property infringement claims, with or without merit, could be very time-consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. Any of these results would harm our business, results of operations, financial condition and cash flows.

 

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Federal, state, foreign government and industry regulations, as well as self-regulation related to privacy and data security concerns pose the threat of lawsuits and other liability.

We do not generally collect and utilize demographic and other information, including personally identifiable information, from and about users (such as customers, potential customers, and others). Users may, however, provide personal information to us in many contexts such as when signing up for certain services, registering for seminars, participating in a survey, connecting with other users and Hadoop experts in our forums, participating in Hortonworks University classes, participating in polls or signing up to receive e-mail newsletters.

Within the United States, various federal and state laws and regulations govern the collection, use, retention, sharing and security of the data we receive from and about users. Outside of the United States, various jurisdictions actively regulate and enforce laws regarding the collection, retention, transfer and use (including loss and unauthorized access) of personal information. Privacy advocates and government bodies have increasingly scrutinized the ways in which companies link personal identities and data associated with particular users or devices with data collected through the internet, and we expect such scrutiny to continue to increase. Loss, retention or misuse of certain information and alleged violations of laws and regulations relating to privacy and data security, and any relevant claims, may expose us to potential liability and may require us to expend significant resources on data security and in responding to and defending such allegations and claims.

Security and privacy breaches may hurt our business.

Any security breach, unauthorized access, unauthorized usage, virus or similar breach or disruption could result in the loss of confidential information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations or other liabilities. If our, our customers’ or our partners’ security measures are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to data, our reputation will be damaged, our business may suffer and we could incur significant liability.

Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and customers. Any significant violations of data privacy could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition. Moreover, if a high-profile security breach occurs with respect to another Hadoop provider, our customers and potential customers may lose trust in the security of Hadoop-based solutions generally, which could adversely impact our ability to retain existing customers or attract new ones.

Prolonged economic uncertainties or downturns could harm our business.

Current or future economic downturns could harm our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from financial and credit market fluctuations and terrorist attacks in the United States, Europe or elsewhere, could cause a decrease in corporate spending on enterprise software in general and slow down the rate of growth of our business.

General worldwide economic conditions have experienced, and in the future may experience, a significant downturn. These conditions make it extremely difficult for our customers and us to forecast and plan future business activities accurately, and they could cause our customers to reevaluate their decision to purchase our offerings, which could delay and lengthen our sales cycles or result in

 

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cancellations of planned purchases. Furthermore, during challenging economic times our customers may face issues in gaining timely access to sufficient credit, which could impair their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts, which would harm our results of operations.

We have a significant number of customers in the business services, advertising, financial services, healthcare and pharmaceuticals, high technology, manufacturing, media and entertainment, oil and gas, online services, retail and telecommunications industries. A substantial downturn in any of these industries may cause firms to react to worsening conditions by reducing their capital expenditures in general or by specifically reducing their spending on information technology. Customers in these industries may delay or cancel information technology projects or seek to lower their costs by renegotiating vendor contracts. To the extent purchases of our offerings are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general information technology spending. Also, support subscription customers may choose to develop or utilize in-house support capabilities as an alternative to purchasing our support subscription offerings or professional services. Moreover, competitors may respond to market conditions by lowering prices of support subscription offerings. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our support subscription offerings or professional services.

We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or industries in which we operate worsen from present levels, our business, results of operations, financial condition and cash flows could be harmed.

We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance the Hortonworks Data Platform, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.

Under GAAP, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry. We may be required to record a significant charge to

 

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earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could harm our results of operations.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2013, we had federal and state net operating loss carryforwards, or NOLs, of $46.3 million and $47.9 million, respectively, due to prior period losses. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering and the concurrent private placement, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that, due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, whether or not we attain profitability.

We have business and customer relationships with certain entities who are stockholders or affiliated with our directors, or both, and conflicts of interest may arise because of such relationships.

Some of our customers and other business partners are affiliated with certain of our directors or hold shares of our capital stock, or both. For example, we have entered into strategic partnerships and/or customer relationships with Yahoo! Inc., Red Hat, Inc., Teradata Corporation and Hewlett-Packard Company. Our directors Jay Rossiter, Paul Cormier and Martin Fink are employees of Yahoo! Inc., Red Hat, Inc. and Hewlett-Packard Company, respectively, and each of Yahoo! Inc., Hewlett-Packard Company and Teradata Corporation are stockholders. We believe that the transactions and agreements that we have entered into with related parties are on terms that are at least as favorable as could reasonably have been obtained at such time from third parties. However, these relationships could create, or appear to create, potential conflicts of interest when our board of directors is faced with decisions that could have different implications for us and these other parties or their affiliates. In addition, conflicts of interest may arise between us and these other parties and their affiliates. The appearance of conflicts, even if such conflicts do not materialize, might adversely affect the public’s perception of us, as well as our relationship with other companies and our ability to enter into new relationships in the future, including with competitors of such related parties, which could harm our business and results of operations.

Catastrophic events may disrupt our business.

Our corporate headquarters are located in Palo Alto, California and we utilize data centers that are located in North America. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational support, hosted services and sales activities. The west coast of the United States contains active earthquake zones. In the event of a major earthquake, hurricane, or catastrophic event such as fire, power loss, telecommunications failure, cyber-attack, war, or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our application development, extended interruptions in the Hortonworks Data Platform, breaches of data security and loss of critical data, all of which could harm our future results of operations.

 

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Risks Related to Ownership of Our Common Stock and this Offering

Our stock price may be volatile or may decline regardless of our operating performance resulting in substantial losses for investors purchasing shares in this offering.

The trading price of our common stock is likely to be volatile and could fluctuate widely regardless of our operating performance. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    actual or anticipated fluctuations in our results of operations;

 

    the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

    failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    ratings changes by any securities analysts who follow our company;

 

    announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

    changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

    price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;

 

    changes in accounting standards, policies, guidelines, interpretations or principles;

 

    actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

 

    developments or disputes concerning our intellectual property or our offerings, or third-party proprietary rights;

 

    announced or completed acquisitions of businesses or technologies by us or our competitors;

 

    new laws or regulations or new interpretations of existing laws, or regulations applicable to our business;

 

    any major change in our board of directors or management;

 

    sales of shares of our common stock by us or our stockholders;

 

    lawsuits threatened or filed against us; and

 

    other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from operating our business, and harm our business, results of operations, financial condition and cash flows.

 

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There has been no prior market for our common stock and an active market may not develop or be sustained and investors may not be able to resell their shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock was determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price, if at all. An active or liquid market in our common stock may not develop following this offering or, if it does develop, it may not be sustainable.

Our directors, officers and principal stockholders beneficially own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

As of October 15, 2014, our directors, officers, five percent or greater stockholders, and their respective affiliates beneficially owned in the aggregate approximately 68.7% of our outstanding voting stock and, upon the completion of this offering and the concurrent private placement, that same group will beneficially own in the aggregate approximately 59.0% of our outstanding voting stock (assuming no exercise of the underwriters’ option to purchase additional shares and no purchase of shares in this offering by our directors, officers, five percent or greater stockholders, and their respective affiliates). These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders will be able to control elections of directors, amendments of our organizational documents, and approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws, as amended and restated in connection with this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:

 

    authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights and preferences determined by our board of directors that may be senior to our common stock;

 

    require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

    specify that special meetings of our stockholders can be called only by our board of directors, the Chair of our board of directors, or our Chief Executive Officer;

 

    establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

    establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;

 

    prohibit cumulative voting in the election of directors;

 

    provide that our directors may be removed only for cause;

 

    provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

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    require the approval of our board of directors or the holders of at least seventy-five percent (75%) of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the federal securities laws, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. For as long as we continue to be an emerging growth company, we intend to take advantage of certain of these exemptions. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. However, we chose to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We will remain an “emerging growth company” until the earliest of: (i) the last day of the fiscal year following the five-year anniversary of the completion of this offering; (ii) the end of the fiscal year in which we have more than $1.0 billion in annual revenue; (iii) the end of the fiscal year in which we qualify as a “large accelerated filer”, with at least $700 million of equity securities held by non-affiliates as of the end of the second quarter of such fiscal year; and (iv) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the exchanges and other markets upon which our common stock is listed, and other applicable securities rules and regulations.

 

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Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. We will be required to disclose changes made in our internal control and procedures on a quarterly basis and we will be required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. However, our independent registered public accounting firm will not be required to formally audit and attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees to assist us in complying with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our operating expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and results of operations.

 

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We may invest or spend the proceeds of this offering and the concurrent private placement in ways with which you may not agree or in ways which may not yield a return.

Our management will have considerable discretion in the application of the net proceeds of this offering and the concurrent private placement, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds of this offering and the concurrent private placement are being used appropriately. The net proceeds of this offering and the concurrent private placement may be used for corporate purposes that do not increase the value of our business, which could cause our stock price to decline.

We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business, and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the increase, if any, of our stock price, which may never occur.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.

Substantial future sales of our common stock in the public market could cause our stock price to fall.

Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering and the concurrent private placement, we will have 41,367,451 shares of common stock outstanding. All shares sold in this offering will be freely tradeable immediately after this offering (except for shares purchased by affiliates) and the remaining 35,367,451 shares of our common stock outstanding immediately after this offering may be sold after expiration of lock-up agreements and market stand-off agreements 180 days after the date of this offering (subject in some cases to volume limitations). In addition, as of September 30, 2014, there were outstanding options and warrants to purchase 17,466,998 shares of our common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements and market stand-off agreements. Sales by these stockholders or option holders of a substantial number of shares after this offering and the concurrent private placement could significantly reduce the market price of our common stock. Moreover, after this offering and the concurrent private placement, some holders of shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we might file for ourselves or other stockholders.

We intend to file a registration statement under the Securities Act of 1933, as amended, or the Securities Act, covering shares of our common stock reserved for issuance under our stock plans. This

 

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registration statement is expected to be filed soon after the date of this prospectus and will automatically become effective upon filing. Accordingly, shares registered under this registration statement will be available for sale in the open market, subject to vesting restrictions with us that may apply to certain shares or the lock-up agreements and market standoff agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share after giving effect to this offering and the concurrent private placement of $9.17 per share as of September 30, 2014, based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of any warrant, upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans or if we otherwise issue additional shares of our common stock. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

Our charter documents designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our certificate of incorporation and bylaws, as amended and restated in connection with this offering, provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could harm our business, financial condition, or results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

    our future financial performance, including our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to generate positive cash flow and ability to achieve and maintain profitability;

 

    the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

    our ability to increase the number of support subscription customers;

 

    our ability to renew and extend existing customer deployments;

 

    our ability to optimize the pricing for our support subscription offerings;

 

    the growth in the usage of the Hadoop framework;

 

    our ability to innovate and develop the various open source projects that will enhance the capabilities of the Hortonworks Data Platform;

 

    our ability to provide superior support subscription offerings and professional services;

 

    our ability to successfully expand in our existing markets and into new domestic and international markets;

 

    our ability to effectively manage our growth and future expenses;

 

    our ability to maintain, protect and enhance our intellectual property;

 

    worldwide economic conditions and their impact on consumer spending;

 

    our ability to comply with modified or new laws and regulations applying to our business, including copyright and privacy regulation; and

 

    the attraction and retention of qualified employees and key personnel.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

 

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The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

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INDUSTRY AND MARKET DATA

This prospectus also contains statistical data, estimates and forecasts that are based on independent industry publications, such as those published by Allied Market Research, Forrester Research, Inc., Gartner, Inc., International Data Corporation and International Data Group, or other publicly available information, as well as other information based on our internal sources. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, third-party estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those estimates made by third parties and by us.

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our common stock that we are selling in this offering and the concurrent private placement will be approximately $75.2 million, based upon an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, we estimate that our net proceeds would be approximately $86.0 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds that we receive from the sale of shares of our common stock in this offering and the concurrent private placement by approximately $6.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of one million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, the net proceeds that we receive from the sale of shares of our common stock in this offering and the concurrent private placement by approximately $12.1 million, assuming the initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and facilitate our future access to the public equity markets. We currently intend to use the net proceeds that we receive from this offering and the concurrent private placement for working capital or other general corporate purposes including funding our growth strategies discussed in this prospectus. These uses include expansion of our sales organization both directly and indirectly through our reseller and OEM partners, international expansion in North America, Western Europe and other geographies, further development and enhancement of the Hortonworks Data Platform and integration with the Hadoop ecosystem and general and administrative matters, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes.

We may also use a portion of the net proceeds that we receive to acquire or invest in complementary businesses, products, services, technologies or other assets. We have not entered into any agreements or commitments with respect to any acquisitions or investments at this time.

 

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We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering and the concurrent private placement. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering and the concurrent private placement in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and short-term investments and long-term investments, as well as our capitalization, as of September 30, 2014 as follows:

 

    on an actual basis;

 

    on a pro forma basis, giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 21,949,525 shares of our common stock, which conversion will occur upon the completion of this offering, as if such conversion had occurred on September 30, 2014; and

 

    on a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above and the sale, (ii) issuance by us of 6,000,000 shares of our common stock in this offering, based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (iii) the sale of 486,486 shares of our common stock to be purchased from us by funds affiliated with Passport in the concurrent private placement at an assumed offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other final terms of this offering and the concurrent private placement. You should read this table together with our consolidated financial statements and related notes, and “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

    As of September 30, 2014  
          Actual                 Pro Forma           Pro Forma
as Adjusted
 
    (In thousands, except share and per share data)  

Cash and cash equivalents and short-term investments

  $ 111,614      $ 111,614      $ 189,151 (1) 
 

 

 

   

 

 

   

 

 

 

Long-term investments

    15,316        15,316        15,316   
 

 

 

   

 

 

   

 

 

 

Convertible preferred stock, par value $0.0001 per share, issuable in Series A, B, C and D: 50,399,075 shares authorized, 43,899,075 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

    252,614                 

Stockholders’ deficit:

     

Common stock, par value $0.0001 per share, actual and pro forma; par value $0.0001 per share, pro forma as adjusted: 114,500,000 shares authorized, 4,686,699 shares issued and outstanding, actual; 500,000,000 shares authorized, 26,636,224 shares issued and outstanding, pro forma; 500,000,000 shares authorized, 33,122,710 shares issued and outstanding, pro forma as adjusted

           3        3   

Additional paid-in capital

    13,947        266,558        341,722   

Accumulated other comprehensive income (loss)

    (165     (165     (165

Accumulated deficit

    (181,104     (181,104     (181,104
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (167,322     85,292        160,456   
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 85,292      $ 85,292      $ 160,456   
 

 

 

   

 

 

   

 

 

 

 

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(1) Pro forma as adjusted cash and cash equivalents and short-term investments reflects $2.37 million of deferred offering costs that had been paid as of September 30, 2014.

If the underwriters’ option to purchase additional shares of our common stock from us were exercised in full, pro forma as adjusted cash and cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and shares issued and outstanding as of September 30, 2014 would be $200.1 million, $352.6 million, $171.3 million and 42,267,451 shares, respectively.

In July 2011, we issued a warrant to purchase 6,500,000 shares of Series A preferred stock at an exercise price of $0.005 per share to Yahoo!, a related party. Upon consummation of the offering, this warrant will be exercisable for 3,250,000 shares of our common stock and the fair value of the warrant will be recognized as a reduction in revenue up to the cumulative amount of revenue recognized to date from Yahoo!, which was approximately $3.3 million as of September 30, 2014, and any excess of such fair value over such cumulative revenue will be recognized in cost of sales, in the quarter in which the offering is consummated. The reduction in revenue and increase in cost of sales resulting from vesting of the warrant is estimated at $42.2 million in the aggregate (comprised of $3.3 million as a reduction in revenue and $38.9 million as an increase in cost of sales, assuming that the offering had been consummated on September 30, 2014), based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and would result in an increase of $42.2 million in additional paid-in capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.” The warrant will not have an impact on our revenue or expenses in periods subsequent to the period in which this offering is consummated.

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents and short-term investments, additional paid-in capital and total stockholders’ equity (deficit) by approximately $6.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of one million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, our cash and cash equivalents and short-term investments, additional paid-in capital and total stockholders’ equity (deficit) by approximately $12.1 million, assuming that the initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

The pro forma and pro forma as adjusted columns in the table above exclude the following:

 

    13,740,630 shares of our common stock issuable upon the exercise of options to purchase common stock that were outstanding as of September 30, 2014, with a weighted average exercise price of $7.39 per share (which excludes 2,593,644 restricted shares issued under the 2011 Stock Option and Grant Plan that are included in the number of shares of our common stock that will be outstanding after the completion of this offering and the concurrent private placement);

 

    337,499 shares of our common stock issuable upon the exercise of options to purchase common stock granted after September 30, 2014, with a weighted average exercise price of $19.76 per share;

 

   

7,112,336 shares of our common stock reserved for future issuance under our 2014 Stock Option and Incentive Plan, which will become effective upon completion of this offering, which contains provisions that automatically increase its share reserve each year and includes

 

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1,112,336 shares of common stock that were reserved under our 2011 Stock Option and Grant Plan;

 

    2,500,000 shares of our common stock reserved for issuance under our 2014 Employee Stock Purchase Plan, which will become effective upon the completion of this offering and contains provisions that automatically increase its share reserve each year;

 

    3,250,000 shares of our common stock issuable upon the exercise of a warrant to purchase shares of our Series A preferred stock outstanding as of September 30, 2014, with an exercise price of $0.005 per share that will be exercisable for common stock upon the completion of this offering; and

 

    476,368 shares of our common stock, subject to further adjustment in the event that we sell any additional shares of Series D preferred stock or warrants to purchase Series D preferred stock prior to the completion of this offering or other liquidation event, issuable upon the exercise of a warrant to purchase shares of our common stock with an exercise price of $8.46 per share.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering and the concurrent private placement. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the concurrent private placement and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding. Our historical net tangible book value (deficit) as of September 30, 2014 was $83.2 million, or $6.43 per share. Our pro forma net tangible book value (deficit) as of September 30, 2014 was $83.2 million, or $2.38 per share, based on the total number of shares of our common stock outstanding as of September 30, 2014, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock as of September 30, 2014 into an aggregate of 21,949,525 shares of our common stock, which conversion will occur upon the completion of this offering.

After giving effect to (i) the sale by us of 6,000,000 shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the sale of 486,486 shares of our common stock to be purchased from us by funds affiliated with Passport in the concurrent private placement at an assumed offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, our pro forma as adjusted net tangible book value as of September 30, 2014 would have been $158.3 million, or $3.83 per share. This represents an immediate increase in pro forma net tangible book value of $1.45 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $9.17 per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $ 13.00   

Pro forma net tangible book value (deficit) per share as of September 30, 2014

   $ 2.38      

Increase in pro forma net tangible book value (deficit) per share attributable to new investors in this offering

     1.45      
  

 

 

    

Pro forma as adjusted net tangible book value per share immediately after this offering

        3.83   
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $ 9.17   
     

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $0.15, and would increase or decrease, as applicable, dilution per share to new investors in this offering by $0.85, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated

 

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underwriting discounts and commissions. Similarly, each increase or decrease of one million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $0.20, and would increase or decrease, as applicable, dilution per share to new investors in this offering by $0.20, assuming that the initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

In addition, to the extent any outstanding options to purchase our common stock are exercised, new options are issued under our share-based compensation plans or we issue additional shares of our common stock in the future, investors participating in this offering would experience further dilution. If the underwriters exercise their option to purchase additional shares of our common stock from us in full, the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering would be $4.00 per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $9.00 per share.

The following table presents, on a pro forma as adjusted basis as of September 30, 2014, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into our common stock upon the completion of this offering, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our common stock and our convertible preferred stock, cash received from the exercise of stock options, and the average price per share paid or to be paid to us at an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and Passport, purchasing shares at an assumed offering price of $13.00, the midpoint of the estimated price range set forth on the cover page of this prospectus:

 

     Shares Purchased     Total Consideration     Average Price
per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     34,880,965         84.3   $ 264,021,069         75.8   $ 7.57   

New investors

     6,000,000         14.5        78,000,000         22.4        13.00   

Private placement investors

     486,486         1.2        6,324,318         1.8        13.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

     41,367,451         100   $ 348,345,387         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $6.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. In addition, to the extent any outstanding options to purchase common stock are exercised, new investors will experience further dilution.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full from us, our existing stockholders would own 82.5%, our new investors would own 16.3% and Passport would own 1.2% (excluding shares of common stock issuable upon conversion of shares of our Series D preferred stock currently held by funds affiliated with Passport, which are included in the shares owned by our existing investors) of the total number of shares of our common stock outstanding upon the completion of this offering and the concurrent private placement.

 

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The number of shares of our common stock to be outstanding after this offering and the concurrent private placement is based on 34,880,965 shares outstanding as of September 30, 2014, including the conversion into common stock of 21,949,525 shares of preferred stock upon the completion of this offering, and excludes:

 

    13,740,630 shares of our common stock issuable upon the exercise of options to purchase common stock that were outstanding as of September 30, 2014, with a weighted average exercise price of $7.39 per share (which excludes 2,593,644 restricted shares issued under the 2011 Stock Option and Grant Plan that are included in the number of shares of our common stock that will be outstanding after the completion of this offering and the concurrent private placement);

 

    337,499 shares of our common stock issuable upon the exercise of options to purchase common stock granted after September 30, 2014, with a weighted average exercise price of $19.76 per share;

 

    7,112,336 shares of our common stock reserved for future issuance under our 2014 Stock Option and Incentive Plan, which will become effective upon completion of this offering, which contains provisions that automatically increase its share reserve each year and includes 1,112,336 shares of common stock that were reserved under our 2011 Stock Option and Grant Plan;

 

    2,500,000 shares of our common stock reserved for issuance under our 2014 Employee Stock Purchase Plan, which will become effective upon the completion of this offering and contains provisions that automatically increase its share reserve each year;

 

    3,250,000 shares of our common stock issuable upon the exercise of a warrant to purchase shares of our Series A preferred stock outstanding as of September 30, 2014, with an exercise price of $0.005 per share that will be exercisable for common stock upon the completion of this offering; and

 

    476,368 shares of our common stock, subject to further adjustment in the event that we sell any additional shares of Series D preferred stock or warrants to purchase Series D preferred stock prior to the completion of this offering or other liquidation event, issuable upon the exercise of a warrant to purchase shares of our common stock with an exercise price of $8.46 per share.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statement of operations data for the years ended April 30, 2012 and 2013 and the eight months ended December 31, 2013 and the consolidated balance sheet data as of April 30, 2012 and 2013 and December 31, 2013 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the nine months ended September 30, 2013 and 2014 and for the eight months ended December 31, 2012, and the consolidated balance sheet data as of September 30, 2014, are derived from our unaudited interim and comparative transition period consolidated financial statements included elsewhere in this prospectus. The unaudited interim and comparative transition period consolidated financial statements reflect, in the opinion of management, all adjustments, of a normal, recurring nature that are necessary for the fair presentation of the consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the full year or any other period. The following selected financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended April 30,     Eight Months Ended
December 31,
    Nine Months Ended
September 30,
 
     2012     2013     2012     2013     2013     2014  
     (In thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

            

Support subscription

   $ 1,276      $ 7,739      $ 3,643      $ 11,415      $ 10,212      $ 19,190   

Professional services

     370        3,259        1,135        6,450        5,726        14,198   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total support subscription and professional services revenue(1)

     1,646        10,998        4,778        17,865        15,938        33,388   

Cost of revenue:

            

Cost of support subscription

     421        5,071        2,880        3,720        4,995        2,875   

Cost of professional services

     974        5,862        3,053        9,990        8,493        19,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue(2)

     1,395        10,933        5,933        13,710        13,488        22,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     251        65        (1,155     4,155        2,450        11,388   

Operating expenses:(2)

            

Sales and marketing

     2,589        17,187        8,403        21,357        21,584        44,553   

Research and development

     6,881        12,070        6,768        14,621        13,752        26,270   

General and administrative

     2,384        7,598        3,487        14,368        15,583        17,634   

Contribution of acquired technology to the Apache Software Foundation

                                        3,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,854        36,855        18,658        50,346        50,919        92,428   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,603     (36,790     (19,813     (46,191     (48,469     (81,040

Interest and other income

     84        215        159        152        159        381   

Other expense

     (1     (52     (49     (129     (56     (7,269
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense (benefit)

     (11,520     (36,627     (19,703     (46,168     (48,366     (87,928

Income tax expense (benefit)

     1        11        8        45        34        (1,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,521   $ (36,638   $ (19,711   $ (46,213   $ (48,400   $ (86,732
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, basic and diluted(3)

   $ (74.30   $ (30.29   $ (16.96   $ (18.18   $ (28.74   $ (20.80
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share of common stock, basic and diluted(3)

     155,052        1,209,750        1,161,880        2,541,800        1,684,167        4,169,679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock, basic and diluted(4)

     $ (2.68     $ (2.62     $ (3.71
    

 

 

     

 

 

     

 

 

 

Weighted average shares used in computing pro forma net loss per share of common stock, basic and diluted(4)

       13,651,154          17,639,090          23,361,541   
    

 

 

     

 

 

     

 

 

 

 

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(1) Total support subscription and professional services revenue for the eight months ended December 31, 2013 and nine months ended September 30, 2014 includes contra-revenue adjustments recognized for equity securities issued to an affiliate of AT&T, which is a customer, as follows:

 

     Eight Months
Ended
December 31,
     Nine Months
Ended
September 30,
     Twelve Months
Ended
September 30,
 
   2013      2014      2014  

Gross support and subscription and professional services revenue:

        

Support subscription

   $ 11,782       $ 21,151       $ 26,768   

Professional services

     6,465         14,277         17,188   
  

 

 

    

 

 

    

 

 

 

Total support subscription and professional services revenue

     18,247         35,428         43,956   

Contra-support subscription and professional services revenue:

        

Support subscription

     (367      (1,961      (2,328

Professional services

     (15      (79      (93
  

 

 

    

 

 

    

 

 

 

Total contra-support subscription and professional services revenue

     (382      (2,040      (2,421

Net support subscription and professional services revenue:

        

Support subscription

     11,415         19,190         24,440   

Professional services

     6,450         14,198         17,095   
  

 

 

    

 

 

    

 

 

 

Total net support subscription and professional services revenue

   $ 17,865       $ 33,388       $ 41,535   
  

 

 

    

 

 

    

 

 

 

 

(2) Stock-based compensation was allocated as follows:

 

     Year Ended April 30,      Eight Months Ended
December 31,
     Nine Months Ended
September 30,
 
     2012      2013      2012      2013      2013      2014  

Cost of revenue

   $ 14       $ 45       $ 44       $ 132       $ 83       $ 320   

Research and development

     140         244         140         468         327         1,146   

Sales and marketing

     18         234         110         321         270         978   

General and administrative

     150         239         122         406         342         3,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 322       $ 762       $ 416       $ 1,327       $ 1,022       $ 5,492   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3) See Note 11 to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.
(4) See Note 12 to our consolidated financial statements for an explanation of the method used to calculate pro forma basic and diluted net loss per share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.

 

     As of April 30,     As of
December 31,
2013
    As of
September 30,
2014
 
     2012     2013      
     (In thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents and short-term investments

   $ 51,350      $ 17,883      $ 38,509      $ 111,614   

Working capital

     50,493        14,102        22,582        90,470   

Property and equipment, net

     381        1,050        1,093        2,201   

Long-term investments

     1,011        1,011               15,316   

Total assets

     55,029        29,279        54,443        160,335   

Deferred revenue

     10,148        16,730        27,928        47,720   

Total stockholders’ equity (deficit)

     (10,623     (46,415     (90,440     (167,322

 

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Key Metric – Gross Billings

We have included gross billings, a non-GAAP financial measure, in this prospectus because it is a key measure used by our board of directors and management to monitor our near term cash flows and manage our business. Gross billings is calculated as total revenue plus the change in deferred revenue for the same period. As we have not yet established vendor-specific objective evidence of fair value for our support subscriptions, we recognize revenue ratably over the period beginning when both the support subscription and professional services have commenced for customers with agreements that purchase both a support subscription and professional services. Most of our customer agreements include both support subscription and professional services. The accounting treatment for such agreements causes our revenue to trail the impact of these customer agreements and creates significant deferred revenue balances.

We have provided a reconciliation between total revenue, the most directly comparable GAAP financial measure, and gross billings in the table below. We believe gross billings provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our board of directors and management.

 

     Year Ended
April 30,
    Eight Months
Ended
December 31,
    Nine Months
Ended
September 30,
    Twelve Months
Ended
September 30,
 
     2012      2013     2012     2013     2013     2014     2014  
     (in thousands)  

Gross billings:

               

Total revenue

   $ 1,646       $ 10,998      $ 4,778      $ 17,865      $ 15,938      $ 33,388      $ 41,535   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred revenue, end of period

     10,148         16,730        15,096        27,928        23,573        47,720        47,720   

Less: Total deferred revenue, beginning of period

             (10,148     (10,148     (16,730     (15,096     (27,928     (23,573
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total change in deferred revenue

     10,148         6,582        4,948        11,198        8,477        19,792        24,147   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross billings

   $ 11,794       $ 17,580      $ 9,726      $ 29,063      $ 24,415      $ 53,180      $ 65,682   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial Data” and the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Risk Factors” and in other parts of this prospectus.

Overview

We seek to advance the market adoption of Hadoop and provide enterprises with a new data management solution that enables them to harness the power of big data to transform their businesses through more effective and efficient management of their valuable data assets. A Hadoop cluster combines commodity servers with local storage and an open source software distribution to create a reliable distributed compute and storage platform for large data sets scalable up to PBs, with thousands of servers or nodes. Our solution is an enterprise-grade data management platform built on a unique distribution of Apache Hadoop and powered by YARN. Our approach is differentiated in that we are committed to serving the Apache Software Foundation open source ecosystem and to sharing all of our product developments with the open source community. We distribute the Hortonworks Data Platform software under the Apache open source license in order to provide broad rights for recipients of the software to use, copy, modify and redistribute the software. Consistent with our open source approach, we generally make the Hortonworks Data Platform available free of charge and derive the predominant amount of our revenue from support subscription offerings and professional services.

Since our founding in April 2011, we and our partners have achieved the following significant milestones:

 

    October 2011: Announced strategic relationship with Microsoft to deliver Hadoop-based solutions for Windows Server and Windows Azure;

 

    February 2012: Announced joint development, support and marketing partnership with Teradata;

 

    June 2012: Hortonworks Data Platform Version 1.0 general availability;

 

    September 2012: Hortonworks Data Platform Version 1.1 general availability;

 

    October 2012: Announced joint initiative with Rackspace to deliver OpenStack and Hadoop-based solutions for public and private cloud;

 

    January 2013: Hortonworks Sandbox general availability and Hortonworks Data Platform Version 1.2 general availability;

 

    May 2013: Hortonworks Data Platform Version 1.1 for Windows general availability (first release for Windows);

 

    June 2013: Hortonworks Data Platform Version 1.3 general availability; Teradata Launches Teradata Portfolio for Hadoop (Teradata sells Hortonworks Data Platform in appliance, on commodity hardware, and as a subscription);

 

    August 2013: Hortonworks Data Platform Version 1.3 for Windows general availability;

 

    September 2013: Announced reseller agreement with SAP;

 

   

October 2013: Hortonworks Data Platform Version 2.0 with YARN general availability (first general availability release of the Hortonworks Data Platform with YARN), announced reseller

 

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agreement with HP and Microsoft launches Windows Azure HDInsight (Azure cloud service built on Hortonworks Data Platform);

 

    February 2014: Announced deepened strategic alliance with Red Hat to bring enterprise Apache Hadoop to the open hybrid cloud;

 

    April 2014: Hortonworks Data Platform Version 2.1 for both Linux and Windows general availability (simultaneous distribution of the Hortonworks Data Platform on both platforms);

 

    May 2014: Hortonworks acquired XA Secure, a data security company. In connection with the acquisition of XA Secure, we acquired developed technology with a fair value of approximately $4.0 million. On August 13, 2014, we contributed the developed technology to the Apache Software Foundation (ASF) and are recognizing an operating expense equal to the carrying value of the developed technology in our statement of operations at the point in time of the contribution (see discussion in Note 4 of the accompanying notes to the consolidated financial statements); and

 

    June 2014: Launch of Hortonworks YARN Ready Program to accelerate independent software vendor on-boarding onto YARN.

We generate revenue by selling support subscription offerings and professional services. Our support subscription agreements are typically annual arrangements. We price our support subscription offerings based on the number of servers in a cluster, or nodes, data under management and/or the scope of support provided. Accordingly, our support subscription revenue varies depending on the scale of our customers’ deployments and the scope of the support agreement. Professional services revenue is derived from consulting services engagements and training services. Our consulting services are provided primarily on a time and materials basis, and to a lesser extent, a fixed fee basis, and training services are priced based on attendance. The growth of our total revenue is dependent upon (i) new customer acquisition, (ii) expansion of sales within our existing customer base and (iii) the annual renewal of our support subscription agreements by our existing support subscription customers. Our revenue is subject to fluctuations based upon our success at addressing these factors but may also be impacted by the revenue recognition requirements of our multiple-element customer arrangements. Our early growth strategy has been aimed at acquiring customers for our support subscription offerings via a direct sales force and delivering consulting services. As we grow our business, our longer-term strategy will be to expand our partner network and leverage our partners to deliver a larger proportion of professional services to our customers on our behalf. The implementation of this strategy is expected to result in an increase in upfront costs in order to establish and further cultivate such strategic partnerships, but we expect that it will increase gross margins in the long term as the percentage of our revenue derived from professional services, which has a lower gross margin than our support subscriptions, decreases.

Our ability to successfully implement these strategies is subject to challenges, risks and uncertainties and our net losses have been increasing year over year. In our efforts to achieve profitability, we have placed and will continue to place an emphasis on investing within our support subscription sales efforts to try to drive increased revenue in both support subscriptions and professional services. If these support subscription sales efforts are not successful, due to unsuccessful execution by us, increased competition in our markets, or other factors, we will find it difficult to add new support subscription customers, and our revenue will not grow as quickly as we would like, and may decline. In addition, our longer-term strategy of leveraging our partners to provide an increasing proportion of professional services to our customers presents certain challenges. This strategy requires us to make upfront expenditures and devote time and attention to cultivating relationships. If we are unable to identify and engage suitable partners that are able to provide such services, or if our partners are unable to provide professional services at the quality level that our customers expect, we may not be able to achieve this transition as quickly as we would like, or at all. We expect that our ability to successfully implement this strategy will have a material impact on whether we can achieve profitability, due to the difference in gross margins on our support subscription services versus our professional services. If the percentage of our total revenue that comes from professional

 

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services does not decrease over time as we expect, or we are not able to establish VSOE for professional services revenue, then our ability to achieve profitability will be negatively impacted.

We have had a few agreements with, and equity issuances to, certain of our early, large customers that have had a significant impact on our historical results and that will continue to impact our reported GAAP results at least through the quarter in which this offering is completed. These transactions were:

 

    In July 2011, we issued a warrant to purchase 6,500,000 shares of Series A preferred stock at an exercise price of $0.005 per share (which is convertible into 3,250,000 shares of common stock) to Yahoo!, a related party. The warrant was issued in connection with our Series A financing and the transactions contemplated thereby, including commercial agreements with Yahoo! providing for support subscription offerings and certain rights to technology. The warrant expires nine years from the date of issuance and will become exercisable for common stock upon the consummation of this offering. As the warrant was issued to a customer, the vesting of the warrant upon the consummation of this offering will result in an immediate reduction in revenue up to the cumulative amount of revenue recognized with Yahoo!, through the consummation of this offering period. Our cumulative revenue from Yahoo! was approximately $3.3 million as of September 30, 2014. Any excess of the fair value of the warrant over the reduction in revenue will be recognized in cost of sales during the quarter in which we complete this offering. Assuming an initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, we would have recognized a contra-revenue adjustment of $3.3 million and a charge to cost of sales of $38.9 million if the offering had been consummated on September 30, 2014. This warrant will not have an impact on our revenue or expenses in subsequent periods.

 

    In February 2012, we entered into a multi-year agreement with Teradata, a related party, whereby we will provide development, support, training and other professional services to Teradata and Teradata’s end-user customers. In April 2012, Teradata made a non-refundable $9.5 million prepayment that will be used to credit amounts owed for end-user support and professional services that we may provide under the agreement. As of September 30, 2014, $6.4 million of the $9.5 million prepayment remained in deferred revenue.

 

    In July 2012, we entered into a multi-year subscription arrangement with Microsoft as a customer and partner in order to enable the Hortonworks Data Platform to execute on the Windows Server and Azure Cloud platforms. The arrangement consisted of an initial co-engineering effort with Microsoft, which, except for ongoing standard maintenance, was completed in October 2013, followed primarily by ongoing support subscription offerings. Microsoft contributed significantly to our early revenue (27% and 55% of total revenue for the years ended April 30, 2012 and 2013, respectively, 58% and 38% of total revenue for the eight months ended December 31, 2012 and 2013, respectively, and 47% and 22% of total revenue for the nine months ended September 30, 2013 and 2014, respectively). We expect the revenues from Microsoft to continue to decrease as a percentage of our total revenue in the future as we generate more revenue from other customers.

 

    In September 2013, we entered into a commercial agreement and common stock purchase agreement with AT&T covering the sale and issuance of 390,269 shares of our common stock to an affiliate of AT&T at a per share price of $0.0002. The shares were fully vested as of January 30, 2014. As a result of the issuance of shares to a customer at below fair value, we recorded contra-revenue in the amount of $0.4 million for the eight months ended December 31, 2013 and $2.0 million in connection with the accelerated vesting of the remaining shares for the nine months ended September 30, 2014.

 

   

In June 2014, we issued a warrant to purchase up to 1.0% of our shares of common stock outstanding at the issuance date at an exercise price of $8.46 per share to Yahoo!, a related

 

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party. The number of shares for which the warrant is exercisable can be increased for future issuances of shares (or warrants to purchase shares) of our Series D Preferred Stock prior to the occurrence of a corporate event, which includes this offering. The warrant was issued to Yahoo! in exchange for the amendment of certain rights held by Yahoo! under the Investors’ Rights Agreement to approve certain corporate transactions involving Hortonworks. The warrant expires nine years from the date of issuance and will become exercisable upon the consummation of this offering. As of September 30, 2014, the warrant is exercisable for 476,368 shares of our common stock. The combined value of the initial measurement and the change in the fair value of this warrant of $7.2 million is recorded as other expense in our consolidated statement of operations for the nine months ended September 30 2014. As of September 30, 2014, this amount is also recorded as a long term liability in our consolidated balance sheet.

In December 2014, we entered into a stock purchase agreement with Passport, pursuant to which funds affiliated with Passport will purchase 486,486 shares of our common stock at a price per share equal to the initial public offering price in the concurrent private placement to close immediately subsequent to the closing of this offering.

We have achieved significant growth in recent periods. For the years ended April 30, 2012 and 2013, our revenue was $1.6 million and $11.0 million, respectively. For the eight months ended December 31, 2012 and 2013, our revenue was $4.8 million and $17.9 million, respectively. For the nine months ended September 30, 2013 and 2014, our revenue was $15.9 million and $33.4 million, respectively. For the years ended April 30, 2012 and 2013, our gross billings were $11.8 million and $17.6 million, respectively. For the eight months ended December 31, 2012 and 2013, our gross billings were $9.7 million and $29.1 million, respectively. For the nine months ended September 30, 2013 and 2014, our gross billings were $24.4 million and $53.2 million, respectively. We incurred net losses of $11.5 million and $36.6 million for the years ended April 30, 2012 and 2013, respectively, $19.7 million and $46.2 million for the eight months ended December 31, 2012 and 2013, respectively, and $48.4 million and $86.7 million for the nine months ended September 30, 2013 and 2014, respectively. For the twelve months ended September 30, 2014, our revenue was $41.5 million, our gross billings were $65.7 million and our net losses were $101.5 million. See “Selected Consolidated Financial Data—Key Metric – Gross Billings” for more information and a reconciliation of gross billings to total revenue, the most directly comparable GAAP financial measure, and an explanation of why management uses this non-GAAP financial measure.

Change in Fiscal Year

We changed our fiscal year end from April 30 to December 31, commencing with our fiscal year ended December 31, 2013.

Key Factors Affecting Our Performance

Adding New Support Subscription Customers.    Growth of our revenue from our support subscription offerings is driven by agreements with new support subscription customers, renewals of existing support subscription agreements and increased revenues from existing support subscription customers. The number of agreements with new support subscription customers signed may vary from period to period for several reasons, including the length of our sales cycle, the effectiveness of our sales and marketing efforts and overall adoption rates of Hadoop-based solutions. The contract value of our support subscriptions with individual support subscription customers varies substantially among customers, and our results of operations may fluctuate from period to period depending on the timing of particular large support subscriptions. Our results of operations may also fluctuate, in part, because

 

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of the resource-intensive nature of our sales efforts, the length and variability of the sales cycle of our support subscription offerings and the difficulty in making short-term adjustments to our operating expenses. The length of our sales cycle from initial evaluation to payment for our support subscription offerings is generally six to nine months, but can extend to one year or more for some customers. In addition, because our professional services engagements frequently relate to initial new support subscription customer deployments of the Hortonworks Data Platform, growth in our professional services revenue is driven primarily by adding new support subscription customers.

Additional Sales to Existing Support Subscription Customers.    Our existing support subscription customers continue to represent a large opportunity for us to expand our revenue base. Growth of our revenue from existing support subscription customers typically comes when customers increase the scale of their deployment of the Hortonworks Data Platform. We price our support subscription offerings based on the number of nodes, data under management and/or the scope of services provided. Accordingly, our revenues from our support subscription offerings vary depending on the scale of our support subscription customers’ deployments and the scope of the support agreement.

Investing in Growth.    We will continue to focus on long-term growth. We believe that our market opportunity is large and underpenetrated, and we will continue to invest significantly in sales and marketing to grow our customer base, expand within existing support subscription customers and grow internationally to drive additional revenue. We also expect to invest in research and development to enhance the Hortonworks Data Platform. To support our expected growth and our transition to a public company, we plan to invest in other operational and administrative functions. We expect to use the proceeds from this offering and the concurrent private placement to fund these growth strategies and do not expect to be profitable in the near future. We also intend to leverage business partners for the delivery of professional services. We believe that our sales and marketing, research and development and general and administrative costs will decrease as a percentage of revenue in the long term as we are able to reach economies of scale and achieve process improvements and other operational efficiencies. With this increased operating leverage, we expect our gross and operating margins to increase in the long term.

Revenue Recognition Policies.    We typically enter into sales arrangements pursuant to which we provide both support subscription offerings and professional services. Pursuant to software revenue recognition rules under GAAP, for arrangements providing for both support subscription offerings and professional services, we typically recognize as revenue the entire arrangement fee ratably over the subscription period, although the appropriate timing of revenue recognition must be evaluated on an arrangement-by-arrangement basis. See “—Critical Accounting Policies and Estimates—Revenue Recognition.” The costs associated with our support subscription and professional services revenue are expensed as we incur the delivery costs. However, in many cases, the related revenue is deferred and recognized ratably over a later period. Thus, during times of rapid customer growth and accompanying delivery of professional services, our gross margin is expected to be negatively impacted.

Key Business Metrics

We review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. These key business metrics include the following:

Dollar-Based Net Expansion Rate.    We believe that our ability to retain our customers and expand their support subscription revenue over time will be an indicator of the stability of our revenue base and the long-term value of our customer relationships. Maintaining customer relationships allows us to sustain and increase revenue to the extent customers maintain or increase the number of nodes, data under management and/or the scope of the support subscription agreements. To date, only a small

 

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percentage of our customer agreements has reached the end of their original terms and, as a result, we have not observed a large enough sample of renewals to derive meaningful conclusions. Based on our limited experience, we observed a dollar-based net expansion rate of 125% as of September 30, 2014. We calculate dollar-based net expansion rate as of a given date as the aggregate annualized subscription contract value as of that date from those customers that were also customers as of the date 12 months prior, divided by the aggregate annualized subscription contract value from all customers as of the date 12 months prior. We calculate annualized support subscription contract value for each support subscription customer as the total subscription contract value as of the reporting date divided by the number of years for which the support subscription customer is under contract as of such date.

Total subscription contract value for a support subscription customer account is a legal and contractual determination made by assessing the contractual terms of each support subscription, as of the date of determination, as to the subscription fees we expect to receive for that support subscription, assuming no changes to the subscription. The total subscription contract value is not determined by reference to historical or future revenue, deferred revenue or any other GAAP financial measure over any period. It is forward-looking and contractually derived as of the date of determination, and the period over which any associated revenue is recognized is affected by our revenue recognition policies under GAAP.

Total support subscription customers.    We believe total support subscription customers is a key indicator of our market penetration, growth and future revenues. In order to grow our customer base, we have aggressively invested in and intend to continue to invest in our direct sales team, as well as to pursue additional partnerships within our indirect sales channel. We generally define a support subscription customer as an entity with an active support subscription as of the measurement date. In situations where there are multiple contracts with multiple subsidiaries or divisions, universities, or governmental organizations of a single entity, each support subscription contract is treated as a separate instance of our subscription or professional services and is counted as representing a separate customer. Our total support subscription customers were 54 and 233 as of September 30, 2013 and 2014, respectively.

Components of Results of Operations

Revenue

We generate revenue primarily under multiple-element arrangements that include support subscription offerings combined with consulting and/or training services. We have not yet established vendor-specific objective evidence of fair value, or VSOE, for our support subscriptions. Accordingly, for our multiple-element arrangements, we recognize revenue on a ratable basis over the period beginning when both the support subscription and professional services have commenced, and ending at the conclusion of the support subscription or professional services period, whichever is longer.

Cost of Revenue

Cost of support subscription revenue consists primarily of personnel costs (including salaries, benefits, and stock-based compensation) for employees associated with our support subscription offerings mainly related to technology support and allocated shared costs. Cost of professional services revenue consists primarily of personnel costs (including salaries, benefits and stock-based compensation) for employees and fees to subcontractors associated with our professional service contracts, travel costs and allocated shared costs. We allocate shared costs such as rent, shared information technology costs, and employee benefit costs to all departments based on headcount. As such, allocated shared costs are reflected in cost of revenue and each operating expense category.

 

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Operating Expenses

Sales and Marketing.    Sales and marketing expenses consist primarily of personnel costs (including salaries, benefits and stock-based compensation) for our sales and marketing employees. In addition, sales and marketing expenses include the cost of advertising, online marketing, promotional events, corporate communications, product marketing and other brand-building activities. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in our selling and marketing activities, building brand awareness, attracting new customers and sponsoring additional marketing events. However, we expect our sales and marketing expenses to decrease as a percentage of our total revenue over the long term.

Research and Development.    Research and development expenses consist primarily of personnel costs (including salaries, benefits and stock-based compensation) for our research and development employees, costs associated with subcontractors and equipment lease expenses. We expect to continue to focus our research and development efforts on enhancing and adding new features and functionality to the Hortonworks Data Platform. As a result, we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future. However, we expect our research and development expenses to decrease as a percentage of our total revenue over the long term.

General and Administrative.    General and administrative expenses consist primarily of personnel costs (including salaries, benefits and stock-based compensation) for our executive, finance, human resources, IT and other administrative employees. In addition, general and administrative expenses include fees for third-party professional services, including consulting, legal and accounting services and other corporate expenses and allocated overhead. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future as we become a public company and continue to invest in the growth of our business. However, we expect our general and administrative expenses to decrease as a percentage of our total revenue over the long term.

 

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Results of Operations

The following table sets forth selected consolidated statements of operations data for each of the periods indicated:

 

    

 

Year Ended

April 30,

  

  

   
 
Eight Months Ended
December 31,
  
  
   

 

Nine Months Ended

September 30,

  

  

     2012     2013     2012     2013     2013     2014  
     (in thousands)  

Support subscription and professional services revenue:

            

Support subscription

   $ 1,276      $ 7,739      $ 3,643      $ 11,415      $ 10,212      $ 19,190   

Professional services

     370        3,259        1,135        6,450        5,726        14,198   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total support subscription and professional services revenue

     1,646        10,998        4,778        17,865        15,938        33,388   

Cost of revenue:

            

Support subscription

     421        5,071        2,880        3,720        4,995        2,875   

Professional services

     974        5,862        3,053        9,990        8,493        19,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     1,395        10,933        5,933        13,710        13,488        22,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     251        65        (1,155     4,155        2,450        11,388   

Operating expenses:

            

Sales and marketing

     2,589        17,187        8,403        21,357        21,584        44,553   

Research and development

     6,881        12,070        6,768        14,621        13,752        26,270   

General and administrative

     2,384        7,598        3,487        14,368        15,583        17,634   

Contribution of acquired technology to the Apache Software Foundation

                                        3,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,854        36,855        18,658        50,346        50,919        92,428   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,603     (36,790     (19,813     (46,191     (48,469     (81,040

Interest and other income

     84        215        159        152        159        381   

Other expense

     (1     (52     (49     (129     (56     (7,269
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense (benefit)

     (11,520     (36,627     (19,703     (46,168     (48,366     (87,928

Income tax expense (benefit)

     1        11        8        45        34        (1,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,521   $ (36,638   $ (19,711   $ (46,213     (48,400   $ (86,732
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Nine Months Ended September 30, 2013 and 2014

Revenue

 

     Nine Months Ended
September 30,
               
     2013       2014       $ Change      % Change  
     (in thousands)         

Support subscription revenue

   $ 10,212       $ 19,190       $ 8,978         88

Professional services revenue

     5,726         14,198         8,472         148   
  

 

 

    

 

 

    

 

 

    

Total support subscription and professional services revenue

   $ 15,938       $ 33,388       $ 17,450         109   
  

 

 

    

 

 

    

 

 

    

Support subscription revenue increased $9.0 million in the nine months ended September 30, 2014 compared to the same period in 2013 due to the significant growth in our subscription customer

 

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base from 54 support subscription customers to 233 support subscription customers as well as sales of additional support subscriptions to our existing customers. The period-over-period increase was also impacted by a $2.0 million contra-revenue adjustment recorded in the period ended September 30, 2014 related to the accelerated vesting of shares issued to an affiliate of AT&T, as discussed under “—Overview” above.

Professional services revenue increased $8.5 million in the nine months ended September 30, 2014 compared to the same period in 2013 due to the significant growth in our support subscription customer base from 54 support subscription customers to 233 support subscription customers and sales of additional professional services to our existing customers. While the percentage of total revenue from professional services for the nine months ended September 30, 2014 on a GAAP basis was approximately 43% of total revenue, the percentage of total revenue from professional services before contra-revenue adjustments for the same period was approximately 40%, which is more in line with prior periods. See “Prospectus Summary—Summary Consolidated Financial Data” for further discussion of such contra-revenue adjustments.

Cost of revenue

 

     Nine Months Ended
September 30,
              
     2013       2014      $ Change     % Change  
     (in thousands)        

Cost of support subscription revenue

   $ 4,995       $ 2,875       $ (2,120     (42 )% 

Cost of professional services revenue

     8,493         19,125         10,632        125   
  

 

 

    

 

 

    

 

 

   

Total cost of revenue

   $ 13,488       $ 22,000       $ 8,512        63   
  

 

 

    

 

 

    

 

 

   

Cost of support subscription revenue decreased $2.1 million in the nine months ended September 30, 2014 compared to the same period in 2013. The decrease was due to a $3.7 million decrease in costs for joint engineering efforts with Microsoft to develop the Hortonworks Data Platform for Windows as such efforts were substantially completed by the end of 2013. The decrease was partially offset by a $1.6 million increase in employee costs related to our increased headcount.

Cost of professional services revenue increased $10.6 million in the nine months ended September 30, 2014 compared to the same period in 2013. The increase was primarily due to a $9.1 million increase in employee compensation related to our increased headcount. In addition, travel costs, rent and web hosting costs increased by $1.1 million, $0.1 million and $0.1 million, respectively, in order to support our growth.

Sales and marketing

 

     Nine Months Ended
September 30,
               
     2013      2014      $ Change      % Change  
     (in thousands)         

Sales and marketing

   $ 21,584       $ 44,553       $ 22,969         106

Sales and marketing expenses increased $23.0 million in the nine months ended September 30, 2014 compared to the same period in 2013. The increase was primarily due to a $17.6 million increase in employee compensation related to our increased headcount. In addition, marketing expenses increased by $2.2 million and travel, rent and equipment expenses increased by $1.8 million, $0.5 million and $0.3 million, respectively, in order to support our growth.

 

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Research and development

 

     Nine Months Ended
September 30,
               
     2013      2014      $ Change      % Change  
     (in thousands)         

Research and development

   $ 13,752       $ 26,270       $ 12,518         91

Research and development expenses increased $12.5 million in the nine months ended September 30, 2014 compared to the same period in 2013. The increase was primarily due to an $8.8 million increase in employee compensation related to our increased headcount. In addition, in the nine months ended September 30, 2013, a significant portion of our research and development employees were supporting the joint engineering efforts with Microsoft to develop the Hortonworks Data Platform for Windows and, accordingly, the related costs of $3.7 million were included in cost of support subscription revenue.

General and administrative

 

     Nine Months Ended
September 30,
               
     2013       2014      $ Change      % Change  
     (in thousands)         

General and administrative

   $ 15,583       $ 17,634       $ 2,051         13

General and administrative expenses increased $2.1 million in the nine months ended September 30, 2014 compared to the same period in 2013. The increase was primarily due to an increase in employee costs of $7.8 million due to our increased headcount. The increase was partially offset by a legal settlement of $6.0 million which was recorded during the nine months ended September 30, 2013.

Contribution of acquired technology to the Apache Software Foundation

 

     Nine Months Ended
September 30,
               
     2013       2014       $ Change      % Change  
     (in thousands)         

Contribution of acquired technology to the Apache Software Foundation

   $       $ 3,971       $ 3,971         N/A   

Operating expenses for the contribution of acquired technology to the Apache Software Foundation were $4.0 million during the nine months ended September 30, 2014 compared to zero for the same period in 2013. On August 13, 2014, we contributed the developed technology acquired in the XA Secure acquisition to the Apache Software Foundation. As a result, we recognized a $4.0 million expense upon contribution, which was equal to the carrying value of the developed technology.

 

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Comparison of the Eight Months Ended December 31, 2012 and 2013

Revenue

 

     Eight Months Ended
December 31,
               
     2012      2013      $ Change      % Change  
     (in thousands)         

Support subscription revenue

   $ 3,643       $ 11,415       $ 7,772         213

Professional services revenue

     1,135         6,450         5,315         468   
  

 

 

    

 

 

    

 

 

    

Total support subscription and professional services revenue

   $ 4,778       $ 17,865       $ 13,087         274   
  

 

 

    

 

 

    

 

 

    

Support subscription revenue increased $7.8 million in the eight months ended December 31, 2013 compared to the same period in 2012. The increase was primarily due to an increase in revenue of $3.8 million from the July 2012 Microsoft contract, under which we began recognizing revenue on a ratable basis in October 2012, and $1.1 million of net revenue ($1.5 million of gross revenue offset by $0.4 million of contra-revenue for the shares issued to an affiliate of AT&T, as described above) related to the AT&T contract, under which we began recognizing revenue on a ratable basis in October 2013. The remaining increase was due to the growth of our customer base from nine support subscription customers to 95 support subscription customers as well as sales of additional subscriptions to our existing customers.

Professional services revenue increased $5.3 million in the eight months ended December 31, 2013 compared to the same period in 2012. The increase was primarily due to the growth of our customer base from nine support subscription customers to 95 support subscription customers as well as sales of additional services to our existing customers.

Cost of revenue

 

     Eight Months Ended
December 31,
               
     2012      2013      $ Change      % Change  
     (in thousands)         

Cost of support subscription revenue

   $ 2,880       $ 3,720       $ 840         29

Cost of professional services revenue

     3,053         9,990         6,937         227   
  

 

 

    

 

 

    

 

 

    

Total cost of revenue

   $ 5,933       $ 13,710       $ 7,777         131   
  

 

 

    

 

 

    

 

 

    

Cost of support subscription revenue increased $0.8 million in the eight months ended December 31, 2013 compared to the same period in 2012. The increase was due to increased headcount to support the growth of our customer base as well an increase of $0.3 million in costs for the development of the Hortonworks Data Platform for Windows.

Cost of professional services revenue increased $6.9 million in the eight months ended December 31, 2013 compared to the same period in 2012. The increase was primarily due to a $4.2 million increase in employee compensation related to our increased headcount. In addition, subcontractor costs increased by $1.6 million and travel costs increased by $0.9 million to support the increase in professional services revenue.

 

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Sales and marketing

 

     Eight Months Ended
December 31,
               
     2012      2013      $ Change      % Change  
     (in thousands)         

Sales and marketing

   $ 8,403       $ 21,357       $ 12,954         154

Sales and marketing expenses increased $13.0 million in the eight months ended December 31, 2013 compared to the same period in 2012. The increase was primarily due to a $9.8 million increase in employee compensation related to our increased headcount. In addition, travel costs increased by $1.3 million due to the increase in headcount and costs related to marketing events increased by $1.1 million.

Research and development

 

     Eight Months Ended
December 31,
               
     2012      2013      $ Change      % Change  
     (in thousands)         

Research and development

   $ 6,768       $ 14,621       $ 7,853         116

Research and development expenses increased $7.9 million in the eight months ended December 31, 2013 compared to the same period in 2012. The increase was primarily due to a $5.9 million increase in employee compensation related to our increased headcount. In addition, subcontractor costs increased by $1.1 million and equipment costs increased by $0.8 million.

General and administrative

 

     Eight Months Ended
December 31,
               
     2012      2013      $ Change      % Change  
     (in thousands)         

General and administrative

   $ 3,487       $ 14,368       $ 10,881         312

General and administrative expenses increased $10.9 million in the eight months ended December 31, 2013 compared to the same period in 2012. The increase was primarily due to a $6.0 million legal settlement and a $1.6 million increase in employee compensation related to our increased headcount. In addition, legal fees increased by $1.7 million primarily related to our legal proceedings and third-party consultant costs increased by $1.0 million as we continued to build out our general and administrative infrastructure.

Comparison of the Years Ended April 30, 2012 and 2013

Revenue

 

     Year Ended April 30,                
     2012      2013      $ Change      % Change  
     (in thousands)         

Support subscription revenue

   $ 1,276       $ 7,739       $ 6,463         507

Professional services revenue

     370         3,259         2,889         781   
  

 

 

    

 

 

    

 

 

    

Total support subscription and professional services revenue

   $ 1,646       $ 10,998       $ 9,352         568   
  

 

 

    

 

 

    

 

 

    

 

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Support subscription revenue increased $6.5 million in the year ended April 30, 2013 compared to the corresponding period in the prior year. The increase was primarily due to an increase in revenue of $7.1 million from Microsoft as we began recognizing revenue under the July 2012 Microsoft contract on a ratable basis in October 2012 and the growth of our customer base from two support subscription customers to 25 support subscription customers.

Professional services revenue increased $2.9 million in the year ended April 30, 2013 compared to the corresponding period in the prior year as we provided increased professional services following the general availability of the Hortonworks Data Platform in late 2012 as well as the growth of our customer base from two support subscription customers to 25 support subscription customers.

Cost of revenue

 

     Year Ended April 30,                
     2012      2013      $ Change      % Change  
     (in thousands)         

Cost of support subscription revenue

   $ 421       $ 5,071       $ 4,650         1,105

Cost of professional services revenue

     974         5,862         4,888         502   
  

 

 

    

 

 

    

 

 

    

Total cost of revenue

   $ 1,395       $ 10,933       $ 9,538         684   
  

 

 

    

 

 

    

 

 

    

Cost of support subscription revenue increased $4.7 million in the year ended April 30, 2013 compared to the corresponding period in the prior year. The increase was due to an additional $3.9 million in costs for the development of the Hortonworks Data Platform for Windows as well as a $0.8 million increase due to employee headcount growth.

Cost of professional services revenue increased $4.9 million in the year ended April 30, 2013 compared to the corresponding period in the prior year. The increase was primarily due to a $3.6 million increase in employee compensation related to our increased headcount and an increase in travel costs of $0.6 million.

Sales and marketing

 

     Year Ended April 30,                
     2012      2013      $ Change      % Change  
     (in thousands)         

Sales and marketing

   $ 2,589       $ 17,187       $ 14,598         564

Sales and marketing expenses increased $14.6 million in the year ended April 30, 2013 compared to the corresponding period in the prior year. The increase was primarily due to a $10.6 million increase in employee compensation related to our increased sales and marketing headcount. In addition, travel costs increased by $1.2 million, tradeshow costs increased by $0.8 million, advertising and promotion costs increased by $0.6 million, subscription software and web hosting costs increased by $0.4 million due to our increased marketing efforts and headcount growth, and allocated rent and occupancy costs increased by $0.3 million.

Research and development

 

     Year Ended April 30,                
     2012      2013      $ Change      % Change  
     (in thousands)         

Research and development

   $ 6,881       $ 12,070       $ 5,189         75

 

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Research and development expenses increased $5.2 million in the year ended April 30, 2013 compared to the corresponding period in the prior year. The increase was primarily due to a $6.9 million increase in employee compensation related to our increased headcount and a $0.6 million increase in subcontractor costs. These increases were partially offset by a $3.9 million increase in allocation from research and development costs to cost of support subscription revenue related to employees who were supporting the joint engineering efforts with Microsoft to develop the Hortonworks Data Platform for Windows.

General and administrative

 

     Year Ended April 30,                
         2012              2013          $ Change      % Change  
     (in thousands)         

General and administrative

   $ 2,384       $ 7,598       $ 5,214         219

General and administrative expenses increased $5.2 million in the year ended April 30, 2013 compared to the corresponding period in the prior year. The increase resulted from an increase in employee costs of $1.9 million, legal fees of $2.1 million primarily related to our legal proceedings and third-party consultant costs of $0.6 million.

Quarterly Operating Results

The following unaudited quarterly statements of operations data for each of the seven quarters in the period ended September 30, 2014 have been prepared on a basis consistent with our annual audited consolidated financial statements and include, in our opinion, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the periods presented are not necessarily indicative of results to be expected for any other period. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Three Months Ended,  
     Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
 
     (In thousands, except customer data)  

Support subscription and professional services revenue:

              

Support subscription

   $ 3,028      $ 3,353      $ 3,831      $ 5,250      $ 4,289      $ 6,765      $ 8,136   

Professional services

     1,636        1,761        2,329        2,897        4,248        5,322        4,628   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total support subscription and professional services revenue

     4,664        5,114        6,160        8,147        8,537        12,087        12,764   

Cost of revenue:

              

Support subscription

     1,688        1,605        1,702        917        589        775        1,511   

Professional services

     2,014        2,910        3,569        4,304        5,311        5,790        8,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     3,702        4,515        5,271        5,221        5,900        6,565        9,535   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     962        599        889        2,926        2,637        5,522        3,229   

Operating expenses:

              

Sales and marketing

     6,564        7,287        7,733        8,557        10,193        14,869        19,491   

Research and development

     3,845        4,751        5,156        6,171        7,793        8,366        10,111   

General and administrative

     3,134        9,009        3,440        2,896        4,933        5,676        7,025   

Contribution of acquired technology to the Apache Software Foundation

                                               3,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,543        21,047        16,329        17,624        22,919        28,911        40,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12,581     (20,448     (15,440     (14,698     (20,282     (23,389     (37,369

Interest and other income

     44        44        71        51        64        112        205   

Other expense

     (7     (19     (30     (77     (34     (4,931     (2,304
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense (benefit)

     (12,544     (20,423     (15,399     (14,724     (20,252     (28,208     (39,468

Income tax expense (benefit)

     3        13        18        15        21        (1,251     34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (12,547   $ (20,436   $ (15,417   $ (14,739   $ (20,273   $ (26,957   $ (39,502
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other financial and operational metrics:

              

Gross billings

   $ 5,518      $ 9,606      $ 9,291      $ 12,502      $ 12,100      $ 19,579      $ 21,501   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Support subscription customers

     23        39        54        95        143        196        233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Quarterly Trends in Revenue

Our quarterly revenue increased sequentially for the seven quarters presented, primarily due to the increase in support subscription customers each quarter as well as additional sales of support subscription and professional services to our existing customers. The largest contributor to the increases in quarterly revenue for the three months ended December 31, 2013, March 31, 2014, June 30, 2014 and September 30, 2014 was revenue from Microsoft, comprising $2.6 million, $2.5 million, $2.5 million and $2.5 million of support subscription revenue, respectively.

Quarterly Operating Expenses Trends

Operating expenses are primarily driven by headcount and headcount-related expenses, including share-based compensation expenses, and by sales and marketing initiatives. Our quarterly operating expenses generally increased sequentially for the seven quarters presented, primarily due to increase in headcount and our growth. The three months ended June 30, 2013 included a legal settlement in general and administrative expenses of $6.0 million that caused our expenses to decrease from the three months ended June 30, 2013 to the three months ended September 30, 2013. Refer to Note 6 in the notes to our consolidated financial statements for further discussion regarding the nature of the legal settlement.

Quarterly Gross Billings

We have included gross billings, a non-GAAP financial measure, in this prospectus because it is a key measure used by our board of directors and management to monitor our near term cash flows and manage our business. Gross billings is calculated as our revenue, plus the change in deferred revenue for the same period. As we have not yet established vendor-specific objective evidence of fair value for our support subscriptions, we recognize revenue ratably over the period beginning when both the support subscription and professional services have commenced for customers with agreements that purchase both a support subscription and professional services. Most of our customer agreements include both support subscription and professional services. The accounting treatment for such agreements causes our revenue to trail the impact of these customer agreements and creates significant deferred revenue balances.

We have provided a reconciliation between total revenue, the most directly comparable GAAP financial measure, and gross billings in the table below. We believe gross billings provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our board of directors and management.

 

     Three Months Ended,  
     Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
 
     (in thousands)  

Gross billings:

              

Total revenue

   $ 4,664      $ 5,114      $ 6,160      $ 8,147      $ 8,537      $ 12,087      $ 12,764   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred revenue, end of period

     15,950        20,442        23,573        27,928        31,491        38,983        47,720   

Less: Total deferred revenue, beginning of period

     (15,096     (15,950     (20,442     (23,573     (27,928     (31,491     (38,983
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total change in deferred revenue

     854        4,492        3,131        4,355        3,563        7,492        8,737   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross billings

   $ 5,518      $ 9,606      $ 9,291      $ 12,502      $ 12,100      $ 19,579      $ 21,501   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

As of September 30, 2014, our principal sources of liquidity were cash and cash equivalents and short-term investments totaling $111.6 million, which were held for working capital purposes. Our cash

 

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and cash equivalents are comprised primarily of money market funds. Our short-term investments are comprised primarily of commercial paper and corporate bonds. Our long-term investments, consisting of debt instruments with a maturity of greater than one year, were $15.3 million as of September 30, 2014.

The following table summarizes our cash flows for the periods indicated:

 

     Year Ended
April 30,
    Eight Months Ended
December 31,
    Nine Months Ended
September 30,
 
     2012     2013     2012     2013     2013     2014  
     (in thousands)  

Cash provided by (used in) operating activities

   $ (853   $ (31,968   $ (15,236   $ (29,833   $ (35,121   $ (54,970

Cash provided by (used in) investing activities

     (25,602     13,152        6,979        (3,863     3,432        (76,518

Cash provided by (used in) financing activities

     53,848        121        43        50,302        50,375        148,917   

To date, we have financed our operations primarily through private placements of preferred stock and cash flow from operations. We believe that our existing cash and cash equivalents balance, together with cash generated from operations and our $50.0 million Series D preferred stock issuance in July 2014, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

Our expected future capital requirements may depend on many factors including customer retention and expansion, the timing and extent of spending on platform development efforts, the expansion of sales, marketing and product management activities and ongoing investments to support the growth of our business in the United States and internationally. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies and intellectual property rights. We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms that are acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

Operating Activities

Our largest source of operating cash inflows is from sales of our support subscriptions and professional services. Our primary uses of cash from operating activities are for personnel costs, which are allocated across cost of sales, sales and marketing, research and development and general and administrative costs.

Operating activities for the nine months ended September 30, 2014 used $55.0 million of cash compared to $35.1 million for the nine months ended September 30, 2013. The increase was primarily driven by our net loss of $86.7 million for the nine months ended September 30, 2014 compared to a net loss of $48.4 million for the nine months ended September 30, 2013. Additionally, accounts receivable increased by $8.6 million during the nine months ended September 30, 2014 based on the timing of payments received from customers and the significant growth of our subscription customer base. These factors were partially offset by an increase in deferred revenue of $19.8 million for the nine months ended September 30, 2014 due to the increase in our support subscription customer base coupled with our ratable revenue recognition as a result of our lack of VSOE for support subscription revenue.

Operating activities for the eight months ended December 31, 2013 used $29.8 million of cash compared to $15.2 million for the eight months ended December 31, 2012. The increase was primarily

 

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driven by our net loss of $46.2 million for the eight months ended December 31, 2013 compared to a net loss of $19.7 million for the eight months ended December 31, 2012. Additionally, accounts receivable increased by $5.7 million during the eight months ended December 31, 2013 based on the timing of payments received from customers and the significant growth of our subscription customer base. These factors were partially offset by an increase in deferred revenue of $11.2 million for the eight months ended December 31, 2013 due to the increase in our support subscription customer base compared to the prior period coupled with our ratable revenue recognition as a result of our lack of VSOE for support subscription revenue.

Operating activities for the year ended April 30, 2013 used $32.0 million of cash compared to $0.9 million for the year ended April 30, 2012. The increase was primarily driven by our net loss of $36.6 million for the year ended April 30, 2013 compared to a net loss of $11.5 million for the year ended April 30, 2012. In addition, accounts receivable increased by $5.9 million for the year ended April 30, 2013 based on the timing of payments received from customers and the significant growth of our support subscription customer base compared to the prior year. These factors were partially offset by an increase in deferred revenue of $6.6 million for the year ended April 30, 2013 due to the increase in our support subscription customer base compared to the prior period coupled with our ratable revenue recognition as a result of our lack of VSOE for support subscription revenue.

Investing Activities

Investing activities for the nine months ended September 30, 2014 used $76.5 million of cash compared to $3.4 million generated for the nine months ended September 30, 2013. The increase in cash used was primarily driven by an increase in purchases of investments of $75.0 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. This was partially offset by an increase in maturity of investments of $0.9 million for the nine months ended September 30, 2014.

Investing activities for the eight months ended December 31, 2013 used $3.9 million of cash compared to cash provided by investing activities of $7.0 million for the eight months ended December 31, 2012. The decrease was primarily driven by an $11.3 million decrease in the maturity of short-term investments for the period ended December 31, 2013 compared to the prior period.

Investing activities for the year ended April 30, 2013 generated $13.2 million of cash compared to $25.6 million used for the year ended April 30, 2012. The increase was primarily driven by an $11.5 million decrease in investments purchased and $27.9 million in proceeds from the sale and maturity of investments compared to the prior year.

Financing Activities

Financing activities for the nine months ended September 30, 2014 generated $148.9 million of cash compared to $50.4 million for the nine months ended September 30, 2013. The increase was primarily driven by sale of the Company’s Series D preferred stock of $149.5 million during the nine months ended September 30, 2014.

Financing activities for the eight months ended December 31, 2013 generated $50.3 million of cash compared to $43 thousand for the eight months ended December 31, 2012. The increase was primarily driven by sale of the Company’s Series C preferred stock of $49.8 million during the period ended December 31, 2013.

Financing activities for the year ended April 30, 2013 generated $0.1 million of cash compared to $53.8 million for the year ended April 30, 2012. The decrease was primarily driven by the $53.0 million issuance of preferred stock in the prior year.

 

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Deferred Revenue and Backlog

Our deferred revenue, which consists of billed but unrecognized revenue, was $47.7 million as of September 30, 2014.

Our total backlog, which we define as including both cancellable and non-cancellable portions of our customer agreements that we have not yet billed, was $17.3 million as of September 30, 2014. The timing of our invoices to our customers is a negotiated term and thus varies among our support subscription agreements. For multiple-year agreements, it is common for us to invoice an initial amount at contract signing followed by subsequent annual invoices. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, we do not recognize them as revenue, deferred revenue or elsewhere in our consolidated financial statements. The change in backlog that results from changes in the average non-cancelable term of our support subscription arrangements may not be an indicator of the likelihood of renewal or expected future revenue, and therefore we do not utilize backlog as a key management metric internally and do not believe that it is a meaningful measurement of our future revenue.

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of December 31, 2013:

 

     Payments Due by Period  

Contractual Obligations:

   Less Than
1 Year
     1 to 3
Years
     3 to 5
Years
     More Than
5 Years
     Total  
     (in thousands)  

Operating leases(1)

   $ 2,299       $ 4,462       $       $       $ 6,761   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 2,299       $ 4,462       $       $       $ 6,761   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Operating leases consist of total future minimum rent payments under non-cancelable operating lease agreements.

Off-Balance Sheet Arrangements

Through December 31, 2013, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures about Market Risk

Our primary exposure to market risk relates to interest rate changes. We had cash and cash equivalents and short-term investments totaling $38.5 million as of December 31, 2013 and $111.6 million as of September 30, 2014. Cash and cash equivalents are comprised primarily of money market funds. Our short-term investments are primarily comprised of corporate bonds and commercial paper. The cash and cash equivalents are held for working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. Because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our consolidated financial statements.

Critical Accounting Polices and Estimates

We prepare our consolidated financial statements in accordance with GAAP. In the preparation of these consolidated financial statements, we are required to make estimates and assumptions that

 

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affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss below.

Revenue Recognition

Apache Hadoop is a freely available open source based software platform. While it has emerged as an enabling technology for the modern data center architecture, there are limitations related to the traditional Hadoop offering that may inhibit broad adoption by enterprises. Our software development efforts are thus focused on creating an enterprise-grade Hadoop platform by working in concert with the Apache community to develop the Hortonworks Data Platform (HDP).

HDP is available under an Apache open source license. Open source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code than that typically used for proprietary software. Because open source software code is generally freely shared, we typically do not generate any direct revenue from our software development activities.

We generate the predominant amount of our revenue through support (support subscription) and consulting and training services (professional services) arrangements with our enterprise customers. We provide telephone support, security updates, bug fixes, functionality enhancements and upgrades to the technology and new versions of the software, if and when available. Our professional services provide assistance in the implementation process and training related activities.

Under our support subscription and professional services arrangements, revenue is recognized when (i) persuasive evidence of an arrangement exists; (ii) the services have been delivered; (iii) the arrangement fee is fixed or determinable; and (iv) collectability is reasonably assured.

Support subscription revenue

In single-element arrangements, support subscription fees are recognized on a ratable basis over the support subscription term. Our support subscription arrangements do not contain refund provisions for fees earned related to services performed.

Professional services revenue

Professional services revenue is derived from customer fees for consulting services engagements and training services. Our consulting services are provided primarily on a time and materials basis and, to a lesser extent, a fixed fee basis, and training services are priced based on attendance. Revenue from professional services, when such services are sold in single-element arrangements, is recognized as the services are performed.

Multiple-element arrangements

Our multiple-element arrangements include support subscription combined with professional services. We have not yet established vendor-specific objective evidence of fair value (VSOE) for support subscription, and we recognize revenue on a ratable basis over the period beginning when both the support subscription and professional services have commenced, and ending at the conclusion of the support subscription or professional services period, whichever is longer. Under our multiple element arrangements, the support subscription element generally has the longest service period and the professional services element is performed during the earlier part of the support subscription period.

 

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Our agreements with customers often include multiple support subscription and/or professional service elements, and these elements are sometimes included in separate contracts. We consider an entire customer arrangement to determine if separate contracts should be considered linked arrangements for the purposes of revenue recognition.

Revenue recognition requires judgment, including whether a software arrangement includes multiple elements and, if so, whether VSOE exists for those elements. A portion of revenue may be recorded as unearned due to undelivered elements. Changes to the elements in a software arrangement, the ability to identify the VSOE for those elements and the fair value of the respective elements could materially impact the amount of earned and unearned revenue in a given period.

Revenue from Strategic Relationships and Reseller Arrangements

We have strategic relationships and reseller arrangements with third parties whereby our support subscription is bundled with those third parties’ products and services. Under these arrangements, we are not the primary obligor for what is ultimately sold by the third parties to their end customers. The amount recognized as revenue represents the amount due to us from the third parties.

Equity instruments issued to customers

We have entered into warrant and share purchase agreements with certain customers. For such arrangements, the fair value of the underlying securities is recognized as contra-revenue to the extent cumulative revenue from the customer is available to offset the fair value of the security on the measurement date. If cumulative revenue from the customer is less than the fair value of the security, the excess is recorded as cost of sales. See additional discussion at Notes 8 and 16 to our consolidated financial statements for further discussion.

Stock-Based Compensation

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized on a straight-line basis over the requisite service period, which is the vesting period of the respective awards.

The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, including the expected term and the price volatility of the underlying stock, which determine the fair value of stock-based awards. These assumptions include:

 

    Expected term.    We estimate the expected term for stock options using the simplified method due to the lack of historical exercise activity for us. The simplified method calculates the expected term as the midpoint between the vesting date and the contractual expiration date of the award.

 

    Expected volatility.    Since we do not have a trading history of our common stock, the expected volatility was derived from the average historical stock volatilities of several unrelated public companies within our industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock option grants.

 

    Risk-free interest rate.    The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock-based award.

 

    Expected dividend.    The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

 

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In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in our financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in our financial statements.

We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility, expected terms and forfeiture rates, which could impact our future stock-based compensation expense.

The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value, as well as assumptions regarding a number of other complex and subjective variables. Historically, for all periods prior to this initial public offering, the fair values of the shares of common stock underlying our share-based awards were estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, contemporaneous valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provide by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market of our common stock, our board of directors exercised reasonable judgment and considered a number of other objective and subjective factors to determine the best estimate of the fair value of our common stock, including; issuances of preferred stock and the rights, preferences and privileges of our preferred stock relative to those of our common stock; and the likelihood of achieving a liquidity event, such as an initial public offering or sale given prevailing market conditions.

In determining a fair value for our common stock, we estimated the enterprise value of our business using the market approach. The market approach estimates the fair value of a company by applying market multiples of comparable publicly-traded companies in the same industry or similar lines of business. The market multiples are based on key metrics implied by the enterprise values of comparable publicly-traded companies. The estimated enterprise value is then allocated to the common stock using a combination of the Probability Weighted Expected Return and the Option Pricing Methods.

For valuations after the completion of this offering, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock in the stock market, as reported on the date of grant.

Loss contingencies

We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset, or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. If we determine that a loss is possible and the range of the loss can be reasonably determined, then we disclose the range of the

 

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possible loss. We regularly evaluate current information available to us to determine whether an accrual is required, an accrual should be adjusted or a range of possible loss should be disclosed.

Recently Issued and Adopted Accounting Pronouncements

Under the JOBS Act, we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

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BUSINESS

Company Overview

Our mission is to establish Hadoop as the foundational technology of the modern enterprise data architecture.

We seek to advance the market adoption of Hadoop and provide enterprises with a new data management solution that enables them to harness the power of big data to transform their businesses through more effective and efficient management of their valuable data assets. A Hadoop cluster combines commodity servers with local storage and an open source software distribution to create a reliable distributed compute and storage platform for large data sets scalable up to PBs, with thousands of servers or nodes.

Our solution is an enterprise-grade data management platform built on a unique distribution of Apache Hadoop and powered by YARN. We continuously drive innovation in the Apache community with a mission to further Hadoop’s development for enterprises of all types and sizes. Our platform deeply integrates with key data center technologies to enable best-of-breed data architectures and enables our customers to collect, store, process and analyze increasing amounts of existing and new data types in a way that augments rather than replaces their existing data center infrastructure.

We employ a differentiated approach in that we are committed to serving the Apache Software Foundation open source ecosystem and to sharing all of our product developments with the open source community. We support the community for open source Hadoop, and employ a large number of core committers to the various Enterprise Grade Hadoop projects. We believe that keeping our business model free from architecture design conflicts that could limit the ultimate success of our customers in leveraging the benefits of Hadoop at scale is a significant competitive advantage.

We are recognized as a leader in Hadoop by Forrester Research based on the strengths of our current offering and our strategy, and we have invested to enhance our position through the introduction of our Enterprise Grade Hadoop platform. Our Enterprise Grade Hadoop platform addresses modern data requirements and enables enterprises to significantly increase their data under management and their business productivity with this data.

We were founded in 2011 when our early senior management team, led by our current Chief Executive Officer Rob Bearden, partnered with a core team of Hadoop developers and engineers from Yahoo! with a goal of expanding upon the early technology developed by Yahoo! in Hadoop, the initial rights to which we obtained from Yahoo!. During 2012 we launched our Enterprise Grade Hadoop platform, the Hortonworks Data Platform for which we provide support subscriptions and professional services. As of September 30, 2014, we had 233 support subscription customers (which we generally define as an entity with an active support subscription) and 292 total customers, including professional services customers, across a broad array of company sizes and industries. We have entered into contracts to establish strategic relationships with Hewlett-Packard Company, Microsoft Corporation, Rackspace Hosting, Inc., Red Hat, Inc., SAP AG, Teradata Corporation and Yahoo! Inc. focused on tightly integrated development, marketing and support strategies to maximize the success of our solutions. Consistent with our open source approach, we generally make the Hortonworks Data Platform available free of charge and derive the predominant amount of our revenue from customer fees from support subscription offerings and professional services.

We have achieved significant growth in recent periods. For the years ended April 30, 2012 and 2013 our revenue was $1.6 million and $11.0 million, respectively. Effective May 1, 2013, we changed our fiscal year end from April 30 to December 31. For the eight months ended December 31, 2012 and

 

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2013, our revenue was $4.8 million and $17.9 million, respectively. For the nine months ended September 30, 2013 and 2014, our revenue was $15.9 million and $33.4 million, respectively. For the years ended April 30, 2012 and 2013, our gross billings were $11.8 million and $17.6 million, respectively. For the eight months ended December 31, 2012 and 2013, our gross billings were $9.7 million and $29.1 million, respectively. For the nine months ended September 30, 2013 and 2014, our gross billings were $24.4 million and $53.2 million, respectively. We experienced net losses of $11.5 million and $36.6 million for the years ended April 30, 2012 and 2013, respectively, $19.7 million and $46.2 million for the eight months ended December 31, 2012 and 2013, respectively, $48.4 million and $86.7 million for the nine months ended September 30, 2013 and 2014, respectively, and $101.5 million for the twelve months ended September 30, 2014. See “Selected Consolidated Financial Data—Key Metric – Gross Billings” for more information and a reconciliation of gross billings to total revenue, the most directly comparable GAAP financial measure, and an explanation of why management uses this non-GAAP financial measure.

Industry Overview

Major technology innovations such as social media, mobile and cloud computing, new web-based applications, such as SaaS and the Internet of Things, in which devices with sensors and actuators transmit increasing amounts of data automatically, have created an always-on, constantly connected society that is putting increasing pressure on enterprise data center infrastructure. Enterprises are facing rapidly escalating costs and complexity associated with adjusting to these new realities and managing the resulting data proliferation in their data centers. Enterprises are struggling to manage these pressures efficiently while seeking to enable more proactive and interactive business applications that harness and leverage the power of big data.

The increase in volume, velocity and variety of data is creating significant challenges to enterprise data management resources and is disrupting the way enterprises design their data infrastructure.

International Data Corporation, or IDC, estimates that data will grow exponentially in the next decade, from 2.8 zettabytes, or ZB, of data in 2012 to 40 ZBs by 2020. This increase in data volume is forcing enterprises to upgrade their data center architecture and better equip themselves both to store and to extract value from vast amounts of data. According to IDG Enterprise’s Big Data Survey, by late 2014, 31% of enterprises with annual revenues of $1 billion or more expect to manage more than one PB of data. In comparison, as of March 2014 the Library of Congress had collected only 525 TBs of web archive data, equal to approximately half a petabyte and two million times smaller than a zettabyte.

Enterprises are not only inundated with increasing amounts of data but also struggle with managing more types of data that are less easily managed by traditional data center architectures. Historically, enterprises focused primarily on managing data from dedicated and disparate data center systems, including enterprise resource planning, or ERP, and customer relationship management, or CRM, systems. To store and process these types of data, enterprises were able to utilize relational database management systems optimized for analyzing preselected, structured data stored within isolated silos.

The increasing variety of data, including new unstructured data types such as clickstream data, geo-location data, sensor and machine data, sentiment data, server log data and other data generated by emails, documents and other file types, is fueling the exponential growth in the aggregate amount of data that has the potential to be captured and managed by the enterprise. These massive quantities of new, context-rich data have historically not been captured, managed or analyzed by the enterprise since traditional data center architectures were designed for smaller volumes of primarily structured data types, and cannot effectively handle the increases in volume, velocity and variety of data. Even recent innovations in database technologies that were purpose-built for specific use cases, including a

 

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variety of new database approaches, such as non-relational databases referred to as NoSQL approaches, fail to meet today’s increasing data management requirements.

In addition, enterprises want to do more with data by extracting value from the increasing quantities and varieties of context-rich data to create more intelligent applications and to increase business productivity. According to Forrester Research, most firms estimate that they are analyzing only 12% of the data they have under management. The unanalyzed 88% represents a missed opportunity for additional insight; however, traditional data center architectures restrict enterprises’ ability to capture and process new types of data and bring this data under management.

Enterprises are pursuing deeper insights and competitive advantage by augmenting structured data management with new types of unstructured data. Combining structured and unstructured data types provides additional context and intelligence from data and enables developers to unlock a virtually unlimited set of use cases across all industries. For example, harnessing the power of this unanalyzed data has already made possible many new revenue generating applications including the ability to analyze brand sentiment, improve fraud protection, leverage genomic data for medical trials and pursue website optimization. We believe that enterprises are realizing the potential opportunities that can be unlocked with this data. For example, according to a 2013 research survey by Gartner, 64% of enterprises were investing or planning to invest in big data technology in 2013, up from 58% in 2012.

The traditional data center architecture has not enabled enterprises to solve the requirements associated with managing the increase in volume, velocity and variety of their data or leveraging their data to create more intelligent applications that enable business transformation.

 

    Traditional data warehouses are constrained by structure and capacity limitations.     Traditional data warehouse solutions such as massive parallel processing, or MPP, databases are optimized for structured data stored in relational databases. These solutions store preselected types of data in a predetermined, specific form, or schema, and are unable to natively process unstructured data, restricting their ability to create insight by using both structured and unstructured data sets. This process of constraining the data to a specific schema, or schema-on-write, structurally limits the types of data that can be stored and used in traditional data architectures to mostly structured datasets. Additionally, traditional data warehouse solutions cannot scale in a cost-effective manner with the growth in data volumes, which effectively limits the analytic capacity of such databases.

 

    Traditional software analytic tools as well as next generation business intelligence tools are not optimized to natively process and analyze new types of data.    Traditional and next generation software analytic tools were designed to be deployed on top of relational databases and provide analytics reporting and virtualization. These analytic tools are dependent on underlying relational databases for data access, and are optimized for providing intelligence from pre-selected data that has been prepared for specific analyses. However, this approach fails to provide visibility into data that has not been preselected, or that sits outside relational databases.

 

    High-end storage arrays used for database workloads are prohibitively expensive for enterprises to scale.    While high-end storage arrays are designed to store high volumes that can be provisioned for data workloads, for enterprise data warehouse systems, each TB of data stored can cost in the range of $40,000 to $100,000, making managing the immense and increasing volume of data economically infeasible.

 

   

Cloud approaches are constrained by performance and compliance limitations.    Recent innovations in cloud computing have helped increase business agility and workload efficiency. While big data processing operates optimally when compute and storage are co-located, some cloud computing architectures encourage a decoupling of compute and storage in order to optimize delivery of computing power while minimizing the cost of storage. This means that big

 

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data processing must retrieve data from cloud storage separately for any computational analysis, leading to latency, throughput and other scalability challenges. Moreover, corporate and government regulations can inhibit the kinds of datasets enterprises are willing or able to store in the cloud.

As a result of these limitations, enterprises are seeking new technologies to collect, store and access higher volumes, velocity and variety of data in a cost-effective manner, and to gain more actionable insight from their increasingly complex and growing data stores. Enterprises need to upgrade their data center architectures to enable them to bring large volumes of data under management and to process and analyze multiple types of data in innovative ways.

Apache Hadoop has emerged as a robust, open source technology that empowers enterprises to solve the growing problems associated with big data.

Hadoop was originally developed in the early 2000s. Partnering with the Apache Hadoop community, Yahoo! led major innovations in the technology to help tackle big data challenges and operate its business at scale. The traditional Hadoop (i.e., Hadoop Version 1.x) offering is largely a batch system that enables users to manage data at scale, but requires siloed computing clusters by application with pre-selected data sets, thus limiting accessibility, interoperability and overall value. Incremental attempts to improve traditional Hadoop focused on bolting on data warehousing and analytics functionality as well as basic levels of security and operations management, which were available through a mix of separate open source projects or commercially available software. This innovation demonstrated the early promise of Hadoop in enabling enterprises to address their big data requirements, but traditional Hadoop still lacks the breadth of functionality and resiliency that would enable it to be deployed more broadly by enterprises in production use cases.

YARN enhances Hadoop to enable enterprise functionality required for a modern data center architecture that meets today’s increasing enterprise data needs.

To improve on this early functionality, Hortonworks engineers created the initial architecture for YARN and developed the technology for it within the Apache Hadoop community, leading to the release of YARN in October 2013. This technology advancement transformed Hadoop (i.e., Hadoop Version 2.x) into a platform that allows for multiple ways of interacting with data, including interactive SQL processing, real-time processing and online data processing, along with its traditional batch data processing. Several early vendors of traditional Hadoop have not made the transition from the bolt on architecture of traditional Hadoop to fully embracing YARN in their respective offerings. YARN is a significant innovation in that it eliminates the need to silo data sets and reduces total cost of ownership by enabling a single cluster to store a wide range of shared data sets on which mixed workloads spanning batch, interactive and real-time use cases can simultaneously process with predictable service levels. YARN is designed to serve as a common data operating system that enables the Hadoop ecosystem to natively integrate applications and leverage existing technologies and skills while extending consistent security, governance and operations across the platform. With these capabilities, YARN can facilitate mainstream Hadoop adoption by enterprises of all types and sizes for production use cases at scale.

Enterprises require a modern data center architecture built on an enterprise-grade Hadoop platform powered by YARN to meet today’s increasing enterprise big data needs.

Enterprises are facing an increasing need to adopt big data strategies that will help them modernize their data center architectures, control costs and transform their businesses to succeed in an increasingly digital world. Inherent in this shift is a move from the post-transaction, reactive analysis of subsets of data to a new model of pre-transaction, interactive insights across a comprehensive and integrated dataset. We believe that organizations that successfully adopt a big data strategy will

 

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succeed, whereas organizations that fail to implement modern data architectures will struggle to sustain competitive advantages.

Although Hadoop has emerged as a critical enabling technology of the modern data center architecture, its batch processing roots and relative immaturity with respect to key capabilities such as high availability, management and security limit how broadly traditional Hadoop can be deployed by most enterprises.

We believe that an enterprise-grade Hadoop solution must meet certain requirements to create and accelerate widespread market adoption and enable the modern data center architecture. We refer to this set of requirements as Enterprise Grade Hadoop, and believe they include:

 

    Capability to centrally manage new and existing data types.    Enterprises must be able to create an integrated repository of data from internal and external data sources that includes both structured and unstructured data, or a data lake, and provide broad and flexible access for processing engines.

 

    Ability to run multiple applications on a common data architecture.    Users must be able to create and deploy applications on a common data architecture that can access and interact with data in a wide variety of ways, spanning batch, interactive and real-time use cases.

 

    High availability and enterprise-grade security, management and governance.     Enterprises need a common platform to provide access to all data simultaneously and extend consistent enforcement of policy across data security, data governance and operational requirements such as provisioning, monitoring and high availability.

 

    Interoperability with new and existing data center infrastructure investments.    IT departments benefit from flexibility in designing a modern data architecture that leverages the best features of a traditional data center ecosystem. The platform must integrate with new and existing storage and computing systems in addition to databases, data warehouse and business intelligence software to create actionable insight that leverages existing investments and skills.

 

    Stability and dependability.    Enterprises require a platform that integrates the latest innovations from the open source community into a thoroughly tested, resilient offering that has been certified for enterprise deployment.

 

    Scalability and affordability.    Enterprises must be able to scale compute and storage capacity in a cost-efficient manner, including provisioning, managing, monitoring and operating Hadoop clusters at scale and capturing new data types under management.

 

    Predictive and real-time analytic capability.    Enterprises are using proactive customer interaction and predictive analytics to help transform their business. The platform must be able to provide the compute capability necessary to perform the advanced statistical and machine learning algorithms required to explore and analyze all types and volumes of data and discover new patterns.

 

    Deployment flexibility.    Enterprises benefit from a native cross-platform approach that has the flexibility to run on Windows or Linux and that can be deployed on premise or across public and private cloud environments simultaneously.

We believe that only with a platform that addresses each of these needs will enterprises be able to transform their businesses by adopting a modern data architecture that solves their increasing data management requirements. Enterprise Grade Hadoop is fundamental to this architectural shift and can turn what was traditionally viewed as a cost center into a revenue generator by enabling new business applications that harness the power of big data.

 

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Our Opportunity

Big data and analytics initiatives are a key driver of infrastructure spending as the transformation to data-driven enterprises continues. IDC projects that the Worldwide Big Data Technology and Services market, which spans hardware, software and services, will reach $32 billion by 2017. Hadoop for many is synonymous with big data since it plays a foundational role in powering modern enterprise data architectures. According to Allied Market Research, the global Hadoop market spanning hardware, software and services is expected to grow from $2.0 billion in 2013 to $50.2 billion by 2020, representing a CAGR of 58%. While still in early phases of adoption, Hadoop has already generated tremendous value by enabling enterprises to cost effectively address the growth of their data, and to do more with this data.

We believe that Enterprise Grade Hadoop brings significant additional value to the entire data center ecosystem far beyond traditional Hadoop’s value proposition for batch processing. Enterprise Grade Hadoop’s ability to store, interactively access and gain value from mass quantities and varieties of data has the potential to enable substantial growth in a variety of established markets. For example, as more data is brought under management, Enterprise Grade Hadoop is able to multiply the value of new and existing business intelligence applications and enterprise data warehouse deployments. These capabilities allow Enterprise Grade Hadoop to create its own growing market, while also creating the potential for existing large markets to grow even larger, thus empowering our ecosystem to promote the value of Enterprise Grade Hadoop.

Our Solution

We are a leading provider and distributor of an Enterprise Grade Hadoop solution that is enabling a re-platforming of data center architectures to harness the power of big data for the enterprise. Our solution is an enterprise-grade data management platform that is built on Apache Hadoop and powered by YARN, and we continuously drive innovation within the Apache community with a mission to further Hadoop’s development for the enterprise.

Our Enterprise Grade Hadoop solution enables our customers to capture, store, process and analyze increasing amounts of existing and new data types without the need to replace their existing data center infrastructure. Our differentiated approach accelerates the market adoption of Hadoop. Our business model is free from architecture design conflicts that could otherwise limit the ultimate success of our customers in leveraging the benefits of this critical technology at scale.

We provide support subscription offerings and related professional services around the Hortonworks Data Platform, which is our open source software distribution of Apache Hadoop and associated projects. We developed the Hortonworks Data Platform to address the limitations of traditional Hadoop. The Hortonworks Data Platform provides the following benefits:

 

    Maximizes data access to drive business transformation.    Our solution integrates all data types into data lakes that allow our customers to increase the scope and quality of their data management. Our solution breaks down traditional data silos and allows enterprises to store and process all of their data in native formats, or schema-on-read, and enables the combination of multiple context-rich data types to solve the limitations of the traditional data architectures. Our solution not only drives down data management costs but also enables business transformation through the creation of new applications that leverage the power of big data to drive richer customer engagement and new revenue opportunities.

 

    Common data operating system that powers big data applications.    The Hortonworks Data Platform leverages the benefits of YARN to create a common data operating system that natively integrates with Hadoop. Our solution enables new and existing applications to integrate seamlessly with Hadoop. It does so by supporting all big data scenarios—from batch to interactive to real-time and streaming.

 

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    Purpose-built for the enterprise.    We engineer and certify Apache Hadoop with a focus on extending traditional Hadoop with the robust capabilities required by the enterprise such as high availability, governance, security, provisioning, management and performance monitoring.

 

    Rigorously tested and hardened for deployment at scale.    We certify and incorporate the most recent innovations from the Apache Hadoop community into the Hortonworks Data Platform releases. Our strategic relationships with leading cloud scale companies enable us to test and harden our platform in the most demanding production environments, assuring high quality and resilient releases at scale. We deliver value to support subscription customers by reducing implementation risk, accelerating time-to-value and helping support subscription customers scale more rapidly.

 

    Enables best-of-breed data center architectures.    We designed our data management platform to be fully open and integrate with new and existing investments within the data center infrastructure. Our solution enables our customers to design best-of-breed data center architectures that are optimized for their needs and that leverage existing skills, tools and processes. We have strong relationships with established system integration partners, including: Accenture, CSC, Think Big Analytics and Wipro. Our solution is designed to work with new big data technologies that are complementary to Hadoop.

 

    Compelling return on investment.    Our solution enables our customers to modernize their data architectures and optimize their investments supporting their big data strategy. Hadoop generates substantial long-term value as data under management increases. Our solution enables our customers to leverage existing investments and increase use of commodity hardware. For example, the annual cost of managing a raw TB of data with the Hortonworks Data Platform and commodity hardware can be 10 to 100 times less expensive than using high-end storage arrays. Moreover, traditional data center approaches do not enable the breadth of big data applications that are possible with our solution, and that present significant new revenue opportunities.

 

    Real-time, predictive and interactive analytics.    Our solution enables our customers to move from post-transaction, reactive analysis of subsets of data stored in silos to a world of pre-transaction, interactive insights across all data with the potential to enhance competitive advantages and transform businesses. Our platform provides a flexible and robust solution capable of supporting the advanced statistical and machine learning algorithms required to explore and analyze both structured and unstructured data.

 

    Superior deployment flexibility.    Our focus on deep integration with existing data center technologies enables the leaders in the data center to easily adapt and extend their platforms. We designed our solution to support a wide range of deployments. We are differentiated in our ability to natively support deployments across Linux, Windows, hardware appliance and public and private cloud platforms simultaneously.

Our Differentiated Approach

We are committed to serving the Apache Software Foundation open source ecosystem and to sharing all of our product developments with the open source community. We support the community for open source Hadoop, and employ a large number of core committers to the various Enterprise Grade Hadoop projects. A committer is an individual who is able to modify the source code of a particular open source project and then “commit” those changes to the central repository. This commitment allows us to drive the innovation of Hadoop’s core open source technology, define a roadmap for the future, ensure predictable and reliable enterprise quality releases, and provide comprehensive, enterprise-class support.

To date, our engineers have contributed significantly to the innovation of YARN, as well as data management, data access, governance, security and operations capabilities to the Hadoop platform consistent with our open source approach. Our focus on open development, our large committer

 

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employee base and our broad understanding of Hadoop technology have allowed us to deliver superior services that are specifically designed to enable Enterprise Grade Hadoop.

We are focused on going to market with a 100% open source solution. This focus allows us to collectively provide the product management guidance for Enterprise Grade Hadoop to mainstream enterprises and our partner ecosystem, and further innovate the core of Hadoop. We believe our approach is unique and that our commitment to advancing the development of Hadoop has helped establish us as a market leader. For example, we have recently been recognized by Forrester Research as a leader in Hadoop.

In addition, our focus on creating an open source solution that integrates with existing data center technologies and skills has allowed us to establish a thriving network of partners and leaders across the data center ecosystem. We have developed distribution and reseller partnerships with companies within the big data marketplace, including Hewlett-Packard Company, Microsoft Corporation, Rackspace Hosting, Inc., Red Hat, Inc., SAP AG, Teradata Corporation and Yahoo! Inc. We have leveraged this integration and these partnerships to enable the ecosystem to bring more data under management and accelerate Hadoop adoption in the enterprise.

Our Strategy

We were founded in 2011 to enable Hadoop to be the enterprise data platform that powers the modern data architecture. We intend to grow our business by focusing on the following strategies:

 

    Continue to innovate and extend Hadoop’s enterprise data platform capabilities.     Addressing the needs of the enterprise through Hadoop is our core mission. We plan to continue our commitment to innovating and developing the various open source Hadoop projects that will continue to enhance the capabilities of this critical big data technology.

 

    Establish Hadoop as the industry standard for the modern enterprise data architecture and Hortonworks as the trusted Enterprise Grade Hadoop provider.    We intend to continue our focus on accelerating the market adoption of Hadoop by enterprises of all sizes and in all vertical markets. In order to achieve this goal, we intend to leverage our leadership position in the market to strengthen the quality and capabilities of Enterprise Grade Hadoop by continually enhancing its governance, security and operations capabilities, rigorously testing new versions of Enterprise Grade Hadoop and strengthening our leadership position as a trusted distributor for enterprise Hadoop deployments.

 

    Continue to support and foster growth in the Hadoop ecosystem.    We are committed to supporting the community deploying Enterprise Grade Hadoop as well as maintaining the interoperability of our platform by enabling leaders in the data center to easily extend their products to integrate with Enterprise Grade Hadoop. This combination of our open solution and our ecosystem of more than 500 partners provides compelling solutions for enterprises across a wide variety of use cases.

 

    Focus on renewing and extending existing customer deployments.    We believe that our solution offers increasingly more value as data under management scales. As data under management increases and return on investment is realized, existing deployments expand and new use cases are discovered, expanding our overall opportunity. Therefore we will continue to focus on supporting our current customer deployments to exceed their expectations. By serving our current base, we will strengthen our relationships as we focus on renewing and broadening the scope of our support agreements.

 

    Grow our sales force directly and indirectly through our reseller and OEM partners.     Our go-to-market strategy relies on a strong sales team and partnerships with some of the largest software companies in the world. We plan to drive growth by further investing into our salesforce and partner channels.

 

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    Grow our customer base across new vertical markets and geographies.    We believe that Hadoop’s use cases are broad, and that our solution can address customers in a variety of industries including online services, education, financial services, government, healthcare/pharmaceuticals, industrials/manufacturing, media/entertainment, retail/ecommerce, technology and telecommunications. Our focus is to penetrate a diverse customer base through the efforts of our sales representatives within different geographies.

 

    Pursue selective acquisitions to further enhance and build out the critical components of the Hortonworks Data Platform.    In May 2014, we acquired XA Secure for its data security capability and are converting the acquired technology into open source features for the Hortonworks Data Platform. We will continue to seek potential acquisition opportunities that can add to the capabilities of an enterprise Hadoop solution.

 

    Continue international expansion.    The majority of our sales today originate within the United States. We believe that there is a substantial opportunity for Enterprise Grade Hadoop outside of the United States, and we intend to continue to increase the size of our customer base through the efforts of our international sales team. We are currently focused on serving the needs of customers in North America and Western Europe with future expansion opportunities in Europe, Asia Pacific and the rest of the world.

Products and Services

Our solution, the Hortonworks Data Platform, is an open source, enterprise-grade data management platform built on Apache Hadoop and powered by YARN. We continuously drive innovation in the Apache community with a mission to further Hadoop’s development for mainstream enterprises across such key areas as data management, data access, security, governance and operations.

Products

Our product offerings include:

 

    Hortonworks Data Platform is a modern data platform built from various open source software components including Apache Hadoop and is designed for mainstream enterprise adoption. The Hortonworks Data Platform is fundamentally versatile, providing linear, scalable storage and compute across a wide range of access methods, from batch to interactive and real time. HDP includes a comprehensive set of the essential data capabilities required by the modern enterprise across governance, integration, security and operations. HDP integrates with and augments existing best-of-breed data center systems and tools and is the only completely open Apache Hadoop platform that provides deployment choice from cloud, an appliance, or on-premises across both Windows and Linux. We released Version 2.1 of the Hortonworks Data Platform in April 2014, and typically release several upgrades per year to include new functionality and new projects.

While Apache Hadoop, through the Hadoop Distributed Filesystem (HDFS), YARN and MapReduce, provides the foundational capabilities for managing and accessing data at scale, the Enterprise Grade Hadoop platform has expanded to incorporate a range of Apache projects that are required components of a complete enterprise data platform. These components fit into five distinct categories: data management, data access, governance and integration, security and operations. The Hortonworks Data Platform, illustrated below, delivers all of the

 

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essential open source components across the five categories in a completely open, integrated and tested platform that is ready for enterprise usage.

LOGO

 

    Data Management: HDFS, the file system for Hadoop, provides linear scale and reliable data storage, and is designed for distributed computing across large clusters of low-cost commodity servers. YARN is the data operating system for Hadoop that enables users to process and access data simultaneously in multiple ways.

 

    Data Access: HDP enables users to access and interact with data using a variety of engines to support batch (MapReduce), interactive (Hive) and real-time (HBase, Accumulo and Storm) data processing use cases.

 

    Governance and Integration: HDP includes functionality that enables users to quickly, easily and flexibly load data, and manage its lifecycle according to policy. For example, Falcon allows users to automate the movement and processing of datasets for pipelines, disaster recovery and data retention, Flume collects data from multiple sources, such as high-volume Web logs, in real-time, and Sqoop enables users to import large amounts of data quickly from external data stores and enterprise data warehouses.

 

    Security: HDP facilitates the administration of consistent policy across requirements for authentication, authorization, audit and data protection. Tools such as Knox provide authentication and access functionality for Hadoop services.

 

    Operations: HDP includes tools used to provision, manage, monitor and operate Hadoop clusters at scale, including Apache Ambari, which is a collection of tools that allows system administrators to provision and manage their Hadoop clusters.

 

   

Hortonworks Sandbox is a personal, portable and free to use Hadoop environment designed to provide the easiest way to get started with Enterprise Grade Hadoop and the Hortonworks Data Platform. Hortonworks Sandbox includes HDP in an easy-to-use form and comes packaged with dozens of interactive Hadoop tutorials from us, our partners and the broader Hadoop community that are all designed to provide the fastest path to value with Enterprise Grade Hadoop. The tutorials we provide are built on the experience gained from training thousands of people in our Hortonworks University Training classes. Many users leverage the

 

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Hortonworks Sandbox as a way to prove the concept of their initial use cases before engaging with us around professional services and support subscription offerings.

Development

We embrace an open source software development model that uses the collective input, resources and knowledge of a global community of contributors collaborating primarily within the Apache Software Foundation open source community on developing, maintaining and enhancing Apache Hadoop. We employ the largest number of active Apache Software Foundation committers and Project Management Committee (PMC) members of any company for the Enterprise Grade Hadoop projects within the Hortonworks Data Platform, including Apache Hadoop, Apache Hive, Apache Pig, Apache Tez, Apache HBase, Apache Accumulo, Apache Storm, Apache Ambari, Apache Knox, Apache Falcon, Apache Oozie, Apache Sqoop, Apache Flume and Apache Zookeeper. The number of active committers and active PMC members that are employed by us and focused on the Apache Hadoop project individually as well in total across all of the Apache projects listed above is more than twice the total of the next largest employer of such committers. These employees enable us to drive innovation, define a roadmap for the future of Hadoop, ensure predictable and reliable enterprise quality releases and provide comprehensive, enterprise-class support.

We believe that we benefit from this open source development model because we are able to offer our software more quickly and with lower development cost than is typical of many software vendors who use a proprietary model to develop their products. Our open source development model also benefits our support subscription customers and partners, who are able to take advantage of the quality and value of open source software that we help to define, develop, integrate, test, certify, deliver, maintain, enhance and support. Our research and development expenses were $6.9 million and $12.1 million for the years ended April 30, 2012 and 2013, respectively, $6.8 million and $14.6 million for the eight months ended December 31, 2012 and 2013, respectively, and $13.8 million and $26.3 million for the nine months ended September 30, 2013 and 2014, respectively.

Licensing

We distribute the Hortonworks Data Platform under the Apache open source license in order to provide recipients broad rights to use, copy, modify and redistribute the Hortonworks Data Platform. These broad rights afford significant transparency for end users of the Hortonworks Data Platform, including our customers and partners, to provide informed suggestions, changes and enhancements to the Hortonworks Data Platform based on their use cases and business needs. Consistent with our open source approach, we generally make the Hortonworks Data Platform available free of charge and derive the predominant amount of our revenue from customer fees from support subscription offerings and professional services.

Support Subscriptions

We provide support under annual or multi-year subscriptions. A support subscription generally entitles a support subscription customer to a specified scope of support, as well as security updates, fixes, functionality enhancements and upgrades to the technology and new versions of the software, if and when available, and compatibility with an ecosystem of certified hardware and software applications. Our support subscriptions are typically non-cancelable and paid for in advance, and are generally consistent among our customers.

Support subscription offerings for the Hortonworks Data Platform are designed to assist our support subscription customers throughout the entire lifecycle: from development and proof-of-concept, to quality assurance and testing, to production and deployment, and are available in two editions: HDP

 

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Enterprise and HDP Enterprise Plus. Both offerings provide support incidents with up to 24x7, one-hour response available from us and selected independent software vendor and original equipment manufacturer, or OEM, partners. Support offerings include but are not limited to remote troubleshooting, advanced knowledgebase, access to upgrades, updates and patches, diagnosis of installation and configuration issues, diagnosis of cluster management and performance issues, diagnosis of data loading, processing and query issues, as well as application development advice.

Professional Services

We offer a range of professional services that are designed to help our customers derive additional value from deploying Hortonworks Data Platform.

 

    Training.    We provide scenario-based Enterprise Grade Hadoop training classes for developers, system administrators and data analysts available in classroom, corporate on-site and online settings, along with examinations that enable individuals to establish themselves as Certified Hadoop Professionals. Our training classes help populate customers with skilled Hadoop professionals who often serve as internal experts and open source advocates, increasing opportunities for successful adoption and use of the Hortonworks Data Platform.

 

    Consulting.    We also provide the services of experienced consultants principally in connection with our technology offerings to assist with the needs of our customers such as deployment assessments, implementations, upgrade planning, platform migrations, solution integration and application development. By providing consulting services, directly and with our certified system integrator partners, we facilitate adoption of the Hortonworks Data Platform.

Sales and Marketing

Our sales and marketing teams work together to drive market awareness, build a strong sales pipeline and cultivate customer relationships to drive revenue growth.

Our sales organization consists of a direct sales team and reseller partners who work in collaboration with our direct sales team to identify new sales prospects, sell our subscriptions and professional services and provide post-sale support. Our direct field sales organization is responsible for targeting enterprise and government accounts globally. Our direct inside sales organization is responsible for targeting medium-size and smaller organizations. Our business development team works with our direct field sales organization to manage the collaboration between our direct field sales team and our strategic and reseller partners. We believe this direct-touch sales approach allows us to leverage the benefits of the channel as well as maintain face-to-face interaction with our customers, including key enterprise accounts. We expect to continue to grow our sales headcount in all markets, particularly in countries where we currently do not have a direct sales presence.

Our sales organization is supported by sales engineers with deep technical domain expertise who are responsible for pre-sales technical support, solutions engineering for our customers, proof of concept work and technical training for our channel partners. Our sales engineers also act as liaisons between our customers and our marketing and product development organizations.

Our marketing is focused on building our brand reputation and the market awareness of our platform and our role in leading the definition and innovation related to Enterprise Grade Hadoop, driving customer demand and a strong sales pipeline, and working with our partners around the globe. Our marketing team consists of corporate marketing and communications, product marketing, partner marketing, field marketing and lead development personnel. Marketing activities include demand generation, advertising, managing our corporate website and partner portal, social media and audience

 

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engagement, trade shows and conferences, press and analyst relations, customer references and customer awareness. We are also actively engaged in driving global thought leadership programs through our website, blogs, media and the annual Hadoop Summit conferences that we have hosted and managed both in the United States and Europe since 2012.

Customers

Our support subscription customer base has grown from 54 support subscription customers as of September 30, 2013 to 233 support subscription customers as of September 30, 2014. Our support subscription customer count consists of organizations that have purchased support subscriptions offerings; we exclude users of Hortonworks Sandbox from our support subscription customer count because we do not have support subscription arrangements with, and do not generate revenue from, users of Hortonworks Sandbox. In situations where there are multiple support subscription contracts with multiple subsidiaries or divisions, universities, or governmental organizations of a single entity, each such contract is treated as a separate instance of our support subscription offerings and is counted as representing a separate support subscription customer. We provide products and services to support subscription customers of varying sizes, including enterprises, educational institutions and government agencies. Our current support subscription customer base spans numerous vertical markets, including online services, education, financial services, government, healthcare/pharmaceuticals, industrials/manufacturing, media/entertainment, retail/ecommerce, technology and telecommunications. See Note 14 to our consolidated financial statements for a summary of revenue by geographic area.

Customer Case Studies

We believe that the following case studies provide a representative sample of how our customers use our solutions. These case studies have been approved by the applicable customers.

Aligning Car Buyers, Dealers and Manufacturers with Data Transparency

Business Challenge

The mission of one Hortonworks customer is to transform how consumers buy cars and how dealers sell them. The company established an intelligent, online platform that provides confident price estimates to car buyers, based on actual prices paid at local dealerships. In order to provide those confident price predictions, the company needed to constantly ingest and store vast amounts of data on recent purchases—with minute levels of detail about optional features, along with photos of all permutations and combinations.

As the company’s network of participating dealerships grew towards the current level of more than nine thousand, the size of the dataset and pressures around data movement began to overwhelm the existing relational database management system architecture. The data storage costs reduced the company’s margins on the referral revenue it earned from dealerships. Also, dealerships stored and reported their raw data in widely varying formats, so the company needed to transform that data before loading it to its relational data store. This complex processing step also added cost and reduced margins.

Solution

Apache Hadoop and Hortonworks Data Platform provided a substantially more economical way to scale the storage and processing of inherently unstructured and poor quality raw data. Now the company stores transactional data in HDFS for more than 8 million new and used vehicles every day. It

 

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uses MapReduce and Apache Hive to enrich that data to power market reports, live offers and its online pricing systems. It also processes more than 1 million vehicle images daily, with a total of 1 billion images having already passed through the system. The unified storage and ETL system on HDP feeds the company’s multi-dimensional business intelligence operations and aligns with its strategy of capturing all the data it can, storing it in HDFS and then using it to make and remake applications.

Impact

This customer was able to achieve high-velocity and efficient data processing on HDP. A full processing run of the company’s vehicular data used to take 6-24 hours. Now with Hadoop it takes one hour, even with more data under management and added enrichment that would have been difficult or impossible before.

Improving Results from a Usage-Based Auto Insurance Program

Business Challenge

A leading auto insurance underwriter sought to implement a usage-based insurance program (UBI) that aligns premiums with empirical risk, based on how policyholders actually drive. The underwriter sought to increase revenues and reduce loss rates relative to its traditional book of auto insurance, which identifies and rewards safe drivers based on their historical driving records. However, these traditional programs did not give underwriters the ability to engage in predictive analytics using actual driving data to assess the risk associated with each individual driver.

This insurance underwriter previously launched UBI products but found it difficult to utilize the large quantity of machine sensor data generated by the UBI devices it deployed with its customers. The constraint of its existing architecture taxed the company’s systems and processes, which inhibited rapid hypothesis testing due to the long processing time.

Solution

The company adopted the Hortonworks Data Platform to retain 100% of policyholders’ UBI data and improve the quality of its analytical processes. Furthermore, HDP has enabled the company to leverage more robust processing power across the platform to shorten processing time significantly. The increased breadth of its data under management and faster processing enables the insurer to price risk with a higher degree of confidence and accuracy.

Impact

HDP allows the insurer to acquire and retain low-risk drivers at more affordable rates based on empirical data about their driving behavior. Additionally, the use of HDP enables the company to store driver data in a more cost-effective manner than with other alternatives.

Strategic Relationships

To facilitate the widespread deployment of the Hortonworks Data Platform, we have focused on cultivating broad support for our technologies from the providers of enterprise software, infrastructure and systems integrator services critical to enterprises. We have strategic relationships and reseller arrangements with third parties whereby our support subscriptions are bundled with such third parties’ products and services.

 

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We have established strategic relationships with Hewlett-Packard Company, Microsoft, Red Hat and Teradata that involve tightly integrated development, marketing and support strategies to maximize the success of our solutions.

Hewlett-Packard Company, one of our stockholders and the employer of our director Martin Fink, resells Hortonworks Data Platform support subscription offerings, whereby Hewlett-Packard Company may perform level one and two support, and deliver professional services to its end-user customers. We receive a net percentage of the gross dollars collected from Hewlett-Packard Company’s end-user customers related to such support and professional services, which customers Hewlett-Packard Company bills directly. Revenue from Hewlett-Packard Company accounted for less than 0.5% of our total revenue for each of the year ended April 30, 2013, the eight months ended December 31, 2013 and the nine months ended September 30, 2014.

Microsoft sells a Microsoft-branded offering of the Hortonworks Data Platform to its end-user customers. We receive a fee for providing support subscription offerings to Microsoft. Revenue from Microsoft accounted for 55.3% of our total revenue for the year ended April 30, 2013, 37.8% of our total revenue for the eight months ended December 31, 2013 and 22.4% of our total revenue for the nine months ended September 30, 2014.

We and Red Hat, the employer of our director Paul Cormier, work together through our research and development organizations to facilitate Hadoop performance on Red Hat’s Enterprise Linux offerings. We had no revenue from Red Hat for the year ended April 30, 2013, and revenue from Red Hat represented less than 0.1% of our total revenue for each of the eight months ended December 31, 2013 and the nine months ended September 30, 2014.

Teradata, one of our stockholders, resells Hortonworks Data Platform support subscription offerings, whereby Teradata typically performs level one support for its end-user customers. We receive a fixed dollar amount per customer transaction from Teradata based on volume, regardless of the amount that Teradata bills to its end-user customers. Revenue from Teradata accounted for 3.6% of our total revenue for the year ended April 30, 2013, 3.8% of our total revenue for the eight months ended December 31, 2013 and 3.3% of our total revenue for the nine months ended September 30, 2014.

Further, leading enterprise software and infrastructure vendors with solutions that run on or with the Hortonworks Data Platform include Amazon Web Services, Inc., BMC Software, Inc., Cisco Systems, Inc., Informatica Corporation, LucidWorks, Inc., MarkLogic Corporation, MicroStrategy Inc., NetApp, Inc., SAS Institute Inc., Splunk Inc., Symantec Corporation, Tableau Software, Inc., Talend Inc., Tibco Software Inc. and VMware, Inc.

Competition

Within the enterprise Hadoop market, we compete against a variety of large software and infrastructure vendors, smaller specialized companies and custom development efforts. Our principal competitors in this market include pure play Hadoop distribution vendors such as Cloudera and MapR Technologies, as well as enterprise software and infrastructure vendors that offer Hadoop distributions such as IBM, Oracle and Pivotal Software.

Within the broader big data market, an enterprise Hadoop solution may compete for workloads against traditional data warehouse solutions from large vendors such as Teradata, Oracle, Microsoft, IBM, Hewlett-Packard Company, SAP and EMC Corporation (Pivotal Software), and non-relational NoSQL databases from pure play vendors such as MongoDB Inc. and DataStax, Inc. Since enterprise

 

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Hadoop is commonly integrated with traditional data warehouses, such as our partnerships with Teradata and Hewlett-Packard Company, and NoSQL databases, such as our partnership with DataStax, this category of vendors and solutions comprises a set of key partners who may compete with us in certain instances while partnering with us in others.

We believe the principal competitive factors in the enterprise Hadoop and big data markets for our solution are:

 

    name and reputation of the vendor or competitive offering;

 

    ability to adapt development, sales, marketing and support to the open source software model;

 

    product price, performance, scalability, reliability, functionality and ease of use;

 

    value of support subscription offerings and quality of support and professional services;

 

    strategic alliances with major enterprise software and infrastructure providers;

 

    availability of third-party solutions that are integrated with and compatible with the technology;

 

    number of Global 2000 reference accounts;

 

    ability to provide a credible and actionable roadmap for the technology;

 

    ability to quickly diagnose software issues and provide patches and other solutions; and

 

    strength of the vendor’s relationships and reputation in the open source community.

We believe that we generally compete favorably on the basis of the foregoing factors. Since we employ a significant number of Hadoop core committers and innovators, we are able to innovate the core open source technology, help define a roadmap for the future, provide predictable and reliable, enterprise-quality releases and offer comprehensive support to our support subscription customers and deeply integrated solutions with our partners.

The traditional barriers to entry that are found in the proprietary software model do not characterize the open source software model. For example, the financial and legal barriers to creating a new Hadoop distribution are relatively low because the software components typically included in Hadoop distributions are publicly available under open source licenses that permit copying, modification and redistribution. While anyone can use, copy, modify and redistribute the Hortonworks Data Platform, they are not permitted to refer to the product using the trademarked “Hortonworks” name unless they have a formal business relationship with us that allows such references.

Some of our actual and potential competitors have advantages over us, such as longer operating histories, significantly greater financial, technical, marketing or other resources, stronger brand and business user recognition, larger intellectual property portfolios and broader global distribution and presence. In addition, our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on operational intelligence and could directly compete with us. Smaller companies could also launch new products and services that we do not offer and that could gain market acceptance quickly.

Intellectual Property

Our offerings, including the Hortonworks Data Platform and Hortonworks Sandbox, are built from software components licensed to the general public under the Apache Software License and similar open source licenses. We obtain many components from software developed and released by contributors to independent open source software development projects primarily at the Apache

 

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Software Foundation. Open source licenses grant licensees broad permissions to use, copy, modify and redistribute the Hortonworks Data Platform. As a result, open source development and licensing practices can limit the value of our software copyright assets. Consequently, our trademarks may represent our most valuable intellectual property. As a result, we actively pursue registration of our trademarks, logos, service marks and domain names in the United States and in other countries. The duration of our trademarks registered in the U.S. generally lasts as long as we use them in commerce and timely file all documents required by the United States Patent and Trademark Office to maintain such registrations.

We rely on a combination of trade secret, copyright and trademark laws, a variety of contractual arrangements, such as license agreements, assignment agreements, confidentiality and non-disclosure agreements, and confidentiality procedures and technical measures to gain rights to and protect the intellectual property used in our business.

We also rely on certain intellectual property rights that we license from third parties, including under certain open source licenses. Though such third-party technologies may not continue to be available to us on commercially reasonable terms, we believe that alternative technologies would be available to us.

Our policy is to require employees and independent contractors to sign agreements assigning to us any inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf and agreeing to protect our confidential information, and all of our key employees and contractors have done so. We also control and monitor access to, and distribution of, our proprietary information.

For a discussion of the risk factors relating to intellectual property that we believe could impact our actual and expected results, see “Risk Factors” in this prospectus.

Legal Proceedings

From time to time, we are involved in legal proceedings and subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Employees

As of September 30, 2014, we had 524 full-time employees, including 468 employees in the United States and 56 employees internationally. None of our employees is represented by a labor union with respect to his or her employment with us. We have not experienced any work stoppages and we consider our relations with our employees to be good.

Facilities

Our corporate headquarters, which includes research and development, sales, marketing, business operations and executive offices, is located in Palo Alto, California. It consists of 30,000 square feet of space under a lease that expires in October 2017. In May 2014, we entered into a lease for our new corporate headquarters consisting of 65,000 square feet of space in Santa Clara, California under a lease that expires in April 2018, and intend to occupy the space before the end of 2014.

 

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We lease all of our facilities and do not own any real property. We intend to procure additional space as we add employees and expand geographically. We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable additional space will be available to accommodate expansion of our operations.

 

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MANAGEMENT

Executive Officers and Directors

The following table provides information regarding our executive officers and directors as of September 30, 2014:

 

Name

   Age     

Position

Executive Officers:

     

Robert Bearden

     48       Chief Executive Officer and Chairman of the Board of Directors

Scott Davidson

     48       Chief Financial Officer

Herbert Cunitz

     51       President

Shaun Connolly

     50       Vice President, Corporate Strategy

Greg Pavlik

     42       Vice President, Engineering

Non-Employee Directors:

     

Paul Cormier(1)

     57       Director

Peter Fenton(1)(3)

     42       Director

Martin Fink(2)

     49       Director

Kevin Klausmeyer(1)(3)

     56       Director

Jay Rossiter(2)

     57       Director

Michelangelo Volpi(2)(3)

     47       Director

 

(1) Member of our compensation committee.
(2) Member of our nominating and corporate governance committee.
(3) Member of our audit committee.

Executive Officers

Robert Bearden.    Robert Bearden co-founded Hortonworks and has served as our Chief Executive Officer from April 2011 to June 2011 and since February 2012 and as a member of our board of directors since April 2011. From August 2009 to April 2011, Mr. Bearden served as an Entrepreneur in Residence at Benchmark, a venture capital firm. From March 2008 to August 2009, Mr. Bearden served as President and Chief Operating Officer of SpringSource, a provider of open source software solutions (acquired by VMware). Mr. Bearden holds a B.S. in marketing from Jacksonville State University.

We believe that Mr. Bearden is qualified to serve as a member of our board of directors because of his operational and historical expertise gained from serving as our Chief Executive Officer and as a senior executive at other technology companies as well as his knowledge of the technology industry.

Scott Davidson.    Scott Davidson has served as our Chief Financial Officer since April 2014. From October 2012 to April 2013, Mr. Davidson served as Vice President, Finance at Dell, Inc., a computer manufacturer and technology company. From October 2007 to September 2012, Mr. Davidson served as Chief Financial Officer of Quest Software, an enterprise software company. Mr. Davidson holds a B.S. in finance from Florida Atlantic University and an M.B.A. from the University of Miami.

Herbert Cunitz.    Herbert Cunitz has served as our President since September 2012. From September 2009 to September 2012, Mr. Cunitz served as Vice President, Global Field Operations at

 

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VMware, a cloud and virtualization company. From May 2008 to September 2009, Mr. Cunitz served as Vice President, Sales at SpringSource, a provider of open source software solutions (acquired by VMware). Mr. Cunitz holds a B.S. in electrical engineering from Columbia University and an M.B.A. from New York University.

Shaun Connolly.    Shaun Connolly has served as our Vice President, Corporate Strategy since December 2011. From October 2011 to December 2011, Mr. Connolly served as an independent consultant to the Company. From September 2009 to September 2011, Mr. Connolly served as Vice President, Product Strategy at VMware, a cloud and virtualization company. From December 2008 to September 2009, Mr. Connolly served as Vice President, Product Management at SpringSource, a provider of open source software solutions (acquired by VMware). Mr. Connolly holds a B.S. in electrical engineering from Drexel University.

Greg Pavlik.    Greg Pavlik has served as our Vice President, Engineering since March 2012. From August 2008 to March 2012, Mr. Pavlik served as Vice President, Product Development at Oracle, an enterprise software company. Mr. Pavlik holds a B.S. in materials science and engineering and an M.B.A. from the University of Pennsylvania.

Non-Employee Directors

Paul Cormier.    Mr. Cormier has served on our board of directors since October 2011. Mr. Cormier has served as President, Products and Technologies of Red Hat, Inc., a provider of open source software solutions, since April 2008 and as Executive Vice President since May 2001. From March 1999 to May 2001, Mr. Cormier served as Senior Vice President, Research and Development at BindView Development Corporation, a network management software company. From June 1998 to March 1999, Mr. Cormier served as Chief Technology Officer for Netect Internet Software Company, a network security vendor. From January 1996 to June 1998, Mr. Cormier first served as Director of Engineering, Internet Security and Collaboration Products and then as Senior Director of Software Product Development, Internet Security Products, for AltaVista Internet Software, a web portal and internet services company. Mr. Cormier holds a B.S. in Business Administration from Fitchburg State College and an M.S. in Software Development and Management from the Rochester Institute of Technology.

We believe that Mr. Cormier is qualified to serve as a member of our board of directors because of his operational expertise gained as a senior executive at leading technology companies as well as his knowledge of the technology industry generally, and in particular, open source solutions.

Peter Fenton.    Mr. Fenton has served on our board of directors since July 2011. Since September 2006, Mr. Fenton has served as a General Partner of Benchmark, a venture capital firm. From October 1999 to May 2006, Mr. Fenton served as a Managing Partner at Accel Partners, a venture capital firm. Mr. Fenton currently serves on the boards of directors of Yelp Inc., a local directory and user review service, Twitter, Inc., a social networking service, Zendesk, Inc., a software development company that provides a software-as-a-service customer service platform, and a number of other privately-held companies. Mr. Fenton holds a B.A. in philosophy and an M.B.A. from Stanford University.

We believe that Mr. Fenton is qualified to serve as a member of our board of directors because of his extensive experience in the venture capital industry and his knowledge of technology companies.

Martin Fink.    Mr. Fink has served on our board of directors since July 2014. Since November 2012, Mr. Fink has served as the Chief Technology Officer and Director, HP Labs, of Hewlett-Packard Company, an information technology company. Since November 2013, Mr. Fink has served as General Manager, HP Cloud, of Hewlett-Packard Company. From 1985 to November 2012, Mr. Fink served in various roles at

 

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Hewlett-Packard Company, most recently as Senior Vice President and General Manager, Business Critical Systems and Converged Application Systems. Mr. Fink holds an associate’s degree in electrical and electronics engineering from Loyalist College and an M.B.A. from Colorado State University.

Kevin Klausmeyer.    Mr. Klausmeyer has served on our board of directors since August 2014. From April 2013 to October 2013, Mr. Klausmeyer served on the board of directors of Sourcefire, Inc., a provider of network security solutions (acquired by Cisco Systems). From July 2003 to September 2012, Mr. Klausmeyer served on the board of directors of Quest Software, Inc., a software company (acquired by Dell, Inc.). From July 2006 to February 2011, Mr. Klausmeyer served as the Chief Financial Officer of The Planet, Inc., a hosting and cloud-based solutions company (acquired by Softlayer Technologies, Inc. which was acquired by IBM). Mr. Klausmeyer currently serves on the boards of directors of Callidus Software Inc., a provider of software-as-a-service sales and marketing automation solutions, and other privately-held companies. Mr. Klausmeyer holds a B.B.A. in accounting from the University of Texas.

We believe Mr. Klausmeyer is qualified to serve as a member of our board of directors because of his financial, accounting, and operational expertise from his prior experience as an executive and director for public and private technology companies.

Jay Rossiter.    Mr. Rossiter has served on our board of directors since July 2011. Mr. Rossiter has been the Senior Vice President of Platforms of Yahoo!, an internet company, since January 2008. Mr. Rossiter holds a bachelor’s degree in mathematics from SUNY Binghamton and a master’s degree in Computer, Information and Control Engineering from the University of Michigan.

We believe that Mr. Rossiter is qualified to serve as a member of our board of directors because of his operational expertise gained as an executive at leading technology companies and his knowledge of the technology industry.

Michelangelo Volpi.    Mr. Volpi has served on our board of directors since October 2011. Since July 2009, Mr. Volpi has served as a General Partner of Index Ventures, a venture capital firm. From June 2007 to July 2009, Mr. Volpi served as Chief Executive Officer for Joost, an Internet premium video services company. From 1994 to June 2007, Mr. Volpi served in various executive roles at Cisco Systems, Inc., a networking and telecommunications company. Mr. Volpi currently serves on the board of Exor S.p.A., an investment company. From April 2010 to April 2013, Mr. Volpi served on the board of directors of Telefonaktiebolaget L. M. Ericsson, a communications technology company, and has served on the board of directors of a number of other privately-held companies. Mr. Volpi holds a B.S. in mechanical engineering, an M.S. in manufacturing systems engineering and an M.B.A. from Stanford University.

We believe that Mr. Volpi is qualified to serve as a member of our board of directors because of his extensive experience in the venture capital industry and his knowledge of technology companies.

Each executive officer serves at the discretion of our board of directors and holds office until his or her successor is duly elected and qualified or until his or her earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

Codes of Business Conduct and Ethics

Prior to the completion of this offering, our board of directors will adopt a code of business conduct and ethics that will apply to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text

 

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of our code of business conduct and ethics will be posted on the investor relations page on our website. We intend to disclose any amendments to our code of business conduct and ethics, or waivers of its requirements, on our website or in filings under the Exchange Act, as required by the applicable rules and exchange requirements.

Board of Directors

Our business and affairs are managed under the direction of our board of directors. The number of directors will be fixed by our board of directors, subject to the terms of our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the completion of this offering. Our board of directors will consist of seven directors, six of whom will qualify as “independent” under the NASDAQ Stock Market LLC, or NASDAQ, listing standards.

In accordance with our amended and restated certificate of incorporation and our amended and restated bylaws, immediately after the completion of this offering our board of directors will be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Our directors will be divided among the three classes as follows:

 

    the Class I directors will be Messrs. Bearden and Klausmeyer, and their terms will expire at the annual meeting of stockholders to be held in 2015;

 

    the Class II directors will be Messrs. Fink, Rossiter and Volpi, and their terms will expire at the annual meeting of stockholders to be held in 2016; and

 

    the Class III directors will be Messrs. Cormier and Fenton, and their terms will expire at the annual meeting of stockholders to be held in 2017.

Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

This classification of our board of directors may have the effect of delaying or preventing changes in control of our company.

Currently, Peter Fenton serves on our board of directors as designee of Benchmark Capital Partners VII, LP, Jay Rossiter serves on our board of directors as designee of Yahoo! Inc. and Michelangelo Volpi serves on our board of directors as designee of Index Ventures V (Jersey), L.P., in each case pursuant to the provisions of a voting agreement, among us and certain of our stockholders. The voting agreement will terminate upon completion of this offering. For additional information, see “Certain Relationships and Related Party Transactions—Voting Agreement.”

Director Independence

Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, our board of directors has determined that Messrs. Cormier, Fenton, Fink, Klausmeyer, Rossiter and Volpi do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing standards of NASDAQ. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and

 

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circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director, and the transactions involving them described in “Certain Relationships and Related Party Transactions.”

Committees of the Board of Directors

Our board of directors has established or will establish, effective prior to the completion of this offering, an audit committee, a compensation committee and a nominating and corporate governance committee.

The composition and responsibilities of each of the committees of our board of directors is described below. Members will serve on these committees until their resignation or until as otherwise determined by our board of directors.

Audit Committee

Immediately following the completion of this offering, our audit committee will consist of Messrs. Fenton, Klausmeyer and Volpi, with Mr. Klausmeyer serving as Chairman. The composition of our audit committee meets the requirements for independence under current NASDAQ listing standards and SEC rules and regulations. Each member of our audit committee meets the financial literacy requirements of NASDAQ listing standards. In addition, our board of directors has determined that Mr. Klausmeyer is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act. Our audit committee will, among other things:

 

    select a qualified firm to serve as the independent registered public accounting firm to audit our consolidated financial statements;

 

    help to ensure the independence and performance of the independent registered public accounting firm;

 

    discuss the scope and results of the audit with the independent registered public accounting firm, and review, with management and the independent registered public accounting firm, our interim and year-end results of operations;

 

    develop procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

 

    review our policies on risk assessment and risk management;

 

    review related party transactions;

 

    obtain and review a report by the independent registered public accounting firm at least annually, that describes our internal control procedures, any material issues with such procedures, and any steps taken to deal with such issues; and

 

    approve (or, as permitted, pre-approve) all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.

Our audit committee will operate under a written charter, to be effective prior to the completion of this offering, that satisfies the applicable rules of the SEC and the listing standards of NASDAQ.

Compensation Committee

Immediately following the completion of this offering, our compensation committee will consist of Messrs. Cormier, Fenton and Klausmeyer, with Mr. Fenton serving as Chairman. The composition of

 

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our compensation committee meets the requirements for independence under NASDAQ listing standards and SEC rules and regulations. Each member of the compensation committee is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code. The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers. Our compensation committee, among other things:

 

    reviews, approves and determines, or make recommendations to our board of directors regarding, the compensation of our executive officers;

 

    administers our stock and equity incentive plans;

 

    reviews and approves and make recommendations to our board of directors regarding incentive compensation and equity plans; and

 

    establishes and reviews general policies relating to compensation and benefits of our employees.

Our compensation committee will operate under a written charter, to be effective prior to the completion of this offering, that satisfies the applicable rules of the SEC and the listing standards of NASDAQ.

Nominating and Corporate Governance Committee

Immediately following the completion of this offering, our nominating and corporate governance committee will consist of Messrs. Fink, Rossiter and Volpi, with Mr. Volpi serving as Chairman. The composition of our nominating and corporate governance committee meets the requirements for independence under NASDAQ listing standards and SEC rules and regulations. Our nominating and corporate governance committee will, among other things:

 

    identify, evaluate and select, or make recommendations to our board of directors regarding, nominees for election to our board of directors and its committees;

 

    evaluate the performance of our board of directors and of individual directors;

 

    consider and make recommendations to our board of directors regarding the composition of our board of directors and its committees;

 

    review developments in corporate governance practices;

 

    evaluate the adequacy of our corporate governance practices and reporting; and

 

    develop and make recommendations to our board of directors regarding corporate governance guidelines and matters.

The nominating and corporate governance committee will operate under a written charter, to be effective prior to the completion of this offering that satisfies the applicable listing requirements and rules of NASDAQ.

Compensation Committee Interlocks and Insider Participation

None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Peter Fenton, a member of our compensation committee, is affiliated with Benchmark. In July 2011, we sold shares of our Series A preferred stock to entities affiliated with Benchmark, in June 2013, we sold shares of our Series C preferred stock to entities affiliated with Benchmark and in March

 

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2014, we sold shares of our Series D preferred stock to entities affiliated with Benchmark. All purchasers of our Series A preferred stock, Series C preferred stock and Series D preferred stock, including entities affiliated with Benchmark, are parties to our investors’ rights agreement and are entitled to specified registration rights thereunder. Such purchasers are also party to a right of first refusal and co-sale agreement and a voting agreement, each of which will terminate upon the completion of this offering. We have described each of these transactions in more detail under “Certain Relationships and Related Party Transactions.”

Non-Employee Director Compensation

Other than set forth in the table and described more fully below, historically, none of our non-employee directors received any cash, equity or other compensation for their services as directors or as members of any board committee, except that in December 2011, Paul Cormier was granted an option to purchase 91,666 shares of our common stock with an exercise price of $0.54 per share, in August 2013, Mr. Cormier was granted an option to purchase 22,500 shares of our common stock with an exercise price of $4.76 per share and in August 2014, upon joining the board of directors, Kevin Klausmeyer was granted an option to purchase 96,226 shares of our common stock with an exercise price of $14.14 per share. Directors who are also our employees receive no additional compensation for their service as a director. During 2013, Mr. Bearden was an employee. See “Executive Compensation” for more information about his compensation.

Director Compensation—2013

 

Name

   Option
Awards(1)(2)
     Total  

Paul Cormier

   $ 48,655       $ 48,655   

 

(1) The amount reported represents the aggregate grant date fair value of the stock options awarded to the director in fiscal 2013, calculated in accordance with ASC Topic 718. Such grant date fair value does not take into account any estimated forfeiture related to service-vesting conditions. The assumptions used in calculating the grant date fair value of the stock options reported in this column are set forth in the notes to our audited financial statements included in this prospectus.
(2) One quarter of the shares subject to the option granted in December 2011 vested on December 5, 2012 and one forty-eighth of the shares will vest monthly thereafter, subject to continued service to us. One quarter of the shares subject to the option granted in August 2013 will vest on August 19, 2014 and one forty-eighth of the shares will vest monthly thereafter, subject to continued service to us. The option granted in August 2013 provides for full vesting acceleration in the event of a change in control.

In September 2014, our board of directors adopted a policy with respect to the compensation payable to our non-employee directors, which will become effective upon the closing of this offering. Under this policy, each non-employee director will be eligible to receive compensation for his or her service consisting of annual cash retainers and equity awards. Our non-employee directors will receive the following annual cash retainers for their service:

Position

   Retainer  

Board Member

   $ 30,000   

Audit Committee Chair

     15,000   

Compensation Committee Chair or Nominating and Corporate Governance Committee Chair

     10,000   

Audit Committee Member other than Chair

     7,500   

Compensation Committee Member other than Chair or Nominating and Corporate Governance Committee Member other than Chair

     5,000   

 

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Our policy provides that, upon the closing of this offering, each non-employee director will be granted RSUs having a fair market value of $150,000 based on the closing trading price on the date of grant. In addition, on the date of each annual meeting of stockholders following the closing of this offering, each non-employee continuing director will be granted an annual award of RSUs having a fair market value of $150,000. The award of RSUs granted upon the closing of this offering and upon the date of each annual meeting of stockholders will fully vest on the anniversary of the grant date, in each case, subject to continued service as a director through the vesting date. In addition, such awards are subject to full accelerated vesting upon the sale of our company.

 

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EXECUTIVE COMPENSATION

Overview

The following discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. The actual amount and form of compensation and the compensation policies and practices that we adopt in the future may differ materially from currently planned programs as summarized in this discussion.

The compensation provided to our named executive officers for 2013 is detailed in the 2013 Summary Compensation Table and accompanying footnotes and narrative that follows this section. Note that as a result of changing our fiscal year, we are providing compensation information for our fiscal year ending April 30, 2013, or Fiscal 2013, as well as for our partial year comprised of the eight months ending December 31, 2013, or Partial 2013 Calendar Year.

Our named executive officers in Partial 2013 Calendar Year were:

 

    Robert Bearden, our Chief Executive Officer, or CEO, and co-founder;

 

    Herbert Cunitz, our President; and

 

    Greg Pavlik, our Vice President, Engineering.

Our named executive officers in Fiscal 2013 were:

 

    Robert Bearden, our Chief Executive Officer and co-founder;

 

    Herbert Cunitz, our President; and

 

    Shaun Connolly, our Vice President, Corporate Strategy.

Summary Compensation Table—2013

The following table provides information regarding the total compensation for services rendered in all capacities that was earned by our named executive officers.

 

Name and Principal Position

  Year     Salary ($)     Bonus ($)     Stock
Awards
($)(3)
    Option
Awards
($)(3)
    Non-Equity
Incentive
Plan
Compensation
($)(4)
    Total ($)  

Robert Bearden(5)

    2013 (1)    $ 166,667                    $ 727,292      $ 166,667      $ 1,060,626   

Chief Executive Officer

    2013 (2)      250,000                             183,333        433,333   

Shaun Connolly

    2013 (1)      133,333                             80,000        213,333   

Vice President, Corporate Strategy

    2013 (2)      186,667                      146,824        106,667        440,158   
             

Herbert Cunitz(6)

    2013 (1)      166,667                             166,667        333,334   

President

    2013 (2)      149,258             $ 589,715               149,258        888,231   

Greg Pavlik

    2013 (1)      200,000                      162,184        66,667        428,851   

Vice President, Engineering

    2013 (2)      283,333      $ 100,000 (7)                    33,333        416,666   
             

 

(1) Partial calendar year comprised of eight months ended December 31, 2013.
(2) Fiscal year ended April 30, 2013.
(3)

The amounts reported represent the aggregate grant-date fair value of the stock options or restricted stock purchases awarded to the named executive officer in Partial 2013 Calendar Year or Fiscal 2013, calculated in accordance with

 

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  ASC Topic 718. Such grant date fair value does not take into account any estimated forfeitures related to service vesting conditions. The assumptions used in calculating the grant date fair value are set forth in the notes to our consolidated financial statements included elsewhere in this prospectus.
(4) The amounts reported represent performance-based cash incentives earned by each named executive officer based on the achievement of certain company and individual and departmental management goals and the individual’s target incentive compensation amount. Incentive compensation awards are paid quarterly, based on the achievement of the objectives agreed to at the beginning of each quarter. Generally, such bonuses are based on individual and departmental performance (75%) and company performance (25%).
(5) Mr. Bearden serves on the board of directors but is not paid additional compensation for such service.
(6) We hired Mr. Cunitz in September 2012.
(7) This amount reflects a portion of the signing bonus paid pursuant to the terms of an offer letter with Mr. Pavlik.

Outstanding Equity Awards at December 31, 2013

The following table sets forth information regarding outstanding equity awards held by our named executive officers as of December 31, 2013.

 

    Option Awards(1)     Stock Awards(2)  

Name

  Vesting
Commencement
Date
    Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Option
Exercise
Price ($)
    Option
Expiration
Date
    Number of
Shares

or Units of
Stock That
Have Not
Vested (#)
    Market Value of
Shares

or Units of Stock
That have Not
Vested ($)(3)
 

Robert Bearden

    6/30/11 (4)                                  492,187      $ 2,677,497   
    2/4/12 (5)(6)      370,370        323,857      $ 0.54        2/8/22                 
    8/19/13 (6)             336,328        4.76        8/20/23                 

Herbert Cunitz

    9/25/12 (7)                                  741,305        4,032,699   

Greg Pavlik

    3/26/12 (8)                                  273,711        1,488,988   
    8/19/13 (9)             75,000        4.76        8/20/23                 

 

(1) Each stock option was granted pursuant to our 2011 Stock Option and Grant Plan. Unless otherwise described in the footnotes below, the stock options are not immediately exercisable. Unless otherwise described in the footnotes below, the shares of our common stock subject to such stock options will vest over a four-year period, with 25% of the shares to vest upon completion of one year of service measured from the vesting commencement date, and the balance will vest in 36 successive equal monthly installments upon the completion of each additional month of service thereafter.
(2) Each stock award was either granted pursuant to our 2011 Stock Option and Grant Plan or pursuant to a stand-alone restricted stock purchase agreement. Unless specified otherwise, each stock award vests over a four-year period, with 25% of the shares to vest upon completion of one year of service measured from the vesting commencement date, and the balance will vest in 36 successive equal monthly installments upon the completion of each additional month of service thereafter.
(3) Amounts calculated using a per share fair market value as of December 31, 2013 of $5.44.
(4) The stock award vests over a four-year period, with 25% of the shares vesting on the grant date and the balance vesting in 48 successive equal monthly installments upon the completion of each month of service thereafter. The award has full vesting acceleration in the event there is a change in control as defined in the restricted stock purchase agreement.
(5) The stock option is immediately exercisable as of the grant date of February 9, 2012 for the first 185,185 shares subject to the option; an additional 185,185 shares are exercisable on January 1, 2013, an additional 185,185 shares are exercisable on January 1, 2014, and the remaining 138,672 shares are exercisable on January 1, 2015. The shares of stock subject to the option vest over a four-year period, with shares vesting in 48 successive equal monthly installments upon the completion of each month of service following the vesting commencement date.
(6) The equity award has full vesting acceleration in the event there is a sale event as defined in the 2011 Stock Option and Grant Plan.
(7) The equity award has full vesting acceleration in the event there is a change in control as defined in the restricted stock agreement.
(8) The equity award has full vesting acceleration in the event there is a sale event as defined in the 2011 Stock Option and Grant Plan and Mr. Pavlik’s employment is terminated without cause following the sale event.
(9) The equity award has full vesting acceleration in the event there is a sale event as defined in the 2011 Stock Option and Grant Plan and Mr. Pavlik’s employment is terminated without cause or he resigns for good reason within 12 months following the sale event.

 

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Executive Employment Arrangements and Other Compensation and Benefit Plans

Employment Agreements

We initially entered into offer letters with each of the named executive officers in connection with his employment with the company, and have replaced these offer letters with executive agreements as further described below in connection with our initial public offering. These agreements set forth the terms and conditions of employment of each named executive officer, including base salary, target annual bonus opportunity and standard employee benefit plan participation. These agreements also contain provisions that provide for certain payments and benefits in the event of a termination of employment, including an involuntary termination of employment following a change in control of the company.

Robert Bearden

On October 30, 2014, we entered into an executive agreement with Mr. Bearden for the position of Chief Executive Officer. The executive agreement provides for his at-will employment and sets forth his base salary and his annual target bonus (which will be increased to $275,000 and $300,000, respectively, at such time as our board of directors determines), and eligibility for our benefit plans generally.

Involuntary Termination of Employment

In the event that his employment is terminated by the company without cause (as defined in the executive agreement), and subject to delivering a fully effective release of claims, he will be entitled to cash severance equal to 12 months of his then current base salary and prorated target incentive compensation for the quarter (in the case of incentive compensation paid on a quarterly basis) or the year (in the case of incentive compensation paid on an annual basis) in which the termination occurs, payable over 12 months, plus a monthly payment equal to our contribution towards health insurance for 12 months. In addition, except to the extent any equity award granted or purchased prior to September 12, 2014 contains more favorable terms, he will receive 12 months acceleration on all stock options, restricted stock, and other stock based awards held by him. Furthermore, to the extent he enters into a non-competition agreement, he will receive an additional amount of cash severance, health benefits continuation and equity acceleration based on the length of such non-competition period, which will be payable over an additional number of months equal to the non-competition period.

Involuntary Termination of Employment in Connection with a Change in Control

In the event that his employment is terminated by the company without cause or by the executive due to constructive termination (as defined in the executive agreement) after a change in control, then in lieu of the severance described above, and subject to delivering a fully effective release of claims, he will be entitled to a lump sum cash severance payment equal to 12 months of his then current base salary and prorated target incentive compensation for the quarter (in the case of incentive compensation paid on a quarterly basis) or the year (in the case of incentive compensation paid on an annual basis) in which the termination occurs, plus a monthly payment equal to our contribution towards health insurance for 12 months. In addition, all stock options, restricted stock and other stock based awards held by him will immediately accelerate and become fully vested upon such termination. Furthermore, to the extent he enters into a non-competition agreement, he will receive an additional amount of cash severance and health benefits continuation based on the length of such non-competition period.

The payments and benefits provided under his executive agreement in connection with a change in control may not be eligible for a federal income tax deduction for the company pursuant to

 

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Section 280G of the Internal Revenue Code. These payments and benefits also may be subject to an excise tax under Section 4999 of the Internal Revenue Code. If the payments or benefits payable to him in connection with a change in control would be subject to the excise tax on golden parachutes imposed under Section 4999 of the Internal Revenue Code, then those payments or benefits will be reduced if such reduction would result in a higher net after-tax benefit to him.

Herbert Cunitz

On October 30, 2014, we entered into an executive agreement with Mr. Cunitz for the position of President and Chief Operating Officer. The executive agreement provides for his at-will employment and sets forth his base salary and his annual target bonus (which will be increased to $275,000 and $325,000, respectively, at such time as our board of directors determines) and eligibility for our benefit plans generally.

Involuntary Termination of Employment

In the event that his employment is terminated by the company without cause (as defined in the executive agreement), and subject to delivering a fully effective release of claims, he will be entitled to cash severance equal to six months of his then current base salary and prorated target incentive compensation for the quarter (in the case of incentive compensation paid on a quarterly basis) or the year (in the case of incentive compensation paid on an annual basis) in which the termination occurs, payable over six months, plus a monthly payment equal to our contribution towards health insurance for six months. In addition, except to the extent any equity award granted or purchased prior to September 12, 2014, contains more favorable terms, he will receive six months acceleration on all stock options, restricted stock, and other stock based awards held by him. Furthermore, to the extent he enters into a non-competition agreement, he will receive an additional amount of cash severance, health benefits continuation, and equity acceleration based on the length of such non-competition period, which will be payable over an additional number of months equal to the non-competition period.

Involuntary Termination of Employment in Connection with a Change in Control

In the event that his employment is terminated by the company without cause or by the executive due to constructive termination (as defined in the executive agreement) after a change in control, then in lieu of the severance described above, and subject to delivering a fully effective release of claims, he will be entitled to a lump sum cash severance payment equal to six months of his then current base salary and prorated target incentive compensation for the quarter (in the case of incentive compensation paid on a quarterly basis) or the year (in the case incentive compensation paid on an annual basis) in which the termination occurs, plus a monthly payment equal to our contribution towards health insurance for six months. In addition, all stock options, restricted stock and other stock based awards held by him will immediately accelerate and become fully vested upon such termination. Furthermore, to the extent he enters into a non-competition agreement, he will receive an additional amount of cash severance and health benefits continuation based on the length of such non-competition period.

The payments and benefits provided under his executive agreement in connection with a change in control may not be eligible for a federal income tax deduction for the company pursuant to Section 280G of the Internal Revenue Code. These payments and benefits also may be subject to an excise tax under Section 4999 of the Internal Revenue Code. If the payments or benefits payable to him in connection with a change in control would be subject to the excise tax on golden parachutes imposed under Section 4999 of the Internal Revenue Code, then those payments or benefits will be reduced if such reduction would result in a higher net after-tax benefit to him.

 

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Greg Pavlik

On October 30, 2014, we entered into an executive agreement with Mr. Pavlik for the position of Vice President, Engineering. The executive agreement provides for his at-will employment and sets forth his base salary and his annual target bonus (which will be increased to $350,000 and $150,000, respectively, at such time as our board of directors determines), and eligibility for our benefit plans generally.

Involuntary Termination of Employment

In the event that his employment is terminated without cause (as defined in the executive agreement), and subject to delivering a fully effective release of claims, he will be entitled to cash severance equal to six months of his then current base salary and prorated target incentive compensation for the quarter (in the case of incentive compensation paid on a quarterly basis) or the year (in the case incentive compensation paid on an annual basis) in which the termination occurs, payable over six months, plus a monthly payment equal to our contribution towards health insurance for six months. In addition, except to the extent any equity award granted or purchased prior to September 12, 2014, contains more favorable terms, he will receive six months acceleration on all stock options, restricted stock, and other stock based awards held by him. Furthermore, to the extent he enters into a non-competition agreement, he will receive an additional amount of cash severance, health benefits continuation and equity acceleration based on the length of such non-competition period, which will be payable over an additional number of months equal to the non-competition period.

Involuntary Termination of Employment in Connection with a Change in Control

In the event that his employment is terminated by the company without cause or by the executive due to constructive termination (as defined in the executive agreement) after a change in control, then in lieu of the severance described above, and subject to delivering a fully effective release of claims, he will be entitled to a lump sum cash severance equal to six months of his then current base salary and prorated target incentive compensation for the quarter (in the case of incentive compensation paid on a quarterly basis) or the year (in the case of incentive compensation paid on an annual basis) in which the termination occurs, plus a monthly payment equal to our contribution towards health insurance for six months. In addition, all stock options, restricted stock and other stock based awards held by him will immediately accelerate and become fully vested upon such termination. Furthermore, to the extent he enters into a non-competition agreement, he will receive an additional amount of cash severance and health benefits continuation based on the length of such non-competition period.

The payments and benefits provided under his executive agreement in connection with a change in control may not be eligible for a federal income tax deduction for the company pursuant to Section 280G of the Internal Revenue Code. These payments and benefits also may be subject to an excise tax under Section 4999 of the Internal Revenue Code. If the payments or benefits payable to him in connection with a change in control would be subject to the excise tax on golden parachutes imposed under Section 4999 of the Internal Revenue Code, then those payments or benefits will be reduced if such reduction would result in a higher net after-tax benefit to him.

Offer Letters In Place In Fiscal 2013 For Named Executive Officers (to be superseded as indicated above)

Robert Bearden

On June 21, 2011, we entered into an offer letter with Mr. Bearden for the position of Chief Operating Officer. Mr. Bearden subsequently became our Chief Executive Officer. The offer letter provides for his at-will employment and sets forth his initial base salary of $250,000 and target bonus

 

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of $150,000, initial equity award of 1,750,000 shares of restricted stock and eligibility for our benefit plans generally. His compensation is subject to adjustment pursuant to our employee compensation policies from time to time.

Shaun Connolly

On December 5, 2011, we entered into an offer letter with Shaun Connolly for the position of Vice President, Corporate Strategy. The offer letter provides for his at-will employment and sets forth his initial base salary of $180,000 (Mr. Connolly’s current base salary is $200,000) and target bonus of $100,000, initial equity award of 222,222 shares of restricted stock and eligibility for our benefit plans generally. His compensation is subject to periodic review and adjustments at our discretion.

Herbert Cunitz

On September 17, 2012, we entered into an offer letter with Herbert Cunitz for the position of President and Chief Operating Officer. The offer letter provides for his at-will employment and sets forth his initial base salary of $250,000 and target bonus of $250,000, initial equity award of 1,078,262 shares of restricted stock and eligibility for our benefit plans generally. His compensation is subject to periodic review and adjustments at our discretion.

Greg Pavlik

On March 10, 2012, we entered into an offer letter with Greg Pavlik for the position of Vice President, Engineering. The offer letter provides for his at-will employment and sets forth his initial base salary of $275,000 (Mr. Pavlik’s current base salary is $300,000), initial equity award of 486,597 shares of restricted stock, signing bonus of $300,000 and eligibility for our benefit plans generally. Mr. Pavlik’s signing bonus is payable on the six month, first, second and third year anniversaries of his commencement of employment with us. His compensation is subject to periodic review and adjustments at our discretion.

Equity Awards—Additional Acceleration Terms Applicable to Currently Outstanding Awards as of December 31, 2013

In addition to the acceleration provided in their executive employment agreements, the terms of the following equity awards contain additional acceleration terms as provided below.

Robert Bearden

In the event of a change in control of the company, the vesting of 100% of the unvested equity awards subject to his June 2011 restricted stock grant, February 2012 options and August 2013 options will be accelerated.

Shaun Connolly

In the event of a change in control of the company, the vesting of 50% of the unvested equity awards subject to his December 2011 restricted stock grant and August 2012 options will be accelerated. In the event Mr. Connolly’s employment is terminated without cause or he resigns for good reason within 12 months after a change of control of the company, the vesting of 100% of the unvested equity awards subject to his December 2011 restricted stock grant and August 2012 options will be accelerated.

Herbert Cunitz

In the event of a change in control of the company, the vesting of 100% of the unvested equity awards subject to his September 2012 restricted stock grant will be accelerated.

 

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