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 report and in our other public filings, 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 since our inception,
including net losses of $194.6 million and $128.9 million for the nine months ended September 30, 2016 and 2015, respectively. As a result, we had an accumulated deficit of $645.5 million at September 30, 2016. It is difficult for us to
predict our future results of operations since the market for our solutions is rapidly evolving and has not yet reached widespread adoption. 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, expand and improve the effectiveness of our distribution channels, and continue to invest in the development of the Hortonworks Data Platform
(“HDP”) and Hortonworks DataFlow Platform (“HDF”) offerings. In addition, as we grow and as a result of being a 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 revenue 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 revenue 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 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 revenue, 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, customers renewing and expanding their support subscription relationships with us will be critical to our business. Our support subscription customers have no obligation to renew their support subscriptions after the
expiration of the initial support 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 support subscription customer renewals,
including those support subscription arrangements which also allow the customer the ability to potentially impact the direction and development of the underlying open source solution, so we cannot accurately predict support subscription customer
renewals. Our support subscription customers’ renewals may decline or fluctuate as a result of a number of factors, including their dissatisfaction with our pricing or our product offerings 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 revenue may decline and our business could suffer. In addition, over time the average term of our contracts could change
based on renewals or for other reasons.
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Because we derive our revenue and cash flows primarily from supporting our connected data
platforms and services and training related to them, failure of these offerings or our new product 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 primarily all of our revenue and cash flows from
customer fees for support subscription offerings and professional services in support of our connected data platforms: HDP and HDF. As such, the market acceptance of our connected data platforms is critical to our continued success. Customer demand
for them is affected by a number of factors beyond our control, including the market acceptance of an open source data platform for both incremental and existing and use cases, the continued enhancement of our connected data platforms to support new
use cases and 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 data to lead to an increase in the data storage and processing demands of our customers, and our connected data platforms 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 our connected data platforms, 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 connected data platforms as well as on
the growth and expansion of the market for open source connected data platforms.
The market for our connected data platforms
encompasses demand for open source distributed data platforms powered by Apache Hadoop and demand for open source data ingest platforms powered principally by open source projects like Apache NiFi. These markets are relatively new, rapidly evolving
and unproven. Our future success will depend in large part on our ability to penetrate the existing market for open source distributed data platforms, as well as the continued growth and expansion of that market, and it will also depend on the
ability of technology like Apache NiFi to penetrate the existing market for open source data ingest platforms as well as the continued growth and expansion of that market. It is difficult to predict support subscription customer adoption and
renewals, support subscription customer demand for our 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
for open source connected data platforms and any expansion of that 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 collection, storage and processing. Furthermore, many potential support subscription customers have made significant investments in legacy data collection, storage and processing software and may be unwilling
to invest in new solutions. If the market for open source connected data platforms fails to grow or expand or decreases in size, or if we do not succeed in further penetrating that market, 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 revenue 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 deliver 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.
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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, Inc. and MapR Technologies, Inc., as
well as from enterprise software vendors, system providers and infrastructure companies not specifically focused on Hadoop distribution. Further, other established system providers not currently focused on Hadoop, including traditional data
warehouse solution providers such as Teradata Corporation (“Teradata”), SAP AG (“SAP”) and EMC Corporation (“EMC”), or open source distributed data platform providers, including non-relational NoSQL database providers
such as MongoDB, Inc. (“MongoDB”) and DataStax, Inc. (“DataStax”) may expand their products and services to compete with us. Additionally, some potential customers may elect to implement and self-support Hadoop deployments
internally, thus not purchasing a support subscription from us. 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 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 our product offerings
depends in part on the offerings’ 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 HDP and HDF with such products and
services, our business will suffer.
The competitive position of HDP and HDF depends in part on these offerings’ 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 HDP or HDF, or our offerings 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 HDP or HDF. We intend to facilitate the compatibility of our product platforms 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, or our own internal programmers 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 (“PMCs”), 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 PMCs 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 also must devote adequate resources to our own internal programmers to support their continued development and enhancement of open source technologies, and if we do not do so, we may have to turn to third parties or
experience delays in developing or enhancing open source technologies. 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
primarily 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 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.
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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 marketplace 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 or incremental support subscription offerings and professional services, our revenue 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 revenue. 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 revenue, 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. The revenue from our three largest customers as a group accounted for approximately 16 percent and 15 percent of our total revenue for the three months ended September 30, 2016 and 2015, respectively, and 15 percent
and 19 percent for the nine months ended September 30, 2016 and 2015, respectively. While we expect that the revenue from our largest customers will continue to 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.
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 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 new 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 billings or 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.
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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:
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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 HDP and the HDF offerings;
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the renewals of our support subscription arrangements with our customers;
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changes in the competitive dynamics of our market;
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customers delaying purchasing decisions in anticipation of new software or software enhancements;
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the timing of satisfying revenue recognition criteria and our ability to obtain VSOE, for our support
subscription offerings;
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our ability to control costs, including our operating expenses;
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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;
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the proportion of revenue attributable to support subscription offerings and professional services, which may
impact our gross margins and operating income;
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the reduction or elimination of support of the Apache Hadoop Project or the Apache NiFi Project by the Apache
Software Foundation, migration of Hadoop technology or NiFi 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 or the Apache NiFi Project
that may impact our business model;
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changes in customers’ budgets and in the timing of their purchasing decisions;
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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.
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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 revenue 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.
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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 to 1,048 at September 30, 2016 from 794 at September 30, 2015 and have increased
our revenue to $132.5 million in the nine months ended September 30, 2016 from $84.5 million in the same period of 2015. 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:
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recruiting, training and retaining sufficient skilled technical, marketing, sales and management personnel;
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preserving our culture, values and entrepreneurial environment;
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developing and improving our internal administrative infrastructure, particularly our financial,
operational, compliance, recordkeeping, communications and other internal systems;
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managing our international operations and the risks associated therewith;
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maintaining high levels of satisfaction with our solutions among our customers; and
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effectively managing expenses related to any future growth.
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If we fail to manage our growth effectively, our business, results of operations and financial condition could suffer.
Our future success depends in large part on the growth of the market for big data applications and an increase in the desire to ingest,
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 HDP and HDF, increase sales of support subscription offerings and professional services and grow our
business depends on the increased adoption of big data services and applications by enterprises. While we believe that big data services and applications can offer a compelling value proposition to many enterprises, the broad adoption of big data
applications and services also presents challenges to enterprises, including developing the internal expertise and infrastructure to manage big data applications and services 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 services, and the third-party growth estimates for this market in this Quarterly Report on Form 10-Q, are subject to significant uncertainty. If the market for big data applications and
services does not grow as expected, our business prospects may be adversely affected. Even if the market for big data applications and services 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, NiFi, HDP or HDF, 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.
HDP and HDF have 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 HDP or HDF may not be reproduced or distributed, may negatively impact our distribution or development of all or a
portion of HDP and HDF. In addition, at some time in the future it is possible that Apache Hadoop or Apache NiFi 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 HDP and HDF 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 U.S. 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. 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 U.S. 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,” 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
U.S. 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 support 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 and overall operating results 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
derived from deferred revenue from subscription agreements entered into during previous quarters. Consequently, a decline in the value of new support subscription agreements entered into within any one quarter, will not necessarily be fully
reflected in the revenue we record for 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 are 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 HDP and HDF are 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 corresponding revenue, could increase costs and harm our results
of operations. In addition, our sales process is highly dependent on our business reputation and on positive references 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 various negative outcomes, which may include
litigation, 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.
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HDP or HDF may contain errors 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 HDP or HDF after deployment. This risk is increased by the fact that much of the code in HDP and HDF are 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 HDP or HDF 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 HDP, the HDF Platform and our other offerings.
In addition, errors in HDP or HDF 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. Furthermore, the mere allegation of such errors and adverse effects could expose us to warranty and other claims for substantial damages. 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 or may not significantly limit our exposure to certain claims. While we seek to
insure against these types of claims, our insurance policies may not adequately limit our exposure to such claims or may not apply to certain 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 HDP or HDF
could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects.
HDP and HDF are 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 and NiFi are technically very complicated, and it is not easy to maximize the value of our offerings 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 HDP or HDF successfully, or in a timely manner, customer perceptions of our company and our
offerings may be impaired, our reputation and brand may suffer, and 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 HDP or HDF to maximize
their potential. HDP or HDF may perform inadequately if they are not implemented or used correctly or as intended. The incorrect or improper implementation or use of our product offerings, our failure to train customers on how to efficiently and
effectively use HDP or HDF, 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 or cloud computing 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 our tools 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 HDP and HDF. 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.
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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.
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 experienced sales
professionals and for engineers experienced in designing and developing software and Apache Hadoop applications. 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. Finally, 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 if so, our business would 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, sales engineers and professional services employees, 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. Recent changes to our sales leadership could adversely affect our ability to do so, which could have a negative impact on our sales productivity or sales execution.
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 would 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 significant expenses in advance of generating material revenue 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
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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, Australia, Brazil, Canada, France, Germany, India, Ireland,
Japan, the Netherlands, Singapore, South Korea, Sweden and the United Kingdom and currently have operations in the United States, Australia, Chile, Hungary, India, Ireland and the United Kingdom. We also have development teams in Hungary, India and
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:
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fluctuations in currency exchange rates;
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unexpected changes in foreign regulatory requirements;
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potentially different pricing environments and longer sales cycles;
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difficulties in managing the staffing of international operations;
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potentially adverse tax consequences, including the complexities of foreign value-added tax systems,
restrictions on the repatriation of earnings and changes in tax rates;
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dependence on strategic alliance partners to increase client acquisition;
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the burdens of complying with a wide variety of foreign laws and different legal standards;
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increased financial accounting and reporting burdens and complexities;
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political, social and economic instability abroad, such as the United Kingdom’s referendum in June 2016
in which voters approved an exit from the European Union and instability in Ukraine (where we have a development team);
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laws and business practices favoring local competitors;
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terrorist attacks and security concerns in general; and
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reduced or varied protection for intellectual property rights in some countries.
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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.
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. For example, in May 2014, we acquired new technology, know-how and solutions through our acquisition of
Agniv, Inc. d/b/a XA Secure, a data security company, in April 2015, we acquired SequenceIQ, kft (“SequenceIQ”), an open source provider of rapid deployment tools for Hadoop, located in Budapest, Hungary, and in August 2015, we acquired
Onyara, a key contributor to Apache NiFi. 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:
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failing to achieve anticipated synergies, including with respect to complementary software or services;
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losing key employees of the acquired businesses;
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integration and restructuring costs, both one-time and ongoing;
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maintaining sufficient controls, policies and procedures, including around integration and accounting for
acquisition-related expenses;
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diversion of management’s attention from ongoing business operations;
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establishing new informational, operational and financial systems to meet the needs of our business;
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our inability to maintain the key business relationships and the reputations of the businesses we acquire;
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uncertainty of entry into markets in which we have limited or no prior experience and in which competitors
have stronger market positions;
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our dependence on unfamiliar affiliates and partners of the companies we acquire;
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insufficient revenue to offset our increased expenses associated with acquisitions;
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potentially incurring accounting charges as we transition an acquired company to our open source business
model;
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our responsibility for the liabilities of the businesses we acquire; and
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unanticipated and unknown liabilities.
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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 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 leading innovator 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 HDP and HDF or our other technologies, 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 intellectual
property rights. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights in a timely manner. We have a registered copyright in China, have registered trademarks in Australia, Canada,
the European Community, Hong Kong, Japan, Mexico, New Zealand, Russia, Singapore, Switzerland, Taiwan, the United Kingdom, and the United States and have issued patent claims in the United States. We also have copyright, trademark and patent
applications pending in various international jurisdictions. Effective intellectual property 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 intellectual property 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
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the Apache Hadoop Project and the Apache NiFi 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 or NiFi gains greater market visibility, we the Apache Hadoop Project and the Apache NiFi Project, as applicable, face a higher risk of being the subject of intellectual property infringement claims. In addition, we
could be subject to lawsuits by parties claiming ownership of what we believe to be open source software.
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.
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 collect and utilize demographic and other information, including personally
identifiable information, from and about our employees and our users (such as customers, potential customers and others). Such information may be collected from our users when they visit our website or elect to use our support tools, or when users
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 and NiFi 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 employees and 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 data and 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. In July 2016, the European Commission adopted a new framework, the EU-U.S. Privacy Shield,
to replace the U.S.-EU Safe Harbor Framework. We are currently assessing the impact of the EU-U.S. Privacy Shield on our operations. 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 or NiFi provider, our customers and potential customers may lose trust in the security of Hadoop- or NiFi-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. In particular, the recent decision by voters in the United Kingdom to leave the European Union has and may continue to result in significant and wide-ranging economic
effects across multiple markets.
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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 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, government, 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 revenue 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 self-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 HDP, HDF or our other technologies, 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 U.S. 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
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, 2015, we had federal, state and foreign tax net operating loss carryforwards (“NOLs”) of $253.0 million,
$223.1 million and $1.2 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, including in connection with our IPO, concurrent private placement or follow-on
offering, and if we undergo an ownership change in the future, 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.
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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 relationships and/or customer relationships with Yahoo!, Red Hat and Hewlett
Packard Enterprise. Our directors Jay Rossiter, Paul Cormier and Martin Fink are employees of Yahoo!, Red Hat and Hewlett Packard Enterprise, respectively, and Yahoo! and Hewlett Packard Enterprise 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 Santa Clara, 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 HDP and HDF, breaches of data security and loss of critical data, all of which could harm our future results of operations.
If we fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results
or prevent fraud.
Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”) requires, among other
things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow
management to report on the effectiveness of our internal control over financial reporting. A report of our management is included under Item 4. “Controls and Procedures” of this Quarterly Report on Form 10-Q. During its evaluation of
the effectiveness of internal control over financial reporting as of December 31, 2015, management identified a material weakness related to the control surrounding the recognition of revenue and deferred revenue for a subset of
non-standard license transactions where post-contract support renewal rates were stated upon commencement of the arrangement. Our findings are related to the design effectiveness of this control. Each of the aforementioned transactions originated
prior to our establishment and formalization of Section 404 internal controls in July 2015. A secondary review of these specific agreements was not performed at a sufficiently detailed level to detect errors in recognition of revenue and
deferred revenue related to these arrangements. With the oversight of management and our Audit Committee, we initiated actions to address the root causes of the material weakness identified. There can be no assurance that such actions will be
sufficient to remedy the material weakness identified or that additional or other control deficiencies will not be identified in the future. If we continue to experience a material weakness in our internal controls or fail to maintain or implement
required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management
evaluations and annual auditor attestation reports when such report is required. Each of the foregoing results could cause stockholders to lose confidence in our reported financial information and lead to a decline in our stock price. See
Item 4. “Controls and Procedures” for more information.
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Risks Related to Ownership of Our Common Stock
Our stock price has been, and may continue to be, volatile or may decline regardless of our operating performance, resulting in
substantial losses for our stockholders.
The trading price of our common stock has been, and may continue 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:
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actual or anticipated fluctuations in our results of operations;
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the financial projections we may provide to the public, any changes in these projections or our failure to
meet these projections;
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failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates
and publication of other news by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
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ratings changes by any securities analysts who follow our company;
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic
partnerships, joint ventures, or capital commitments;
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changes in operating performance and stock market valuations of other technology companies generally, or those
in our industry in particular;
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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;
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changes in accounting standards, policies, guidelines, interpretations or principles;
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actual or anticipated developments in our business or our competitors’ businesses or the competitive
landscape generally;
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developments or disputes concerning our intellectual property or our offerings, or third-party proprietary
rights;
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announced or completed acquisitions of businesses or technologies by us or our competitors;
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new laws or regulations or new interpretations of existing laws, or regulations applicable to our business;
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any major change in our Board of Directors or management;
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sales of shares of our common stock by us or our stockholders;
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lawsuits threatened or filed against us; and
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other events or factors, including those resulting from war, incidents of terrorism, or responses to these
events.
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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
particular, the trading price of our common stock has fluctuated significantly in recent periods. In the past, stockholders have instituted securities class action litigation following periods of market volatility, and a securities class action
litigation was recently instituted against us. This securities litigation and any other securities litigation we may become involved in may subject us to substantial costs, may divert resources and the attention of management from operating our
business and may harm our business, results of operations, financial condition and cash flows.
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 November 1, 2016, our directors, officers, five percent or greater stockholders, and their respective affiliates beneficially owned
in the aggregate approximately 45 percent of our outstanding voting stock. 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.
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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 amended and restated certificate of incorporation and bylaws 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:
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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;
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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;
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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;
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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;
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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;
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prohibit cumulative voting in the election of directors;
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provide that our directors may be removed only for cause;
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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 of our
outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.
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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 are taking 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, 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 our IPO; (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.
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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 are subject to the reporting requirements of 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.
Compliance with these rules and regulations will
continue to 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 are required to disclose changes made in our internal control and procedures on a quarterly basis and we are required to furnish a report by management on, among other things, the effectiveness
of our internal control over financial reporting. 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 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. As we continue to grow rapidly, both organically and through strategic acquisitions, we expect to enhance our disclosure controls and procedures and internal control over
financial reporting, however, we cannot guarantee the adequacy of these enhancements, including integration and accounting for acquisition-related 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.
Being a public company and these new rules and regulations will continue to make it more expensive for us to obtain director and officer
liability insurance, and in the future 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 our filings with the SEC, our business and financial condition has 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.
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.
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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
depends in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts cover 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, particularly sales by our directors, executive officers and significant
stockholders, or the perception that these sales could occur, could cause the market price of our common stock to decline. As of September 30, 2016, we had 60,236,401 shares of common stock outstanding, which excludes any shares of common stock
issuable upon exercise of warrants and options outstanding as of such date. In addition, as of September 30, 2016, there were outstanding options and warrants to purchase 11,778,448 shares of our common stock. These options and
warrants, if exercised, will result in these additional shares becoming available for sale. Sales by these stockholders, option holders or warrant holders of a substantial number of shares could significantly reduce the market price of our common
stock. Moreover, some holders of shares of our common stock have rights, subject to certain 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.
Additionally, the shares of common stock subject to outstanding options and restricted
stock unit awards under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations.
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 amended and restated certificate of incorporation and bylaws 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 amended and restated 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 amended and restated 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 amended and restated 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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