Alibaba OEM further strengthens prospects

WANdisco 7 March 2018 Update
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WANdisco

Alibaba OEM further strengthens prospects

FY17 results

Software & comp services

7 March 2018

Price

775.00p

Market cap

£317.5m

US$1.39/£

Net cash ($m) at 31 December 2017

$23.4m

Shares in issue

40.9m

Free float

88%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.0

28.0

48.0

Rel (local)

5.5

31.0

50.0

52-week high/low

881.50p

371.00p

Business description

WANdisco is a distributed computing company. It has developed a suite of solutions based around proprietary replication technology, which solve critical data management challenges prevalent across cloud computing, big data and the ALM software markets.

Next events

AGM

May 2018

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

WANDisco is a research client of Edison Investment Research Limited

WANdisco’s full year results confirm the transformational year with bookings growing by +45% y-o-y on a cost base that increased by only 5% and cash burn was substantially reduced. Today’s announcement of an OEM partnership with Alibaba adds significantly to an already exceptional platform for growth. With an impressive roster of tier one partners likely to start contributing to the mix, we upgrade our FY18 and FY19 bookings estimates by a further 7% and 5% and see scope for more to come.

Year end

Revenue ($m)

EBITDA
($m)

PBT*

($m)

EPS*
(c)

Net cash
($m)

EV/sales
(x)

12/16

11.4

(7.5)

(16.4)

(46.9)

7.6

38.1

12/17

19.6

(0.6)

(7.8)

(18.6)

23.4

21.3

12/18e

24.6

(0.5)

(8.0)

(18.2)

20.8

17.1

12/19e

31.4

1.0

(6.8)

(15.3)

21.3

13.4

Note: *PBT and EPS are normalised (fully diluted), excluding amortisation of acquired intangibles, exceptional items and share-based payments. EPS is fully diluted.

OEM partnership with Alibaba

The announcement of an OEM partnership with Chinese internet giant Alibaba adds a significant new channel for growth. Alibaba is the sixth largest cloud platform globally and revenues doubled in Q4 to $553m ($2.2bn annual run rate). WANdisco Fusion will be embedded as a standard component in selected Alibaba cloud solutions. The press comment from Alibaba cites the migration to cloud, disaster recovery and hybrid cloud enablement as the use cases underpinning the partnership, highlighting the broad applicability of Fusion. We understand that the technical integration is close to completion and we expect the companies to start building a commercial pipeline with immediate effect, with first deal flow likely in H2.

Strong growth, operational leverage

FY17 bookings grew by 45% y-o-y to $22.5m driven by the core big data business growing by 121% to $15.7m. Revenues were substantially ahead at $19.6m (Edison $17.5m) due to the faster revenue recognition cycle of IBM royalties vs the subscription model which predominates elsewhere. With costs slightly below our forecast, the EBITDA loss was £0.58m vs our $2.8m estimate. While IBM was the prime mover of growth in FY17, we expect the other partners to add increasingly to the mix, providing diversity in terms of partner, use case, geography, vertical market and deal size. We upgrade our FY18 and FY19 bookings estimates by 7% and 5% respectively. Costs are unchanged but a faster revenue recognition cycle (due to IBM royalties and IFRS15) contributes to upgrades to revenues (+11%) and EBITDA. We expect the business to generate positive EBITDA and free cash flows in FY19, but there remains good scope for further upside in these estimates.

Valuation: Case for upside strengthened

WANdisco’s EV/sales rating of 17.1x and 13.4x for FY18 and FY19 respectively remains a premium to peers, although upgrades have narrowed the premium substantially. WANdisco’s investment case has always been predicated on the potential for it to scale into a significantly larger, highly profitable business.

.

Set to ride the cloud

Big data, IBM and financial services the key drivers in FY17

While WANDisco’s base been built on an enviable roster of tier one cloud partnerships over the past year, growth in FY17 was driven primarily by on-premise deployments, The company’s OEM relationship with IBM was the primary driver of this growth (although the Dell/Virtustream OEM agreement also contributed $1m+ from a $3m+ minimum commitment). 60% of big data bookings came from the financial services industry, primarily through two $4m+ deals secured through the IBM relationship, where Fusion is being used for business continuity and fraud management purposes. IBM’s focus is clearly on securing very large deals and with its strong presence in financial services, we expect this vertical to remain very important into FY18 and beyond.

Relationships with all of the top six cloud platform providers

Strategically, the company’s progress in deepening relationships with major cloud providers has significantly strengthened the company’s platform for growth. With the addition of Alibaba, WANdisco now has partnerships or collaborations in some form with all of the top six cloud platforms providers globally, which we summarise below.

Exhibit 1: WANDisco – cloud partner status

Provider

Est market share

Partnership status

Comment

Amazon

34%

Multiple collaborations, the most significant of which was Fusion’s integration into the AWS Snowball solution for enabling enterprises to migrate very large amounts of data into the cloud.

Given AWS’s scale, any traction could be significant. Look for commercial progress with Fusion’s integration into Snowball.

Microsoft

12.5%

WANdisco has unveiled a number of integrations with Microsoft Azure, the most significant of which was Fusion’s integration into Microsoft’s Azure Data Box solution for uploading very large volumes of data to the cloud.

We believe the complementarities with Microsoft are particularly strong given Microsoft’s capability in hybrid cloud. Could be an important driver of revenues in FY18 and beyond.

IBM

7.5%

OEM agreement/Fusion white labelled as IBM Big Replicate. Generating significant revenues but mainly for on-premise applications.

Expect further strong contribution from IBM in FY18 and FY19. WANDisco has hired two people from IBM which could help shorten engagement cycles. Look for extension of deployments to cover cloud and on-premise.

Google

6%

Fusion supports Google Cloud but no commercial partnership announced.

Potential for deeper collaboration is unclear.

Oracle

5%

Longstanding partnership, which has generated multiple $1m deals, mainly for on-premise deployments. Fusion has the highest big data accreditation and is available on the Oracle Cloud Marketplace.

Look for further deal flow which could be on-premise or cloud.

Alibaba

3.5%

New OEM agreement. Fusion will be embedded as a standard component in selected Alibaba Cloud solutions.

Technical integration is close to completion and we expect the companies to start building a commercial pipeline with immediate effect. First deals likely in H2. Fusion could potentially be a powerful tool as Alibaba aggressively seeks to take share from incumbents.

Dell/ Virtustream

N/A

OEM agreement. Focused on mission critical applications in cloud/private cloud or hybrid cloud deployments. Fusion is being sold as a standard Virtustream product covering on-premises, hybrid and cloud environments, using WANdisco’s standard subscription pricing model.

$3.6m+ minimum commitment, but this could be exceeded relatively quickly.

Bytes Technology Group

Co-sell and re-sell agreement, signed in January 2018.

Bytes is Microsoft's largest partner in the UK and a Cloud Licensing Solutions EMEA Partner, with a market share of 35% for Microsoft Azure in the UK.

Source: Edison Investment Research, WANdisco

Expect cloud revenues to kick-in in FY18

At this relatively early stage it is still difficult to gauge the timing and rate at which these partners start to generate bookings/revenues. Nevertheless, we do expect growth to be driven by a more diverse set of partners in FY18 and beyond that, a further acceleration is very possible.

Well placed to benefit from a major structural trend

The market opportunity in cloud is very significant. The migration of enterprise data to the cloud is the largest structural shift taking place in the enterprise technology market today. Q4 results from the major cloud service providers indicated that this trend is accelerating, with Synergy Research Group estimating that spend on cloud infrastructure services jumped 46% y-o-y, comfortably beating the growth rates achieved in the previous three quarters. Market leader Amazon AWS’s revenues exceeded $5bn for the first time in Q4 with growth accelerating to $45% y-o-y; Microsoft grew Azure revenues by a staggering 98% y-o-y and Alibaba doubled cloud revenues in Q4 to $553m and has ambitious plans to move up the rankings and take market share.

Exhibit 2: Cloud infrastructure providers - Q4 market share and y-o-y growth

Source: Edison Investment Research, Company Reports, Synergy Research

Financials: Bookings upgraded, no change to costs

We upgrade our FY18 and FY19 bookings estimates by 7% and 5% respectively – all due to the big data business where we now forecast 55% and 40% growth in bookings for those respective years, offset by a drift in the non-core Source Code Management which is being run for the cash it generates. Our estimates were at the low end of consensus previously and the upgrades reflect the buoyant market outlook, increased confidence that other partners will start contributing in FY18 and management’s comments that the pipeline is strong.

Our 11% revenue upgrades for FY18 and FY19 reflect 1) the faster revenue recognition cycle of IBM royalties, 100% of which are recognised upon receipt of the royalty report for the prior quarter. 2) the likely impact of IFRS15, which will require a greater up-front weighting of revenues for subscription services.

Our cost estimates are unchanged, resulting in a substantially reduced EBITDA loss forecast for FY18 moving to profit in FY19 when we also forecast positive free cash generation.

We believe that there remains scope for further upside in these estimates. Strong deal flow would be the key catalyst for FY18 upgrades, while further extensions/deepening of tier one partnerships are a key indicator for future years.

The company’s balance sheet remains strong. Net cash at the year end was $23.4m supported by the $21.2m net placing in December (at 550p), to help accelerate the on boarding of new strategic partners. The Alibaba OEM partnership indicates that these resources are being put to good effect.

Exhibit 3: Changes to estimates

Year end January ($'000s)

FY16

FY17e

FY17

%

FY18e

FY18e

%

FY19e

FY19e

%

Profit & loss

Actual

Estimate

Actual

change

Old

New

change

Old

New

change

Bookings Big Data

7100

15700

15700

0%

22300

24300

9%

32000

33900

6%

Bookings SCM

8400

6800

6800

0%

6200

6200

0%

5800

5800

0%

Total bookings

15500

22,500

22,500

0%

28,500

30,500

7%

37,800

39,700

5%

Revenue

11379

17,474

19,637

12%

22,228

24,640

11%

28,410

31,448

11%

Cost of sales

(1,349)

(1,784)

(1,972)

11%

(2,480)

(2,654)

7%

(3,289)

(3,454)

5%

Gross profit

10,031

15,691

17,665

13%

19,748

21,986

11%

25,121

27,994

11%

Cash costs ex cap dev cost

(17,494)

(18,500)

(18,245)

-1%

(22,500)

(22,500)

0%

(27,000)

(27,000)

0%

EBITDA

(7,464)

(2,809)

(580)

-79%

(2,752)

(514)

-81%

(1,879)

994

-153%

Capitalised development cost

(5,860)

(6,497)

(6,303)

-3%

(6,952)

(6,744)

(7,438)

(7,216)

EBITDAC (adj. for capitalised development)

(13,324)

(9,306)

(6,883)

-26%

(9,703)

(7,258)

-25%

(9,317)

(6,222)

-33%

Operating profit (before amort and except)

(16,104)

(9,929)

(7,494)

-25%

(10,172)

(7,728)

-24%

(9,599)

(6,520)

-32%

Exceptionals

(32)

(1,500)

0

0

0

0

Share based payments

(1,787)

(1,400)

(2,201)

57%

(1,400)

(3,200)

(1,400)

(3,200)

Operating profit

(17,923)

(12,829)

(9,695)

-24%

(11,572)

(10,928)

-6%

(10,998)

(9,719)

-12%

Net interest

(268)

(268)

(315)

18%

(268)

(315)

(268)

(315)

Profit before tax (norm)

(16,372)

(10,197)

(7,809)

-23%

(10,440)

(8,043)

-23%

(9,866)

(6,834)

-31%

EPS (IFRS) (c)

(27.9)

(38.4)

(35.8)

-7%

(27.8)

(26.4)

-5%

(26.3)

(23.5)

-11%

Closing net debt/(cash)

(7,559)

(23,409)

(23,397)

0%

(23,660)

(20,782)

-12%

(25,966)

(21,333)

-18%

Average number of shares in issue

33,291

38,601

37,783

-2%

41,003

41,003

0%

41,203

41,203

0%

Year-end number of shares in issue

36,991

40,903

40,903

0%

41,103

41,103

0%

41,303

41,303

0%

Source: Company data, Edison Investment Research

Valuation: Sustaining similar growth should deliver upside

WANdisco’s rating stands at 17.1x FY18e EV/sales, dropping to 13.4x for FY19e. This is a premium to peers (a diverse range from c 2x to 11.3x), although upgrades have narrowed the premium substantially. WANdisco’s investment case has always been predicated on the potential for it to scale into a significantly larger, highly profitable business. We believe that its progress in FY17 has significantly strengthened its credentials.

Our DCF suggests the current share price requires sustained bookings growth of c 35% (ie a touch higher than forecast for FY18 and FY19) through 2025 with EBITDAC margins growing to exceed 25%. In practice, we believe that if WANdisco continues to strengthen its platform of tier one channel partners, it should be well placed to grow faster than this. Most of the company’s partners are growing their cloud revenues at a faster rate. With a broad addressable market, a strong IP position and an indirect sales model, healthy 25%+ margins should be readily achievable if execution remains good, although we expect the emphasis to remain on growth over margins in the near to medium term.

Exhibit 4: DCF sensitivity to medium-term growth and margins

Bookings growth FY18

30%

40%

50%

60%

70%

Bookings CAGR FY18-25e

11%

21%

31%

41%

51%

Revenues 2020 ($m)

36,656

43,210

50,522

58,637

67,601

Implied share price (p) (excluding dilution)

Matured EBITDAC margin

15%

143

260

459

789

1,339

20%

180

326

565

974

1,628

25%

216

389

675

1,149

1,923

30%

252

449

778

1,329

2,207

35%

286

511

886

1,500

2,497

Source: Edison Investment Research. Note: EBITDAC = EBITDA considering capitalised R&D costs as expenses. WACC = 10%.Assumes a progressive eight-year fade in growth rate from 2018.

The company’s potential strategic attractiveness should also not be ignored. We are seeing M&A from industry majors as they build out their cloud/hybrid strategies – most recently with Microsoft buying Avere Systems, a high-performance storage vendor for an undisclosed amount. We believe that WANdisco could potentially be a good fit for a number of cloud/enterprise software players.

Exhibit 4: Financial summary

$'000s

2016

2017

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

11,379

19,637

24,640

31,448

Cost of Sales

(1,349)

(1,972)

(2,654)

(3,454)

Gross Profit

10,031

17,665

21,986

27,994

EBITDA

 

 

(7,464)

(580)

(514)

994

Operating Profit (before amort and except)

 

 

(16,104)

(7,494)

(7,728)

(6,520)

Acquired Intangible Amortisation

0

0

0

1

Exceptionals

(32)

0

0

0

Share based payments

(1,787)

(2,201)

(3,200)

(3,200)

Operating Profit

(17,923)

(9,695)

(10,928)

(9,719)

Net Interest

(268)

(315)

(315)

(315)

Profit Before Tax (norm)

 

 

(16,372)

(7,809)

(8,043)

(6,834)

Profit Before Tax (FRS 3)

 

 

(10,047)

(14,004)

(11,243)

(10,033)

Tax

772

489

409

365

Profit After Tax (norm)

(15,600)

(7,320)

(7,634)

(6,468)

Profit After Tax (FRS 3)

(9,275)

(13,515)

(10,834)

(9,668)

Average Number of Shares Outstanding (m)

33.3

37.8

41.0

41.2

EPS - normalised (c)

 

 

(46.9)

(19.4)

(18.6)

(15.7)

EPS - normalised fully diluted (c)

 

 

(46.9)

(18.6)

(18.2)

(15.3)

EPS - (IFRS) (c)

 

 

(27.9)

(35.8)

(26.4)

(23.5)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

88.1

90.0

89.2

89.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

6,251

6,393

6,223

6,226

Intangible Assets

5,977

5,581

5,326

5,244

Tangible Assets

274

812

897

982

Investments

0

0

0

0

Current Assets

 

 

13,704

33,366

27,503

29,499

Stocks

0

0

0

1

Debtors

6,145

5,969

6,721

8,164

Cash

7,559

27,397

20,782

21,333

Other

0

0

0

1

Current Liabilities

 

 

(9,409)

(17,167)

(17,122)

(22,248)

Creditors & Deferred Income

(9,409)

(13,167)

(17,122)

(22,248)

Short term borrowings

0

(4,000)

0

0

Long Term Liabilities

 

 

(6,980)

(7,058)

(6,821)

(9,961)

Long term borrowings

0

0

0

0

Deferred Income

(6,980)

(7,058)

(6,821)

(9,961)

Net Assets

 

 

3,566

15,534

9,784

3,516

CASH FLOW

Operating Cash Flow

 

 

(2,944)

656

4,336

8,017

Net Interest

(161)

(257)

(315)

(315)

Tax

690

1,364

409

365

Capex (inc capitalised R&D)

(5,922)

(7,056)

(7,044)

(7,516)

Acquisitions/disposals

0

0

0

0

Financing (net)

13,523

21,188

0

0

Dividends

0

0

0

0

Net Cash Flow

5,187

15,895

(2,614)

551

Opening net debt/(cash)

 

 

(2,555)

(7,559)

(23,397)

(20,782)

HP finance leases initiated

0

0

0

0

Other

(175)

(57)

0

0

Closing net debt/(cash)

 

 

(7,559)

(23,397)

(20,782)

(21,333)

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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