Bookings ahead, expanding platform for growth

WANdisco 17 January 2018 Update
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WANdisco

Bookings ahead, expanding platform for growth

Trading update

Software & comp services

17 January 2018

Price

810p

Market cap

£331m

US$1.37/£

Net cash ($m) at end FY17

23.4

Shares in issue

40.9m

Free float

92%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

42.1

(5.8)

195.6

Rel (local)

37.1

(8.6)

175.2

52-week high/low

881.5p

293.0p

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

Full year results

March 2019

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Bridie Barrett

+44 (0)20 3077 5700

WANdisco is a research client of Edison Investment Research Limited

WANdisco’s strong bookings momentum ($22.5m, +45%y-o-y, vs Edison $21.7m) in FY17 was more than matched by the strategic progress during the year. For the core big data business we upgrade our bookings estimate by 21% and now forecast 40%+ y-o-y bookings growth for FY18 and FY19, partially offset by a de-focus on the legacy SCM business. The company’s platform for growth looks exceptionally strong and we see scope for a further acceleration driven by adoption of Fusion for more use cases, sales through more partners and supported by very attractive market dynamics.

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

39.2

12/17e

17.5

(2.8)

(10.2)

(24.4)

23.4

25.6

12/18e

22.2

(2.8)

(10.4)

(23.8)

23.7

20.1

12/19e

28.4

(1.9)

(9.9)

(22.4)

26.0

15.7

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

Big data drives bookings beat

Momentum remained strong in H2 with FY17 bookings growing by 45% y-o-y to $22.5m and bookings for the core big data business growing by 121% to $15.7m (Edison $13m). The trading update does not give any P&L figures, but FY17 net cash stood at $23.4m supported by the December fund-raise ($22m gross at 550p). Strategic progress made over course of the year should lay the platform for an acceleration in growth from here. Revenues from established partners (IBM, Oracle) should continue to build while newer partners such as Microsoft, Virtustream and Amazon should add increasingly to the mix. We also anticipate further partnerships with leading cloud/enterprise players to be formalised, strengthening the platform for growth in future years.

Upgrading top line, investing to maximise potential

We nudge up our FY18 bookings estimate from $28m to $28.5m (27% y-o-y growth), upgrading the core big data bookings by 21% to $22.3m partially offset by a reduction in SCM from $9.5m to $6.2m. We forecast 33% bookings growth in FY19, again all driven by 43% growth in big data. We believe there is scope for upside, which could be significant if progress in developing OEM partners progresses to plan. Management’s focus will be on maximising the revenue opportunity through investing in supporting channel partners and product development while at least maintaining cash resources. Hence we forecast the business to break even at a cash-generation level in FY18 before returning to positive cash generation in FY19.

Valuation: Pricing in a further acceleration

Progress in FY17 has significantly strengthened WANdisco’s credentials for delivering sustained strong growth. This is reflected in the rating of 15.7x FY19e sales. The company’s potential strategic attractiveness is also a factor. We believe the further strong deal strong flow or strategic partner development could be the key catalysts for more aggressive growth assumptions to be priced in.

Enviable platform for growth

At the centre of a significant growth trend

We reiterate our view that the migration of enterprise data to the cloud remains the major ongoing technology shift taking place in the enterprise market today. The rate at which data and computing are moving to cloud platforms continues to gather pace. It is also the technology cycle on which the development of many others such as big data analytics and AI depend.

This momentum was highlighted in the Q317 earnings season, with the four largest global cloud providers by market share – Amazon AWS, Alphabet (Google Cloud), Microsoft (Azure) and IBM – growing their combined cloud computing businesses by 40% y-o-y to $19bn.

Exhibit 1: LTM revenue growth and market share of key partners

Source: WANdisco, Edison Investment Research, company reports (LTM from Q217)

We expect growth rates to remain very strong. We are in effect witnessing a significant land grab among major technology companies as they seek to capitalise on the trend and attract enterprises to “sticky” cloud services. Adoption of migration services such as AWS Snowball, or Microsoft’s Azure Data Box (both of which are integrated with Fusion) could accelerate the trend, while companies with more of a legacy in the on-premise world, such as SAP (Upgrade2Success) and Accenture (Cloudshaper, Accelerate and Cloudbuilder), have all launched new initiatives that aim to drive the migration from on-premise to cloud.

Enabling hybrid cloud adoption

The migration of data to the cloud should not be thought of as one-way traffic. The vast majority of enterprises will continue to run hybrid environments, using a combination of on-premise, private and public cloud infrastructure. In fact, the maturation of hybrid cloud offerings is seen as one of the key drivers of enterprise cloud adoption and Microsoft’s more developed hybrid capability has been cited as being one of the key factors that has enabled Azure to take market share from AWS over course of the last year.

WANdisco also looks exceptionally well placed to both support enterprise hybrid cloud adoption and to benefit from it, through enabling data to be replicated between data sources without incurring downtime and while ensuring data consistency. The technology can be used to replicate data from one data centre to another, from a data centre to the cloud and back (to enable analytics to be run for example), from one cloud platform to another or to a mobile data centre – such as Amazon’s Snowball solution for large-scale cloud migrations.

Exhibit 2: Data can be stored and moved across multiple clouds and locations

Source: Edison Investment Research

Credentials with tier one partners and customers strengthened

While the potential for WANdisco’s technology has always looked compelling, one can generally get a much better gauge of a company’s prospects by looking at who they work with and how much customers spend. Over the past 12 months, WANdisco’s credentials have significantly strengthened in this regard.

IBM: the company signed its two largest deals ever, both worth $4m+ through the IBM OEM agreement, demonstrating the ability of the OEM model to deliver significant revenue growth. We expect further sales growth through this agreement in FY18.

Dell/Virtustream: in November, the company signed its second OEM agreement, with Dell/EMC’s cloud platform and software business. We understand that the deal has a $3m+ minimum commitment, but believe that there is scope for this to be exceeded relatively quickly and look for further progress in FY18.

Amazon AWS: the company entered into a number of collaborations with the cloud platform market leader, the most significant of which was Fusion’s integration into AWS’s Snowball solution for enabling enterprises to migrate very large amounts of data into the cloud. We believe Fusion could benefit from proactive support from AWS’s sales team and look for further progress in FY18.

Microsoft: similar to AWS, 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 and believe it could be an important driver of revenues in FY18 and beyond.

Expect further expansion and deepening of partner network in FY18

The $22m December fund-raise was carried out specifically to support a faster roll-out of the company’s OEM strategy. The funds will be used to support the commercial and technical integration with existing partners and to assist with on-boarding of new ones in parallel. The company’s success in expanding and deepening its channel partner network will be the key lead indicator for prospects in FY19 and beyond. The recent hire of a VP signals management’s intention to accelerate initiatives to apply the company’s patented replication technology in new markets.

Estimate changes

The bookings beat ($22.5m vs $21.7m forecast) was driven entirely by the core big data business, where bookings grew by 142% y-o-y to $15.7m Bookings for the cash cow, Source Code Management (SCM) business, dropped by 24% to $6.8m (Edison $8.7m).

Year-end net cash was $23.4m, with $27.3m of cash and $4m of debt, supported by the December fund-raise. We understand that the cash for the $4.3m deal with a major financial institution signed in late December has not yet been received.

Our FY18 bookings estimate is nudged up from $28m to $28.5% (27% y-o-y growth), with the core big data bookings estimate upgraded by 21% to $22.3m (42% growth) offset by a reduction in SCM from $9.5m to $6.2m. We introduce estimates for FY19, forecasting 33% bookings growth, again all driven by big data (43% growth) with an ongoing drift in SCM. We believe there is scope for upside, which could be significant if progress in developing OEM partners progresses to plan.

WANdisco’s focus will be on maximising the revenue opportunity of the business, while at least maintaining cash resources. Hence we forecast the business to broadly break even at a cash-generation level before moving back into positive cash generation in FY19.

Looking longer term, we believe that Progress in FY17 has significantly strengthened WANdisco’s credentials for delivering sustained strong growth, while we believe with scale, the company’s model should support attractive 25%+ EBITDA margins.

Exhibit 3: Estimate changes

$000s

2015

2016

2017e

2018e

2019e

Actual

Actual

Old

New

% change

Old

New

% change

New

Bookings Big Data

2,500

7,100

13,000

15,700

21%

18,500

22,300

21%

32,000

Bookings SCM

6,500

8,400

8,700

6,800

-22%

9,500

6,200

-35%

5,800

Total Bookings

9,000

15,500

21,700

22,500

4%

28,000

28,500

2%

37,800

Revenue

10,994

11,379

17,029

17,474

3%

21,748

22,228

2%

28,410

Cost of Sales

(749)

(1,349)

(1,784)

(1,784)

0%

(2,349)

(2,480)

6%

(3,289)

Gross Profit

10,245

10,030

15,246

15,691

3%

19,399

19,748

2%

25,121

EBITDA

(15,988)

(7,464)

(3,254)

(2,809)

-14%

(655)

(2,752)

320%

(1,879)

Capitalised development cost

(8,369)

(5,860)

(6,497)

(6,497)

0%

(6,952)

(6,952)

0%

(7,438)

EBITDAC (adjusted for capitalised development)

(24,357)

(13,324)

(9,751)

(9,306)

-5%

(7,607)

(9,703)

28%

(9,317)

Operating Profit (before amort and except)

(25,858)

(16,104)

(10,374)

(9,929)

-4%

(8,075)

(10,172)

26%

(9,599)

Exceptionals

(614)

(32)

0

(1,500)

0

0

Share based payments

(4,057)

(1,787)

(1,400)

(1,400)

0%

(1,400)

(1,400)

0%

(1,400)

Operating Profit

(30,529)

(17,923)

(11,774)

(12,829)

9%

(9,475)

(11,572)

22%

(10,998)

Net Interest

(506)

(268)

(268)

(268)

0%

(268)

(268)

0%

(268)

Profit Before Tax (norm)

(26,364)

(16,372)

(10,642)

(10,197)

-4%

(8,343)

(10,440)

25%

(9,866)

EPS - (IFRS) (c)

(103.9)

(27.9)

(36.7)

(38.4)

5%

(24.8)

(27.8)

12%

(26.3)

Closing net debt/(cash)

(2,555)

(7,558)

(7,071)

(23,409)

231%

(10,376)

(23,660)

128%

(25,966)

Source: WANdisco data, Edison Investment Research

We focus our narrative on bookings and year-end net cash. P&L figures were not disclosed in the trading update. Forecasting revenues is complicated by the mix between IBM royalties (recognised upfront) and subscriptions, currently recognised over the lifetime of the contract. The application of IFRS 15 will further complicate the picture and the capitalisation of development spend further complicates the meaningfulness of profitability measures.

Valuation

WANdisco’s rating stands at 20.1x FY18e EV/sales, dropping to 15.7x for FY19e. This is a premium to peers (a diverse range from c 2x to 11.3x). 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 sustained growth of c 37% (i.e. 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 expect the emphasis to remain on growth over margins in the near to medium term.

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

Bookings growth FY18

30%

40%

50%

60%

70%

Bookings CAGR FY16-25e

13%

23%

33%

43%

53%

Revenues 2020 ($m)

36,656

43,210

50,522

58,637

67,601

Implied share price (p) (excluding dilution)

Matured EBITDAC margin

15%

139

258

460

796

1,354

20%

176

325

568

983

1,648

25%

213

388

679

1,161

1,948

30%

249

450

783

1,344

2,236

35%

284

513

894

1,517

2,531

Source: Edison Investment Research. Note: EBITDAC = EBITDA considering capitalised R&D costs as expenses. WACC = 10%, reduced from 12.5% previously as the business is approaching cash flow break-even. TGR = 2%. 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 could 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 5: Financial summary

$'000s

2016

2017e

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

11,379

17,474

22,228

28,410

Cost of Sales

(1,349)

(1,784)

(2,480)

(3,289)

Gross Profit

10,030

15,691

19,748

25,121

EBITDA

 

 

(7,464)

(2,809)

(2,752)

(1,879)

Operating Profit (before amort and except)

 

 

(16,104)

(9,929)

(10,172)

(9,599)

Acquired Intangible Amortisation

0

0

0

1

Exceptionals

(32)

(1,500)

0

0

Share based payments

(1,787)

(1,400)

(1,400)

(1,400)

Operating Profit

(17,923)

(12,829)

(11,572)

(10,998)

Net Interest

(268)

(268)

(268)

(268)

Profit Before Tax (norm)

 

 

(16,372)

(10,197)

(10,440)

(9,866)

Profit Before Tax (FRS 3)

 

 

(10,047)

(15,394)

(11,840)

(11,265)

Tax

772

560

431

410

Profit After Tax (norm)

(15,600)

(9,637)

(10,009)

(9,455)

Profit After Tax (FRS 3)

(9,275)

(14,834)

(11,409)

(10,855)

Average Number of Shares Outstanding (m)

33.3

38.6

41.0

41.2

EPS - normalised (c)

 

 

(46.9)

(25.0)

(24.4)

(22.9)

EPS - normalised fully diluted (c)

 

 

(46.9)

(24.4)

(23.8)

(22.4)

EPS - (IFRS) (c)

 

 

(27.9)

(38.4)

(27.8)

(26.3)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

88.1

89.8

88.8

88.4

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

 

 

6,253

5,930

5,761

5,780

Intangible Assets

5,977

5,574

5,325

5,264

Tangible Assets

276

356

436

516

Investments

0

0

0

0

Current Assets

 

 

13,703

36,019

33,432

39,597

Stocks

0

0

0

1

Debtors

6,145

8,610

9,773

13,630

Cash

7,558

27,409

23,660

25,966

Other

0

0

0

1

Current Liabilities

 

 

(9,409)

(15,490)

(14,031)

(17,930)

Creditors & Deferred Income

(9,409)

(11,490)

(14,031)

(17,930)

Short term borrowings

0

(4,000)

0

0

Long Term Liabilities

 

 

(6,980)

(4,658)

(6,305)

(8,487)

Long term borrowings

0

0

0

0

Deferred Income

(6,980)

(4,658)

(6,305)

(8,487)

Net Assets

 

 

3,567

21,801

18,858

18,960

CASH FLOW

Operating Cash Flow

 

 

(2,955)

356

7,339

9,903

Net Interest

(161)

(268)

(268)

(268)

Tax

690

560

431

410

Capex (inc capitalised R&D)

(5,924)

(6,797)

(7,252)

(7,738)

Acquisitions/disposals

0

0

0

0

Financing (net)

13,523

22,000

0

0

Dividends

0

0

0

0

Net Cash Flow

5,173

15,851

250

2,306

Opening net debt/(cash)

 

 

(2,555)

(7,558)

(23,409)

(23,660)

HP finance leases initiated

0

0

0

0

Other

(175)

0

0

0

Closing net debt/(cash)

 

 

(7,558)

(23,409)

(23,660)

(25,966)

Source: Company data, 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
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by WANdisco and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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United Kingdom

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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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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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