Cloud OEM agreement with Virtustream/Dell

WANdisco 7 November 2017 Update
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WANdisco

Cloud OEM agreement with Virtustream/Dell

New OEM agreement

Software & comp services

7 November 2017

Price

817.50p

Market cap

£310m

US$1.31/£

Net cash ($m) at 30 June 2017

6.9

Shares in issue

37.9m

Free float

88%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.5

16.8

517.0

Rel (local)

1.1

15.1

448.6

52-week high/low

881.50p

130.00p

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

FY trading update

January 2018

Analyst

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 second OEM partnership, with Virtustream, Dell/EMC’s cloud platform and software business, significantly strengthens the company’s platform for growth in FY18 and beyond. It is also significant because it relates to cloud object storage rather than Hadoop, firmly demonstrating the applicability of Fusion in cloud/hybrid cloud deployments. It thus raises confidence that other similar deals in the pipeline will also convert, laying a platform for a very significant acceleration in growth.

Year end

Revenue ($m)

EBITDA
($m)

PBT*
($m)

EPS
(c)

Net cash ($m)

EV/sales
(x)

12/15

11.0

(16.0)

(26.4)

(87.7)

2.6

37.6

12/16

11.4

(7.5)

(16.4)

(46.9)

7.6

35.8

12/17e

17.0

(3.3)

(10.6)

(26.7)

7.1

24.0

12/18e

21.7

(0.7)

(8.3)

(20.6)

10.4

18.8

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

Second OEM, first for cloud

Virtustream is a subsidiary of computing/storage giant Dell/EMC. Its focus is on enabling enterprises to run mission critical applications in cloud/private cloud or hybrid cloud deployments, making it a natural fit for WANdisco Fusion. Fusion will be sold as a standard Virtustream product covering on-premises, hybrid and cloud environments, using WANdisco’s standard subscription pricing model. We understand that the deal has a $3m+ minimum commitment, but believe that there is scope for this to be exceeded relatively quickly. The product’s launch is anticipated in December, and thus the partnership should start to contribute meaningfully to revenues in FY18.

Cloud credentials strengthened

WANdisco is now looking very well placed to exploit the significant opportunity in cloud storage. The company has made strong progress advancing its cloud partnerships, notably announcing product collaborations with Amazon and Microsoft in recent months, but this is the company’s first OEM partnership in this field. We believe that other partnerships are in the pipeline and our confidence that some of these will convert has moved up a notch. Management estimates that the TAM for its products in cloud object storage will be worth $2.75bn in 2018 growing to $6.75bn in 2020, versus $0.22bn for Hadoop at the same time.

Valuation: Recent progress strengthens upside case

We are not changing our estimates at this stage. FY17 financial performance depends on the timing at which large deals come in, but looking beyond this, we believe WANdisco’s platform for delivering significant, operationally geared upside has strengthened. The valuation demands significant growth and margins (our DCF suggests a five-year revenue CAGR of 40% through 2025, with EBITDA margins reaching 25%+). With WANdisco’s compelling market fundamentals, geared business model and rapidly strengthening roster of tier one partners, we now believe it has good potential to exceed this. The company’s strategic attractiveness should also factor in the valuation consideration.

OEM partnerships lay platform for an acceleration

Second OEM partnership, first in cloud object storage

The OEM partnership with Virtustream significantly strengthens WANdisco’s growth credentials in cloud object storage.

Operating as an independent subsidiary, Virtustream is an important element of Dell EMC’s cloud offering, providing mission-critical cloud (including hybrid and private cloud) infrastructure as a service (IaaS), hosted services and software. Compared to other more general-purpose cloud platform providers, the focus is on running high input/output intensity, mission-critical applications, thus making it a natural fit for WANdisco Fusion with its ability to deliver very high resilience and uptime.

Virtustream was acquired by storage giant EMC for $1.2bn in July 2015, prior to Dell’s acquisition of EMC in October 2015. The revenue run rate on acquisition was said to be around $100m, but corporate material indicates that it is one of the fastest-growing business units within the larger group. The corporate website states that it has 2,500 employees, runs 20+ datacentres and has major operations in 10 countries.

Meaningful revenue potential, starting in FY18

Fusion will be sold as a standard Virtustream product covering on-premises, hybrid and cloud environments. We understand that there is a $3m+ minimum commitment over the three-year contract period, but believe that there is good potential for this threshold to be substantially exceeded. The deal is mutually non-exclusive. The product’s launch is anticipated for December and pricing will use WANdisco’s standard per terabyte pricing and subscription model. Consequently, we believe that the partnership should start to contribute meaningful to WANdisco’s bookings and recurring subscription revenues in FY18.

Exhibit 1: The total addressable market (TAM) for cloud object storage is significantly larger than for Hadoop

Source: WANdisco

IBM update: Significant growth potential

H1 gave a glimpse of the transformative potential of OEM partnerships

WANdisco’s OEM partnership with IBM is focused on analytics/Hadoop, but still delivered $4.2m of revenue in H1. This contribution was the primary driver of WANdisco’s 71% revenue growth in H1, achieved in a period when costs reduced substantially, giving us a glimpse of the transformative impact that successful implementation of the indirect model can have.

Very significant growth ambitions

Nick Dimtchev, business unit executive for IBM’s Analytics Division, presented at WANdisco’s recent capital markets day (link: capital markets webcast). It was apparent from the presentation that, despite the strong contribution in H1, the partnership is only now really getting into gear and that significant growth is being targeted. Mr Dimtchev’s remit is to drive revenue from IBM’s Hadoop Analytics solution set, of which Big Replicate (the white-labelled Fusion product) is a core component, from circa $20-30m to $200-300m over a two- to three-year period. (A remit he has successfully executed with other IBM businesses previously.) The Hadoop offering is being included in IBM analytics “core sales plays” meaning that it is being given executive management priority and weekly execution targets. Having demonstrated initial successes in North America and Europe, IBM now plans to roll out the expansion to all regions. Mr Dimtchev confirmed that he was “very optimistic about driving short-term results”.

A transformative 12 months

Over the past 12 months, WANdisco has progressed from being a company that appeared to be in a very promising position but still with much to prove, to one that now looks well set to execute on its potential. In particular the company’s credentials in cloud have strengthened significantly in the past six months, with the company’s collaborations with Oracle, Microsoft and Amazon all moving forward (see Exhibit 2) and the Virtustream OEM agreement adding concrete growth potential. Other similar agreements would strengthen the platform for growth further.

Exhibit 2: Timeline of key milestones over the past 12 months

Source: Edison Investment Research

No change to estimates, but there to be beaten

We are not changing our estimates at this stage. FY17 financial performance depends on the timing at which large deals come in, but looking beyond this, we believe WANdisco’s platform for delivering significant, operationally geared upside has strengthened. We forecast 42% growth in big data bookings in FY18, but given the potential from IBM supplemented by Virtustream and other partners, we believe that there is the potential to significantly exceed this. With a highly operationally geared model, upside should drop strongly through to earnings and cash flows.

Exhibit 3: Forecast summary

$000s

2015

2016

2017e

2018e

Bookings Big Data

2,500

7,100

13,000

18,500

Bookings SCM

6,500

8,400

8,700

9,500

Total bookings

9,000

15,500

21,700

28,000

Revenue

10,994

11,379

17,029

21,748

Cost of sales

(749)

(1,349)

(1,784)

(2,349)

Gross profit

10,245

10,030

15,246

19,399

EBITDA

(15,988)

(7,464)

(3,254)

(655)

Capitalised development cost

(8,369)

(5,860)

(6,497)

(6,952)

EBITDAC (adjusted for capitalised development)

(24,357)

(13,324)

(9,751)

(7,607)

Operating Profit (before amort and except)

(25,858)

(16,104)

(10,374)

(8,075)

Exceptionals

(614)

(32)

0

0

Share-based payments

(4,057)

(1,787)

(1,400)

(1,400)

Operating profit

(30,529)

(17,923)

(11,774)

(9,475)

Net interest

(506)

(268)

(268)

(268)

Profit before tax (norm)

(26,364)

(16,372)

(10,642)

(8,343)

EPS - (IFRS) (c)

(103.9)

(27.9)

(36.7)

(24.8)

Closing net debt/(cash)

(2,555)

(7,558)

(7,071)

(10,376)

Source: WANdisco accounts, Edison Investment Research

Valuation: What once looked ambitious now looks very achievable

The valuation demands significant growth and margins (our DCF suggests a five-year revenue CAGR of 40% through 2025, with EBITDA margins reaching 25%+). Given the company’s recent progress, and the improved visibility of the potential through IBM, achieving – or beating – this performance now looks eminently possible. The company looks exceptionally well placed in a market with compelling market fundamentals and a geared business model. The company’s strategic attractiveness should also factor in the valuation consideration.


Exhibit 4: Financial summary

$000s

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

10,994

11,379

17,029

21,748

Cost of Sales

(749)

(1,349)

(1,784)

(2,349)

Gross Profit

10,245

10,030

15,246

19,399

EBITDA

 

 

(15,988)

(7,464)

(3,254)

(655)

Operating Profit (before amort and except)

 

 

(25,858)

(16,104)

(10,374)

(8,075)

Acquired Intangible Amortisation

0

0

0

0

Exceptionals

(614)

(32)

0

0

Share based payments

(4,057)

(1,787)

(1,400)

(1,400)

Operating Profit

(30,529)

(17,923)

(11,774)

(9,475)

Net Interest

(506)

(268)

(268)

(268)

Profit Before Tax (norm)

 

 

(26,364)

(16,372)

(10,642)

(8,343)

Profit Before Tax (FRS 3)

 

 

(31,035)

(10,047)

(14,339)

(9,743)

Tax

1,129

772

522

354

Profit After Tax (norm)

(25,235)

(15,600)

(10,121)

(7,989)

Profit After Tax (FRS 3)

(29,906)

(9,275)

(13,818)

(9,389)

Average Number of Shares Outstanding (m)

28.8

33.3

37.6

37.8

EPS (c)

 

 

(87.7)

(46.9)

(26.9)

(21.1)

EPS - normalised fully diluted (c)

 

 

(87.7)

(46.9)

(26.7)

(20.6)

EPS - (IFRS) (c)

 

 

(103.9)

(27.9)

(36.7)

(24.8)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

93.2

88.1

89.5

89.2

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

 

 

8,813

6,253

5,930

5,761

Intangible Assets

8,583

5,977

5,574

5,325

Tangible Assets

230

276

356

436

Investments

0

0

0

0

Current Assets

 

 

9,283

13,703

14,429

20,085

Stocks

0

0

0

0

Debtors

6,728

6,145

7,358

9,709

Cash

2,555

7,558

7,071

10,376

Other

0

0

0

0

Current Liabilities

 

 

(6,439)

(9,409)

(11,467)

(12,342)

Creditors & Deferred Income

(6,439)

(9,409)

(11,467)

(12,342)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(6,060)

(6,980)

(11,557)

(15,201)

Long term borrowings

0

0

0

0

Deferred Income

(6,060)

(6,980)

(11,557)

(15,201)

Net Assets

 

 

5,597

3,567

(2,665)

(1,697)

CASH FLOW

Operating Cash Flow

 

 

(18,138)

(2,955)

6,056

10,470

Net Interest

59

(161)

(268)

(268)

Tax

552

690

522

354

Capex (inc capitalised R&D)

(8,464)

(5,924)

(6,797)

(7,252)

Acquisitions/disposals

0

0

0

0

Financing (net)

26,175

13,523

0

0

Dividends

0

0

0

0

Net Cash Flow

184

5,173

(487)

3,305

Opening net debt/(cash)

 

 

(2,481)

(2,555)

(7,558)

(7,071)

HP finance leases initiated

0

0

0

0

Other

(43)

(175)

0

0

Closing net debt/(cash)

 

 

(2,555)

(7,558)

(7,071)

(10,376)

Source: WANdisco 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

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

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

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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