Does the cloud have a silver lining?

WANdisco 7 April 2016 Update

WANdisco

Does the cloud have a silver lining?

Full year results

Software & comp services

7 April 2016

Price

178.50p

Market cap

£53m

£/$1.42

Net cash ($m) at 31 December 2015

2.6

Shares in issue

29.6m

Free float

76%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

40.0

131.8

(18.9)

Rel (local)

40.7

129.7

(11.5)

52-week high/low

300.0p

73.0p

Business description

WANdisco is a distributed computing company. It has applied its proprietary replication technology to open-source tools to claim a strong position in the software version control market and is now establishing a promising position in the big data infrastructure market.

Next events

Q1 trading update

April 2016

AGM

June 2016

Analyst

Dan Ridsdale

+44 (0)20 3077 5729


WANdisco is a research client of Edison Investment Research Limited

WANdisco’s results were as expected, with long decision cycles affecting the big data business and ALM only picking up late in the year. Ultimately, deal flow and cash flow will be the key metrics on which to measure progress over the course of 2016. However, there are indications that a recovery is due. In particular, Fusion’s ability to accelerate data migrations to the cloud and partnerships with leading cloud players such as Amazon, Microsoft and IBM could provide the blend of compelling use case and strong channel partners to accelerate adoption.

Year end

Revenue
($m)

PBT*
($m)

EPS*
(c)

Net cash/
(debt) ($m)

EV/Sales
(x)

Yield
(%)

12/14

11.2

(25.9)

(103.3)

2.5

6.5

N/A

12/15

11.0

(26.4)

(87.7)

2.6

6.6

N/A

12/16e

11.4

(21.3)

(69.0)

(10.0)

7.5

N/A

12/17e

13.3

(19.5)

(62.2)

(14.2)

6.7

N/A

Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, exceptional items and share-based payments.

Difficult year, but no further surprises

Full year results contained no surprises following February’s trading update. Slower than expected enterprise adoption of the WANdisco’s big data solutions and disruption in the ALM business resulted in bookings falling to $9m from $17.4m last year. The comparatively modest 2% decline in revenue reflects the smoothing effect of WANdisco’s subscription revenue model, while reduced losses reflect the substantial cost savings made in H2 (and some more coming through in early 2016), facilitated by the completion of the Fusion development. Net cash at year-end was $2.6m, down from $15.2m in June 2015, with the $10m facility undrawn.

Is cloud migration the killer app?

We believe there are more positive indications that bookings should move forward in FY16. Q4 ALM bookings recovered and, with the sales force restructured and the business focused on Subversion, a return to growth and profitability at the contribution level is targeted for FY16. In big data, Fusion’s ability to significantly accelerate the migration of enterprise data to the cloud could be the use case that enables WANdisco to accelerate momentum, particularly given its partnerships with key cloud players Amazon, IBM, Microsoft and Google.

Estimates unchanged

Our estimates have not changed significantly but, given the weak bookings in 2015, achieving the flat revenue performance forecast for FY16 does require a substantial recovery in bookings (to $15m). Our forecast end-FY16 net debt position of $10m implies that the company needs to raise funds, although the move to a channel model could accelerate the cash cycle and management intends to manage costs to operate within its means. Excluding potential dilution, our reverse DCF suggests that the current share price factors in c 32% revenue growth to 2020 (to $43m) with the EBITDAC margin reaching 20% at this time. We believe WANdisco’s market opportunity and partnerships could support such performance or substantially more, although an uptick in bookings is required in FY16 to underpin such a scenario.

Is the cloud a silver lining

Big data – what has held up progress?

While WANdisco more than doubled its big data customer base in FY15 from 10 to 26 and a further five existing customers scaled up or renewed their deployments, progress was significantly slower than expected entering the year, with bookings dropping to $2.5m from $2.8m in FY14.

The primary reason for this is that adoption of Hadoop by enterprises for the real-time, mission-critical applications for which WANdisco’s technology has been designed has been slower than anticipated. This has meant that the benefits of using WANdisco’s technology have not been adequately strong or apparent for enough enterprise customers to drive a significant uptick in bookings.

The overall big data technology supply landscape also remains fragmented, dynamic and immature. This has been a suppressing factor in enterprise uptake and makes it difficult for focused technology providers such as WANdisco to gain broad-based adoption.

Has WANdisco found its “killer app” in cloud migration?

While wary of hyperbole, we believe that WANdisco may now have found its “killer app”1 through Fusion’s ability to significantly reduce the time and eliminate the downtime involved in migrating enterprise data to cloud services. We believe the migration of enterprise data to the cloud is a stronger technology transition cycle than enterprise Hadoop adoption and WANdisco’s value proposition to both customers and partners is clearer.

A killer application (killer app) is any computer programme that is so necessary or desirable that it proves the core value of some larger technology.

This cloud migration capability was enabled by the launch of Fusion in April 2015, which extended the company’s capability beyond Hadoop, allowing its proprietary replication technology to be applied to storage environments using a mix of Hadoop-compatible storage systems such as EMC Isilon, Oracle and cloud storage systems such as Amazon S3 and Google Dataproc.

Exhibit 1: WANdisco cloud storage partnerships – status

Storage and analysis platform

Cloud platform market share*

Sales channel status

Status

Amazon Web Services (AWS)

27%

Amazon Web Services marketplace
Amazon sales team

Successful customer trials

IBM

12%

IBM sales team

Engaged with key opportunities

Microsoft Azure

16%

Windows Azure marketplace

Online travel company in trial

Google Cloud Dataproc

4%

WANdisco one of five key technology partners

Pipeline build

Source: WANdisco. Note: *Wikibon, H115.

The company has secured partnerships with four of the leading cloud storage companies globally, most significantly Amazon, which holds an estimated 27% market share according to Wikibon, but also IBM, Microsoft and Google, a relatively new entrant to the marketplace but one that clearly has the potential to become a very major player.

Whereas industry giants like these partner with many smaller technology companies, we believe the prominence of WANdisco in the marketing material of these vendors is also notable. We include links to some of this collateral in Exhibit 1, but it is worth noting that WANdisco is currently on the landing page of Amazon’s AWS marketplace and is one of five key partners for Google’s Dataproc service.

Cloud computing land grab

We believe these partnerships place WANdisco in a potentially attractive position. The growth of cloud computing has been a clearly identified structural growth trend for a long time now. However, only since Amazon started breaking out the reporting of its AWS services earlier this year has the full scale of this trend and the lead that Amazon has carved out become apparent to a wider audience. AWS revenues grew 69% y-o-y in Q4 of this year to $2.4bn, up from $2.08bn in Q3. The operation is also strongly profitable, with Q4 margins of 28.5%, up from 25% in Q3.

While early adoption was by innovative start-ups or for web-centric elements of enterprise computing systems, research suggests that more enterprises are migrating core computing infrastructure to the cloud. Amazon announced in March that more than 1,000 databases had migrated to its data centres since January, including Thomas Publishing, Expedia Inc and Pegasystems. A recent International Data Corporation survey found that 58% of companies planned to use web-based, on-demand computing services, including both public services such as Amazon Web Services (AWS) and private cloud-like facilities, for more than two applications, up from 24% just 14 months earlier.

Given the commercial opportunity at play and the long-term strategic ramifications of capturing or losing out on market share in this structural shift, cloud computing companies are now scrambling to gain market share.

A compelling use case for Fusion

WANdisco looks well placed because the amount of time and disruption involved in migrating an enterprise database onto the cloud is a key barrier to adoption and Fusion provides a solution to reduce this. Market analyst Gartner recently stated that migrating data onto a cloud platform can take as long as two years for companies with over $100m in annual revenues. Enterprises have continually active files, which cannot be simply shut down and copied over to the cloud in bulk.

It is strongly in the interests of cloud service providers to support or provide solutions such as Fusion, which make the transition easier. For enterprises Fusion also provides the flexibility benefit of facilitating the movement of data both to and from the cloud.

How big is the opportunity?

At this early stage, it is still difficult to ascertain how quickly and significantly the cloud migration opportunity will emerge for WANdisco. However, we expect initial deals to be announced over the course of H1, building in H2 as more enterprises migrate their data, WANdisco builds up more reference customers and as its partnerships mature. Initial migrations may be relatively limited, scaling up over time.

WANdisco estimates the “active” migration addressable market to be worth c $170m+, so if the Fusion offering lives up to its promise, cloud migration could be the killer app that drives an acceleration in WANdisco’s big data bookings growth.

Exhibit 2: Estimated cloud migration technology market size

Cloud platform

2016 new cloud platform revenue

Migration revenue

Active migration addressable
market

$m

Annual growth in annualised revenue to Q416

10% of new cloud platform revenue

30% of migration revenue less 20% partner share

AWS

3,855

386

93

IBM

2,124

212

51

Microsoft Azure

679

68

16

Google

354

35

9

Source: WANdisco, Wikibon, company reports

ALM – focused on Subversion

As flagged throughout 2015, WANdisco’s ALM business stalled in FY15, with bookings dropping to $6.5m vs $14.6m a year ago. The drop-off has been attributed to misfiring sales execution early in the year, followed by a reorganisation of the company’s sales team. The sales execution for the core Subversion ALM product suite also suffered from being in big data’s shadow, while the launch of products for the distributed Git ALM platform probably also distracted somewhat from the core product.

Management does not believe that progress is being substantially held back by any structural changes in demand. Market analyst TechNavio estimates that the global application lifecycle management market will grow at a CAGR of 4.5% between 2013 and 2018. An estimated 40% of the global developed base still uses proprietary ALM tools. Gartner estimates that 1-2% of these will migrate to open-source solutions such as GIT and Subversion each year. While Git has been taking market share from Subversion, much of this has been for distributed, open-source type projects, whereas Subversion is a tried-and-tested solution and is expected to retain a strong presence in the enterprise market. WANdisco’s ALM renewal rate was 87% in both 2014 and 2015.

Eyeing profitable growth

Management has stated that Q4 was the best quarter for ALM over the course of the year and expects forward progress to continue in FY16. With cost savings now implemented, management has stated that the ALM business is now profitable at the contribution level, before central costs.

Financial performance

Flux at a number of levels affected FY15, expect a recovery in FY16

Full year results contained no surprises following the February trading update and our estimates have not changed substantially, although we introduce FY17 estimates.

From a financial standpoint, 2015 was clearly a difficult year, affected by flux in the big data supply landscape, slower than anticipated enterprise uptake and the refocusing and restructuring of the ALM business. This is reflected in the significant drop-off in bookings, from $17.4m in FY14 to $9.0m in FY15.

We forecast a recovery in bookings in FY16, continuing into FY17, across both big data and ALM. In big data, we believe the company’s promising position in cloud migration is the key catalyst, although we also expect to see forward progress with new customers and scale-ups from customers deploying big data on their own infrastructure. In ALM we believe a refocused sales team and product should support an improvement in momentum.

While in absolute terms the 67% growth in bookings forecast for FY16 is significant, it is worth noting that this is still below the level recorded in FY14, with our forecast for ALM bookings substantially below the FY14 level.

WANdisco’s broadly flat revenue profile from 2014 through 2016 reflects the smoothing effect of the company’s subscription revenue model. Revenues are recognised over the lifetime of the subscription period, which averaged 2.1 years in FY15.

Exhibit 3: P&L model

$000s

2011

2012

2013

2014

2015

2016e

2017e

Bookings

Big data

0

0

212

2,800

2,500

6,000

14,000

ALM

4,600

7,916

14,548

14,600

6,500

9,000

10,000

Total Bookings

4,600

7,916

14,760

17,400

9,000

15,000

24,000

Growth

54%

72%

86%

18%

-48%

67%

60%

Average subscription contract duration (yrs est)

1.41

1.51

2.53

2.09

2.62

2.05

2.05

Revenues

Drawn from deferred income

2,409

3,525

4,984

7,801

10,917

7,666

2,800

New business

1,469

2,549

3,028

3,417

76

3,743

10,475

Total revenues

3,878

6,031

8,012

11,218

10,994

11,408

13,275

Overall growth

30%

56%

33%

40%

-2%

4%

16%

Cost of sales

(303)

(497)

(1,579)

(2,165)

(749)

(1,248)

(1,997)

As % of bookings

-7%

-6%

-11%

-12%

-8%

-8%

-8%

Gross profit

3,575

5,534

6,433

9,053

10,245

10,160

11,278

Gross margin

92.2%

91.8%

80.3%

80.7%

93.2%

89.1%

85.0%

Cash opex

(3,425)

(8,537)

(14,265)

(26,927)

(26,233)

(20,500)

(19,500)

EBITDA adjusted

150

(3,003)

(7,832)

(17,874)

(15,988)

(10,340)

(8,222)

Capitalised R&D

(1,207)

(3,912)

(7,443)

(9,040)

(8,369)

(6,500)

(6,500)

EBITDAC (EBITDA after capitalised development)

(15,275)

(26,914)

(24,357)

(16,840)

(14,722)

Source: Edison Investment Research, company data

Cost savings and move towards a more scalable model

Losses reduced, reflecting cost savings implemented over the course of FY15. With further savings implemented in Q116, the company’s annualised cash cost base (including capitalised development) has now been reduced to $25.3m from a peak of $42m in 2014. These reductions have been facilitated by the completion of the Fusion development and the move towards a channel-driven sales model for big data, which should enable the business to scale without continuing incremental investment in sales.

We continue to forecast EBITDAC losses over our forecast period, although given the company’s typically front end-weighted payment terms, its cash burn/generation profile will be highly dependent on bookings momentum.

Options to lower cash burn by more than our forecast

The company had net cash of $2.6m at end FY15, with the $10m working capital facility from HSBC remaining undrawn at year-end, although we understand that it is now being used. On the basis of our current forecasts, the company drops to a $10m net debt position at end FY16, implying that it will need to raise funds over the course of the year. Management has stated that it intends to run the business within its financial means. With the move towards a more productised, channel-driven model, it is possible that the bookings to cash collection cycle accelerates. In the absence of this, or a bookings acceleration, further cost cuts are also an option. However, at this stage, we do not believe there are enough data to support a material change to our estimates.

Valuation

Valuing WANdisco at this juncture is clearly difficult, as so much depends on a significant recovery in bookings momentum, which we forecast but have yet to see come through. However, given the scale of the opportunity in big data, particularly in cloud migration, we believe deal flow indicating that the company’s partners are starting to generate scalable bookings growth should be a catalyst for a further share price recovery.

We run a number of scenarios through a DCF model shown in Exhibit 4, varying growth in bookings versus long-term EBITDAC margin. While one needs to factor in the likelihood of further dilution at some stage, we believe the company would broadly need to grow revenues to more than $50m (from $11m in FY15) by 2020, with EBITDAC margins expanding to 20% by this time, to grow into its current valuation.

Exhibit 4: DCF scenario analysis

Bookings growth FY16

40%

50%

60%

70%

80%

Bookings CAGR FY16/2025

22%

27%

32%

37%

42%

Revenues 2020

29,158

37,499

47,603

59,729

74,163

C/F B/E Year

2020e

2019e

2018e

2018e

2018e

Peak net debt

(27,760)

(20,987)

(15,861)

(13,905)

(11,843)

Implied share price (excluding dilution)

Matured EBITDAC
margin

15%

(54.6)

15.9

104.5

215.0

362.2

20%

(27.3)

58.9

165.8

300.4

480.1

25%

(0.3)

102.0

222.7

383.3

602.7

30%

24.8

140.0

283.0

470.9

716.5

35%

50.0

179.9

337.1

549.6

837.5

Source: Edison Investment Research. Note: WACC of 12.5%, terminal growth rate of 2.0% from 2025. We assume a steady fade in bookings growth (as a percentage) from FY16 and steady average subscription term at two years.

Exhibit 5: Financial summary

$'000s

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

8,012

11,218

10,994

11,408

13,275

Cost of Sales

(1,579)

(2,165)

(749)

(1,248)

(1,997)

Gross Profit

6,433

9,053

10,245

10,160

11,278

EBITDA

 

 

(7,832)

(17,874)

(15,988)

(10,340)

(8,222)

Operating Profit (before amort and except)

 

 

(12,888)

(26,424)

(25,858)

(20,510)

(18,692)

Acquired Intangible Amortisation

0

0

0

0

0

Exceptionals

(2,276)

(1,586)

(614)

0

0

Share based payments

(4,104)

(11,907)

(4,057)

(4,057)

(4,057)

Operating Profit

(19,268)

(39,917)

(30,529)

(24,567)

(22,749)

Net Interest

(242)

557

(506)

(800)

(800)

Profit Before Tax (norm)

 

 

(13,130)

(25,867)

(26,364)

(21,310)

(19,492)

Profit Before Tax (FRS 3)

 

 

(19,994)

(39,360)

(31,035)

(25,367)

(23,549)

Tax

263

1,053

1,129

923

857

Profit After Tax (norm)

(12,867)

(24,814)

(25,235)

(20,387)

(18,636)

Profit After Tax (FRS 3)

(19,731)

(38,307)

(29,906)

(24,444)

(22,693)

Average Number of Shares Outstanding (m)

22.0

24.0

28.8

29.6

30.0

EPS - normalised (c)

 

 

(58.5)

(103.3)

(87.7)

(69.0)

(62.2)

EPS - (IFRS) (c)

 

 

(89.7)

(159.5)

(103.9)

(82.7)

(75.7)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

80.3

80.7

93.2

89.1

85.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

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

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

8,403

10,224

8,813

5,843

2,573

Intangible Assets

8,092

9,814

8,583

5,265

1,647

Tangible Assets

311

410

230

578

926

Investments

0

0

0

0

0

Current Assets

 

 

36,184

16,933

9,283

12,436

10,347

Stocks

0

0

0

0

0

Debtors

10,511

14,452

6,728

7,450

9,520

Cash

25,673

2,481

2,555

4,986

827

Other

0

0

0

0

0

Current Liabilities

 

 

(15,874)

(13,043)

(12,562)

(33,932)

(48,009)

Creditors

(15,874)

(13,043)

(12,562)

(18,932)

(33,009)

Short term borrowings

0

0

0

(15,000)

(15,000)

Long Term Liabilities

 

 

(5)

(5)

(5)

(5)

(5)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(5)

(5)

(5)

(5)

(5)

Net Assets

 

 

28,708

14,109

5,529

(15,659)

(35,094)

CASH FLOW

Operating Cash Flow

 

 

(11,588)

(13,551)

(18,224)

(5,492)

2,985

Net Interest

(242)

58

59

(800)

(800)

Tax

263

(3)

552

923

857

Capex (inc capitalised R&D)

(7,763)

(9,515)

(8,464)

(7,200)

(7,200)

Acquisitions/disposals

0

0

0

0

0

Financing (net)

30,235

465

26,175

0

0

Dividends

0

0

0

0

0

Net Cash Flow

10,905

(22,546)

98

(12,569)

(4,158)

Opening net debt/(cash)

 

 

(14,545)

(25,673)

(2,481)

(2,555)

10,014

HP finance leases initiated

0

0

0

0

0

Other

209

(619)

(16)

0

0

Closing net debt/(cash)

 

 

(25,673)

(2,481)

(2,555)

10,014

14,173

Source: Company accounts, Edison Investment Research

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Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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Germany

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United Kingdom

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245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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