Long decision cycles still hurting

WANdisco 12 February 2016 Update

WANdisco

Long decision cycles still hurting

Company update

Software & comp services

15 February 2016

Price

138.5p

Market cap

£41m

$1.45/£

Net cash (£m) at Dec 2015 (est)

3

Shares in issue

29.6m

Free float

76%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

89.7

13.1

(65.4)

Rel (local)

102.5

28.3

(58.4)

52-week high/low

445.0p

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 event

Full-year results

16 March

Analyst

Dan Ridsdale

+44 (0)20 3077 5729

WANdisco is a research client of Edison Investment Research Limited

Long customer decision cycles for WANdisco's Fusion big data product is still affecting bookings and revenues, although the ALM business did pick up in Q4. Cost reductions are helping to mitigate the impact on profitability and cash burn, although unless bookings accelerate, further funds may need to be raised in FY16. The company’s co-marketing with major partners such as IBM, Oracle and Amazon has visibly increased over the past few months, and while timing is difficult to gauge, converting this activity to new customer wins will be key to achieving an uptick in growth.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

Net cash/
(debt)($m)

EV/Sales
(x)

Yield
(%)

8.0

(13.1)

(58.5)

25.7

4.2

N/A

11.2

(25.9)

(103.3)

2.5

5.1

N/A

11.3

(25.9)

(89.3)

3.0

5.0

N/A

11.7

(21.3)

(71.6)

(10.4)

6.0

N/A

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

Cost reductions help mitigate revenue shortfall

The full-year trading update stated that revenues are expected to be slightly below consensus expectations, but as a result of cost savings adjusted EBITDA loss is expected to be slightly better than consensus. We reduce our FY15 revenue estimate from $12.8m to $11.3m but leave our EBITDA loss estimate essentially unchanged as we were already slightly below consensus. The company burned c $12.2m of cash in H2, leaving year-end net cash at c $3.0m (our previous estimate $7.7m); the $10m overdraft facility remains undrawn. Further cost savings are said to have brought cash flows closer to break even in Q116 so far.

Progress with partners key to a big data uptick

The referencability of Fusion continues to improve, with six customers (vs three at H115) now live with the product. Co-selling with key partners such as IBM, Oracle and Amazon is said to have increased, and we have certainly seen more co-marketing events/collateral with these partners to support this. While the timing of uptake remains uncertain, successfully converting these opportunities is key to driving an uptick in scalable growth.

Valuation: Uptick in new business key

Our estimate changes are detailed overleaf, with FY16 revenues reduced by 29% to $11.7m and EBITDA loss reduced by 17%. Our FY16 net debt position increases to $10.5m from $9.4m, on which basis WANdisco would need to raise funds during the year. Any valuation clearly needs to factor in dilution, but excluding this our reverse DCF suggests that the current share price factors in c 32% revenue growth to 2020 (to $43m) with EBITDA 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 new business momentum is clearly required in FY16 to underpin such a scenario. We also believe that the company’s strategic attractiveness should be considered in the investment case.

Progress with partners a key lead indicator

WANdisco’s potential to drive a sustainable acceleration in operationally geared growth hinges on:

its ability to gain leverage from its impressive array of channel relationships; and

subscription level scale-ups from its growing customer base as deployments are extended.

Looking at the company’s partner network in more detail, as of November last year it had partnerships with seven major storage vendors covering an estimated 67% of worldwide big data hardware and software revenue, according to Wikibon.

The February trading statement lists Amazon, the leading supplier of cloud data services, as an intriguing addition to this roster of partners. WANdisco’s Fusion S3 product, which is available on the Amazon Web Services (AWS) Marketplace, enables rapid migration of data to and from an AWS implementation. A number of other major storage players such as IBM and Oracle (both WANdisco partners) as well as Google and Oracle have recently announced significant initiatives to compete in this space. We feel that WANdisco remains in a strong position to capitalise on this trend, although the timing and extent to which this benefits the company’s bookings is difficult to estimate. Nevertheless, after bookings momentum, we believe that demonstrable progress in advancing these partner relationships will be one of the key lead indicators for the future.

Estimate changes

Changes to our earnings estimates are shown below.

We have reduced our FY15 revenue estimate (which was slightly above consensus) by 12%, but left our EBITDA loss estimate unchanged as it was at the lower end of the consensus range.

The company does not state its bookings for the year but these are likely to be well below our previous $15.4m estimate, which required a substantial uptick in H215.

The ALM business did pick up but this was late in the year, while in big data the company secured a similar number of contract wins in H215 to the eight recorded in H115.

Our year-end FY15 net cash position reduces from $7.7m to $3.0m (as per the approximate $3m in the statement), reflecting the lower cash inflows from bookings.

Our FY16e EBITDA and EBITDAC (after capitalised development costs) loss forecasts reduce by 17% and 20% respectively reflecting the impact of substantial cost savings, more than offsetting the 29% reduction in our revenue forecast.

Our year-end FY16 forecast net debt position increases to $10.5m from $9.4m reflecting the lower bookings intake. The company has a $10m general purpose credit facility, which is as yet undrawn. On the basis of these estimates the company would need to raise further funds during the year. Given the typical advance payment terms, the company’s booking momentum will be the main variable driving cash consumption/generation.

We would expect further cost reduction to be made if bookings momentum remains subdued to preserve cash.

Exhibit 1: Estimate changes

$000s

2013

2014e

2015e

 

2016e

 

Year-end 31 December

Actual

Actual

Old

New

Change (%)

Old

New

Change (%)

Revenue

8,012

11,218

12,766

11,286

(12)

16,403

11,678

(29)

Cost of sales

(1,579)

(2,165)

(1,916)

(1,219)

(36)

(3,024)

(2,115)

(30)

Gross profit

6,433

9,053

10,850

10,066

(7)

13,380

9,563

(29)

EBITDA

(7,832)

(17,874)

(16,150)

(16,134)

0

(13,120)

(10,937)

(17)

Capitalised development cost

(7,443)

(9,040)

(8,564)

(8,700)

2

(8,564)

(6,500)

(24)

EBITDAC (adjusted for capitalised development)

(15,275)

(26,914)

(24,714)

(24,834)

0

(21,684)

(17,437)

(20)

Operating profit (before amort and except)

(12,888)

(26,424)

(26,000)

(25,984)

0

(23,270)

(21,087)

(9)

Exceptionals

(2,276)

(1,586)

(800)

(800)

0

0

Share-based payments

(4,104)

(11,907)

(9,000)

(9,000)

(9,000)

(9,000)

Operating profit

(19,268)

(39,917)

(35,800)

(35,784)

(32,270)

(30,087)

Net interest

(242)

557

95

95

(200)

(200)

Profit before tax (norm)

(13,130)

(25,867)

(25,905)

(25,889)

0

(23,470)

(21,287)

(9)

 

0.0

0.0

EPS - (IFRS) (c)

(89.7)

(159.5)

(123.6)

(123.5)

0

(109.6)

(102.3)

(7)

Closing net debt/(cash)

(25,673)

(2,481)

(7,668)

(3,030)

(60)

9,374

10,449

11

Source: Company data, Edison Investment Research

Exhibit 2: Financial summary

$'000s

2013

2014

2015e

2016e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

8,012

11,218

11,286

11,678

Cost of Sales

(1,579)

(2,165)

(1,219)

(2,115)

Gross Profit

6,433

9,053

10,066

9,563

EBITDA

 

 

(7,832)

(17,874)

(16,134)

(10,937)

Operating Profit (before amort and except)

 

 

(12,888)

(26,424)

(25,984)

(21,087)

Acquired Intangible Amortisation

0

0

0

0

Exceptionals

(2,276)

(1,586)

(800)

0

Share based payments

(4,104)

(11,907)

(9,000)

(9,000)

Operating Profit

(19,268)

(39,917)

(35,784)

(30,087)

Net Interest

(242)

557

95

(200)

Profit Before Tax (norm)

 

 

(13,130)

(25,867)

(25,889)

(21,287)

Profit Before Tax (FRS 3)

 

 

(19,994)

(39,360)

(35,689)

(30,287)

Tax

263

1,053

357

303

Profit After Tax (norm)

(12,867)

(24,814)

(25,532)

(20,984)

Profit After Tax (FRS 3)

(19,731)

(38,307)

(35,332)

(29,984)

Average Number of Shares Outstanding (m)

22.0

24.0

28.6

29.3

EPS - normalised (c)

 

 

(58.5)

(103.3)

(89.3)

(71.6)

EPS - (IFRS) (c)

 

 

(89.7)

(159.5)

(123.5)

(102.3)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

80.3

80.7

89.2

81.9

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

 

 

8,403

10,224

9,324

6,374

Intangible Assets

8,092

9,814

9,016

5,718

Tangible Assets

311

410

308

656

Investments

0

0

0

0

Current Assets

 

 

36,184

16,933

14,970

16,461

Stocks

0

0

0

0

Debtors

10,511

14,452

11,940

11,910

Cash

25,673

2,481

3,030

4,551

Other

0

0

0

0

Current Liabilities

 

 

(15,874)

(22,555)

(21,135)

(40,861)

Creditors

(15,874)

(22,555)

(21,135)

(25,861)

Short term borrowings

0

0

0

(15,000)

Long Term Liabilities

 

 

(5)

(5)

(5)

(5)

Long term borrowings

0

0

0

0

Other long term liabilities

(5)

(5)

(5)

(5)

Net Assets

 

 

28,708

4,597

3,154

(18,031)

CASH FLOW

Operating Cash Flow

 

 

(11,588)

(13,554)

(15,747)

(6,382)

Net Interest

(242)

58

95

(200)

Tax

263

0

357

303

Capex (inc capitalised R&D)

(7,763)

(9,515)

(8,950)

(7,200)

Acquisitions/disposals

0

0

0

0

Financing (net)

30,235

465

24,794

0

Dividends

0

0

0

0

Net Cash Flow

10,905

(22,546)

549

(13,479)

Opening net debt/(cash)

 

 

(14,545)

(25,673)

(2,481)

(3,030)

HP finance leases initiated

0

0

0

0

Other

209

(619)

0

0

Closing net debt/(cash)

 

 

(25,673)

(2,481)

(3,030)

10,449

Source: Company accounts, Edison Investment Research

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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NSW 2000, Australia

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New Zealand

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