Staking a claim in blockchain

WANdisco 26 July 2018 Update
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WANdisco

Staking a claim in blockchain

Patent filing and appointment

Software & comp services

26 July 2018

Price

875.6p

Market cap

£365m

$1.32/£1

Net cash ($m) at 31 December 2017

23.4

Shares in issue

41.7m

Free float

88%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(29.4)

(0.1)

30.6

Rel (local)

(30.5)

(3.7)

26.2

52-week high/low

1250.0p

532.5p

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, ALM software and now blockchain markets.

Next events

Trading update

Mid-August 2018

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Alasdair Young

+44 (0)20 3077 5700

WANdiscoWANdisco is a research client of Edison Investment Research Limited

WANdisco’s filing of a patent to protect the use of its core DconE technology in blockchain applications lays the cornerstone for the business’s expansion into another major application. The potential for the technology to significantly improve the scalability and speed of permissioned blockchain implementations could unlock significant bottlenecks holding back its deployment in large-scale, high-throughput applications. The near- to medium-term revenue opportunity is difficult to gauge, but the first commercial steps are expected over the next 12 months and WANdisco’s cloud/big-data partners are all active players in the blockchain arena.

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

41.7

12/17

19.6

(0.6)

(7.8)

(18.6)

23.4

23.4

12/18e

24.6

(0.5)

(8.0)

(18.2)

20.8

18.7

12/19e

31.4

1.0

(6.8)

(15.3)

21.3

14.6

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

New application for core technology

Further to the hire of Dr Ramki Thurimella in January, the announcement formalises WANdisco’s entry into the blockchain arena. The patent filing seeks to leverage the company’s core replication technology to significantly improve the scalability of private (permissioned) blockchain networks. The alleviation of these capacity issues could improve the uptake of blockchain applications for use cases ranging from financial services to supply chain management. Any sector with high volumes of data could be set to benefit from such applications.

Commercialisation imminent

While it is still early stages and it is difficult to quantify the opportunity, we understand that the technology is substantially built. The first commercial engagements are expected to follow over the next 12 months. We also highlight that many of WANDisco’s major partners (eg IBM) are active protagonists in the blockchain arena, which could reduce sales cycles and improve overall prospects.

Valuation: Premium justified

The release also confirms that trading is in line with expectations and we are leaving our forecasts unchanged, pending the August trading update. WANdisco currently trades on 18.7x and 14.6x FY18e and FY19e sales, which remains a considerable premium to peers. However, WANdisco’s investment case remains predicated on its potential to grow into a scalable, high-margin business. This announcement lends further credence that the company can achieve this aspiration.

New application for core technology

The announcement of the patent filing formalises WANdisco’s entry into the blockchain arena, which has been mooted for a while and follows the appointment of Dr Ramki Thurimella (VP of Research) in January this year to explore opportunities for the company’s core replication technology in new markets. Evidence of Dr Thurimella’s expertise can be seen in his white paper: The hitchhiker’s guide to blockchains, which along with discussions about the merits of different blockchain architectures, sketches the construction of a serverless gold exchange.

The problem that WANdisco’s application seeks to solve is that the performance and resources consumed by large-scale blockchains is significantly affected by the requirement to retain consensus throughout the chain. This is a significant obstacle to its deployment in large-scale, high-throughput applications.

WANdisco’s core DconE replication technology is based on the Paxos consensus algorithm. Through combining DconE with encryption extensions, management believes that it can address this scalability/throughput issue in blockchain and thus open up significant new opportunities for both the technology and the business.

Trading in line with expectations

The statement confirmed that the company is trading in line with market expectations and that the board remains positive about the pipeline of opportunities being presented. We have not published interim forecasts but highlight that whereas FY17 financial performance was heavily influenced by a number of large deals through IBM (H1 included a $4.1m deal through this channel), we expect a more distributed revenue profile this year, with revenues from the Microsoft partnership likely to build progressively throughout the year and beyond.

The company also announced the appointment of Dr Sakthi Subramanian as VP of Engineering. Dr Subramanian is a network security expert, with experience at multinational cyber security companies, including McAfee and FireEye.

Exhibit 1: 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: 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. 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.
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 2018. “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 4, 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 4, 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. 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.
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 2018. “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 4, 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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