Stronger financial footing

WANdisco 29 June 2016 Update

WANdisco

Stronger financial footing

Fund raise

Software & comp services

29 June 2016

Price

122.5p

Market cap

£44m

US$/£1.33

Net cash ($m) at December 2015

2.6

Shares in issue

36.0m

Free float

75%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(31.9)

(24.9)

(48.1)

Rel (local)

(29.4)

(24.2)

(42.5)

52-week high/low

232.5p

73.0p

Business description

WANdisco is a distributed computing company. It has applied its proprietary replication technology to opensource tools to establish itself in the software version control market and is now establishing a promising position in the cloud and big data infrastructure markets.

Next events

Half-year results

September 2016

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Eric Opara

+44 (0)20 3681 2524

WANdisco is a research client on Edison Investment Research Limited

WANdisco’s raise of $15m net (c £10.1m) at 160p/share should support the business through to cash flow break-even in all but a bearish scenario. Equally, we believe lead indicators to support an inflection in bookings are strengthening: bookings recovered in Q1, the number of live deployments more than doubled, the first royalties from IBM are expected this year and enterprise adoption of cloud and big data appear to be accelerating.

Year end

Revenue ($m)

EBITDA
($m)

PBT*
($m)

EPS*
(c)

Net cash
($m)

EV/sales
(x)

12/14

11.2

(17.9)

(25.9)

(103.3)

2.5

5.0

12/15

11.0

(16.0)

(26.4)

(87.7)

2.6

5.1

12/16e

11.9

(9.8)

(20.8)

(60.7)

4.6

4.5

12/17e

13.3

(8.2)

(19.5)

(51.6)

0.4

4.4

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

Fund raise solidifies position

WANdisco is raising $15m at 160p with $10.5m anchored by two new US investors: Global Frontier Investments and Ross Creek Capital. While a strong inflection in bookings is still required, our analysis suggests the increased funds should be sufficient to take the company to break-even unless uptake materially disappoints.

More support for an uptick in bookings

Bookings moved forward meaningfully in Q1 while costs continued to reduce. Commercial progress supports our expectation of an inflection in bookings growth in FY16. A large big-data deal is expected to close soon and the number of customers that have gone live with Fusion more than doubled in Q1. The IBM partnership is expected to start generating revenue this year with 1,400 IBM sales reps being trained on the product while nearly 5,000 employees now have Fusion-related compensation incentives. The company’s key partners are all reporting strong double-digit growth for their cloud platform businesses, with hybrid cloud (for which Fusion is a key enabler) a key focus of both IBM and Oracle.

Valuation: Base case returns 201p, scope for upside

Our estimates have not changed other than factoring in the fund-raise and $0.5m development fees from IBM. We now forecast that WANdisco remains in a net cash position throughout our forecast period. With EBITDA and cash consumption reported as ahead of expectations in Q1 and scope to accelerate the cash collection cycle we believe that there is potential for further improvements at these levels. Consequently we believe that, unless bookings uptake disappoints significantly, the company is unlikely to need to raise further funds. Ascribing a precise fair value to the business remains difficult. Our central scenario, whereby the company delivers to our estimates for FY16 and FY17 then bookings growth moderates year-on-year to 2025 and EBITDAC margins stabilise at 20%, returns a 201p fair value. We believe that the market and the company’s partners could support more aggressive growth at better margins but we need more visibility of partner bookings coming through strongly before using this as a base case.

Investment summary

Bookings recovery with lower costs in Q1

The company’s trading statement flagged a meaningful recovery in performance in Q1, with new sales bookings “significantly ahead” of a very quiet Q1 (bookings of $2m) last year. Cash costs have continued to reduce as a result of rationalisation measures in both FY15 and Q116. Consequently, the company has stated that both adjusted EBITDA and net debt were better than expected.

The lead indicators suggest this recovery has a good chance of continuing. The company has stated that the pipeline of sales opportunities, both from the direct sales team and via partners, provides significant opportunities for bookings and revenue growth. This pipeline is said to include a good number of substantially sized opportunities with both new customers and existing customers seeking to scale up.

The company signed four significant Big Data deals over the quarter while another, which we understand would have been the company’s largest to date, slipped into Q2 although it is expected to close in H1.

Live deployments more than double over the quarter

Importantly the number of customers who have gone live more than doubled over the quarter, going from six to 14. This substantially increased the company’s revenue opportunity from customers scaling up their deployments as the volume of data handled by WANdisco's products grows.

IBM collaboration key to scale up

WANdisco’s OEM agreement with IBM appears to be progressing to plan and provides the other key mechanism for scaling revenues and earnings in 2016 and beyond. Through this agreement, IBM will embed a customised IBM-branded “IBM Big Replicate” version of Fusion into its Big Insights solution set. An example of IBM’s marketing collateral for the product can be found here, with continuous availability, streaming backup, uninterrupted migration (to the cloud), hybrid cloud and burst to cloud and guaranteed data consistency across clusters any distance apart listed as key benefits. IBM is funding c $0.5m of development work to integrate Fusion into elements of IBM's platform, with initial royalties anticipated in H216.

Estimating the timing and rate at which partner revenues ramp up is always an uncertain exercise. However, we do believe this partnership has the potential to be a powerful driver of scalable growth:

Leveraging IBM’s global sales team – IBM is training c 1,400 sales representatives (backed up by more sales support staff) on selling the IBM/Fusion product and in total over 5,000 IBM sales employees (eg, sales engineers, inside sales) now have Fusion compensation incentives. WANdisco has less than 10 direct sales staff. Consequently the partnership has the potential to make a significant impact on WANdisco’s top line, profit and cash generation with only relatively small conversion rates.

IBM customers have been demanding it – in a recent conference call organised by WANdisco, Ritika Gunnar, IBM’s VP Data and Analytics, commented that while IBM does have solutions with benefits that overlap with Fusion, customers have been requesting Fusion and active:active replication solutions. This was a key catalyst for establishing the partnership.

IBM is a leading player in cloud and analytics – while at group level IBM is struggling as it transitions its business, it is a top two supplier of big data and analytics solutions and a top five supplier of cloud platform services globally. The Analytics and Cloud segments are the two primary drivers of the company’s growth strategy. Annualised cloud as a service revenues grew 46% to $5.4m in Q116.

Hybrid cloud is core to IBMs growth strategy – IBM is betting on hybrid-cloud services as a way to differentiate the company's products. Its strategy focuses on connecting customers' legacy IT systems to either public or private clouds. In addition to basic computer and storage services, IBM is marketing the company's ability to integrate customer-facing cloud applications to legacy back-end systems as a differentiator.

Exhibit 1: IBM – strategic imperative business Lines performance Q116

Q116 revenues, bn

YoY growth

Analytics

$4.2

9%

Cloud

$2.6

36%

Cloud Delivered as a Service – exit annual run-rate

$5.4

46%

Mobile

$0.8

93%

Security

$0.4

20%

Social

$0.2

(1%)

Source: IBM. Note: Bold shows business lines relevant to WANdisco.

CFO departure

The departure of CFO Paul Harrison does not change the investment case in our view. Mr Harrison is joining Just Eat (£3bn market capitalisation) having left his CFO position at Sage (£6.78bn market capitalisation) to join WANdisco in 2013. The company is in the early stages of identifying candidates to replace Mr Harrison.

Fund-raise anchored by two US specialists

The company’s $15m equity raise at 160p was anchored by $10.5m of funds from two specialist fund managers, Global Frontier Investments and Ross Creek Capital plus other undisclosed parties. The remainder is being placed with existing major shareholders.

Estimate changes

Our estimate changes are shown in Exhibit 2 and factor in only the increased funds and dilution from the placing and the $0.5m development/integration fees from IBM.

Lead indicators support a robust bookings recovery

We believe that lead indicators support our expectation of a robust bookings recovery in FY16 and beyond, following a disappointing 2015, impacted by long decision cycles and the shift to a partner centric model in big data and a loss of focus in ALM. Bookings increased substantially y-o-y in Q1, the IBM partnership is expected to start generating royalties in H2, the number of live customers more than doubled in Q1 and enterprise adoption of both big data analytics and cloud appears to be accelerating.

Relatively low UK and European exposure

While no business is completely shielded from the economic uncertainty around Brexit, it is worth noting that 66% of the company’s 2015 revenues were generated from North America. We understand that the company’s pipeline is currently North American and Asia Pacific weighted and consequently we expect exposure to the UK and Europe to remain relatively low.

Funding gives more scope to execute and customer reassurance

Given that EBITDA and cash burn were better than expected and that our estimates were more cautious than consensus on both measures, there may be scope for upside here. In particular, with the move towards a more productised, channel-driven model, it is possible that the bookings to cash collection cycle accelerates. However, at this stage, we do not believe there are enough data to support a change on this basis.

Nevertheless, we now estimate that the company will remain in a net cash position throughout our forecast period. The company still has its $10m HSBC debt facility available to June 2017, which could potentially be extended.

Significant further dilution unlikely unless things go wrong

The rate of cash burn clearly depends on a number of factors, with bookings growth, working capital – particularly the amount of cash collected in advance – and cash staff costs (both expensed and capitalised) being key. We show a scenario analysis of trough cash and peak debt under varying bookings growth and long-term margin scenarios (but with stable working capital ratios) in Exhibit 2. Taking into account the potential for WANdisco to accelerate the cash collection cycle, which is not factored in here we believe that significant new funding is only likely to be required if uptake / bookings growth falls significantly below expectations.

Exhibit 2: Estimate changes

$'000s

2013

2014e

2015

Change

2016e

2016e

Change

2017e

2017e

Change

Year end 31 December

Actual

Actual

Actual

Old

New

Old

New

Revenue

8,012

11,218

10,994

-3%

11,408

11,908

4%

13,275

13,275

0%

Cost of Sales

(1,579)

(2,165)

(749)

-39%

(1,248)

(1,748)

40%

(1,997)

(1,997)

0%

Gross Profit

6,433

9,053

10,245

2%

10,160

10,160

0%

11,278

11,278

0%

EBITDA

(7,832)

(17,874)

(15,988)

-1%

(10,340)

(9,840)

-5%

(8,222)

(8,222)

0%

Capitalised development cost

(7,443)

(9,040)

(8,369)

-4%

(6,500)

(6,500)

0%

(6,500)

(6,500)

0%

EBITDAC (adjusted for capitalised development)

(15,275)

(26,914)

(24,357)

-2%

(16,840)

(16,340)

-3%

(14,722)

(14,722)

0%

Operating Profit (before amort and except)

(12,888)

(26,424)

(25,858)

0%

(20,510)

(20,010)

-2%

(18,692)

(18,692)

0%

Exceptionals

(2,276)

(1,586)

(614)

 

0

0

 

0

0

 

Share based payments

(4,104)

(11,907)

(4,057)

 

(4,057)

(4,057)

 

(4,057)

(4,057)

0%

Operating Profit

(19,268)

(39,917)

(30,529)

 

(24,567)

(24,067)

 

(22,749)

(22,749)

0%

Net Interest

(242)

557

(506)

 

(800)

(800)

 

(800)

(800)

0%

Profit Before Tax (norm)

(13,130)

(25,867)

(26,364)

2%

(21,310)

(20,810)

-2%

(19,492)

(19,492)

0%

 

 

 

 

 

0.0

 

 

0

 

 

EPS - (IFRS) (c)

(89.7)

(159.5)

(103.9)

-16%

(82.7)

(73.1)

-12%

(76)

(62.8)

-17%

Closing net debt/(cash)

(25,673)

(2,481)

(2,555)

-16%

10,014

(4,568)

-146%

14,173

(409)

-103%

 

0

 

0

 

Average number of shares in issue (000s)

23,874

24,018

28,783

 

29,551

32,797

 

29,980

36,130

21%

Year-end number of shares in issue (000s)

24,261

24,261

29,564

 

29,880

36,030

 

30,080

36,230

20%

Source: Edison Investment Research, WANdisco

Valuation: Building blocks in place for a recovery

Pinning a precise valuation on WANdisco is difficult. However, a scenario analysis suggests that if the company delivers to our estimates (driven by 67% and 60% bookings growth for FY16 and FY17) while keeping the cost base under control, it should be well placed to deliver upside. A scenario whereby the company delivers to our estimates for FY16 and FY17, then bookings growth moderates year-on-year to 2025 and margins EBITDAC (EBITDA after capitalised development costs) stabilise at 20% in from FY19 returns a 215p fair value. We believe that the market and company’s partners could support more aggressive growth and the company’s indirect model could support higher margins than this, although we need more visibility of partner bookings coming through strongly before using this as a base case scenario.

Equally, we believe that given the company’s partners and IP position, WANdisco’s potential strategic value should not be ignored from the investment case and, in particular, could provide downside protection if bookings do not come through has expected.

Exhibit 3: DCF scenario analysis

Bookings growth FY17

30%

45%

60%

75%

90%

Bookings CAGR FY16/2025

22%

29%

36%

44%

51%

Revenues 2020

30775

41928

55777

72722

93189

C/F B/E Yr

2019E

2019E

2018E

2018E

2018E

Peak Net Debt

-9591

-4094

-1912

-696

-696

Implied share price

Matured EBITDAC Margin

15%

-70.4

18.9

142.5

327.6

601.8

20%

-45.6

64.4

214.9

441.3

777.6

25%

-20.8

106.8

290.4

559.4

958.9

30%

2.7

147.6

359.2

669.4

1140.2

35%

25.5

191.7

430.9

786.0

1310.9

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 4: 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

11,908

13,275

Cost of Sales

(1,579)

(2,165)

(749)

(1,748)

(1,997)

Gross Profit

6,433

9,053

10,245

10,160

11,278

EBITDA

(7,832)

(17,874)

(15,988)

(9,840)

(8,222)

Operating Profit (before amort and except)

(12,888)

(26,424)

(25,858)

(20,010)

(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)

(24,067)

(22,749)

Net Interest

(242)

557

(506)

(800)

(800)

Profit Before Tax (norm)

(13,130)

(25,867)

(26,364)

(20,810)

(19,492)

Profit Before Tax (FRS 3)

(19,994)

(39,360)

(31,035)

(24,867)

(23,549)

Tax

263

1,053

1,129

905

857

Profit After Tax (norm)

(12,867)

(24,814)

(25,235)

(19,906)

(18,636)

Profit After Tax (FRS 3)

(19,731)

(38,307)

(29,906)

(23,963)

(22,693)

Average Number of Shares Outstanding (m)

22.0

24.0

28.8

32.8

36.1

EPS - normalised (c)

(58.5)

(103.3)

(87.7)

(60.7)

(51.6)

EPS - (IFRS) (c)

(89.7)

(159.5)

(103.9)

(73.1)

(62.8)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

80.3

80.7

93.2

85.3

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

27,018

24,929

Stocks

0

0

0

0

0

Debtors

10,511

14,452

6,728

7,450

9,520

Cash

25,673

2,481

2,555

19,568

15,409

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

(1,077)

(20,512)

CASH FLOW

Operating Cash Flow

(11,588)

(13,551)

(18,224)

(4,992)

2,985

Net Interest

(242)

58

59

(800)

(800)

Tax

263

(3)

552

905

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

14,100

0

Dividends

0

0

0

0

0

Net Cash Flow

10,905

(22,546)

98

2,013

(4,158)

Opening net debt/(cash)

(14,545)

(25,673)

(2,481)

(2,555)

(4,568)

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)

(4,568)

(409)

Source: Company accounts and Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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

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