Turning point

WANdisco 23 January 2017 Update

WANdisco

Turning point

Trading update

Software & comp services

23 January 2017

Price

393.00p

Market cap

£146m

£/US$1.24

Net cash ($m) 31 December 2016

7.6

Shares in issue

37.1m

Free float

85%

Code

WAND

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

93.6

164.7

407.1

Rel (local)

89.4

158.7

305.8

52-week high/low

393p

75p

Business description

WANdisco is a distributed computing company. The company 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

Full year results

Feb/March 2017

Analyst

Dan Ridsdale

+44 (0)20 3077 5729

WANdisco is a research client of Edison Investment Research Limited

WANdisco’s performance in H2 indicates that its investment in creating a platform for scalable growth is starting to reap returns. H2 bookings grew by 109%, costs reduced and in Q4 the company operated at close to cash-flow break even. The pipeline entering FY17 is strong and with three major tech partners – IBM, Oracle and Amazon – now generating sales, WANdisco looks exceptionally well placed to continue benefitting from the growth in cloud storage and big data.

Year end

Revenue ($m)

EBITDA*
($m)

PBT*
($m)

EPS
(c)

Closing net cash ($m)

EV/sales
(x)

12/14

11.2

(17.9)

(25.9)

(103.3)

2.5

15.8

12/15

11.0

(16.0)

(26.4)

(87.7)

2.6

16.2

12/16e

11.4

(8.9)

(18.9)

(53.7)

7.6

15.1

12/17e

15.0

(4.9)

(15.2)

(37.5)

2.1

11.9

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

Bookings grow and costs reduce

Bookings for the full year were $15.5m (Edison estimate $15m) up 72% y-o-y with momentum accelerating in Q4 when bookings were up 97% y-o-y to $6.1m. The Q4 figure includes the a $1.0m deal with a major automotive manufacturer, which came in through the IBM partnership. However, it is worth noting that IBM’s royalty reports are received 60 days following the end of the quarter, so this figure may not include the contribution from smaller IBM deals signed in Q4. The trading update does not give P&L figures, but with the company benefiting from its positive working capital model and run-rate operating costs (including capitalised R&D) reduced to c $25m (vs c$36m in FY15), cash burn fell to $200k in Q4. As a result, year-end net cash at $7.6m is well above our $4.6m estimate.

Well placed to continue generating scalable growth

We believe that this trading period should mark a turning point in WANdisco’s financial performance. The company has invested significantly in repositioning its products to meet the evolving demands of the big data and cloud market place. Partnerships with the likes of IBM, Oracle and Amazon verify this investment, provide channels for scalable growth and strengthen the company’s credentials elsewhere. Our estimate changes are shown in Exhibit 1. We trim our FY17 bookings figure to $20.5m from $24m to add a greater level of contingency, although revenues move up and losses move down reflecting the draw-down of FY16 bookings, IBM royalties (which are recognised as received) and lower costs.

Valuation: Recovery prices in an acceleration

WANdisco's FY17 EV/sales rating of 11.9x and our reverse DCF imply the market is pricing in an acceleration in momentum from here. It is too early to say with certainty that this will happen, but we believe our estimates are conservative and further visibility on the contribution from IBM or progress with other partners could raise our growth assumptions. The company's strategic attractiveness should also factor in the valuation equation.

Estimate changes

Our estimate changes are shown in Exhibit 1. While FY16 bookings of $15.5m were ahead of our $15m estimate, the heavy Q4 weighting ($6.1m) reduces the amount recognised during the year, hence we have trimmed our FY16 sales number, which is reflected through the P&L.

The better than expected closing net-cash position suggests a higher weighting of payments in advance and good cash collection.

We have pared back our FY17 bookings estimate, simply to add a greater level of contingency to our forecast. Nevertheless, the company enters the year with a strong pipeline. Bookings growth should benefit from a full year of the IBM OEM partnership, a greater contribution from Amazon Web Services, scale ups of existing deployments and generally growing deal sizes as big data and cloud deployments scale up and become more mission critical.

WANdisco does not yet have full visibility on the royalties to be recognised (during Q117) from IBM’s Q4 sales activities as it will receive the royalty report 60 days after the quarter ends. However, IBM showed good progress with its cloud business in its Q416 report. IBM’s cloud revenues grew by 35% y-o-y to $13.7bn during the year and the exit run rate of its cloud-as-a-service revenue increased to $8.6bn from $5.3bn last year. WANdisco also stated that hybrid cloud services saw strong growth.

At the P&L level our FY17 revenue forecast increases and losses decrease. This reflects the draw-down of deferred revenue from FY16 and a more rapid revenue recognition cycle of royalties for IBM, the full value of which is recognised one quarter in arrears (the royalty report is received five to six weeks after the end of the quarter).

We forecast a net cash outflow of $5.4m, on which basis net cash will drop to c $2m. However, given the positive working capital profile, this figure is highly dependent on bookings and there may be scope to reduce costs further. The company’s $10m revolving credit facility expires in June 2017 although with the progress being made, there will be scope for renewal.

Exhibit 1: Forecast changes

$'000s

2013

2014e

2015e

2016e

2016e

 

2017e

2017e

 

Year end 31 December

Actual

Actual

Actual

Old

New

Change

Old

New

 

Total Bookings

14760

17400

9000

15,000

15500

3%

24,000

20,500

-15%

Revenue

8,012

11,218

10,994

11,908

11,439

-4%

13,275

14,969

13%

Cost of Sales

(1,579)

(2,165)

(749)

(1,748)

(1,163)

-34%

(1,997)

(1,538)

-23%

Gross Profit

6,433

9,053

10,245

10,160

10,277

1%

11,278

13,431

19%

EBITDA

(7,832)

(17,874)

(15,988)

(9,840)

(8,924)

-9%

(8,222)

(4,869)

-41%

Capitalised development cost

(7,443)

(9,040)

(8,369)

(6,500)

(6,500)

0%

(6,500)

(6,500)

0%

EBITDAC (adjusted for capitalised development)

(15,275)

(26,914)

(24,357)

(16,340)

(15,424)

-6%

(14,722)

(11,369)

-23%

Operating Profit (before amort and except)

(12,888)

(26,424)

(25,858)

(20,010)

(18,794)

-6%

(18,692)

(15,039)

-20%

Exceptionals

(2,276)

(1,586)

(614)

0

(200)

 

0

0

 

Share based payments

(4,104)

(11,907)

(4,057)

(4,057)

(2,000)

 

(4,057)

(2,000)

-51%

Operating Profit

(19,268)

(39,917)

(30,529)

(24,067)

(20,994)

 

(22,749)

(17,039)

-25%

Net Interest

(242)

557

(506)

(800)

(150)

 

(800)

(150)

-81%

Profit Before Tax (norm)

(13,130)

(25,867)

(26,364)

(20,810)

(18,944)

-9%

(19,492)

(15,189)

-22%

 

 

 

 

0.0

 

 

0

 

 

EPS - (IFRS) (c)

(89.7)

(159.5)

(103.9)

(72.0)

(48.4)

-33%

(61)

(44.7)

-27%

Closing net debt/(cash)

(25,673)

(2,481)

(2,555)

(4,568)

(7,566)

66%

(409)

(2,104)

414%

Source: Company data Edison Investment Research


Valuation

Following the strong recovery in share price, WANdisco’s FY17 EV/sales at 11.9x rating has risen to a premium to its big data and cloud software peer group, which has a diverse range from 1.7x (Attunity) to 7x (Splunk). WANdisco’s FY17 forecast growth rate is towards the upper end of this peer group, but we believe this rating prices in a more rapid acceleration than we have forecast.

A DCF scenario analysis supports this view, suggesting that a 394p share price requires the company to deliver sustained growth in the mid- to high 30s with EBITDAC (EBITDA + capitalised R&D) margins expanding to above 30%.

Exhibit 2: DCF scenario analysis

Bookings CAGR FY16/2025

20%

35%

50%

65%

80%

Revenues 2020 ($000s)

31220

42011

55100

71673

92481

Implied share price (p)

Matured EBITDA margin

15%

-47.7

151.8

630.8

1837.6

4729.7

20%

-21.4

218.0

797.6

2224.8

5599.7

25%

3.7

286.8

956.2

2601.5

6479.5

30%

28.7

349.9

1119.3

2986.4

7359.2

35%

51.6

417.8

1281.6

3371.4

8224.5

Source: Edison Investment Research. Note: WACC 12.5%, terminal growth rate 2%.

However, we do believe that our forecasts are now conservative. By the time of the full-year results the company will have received its first royalty report from IBM which should give us better visibility on the impact of this relationship. Good progress on this front and confirmation that the strong pipeline is translating to deal flow in H1 could be a catalyst for upgrades. Deepening relationships with other partners such as Amazon, Microsoft or Google could be a catalyst to forecast a bookings acceleration beyond FY17.

Exhibit 3: 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

11,439

14,969

Cost of Sales

(1,579)

(2,165)

(749)

(1,163)

(1,538)

Gross Profit

6,433

9,053

10,245

10,277

13,431

EBITDA

 

 

(7,832)

(17,874)

(15,988)

(8,924)

(4,869)

Operating Profit (before amort and except)

 

 

(12,888)

(26,424)

(25,858)

(18,794)

(15,039)

Acquired Intangible Amortisation

0

0

0

0

0

Exceptionals

(2,276)

(1,586)

(614)

(200)

0

Share based payments

(4,104)

(11,907)

(4,057)

(2,000)

(2,000)

Operating Profit

(19,268)

(39,917)

(30,529)

(20,994)

(17,039)

Net Interest

(242)

557

(506)

(150)

(150)

Profit Before Tax (norm)

 

 

(13,130)

(25,867)

(26,364)

(18,944)

(15,189)

Profit Before Tax (FRS 3)

 

 

(19,994)

(39,360)

(31,035)

(16,731)

(17,189)

Tax

263

1,053

1,129

609

625

Profit After Tax (norm)

(12,867)

(24,814)

(25,235)

(18,335)

(14,563)

Profit After Tax (FRS 3)

(19,731)

(38,307)

(29,906)

(16,122)

(16,563)

Average Number of Shares Outstanding (m)

22.0

24.0

28.8

33.3

37.1

EPS - normalised (c)

 

 

(58.5)

(103.3)

(87.7)

(55.1)

(39.3)

EPS - normalised diluted (c)

 

 

(58.5)

(103.3)

(87.7)

(53.7)

(37.5)

EPS - (IFRS) (c)

 

 

(89.7)

(159.5)

(103.9)

(48.4)

(44.7)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

80.3

80.7

93.2

89.8

89.7

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

8,731

5,641

2,271

Intangible Assets

8,092

9,814

8,501

5,401

2,001

Tangible Assets

311

410

230

240

270

Investments

0

0

0

0

0

Current Assets

 

 

36,184

16,933

9,283

12,586

7,859

Stocks

0

0

0

0

0

Debtors

10,511

14,452

6,728

5,020

5,755

Cash

25,673

2,481

2,555

7,566

2,104

Other

0

0

0

0

0

Current Liabilities

 

 

(15,874)

(13,043)

(12,499)

(16,947)

(23,414)

Creditors

(15,874)

(13,043)

(12,499)

(16,947)

(23,414)

Short term borrowings

0

0

0

0

0

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

5,510

1,275

(13,288)

CASH FLOW

Operating Cash Flow

 

 

(11,588)

(13,509)

(18,138)

(2,967)

863

Net Interest

(242)

58

59

(150)

(150)

Tax

263

(3)

552

609

625

Capex (inc capitalised R&D)

(7,763)

(9,515)

(8,464)

(6,780)

(6,800)

Acquisitions/disposals

0

0

0

0

0

Financing (net)

30,235

465

26,175

14,300

0

Dividends

0

0

0

0

0

Net Cash Flow

10,905

(22,504)

184

5,011

(5,462)

Opening net debt/(cash)

 

 

(14,545)

(25,673)

(2,481)

(2,555)

(7,566)

HP finance leases initiated

0

0

0

0

0

Other

209

(661)

(43)

0

0

Closing net debt/(cash)

 

 

(25,673)

(2,481)

(2,555)

(7,566)

(2,104)

Source: Company data, 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 and Sydney. 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

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

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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

88 Phillip St, Sydney

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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

88 Phillip St, Sydney

NSW 2000, Australia

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 and Sydney. 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

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

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

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

88 Phillip St, Sydney

NSW 2000, Australia

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