WANdisco — Internet of things provides the ‘killer app’

WANdisco’s unique capability has always been in enabling its clients to move very large amounts of data without disruption. Historically the company has won large deals for Hadoop, on-premise replication and cloud migrations but this has been relatively sporadic. We believe that the rapidly expanding Internet of Things and the intersecting Edge to Cloud markets provide the potential for a rapid and sustained acceleration in major deal flow.

This is primarily because these applications require continuous movement of very large volumes of data. IDC values the global IoT market at $742bn in 2020, with IoT devices expected to generate 73.1 zettabytes annually by 2025 (1 zettabyte is 1bn terabytes or 1tn gigabytes). Gigabit estimates that global IoT spending will total $15tn from 2019–25, and McKinsey Digital forecasts that every second this year, 127 devices will connect to the internet the first time.

Market participants are now investing heavily to capitalise on this opportunity. As a result, WANdisco is seeing opportunities across multiple industries, with automotive particularly prominent, driven by the explosive growth in sensor generated data to support electrification, ADAS and automation. As shown in Exhibit 1, connected car and smart meter devices have generated large amounts of data for WAND. Recent IoT deals include $39.3m in contacts with a major telecom provider to support its smart meter operations (including a record $25m contract announced on 21 September), and a $5.0m contract with a major automotive component supplier for sensor analytics.

Note that IoT devices generate a recurring stream of business for WAND rather than a one-shot deal to migrate data to the cloud (see Exhibit 2). IOT devices (eg car sensors, smart meters, cell phones) continually generate data that must be gathered and sent from the edge (ie processing and/or analysing data close to where it is generated) to the cloud. Therefore, these telecom or automotive suppliers have an ongoing need to migrate data as significant amounts are generated every day. For instance, Otonomo, a company that operates a mobility and vehicle data platform, ingests more than 4bn data points a day globally from over 50m vehicles licensed on its platform.

We see a natural product market fit between an IoT customer’s need to move large amounts of data and the easy scalability of WAND’s CtC model, which is designed to move these rapidly increasing amounts of data. Due to the perpetual nature of the IoT use case, we view it as worth more than the more front- end weighted cloud data migrations.

There are a number of other factors that have also contributed to above and beyond the IOT product market fit. On the product side, a key development has been to make the solution much easier to deploy, to the extent that the company is able to offer free proof of concept trials of the company’s ability to migrate data to and from any major cloud provider, and this is proving a major selling point according to management, providing clients a route out of supplier lock-in.

WAND’s products are designed to be cloud agnostic and easy to use, enabling self-service for customers so they can choose what they need. LiveData Migrator’s (LDM) ability to facilitate multi-cloud strategies remains a key selling point. Rather than being locked into a specific provider, customers can move data across multiple clouds (see Exhibit 3). Deployments are easier and do not require significant amounts of installation expertise, time and cost.

A restructuring of the company’s sales and marketing teams, bringing in high-calibre professionals from firms such as Oracle, Google Cloud and Hewlett Packard, has unquestionably had an impact. For instance, speeding up the sales cycle is an area of focus, with rapid product deployments, increased readiness for pilots, improving coordination with other teams, standard pricing, terms and conditions for CtC contracts, and streamlined approvals, all with the goal of closing a deal within a quarter. From a sales perspective, WAND has reached a key inflection point (see Exhibit 4), with faster time to close, logo expansion (adding new customers and partners to ecosystem), growing average deal size, greater visibility in clients where the CEO is signing deals rather than just a data architect, and expanding use cases.

Strong partnerships and alliances are also foundational to WAND’s go to market strategy. Management has entered into partnerships with major cloud data providers and resale agreements with global and national data migrators (see Exhibit 5). Partners are seeing significant increases in their pipelines, so management sees that driving growth in WAND’s pipeline too. Notable is the partnership with Oracle, where the cloud provider provided fully funded access to WAND’s LDM. Oracle purchases the licences directly from WANdisco for migration projects, fitting well with a large defined pipeline that Oracle intends on pursuing this year. As we noted in an earlier note, if Oracle succeeds in bringing a portion of its huge installed base to the Oracle cloud, then WAND’s opportunity should be significant.

These partnerships with large cloud providers also provide referenceability for the company’s products, showing examples where WAND’s solutions are used by well-regarded cloud vendors. As WAND has grown its deployments with these big firms, so has its roster of customers. Importantly, partners also benefit from these arrangements. Management estimates that every $1 of WAND revenue drives $20 of partner revenue, a unique value proposition that incentivises partners to increase their use of WAND’s products.

WANdisco’s migration to a CtC model has proved to be a win-win for customers and for WAND. In a CtC model, the customer commits to using a certain amount of data over a set time period. Contracts are priced based on the volume of data moved or consumed, represent a minimum commitment for a set period, and, importantly, they are non-cancellable. As customers consume data, revenues are recognised.

As shown in Exhibit 6, the CtC model is a cycle that spans WANdisco’s key performance indicators (KPIs): remaining performance obligations (RPO), bookings and revenues. We discuss these KPIs and how they flow through to financial performance below:

As WAND continues to grow, one would expect to see bookings (new orders for data) outpace revenues (consumed data), a book/bill ratio > 1, and ending RPO > beginning RPO.

Regarding cash collection, WAND typically requires about a year’s worth of data in cash up front with some customers pre-paying up to 50% of the initial contract. These prepayments demonstrate customers’ commitments to WAND’s product and clearly enhance its working capital profile, as witnessed by the deferred income balance rising from $2.7m to $11.2m in H122e.

The commercial benefits of a CtC model are clear. Customers directly pay for a specific amount of data and know that is exactly what they will get, rather than having to estimate how much they may need and then worrying about going over or under. CtC provides a more predictable revenue stream for management and less discounting than a subscription-based model. Moreover, as customers grow and ramp up their businesses, they will naturally consume more data, and WAND participates in that upside, ultimately leading to higher lifetime values per customer.

Another advantage of CtC is its inherent scalability. As customers collect more data, they can expand the amount of contracted data to be migrated to the cloud. This scalability is seen in a recent set of deals with a global telco (see Exhibit 7). The client originally entered into a $1.5m CtC contract to migrate 8PB of smart meter data to the cloud. One week later, the customer added on more data worth $1.2m and a few months later entered into a second follow-on CtC deal worth $11.6m, with 50% paid in advance. This week, the customer entered into a fourth commit-to-consume contract worth a record $25m, which is a geographical expansion of smart metering beyond Europe and a vertical use case expansion into automotive applications. Altogether, the CtC opportunity expanded from $1.5m initially to a total of $39.3m, showing how this sort of business model provides opportunities for significant expansion and growth.

The impact of the expanding IoT use cases was seen in the company’s H122 results. WANdisco reported a strong performance in line with the July trading update. A significant acceleration was driven by multiple Live Data Migrator (LDM) contract wins, particularly for IOT use cases, with bookings rising more than tenfold to $27.3m and RPO up to $31m from H121’s $3.5m. This drove revenue growth of 74% y-o-y to $5.8m, with the significant bulk of this momentum to be reflected in future revenues.

The General Availability of WAND’s LDM and LiveData Migrator on Azure (LDMA), and LDM’s ability to migrate data across multiple cloud providers were behind much of the momentum in multi-million-dollar contract wins.

Note these wins were across multiple use cases, but in the IoT the company appears to have found a significant sweet spot. As noted earlier, IoT deals in FY22 include $39.3m in contracts signed with a major telecom provider ($14.3m in H122) and a $5.0m contract with a major automotive component supplier, and large LDM wins for Hadoop migration-to-cloud uses cases, such as a $1.1m contract with a Canadian financial institution to migrate workloads to Google Cloud.

Management’s H122 outlook describes the pipeline as robust, with the outlook in line with expectations. Driven by the recent record $25m contract win, we forecast a further uptick in H2 with FY22 bookings of $60m, FY22 ending RPO of $57.4m and FY23 ending RPO of 97.4m (see Exhibit 8). We see scope for future upside – this contract win boosts known FY22 bookings to $52m so far, so WAND only needs another $8m between now and year-end to reach our $60m FY22 estimate. We are not changing our P&L and cash forecasts at this time and leave FY23 bookings unchanged. Although this growth looks modest given the very substantial increases this year, it is prudent to wait for evidence of deal flow before revisiting this figure.

We believe that the risk to our forecasts is on the upside. It was clear from the CMD that management is excited by the strength of the pipeline. The announcement of more large deals would be a further catalyst here, and upside potential, particularly to bookings and TCV, could be significant. The extent to which this drops through to revenue will depend on when the clients actually start moving data, although in many cases WANdisco is receiving a substantial proportion of cash upfront (up to 50% of TCV) so the balance sheet is likely to benefit as well.