WANdisco plc WAND – LSE; WAND.L
January 16, 2018 European Software & IT Services
BUY COMPANY UPDATE FY update... ‘Hit 'em with the fusion, nah’ Price (15 January 2018) 830p Summary Changes Previous Current
Rating - BUY WANdisco smashes our 2017 forecast with bookings, +45% YoY to US$22.5m – besting Target Price 1,062p 1,067p our US$20.8m estimate. The start-turn was ‘Fusion’ where bookings are +121% YoY to US$15.7m - we had expected US$12.6m. Also, CFO Erik Miller continues to delight on Key data cash, US$27.4m, ahead of estimates. Whilst WANdisco did not disclose to revenue or Bloomberg/Reuters codes: WAND LN / WAND.L EBITDA detail we elected to make small upgrades as we ‘bake-in’ the bookings beat. Market cap (£m) 276 Net/net we raise 2017E revenue from US$16.8m to US$18.6m and Adj EBITDA from - FTSE ALL SHARE 4,264 US$2.4m to -US$1.79m. Whilst it is easy to get carried away with the numbers beat in 1mth perf (%) 45.6 truth we are more impressed by the CEO Mr Richards commentary that “. . . there has 3mths perf (%) (3.8) been a transformation at WANdisco which started when we launched our core WANdisco 12mths perf (%) 270.5 Fusion product ‘. With this we are reminded that Mr Richards has, by evolving Fusion as 12mth high-low (p) 890 - 246 a general data replication platform (i.e. this is no longer the Hadoop-play) he has created Free float (%) 75 shareholder value 'in the moment' and for the long term as Fusion maps onto a changing market. Also shows that he is cognizant of the product life cycle and the constant need Key financials for product refresh. This morning we expect that Mr Richards is likely singing along to Allan Kingdom and ‘The Fusion’ ‘I be off the loud pack / I be off the bounce back’ as he Year to Dec 2016A 2017E 2018E weaves his way to work through San Francisco traffic – as long as he has dialled in to Sales 11.4 18.6 21.9 Hip Hop Corner on the car stereo. To reflect the forecast changes we increase our target EBITDA (adj) (7.5) (1.8) 1.0 price to 1067p (1,062p) and retain our Buy. EV/EBITDA (x) (50.1) (199.6) 358.4 PE adj (x) NA NA NA EV/Sales (x) 32.9 19.3 16.4 Key Points EPS adj (c) (0.47) (0.24) (0.14) News. In an FY trading update WANdisco announces that bookings are +45% YoY to Prices are as of close 15 January 2018 US$22.5m, US$15.5m YoY, and ahead of our US$20.8m estimate. Fusion bookings All sources unless otherwise stated: Company are +121% to US$15.7m, 2016: US$7.1m and Stifel: US$12.6m. Cash of US$27.4m, data, FactSet, Stifel estimates including US$4.0m from the new growth capital facility, at 31 December 2017 (30 June Share price performance (indexed) 2017: US$9.9m). Stifel estimate US$23.8m.
350 Operational highlights. WANdisco signed two new contract awards with major financial 300 institutions, US$4.32m and US$4.1m respectively contract, both secured via the IBM OEM partnership. Other contracts include a US$2.0m contract for WANdisco Fusion with 250 one of the world’s largest retailers and a first contract win for WANdisco Fusion in the 200 healthcare sector with a major American healthcare company. 150 David Richards, CEO and Interim Chairman: “We have begun 2018 with a strong new 100 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 business pipeline across multiple industry verticals, not only through our partnership with
Absolute Rel.FTSE ALL SHARE (ASX) IBM, but also via our other channel partners, as we maximise our routes to market. With the proceeds of the recent placing we have the resources to capitalise on the opportunity in front of us.”
Impact on forecasts. We have changed 2017E forecasts to reflect the news. We have raised FY revenue to US$18.6m, from US$16.8m prior. In addition we raised Adj EBITDA to -US$1.79m from -US$2.4m prior estimate.
Diary date. Finals early March 2018
George O'Connor | +44 (0) 20 7710 7694 | george.o'[email protected] UK Sales Desk | +44 (0) 20 7710 7600 Completed: 16 January 2018 02:15EST Disseminated: 16 January 2018 02:15EST MiFID II - Research: Is your access agreed? CONTACT us today
Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages 23 - 25 of this report. WANdisco plc Company Update WAND – LSE January 16, 2018 European Software & IT Services
Key data1 Key information
Key profit and loss data ($) Target price methodology/risks 2016A 2017E 2018E Target price methodology. We use a blended model to arrive at our Sales 11.4 18.6 21.9 12-month target price of US1,471cents/1,067p (note: we are using GB EBITDA (9.3) (3.0) (0.6) £:US at $1.38), using discounted cash flow, sum-of-the-parts and free EBITDA margin (%) (81.3) (16.4) (2.6) cash flow yield. While WANdisco has a number of adjacent growth opportunities, we believe the ‘cash generation’ bias in our valuation Gross profit 10 17 20 methodology reflects how investors see the benefits of subscription- Net income (9.2) (12.4) (7.8) based business models. PBT rep (10.0) (13.3) (8.7) EBITDA adj (7.5) (1.8) 1.0 Risks to target price. In addition to general and macroeconomic risks, Depreciation & amortisation 9 8 8 the downside risks include continued deceleration in the source code DPS 0.00 0.00 0.00 and Big Data markets. This would impact cash inflow and thereby increase cash outflow and lessen investor interest. Upside risks include Key cash flow data ($) a better-than-expected revenue growth, possibly as a consequence of the channel partner sales accelerating faster than anticipated. 2016A 2017E 2018E Operating profit (17.9) (10.9) (8.8) Operating cash flow (2.2) 3.9 4.2 Business description Capex (0.1) (0.1) (0.1) WANdisco is an infrastructure software company that has developed a Dividends 0.00 0.00 0.00 patent-protected method for data replication of across heterogeneous Net debt (7.3) (23.4) (22.2) compute environments. Taxes paid (0) 1 1 Cash flow from investing 5 19 (1) Senior management FCF (8.3) (0.8) (1.2) David Richards - CEO Dividends 0.00 0.00 0.00 Cash at end of year 8 27 26 Erik Miller - CFO
Key balance sheet ($) Key dates 2016A 2017E 2018E Cash and cash equivalents 7.6 26.8 25.5 Mar 2018 - Finals Total assets 20.2 39.4 37.9 Major shareholders Oppenheimer Funds 12.9%
T. Rowe Rice International 4.74%%
Ross Creek Capital 3.58%
Global Frontier Investments 2.59%
Herald Investment Management 1.89%
Website www.wandisco.com 1 Year end December Data in millions, except per share and percentages Source: Company data, FactSet, Stifel estimates
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WANdisco FY update . . ‘Hit 'em with the fusion, nah’
The news WANdisco provides an update on the performance of its business in the second half and full year results to 31 December 2017.
Financial highlights . Record bookings secured in 2017, up 45% YoY to US$22.5m, US$15.5m YoY, and ahead of our US$20.8m estimate.
. H2/2017 bookings +28% YoY to US$12.3m, US$9.6m YoY. These are ahead of our estimates, and up sequentially from US$9.7m in H1/2017A
. Big Data bookings, i.e WANdisco Fusion, +121% in 2017 to US$15.7m, US$7.1m YoY. Stifel: US$12.6m
. Details suggest Source Code Management bookings cUS$6.8m - our estimate was US$8.3m
. A new US$5.0m term loan facility with Silicon Valley Bank, with an additional US$3.0m revolving credit facility
. Raising US$22m gross proceeds via a 2.97m share placing 4 December 2017
. Cash of US$27.3m, including US$4.0m from the new growth capital facility, at 31 December 2017 (30 June 2017: US$9.9m). Stifel estimate US$23.8m
Operational highlights . Two new contract awards with major financial institutions, a record US$4.32m contract win as well as a US$4.1m contract, both secured through the IBM OEM partnership
. A US$2.0m contract for WANdisco Fusion with one of the world’s largest retailers
. A first contract win for WANdisco Fusion in the healthcare sector with a major American healthcare company
Technology . Released WANdisco Fusion 2.11, the latest version of the Company's patented data replication product which includes substantial performance improvements to the Fusion core replication engine, resulting in flexible installation processes for users, as well as significant product performance improvements of up to 75% from the prior version
. Launched one of the industry’s first Hybrid Data Lake architecture in collaboration with Amazon Web Services (“AWS”)
. Integrated with AWS Snowball, a secure appliance to transfer large amounts of data in and out of the AWS cloud
Route to market . Deepened integration with major industry players and collaboration with key partners to further enhance ability to execute
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. Announced an OEM partnership with Virtustream, a Dell Technologies company, for WANdisco Fusion, worth a minimum of US$3.6m.
. Fully integrated with Microsoft Azure Databox and HD Insights, enabling the purchase of WANdisco Fusion on the Azure Marketplace
David Richards, CEO and Interim Chairman: “Our market doesn’t stand still – and nor does our product. There has been a transformation at WANdisco which started when we launched our core WANdisco Fusion product. We moved from a Hadoop focus towards providing a general data replication platform and we now support Cloud Object Storage and a variety of other technologies, increasing our addressable market. We have made significant improvements to our core WANdisco Fusion product, making it more flexible, easier to install, and faster with reduced complexity. This should further increase our abilities to win new business in the future.
“We have begun 2018 with a strong new business pipeline across multiple industry verticals, not only through our partnership with IBM, but also via our other channel partners, as we maximise our routes to market. With the proceeds of the recent placing we have the resources to capitalise on the opportunity in front of us.”
Stifel Viewpoint Why is Fusion on a roll? We think that four points are salient in explaining Fusion’s +121% bookings growth. (i) Big data means big outage and a big problem which is now being realised by the enterprise IT community. (ii) We see a strengthening use case. While DR has the most visible momentum currently, there are a number of use cases, each supported by a strong ROI. (iii) While WANdisco has a blended sales model Fusion sales have accelerated by the channel, and in particular by the IBM OEM. We recall IBM stating at WANdisco’s CMD, October 2017, that it could see a US$200 – US$300m revenue line. With the latest contract win, US$4.3m, announced on 2 January 2018, investors will pay more attention to IBM’s commentary. (iii) The development of the hybrid cloud (see later in this report) shows us that WANdisco has technically skated to where the ‘puck was headed’.
WANdisco Fusion – an agnostic platform Despite our coverage of WANdisco, we feel that the message around WANdisco Fusion now being an agnostic platform may not be fully appreciated. Whilst WANdisco originally IPO’d on its SCM (i.e. Version Control) business one of its earliest technology feats was to extricate its core DConE technology from the SCM product and make it more a platform. Thereafter, it was 'pointed’ at the Hadoop market. Since then Fusion has further evolved into being a general data replication platform which also now supports Cloud Object Storage and a variety of other technologies. This will increase abilities to win new business, broaden TAM and allows WANdisco to have a suite of products at different points of the Product Life Cycle.
Channel contribution We think that IBM contributed to cUS$10m in 2017A bookings. In late 2017A WANdisco inked a new channel deal with Dell/EMC and it has sales partnerships with Amazon Web Services, Cisco, Microsoft Azure, Google Cloud, HPE, Oracle and others. Increased wider channel sales will be one of the big events for 2018, in our view.
How about pricing power? We believe that WANdisco’s unique technology may be translating to some pricing power. Remember that the core pricing is based on storage required/node, and we have this declining in forecasts – this suggests further upside to our estimates.
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Pipeline close rates Mr Richards comments that WANdisco has “begun 2018 with a strong new business pipeline”. We think that the year 2017 was defined by a large upgrade to WANdisco sales process and capabilities. Not only was there an expanded pipeline but also WANdisco has worked hard to ensure better pre- qualification and pipeline management. This increased sales discipline will be needed as the other channel partners, in particular Dell/EMC, start to deliver improved volumes in 2018.
New vs existing customers – who is buying Fusion bookings are in the majority from new customers, while SCM bookings were primarily the reverse, to existing customers.
Implementation/on-boarding We had some concern that WANdisco may have been short of staff for implementation and customer on-boarding. There were some instances where customers delayed implementation until the recent Fusion 2.11 release. This likely lends weight to Mr Richards confidence in his outlook commentary.
SCM was shy of our expectations. We believe that the reason is that SCM is being run as a cash generative line of business but gets little new investment. The division has nine engineers and limited sales resources.
5 WANdisco plc Company Update WAND – LSE January 16, 2018 European Software & IT Services
Impact on forecasts
We have reflected the bookings beat in our forecasts. WANdisco did not disclose below the bookings by product line so we have made some general assumptions, which we will re-visit on the publication of final results. Net/Net, the changes are as follows:
. 2017E: We increased bookings, revenue and Adj EBITDA to US$22.5m (from US$20.8m), US$18.55m (from US$16.8m), and -US$1.79m (from -US$2.4m), respectively.
. 2018E: We increased bookings, revenue and operating costs to reflect the improving sales momentum and the expected new hires. We increased the basic share count to 40.9m and added options. We increase revenue to US$21.95m (from US$20.9m), as we envisage a period end weighted sales push, given it takes OEMs time to make their sales. We have left working capital assumptions unchanged. We factored in the new share count from the placing.
. 2019E: We increased revenue to US$27.88m from US$26.6m as further new OEMs are on- boarded. The IBM OEM experience was that it takes between 9 and 12 months for the new channel to begin to deliver meaningful revenue.
. 2020E: We increased revenue to US$32.7m from US$32.1m, with adjusted EBITDA unchanged at US$7.8m.
Figure 1: WANdisco Summary forecast changes (US$m) New forecasts Earlier forecasts Year to 31 December 2017E 2018E 2019E 2020E 2017E 2018E 2019E 2020E Bookings 22.5 31.60 41.69 51.10 20.8 30.6 40.5 50.2 ALM 6.8 5.57 5.29 5.05 8.3 7.9 7.6 7.5 Big Data 15.7 26.03 36.41 46.06 12.6 22.7 32.8 42.7 Turnover by type ALM 6.92 5.68 5.40 5.2 8.4 8.0 7.8 7.7 Fusion 11.63 16.27 22.47 27.5 8.4 12.8 18.8 24.4 Maintenance, training & other services 1.93 3.15 3.73 4.7 1.9 2.9 3.5 4.5 Total turnover 18.55 21.95 27.88 32.7 16.8 20.9 26.6 32.1
Cost of sales -1.30 -1.54 -1.95 -2.29 -1.2 -1.5 -1.9 -2.2 Gross profit 17.25 20.41 25.93 30.37 15.6 19.4 24.7 29.8 Gross margin 93% 93% 93% 93% 0.9 0.9 0.9 0.9 Expenses -28.12 -29.20 -31.92 -33.67 -27.1 -29.0 -31.3 -32.8 Reported EBIT pre-exceptional -10.86 -8.79 -5.99 -3.30 -11.5 -9.6 -6.6 -3.0 Our adjustments: Share based payments 1.25 1.56 1.80 1.98 1.3 1.4 1.5 1.7 Acquisition related items 0.00 0.00 0.00 0.00 0.0 0.0 0.0 0.0 Depreciation & Amortisation 7.82 8.23 8.65 9.10 7.8 8.2 8.6 9.1 Adj EBITDA pre-exceptional -1.79 1.00 4.46 7.78 -2.4 0.0 3.6 7.8
Source: Company data, Stifel estimates
Forecast methodology We model WANdisco using a range of inputs based on the demand environment, visible bookings traction, the fade rate and average selling prices. Our cost model assesses the gross margin by line of business and the operating cost model includes estimates for staff numbers and staff costs.
The bookings drivers WANdisco sells subscription licences. These are charged and then booked to revenue on a pro rata basis. Generally, a ‘booking’ has three components: the recognised revenue element (which could be a royalty), the deferred revenue element (billed and sitting on the balance sheet until revenue recognition conditions have been satisfied), and the ‘unbilled’ accounts receivable, or the amount that refers to
6 WANdisco plc Company Update WAND – LSE January 16, 2018 European Software & IT Services
contracts where WANdisco has yet to bill the customer. The model is complicated as royalties (i.e. the instantly recognised revenue element) increased to 60% of Big Data bookings in H1/2017A results. However, subscription contracts would be for (say) year two or three of a three-year contract term. We have generated bookings by looking at these components across the ALM and Fusion/Big Data divisions (see table for our core assumptions).
SCM/ALM assumptions . Short-term bookings growth is predicated on the H2 larger contract signings and some increase in the customer count, given a new focus on the division since H2/2016. We have used an 85% renewal rate.
. We have reduced pricing on new bookings. On renewal and add-on bookings, we have factored in some deflation with the ASP.
. We see a residual long tail bookings stream in SmartSVN.
Figure 2: WANdisco SCM forecast assumnptions (US$m) Bookings (US$m) 2014A 2015A 2016A 2017E 2018E 2019E 2020 New customer booking 7.5 1.2 3.4 1.1 1.1 0.8 0.7 Customer count 46 20 17 15 15 12 10 Asp (US$000) 163.0 60.0 78.0 78.0 70.2 68.1 68.1 Add-on bookings 4.0 1.6 1.1 1.7 1.0 1.0 1.0 Customer count 54 49 40 38 30 30 30 Asp (US$000) 74.1 32.7 31.0 45.0 31.5 31.5 31.5 Renewal bookings 2.8 3.5 3.7 3.8 3.4 3.4 3.3 Customer count 68 83 59 58 65 65 65 Asp (US$000) 41.2 42.2 46.4 64.9 52.0 52.0 50.9 SmartSVN bookings 0.3 0.2 0.2 0.2 0.2 0.1 0.1 Total Bookings (US$m) 14.6 6.5 8.40 6.79 5.57 5.29 5.05 Total customer count 168 152 116 111 110 107 105 Average asp (US$000) 86.9 42.8 72.4 61.4 50.4 49.2 47.9 Bookings growth (%) -55.5% 29.2% -19.2% -18.0% -5.0% -4.5% Revenue 10.4 9.2 8.2 6.9 5.7 5.4 5.2 Book:Bill 1.40 0.71 1.03 1.02 1.02 1.02 1.02
Source: Company data, Stifel estimates
Fusion assumptions . We envisage continued growth in the customer count, with new customer bookings growing markedly through our projections period. We also assume a stronger ‘Go Live’ rate from Fusion as WANdisco improves the rate by a mix of more experienced, more numerous staff dedicated to the function.
. Our model is built on the cost of storage. While we envisage flat cost/TB through our projections period, we see users buying incrementally more storage. We note IDC end-user research into Hadoop adoption concluded that storage was growing by c60% a year. We have used a cost/node methodology. While this is still valid, discussions with users suggest that the market is moving away from this.
. We have factored in an 80% renewal rate for 2017, rising to 80% in 2018 and then to 90% for 2019-20. The 90% rate is a better average for this sector.
. The risk in the forecasts is that the royalty numbers increase and in turn this accelerates revenue recognition.
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Figure 3: WANdisco Fusion: Bookings assumptions Year to 31 December 2014A 2015A 2016A 2017E 2018E 2019E 2020 New customer bookings 0.38 0.96 4.29 8.76 13.73 17.50 20.09 Customer count 9 17 15 25 40 61 82 Asp (US$000) 42 56.5 286.0 357.5 339.6 288.7 245.4 Go live 0.36 0.72 2.43 6.05 10.92 16.71 23.01 Customer count 3 6 9 17 30 44 60 Asp (US$000) 120 120 286 352 370 378 385 TB 8 8 8 15 16 24 Price/Node +5 TB (US$000) 15.0 130.0 130.0 130.0 130.0 130.0 Go live to new customers (%) 33% 35% 57% 70% 73% 73% 73% Renewal/Scale-up (US$m) 0.04 0.00 0.37 0.90 1.38 2.19 2.96 Customer count 1 5 7 16 25 40 54 Asp (US$000) 36 31.2 55.0 55.0 55.0 55.0 55.0 Additional TB 24 24 48 64 84 128 128 Price/TB (US$) 1500.0 1300.0 1300.0 1300.0 1300.0 1300.0 1300.0
Bookings (US$m) 2.80 2.50 7.10 15.7001 26.03 36.41 46.06 Total customer count 10 26 32 40 65 101 142 Average asp (US$000) 280.0 96.2 221.7 266.1 319.3 383.1 459.8 IBM royalty 0.0 10.0 14.0 17.5 21.0 Bookings growth (%) -10.7% 183.8% 121.3% 65.8% 39.9% 26.5% Revenue 0.77 1.84 3.20 11.63 16.27 22.47 27.50 Book to bill 3.63 1.36 2.22 1.35 1.60 1.62 1.68
Source: Company data, Stifel estimates
How do we arrive at revenue? Revenue follows bookings at WANdisco, for both subscription and royalty bookings. As we commented, revenue is a pro rata from bookings as the revenue recognition conditions are satisfied. We therefore apportion our bookings across revenue and receivables, and factor in that revenue is also a function of prior period bookings. This model also gives rise to a book/bill ratio (see below). We were conscious that this will change over time as it will be influenced by contract terms and types.
Figure 4: WANdisco: Bookings to revenue (US$m) Year to 31 December 2014A 2015A 2016A 2017E 2018E 2019E 2020 Bookings 17.360 9.012 15.495 22.487 31.598 41.693 51.105 Growth (%) -48.1% 71.9% 45.1% 40.5% 31.9% 22.6% Revenue 11.218 10.994 11.379 18.552 21.948 27.877 32.657 Growth (%) -2.0% 3.5% 63.0% 18.3% 27.0% 17.1% Book:Bill 1.5 0.8 1.4 1.2 1.4 1.5 1.6
Source: Company data, Stifel estimates
Just a thought We believe our estimates are very conservative – particularly in the light of the strong bookings, however, we acknowledge that a series of accelerators could potentially deliver better-than-expected earnings growth:
. More new clients. Sales are basically upsells to free customers managed by WANdisco’s inside sales team (i.e. to on-base customers), but with (1) a strong channel push, coupled with (2) additional quota-carrying sales staff, there could be upside to our new account assumptions.
. Widening the sales reach. There are co-related product areas where WANdisco could make sales inroads. The first indication of this is likely to be from new channel partner sales, where they are using domain or subject matter experts to open new ‘use cases’. For us, this was the case from that banner auto contract that WANdisco signed via its IBM OEM relationship. In our view, there should be sales opportunities in adjacent markets like healthcare, fintech and smart cities.
8 WANdisco plc Company Update WAND – LSE January 16, 2018 European Software & IT Services
. Rising average selling prices (ASP). The recent experience at WANdisco is that it has been able to increase ASPs. Given (1) the macro backdrop, and (2) many users still expect Open Source software to be ‘free’ software, there may well be some customer push-back on attempts to increase prices. (3) Larger data volumes driving larger contract sizes. As future pricing predicated on storage, and given rising storage volumes, there may well be a ‘natural’ price inflator.
. New products. WANdisco has maintained an aggressive technology insertion rate – adding modules for new functional areas and expanding its product range. Maintaining this technology insertion rate should continue to drive upgrade spend among the customer base.
Are our sales expectations rational? . For 2018E we assumed eight quota-carrying sales staff with an average ‘bag’ of US$1.5m. On 65% utilisation, they generate US$7.8m. For 2018E, there is a further US$15.4m from deferred and US$14m from OEM, suggesting ‘doable’ revenue of US$37.2m.
. Survey data suggests that our growth in storage could be on the conservative side. We note IDC analysts suggest that Hadoop users average storage Y/Y growth of c0%-plus. Also, the survey data suggests some large Hadoop clusters, which are already larger than our assumptions.
The staff-adjusted cost model As in the mainstay of technology companies, while profit is seen as a function of Sales & Marketing, Administrative and R&D costs, in our view, the most important cost is the ‘people’. Salaries are the mainstay of the operating costs. We attempt to capture this dynamic in our cost model, in which we take a ‘bottom up’ approach. Here, we use the reported cost of staff and project forward on the basis of: (1) wage inflation/deflation; and (2) assumed headcount numbers. Our assumptions are outlined in the table below:
Figure 5: WANdisco: Staff economics (US$m) Year to 31 December 2017E 2018E 2019E 2020E Software development 75 79 84 86 Selling & Distribution 32 39 43 44 Administration 17 18 18 18 Average headcount 124.0 136.0 145.0 148 Growth in staff (%) -7% 10% 7% 2% Employee productivity Revenue/employee (US$000) 149.61 161.38 192.26 220.66 Employee cost Staff costs -12.46 -14.01 -15.39 -16.25 Cost/employee (US$000) -100.51 -103.02 -106.11 -109.82 Growth in cost/employee (%) 2.5% 2.5% 3.0% 3.5% R&D assumptions Staff 75 79 84 86 Proportion of staff engaged in software development 60% 58% 58% 58% Staff salary rate (US$000) 120.61 118.47 127.33 131.79 Spend related SW development (US$m) 9.05 9.36 10.70 11.33 R&D staff 49 51 55 56 Development spend 5.88 6.08 6.95 7.37 R&D capitalised 5.88 6.08 6.95 7.37 R&D Adjustment R&D capitalised 5.88 6.08 6.95 7.37 Pre exceptional EBITDA less capitalised R&D -7.67 -5.08 -2.49 0.41
Source: Company data, Stifel estimates
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The investment case - Why do we like WANdisco?
WANdisco is an infrastructure software company operating at the confluence of four IT axes: big/lots of data; migration to Cloud; importance of RASS; and agile software development/DevOps. The company has differentiated technology and an impressive client list, and is currently enjoying strong operational momentum.
Impressive technology WANdisco replicates data across heterogeneous environments. Its Distributed Coordination Engine (DConE) is patent-protected (11 issued, 27 pending). DConE is capable of active transaction replication, where data servers are equal peers in a distributed network. This means data is never lost (critical in disaster recovery situations), and can be moved, at speed and at scale, between computing environments (critical in replication and data migration scenarios) and in new-world Cloud SLA management (critical for customers migrating between IaaS providers). Customers talk about a very strong ROI. This technology is an enhancement of the Paxos algorithm to enable active-active replication between a variety of data sources, including Hadoop clusters, Cloud environments, NAS (network-attached storage) filers, etc. It enables continuous data access in the face of network outages, hardware failures and entire data centres going up and down.
…which keeps getting enhanced Latest news from WANdisco: There were two key announcements of note in November. As these were separate, investors may well have glossed over their combined significance. First, there was the Fusion 2.11 debut, which was a necessary pre-requisite for the later AWS Snowball news. V2.11 delivered 45- 70% performance improvements to Fusion. Customers can, for the first time, transfer large quantities of data faster, and cheaper, to the cloud and allows large scale data migrations to take place and support the ongoing development of hybrid cloud computing. Thereafter, 28 November 2017, WANdisco announced Fusion was integrated with Amazon Web Services, AWS, Snowball, Amazon’s petabyte scale data transport solution that uses secure appliances to transfer large amounts of data in and out of the AWS cloud.
The bluest of the blue-chip customers WANdisco’s customers are companies that are building software, are organised globally, and are migrating to the Cloud – this should make for a very large total addressable market (TAM). Sectors include: auto, entertainment, financial services, government, healthcare, IT, telecoms and utilities. The customer list has a strong tech constituency that includes not only Accenture, ARM, Cisco, Dell, HP and IBM, but also banks like HSBC and such global brands as GE, Fidelity, John Deere, Johnson & Johnson, Pitney Bowes and Wal-Mart. The company has c200 customers (of which c31 are on WANdisco’s Big Data product, and most use its ALM product).
Large TAM still expanding organically Trying to draw a boundary around WANdisco’s TAM can be a frustrating exercise. Thinking through the technology tends to throw up new use cases in multiple adjacent customer markets and vertical industries, all in addition to the current focus on replication, migration and Application Lifecycle Management. Looking at the three core areas, we think: (1) disaster recovery should be a cUS$11bn TAM; (2) data migration to the Cloud suggests a cUS$7bn TAM; (3) inter-Cloud data replication, availability and procurement/SLA management should be a large and viable market as the cloud-based application hosting market matures and enterprise users think about their pricing power.
Attractive multiples – all about the growth WANdisco is enjoying accelerating growth. The FY trading update headlined with news of record bookings with Fusion +121% YoY, as group bookings grew +45% YoY.
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The new multi-layered sales and distribution model is thriving A key focus for 2017 was to establish a partner network. Mission accomplished – now, in addition to its own ‘direct sales team’, WANdisco has a set of Tier 1 channel partners. This includes IBM, with which WANdisco inked a rare OEM agreement, and Dell/EMC as well as significant channel partnerships with Oracle and Amazon. All are contributing to bookings and are instrumental in building the company’s sales pipeline. They also reduce the cost base, thereby hastening WANdisco along the path to profitability.
Management stays the course, maintains the ‘passion’ Management has been through the mill – and remains together. The ‘top table’ still includes founders David Richards and Yeturu Aahlad. New CFO Erik Miller has public and private software industry experience.
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Thoughts on the bigger picture - recap
1. The Cloud is getting more 'hybrid’ and more complex - it supports the WANdisco investment case A central pillar to our WANdisco investment thesis is that the WANdisco use case (see below) becomes more pressing for enterprises as they migrate to a hybrid cloud computing environment.
The expanding use cases
. Disaster recovery. Customers use WANdisco to ensure that if their server goes down (e.g., the area electricity gets knocked out), that data would not be lost. WANdisco products provide Cloud, on-premise and Cloud-to-Cloud with guaranteed data consistency and no data loss.
. Data migration to the Cloud. Over time, the Cloud is attracting customers like a moth to a flame because it is cost effective, requires little upfront investment, and brings many other benefits to an enterprise. This use case will impact many companies, and will be long-running simply because companies will migrate to the Cloud at different paces. By its nature, however, the Cloud represents a one-off sale, and is arguably less interesting for WANdisco (and its shareholders).
. Customers could use a ‘hybrid’ Cloud, where they mix and match on-premise and Cloud servers, and move data between the two. Other users might move data from the ‘edge’ of the network to the core. Here a customer talked through a medical example – with on-the-edge data collection from remote locations and the analysis in the core. This gives WANdisco an annuity revenue stream.
. Inter-Cloud data replication and availability. In this scenario, customers look to maintain dual supplier strategies (like their on-premise brethren of old), or to migrate to a new Cloud vendor after losing confidence with the current supplier owing to poor SAL management, predatory pricing and the cost of extracting data or security issues, etc. They will need to be able to move data between suppliers in order to avoid predatory pricing and ‘lock-in’. This nascent market currently reflects the early stage of enterprise users migrating to the Cloud. Some customers have already started to migrate between Cloud providers, but much of their eagerness to do so gets diluted once they recognise the downtime required with traditional migration methods. We are reading more about these Cloud migrations in the trade press suggesting that there is a growing audience.
. Improving Cloud provider availability. We note outages at cloud service providers. If data were being consistently replicated across multiple data centres within a cloud provider in near-real time, these outages would not occur. This suggests that data is replicated across cloud data centres in a batch-based approach – hence the outages.
Rising complexity illustrates the increased drive to hybrid cloud We also note that the ‘clouds’ personality is also changing – it is becoming more feature rich, as cloud providers (IaaS) mirror increasingly standard features and functions in the belief that these will aid competitive differentiations. However, this is a proliferation of mostly undifferentiated services. Yet, in our view, it will only serve to encourage users to retain a multiplier supplier strategy to be in a position to migrate from IaaS to IaaS – in order to avoid any lock-in or predatory pricing and migrate for their best product and pricing match.
We note a KPMG report that highlights the myriad ways that cloud complexity presents a significant barrier to enterprise IT adoption, claiming that the state of online services is far from being any kind of computing utility. The report points out that for many organizations, implementing cloud computing and getting value from it are not necessarily synonymous. The diversity of legacy estates, technical debt, and growing number of available cloud services and delivery options (public, private, hybrid) create a
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level of complexity in decision-making and implementation that is challenging at best and presents a barrier at worst.
Heightened competition among vendors amidst is causing CIOs and enterprise IT buyers to adopt multiple cloud solutions. This concern of ours was illustrated at the recent AWS re:Invent expo where AWS’s focus on individual products, not overall solutions to enterprise and developer problems, makes it more difficult in the long term to expand its share of the total enterprise infrastructure and application market.
2. What we are seeing in the hybrid cloud The promise of hybrid computing is that users can leverage their existing onsite resources and the public cloud in a seamless fashion and use these to respond quickly to new and changing business requirements. To illustrate, think about (say) a fast moving line business that needs extra computing capacity because it is subject to seasonal, daily or intra-day operational ‘spikes’. The notion is at an early stage as most user organisations typically use internal, or private cloud, environments for their most rigorous and secure line-of-business workloads and use public cloud for test and development, backup, or disaster recovery. A break on more widespread adoption is that migrating workloads from a private/on-premise environment to a cloud can take weeks or months (interesting as private company Rubrik made this point with an illustration of a workload taking 160 hours!). So, consequently there has been a bottleneck in user adoption.
More recently, user organisations have been putting line of business applications in the cloud (think of say Sage plc and its newest business applications). While there was a school of thought that hybrid cloud would be a transitionary phase – the argument being that at some stage all data goes cloud – this has been revised to an approach that users will (a little bit like portfolio managers) sometimes use on- premise, sometimes private cloud, sometimes public cloud and sometimes a combination of all three. Delivering on this is at the heart of the Amazon announcement. The extent of revision is such that now the consensus amongst industry thinkers is that the mainstay of users will adopt hybrid computing models.
As a general concern, we note that as more ‘cloud’ will mean more standardisation (the downside of the distributed memory model) and so the trade-off will be less tailored options. In our view, this will mean that a cohort of organisations will keep on-premise solutions and a multisource/hybrid computing environment.
Latest from industry analysts Wikibon – the development of the multi-cloud. We were fortunate in being able to attend the annual Wikibon Predictions teleconference in December. Of the points of note was the confirmation of hybrid cloud as ‘the thing' - remember for many this was seen as a transitional phase. The Wikibon analysts argue that the terms hybrid cloud and multi-cloud have been muddied and now get used interchangeable. They see a world of Hybrid cloud being equal to a combination of Private and Public; so it is Multi-cloud. A multi-cloud that spans two or more providers is hybrid and that is becoming more commonplace, and so hybrid cloud is becoming even more relevant.
In the foreseeable future, these analysts believe most organisations will be both hybrid, and multi-cloud, by which we mean that organisations will likely have workloads in more than one Infrastructure or Platform as a service provider. A true hybrid cloud would enable users to:
. Connect workloads that remain 'on premise' (i.e., CRM database) with those that make more sense in the 'infinitely scalable' world of cloud (for example, a mobile app that refers to your database).
. Enable users to move workloads back and forth with relative ease (perhaps for geographical reasons, to launch in a new country with effectively local infrastructure).
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. Enable scaling on-premise infrastructure into the cloud at peak times.
What are the use cases we are seeing in hybrid cloud environments? . Development/QA/test. By their nature, ‘Agile’ developers need a flexible environment for developing and testing software applications. Moving application development and testing to the cloud have established benefits in cost savings and increased time-to-market. A service provider’s platform may not be compatible with existing IT investments, making data migration (i.e. back in- house for the deployment) difficult, but not if both environments use the same platform. Back to its heritage in Version control, WANdisco was referenced amongst the developer community.
. Disaster recovery/backup/archiving. To mitigate the risk of natural disasters or technical failure, a single site IT deployment makes companies more vulnerable to service disruption. Completely replicating production environments on a second site is economically unattractive, but using remote storage lowers costs and can be used in the event of service disruption. This has been a steady use case for WANdisco.
. Web/e-commerce. N-tier applications, like (say) many online retail stores, have public-facing web assets and business critical assets onsite. These can potentially cause security risks to enterprise information and customer data if proper compliance and controls aren’t implemented.
. The outsourced data centre. For companies exploring outsourcing data centre functionality and wishing to avoid building a new data centre, the cloud is a cost-effective option to meet the needs for more capacity without incurring additional capital expenses. Here we are watching the development of Hybrid Service, which would offer this ‘on demand’ capacity. Users can provision resources on an ad hoc basis with a unified management console to administer the hybrid infrastructure – data centres and public cloud.
. Packaged applications. With broadly flat IT budgets, user organisations face the conflicting challenge of quickly adding capacity on-demand to meet business-critical requirements or free up existing resources for higher value projects. Migrating standard packaged applications, like email and collaboration software, to a hybrid cloud has the downside that in many cases existing applications have to be reconfigured or worse rewritten for a public cloud platform. The requirement to re-architect packaged applications and configurations to run on that cloud provider’s specific platform is enough to stimulate interest in hybrid.
Eyes on the prize – good adoption fuels developing TAM We note research from MarketsandMarkets, which concludes that the hybrid cloud market is estimated to grow from US$33.28bn in 2016 to US$91.74bn by 2021, a 22.5% CAGR. While application usage is analytics, the disaster recovery segment is expected to grow at the highest CAGR. We remind investors of our constant ‘grudge’ – it is not TAM but the company’s ability to execute on TAM that is more critical. In that, WANdisco’s sales partnerships with the leading IaaS and PaaS companies are critical.
3. The shift of mainstream enterprise adopting Hybrid cloud We have commented that the deal was in part illustrative of a maturing of hybrid cloud market. Our thinking is that more mainstream later adopter enterprises have different (i.e., more conservative) views on vendor selection, and, for this constituency, vendor viability is measured differently than for early adopters. So, while early adopters see a strong technology edge, later adopters will look for a greater sense of vendor viability. We see this (potential) market shift in a positive light, as it expands TAM and should lead to stronger bookings and revenue growth at WANdisco; simply put, the product growth stage dwarfs the introduction stage.
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RISKS
The key risks to our investment case include: (1) the core technology, (2) the competitive market, (3) the nature of the demand environment, and (4) WANdisco’s continued ability to deliver further sales growth at similar-to-recent rates.
Technology risk In terms of technological risk, we identify two issues:
1. What problem does DConE solve, and is it ‘critical’ enough? Some repositioning has aimed at ‘nailing down’ the use case. However, in WANdisco Fusion, we see a coherent product with a defined end-market.
2. Is the core technology established? Paxos creator (from his paper ‘The Part-Time Parliament’) Dr Leslie Lamport acknowledged to us that, despite interest in the Paxos offshoot Raft having led to a number of implementations, Paxos remains the standard approach to implementing fault-tolerant systems.
Sidebar: the origins of DConE The original intellectual property (IP) underpinning DConE was first issued in 2005, after WANdisco’s technical founder Yeturu Aahlad spent five years working to create a peer-to-peer distributed system. Dr Aahlad’s work was based on a paper by mathematician/computer scientist Dr Leslie Lamport, who named his solution the Paxos algorithm (see Appendix). That Dr Aahlad had been a distributed systems architect at Sun Microsystems tells us that he was in the right place at the right time, when the industry was just beginning to think about issues around distributed computing.
Good enough and DIY solutions . The technology industry is littered with examples of ‘good enough’ technology (note: this report was written in Microsoft Word 2010). Good enough often means ‘cheaper’, but also in this case we have come across examples where companies have developed a (nearly) peer-based system using batch-processing (i.e. not real-time) and solutions that re-hash the ‘master/slave’ methodology – i.e. they are not peer-to-peer. There is no direct competitor, and the key is data migration with no interruption (i.e. zero outage).
. Some of the ‘2.0’ web properties solve the problem by: (1) using more hardware (the unit of production in a data centre is a small, and cheap compute blade, easily deployed) by creating a hardware-based fault tolerance – an easier fix, but not generally suitable; (2) developing their own solutions.
. Raft. Raft is a consensus algorithm designed as an alternative to Paxos. It was meant to be more understandable than Paxos. Like Paxos, Raft offers a generic route to distributing a state machine across a cluster of computing systems, ensuring that each node in the cluster agrees upon the same series of state transitions. The difference is that Raft decomposes the problem into relatively independent sub-problems. A server in a Raft cluster is either a leader, a candidate, or a follower, with the leader responsible for log replication and informing the followers via a heartbeat message. There are a number of implementations (see https://raft.github.io/#implementations), but no large commercial sponsorship.
. Blockchain enjoys some status as a tech cure-all currently, and its distributed ledger technology is being explored as a trusted way to track the ownership of assets with no need of a central authority. The design goal is to speed up transactions and cut costs, while lowering fraud incidences. At its heart, Blockchain is a distributed file system. The database is shared by all nodes participating in a system, and people using Blockchain keep copies (a block) of the Blockchain file. As such, the Blockchain database uses a distributed consensus model. Each block
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has a cryptographic signature (aka a hash) of the preceding block, hence the ‘chain’ analogy as the blocks are added sequentially. It is a peer-to-peer network with many distributed nodes. While the failure of one node (or even several nodes) will not prevent the rest of the network from functioning properly, data will still be lost. Current criticisms of Blockchain include its (lack of) speed and the visibility of the information (to anyone). We know of one WANdisco customer that had been exploring Blockchain, but now sees DConE as more suitable for its needs.
Artificial intelligence taking over Just to future-proof this report – there are moves afoot to bring more artificial intelligence (AI) into the software development world. It is not too much of a stretch, should we accept it, that AI develops software autonomously. In that case, ‘out of the box’ fault tolerance could be at such a level that, coupled with AI developed software, knowledge (i.e. the practical implementation of data) will be ubiquitous and will always be available. This would negate the need for DConE. We offer no timeframe.
Sales execution is there at last As befits an early-stage software company, WANdisco has had a multifaceted ‘let’s try a few things’ go- to-market strategy. We recall its pre-IPO days, when WANdisco built a ‘frictionless’ sales model for its ALM line of business, supplemented with an ‘inside’ sales team that concentrated on converting the free community to paying customers. However, ALM/version control customers were a technical audience that knew what it wanted. The same approach was never going to work for Big Data, where WANdisco debuted in 2013, and where it would have to build its own enterprise sales team supplemented by a sales channel. The early moves with the Hadoop ‘distro’ companies (Cloudera and Hortonworks) looked sensible, yet ultimately proved to be the wrong start point as the distros developed their own Disaster Recovery (DR) offer. Through iterations, WANdisco now has a multifaceted sales distribution model that headlines with a rare IBM OEM relationship. In addition, WANdisco has its own enterprise sales team, coupled to channel partners including Amazon and Oracle, plus a number of professional services organisations.
Competition – a wrinkle Looking through the competitive pack, we note a product competitor in the ALM market, ‘Git’. Git is an Open Source, distributed version control system designed to handle all projects, from small to very large, with speed. It is positioned as a replacement product for version control tools.
Git has surged in recent years, and companies like GitHub and (to some extent) Atlassian have done a better job at tethering themselves to the Git banner. While WANdisco has a Git (and indeed a Gerrit) offer in addition to Subversion, arguably the company needs to work harder to establish its brand in the Git market.
‘Forking’ WANdisco is an engineering-led software company that puts technology on a pedestal, and its customers look to it to figure out ‘what’s next’. In such situations, ‘forking’ comes with the territory in the Open Source world. ‘Forking’, or the development of competing variations, occurs when projects splintering into different forms lead to disputes. However, a number of recent staff and process changes in engineering at WANdisco should help reduce the risk of forking.
Difficulties in hiring As a small company with developers in San Francisco, WANdisco may find it difficult to hire. In fairness, given that options are ‘under the water’, we are surprised that unplanned staff attrition is not more of an issue. We caution that:
. Good people remain ‘hard’ to hire;
. The US, Northern Ireland and Sheffield offices may find it difficult to hire. In the US, the staff may be too ‘footloose’ and expensive, too prone to receiving competitor calls. In Sheffield, they may be too scarce. In Northern Ireland, they might not be skilled enough. We like the global nature of
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WANdisco, and think the company needs to have a distributed office structure to mirror how its customers are organised.
From our on-going Glassdoor research we note that WANdisco has a good employee reputation, and this will help it in hiring and retaining staff.
Figure 6: WANdisco Glassdoor rating (x) Company Jun-14 Jan-15 Jan-16 Jun-16 Jan-17 Jun-17 Nov-17 Dec-17 Jan-18 Trend WANdisco 3.4 3.9 3.6 na 3.4 3.4 3.5 3.6 3.6 ↔ All companies 2.86 3.14 3.32 3.39 3.52 3.44 3.54 3.48 3.52 ↑
Source: Glassdoor
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Target price and valuation
Our 12-month target price share is US1,474cents/1,067p, which implies 29% upside potential (note: we are using GB£:US at $1.38.). WANdisco offers investors exposure to a business enjoying rigorous growth in a global target market, and to perhaps the ‘noisiest’ theme in IT currently – Big Data and hybrid cloud computing. We see abundant evidence that the company is now positioned to accelerate growth that should create further value for its shareholders. Our blended valuation model (taking in DCF US1,825 cents, sum-of-the-parts US1,135 cents and FCF yield US1,825 cents) leads us to our 12- month target price.
Investment rationale . Strong growth opportunity – growth is currently accelerating.
. An established business serving global Tier 1 customers. This is not a blue-sky business.
. Robust business model. The subscription revenue model gives visibility and helps to de-risk forecast sales.
. The offer. In our view, WANdisco technology has a competitive lead in an established growth market. This competitive lead is based on very strong technology building blocks.
. WANdisco is at an inflection point. With Adjusted EBITDA profitability from H1/2017A, WANdisco is clearly at an inflection point as sales activity has accelerated since mid-2016.
. Attractive cash flow profile. The company has minimal working capital requirements. That said, as WANdisco delivers closer to its target operational model, it should generate operating cash ahead of operating profit.
How do we value WANdisco? Target price methodology. We use a blended model to arrive at our 12-month share price target of US1,474 cents/1067p (note: we are using GB£:US at $1.38), using discounted cash flow, sum-of-the- parts and free cash flow yield. While WANdisco has a number of adjacent growth opportunities, we believe the ‘cash generation’ bias in our valuation methodology reflects how investors see the benefits of subscription-based business models.
Risks to target price. In addition to general and macroeconomic risks, the downside risks include continued deceleration in the source code and Big Data markets. This would impact cash inflow and thereby increase cash outflow and lessen investor interest. Upside risks include a better-than-expected revenue growth, possibly as a consequence of the channel partner sales accelerating faster than anticipated.
Valuation inputs . DCF valuation: US1,825 cents. Our cost of capital assumptions include a WACC of 8.5% and a 3% terminal growth rate – at a zero terminal growth, the implied valuation would be US1,258 cents. Our WACC assumptions include a beta of 1.15, risk-free rate of 2.0x (ahead of current UK 10-year government gilts at 1.33%) and equity risk of 5.7x (we calculated this by the inverse equity method using the sector P/E of 17.7x). We are not surprised at the DCF valuation, given the strong cash generation as evidenced with the latest FY trading update coupled with our expectation of an increasingly attractive EBITDA margin at WANdisco – i.e. we project a 35% margin at the end of our estimates period, which would be analogous to (say) the SUSE division of Micro Focus.
. SOTP valuation: US1,135 cents. Here, we disentangled the divisions (ALM and Big Data) and applied standard multipliers, based on our latest sector valuation results. We also assumed a 15% corporate overhead, which is a common aspect of sum-of-the-parts valuation models. We highlight
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the sum-of-the-parts valuation because we believe that we should see further consolidation in 2017 in both of WANdisco’s operational segments: Source Code Management/ALM and Data Storage. Note, for example, investors have seen Micro Focus become a consolidator on a global scale. We are also conscious that a trade buyer will value WANdisco from the perspective of their own channel pipeline. In this regard, consolidators like IBM will pay a premium to the market value simply because it reflects their ability to ‘squeeze’ greater sales volume out of the product.
. Free cash flow yield US1,825 cents: We have observed the FY2 free cash flow yield for our Big data companies tends to be plus or minus 1%. We also acknowledge that early-stage companies will typically attract a lower yield, so it expands through the company lifecycle. To reflect our thinking, we have averaged WANdisco’s FCF from 2018 to 2020 to arrive at US$2.55m. If we apply a 0.5% FCF yield to this, we arrive at our valuation.
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Figure 7: Profit & loss (US$m) Year to 31 December 2016A 2017E 2018E 2019E 2020E Bookings 15.5 22.5 31.60 41.69 51.10 ALM 8.4 6.8 5.57 5.29 5.05 Fusion 7.1 15.7 26.03 36.41 46.06 Turnover by type ALM 8.2 6.92 5.68 5.40 5.2 Fusion 3.2 11.63 16.27 22.47 27.5 Total turnover 11.4 18.55 21.95 27.88 32.7
Cost of sales -1.35 -1.30 -1.54 -1.95 -2.29 Gross profit 10.03 17.25 20.41 25.93 30.37 Gross margin (%) 93% 93% 93% 93% 93% Expenses -27.92 -28.12 -29.20 -31.92 -33.67 Reported EBIT pre exceptional -17.89 -10.86 -8.79 -5.99 -3.30 Our adjustments: Share based payments 1.79 1.25 1.56 1.80 1.98 Acquisition related items 0.00 0.00 0.00 0.00 0.00 Depreciation & Amortisation 8.64 7.82 8.23 8.65 9.10 Adj EBITDA pre exceptional -7.46 -1.79 1.00 4.46 7.78 Margin (%) -0.66 -10% 5% 16% 24% Exceptional costs 8.11 -2.30 0.00 0.00 0.00 Adj EBITDA post exceptional 0.65 -4.09 1.00 4.46 7.78 Adj EBITDA pre exceptional inc Dev expenditure -13.324 -7.67 -5.08 -2.49 0.41 Depreciation -0.17 -0.20 -0.23 -0.25 -0.28 Adj EBITA -7.638 -1.99 0.77 4.21 7.50 Net Interest -0.27 -0.14 0.07 0.07 0.08 Adjusted pre tax profit -7.91 -2.14 0.84 4.28 7.58 Exceptional items 8.11 -2.30 0.00 0.00 0.00 Share based payments -1.787 -1.25 -1.56 -1.80 -1.98 Intangible amortisation -8.466 -7.62 -8.00 -8.40 -8.82 Pre-tax profit post exceptional -10.046 -13.30 -8.72 -5.92 -3.22
Taxation 0.772 0.81 0.85 0.89 0.94 Profit after tax -9.274 -12.49 -7.87 -5.02 -2.28 Other income 0.107 0.11 0.12 0.12 0.13 Dividends 0.0 0.00 0.00 0.00 0.00 Reported retained profit post exceptional -9.167 -12.38 -7.75 -4.90 -2.15 Weighted average basic shares (m) 33.29 37.66 40.90 40.90 40.90 Weighted average full diluted shares (m) 33.29 37.66 43.77 43.77 43.77
Diluted adjusted EPS (US$) -0.47 -0.24 -0.14 -0.07 -0.01
DPS (US$) 0.0 0.0 0.0 0.0 0.0
Source: Company data, Stifel estimates
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Figure 8: Cash flow (US$m) Year to 31 December 2016A 2017E 2018E 2019E 2020E
PAT -9.27 -12.49 -7.87 -5.02 -2.28 Depreciation & Amortisation 8.64 7.82 8.23 8.65 9.10 Share based payments 1.82 1.25 1.56 1.80 1.98 Increase/(decrease) creditors/payables 0.83 1.19 0.43 0.62 0.53 Increase/(decrease) deferred income 2.74 2.35 2.61 2.43 0.00 (Increase)/decrease debtors/receivables 0.33 -1.23 -0.75 -1.43 -0.29 (Increase)/decrease in Gov grant -0.01 0.00 0.00 0.00 0.00 Working capital 3.88 2.32 2.29 1.62 0.24 Other -7.24 5.00 0.00 0.00 0.00 Operating cash flow -2.18 3.89 4.22 7.05 9.04 Net interest -0.17 -0.14 0.07 0.07 0.08 Taxation -0.08 0.81 0.60 0.63 0.66 Net capex -0.06 -0.07 -0.07 -0.07 -0.08 Development -5.86 -5.29 -6.02 -6.60 -7.15 Free cash flow -8.35 -0.80 -1.21 1.06 2.55
Dividends 0.00 0.00 0.00 0.00 0.00 Acquisitions 0.00 0.00 0.00 0.00 0.00 Other 0.00 0.00 0.00 0.00 0.00 Net cash flow -8.35 -0.80 -1.21 1.06 2.55
Shares issued (net) 13.52 20.00 0.00 0.00 0.00 Cash/(debt) acquired 0.00 0.00 0.00 0.00 0.00 Currency effects -0.18 0.00 0.00 0.00 0.00 Increase / (decrease) cash 5.00 19.20 -1.21 1.06 2.55
Opening cash / (debt) 2.56 7.56 26.76 25.55 26.61 Closing cash / (debt) 7.556 26.76 25.55 26.61 29.17
Borrowings/finance lease 0.29 0.31 0.34 0.36 0.00 Other loans 0.00 3.00 3.00 3.00 0.00 Net cash (debt) 7.26 23.45 22.21 23.26 29.17
Source: Company data, Stifel estimates
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Figure 9: Balance sheet (US$m) Year to 31 December 2016A 2017E 2018E 2019E 2020E Fixed Assets P. P & Equipment 0.49 0.44 0.38 0.41 0.37 Intangible assets 5.98 4.84 3.89 4.47 4.48 Total fixed assets 6.47 5.29 4.27 4.89 4.85
Current Assets (Receivables) Cash at hand and in bank 7.56 26.76 25.55 26.62 29.17 Trade debtors 6.15 7.37 8.12 9.55 9.84 Other receivables & prepayments 0.00 0.00 0.00 0.00 0.00 Corp tax credit receivable 0.00 0.00 0.00 0.00 0.00 Total current assets 13.70 34.13 33.67 36.16 39.01
Total assets 20.17 39.42 37.94 41.05 43.86
Current liabilities (Payables) Short-term debt 0.09 0.09 0.09 0.09 0.09 Trade creditors 3.49 4.68 5.11 5.73 6.26 Deferred income 5.81 8.16 10.77 13.20 13.20 Current tax liabilities 0.01 0.00 0.00 0.00 0.00 Deferrred government grant 0.01 0.01 0.01 0.02 0.02 Total current liabilities 9.41 12.94 15.99 19.04 19.57
Net Current Assets 4.29 21.19 17.68 17.13 19.44 Total Assets-Current Liabilities 10.76 26.48 21.95 22.01 24.29
Non-current liabilities Deferrred income 6.68 9.70 13.63 17.98 22.04 Borrowings/finance lease 0.29 0.31 0.32 0.34 0.36 Borrowings 3rd pty loan 3.00 3.00 3.00 3.00 Deferred tax liability 0.00 0.10 0.11 0.12 0.13 Retirement benefit obligations 0.00 0.00 0.00 0.00 0.00 Total non-current liabilities 6.98 13.11 17.06 21.44 25.53 Total Liabilities 16.39 26.05 33.05 40.48 45.10 Net assets 3.78 13.37 4.89 0.57 -1.24
Shareholders funds Called up share capital 5.64 5.92 6.22 6.53 6.85 Share premium 94.53 114.53 114.53 114.53 114.53 Translation reserve -8.28 0.15 2.56 3.58 4.89 Other reserves 1.25 1.25 1.25 1.25 1.25 Retained earnings -89.34 -108.47 -119.66 -125.31 -128.76 Shareholders funds 3.78 13.37 4.89 0.57 -1.25 Equity and liabilities 20.17 39.42 37.94 41.05 43.85
Source: Company data, Stifel estimates
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Important Disclosures and Certifications
I, George O'Connor, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, George O'Connor, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Our European Policy for Managing Research Conflicts of Interest is available at www.stifel.com/institutional/ ImportantDisclosures.
WANdisco plc (WAND.LN) as of January 15, 2018 (in GBp)
02/23/2017 03/08/2017 04/24/2017 09/06/2017 09/26/2017 10/19/2017 12/04/2017 12/12/2017 01/09/2018 390.50 480.00 462.00 700.00 817.50 860.00 567.50 592.50 710.00 I:B:508.89 B:606.66* B:622.70* B:842.74* B:843.00* B:1,029.10* SU*:0.00* B*:1,062.22* B:1,062.22*
1,400
1,200
1,000
800
600
400 (GBp) Price
200
0 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18
*Represents the value(s) that changed. Powered by: BlueMatrix Buy=B; Hold=H; Sell=S; Discontinued=D; Suspended=SU; Discontinued=D; Initiation=I
For a price chart with our ratings and any applicable target price changes for WAND.LN go to http://stifel2.bluematrix.com/sellside/Disclosures.action?ticker=WAND.LN Stifel or an affiliate is a market maker or liquidity provider in the securities of WANdisco plc. Stifel or an affiliate managed or co-managed a public offering of securities for WANdisco plc in the past 12 months. Stifel or an affiliate has received compensation for investment banking services from WANdisco plc in the past 12 months. Stifel or an affiliate expects to receive or intends to seek compensation for investment banking services from WANdisco plc in the next 3 months. WANdisco plc is provided with non-investment banking, securities related services by Stifel or an affiliate or was provided with non-investment banking, securities related services by Stifel or an affiliate within the past 12 months. WANdisco plc is provided with investment banking services by Stifel or was provided with investment banking services by Stifel or an affiliate within the past 12 months. WANdisco plc is a client of Stifel or an affiliate or was a client of Stifel or an affiliate within the past 12 months. Stifel or an affiliate has received compensation for non-investment banking, securities related services from WANdisco plc in the past 12 months. Stifel or an affiliate is a corporate broker and/or advisor to WANdisco plc. The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on various factors, including Stifel’s overall revenue, which includes investment banking revenue. Our investment rating system is three tiered, defined as follows:
BUY -We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plus dividend yield.
HOLD -We expect a total return between -5% and 10% over the next 12 months with total return equal to the percentage price change plus dividend yield.
SELL -We expect a total return below -5% over the next 12 months with total return equal to the percentage price change plus dividend yield.
Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/or target price, and/or coverage due to applicable regulations or Stifel policies. SUSPENDED indicates the analyst is unable to determine a “reasonable basis” for rating/target price or estimates due to lack of publicly available information or the
23 WANdisco plc Company Update WAND – LSE January 16, 2018 European Software & IT Services
inability to quantify the publicly available information provided by the company and it is unknown when the outlook will be clarified. SUSPENDED may also be used when an analyst has left the firm.
Of the securities we rate, 49% are rated Buy, 38% are rated Hold, 2% are rated Sell and 11% are rated Suspended.
Within the last 12 months, Stifel or an affiliate has provided investment banking services for 21%, 7%, 0% and 12% of the companies whose shares are rated Buy, Hold, Sell and Suspended, respectively.
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24 WANdisco plc Company Update WAND – LSE January 16, 2018 European Software & IT Services
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The recommendation contained in this report was produced at 16 January 2018 02:15EST and disseminated at 16 January 2018 02:15EST.
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