WANdisco plc WAND – LSE; WAND.L
December 12, 2017 European Software & IT Services
BUY RESUMPTION OF COVERAGE WANdisco: ‘Thou and I will see him dine, When we bear him thither’; Resumption of Coverage Price (11 December 2017) 593p Summary Changes Previous Current We are resuming coverage of WANdisco following the expiration of a research restriction. Rating SUSPENDED BUY With cUS$22m in its coffers (the bills should be ‘deep and crisp and even’), WANdisco Target Price - 1,062p can now turbo charge organic growth and its ability to execute on TAM. Last week, in a Key data heavily over-subscribed (c5x) placing, WANdisco got a green light from shareholders to Bloomberg/Reuters codes: WAND LN / WAND.L fatten-up its balance sheet and hire new sales and engineering staff. WANdisco is being measured; the c10-15 FTE planned adds is not a large number, hiring will be partly ex-post Market cap (£m) 197 following the OEM sign-ups. The majority of the funds will be directed to the balance sheet, FTSE ALL SHARE 4,093 and so be a comfort to new blue-chip OEM partners and customers. As the prior shakier 1mth perf (%) (26.9) balance sheet didn’t deter partners, like IBM, Dell, Oracle and Amazon and a roster of blue- 3mths perf (%) (11.2) chip clients who saw that unique technology offer, our read-through is that bolstering the 12mths perf (%) 192.6 balance sheet is illustrative of mainstream (i.e., later adopters) enterprises migrating to 12mth high-low (p) 890 - 172 hybrid cloud computing. We see this (potential) market shift in a positive light, as it expands Free float (%) 75 TAM and should lead to stronger bookings and revenue growth at WANdisco; simply put, the product growth stage dwarfs the introduction stage. These users also need replication Key financials of continuously changing data, guaranteed consistency, no downtime and no business disruption, to be sure, but they also need greater comfort from seeing a beefy balance sheet. Year to Dec 2016A 2017E 2018E Here, we amend our forecasts to accommodate the new funds. Spoiler Alert: The forecasts Sales 11.4 16.8 20.9 are up – revenue ticks up, and the increased operating costs are absorbed by incremental EBITDA (adj) (7.5) (2.4) 0.0 revenue growth so profitability is enhanced, not dented. This is a good deal for investors as EV/EBITDA (x) (34.3) (99.1) 15,806.3 ‘Ye who now will bless the poor, Shall yourselves find blessing’. We increase our target price PE adj (x) NA NA NA to 1,062p (vs. 1,029p before we suspended coverage) and resume coverage with a Buy. EV/Sales (x) 22.5 14.2 11.6 EPS adj (c) (0.47) (0.25) (0.17) Key Points
Prices are as of close 11 December 2017 The transaction backstory. On 4 December 2017, WANdisco placed 2,971,069 new All sources unless otherwise stated: Company ordinary shares at 550p/share, and raised cUS$22m gross. The intention had been to data, FactSet, Stifel estimates raise US$10m. The placing shares were c7.8% of the existing issued ordinary share Share price performance (indexed) capital, and the price was just outside the strip: a 2.7% discount to the closing midmarket share price the prior trading day (1 December). With these fresh funds, WANdisco 450 400 promises ‘strong organic revenue growth’ as it deploys the cash to hire sales and 350 engineering staff, and build its channel and OEM capabilities. In addition, WANdisco 300 reported that it was: (i) experiencing strong organic revenue growth through IBM, Dell 250 and partnership deals and (ii) seeing significant new partnership opportunities. 200 150 Forecast changes. We have reflected the placing in our financial model, net/net (2017: 100 50 we increase cash; 2018: improved cash, increase costs assumptions reflecting new hires Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 with increased revenue expectations; 2019E: increase revenue to US$26.57m from US Absolute Rel.FTSE ALL SHARE (ASX) $24.29m as the new OEMs are on-boarded).
Upside risk to estimates. WANdisco has delivered two earnings upgrades this year. We have not altered our 2017 assumptions. WANdisco has said it is confident of achieving market expectations. We suspect that the risk to estimates is on the upside and investors may well see further earnings upgrades in the near term.
Sale of Director/PDMR shares. On 4 December, WANdisco also announced that certain existing shareholders, including the directors, David Richards and Yeturu Aahlad, had sold in aggregate 1,045,000 existing ordinary shares of 10p at 550p, c2.8% of the issued share capital. Prior to that sale, there were 52.7% of shares in the US; the director share sale brought the US owned proportion to 49.9%, thereby making this a UK offer.
Target price update. Our 12-month target price share is US1,431cents/1,062p, which implies 79% upside potential (GB£:US at $1.35.). WANdisco offers investors exposure to a business enjoying rigorous growth in a global target market, and to perhaps the ‘noisiest’ theme in IT currently – Big Data and hybrid cloud computing. We see ample evidence that the company is now positioned to accelerate growth. Our blended valuation model (taking in DCF US1,802 cents, sum-of-the-parts US1,145 cents and FCF yield US1,706 cents) leads us to our 12-month target price.
George O'Connor | +44 (0) 20 7710 7694 | george.o'[email protected] UK Sales Desk | +44 (0) 20 7710 7600 Completed: 12 December 2017 03:29EST Disseminated: 12 December 2017 03:29EST MiFID II - Research: Is your access agreed? CONTACT us today
Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages 27 - 29 of this report. WANdisco plc Resumption of Coverage WAND – LSE December 12, 2017 European Software & IT Services
Key data1 Key information
Key profit and loss data ($) Target price methodology/risks 2016A 2017E 2018E Target price methodology. We use a blended model to arrive at our Sales 11.4 16.8 20.9 12-month target price of US1,431cents/1062p (note: we are using GB EBITDA (9.3) (3.7) (1.4) £:US at $1.35), using discounted cash flow, sum-of-the- parts and free EBITDA margin (%) (81.3) (21.8) (6.5) cash flow yield. While WANdisco has a number of adjacent growth opportunities, we believe the ‘cash generation’ bias in our valuation Gross profit 10 16 19 methodology reflects how investors see the benefits of subscription- Net income (9.2) (13.0) (8.5) based business models. PBT rep (10.0) (13.9) (9.5) EBITDA adj (7.5) (2.4) 0.0 Risks to target price. In addition to general and macroeconomic risks, Depreciation & amortisation 9 8 8 the downside risks include continued deceleration in the source code DPS 0.00 0.00 0.00 and Big Data markets. This would impact cash inflow and thereby increase cash outflow and lessen investor interest. Upside risks include Key cash flow data ($) 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) (11.5) (9.6) Operating cash flow (2.2) 3.9 3.3 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) (23.8) (21.7) compute environments. Taxes paid (0) 1 1 Cash flow from investing 5 20 (2) Senior management FCF (8.3) (0.4) (2.0) David Richards - CEO Dividends 0.00 0.00 0.00 Cash at end of year 8 27 25 Erik Miller - CFO
Key balance sheet ($) Key dates 2016A 2017E 2018E Cash and cash equivalents 7.6 27.1 25.1 Jan 2018 - Trading update Total assets 20.2 39.1 37.1 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: ‘Thou and I will see him dine, When we bear him thither’
The Transaction backstory – What happened? According to WANdisco, it is experiencing strong organic revenue growth. It plans to use the placing proceeds to capitalise on its current momentum and to accelerate its growth ambitions. This is to be achieved primarily by investing in its partner sales channel, and by hiring channel managers and engineering staff to increase development capacity and testing. In our view, this should allow for parallel efforts with multiple partners to occur instead of the slower serial approach presently.
There is growing demand for big data replication solutions as enterprises are increasingly relying on the cloud, large scale data and existing data replication solutions, creating increasingly “unacceptable” outage times as the volume of data increases.
WANdisco’s go-to-market strategy leverages its OEM and strategic partners and it believes it must deepen its existing relationships and ink new ones in order to accelerate growth. WANdisco currently has two OEM relationships, IBM and Dell/EMC’s Virtustream and has partnerships with leading cloud technology companies, including Amazon Web Services, Cisco, Google Cloud, Hewlett Packard Enterprise, Microsoft Azure and Oracle, to resell its patented technology. In addition, the proceeds will strengthen the company's balance sheet, giving confidence to new strategic partners and customers.
Current Trading The Board remains confident that the company is on track to achieve market expectations.
Admission Placing Shares commenced trading 8:00AM on 11 December 2017.
Director/PDMR lock-up Following completion, David Richards and Yeturu Aahlad agreed not to dispose of any of their interests in ordinary shares for 12 months.
David Richards, CEO and Interim Chairman: “We are pleased with the support shown by both existing and new investors for this fundraising as we seek to continue to deliver strong organic revenue growth. The fundraising will enable us to enhance our ability to capitalise on the sizeable market opportunity, as we deepen and broaden our strategic partnerships in order to maximise our sales pipeline. In addition, the proceeds will strengthen the Company's balance sheet, giving confidence to new strategic partners and customers.”
Mr Richards’ Charitable share donation. After the deal closed, Mr. Richards made a charitable donation of 100,000 ordinary shares, for nil consideration, to the David and Jane Richards Family Foundation. The Foundation’s goal is to educate, empower and improve the lives of children in the UK and America, through hands-on programmes and targeted assistance. Mr. Richards commented: “I hope practical learning initiatives in computer science with real-world applications across all industries will open up new opportunities for young people and equip them to compete in the global job market.”
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Impact on forecasts
We have reflected the cash raise in our forecasts. Net/Net, the changes are as follows:
. 2017E: We increased cash to US$23.81m from US$4.89m previously; we assume net proceeds of the raise to be US$20m. Revenue and bookings are unchanged at US$16.8m and US$20.8m, respectively.
. 2018E: We increased operating costs to reflect new hires. We have increased the basic share count to 40.9m and added options. We increase revenue to US$20.85m from US$20.1m, 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, end cash at US$21.73m. We factored in the new share count.
. 2019E: We increased revenue to US$26.57m from US$24.29m 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 increase revenue to US$32.09m from US$29.1m, with adjusted EBITDA increased to US$7.8m from US$6.7m previously.
Figure 1: WANdisco: Summary forecast changes (US$m) New forecasts Prior forecasts Year to 31 December 2016A 2017E 2018E 2019E 2020E 2017E 2018E 2019E Bookings 15.5 20.8 30.63 40.48 50.21 20.8 29.3 40.6 ALM 8.4 8.3 7.88 7.64 7.54 8.3 7.9 7.6 Big Data 7.1 12.6 22.75 32.84 42.67 12.6 21.4 33.0 Turnover by type ALM 8.2 8.44 8.04 7.81 7.7 8.44 8.04 7.81 Fusion 3.2 8.37 12.82 18.77 24.4 8.37 12.06 16.48 Total turnover 11.4 16.81 20.85 26.57 32.1 16.81 20.10 24.29
Expenses -27.92 -27.12 -28.97 -31.28 -32.82 -27.12 -28.27 -29.90 Reported EBIT pre exceptional -17.89 -11.49 -9.58 -6.57 -2.98 -11.49 -9.58 -7.32 Adj EBITDA pre exceptional -7.46 -2.41 0.02 3.59 7.78 -2.41 0.02 2.84 Adj EBITDA pre exceptional inc. Dev expenditure -13.324 -7.90 -5.94 -3.06 0.80 -7.90 -5.86 -3.56 Weighted average basic shares (m) 33.29 37.66 40.90 40.90 40.90 37.66 37.66 37.66 Weighted average FD shares (m) 33.29 37.66 43.77 43.77 43.77 37.66 37.66 37.66
Diluted adjusted EPS (US$) -0.47 -0.25 -0.17 -0.09 -0.01 -0.25 -0.20 -0.13
Source: Company data, Stifel estimates Forecast methodology We model WANdisco using a range of inputs based on the demand environment, visible bookings traction, the fade rate and average selling prices. Our cost model assesses the gross margin by line of business and the operating cost model includes estimates for staff numbers and staff costs.
The bookings drivers WANdisco sells subscription licences. These are charged and then booked to revenue on a pro rata basis. Generally, a ‘booking’ has three components: the recognised revenue element (which could be a royalty), the deferred revenue element (billed and sitting on the balance sheet until revenue recognition conditions have been satisfied), and the ‘unbilled’ accounts receivable, or the amount that refers to contracts where WANdisco has yet to bill the customer. The model is complicated as royalties (i.e. the instantly recognised revenue element) increased to 60% of Big data bookings in H1/2017A results. However, subscription contracts would be for (say) year two or three of a three-year contract term. We have generated bookings by looking at these components across the ALM and Fusion/Big Data divisions (see table for our core assumptions).
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SCM/ALM assumptions . Short-term bookings growth is predicated on the H2 larger contract signings and some increase in the customer count, given a new focus on the division since H2/2016. We have used an 85% renewal rate.
. We have maintained pricing on new bookings despite the recent evidence that WANdisco is winning larger deals. On renewal bookings, we have factored in some ‘upsell’ success with the ASP increasing ahead of the general inflation rate. However, for add-on bookings, we have elected to keep the ASP deflating.
. We see a residual long tail bookings stream in SmartSVN.
Figure 2: WANdisco: SCM/ALM Bookings assumptions (US$m) Year to 31 December 2014A 2015A 2016A 2017E 2018E 2019E 2020E New customer booking 7.5 1.2 3.4 2.6 2.2 2.5 2.6 Customer count 46 20 17 21 20 22 23 Asp (US$000) 163.0 60.0 78.0 124.8 112.3 112.3 112.3 Add-on bookings 4.0 1.6 1.1 1.7 1.2 1.2 1.2 Customer count 54 49 40 38 30 30 30 Asp (US$000) 74.1 32.7 31.0 45.0 40.5 40.5 40.5 Renewal bookings 2.8 3.5 3.7 3.8 4.2 3.8 3.6 Customer count 68 83 59 58 65 65 65 Asp (US$000) 41.2 42.2 46.4 64.9 64.9 58.4 55.5 SmartSVN bookings 0.3 0.2 0.2 0.2 0.2 0.1 0.1 Total Bookings (US$m) 14.6 6.5 8.40 8.28 7.88 7.64 7.54 Total customer count 168 152 116 117 115 117 119 Average asp (US$000) 86.9 42.8 72.4 70.7 68.3 65.0 63.6 Bookings growth (%) -55.5% 29.2% -1.5% -4.8% -3.1% -1.3%
Source: Company data, Stifel estimates
Fusion assumptions . We envisage continued growth in the customer count, with new customer bookings growing markedly through our projections period. We also assume a stronger ‘Go Live’ rate from Fusion as WANdisco improves the rate by a mix of more experienced, more numerous staff dedicated to the function.
. Our model is built on the cost of storage. While we envisage flat cost/TB through our projections period, we see users buying incrementally more storage. We note IDC end-user research into Hadoop adoption concluded that storage was growing by c60% a year. We have used a cost/node methodology. While this is still valid, discussions with users suggest that the market is moving away from this.
. We have factored in an 80% renewal rate for 2017, rising to 80% in 2018 and then to 90% for 2019-20. The 90% rate is a better average for this sector.
. The risk in the forecasts is that the royalty numbers increase and in turn this accelerates revenue recognition.
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Figure 3: WANdisco: Fusion bookings assumptions (US$m) Year to 31 December 2014A 2015A 2016A 2017E 2018E 2019E 2020E New customer bookings 0.38 0.96 4.29 6.66 11.38 15.37 18.67 Customer count 9 17 15 25 44 66 89 Asp (US$000) 42 56.5 286.0 271.7 258.1 232.3 209.1 Go live 0.36 0.72 2.43 5.00 9.86 15.09 20.78 Customer count 3 6 9 17 32 48 65 Asp (US$000) 120 120 286 292 306 312 319 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 1.51 2.39 3.23 Customer count 1 5 7 16 27 43 59 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 12.56 22.75 32.84 42.67 Total customer count 10 26 32 40 69 110 155 Average asp (US$000) 280.0 96.2 221.7 266.1 319.3 383.1 459.8 IBM royalty 0.0 10.0 14.0 17.5 21.0 Bookings growth (%) -10.7% 183.8% 77.0% 81.2% 44.4% 29.9%
Source: Company data, Stifel estimates
How do we arrive at revenue? Revenue follows bookings at WANdisco, for both subscription and royalty bookings. As we commented, revenue is a pro rata from bookings as the revenue recognition conditions are satisfied. We therefore apportion our bookings across revenue and receivables, and factor in that revenue is also a function of prior period bookings. This model also gives rise to a book/bill ratio (see below). We were conscious that this will change over time as it will be influenced by contract terms and types.
Figure 4: WANdisco: Bookings to revenue (US$m) Year to 31 December 2014A 2015A 2016A 2017E 2018E 2019E 2020E Bookings 17.360 9.012 15.495 20.832 30.627 40.480 50.208 Growth -48.1% 71.9% 34.4% 47.0% 32.2% 24.0% Revenue 11.218 10.994 11.379 16.813 20.852 26.574 32.087 Growth -2.0% 3.5% 47.8% 24.0% 27.4% 20.7% Book:Bill 1.5 0.8 1.4 1.2 1.5 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 H1/2017A results on 5 September, 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.
. 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
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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? . We assumed six quota-carrying sales staff with an average ‘bag’ of US$1.5m. On 75% utilisation, they generate US$6.75m. For 2017E, there is a further US$8.2m from deferred and US$4m from OEM, suggesting ‘doable’ revenue of US$18.9m.The balance sheet release means that the new sales hurdle is low –c55% of revenue is already pre-sold subscription contracts
. Survey data suggests that our growth in storage could be on the conservative side. We note IDC analysts suggest that Hadoop users averaging storage Y/Y growth of c60%-plus. Also, the survey data suggests some large Hadoop clusters, which are already larger than our assumptions.
. We are still at the early stages of this technology. Usage patterns are based from users who have themselves limited experience with Hadoop in production (rather than test and experimentation) deployment.
The staff-adjusted cost model As in the mainstay of technology companies, while profit is seen as a function of Sales & Marketing, Administrative and R&D costs, in our view, the most important cost is the ‘people’. Salaries are the mainstay of the operating costs. We attempt to capture this dynamic in our cost model, in which we take a ‘bottom up’ approach. Here, we use the reported cost of staff and project forward on the basis of: (1) wage inflation/deflation; and (2) assumed headcount numbers. Our assumptions are outlined in the table below:
Figure 5: WANdisco: Staff economics (US$m) Year to 31 December 2016A 2017E 2018E 2019E 2020E Staff numbers Software development 83 70 77 80 81 Selling & Distribution 34 25 34 38 39 Administration 17 23 17 17 17 Average headcount 134 118.0 128.0 135.0 137 Growth in staff (%) -16% -12% 8% 5% 1% Employee productivity Revenue/employee (US$’000) 84.92 142.48 162.91 196.84 234.21 Employee cost Staff costs -13.14 -11.86 -13.25 -14.39 -15.12 Cost/employee (US$’000) -98.06 -100.51 -103.52 -106.63 -110.36 Growth in cost/employee (%) 8.0% 2.5% 3.0% 3.0% 3.5% R&D assumptions Staff 83 70 77 80 81 Staff salary rate (US$’000) 117.67 120.61 119.05 127.95 132.43 Spend related SW development (US$m) 9.77 8.44 9.17 10.24 10.73 R&D staff 54 46 50 52 53 R&D staff / total Software developers 65% 65% 65% 65% 65% Development spend 5.86 5.49 5.96 6.65 6.97 R&D capitalised 5.86 5.49 5.96 6.65 6.97 Pre exceptional EBITDA less capitalised R&D -13.32 -7.90 -5.94 -3.06 0.80
Source: Company data, Stifel estimates
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Points to ponder
1. Why did WANdisco raise money at a devalued share price? We recall that WANdisco's share price was down 35% in November; by contrast, FTSE All Share fell a miserly 1% in the current ‘mini-correction’. Usually, a c30%plus fall will reflect a forecast downgrade (the company reiterates guidance/we are relaxed about our FY estimates), a shock ‘C’-level change (the new team at WANdisco is happily ensconced – seen at the recent CMD), a client defection of some kind (nope) or maybe a cash or accounting related issued – not likely on CFO Erik Miller’s watch – remember this newbie shrunk the cash burn from US$5.3m to US$0.6m at H1/2017A interim results. Or maybe the fall reflects a problem with TAM – also not the case.
For us, the share price fall was emblematic that WANdisco is caught in that ‘AIM illiquidity’ trap – by this, a small number of shares drift on to the market, in weak conditions they create downward price pressure as traders ‘find’ the buyer. This in turn, encourages other folks, maybe distressed, to sell and (hey presto) a self-fulfilling, self-created, downward price spiral occurs. At the same time, WANdisco faced an operational imperative to hire, given the opportunities pipeline. As we have seen, first hand, the new account onboarding team at WANdisco, we appreciate that the company has been stretched in its resources. While WANdisco was caught between the proverbial ‘rock and a hard place’, supporting investors got a very good deal. In addition, as management sold shares in order to ensure that this qualified as a UK deal, with less than 50% of shares held in the US, management had to sell down in order to expedite the deal – they ended as double losers.
2. 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 cases (see below) becomes more pressing for enterprises as they migrate to a hybrid cloud computing environment.
The expanding use case . 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.
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. 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) mirroring 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 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. 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.
3. 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.
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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.
4. The shift of mainstream enterprise adopting Hybrid cloud In the introduction of this report, we 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.
To help illustrate this point, we note that products go through definite lifecycle. In turn, this product lifecycle informs the company (i.e. a collection of products) valuation. In the figures below, we attempt to model this effect.
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Figure 6: Stylised four-stage product life cycle
Chasm here
time Product Growth Maturity Decline Introduction
Source: Stifel Research
Figure 7: Our stylised four-stage product life cycle – explained Stage Characteristics Product First marketing occurs. Prior to the first customer delivery, the product is extensively developed. The Introduction establishment of test sites before this stage (also known as beta testing) is the norm. Slower sales growth in this initial stage can be attributed to factors like delays in the expansion of production capacity, technical hitches, inadequate distribution channels and a lack of customer acceptance of innovations. Sophos and its Project Galileo (next-generation end-user, server and network technologies all working together) due in the market this calendar year is illustrative. Growth The product has been accepted by the market and sales increase substantially. Competition is strong and as a result pricing, features and marketing issues start to become important. However, demand is strong enough so that the original pricing remains relatively unchanged. Market growth is stimulated by issues such as improvements to product quality and new features, new market segments and new distribution channels Maturity Traditionally the longest stage of the product lifecycle. This is characterised by demand beginning to ebb and sales growth slowing. Price cuts occur and discounts increase. Decline This refers to the stage of a sales decline and withdrawal from marketing.
Source: Stifel Research
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Looking at the run into the year end
We are (even more) relaxed about FY/2017E forecasts. As it announced the cash call, WANdisco stated that it remained ‘confident that the company is on track to achieve market expectations’. We are comfortable with our FY2017E estimates, which are, we believe, readily achievable. WANdisco’s subscription model means: (i) half the H2 revenue requirement drifts in from the balance sheet already (recall that US$14.5m deferred revenue balance at H1/2017A results), and (ii) the rest is comprised of the healthy outlook at the SCM division – a positive upswing at interim results from its c200 customers. Also, Fusion benefits from its product release cycle – note the 2.11 release (see below), which will fuel upgrades and new wins. In addition, we remind investors of the upbeat presentation from IBM at WANdisco’s CMD and of course the latest channel partner, Virtustream, which comes with a large booking. IBM’s OEM revenue is ‘royalty’ and so has in-period revenue recognition, unlike subscription revenue, which is deferred. All in, the H2/2017E revenue hurdle is very doable and does not require any new extra-large contracts in order to achieve estimates.
The table (see below) shows the teardown of our WANdisco H2/2017E expectations. While the source of revenue is illustrated by the product groups, SCM and Fusion, we should add that cUS$3.5m comes from deferred revenue. This means that the ‘new’ revenue hurdle is a comfortable US$3.7m. While the H2/2017E ‘hurdle’ may not seem demanding given WANdisco’s H1 revenue strength, in crafting our forecasts we were keen to remove as much of the exposure to royalty contracts as possible. However, a key defining attribute of WANdisco's H1/2017A was undoubtedly the strength of its sales momentum. Then Fusion bookings were +173% YoY to US$7m as WANdisco announced:
. US$4.1m contract with a major financial services multinational
. First contract in retail with a US$2.0m order from a major retailer
. US$0.65m order from a US Healthcare corporation
Figure 8: WANdisco: H2/2017E teardown (US$m)goes here Year to December US$m 2016A H1/2017A H2/2017E 2017E Bookings 15.5 10.2 10.6 20.8 ALM 8.4 3.2 5.1 8.3 Big Data 7.1 7.0 5.6 12.6 Turnover by type ALM 8.2 4.6 3.9 8.44 Fusion 3.2 5.1 3.3 8.37 Total turnover 11.4 9.7 7.2 16.81
Cost of sales -1.35 -0.93 -0.24 -1.18 Gross profit 10.03 8.73 6.91 15.64 Expenses -27.92 -12.48 -14.64 -27.12 Reported EBIT pre exceptional -17.89 -3.76 -7.73 -11.49 Our adjustments: Share based payments 1.79 0.46 0.79 1.25 Acquisition related items 0.00 0.00 0.00 0.00 Depreciation & Amortisation 8.64 3.55 4.27 7.82 Adj EBITDA pre exceptional -7.46 0.25 -2.67 -2.41
Source: Company data, Stifel estimates
In H1/2017A, WANdisco started to see the benefit from its IBM OEM contract. At WANdisco's CMD, 17 October, Nick Dimtchev, Business Unit Executive, IBM/Hortonworks Alliance Global Sales Leader spoke to investors about previous cases where IBM had taken a US$20-30m revenue business and transformed it to a US$200 - 300m one in a few years. That was the intention with IBM Big Replicate (i.e. the WANdisco Fusion OEM product). Mr Dimtchev talked to investors about how IBM has made this a repeatable structured process which starts with the customer use case and how much they will pay.
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Dovetailing with industry analyst Mr Burris comments, Mr Dimtchev stated that distributed data, different types of data and ensuring that the customer has the right data to run their applications is a critical success factor. Of the comments:
. The importance of the ‘data landing zone’. IBM has signed two OEM agreements in this business area, WANdisco, and more recently Hortonworks. IBM sees Hortonworks as the number 1 Hadoop distribution.
. Why did IBM chose WANdisco? (i) It supports multiple databases and so gives IBM the flexibility to be heterogeneous, like the target customer base. (ii) There are no other enterprise-grade alternatives for restore and data replication. (iii) WANdisco Fusion solves big enterprise user pain points and it has a tangible ROI.
. Who are the target customers? These are typically regulated industries such as Banking, Insurance, Telco and Manufacturing, where the customers are complex and large (20 – 4,000 Hadoop nodes) and in production mode (i.e. they have moved from using Hadoop for test and development). They are all looking to reduce cost of ownership and risk.
. Why does IBM BigReplicate win? (i) It is not just one product and customers like the ‘one-stop shop’ integrated product as part of the wider IBM product family, (ii) it plays a role as part of IBM’s hybrid cloud strategy – thereby helps customers migrate at their pace, (iii) the IBM wider focus and investment in big data, i.e. analytics and Watson, (iv) the strategic alliance with Hortonworks.
. The customer use case. Mr. Dimtchev talked though a use case based on downtime, which had been costing the customer US$466k per incident. For this customer, over three years, IBM was able to demonstrate savings of US$9.3m.
. How many potential customers? Including the c100 Hortonworks customers, Mr. Dimtchev talked about up to 2,000 customers and that IBM was looking to extend outside North America and Europe. The deals would be very large transactions (i.e. multi-million dollar value deals). In Q&A, WANdisco CEO David Richards talked about a US$700m deal (value to IBM contract) and later, chatting with Mr. Dimtchev, he also talked though other similarly very large deals.
. See more — the CMD is here:
http://webcasting.brrmedia.co.uk/broadcast/preview/59d65608d349960788385d17
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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 H1 numbers headline with news of record bookings +97% Y/Y, 109% growth in H2 bookings, FY total bookings +72% Y/Y. Following a US$14m fund raising in summer 2016, cash stood at US$7.6m on 31 December, up from US$1.1m at 30 June 2016.
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The new multi-layered sales and distribution model is thriving A key focus for 2016 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, 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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Risks
The fundraising addresses cash as a key risk. The other risks 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. Later in this report, we look at two case studies (Airbnb and Netflix) to illustrate what cash- and engineering-rich companies can do for themselves.
. 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
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Blockchain file. As such, the Blockchain database uses a distributed consensus model. Each block 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 (see below), 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 like Perforce or Subversion. Git has surged in recent years, and companies like GitHub and (to some extent) Atlassian have done a better job a 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, and too prone to receiving competitor calls. In Sheffield, they
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may be too scarce. In Northern Ireland, they might not be skilled enough. We like the global nature of WANdisco, and think the company needs to have a distributed office structure to mirror how its customers are organised.
Staff are expensive We refer to ITJobswatch for an impression of UK software developer costs for contractor and full-time staff. Staff costs are c70% of any tech company’s operating spend. Most of WANdisco’s staff are in three locations. Of these, we note that a Hadoop developer in the UK is £800-850/day for a contractor, c£64,000 per annum full time. This is a UK average, and local rates in Sheffield will be cheaper than the same role in the City of London. The same role in San Francisco will average US$112,000 for FTE – that translates to £90,000, or c40% more on a ceteris paribus basis. While the issue of staff costs will be food for thought, balancing this we recall a conversation with analysts at Gartner, who noted that there was a big difference in two hypothetical developers just on the basis of the influence of the surroundings, and suggested that developers are better in somewhere like Silicon Valley, as it is a magnet for new thought and best practice.
Figure 9: IT contractor & full time day rates – trend since 2011 (£) Contractor Full time Annual totals Daily rate Sequential change Annual rate Sequential change 2011 £421.9 £42,870 2012 £390.7 -7.4% £41,544 -3.1% 2013 £392.0 0.4% £42,037 1.2% 2014 £391.4 -0.2% £43,193 2.7% 2015 £403.3 3.1% £44,220 2.4% 2016 £421.0 4.4% £45,688 3.3% 2017 £ 435.8 3.5% £46,327 1.4%
Source: ITJobswatch.co.uk
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Competitive overview
Signing agreements with key players in the space (IBM, Oracle, Dell, Amazon and Microsoft) all indicate that: (i) WANdisco IP is extremely broad, (ii) there is a general acknowledgement that there isn’t anyone doing anything similar, and, in their view, (iii) WANdisco has a multi-year head-start over anyone. There is no direct competitor. However, looking into the market we see a number of competitive areas:
. We can see operational overlaps with ETL (Extract, Transform, Load) vendors in the data migration business. The long list of established companies focused on this area includes Informatica, Information Builders, SAS and Syncsort. Here, the competitive threat can be somewhat overplayed.
. There is also some overlap with the database replication vendors. This is more often a master/slave architecture between the original and the copies. The master logs the updates, which then ripple through to the slaves, which output a message, stating that it has received the update successfully, thus allowing the sending (and potentially re-sending until successfully applied) of subsequent updates. In the case of multi-master replication, the updates can be submitted to any database node, and then ripple through to other servers – but here the challenge is transactional conflict prevention. Database replication also becomes difficult when it scales up.
. In addition, there are more niche Big Data replication vendors like Attunity, Denodo, Talend and many others. Looking at (e.g. Attunity), we note that its Replicate software helps load and ingest data across all major databases, data warehouses and Hadoop, on-premises and in the Cloud. Attunity’s customer base for this product set is estimated to be c2,000 organisations globally. Through capabilities for replicating data to and from the Cloud, and accelerating data warehouse deployments, Big Data (Hadoop) and workload optimisation support, Attunity enables a broad scope of integration styles, and also supports Apache Kafka by enabling real-time intertwining of data movement.
. The most potent are the IaaS and PaaS vendors. Here we find the solution is first to put hardware server technology at the problem. Note for example that Amazon Web Services has disaster recovery. But looking at the offer, we note Amazon has an AWS Import/Export feature when users are moving large amounts of data into and out of AWS – it is portable storage device, which for data sets of significant size, AWS Import/Export is often faster than Internet transfer. For data migration, as customers move to the Cloud, AWS offers Amazon Relational Database Service, alongside Amazon DynamoDBis (a NoSQL database), and Amazon Redshift is a fully managed, petabyte-scale data warehouse service.
. Other Cloud infrastructure software vendors, such as distro Cloudera or Hortonworks. We have seen distros and infrastructure Hadoop companies launch their own, mostly, Disaster Recovery based solutions. For example, Cloudera Manager Backup and Disaster Recovery (BDR) is its Hadoop DR offer. These are typically active:passive and likely reflect early Hadoop usage and the use of non-mission critical applications. On user forums, we find lots of interest in using the ‘snapshot feature’ in HDFS. These will take a point in time image, which in truth could be for an entire file system, a sub-tree in a file system or just a file. Clearly this will not capture the incremental data changes, and snapshotting can be bandwidth-intensive.
. Other technology solutions – here, we have Raft and to some extent Blockchain, yet neither has a major commercial endorsement. Docker is also lurking in the background. While not directly competitive, it allows users to develop distributed computing systems by using software ‘containers’. Docker can be integrated into various infrastructure tools, including Amazon Web Services, Ansible, CFEngine, Chef, Google Cloud Platform, IBM Bluemix, HPE Helion, Microsoft Azure, OpenStack, Oracle Container Cloud Service and others. According to industry analysts 451
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Research, ‘Docker is a tool that can package an application and its dependencies in a virtual container that can run on any Linux server. This helps enable flexibility and portability on where the application can run, whether on premises, public Cloud, private Cloud, bare metal, etc.’ Kafka also deserves a mention. Kafka is used for building real-time data pipelines and streaming applications. This is an Apache Open Source project. Kafka lets users publish and subscribe to streams of records so it is a messaging system. Kafka also lets users store streams of records in a fault tolerant way. So we can see advantages like scalability and fault-tolerance so there is some overlap with WANdisco. Kafka is also widely used and it may become more popular as users look to ingest data into a Hadoop cluster and then cleanse it. (Consider a use case: you might trawl the web for all references for all daily commuters into the City of London – use Kafka to gather that raw data. Then run an analytics to find the only Irish guy with five kids.)
. DIY. (1) Airbnb posted a blog detailing its migration of a Hive warehouse. The warehouse had grown from 350TB in mid-2013 to 11PB by the end of 2015. The sheer size of the warehouse gave rise to issues of reliability, so Airbnb opted to migrate to a new architecture. Airbnb decided that existing migration tools either had issues with a large data warehouse or had a significant operational overhead, so it developed ‘ReAirto’ to save time and effort when replicating data at this scale. Initially, all the data was in a single HDFS/Hive warehouse, but the mixed production with ad hoc workloads led to reliability issues. Airbnb split the warehouse in two: production jobs and ad hoc queries. It then had to migrate the large warehouse, and then after the split keep datasets in sync. It developed ‘ReAir’ to do this, and has since open-sourced the tool for the community. ‘ReAir’ is useful for replicating data warehouses based on the Hive metastore, and Airbnb has made these tools to be scalable to clusters which are petabytes in size. ReAir can work across a variety of different Hive and Hadoop versions and can operate largely standalone.
. ReAir includes two replication tools: batch and incremental.
. A batch replication tool to copy a specific list of tables at once, which is ideal for a cluster migration.
. An incremental replication tool to track changes that occur in the warehouse and replicate the objects as they are generated or modified. This keeps datasets in sync between clusters as it starts copying changes within seconds of object creation.
. Link to GitHub: https://github.com/airbnb/reair
. (2) Netflix has a loosely coupled microservice-based architecture that emphasises separation of concerns. It has developed EVCache, its data-caching service that provides the low-latency, high reliability caching solution, and it routinely handles upwards of 30m requests/sec, storing hundreds of billions of objects across tens of thousands of memcached instances, translating to c2 trillion requests a day globally. When Netflix launched in 130 additional countries, it built EVCache’s global replication system. EVCache is Open Source, and has been in production for more than five years. Netflix’s Cloud-based service is spread across three Amazon Web Services (AWS) regions. While requests are mostly served from the region the member is closest to, this can change due to (say) problems with infrastructure or a regional/geographic failover, so because of this Netflix has a stateless application server architecture, whereby a server can take a request from any region.
. Consequently the data must be replicated to all regions so it’s available to serve member requests no matter where they originate. Netflix designed EVCache for itself, so it admits that one non requirement was to have strong global consistency. Remember that Netflix doesn’t mind if (say) the Ireland and Virginia servers have slightly different recommendations for the same person as long as the difference does not impact browsing or streaming experience. For non-critical data, Netflix has an “eventual consistency” model for replication, whereby local or global differences are tolerated for a short time. This simplifies the EVCache replication design, and means that Netflix
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did not worry about global locking, quorum reads and writes, transactional updates, partial-commit rollbacks or other complications of distributed consistency.
Figure 10: Competitive overview
Source: Stifel Research
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Target price and valuation
Our 12-month target price share is US1,431cents/1,062p, which implies 79% upside potential (note: we are using GB£:US at $1.35.). 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 US1,802 cents, sum-of-the-parts US1,145 cents and FCF yield US1,706 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 US1,431 cents/1062p (note: we are using GB£:US at $1.35), 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: US1,802 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: US1,145 cents. Here, we disentangled the divisions (ALM and Big Data) and applied standard multipliers, based on our latest sector valuation results. We arrive at a value of US538 cents. We also assumed a 15% corporate overhead, which is a common aspect of sum-of-
22 WANdisco plc Resumption of Coverage WAND – LSE December 12, 2017 European Software & IT Services
the-parts valuation models. We highlight 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 US1,706 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$2.08m. If we apply a 0.5% FCF yield to this, we arrive at our valuation.
The broader consensus valuation peer group. We keep tabs on a number of companies who while they are weak operational comparisons they have a use in informing our valuation thinking. The latest operational and valuation ratios from this group are as follows:
Figure 11: Consensus Valuation data (x) EV Share Revenue growth EBITDA growth EBITDA margin EV/EBITDA (x) EV/Sales (x) PE (x) EV/FCF (%) Company (US$m) (p) FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 WANdisco WAND LN 316.9 592.5 49% 20% na na -29% -11% -64.2 -144.7 18.7 15.6 -23.2 36.6 0.1% 0.2% First Derivatives FDP LN 470.9 1455.0 15% 15% na 16% 31% 32% 22.6 19.5 7.1 6.2 na 23.6 2.5% 3.1% Tableau* DATA US 4752.0 71.4 6% 8% na na 4% 5% 147.5 109.6 5.4 5.0 392.4 3.5 3.3% 3.6% Splunk** SPLK US 10397.6 81.0 31% 25% na na 12% 13% na 50.1 8.4 6.7 139.4 1.0 2.3% 3.1% Hortonworks HDP US 1337.5 19.9 39% na na na -9% na -56.4 na 5.2 na -14.3 na Na na Talend TLND US 1096.5 40.9 40% na na na -15% na -48.2 na 7.4 na -51.8 na Na na MicroStrategy MSTR US 895.5 134.7 -2% na na na na na na na 1.8 na 23.0 na Na na Attunity ATTU US 134.5 7.1 13% 18% na 29% 6% 7% 34.8 26.8 2.2 1.9 1007.1 0.4 Na na Atlassian TEAM US 10133.5 46.7 na na na na na na 46.5 34.8 12.0 9.3 98.7 0.7 2.6% 3.4% Cloudera** CLDR US 1909.7 16.9 39% 27% na -16% na na -19.3 -22.9 5.3 4.2 -16.9 -0.3 -3.6% -1.5% MongoDB** MDB US 1485.8 25.1 45% 37% na 6% na na -19.9 -18.7 10.1 7.4 -13.7 -0.2 -3.7% -4.3% New Relic NEWR US 3099.4 60.4 32% 26% na 280% 3% 8% 322.3 84.9 8.9 7.0 -279.7 2.7 0.2% 1.1% Average 28% 22% 0% 63% 0% 9% 36.6 15.5 7.7 7.0 114.6 -0.6 0.5% 1.1%
*Followed by colleague Tom Roderick **Followed by Brad Reback Note: Priced 11December 2017, 16:35 GMT Source: Bloomberg data
23 WANdisco plc Resumption of Coverage WAND – LSE December 12, 2017 European Software & IT Services
Figure 12: Profit & loss (US$m) Year to 31 December 2016A 2017E 2018E 2019E 2020E Bookings 15.5 20.8 30.63 40.48 50.21 ALM 8.4 8.3 7.88 7.64 7.54 Big Data 7.1 12.6 22.75 32.84 42.67 Turnover by type ALM 8.2 8.44 8.04 7.81 7.7 Fusion 3.2 8.37 12.82 18.77 24.4 Total turnover 11.4 16.81 20.85 26.57 32.1
Cost of sales -1.35 -1.18 -1.46 -1.86 -2.25 Gross profit 10.03 15.64 19.39 24.71 29.84 Gross margin (%) 93% 93% 93% 93% 93%
Operating costs Expenses -27.92 -27.12 -28.97 -31.28 -32.82 Reported EBIT pre exceptional -17.89 -11.49 -9.58 -6.57 -2.98 Our adjustments: Share based payments 1.79 1.25 1.38 1.51 1.66 Acquisition related items 0.00 0.00 0.00 0.00 0.00 Depreciation & Amortisation 8.64 7.82 8.22 8.64 9.09 Adj EBITDA pre exceptional -7.46 -2.41 0.02 3.59 7.78 Margin (%) -0.66 -14% 0% 14% 24% Exceptional costs 8.11 -2.30 0.00 0.00 0.00 Adj EBITDA post exceptional 0.65 -4.71 0.02 3.59 7.78 Adj EBITDA pre exceptional inc Dev expenditure -13.324 -7.90 -5.94 -3.06 0.80 Depreciation -0.17 -0.20 -0.22 -0.24 -0.27 Adj EBITA -7.638 -2.62 -0.20 3.35 7.51 Net Interest -0.27 -0.14 0.06 0.07 0.09 Adjusted pre tax profit -7.91 -2.76 -0.14 3.42 7.60 Exceptional items 8.11 -2.30 0.00 0.00 0.00 Share based payments -1.787 -1.25 -1.38 -1.51 -1.66 Intangible amortisation -8.466 -7.62 -8.00 -8.40 -8.82 Pre-tax profit post exceptional -10.046 -13.93 -9.52 -6.49 -2.88
Taxation 0.772 0.81 0.85 0.89 0.94 Profit after tax -9.274 -13.12 -8.67 -5.60 -1.94 Other income 0.107 0.11 0.12 0.12 0.13 Dividends 0.0 0.00 0.00 0.00 0.00 Reported retained profit post exceptional -9.167 -13.00 -8.55 -5.48 -1.81 Weighted average basic shares (m) 33.29 37.66 40.90 40.90 40.90 Weighted average fully diluted shares (m) 33.29 37.66 43.77 43.77 43.77
Diluted adjusted EPS (US$) -0.47 -0.25 -0.17 -0.09 -0.01
DPS (US$) 0.0 0.0 0.0 0.0 0.0
Source: Company data, Stifel estimates
24 WANdisco plc Resumption of Coverage WAND – LSE December 12, 2017 European Software & IT Services
Figure 13: Cash flow (US$m) Year to 31 December 2016A 2017E 2018E 2019E 2020E Operating Profit -9.27 -13.12 -8.67 -5.60 -1.94 Depreciation & Amortisation 8.64 7.82 8.22 8.64 9.09 Share based payments 1.82 1.25 1.38 1.51 1.66 Increase/(decrease) creditors/payables 0.83 0.75 0.62 0.60 0.69 Increase/(decrease) deferred income 2.74 2.73 2.75 2.71 0.00 (Increase)/decrease debtors/receivables 0.33 -0.53 -1.03 -1.39 -0.57 (Increase)/decrease in Gov grant -0.01 0.00 0.00 0.00 0.00 Working capital 3.88 2.95 2.33 1.93 0.12 Other -7.24 5.00 0.00 0.00 0.00 Operating cash flow -2.18 3.90 3.26 6.48 8.93 Cash conversion 23% -30% -38% -116% -459% Net interest -0.17 -0.14 0.06 0.07 0.09 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 -4.94 -5.90 -6.32 -6.76 Free cash flow -8.35 -0.44 -2.05 0.79 2.84
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 -0.44 -2.05 0.79 2.84
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 19.56 -2.05 0.79 2.84
Opening cash / (debt) 2.56 7.56 27.12 25.07 25.85 Closing cash / (debt) 7.556 27.12 25.07 25.85 28.69
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 23.81 21.73 22.50 28.69
Source: Company data, Stifel estimates
25 WANdisco plc Resumption of Coverage WAND – LSE December 12, 2017 European Software & IT Services
Figure 14: 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 27.12 25.07 25.86 28.70 Trade debtors 6.15 6.68 7.71 9.10 9.67 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 33.80 32.78 34.96 38.37 Total assets 20.17 39.09 37.05 39.84 43.22
Current liabilities (Payables) Short-term debt 0.09 0.09 0.09 0.09 0.09 Trade creditors 3.49 4.24 4.86 5.46 6.15 Deferred income 5.81 8.54 11.29 14.00 14.00 Current tax liabilities 0.01 0.00 0.00 0.00 0.00 Deferred government grant 0.01 0.01 0.01 0.02 0.02 Total current liabilities 9.41 12.88 16.25 19.57 20.26
Net Current Assets 4.29 20.92 16.53 15.39 18.11 Total Assets-Current Liabilities 10.76 26.21 20.80 20.28 22.95
Non-current liabilities Deferred income 6.68 8.98 13.21 17.46 21.65 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 12.39 16.64 20.92 25.15 Total Liabilities 16.39 25.27 32.89 40.49 45.41 Net assets 3.78 13.81 4.16 -0.64 -2.19
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 -108.03 -120.39 -126.51 -129.70 Shareholders’ funds 3.78 13.81 4.16 -0.64 -2.19 Equity and liabilities 20.17 39.09 37.05 39.85 43.23
Source: Company data, Stifel estimates
26 WANdisco plc Resumption of Coverage WAND – LSE December 12, 2017 European Software & IT Services
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.
WANdisco plc (WAND.LN) as of December 11, 2017 (in GBp)
02/23/2017 03/08/2017 04/24/2017 09/06/2017 09/26/2017 10/19/2017 12/04/2017 390.50 480.00 462.00 700.00 817.50 860.00 567.50 I:B:508.89p B:606.66p B:622.70p B:842.74p B:843.00p B:1,029.10p SU*:NA 1,000
800
600
400 Price (GBp) Price 200
0 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
*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. 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 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.
27 WANdisco plc Resumption of Coverage WAND – LSE December 12, 2017 European Software & IT Services
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28 WANdisco plc Resumption of Coverage WAND – LSE December 12, 2017 European Software & IT Services
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