WANdisco plc WAND – LSE; WAND.L March 7, 2018 European Software & IT Services BUY COMPANY UPDATE WANdisco Finals: [epub ahead of print] Price (6 March 2018) 755p Summary Changes Previous Current Rating - BUY WANdisco brings some California sparkle to a dank London morning with its FY2017A Target Price 1,067p 1,081p results. WANdisco pre-announced (16 January) that it had exceeded our bookings forecasts, today we see revenue, Adj EBITDA and cash all crush expectations. The start- Key data turn was ‘Fusion’ with bookings +121% YoY to US$15.7m, (iii) Average Contract Value Bloomberg/Reuters codes: WAND LN / WAND.L continues to increase, with several US$1m+ contracts and, (iii) cash overheads were Market cap (£m) 251 contained at US$24.5m, from US$23.4m Y/Y. As we factor in cash burn down to US$5.3m, FTSE ALL SHARE 3,946 US$8.3m Y/Y this is a blue riband performance, and the third beat & raise from CFO 1mth perf (%) 6.0 Erik Miller. As we bake these results into our forecasts we raise 2018E revenue from US 3mths perf (%) 28.0 $21.9m to US$24.46m and Adj EBITDA from US$1.0m to US$1.28m – savour that profit. 12mths perf (%) 48.0 Whilst it is easy to get carried away with the numbers, in truth we are more impressed 12mth high-low (p) 890 - 362 by CEO Mr Richards: (i) ability to drive a deep transformation while ensuring the integrity Free float (%) 75 of the deep technical skill base (R&D spend US$6.3m, US$5.9m Y/Y). (ii) Re-building sales around Tier 1 hyperscale vendors such as Amazon, Dell, Google, IBM, Microsoft Key financials and Oracle – although IBM is still the mainstay of the royalty revenue which increased to US$8.3m, US$1 Y/Y. (iii) By evolving Fusion as a general data replication platform (i.e. Year to Dec 2017A 2018E 2019E no longer the Hadoop/on-premise-play) there is shareholder value 'in the moment' and Sales 19.6 24.5 29.0 for the long term as Fusion now better maps onto a changing hybrid/multi-cloud market. EBITDA (adj) (0.6) 1.3 6.0 The forecast changes increases our target price to 1081p (1,062p). We retain our Buy. EV/EBITDA (x) (560.9) 257.3 54.9 PE adj (x) NA NA NA EV/Sales (x) 16.6 13.5 11.4 Key Points EPS adj (c) (0.19) (0.13) (0.03) Final results headlines. Record bookings +45% Y/Y to US$22.5m, Fusion is +121% to Prices are as of close 6 March 2018 US$15.7m, SCM at US$6.8m. Group revenue +73% to US$19.6m, vs Stifel US$18.6m All sources unless otherwise stated: Company featuring Fusion revenue, US$11.1m +249% Y/Y and SCM at US$8.5m, up US$0.3m data, FactSet, Stifel estimates Y/Y. Cash overheads US$24.5m, US$23.4m Y/Y, Adjusted EBITDA loss US$0.6m, US Share price performance (indexed) $7.5m Y/Y, and ahead of Stifel US$1.8m loss. Following a placing, cash was US$27.4m, US$7.6m Y/Y, with pleasingly the cash burn US$5.3m, down from US$8.3m Y/Y. 200 180 Operational highlights. (i) Established a partner ecosystem with an OEM partnership 160 with Virtustream, a Dell Technologies company, worth a minimum of US$3.6m over 3 140 years. (ii) Integrated WANdisco Fusion with Amazon Web Services Snowball, Microsoft 120 Azure Databox and HD Insights (iii) IBM secured two record contract wins with ‘major 100 global financial institutions’, each worth in excess of US$4m. (iv) First contract wins with 80 marquee clients in the retail and healthcare sectors. 60 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Absolute Rel.FTSE ALL SHARE (ASX) David Richards, CEO and Interim Chairman: “Our strategy is delivering clear results; we have increased revenue by 73% while maintaining control of our costs, bringing us significantly closer to our goal of cash flow breakeven. We have started 2018 with a strong new business pipeline and I am confident WANdisco is well positioned to take advantage of a wide range of sizeable growth opportunities.” Impact on forecasts. We have changed 2018E forecasts to reflect the news. We have raised FY2018E revenue to US$24.46.6m, from US$21.9m prior. In addition we raised Adj EBITDA to US$1.28m from US$1.0m prior estimate. See table (enclosed) for further detail. Completed: 7 March 2018 02:45EST George O'Connor | +44 (0) 20 7710 7694 | george.o'[email protected] Disseminated: 7 March 2018 02:45EST UK Sales Desk | +44 (0) 20 7710 7600 Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages 27 - 29 of this report. WANdisco plc Company Update WAND – LSE March 7, 2018 European Software & IT Services Key data1 Key information Key profit and loss data ($) Target price methodology/risks 2017A 2018E 2019E Target price methodology. We use a blended model to arrive at our 12- Sales 19.6 24.5 29.0 month share price target of US1,502 cents/1081p (note: we are using EBITDA (2.8) (1.5) 2.8 GB£:US at $1.39), using discounted cash flow, sum-of-the-parts and EBITDA margin (%) (14.2) (6.0) 9.8 free cash flow yield. While WANdisco has a number of adjacent growth opportunities, we believe the ‘cash generation’ bias in our valuation Gross profit 18 22 27 methodology reflects how investors see the benefits of subscription- Net income (13.7) (8.6) (4.6) based business models. PBT rep (14.0) (8.9) (4.9) EBITDA adj (0.6) 1.3 6.0 Risks to target price. In addition to general and macroeconomic risks, Depreciation & amortisation 7 7 8 the downside risks include continued deceleration in the source code DPS 0.00 0.00 0.00 and Big Data markets. This would impact cash inflow and thereby increase cash outflow and lessen investor interest. Upside risks include Key cash flow data ($) a better-than-expected revenue growth, possibly as a consequence of the channel partner sales accelerating faster than anticipated. 2017A 2018E 2019E Operating profit (9.7) (8.8) (4.8) Operating cash flow 1.1 3.0 8.3 Business description Capex (0.8) (0.8) (0.8) 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 (24.1) (19.5) (20.1) compute environments. Taxes paid 1 1 1 Cash flow from investing 20 (5) 1 Senior management FCF (5.3) (4.6) 0.6 David Richards - CEO & Interim Chairman Dividends 0.00 0.00 0.00 Cash at end of year 27 23 23 Erik Miller - CFO Key balance sheet ($) Key dates 2017A 2018E 2019E Cash and cash equivalents 27.4 22.8 23.4 July 2018 - Trading Update Total assets 41.9 40.4 43.8 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 2 WANdisco plc Company Update WAND – LSE March 7, 2018 European Software & IT Services WANdisco Finals: [epub ahead of print] 2017A results: The highlights Royalties rock. The shape of revenue has changed since the IBM OEM deal was first inked. For 2017A royalty/perpetual revenue was US$8.3m, from US$1.0m Y/Y. To be sure, subscription revenue is still the mainstay of group revenue being 53% of total, but it is down from 73% Y/Y. IBM pays 60 days and DSO on the company measure is 33 days. Big Data – Big promise. The demand for WANdisco’s solutions continues to grow as organisations recognise the value of being able to harness and react to very large live data sets in real time. This capability is providing the basis for innovative customer service, service personalisation, social-media monitoring, online booking systems, fraud detection, complex diagnostics, and targeted maintenance. Also, it is central to emerging business models –the Internet of Things, AI /machine learning. Autonomous cars, smart transport systems, machine-assisted medical research, personalised advertising and media services, and new banking, retail and manufacturing models all rely on the ability to harness live data at significant scale. However the lack of parity between the original source data and that data being held or used in secondary locations is limiting what those companies can do with it. Source Code Management – No shrinking violet. The Source Code Management revenue stream continues to produce recurring revenues ahead of our expectations. This product set uses the same data-replication technology that underpins Fusion. A scalable Indirect sales model. In addition to the significant OEM relationships with IBM and Dell EMC, WANdisco has go-to-market partnerships with Amazon Web Services, Cisco, Microsoft Azure, Google Cloud, Hewlett Packard Enterprise and Oracle. For investors these both endorse WANdisco’s unique technology but extend sales reach.