WANdisco Cloud OEM agreement with Virtustream/Dell New OEM agreement Software & comp services WANdisco s second OEM partnership, with Virtustream, Dell/EMC s cloud platform and software business, significantly strengthens the company s platform for growth in FY18 and beyond. It is also significant because it relates to cloud object storage rather than Hadoop, firmly demonstrating the applicability of Fusion in cloud/hybrid cloud deployments. It thus raises confidence that other similar deals in the pipeline will also convert, laying a platform for a very significant acceleration in growth. Year end Revenue EBITDA PBT* EPS (c) Net cash EV/sales (x) 12/15 11.0 (16.0) (26.4) (87.7) 2.6 37.6 12/16 11.4 (7.5) (16.4) (46.9) 7.6 35.8 12/17e 17.0 (3.3) (10.6) (26.7) 7.1 24.0 12/18e 21.7 (0.7) (8.3) (20.6) 10.4 18.8 Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Second OEM, first for cloud Virtustream is a subsidiary of computing/storage giant Dell/EMC. Its focus is on enabling enterprises to run mission critical applications in cloud/private cloud or hybrid cloud deployments, making it a natural fit for WANdisco Fusion. Fusion will be sold as a standard Virtustream product covering on-premises, hybrid and cloud environments, using WANdisco s standard subscription pricing model. We understand that the deal has a $3m+ minimum commitment, but believe that there is scope for this to be exceeded relatively quickly. The product s launch is anticipated in December, and thus the partnership should start to contribute meaningfully to revenues in FY18. Cloud credentials strengthened WANdisco is now looking very well placed to exploit the significant opportunity in cloud storage. The company has made strong progress advancing its cloud partnerships, notably announcing product collaborations with Amazon and Microsoft in recent months, but this is the company s first OEM partnership in this field. We believe that other partnerships are in the pipeline and our confidence that some of these will convert has moved up a notch. Management estimates that the TAM for its products in cloud object storage will be worth $2.75bn in 2018 growing to $6.75bn in 2020, versus $0.22bn for Hadoop at the same time. Valuation: Recent progress strengthens upside case We are not changing our estimates at this stage. FY17 financial performance depends on the timing at which large deals come in, but looking beyond this, we believe WANdisco s platform for delivering significant, operationally geared upside has strengthened. The valuation demands significant growth and margins (our DCF suggests a five-year revenue CAGR of 40% through 2025, with EBITDA margins reaching 25%+). With WANdisco s compelling market fundamentals, geared business model and rapidly strengthening roster of tier one partners, we now believe it has good potential to exceed this. The company s strategic attractiveness should also factor in the valuation consideration. 7 November 2017 Price 817.50p Market cap 310m US$1.31/ Net cash at 30 June 2017 6.9 Shares in issue 37.9m Free float 88% Code Primary exchange Secondary exchange Share price performance WAND AIM N/A % 1m 3m 12m Abs 2.5 16.8 517.0 Rel (local) 1.1 15.1 448.6 52-week high/low 881.50p 130.00p Business description WANdisco is a distributed computing company. It has developed a suite of solutions based around proprietary replication technology, which solve critical data management challenges prevalent across cloud computing, big data and the ALM software markets. Next events FY trading update January 2018 Analyst Dan Ridsdale +44 (0)20 3077 5729 Bridie Barrett +44 (0)20 3077 5700 tech@edisongroup.com Edison profile page WANdisco is a research client of Edison Investment Research Limited
$ (billon) OEM partnerships lay platform for an acceleration Second OEM partnership, first in cloud object storage The OEM partnership with Virtustream significantly strengthens WANdisco s growth credentials in cloud object storage. Operating as an independent subsidiary, Virtustream is an important element of Dell EMC s cloud offering, providing mission-critical cloud (including hybrid and private cloud) infrastructure as a service (IaaS), hosted services and software. Compared to other more general-purpose cloud platform providers, the focus is on running high input/output intensity, mission-critical applications, thus making it a natural fit for WANdisco Fusion with its ability to deliver very high resilience and uptime. Virtustream was acquired by storage giant EMC for $1.2bn in July 2015, prior to Dell s acquisition of EMC in October 2015. The revenue run rate on acquisition was said to be around $100m, but corporate material indicates that it is one of the fastest-growing business units within the larger group. The corporate website states that it has 2,500 employees, runs 20+ datacentres and has major operations in 10 countries. Meaningful revenue potential, starting in FY18 Fusion will be sold as a standard Virtustream product covering on-premises, hybrid and cloud environments. We understand that there is a $3m+ minimum commitment over the three-year contract period, but believe that there is good potential for this threshold to be substantially exceeded. The deal is mutually non-exclusive. The product s launch is anticipated for December and pricing will use WANdisco s standard per terabyte pricing and subscription model. Consequently, we believe that the partnership should start to contribute meaningful to WANdisco s bookings and recurring subscription revenues in FY18. Exhibit 1: The total addressable market (TAM) for cloud object storage is significantly larger than for Hadoop 12 10 8 6 4 2 0 2015 Non-stop Hadoop 2016 Fusion 2017 Fusion 3.0 2018 2019 2020 Hadoop Cloud Object storage NFS All else Source: WANdisco IBM update: Significant growth potential H1 gave a glimpse of the transformative potential of OEM partnerships WANdisco s OEM partnership with IBM is focused on analytics/hadoop, but still delivered $4.2m of revenue in H1. This contribution was the primary driver of WANdisco s 71% revenue growth in H1, achieved in a period when costs reduced substantially, giving us a glimpse of the transformative impact that successful implementation of the indirect model can have. WANdisco 7 November 2017 2
Very significant growth ambitions Nick Dimtchev, business unit executive for IBM s Analytics Division, presented at WANdisco s recent capital markets day (link: capital markets webcast). It was apparent from the presentation that, despite the strong contribution in H1, the partnership is only now really getting into gear and that significant growth is being targeted. Mr Dimtchev s remit is to drive revenue from IBM s Hadoop Analytics solution set, of which Big Replicate (the white-labelled Fusion product) is a core component, from circa $20-30m to $200-300m over a two- to three-year period. (A remit he has successfully executed with other IBM businesses previously.) The Hadoop offering is being included in IBM analytics core sales plays meaning that it is being given executive management priority and weekly execution targets. Having demonstrated initial successes in North America and Europe, IBM now plans to roll out the expansion to all regions. Mr Dimtchev confirmed that he was very optimistic about driving short-term results. A transformative 12 months Over the past 12 months, WANdisco has progressed from being a company that appeared to be in a very promising position but still with much to prove, to one that now looks well set to execute on its potential. In particular the company s credentials in cloud have strengthened significantly in the past six months, with the company s collaborations with Oracle, Microsoft and Amazon all moving forward (see Exhibit 2) and the Virtustream OEM agreement adding concrete growth potential. Other similar agreements would strengthen the platform for growth further. Exhibit 2: Timeline of key milestones over the past 12 months 1000 900 Amazon Snowball development (press release) Release of Amazon AWS hybrid data lake architecture, Share price (p) 800 700 600 500 400 300 200 100 $1m deal with a major automotive manufacturer (with IBM) First deal through AWS (Playtika) $4.1m deal with major finanical institution (with IBM) $2m win with major retailer (direct) Compliance with Oracle MAA (High Availability) Architecture Microsoft Azure HDInsight agreement Integration with Microsoft Azure Data Box OEM announced with Virtustream / Dell 0 04/11/2016 04/01/2017 04/03/2017 04/05/2017 04/07/2017 04/09/2017 04/11/2017 Source: Edison Investment Research No change to estimates, but there to be beaten We are not changing our estimates at this stage. FY17 financial performance depends on the timing at which large deals come in, but looking beyond this, we believe WANdisco s platform for delivering significant, operationally geared upside has strengthened. We forecast 42% growth in big data bookings in FY18, but given the potential from IBM supplemented by Virtustream and other partners, we believe that there is the potential to significantly exceed this. With a highly operationally geared model, upside should drop strongly through to earnings and cash flows. WANdisco 7 November 2017 3
Exhibit 3: Forecast summary $000s 2015 2016 2017e 2018e Bookings Big Data 2,500 7,100 13,000 18,500 Bookings SCM 6,500 8,400 8,700 9,500 Total bookings 9,000 15,500 21,700 28,000 Revenue 10,994 11,379 17,029 21,748 Cost of sales (749) (1,349) (1,784) (2,349) Gross profit 10,245 10,030 15,246 19,399 EBITDA (15,988) (7,464) (3,254) (655) Capitalised development cost (8,369) (5,860) (6,497) (6,952) EBITDAC (adjusted for capitalised development) (24,357) (13,324) (9,751) (7,607) Operating Profit (before amort and except) (25,858) (16,104) (10,374) (8,075) Exceptionals (614) (32) 0 0 Share-based payments (4,057) (1,787) (1,400) (1,400) Operating profit (30,529) (17,923) (11,774) (9,475) Net interest (506) (268) (268) (268) Profit before tax (norm) (26,364) (16,372) (10,642) (8,343) EPS - (IFRS) (c) (103.9) (27.9) (36.7) (24.8) Closing net debt/(cash) (2,555) (7,558) (7,071) (10,376) Source: WANdisco accounts, Edison Investment Research Valuation: What once looked ambitious now looks very achievable The valuation demands significant growth and margins (our DCF suggests a five-year revenue CAGR of 40% through 2025, with EBITDA margins reaching 25%+). Given the company s recent progress, and the improved visibility of the potential through IBM, achieving or beating this performance now looks eminently possible. The company looks exceptionally well placed in a market with compelling market fundamentals and a geared business model. The company s strategic attractiveness should also factor in the valuation consideration. WANdisco 7 November 2017 4
Exhibit 4: Financial summary $000s 2015 2016 2017e 2018e Year end 31 December IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 10,994 11,379 17,029 21,748 Cost of Sales (749) (1,349) (1,784) (2,349) Gross Profit 10,245 10,030 15,246 19,399 EBITDA (15,988) (7,464) (3,254) (655) Operating Profit (before amort and except) (25,858) (16,104) (10,374) (8,075) Acquired Intangible Amortisation 0 0 0 0 Exceptionals (614) (32) 0 0 Share based payments (4,057) (1,787) (1,400) (1,400) Operating Profit (30,529) (17,923) (11,774) (9,475) Net Interest (506) (268) (268) (268) Profit Before Tax (norm) (26,364) (16,372) (10,642) (8,343) Profit Before Tax (FRS 3) (31,035) (10,047) (14,339) (9,743) Tax 1,129 772 522 354 Profit After Tax (norm) (25,235) (15,600) (10,121) (7,989) Profit After Tax (FRS 3) (29,906) (9,275) (13,818) (9,389) Average Number of Shares Outstanding (m) 28.8 33.3 37.6 37.8 EPS (c) (87.7) (46.9) (26.9) (21.1) EPS - normalised fully diluted (c) (87.7) (46.9) (26.7) (20.6) EPS - (IFRS) (c) (103.9) (27.9) (36.7) (24.8) Dividend per share (c) 0.0 0.0 0.0 0.0 Gross Margin (%) 93.2 88.1 89.5 89.2 EBITDA Margin (%) N/A N/A N/A N/A Operating Margin (before GW and except.) (%) N/A N/A N/A N/A BALANCE SHEET Fixed Assets 8,813 6,253 5,930 5,761 Intangible Assets 8,583 5,977 5,574 5,325 Tangible Assets 230 276 356 436 Investments 0 0 0 0 Current Assets 9,283 13,703 14,429 20,085 Stocks 0 0 0 0 Debtors 6,728 6,145 7,358 9,709 Cash 2,555 7,558 7,071 10,376 Other 0 0 0 0 Current Liabilities (6,439) (9,409) (11,467) (12,342) Creditors & Deferred Income (6,439) (9,409) (11,467) (12,342) Short term borrowings 0 0 0 0 Long Term Liabilities (6,060) (6,980) (11,557) (15,201) Long term borrowings 0 0 0 0 Deferred Income (6,060) (6,980) (11,557) (15,201) Net Assets 5,597 3,567 (2,665) (1,697) CASH FLOW Operating Cash Flow (18,138) (2,955) 6,056 10,470 Net Interest 59 (161) (268) (268) Tax 552 690 522 354 Capex (inc capitalised R&D) (8,464) (5,924) (6,797) (7,252) Acquisitions/disposals 0 0 0 0 Financing (net) 26,175 13,523 0 0 Dividends 0 0 0 0 Net Cash Flow 184 5,173 (487) 3,305 Opening net debt/(cash) (2,481) (2,555) (7,558) (7,071) HP finance leases initiated 0 0 0 0 Other (43) (175) 0 0 Closing net debt/(cash) (2,555) (7,558) (7,071) (10,376) Source: WANdisco accounts, Edison Investment Research WANdisco 7 November 2017 5
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