Anaplan - Not All Plans Work Out In All Ways All Of The Time
Summary
- Anaplan's Q4 was a beat and raise on a headline basis.
- The company did not make consensus billings targets, and billings growth fell from 59% to 25% sequentially.
- The shares fell noticeably losing 24% of their value the day after the earnings release.
- Overall, valuation has fallen to a very reasonable 10X EV/S on a 12 month forward revenues estimate.
- The company continues to enjoy leadership status in its space and it has an unmatched competitive position within the cloud planning market.
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Some comments about the Anaplan stumble
Just to note-this is an article about Anaplan’s business and its valuation. It is not an article about Anaplan’s (NYSE:PLAN) exposure to the Covid-19 virus. The company has been involved in selling its solutions in the Asia/Pac region for several years. Management called out its leadership in Asia/Pac as being experienced and professional. Growth in Asia/Pac has been outstanding over the last several years. I do not think that anyone can really handicap whether companies selling enterprise software will be materially impacted by the secondary and tertiary impacts of the virus in either the Asia/Pac region or the rest of the world.
Anaplan is obviously not a company focused on consumer interaction. The ultimate impact of the virus on the company’s business is not really knowable, and neither its growth rate nor its profitability are going to be affected in the long term by the virus.
It would be naïve to imagine that the forecast the company provided as recently as last week will not see some impact from the effects of the virus. Anaplan has an exposure to the transportation industry-an important vertical market for the company, and at this point, that business segment is already seeing noticeable impacts from the virus. Economic activity the next two-three months is likely to be constrained. After that, there will be a period of recovery, as the new cases of the virus wane and as aggressive stimulus efforts are felt. Overall, as a business, I do not believe that Anaplan will experience any unusual impact from the disease and investors should not focus on the disease in evaluating the company.
I have been a shareholder in the company since last April/May with a position of a bit more than 5% of my portfolio. Anaplan I intend to maintain that position and will opportunistically add to the shares of PLAN in my portfolio or to the portfolios I manage. Anaplan is the leading vendor in the cloud planning space and it has some very substantial advantages when compared to its competitors. The space will continue to thrive, and Anaplan will continue to lead it. That is usually the formula for a successful investment, and I think that will remain the case regardless of any impact from the virus. Anaplan shares are reacting to fears of the virus and its impact on the world economy. There is nothing I could say or would want to say to deny that in a panicky, risk-off mode, that Anaplan shares will not continue to be sold by quants and hedge funds alike. And that is the end of my commentary about Covid-19 and its impact on Anaplan’s business.
Anaplan has a technology and a market position that make it an excellent choice for investors looking to take advantage of this stock market panic. In the wake of the 31% share price fall, some of the valuation metrics have become quite attractive. The company has an EV/S ratio, calculated on 12 month forward sales of about $500 million, of just greater than 10X. That valuation is about 30%-35% below average for the company’s low 40% growth cohort. If the company achieves its cash flow break-even target this year, it will exceed the average profitability for the company’s growth rate. The shares have fallen around 18% YTD, although they are still up 17% over the last year.
Anaplan shares fell noticeably in the wake of the company’s Q4 earnings release. The headline numbers were satisfactory, and really so was the forward guidance. What did in the shares was a calculated bookings metric that fell from a rate of about 59% growth as calculated for Q3, to 25% growth as calculated for Q4. The fall was partially attributed to management changes in the sales organization, particularly in North America, that apparently lead to some deals not closing in the time period that had been forecast. That said, the company’s Remaining Performance Obligation (RPO) balance reached $656 million last quarter, up 49% year on year, and up 11% sequentially. RPO is a superset of the elements that make up calculated billings and is the best representation of backlog provided by a company. If the backlog is rising at a strong pace, the calculated billings number is significantly less meaningful in evaluating the actual commercial performance of the company’s selling motion.
The company announced the departure of its chief growth officer, really its head of sales, Mark Anderson. Mr. Anderson had come to PLAN from a stint as president of Palo Alto (PANW) where he had been responsible for its go to market implementation. He had only been with Anaplan since August 5, 2019. The announcement of his departure said it was based on a desire to spend more time with his family and to focus on his philanthropic efforts. What might have happened, precisely, is not really knowable. Frank Calderoni, the CEO of Anaplan is very well known by many in the tech world. Before joining Anaplan, Mr. Calderoni was EVP of Red Hat and before that he worked at Cisco rising to the CFO after a 10 year career. While I would obviously like to understand a bit more as to what happened with regards to the sales transition, and precisely how the new structure is going to work, I am willing to give Mr. Calderoni the benefit of the doubt here
The company has decided to re-architect a component of its sales effort. It now has two specific segments-one is called majors and the other is called the enterprise, with greater sales specialization and aligned support resources. The company has evolved a structure of managing directors in each region who will report directly to the CEO and there are no plans to replace Mr. Anderson. Like other observers, I wonder why it was that the company implemented those changes during its 4th quarter when there were a great many opportunities that might have benefited from an in-place senior sales organization.
At the end of the day, whether the sales leadership transition timing was optimal or not, and whether or not the relatively disappointing bookings calculated in Q4 are a meaningful metric, the company still raised guidance for revenues beyond prior expectations for 2020. The company said that its pipeline continued to expand substantially, that its partner eco-system continues to achieve significant and growing success and that it is hiring sales talent to match the increasing level of sales opportunities the company is seeing. It is unusual to see a company raise guidance when bookings miss; it is more unusual as well to see a company which beat operational expectations and raised headline earnings expectations by a noticeable amount to see its shares suffer a 24% share price set-back in a single day.
I think it worth noting that the CFO used the word "prudence" several times in answering questions about billings and revenue growth. Prudence is CFO-speak for noticeably conservative. I read and listen to a plethora of conference calls over the course of a quarter. The Anaplan duo on this call, or so it seemed to me, was suggesting that while there were issues in closing some deals in the Americas at the end of Q4, those issues have been remediated and the company has lots of momentum and has seen an acceleration in the opportunities in the forecast.
While this company does not forecast billings-and really no company ought to forecast billings-given the forecast that full year billings will track revenue growth, and that revenue growth in Q1 will be in the 48% range, it is understandable that some observers are wondering just how close billing growth and revenue growth confluence might be in Q1. The current share price suggests that investors are not expecting a full recovery in billings growth in Q1 which is a not set-up if one is considering entering or adding to the name.
One questioner asked quite specifically just how the company could achieve its forecast for billings this quarter due to the impact of the virus and the tough compare. The CEO certainly had an opportunity to hedge, and chose to do something very different. The stock price suggests that the preponderance of investors do not believe either the Q1 forecast or even the forecast for the full year. That is a desirable scenario for investors, since just a little performance will be viewed as satisfactory.
Because the company increased its revenue forecast and lowered its EPS loss forecast for the current year, a few price targets for Anaplan were increased. At this point, no brokerage has changed their rating on the shares. The company projected Q1 revenues that show sequential growth of about 4-5% but year on year growth of about 48% in Q1. In the year-ago Q1, sequential revenues rose by 11%, and were it not for the potential negative impact of the virus on the operational performance of this company-or really any IT vendor-I would imagine that it would come far closer to 11% growth than the level being forecast.
The company is projecting a non-GAAP loss that is the equivalent of about $.13/share for the quarter. For the year, the company forecast is for growth of 34%. This guidance was increased by about 2% from the company’s prior projection. I think any realistic forecast for this company would show growth at or above 40%; the kind of growth drop-off implied by the Q1 and the full year forecast is simply not a representation of how management has depicted this business and opportunities.
The company is projecting a non-GAAP operating loss margin of about 13%. This compares to a 16% non-GAAP net loss in the just concluded fiscal year. The company continues to project that it will reach cash flow breakeven by the end of the current fiscal year, and that calculated billings will at least match the growth in the company’s reported sales revenues.
Anaplan-A little bit of background
Anaplan is one of the leaders in the connected planning space and its technology has allowed users to undertake the kind of “what if” analysis that was not heretofore feasible. Until a few years ago, the primary planning tool of choice was Excel, and there are still many businesses that are stuck back in that era. As many readers probably expect, a company such as this offers a platform that is built on a proprietary data engine.
Modelling using Anaplan is intuitive, and can be done by data analysts with no coding knowledge. It is another application that is designed to be used by a team. More unique than widely realized, is the advantage PLAN offers users in terms of scale. The concept of connected planning means that a model can be built and scenarios can be evaluated across an entire enterprise. Because of the way the models built using this technology work, using Anaplan typically will cut time to evaluate a scenario by 50%-70%.
Anaplan is a leader in the Gartner survey. I have linked to that here. Users like Anaplan because it is tops in integrated financial planning/modeling, solution flexibility and the ability to deal with complex budgets and plans. Basically, more people in different roles and at different companies achieve better user satisfaction using Anaplan than any other vendor.
Back when Anaplan came pubic, it used a TAM of $17 billion that was supposed to grow by 25% in three years in its S-1 filing. The company also showed a study from IDC in which it detailed that its target market was for 72 million seats. Whether or not 72 million people really need something as sophisticated and encompassing as what Anaplan offers is something I will leave to different heads. I seriously doubt that there will be 72 million or even 25 million Anaplan users.
But this market is one marked by replacing on-prem products such as those sold by Oracle (ORCL) and SAP (SAP). Oracle has sold Hyperion for years, and SAP was founded as a company that developed planning solutions. These days SAP sells its own products and those that had been offered by Callidus. The problem for SAP is that its users are far less happy with their experience than those of Anaplan.
Oracle gets better marks than SAP from Gartner-but still falls short in some key categories such as ease of implementation, application governance and performance. The users surveyed by Gartner placed Oracle in the lowest quartile in terms of performance. Basically, if a user wants connected planning in order to make data driven decisions, Oracle is not a solution set that fills the requirements for most users.
As many readers know, Workday bought an Anaplan rival called Adaptive Insights shortly before it was scheduled to go public. Gartner rates Adaptive Insights somewhat below Anaplan, but still a leader in the space. Adaptive, when it was bought by WDAY, was targeted at smaller users, and thus has never had the scalability that Anaplan offers. That is still the case. That said, sometime this year, WDAY hopes to completely integrate the Adaptive offering as part of what it can offer users in HCM and financial apps.
Anaplan has been considered the leader in its space for some time now. I don’t see anything specific based on the 3rd party surveys that would lead me to believe that Anaplan will be dethroned from its leadership position any time in the near future.
It is my view that the very positive tone of the call, which apparently hasn’t impressed investors in any positive fashion, is predicated on two main pillars. One is that cloud planning apps are a very large and rapidly growing market relative to the size of Anaplan, and the market size is growing quite a bit faster than most prior estimates had assumed. The concept of a “data driven enterprise” while it sounds no more than a commercial is real. Large enterprises are attempting to make their decisions based on data and scenario exercises and to do so they absolutely have to have a very scalable, very capable set of solutions that can be used by everyone in an enterprise.
And while there are certainly competitors in this space, I think it is fair to say that Anaplan is far in front of the usual competitive suspects of Oracle and SAP. Strong growth of the market and an even stronger competitive position usually make for excellent share price performance. I view the stumble as just that, and I look at the share price as an opportunity.
The Anaplan Business Model
One of the easier things for an analysis in addressing Anaplan is that it was built as a pure subscription model and it remains as a company in which well over 90% of its revenues come from subscriptions. Professional services is a small component of revenue, and it has not been growing and has thus subtracted a few hundred basis points from the reported growth rate. Consulting revenues are around 10% of the total, and may grow modestly from this point forward. Consulting revenue have produced negative gross margins, and one place that seems likely to be a focus of remediation is within that category. The company is seeing a modest increase in its subscription gross margins as it has sold increasingly larger and more complex deals that usually are less price competitive.
The company had a 58% increase in GAAP research and development expense last quarter year on year, and a 25% increase sequentially. Sales and marketing expense rose 39% year on year, while rising 15% sequentially. Management has indicated that it will be ramping sales and marketing expense noticeably in Q1 to take advantage of some meaningful opportunities. The sequential growth of sales and marketing in Q4 was almost certainly below optimal levels and is doubtless symptomatic of some dysfunction in the space that led to a shortfall in billings and to the departure of the Chief Growth Officer.
Overall, management has forecast about a 300 basis point improvement in operating margins in fiscal 2021. Given the company has consistently beaten earnings forecast since it has been public, and the CEO will do about anything to continue that record, I imagine that the improvement in operating margins will be greater than forecast and that the company will handily over-attain its cash flow break-even target.
While Anaplan remains focused more on growth than on margin, its high DBE of 122%, and its large deal opportunities are amongst tailwinds in terms of expecting to see rising profitability. While neither I or others will ever figure out the impact of Covid-19 in advance, taking advantage of the current share price pullback seems logical to me.
This article was written by
Analyst’s Disclosure: I am/we are long PLAN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (11)
In many ways Workday is an admirable company with strong values and leadership. Buying Adaptive Insights, after struggling with their own planning app for years, was a bold move. But I want to keep coming back to facts. The RPO number rose 49% and 11% sequentially. That is a superset of billings. The CEO talked specifically about the expansion of the pipeline. Usually you do not hear that from companies that need to explain deteriorating win rates because it becomes painfully obvious in just a quarter and will have to be put down to either a management miscue or competitive issues. You can believe this CEO or not-I for one do believe that the pipeline expanded. It is hard for me or anyone else at this point to suggest we know how Q1 might come out. Anaplan certainly has business in Asia/Pac and cutting travel in the US is going to have an impact on closing deals. And for sure, I imagine the travel/transportation vertical, a large user of planning products will not be buying in Q1. So, I can't prove my thesis, because I fully expect that Anaplan's results will be below expectations. But I do not think there is any real evidence that Workday is close to taking market share from Anaplan, and frankly I would be surprised if that changes in the foreseeable future.
The idea that an experienced executive like Frank Calderoni is not doing everything in his power to maximize shareholder values is a bit far fetched...and I would use other terms if not for my dislike of value words. Why and how there might have been some conflict between Calderoni and his erstwhile sales lieutenant is a story I would like to know, and probably never will. But I doubt if it would qualify for some kind of conspiratorial evaluation. People clash. It happens all the time in different ways. What usually doesn't happen and did, was that management talked about billings tracking revenue growth in the current fiscal year. That is extremely positive given what just happened. In a risk off environment, my observation is that people are willing to cherry pick negatives, and then disregard positives said by the same individual at the same time. I see that with the evaluation of the PLAN quarter along with many others.
Speaking of its unmatched position in financial planning, I started to doubt that after following WDAY's recent actions. I'm afraid that the drop in billings reflects the competitive pressure as WDAY morphs aggressively from human capital to financial related applications and procurement.In the meantime, the CEO of PLAN is a professional C suite manager, backing by a few significant shareholders that come from VC or PE industry, this had me struggle as these kinds of mgmt usually care less about shareholder values.