Anaplan: Not A Cool Kid In Pandemic Times

Summary

• Anaplan has reported Q1 2021 results with a large hit by the coronavirus pandemic.
• Revenue growth was decent at 37%, but billings growth was only 10%, and the net retention rate was down to 117%.
• The long-term opportunity remains intact, and there is some evidence that suggests strength in the business model.
• Still, the market response to the data was soft and the valuation is high, given the new circumstances, so I would wait for a better price to buy in.

Amidst pandemic-related uncertainties and recent sales execution issues, Anaplan (NYSE:PLAN) reported financial results for its first quarter of fiscal 2021. The most shocking highlights were a historically low net retention rate of 117% and a growth in calculated billings of 10% - down from 25% last quarter, which was itself a poor result. These figures suggest that the company is having a difficult time due to the coronavirus pandemic, and the market didn't think before selling on the news. In fact, the stock was down up to 10% in the after-hour market of the earnings day. Although the pandemic is hurting Anaplan, there is evidence that suggests that the fundamental forces behind this growth story are only on hold while the pandemic persists. Also, the company is seizing this pandemic in a way that may boost growth beyond normal levels after the pandemic issue is over. The market response to the data, although negative, was soft, and still left the valuation high for a company that may end 2020 growing below 20%. I remain confident in the long-term growth potential for Anaplan, but I'll be on the sidelines waiting for a better price.

Anaplan Is Out Of The WFH Party… And It Is Hurting

Unfortunately for its shareholders, Anaplan is not one of those IT companies that have benefited from the boost to work-from-home or e-commerce trends. It was rather affected by the delay in investments on digital transformation projects that such a pandemic is causing. Have in mind that Anaplan has a top-down selling model, and that buying a subscription to its platform is an important and significant decision for a customer that requires approval from the top executive level (the average customer pays Anaplan in excess of $200,000 per year).

Thanks to the recurring nature of the company's business model, GAAP revenue experienced only a small deceleration of 5 points both on a total and a subscription basis. Total revenue growth was 37% and subscription revenue growth was 44%, both Y/Y. In previous quarters, subscription revenue had been backed by a strong momentum in billings growth, which was constantly between 40% and 60% until last quarter, when the company's growth executive departed, and some sale execution issues arose. But after two quarters of sluggish billings growth (25% in Q4-20 and 10% in Q1-21), I am surprised by how the revenue has held up so well against the odds.

But revenue is maybe the only good piece of news from this quarter (if you consider it good news - for the record, I do). Every other relevant metric of performance indicates that Anaplan has a very difficult year ahead, and that growth may go down to the twenties or even the teens. Look at billings, 10% Y/Y. Net retention rate, 117% down from 122% past quarter and 123% the year ago quarter. Deferred revenue and RPO both down from the previous quarter. This is the first time that I see Anaplan losing business. Yes, it is losing business.

For a SaaS company, there are some assets (or liabilities if you prefer to call them that way) that represent the fuel of growth. Annual Contract Value (ACV), Remaining Performance Obligations (RPO or Backlog), and Deferred Revenue are examples of this concept. GAAP subscription revenue for a certain quarter is made of a share of deferred revenue that is realized and a share of the billings of that period, leaving the remaining of those billings as new deferred revenue for realization in future periods.

In a hypothetical example of a growth story, billings should be above revenue, so there is room to increase deferred revenue, so the growth can continue going forward. A company does not need to keep such a pace every quarter, though, but at least it should do it on a TTM basis - this is called seasonality, and many SaaS companies experience it at some level. And this concept applies to RPO or ACV, as they expand, they pull GAAP revenue along, but if they shrink, then revenue growth will decelerate and even go negative.

Before this quarter, I had never seen RPO or deferred revenue decreasing on a Q/Q basis for this company. The typical seasonality for Anaplan is to grow deferred revenue (as an example) by small sequential rates in both fiscal Q1 and Q2, and then accelerate in Q3 or Q4, when the majority of the year's billings take place. Here is a chart with the readings from the last eight quarters. See how the uptrend was broken in this quarter:

(Author)

This performance would not be expected after hearing the management saying that the company closed 25% of what remained of the Q4 pipeline:

So, February had a combination of all that. We did close some deals from Q4. I would say, we closed about 25% of the deals from the first -- from the fourth quarter in the month of February, which was healthy.

(Earnings Call)

Hence, I guess that the company is experiencing a higher-than-usual customer churn that is offsetting those deals. Or in other words, customers are leaving the company (on a net basis). In fact, the management mentioned on the earnings call that it lost a large customer due to an M&A deal. Here is where we go back to net retention and the 5-point sequential slide from 122% to 117%. The company said that this customer was liable for most of the decrease:

Our dollar-based net expansion rate or NRR was 117% this quarter. Historically this has been above 120%. This reflects, the lower percentage of booked deals coming from expands this quarter, as well as churn resulting from one major account where there was a change of control due to M&A. …

… And clearly a lot of our churn in the past as we've always articulated has come from side events such as that [Author's note: the lost account from the paragraph above]. On a normalized rate if you excluded that item, NRR would have been closer to 120%.

(Earnings Call)

Doing the math with that 117%, one should be able to understand that there was nearly any revenue expansion from existing customers during the quarter. Bear in mind that the figure is a TTM average, so a decrease of 6 points in one quarter on a Y/Y basis means that the difference between the current quarter and the year ago quarter is actually somewhere near 24%, so retention could be near 100% in this quarter (if we assume that the retention in the year ago quarter was an average retention). If you combine near-flat revenue retention with limited customer acquisition, then where will growth come from?

As I said before, the good news for Anaplan is its deep RPO tailwind (see chart above). But still most of that RPO has to be charged to customers, and the company is already having some of them asking for billings concessions:

We've had some moderate request, in regards to whether for its payment extension or split billings. But our opportunity is really selling into improving our value why we should try to keep things as close to normal with the one-year payment upfront. But there have been some limited concessions last quarter and there are some assumptions coming into this quarter as well.

(Earnings Call)

Now, the company withdrew its annual guidance for fiscal 2021, but still gave a hint of what to expect in Q2. The outlook for Q2 revenue is $103-104 million, which represents a midpoint growth of 24% Y/Y, and given the guidance for services revenue of $8-9 million, subscription revenue is expected to be ~$95 million, with a growth of only 29%, down from 44% this quarter. Billings is expected to amount $98-100 million in the quarter, representing continued weakness in growth with only 11% from the year ago quarter. Combining revenue and billings expectations from the company, I come to the conclusion that RPO and deferred revenue are expected to decrease (once again), and it also reaffirms my view that this company could end the fiscal year with quarterly growth in the twenties or even the teens.

In summary, the coronavirus pandemic is hitting Anaplan hard, making long sales cycles even longer and making customers delay important decisions on significant IT investments. Still, I believe that Anaplan's fundamental drivers are only on hold until this pandemic is over, and maybe that part of its economic moat is deepening.

The Growth Story Seems To Be Alive, And The Company Is Seizing The Pandemic On Its Own Way

The Anaplan's platform is like a plane. And a plane is useless without a pilot to fly it well. So, the success of a certain plane in the marketplace relies to some degree in the existence of a number of pilots with the expertise to fly it. In the case of Anaplan, its success is somehow related to a growing army of Certified Master Anaplanners, who have the expertise to get the most out of Anaplan tools for its customers, and are the though leaders evangelizing the platform's use. This author believes that if Anaplan has an economic moat to support its long-term success, those Master Anaplanners are part of it. The more of them out there, the more appealing Anaplan will be for potential customers. Think of it as a switching cost for a company. If a customer is to change its planning software vendor, then it would have to hire someone new to operate it.

Well, Anaplan is having great momentum with those Master Anaplanners, and the number of them doubled this quarter over the year ago quarter, with the pandemic having something to do with it:

Another trend we're seeing is the need for companies to focus on reskilling their workforces now. We're proud to be contributing to the advancement of our professional community. This quarter we continued to grow the number of certified Master Anaplanners now up over 100% year-on-year.

(Earnings Call)

Similarly, the company's partners added 500 consultants during the quarter, and now the number of partner consultants tops 2,500. That represents a growth of 25% over the previous quarter and 67% over two quarters ago. This shows the high commitment of Anaplan's partners. Here is CEO Frank Calderoni on the earnings call:

Finally, I'm pleased to share our partners added another 500-plus Anaplan certified resources into the market during the quarter. And in many cases, we are seeing them ramp ahead of schedule an indication of their intent to continue building new Anaplan pipeline.

(Earnings Call)

To get the most of the pandemic, Anaplan launched a 90-day free trial program to help mitigate the crisis among potential customers. This program is different than the usual approach of Anaplan - it is sort of a bottoms-up approach, while Anaplan has always been a top-down business (and platform). The nature of the company's platform requires a top-down approach, because of its complexity and the need for consultancy services, but a freemium bottoms-up offer, paired with proper consultancy services, could help in growing the number of customers first and then grow revenue at stronger rates than expected when the pandemic is over. Here is the CEO commenting on the interest that this initiative is already attracting:

We also launched a 90-day free trial and met with various non-profit organizations, governments and customers to help them address their urgent challenges related to COVID-19. We've seen increased interest in our platform with a number of app downloads up about 80% higher than the monthly average. The most visited page on our website in April was Deloitte's Dynamic Clinical Staffing Model built on the Anaplan platform.

(Earnings Call)

The Valuation Appears To Be High

As I write this, PLAN is trading at $45.92 per share. At that price, the market value of the 136.4 million shares is $6.26 billion. Netting out $303 million of cash and no debt, the enterprise value stands at $5.96 billion. This means that, on a trailing basis, the EV is 15.9 times revenue of $376 million. In a normal environment (off-pandemic) and with normal revenue growth expectations (30-40%), this price would be right, given the multiples of other SaaS names with similar growth ratios.

But expectations have been adjusted. For example, analyst estimates for NTM revenue are $453 million, which represents a growth of nearly 20% and a forward EV/Revenue of 13.2x, which I would accept if the company had a much better profitability profile. Anaplan is not profitable, not even on an operating cash flow basis, and it is far from being profitable (check my previous articles for further details on this matter). Also, my expectations for NTM revenue are lower than those of the analysts. I expect growth to be more like 10-15% during the next 12 months, given the current and expected performance of billings, so a 15.9x trailing multiple does not make much sense for me.

Furthermore, I am confused by the market response to the earnings release. It seems that, with this stock, the market has a more long-term-oriented mindset than with other SaaS stocks and their results. Last quarter, and with better results, the stock sold off hard. It must have lost around 50% of value on that sell off, but yes, it aligned with the broader coronavirus sell-off of late February. I guess that whoever bought the stock when it was at the bottom was buying it with a very long-term mindset and would not sell it because of a short- to mid-term issue when its stock position almost doubled in a short amount of time.

I believe in the long-term growth potential of Anaplan beyond its issues with the pandemic, but would not buy the stock at current levels. I think that the price may go down on disappointment from the next quarter's results and a better opportunity will show itself.

The Bottom Line: I'm On The Sidelines Waiting For A Better Price

In a quarter where analysts were supposed to assess the success of the sales reorganization taking place at Anaplan, the coronavirus pandemic came to the stage and altered the situation. No one knows to what degree the performance of the company was affected by sales execution issues or the pandemic. Still, the impact of the coronavirus on Anaplan is significant and will last a few quarters.

It is hard for me to make an investment decision because the post-earnings price moves confuse me. The market reaction was negative, but not enough to create a proper entry point. The valuation of the stock is not appropriate for the growth expectations for fiscal 2021 and the company's profitability profile. I think that investors are either overoptimistic or very long-term minded. Therefore, the stock could go down further on disappointment during the year, or it could go otherwise as the company achieves good progress on other important metrics away from revenue, billings growth, or net retention.

I am neutral on PLAN, and waiting for a better entry point, somewhere near or below the 10x trailing EV/Revenue mark.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Comments

[Ziggy60]

Nice read. I’m also waiting for a good re-entry point. I bought earlier this year and sold last month. This article clarified a few things for me. Thanks.

[AlphaBeta Asset Management]

@Ziggy60 I'm glad you found it helpful. Thanks for the feedback.