Anaplan (PLAN: $37)
Coverage initiated March 8, 2019 at $36.56 in the AGGRESSIVE portfolio.
Company Overview. Anaplan is a San Francisco-based software developer with 20 offices globally, nearly 20 partners and over 1,000 customers. The company uses cloud computing to deliver a planning module that allows corporate executives to connect various platforms and accelerate their decision-making. What makes the offering so powerful is the ability to analyze data on employee performance and use that data to better inform their strategic decision-making.
The core product is the Hyperblock, a patented technology that allows for instantaneous updates to software databases. Hyperblock connects an enterprise's disparate parts by linking the data of different business lines so managers can see how their decisions impact other operations and stakeholders throughout the organization.
The company has also released the Anaplan App Hub, a proprietary community for customers who want to build and share planning apps. People who love to code and don’t happen to work for Anaplan can offer up their own applications as improvements on the current product line. This allows the company to leverage the core competencies of its customer base as opposed to relying solely on in-house innovation and turns what would otherwise be a closed ecosystem into an open platform more like Apple's App Store or an open-source community.
Market Analysis. Software-as-a-Service (SaaS) is a growing industry that receives a lot of attention from investors. First and foremost, SaaS companies like Anaplan operate on a subscription basis, so revenues are consistent and predictable. We love that.
Additionally, customers can be upsold on upgrades and enhanced services, leading to increased revenue generation. And given the fact that SaaS companies like Anaplan offer services that are embedded into a company’s daily operations, they are difficult to eliminate without disrupting the workflow of employees, hence retention rates are traditionally very high. Once an SaaS company establishes itself as a core component of a customer's operations, they tend to stay there, unless supplanted by a more innovative or cheaper alternative.
Competitive Analysis. Anaplan is a mid-cap Tech company ($5 billion market cap) and focuses squarely on enterprise planning capabilities. Competitors include Tableau, Oracle, IBM, and Salesforce, all of which deliver planning software as an ancillary service to their core operations. For example, Salesforce primarily supports customer relationship management tools meant for sales and marketing executives. While enterprise planning is an adjunct service, it is not their core competency. Anaplan, on the other hand, competes with these major players by focusing on a core competency of enterprise planning – in other words, software that enables managers to better plan their employees’ daily workflow.
Anaplan’s relatively small market cap and focus on enterprise planning make it a strong candidate for an acquisition from one of its competitors looking to gain a leg up in the enterprise planning sector of SaaS.
Financial Analysis. Revenue has increased dramatically in each of the last three years with growth of 70% in 2016 and 40% thereafter, topping $240 million for 2018. While Anaplan has yet to reach profitability, that isn’t the goal yet. In fact, the company nearly doubled sales expenses last year to further establish its global footprint, taking profits farther out of reach for the time being. The goal here is to capture market share as quickly and efficiently as possible and entrench the company in its clients’ operational workflow. Once that happens, revenue comes rolling in year after year and it becomes harder and harder for an upstart to supplant the company and poach clients.
Anaplan has been increasing its cash on hand, from $100 million at the start of 2018 to $330 million at the start of this year. That’s a 3x increase in the span of a year, which places the company on much surer footing going forward, and opens up further expansion possibilities, either by opening more offices and boosting the sales force or even by absorbing smaller Tech companies.
And the sales boost is having a major impact. Anaplan closed four deals of $1 million or more in 4Q18 and is successfully up-selling major clients. On the most recent earnings call, the CEO noted that a multi-national Pharma company has been a client for a 18 months and just signed up for another $8 million a year in services. According to the CEO, the company and client are “still in the early stages of the relationship, with so much more opportunity ahead.”
The Stock. The stock went public last October at $17. It’s been a solid 100% return since and the upward trajectory is bound to continue for some time. Management is forecasting 30% YoY revenue growth this year, which turns a $240 million base into $310 million in the next 12 months. And remember, the stock catapulted 5% after its first earning call and another 10% after the second. So we’re trending in the right direction here when it comes to performance vs. expectations.
Many competitors are growing revenue at around 30% per year. Anaplan is comfortably outpacing them with +40% YoY revenue growth. Even though the company forecast 30% growth over the next two years – placing them in line with their competition – we believe they are being conservative and will outpace that growth rate. 4Q18 revenue grew nearly 50% YoY, representing a 9-point acceleration from 3Q18’s 40% YoY growth. So the company is growing its top line faster and faster and we so no reason why there should be a sudden pullback to 30% growth for the year.
Additionally, there is zero long-term debt on the books. With more and more cash in the coffers every quarter, Anaplan could decide to rocket-fuel its growth or finance a strategic acquisition with a debt offering. For now, neither is necessary given the meteoric growth rates, which are occurring organically.
Risk Factors. Anaplan is currently priced at 12x expected revenue for the next fiscal year, which is not cheap. Direct competitors DocuSign, Mimecast and BlackLine (as opposed to SaaS Blue Chips like Tableau, Oracle and Salesforce mentioned above) all trade below 10x on a forward revenue basis.
That said, Anaplan has by far the best potential to capture more meaningful market share, given its proprietary suite of products and services. The company doubled in market cap in less than six months – and did so for a reason. They are a clear innovator in the space, so investors are willing to pay a double-digit multiple on forward expected revenue. Additionally, as noted above, the company is likely to grow its revenue beyond that 30% target, which management wisely introduced as a very conservative low bar.
As we mentioned above, sales and marketing costs have moved higher, but that’s to be expected for a growing Tech company. These numbers aren’t an apples-to-apples comparison, since Anaplan was a private company during 4Q17. Public companies tend to have higher operating costs, so we’re going to keep an eye on operating costs moving forward, and see how they compare to the most recent quarters. We fully expect costs to continue rise and in no way anticipate a profit any time soon for this growing mid-cap Tech company. That said, should sales and marketing costs continue to increase without those seven-figure deals continuing apace, then we might have to sound some alarm bells. For now, we’re fully content with the direction the company is headed.
BMR Take: Anaplan’s went public at perhaps the worst time all year – October, right when the ground was collapsing under the market’s feet. That said, the stock still managed to double in five months. Now that the market is on surer footing and the mid-cap Tech sector is back on an upward trajectory, look for Anaplan to ride the broader tailwinds to higher and higher peaks. This is a fundamentally sound, growing company with a proprietary cloud-computing platform. The initial launch has been all positive and we see no reason for a slowdown as management ramps up its sales and marketing. We’re planning on Anaplan having a big year with continued outperformance on forthcoming earnings calls.