Introduction and Investment Thesis
Anaplan (PLAN) is a cloud-based corporate planning tool focused on large enterprises that provide organizations with an easy to use, well-integrated platform to conduct scenario modeling, data analysis, and other analytics type workloads. Unlike legacy planning applications which were largely confined to finance departments, Anaplan’s solution allows all stakeholders across a company to collaborate effectively in corporate planning initiatives. This differentiation is driven by the company’s Hyperblock technology that allows for thousands of simultaneous users and drives the strong predictive analytics solution that underpins the platform.
The company currently serves over 1,500 customers across all industries, including technology, healthcare, retail, transportation, and governments. Customer concentration is minimal with no customer making up more than 10% of the revenue base.
Even through COVID disruptions, the company has performed well as one of the tailwinds of the pandemic is increasing digitization of corporate processes and planning. This is due to stay at home orders and social distancing demands that in turn drive the need for a cloud-based solution to allow disparate departments in an organization to collaborate effectively and efficiently across numerous geographies and time zones. Even though initially Q1 was soft driven by the more enterprise-sized customer base holding off on big-ticket items as they worked through the crisis, this seems to have been remedied to an extent in Q2 and is what drives my overall bullishness on the company’s prospects.
However, sales cycles are still long and the company is reliant on existing customers for 60% of bookings in Q2. This illustrates the difficulty in landing new clients in this crisis. However, the strong upsell rates from the existing base is a positive and will be a good growth source while we wait for a more normalized sales environment.
To put specific numbers around this, the company saw a significant decline in billings growth in Q1 as seen in the chart below to just 10% YoY. Based on Q2 performance, it seems that the company has finally hit an inflection this quarter with strong billings growth in Q2 of 22% YoY after a significant slowdown in Q1. This is alongside strong retention of nearly 116%, which makes me believe that the company is at an inflection point
More importantly, what is core to my bullishness on the stock is the fact that the company operates in a massive market filled largely with competitors that have a less sophisticated product offering. This includes major competitors such as SAP (NYSE:SAP) and IBM (NYSE:IBM), which the company has successfully been able to take share from over the last few years. Additionally, the overall market size is $17B in 2018 and is expected to grow to $21B by 2021, according to the company’s S-1. Even with more modest differentiation, I believe that this market size is large enough and growing fast enough for multiple companies, including Anaplan, to win.
Even through COVID, the company generated strong growth of nearly 26% YoY from $84.5M to $106.5M in Q2 2020. Subscription revenue, which is the main driver of value for the company, grew even faster at 32% YoY to $97M. Likewise, operating losses decreased on a dollar value basis YoY, illustrating the increasing benefits of scale on the operating leverage of the business. Cash remains strong at $304M which gives the company significant liquidity to grow without needing to raise additional dilutive equity.
The market that Anaplan plays in is highly competitive with numerous well-funded competitors, including SAP, Workday (NASDAQ:WDAY), Oracle (NYSE:ORCL), and IBM, that all offer similar enterprise planning solutions. However, I believe that Anaplan’s strong cloud based offering as well as proprietary Hyperblock technology provide meaningful differentiation and should allow the company to continue to grab share over the foreseeable future.
Additionally, the company’s net loss is still high at nearly $140M if you annualize the most recently completed quarter’s net income. Although liquidity remains strong at $304M in cash, there is always a risk of further dilutive equity rounds.
Valuation and Conclusion
The company currently trades at a EV to revenue multiple of ~21x. However, as the company continues to perform and demonstrate an inflection on performance, I believe that it is highly likely that it can re-rate to the 26x range as seen in the past. This can drive ~25% upside from today. In conclusion, I believe that the valuation is compelling and that Anaplan has a strong platform in the space with clear signs of a performance inflection happening. This drives my bullish rating on the stock.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PLAN over 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.