|Shares Out. (in M):||126||P/E||0||0|
|Market Cap (in $M):||7,430||P/FCF||0||0|
|Net Debt (in $M):||30||EBIT||0||0|
Anaplan is an industry leading cloud-based provider of Connected Planning solutions
Attractive product attributes
Provides tremendous ROI to clients: Reduces forecasting and planning cycle by weeks, increases forecasting accuracy, reduces opex and organizational complexity, drives sales with quicker time to market
Fast implementation period: Anaplan solutions get up and running within months for even the largest, most complex organizations
Highly sticky: single digit churn rate
Small % of IT budget
Complex / high switching cost
Lots of product use cases: A big piece of product distinction is Anaplan’s ability to deliver planning solutions suitable to various departments and use cases (across finance, sales, supply chain, etc.), rather than just financial planning
Client feedback is excellent: Great product, fast, reliable, easy to use, accurate, high connectivity, premium product in the marketplace
Strong moat with attractive technology, network, and platform ecosystem effects
Honeycomb Effect: Starting with a single use case, Anaplan clients are adopting Anaplan rapidly to adjacent use cases
Products often land in FP&A and then extend to other firm use cases, (e.g. financial planning, supply chain planning, sales planning, performance management), divisions (e.g. HR, FP&A), business lines, geographies, etc.
Validation: FP&A is ~60% of use cases
Network Effect: A network effect is created as employees across different functional areas of a firm use the product interconnectedly with each other. In addition, Anaplan software can be used to link different companies together (e.g. Coke uses Anaplan to connect with their bottlers).
Proprietary Technology: Anaplan’s proprietary Hyperblock technology provides a central in-memory modeling hub for the platform, and is a key competitive advantage in enabling extensibility and scale while providing real-time calculations to many concurrent employee users, making it the primary source of information/data for decision making within an organization.
Ecosystem: Broad ecosystem of partners are investing heavily to establish practices using Anaplan’s platform
Connected planning projects can drive as much as $8-10 of services work for every $1 of revenue for Anaplan
Management noted that partners trained to be Anaplan model builders were growing from ~1,000 to 1,500 this year.
~50% of deals now involve a partner.
The partnership ecosystem is rapidly growing and will contribute to sourcing larger deals
Annual contract values (ACV) are ~3-5x larger when partners are involved
Diverse group of ecosystem partners
High end: Deloitte, McKinsey, Bain, PWC, Accenture
Success with Deloitte
Announced in June 2019 signing of 41 new deals
Deloitte increased its number of certified Anaplan model builders by 67% y/y to keep up with market demand
Deloitte now has 650+ consultants delivering Anaplan solutions to customers—with plans to double that number by 2021
Regional: Wipro, Appirio, Slalom, etc. These clients reach more broadly into the Global 2000
Services: Anaplan has a large network of certified partner resources globally that deliver ~75% of the firm’s implementation projects.
Based upon extensive due diligence, we believe Anaplan is the “gold standard” in the marketplace. Anaplan has an unparalleled position in the marketplace today given its leading technology, incumbency status among large enterprises, expertise, and ecosystem of relationships
Anaplan competes against greenfield opportunities, ERP providers, and point solution vendors
Greenfield: Conversion of manual, excel-based processes
ERP Providers (Workday, SAP, Oracle, IBM): Anaplan competes most directly with financial planning solutions offered by large ERP. We believe Anaplan will win for several reasons:
Quicker time to value
Lower cost of ownership with cloud innovation and service delivery
Broader use adoption with less complexity working with software; minimizes the need for IT involvement
ERP systems are not investing in their planning products
Point Solution Vendors: Next-gen Point Solution vendors specialize in specific use cases and/or segments and have a finite market opportunity. Vendors include: Adaptive Insights (acquired by Workday) and Host Analytics in Finance/HR, Callidus (SAP) and Xactly (Vista) in Sales planning, and JDA and Kinaxis in Supply Chain
Adaptive Insights (Workday): Relative to Anaplan, Adaptive tends to be a mid market offering (not enterprise) geared towards budgeting / financial planning, whereas Anaplan tends to operate more broadly and thrives on complexity extending across an entire organization
Go-to-Market Strategy is Working
A top priority of Anaplan management is to penetrate the Global 2000 corporations, of which they have landed >250 already
Anaplan utilizes a land and expand strategy, targeting a key functional area or use case before expanding across the organization
Anaplan uses (1) direct sales team and (2) partners
Direct Sales: Targets large enterprise customers
Partners: Anaplan has a large network of consulting and implementation partners, extending the reach of its direct sales team while minimizing the (margin dilutive) services load on the organization.
Partner helping enact repeatable processes for targeted use cases / industries which reach below the primary direct focus of G2K customers
Proof Point: as of 1Q20, Anaplan’s Top 25 customers are spending $3mm+ ARR annually vs. ~$300K in initial purchase price (a 10x increase).
Large Growth Market
An industry inflection in demand is taking place and Anaplan is well positioned
IDC sizes the WW performance management and analytic applications software markets at $17Bn today, expected to grow to $21Bn by 2021
Gartner sizes the analytics and business intelligence software market at $20Bn+, the ERP software market at $35Bn+, and the supply chain management software market at $15Bn+.
PLAN is tiny today at $250mm run rate subscription revenues
PLAN shows up in 4 separate Gartner magic quadrants, validating breadth of its platform capabilities
Strong unit economics justify investment in growth
CAC Payback = 22 months
New business wins (a good thing) will initially drive down margins. Management has provided contribution margins on new business wins. In year 1, contribution margins are sharply negative due to heavy up-front costs landing a client, but the economics become considerably more favorable in years 2-3, improving to 60+% by year 3
Anaplan is investing in a land-grab market opportunity towards driving sustained 30+% revenue growth
KPIs are incredible, supporting long runway towards 30%+ top line growth
Customers +25% y/y
ARPC +30% y/y
Net dollar revenue retention consistently >120%+, yet there is room for expansion
Anaplan has ~1150 customers, of which >250 are within the Global 2000
Revenue run rates imply an average annual customer spend of >$250k
Management has attributed strong revenue growth to the increasing size of initial lands and accelerated expansions which validate the significance of Anaplan to clients
Subscription Revenue: We break out revenue into G2K and non G2K
Global 2000: Assuming Anaplan can reach ~1/2 of the Global 2000 over time and that the spend potential of this group can reach current Top 25 levels would suggest a ~$3Bn revenue opportunity (vs. $250mm today)
Outside G2K: Historically ~45% of revenue (assume relationship holds). Large G2K clients have pushed Anaplan onto smaller companies.
Professional Services Revenue: Should continue downward trend as more work gets shifted to partners
Professional services gross margins continue to operate near break-even.
Overall gross margins should scale into the high-70s over time as subscription revenues represent a greater portion of total revenues
Margins will be depressed in the intermediate term (and will slowly rise over time) due to reinvestment to drive growth: CEO Frank Calderoni and CFO Dave Morton believe prior management drove towards margin improvement too early
Both have indicated a focus on top-line growth at the expense of near-term margin expansion to capture the inflection in market demand
Sales and Marketing
S&M investments are primarily focused on adding direct sales reps
Enterprise focused sales reps generally take 9-12 mos to ramp up
Over the long term, Anaplan should be able to grow into double digit positive operating margins with a mix shift away from professional services and sales and marketing providing the greatest amount of operating leverage
Analysts have raised concerns regarding management’s focus on reinvestment to drive growth given FY 19 revenue growth came in at 43% with a -31% margin.
Nevertheless, S&M efficiency metrics should offer some comfort. Last year Anaplan generated $87mm in incremental new billings on $97mm in prior year's S&M expense. See below.
FY 20 billings/top line growth provide validation on whether S&M investments are effective
Given these dynamics, key questions should be how long Anaplan’s negative margin profile should persist and how much operating leverage can ultimately delivered over time
The Company has highlighted FCF margins and the pace of trajectory towards break-even are a function of billings growth
We forecast Anaplan will reach FCF break-even byFY22
Bigger Picture / Conclusion
Rare asset in SMID cap space: Enterprise focused SMID cap companies are rare and high in strategic value
Beating consensus expectations: Anaplan has only been public for three quarters but has consistently delivered ahead of consensus expectations
Takeout potential: Anaplan would be a highly strategic asset to a number of players, including SAP, ORCL, MSFT, IBM, CRM, NOW
Anaplan’s stock price could continue trading strong if Company continues to deliver strong growth.
Multiples could hold, or even expand, when the Company hits breakeven by FY 2022 (CY 21) and delivers to the rule of 40.
Anaplan shares trade ~19x EV/S on CY20E; if this multiple holds thru to CY21 that would translate to a $75 share price
Supporting this valuation would be intrinsic value in the customer base and the Company will have pricing power in the future from its moat and high customer ROI
Continues to deliver strong growth
Capture new lands in G2000
Delivers on gross margin expansion, shifting professional services work to partners