Description

Due to its lengthy trading suspension and dilutive capital raise caused by a salesperson's fraud, Cirata PLC (CRTA) has been left for dead by the capital markets. As a result, investors have ignored the entrance of a capable, proven, credible software management team poised to finally exploit CRTA’s valuable technology. This new team has introduced ambitious long-term goals that, if achieved, would generate a share price that is multiples of current levels.

Formerly known as WANdisco (WAND), CRTA offers cutting-edge data migration software powered by its distributed PAXOS algorithm, which produces an accurate replication of a target system. This software is uniquely able to transfer large (petabyte+ scale), continuously changing data sets with zero downtime and zero data loss.  By enabling fast transfer, seamless migration and reliable consistency of large datasets, CRTA’s technology empowers customers to transition from on-premise to hybrid and multi-cloud environments with long-term use cases in artificial intelligence, machine learning, IoT, and data analytics.[i]

Fraud Investigation

In late 2022/early 2023, WAND’s share price surged because of early large wins in the nascent IoT data migration market. These wins drove reported bookings to grow 967% for FY 2022[ii].  Capitalizing on this momentum, WAND announced in early March 2023 to explore an additional listing for its shares in the United States.[iii]

However, just three days after this relisting announcement, WAND shocked the market by revealing that the company had found “significant, sophisticated and potentially fraudulent irregularities with regards to received purchase orders and related revenue and bookings, as represented by one senior sales employee”, forcing them to restate the company’s results.[iv]

As a result of this fraud discovery and financial restatement, the company’s shares were suspended while they undertook an investigation.  This situation was exacerbated by the company’s significant investment in growth investments to support these falsified contracts. As a result, WAND’s cost structure was far too high, and the company found itself undercapitalized at the time of the fraud announcement, sparking concerns as to whether WAND could continue as a going concern.[v]

The company’s CEO/Co-Founder and CFO resigned due to their lack of proper oversight and were replaced by a new CEO, CFO and Chairman.[vi]

Strong New Management

CRTA’s incoming management team brings extensive experience with success at large UK software companies. CEO Stephen Kelly joined in May 2023 with a history of software turnarounds.  Most recently, Kelly led the turnaround at UK software company Sage PLC where he doubled the market cap to GBP 8bln[vii] and earn recognition as the most influential personality in the UK in the Tech500 Power List.[viii] 

Prior to his success at Sage, Kelly was the Chief Operating Officer of the UK Government and was also the CEO of Micro-Focus, where  the stock went up almost 3x over the course of his four-year tenure to over GBP 1.0bln of market capitalization.[ix]  Additionally Kelly brings US software experience from his time as COO and then CEO of Nasdaq listed software company Chordiant Software and in a senior sales position at Oracle.[x]

Also joining in April 2023 were CFO Ijoma Maluza, former CFO of BluePrism, a UK based software company that was acquired in 2022 for over GBP 1.1bln[xi].  Further augmenting the team, Chairman Ken Lever was formerly Chairman of Biffa PLC which was acquired in 2023 for over GBP 1.8bln and consultant RPS Group which was acquired in 2023 for GBP 0.7bln.[xii]  In his executive career, Ken Lever was CEO of software business Xchanging PLC which was acquired for GBP 0.5bln in 2016.[xiii]

In short, Kelly and Maluza are seasoned software executives at billion-pound companies and Lever has been chairman at multiple significant UK-listed companies. 

Underscoring their commitment to the opportunity, Kelly, Maluza and Lever all participated in the equity raise, buying ~1.3mln shares at 50p.  Post-raise, management and the board own ~3% of the recapitalized company.[xiv]  Kelly also has been granted 700k options and Maluza received 400k options with a strike set at the 20 day VWAP post listing.[xv]

In November and December, Kelly and two senior VPs bought over 400k shares in the market at prices ranging from 48p to 63p.  Kelly also transferred 246k shares to his 3 daughters at 63p per share.[xvi] Unless he doesn’t like his children, I view this transfer as another sign that he is bullish on CRTA’s long-term future.

We are also seeing optimism from mid-level members of the team.  Sales executive Danny Keating has shared his enthusiasm about CRTA in his post commenting on why he had to return to the company.[xvii]

Financial Targets

So why are these successful, high-profile managers joining a company with a market capitalization of less than GBP 100mln? In short, I believe they joined because they understand that CRTA has huge potential if managed properly.

Before he joined as CEO, Kelly posted his thoughts on WAND on his twitter feed where he talked about the potential for the company to generate $500mln of revenue with 30-40% EBITDA margins as he attempted to rally investor support to save the company. [xviii] 

Since joining as CEO, Kelly has provided more concrete details about his expectations for CRTA’s future, including presenting a Turnaround Plan outlining ambitious targets.[xix]   

This Plan targets a medium-term revenue CAGR of >50%, showing their expectations for rapid revenue growth.  They have also targeted a long-term goal of being a “Rule of 50” company where the sum of revenue growth percentage plus EBITDA margin is equal to or better than 50%.

In addition, CRTA’s management aspires to a 10% share of the estimated future $2.0bln Serviceable Addressable Market (SAM), implying ~$200mln of revenues. This goal shows the scale of their ambition for the next 5 years.

For the near term, the company expects to be cash flow breakeven exiting FY 24 with a Rule of 40/50 company.[xx] Cash flow breakeven implies revenues of ~20mln, which would be over 100% y/y growth compared to the <10mln of revenues expected for FY 23.[xxi]

By presenting these concrete targets, CRTA’s new management team is demonstrating their confidence in the company’s potential for rapid growth.

Progress Since Investigation

The new management team has also made significant progress since they joined a few months ago.  To ensure the company’s survival, they restructured the cost base from $41mln to a more sustainable $22-23mln. CRTA also undertook a $30mln capital raise, ensuring a going concern judgement from their auditors and enabling the completion of audited financial statements for 2022.  As a result, CRTA was able to lift the share suspension and began trading again on July 25th. [xxii] 

One of the key challenges faced by the management team was restarting the company’s order pipeline. Because of the uncertainty during the suspension surrounding CRTA’s ability to survive as a going concern, customers have been prudently waiting for more clarity on the company’s survival before making commercial commitments.

Furthermore, CRTA has historically done a poor job of monetizing its market-leading technology.  As supported by my diligence (see appendix), while CRTA’s technology is described as “genius” and “mind-bending”, the company lacked brand awareness and did not invest in its salesforce such that the support was described as “awful”.

Since relisting, the new management team has resumed commercial activities with existing customers, potential clients, and strategic partners.  They have invested in rebranding the company and put in place an upgraded sales force to support both direct and partner-led sales. As a result, CRTA management has cleansed the pipeline and has since commented that the level of observed customer engagement provides “increasing confidence in its growth ambitions” of the Turnaround Plan.[xxiii] 

The company has also announced multiple customer wins despite the headwinds from the fraud investigation and going concern overhangs.  Since the fraud was unearthed, CRTA has signed renewals with automotive manufacturer BMW, semiconductor manufacturer Analog Devices, and global grocery chain Tesco.  The company has also announced a new agreement with Accenture to implement CRTA at a leading Australian bank, a small initial contract with the FordDirect, a JV between Ford Motor Company and its franchise dealers, an expanded contract with NatWest bank and a renewal with us Insurer HCSC.[xxiv]

While these deals were not massive in scale, the willingness of these large customers to trust their data to CRTA during this period of significant uncertainty around the company’s survival speaks to the value of CRTA’s solution.

This progress has also been shown in their Q3 trading updated where they provided an outlook for sequential bookings growth of 54-114% in H2 2023 vs. H1 2023.[xxv]  This growth is important because it represents the first half that the new management team has been in charge.

Upside Valuation

If the new management team is successful, CRTA has the potential to return multiples from the current share price.  Obviously, precision is very difficult here, so I just present this example to show that the return potential is significant if the company is even close to successful.

Reaching new management’s goal of $200mln of 2028 revenue would suggest a share price of ~GBP 1,100-GBP 1,400 at an 8-10x revenue multiple.  This share price represents a 17-21x multiple of the current share price or ~75-83% 5-year CAGR. 

I believe 8-10x multiples in this upside scenario would be appropriate because CRTA would be a fast growing, highly profitable company (>60% Revenue CAGR to achieve targets, 85% gross margins, Rule of 50, software-like margins at scale).  Companies with these characteristics tend to be afforded high multiples by investors.  At $200mln of revenues, I believe the company would still have a long runway for growth.

Regarding the probability of achieving the ambitious targets set by the new management team, it's important to acknowledge that these are very rough projections. However, they are also the goals of a highly credible management team with a proven track record of success who have now been at the company for several months in a very challenging period.

It’s crucial to recognize that the current management team, led by Kelly, Maluza, and Lever, is not responsible for the mistakes of the old management team.  However, they are responsible for the projections in the Turnaround Plan. Furthermore, as experienced public market executives, I believe they understand the importance of their public projections.

Downside Valuation

Small, cash-burning companies like CRTA are fragile.  The company needs to continue scaling through 2024 and small challenges could have outsized impacts.  The company also has the stigma of its prior fraud and rescue capital raise which will make it univestable for many investors.

However, I do believe it is possible to estimate downside support.  At ~$10mln of 2022 revenues and $22-23mln cost base, CRTA should burn 12-13mln of cash annually. 

CRTA management has publicly targeted being cash-flow breakeven during 2024, suggesting that they see the potential for significant revenue improvement from the current run-rate.[xxvi]  As incoming CEO Kelly put it, “Cirata has a history of under-performance when generating sales bookings and revenue despite the strength of its market leading technology.  We have been shown to be severely inadequate as a sales organization to develop and convert sales opportunities despite the obvious needs of prospective customers and the obvious growing demand for our offering.” [xxvii]

However, even if we assume absolutely no improvement with the new management team and value 2022 revenue at 3x, CRTA would still be worth GBp 31 after 1 year of cash burn or ~53% downside from the current GBp 67 price.

Finally, I believe 3x revenues is conservative for a software company with >85% gross margins and a unique technology.  Furthermore, based on my research, I believe CRTA’s IP would have value to a variety of partners in a sale scenario.

Conclusion

CRTA presents a compelling investment opportunity for investors who recognize the potential of its unique technology and have faith in the capabilities of the new management team. Despite the challenges imposed by the prior management's missteps, the current situation offers a chance to support a company poised for positive transformation under the leadership of a top-class UK software management team.

Not surprisingly, an early-stage company like CRTA has the potential for significant downside.  However, I believe the potential for significant upside from the current share price presents an attractive risk-reward.

APPENDIX- Customer & Partner Testimonials, Learnings from Due Diligence

References before Aug 2023 use old name WANdisco

Customer Testimonials

Outside of Stephen Kelly’s optimism, customer testimonials help provide confidence in the value of CRTA’s technology.  Customer commentary from industry webinars, customer press releases, and CRTA publications[xxviii] have supported the notion that CRTA has a unique asset (emphasis mine) and show some examples of the value of CRTA to multiple large enterprises in different industries. 

“The on-premises solution would have been nothing more than dead end for us, as it would have been too inflexible as well as very expensive. Cirata was the only answer.”- Guido Vetter, Head of Center of Excellence Advanced Analytics, Daimler

AMD’s story offers an excellent case study for the power of Cirata. Leveraging our technology, AMD was able to successfully move their data to the cloud without any downtime or business disruption. “Cirata LiveData Platform provides AMD with consistent data in real time across our cloud and on-premises solutions, offering near-zero RPO and enabling hybrid cloud agility to drive the business forward.”  said Ajay Prasad, AMD’s Big Data Leader.

AMD was facing very similar challenges to what a lot of our other customers face when they move to the cloud. For one, how do you move a large amount of data, terabytes, maybe petabytes of data to the cloud?  And while you are moving this how do you keep data consistent without taking a downtime?.... This is where Cirata’s Fusion product actually came into the picture.  AMD decided to use Cirata Fusion and Azure DataBox as a way to synchronize their data from their on-premise storage to Azure.- Arindam Chatterjee, Principle Group Manager Microsoft [xxix]

GoDaddy Chief Data and Analytics Officer Wayne Peacock, said: GoDaddy often builds applications in-house to best support our growth. However, we found that Cirata's LiveData Migrator delivered the best time to value solution in the use case of a Hadoop to Amazon S3 data migration and replication. Rather than running an internal time-consuming and costly manual migration project, using LiveData Migrator has helped us avoid disruption to our production processes and made 70 TB of data immediately available for Amazon S3 testing.[xxx]

AT&T’s advertising technology arm Xandr also chose CRTA and listed these reasons why (see slide below).  Matt Kowalcyzk Software Engineer at Xandr said, “(Cirata) LiveData Migrator has been useful in a lot of ways by basically eliminating complexity from our organization and I really value those types of solutions.” [xxxi]

Partner Testimonials

CRTA also has an attractive list of strategic partners.  In 2020, CRTA announced partnerships with AWS, a first-party native integration with Microsoft Azure after a multi-year joint project between the two companies to integrate CRTA’s technology into Azure.[xxxii] The company also has partnerships with Google Cloud, Oracle, Databricks, Snowflake and OEM relationships with IBM and Alibaba.[xxxiii]

Jeff King, Senior Program Manager- Azure Storage noted in an introductory webinar, “You can’t just move petabytes easily. There’s just a lot of complexity… That’s why we wanted to address it. We wanted to address it with a turnkey migration solution.  There’s nothing else like it (Cirata) on the market.”[xxxiv]

The company also has partnerships with Snowflake and Oracle, where Oracle will provide “fully funded access to LiveData Migrator for its customers and partners to accelerate data like migrations to Oracle Cloud Infrastructure”.[xxxv] Commentary from these partners has also been extremely supportive.

Tarik Dwiek, Director of Technology Alliances, Snowflake commented:

"Snowflake's Data Cloud is helping customers mobilize their data to unlock
more business value than they would otherwise with on-premise Hadoop clusters.
Our partnership with Cirata and its LiveData Migrator platform will enable
our customers to reduce migration costs and accelerate time to value by
automating the data migration process, while minimizing the risk of business
disruption during the migration."

Vinay Kumar, Senior Vice President, North America Cloud Solutions Engineering,
Oracle, said: "Our goal is to make migrations as easy as possible for our
customers and partners. Adding Cirata LiveData Migrator to our Cloud Lift
Services will help deliver accelerated data lake migrations with robust data
security and integrity across a variety of data sources." 

CRTA also works with system integrators like Infosys, Accenture and others as their cloud migration solution.   Here’s how Infosys describe the solution in a customer webinar.

Satish HC, Executive Vice President, Data & Analytics, Infosys Ltd, commented: "Cirata technology provides a unique platform to migrate "live" data at scale into and within Azure without business disruption. We have proven its capabilities in a multi-petabyte scale customer environment. The native integration with Azure simplifies deployment and makes LiveData Migrator for Azure the primary choice in live data migration scenarios. We look forward to working closely with Cirata in the future to capitalize on the migration opportunity."[xxxvi]

Due Diligence Findings

Diligence performed by myself and other CRTA investors has supported the thesis that CRTA has superior technology.

 But when you guys selected Cirata, do you think that, that decision was really driven by something that was unique, special, like not replicable by another solution?

Yes, yes.- Financial Institution Customer

They are the only ones in the market who can do live replication of data from a Hadoop environment to a target environment- CRTA Reseller Partner

One of the strengths for sure for them is their technology. They have this wonderful algorithm or technology that allows you to copy data without having to shut down the source. That's a magnificent thing because the hardest thing about data migration typically is that time in between when you've got something copied and you have to shut down the original and start up the new one. -Former CRTA Partnerships Manager

On the question of “Why Hasn’t This Worked Already”, my due diligence has shown the shortcomings of the prior management team in terms of execution, name recognition and lack of investment into the sales force. [xxxvii]

So the company is a Dr. Jekyll and Mr. Hyde. The technology that makes it work, Paxos, their modified Paxos algorithm is genius. Just mind-bending technology on the front. The engineering team that supports everything else other than that are awful.

So the actual underlying patents are magical. The ability for engineering to execute on its potential is deplorable. Management spends a lot more time getting good press than actually talking to customers. It was impossible for me to get anybody from the executive team to actually talk to a customer like Advanced Micro Devices, Daimler, Capital Group, after we sold the transaction, they didn't want to have anything to do with the customer. - Former CRTA Sales Director

I suppose maybe the one area that they could improve upon is a lot of people don't actually know about Cirata.

Cirata is a no-name. Nobody heard of it. I didn't hear about it when I was interviewing. I think that they struggled to get the brand out. Some people know about it.- Former CRTA Director of Product Marketing

Those deals got extended because of that delay within the sales network where we thought they would actually speed it up, but they ended up slowing it down because Cirata didn't invest in its sales force, because they expected to leverage the Microsoft sales force or the AWS sales force. -Former CRTA Finance Executive

Catalyst

2024 Guidance

Continued bookings progress