Sphere 3D Has A Large Upside

|  163 comments  |  About: Sphere 3D Corp. (ANY), Includes: ERIC

Summary

• While suffering some headwinds from shorts and financial distress from a large shareholder, Sphere 3D shares now have a very favorable risk/reward ratio.
• A flurry of new deals, market inroads for their most promising virtualization solution Glassware, and a financial turn around provide chances for a very significant upside.
• Recent company guidance buttresses our thesis that the whole is much more than the sum of the parts of the acquired companies.

We have a fairly simple thesis on why you should buy Sphere 3D (NASDAQ:ANY), the virtualization and storage company, and after a rather steep sell-off, one can profit from the timing as well. Basically our thesis consists of three legs:

• Sphere's Glassware 2.0 application virtualization solution holds a lot of promise.
• After Sphere 3D acquired V3 Systems and Overland, and the latter acquired Tandberg, the whole is more than the sum of the parts.
• Overland was shrinking and loss making for years, but it is experiencing a turn-around.

Glassware 2.0
Much of the hope for the company is based on Glassware which has introduced a new way to virtualize applications and make them available anywhere, independent of device and operating system, with the same functionality.

You can find a description of how it works here and here, and an interview with (former) CEO Peter Tassiopoulos here. For our purposes it is more important to realize the advantages over competing solutions:

• Glassware is able to virtualize applications that other solutions can't
• Glassware is more efficient than other solutions in terms of resources it needs to function
• It is a very simple solution

Virtualization expert Simon Bramfitt commented on Glassware:

Glassware is fast. When I connected via cable modem from home to a Glassware server over 2,000 miles away in Mississauga, new sessions launched nearly instantaneously. Moreover, Sphere 3D's RDP-based remoting protocol performed well enough not to draw attention to itself as something significantly lacking in comparison to Citrix's HDX, at least when accessing a range of office applications.

According to Bramfitt, all but three of the thousands of new offerings at that VMWare conference last year were just incremental improvements. Glassware was one of three truly new products.

Now, most of these are just management claims, is there any independent validation for that? One of the first deals was with Novorad, here is their CEO:

"We have tested many of today's leading virtualization technologies and have looked at a number of potential solutions; none were able to deliver the simple migration to virtualization and incredible performance that we get from the Sphere 3D approach to virtual computing." said Paul Shumway, Senior Vice President of Novarad, "The first time we saw our products run on Glassware 2.0, we were sold ".

Novorad is a leading medical imaging company and will offer this to their clients. The uptake of this solution seems to be going pretty well:

In response to high customer interest at SIIM, Novarad placed orders for Glassware 2.0™, delivered on Overland SnapServer DX2 appliances, and for V3 Appliances with Desktop Cloud Orchestrator™ management software. A portion of the initial order from Novarad will fulfill a deployment to one of the leading Hospital Systems in the United States. Through a drop-in appliance approach, NovaGlass is able to deliver enterprise-class performance and reliability coupled with the scalability required to meet the needs of customers that range in size from small clinics to large Hospital systems.

You might also note that Shere 3D is a partner in the Dell DRIVE Pluselectronic health record initiative

Dell DRIVE Plus, a collaboration among Dell, Red Hat, Intel and VMWare, helps make deploying and optimizing electronic health record (EHR) solutions easier and more cost effective. Healthcare customers who implement this innovative solution reap many benefits, including lower EHR costs and the flexibility of an open industry-standard platform. The platform is expanding to include both Glassware 2.0™ and Desktop Cloud Orchestrator™ from Sphere 3D.

Dell, Red Hat, Intel, VMWare.... Sphere 3D, these are rather big boys. So Glassware seems to have a toehold in the medical document market already, just one vertical.

Speaking about Dell, there was that new Dell server presented at the annual Dell World, with a Glassware logo and it wasn't in the Sphere 3D boot. While we do not yet fully understand the relation between the two companies, the fact that there is one is telling in and by itself.

Then there is their partnership with Ericsson involving both V3 Desk Orchestrator and Glassware solutions for managed service providers. This seems to already providing results:

The new solution has been in production with various clients since the initial part of this year. New trials are also underway and in planning stages with several North American MSPs in conjunction with Ericsson, a world leader in the rapidly-changing environment of communications and managed services technology.

We think a recent deal with Adams NetWorks is also the result of this:

Sphere 3D Corporation (TSX-V: ANY, NASDAQ:ANY), a virtualization technology solution provider, is pleased to announce that Adams NetWorks, a subsidiary of Adams Telephone Co-Operative ("Adams"), has selected Sphere 3D to provide a complete self-serve virtualization solution designed to address the needs of their small and medium sized business ("SMB") customers.

Self-service virtualization solution apt for SMB customers point to the ease of use, a competitive strength of Glassware.

Then we have the educational vertical, more especially Chromebooks, the technology of choice for many school districts because of its cost and IT management simplicity. Chromebooks run on Chrome from Google (NASDAQ:GOOG), the problem with Chromebooks is that they can't really run legacy Windows applications.

This is where Glassware 2.0 comes in, with their six click virtualization solution. There are already customers, and these are both large and happy, Here is Dustin Hardin from New Caney:

"We tried traditional virtualization techniques but the specific applications we needed couldn't virtualize or wouldn't scale. With our Glassware 2.0 enabled Dell™ server, we were able to virtualize the applications we needed and future proof our investment in Chromebooks for our students," commented Dustin Hardin, Director of Technology of New Caney ISD, a current Glassware customer. "Having the ability to securely deliver virtualized Windows-based applications to our students allows us to plan around our own technology roadmap instead of having to rely on multiple software vendors to release compatible versions or maintain support for existing versions already in use by our schools."

New Caney is a school district with a 14K Chromebook implementation. Mr. Hardin even demonstrated the Glassware solution at a recent education conference, so there might be others in this vertical getting interested.

Then there is the Chesterfield County School district, with a whopping 32K Chromebook implementation. Guess what they are using to still be offering legacy Windows apps? Yes, Glassware 2.0.

Note also that Sphere entered in agreement with Microsoft so that they can offer these solutions and they recently added the ability to use Google drive as storage solution. The latter is important as Glassware sits on the server while student work is likely to be saved on the local drive or on the network.

Neither is optimal. The local drive (the harddrive of the student's PC) doesn't make his/her work available elsewhere, and network storage creates complexity and risks where there are multiple students working on the same project or assignments (copying or deleting work of others, etc.). Creating a secure folder for every student is cumbersome, so why not simply use an existing solution like Google Drive?

So we have Glassware entering large verticals like medical documents, managed service providers and education already, partnering with really big companies like Dell, Ericsson, Microsoft and Google. The claim by shorts that Glassware is fluff without sales looks rather silly, while the claim by the company that it provides an easier and cheaper virtualization solution is gathering evidence as we speak.

New company guidance
These are very promising developments but investors are also interested in the monetary side of things. The confidence of management has now increased sufficiently to put out rather promising guidance. Because of the incomparability of quarters and the effects of acquisitions, these are a little difficult to read for the uninitiated, but the most relevant part of it was the following:

we have set our goal for an annualized run rate of over US$160 million in Q4 2015.

Since the revenues of Sphere 3D alone (without Overland) and V3 Systems were very small, this can best be compared to the annual run rate of Overland/Tandberg, and it turns out that $160M would be almost double that (the last quarter, Overland/Tandberg revenues were $22.9M, which would amount to $92M annualized).

Now, the question is, if this indeed materializes, where does this spectacular growth come from, given that Overland was shrinking and loss making for years.

Turn around at Overland?
The first candidate is a turn around at Overland. There are some signs that thetape storage market is turning around, so this is a possibility, but still, after years of declining revenues this would really be a spectacular turn around and isn't very likely, in our view.

What should not be forgotten is that apart from possible revenue growth, Overland is likely to turn around in the profitability department, arguably even more important for the share price of Sphere 3D:

The significant operational changes at Overland will result in cost-savings of 10% to 15% (or $2 million to $3 million) greater than our previously-announced target of $20 million. The final phase of the integration plan, which includes recent organizational reductions and changes to our manufacturing and supply chain operations, is expected to positively impact gross margins going forward. The Tandberg integration plan will be completed prior to the closing of the merger agreement with Sphere 3D and is expected to allow for a profitable run-rate exiting calendar year 2014, excluding one-time charges and stock compensation expense. [CEO Eric Kelly in Nov 2014]

What are these one-time charges and stock compensation expenses?

One-time costs for the first quarter of fiscal 2015 were approximately $1.9 million. Stock compensation expense was $0.8 million in the first quarter of fiscal 2015, compared to $0.9 million in the first quarter of fiscal 2014 and $1.2 million in the fourth quarter of fiscal 2014. [Q1 2015 results]

So we must be pretty close, and if revenues are exploding the way the company predicts, the company will likely enjoy solid profitability pretty soon. Here is from a recent (February 2015) SEC filing:

The acquisition of Overland complements the activities of Sphere 3D and is expected to be immediately accretive to earnings.

The whole bigger than the sum of the parts
While the company might already be at, or close to profitability, we haven't yet explained the projects ramp up in sales. If these management projections are right, it isn't likely to all come from Overland/Tandberg, given the previous yearly decline.

By the fourth quarter, the yearly revenue run rate will have increased almost $70M. Is this all Glassware 2.0? If so, this would be a rather dramatic ramp up, and the first half of this article provides some substantiation of that. We simply think that the whole is much larger than the sum of the parts:

• Overland's acquisition of Tandberg gave it more scale, geographical complementarity and scope for big cost reductions.
• Sphere 3D's acquisition of V3 Systems gave it complementary capabilities in the realm of desktop virtualization.
• Sphere 3D's acquisition of Overland/Tandberg is providing both Sphere 3D and V3 Systems with a 17k Overland reseller network. Many potential clients would also be rather hesitant without the service and support organization of the scale of Overland to enter into contracts with very small companies like Sphere 3D and V3 Systems without that.
• With Sphere's application virtualization and V3 System's desktop virtualization, Overland has a much broader product offer which enables it to provide integrated solutions (selling to clients like Jefferson Homebuilders, Industrial Networking Solutions and AmeriFirst Finance, all in the last two months.)

The proof of this thesis is that all of these four companies were really struggling on their own. Evidence is mounting that the combination is thriving. Apart from the deals already mentioned, the combined Sphere 3D has now able to close big distribution deals with the likes of Promark (as it happens, the biggest ICT distributor) and Atos.

Share performance
The remarkable thing is that after the flurry of deals and promising corporate updates of greatly increasing financials, the share price has gone south.

Now, this is still a small and relatively unknown company, and it is in the sort of waste land between retail and institutional investors and valuation based on promise to one based on harder financial data.

The stock price of companies like that have a habit of being rather volatile, and Sphere's stock price has additional hurdles of a fairly large short position (and accompanying articles) and a large shareholder (Pinetree) in some financial distress.

But with the resent guidance and an end of the bleeding of Overland, we think we're on much more solid footing and where Glassware can take the company remains to be seen, but the initial customer acceptance is very promising.

While the price might remain volatile for a while, we think that the risk/reward ratio is particularly favorable at below $5, given the flurry of recent deals, the expected ramp up in sales and the turn to profitability at Overland.

By Shareholders Unite

Source:http://seekingalpha.com/article/2930376-sphere-3d-has-a-large-upside