Roth on OVRL nov 14 2014.
OVRL reported 1Q15 revenues/GAAP EPS results of $22.9 million/$(0.42) versus our $22.5 million/$(0.25) estimates. We believe that OVRL's pending merger with Sphere 3D Corporation (Nasdaq: ANY) may create a leading vir tualization, data management/storage platform company. We believe that OVRL and Sphere 3D are making good progress on platforms combining OVRL's storage products with Sphere 3D's Glassware cloud/ mobility virtualization platform and V3 desktop virtualization appliance. The deal may close by end of November with 65% of OVRL's shareholders supporting the deal.
Update on OVRL, Tandberg, Sphere 3D Synergies. In our opinion, OVRL/ Tandberg Data and Sphere 3D are making good progress on achieving synergies in their storage, networking, server and cloud computing and virtualization product initiatives. We believe that the merger with Sphere 3D may close by end of November 2014 with a shareholder meeting scheduled for Nov. 28, 2014. We believe that existing shareholders and management of OVRL own approximately 65% of outstanding stock and have indicated support for the merger. We believe that OVRL and Sphere 3D are gaining momentum in the cloud and virtualization business with platforms such as SnapServer DX2 NAS storage platforms, V3 desktop virtualization appliance, Sphere 3D’s Glassware 2.0 mobility, cloud virtualization software platform, RDX removable disk platforms and Neo XLSeries tape libraries.
OVRL/Tandberg's core NAS storage platforms and RDX platforms are growing well. We note that 1Q15 revenue mix was 84% product/16% services. We believe that Overland’s NAS storage business with the
OVRL One-Year Price and Volume History SnapServer and SnapScale appliances is observing good growth in the
enterprise and SMB market. In our opinion, synergies with OVRL’s distribution
(Tandberg's access to large OVRL distributor/reseller channel) and OEM
customer base (HP, IBM, Lenovo, NEC, Fujitsu, etc.) are positive for Tandberg’s
RDX removable disk cartridge platform's revenue growth. Management
indicated that OVRL is on track to exceed annual operating synergies of
approximately $20 million by 10 to 15% and potentially achieve profitability on an adjusted EBITDA basis, excluding one-time charges, by the end of calendar 2014. We believe that OVRL’s settlement of the BDT Media Automation GmBH lawsuit and a patent cross-license agreement clears the way for future strategic collaboration.
Estimates & Target Price. We update our standalone OVRL FY15 revenues/ GAAP EPS estimates (without Sphere 3D combination) from $114.0 million/ $(0.65) to $114.4 million/$(1.01) including one-time expenses relating to Tandberg Data merger. Our standalone target price of $6 for OVRL is based on 1x EV/FY15 estimated revs of $114.4 million for OVRL excluding pending Sphere 3D merger.
SUMMARY
OVRL and Sphere 3D have indicated early success data points of the joint platforms in examples such as a public sector implementation of Chromebook devices with virtualized applications and storage in the cloud and also cloud deployment of a leading business productivity software application. Another example includes a hospital network implementing a combined applications platform using SnapServer DX2 NAS storage, V3 desktop virtualization appliance, and Glassware 2.0 software.
We believe that OVRL/Tandberg and Sphere 3D have significant areas for collaboration with industry leaders in the cloud virtualization, mobility, networking, and storage market with companies as Microsoft, VMware, Citrix, Cisco, Intel, NetApp, Oracle, SAP, NVidia etc. In our opinion, the combined OVRL-Sphere 3D company will have a significant IP portfolio in areas such as desktop /cloud virtualization and mobility, unified software-defined storage, networking and compute platforms, efficient hypervisor implementations with low overhead including micro-hypervisor technology that can be embedded within a thin client OS or system-on- chip.
Technology & Product Milestones OVRL management has indicated shipment of over 2 million RDX removable disk cartridges to date and over 650K RDX drives shipped worldwide, indicating the growing acceptance of OVRL/Tandberg’s RDX technology for backup and archival purposes. For the network-attached storage (NAS) market, OVRL announced the newest version of its marquee GuardianOS NAS operating system with enhanced features for simplified storage management, higher security, performance, and support for platform sharing, virtualized storage and network environments. For the SnapServer NAS storage platform, OVRL management announced a collaboration with BitTorrent to embed BitTorrent Sync software with the SnapServer NAS storage platform. The combined platform delivers, in our opinion, an integrated, secure private cloud mobility solution with the capability to provide syncing and file-sharing between geographically dispersed mobile devices such as smartphones and tablets, desktop clients, and NAS systems.
Synergies for Combined Sphere 3D-Overland Merger Sphere 3D and Overland have been working together to develop an integrated application virtualization and data storage platform, as well as a virtual desktop infrastructure (VDI) solutions, which are already installed at select strategic customers and partners. The application virtualization platform allows native third party applications to be delivered in the cloud or on premise on a multitude of endpoint devices independent of their operating system. The VDI market, a key segment of the virtualization market, is estimated to be over $5 billion and growing 20% annually, according to Frost & Sullivan. Through the combination, we believe that the combined Sphere 3D-Overland/Tandberg Data company will have greater financial and operational scale, and a large and well established worldwide distribution network and tier one OEM partnerships. We believe that Overland's acquisition of Tandberg Data and Sphere 3D's acquisition of V3 Systems are important building blocks in rolling out a global suite of virtualization/storage and data management platforms.
The combination of Sphere 3D's Glassware 2.0 virtualization solution and Overland's data storage solutions will enable mobile device users the full functionality of any software program or application on any device, anywhere, eliminating the application limitations, data management and security problems for enterprises created by the BYOD (Bring Your Own Device) phenomenon. Mobile users that need productivity applications such as word processing, spreadsheets, presentations and collaborations, specialized software for computer-aided design (CAD), magnetic resonance imaging (MRI), software development, video production or customized legacy applications can now experience full application functionality via the cloud or in the data center.
Combined Sphere D-Overland. Tandberg Data entity will have a $100 million to $120 revenue run-rate with upside possible from Sphere3D cloud storage/virtualization software and appliance revenues. We believe that investors may find the combined Sphere 3D-OVRL-Tandberg entity to be a more attractive investment opportunity with scale, diversified product and customer base, and a lower opex structure. The combined company has the ability to accelerate new initiatives such as virtualization and public/private cloud software and data management platforms, scale-out NAS storage, cloud/mobility storage, mission-critical enterprise data backup and recovery through disk and tape solutions, etc. The combined company will have a more global customer base with Sphere 3D strength in Tandberg's strengths in EMEA and cost-effective manufacturing base in China complementing Overland's strength with SMB and channel partners in
VALUATION
Our standalone target price of $6 for OVRL is based on 1x EV/FY15 estimated revs of $114.4 million for OVRL excluding pending Sphere 3D merger. Based on the success of the combined OVRL-Tandberg-Sphere 3D company in synergistic storage and cloud/virtualization platforms, the stock may have upside potential longer-term. The combined Sphere 3D/OVRL company has upside potential depending on the success of the merged Sphere 3D and OVRL/Tandberg virtualization software and data storage and management platforms, operating and product/customer synergies with the deal, recent branded network-attached storage (NAS) product initiatives such as the SnapServer DX and SnapScale X2/X4 scale-out platforms, continued operating expense improvements, and software/storage/cloud virtualization platform offerings that leverage the global scale and OEM/channel partnerships established by OVRL and Tandberg Data. Impediments to our price target include: inability to close the Sphere 3D and OVRL deal, lower than expected sales due to macro weakness in enterprise/SMB IT spending, delays in ramping new product platforms such as V3 virtualization/ storage and server appliance, SnapServer DX/SnapScale clustered NAS solutions, lack of success with Sphere 3D to sell integrated storage/virtualization software appliances and cloud services.
