Point Of Return
Sphere 3D Corp.
debut on the NASDAQ Global Market
this week heralds the arrival of a new and powerful competitor to
the Information Storage and Virtualization sectors - two of the
fastest growing segments of the world economy.
The incumbents in the space are
Citrix Systems, Inc.
(NASDAQ:[[CTXS]]) with a $10 billion market cap,
(NYSE:[[EMC]]) with a $54 billion market cap,
(NYSE:[[VMW]]) with a $41 billion market cap, and
(NASDAQ:[[MSFT]]) with a $367 billion market cap.
The reason why I think Sphere 3D is a serious contender is as a
result of several acquisitions the company has made in the last
year, combining Sphere's Glassware 2.0 virtualization platform - by
all accounts, a revolutionary approach to virtualization - with V3
Systems' Virtual Desktop products and Overland Storage's global
data management and storage business.
The target is the $100 billion Virtualization/Storage space, and
early indications suggest that Sphere 3D's Glassware 2.0 is already
displacing the incumbents in enterprise-scale applications.
If you look at the new corporate structure of the combined
Sphere 3D Corp., it bears an uncanny resemblance to that of EMC
Corp. before it floated 15% of VMware back in 2009, essentially
creating two value creation machines where formerly there was
Is Sphere 3D the nucleus of that successful model? I happen to
believe it is, and here's why.
Virtualization and Storage Industries: Explosive Growth
There are a few great anecdotes around that capture the real
scale and scope of the explosion in information and data generated
by business worldwide. Now saddled with the simplistic yet succinct
"Big Data" tag, that label already appears understated.
But the best anecdote, to convey in a one sound bite what is
happening in the world of Big Data, is this one from Eric Schmidt,
CEO of Google:
"Every two days now we create as much information as we did
from the dawn of civilization up until 2003"
Now, think of it in terms of one of the latest buzzwords in
enterprise computing, 'BYOD', which stands for 'Bring your own
device'. In other words, enterprises have learned that both
productivity and employee satisfaction are dramatically enhanced
when they can conduct their tasks on their preferred devices. At
the same time, employees are demanding access to applications and
cloud-based data sources on those devices.
Exhibit 1: Worldwide Public IT Service Spending
Source: Cormark Securities, IDC
Exhibit 2: Worldwide Connected Devices Unit
(click to enlarge)
Source: Cormark Securities, IDC
Exhibit 3: Worldwide VDI Spending
(click to enlarge)
Source: Cormark Securities, IDC
What Will Sphere 3D Look Like upon Completion of the
Merger with Overland?
In understanding the value proposition for investors arising
from the combination of Overland with Sphere 3D and its already
completed acquisition of V3 Systems, the thesis is simple: The
whole is worth more than the sum of the parts. A lot more.
First, let's look at what put Sphere 3D Corp. on the map: it's
, and it does one thing, but does it better than everything else
out there, including its mega-cap competitors. Glassware 2.0 allows
you to extend the life of software indefinitely by making software
available to any device regardless of its operating system. For
simplicity's sake, imagine being able to access virtual versions of
any application, from mainframes to windows 8 on your iPad, with
near-identical performance and minimal latency, as if you had it
installed on your iPad.
The company's software achieves this without straining the
capacity of the network through resource hungry virtualization code
or virtual machine architecture, as is the traditional standard in
Exhibit 4: Traditional Virtualization
(click to enlarge)
Exhibit 5: Sphere 3D's Next Generation Virtualization
Source: Jacob Securities
For consumers, it's not a huge deal. But for enterprises and
institutions who have distributed networks around the world, with
members running every conceivable combination of smart devices,
laptops and workstations, the challenges of providing uniformly
configured software apps with secure and fast connections to data
sets stored in the Cloud is daunting to say the least. And, up
until now, very expensive.
Citrix and VMware are analogous to Sphere 3D, whereas EMC, the
largest information storage provider in the world, is analogous to
Overland Storage; in addition Sphere 3D acquired V3 Systems Inc.,
which is poised to give California darling and
start up Nutanix a run for its money.
Citrix is notoriously onerous and complex to deploy and
administer across enterprise IT infrastructure, and has a
limitations that prevent it from scaling linearly, often requiring
replication of both hardware and software iterations across the
same organization when confronted with differentiated core
Unfortunately, Citrix and even VMware have a problem with
virtualizing the more complex and mission critical applications. An
: "traditional virtualization technologies are great for handling
commodity work, but they are fundamentally unsuited for
applications that organizations depend on to run their most
important, sensitive, business-critical processes - such as those
that drive customer relationships, financial transactions and
supply chains - or mission-critical applications."
VMware is the 900 pound gorilla in virtualization software and
increasingly, in hardware, and is majority owned by EMC
Corporation. That combination makes the utmost sense once you
understand that the vast majority of enterprise data is stored on
server farms that are best accessed via virtualized software
programs converged on a 'hypervisor' single interface for
In fact, to really understand the differences and similarities
among VMware and EMC Corp. on the one hand, and Sphere 3D, V3
Systems and Overland Storage on the other, you really needn't look
further than the evolutionary history of the former two. Both
started as independent entities pursuing their individual
destinies, who, when combined with the purchase of struggling
VMware by cashed up yet stagnating EMC, found their combined
offering an irresistible and profound game changer in the
Information Technology as a Service (ITaaS) sector. It was this
converged solution that suddenly gave enterprises a more economic
approach to storing reams of data that needed to be accessed and
modified remotely by a distributed workforce around the world.
Think of it as mp3s finally making it into the mainstream and
replacing CDs once it was available on devices like the iPod.
Software drove the hardware sales which drove software market
Of course, VMware's product offering and EMC's storage offerings
have greater breadth than anything Sphere 3D can offer (yet);
however, when the acquisition of Overland Storage is complete,
expected to occur by the end of August 2014, the gap will begin to
narrow. The combination of Sphere 3D and Overland Storage
represents exactly the same combination that was the seed that grew
VMware and EMC into 50 billion dollar enterprises with sales in the
billions each year.
Exhibit 6: 2014 Business Highlights - Transitioning into
a Commercial Enterprise
- Completed acquisition of the Virtual Desktop Infrastructure
technology ("VDI technology") of V3 Systems, Inc., a privately
held virtualization company, including the V3 Appliances design,
Desktop Cloud Orchestrator ("DCO") software and other
Intellectual Property related to the VDI technology. Hired
certain key individuals, including Mr. Stoney Hall to head Global
Sales, and former founder of V3 Systems, Mr. Peter Bookman, who
is taking on responsibility, amongst other things, for
accelerating the building of the company's Intellectual Property
- Converted 3 provisional patents to full patent filings in Q1
2014, bringing the total number of full patent filings to
- Recognized over $1 million in revenue in Q1 from Glassware
2.0 licenses, V3 Appliances, Professional Services and Desktop
Cloud Orchestrator, including the company's first Desktop as a
Service ("DaaS") agreement, with an international services
- Derived revenue from customers in Canada, the United States,
Europe and elsewhere; verticals sold to in Q1 2014 include
Government, Construction and Financial Services;
- Finalized partnership with Dell to integrate the Glassware
2.0 platform and DCO software, with Dell DRIVE;
- Signed a collaboration agreement with Novarad Corporation.
The Collaboration agreement will allow Sphere 3D and Novarad to
offer an on premise appliance for the delivery of Novarad
software to healthcare providers without the requirement to
refresh workstation hardware. By delivering an Infrastructure as
a Service ("IaaS") offering, customers can take advantage of a
pre-built solution based on a verified architecture that reduces
deployment risk and accelerates time to availability.
- Expanded relationship in Q1 2014 with Corel beyond previously
announced VAR and Distribution agreements. Provided Glassware 2.0
as a platform for WordPerfect X7 companion iPad offering. Corel
is estimated to have over 100 million active retail users in 75
- Raised USD $5 Million through the sale of a senior secured 8%
convertible debenture, convertible at USD $7.50 per share.
Source: Sphere 3D MD&A
V3 Systems' Role
V3 Systems was acquired by Sphere 3D in March of 2014 for just
under $10 million. The thing about V3 Systems that Sphere 3D needed
was its leadership and talent in Virtual Desktop Infrastructure
architecture and a proven delivery mechanism for their Glassware
2.0 software. In other words, the appliance that can come
pre-installed with either Glassware 2.0 or any other virtualization
software or both.
The company was founded by Peter Bookman, who now serves as
Sphere 3D's Head of Global Strategy.
Sphere 3D's press release
announcing the acquisition in February 2014:
"Founded in 2010 and based in Salt Lake City, Utah, V3 is a
technology leader in desktop cloud management solutions. V3 is
the creator of the
Desktop Cloud Orchestrator
("DCO") software, which allows administrators to manage
local, cloud hosted, or hybrid virtual desktop deployments and
; a series of purpose-built, compact, efficient and
easy-to-manage servers. As a VMware OEM embedded partner, V3 has
revolutionized the speed, ease of use, deployment and even the
data center required for virtual desktop infrastructure (VDI). V3
has won numerous awards including a DEMOgod Award, Best Startup
Company at the Best of INTEROP 2012, and a Utah Innovation Award
in 2013. The V3 customer list includes the FBI, U.S. Department
of Labor, U.S. Naval Academy, University of Texas, Blue Cross
Blue Shield, and Children's Hospital of Alabama, among
So V3 Systems provides a key component that allows Sphere 3D to
control their future architecture both form a hardware and software
perspective, unlike VMware's reliance on Nutanix and recent
with them as a partner.
Overland Storage: Cold Storage and a Global Trap
Overland Storage has a long and really quite interesting history
itself. It got started back in 1980 as Overland Data in San Diego,
California, and built a business focused on the storage of data on
tape drives. Through acquisition and its own product development,
the company became one of the largest tape Storage Vendors in the
In fact, Overland continues to win awards, even recently having
won Tape-based product of the year at the 2014
with its NEO 8000e Tape Library and its Tandberg Data Storage
Library T40+ honored as a runner-up in the competition; it was also
nominated in numerous disk storage categories.
People in the Enterprise IT universe tend to view tape storage
as primitive, but there are thousands of companies who have
critical data stored over decades on tape and for whom it is
cost-prohibitive to update.
According to IDC, "worldwide data growth will reach the
unfathomable amount of 40,000 exabytes by 2020 -- or approximately
5,247 gigabytes of data per human on the planet. Furthermore,
according to the DatacentreDynamics 2012 Global Census, the
worldwide data center energy requirements to store and process this
accumulating data grew 63%, in just one year, to reach 38GW in
2012, or roughly the equivalent of 30 nuclear power plants."
So, despite the fact that most of the IT universe has been
moving first to disk-based, and now increasingly to cloud-based
storage (which is still disk-based storage accessed through the
internet), Overland has been continuing to expand making serious
advances in tape storage, including their patented Virtual Tape
Library products, while simultaneously advancing its own brand of
disk storage infrastructure appliances -
As stated on the company's web site,
"Companies can focus on building their business instead of
worrying about data growth, data loss or data management with
SnapScale clustered NAS, SnapSAN, SnapServer NAS, NEO Series tape
libraries, and REO Series VTL product lines combined with dedicated
global service and support from Overland Storage."
On a recent investor conference call to explain Sphere 3D's
interest in Overland Storage, Sphere 3D CEO Peter Tassiopoulos
Overland sells its award-winning solutions through a global
network of partners that include leading international OEMs, such
as HP, IBM and Fujitsu, 1000's of value added resellers, and a
number of distributors and integrators. Not only has Overland won
product awards, they have earned numerous awards and accolades
for their commitment to the channel.
Earlier this year, Overland completed the acquisition of
Tandberg Data. The Tandberg acquisition had the effect of
doubling the size of Overland to a company with annualized
revenue in excess of $100 million. It also complemented
Overland's existing data management product portfolio and enables
Overland to offer a broader spectrum of data management solutions
to customers that range in size from small medium businesses all
the way up to the enterprise.
In summary, the combination of Overland and Tandberg created
substantial critical mass including:
in excess of 1,000,000 units deployed
solutions are available in over 70 countries
strong IP portfolio with over 100 patents globally
currently has a number of OEM relationships with the
world's leading technology brands.
Painting the Big Picture: Sphere 3D + Overland Storage =
VMware + EMC
So perhaps now it is a little bit clearer as to why Sphere 3D's
shares have soared by
an astounding 2,064% over one year
. If you look at each of the parts, they don't individually
constitute any tremendous value. But when you look at what the
combined service offering entails, and the partnerships now in
place, the value proposition becomes quite apparent.
In addition, it's possible the appreciation here is more an
indication of a legitimate resurgence of the tech sector and the
increased attention given to the space as a result of rotation out
of declining sectors, such as resources, rather than complete
acknowledgement of Sphere 3D's financial prospects.
It's simply too soon to project the numbers or even try to
forecast what the future revenue picture is going to look like for
the combined entity, and doing so prior to the closing of the
Overland acquisition would be premature.
Early stage tech companies don't lend themselves to traditional
valuation methods. There are typically no revenues (and only
negative cash flows), and visibility into real revenue tends to be
murky until the first commercialization effort pans out and is
As Sphere 3D's revenue model becomes more apparent, and the
company transitions to being revenue positive over the next couple
of quarters, forward EV/Sales multiples should expand, providing
further lift to shares and investor confidence in Sphere 3D's
In the press release announcing the definitive merger agreement
with Overland, the following statement appeared:
For the three and nine months ended March 31, 2014, Overland
had revenue of $20.24-million (U.S.) and $41,482,000 (U.S.),
respectively, and incurred a loss of $6,633,000 (U.S.) and
$15,539,000 (U.S.), respectively. Audited revenue for the 12
months ended June 30, 2013, was $48.02-million (U.S.) and a loss
of $19,647,000 (U.S.). As at March 31, 2014, Overland's assets
were $91,788,000 (U.S.) and had liabilities of $50,696,000
(U.S.). As at June 30, 2013, Overland's assets were $31,403,000
(U.S.) and had liabilities of $41,699,000 (U.S.).
Sphere 3D, for its part, is anticipated to begin reporting
significant revenue this quarter, and so at this point, it is
impractical to try and value the company via its financials. It
recently closed a $10 million bought-deal financing, so is
sufficiently capitalized for the near term.
(1) Sales Mis-execution
- Sphere 3D needs to commercially capitalize on its first mover
advantage in next gen virtualization with Glassware 2.0, and has a
limited window of opportunity to do so. Should the company's
channel partners fail to achieve sales traction, companies with
competitive offerings to Glassware could capture the market
position sought after by Sphere 3D
- As an early stage venture, Sphere 3D will have ongoing working
capital and research and development funding needs in excess of the
cash it generates from operations. The company's ability to
continue its growth is predicated on its continued success in
- Companies currently operating in the virtualization space have
achieved considerable customer penetration selling "traditional"
virtualization solutions (as referenced from above). The customers
of these companies may been unwilling to switch to an alternative
solution, such as Sphere 3D, meanwhile their vendors will likely
attempt to transition to the same type of technology Sphere 3D has
developed. Should Sphere 3D and its partners fail to maximize their
first mover advantage and grab market share for their next gen
offering, results and share price would be adversely affected.
It will take a significant amount of capital to fully deploy
such an ambitious business plan, but Sphere 3D has a few things
going for it in that regard. First of all, with only 23 million
shares outstanding, the company has an incredibly tight structure
that will enable it to raise substantial amounts of capital on
terms that will not prove excessively dilutive to current
Secondly, the company is the beneficiary of an incredible amount
of industry press, because the bloggers and tweeters and posters in
the technology world are all abuzz with the idea that Glassware
could displace VMware and Citrix, and the combined company could
take a big bite out of EMC with its superior data virtualization
Third, this is a company whose meteoric rise thus far shows no
sign of abating. And with the commencement of trading on NASDAQ
this week, U.S. institutional investors will be able to start
buying Sphere 3D. That's when the real fireworks could begin.
Exhibit 7: Short Position
Getting onto the NASDAQ allows ANY shares greater liquidity, and
allows a lot of U.S. funds which may not have had the mandate to
invest in Canadian-listed or Over-the-Counter stocks to now invest.
And likewise for retail investors hesitant of the same issues. As
the story continues to develop, there is major risk for a short
time (yes, pun intended). So whether you are long or short, some
has got to give here.
Overall, this virtualization software company has had an
incredible stock market run, and some investors are sitting on very
large returns; however, there has been a lot of new and interesting
developments in recent months suggesting there is still a long way
to go for this stock.
I like the technology, now it's up to management to continue to
execute. The Overland-Sphere merger should close in the next couple
weeks, and Q2 financials are due out before the end of August. I'll
primarily be looking for revenue inflection which will mean that
users are adopting the platform and we could have a serious new
contender in the space.
Given its current market capitalization, Sphere 3D is the best
offering out there to rapidly rise to the top of the proverbial
pile of storage and virtualization converged products available for
The author has no positions in any stocks mentioned, and no plans
to initiate any positions within the next 72 hours. The author
wrote this article themselves, and it expresses their own opinions.
The author is not receiving compensation for it. The author has no
business relationship with any company whose stock is mentioned in
) CEO Dr. Ariel Katz on Q2 2014 Results - Earnings Call