On Tuesday we hosted a call previewing the Pivotal Software (PVTL) IPO. For access to the Call Replay CLICK HERE.
Final Thoughts Pre-IPO:
Separating Labs vs Product to drive valuation:
- Fast growth multiple of revenue for PCF (Pivotal Cloud Foundry) +
- IT Services EV/S multiple for Labs +
- Middle of the road EV/S for profitable, still growing, but slower growth BDS (Big Data Suite) +
- Pro forma net cash
- On ~290MM shares diluted = IPO Range...not much upside to play with
Another look: Valuation based on target SW revenue in F20 at 40% FCF generation:
- F20 software revenue with 90% GM (95% incremental GM) will eventually mean a 40% OPM or OCF %. Applying that to F20 and putting a 3%-5% FCF yield range gets $13-21 per share. That’s the valuation BULL case.
- The company would also realize upside by potentially selling BDS or spinning it out over time
Downside risks:
- Flash of churn spiking against the company as customers potentially switch to other vendors or managed Kubernetes solutions (or move to AWS wholesale like GE) at the end of 1-3 year contracts would disrupt the flow of growth and force the company back on its heels
- At a certain peak penetration of their opportunity set (PaaS to large enterprise) the PCF revenue will devolve for these reasons
- For now, downside valuation gets us to $10-11 based on 25-30x F20 FCF
Bottom-line:
We like the revenue momentum of the PCF product which we think continues and also contributes to high incremental cash flows in the coming years. But the valuation at the IPO for an entity that has product segments in both adoption and saturation phases doesn't leave enough wiggle room to get super excited on the Long side.
Summing up the bull & bear cases:
BULL Case:
- Fast growth category
- Impressive revenue momentum with core product
- High incremental margin revenue should translate to fast growing FCF
BEAR Case:
- An overall mixed picture with LABS potentially flat or in sunset mode & BDS seemingly unwanted
- A fast growing shift in core PaaS category towards a different product than PCF (managed Kubernetes)
- IPO valuation that does not invite risk-taking
