Wandisco Plc (LON:WAND) made substantial strategic progress in FY18, deepening both its partnerships with major cloud providers and broadening its product base. With discussions over a strategic deal with a major cloud vendor still ongoing and FY19 off to a good start (Q1 revenue up 38% y-o-y), we leave our forecasts largely unchanged. In our view its exceptional growth prospects and potential strategic value justify a premium rating.
FY18: Substantial strategic progress
Lacklustre financials do not tell the full story of WANdisco’s FY18, with revenue down 13% y-o-y and adjusted EBITDA losses widening to $9.4m. In the last year it signed partnership deals with Alibaba (NYSE:BABA) Cloud and Microsoft (NASDAQ:MSFT) Azure and has been designated an ATP at Amazon (NASDAQ:AMZN) AWS. Its partnerships now cover five of the top six cloud-platform providers and over 60% of the market. It also extended its longstanding partnership with IBM (NYSE:IBM) to include structured data.
On track for an inflection in FY19
Strategic progress should lead to improving financials in FY19. The company indicates that negotiations for an expanded deal with a large cloud player are ongoing and traction with Google (NASDAQ:GOOGL) Cloud, the only platform yet to generate significant revenue for WANdisco, is improving. Sales in Q119 rose 38% y-o-y and a large part of this growth is now being driven by subscription revenue. Our FY19 forecasts (largely unchanged) imply 84% revenue growth (see Exhibit 1).
Setting out the medium-term opportunity
For the first time management has formally set out its financial ambitions. It believes WANdisco can generate $100m+ in annual recurring sales within three to four years (implying a 50%+ CAGR). Growth will initially be driven by the replication of data migrating to the cloud but will increasingly reflect the need to support hybrid and multi-cloud strategies. Our FY20 forecast implies 30% y-o-y growth.
Valuation: Growth and strategic value justify premium
The current share price implies a 7.8x FY20e EV/sales multiple, a DCF factoring in a 25% sales CAGR and an EBIT margin of 44% by FY30. Achieving this demands strong execution but is deliverable given market trends. The recent flurry of M&A activity also supports a premium rating. IBM’s bid for RedHat (9.7x LTM sales) shows that big players will pay for rapidly growing ‘cloud’ assets; the Attunity and CloudEndure deals highlight the specific strategic value placed on data replication technology.
Business description
WANdisco’s proprietary replication technology enables its customers to solve critical data management challenges created by the shift to cloud computing. It has established partner relationships with leading players in the cloud eco system including Amazon and Microsoft.
Changes to forecasts
We make modest changes to our FY19 forecasts at this point. We believe the strategic progress achieved in FY18 should see revenue growth accelerate to 84% in FY19. Growth of 38% in Q1FY19 (up from 13% in H2FY18) suggests this reacceleration is on track and securing a strategic deal with a major cloud provider could deliver all the incremental revenue required to meet this forecast at a stroke. There is no certainty this deal can be closed however and with subscription revenue ramping but still at a relatively low level, visibility remains limited. Our forecasts imply modest positive adjusted EBITDA is achieved in FY19.
We introduce an FY20 forecast that implies 30% y-o-y growth, below the 50%+ CAGR implied by the ‘medium-term’ opportunity set out by the management, but in line with the growth of the broader cloud market.
