Conclusion is that even after the run-up, it remains a buy (not a shocking revelation).
Pivotal: A Long Time Coming https://seekingalpha.com/article/4182453?source=ansh $PVTL
volfan84
Long Sept 2018 $22.50 PVTL calls
11 Likes
Very interesting.
I read through the article on Pivotal, and the finance table in the article is line for line the same as the table Saul posted in his deep dive on 5/14/18.
Either Saul got it from a Pivotal presentation (I don’t think so), or “Investing City” copied Saul’s table.
Jimbo
3 Likes
Good catch Jimbo! I admit to being “Investing City.” I made a table which I actually posted on this board comparing PVTL to OKTA and I forgot I used Saul’s table for that comparison. I should give Saul credits in the article!
Apologies to Saul if you read this. Thanks for bringing that to my attention and thanks to everyone on this board. What an incredible group of thinkers.
Fish
8 Likes
Good catch Jimbo! I admit to being “Investing City”… I forgot I used Saul’s table … I should give Saul credits in the article! Apologies to Saul if you read this. Thanks for bringing that to my attention and thanks to everyone on this board. What an incredible group of thinkers…
Hi Fish, It’s an excellent deep dive article and I’m flattered that you used my table word for word. Glad to help spread the word about Pivotal
Best,
Saul
4 Likes
Fish,
Thank you for the article! While I believe I understand your point about client concentration risk, I do feel the client count is something to keep an eye on. What really counts is, as you stated, Pivotal does not have a lot of customers but those customers it does sell to seem to love the Cloud Foundry.
Thank you also to volfan for the link to the article.
Cheers,
Chris
Thanks Saul. Means a ton…
Thanks Chris. Great point.
Fish,
Good article, I learned a lot about a company I already own. I had thought about pairing down my allocation, ~15% right now, but will leave it alone. I was more worried about the ownership by DellEMC and VMWare before, but now I think that they are aligned with stock holders if they are going to make more off of the share price increasing than the IPO.
Robert
Fish,
You appear to be sanguine about TAM, this is the singular thing about PVTL that gives me pause. I don’t know what it is or even how to go about capturing it, but it seems to me intuitively that the number of customers must be constrained. While PVTL is growing as the proverbial weed, I would think that market saturation is a risk.
My experience at a Fortune 50 company was that an increasing number of applications were COTS rather than in-house development which had historically been the case. Quite simply, where I worked we designed and built very large pieces of equipment for both commercial and military customers. Executive management felt that s/w was not a core competency (other than product embedded s/w which was managed entirely differently than IT. Embedded s/w did not get hosted in any cloud).
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Fish,
You wrote: It does not have a lot of customers but those customers it does sell to seem to love the Cloud Foundry. Pivotal also does not have any client concentration risk that is typical of a company with a few hundred customers.
Why do you say that it doesn’t have client concentration risk?
Also you included Pivotal in the Public Cloud Services: PaaS segment which is growing rapidly. Seems a bit broad, so I was wondering if you have anything else to say regarding the TAM. You mentioned also that OpenShift seems like a worthy competitor but Red Hat is also focused on a lot of other things than Pivotal’s Cloud Foundry bread and butter. All in all, I think there is enough market share to go around. Again, that is the point I am raising: is there really plenty to go around? I don’t share the enthusiasm that is, but I’d like to understand your perspective.
Thanks,
Bear
@CMFFish - nice to see that the thinking here being spread out to the broader world. The more people who buy our stocks, the better 
@Bear
You mentioned also that OpenShift seems like a worthy competitor but Red Hat is also focused on a lot of other things than Pivotal’s Cloud Foundry bread and butter. All in all, I think there is enough market share to go around. Again, that is the point I am raising: is there really plenty to go around?
My perspective on this is that the addressable market for Pivotal Cloud Foundry is all enterprise companies world wide that have complex IT portfolios that include a significant number of home-grown apps. A simple test would be any company that has at least 2 enterprise architects. This is, of course, a massive market, including most public companies in the US.
The reason is that what Pivotal primarily provides is a way for teams to build and deploy their applications on any number of deployment points, which include public clouds, private clouds, containers, virtual machines (hypervisors), and even local machines. They greatly speed up build, test, validation, and deployment activities of development teams, so Pivotal pays for itself very quickly in lower dev costs and faster dev speed.
Now this does beg the question - why doesn’t Pivotal attack this larger market of mid-large sized companies, along with their primary target of very large companies. I don’t know, but I can speculate.
First of all, Pivotal comes out from the shadows of EMC/VMWare/Dell, all of which have their enterprise sales forces that target huge companies. These sales teams provided Pivotal’s initial sales, which they then went on to land/expand.
Secondly, targeting the large market of mid-size companies is expensive and requires a large sales force. A smart strategy would be to develop in-bound marketing, online signup and target developers. They have started this already, and they may have a plan to develop up this online partially-automated sales cycle, which is efficient. This type of growth takes time to get going, but then starts feeding itself.
Historically, Pivotal was very successful in appealing to developers directly - they developed and evangelized the top open source enterprise libraries out there - Spring, Hadoop, Cloud Foundry. If they go back to their roots, they can do massive customer growth in this mid-size customer segment.
As a side note, I hope and expect that in the next year or so, we will see them come out with a big data analysis product that they will co-sell with PCF, either as an add-on module or a stand-alone product. Their developers were behind Hadoop, and they have enormous expertise in data analytics - they should be able to turn the data market upside down. This would also be another way for Pivotal to enter the mid-size market.
Or finally, they may just be focused on the really big clients as the highest margin way to get revenue. This might sound like a good strategy to a CFO, as you are maximizing the bottom line, but it would worry me, and I would start looking at when to get out. You don’t want to leave the whole big centre of the market empty for another competitor to take.
One more thing - RedHat is clearly a competitor to PCF, but it isn’t apples to apples. RedHat’s primary business is to provide Linux support for enterprise customers, and they also “cloudize” Linux data centres, they way Nutanix does. RedHat’s OpenShift is somewhat similar to PCF, but the actual comparison is to PKS which is Pivotal’s recent Container PAAS. So RedHat doesn’t really provide a vendor-neutral development stack - it is container only. We’ll have to see where the technology goes, but unless containers totally win the tech wars, enterprises will have a mix of IAAS, CAAS, PAAS, SAAS and others, and OpenShift won’t be a fit for most companies (they could expand to compete, of course).
So the way I think of RedHat is that they are a vertically integrated tool set. They do everything for RedHat Linux Servers. They do what Microsoft, Nutanix, Pivotal all do, but only for Linux. Containers are originally and primarily a Linux technology, so it is well part of this vertically integrated ecosystem.
Pivotal, on the other hand is horizontally integrated - they do app building and deploying across all sorts of environments and technologies. RedHat thus competes with Pivotal, just in a portion of Pivotal’s market.
30 Likes
SteppenWulf,
Very helpful!
As a side note, I hope and expect that in the next year or so, we will see them come out with a big data analysis product that they will co-sell with PCF, either as an add-on module or a stand-alone product. Their developers were behind Hadoop, and they have enormous expertise in data analytics - they should be able to turn the data market upside down. This would also be another way for Pivotal to enter the mid-size market.
Or finally, they may just be focused on the really big clients as the highest margin way to get revenue. This might sound like a good strategy to a CFO, as you are maximizing the bottom line, but it would worry me, and I would start looking at when to get out. You don’t want to leave the whole big centre of the market empty for another competitor to take.
Any time frame on when you expect we’ll know? (When this will play out)
So the way I think of RedHat is that they are a vertically integrated tool set. They do everything for RedHat Linux Servers. They do what Microsoft, Nutanix, Pivotal all do, but only for Linux. Containers are originally and primarily a Linux technology, so it is well part of this vertically integrated ecosystem.
Pivotal, on the other hand is horizontally integrated - they do app building and deploying across all sorts of environments and technologies. RedHat thus competes with Pivotal, just in a portion of Pivotal’s market.
That makes a lot of sense, thanks. I guess I wonder then – Goldman, Barclays, SoftBank, KeyBank, Cisco, T Mobile, Ebay, JD.com, Comcast, Phillips, and the many other companies of Kubernetes – do they only use Linux? Do you see them being customers of Pivotal as well? I’m sure there’s a simple answer here, but to a novice it seems like they’ve already made their investment.
Bear
2 Likes
First of all, Pivotal comes out from the shadows of EMC/VMWare/Dell, all of which have their enterprise sales forces that target huge companies. These sales teams provided Pivotal’s initial sales, which they then went on to land/expand.
Secondly, targeting the large market of mid-size companies is expensive and requires a large sales force.
‘’’
Yes and yes. And i am at a Dell training tomorrow and can try and get some color on the legacy makeup/focus of their sales teams and current setup.
DellEmc has a massive portfolio. Odds are your overall dellemc rep could retire their quota a thousand different ways across servers, PCs, storage, hci, software, maintenace renewals, networking, rsa security, and even dell-branded nutanix appliances. They probavly very rarely led with pivotal and my guess is the pivotal sales team would be brought in when/if the account lead for dell sniffed a potential oppty.
On your second point, i would bet the pivotal experts/sales team were few in number.
An increased reliance on accenture/partners should bolster sales opportunities.
Also, they still get friendly nod from dell sales teams (just as dell does with vmware today) and Pivotal has the benefit of a likely increased sales headcount that can be more proactive vs waiting on dellto bring them into deals.
Finally…like with vmware being spun out and separate they have a more visible identity now that they arent buried in the dellemc massive portfolio line card.
I had heard of pivotal, but didnt pay more attention until dell spun them out. It is kond of like ignoring Airwatch because VMware owns them and also has a ton of other solutions to get trained on, like vsan, vxrail, nsx, and cloud foundations.
Just the very nature of going public is opening eyes and drawing validation, so that also helps with them getting more at-bats.
Dreamer
7 Likes
Pivotal has two markets. The first, and most looked at, is doing what Pivotal did for Boeing and that is transforming the entire organization into an Agile software creating machine, to create and update new apps in a manner that has probably the second best ROI increase I have seen in any company since the personal computer came along (excepting the ROI that Nvidia GPUs and software have made in the data center).
The larger market is more mundane, but 3 to 4x as big, and that is moving existing legacy applications these corporations have into the cloud.
I forget the TAM, but it is a growing TAM, but presenting around $15 billion and $60 billion or thereabouts.
Pivotal is not going to run out of customers and market. Even SAP is still growing. Look at SAP’s market, and that is the prime market of like companies that Pivotal will target, and then look at what Oracle goes after, and what Nutanix goes after (these are all sophisticated It organizations or the enterprise would not need Nutanix).
Pivotal was Pivotal Labs (a consulting firm) from 1989 up until 2014. Pivotal Labs has been a major contributor to Hadoop and has its own big data products (such as is used by Morgan Stanley and many others). It was not until 2015 that Cloud Foundry was started, and as you may imagine it did not start out being what it is today. So it probably as not until 2016 or later really when Pivotal Cloud Foundry became anything approaching what it is today.
And yet, since then they have gone from 0-339 huge corporate customers, and from $0 to what will probably be $400 million in subscription revenue this year (all recurring, 92% gross margin, revenue).
Pivotal, until now has not aggressively marketed Pivotal Cloud Foundry. It has gained customers because customers like Ford, GE, liked is so much that they then invested 9 figures into the company (remember, these investments came in 2016 (one year after Pivotal Cloud Foundry was even a product at all, and one year removed form 0 customers). Ford so much liked Pivotal that they are basing their entire software culture on it, and following Pivotal Labs and setting up shop next door to each new Pivotal Labs (17 are planned around the world I believe).
I have already linked to the Boeing CIO 13 minute presentation of just what Pivotal did for Boeing. The numbers are off the chart.
It was only now, post IPO, that Pivotal has stated they are working on marketing. Was not a high priority before as they lived with developing their product and EMC/VMWare selling it as an aside.
I fully expect upside surprises to the customer acquisition numbers moving forward (perhaps not immediately as Pivotal is not just expanding a sales force, but expanding dramatically SI’s (System integrators) and eco-system to sell as part of their own self-interests as well.
If Pivotal does manage to increase customer growth rates (as only now it is even trying) then I will make a ton of money on it. If it does not, I will lose some money on it.
Is what it is. Like it or not. Like with everything, I like it as an investment at $4 billion than $6.9 billion marketcap. The hope is of course I will like it better at $6.9 billion than $12.9 billion market cap.
Pivotal is about the youngest (oldest company) to ever IPO, with a core product, that has created such upheaval (positively amongst its 300+ customers) to ever IPO.
Either you picture Pivotal as to what it has incredibly done in such a short period of time, understand that it never really marketed this product by any extensive means, and that dynamically, now that it is as public company further investing in the platform (as the new version just made signficant improvements and capabilities) and viewing Pivotal dynamically as now finally investing from a marketing perspective.
If not, no reason to invest here. If so, you may find reason to invest here.
Absent of market is not an issue here, at all. If it were they would not be “creating” as it sounds more like the ecosystem is coming to them, such an ecosystem surrounding the product.
I have just seen a cash making machine at its nascent stage (unlike anything I have ever seen by a company so young) and it may not work out. Clearly, there is little history here. But what history there is, is a unique story.
Hey, I may sell and take profits (albeit I cannot afford to sell these profits due to taxes, it would be insane for me to do so - so call me biased. Because I am of course).
Tinker
18 Likes
Hello Bear,
I believe that I understand your reservations about Pivotal. I agree that they have not been growing the number of customers rapidly. It appears to me that their ARR growth of 150+ is absolutely phenomenal. They have only recently begun to establish a worldwide sales organization. They have only recently scaled to the point where the Accentures and other big consulting firms can profit by carrying their water. It appears that they are the winner in their category. I share your concern about the limited number of customers, but believe I understand that this may change for the better any moment. In the meantime, 158%ARR and a few new customers gives a 69% y/y increase in a subscription business with 92% margins. I think I will hold (buy more from time to time) and watch whether or not the ARR goes down or the customer acquisition goes up.
Best regards,
Mike
7 Likes
@Bear
Any time frame on when you expect we’ll know? (When this will play out)
What we’re really looking for is to understand their strategy. As a recent IPO, we don’t know what parts of their strategy they are hiding. Sun Tzu talks a lot about deception in the Art of War, for instance Secret operations are essential in war; upon them the army relies to make its every move.. Technology startups love the Art of War, and chances are they are hiding their strategy on the things that aren’t material in their income statement.
So, do they have a laser-like focus on profitability, which is directing their strategic direction to only aim for massive customers? I hope they are more like Bezos than a typical CFO - this is the time for their revenue to explode, investing what they need to for it.
Or do they actually have a strategy to go after the broad market of mid-sized companies? We have to remember that their business model is to charge by the cloud workload, which is fantastic for huge customers but problematic for small ones. A huge customer where IT is critical to success, might be paying $10M/yr or more, so Pivotal can afford to roll out the red carpet. A mid-size manufacturing business might just be paying a few thousand a year, which doesn’t leave a lot of room for hand-holding. This is a tough needle to thread - they need to close most smaller customers without using a live sales person, or they can’t do it profitably. I actually have this same problem, at a different scale, in my own e-learning side business - this is where things like Inbound Marketing, which HubSpot is the king of, could make a big difference. If they do have a strategy for the broader market, they may need to prioritize big revenue growth first - it’s hard to juggle multiple market segments if you don’t have the scale yet.
When would we know? Well, I think we already know they are investing at least a bit in the mid market. Individual developers or small companies can buy individual workloads on their product directly online. This is the first step to a digital sales strategy. One way or another we should see this grow in the next year. I’m not sure how they would report these numbers - they’re not like their existing customer count. But we should either see it in their customer count, or in a new revenue segment that aggregates all the small customers. If they don’t in some way report revenue from small customers some time during the next year, they are probably not trying to get them, which I believe will leave them open to disruption from someone else - nature abhors a vacuum, so someone will come in the mid-market if they don’t, and then they’ll have competition everywhere.
So my guess - within 4 quarters we should be hearing something about how they are going to tackle the broader market, or else maybe they don’t have a strategy.
I guess I wonder then – Goldman, Barclays, SoftBank, KeyBank, Cisco, T Mobile, Ebay, JD.com, Comcast, Phillips, and the many other companies of Kubernetes – do they only use Linux? Do you see them being customers of Pivotal as well?
So this will get a bit technical. Kubernetes is a Container management system, created by Google and given away for free by them, using Docker containers which are built on Linux technology and are also open source. Deploying on containers is now called Containers As A Service (CAAS), and it is half way between Infrastructure As A Service (IAAS) and Platform As A Service (PAAS).
IAAS is slicing up INFRASTRUCTURE - i.e. physical machines - into multiple virtual machines. This is what VMWare and other Hypervisors give you. You get a slice of a machine, but do everything on it yourself.
PAAS is putting your application on a cloud PLATFORM, and not caring how. The platform will manage it from minute to minute, making sure you always have enough cloud to support your customers, while you are happy as a clam not knowing about it. Just do it! is actually the PAAS mantra.
CAAS is something in between - you specify every detail of how your deployment on the cloud should look, but then the container system makes sure that minute by minute all your customers are supported. Containers are complex to set up, so Kubernetes is a system Google developed and gave away for free, that makes it a lot easier. Google actually developed Kubernetes because they found out that people using Docker containers were much more likely to use Google than people using a PAAS (because Google screwed up their PAAS so badly, but in a container they were on an even playing field with Amazon and Microsoft).
It’s more work to set up a Container than a PAAS, but then after it is set up, the container mostly manages itself, which is a lot less work than IAAS. One additional advantage - CAAS is deployment neutral - that is, you can deploy to Google, AWS or Azure or Nutanix, or where you want.
Pivotal is truly neutral - not just about the deployment destination, but about pretty much everything. It is a PAAS itself, but it deploys to virtual machines (IAAS), cloud platforms (PAAS), containers (CAAS), and even individual computers.
So which technology is going to win? Very likely all of them. I don’t know of a company playing in the cloud that isn’t trying multiple variations for different situations. There are cases where IAAS will prove to be very cost effective, while in complex projects you will want the flexibility of CAAS or PAAS. PAAS greatly reduces development time, other things being equal.
Pivotal directly supports Kubernetes and Docker containers, as well as all the public and private clouds, virtual machines, Nutanix, and all the cloud platforms. So Kubernetes is not a competitor to Pivotal. Now there are lots of container management startups that are specifically targeting Kubernetes, trying to make it easier to use, and RedHat has a product which is also popular in this space.
If the whole world decides Kubernetes is the only way to go, one of these companies might win. But if people continue using a bunch of different strategies in the cloud, then Pivotal is the only thing around that is truly vendor neutral, and can get all your applications on whatever destination they want. Containers or Kubernetes use is not necessarily a threat to Pivotal - in fact container management startups will probably look to integrate with Pivotal, and it could increase Pivotal’s dominance.
Coming back to our original topic, I would say Pivotal’s biggest challenge is not to screw it up. They have no real competition in their segment of vendor-neutral products - they need to keep the market and prevent credible competition from coming up.
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According to Pivotal it is currently saving the US Air Force $1 million per day in fuel costs. Claire Apthorp spoke to the company to find out more about this astonishing success story.
Pivotal and the Air Force. As I said, the second largest ROI enhancing company I have seen since the PC (Nvidia being ahead of Pivotal in regard of efficiencies the product brings).
https://www.airforce-technology.com/features/pivotal-innovat…
Tinker
9 Likes
Btw/ if you have any doubt as to why Pivotal has the highest ARR growth we have ever seen, just read the entire article I linked to, as to first how successful this first program has been, second how the entire software culture has changed so that now Air Force personnel can ask civilian developers to create things and it is done quickly, to how this first project was implemented in just 90 days and at very low cost for immediate enormous ROI, to just how many additional current plans they have for Pivotal Cloud Foundry (much less where they will go from there).
Boeing has more than 1000 such plans as another example.
It is very difficult to see how word does not get around regarding Pivotal the more and more results like this are achieved. But then again it is at those times that i am usually most wrong. We humans are brilliant and clever and also our own worse enemies sometimes when it comes to change.
I have wagered however, that the key element of our economic system, naked self-interest, will come into play here as there are few areas any company can invest in that will create this sort of ROI with pay back achieved so quickly.
The future will tell.
Tinker
3 Likes
I believe it was at the earnings call, but it may have been an interview with the CFO…no wait, it was at the day after investment presentation that Pivotal gave (their very first). Pivotal stated that they are not looking at profits, not looking at competition. That they are the clear leaders, they have an enormous opportunity in front of them and their sole focus is creating the best product that they can create and making it available.
Thus, no, wisely, Pivotal is not shooting for profits at this time. But I also get the impression that Pivotal is not so hot in the marketing department. They are great in the product development department. They have a strategy, and a lot of involves third party SIs, but I really do think they can go to VMWare Labs and take an Agile course in marketing, as I think they need it. I assume they will given they raised more than $600 million at the IPO.
Tinker
2 Likes
Cross post for me from Bear’s article on selling. Seemed relevant due to AF mention.
I think the most important thing I heard during the earnings call was that the Air Force Air Operations Center was a customer and uses PCF.
The DoD is way behind the curve on cloud transition and this could be the start of an incredible growth track within the DoD and government entities.
Once companies get familiar with gvmnt contracts and get into one big deal, there’s usually more to follow.
Time will tell but Pivotal is my largest holding.
I have a friend who works there. He’s super smart (common sense and book smart), is a great person, and loves working there.
All good signs. I’m sure it will be volatile, but believe they bring tremendous value to customers
1 Like