Pivotal: I had to give a little reality testing

But go ahead and compare them to a company that IPO’d 78 days ago who lets small customers use their company’s office space as their own… how can all of you have so much confidence when they have had literally one public quarterly report ever? …I’m just a little surprised at the confidence level in such a recent IPO.

I couldn’t believe this when I read it. Referring to Pivotal as if it is a little IPO that someone started in their garage six months ago. As far as “78 days ago” and “such a recent IPO”, Pivotal has been around since 1989. That’s almost 30 years. Its founder is still the CEO. Its original business model was as a private consulting group, most recently using the open source software they had developed as the base for a services business, helping enterprises transition to the cloud. They developed open source Cloud Foundry as I understand it. They helped develop Hadoop. (To quote Steppenwulf: “Pivotal was instrumental in developing Hadoop and tools to manage Hadoop… Hortonworks is a Pivotal partner, and Cloudera and MapR the other competitors in the Hadoop as a service (HAAS) space. This isn’t an area that Pivotal currently serves, although it was instrumental in actually creating Apache Hadoop.”)

As far as a shortage of customers: as Tinker pointed out: Ford, GE, Microsoft, Google, and EMC/VMWare liked the product so much that they BOUGHT THE COMPANY with quite substantial investments. Ford has based its entire software development under the Pivotal Lab umbrella (hardly the only one).
And Treepak listed a few more happy customers: Allstate, Bluecross, Humana, Boeing, US Airforce, IRS…
And there’s the British Government too, etc etc

Does this really, REALLY, sound like a new IPO with just a 78 day history that we should be afraid of???

And criticizing them because they start counting companies at $50,000, because “$50,000 won’t budge the needle”:
Most companies count every customer, even the $50 ones. Pivotal says it’s not worth the trouble to count ones less than $50,000. And you are criticizing that practice of just counting the ones who actually count to them? What nonsense!

“How can all of you have so much confidence when they have had literally one public quarterly report ever?” — Well, they do have their SEC filing which gives results for three years back. Lets see:

Their current business model is subscription. Their subscription revenue was up 73% last year, and 174% in two years. (Wow, they must really be having trouble!!!). It was up 69% for their April quarter and up 20% sequentially!!!

Their subscription revenue gross margin was 88% last year! And 92% in their most recent quarter. (Gross margin only 92%…Wow, that’s worrisome.)

Their dollar-based net-retention rate was 156%!!! And over 150% for the last seven consecutive quarters. Did you get that? Over 150% for the last 7 quarters.

How can I have confidence in this company??? I just don’t know.

And a few more facts from the Apr 2018 quarter
GAAP operating loss was $33 million, improved from a loss of $48 million. It was 22% of revenue, improved from 44%.
Adj operating loss was $21 million improved from a loss of $40 million. It was 14% of total revenue, improved from 33%.
GAAP net loss was $32.5 million, improved from $51.5 million.
Adj net loss was $23 million, improved from $43 million yoy
Adj net loss per share was 10 cents, improved from 20 cents loss a year ago
Operating cash flow was $4.5 million improved from negative $4.4 million a year ago.

Okay, ask me again why I have confidence in them! Look, they may crash and burn. Other companies have. But it won’t be because there was no reason to have confidence in them.

Saul

65 Likes

Well . . . dang it Saul!

I might as well pull my trot line bid for 22.50 up.

The bots will grab this post and by the open Monday the MACD will start turning up and the blue light special will be over.

Cheers
Qazulight

3 Likes

As far as a shortage of customers: as Tinker pointed out: Ford, GE, Microsoft, Google, and EMC/VMWare liked the product so much that they BOUGHT THE COMPANY with quite substantial investments. Ford has based its entire software development under the Pivotal Lab umbrella (hardly the only one).
And Treepak listed a few more happy customers: Allstate, Bluecross, Humana, Boeing, US Airforce, IRS…

Saul:

I think the concern over paucity of customers is justified. As I have pointed out before, there has been a substantial deceleration of new customers over the past 3 years:

2015: 75
2016: 180
2017: 275
2018: 319
2019 (first quarter): 339

The growth in new customers has slowed to just 16% between 2017 and 2018 and we are now seeing them project slowing subscription growth to 43% next quarter and 47% for year-end…they decline to project new customer growth rates.

However, in just the 1st quarter, they grew 20 customers compared to 44 the entire year of 2018. After further research, I am convinced they have yet tapped a very substantial larger enterprise customer pool. Their market is not the small fry…it is the very large enterprise so we should expect smaller customer numbers but that was a substantial deceleration nonetheless.

Furthermore, I would agree that $50,000 customer criteria cannot be meaningful…even if I applied that 162% net revenue expansion rate to 339 customers X the then $136,000…still just yields $46 million…well short of $350 million in subscription revenue they are on track for this year…hence the massive upselling conclusion.

But since you ask why the concern…that rapid deceleration of customer growth was enough to get my attention and IMO, rightfully so. If we assume, since they will not forecast customer growth, that they can repeat the 20 new customers per quarter, that would get them 25% growth vs the 16% growth last year. I suspect they actually do have a longer sales cycle than many here appreciated…especially dealing with the largest of enterprises.

I would also think that analysts would be really drilling down to just how they attract new customers…they are not rushing to their gates obviously. They vaguely mentioned some things they did last year to increase new customer acquisition but their S1 implied the main source is the DELL family cross selling (not their exclusive source).

And finally for the “elephant” in the room since you mentioned Hadoop…anyone know the story of how it got its name?

4 Likes

If we assume… that they can repeat the 20 new customers per quarter, that would get them 25% growth vs the 16% growth last year.

Hi Duma, You are ignoring that they grew subscription revenue by 73%(!) last year in spite of only growing new customers by 16%!!! If they are increasing the rate of new customer growth by 50% from 16 to 25, should be estimate that their rate of subscription revenue growth will increase from 73% to 110% (up 50% too). No, of course not. What is clear though is that (a) the initial “lands” must be getting much bigger, and (b) the up sells, once a customer sees how helpful their system is, must be huge. As the guy from the Air Force (I think it was) said, “Once we found out how helpful it was on one area, there were 100 other areas we wanted to use it for.” And Pivotal charges by usage.

But Duma, don’t take a position. I may add to mine tomorrow after writing all this, and I don’t want the price to go up. :grinning:

Saul

19 Likes

I think the market may be price anchoring a bit with Pivotal similarly to my thoughts on Nutanix. “The market” just can’t quite believe the numbers will continue, and this definition of a customer ($50,000) gives something to remain skeptical about. My view is that “the market” had things a bit more correct with the price at about $28-29 shortly after the earnings release. $31 may have been pushing it a bit, but after the next earnings if the expansion rate stays at 148% or higher, with the cash flow and earnings numbers continuing to trend more and more towards where we want to see them, I am not sure the $31 shortly after the initial earnings report as a public company will seem all that crazily high.

volfan84
Here is a link to my Nutanix price anchoring post:
http://discussion.fool.com/market-wide-price-anchoring-ntnx-3311…

2 Likes

But Duma, don’t take a position. I may add to mine tomorrow after writing all this, and I don’t want the price to go up. :grinning:

Saul

Too late…already did.

But that doesn’t change that I still identify in every investment, the 2 or 3 key issues that are the essence of the investment thesis…and try to track those issues carefully.

IMO, in the case of PVTL, they are:

  1. Why did their customer growth decelerate and what are they doing to reaccelerate

  2. Do they have a pool of future customers to support their touted TAM of $50 Billion and what are they?

  3. Are they maintaining their massive upselling since otherwise they risk going the path of Cloudera that failed to keep that upselling going and also chose the wrong new customers to acquire. It is not customer growth for growth sake…it is the right customers (lessons from looking over the Cloudera experience) that are more prone to upsell…an evaluation Dreamer and I did on the NPI.

  4. Is the DELL family an asset or hinderance. I expect substantial selling pressure from time to time with no news…just DELL selling (that was the VMware experience). Anticipate this.

You may disagree with these more forward looking items, but that is how I prefer to think…trust but verify.

If they don’t grow quality customers, they will see decelerating revenue. If they just grow any customers, they risk the Cloudera event. Thus far, it is hard to argue they have not targeted quality customers based on the massive upselling…but it also seems clear that this is a longer sales cycle event.

10 Likes

Saul,

That’s some kind of power. You have the ability to trade on Sundays?!?

Just kidding, but in all seriousness, I’m debating adding to my position as well. Only issue for me is that its my largest holding at 19%. However, I’m still adding to my portfolio monthly so that takes away some of the risk of too big a position.

And I’ll have to wait at least 2 trading days from the last time I mention PVTL which puts me to at least Wednesday…unless I count Sunday as a trading day which apparently it is for Saul ; )

  • Austin

Shopify (SHOP) Ticker Guide

For information on all of my current holdings view my profile here: http://my.fool.com/profile/CMFAleeb/info.aspx

And I’ll have to wait at least 2 trading days from the last time I mention PVTL which puts me to at least Wednesday

Should have kept quiet, Austin. This board may manage to help push it back towards $25 or more per share by Wednesday.

I may consider a pre-market add of shares on Monday since I haven’t any Fool-related restrictions. I still presently only have some options positions.

1 Like

I guess every case is different but concerns about ‘decelerating growth’ is somewhat strange or show the shorter term emphasis here. Growth could soften and then re-accelerate. why would the initial growth phase be strictly growing linearly? it can decelerate and accelerate, go up and down and up and down and up and up…?

if the lens is put down over a longer time period, that weakening at that one time may be insignificant.

I guess that chasing something at ‘an early stage’ and selling after the run ups can be lucrative. Afterwards you look for another one to ride. In these past couple of years the IPOs for tech start-ups have been hot. But that will inevitably cool off and there won’t be any hot IPO to ride off.

The question then will be ‘which one should I keep for a longer period?’.

tj

All fair points, Saul. Your enthusiasm may be warranted, and we all know your track record speaks for itself, so I won’t try to act like I have some greater knowledge than you or anyone else. However, your knowledgebase does say:

I try to avoid “story” stocks that are always going to make money next year, or in two years, or in five years.

and

I usually won’t touch a “story” company that is losing money, but that “will break even two years from now,” no matter HOW enticing the story is.

There are also companies that don’t belong on the board. Like a company that has seen decreasing revenue and decreasing earnings over a number of years, and now is being considered as a take-over, or a sell-off-the-parts candidate. That’s simply not what this board is about. There are other boards for this kind of situation. Another example would be an early stage biotech, with no actual revenue, but great ideas. Or a new IPO of a company that has revenue, but still has large losses and hopes of breaking even two years from now. You can weed those out yourself.

PVTL is projecting losses of $0.45 per share this year. That’s a much different story than NTNX, AYX, PURE, SQ, SHOP, etc. Is their “story” enough to make you think they are the exception?

4 Likes