Bert's latest thoughts on PVTL

https://seekingalpha.com/article/4175271-pivotal-trying-make…

A very interesting article from Bert - he raises many points similar to our discussion. Since people on this board have communicated with him, this might not be coincidence - he may have dug deeper into some of our topics.

His conclusion on investing in Pivotal: He is on the fence.

On the one hand he is strong on their subscription business The 158% net dollar retention rate is not surprising and is one of the strongest arguments for owning these shares.

On the other hand, he considers the services business an anchor on the shares, as contracting services revenue will continue to hide the hypergrowth of subscription business, and the low services margin (15%) will hide the huge subscription margin (90%). Now he does predict that next year’s subscription revenue will grow to 70% from today’s 56% - so the true value of the subscription business will presumably get revealed eventually, preferably a bit at a time.

Bert’s article confirms the hypergrowth thesis in subscription business. I personally think that having an additional lower margin services business is not a negative, but rather a positive, for a few reasons:

First of all, a services business not only provides additional revenue, it also provides in-house expertise in client problems. If utilized as a source of information, it’s one of the best ways a tech product company can stay ahead new trends and upcoming issues, and keep customers delighted.

Secondly, Bert mentions that the big data represents 15%-20% of the service revenue, and is both profitable and growing rapidly. Pivotal has deep expertise in Hadoop. As Bert mentions, this may be an additional sleeper asset - it would be great to see this productized into a tool set for data analytics.

I consider this article, along with Saul’s analysis, validation of my investment thesis, even though Bert is on the conflicted and not ready to recommend at the moment.

The confusion around 2 different types of revenue is the reason for the low price to revenue multiple today. As patient investors, we know that mispricing in the market leads to the best long term investments. It’s hard to know when the market will catch on, but when it does today’s investors should do very well.

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“The confusion around 2 different types of revenue is the reason for the low price to revenue multiple today. As patient investors, we know that mispricing in the market leads to the best long term investments. It’s hard to know when the market will catch on, but when it does today’s investors should do very well.”

This situation reminds me of 2 other situations where a transition or other event “hid” the earnings story. When UBER was leaving TWLO the FUD hid the growth ex UBER for a couple quarters until it became evident that the growth story continued. The second was when a stock (I think it was HUBS) had their expensive conference earlier than it had in previous years making the yoy growth look like it was slowing until Saul pointed out the conference usually cost the company XXX amount of money without which the company would have shown stellar growth. Hopefully this works out as well as the prior 2 instances have.

Rob

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clearly slow growth in the old business will hold back overall growth rates. But there is something to be said about the advantages of having a cash cow on premises too.

PVTL also has an overhang due to the ownership and voting rights, not just the “misunderstood” earnings growth. It seems like anybody that looks beyond a Reuters two liner earnings update would see the subscription revenue story.

They set it up so that Dell is guaranteed control even if they further dilute share count later on by giving themselves more voting power.

This reminds me of the Activision situation. I held those shares while they did nothing for years and when they finally got independent the share price skyrocketed.

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