Note: This is an edited repost of a prior post that was posted previously but with a slightly
more cohesive and somewhat smoother flowing style and an unadulterated and chock full expose
of elegance and thoughtful expression. Or something like that only different.
The company burst onto the scene with swagger - Buzz and Gravitas. Investors flocked to it offering insight and praise. Analysts gushed over its future:
(Please take a brief moment to use your own imagination to picture gushing analysts)
But then…suddenly, after only the briefest of moments in the limelight, and only an earnings report or two, the bottom fell out. The company was cast adrift - orphaned at an early age:
Why? I think it had something to do with exceptionally high expectations brought sharply back to reality by its slow, slow, really slow customer growth. Its most recent earnings report and
Conf Call Transcript can be found here:
Subsequent to the Conf Call this is what happened:
Thereafter, investors began asking the question: Pivotal…Is that all there is…is that all there is… Pivotal?:
Investors piled out…fled…exited swiftly and definitively. It was rush hour in Los Angeles or maybe Houston. It was a tsunami of investors piling out. Or maybe like when you are in Manhattan - and its windy and cold and you don’t want to use the subway and try to hail a cab. Or something similar to that.
The company was on the ropes and down in the dumps, despondent and seeing solace:
So…like any patient, knowledgeable, mostly sane and sophisticatedly astute investor - I bailed out. And just like that PVTL was consigned to my personal scrap heap of one hit wonders:
PIVOTAL went public in mid April 2018 and closed its first day of trading at $15.73. It started slowly but once it’s story got out it gathered steam - got is second wind - the stock soared to
as high as $31.24 - logging a double in just a few months. Life was good!
The company is majority owned by Dell - which no one seems to like - and only considers/counts anyone as an actual customer if they contract for at least a minimum of $50,000. Those are evidently the only actual customers they report which gives them some minuscule number of new customers to report each quarter. Why Pivotal…Why?
NOTE: Their average contract is for several hundred thousand dollars…so they could have (emphasizing could have) dozens of clients just below that $50k level at which time PVTL
recognizes and reports them as real people.
Pivotal offers cloud based software that, “specializes in integrated solutions with strategic services” and provides application and data infrastructure software." They explain that everyone who is anyone needs what they offer if they want to move/convert their businesses to operate
in the cloud. Sounds reasonable and they wouldn’t lie or exaggerate a thing like that! Their main products appear to be something called Pivotal Cloud Foundry (PCF) - which is designed to remove the complexity involved in developing software; and, Pivotal Container Service (PKS) with is something about something called Kubernetes - which is supposed to be a very big deal. I was a little fuzzy on the details so I looked it up and this is what I got:
“is an open source platform that automates linux container operations…in other words you can cluster together groups of hosts running linux containers.”
I am very happy we cleared that up. Just a walk in the park. You can find your very own Kube tutorial here:
Now that we have a basic understanding of Kube (Thats what the really kewl in-the-know folks call it) lets move on to the meat of the issue.
The last three earnings reports featured the following Revenue Growth:
Rock Steady but measured against sky high expectations it just wasn’t enough. Highlights/Lowlights of the conf call here:
- Subscription Rev Growth of 53%
- Subscription Revenue as a % of total revenue increased 9% Y/Y
- Customer Growth of 17% Y/Y bringing total customer count to 368.
Note 1: The 368 customer total only reflects those clients paying an annual contract
value of a minimum of $50K.
Note 2: The company only recognized 14 new customers in Q3 which brought the number of folks
flocking to PVTL to a Grand Total of 49 YTD - representing an increase of 26% over last years
Q3 total of 39 new customers. LET THE ANGST BEGIN!
But then…but then… along came John:
** Dollar Based Retention Rate “steady” STEADY I SAY…AT 150%. 150%…who does that?
And just like that - in my humblest of opinions…PVTL was back. Not back like the Bad News Bears or like Original Coke…but back all the same; although, frankly they never left. It is all a slight misunderstanding or maybe just a failure to communicate the actual number of new clients they might have signed up with contract values below the $50K. Anyway this is the inflection point - the golden nugget - that suggests that Rocky may yet get off the mat.
- Gross Margins of 67% - improvement by 7 points Y/Y
- Subscription Margins of 93%.
- Raised Guidance. Yeaaaaaa - Happy Feet.
During the conf call someone asked about the new customer pipeline for Q4. The answer to this question was provided by a guy named Rob Mee which is a real name and not a joke about getting mugged in New York. His reply:
“Our reps are focused on delivering on that, as well as expanding, they are driving many new deals and we are encouraged by the pipeline for our Q4 opportunities.”
Ok, so here is how I see it: Nothing has changed in the PVTL story: Great potential - Raised
Guidance - promising pipeline for Q4 - very, very high and “steady” Dollar Based Retention rate
of 150% (Who does that?). All of this and the stock is trading a buck or two higher than its IPO closing price AND all the while revenue has been building up - WHILE - the valuation has been coming down.
So…like any independent thinking investor whose entire investing acumen revolves around his own personal research (along with all the great help from Saul’s and Tinker’s boards) I asked Bert. THE Bert:
Humble Me: Hi Bert - has anything changed in your thinking regarding Pivotal?
BERT: (Paraphrasing) “Nothing has changed in their DevOps opportunity and they just reported a great quarter…shares are painfully cheap”.
Tinker’s admonition that cheap is cheap for a reason does not overshadow the fact that sometimes the market just gets it wrong. Of course - more times than not Tinker is right…because…well, because he is Tinker. But in this case I am not sure that with a little more patience investors could be richly rewarded. Or maybe not.
Pivotal may be slow and cumbersome but it is most definitely not a shell game. It is nothing like the Mom’s On The Roof technique for explaining or softening tragedy nor remotely related to the Lost Diamond Scam. Personally, I am holding a small position at least until the next earnings report. After that - we’ll see how my comeback company of the year thesis is progressing. And I will keep the Growth Monkey quote
close: “Its ok to be wrong - its not ok to stay wrong”.
But I don’t think I am wrong and - Bert says hello.
All the Best