Circling Back to Pivotal

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:

/Users/owner/Desktop/Unknown.jpeg

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:

https://seekingalpha.com/news/3416187-pivotal-software-plus-…

https://seekingalpha.com/article/4227805

Subsequent to the Conf Call this is what happened:

https://seekingalpha.com/news/3416456-analysts-trim-pivotal-…

Thereafter, investors began asking the question: Pivotal…Is that all there is…is that all there is… Pivotal?:

https://video.search.yahoo.com/yhs/search?fr=yhs-ddc-ddc_bd&…

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:

https://www.youtube.com/watch?v=efHzGxEzDQA

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:

https://www.youtube.com/watch?v=Qkuu0Lwb5EM

Maybe…Maybe not.

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:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&…

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:

28.5%
30.5%
30.4%

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:

https://www.youtube.com/watch?v=eFyr49TwuiI

** 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

7 Likes

funny thing… i just bought few call options today…

With that, I have put PVTL in the same bucket as PSTG … looks very cheap and attractive… may explode without warning… I cant buy because our great sage Tinker on this board who diligently asks “why is this stock cheap… what is the reason… and why that reason is wrong”… and I cant come up with logical reason (like hidden growth in case of NTNX)…

so I decide to hold few, cheap, near term calls and see them expiring worthless every two months and I repeat again… hoping and wishing one day it will all pay back!!! Hopefully, one day I will be able to stop that insanity…
(Sorry for OT discussion related to options…)

4 Likes

Thanks for the rehash Champico.
I hope you’re right, but I’m going to add some negativity back into the mix, just from my notes:

Dollar based retention rate of 150% is great. Fantastic. But it’s down from 156% and it’s measured on a rolling 12 month basis. So this last quarter would have been a lot lower. Questions on growth sustainability here - we’ll come back to this.

Customers - this was the most crucial thing to look out for last Q. And it was hands-down disappointing. It was also probably more disappointing that management didn’t appear disappointed. Why is it important? Because it allows pivotal to remain in hyper-growth mode, particularly for their high margin subscription business (slowed from 69% growth to 51%!!)
$50k annually is a pittance. It’s nothing. I wouldn’t put much hope that they have dozens of customers laying in wait at the 40k region, just waiting to cross that 50k threshold and explode into the hundred of thousands of dollars spent each.

Even with 368 customers, please also bear in mind that they are top-heavy here. A lot of the revenue is concentrated amongst a few key businesses. For example, Ford in Q2 last year had 12 million in revenue (almost 10% of Pivotal’s revenue!). This year, they had a bad quarter and decreased their spend to 3 million. Wow, that’s a drop! And Ford are the guys putting their offices next to Pivotal, praise them from the roofs, and are also invested in Pivotal.

We can get two points from this:

  1. Pivotal’s revenue heavily concentrated on a few big key enterprises. A stumble to one of these enterprises (e.g. Ford), will put a dent in Pivotal’s revenues. This means when you invest in Pivotal, you’re also invested in the good fortunes on these other companies. Compare this to say Nutanix with 10,000 and growing customers, or Shopify with, is it 800,000 now? - if a few dozen go bust or have bad quarters, you don’t mind so much.

  2. Why has the poster child of Pivotal declined their spend by so much? To me, this is the biggest deal. To suddenly spend only 25% the previous year is a drastic change. Clearly, Pivotal wasn’t as crucial to Ford as originally thought. Maybe there’s a good reason, but I haven’t found it.

Okay, so here’s my angst. Pivotal has an amazing dollar based retention (they’re upselling incredibly well to their current customers), and have an amazingly high margin business - 93%. They’re operating cash flow positive this year. They will be a cash machine. Awesome. But there is a ceiling to upselling, and it’s starting to show with the slow-down in retention dollars and the subscription business.
If Pivotal do not grow their customer base faster, growth will stagnate sooner rather than later

And that, my friend, is why Pivotal dropped as it has.


I can add one positive, but it takes some twisted thinking:

RPO - Remaining Performance Obligations - was bought up from left-field by management last quarter. It was a big double u t f is this moment. There was negative reaction, they didn’t give historical numbers to compare with, immediate thoughts were of management trying to hide/fudge figures.
But billings guidance can be very lumpy. RPO might actually be a really good long-term indicator of how the business is doing. Maybe management are ahead of their time.
Just rubbish that they didn’t give historical values.

From 10Q
The typical contract term for subscription contracts is one to three years, while the contract term for professional services is generally less than twelve months. Our contracts are non-cancelable over the contractual term. As of August 3, 2018, the aggregate amount of the transaction price allocated to billed and unbilled remaining performance obligations for subscriptions and services for which revenue has not yet been recognized was approximately $790 million. We expect to recognize approximately 50% of the transaction price as subscription or services revenue over the next 12 months and the remainder thereafter. As of February 2, 2018, the aggregate amount of the transaction price allocated to billed and unbilled remaining performance obligations for subscriptions and services for which revenue had not yet been recognized was approximately $820 million.

We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. We generally bill our customers annually in advance, although for our multi-year contracts, some customers prefer to pay the full multi-year contract amount in advance.

Contracts can be up to 3 years. Subscription contracts generally 1-3 years whilst services are sub 12 months. So majority of RPO related to subscription.

Billed RPO will equal deferred revenue on the balance sheet. Unbilled is the remaining

Billed a year in advance → current liabilities
They’ve said RPO peaks seasonally in Q4

19 Likes

Slot machines can be fun. No use hanging your head over it.

I sipped some good rum last night. My trainer disapproves, but “I yam what I yam”

Cheers
Qazulight

1 Like

funny thing… i just bought few call options today…

I like Pure but the stock has been disappointing. I’ve been babysitting PSTG selling covered calls and have brought my cost basis down to $19.30. High tech is cyclical and PSTG and others will take some time to get back on track.

PSTG has recovered nicely since the Dec 24 low.

Denny Schlesinger

Ben:

Great counter points and you may well be right on target. Those were all the arguments - and entirely valid ones - brought up as the PVTL ship was stalling. But my thesis is that DevOps is a large and growing TAM within the IT universe and that PVTL has a central if not dominant role to play. The fact that the IBM fading star attached itself to the space by buying Red Hat while paying a kings ransom for it is to me evidence of the mission critical nature of DevOps and Kubernetics and the value attached to them.

Additionally, I see the current share price around floor level - don’t think it will ever be in the bargain bin - and if the company does nothing more than continue the 30% Rev Growth going forward - the sheer weight of the numbers will burst through the dam of investor concerns. Maybe - maybe not.

Thats the thesis and it will either be proven right or wrong on future earnings reports with the first one coming up in March I believe. So, I am maintaining a small position that won’t be a portfolio killer if it is proven wrong - about a 1.5% stake in the opportunity - to see if plays out like I think it will.

All the Best,

4 Likes

Hi Nilvest:

Didn’t want to clutter the boards with my lament over my poorly crafted option skills. I simply don’t understand options enough but think that those who really understand how to use them are certainly better investors.

PSTG I am not so sure about and haven’t spent very much time researching them.

All the Best,
michael

Champico33 -

I too have continued my flirtation with PVTL (small position) as I just can’t seem to get away from two things:

  1. While trending can be an idiot’s game (see NVDA)… if the business continues to grow ~30% Y/Y with Opex growing ~15-20% Y/Y the combination of the current low valuation and the rapidly shifting mix to high margin Subscription Revenue result in some crazy metrics two years out. If PVTL’s price holds flat the next two years and these trends continue (on average it has done both of these on average the last 2 years even with less than stellar customer growth) then I show PVTL would have a PE of ~25 and a PS of ~4! That is for a SaaS company in a supposedly high growth, large TAM field. To me a company with these margins, TAM, etc. would deserve a multiple of at least double that even with the customer growth only ~20%. If they could start accelerating customer acquisition… why not even higher?

  2. Customer concentration can be a big negative, no doubt. However, its hard not to salivate over the idea that a company has only penetrated A FEW HUNDRED customers out of the thousands and thousands of sizable companies in the world and that they have shown that the annual revenue of a customer could be as high as $10M+! Now that is obviously well above their average customer… but if GE and Ford could do it why not others? Doesn’t this indicate that while Net Expansion Rate may be lumpy currently and drop due to GE and Ford fall off… the 150%+ it has had historically may not be an anomaly but rather a feature. it makes new customer they do obtain very valuable and makes the runway seem incredibly long.

Large disclaimer that both of these are numbers / theory based. Ultimately what matters is the quality of the “product”, whether this is truly a high growth large TAM, and the company’s ability to execute. Are the low customer growth numbers, drop in GE revenue, and the fumbles on the earnings call indicative of an overhyped offering / TAM with poor leadership? If so maybe even the run-rate scenario could fall short. I don’t understand the tech well enough to know / have a conviction on that front.

Hard one to pass up for sure. I have a constant internal back and forth on PVTL, so I could be out in the not to distant future.

Erik

1 Like

What you all might want to keep in mind is that:

Pivotal has had very, very artificially low operating expenses in the past because they were a part of Dell until a year or so ago, and they had all those big clients, like Ford, passed to them, without any sales and marketing expenses, by Dell and VMWare (also part of Dell system). They essentially weren’t declaring any sales and marketing expenses.

Pivotal also has management who are used to operating as a small cog in the Dell system and, as opposed to many IPO’s, this management group has been sheltered for many years, and has never had any experience operating as a free-standing company.

Thirdly, the very slow patient accumulation may well be because the new sales force they’ve had to hire hasn’t a clue about how to go out and round up large customers on their own.

If you’ve taken those points into consideration, and still decided to buy, that’s fine, but you should have your eyes open. That’s all my opinions and I’m sure others will differ about some of the points.

Saul

16 Likes

Hi Fly:

You summarized my feelings much better than I did myself.

I thought and thought and thought about it and in the end I decided that the potential rewards far outweigh the risks. While things can always go from worse to really worse - I look at the stock price and just feel that a floor has been put in - and in actually the company just turned in a really nice quarter.

IF the company continues performing at its current growth rate I see it like flood water building up behind a dam. (Not like a dam like the Hoover dam - but sort of like one of those beaver dams you run across if you hike the high country.) Eventually the market will recognize it - the growth not the beaver dam - and the stock price will move higher.

Like you point out - all a thesis that needs to be proven and we’ll see beginning with the next report.
We’ll see.

All the Best

Saul:

Thanks for pointing those issues out and I fully recognize that most of the really smart folks here and on Tinker’s NPI board feel the very same way. But…in the end, the great thing about you Saul is that you teach people how to invest and to think for themselves. Many, many here have profited greatly from you - and I am certainly one of those.

However in this case I have thought about everything mentioned to date - and fully recognize that I am going against the grain - and have left the reservation, so to speak (Note: I do not claim any Native American heritage although I did have a Kickapoo indian named Escapula Moralles somewhere in the family tree).

I am keeping the position on the smaller test flight level and if I am wrong then I will exercise Growth Monkey’s most excellent advice that “Its ok to be wrong but its not ok to stay wrong”. And another lesson will be learned. If it is a mistake then it certainly won’t be the first investing mistake I have made nor anywhere close to the last one. I’ll just call “mulligan” and move on.

All the Best

4 Likes

I was going to do a longer post on Pivotal, but why I moved away is because of the slow customer growth. It is a lottery pick each earning call to see if they can speed up their pace of retaining new customers. I lost my discipline a bit late last year during the turmoil months and did play two earnings calls…erp! Wrong answer. Why play an earnings call? There are so many great companies to invest in that investing, in the end, is not so much luck but risk/reward.

Second, if you look at the customers that Pivotal has they are largely old tech industrial companies that cannot do it themselves. As Dreamer said on an unrelated post on NPI, although DevOps and Agility are big and huge, apparently most companies can do it without Pivotal. When one looks at Mongo, for example, Mongo provides much of what Pivotal does (and getting better at it) albeit I understand not apples to oranges, but Pivotal is not the only solution out there.

Look at their prime customers: Ford, GE, Boeing, Air Force. Pivotal worked utter wonders with Boeing and the Air Force. Boeing might not be a prospering company anymore had they not gone with Pivotal. Ford, despite what I am sure are miracles worked there, is still doing not so good as a business. GE made a publicly traded company out of the Pivotal platform and they had to sell it off because they could not figure out how to properly run it.

One of the prime customer stories on their web-site is a 100 year old merger and acquisition transactional company that is very old school. They went with Pivotal or probably would have died.

All of these companies have in common that they have real IT problems and are old. Such companies are usually late adopters of technology, and slow to change. And thus hard to close even with a Pivotal solution that we all know can work miracles for them.

I am sure not all their customers of this characteristic but it does seem a pattern. It may very well be that companies that are more modern in nature can do Agile and DevOps without having to do it the Pivotal way.

Makes it difficult to close deals. Perhaps the marketing relationship with VMWare and Dell will start to pay dividends. To date however that has been disappointing. I think Docusign has better synergies with Salesforce (their largest partner) than Pivotal has with VMWare (public statements aside, it almost seems as if VMWare resents having to work with Pivotal).

I hope this quarter turns the corner for Pivotal, but “hope” {other than in space rebellions} is not an investing strategy most prosper in. But perhaps this will be Pivotal’s quarter. Since I am writing this, most certainly this will be Pivotal’s quarters, just like their first earnings quarter was.

Tinker

7 Likes

Tinker:

Thanks for your comment. With you pitching in there is no doubt that despite the long odds I at least have that going for me:

https://www.youtube.com/watch?v=X48G7Y0VWW4

All the Best