On Pivotal's number of subscribers

Investment Analysis Clubs Saul’s Investing Discussions
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I came across this in reading Wouter’s interesting deep dive on Pivotal. I think it should be highlighted as it relieves a lot of anxiety about Pivotal’s number of clients:

We define the number of subscription customers as the organizations that have a subscription contract for our software resulting in at least $50,000 of annual revenue in that period. While we may enter into subscription agreements with multiple parties inside a larger organization, we count a customer as an addition to our subscription customers only if it represents a unique global ultimate parent.

The way I read that (and it seems pretty clear) is that they only count a company as a subscription company if it brings in at least $50,000 dollars annually. They don’t count individual departments in companies, and they don’t count smaller accounts. Thus, it seems, if a company only accounts for $30,000 a year, it isn’t counted, so they may have a number of additional smaller customers that they don’t think worthy of being considered a subscription client, which is a major designation to them.

In the case of the U.S. government, we count U.S. government departments and major agencies as unique subscription customers.

That is pretty clear.

Best

Saul

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Thats amazing, especially due to what i pointed out, swapping out for nutanix is expensive, growing up with it as the solitary system is very efficient!

Which means if these sub 50k companies are going to grow up, the customer count increase will be significant!

MK

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Thank you for reiterating and puting PVTL out there Saul and to Steppenwulff for bringing PVTL to the board.
Although many of us have had concerns re: PVTL customer count, pondering this a bit more, the revenue growth rate, relative reduction of SG&A per dollar of revenue gives me significant conviction. With 319 delighted customers that generate over $50K in annual revenue, with such sexy net dollar retention rates, profitability and the “ocean” of additional large (and small) potential customers, I am reassured that we may be in the early innings of a cash printing machine.
sjo

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319 Subscription Customers in 4 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.

Their dependency on net expansion of existing customers reminds me a bit of CLDR…in the latter case, CLDR didn’t expand the acquired new customers but did grow new customers. With PVTL, their new customer growth rate may be slowing but they compensate by net expansion…that is a vulnerability IMO…….should they see falling net expansion.

So we do see slowing growth rates for both new customers and subscription revenue. I was also interested in who/what is characteristic of their new customer wins…earnings call wasn’t that descriptive although they were largely “on-prem” utilizations…making me wonder if the “Dell family” along with VMWare is driving their business more than an independent wins…since VMWare does a large amount of business on-prem.

Lastly, Michael Porter writes of the competitive advantage in a company being dependent on 5 forces…one which is buyer power…in the case of PVTL and so few customers…the buyers do have leverage…just not sure how this plays out in pricing power in the nearterm.

One can see why Bert wasn’t overly thrilled about PVTL…it is very early and the trending still isn’t as nice as many other tech stocks discussed in previous couple years.

The TA for PVTL has retraced significantly from $30 to $24.7:

http://www.stockta.com/cgi-bin/analysis.pl?symb=PVTL&cob…

So from that perspective, someone taking a position with closing of that gap is certainly better that having taken a position at $30.

There is more complexity to this stock investment than meets the eye (customer growth rates and subscription rates slowing, DELL’s family influence, net expansion rate successes, buyer power, new IPO, DELL/VMWare deal yesterday to bring DELL public, etc.).

The announced prospective deal with government could be a catalyst that might jolt the stock…but not sure they guided in a manner for subscription growth that suggests a big quarter is coming 2nd 2019.

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I think Pivotal’s situation is quite simple actually. Dell is not going to screw up its business. It did not screw up VMWare’s business, it has not screwed up EMC’s business. Dell actually allowed Nutanix to compete directly with VMWare on Dell’s own servers.

Yes Dell needs money, but Dell took money from VMWare only when VMWare was in the position to be able to handle this without any harm to their business, future, or shareholders.

Pivotal also was not putting much emphasis into marketing for customers last year. They were focused on what they do best, and that is R&D and upgrading cloud foundry. They gave up trying to use their own container and with their partners, Google and VMWare (no one has better partners than Pivotal) they created their own Kubernetes product. Pivotal has specifically said they are now going to focus on adding more customers.

So it is simple. Pivotal adds more customers we make money. Pivotal does not add more customers we lose money.

The analogy to Cloudera is a false one. Cloudera’s problem is that only the largest of companies can benefit from their product at this point in time. Instead of focusing on expand, they focused on land, and the landings were made into companies that could not really use the product.

Pivotal, on the other hand, does not focus on the large, but the micro. Micro services, micro apps, iterative programming, etc. Pivotal also focuses on moving legacy apps to the cloud. Nothing in there speaks of limitations on client retention.

I do not think it is much more complicated than that. Dell is not going to hurt Pivotal’s business, and if Pivotal can grow its customer base as it now says it will start to focus on we make money. If they do not we lose money.

When I see what Pivotal did for Boeing (just the most moving of many examples) I am willing to invest in a company that can not only do this in a bureaucratic swamp that 150,000 employee 110 year old company Boeing has, it also went into the Air Force and the IRS and did things we take for granted in the private sector, but these organizations, despite a decade, could not do for themselves. Pivotal did in a matter of weeks.

Perhaps there is little value there for organizations around the world to work with. Ford, Home Depot, Google, Microsoft, VMWare, Boeing, are probably flukes that will not be repeated as Pivotal’s market is only limited to the most competent of very large organizations…not.

We will see. Won’t be difficult to follow. Btw, Pivotal destroyed its guidance last quarter, as it AYX, as did NVDA, etc. It has either become a game these days, or indicative that demand is greater than their neutral models indicate it will be. Probably both are at play.

Next quarter is next quarter, and of course on pins and nails again, and again, and again…not. Bring it on.

Tinker

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Well, I just confused pvtl and ntnx
:joy: SORRY

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The growth in new customers has slowed to just 16% between 2017 and 2018

Hi Duma, I don’t understand a thing about the technology, and I’m also a little concerned about Dell’s influence, but I can answer your point above. In all of their last fiscal year they only grew by 44 new Subscription Customers, allegedly because they were so busy expanding their existing customers (subscription revenue did grow by 73% in that last awfully slow fiscal year, after all), but they grew Subscription Customers by 20 in the first quarter, which would be a run rate of 80, almost doubling the number they added last fiscal year. Just a different was of looking at it.

One can see why Bert wasn’t overly thrilled about PVTL

On June 14, Bert wrote a shame-faced complete reversal for his subscribers, which started like this

“Color me very impressed. Color me a little blue in that I do not own this name. Color me a bit shame-faced in that my initial article did subscribers no favors and got the stock recommendation totally wrong. Sometimes this is a humbling business.”

He went on to explain why. Since it’s still less than a month old and a paying subscription I shouldn’t reprint it all yet but you get the idea. (I think the sub is very worthwhile by the way).

Best,

Saul

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On June 14, Bert wrote a shame-faced complete reversal for his subscribers, which started like this

“Color me very impressed. Color me a little blue in that I do not own this name. Color me a bit shame-faced in that my initial article did subscribers no favors and got the stock recommendation totally wrong. Sometimes this is a humbling business.”

Bert’s original article appeared May 17th when PVTL traded at $18.18…then promptly went up to peak at $28.91 on June 15th…the day after you say he wrote a mea culpa.

The stock has since pulled back to $23.57 and just $2 short of filling that gap up when it broke out on June 13th the day before Bert’s reconfigured opinion…and a mere 30% higher than his original article.

If one believes the chartists and people like James O’Shaughnessy on what works on Wallstreet……the pullback from a breakout is the optimal time to take a position.

I acknowledge that the DELL ownership and complete control of PVTL could be a two edge sword…on the one hand, DELL is unlikely to allow it to fail…on the other, DELL is likely to use its ownership for its own purposes.

On the NPI, we did go back to see the impact of DELL ownership on VMWare’s stock…it was clear there were stock declines that times to DELL offloading shares. It is also clear that DELL has used VMWare to return to public and used VMWare to finance that return to the tune of over $1 Billion.

After looking at the timing of Bert’s articles…he hasn’t yet acquired the “Gilder effect”…so maybe this indicates we are not too frothy in this market as yet :wink:

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they only count a company as a subscription company if it brings in at least $50,000 dollars annually

I can’t make sense of why they chose $50,000. A 50k/year customer is still really tiny. If all 339 “subscription customers” were at even $100,000/year, that would be just 33.9m in annual revenue, where we know the subscription revenue was something like 10 times that much.

In fact, since it was 90 million last quarter, I’ll assume it will be about 400 million in 2018 calendar year.

The only way this makes sense to me is that they have dozens of small customers around $50,000 or $100,000 (or else why would they even use that number as a cut-off?), and then maybe something like 20 or 25 super-large customers whose subscription spend is probably several million dollars each year. Twenty-five customers that average $5,000,000 each would only be 125m…not even a third of the 400m I’m expecting in 2018.

All this to say, if you believe in Pivotal, I think you have to do so because you believe they will have other very large customers spend millions with them each year. $50,000/year customers aren’t going to move the needle. Does anyone disagree with that?

If you agree with that…who are these customers going to be?

Bear

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All this to say, if you believe in Pivotal, I think you have to do so because you believe they will have other very large customers spend millions with them each year. $50,000/year customers aren’t going to move the needle. Does anyone disagree with that?

Oh, and the reason I highlighted “other” is that these same 20-25 (or however many) customers who spend millions with Pivotal each year can’t just keep spending more and more, right? I mean there’s a limit somewhere – we just don’t know if most of them are near it yet or not.

Bear

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Large enterprises dont always move rapidly nor do they move large amounts of their environments to different processes all at once.

50k is probably more than the very lightweight trials by certain devops folks at large organizations but also just big enough to show that they have now seriously attempted deploying pivotal and serious future expansion is now likely.

I wouldnt read too much into this. They could just count them all as clients but this method is more realistic and conservative, which i prefer from mgmt.

Dreamer

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http://fortune.com/global500/list/

world’s biggest companies by revenue
So I guess the question is how far down can Pivotal go on the list
Comcast is a satisfied customer and they are #79 on the list.

Companies like SAP have done well catering mostly to the big boys.

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It should be said that SAP, once the dominated the corporate 2000 moved to then dominate everywhere else, and have done a great job of doing so. SAP is now a dominant force in smaller sized substantial businesses. You know the $10 million to $100 million, and I have even heard stories of the $500,000 business with aspirations.

One reason being, is that it is expensive up front. But if you have the capital, and if you have the confidence in what you are doing, SAP will plug and play into supply chains around the world. So you will actually see a $500,000 business paying more than $50k to install SAP. It is a material risk for these firms, but pays off very nicely if the firms succeeds and starts selling product in China, South Africa, etc.

Point being, there is no reason that Pivotal cannot focus on the corporate 2000, and then like SAP, expand its horizons over time.

There is a long runway to go. Pivotal just grew its subscription revenues by 69% or something like that while only adding 20 new customers. What happens when Pivotal gets to 500 customers, 1000 customers…hopefully we shall be that lucky to see it, and on-going.

But perhaps the work of fantasy on my part. There are no assurances at all that Pivotal will indeed grow like this. As I said, if they don’t, we might lose some money, if they do, we might make quite a bit.

Tinker

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What happens when Pivotal gets to 500 customers, 1000 customers

That’s exactly my point, Tinker. Even if they get 1,000 new customers who each spend 50k/year, nothing happens. Pivotal’s 400m in subscription revenue goes up to 450m. Whoop dee doo.

That’s why I say 50k/year is a strange and pointless cutoff for what counts as a customer.

Bear

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Bear,

Every company defines a customer in their own way. Twilio’s us absurdly generous to Twilio in how they define a customer. Something like a few dollars of use or something, I forget the details.

Pivotal’s manner of describing a customer is about the most conservative definition I have ever seen. IT is but a definition.

Tinker

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Pivotal’s manner of describing a customer is about the most conservative definition I have ever seen. IT is but a definition.

Right and the bigger revelation is that PVTL must have a massive upselling of customers…just do the math of 300 customers X $50,000 and compare that to their total revenue.

Obviously, what starts at $50,000 doesn’t end there…not even close.

This is what I was referring to in the comparison to CLDR…massive upselling as the main aspect of their business model…in fact an absolute necessity.

Now if they could combine that upselling with massive customer growth, that would be the holy grail.

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<<<Now if they could combine that upselling with massive customer growth, that would be the holy grail.>>>

That is the business plan.

Btw/ for Pivotal is does not take massive upselling. Those customers who come through Pivotal Labs use the product with 1.5x more intensity than those that do not. It is simply educating the client on the product.

Once in the door, and the first project gets going, you find out that there are 1000 more that can be done, that have not been done, and it virally takes off.

What Pivotal needs is to expand those who come through Pivotal Labs, and of course every other channel, but that is why they are building 17 more locations around the globe. Baidu has now adopted the Cloud Foundry (first in China).

Tinker

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I should say Baidu now offers Cloud Foundry on its cloud, not that Baidu is an internal user of Cloud Foundry (I do not know the answer to that question).

Tinker

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Right and the bigger revelation is that PVTL must have a massive upselling of customers…just do the math of 300 customers X $50,000 and compare that to their total revenue.

Obviously, what starts at $50,000 doesn’t end there…not even close.

It’s either that, or…what Bear mentioned and I brought up a few months ago:

They have a small number of customers spending several millions dollars, and significantly more spending somewhere around $50k (which is basically irrelevant to their overall revenue). If they add 1,000 more customers and they are just the startups/small companies (http://discussion.fool.com/so-i-know-i39m-late-to-the-discussion…) then it won’t matter how good they are at upselling.

How can anyone on here be so confident that they are attracting new, significant customers that are going to actually spend relevant money?

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Or maybe they have one customer spending $300 million and the rest spending $50,000…I do not think so, but just as likely.

Why don’t you go look at their customer list, their venture capital investors that literally liked the product so much they bought the company (in regard to Ford and GE and Microsoft and Google and EMC/VMWare/DELL) and then study what their product actually does, and why it takes off so virally through the organization.

If a customer stays at $50,000 that means they are trying it on and don’t like it and will drop as a customer.

Tinker

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