Doing a deeper dive on Pivotal.
I’ll start with the potential red flag as they move away from services. I’m listening to their CFO during the recent William and Blair Growth Conference.
She said one data point they have gathered, but won’t update regularly is that customers who have used Pivotal Labs at some point (part of their lower margin services revenue) spend 150% more than customers who have not.
There’s a lot to dissect here. Pivotal Cloud Foundry (PCF), their software platform is only a few years old. When it didn’t have a good reputation, Pivotal Labs was kind of their foot in the door. It’s basically Transformation Consultants who come in and run companies through an Agile transformation to help them think and develop in a more innovative way. This would then lead to good results, happy customers, and interest in PCF.
Pivotal is probably taking all of this into consideration and coming up with a strategy through partnerships to avoid any negative effects of their services revenue going away.
Now for the good stuff:
Their total Cost of Revenue was $59 million during Q1’19. Cost of Services revenue made up $51 million or 86% of their total cost of revenue. As they dedicate resources away from services and focus on subscription, I expect this to really improve their ability to become profitable. This doesn’t mean they will become profitable, but they could find themselves in a similar position to Amazon a few years ago when they could have been profitable, but elected to dedicate more money to R&D and growth. We’ve all seen how that has played out.
I’ll also be watching how fast (or if) their Sales and Marketing Expense($69 million), R&D ($44 million) and General and Admin Expenses ($16 million) go down as they move away from services revenue. My guess is R&D won’t, but the other two will.
My apologies if someone else has already brought this up, but it helps me to think through this.
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