Pivotal Key Services Factor To Watch

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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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I was actually thinking about this after my last post. If the results are so much better when customers have come through the lab, what happens when they cut out services? Can the partners do as effective a job. I don’t know. But, I agree it could be a concern.

Treepak

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Tree,

What I’m guessing is that Pivotal thinks now that PCF is becoming well known and major businesses are seein results, it is not as crucial for Pivotal to be doing all of the Agile transformations (Part of services).

Partnering with great partners can still help with distribution of PCF and their Pivotal Labs tools. Salesforce, AWS, Google, Alteryx, Amc many others use partners very successfully.

The benefits will probably far outweigh the negatives. Pivotal can focus on making their software best in class and even allocate more towards R&D to build new software in the future.

Just have to make sure they make the transition smoothly, which I’m sure they will.

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