Pivotal: the answer to the puzzle?

Why did their customer growth decelerate?

One more thought, and maybe the key to answering the puzzle. Think of that 73% growth rate of subscription revenue they had last year. There’s a limit to how much new business any company can onboard successfully and do a good job. Increasing their business by 73% must be pretty close to the limit.

Maybe their customer growth didn’t decelerate! Maybe they were just so busy with all the new things their current customers wanted to add, and with onboarding the new customers that they started, that their support staff just simply couldn’t handle more than 73% growth last year.

Consider that they increased their subscription revenue by 174% in two years from fiscal 2016 to fiscal 2018. That means subscription revenue was 274% of what it was two years ago. And then consider that they did it with only an 18% increase in S&M expense over those two years.

It sounds as if customers, and especially existing customers who wanted to expand their footprint, were coming to them as fast as they could handle them, and they just didn’t need more S&M at all.

How’s that for a theory?

Saul

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It sounds as if customers, and especially existing customers who wanted to expand their footprint, were coming to them as fast as they could handle them, and they just didn’t need more S&M at all.

How’s that for a theory?

Unfortunately that would mean they’re failing at the “land” part of the “land and expand” business model, and that Kubernetes is probably benefiting from it by mopping up the new large customers.

Look, I’m not saying Pivotal is doomed. I’ve just keyed on to a very valid question that Epictetus brought up, but I’m tired of talking about Pivotal. Nothing anyone has said has moved the needle for me. I will restate my points, and not post on Pivotal again (unless anyone offers new information).

  1. It doesn’t matter if they have 300 customers over $50k, or 3,000 customers over $50k. Therefore I don’t care if they grow new customers 16%, 25%, or 250%.

  2. All that matters is how many very large customers they have, and can potentially get, who are willing to spend millions of dollars a year with them.

(I think #1 and #2 are the points Epictetus keeps making. People are getting confused and arguing against straw men. “But they have good customers like Ford and Boeing, etc” – yeah, no one said they didn’t. It’s a question of how many. “But they have 20 new customers and may have have 80 or more in 2018!” – so what? 80 x $50k = $4 million annually! Don’t spend it all in one place!)

  1. I have serious concerns that the number of large customers they have isn’t really growing much. The customers they’ve had for years may simply be spending more with them.

  2. Their customers are spending more, which is good, but not really close to 73% more or 58% more. Pivotal is in a shift from their old model to now, subscription revenue. So subscription revenue is growing faster than Pivotal is actually growing. Old revenue is getting replaced with subscription revenue. So the 28% total growth they had last quarter is more realistic than 60% or whatever.

  3. Since their new customers don’t matter unless they upsell them, retention rate will be all that matters, and as they’ve said, it will be coming down. Therefore I expect total revenue growth will not go up much from that 28%.

Anyway, good luck to Pivotal longs. As I said, this is my summary and last post on this unless someone addresses these issues in a meaningful way. I’m not anxious to rehash everything that’s already been said.

Bear

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Maybe their customer growth didn’t decelerate! Maybe they were just so busy with all the new things their current customers wanted to add, and with onboarding the new customers that they started, that their support staff just simply couldn’t handle more than 73% growth last year.


The largest IT VAR/resellers cant even sell Pivotal yet, which lends credence to Saul’s points here. Those partners need to be qualified for both presales and services capabilities first. Currently only larger consultant outfits like Accenture and/or other large oem vendors are partners, per their website.

As a comparison, a 2-yr old article shows 80-85% of Cisco’s business goes thru the channel.

I get why people keep obsessing but if you understand IT industry sales you would be more at ease on customer growth. How many employees in Pivotal labs? How many employees engaged per client opportunity? (Hint: more than 1) How many large enterprise and large public sector accounts are there to target…2000? Are we talkong US or global?

It all looks good. Lets see what next PRs and ERs show us.

Dreamer

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I should amend my comments that some VARs are now in the pivotal partner program, but it is still early days and those partners will take time to establish services expertise and likely in many cases they may be more responsible for the initial sale while pivotal labs still does the services if that partner isnt fully up to speed yet: https://pivotal.io/partners/var

It doesn’t matter if they have 300 customers over $50k, or 3,000 customers over $50k. Therefore I don’t care if they grow new customers 16%, 25%, or 250%.

Bear:

That is a very novel business construct! Of course it matters…they MUST have new customer growth and they need to have quality customers as I outlined in the other thread. Perhaps you are unfamiliar with the Cloudera recent debacle? Not growth at any sake but quality growth…but “it doesn’t matter if they grow new customers”???..….simply not true.

2) All that matters is how many very large customers they have, and can potentially get, who are willing to spend millions of dollars a year with them.

That is very true but dunno Bear…these customers are large…they simply have to be. There is no other explanation for the massive upselling. You seem to imply that a few larger companies can make up $300 million shortfall in annual subscriptions?? Those must be some truly insane IT budgets to throw that amount at just Pivotol……let alone all that is on their plate (these are not predominantly tech companies to begin with so they have other uses for their money I am sure). Do you have any examples of IT budgets of that magnitude in non-tech companies?

Your caution is warranted…new IPO, customer deceleration, requirement for larger enterprise customers………yes we have established those facts long ago.

Add to that the sales cycle concern and you may see some stock price compression for sure.

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Another important factor here is that when a “large” customer signs up with Pivotal, They may just commit to specific segments of their business at first. Especially in the new world of Agile software development where huge organizations are trying to break their development models into smaller, more flexible entities.

However, once a certain arm of a major business think T-Mobile, Boeing, etc find success with PCF, the VPs of other areas will surely take note and there’s potential for significant revenue growth from these big businesses that are already customers.

I think the segmentation to a partner model with consulting firms helping to deliver the Pivotal Labs portion of their business (services) will ignite revenue growth for many many years to come. As long as Pivotal keeps innovating and improving their software, which is what this transition to more of a subscription model is designed to do.

This is straight out of the Salesforce playbook and it has worked wonderfully for Salesforce, even as more and more competition has popped up.

  • Austin

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Sheeshhhhh. You do realize that the Pivotal Cloud Foundry business is really only 3 years old?

You do realize that Pivotal was really an inside “hobby” for DELL until around 2015, and at that point Pivotal had no need of any new sales force and resale VARs because EMC and VMWare and Dell’s already existed?

You do realize, that as a baby company, with subscription revenue growth that compares to Nvidia GPU data center growth, there was no compelling need to build out a sales force and any other sales channel? Pivotal was doing more business than anyone expected without them.

Pivotal was doing so well that they decided to spin it out as an IPO and make a real company out of it.

You do realize that it is only now, since Pivotal has gone public, that Pivotal has even worked at creating the normal sort of sales force and sales channel?

As I recall, Pivotal at the last earnings call indicated that around 30% of leads come from the parent Dell family, the rest are independent of Dell, and Pivotal went out of their way that they are no longer dependent upon Dell, with this rapidly decreasing number from Dell (30% or so now) declining.

But no, THEY ARE NOT STUPID ENOUGH to not take advantage of the sales channels through Dell either.

So either judge Pivotal on what it was, because it did not have to be something else, or what it accomplishes despite this, which is quite incredible, and what it will be if it actually does create its own sales channel and force like every other company.

Your choice. We will not know anything again until earnings call. OTher then rumor that PKS has gained some traction (not sure how “traction” was defined as no further details were given by the source).

Tinker

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Thanks Saul and Bear for nicely argued pro and con cases.

One of you will be very wrong. Of course being wrong only hurts you if you own a stock. There are always other stocks to buy. So I have to ask myself if I sold PVTL, what would I buy with the money?

What we don’t know or sure is to what extent Pivotal has been deployed inside these large companies, and how big companies have to be to benefit from Pivotal . We do know that Comcast is a customer and they are not in the top 70 companies by revenue. My guess is that Pivotal could help any company that uses more than one Cloud, public or private. Like SAP ,they are starting with biggies.

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What to buy if you sold Pivotal? ALGN and NVDA. Conservstive.

AYX - fast sustained growth. I am looking into Forrester’s opinion more deeply to ascertain this #1 and 2 company ahead of AYX. The #2 company has a recent pre IPO valuation of $235 million after $43 million series D by Google.

This company is more than self service, it actually is automatic service. Hit a few buttons and AI does stuff. Seems very niche, and it’s revenues indicate this despite maybe 8000 clients (not using the controversial or damnable $50k threshold) and low 8 figure revenue.

I believe this company made #2 because of utter ease of use. Hit a button and it does stuff that may produce insight. Do not know more than this at present.

MDB for obvious reasons we have been over. On NPI I compared the 2017 and 2018 surveys and still no NoSQL even close.

Just a few suggestions.

There are many excellent options.

Tinker

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I already own all those suggestion.
The amount of money I must by necessity have in each individual stock in a smallish portfolio already makes me nervous, I don’t want to add more. I have added starter positions in TWLO, ZS, and NEWB . But none look like a 2 or 3 bagger unless markets improve a lot.

re Nvidia
I just go my new Nvidia 1070 GPU gaming computer in action. I find that the new graphics capability brings another dimension to the best games. At some divide point it stops looking like a cartoon or even a game and starts to took like the real thing. Too bad I am so fumble fingered with the controls.
I can not understand the sluggish NVDA stock price or the analyst earnings estimates. Either the Market is wrong or I am.

I do think car autonomy will be slow but that’s lagniappe to me . Will be big long term though.

AI? lots of talk, probably lots of companies tip-toeing into it but I am unsure about actual sales figures. So far it looks disruptive only in a few areas. But it does not have to be disruptive for nearly everybody to want to use it. Strongly additive plus fear of being left behind should be enough.

Gaming? The better it gets and the more people can afford better GPU, the more GPU sold. A couple of things have changed for the better since I last fooled with PC games. There are lots of good cheap games out there. And Steam has made it a lot easier, you used to buy a CD based game ,then have to install a bunch of updates , any one of which was likely to cause problems with your computer or the game. In fact I gave up gaming mainly because of that. Steam gives you games with that chore already done

4) Their customers are spending more, which is good, but not really close to 73% more or 58% more. Pivotal is in a shift from their old model to now, subscription revenue. So subscription revenue is growing faster than Pivotal is actually growing. Old revenue is getting replaced with subscription revenue. So the 28% total growth they had last quarter is more realistic than 60% or whatever

If we examine what’s in bold we find that is not what’s going on here and it might move the needle, if just a little.

The products that are included in this Services segment are not competitive to the subscription product. I believe they are what is Pivotal Labs for Services segment where they provide consulting to co-develop IT stuff and Pivotal Cloud Foundary platform as a service for subscriptions segment. The Pivotal Labs is still a very important part of their business. For instance, the US Air Force contracts are for Pivotal Labs. Pivotal assigned, if I recall correctly, 5 IT specialists to work with the Air Force on the projects.

From the earnings call

Services represented 42% of total revenue, generating $65.6 million, down 3% over last year. This decrease was primarily driven by the continued decline of maintenance revenue associated with our legacy products, which was less than 2% of total revenue in Q1.

The primary indicator of the growing market adoption of our platform is our subscription revenue, which grew 69% to $90.1 million

For the fiscal year, we expect subscription revenue to be between $380 million and $384 million, representing growth of approximately 47%. We currently expect total revenue to be in the range of $642 million and $649 million, representing growth of 27%.

Pivotal is saying the services revenue is getting smaller but only by a very small amount ($2M) and only driven down by the maintenance revenue on legacy products that now amounts to only $3M in total quarterly revenue for the company. This declining segment of a segment will be immaterial going forward.

So how are they expecting Services to perform going forward?

Revenue for PVTL in 2017 was about $510M and approximately half of that, or $255M, was Services. Using the top of guidance total revenue and subtracting out top of guidance subscription revenue shows they are expecting $265M in Services revenue at top of guidance. That would be a slight increase.

I believe it is not the case that customers are leaving Pivotal Labs for Cloud Foundary subscriptions, although from the NRR numbers it may very well be that many are adding it.

Services revenue is not likely to be a growth area for Pivotal and management doesn’t expect it to be, the investment thesis revolves around PCF continuing to grow at a rapid pace to the point that it so eclipses Services revenue that it’s stagnant growth doesn’t dilute total growth too much. And of course it keeps growing that way there after.

I’m convinced it will but not so much that it’s a large position.

Darth

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If you think there is not real growth with Pivotal, run the very rapid growth in gross margin dollars.

Subscriptions are 92% gross margins, services about 23%. I have already done the math on NPI. Not difficult to do it for yourself. Watch just how quickly this company’s gross margins in total dollars will grow if these trends continue.

It is not anything at all like replacing old revenue with new revenue, unless you consider 23% gross margin revenue to be the equivalent of 92% gross margin revenue.

If you do, let us know, and let us know how you come to that conclusion. I can see no way they can be equated.

Start with last year when it was $250 million for subscription and service. This year projections (which are probably conservative), and then grow subscriptions 50% next year, while holding services basically even and let us know if the total gross margin dollar increases are something to be sneezed at and no different than replacing old revenue with new revenue.

Tinker

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Bear,
As you know, I’ve also questioned PVTL’s long term growth prospects. What is the TAM they see as their market, is their vision clear. I have misgivings, but, and this is an important but, whatever the length of their runway, they are pretty much just barely out of starting gate at this point. Over the next couple of years (8 quarters) I see a lot of growth potential.

I think it was Tinker who identified “long term” as over a year because of capital gains tax. I’ve found that Tinker and I have some pretty big differences about some stuff, but I agree with him on this and I have a lot of respect for his technical expertise.

Like Saul, I’d like to think every position I take will be a buy and hold per TMF mantra, but the reality is, it doesn’t work out that way. Holding a position for over a year is long term. I reevaluate every position almost daily.

I don’t know what the TAM for PVTL might be, but presently I don’t care. For now and the “long term” I have high confidence in this position.

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Pivotal is saying the services revenue is getting smaller but only by a very small amount ($2M) and only driven down by the maintenance revenue on legacy products that now amounts to only $3M in total quarterly revenue for the company. This declining segment of a segment will be immaterial going forward.

So how are they expecting Services to perform going forward? Revenue for PVTL in 2017 was about $510M and approximately half of that, or $255M, was Services. Using the top of guidance total revenue and subtracting out top of guidance subscription revenue shows they are expecting $265M in Services revenue at top of guidance. That would be a slight increase. I believe it is not the case that customers are leaving Pivotal Labs for Cloud Foundary subscriptions, although from the NRR numbers it may very well be that many are adding it.

Services revenue is not likely to be a growth area for Pivotal and management doesn’t expect it to be, the investment thesis revolves around PCF continuing to grow at a rapid pace to the point that it so eclipses Services revenue that it’s stagnant growth doesn’t dilute total growth too much. And of course it keeps growing that way there after.

Nice discussion Darth, Thanks
Saul

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Subscriptions are 92% gross margins, services about 23%… Watch just how quickly this company’s gross margins in total dollars will grow if these trends continue.

Thanks Tinker, Isn’t that the truth!
Saul

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For the fiscal year, we expect subscription revenue to be between $380 million and $384 million, representing growth of approximately 47%. We currently expect total revenue to be in the range of $642 million and $649 million, representing growth of 27%.

Darth:

That total revenue has some significance IMO…call it anecdotal if you want…but I have mentioned on the NPI a few times that all of these companies desperately want to hit that $1 Billion revenue run rate…seems to them to be the point that they achieve credibility even though to you and I, it seems an arbitrary number.

I have noticed as they get to within shouting distance of that number…that is when people start to believe it is actually acheivable for a company…the stocks tend to fly. You will hear them mention this $1 Billion revenue milestone soon enough if they haven’t already said it…they all want it.

By itself, not an investable hypothesis, just another observation that the market does work in mysterious ways. This stock has appropriately pulled back from its highs and is within shouting distance of the $1 Billion (by end of next year?..at present growth rate).

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Cross post of mine, from a different thread, but I think it’s relevant to this discussion on Services vs Subscription rev.

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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CMFAleeb,

Your throw-away comment “when it didn’t have a good reputation” in regards to Cloud Foundry they would use Pivotal Labs to get in the door.

This comment (take it FWIW since it is anonymous, but seems pretty dialed in) makes me wonder if they have fixed these “reputation” issues since this was posted on Quora 1/1/17. I don’t work in the industry, so any reactions would be worth reading for all of us from you or SteppenWulf or anyone who actually is more connected. Thanks

Our company had a very close experience with Pivotal Labs working with them for an entire engagement for over a year and worth several millions dollars. I work for a top tier of Fortune 100 well known company operating around the world also known as a famous brand.

Our senior management was approached by Pivotal CEO and his marketing team which resulted in apparently convincing arguments that our technology organization sucked big time and that they would totally reinvent how we develop software. Since we spend tons of dollars yearly on technology, it seemed like a good idea to our senior management aspiring for the next promotion. Pivotal Labs positioned themselves as the “expert” in software development methodology, and flashing amazing success stories from other large companies engaged with them.

After a long and very painful engagement, every single person working on the floor with Pivotal Labs is unanimous: the engagement was not only a waste of time, but much worse, also detrimental to their career. Their peers now look at them with disgust having produced absolutely nothing really new, useful, or game changing. To be fair, they learned what is an hypothesis and how to invalidate having terrible ideas which was always proclaimed as a huge success since nothing else was delivered. Their “work” is designed to stretch the assignment as long as possible since Pivotal Labs gets paid by the hour, not delivery. As for pair programming, it is anything but a new model but everyone involved stated that it is not productive in the long run.

Let me give you an idea of how much money they sucked from us. Well, just four Pivotal Labs folks costs just over $2 million for one year since they charge $42,000 / month / person. This is not counting our own people. We had six other groups with a similar setup, so $12 million per year. Now you would think that you have top notch quality engineer well trained team on Pivotal Technologies like Cloud Foundry, Gemfire and Spring, right? Wrong! They gave us 3 total newbies on these technologies, one semi-expert which turned out to not know much after scratching the surface. Within that a pack an arrogant freshman from college. For $150K / year, you would much higher quality level folks on the street.

Absolutely nothing useful got delivered since they are not responsible nor liable for any deliverables. The team’s attitude is that we are a pile of crap and they know how to develop software. We were often treated with condescending attitude, insulting statements, and blaming any issue on our side. Our people were much more hands on, had total knowledge of the business which Pivotal refuses to learn since they just want to be “generalist”. The Pivotal team is fanatic about controlling their in-house Pivotal Tracker and nothing is set in stone to avoid commitment at all cost. The user stories are generic, subject to sudden change and scope, there is no sprint, and nothing can be tracked easily to ensure total lack of transparency from the client side. They bill by the hour and they overbill many more hours per day than they actually work: team members often come late without any excuse, they have their own “meetings”, often disappear from their desk for no reason, and they leave at their own time no matter what.

But here’s the worse part: nobody except top management is allowed to see Pivotal Labs weekly report which always claims “great progress and amazing improvements” stating a total dishonest representation of the truth. And if anyone on our side tries to inform our management that things are not going well at all, Pivotal has a direct line to the top management to complain at these individuals and their careers are instantly damaged because they are tagged as a not being a good team partner and resisting their “culture”. Bottom line, everyone on the client side has to keep their mouth shut and live in fear of being outed just for stating the obvious issues taking place at Pivotal Labs. That is absolutely surreal. Because of this setup, the level of arrogance from Pivotal Labs is absolutely the worse imaginable in a working environment. Our people were deeply depressed and all wanted to leave the company.

Pivotal Labs is an expensive scam. Super smartly designed by folks only interested to cash as much money from you without having any legal responsibility to deliver anything tangible. It just a matter of time that their clients actually understands this and we are certainly not the only one. Our senior management took a while to realize what was going on and finally ended our contract with Pivotal after was too much time and money wasted down the drain. Projects were late, the entire code had to be rewritten from scratch and Pivotal never took any accountability. Total scam. Make sure to ask around REAL clients before going with Pivotal Labs to avoid losing a fortune and precious time.

Obviously I don’t think the whole thing is a scam, the numbers speak for themselves. This guy sounds pissed that they didn’t seem to value his abilities. Everyone has an ax to grind and looks to blame someone else. But, that wasn’t the only similar story I found looking around.

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You do realize that Pivotal was really an inside “hobby” for DELL until around 2015, and at that point Pivotal had no need of any new sales force and resale VARs because EMC and VMWare and Dell’s already existed?

Tinker - that ain’t the case. I was invested in EMC for many years (pre DELL buy out) and saw Pivotal as the most exciting part of that business, followed by VMWare followed by legacy EMC storage.

It wasn’t a DELL hobby at all and has been going a lot longer than that. Admittedly DELL have probably consolidated some parts of the Pivotal business together since they got their hands on it but it isn’t the main story here.

Ant

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Pivotal Lab as a consulting business, and with software to create big data technology has been around. But Pivotal as a subscription software company has only been around with real business since about 2014/2015. It is amazing what they have done in that period of time.

True, Pivotal was a start up with near unlimited capital and a built in sales force as well. So no the usual “start-up” but Pivotal as it currently exists is an extension of what existed before, but has and will vastly outstrip what was, and this new Pivotal has only been around on a real commercial basis for about 3 years.

I do sincerely hope that your evaluation of Pivotal does indeed come to pass. Seems it might.

I am not sure how Pivotal gets into the big data game that it was a leader in developing it begin with. Perhaps Big Data is not as profitable anyways as is micro-applications and iterations thereof, and managing Kubernetes.

Tinker