PVTL and the RHAT acquisition

IBM acquired RedHat today at about a 60% premium - it’ll be nice on Monday to get that in my account.

https://seekingalpha.com/news/3401910-ibm-acquires-red-hat-3…

IBM didn’t buy RedHat for their Linux business - it is all about buying the #2 Cloud Tools company, and a company in the running for top Kubernetes tools.

PVTL is the #1 Cloud tools company, and at the current price, is a screaming buy in my opinion.

I know Tinker has compared PVTL to a mainframe company. I think where the analogy falls apart is that PVTL technology is excellent for any size development team. PVTL makes PC’s but sells them only to top tier clients, as if it was selling mainframes.

Selling only huge deals is fantastic for now - it minimizes sales costs and maximizes margin - I’m sure the CFO loves it and wants that to continue. The issue is that, as Tinker says, the really big money is in the mid market. Pivotal needs to get there, and I’m sure it has or is developing a strategy for it. How quickly they start, how much they invest in it, and how well they do will determine how well they do in the longer term - 3-5 yrs down the road.

But PVTL is doing so well in the top tier markets, that they will continue to blow away their revenue and profit numbers for the next couple of years - anything they do in the mid market will be a rounding error for at least 2 years.

For what it’s worth, I think PVTL has a fantastic risk/reward profile at this price - I think it is worth a look for people on this board.

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I just pulled up a chart comparing Red Hat vs Mongo,Square, Okta, AYX, Talend, and the like. Red Hat has badly underperformed year to date, one year and two year. Even with the 60% some premium here Red Hat is still slightly behind most others at their market crash current valuations.

I would not say holding Red Hat because it might be bought out would have been anything but an unperforming strategy with the luck of getting acquired for a premium (and even then underperforming).

Btw Mongo has outperformed everything else, even Twilio. I was not even aware that Mongo only fell 16% in this market crash as it is the predominant portion of my port and I no longer even think of it or look at it closely. It is just there not to be done with. Seems that is the reason my port has not experienced great trauma, although the edge of my port (which is everything else) has performed like everything else, which is catastrophically.

As such, why would I want to worsify by holding a Red Hat or a Pivotal. I have no doubt that Pivotal will make a bounce back from last quarter, and this Red Hat acquisition might give it a bounce as well. But at this point in time is it going to outperform a Mongo, a Twilio, a Square, and the like?

I am just not capable of playing the bounce on a stock that appears to have less longer term appeal than what it originally was perceived to have. I have no doubt that Pivotal is #1. I have no doubt and have advocated that Pivotal has a superb product. The issue is what sort of business will they make out of it?

Given the current pricing mechanism, which is run rate, it may take a larger enterprise to make the cost of sale and support and R&D worthwhile for Pivotal as a certain volume of usage is required to produce enough revenues. Are mid market companies in general likely to produce that much run rate?

I do not know the answer to that question. If anyone does please speak up. Until then Pivotal is a Fortune 200, Fortune 1000, maybe Fortune 2000 company. If they can retain more than 15 new customers in a quarter despite specifying that their focus is to increase new customer engagements then they do not need the mid-market. The Fortunate 1000, 2000, will provide enough growth for years. But they have to actually start growing customer count as if their product was really something such companies were begging for and desperately need.

Tinker

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Hey Tinker, I think you misunderstood. My post didn’t have anything to do with recommending Redhat as an investment. I got into Redhat because of my investment in Pivotal - I often take a small position in a competitor of a big investment, as it keeps me informed of everything that is going on with the competitor and that area of the market. Sounds a bit dumb, I know, but I find I’m too busy to keep track of all the companies I should watch, and this has helped me make quick moves when something changes that might be first seen in the competitor.

In the case of Redhat, I actually did end up investing more when it stumbled after its last earnings - they missed on their Linux business (with the excuse that it wasn’t a real miss, but based on moving to a new 3-yr license which changes how they recognize revenue), but did well on Kubernetes which is what I care about.

Anyway, that is all irrelevant.

My key point is that this is a very big growth area of the market - enterprise cloud native tools. Pivotal is #1, Redhat is #2, IBM was competing to be #3. IBM believed Redhat was way undervalued for this tool set - this is all they bought Redhat for - they really don’t care about the Linux market.

Pivotal needs to prove they can duplicate their ability to win in the mid-market, but that proof needs to come in a year or two. For now they are growing enormously fast in the top tier market, and that is all they need to be a great investment for the next couple of years.

I think this purchase of Redhat by IBM just indicates how important this set of tools is for the cloud market

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IBM didn’t buy RedHat for their Linux business - it is all about buying the #2 Cloud Tools company, and a company in the running for top Kubernetes tools.

There are literally only two upstream players in Kubernetes. Red Hat and Google. First, if you don’t understand what I mean with “upstream” then research it or don’t both replying to me. Second, this is essentially a minor negative for IBM for the price they paid (but a better outcome than not buying RHT) and a positive to just about nobody who is public. There is literally no other publicly traded company that benefits. My read is that this is… just about a 100% disaster for NTNX. There virtualization product is based on KVM, which Red Hat controlled via their Qumranet acquisition years ago. It’s probably a strong negative to Oracle, which loses based on the consolidation of OpenJDK players. Maybe Docker or Heptio gets acquired.

You all should listen to Smorgasbord1 more, and Tinker and Bert less.

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I would see this acquisition as a real competitive issue for Pivotal.

Essentially Red Hat would be able to massively ramp up its PAAS customer base by cross selling or in selling to IBM clients and leveraging the IBM salesforce.

So whilst Pivotal is at the high end large spending top tier client stage in the market Red Hat would be able to race faster into wide spread high volume adoption. Once that happens then it wins the PAAS space with a network effect.

A

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@ajm - your tone is pretty arrogant - if you know so much, and don’t want people who don’t know your terms, maybe you aren’t getting value being on the board. I’m impressed that the term “upstream” differentiates people who are worthy of replying to you.

I do think you don’t know what you are talking about when you say that this is a disaster for Nutanix. Nutanix’s biggest competition is VMWare, not Redhat with or without IBM.

I think people on this board will do well listening to Bert, and not so much to you.

@anthonymns
I agree that this acquisition shows the intention of IBM to compete with Pivotal. IBM has all the middle tier customers that Pivotal isn’t addressing yet, as PVTL is focused on the top tier. Using RedHat’s Openshift product, IBM can really try to get that middle tier.

I don’t think it is a given that this strategy will work, or even that IBM loses if it doesn’t work. IBM wants to be a real player in the cloud, and being 2nd will give it to them.

Pivotal (call me an optimist) must be preparing a strategy for the middle tier. The CTO will be fighting with the CFO on when to start - it will lower margins when it starts, and confuse the analysts even more as the top line increases and the bottom line decreases. They have the top product in this space, and have already, in their history, proven they know how to win in the middle tier - look at Spring and Hadoop.

I don’t say Pivotal couldn’t blow it, but I think this will simply provide some time as IBM and Redhat figure out how to work together, while Pivotal launches their middle tier strategy. Let’s see if something about that isn’t in their next quarterly report.

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@SteppenWulf

I’m sorry my post bothered you. I’d ask you hit the ‘Ignore this Person’ button so I don’t trouble you further. I post here infrequently and decreasingly over time, so you won’t be missing much.

Best of luck with NTNX and PVTL.

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There is also something to be said for having the better product … it doesn’t always mean winning in the marketplace, but it does give one an advantage. I find it significant that the other players in this space started with products, but PVTL started with consulting and techniques and the product grew out of this … i.e., the products are something that actually work in the context of the right method. To be sure, this may mean that there is a dependence on getting adopting companies to adopt the right method in addition to the products, but that seems like a better recipe for actual success of the adoption than a product without a method dropping into an arbitrary environment.

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@ajm
I’m not bothered by your posts in general, and I’m usually happy when people disagree with me. I won’t be ignoring your posts. I’m here to become a better investor and that happens when I learn something I didn’t know.

I just get upset when people think they know more than everyone else - saying that if someone doesn’t understand the difference between upstream and downstream partners means they don’t know enough to respond is disregarding all the other areas of knowledge you don’t know. Some people bring more technical knowledge, others financial knowledge, others business knowledge and so on. No one has the whole picture, so we make better decisions when everyone speaks and listens.

I don’t want to see people feel reluctant to post because they’re afraid someone will embarrass them for not knowing some small thing. I’m sure it’s possible to express oneself without demeaning others.

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I don’t think it is a given that this strategy will work, or even that IBM loses if it doesn’t work. IBM wants to be a real player in the cloud, and being 2nd will give it to them.

Pivotal (call me an optimist) must be preparing a strategy for the middle tier. The CTO will be fighting with the CFO on when to start - it will lower margins when it starts, and confuse the analysts even more as the top line increases and the bottom line decreases. They have the top product in this space, and have already, in their history, proven they know how to win in the middle tier - look at Spring and Hadoop.

I don’t say Pivotal couldn’t blow it, but I think this will simply provide some time as IBM and Redhat figure out how to work together, while Pivotal launches their middle tier strategy. Let’s see if something about that isn’t in their next quarterly report.

Hi SteppenWulf

Yeh - good points. Believe me I wouldn’t be betting on IBM versus Pivotal but IBM + RedHat vs Pivotal is a different situation. A lot might come down to whether RedHat staff stay during the uncertainty and after. You can be sure that IBM will be offering internal retention incentive plans and you can be sure that Pivotal and everyone else will be offering some kind of RedHat employee hiring incentive.

I guess IBM can afford it better than Pivotal. I think a key decider on the outcome of mass staff retention/defection is whether IBM indicate they will dump their current CEO and promote the RedHat CEO to IBM+RedHat CEO (which I believe they should do in a heartbeat).

A

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Pivotal (call me an optimist) must be preparing a strategy for the middle tier. The CTO will be fighting with the CFO on when to start - it will lower margins when it starts, and confuse the analysts even more as the top line increases and the bottom line decreases.

Did you mean to say that the bottom line will decrease? Or just that margins would decrease as a smaller piece of each sale would fall to the bottom line? That seems like a big deal if the bottom line were to decrease despite further hyper growth, but I suppose that could be possible as they spend on open to take market share.

-mekong

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@mekong
I really don’t know how they will implement their mid-tier strategy, or how they will attack this part of the market. There are a lot of different strategies - they can work with consulting partners, they can have a self-service ramp, they can do a formal enterprise sales strategy.

What I do know is that they will need a new strategy to address this market. Each sale will be smaller and there will be more of them, so they will need to find a way to sell smaller deals profitably.

If I was a CFO, I’d raise the questions that people on this board have raised - why not just stick with the top tier customers that are providing such a great margin, and that they are very successfully selling to.

But if I was CTO, I’d be looking further out, and saying, if the middle tier isn’t buying our product, what will they be buying? And whoever is selling to them, why wouldn’t they sell to our top tier customers too?

They have to get to the middle tier market - it is a lot bigger, and will also have seeds of more products - but it will affect their margins. I really don’t know how much, I’m just waiting to see how they will handle this pivot

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Don’t we already know that PVTL is developing their partner market, exactly to support adoption in smaller companies?

IBM believed Redhat was way undervalued for this tool set - this is all they bought Redhat for

What is the TAM for those toolset? I think the market opportunity is not big enough and current marketshare is not big enough to justify $34B valuation.

great advise ajm.
you just inspired me to ignore you.
dont bother responding because i wont be seeing your response anyway : -)

You all should listen to Smorgasbord1 more, and Tinker and Bert less.

Ugh. As Michael Corleone famously said (https://www.youtube.com/watch?v=UPw-3e_pzqU ) “Just when I thought I was out, they pulled me back in.” This isn’t the way I like to roll.

But, first, let’s all acknowledge ajm101’s predictive ability. On Oct 30 he/she wrote:
Maybe Docker or Heptio gets acquired.

And Heptio got acquired less than a week later! https://techcrunch.com/2018/11/06/vmware-acquires-heptio-the…

And by VMWare, no less! So, what’s going on here?

First, if you don’t understand what I mean with “upstream” then research it or don’t both replying to me.

Well, this is exactly the kind of knowledge-protecting nomenclature I despise. Very simply, “Upstream” refers to the Open Source version, as opposed to the many proprietary variations available (which are commonly known as “Packaged Kubernetes.”

By now, I suspect many of you are head scratching as to what Kubernetes actually is and does, and what all the fuss about “containers” is, etc. If there’s interest and I get some time I’ll see if I can do a high level explanation post. But, for now, just think of Containers as the next technology generation beyond Virtualization (see some of my prior posts here for explanations of that). Basically, where a Virtual Machine encompasses an entire OS (Operating System) that’s isolated form hardware, a Container shares all the read-only parts of the OS with the other Containers on that system. The main advantages being that containers are much smaller than VMs and so they start up way faster, and that direct to hardware capabilities are available without an emulation layer like the hypervisor, and so they run faster, too. Finally, Kubernetes is just one type of management platform for containers, originally developed by Google (second generation of their “Borg” platform).

Here’s a decent summary article on the top players in Kubernetes, at least as of 6 months ago: https://blog.aquasec.com/kubernetes-management-platform-for-…

I think ajm101’s claim that Google and Red Hat are the only two upstream Kubernetes players is inaccurate: Microsoft supports it with their Azure Container Service (AKS) (but that was still in Preview the last time I checked). I’m not sure what the advantage here is, as most enterprises want to pay for the technology they use, if only to be ensured of support for it.

My read is that this is… just about a 100% disaster for NTNX. There (sic) virtualization product is based on KVM, which Red Hat controlled via their Qumranet acquisition years ago.

Well, Nutanix doesn’t care which Hypervisor (Virtual Machine engine) is used. You can use VMWare if you want. What Nutanix did was to take the Open Source KVM and integrate that really well into the rest of their Acropolis platform. KVM is a standard part of the Open Source Linux distribution as of 2007, so I don’t know that it matters who started it. Anyway, if you just want to stand up a lot of servers on premise, using Nutanix’s integrated solution is a really easy way to go. Unless you’re moving existing VMs onto the new systems, I don’t know of a compelling reason to start with anything other than KVM, especially if you’re starting from scratch with a Nutanix system. I’m sure VMWare would say otherwise.

I personally still haven’t figured out the competitive landscape here. Nutanix doesn’t seem to have a strong offering for those who wish to run containers on-premise (and I don’t even know if that’s a desirable thing). This article, Nutanix: The Move From a VM to a Container is Unnatural, a Challenge of New Platforms (https://thenewstack.io/nutanix-the-move-from-a-vm-to-a-conta… ), is interesting in a few ways:

The first wave of virtualization involved taking workloads off of unmanageable physical servers, transporting them onto virtual layers, and then pooling the resources beneath those layers to make virtual machines into devices the size of planets. Well, that was Stage One. Stage Two was moving these virtual machines onto a cloud platform layer that was designed for virtualization. Now, Stage Three involves the retooling of software to become purpose-built for virtualization, so that it “lives” in this new environment, not as a refugee, but rather a native.

It’s telling to me that this “Stage Three” wasn’t described as Containers, although to me that’s clearly to what the author is alluding. But then the article continues:

“I think the move from a VM to a container is a very unnatural, and maybe unnecessary, move,” said Howard Ting, Nutanix’ senior vice president of marketing, in an interview with The New Stack. “But the movement from a VMware hypervisor to a Hyper-V environment, and then to AWS — that’s a very real requirement.”

This was kind of surprising to me. I see enterprises moving from VMs (Virtual Machines) to Containers as a migration that is still taking place, and that new applications will often be written for Containers rather than VMs in many circumstances. As this good article (https://cloudacademy.com/blog/container-virtualization/ )explains:

• Containers, compared to hypervisor virtualization, are more likely to be secure as, by design, their applications are logically restricted to their own environment.
• Containers provide significantly better performance, as they use native, rather than emulated resources.
• Launching a container is much faster than a virtual machine.
• Containers offer better control on underlying resources.

So, if Nutanix is concentrating on supporting VM deployments and isn’t so good at Containers, then that might become an issue if enterprises find they have many Container written applications, even if they want to move those to on premise (moving cloud to on premise is what Nutanix’s main thrust is about).

For me, the whole premise behind Nutanix’s current offerings doesn’t seem compelling. Their future vision of enabling enterprises to easily move applications from cloud to on-premise IS compelling, but they’re still pretty far away from achieving that. And as the main cloud providers add more and more capabilities to their platforms (container management, serverless, etc.), Nutanix has a moving target to achieve. Amazon, Microsoft, and Google all actually want to have lock-in to their services, so their only incentive to standardize is to be able to steal business from each other. If that happens, then perhaps Nutanix can take advantage and be a huge success.

BTW, this was supposed to be a thread about Pivotal and Red Hat. I still see Pivotal as a business that in an ideal world should survive, as it makes the software world a better place, but adopting Pivotal is a very big deal and I don’t see many companies being brave enough to do things like adopt Pair Programming, which Pivotal pushes very hard. I think the people at Pivotal are great at what they do, and I’ve personally drunk their Kool-Aid, but even at my work I don’t attempt such large-scale process overhauls. I think a company has to literally have a couple of failures before they’ll resort to such changes.

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I think a company has to literally have a couple of failures before they’ll resort to such changes.

Don’t most good-sized companies have a repertoire of failures to choose from?

hmm… that was interesting write up on Nutanix…
Smorgasboard1, thanks for sharing this insight.
Cant wait to see what Tinker says on containers being potential large weakness for NTNX