PVTL conf call

I was half tempted to take a little bit off the table with today’s pop, but then after reading the conference call transcript, I don’t want to sell any of my overweight position. Here are some of the highlights from the PVTL earnings call:

Before discussing the details of our results, I want to provide context on our financial model. We are fundamentally a platform software company. We have a subscription based business model for our software with PCF at the core of our offering. This provides us with a high level of visibility into future revenue. Our subscription revenue is recognized ratably over the term of our contracts, which are typically between one and three years. We price our software primarily on the number of application workloads or instances a customer expects to deploy on the platform. This means that our revenue grows as existing customers expand the use of our platform and as we add new customers. We generally bill our customers annually in advance, although for our multi-year contracts, some customers pay the full contract amount upfront.

Good to see how the cash flow works for subscriptions. Nice to get the cash in advance with a lot of deferred revenue to be booked as revenue in the future.

Our strategic services have been a critical driver of our rapid subscription growth as we use labs to acquire new customers who have PCF affinity, while helping existing customers get more out of the platform, leading to the expansion of their overall software spend. We typically price our strategic services on a time and materials basis.

A little color on service revenue which helps to increase subscription revenue.

Subscription revenue grew 69% and represented 58% of total revenue, up from 44% in Q1 of last year. Growth in subscriptions is the driving force behind our revenue mix shift and subsequent margin improvement. As we execute on our strategy of landing new customers and expanding the footprint of existing customers on our platform, we expect to continue to drive growth and operating leverage over time.

Nice to see subscription revenue now make up 58% of the revenue vs 44% last year. As this continues to increase, margins and cash flow will improve.

RPO or Remaining Performance Obligation, represents the estimated value of our billed and unbilled subscriptions and services, and demonstrates the visibility associated with our revenue model. RPO was $800 million at the end of Q1 with approximately 50% expected to be realized in the next 12 months. We expect quarterly seasonality in RPO with variability from a peak in Q4, relative to the subsequent quarters.

Interesting that they have this much visibility into future revenue. So already $400M is pretty much guaranteed to be booked as revenue over the next year.

Sales and marketing expenses were $64.7 million for the first quarter or 42% of total revenue. We continue to invest in our field sales and our land and expand priorities while improving sales productivity and efficiency. We will continue to focus on increasing our customer count, renewing existing customers and expanding customers’ footprint on the platform.

Good to see them investing into growing their subscription service. With 92% margins, this is the way to go.

Research and development expenses were $41.6 million or 27% of total revenue in the first quarter. Innovation remains a top priority for us. We will continue to invest in R&D to expand our market leadership and platform capability to drive greater adoption of our PCF platform.

Also nice to see they are continuing to invest in innovation and product enhancements to increase revenue growth.

We exited Q1 with $645.5 million in cash and cash equivalents. Cash flow from operations was $4.5 million, primarily driven by Q4 collections. Free cash flow was a positive $2.6 million. This is our first quarter of positive free cash flow. We expect continued progress towards sustainable positive free cash flow, however, it may not be linear given seasonality trends. In addition, we received a tax sharing payment from Dell for $32 million which added to our total cash inflows. We expect these payments to be significantly lower going forward. Overall, we are very pleased with our first quarter performance.

Great to see they are positive cash flow based on operations. Nice to see they can invest so much into growing sales and not bleed cash. The Dell tax payment is a nice benefit, but expect that to largely go away and hurt cash flow. This should get offset with more subscription revenue at high margins.

The VMware connection there is very helpful because we are activating their large sales force to help us go to market there.

The IBM sales force support has been discussed here, but the VMware sales support has been key in adding to their growth.

From a deferred perspective, our long-term deferred includes prepayments from some of the subscription customers, so that can – tend to be lumpy. If you’re looking at short term deferred, though, that’s definitely a closer proxy for subscription growth. And just remember that both short-term and long-term deferred include services. And services is still a material portion of our revenue. So that can also impact the trend. I would say short-term though, the net expansion rate certainly helped. We’re at kind of leading – industry leading net expansion rate of 156%. Now that we’re at scale, we wouldn’t expect to maintain that rate, so you should expect that rate to come down over time. But we also saw strong demand from new customers in the quarter. I would also tell you that RPO, which is the new 606 metric, shows very strong revenue coverage relative to Q1.

Helpful to consider deferred revenue when forecasting their revenue growth. Also, the 156% dollar expansion rate is probably not sustainable going forward. Hopefully it does not dip that much though.

Brad Zelnick

For Rob, Rob, we noticed you recently signed a major new one year agreement with the U.S. Air Force. Can you talk about the nature of the deal and how do you view the opportunity in the federal space more generally?

Rob Mee

Thanks, Brad. Yes. The federal sector is really a large and growing opportunity for us as modernization and innovation has really become a strategic imperative across the agencies. It’s been an area of investment for us over the last few years. So, it’s encouraging to us to see these wins. We’ve had several deals with the Air Force, the Air Operations Center has adopted Pivotal Cloud Foundry and is implementing the Pivotal Labs agile methodology to advance their software development capabilities.

Brad Zelnick

Yes. So, Federal seems to be a huge opportunity.

It looks like Federal is a huge market for the company. This could be a nice growth driver.

And our net expansion rate does include churn. And so, I think as you look at that number, again, we’re at scale. We’re expecting it to come down, but it is pretty compelling that shows kind of our strategy of landing and expanding is working.

Good validation of the land and expand concept, but again we can’t expect the 156% rate indefinitely.

I would say as well, in Q1, we did see some favorable in-quarter linearity that was associated with the timing of deals, and we would not necessarily expect that to recur at the same level moving forward. And so, there were not necessarily larger deals or larger ASPs or ACD [ph] type of contracts. But, I would say that there were timing of deals in quarter that benefitted in-quarter revenue on the subscription side.

So this may explain why their 20% subscription growth vs last quarter in not sustainable. Still the forecasted 3% growth is very conservative.

I think, your implication is completely valid that the urgency is increasing and the activity is increasing sort of the digital transformation generally. More specifically, we really find that customers are trying to increase productivity and getting, building more applications and getting them to production more quickly. But they are also expecting operational efficiencies. And I think that’s something that we are uniquely positioned to bring them with an approach and methodology that we bring of how to develop software in a very modern way as well as enabling technology to get the operational efficiencies and enable people to develop very, very quickly and incrementally. So, yes, that’s a fortunate trend for us.

Strong tailwinds should help them continue to grow the subscription business.

We haven’t had that many net adds since Q4 of fiscal ‘17. So, we were really pleased with the results. And as I mentioned earlier, we did make some pretty significant investments in the back half of last year to really help drive the field on new customer acquisition and making sure that we were both renewing our existing customers and expanding their footprint but also adding new customers. And so, I think what you saw in Q1 is kind of the starting to kind of realize the benefit of some of those earlier investments. And then in terms of I guess verticals, we really saw – I mean, we don’t have customer concentration with one or two customers in terms of our quarterly performance. I mean that’s really the benefit of our subscription model, but we really saw across industry, we don’t have any industry concentration as well. And so, we’re really pleased with just kind of the breadth of I guess the performance in Q1.

Wow, the 20 customer adds in Q1 was the highest in more than a year.

Raimo Lenschow

Thank you. And one quick follow-up for Cynthia. Just we talked a lot about the second half last year investments into increasingly singing more customers. I would assume what we saw this quarter, since they were kind of longer term investments, should be like just the beginning of something, rather than just a one-off quarter thing, correct?

Cynthia Gaylor

Yes. I would say, it’s just the beginning. And I think – I would say, we don’t forecast guidance on customer account for quarter. So, I would expect different quarters to exhibit different trends there. But, it is a focus area for us. And so, we would expect those investments to pay off over time, but I wouldn’t say we’re forecasting that to be every quarter for the remainder of the year.

Nice to hear they are at the beginning of realizing the benefits (new customers) of their investments, but adding 20 customers per quarter with 20% subscription revenue growth vs the last quarter is not sustainable. However, they will still add plenty of customers that should help them grow strongly.

I mean, we think there’s a large and growing opportunity for systems integrators to help enterprises modernize and re-platform their existing application portfolio. So, we’re working with global systems integrators like Accenture and Cognizant, along with other firms like Perficient that I mentioned. They’re building focused practices around Pivotal technology implementation including application migration but also including cloud-native development. So, they’re very much looking to do modern co-developments in an enablement kind of mode just like Pivotal Labs. And from our perspective, we really feel – along with the mission of transforming how the world builds software, the more people are enabled to build that way and help others build software that way, the better for the world in general.

Marketplace is definitely strategic for our business. We have a lot of great partnerships. We mentioned one or two of them. What we’re also seeing with PKS is that the interest in building services that integrate with that is a lot of demand for that as well. So, we think we’ll see our marketplace expand with PKS as well. And we’re going to continue to press on that. We have a lot of great joint go-to-market opportunities with a lot of ISV providers.

We’re continuing to see customer demand for our data products, particularly as customers want to migrate to open source based products and away from proprietary solutions. And the other thing that we’re seeing is that customers increasingly want to have as a service for self service delivery of their data stores. And so, we’ve oriented our product roadmap to deliver on this, leveraging the technology that we’ve been building in PCF. So, we’ve seen early success with this strategy with the Pivotal Cloud Cache or PCC. The PCC is based on the GemFire code base. But we imagine this a self service multi-cloud caching solution.

Business is very strong and there are plenty of drivers for continued revenue growth.

For the second quarter we expect subscription revenue to be between $92 million and $93 million, representing growth of approximately 43%. We expect total revenue to be between $157 million and $159 million, representing growth of 25%. 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%.

This should like low balling the forecast to me. Given their new customer growth in Q1 and big investment in adding customers made at the end of last year, they should have no trouble beating their guidance. Even with the stock price pop, this continues to be a great investment.


thanks for this great summary and commentary, wouter!

and add my kudos to SteppenWulf for bringing this one to us. I had taken a good sized position last month, and added a bit more to it today, even after the big pop.

I think the rest of the investing community is only beginning to see PVTL show up on their radar now


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Pvtl rev growth was 28% which seems rather lackluster for its cap.

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Pvtl rev growth was 28% which seems rather lackluster for its cap.

The key data points from the Pivotal earning report are the 156% dollar based retention rate for their subscription customers and the 69% (if my memory is serving me well) year over year increase in subscription revenues. Yes, the top-line is “relatively lackluster”, but it masks the incredible subscription growth rate, which Tinker, SteppenWulf, and others have indicated is very much locked in once Pivotal lands a customer.




In addition to volfan’s good comments, also pay attention to the margins from their two categories. Only 22% margins in the “service” business which isn’t growing quickly. However the rapidly growing subscription business is at 91% margin!

The overall margin expansion for the company, coming from the outsized growth of the subscription business means their margin dollars (“gross profit” on the income statement) have been, and likely will be continue to be growing at a MUCH higher rate than the 28% topline gross revenue. This latest quarter’s gross profit was up more than 55% vs the same quarter of last year.

At the end of the day, it’s the amount of cash they keep (i.e. gross profit) that matters!