PVTL decision explained

Investment Analysis Clubs Saul’s Investing Discussions
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As I mentioned, I sold my entire PVTL position the day after the earnings results came out. The main reason for selling was the slowing yoy growth. Looking only at the recurring revenue, the growth looks like this:

Q1 18: 83.5%
Q2 18: 82.0%
Q3 18: 74.4%
Q4 18: 58.2%
Q1 19: 68.7%
Q2 19: 50.9% quarter just reported
Q3 19: 48.3% midpoint of guidance
Q4 19: 37.2% midpoint of guidance

Management’s reluctance to discuss some of the growth drivers was another reason. Why are they not being more transparent? Maybe it’s nothing, but it adds to my doubt.

The above two reasons were enough for me to redeploy my money into 2 companies that appear to me to be killing it. ZS’s billings was amazing. I don’t like the valuation so much but that growth was enough for me to boost up my position to about 6%. I’ve posted a lot about NVDA lately and their product releases, their explanations about how they fit into their huge target markets just really increased my confidence that this company is going to continue to grow for a long while still. I increased my position to about 9.3%. This year I’ve sold and added partial NVDA positions a bunch of times.

Here’s another way I look at the PVTL sale. I figured that this stock is likely to languish for a while, at least until the Q4 numbers come out. Maybe their Q3 results will boost the stock back up but I think it probably more likely that it would take a super strong Q4 result before the stock can really take off. I could be completely wrong about this, but I’ve decided to place my bets on ZS and NVDA for now. I may change my mind on PVTL in 3 or 6 months, and that’s the nice thing about selling a position at a loss…no taxes will be paid on this decision and I can always change my mind as new information comes in. A year ago I probably would have not sold PVTL, probably because I would have been concerned about making a mistake. Now I look at this differently…if I feel I am making a good decision based on the current information available then there is no mistake. If the outcome is worse than the alternative that I didn’t choose then that’s ok too. In the case of PVTL, ZS, and NVDA I felt that I got new information that I could act on to get a better future outcome. Every day we new information and we analyze this information to alter our previous view. I think that as investors if our view of reality has changed then it is our duty to align our portfolios to this new reality.

Another example is LGIH. I think that the situation with LGIH changed but I think that my decision to sell last year also had a lot to do with new information that I got from other stocks. By comparison these other stocks seemed so much better. Which stock do I want to cut to make funds available to add to these other stocks. LGIH was for me the obvious choice. In the past I might have considered LGIH to me my stock. The one that I analyzed and the one that I followed and wrote about. I would have been influenced to hold on to it just because of all the effort that I had put into studying it. I think that this can be detrimental to portfolio performance. This is how Saul is ruthless. He sees things for how they are and makes decisions based on nothing more that his view of the situation. No falling in love with a company. No extra points for having spend hours studying a stock over a long time period. It’s really simple: is stock A better than stock B? If yes, then move some money from B to A. If stock C comes along that’s even better then move some money from A to C.

So back to PVTL, NVDA, and ZS. The new information that I got about these companies prompted me to move my capital. The previous allocations that I had on these 3 and the allocations that I had on all my other stocks also influenced where I put the money from the PVTL sale. For example, I would have added a bunch to NTNX if it wasn’t already such a huge position in my portfolio.

Chris

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Thanks Chris for your nice discussion of your thought process around the decision. I really appreciate it.
Best,
Saul

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For me it was pretty simple, I had previously made the decision to sell Pivotal and had, but bought back in for earnings.

When earnings came out it was obvious things were slowing, and unlike other companies like Nutanix or MDB or Nvidia, real business momentum was not brewing at Pivotal. And thus there is better place to put my money.

Then you listen to the conference call (and the share price fell another $10-$15 during the call (as the earnings themselves were only enough to be a reasonable earnings konk) and you hear that management is happy with 15 new customers, when bringing in new customers was their primary goal for the year, and management is unable to give us numbers we need to assess growth and the pipeline other than their guidance, guidance that was pretty weak and a large drop off, there was no reason left to want to hold Pivotal compared to so many other companies.

Yes, with such a small number of customers obviously business will be lumpy, but only 15! Where is the acceleration of customers, their number 1 priority? Hey, they may bring in 35 next quarter, but if so, it is not anywhere to be seen in the guidance, and Pivotal knows its pipeline better than any company we follow. They all are coming through Labs or one of the System Integrators that Pivotal trains. If they had that many new contracts signed, but money not received this quarter, or that many on the precipice, then why guidance that fall so precipitously?

As such, if Pivotal fooled us cynical investors, then bad on Pivotal for horrible communication. Assuming Pivotal is not horrible at communicating, there is no present visibility into accelerating customer growth. Either scenario, it is not a company one wants to invest in. Particularly when you have visionary world changing companies like Nvidia or Nutanix or Zs or MDB or Twilio, etc. These companies are making Pivotal look like they are playing in the minor leagues in comparison.

I have never been this personally angry at an earnings call (in fact, I may be disappointed but not angry, bad quarters happen) but this call made me angry.

Thus, I don’t think you lose selling out of Pivotal. Take your capital loss (save cash money) and move into something that is almost certain to appreciate much faster for much longer. Win/win. Move on. As Bert says, stocks are not our “children”. In the end my capital gains on Pivotal are about equal to the losses. My anger was this unprofessionalism and utter failure to perform at what they said was their priority, and then saying they were “pleased” with it.

Anyone remember Nutanix and Zen, both having bad quarters because of salesforce issues? They did not say they were “pleased” they admitted the problem, said what they were going to do about it, and did it! Talend had a similar issue pre-IPO that they continued to resolve post-IPO and they were open about it. Not Pivotal. It is as if they don’t even recognize the issue (hey, maybe 15 is the precursor to 50 - but again if so Pivotal gave us absolutely no reason to think so).

For me, even if Pivotal ends up being the stock of the decade (not going to happen), it is the right decision. Moving on. I have vented out on this one.

Tinker

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Me too . . . no not that me too, me too I sold PVTL the day after earnings mainly because the CEO went on and on and on and never said much of anything. Redeployed the funds to ZS and TWLO.

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Thanks Chris (and all) for the candor on your decision making. All resonate with me to different degrees.

Still feeling out my PVTL position but did want to mention for anyone still making a decision on the stock that using the midpoint of guidance for a company like this is too conservative. It may be prudent for a more traditional business model, but for a SaaS business in a strong economy(if that is too optimistic a word for anyone read “:recently stable” or “relatively predictable”!) there is a high probability they will be above guidance for both the quarter and the rest of the fiscal year. I follow / own similar stocks to others on this board and all of them show significant deceleration if you take guidance at its face value. PVTL in particular with their lower customer count and customer count growth should be one of the most predictable for management as they rely less on new customers (though I agree with you and Tinker, I want more of them!) and have high and consistent dollar net expansion rate of 150%.

PVTL overshot the top end of guidance in Q1 (105% of high end guidance) and Q2 (103% of high end guidance overall, 105% of Subscription guidance). This is very consistent with all the other SaaS type stocks on this board. SaaS companies release guidance so that they can both beat AND raise each quarter. So, I think it is wise in an economy like this to multiply the top end of a SaaS companies guidance for the current quarter by 103%-105% to set your expectations. To calculate the fiscal year, you would need to apply this same 103-105% to the “difference” of what their guidance indicates for the rest of the year. Doing this for PVTL has me modeling 55% Subscription growth in Q3 and 50% in Q4. This is still “slowing”, just want to try to be closest to pin on the reality of their guidance.

I have been a bit surprised in individuals disappointment on the revenue results - yes 51% subscription growth is a “slow down” but they had already guided a good bit lower than this three months ago. Would be rare for a company to come in at 110%+ of guidance in a subscription business and would put into question their ability to understand the business. Customer concerns on the other hand resonate more with me, though I was only modeling 17-20 customers not 35+. Silver lining is if they can keep growing at these %'s even with the low customer growth they may could show growth acceleration if they actually can increase customer growth rate.

I believe Tinker highlighted it on another post, but PVTL has the potential to be a money making machine in the future given the subscription GM % and subscription growth even if it continues to slow. The ever growing subscription mix coupled with the fact that opex y/y has grown slower than topline for 6 straight quarters shows it is on an inevitable march to profitability. Have to weigh that against the relatively benign customer growth and flustered management on the earnings call to make a decision on if this is more or less attractive than other opportunities.

Erik

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Customer addition/year history has been as follows:
FY 16 - 105 (75 to 180)
FY 17 - 95
FY 18 - 44
FY 19 - 35 in Q1+Q2

Customer addition this FY has been faster than in 2018 but slower than past years. Seasonally Q3 is slow but Q4 is their high growth Q. RPO peaks after Q4 and trends around that level in subsequent quarters. End of 2018 it was 820B, 800B after Q1 2019 and 790B after this Q. Sounds like they get most of their growth forecast in Q4. I am still holding onto my small 2% position waiting to see if RPO after Q4 goes up. Company still claims they are in a market with $50B+ TAM. If you believe that it does have a long runway.

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