PVTL ER

Investment Analysis Clubs Saul’s Investing Discussions
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Overall, PVTL beat guidance and raised guidance, although the raise in guidance was not significant. Stock is down about 19% after hours. Total revenue came in at $164.4M, up 30% yoy. This compares to their guidance of $157 to $159 million and the analyst estimate of $158.2 million, so a solid beat. Subscription revenue was $97.5 million, an increase of 51% yoy. This compares to guidance of $92 to $93 million. I knew their Q2 guidance was conservative, but was hoping they would stay closer to their 69% subscriptions growth from Q1. This is disappointing.

· The Dollar-based net expansion rate was 150%, which is a little lower than the 156% from Q1. Very solid. They increased subscription customers (over $50K) from 339 to 354, adding 15 customers during the quarter and 35 during the first half. This compares to 44 new customers during all of prior year.

· Operating cash flow was positive $18.4M compared to negative $56.5M last year and positive $4.5M last quarter. This is a solid improvement.

Some operational highlights:

· Released significant updates to Pivotal Cloud Foundry in the quarter including:

-PAS 2.2 delivered support for deployment on Microsoft Azure Stack along with other enhancements to improve developer productivity and security of the platform

-PKS 1.1 included new high-availability deployment options and includes the most recent version of Kubernetes open-source

· Joined Google in launching a new open-source project for serverless functions called Knative. After making significant contributions to Knative, we will use this along with our own project Riff to create Pivotal Functions Service

· HCL, a global systems integrator, extended its collaboration with Pivotal to build a global network of ‘Cloud Native Labs’ where enterprises will be able to build new and modernize existing applications for deployment to PCF

· Awarded Microsoft Azure US Consumption 2018 Partner of the Year, for the second consecutive year

· Winner of the Solstice 2018 Partner of the Year award

And here is management guidance from the Q1 earnings release:

· Subscription revenue of $97.5 to $98.5 million

· Total revenue of $163 to $165 million

· Non-GAAP loss from operations of $23 to $22 million

· Non-GAAP net loss per share of 9¢ to 8¢ assuming weighted average shares outstanding of approximately 258 million

And for the full year (compared to guidance given last quarter):

· Subscription revenue of $386.5 to $390.5 million (compared to $380 to $384 million at Q1)

· Total revenue of $647 to $653 million (compared to $642 to $649 million at Q1)

· Non-GAAP loss from operations of $86 to $83 million (compared to $96 to $91 million loss at Q1)

· Non-GAAP net loss per share of 36¢ to 34¢, assuming weighted average shares outstanding of approximately 251 million (compared to 39¢ to 37¢ loss at Q1)

I had hoped that investor expectations were lower and closer to the guidance that was given during Q1 but based on the market reaction it appears that the expectations were higher. At the afterhours price of 23.50, the new market cap is around $6.0B. With cash of $671M and using the guided sales of $650M, it now has a EV/sales ratio of 8.0. Compared to other software stocks with EV/sales ratios at 15 and higher, I am surprised by the strong downside reaction as you would think lower expectations would be built into a lower EV/sales valuation. One of the reasons I like PVTL so much is that you get exposure to the strong subscription growth while not paying a comparatively high valuation. I am not selling as I think the performance was very solid given the valuation.

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I don’t understand the reaction here at all. This may be like Mongo, which started down, then turned around the next day.

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Well, I had expected these partnerships with Dell and VMWare plus internal spending on Sales would drive new customer growth… and they managed just 15 new customers. egh. I’m kind of disappointed with this.

Also, although subscription growth was 50%, thats a big drop from 70% last quarter!!

Guidance was raised, but just barely.

I suspect thats why the stock is down alot AH.

Let’s see what they say on the CC.

Matt

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After a quick look and trying to put some numbers together on the fly from the few public filings we have so far

Historical Subscription revenue annual numbers (we are currently in fiscal 2019):

2016 $95m
2017 $150m +58%
2018 $259m +73%
2019 $390m +50% (at the top end of the new guidance in today’s earnings release)

Quarterly subscription revenue for 2019 (the current fiscal year)

Q1 $90.1m +69% (actual)
Q2 $97.5m +51% (actual)
Q3 $98.5m +49% (top end of new guidance)
Q4 $104.4m +39% (assuming they hit exactly the top end of both new annual and Q3 guidance)

So I’m not too surprised by the market’s after hours reaction.

Only adding 15 subscription customers this month, getting to 19% growth year over year isn’t mind blowing.

This quarter’s (Q2) subscription revenue being up only 51% compared to last quarter’s (Q1) 69% is a big dropoff. Also guiding to only 50% annual subscription revenue growth at the top end of the range, compared to 58% and 73% in the prior two years is not what I hoped for either.

Next quarter’s (Q3 2019) subscription revenue guided to a range of $97.5m-$98.5m compared to Q2 2019’s, essentially flat with the quarter that just ended.

Also, last year’s 2018 second half (Q3+Q4 combined) subscription revenue was $141m. Assuming they hit their full year 2019 top end guidance, they would do $202m in the second half of this year, only a 43% increase, which would indicate that the subscription revenue growth rate will continue to slow over the next two quarters.

On the other hand, reason to be more optimistic is that, in the first quarter’s earnings release three months ago, they only guided to $92-93m subscription revenue for Q2, so they beat the top end of their guidance by 4.8%. If they beat the top end of the new Q3 guidance by the same 4.8%, they will do $103.2m in Q3, which looks a bit better.

If they exceed both Q3 and Q4 2019’s guidance by 4.8%, that would make this year’s quarterly breakout look like:

Q1 $90.1m +69% (actual)
Q2 $97.5m +51% (actual)
Q3 $103.2m +56% (estimate assuming they beat top end of new guidance by 4.8%
Q4 $109.4m +46% (estimate assuming they beat top end of new guidance by 4.8%

This would look a fair bit better. Their growth rate would be on the way back up next quarter at +56%, but then slow in Q4 (unless they increase Q4’s guidance again three months from now and then subsequently beat it again, which is very possible and could put Q4 back into the low to mid 50%'s).

And exceeding their new estimate for both Q3 and Q4 2019 by 4.8%, that would get subscription revenue just above $400m this year, and the annual trend would look like:

2016 $95m
2017 $150m +58%
2018 $259m +73%
2019 $400m +54%

Again, not so bad, but still a bigger dropoff than I was looking for.

-mekong

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Welcome to the Curious case of Pivotal. What’s curious to this humble Monkey is what Saul will do with these results.

On the one paw, you have the obvious case for selling. Why? Because when quarterly subscriptions slow down this much, seemingly all of a sudden, well, looks like there’s something in the water, and Saul usually doesn’t like waiting around to find out what the offending toxic chemicals are. Part of his skill is being completely unattached to the company and its story and the ability to look with utmost discernment at the numbers themselves. And in this case, the growth numbers slowed down a good bit.

On the other paw, the growth rate is still quite astounding if this were any other company and we haven’t totally become blase about the insane growth and results of our SaaS companies. So add to that a discount of what looks to be 25% afterhours, or 1+billion in market cap, and we still have a company growing really quickly but selling at a huuuuge discount from where it was just a few hours ago.

Since this is still a young and small company, with a strong business model and a green future in front of it, Monkey suspects that Saul will not be pleased with the slow-down in growth, but that in the context of a 25% haircut, it would be a foolish decision to buy high and sell low. If the market only punished the stock, say, 7%, then Saul might be more likely to say, ok, we thought we had a big bushel of delicious bananas but instead we have a small green one that needs more time to ripen, so a soft exit is just the thing, we have a better place for our 'naners, apparently.

Monkey’s guess: Saul keeps his shares, and nibbles just a bit at the discount price afterhours or before open, and gives Pivotal one more quarter to see if they can regain some of their exuberant bounce. What are your intuitions about what Saul will do?

Curious,

Monkey (long PVTL)

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I am guessing he dumps all/most and adds more to others.

Dreamer

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Monkey, I’m hoping what you hope. Thanks.

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Monkey’s guess: Saul keeps his shares, and nibbles just a bit at the discount price afterhours or before open, and gives Pivotal one more quarter to see if they can regain some of their exuberant bounce. What are your intuitions about what Saul will do?

http://discussion.fool.com/34005788.aspx

Seems to me that we are seeing an acceleration of new customers from 2018 as seen in the above post.

The challenge remains what I previously posted back then…this has a concentrated customer base…each incredibly adding to revenue…but smaller numbers nonetheless.

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If Saul will tell u what he did before month end

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We really don’t know what is going to happen in the market tomorrow, but let’s assume Pivotal stays somewhere around $22 for the sake of discussion.

The bull case:

Looking at the subscription business only, we can assume a 50% growth rate based on the NRR of 150%. 6 months out the P/S is roughly 14x on that business only. This compares favorably to other business growing at the same pace with the same margins. Margins on that business were 93% this quarter. Overall margins were 66% and should be growing as the services revenue is outpaced by subscription. The first half of the year saw 35 new customers added and if that pace holds, total customers will grow 22% this year. Cash flow was positive. Operating margins improved quite a bit (less negative). PKS was just released and the company believes this will help add logos. PFS is another new offering just getting started. Overall customer growth rate will pick up this year. Leverage in the business is apparent. Partners will help with this as they provide the services component.

The bear case:
Not enough customers
Only had 15 customers adds this quarter
Why can’t they add customers more quickly
Pivotal abstracts away too much with their solutions limiting flexibility
Dell affects the stock price somehow
A new competitor in agile software arises

What do others think?

A.J.

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I have a feeling that he will wait for the dust to settle after the open…and sell into any strength throughout the day and invest the proceeds in

since it is football season, here is a good analogy…

it’s like having a top wide receiver with huge upside(example Odell Beckham Jr.) who sprains his ankle…

why continue to hold him and wait for him to heal when you can dump him and pick up a healthy Julio Jones…

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I have a feeling that he will wait for the dust to settle after the open…and sell into any strength throughout the day and invest the proceeds in

Maybe but Saul had already been trimming Pivotal previously during August in case that gives you a clue.
A

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Heck, I sold it all off (just better places for it) but at the last second, after concurring with a very valuable poster with some information he found, I bought it back!!! What you gonna do.

Generally speaking it usually does not pay to sell at the bottom of a sell off. After hours is much smaller volume and not necessarily indicative of where it will end up. At least not enough to let me lose any sleep for having to get up at the open and as once happened with orange juice futures with Mortimore and his brother, “sell, sell, sell, get out there and sell!” as their entire fortune twiddled away on betting the wrong direction of the futures market.

It is still a great business, it is not going away, and the chances are that it will get even better. I will listen to the earnings call as apparently the transcript is more delayed with Pivotal than with other companies. But regardless, it is not a company like MDB or Zs or Nutanix that is going to dominate and grow and not look back and be possibly something historical.

It is not going to be the operating system of the cloud as it once thought it might be, and still thought it could be for Fortune 500 and the like. Not gonna happen here. It is on its way to creating a cash cow at some indeterminate size. I don’t invest in cash cows, although some folk do so I am not looking to keep it. There may be a lot of thought like that tomorrow, and we can hope not. There may also be a lot of buying back once that happens with others who want to buy into a cash cow with a positive future that is greater than the current market cap after hours. So what goes up or also goes down and then up and so on as long as it is not Trivago - not sure how the Fool got around to recommending that company, but it has fallen and never gotten back up. There is one biotech that is much worse, but perhaps the two worse Fool service recommendations in history.

Pivotal is not that, not by a long shot.

Tinker

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<<< After hours is much smaller volume and not necessarily indicative of where it will end up. >>>

I’d like to agree with you Tinker but maybe not in this case. Pivotal closed at 4pm with volume of just over 3M shares and then traded over 3M more in AH. 3M is 3x the 50 day avg volume.

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I thought the earnings report was mostly good. As I said last quarter, the number I am watching is the gross profit. Since all of their growth is in the 90+% margin subscription business, most of the subscription sales go to the bottom line. It was up 48% over last year.

Positives:

-gross profit up 48% (I consider this the companies growth rate metric)
-total revenue up 30%, expanding from 28% last quarter

  • gross margin of 66% (+8% vs last year, +4% vs last quarter)
  • net margin of -9% (improving from -24% last year)
  • CF of $18.4 M
  • revenue of $164 M is a beat of the companies $159 M guidance
  • net expansion rate of 150, 150 and above for 8 quarters in a row (customers love the product)

Negatives:

  • raised full year guidance from $649 M to $653 M (barely a raise)
  • only added 15 customers vs 20 last quarter.

Since they said their focus this year is adding new customers, 15 is disappointing. I was hoping for a number larger than the 20 last quarter. Since they are only counting customers with greater than $50 K in sales, maybe it takes awhile to start the customer in Pivotal labs, where they are under the $50 K number, figure out the needs of the customer, and then transition to the subscription cloud foundry business. Not sure. Hopefully will get answered on the conference call.

Jim

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I forgot to mention the subscription growth. I don’t think its a positive or a negative.

Here are the subscription growth rates:

2018 48 82 74 58
2019 69 51

-Slower than I would like so not a positive for me.

-Not a negative because a tough comparison to the 82 from last year, so kind of expected.

Jim

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https://www.fool.com/earnings/call-transcripts/2018/09/12/pi…

The fool has the PVTL conference call.

They were asked right away about the 15 new customers, two of which are Pepsico and Autozone.

  • didn’t give much detail, feel “really good” about how new customers are coming.
  • reminded everyone that they use a conservative measure for customers, only count revenue in a quarter, not bookings.

The customers counted are subscription customers only.

Jim

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Jimbo,

Very interesting on the historical run rates. I concur, customer growth rate is very disappointing, particularly given the company focus,and not just the company focused but the focus of the entire Dell organization, with Pivotal being stated by pundits in the industry who know something as critical (not bet the business critical as there are alternatives, but critical) to VMWare’s business health. Pivotal creates functionality that other competitors have that VMWare does not.

Also disappointing is that usually when a leading company goes public it does something to the company. It gives the company credibility and this results in the company getting a turbo boost. See Mongo and Zs as examples.

Q4 was stated at the conference call to be cyclically the big quarter and yet, although I have not run the numbers, it appears that Q4 is actuallly being guided downward if you subtract out the Q3 mile upward guidance. TTD had a similar issue about a year ago that they clearly got over. So it may mean nothing, but all in all, after reading the transcript of the call, I sadly have to say that PVTL seems fairly valued at the after hours enterprise value and nothing in the call was such to give anyone pause to think there will be much upside performance moving forward. The closest that came to that would be their conservative definition of a new customer, so revenue actually received in a quarter, and not just billed or the contract signed. Nevertheless, no one can say anything but it was below expectations.

Mind you, very healthy business, growing gross margins, product obviously has adoption. But the company utterly failed in the one thing that was its focus for the year, growing logos. I did not look at last year’s comparable, but one analyst indicated that the number of new customers this quarter was about the same as the year ago quarter. THAT IS PLAINLY DISAPPOINTING. They have the new PAS, PKS, just went public, are focused on growing logos, EMC, DELL, and VMWare are set up to sell Pivotal and make it easy, Google is working with them as a prime reference for PKS, and their customer growth rate, year over year, is flat.

Well, as I said on NPI the error here we made was hope. We know that Nutanix’s business, MDB, Zs, they are all just going to grow. They may have a disappointing quarter here and there, but they are going nowhere but up. We pretty much know this. With Pivotal we were hoping, and had good reason to hope, that logo growth would accelerate. That hope was dashed. We now know that such hope is not a reason to invest in Pivotal. They may surprise in the future in regard, but it is still only hope that will happen.

I guess the most disappointing thing about the earnings call was that management was just fine with only 15 new logos. No changes made, no need to address sales efficiency, sales structure, Change the go to market tactics, leadership issues, NADA. They were quite “pleased” with the results.

If you may remember, as an example, Nutanix has some real sales force issues earlier in its life as a public company. They ever said they were pleased with it, they said they would fix it. Talend had a similar issue, and the present CEO, first thing he did, he fixed the sales force, and he is still fixing the sales force (with Europe being the last aspect of the sales force to fix, and apparently now having come around).

It is not an uncommon problem for a young company to have to grow into being a larger company and making the sales growth expected from a public company. But Pivotal was “pleased” with their customer adds. That just hits me wrong. That is not even part of the Dell culture. You will not see VMWare behaving like this. VMWare would fire the VP,bring some in who can do the job, change the structure of the sales force, and get it to to work!

Anyways, the original earnings call from their first report was not very informative, and this one was not either. At least two analysts tried to get under the hood to get Pivotal to reveal the true metrics of year over year growth, and Pivotal simply would not do it even though they had the numbers to do so. The analysts were polite and did not prod thereafter, as they never do, but it is quite difficult to have any faith in upside results when a company is not confident enough to put out there clear growth numbers with metrics that analyst think matter, and thing they did great when they added 15 new customers in 90 days. Not my company, but if it were, like pretty much with all great companies in the past, it would not be something to be pleased about. The company had no answers to any issues with the sales force, or anything needing to be tweaked or changed.

Perhaps a bit of sour grapes there inn the end, but we do not like to invest in “nice” companies when the company is in an extremely competitive industry. They are no longer private living on the very large allowance that EMC gave them then Dell, they now need to make it on their own and they clearly do not have the Dell culture of kick ass in the market and win that historically great companies of EMC, Dell, and VMWare all have. Seems like Pivotal is the little brother who chose not to follow the family business because he was an artist or a clothes maker or something. That may be a bit extreme, but you get the gist of it. This is not a win and take numbers company like the rest of the organization is with Dell.

Tinker

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Since they are only counting customers with greater than $50 K in sales, maybe it takes awhile to start the customer in Pivotal labs … --Jimbo5

That’s evidently not a critical factor, or else the guidance for '19 would need to be considerably higher if we were to assume that there is a back-swell of cash at the dam to come down the river in the near future. I have no problem being cautious and conservative with estimates and guidance, but if they’re downgrading their actual expectations that much, then they are propagating a culture bordering on dishonesty. I don’t think that’s the case.

They were quite “pleased” with the results.–Tinker

There it is. And that’s the bottom line for me. Big concentration on new clients, resulting in 15 adds. and mediocre growth. The adds may all be huge, but if that’s the case and management wants us to know that, then they need to be more transparent with projections. Again, I don’t think that’s the case.

I fully believed in the model and at a glance I see no changes made or planned there. Now I have serious doubts about management’s ability to execute, and that leaves no room for a strategy not based on hope. I have expectations about my companies; the future is never known. But I can’t invest in a company where hope is a primary catalyst. (And if I did, I would not have enough hope left in PVTL.)

In the end, I may be wrong and if so, that’s okay. I will look back for lessons to be learned but I won’t look back with regrets, as they never pay. So I will wait to see if PVTL can recover maybe ~10% over the next 2-3 weeks (I think it might) and then sell my (14%) position in its entirety. Don’t worry, it’s only a few thousand shares. Now, if Saul bails, look out below! :slight_smile:

So much for my plans to buy a new pickup this winter with PVTL gains. But all is not lost. No vehicle ever gave me such a high return ever, let alone in 3 months. Good luck PVTL and PVTL holders. Thanks for the ride.

I invest in people. Financial results. Profits. Expectations? Sure. And I have hopes, like everyone else. But my analyses have no slot for hope, so by design it doesn’t enter into my investing decisions.

So many try to define risk in investing. Some are ridiculous. Some involve high level calculus. Now I don’t have the holy grail of definitions of investing risk, and I can’t say that hope is precisely equal to risk. And maybe it’s just me, but I have noticed that the more a strategy depends on hope, the higher the risk of loss of capital. As a fan of Rule #1, I try to avoid it.

Dan

It wasn’t a mistake. It was a lesson learned. (Again.)

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All:

There is no new information that you were not already aware of before this earnings call.

Two prior posts of mine discussed these issues here:

http://discussion.fool.com/pivotal-i-had-to-give-a-little-realit…

http://discussion.fool.com/pvtl-the-tangled-web-we-weave-3313484…

We knew about the decelerating customer base…the complexity of the service vs subscription revenue, the concentrated enterprise level customer, the definition issues of what constituted a customer, etc.

I read the conference call a bit different from others here it seems.

I read:

  1. The new customer growth is re-accelerating from 2018.
  2. They are growing subscription revenue faster than service and more than they guided
  3. There are new logos they have signed but do not categorize as new customers as yet since they are billed but not revenue booked.
  4. The DELL/VMW partnership has started to yield greater interest and bookings not yet recorded as a new customer as defined by their revenue definition.
  5. They raised the guidance for Q3 and year end from what they said at last earnings call.
  6. PKS was just released a quarter ago or so, so its very early earnings.

Point being…if anything, things appear better than they looked after the last earnings call and from my two links above. Everyone here knew, or should have known about these issues of concern regarding decelerating concentrated enterprise level customers.

Not touting this company for sure as you can see from my prior two posts but, it surprises me that there is such sanguine posting when all these issues were previously known.

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