I started looking into PVTL. Here is the section in the S-1 that describes their revenue model:
We generate a substantial and increasing portion of our revenue from the sale of PCF subscriptions. We generate subscription revenue primarily from the sale of time-based subscriptions. Customers purchase subscriptions of our software platform and choose where to deploy it. Deployment options include a customer’s private cloud, a public cloud of its choice, or multiple private and public clouds. Our customers subscribe to use our software platform with pricing based on the number of workloads, such as applications, containers or other microservices. Subscriptions are offered typically for one- to three-year terms, and we recognize revenue from our subscriptions ratably over the subscriptions’ term. We generally bill our customers annually in advance, although for our multi-year contracts, some customers pay the full contract amount in advance. We expect that over time subscription revenue will become a larger percentage of our total revenue as customers continue to adopt and expand their PCF subscriptions and as our systems integrator (“SI”) partner relationships ramp to directly deliver Labs-like services to our customers. As a result, our services revenue may continue to fluctuate; any services revenue growth is expected to be modest both in absolute dollars and relative to our subscription revenue growth.
We offer strategic services including Labs, implementation and other services. Labs involves co-development and application transformation services. We offer implementation services to enable our customers to configure, deploy, test, launch and operate PCF. Part of our strategy to scale our subscription revenue is to rely, in part, on SI partners to deliver co-development, application transformation and implementation services to our customers, particularly as our customers move from early deployment to broader adoption of PCF. We intend to grow our services revenue at a slower rate than our subscription revenue as customers are enabled on our platform and increasingly use our partner ecosystem for their services needs. Our strategic services are typically priced on a time and materials basis with revenue recognized upon the delivery of the services.
Now, I have taken a position in PVTL. Here are my thoughts:
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Financials are rapidly moving in the right direction. Very fast revenue growth and rapidly increasing profits.
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The relatively low margin service revenue that is shrinking or slowly growing provides their customers a way to implement PCF. Once customers get configured, deployed, tested, launched and operating PCF then they can make use of these on an ongoing basis. This means that in order to get future subscription revenue the development work needs to get done. In the past PVTL provided implementation as a service. In order to scale the business further these services need to get scaled. But remember that the availability of these services are required to drive future growth of subscription revenue. PVTL has elected to partner or outside the needed work to get new customers implemented (and to expand new use cases for existing customers). If this strategy works and their partner ecosystem can fulfill the customers needs to get additional business configured, deployed, tested, launched and operating then PVTL can scale and grow faster. In addition, it will allow PVTL to scale the business without the additional expansion and expenses associated with a low margin services/consulting department.
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Since Pivotal Labs was there to implement new customers, the amount of this business could be a predictor of future subscription revenue. We can expect their future subscription revenue will continue to be driven by how fast customers can receive help in implementing so that they can use PVTL on a routine basis. While we can continue to watch their service/professional services revenue for indication of subscription growth, an increasing amount of subscription growth will be “hidden” because partners will be providing these services. Look at the recent financials and the guidance:
Services Revenue:
Q4 2018:
Q1 2019: $65.6M
Q2 2019(E): $65.5
FY 2019 (E):$263.5 ($69.9M average)
Looking at the above, PVTL will keep helping customers implement at the same pace as before. Therefore, perhaps we can assume that additional in future subscription revenue will continue at the same incremental dollar amount as previously? The services that partners offer will lead to additional future subscription growth but since we have no visibility into this we don’t have this as a leading indicator of future subscription revenue levels and growth. However, perhaps we can assume that services provided by PVTL’s partners are ramping.
Chris