PVTL valuation

Although PVTL earning were disappointing, I wanted to compare them with some other software companies that have slower total growth. I compared PVTL to WK, CLDR and ADBE. See details below (all numbers are from the latest quarterly results for the 1 quarter period, except for the total forecasted sales which is annual):

WK (Workiva) has a market cap 1.57B and an EV of $1.51B. With forecasted total sales of $241M, it has an EV/sales of 6.3. WK has total revenue growth of 19.7% and subscription revenue growth of 19.2%. Gross margins were 72.4%. R&D was up 28%, Sales expenses up 12% and G&A up 142%. Cash flow is negative 2.5M compared to positive 4.0M last year.

Cloudera (CLDR) has a market cap of $2.7B and an EV $2.3B. With forecasted sales of $450M, it has an EV/sales of 5.1. CLDR had total revenue growth of 23% and subscription revenue growth of 26%. Gross margins were 71%. R&D was up 24%, Sales expenses up 38% and G&A up 33%. Cash flow is negative 23.5M compared to positive 22.9M last year.

Adobe (ADBE) has a market cap of $133B and an EV $130B. With forecasted sales of $9B, it has an EV/sales of 14.1. ADBE had total revenue growth of 24%. Gross margins were 71%. R&D was up 26%, Sales expenses up 22% and G&A up 25%. Cash flow is positive 955M.

PVTL has a market cap of $5.2B and an EV of $4.5B. With forecasted sales of $650M, it has an EV/sales of 6.9. PVTL had total revenue growth of 30% and subscription revenue growth of 51%. Gross margins were 66% (up from 58% last year) and subscription gross margins were 93%. R&D was up 18%, Sales expenses up 33% and G&A up 37%. Cash flow is positive 18.4M compared to negative 56.5M last year.

PVTL has the fastest total growth of the group and this will likely to increase as subscription growth becomes a higher percentage of total revenue. PVTL seems to be a much better deal than WK given that WK is growing revenue at 66% of the pace of PVTL. WK has slightly stronger gross margins, but PVTL should catch up soon as their 93% subscription margins become a higher total percentage of revenue. PVTL is also cash flow positive vs WK being cash flow negative. CLDR stacks up a little better but their 23% revenue growth is lower and they are cash flow negative, so it makes sense for them to have a lower valuation than PVTL. ADBE is a great company and very profitable, but at an EV/sales of 14.1. They are very expensive given their slower growth rate of 24%. They are valued so highly due to their strong cash flow of almost $1B for the quarter. PVTL has improved their cash flow quite nicely to positive $18.4M compared to negative $56.5M last year and positive $4.5M last quarter. This will continue to improve as their subscription revenue becomes a higher percentage of total revenue.

While I agree that PVTL’s recent earnings was disappointing, I think their valuation is quite cheap and has low expectations built into it. If they beat earnings and raise guidance for Q4 with subscription revenue growing at 50%, the stock could pop when they announce their Q3 earnings.

28 Likes

Hi Wouter28,

While I agree that PVTL’s recent earnings was disappointing, I think their valuation is quite cheap and has low expectations built into it. If they beat earnings and raise guidance for Q4 with subscription revenue growing at 50%, the stock could pop when they announce their Q3 earnings.

I agree with you here! Thanks for the great write ups. I might be the only one here who will add to my position should the stock drop back to my original price points between $18-$19 a share.

Lets not forget:

  • The company is continuing quite successfully pivoting into a subscription based business.

  • the 150% retention rate is still tops, and will continue to drive growth for years

  • As Bert mentioned, alot of companies will start moving away from billings guidance due the lumpy nature of bookings

  • 51% growth is still stellar, along with the 92% or so margins

  • Pivotal may have actually added 30 new customers last month for all we know, but if they haven’t generated $50,000 in revenue yet they are not included as “new customers”. Because this is a company whose new customers are all based on subscription, quite frequently, when large new customers deploy their order towards the end of the quarter, they do not count as a new customer

  • End of September is end of fiscal year for the feds, so we may see a nice uptick in government contracts

  • If I’m not mistaken, bookings are highest at the end of the year, so I believe customer count will accelerate

  • I’m not a techie, but it sure seems to me that the PKS product is/will be a home run product for them

  • Lastly, I am certainly capable of waiting 3 little months until the next earnings report. After all, I only bought shares in May after learning about the company

Just thought I would throw in my thoughts, although I realize we are definitely in the minority here. :slight_smile:

Best,
Matt

28 Likes

Hello,

Thanks for the 2 posts. I projected PVTL to grow subscription revenues for the 4 years following
FY19 at 50% per year and service revenues at 4%. I estimated gross margins at 92% and 25% respectively. This brings revenue growth to 42% in the 4th year and gross margin to 83%.

If/when this growth does occur, PVTL will be a high-growth company a cash cow and a market darling.

Best regards,

Mike

1 Like

If/when this growth does occur, PVTL will be a high-growth company a cash cow and a market darling.

The market has two kinds of investors, some want instant gratification while others are willing to give their companies a chance. I’m in the latter group because I like Pivotal’s business model and I think sellers are focusing in the wrong metrics. Time will tell.

Denny Schlesinger

14 Likes

Interesting valuation comparisons - I’m actually liking ServiceNow the most which wasn’t benchmarked - they have much greater scale but without being too big to grow. They consistently maintain their growth rate around 35-40%, they are profitable and are demonstrating massive leverage. I’m looking at taking a position.

Latest Q revenues $631m with YoY growth rate: 40.8% (beat by $12.6m) - subscription growth = 45%
Latest Q EPS 0.49 beat by 0.06 (YoY growth of 120%+)
PE ratio 87.9
Price / Sales 15.95
EV / Sales 13.1
Market Cap $36.1bn
EV $29.69bn

Latest results…
https://seekingalpha.com/news/3373794-servicenow-reports-q2-…
https://seekingalpha.com/pr/17226116-servicenow-outperforms-…
https://seekingalpha.com/article/4190187-servicenow-2018-q2-…

A

2 Likes

A consideration :

I’m only really interested in the subscription revenues @pvtl, which are circa 400m.

I do my valuation based on this number rather than total revenues to give me a margin of safety, and because I think it is a closer approximation of the eventual target model.

The low margin services which seem to make it better value than I perceive it to be.

Worth a thought