Who knows what the stock will do long term, that’s not the point.
Saul and others have made some great posts lately which helped me see Pivotal has had red flags since it came public. Red flags in terms of us actually understanding the company.
Why and how did we fall in love with it in the first place?
Did we compromise and accept some things we truly didn’t understand because of all the excitement when they reported last quarter?
Did we fall for Pivotal because we thought it looked or felt similar to some of our other more proven, easier to understand companies?
Would love to do a collective review on our journey with Pivotal.
Why and how did we fall in love with it in the first place?
Did we compromise and accept some things we truly didn’t understand because of all the excitement when they reported last quarter?
Great questions. I would answer yes.
Pivotal, as Saul pointed out today, never had the proven history of growing organically as an entrepreneurial company.
I think some people anchored to a number – the net expansion rate which was near 160% – without taking it into context. The context Epictetus mentioned regarding the customer base.
Speaking of the customer base, we simply cannot ignore customer concentration. “7 of the largest banks, 9 of the largest automakers, 7 of the largest insurers, 8 of the largest retailers, and 9 of the largest Telcos” – this may be 75% or 90% of their recurring revenue. This just won’t do.
The transition. I think many were intrigued that the subscription growth was so impressive, but didn’t account for the fact that it was largely because legacy customers were moving to subscription model. These were not new customers.
Gurus. Steppenwulf is with Citi I bet, on of PVTL’s largest customers. No offense to him, but just because it works for them doesn’t mean it’s the next big thing.
Would love to do a collective review on our journey with Pivotal.
What I learned is that it is dangerous to buy a recently IPO’ed company whose only history is as a division of a larger company. It may do well in the future, but the prior years’ figures may be meaningless.
Also, this was a company that just changed its entire business sometime in 2015, from a consulting and service orientation to a SaaS company. Thus, as Bear points out, a lot of their new SaaS business comes from companies where they used to have service contracts, and not new business. They had no prior experience at recruiting new SaaS customers. (I suspect most of their customers came from Dell and VMWare). This explains the ridiculously low cost of sales and ridiculously high gross margins (for a new company just starting out).
Best,
Saul
PS, In all fairness to Steppenwulf, I should point out that:
Thanks to him I bought my position at roughly $19, and sold out less than a half a year later at roughly $22, so it wasn’t a total disaster for me.
A lot of the problem comes from management’s lack of experience in running an independent company, and their lack of explanation about what is going on. There was no way that he could be aware of that back when he recommended it. I don’t think they had even reported once back then.
Steppenwulf also encouraged us about Mongo, and he encouraged me to take a new full position in Mongo at about the same time as my Pivotal position, at about $43.50, and it’s now almost doubled at $83.48. So two recommendations, one of which I sold out at a 14% gain, and the other which is up 87% currently, is not bad.
If I had to sum it up in one sentence I would say, that PVTL is a very young public company that simply fell short on very high expectations and didn’t handle its second earnings call the right way. As you said, who knows what will happen in the long run with the stock. Maybe it will be a raging success (I hope so for everyone that is still long).
I didn’t have the feeling that many people on this board were in love with the stock - I certainly wasn’t “in love“. I liked it, bought a small position to follow it and added a bit after the first earnings report that seemed very nice. But there were too many uncertainties connected to a company that just reported it’s first quarters as a public company, to justify giving it a large percentage of my portfolio. If anything, this case goes to show that you shouldn’t fall in love with any single stock, especially if it is a recent IPO with no track record on the market. I think what drew in people in the beginning was the insightful and lucid write-up from Steppenwulf about their product. Saul followed that up with a very detailed write-up on financials, including back and forth questioning with Bert and Steppenwulf. The bottom line was, that we had a great company at our hands, with years of high growth ahead of it, that was somewhat hidden in the top line through the mix of high subscription growth and the stagnant services part. The thesis was that subscription revenue (and with it total revenue) would accelerate, as the company would continue to up-sell to existing customers and focus more on bringing in new customers. I still believe that what was written about the company is true today. PVTL certainly is a very successful and growing company, even after their disappointing earnings release. But will it accelerate growth going forward? Will it surpass the high standards that we set for our stocks and continuously surprise us positively? It’s possible, but I wouldn’t bet on it.
It has to be pointed out, though, that the risks were always very clear: The high Dell ownership, no proven track record as a public company, low customer count and struggle to add substantially to that low number. On top of that, if I remember correctly, Steppenwulf slightly changed his opinion on Pivotal’s competitive position long before the second quarter earnings release (I don’t remember when exactly, but I think he concluded that MDB has a much stronger competitive advantage in their field than PVTL - from his point of view). But could we have known in advance that they would miss on customer adds? Could we have known that management would be evasive and intransparent in their call? I think both answers are no. Is the company doomed because of these missteps? Not at all! There are simply other companies on the market right now that seem to have a brighter future, better management and less uncertainty.
I think we did nothing wrong with PVTL at all. If anything, it was a textbook example of why this board is so great. It shows a constructive and focused group effort to invest in the best possible way. Setting high standards for choosing an investment AND maintaining these same high standards while holding. We can’t pick only winning stocks and we can’t look into the future, that’s simply impossible. However, we can protect ourself by having processes, by being diligent and ruthless. And we were just that. From the write-ups for choosing the investment until the discussions that led to selling the stock the analyzes have been on a very high level in my opinion. We had a thesis and it appears that it won’t play out as we thought. But when we realized that, we didn’t change our thesis to make the stock look better, or try to find excuses. We just simply moved on.
…I think we did nothing wrong with PVTL at all. If anything, it was a textbook example of why this board is so great. It shows a constructive and focused group effort to invest in the best possible way. Setting high standards for choosing an investment AND maintaining these same high standards while holding. We can’t pick only winning stocks and we can’t look into the future, that’s simply impossible. However, we can protect ourself by having processes, by being diligent and ruthless. And we were just that. From the write-ups for choosing the investment until the discussions that led to selling the stock the analyzes have been on a very high level in my opinion. We had a thesis and it appears that it won’t play out as we thought. But when we realized that, we didn’t change our thesis to make the stock look better, or try to find excuses. We just simply moved on.
Great post, and great summation, Niki. Thanks for your analysis.
Saul
Lesson? No one is always correct. Here, the CEO stated firmly to the world that new customer acquisition was their primary goal this year. As we do w all companies we follow, we had to watch to see if the thesis played out. It did not so out we got. In the end AI broke even w earlier capital gains against loss s from a late purchase just prior to earnings.
Had Pivotal given something in guidance we’d all still be invest d in Pivotal. We invest in many early companies such as Zscaler, Mongo, Nutanix (who had a scratchy start of it), Twilio (went straight up and then straight down) etc.
What makes Pivotal different is simply what the CEO stated did not come to pass, and what did not come to pass was so core to the investment thesis there was no reason to stay invested.
Hey, if they make a grand come back then good for those who held. When the thesis is broken that was specifically laid out by management I am not trusting them to right the ship. Better places.
Thus the lesson, move to better places when wrong you have been about the core of the investment.
I didn’t buy Pivotal until I understood the product, it’s fantastic but maybe it takes a coder to see why. Deploying software is a real PITA. Programmers love their code but have to waste an awful lot of time to test and deploy it. A tool that can do it for you, “I don’t care how” is fantastic. The idea behind AGILE is to enable continuous deployment, small chunks at a time. Cloud Foundry is a great implementation of AGILE, you write the code and Cloud Foundry takes it from there.
I’m the odd man out with two exceptions.
1- One half of a Saul lesson: “What I learned is that it is dangerous to buy a recently IPO’ed company whose only history is as a division of a larger company.” The first half. I don’t like to recently IPOs but in the excitement of this stock I missed that fact, my bad. The second half is generally not true, the conventional wisdom is that when a company spins out a divison it fattens it up to make sure it does well.
2- Client concentration. Yes, large clients, specially 10% clients are a risk. There is no way to know how many clients Pivotal has because they don’t count as clients those that don’t spend at least $50K which is weird. Having large clients one can be sure there is a long tail of small clients that bring in very little.
I did lower my cost basis by 10.5% trading covered calls. I’m holding
Why and how did we fall in love with it in the first place? Did we compromise and accept some things we truly didn’t understand because of all the excitement when they reported last quarter? Did we fall for Pivotal because we thought it looked or felt similar to some of our other more proven, easier to understand companies?
Tinker has it right IMO…you learn very little from a single stock event and if you change direction on the basis of every single stock’s move, you will lose in the market. Rolling Stones just lack consistency and that is why most investors do not beat the emotionless and consistent index funds.
My suggestion, don’t make radical moves in your investment thesis on the basis of PVTL. Make adjustments on the basis of probabilities of larger groups of stocks…I have previously posted the data on IPO’s in general…that is much more valuable information that a single IPO…what do most IPO’s do…that is far more valuable information.
But as Tinker suggested…stay with PVTL if that is your best opportunity for your money…move on to something else if that is the greater opportunity.
Would love to do a collective review on our journey with Pivotal.
From the start I had two concerns:
(1) Very low costumer count. 15 new customers this quarter (for 354 total) means even one additional or one fewer costumer in the quarter would make a significant impact on customer growth and likely on revenue growth. Contrast this to a company with thousands of costumers, one more or less wouldn’t even be noticed.
(2) The tight ties to Dell, as already noted by Saul and others.
I was willing to give the company a chance in spite of these risks but never could justify more than a very small position size.
I sold when reading the last earnings call. From what they said, I have no faith in management’s ability to navigate the challenges of a new and rapidly growing small company. They had too much of a fixed mindset (rather than a growth mindset). Too much a feel of a small piece of a big corporation rather than excited entrepreneurs. Not surprising being a spin-off of Dell.
FY 2016 75 to 180
FY 2017 180 to 275
FY 2018 275 to 319
FY 2019 319 to 354 (last 6 months)
After averaging 100 new customers/year in 2016 and 2017 why did the customer growth drop to just 44 in 2018? This should have raised a red flag IMHO. Could it be because of the trend towards kubernetes and lack of a Pivotal product to address that? PKS was developed only in 8/2017.