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Tuesday April 17th, at 2:00PM ET
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Join us! We will review the fundamentals of Pivotal Software (PVTL) which intends to price its IPO this week.
Pivotal participates in a high growth segment of the software industry known as PaaS (“platform as a service”). Pivotal’s leading Cloud Foundry product is known for developers entering ‘cf_push ==’ and having their applications up and running within minutes.
PROBLEMS WITH FUNDAMENTALS (THE SHORT SIDE):
- Market for commercial PaaS solutions is stalked by the presence of strong freemium options which anyway have wider addressable markets than Pivotal from a workload perspective
- PVTL is cut from the same cloth as VMW and takes price on customers (without the monopolistic position at the beginning)
- Large enterprise focus with penetration of the opportunity set seemingly already up the curve, both in terms of absolute number of customers relative to the subsets of large enterprises, and in terms of revenue per customer, AND especially in terms of incremental revenue per incremental customer
- Evidence of saturation can be seen from the plateau of revenue from leading customers (and shareholders), as well as by the flattening of revenue from partners (and shareholders) VMW and Dell-EMC. Saturation can also be implied from PVTL’s willingness to walk away from once-core Labs revenue in order to bring in new SIs to help in the search for new PCF customers
- A history of 'starts' and 'stops' with this company including multiple different business models over time, a history of launching many products but very few continuing to yield revenue or growth after even just a brief few years, implying a product set that has always been somewhere between adoption and saturation
THE LONG:
- PVTL saw an acceleration of new revenue momentum exiting F18
- PVTL headcount growth jumped significantly on a monthly basis from F17 and 1HF18 levels over the last 6 months
- PaaS product has positive adoption momentum in 2018
- Backing out Pivotal’s Big Data Suite revenue makes Pivotal Cloud Foundry product revenue even that much more impressive over the last ~18 months, implying the company may have found their gusher
NET: NEXT 3 YEARS VS NEXT 6-9 MONTHS:
Investors have to value three components: 1) Labs revenue in decline (currently low d-d%), 2) BigDataSuite good technology (decent size) and is still growing (low d-d%), 3) Fast rising PCF revenue, with risks. Using a SOTP approach, we can't get much beyond the IPO offer price.
In the coming years investors will also have to value the underlying P+L elements, which we think may be still a bit messy going forward. Normally, the transition from Services to Subscription P+L is good for investors. In this case, it is a fairly mature company, already at least 4 years into the transition, still chasing headcount, still chasing a dream...signs that usually mean the P+L will not always act like the placid incremental fall-through mechanism we expect it to be with subscription software.
Why isn't this an outright Short? Current momentum in the business is pretty strong. And while our analysis makes us think they are fishing in a limited pool, even if they are already ~20-25% penetrated, accelerated growth (for PCF x-Labs, x-BDS) can still continue at least in F19 (CY18) and F20.
Join us as we go through our full analysis today at 2pm.
