A Quick Look At Pivotal’s S-1

I've taken a quick look at the numbers in Pivotal's S-1 to get a feeling for how the finances align with management's rhetoric about its prospects.
The short answer is that things look good for Pivotal's sales prospects. The key to success will be increasing subscriptions without overspending on sales and marketing.

As you can see, revenue growth is strong while operating costs are fairly flat. The structure of Pivotal's business means it can scale revenue growth well without having to add huge amounts of costs. This is the beauty of a mostly software business: the marginal cost of creating more of it isn't very high.

All that gross margin does get eaten up by overheads, though.

Sales growth is doing most of the heavy lifting here. R&D spend has increased from about $120.5 million in 2016 to $161 million in 2018 which is about 34%, while sales has increased 81%. Sales and marketing is the stand-out cost in absolute terms, but it's only increased about 18% from $187 million in 2016 to $221 million in 2018. General and admin costs are modestly up from $58 million in 2016 to $67 million in 2018 (15%).

It's where the growth is coming from that is most interesting to me.

Pivotal has grown its customer based from 180 customers in 2016 to 319 in 2018. That's a 77% increase, which aligns with the volume of sales growth, but it means the average revenue per customer is essentially flat: $1.56 million in 2016, $1.51 million in 2017, and $1.60 million in 2018. Pivotal added 95 customers in 2017, but only 44 in fiscal 2018, according to the S-1. Given how vital growth in the number of customers is, one would hope this is a temporary blip in customer acquisition, because if that continues to slow, so will overall growth.

The nature of sales has also changed quite dramatically.

As you can see, Pivotal now gets more than 50% of its sales as subscriptions rather than services. Subscriptions are up 173% from 2016 to 2018, compared to a 35% increase in services sales. That kind of trend will see the vast majority of Pivotal's sales coming from subscriptions in the very near term, and with the correspondingly low cost of sales that subscriptions have. That means lots of gross margin, which has grown from 33% in 2016 to over 55% in 2018, and that means lots of money to cover the overheads like sales and R&D.

Pivotal will need to continue to invest substantially in R&D given the incredibly fast moving marketing it plays in, but the dramatic drop in general and admin and sales and marketing costs on a common size basis indicate that Pivotal already has the admin structures in place to scale its number of customers smoothly, and that sales and marketing is being very effective.

If Pivotal can keep this up, they could be profitable within 2 years post-IPO which not many tech companies are managing to achieve. My big concern is the slowdown in customer acquisition, so I'd want to be seeing a bunch of new customers piling in to buy subscriptions.

The way enterprises write software is changing very quickly as they realise that they're totally out-paced by those who have embraced the newer fast-flow techniques of the cloud-native people. You don't have to write your software to run in the cloud to be competitive, but you do need to be using a similar tool-chain or you're just too slow to keep up, let alone catch up.

Now to see if the public market agrees with me!

Disclaimer: I am not a financial advisor and do not hold licenses to provide financial advice. This information is provided for general entertainment purposes only. Get professional advice from a licensed advisor before making investment decisions, not some random person on the Internet.

This article first appeared in Forbes.com here.