Pivotal Software Slashes Its Guidance

Pivotal Software (NYSE: PVTL), a cloud platform-as-a-service provider that went public last year, has run into some trouble. Though the company beat analyst estimates for both revenue and earnings when it reported its first-quarter results on Tuesday, a full-year guidance cut stole the show. The stock opened on Wednesday down more than 30%.

Part of the problem is that it's taking Pivotal longer to close deals. "We closed fewer deals than we expected in Q1 due to sales execution and a complex technology landscape that is lengthening our sales cycle," said Pivotal CEO Rob Mee during the earnings call. The company added just six net new subscription customers during the quarter, bringing the total up to 383.

Existing customers are driving growth

Pivotal reported first-quarter revenue of $185.7 million, up 19.3% year over year and $1.6 million above the average analyst estimate. Subscription revenue surged 43% to $128.9 million, while services revenue slumped 13.3% to $56.9 million.

Subscription revenue growth was driven primarily by existing customers. The company's dollar-based net expansion rate, which measures revenue growth from the existing customer base, was 143% in the first quarter. Pivotal expects this metric to decline over time as it scales, but it remains very high relative to other software-as-a-service companies.

Pivotal posted a net loss of $31.7 million on a GAAP basis in the first quarter, along with a non-GAAP net loss of $8.6 million. Both represent improvements over the prior-year period. Non-GAAP earnings per share came in at a loss of $0.03, up from a loss of $0.10 in the prior-year period and $0.02 better than analysts were expecting.

The market cared little about any of this, though. With Pivotal cutting its full-year outlook and providing second-quarter guidance that was well short of expectations, the first-quarter results were lost in a sea of bad news.

A complex technology landscape

Pivotal expects to produce total revenue between $185 million and $189 million in the second quarter, and subscription revenue between $131 million and $133 million. At the midpoints, those ranges represent year-over-year growth of 13.7% and 35.4%, respectively. Analysts were expecting total revenue guidance of $197.5 million, far above what Pivotal provided.

For the full year, Pivotal sees total revenue between $756 million and $767 million, and subscription revenue between $530 million and $538 million. That's growth of 15.8% and 33.2%, respectively. Previously, Pivotal had guided for full-year revenue of $798 million to $806 million, and subscription revenue between $542 million and $547 million.

The company blamed a complex technology landscape for lengthening its sales cycles and delaying the closing of some deals. Sales execution issues were also a factor, and the company doesn't expect a quick fix. General economic uncertainty may also be to blame for the weak guidance -- customers may be less willing to sign deals against a backdrop of tariffs and trade wars.

One reason Pivotal stock was hit so hard Wednesday morning was a lofty valuation. Prior to the post-earnings collapse, the stock traded for roughly 7.5 times annual sales. That's not nearly as expensive as some other software-as-a-service companies, but Pivotal also isn't growing all that fast. With revenue now expected to grow by less than 16% this year, it's hard to swallow that kind of valuation.

The silver lining is that Pivotal is having no problem getting existing customers to increase spending. But given the weak guidance, the market doesn't care.

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