No. of Recommendations: 58
Part 3 – the checklist

Here again is the post from last week that discussed what I look for in high growth companies:

Now, I’ll quickly go through this for PVTL.

1.Strong sales growth guidance over the next year (40% plus)

Although on initial assessment, PVTL would appear to fail this criteria with only 28% revenue growth for Q1, I think we should focus on PCF, which is the company’s focus. Its revenue was up 69% for Q1 and management is guiding for 47% annual growth. I think this guidance is conservative and I would be surprised if PCF revenue growth is below 50%. This is due to PCF revenue growth accelerating during the past 3 quarters.

2. A large addressable market (TAM)

Part 1 covered this. Our cloud-native software addresses IT spending across the rapidly growing market for public cloud workloads, sometimes referred to as Platform-as-a-service ("PaaS"), and the market for application infrastructure, middleware and development software. We believe our cloud-native platform opportunity is the aggregate of these two markets, with spending today estimated at over $50 billion.

Given projected revenue of $645.5M for this year, a $50B TAM is significant.

3. A TAM that is expected to grow significantly

Also addressed in part 1. According to Gartner, spending on cloud application infrastructure services (PaaS) is expected to be $16.0 billion in 2018, growing to $29.0 billion by 2021, representing a 22% compound annual growth rate ("CAGR"). According to Gartner, spending on application infrastructure, middleware and development solutions is expected to be $43.2 billion in 2018, growing to $51.4 billion by 2021, representing a 6% CAGR.

The more important PaaS market growing 22% CAGR is impressive and shows that PVTL’s TAM is growing quickly.

4. A product that customers love

Tinker and other have done a good job posting how customers love PVTL - Boeing (, the IRS (, the Air Force (, etc.

Boeing saw a 100 times faster infrastructure, 6 times increase in server utilization and nearly 1,000 developers delivering hundreds of apps to PCF. Here is Boeing’s CIO presenting on what Pivotal has done for them:

T-Mobile saw a 37% increase in developer productivity, Liberty Mutual saw 4 times the release velocity with a 60% reduction in infrastructure costs.

There is a lot more customer stories here:

5. A strong dollar expansion rate (over 100%)

PVTL leads the way here with 156%. This demonstrates how much customers really love the product. Expect this to come down somewhat, but PVTL is unmatched for this category.

6. A lot of recurring revenue

PCF is their subscription revenue business and now makes up 58% of total revenue. This will only grow higher given the slow growth service business and high growth PCF business.

Now on to the non-sales metrics.

1. A smaller market cap, preferably less than $10B

PVTL’s current market cap is $6.3B

2. High margins

Overall margins are 64%, but PCF margins are 92%. PCF margins are even expanding as they gain scale. These are great margins.

3. Growing profitability – not only do we want to see strong margins, but increasing margins. This also demonstrates pricing power and scale.

Margins have been increasing for both overall and PCF. Although not profitable, they are cash flow positive from operations while last year they were cash flow negative.

4. Light asset models – no way to have high margins with a lot of fixed assets on the books. Software companies have this and as they get larger, they become more profitable as their variable costs decrease per product sold (scale)

PVTL is definitely asset light given their 92% margins on PCF. Margins are increasing as they gain scale.

5. Little or no debt

PVTL has no debt and has $645M in cash

6. Not a ton of stock comp

Although they issue a good amount of options and RSUs, the total stock comp expense is only $10.7M for Q1. This will likely go up and is a little hard to assess after being public for only 1 quarterly earnings release. So far, the stock comp seems low, but this is something to keep an eye on.

7. High inside ownership – love to see founder led companies with larger ownership of stock. This obviously aligns their interests with fellow shareholders.

Dell owns 70% of the company, while Ford owns 17.5M shares (7%) and GE owns 15.5M shares (6%). According to Yahoo, The CEO, Robert Mee, owns 666,667 shares or around 0.25%. PVTL has not yet filed a proxy statement, so insider ownership is a little hard to assess at this point. Rob has been leading the company since it was founded in 2013.

Overall, PVTL does very well on the above items, especially sales growth.

Now quickly on to valuation. The enterprise value is $5.7B (6.3B market cap minus the 645M in cash) and forecasted sales for this year are $645.5M. That gives us an EV to sales ratio of 8.8 times. In comparison with other high growth software companies, this is not an overvalued stock. I think this is partly due to PCF’s growth and margins being overlooked as the service business brings down the overall revenue growth and margins. Also, being a relatively new IPO, I don’t think PVTL is followed as closely as other software companies. On seeking alpha, there are a few articles but minimal comments. It’s also not a Motely Fool service recommendation (yet). There are 11 analysts that cover the company with 6 with a hold rating, 4 with a buy rating and 1 lonely analyst with a strong buy rating (from Yahoo). I think PVTL’s Q1 earnings release got them some attention, but I think this attention will grow as they continue to put out earnings with heavier contributions from PCF as that becomes an even larger percentage of overall revenue.
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