Blog Article | Rohit Kulkarni
Posted: April 12, 2018

Pivotal Software IPO: Successful Offering May Trigger More Open Source Software IPOs

Summary: Pivotal, the cloud software company spun out of Dell-EMC and VMware, plans to go public next week. At the high-end of its price range, Pivotal’s IPO would net $700 million at a $4 billion valuation. It would be the second largest IPO of 2018 behind Dropbox. (We excluded Spotify from this analysis because its IPO did not include any primary share sales.) Pivotal’s IPO could pave the way to a public offering from other Unicorns with open source software business models such as Docker and SugarCRM. Or, it could inspire SaaS firms such Palantir to also consider a large public offering.

Pivotal’s IPO is particularly noteworthy for two reasons:

  1. Litmus test for open source software: Pivotal’s IPO could validate that open source software can evolve from an innovative technology to a sustainable, successful business model valued by Wall Street. That could bode well for comparable software unicorns such as Docker and SugarCRM. We continue to believe that open source software technology is a crucial component of modern cloud infrastructure, and we expect to see more such open source software-based unicorns. Investors view Red Hat (which Pivotal most closely resembles) as one of the most successful open source software businesses. Over the past two years, Red Hat’s stock has more than doubled to $150 per share. On the flip side is Cloudera. Since going public in April 2017, Cloudera stock has dropped 30 percent after a 50 percent down-round IPO.
  2. Valuation test for SaaS-Services combo businesses: The Pivotal offering could also set a positive precedent for companies evolving from a pure services or consulting-based business model to a SaaS or subscription-based business. That could bode well for software unicorns such as Palantir.

Private Tech Valuations Continue To Rise In Public Markets: Recent IPO activity among VC-backed tech companies has been quite encouraging. Cybersecurity firm Zscaler upped its IPO at $16 per share after an initial range of $13 to $15 per share. Zscaler’s IPO was effectively valued at 99 percent above its most recent private funding round. Dropbox and Spotify have also enjoyed warm receptions on Wall Street. Pivotal’s proposed $4 billion valuation in the public markets (assuming the high-end of its IPO pricing range) would compare favorably to its $3.3 billion private valuation.

Because tech IPOs can serve as a key indicator of investor sentiment, the ongoing uptick in valuations as private companies seek public valuations is a promising sign for the more than 200 unicorns waiting to go public. We could very well see another wave of IPOs, as well as significant value creation for institutional and individuals investors and employee shareholders.

Including Pivotal, we’ve tracked 25 VC-backed tech IPOs over the past 24 months in the chart below. According to our data, 17 companies enjoyed IPOs that exceeded recent private valuations, while eight companies suffered down-round IPOs. Year to date, we haven’t had a down-round IPO.

Source: Google Finance; SharesPost Research; Spotify IPO valuation assumed at $28.5 billion; Pivotal IPO valuation assumed at $4.0 billion; Chart excludes Stitch Fix IPO which implied a 595 percent estimated premium.

Background: Rob Mee founded Pivotal in 1989 as a software consulting and services shop. The San Francisco company was acquired by EMC in 2012. By April 2013, it was spun out into a new business, Pivotal Software. The company has raised $1.7 billion in venture funding since 2013, including investments from General Electric, Ford, and Microsoft. Pivotal offers two ways to generate revenue: services and a “Pivotal Cloud Foundry” (PCF) for companies that want to build native cloud software using open source code. The PCF is essentially a platform that integrates all the components necessary to create software to run on both public and private clouds. This includes an operating system, security framework, networking engine, and data services. Companies pay Pivotal a subscription fee to access the PCF. This kind of business model is much more stable than services.


The Upside Scenario

Ongoing shift toward subscription revenues: In fiscal year 2015, more than two-thirds of Pivotal’s annual revenues came from services, compared to 34 percent for the PCF business. Today, PCF subscriptions make up 51 percent of its annual revenue.

Gross margin trending higher: Pivotal generated a 43.1 percent gross margin last year, a significant jump from 33.3 percent in fiscal 2015.

Big corporate backer: Dell continues to own 70 percent of Pivotal. Dell’s controlling ownership will likely mean lower volatility in share price.


The Downside Risk

A very crowded market: Competition includes large incumbents like Oracle, IBM, SAP, as well as an evolving list of niche players.

Child needs to grow up: Pivotal remains heavily dependent on Dell-EMC, VMware, and Dell Technologies. Pivotal initially received back-office and administrative services from DellEMC and VMware. Today, Pivotal relies on DellEMC and VMware to market and sell its products and services. We will wait and watch how Pivotal operates as an independent public company going forward.

Ongoing operating losses: Pivotal lost $168.3 million from operations last year. That’s a big number but still a significant improvement over fiscal year 2015, when it reported a $272.7 million operating loss.



Please Read These Important Legal Notices and Disclosures

CONFLICTS: This report is being published by SharesPost Research LLC and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost Inc. SP Investments Management is the investment manager of the SharesPost 100 Fund, a registered investment company, and other funds.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction. This report does not constitute an offer to provide investment advice or services. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that these companies have endorsed, supported, or otherwise participated with SharesPost. Company “thesis” is the opinion of SharesPost and is not a recommendation to buy, sell, or hold any security of such company.

Investors should be aware that, at any given point in time, the SharesPost 100 Fund (the “Fund”) may or may not have an ownership interest in any of the issuers discussed in the report. Accordingly, investors should not rely on the content of this report when deciding whether to buy, hold, or sell interests in the Fund. Instead, investors are encouraged to do their own independent research. Before investing in the Fund, investors are cautioned to carefully consider the investment objectives, risks, charges, and expenses before investing. For a prospectus containing more information about the Fund, please visit www.sharespost100fund.com. Read the prospectus carefully before investing.

ANALYST CERTIFICATION: The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost Inc. and its subsidiaries and the performance and productivity of such analyst, including (1) feedback from clients of the SharesPost Financial Corporation and other stakeholders in our ecosystem, (2) the quality of such analyst’s research, and (3) the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost Inc., including brokerage sales.

DISCLAIMER: This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks. You should complete your own independent due diligence regarding the investment, including obtaining additional company information, opinions, financial projections, and legal or other investment advice.

Investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, SharesPost Investment Management, the SharesPost 100 Fund, and the SharesPost 100 List are all registered trademarks of SharesPost Inc. All other trademarks are the property of their respective owners.

Copyright © SharesPost, Inc. 2018. All rights reserved.

Rohit Kulkarni
Article Author

Rohit Kulkarni

Rohit is the Managing Director, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, Rohit was a Vice President, Senior Analyst at RBC Capital Markets.

Pivotal

Pivotal

Sector: Analytics/Big Data
Founded: 2013
FULL COMPANY PROFILE

PLEASE READ THESE IMPORTANT LEGAL NOTICES AND DISCLOSURES

This blog post is being published by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management, LLC., an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc. SP Investments Management, LLC is the investment manager of the SharesPost 100 Fund, a Registered Investment Company, and other funds. These entities and funds (hereafter “SharesPost”) does, seeks to do business with and owns the companies covered in this research report. Consequently, investors should be aware that SharesPost has a conflict of interest that could affect the objectivity of this report.

None of the information contained in this blog post represents an offer to buy or sell or a solicitation of an offer to buy or sell any security and no buy or sell recommendation should be implied, nor does it constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation, do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax or transactional advisory services.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company.

Important Notice

You are now leaving the SharesPost 100 Fund area of the SharesPost website and proceeding to either a) SharesPost Inc. and its affiliates including SharesPost Financial Corporation, a separate company registered as a broker/dealer with the Securities and Exchange Commission and member of FINRA/SIPC, and SharesPost Investments Management, LLC, a registered investment advisor, or b) to another third party, including UMB Fund Services, Inc. and Foreside Fund Services, LLC, both SharesPost 100 Fund service providers.

go back continue