The one big hiccup came in 2Q18 when the company’s remaining performance obligations (RPO), a measure of future revenue streams, fell from $800 mln in Q1 to $790 mln in Q2. The dip caused the stock to crater by about 20% the following day on September 13. While the stock has rebounded sharply off of its late December lows, it still hasn't erased those losses.
Outside of that disappointment, the company's outperformance relative to expectations can largely be attributed to its strategy to focus on driving subscription growth higher, compared to services revenue. PVTL believes its services are already at scale and it is using services to drive subscription growth. For example, as a customer signs on with PVTL, it will use the services side to help customers implement its Pivotal Cloud Foundry (PCF) product and then steer them towards additional deployments that they, or other departments, can use.
This "land and expand" approach has resulted in expanding gross margin as subscription revenue carriers higher margins than services, and, it has driven its dollar-based net expansion rate to very impressive 150%+ levels. PVTL has also been steadily adding more large "blue chip" customers, as it calls them, providing another boost.
But, with the stock rallying sharply higher heading into tonight's report, PVTL will likely need to keep its winning streak alive versus consensus estimates, and, its other key metrics will also need to impress in order to keep this momentum going.
In its Q3 report, the company issued guidance for Q4, seeing a loss per share of ($0.10)-($0.09) and revenue of $169-$171 mln. The consensus sits right at those figures at ($0.09) and $170.2 mln. In order to meet the Street's expectations for 1Q19, it will need to guide for a loss per share of ($0.05) and revenue of $189.9 mln, representing yr/yr growth of 22%.
As noted above, PVTL has established a track record of beating expectations. That said, investors shouldn't be anticipating blow out results from the company as it has exceeded bottom line estimates by just $0.03 in each of the past three quarters. Its revenue upside has been a little more considerable, but, the magnitude of the outperformance there has shrunk quarter to quarter.
Similarly, the company has generally provided EPS guidance inline with expectations, but, with revenue guidance that is modestly above estimates.
In addition to the main headline numbers, there are a few other key metrics that could drive the stock. First and foremost is RPO, which represents the estimated value of its billed and unbilled subscriptions and services. There is some quarterly seasonality tied to this metric, with variability from the peak in Q4, relative to subsequent quarters.
- Remaining Performance Obligations: As noted above, RPO fell in Q2, which sank the stock, despite the upside EPS and revenue performance. During that earnings call, management commented that in Q1, the start dates and pre-payments worked in its favor, while, in Q2, it did not experience that same level of favorability.
- Last quarter, RPO came in at $790 mln, flat with Q2, with the company guiding for modest RPO growth in Q4, given the difficult yr/yr compare. Generally speaking, PVTL expects RPO growth rates to decline as it continues to scale its business.
- New Subscription Customers: The company defines new subscription customers as those that have a contract resulting in at least $50K in revenue. Last quarter, PVTL added 14 net new customers, for a total of 368. Prior to that, in Q2 the company added 15 new subscription customers.
- Overall, subscription revenue is becoming a larger piece of the overall pie as the company seeks to expand business with its existing customers. As of last quarter, subscription revenue accounted for 60% of total revenue, as compared to 51% in 3Q17. This helped push its gross margin higher to 62.8% from 55.3% in the year ago quarter.
- Dollar-based Net Expansion Rate: This has been a stand-out metric for PVTL, but, the company does expect it to taper off soon. In Q3, it came in at 150%, inline with Q2's performance, and down very slightly from Q1's 156% mark.
To conclude, PVTL has done well in terms of exceeding earnings and revenue expectations. Also, its focus on driving subscription revenue growth higher is paying dividends in the form of margin expansion and improved bottom line performance. The key, in terms of the stock moving higher, might come from its other key metrics, in particular, its remaining performance obligations, as that will provide a good gauge regarding the current demand environment for its business.