Pivotal Software (PVTL) is pivoting sharply this morning after reporting Q1 (Apr) results/guidance last night. PVTL provides software development tools so that developers can create new cloud-native applications more quickly and easily. The AprQ results were pretty good but the guidance was a disappointment to investors.
For Q2 (Jul), Pivotal is expecting a loss, but that's in-line with expectations. The problem is on the revenue line as guidance of $185-189 mln is well below consensus and it's the same for the full year: EPS generally in-line but revenue guidance well below.
So, what is going on here? Pivotal says customer expansions are going well and it ended AprQ with 383 subscription customers, up 13% yr/yr. The problem is that PVTL closed fewer deals than it expected in the quarter, citing sales execution and a complex technology landscape that is lengthening sales cycles.
On the call, PVTL explained that some of the deals it expected to close in AprQ slipped. A few of those have already closed in early JulQ and PVTL expects some to close in the remaining quarters of this fiscal year. To improve its sales execution, PVTL has hired a new Head of Sales for the Americas. PVTL also plans to "focus on building pipeline by increasing demand-gen and sales-enablement activities and introducing a new version of PAS that runs on Kubernetes," according to CEO Robert Mee.
The worst things for investors to hear from a company are comments like: "sales execution issues", deals getting pushed back, or sales cycles lengthening. It could mean that its software platform is becoming less relevant in the market, or the company is losing competitive bids to other providers and it could mean management does not have a good handle on the problem areas and what to do to handle these issues.
It has not been PVTL's habit in its history to have results like this. Previously, the company had a long history of raising guidance when reporting earnings. Now between this quarter and last quarter, PVTL has now had back-to-back quarters of an in-line result and downside revenue guidance. Investors may have given PVTL the benefit of the doubt last quarter, but now are clearly spooked.
While it may be tempting to bargain shop down here, we would be cautious with PVTL until we feel comfortable that management has a good handle on what has been going wrong and we would need to see some improvement in the financial results. This may take a few quarters. On a final note, PVTL has a large/heavy float of 76.25 mln shares with a pretty small short interest of 4.6% so a quick bounce back seems unlikely.