Pivotal Software is a provider of a cloud-native platform that makes software development and IT operations a strategic advantage for its customers. Its cloud native platform, Pivotal Cloud Foundry, accelerates, and streamlines software development by reducing the complexity of building, deploying, and operating new cloud-native applications and modernizing older applications. This helps its customers spend more time writing code and waste less time on mundane tasks and focus on activities that drive business value.
In addition to its PCF platform, its complementary PCF and Labs offering enables organizations to effectively build cloud-native software and compete in today's business environment. Its customers often start with smaller PCF deployments in specific groups or departments and then expand their subscriptions as they seek to deploy and manage more applications and other workloads.
Circling back to its 2Q19 report, PVTL posted a loss per share of ($0.06), beating analysts ($0.09) expectation. This follows last quarter's $0.03 beat, so in both of PVTL's earnings report since going public on April 20, it has exceeded analysts' bottom line expectations. Gross margin also improved sharply to 62.8% compared to 55.3% in the year ago period.
PVTL did ramp up its Sales & Marketing expense considerably, though, up 33% to $70.6 mln, representing 42.9% of revenue. That is up a bit from 2Q18's 41.9%, which isn't the most encouraging sign as it suggests PVTL is having to invest more heavily in sales in order to boost top-line growth.
Still, its operating loss did improve slightly to ($35.4) mln from ($36.3) mln a year ago, and, it generated positive operating cash flow of $18.4 mln versus negative cash flow of ($56.5) mln in Q2 of last year.
Shifting to the top-line, revenue was up 30.5% to $164.4 mln, also ahead of the $158.1 mln consensus. And, in fact, the 30.5% jump is a modest acceleration from last quarter's 28.5% increase. That's the good news. But, where many investors are focusing in on is its billings and the deferred revenue line. On billings, which is a good barometer for current demand as it measures only new business won during the period, PVTL missed analysts' expectations by $25 mln.
Similarly, current deferred revenue, which are contract liabilities that include payments received in advance of performance under the contract, dropped by more than 6% from last quarter to $244.7 mln. In other words, PVTL received less up-front payments from customers this quarter, as compared to last, indicating that demand in Q2 was weaker than it was in Q1.
That said, a couple other metrics do demonstrate that business certainly isn't falling off a cliff. Namely, dollar-based net expansion rate was an impressive 150%, virtually inline with last quarter's 156%. This is an indicator of its customers' expanded use of and demand for its platform. Additionally, the company added another 15 subscription customers during the quarter, for a total of 354. Subscription customers are defined as the number of organizations that have a contract resulting in at least $50K in annual revenue.
To conclude, the slip in bookings and dip in current demand have tarnished an otherwise strong report. The substantial improvement in cash flow generation is especially notable, as is the jump in gross margin and healthy dollar-based net expansion rate. But, based on the magnitude of the downside move, investors don't appear willing to give PVTL the benefit of the doubt, concerned that demand really is decelerating rapidly.