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Why Pivotal Software Stock Fell 35.4% in the First Half of 2019

By Steve Symington - Jul 9, 2019 at 7:11PM

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It took a single day to erase five months of gains.

What happened

Shares of Pivotal Software (PVTL) declined 35.4% in the first six months of 2019, according to data from S&P Global Market Intelligence, after the cloud-native platform specialist significantly reduced its full-year guidance despite beating expectations with its latest quarterly report.

To be sure, after trading modestly higher through the end of May, Pivotal Software stock plummeted 41% in a single day on June 5, when the company told investors its fiscal first-quarter 2020 revenue had climbed 19.3% year over year to $185.7 million, translating to an adjusted net loss of $8.6 million, or $0.03 per share. Analysts, on average, were modeling a loss of $0.05 per share on revenue closer to $184 million.

Man in suit watching red arrow crash through a concrete floor.

Image source: Getty Images.

So what

Pivotal Software's subscription revenue soared 43% year over year to $128.9 million, as its number of subscription customers climbed 13% to 383, and its dollar-based net expansion rate arrived at 143% (anything above 100% indicates renewing customers are spending more with their new contracts). That growth was only partly offset by a 13% decline in services revenue, to roughly $56.9 million.

For the current fiscal second quarter, however, Pivotal is targeting revenue of $185 million to $189 million -- up roughly 13.7% at the midpoint and significantly below the $198 million most analysts were modeling. This range assumes subscription revenue of $131 million to $133 million, good for decelerated growth of roughly 35%.

As such, Pivotal significantly lowered its full-year 2019 outlook to call for total revenue to grow 16% to a range of $756 million to $767 million (down from its old range of $798 million to $806 million, or 22% growth), assuming a 33% increase in subscription revenue to a range of $530 million to $538 million (down from $542 million to $547 million before).

Now what

During the subsequent conference call, CEO Rob Mee blamed closing fewer deals than expected in the first quarter "due to sales execution and a complex technology landscape that is lengthening [the company's] sales cycle."

Mee noted, however, that some of those pushed deals have already closed in the second quarter, while others are expected to close "in the coming quarters." The company has also taken several steps to bolster sales execution, including pipeline-building activities, replacing its head of North American sales, and launching a new version of the Pivotal Application Service (PAS) that runs on the open-source Kubernetes container-orchestration system.

Nonetheless, it was hard to blame the market for so violently bidding down shares in response. And until the company proves its sales execution issues are only temporary, I suspect the stock will remain under pressure.

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