Pivotal Software Inc.
Cloud software has been a hot sector for initial public offerings, but now we will see how Wall Street feels about cloud software used to make more cloud software.
Pivotal Software Inc. announced early Friday that it would sell at least 37 million shares in its IPO at a price of $15, the midpoint of the expected price range of $14 to $16. That price values the software company at $3.75 billion based on shares outstanding as of the offering, and will raise at least $555 million in proceeds. Pivotal will receive the bulk of the proceeds, but General Electric Co. , which invested in Pivotal in 2013, sold about 3.9 million shares in the offering to receive about $58 million.
Shares are expected to begin trading Friday morning on the New York Stock Exchange under the ticker symbol PVTL. Underwriters — Pivotal lists 15 banks working on the offering, led by Morgan Stanley, Goldman Sachs and Citigroup — will have access to an additional 5.5 million shares.
Here’s what you need to know:
Cloud software to manage cloud software
Pivotal’s main product is Pivotal Cloud Foundry, or PCF, a software program sold on a subscription basis that developers and IT departments use to help build, deploy and operate cloud-based software and applications. Put bluntly, it is cloud software that helps build and use cloud software. The company also offers services through a division called Pivotal Labs, which helps companies develop software and make changes to adapt to extensive use of cloud computing and software as a service.
In its prospectus filed with the Securities and Exchange Commission, Pivotal claims that 50 of the Fortune 500 companies use its products. Customers include airlines such as American and Southwest, airplane maker Boeing Co., and health-care companies such as Express Scripts and Humana.
Cloud software has been one of the hottest areas of the IPO market for years, and that trend has continued in 2018. So far this year, cloud-security company Zscaler Inc. and cloud-storage offering Dropbox Inc. have been two of the biggest IPOs in the tech sector. Last week, Zuora Inc. , a cloud-software company that helps companies manage subscription businesses, commanded a hefty valuation in its IPO.
Growing revenue, shrinking losses
Pivotal revenue topped a half-billion dollars for the first time in the most recent fiscal year, which ended Feb. 2, thanks to growth of 22% from the year before to $509.4 million. Revenue growth is slowing, however, as sales jumped 48% from $280.8 million to $416.3 million.
The company is cutting down on losses, however. Pivotal’s net loss was actually greater than its revenue in 2016, when the company lost $282.7 million. The next year, it cut losses down to almost half of revenue at $232.5 million, and losses equaled less than a third of revenue in the most recent year, when the company lost $163.5 million.
Subscription revenue is rising faster, with those sales growing at a 73% clip and now making up more than half of revenue.
The Dell-EMC-VMware connection
Pivotal was founded in 2013, but its roots go back much farther. Chief Executive Robert Mee founded a company called Pivotal in 1989, which was acquired by EMC in 2012; EMC combined that company with some assets from another public company that it partially owned, VMware Inc. , to create Pivotal. GE invested in the company at that time.
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Since then, EMC has been acquired by Dell Technologies Inc., a longtime tech giant that went private before it acquired EMC. Pivotal is now majority owned by DellEMC, though Ford Motor Co. and Microsoft Corp. also bought stakes in a 2015 investment round. The connection helps Pivotal because it can sell products in packages with hardware sold by DellEMC, or in coordination with VMware’s own software offerings — transactions processed through those two other companies represented 46%, 44% and 37% of Pivotal revenue in the last three years, respectively.
“We jointly market and sell our products and services with DellEMC and VMware and enjoy significant and mutually beneficial commercial and go-to-market relationships,” the company stated in its prospectus.
Dell is in control
That investment gives Dell complete control of Pivotal, even after the IPO. The company will own about 70% of the stock after the offering, making Pivotal a “controlled company,” a designation that allows it to avoid certain corporate governance restrictions.
While that control is substantial, it apparently was not enough for Dell and Pivotal. The company also is establishing two tiers of stock with different voting powers — investors in the offering will receive class A shares, while Dell and other early investors will hold class B shares. The class B stock will have 10 votes for every share to one vote for class A shares.
That move supersizes Dell’s control: While it will hold about 70% of the stock after the offering, it will control almost 96% of the voting power. That could allow Dell to sell the business or make other major moves without the approval of common stockholders, and means Dell must approve many potential important decisions the company makes.
Competition from big players
Pivotal may actually compete with Dell and VMware in some areas, it warns in its prospectus, which shows just how quickly friends can become enemies in the competitive software sector. That dynamic is not limited to Dell and VMware, though, and will likely be much more dangerous elsewhere.
Specifically, Pivotal could face stiff competition from the major cloud-computing vendors: Amazon.com Inc.’s Amazon Web Services, Alphabet Inc.’s Google Cloud and Microsoft’s Azure. Pivotal lists all three as potential competitors, even as it celebrates their partnerships.
“We have received numerous industry awards, including in 2017 the Google Cloud Technology Partner of the Year for 2016 and an Azure consumption partner of the year award from Microsoft for 2016,” Pivotal notes early in its prospectus.
Other competitors named by Pivotal include International Business Machines Corp. , Oracle Corp. and Red Hat Inc.