Under The Hood Of Pivotal Software And Smartsheet’s IPOs

It’s IPO season at the moment, with Dropbox freshly launched, Zscaler out and about, and Spotify on the horizon. But those aren’t the only debuts looking to float. Next up could be Pivotal Software and Smartsheet.

The two companies filed recently (March 23 for Pivotal, March 26 for Smartsheet), so today we’ll take a quick look at the pair’s numbers to get a better sense of their respective health. As they will go out likely in a similar-ish timeframe (barring calamity), looking at them together doesn’t seem inappropriate.

We’ll begin with Pivotal, look at its funding history, peek at its operating results, and then do the same for Smartsheet. In we go.

Pivotal Software

Pivotal, a 2012 spinout from VMware and EMC, raised extensive capital during its short life as an independent company. The self-described “cloud-native platform” shop raised an enormous $946 million Series A in 2013 from its parents (EMC, VMware), a comparatively modest $105 million Series B from General Electric also in 2013, and a $653 million Series C in 2016 from investors including Ford.

That’s about $1.7 billion in capital, according to Crunchbase’s calculations.

So, what has all that fundraising bought? For the fiscal year ending February 2, 2018, Pivotal had revenue of $509.4 million, up from $416.3 million the year before. The company’s revenue in its last fiscal year (up 22 percent, roughly), was split roughly 50-50 between subscription top line and services income.

As you might expect, the former has much higher margins than the latter. Pivotal generated $281.0 million in gross profit in its February-ended fiscal year, up nearly $100 million from the preceding year. And, despite increased costs in each operating category, the company’s GAAP net loss fell to $163.5 million, from $232.9 the preceding fiscal year.

Looking at a non-cash costs, the firm’s share-based comp costs came in between $28 million and $29 million its last two fiscal years, so the company’s GAAP losses are material. Indeed, Pivotal’s operating activities consumed $116.5 million in its last fiscal year, albeit an improvement from a $166.4 million operating cash burn the fiscal year before.

Still, there is some hope. Pivotal’s last fiscal year’s gross margin of 55 percent was up from 44 percent the year before, and up from 33 percent the year before that. That’s a ramp towards profits, just a long one from a company that remains so deeply unprofitable.

And why is Pivotal going public? It needs the money. With just $73 million in cash on its books, the firm needs more cash to feed its growth or it dies. Still, observing Pivotal’s quarterly results we can see generally falling net losses, and generally growing revenue. That’s worth something.

Smartsheet

Smartsheet is an interesting company. Based in Bellevue (that’s somewhere near Seattle, but not Redmond, where Microsoft is located), the SaaS work management tool (projects, tasks, calendars, etc) raised just over $106 million in its life, across four rounds.

Founded in 2005, Smartsheet raised $1.5 million in 2010, $17.5 million in 2012, $35 million in 2014, and $52.1 million in 2017.

That funding ramp helped the company grow to $111.3 million in top line during its fiscal year ending January 31, 2018. That was up about 66 percent from its preceding fiscal year ($66.9 million), which in turn was up 64 percent from $40.8 million.

That all sounds nice, until we examine the firm’s incredible net loss expansion. That’s not really what you want to hear, but observe the figures:

• Fiscal year ending January 31, 2016 net loss: $14.3 million (35.0 percent of revenue)
• Fiscal year ending January 31, 2017 net loss: $15.2 million (22.7 percent of revenue)
• Fiscal year ending January 31, 2018 net loss: $54.7 million (49.1 percent of revenue)

So, that’s yucky. Especially as the firm claims that a 130 percent “dollar-based net retention rate for all customers” in its most recently concluded fiscal year, up from 122 percent the fiscal year prior, and 113 percent the fiscal year before.

So, the company’s SaaS compound rate has gone up, while its percentage growth rate has been flat (no sin there: higher bases and nil percent growth are fine at scale), but its costs have skyrocketed. Why? A few reasons. First, it has raised its operating costs across each category. Again, not a huge sin. But the company did take a $15.5 million charge in its quarter ending July 31, 2017 relating to its “2017 Tender Offer.” Thus, to understand the firm’s rising unprofitability, we’ll have to grok that event.

In short, the firm allowed “current and former employees and directors” to sell $55 million in shares. That led to a share-based compensation cost of $15.5 million to the company due to a “premium over the fair value of the shares of common and convertible preferred stock.” So, that $15.5 million is a big whatever, for today at least.

So what happens to the firm’s net loss as a percent of revenue for the fiscal year ending January 31, 2018 if we cut out that line item? It runs out to 35.2 percent, which is more in line with its two-years-ago figure (see above), and quite higher than its prior-year result.

The question here, it seems, is how much investors like 65+ percent growth at scale (over $100 million in revenue), and if they are willing take on higher operating losses in the short term to buy revenue that may compound at a pretty significant net retention rate.

What’s The Short Version?

Fair ask, given that we ended up going on a bit above. So, as briefly as we can:

• Pivotal is a big firm backed by bigger firms that bleeds lots of money, but has its trend lines moving in the right direction (revenue up, losses down). The question for it is how the public market will value a company that consumes so much cash, and is only growing in the 20s.
• Smartsheet is a rapid-compounding SaaS firm that has an interesting cost question baked into its S-1. What trailing revenue multiple it can pick up going public could help us understand how to value other SaaS companies. However, not all its recent losses are real, as we learned from examining its recent tender offer.

There, now you are all prepped!