Pivotal Software’s IPO Pricing Shoots For Healthy Revenue Multiple

Quick Note: Pivotal Software’s IPO detailed an initial price range this week. With a $14 to $16 per-share estimate, the firm is shooting for a robust revenue multiple when it goes public.

When we last peeked at Pivotal Software’s IPO we noted its large revenue, slowing growth, services and subscription mix, and more. Today we add pricing to the mix.

In an updated filing this week, Pivotal Software detailed its first pricing guess: $14 to $16 per share. At the upper end of that range, the firm would generate $680.8 million from selling 42,550,000 shares. That sum includes a number of adulterants, including over-allotment allocations, shares sold from existing holders and the like. Pivotal Software itself is selling just 33,117,000 in the offering before other blocs are accounted, implying a haul of $529.9 million, or $617.9 million including a 5,550,000 over-allotment option afforded to underwriters.

So what’s the firm worth at a $14 or $16 price? According to the firm’s S-1/A, after its IPO, it will have 217,119,392 shares outstanding, before taking into account stock options, reserved future grants, and its various equity compensation plans. So, at that number, the company is aiming for a valuation of between $3.04 billion and $3.48 billion.

If you take into account future-promised shares, the company’s fully-diluted market cap is even higher.

And that fact is why we’re highlighting Pivotal’s pricing cycle. Normally with a company so quiet we’d skip to the final pricing and drop you a note on its first-day performance. However, in this case, the company’s pricing is interesting. So let’s take a moment and explore why.

Quick Notes On Revenue

To understand why Pivotal’s pricing is eye-catching, we have to start with its revenue. Namely, it’s revenue growth, revenue mix, and gross margin production.

• Revenue Growth: Pivotal’s revenue growth has dramatically slowed in recent quarters. The firm grew 48.2 percent in its fiscal year ending February 3, 2017. In its fiscal year ending February 2, 2018, the company grew just 22.4 percent. That is a dramatic slowdown. Adding to the bad news: the firm’s quarterly revenue results don’t show a re-acceleration of growth, possibly presaging another year-over-year percentage revenue growth decline.
• Revenue Mix: Around half of Pivotal’s revenue comes from services, which had gross margins of just 21 percent in its last fiscal year, give or take. The company’s other revenue halve, its subscription top line, had a far-healthier 88.2 percent gross margin during the same period.
• Gross Margin: Thus Pivotal’s gross margin production from its more-than-$500 million revenue mark is light for a modern software company. Indeed, the firm generated just $281.0 million in gross margin in its last fiscal year, despite operating expenses of $449.3 million.

The firm’s revenue growth has slowed, it has a tough revenue mix, and it generates not nearly enough gross margin to cover its costs.

Notably, from its trailing revenue result of $509.4 million, the firm wants a multiple of around six to seven. The actual figures are 5.97x, and 6.83x, rounding gently.

Why is that surprising? Box, a company that is around the same size, has around a 5.5x revenue multiple (trailing). It’s growing more quickly, has a better revenue mix, smaller GAAP loses (though not by much), and, critically, positive free cash flow. Pivotal consumed $116.5 million in cash just to cover its operating deficits in its last fiscal year. This is not to say that Box is a high mark for revenue multiples; there are far higher figures to be found. But why Pivotal thinks it deserves one is interesting.

More when it prices.