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Pivotal IPO Filing Reveals Dell, VMware Partnership Benefits, Risks

Pivotal Software, Dell Technologies’ cloud computing startup, is pursuing an IPO (Initial Public Offering) that could be worth up to $100 million, according to an SEC filing. That filing also reveals how Pivotal must balance big benefits and big risks from its relationships with Dell Technologies and VMware.

Pivotal offers Cloud Foundry (PCF), a multi-cloud platform that allows customers to rapidly  deliver apps, containers and associated functions. The company also offers various application, container and marketplace services. Demand for those offerings is growing rapidly.

Pivotal Business Focus, Revenue Growth

Among Pivotal’s key performance indicators mentioned in the filing:

  • Subscription revenues reached $259 million in fiscal 2018, up from $150 million in 2017 and $95 million in 2016. That represents year-over-year growth of 58 percent and 73 percent in the two most recent fiscal years. The company had 319 subscription customers as of the end of fiscal 2018.
  • Total revenues were $509.4 million in fiscal 2018, up from $416.3 million in 2017 and $280 million in fiscal 2016. That represents year-over-year growth of 48% and 22% for the company’s two most recent fiscal years.
  • Net losses have been shrinking, falling from $282.7 million in fiscal 2016 to $232.9 million in fiscal 2017 and $163.5 million in fiscal 2018.

    Pivotal Software’s subscription customer count. Source: SEC Filing, March 23, 2018

Pivotal, Dell and VMware: Partnership Benefits, Risks

Throughout the filing, Pivotal highlights how Dell’s ownership helps the software company in a range of ways. Pivotal’s relationship with VMware — which Dell also largely owns — also delivers some key benefits, the filing indicates.

Roughly 37 percent of Pivotal’s revenue involved agency agreements with Dell EMC and VMware in fiscal 2018, down from 46 percent in 2016. Clearly, Pivotal benefits from the partnerships in a big way. But that also involves some risk. “Any adverse changes in our joint sales arrangements or the effectiveness of such arrangements with DellEMC or VMware could have a material impact on our results of operations,” the filing warns.

Moreover, the tight alliance across Dell, VMware and Pivotal also comes with broader partner ecosystem and competitive risks.

As the filing points out:

“Dell Technologies could also assert control over us in a manner which could impede our growth or our ability to enter new markets or otherwise adversely affect our business. Further, Dell Technologies could utilize its control over us to cause us to take or refrain from taking certain actions, including entering into relationships with strategic, technology and other marketing partners, enforcing our intellectual property rights or pursuing corporate opportunities or product development initiatives that could adversely affect our competitive position, including our competitive position relative to that of Dell Technologies or VMware in markets where we compete with them.”

Dell-VMware Reverse Merger: More Concerns?

The Pivotal IPO filing comes as Dell evaluates a potential reverse merger with VMware. Multiple shareholders have already expressed concerns about that potential Dell move. Chief among them: Shareholders don’t want VMware’s fast-growth network- and storage-virtualization businesses to get bogged down with Dell’s slower-growth, lower-margin, massive hardware businesses.

Michael Dell and his advisors apparently want to reach a decision on the potential reverse merger within the next several weeks, with multiple sources pointing to Dell EMC World 2018 (April 30 – May 3) as a potential announcement target. Both Michael Dell and VMware CEO Pat Gelsinger are scheduled to keynote the conference.

Multiple reports reinforce that there’s a chance Dell may decide not to pursue the reverse merger.

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