Analysts Point To Pivotal Software's Sales Execution Issues Following Mixed Q1

Pivotal Software Inc PVTL reported a first-quarter loss Tuesday and issued below-consensus guidance for fiscal 2020.

The Analysts

Morgan Stanley analyst Sanjit Singh maintained an Overweight rating on Pivotal and lowered the price target from $26 to $18.

Credit Suisse analyst Brad Zelnick maintained an Outperform rating and reduced the price target from $25 to $20.

Bank of America Merrill Lynch analyst Nikolay Beliov reiterated a Neutral rating and cut the price target from $25 to $20.

KeyBanc Capital Markets analyst Alex Kurtz maintained an Overweight rating and lowered the price target from $27 to $21.

Wedbush analyst Daniel Ives downgraded Pivotal from Outperform to Neutral and reduced the price target from $26 to $15.

Morgan Stanley: Return To Durable Growth Could Take Time 

Pivotal's billings miss and subpar revenue guidance are primarily attributable to customer uncertainty on how to best integrate Kubernetes — the emerging standard to manage application containers ÿ into their environment, Singh said in a Wednesday note.

As a result, sales cycles are elongating, he said. 

Pivotal isn't losing deals to rival commercial platforms, as reflected by the closure of some slipped deals in the second quarter, the analyst said. 

Morgan Stanley said it believes customers will take some time to vet their options, which suggests a return to durable growth may take more than one to two quarters, Singh said. Investors who are willing to wait out the period of uncertainty could be rewarded, he said.

Credit Suisse: Equity Priced In Line With Intrinsic Value Of Installed Base Business

Pivotal's results and guidance suggest the shift to containerized architecture and Kubernetes is more disruptive than initially estimated, Zelnick said in a Tuesday note. 

The equity is now priced in line with the intrinsic value of its installed base business, the analyst said. 

"Based on our floor value analysis and sensitivity thereof, we believe $13 represents a floor value for stock," he said.

Credit Suisse said it sees the potential for self-help and even strategic optionality as part of the broader Dell Technologies Inc DELL/ VMware, Inc. VMW family.

See also: Pivotal Still Sees Plenty Of Growth Opportunities At Amazon

BofA: Higher Sales Spending To Impact Performance

Poor sales execution in the first quarter was responsible for the weak guidance, as Pivotal added six new customers and closed fewer deals than expected due to an inherently complex product sale, Beliov said in a Wednesday note. 

The company is planning to overcome this handicap by hiring a new North American head of sales and investing further in direct sales representatives, the analyst said. 

BofA lowered its estimates for revenue growth, EPS and margins as Pivotal increases spending on GTM initiatives.

"Despite the poor results, we reiterate our Neutral rating given strong technology," Beliov said. 

KeyBanc Sees Shift In Demand

The first-quarter performance was mixed, Kurtz said: subscription revenues exceeded estimates, while services revenues were weaker than expected.

The shift in demand due to the longer time taken by customers to close deals was responsible for the weak guidance, the analyst said. 

The analyst said he sees the post-earnings stock reaction as reflecting a "worst-case scenario." 

Wedbush: 'Cracks In The Business Model' 

Notwithstanding mixed first-quarter results and weak guidance, the overall opportunity for Pivotal remains attractive given the surge in cloud-native spending, Ives said in a Wednesday note. 

The quarter was a game changer, as it was plagued by execution issues in North America and a shift in cloud product strategy, the analyst said. 

Pivotal is set to be it by company-specific and secular headwinds, and its profitability prospects are now pushed further out, with a softer top-line on the horizon, Ives said. 

"Strategically speaking, PVTL could be an M&A prospect down the road, but ultimately no strategic/financial buyer in our opinion would take a serious look at this name right now given the current cracks in the business model, which call into question the future growth opportunity for the company over the coming years." 

The Price Action

Pivotal shares were plunging by 43.96 percent to $10.38 at the time of publication Wednesday. 

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Photo courtesy of Pivotal Software.