10-Q 1 a18-17070_110q.htm 10-Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

þ          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 3, 2018

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to

 

Commission File Number 001-38460

 


 

Pivotal Software, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

94-3094578

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

875 Howard Street, Fifth Floor

San Francisco, California 94103

(Address of principal executive offices)

(Zip Code)

 

(415) 777-4868

(Registrant’s telephone number, including area code)

 

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer þ

Smaller reporting company o

 

Emerging growth company þ

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ.

 

There were 257,385,436 shares of common stock outstanding, consisting of 81,871,164 outstanding shares of Class A common stock and 175,514,272 outstanding shares of Class B common stock, as of August 31, 2018.

 

 

 



Table of Contents

 

Pivotal Software, Inc.

Table of Contents

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (unaudited)

1

 

Condensed Consolidated Balance Sheets as of August 3, 2018 and February, 2, 2018

1

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended August 3, 2018 and August 4, 2017

2

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended August 3, 2018 and August 4, 2017

3

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 3, 2018 and August 4, 2017

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

26

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3.

Defaults Upon Senior Securities

54

Item 4.

Mine Safety Disclosures

54

Item 5.

Other Information

54

Item 6.

Exhibits

54

Signatures

 

55

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.                        FINANCIAL STATEMENTS

 

Pivotal Software, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

 

 

August 3,

 

February 2,

 

 

 

2018

 

2018

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

671,708

 

$

73,012

 

Accounts receivable, less allowance for doubtful accounts of $3,431 and $3,264 as of August 3, 2018 and February 2, 2018, respectively

 

132,443

 

210,677

 

Due from Parent

 

1,531

 

31,096

 

Deferred sales commissions, current

 

35,594

 

38,937

 

Other assets, current

 

15,698

 

13,012

 

Total current assets

 

856,974

 

366,734

 

Property, plant and equipment, net

 

28,772

 

31,985

 

Intangible assets, net

 

21,752

 

26,651

 

Goodwill

 

696,226

 

696,226

 

Deferred income taxes

 

561

 

463

 

Deferred sales commissions, noncurrent

 

23,960

 

24,890

 

Other assets, noncurrent

 

4,834

 

6,448

 

Total assets

 

$

1,633,079

 

$

1,153,397

 

 

 

 

 

 

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

16,477

 

$

17,214

 

Due to Parent

 

11,576

 

15,451

 

Accrued expenses

 

46,935

 

64,251

 

Income taxes payable

 

1,312

 

1,748

 

Deferred revenue, current

 

244,727

 

260,341

 

Other liabilities, current

 

6,704

 

1,109

 

Total current liabilities

 

327,731

 

360,114

 

Deferred revenue, noncurrent

 

61,882

 

57,126

 

Deferred income taxes

 

131

 

427

 

Debt, noncurrent

 

 

20,000

 

Other liabilities, noncurrent

 

8,520

 

7,931

 

Total liabilities

 

398,264

 

445,598

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Redeemable convertible preferred stock

 

 

1,248,327

 

Stockholders’ equity (deficit):

 

 

 

 

 

Class A common stock

 

819

 

43

 

Class B common stock

 

1,755

 

650

 

Additional paid-in capital

 

2,436,568

 

595,113

 

Accumulated deficit

 

(1,210,722

)

(1,142,600

)

Accumulated other comprehensive income

 

5,720

 

5,554

 

Total Pivotal stockholders’ equity (deficit)

 

1,234,140

 

(541,240

)

Non-controlling interest

 

675

 

712

 

Total stockholders’ equity (deficit)

 

1,234,815

 

(540,528

)

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)

 

$

1,633,079

 

$

1,153,397

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

 

Pivotal Software, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

August 4,

 

August 3,

 

August 4,

 

 

 

2018

 

2017

 

2018

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription

 

$

97,494

 

$

64,566

 

$

187,615

 

$

117,989

 

Services

 

66,914

 

61,444

 

132,528

 

129,231

 

Total revenue

 

164,408

 

126,010

 

320,143

 

247,220

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription

 

8,105

 

7,618

 

16,234

 

15,116

 

Services

 

53,129

 

48,726

 

104,291

 

100,261

 

Total cost of revenue

 

61,234

 

56,344

 

120,525

 

115,377

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

103,174

 

69,666

 

199,618

 

131,843

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

70,550

 

52,875

 

139,688

 

105,032

 

Research and development

 

47,001

 

39,661

 

91,429

 

79,679

 

General and administrative

 

21,025

 

15,364

 

37,433

 

33,777

 

Total operating expenses

 

138,576

 

107,900

 

268,550

 

218,488

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(35,402

)

(38,234

)

(68,932

)

(86,645

)

Other income, net

 

237

 

1,910

 

546

 

2,631

 

Loss before provision for (benefit from) income taxes

 

(35,165

)

(36,324

)

(68,386

)

(84,014

)

Provision for (benefit from) income taxes

 

437

 

(822

)

(227

)

2,832

 

Net loss

 

(35,602

)

(35,502

)

(68,159

)

(86,846

)

Less: Net loss (income) attributable to non-controlling interest

 

(5

)

118

 

37

 

(84

)

Net loss attributable to Pivotal

 

$

(35,607

)

$

(35,384

)

$

(68,122

)

$

(86,930

)

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.14

)

$

(0.52

)

$

(0.38

)

$

(1.28

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

257,240

 

68,330

 

181,404

 

68,142

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Pivotal Software, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

August 4,

 

August 3,

 

August 4,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(35,602

)

$

(35,502

)

$

(68,159

)

$

(86,846

)

Foreign currency translation adjustments

 

5

 

(717

)

166

 

(861

)

Comprehensive loss

 

(35,597

)

(36,219

)

(67,993

)

(87,707

)

Less: Net loss (income) attributable to the non-controlling interest

 

(5

)

118

 

37

 

(84

)

Comprehensive loss attributable to Pivotal

 

$

(35,602

)

$

(36,101

)

$

(67,956

)

$

(87,791

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Pivotal Software, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

August 3,

 

August 4,

 

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(68,159

)

$

(86,846

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,354

 

11,073

 

Stock-based compensation expense

 

29,805

 

11,409

 

Provision for doubtful accounts

 

619

 

 

Deferred income taxes

 

(405

)

209

 

Gain on sale of investment

 

(3,234

)

 

Other

 

1,461

 

855

 

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

76,340

 

13,764

 

Due from Parent

 

(236

)

 

Deferred sales commissions

 

4,272

 

3,024

 

Other assets

 

(2,457

)

(3,746

)

Accounts payable

 

(547

)

4,640

 

Due to Parent

 

(3,185

)

(23,128

)

Deferred revenue

 

(10,554

)

(7,774

)

Accrued expenses

 

(16,213

)

13,468

 

Other liabilities

 

5,959

 

2,086

 

Net cash provided by (used in) operating activities

 

22,820

 

(60,966

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(4,052

)

(8,458

)

Proceeds from sale of investment

 

3,234

 

 

Net cash used in investing activities

 

(818

)

(8,458

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the initial public offering, net of issuance costs paid

 

544,674

 

 

Proceeds from the issuance of common stock

 

9,424

 

3,935

 

Contribution from DellEMC

 

41,277

 

25,800

 

Borrowings on credit facility

 

15,000

 

 

Repayments on credit facility

 

(35,000

)

 

Net cash provided by financing activities

 

575,375

 

29,735

 

Effect of exchange rate changes on cash and cash equivalents

 

1,319

 

(1,798

)

Net increase (decrease) in cash and cash equivalents

 

598,696

 

(41,487

)

Cash and cash equivalents at beginning of period

 

73,012

 

133,873

 

Cash and cash equivalents at end of period

 

$

671,708

 

$

92,386

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.              Overview and Basis of Presentation

 

Company and Background

 

Pivotal Software, Inc. and its consolidated subsidiaries (“Pivotal,” “we,” “us,” “our” and the “Company”) provide a leading cloud-native application platform, Pivotal Cloud Foundry (“PCF”), and differentiated services, Pivotal Labs (“Labs”). Our leading software platform and differentiated services enable enterprises to adopt modern software and development methodologies that transform their products and the economics of their business. We help make software development and operations a strategic advantage for our customers to revolutionize the experiences they offer their own customers, drive new sources of revenue and improve the speed and cost of business operations. We were incorporated in the State of Delaware on April 1, 2013.

 

Reverse Stock Split

 

In April 2018, the Company’s board of directors (the “board of directors”) and stockholders approved an amendment to the Company’s amended and restated certificate of incorporation effecting a 1-for-2 reverse stock split of the Company’s issued and outstanding shares of common stock and preferred stock. The reverse split was effected on April 6, 2018. The par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding share and per share amounts included in the accompanying unaudited condensed consolidated financial statements have been adjusted to reflect this reverse stock split for all periods presented.

 

Fiscal Years

 

Our fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. Our 2018 fiscal year (“fiscal 2018”) ended on February 2, 2018 and our 2019 fiscal year (“fiscal 2019”) ends on February 1, 2019.

 

Initial Public Offering

 

On April 19, 2018, we commenced an initial public offering (“IPO”), which closed on April 24, 2018.  As part of the IPO, we issued and sold 38,667,000 shares Class A common stock, which included 5,550,000 shares sold pursuant to the exercise by the underwriters’ option to purchase additional shares at a public offering price of $15.00 per share. We received net proceeds of $548.1 million from the IPO, after underwriters’ discounts and commissions and before deducting offering costs of approximately $3.7 million, of which $0.3 million is accrued as of August 3, 2018. Prior to the completion of the IPO, all shares of Series A and C-1 redeemable convertible preferred stock then outstanding were converted into 110,466,653 shares of Class B common stock on a one-to-one basis and all shares of Series B and C redeemable convertible preferred stock then outstanding were converted into 37,412,396 shares of Class A common stock on a one-to-one basis.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated financial statements include the results of Pivotal Software, Inc. and its wholly-owned and majority-owned subsidiaries.  The condensed consolidated balance sheet as of February 2, 2018 included herein was derived from the audited financial statements as of that date. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the information contained herein reflects all adjustments necessary for a fair presentation of Pivotal’s results of operations, financial position and cash flows for the periods presented. All such adjustments are of a normal, recurring nature. The results of operations for the periods presented in this report are not necessarily indicative of results to be expected for the full fiscal year 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements filed pursuant to Rule 424(b) under the Securities Act of 1933 on April 20, 2018 (the “Prospectus”).

 

Following the acquisition of EMC Corporation by Dell Technologies Inc. (“Dell Technologies”) in September 2016 our majority stockholder became Dell Technologies. DellEMC and VMware, Inc. (“VMware”), which is also a majority-owned subsidiary of Dell Technologies, are collectively referred to as the “Parent” in these notes to the condensed consolidated financial statements. “DellEMC” refers to EMC Corporation, the wholly-owned subsidiary of Dell Inc. and the indirect wholly-owned subsidiary of Dell

 

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Technologies that directly and indirectly holds shares of our Class B common stock, whether before or after its acquisition by Dell Technologies. Our results of operations and financial position are consolidated with Dell Technologies’ financial statements.

 

Our financial information includes estimates and allocations of certain corporate functions provided to us by DellEMC. These estimates and allocations of costs are considered reasonable by our management. Our historical results are not necessarily indicative of what our results of operations, financial position, cash flows or costs and expenses would have been, or will be in future periods, had we transacted with a third party during the periods presented.

 

For fiscal 2018 and the fiscal 2019 period prior to the IPO, we did not file separate U.S. tax returns as we were included in the tax grouping of other Dell Technologies entities for U.S. federal tax purposes and for most U.S. state tax jurisdictions. As of the date of the completion of our IPO, April 24, 2018, we no longer qualify for inclusion in the Dell Technologies U.S federal consolidated tax return. Our federal deconsolidation from Dell Technologies reduces the amount of benefit or expense we receive from the tax sharing agreement in prospective periods to the benefit or expense that Dell Technologies realizes from our inclusion in their unitary state returns. See Note 10 and 13 for more information.

 

2.              Significant Accounting Policies

 

Consolidation

 

The condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP and include our accounts and the accounts of our majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Accounting Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Estimates are revised as additional information becomes available. In the condensed consolidated statements of operations, estimates are used, but are not limited to, when accounting for revenue arrangements, income taxes and the related valuation allowance and the valuation of common stock options. In the condensed consolidated balance sheets, estimates are used in, but are not limited to, the determination of the valuation and recoverability of assets, such as accounts receivable, fixed assets, deferred sales commissions, goodwill and other identifiable intangible assets, and estimates are used in determining the reported amounts of liabilities, including the impact of contingencies, all of which also impact the condensed consolidated statements of operations. Actual results could differ from these estimates and such differences could be material to our condensed consolidated financial position and results of operations.

 

Significant Accounting Policies

 

There have been no changes to the Company’s significant accounting policies described in the Company’s Prospectus.

 

Recently Adopted Accounting Pronouncements

 

Statement of Cash Flows—In August 2016,the Financial Accounting Standards Board (“the FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The update was issued with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. The adoption of this pronouncement was effective beginning with our fiscal 2019 period and had no effect on our financial position, results of operations or liquidity.

 

Income Taxes—In October 2016, the FASB issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Prior to the issuance of this ASU, existing guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. The adoption of this pronouncement was effective beginning with our fiscal 2019 period and it had no effect on our financial position, results of operations or liquidity.

 

Business Combinations—In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies when transactions should be accounted for as acquisitions (or disposals) of assets or business. The adoption of this pronouncement was effective beginning with our fiscal 2019, including interim periods within that fiscal year, and it had no effect on our financial position, results of operations or liquidity.

 

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Compensation—Stock Compensation—In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.” The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. The adoption of this pronouncement was effective beginning with our fiscal 2019 period and it had no effect on our financial position, results of operations or liquidity.

 

Compensation—Stock Compensation—In June 2018, the FASB issued ASU No. 2018-07, “Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting,” which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. The early adoption of this pronouncement was effective beginning with our fiscal 2019 period and it had no effect on our financial position, results of operations or liquidity.

 

Recently Issued Accounting Pronouncements

 

Leases—In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize most lease liabilities on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The update states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The update is effective for annual and interim periods beginning with our fiscal 2020, and early adoption is permitted. We continue to evaluate the impact of this guidance on our consolidated financial statements and related disclosures, but expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.

 

Intangibles—Goodwill and Other—In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which required us to determine the implied fair value of goodwill by allocating the reporting unit’s fair value to each of its assets and liabilities as if the reporting unit was acquired in a business acquisition. Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. The updated guidance is effective for our annual and interim periods beginning with fiscal 2021, with early adoption permitted, and will be applied on a prospective basis. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

 

3.              Deferred Sales Commissions

 

Deferred sales commissions, current and noncurrent, were $59.6 million and $63.8 million as of August 3, 2018 and February 2, 2018, respectively. Amortization expense for these deferred commissions costs was $11.8 million for both the three month periods ended August 3, 2018 and August 4, 2017, respectively and was $24.4 million and $23.2 million for the six months ended August 3, 2018 and August 4, 2017, respectively. We defer commissions costs related to acquiring new customers and expanding sales to existing customers over the estimated customer life. We defer commissions costs related to customer renewals over the contract term. There was no impairment loss related to the commissions costs capitalized for the periods presented.

 

4.              Property, Plant and Equipment

 

Property, plant and equipment consist of the following (in thousands):

 

 

 

August 3,

 

February 2,

 

 

 

2018

 

2018

 

Furniture and fixtures

 

$

7,096

 

$

5,961

 

Equipment

 

18,621

 

19,723

 

Software

 

6,181

 

5,423

 

Leasehold improvements

 

37,739

 

37,796

 

Total property, plant and equipment

 

69,637

 

68,903

 

Accumulated depreciation

 

(40,865

)

(36,918

)

Property, plant and equipment, net

 

$

28,772

 

$

31,985

 

 

For the three months ended August 3, 2018 and August 4, 2017, depreciation expense was $2.9 million and $2.8 million, respectively, and for the six months ended August 3, 2018 and August 4, 2017, depreciation expense was $5.9 million and $5.2 million, respectively.

 

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5.              Intangible Assets

 

Intangible assets, excluding goodwill, consist of the following (in thousands):

 

 

 

August 3, 2018

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

Purchased technology

 

$

87,573

 

$

(86,845

)

$

728

 

Trademarks and tradenames

 

12,900

 

(10,946

)

1,954

 

Customer relationships and customer lists

 

55,800

 

(36,730

)

19,070

 

Other

 

2,750

 

(2,750

)

 

Intangible Assets

 

$

159,023

 

$

(137,271

)

$

21,752

 

 

 

 

February 2, 2018

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

Purchased technology

 

$

90,198

 

$

(87,153

)

$

3,045

 

Trademarks and tradenames

 

12,900

 

(10,291

)

2,609

 

Customer relationships and customer lists

 

55,800

 

(34,803

)

20,997

 

Other

 

2,750

 

(2,750

)

 

Intangible Assets

 

$

161,648

 

$

(134,997

)

$

26,651

 

 

For the three months ended August 3, 2018 and August 4, 2017, amortization expense was $1.7 million and $2.9 million, respectively, and for the six months ended August 3, 2018 and August 4, 2017, amortization expense was $3.4 million and $5.8 million, respectively. During the three months ended on August 3, 2018 we impaired certain purchased technology assets for a total amount of $1.5 million.

 

As of August 3, 2018, future expected amortization expense of intangible assets is expected to be as follows (in thousands):

 

Fiscal Year

 

Amortization
Expense

 

Remainder of 2019

 

$

3,070

 

2020

 

4,425

 

2021

 

2,496

 

2022

 

1,809

 

2023

 

1,791

 

Thereafter

 

8,161

 

 

6.              Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 

 

 

August 3,

 

February 2,

 

 

 

2018

 

2018

 

Accrued salaries and benefits

 

$

27,786

 

$

30,389

 

Accrued commissions

 

5,903

 

16,619

 

Other

 

13,246

 

17,243

 

Accrued expenses

 

$

46,935

 

$

64,251

 

 

7.              Fair Value of Financial Assets and Liabilities

 

Our estimate of fair value for financial assets and financial liabilities is based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. Management determines fair value using the following hierarchy:

 

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·                  Level 1—Quoted prices in active markets for identical assets or liabilities.

 

·                  Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·                  Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Our cash and cash equivalents of $671.7 million and $73.0 million as of August 3, 2018 and February 2, 2018, respectively, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Our cash equivalents include money market funds of $557.5 million and $0 as of August 3, 2018 and February 2, 2018, respectively.

 

8.              Debt

 

On September 8, 2017, we entered into a credit agreement and related security agreement with Silicon Valley Bank and certain other banks named therein for a senior secured revolving loan facility in an aggregate principal amount not to exceed $100.0 million (the “Revolving Facility”). Borrowings under the Revolving Facility are secured by our tangible assets. Our borrowing capacity under the Revolving Facility is based on subscription revenue. The Revolving Facility has a maturity date of September 8, 2020, unless it is terminated by us or an event of default has occurred prior to such date. The Revolving Facility limits our and our subsidiaries’ ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends or make other distributions; make acquisitions and other investments; dispose of assets; and engage in transactions with affiliates except on an arms-length basis.

 

Any borrowings under the Revolving Facility may be drawn, at our option, as Eurodollar or Alternate Base Rate (“ABR”) loans. ABR loans bear interest at a rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) 3.00%, in each case plus a margin ranging from 0% to 0.50%. Eurodollar loans bear interest at a rate equal to an adjusted LIBOR rate plus a margin ranging from 3.00% to 3.50%. The margins on outstanding borrowings are determined based on our average daily usage of the Revolving Facility. In addition, we are obligated to pay an unused commitment fee and other fees.

 

We have the option to repay any borrowings under the Revolving Facility prior to maturity without penalty. The Revolving Facility contains customary representations and warranties that require us to comply with certain covenants, including financial covenants relating to our operating performance and liquidity. We were in compliance with these financial covenants as of August 3, 2018.

 

We may also request, subject to certain conditions, increases in the commitments under the Revolving Facility in an aggregate amount of up to $50.0 million on the same maturity, pricing and other terms applicable to the then-existing commitments under the Revolving Facility. There can be no assurance that such increases will be available.

 

During the three months ended May 4, 2018, we borrowed $15.0 million under the Revolving Facility, which was in addition to the $20.0 million that was already outstanding as of February 2, 2018, and then repaid the total outstanding balance of $35.0 million on the Revolving Facility by April 2018. During the three months ended August 3, 2018, we did not draw down on the Revolving Facility. As of August 3, 2018, no amounts were outstanding under the Revolving Facility.

 

9.              Unearned Revenue and Performance Obligations

 

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. During the three months ended August 3, 2018 and August 4, 2017 we recognized revenue of $104.8 million and $62.9 million, respectively, and during the six months ended August 3, 2018 and August 4, 2017 we recognized revenue of $176.5 million and $122.3 million, respectively, which was included in the corresponding deferred revenue balance at the beginning of the reporting periods presented.

 

We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. We generally bill our customers annually in advance, although for our multi-year contracts, some customers prefer to pay the full multi-year contract amount in advance. Payment terms on invoiced amounts are typically 30 to 90 days. Contract assets include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that may not have been invoiced; such amounts have been insignificant to date.

 

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Remaining Performance Obligations

 

The typical contract term for subscription contracts is one to three years, while the contract term for professional services is generally less than twelve months. Our contracts are non-cancelable over the contractual term. As of August 3, 2018, the aggregate amount of the transaction price allocated to billed and unbilled remaining performance obligations for subscriptions and services for which revenue has not yet been recognized was approximately $790 million. We expect to recognize approximately 50% of the transaction price as subscription or services revenue over the next 12 months and the remainder thereafter. As of February 2, 2018, the aggregate amount of the transaction price allocated to billed and unbilled remaining performance obligations for subscriptions and services for which revenue had not yet been recognized was approximately $820 million.

 

10.       Income Taxes

 

As a result of the IPO, we are no longer included in the Dell Technologies U.S. federal tax return. Our federal deferred tax assets and liabilities previously calculated on a separate return basis have been adjusted to reflect only the actual carryforward items which Pivotal has on its separate federal tax return. We continue to present on a separate return basis the deferred tax assets and liabilities for those states where we file unitary returns with the Dell Technologies group. As of February 2, 2018, we had gross federal net operating loss carryforwards of $627.8 million which were removed in April 2018 due to the federal deconsolidation from Dell Technologies. A full valuation allowance was recorded against U.S. federal, state and certain foreign deferred tax assets because we determined that it was more likely than not that those deferred tax assets would not be realized. As of August 3, 2018, we have a net deferred tax asset of $0.4 million.

 

For the three months ended August 3, 2018 and August 4, 2017,  the income tax provision (benefit) was $0.4 million and $(0.8) million, respectively, and for the six months ended August 3, 2018 and August 4, 2017, the income tax provision (benefit) was $(0.2) million and $2.8 million, respectively. Our quarterly provision is primarily due to foreign taxes due in profitable jurisdictions.

 

11.       Common Stock and Stock-Based Awards

 

As of August 3, 2018, we had 4,000,000,000 shares of Class A common stock authorized, of which 81,871,164 shares were issued and outstanding, and 500,000,000 shares of Class B common stock authorized, of which 175,514,272 shares were issued and outstanding. Both Class A common stock and Class B common stock have a par value of $0.01 per share. As of August 3, 2018, we had reserved 74,890,957 shares of common stock available for future equity award grants under our equity incentive plans and for future issuance upon exercise of any outstanding stock options and upon vesting of restricted stock units.

 

Holders of Class A common stock are entitled to one vote per share and holders of Class B common stock are entitled to ten votes per share.

 

Stock Options

 

Stock options generally vest over 48 months as follows: (i) 25% vest 12 months from the date of grant, and (ii) the remaining 75% vest on a monthly basis over the remaining term. The fair value of each stock option granted during fiscal 2019 was estimated on the date of grant using the Black-Scholes option pricing model.

 

The following table reflects our stock option activity during the six months ended August 3, 2018 (in thousands):

 

 

 

Number of Shares
Subject to Options

 

Weighted-Average
Exercise Price

 

Options outstanding at February 2, 2018

 

54,388

 

$

7.82

 

Granted

 

2,808

 

$

13.99

 

Exercised

 

(1,493

)

$

6.31

 

Forfeited

 

(967

)

$

9.05

 

Expired / cancelled

 

(269

)

$

6.99

 

Options outstanding at August 3, 2018

 

54,467

 

$

8.15

 

 

As of August 3, 2018, there was $80.9 million of unrecognized compensation cost related to the unvested options, which is expected to be recognized over the remaining vesting period.

 

Restricted Stock Units

 

The Company granted 0.3 million and 8.7 million Restricted Stock Units (“RSUs”) with an aggregate fair value of $7.4 million and $133.2 million in the three and six months ended August 3, 2018, respectively, of which all are substantially unvested and

 

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outstanding as of August 3, 2018. RSUs awarded under the 2018 Equity Incentive Plan will generally vest over four years. The vesting is contingent on the employees’ continued service through such date. RSUs are generally subject to forfeiture if employment terminates prior to the vesting date. We expense the cost of the RSUs, which is determined to be the fair market value of the shares of common stock underlying the RSUs on the date of grant, ratably over the period during which the vesting restrictions lapse.

 

The following table reflects our RSU activity during the three and six months ended August 3, 2018 (in thousands):

 

 

 

Number of
Restricted Stock
Units

 

Weighted-
Average
Grant
Fair Value

 

RSUs outstanding at February 2, 2018

 

 

$

 

Granted

 

8,388

 

$

15.00

 

Forfeited

 

 

$

 

RSUs outstanding at May 4, 2018

 

8,388

 

$

15.00

 

Granted

 

267

 

$

27.84

 

Forfeited

 

(58

)

$

15.00

 

RSUs outstanding at August 3, 2018

 

8,597

 

$

15.40

 

 

For the three and six months ended August 3, 2018, stock-based compensation expense associated with RSUs was $8.4 million and $9.8 million, respectively. As of August 3, 2018, there was $122.1 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over the remaining vesting period.

 

Employee Stock Purchase Plan

 

Our Employee Stock Purchase Plan (the “ESPP”) became effective upon our IPO. The ESPP initially reserved and authorized the issuance of up to a total of 2,800,000 shares of Class A common stock to participating employees. Eligible employees may elect to participate in the ESPP in accordance with the enrollment procedures, upon which the employee authorizes payroll deductions from his or her paycheck on each payroll date during the offering period in an amount equal to at least 1% of his or her compensation, but not more than the contribution limit. The contribution limit for each offering period is the lesser of (i) 15% of an eligible employee’s compensation for the offering period or (ii) $7,500. Except for the initial offering period, the ESPP provides for 6-month offering periods commencing on January 11 or July 11 and ending on July 10 or January 10 of each year. The initial offering period under the ESPP commenced on April 20, 2018 and will end on January 10, 2019. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of our stock on the offering date or (2) the fair market value of our stock on the purchase date. For the three and six months ended August 3, 2018, stock-based compensation expense associated with the ESPP was $1.0 million and $1.2 million, respectively. As of August 3, 2018, there was $1.9 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over the remaining term of the initial offering period.

 

Stock-Based Compensation Expense

 

The following table summarizes the components of total equity stock-based compensation expense included in our condensed consolidated financial statements for each of the periods presented (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

August 4,

 

August 3,

 

August 4,

 

 

 

2018

 

2017

 

2018

 

2017

 

Cost of revenue - subscription

 

$

411

 

$

87

 

$

638

 

$

180

 

Cost of revenue - services

 

4,188

 

1,186

 

6,477

 

2,505

 

Sales and marketing

 

5,688

 

1,697

 

9,259

 

3,352

 

Research and development

 

5,386

 

1,372

 

8,250

 

3,084

 

General and administrative

 

3,371

 

1,060

 

5,181

 

2,288

 

Total stock-based compensation expense

 

$

19,044

 

$

5,402

 

$

29,805

 

$

11,409

 

 

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The expense related to awards previously granted by DellEMC and VMware to certain of our employees was $0.3 million and $0.1 million for the three months ended August 3, 2018 and August 4, 2017, respectively, and was $0.6 million and $0.2 million for the six months ended August 3, 2018 and August 4, 2017, respectively.

 

12.            Net Loss per Share

 

Basic loss per share is based on the weighted-average effect of all common shares issued and outstanding and is calculated by dividing net loss attributable to common stockholders by the weighted-average shares outstanding during the period.

 

The following table sets forth basic and diluted earnings (loss) per share for each of the periods presented (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

August 4,

 

August 3,

 

August 4,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(35,607

)

$

(35,384

)

$

(68,122

)

$

(86,930

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

257,240

 

68,330

 

181,404

 

68,142

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.14

)

$

(0.52

)

$

(0.38

)

$

(1.28

)

 

Since we were in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive.

 

Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):

 

 

 

August 3,

 

August 4,

 

 

 

2018

 

2017

 

Shares subject to outstanding common stock options

 

54,467

 

39,876

 

Conversion of convertible preferred stock

 

 

147,879

 

Unvested RSUs issued and outstanding

 

8,597

 

 

Shares committed under the ESPP

 

801

 

 

Total

 

63,865

 

187,755

 

 

13.            Related Party Transactions

 

DellEMC and VMware Agency Arrangements

 

Dell, including DellEMC and VMware, are our customers. Since our formation, we have also entered into agency arrangements with DellEMC and VMware that enable our sales team to sell our subscriptions and services leveraging the DellEMC and VMware enterprise relationships and end customer contracts. These transactions result in DellEMC or VMware invoicing customers and collecting on our behalf. In exchange, we pay an agency fee, which is based on a percentage of the invoiced contract amounts, for their services. Such percentage ranged from 1.5% to 5% for the six months ended August 3, 2018 and August 4, 2017, respectively.

 

In aggregate, we paid DellEMC and VMware $2.1 million and $1.6 million for the three months ended August 3, 2018 and  August 4, 2017, respectively, and $5.7 million and $2.9 million for the six months ended August 3, 2018 and August 4, 2017, respectively, which was deferred and amortized to sales and marketing expense over the term of the underlying customer arrangements.

 

Sales of our Products and Services to DellEMC and VMware

 

From time to time, we have sold our software products and professional, software support and other services to DellEMC and VMware for their internal use. Revenue recognized for sales of our products and services to DellEMC was $3.1 million and $2.5 million for the three months ended August 3, 2018 and August 4, 2017, respectively, and was $6.8 million and $4.8 million for the six

 

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months ended August 3, 2018 and August 4, 2017, respectively. Revenue recognized for sales of our products and services to VMware was $0.3 million and $0.4 million for the three months ended August 3, 2018 and August 4, 2017, respectively, and was $0.8 million and $1.3 million for the six months ended August 3, 2018 and August 4, 2017, respectively.

 

DellEMC and VMware Transition Services and Employee Matters Agreements

 

We and DellEMC engage in several ongoing related party transactions which resulted in costs to us. DellEMC acts as a paying agent for certain of our expenses including payments to vendors and other expenses such as payroll.

 

Pursuant to ongoing shared services and employee matters agreements, we are charged by DellEMC for certain management and administrative services, including routine management, administration, finance and accounting based upon estimates and allocations. Additionally, in certain geographic regions where we do not have an established legal entity, we contract with DellEMC subsidiaries for support services. We are charged for overhead items such as facilities and IT systems for our employees that work from DellEMC office locations. The costs incurred by DellEMC on our behalf related to these employees are charged to us with a markup. These costs are included as expenses in our consolidated statements of operations and primarily include salaries, benefits, travel and rent.

 

These expenses are charged to us on the basis of direct usage when identifiable, with the remainder charged primarily on the basis of headcount or other measures. Management believes the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the periods presented.

 

Charges received from DellEMC for the three months ended August 3, 2018 and August 4, 2017 were $7.6 million and $28.1 million, respectively, and for the six months ended August 3, 2018 and August 4, 2017 were $16.2 million and $61.9 million, respectively.

 

Dell Technologies Tax Sharing Agreement

 

Pursuant to a tax sharing agreement Pivotal has historically received payments from Dell Technologies for the tax benefits derived from the inclusion of our losses in certain Dell Technologies U.S federal and state group returns.  As of a result of stock issued during our IPO, Pivotal no longer qualifies for inclusion in the Dell Technologies U.S federal consolidated tax return.  This reduces the amount of benefit or expense we receive from the tax sharing agreement in prospective periods to the benefit or expense that Dell Technologies realizes from our inclusion in their unitary state returns.

 

As of August 3, 2018, the tax sharing agreement receivable of $0.2 million is included in the due from Parent and additional paid in capital financial statement lines.

 

Other Related Party Transactions

 

Through September 6, 2018, certain of our directors are executives of companies that are our customers. Subsequent to this date only one of our directors is an executive of a company that is our customer.

 

Revenue recognized from sales of subscriptions and services to General Electric Company was $2.9 million and $2.6 million for the three months ended August 3, 2018 and August 4, 2017, respectively, and was $5.9 million and $5.6 million for the six months ended August 3, 2018 and August 4, 2017, respectively.

 

Revenue recognized from sales of subscriptions and services to Ford Motor Company was $3.3 million and $12.2 million for the three months ended August 3, 2018 and August 4, 2017, respectively, and was $6.9 million and $23.0 million for the six months ended August 3, 2018 and August 4, 2017, respectively.

 

We had outstanding accounts receivable balances from General Electric Company of $2.3 million and $4.2 million as of August 3, 2018 and February 2, 2018, respectively.

 

We had outstanding accounts receivable balances from Ford Motor Company of $2.7 million and $3.2 million as of August 3, 2018 and February 2, 2018, respectively.

 

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14.       Commitments and Contingencies

 

Leases

 

We lease office and equipment under various non-cancelable operating leases, which generally contain renewal options, free rent periods and escalation clauses. Minimum commitments under non-cancelable operating lease agreements, net of sublease income, as of August 3, 2018 are as follows (in thousands):

 

Fiscal Year

 

Amount

 

Remainder of 2019

 

$

11,470

 

2020 - 2021

 

40,554

 

2022 - 2023

 

36,205

 

Thereafter

 

59,036

 

Total minimum lease payments

 

$

147,265

 

 

Litigation

 

From time to time, we are involved in legal proceedings and subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the resolution of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Even if any particular litigation is not resolved in a manner that is adverse to our interests, such litigation can have a negative impact on us because of defense and settlement costs, diversion of management resources from our business and other factors.

 

Warranties and Indemnification

 

Our software is generally warranted to perform substantially in accordance with the subscription agreement. Our contracts generally include provisions for indemnifying customers against liabilities if our services infringe or misappropriate a third party’s intellectual property rights. Costs and liabilities incurred as a result of warranties and indemnification obligations were not material during the periods presented and no liability has been recognized relating to these obligations.

 

15.       Segment and Geographic Information

 

The following table summarizes revenue by geography based on the sold-to location of our customers that purchase subscriptions and services (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3, 2018

 

August 4, 2017

 

August 3, 2018

 

August 4, 2017

 

 

 

Amount

 

Percentage of
Revenue

 

Amount

 

Percentage of
Revenue

 

Amount

 

Percentage of
Revenue

 

Amount

 

Percentage of
Revenue

 

United States

 

$

128,096

 

78

%

$

99,334

 

79

%

$

247,752

 

77

%

$

192,168

 

78

%

International

 

36,312

 

22

%

26,676

 

21

%

72,391

 

23

%

55,052

 

22

%

Total

 

$

164,408

 

100

%

$

126,010

 

100

%

$

320,143

 

100

%

$

247,220

 

100

%

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “seek,” “plan,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements filed on April 20, 2018 pursuant to Rule 424(b) under the Securities Act of 1933 (the “Prospectus”). The following discussion and analysis contains forward-looking statements that involve risks and uncertainties; our future results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and in our Prospectus. Our fiscal year is the 52- or 53-week period ending on the Friday nearest January 31.

 

Overview

 

We provide a leading cloud-native platform that makes software development and IT operations a strategic advantage for our customers.

 

Our cloud-native platform, Pivotal Cloud Foundry (“PCF”), accelerates and streamlines software development by reducing the complexity of building, deploying and operating new cloud-native applications and modernizing legacy applications. This enables our customers’ development and IT operations teams to spend more time writing code, waste less time on mundane tasks and focus on activities that drive business value — building and deploying great software.

 

PCF customers can accelerate their adoption of a modern software development process and their business success using our platform through our complementary strategic services, Pivotal Labs (“Labs”). Enterprises across industries have adopted our platform to build, deploy and operate software, including enterprises in the automotive and transportation, industrial and business services, financial services, healthcare and insurance, technology and media, consumer and communications and government sectors.

 

Our offering, which includes PCF and Labs, enables organizations to build cloud-native software and compete in today’s business environment.

 

·                            PCF accelerates and streamlines software development by reducing the complexity of building, deploying and operating modern applications. PCF integrates an expansive set of critical, modern software technologies to provide a turnkey cloud-native platform. PCF combines leading open-source software with our robust proprietary software to meet the exacting enterprise-grade requirements of large organizations, including the ability to operate and manage software across private and public cloud environments, such as Amazon Web Services, Microsoft Azure, Google Cloud Platform, VMware vSphere and OpenStack. PCF is sold on a subscription basis.

 

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·                            Labs software development experts deliver strategic services that transfer the expertise for enterprises to accelerate their cloud-native transformation by implementing modern agile development practices. With Labs, we help customers co-develop new applications and transform existing ones while accelerating software development, streamlining IT operations and ultimately driving self-sustaining business transformation.

 

We generate a substantial and increasing portion of our revenue from the sale of PCF subscriptions. We generate subscription revenue primarily from the sale of time-based subscriptions. Subscriptions are offered typically for one- to three-year terms, and we recognize revenue from our subscriptions ratably over the subscriptions’ term. We expect that over time subscription revenue will become a larger percentage of our total revenue as customers continue to adopt and expand their PCF subscriptions and as our systems integrator (“SI”) partner relationships ramp to directly deliver Labs-like services to our customers.

 

We offer strategic services including Labs, implementation and other services. Labs involves co-development and application transformation services. We offer implementation services to enable our customers to configure, deploy, test, launch and operate PCF. Part of our strategy to scale our subscription revenue is to rely, in part, on SI partners to deliver co-development, application transformation and implementation services to our customers. We intend to grow our services revenue at a slower rate than our subscription revenue as customers are enabled on our platform and increasingly use our partner ecosystem for their services needs. Our strategic services are typically priced on a time and materials basis with revenue recognized upon the delivery of the services.

 

We remain focused on attracting new subscription customers, retaining our customers and expanding their usage of our platform, and leveraging strategic services, delivered by us and our partners, to accelerate our customers’ pace of innovation and use of PCF.  This focus has resulted in rapid growth of our subscription revenue and significant total revenue growth in recent periods.

 

To realize this rapid growth, we have made and expect to continue to make substantial investments across our business. Specifically, we have increased our total employee base over time, and we intend to continue to invest in our business to take advantage of our market opportunity and to expand our sales capacity and further improve sales productivity to drive additional revenue and grow our global customer base. Additionally, we continue to invest in the development and expansion of our partner ecosystem to supplement our sales and services resources and increase our reach in our target markets. We also expect to continue to make significant investments in research and development to expand our product and engineering teams to further develop our platform. We expect to incur increased general and administrative expenses to support our growth and operations.

 

Key Metrics

 

We regularly review the following key metrics to measure performance, identify trends, formulate financial projections and to help us monitor our business. While we believe that these metrics are useful in evaluating our business, other companies may not use similar metrics or may not calculate similarly-titled metrics in a consistent manner.

 

 

 

August 3,
2018

 

May 4,
2018

 

August 4,
2017

 

Subscription customers

 

354

 

339

 

297

 

Dollar-based net expansion

 

150

%

156

%

168

%

 

Subscription Customers

 

We believe that the number of our subscription customers is an important indicator of the growth of our business, our increased customer footprint and the market acceptance of our platform. We define the number of subscription customers as the organizations that have a subscription contract for our software resulting in at least $50,000 of annual revenue in that period. While we may enter into subscription agreements with multiple parties inside a larger organization, we count a customer as an addition to our subscription customers only if it represents a unique global ultimate parent. In the case of the U.S. government, we count U.S. government departments and major agencies as unique subscription customers. We view our total number of subscription customers as reflective of the number of sources of revenue to us and our growth and potential for future growth.

 

We had 354, 339 and 297 subscription customers as of August 3, 2018, May 4, 2018 and August 4, 2017, respectively. We expect growth in subscription customers to continue as we deliver enhancements to our products and remain focused on increasing our subscription customer count. Our total number of subscription customers and the net additions in any period may continue to fluctuate as a result of several factors, including the focus of our sales force, customer satisfaction with the functionality, features, performance or pricing of our offering, consolidation of our customer base and other factors, a number of which are beyond our control.

 

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Dollar-Based Net Expansion Rate

 

We believe that the dollar-based net expansion rate is an important measure of our business because it is an indicator of our subscription customers’ expanded use of and demand for our platform and our ability to grow revenue and profitability. Our dollar-based net expansion rate compares our subscription revenue from a common group of customers across comparable periods. We calculate our dollar-based net expansion rate for all periods on a trailing four-quarter basis. To do so, we calculate our dollar-based net expansion rate as of each quarter end by starting with the subscription revenue from customers as of the prior year’s same quarter (the “Prior Period Subscription Revenue”). We then calculate subscription revenue from these same customers as of the current quarter end (the “Current Period Subscription Revenue”). Finally, to assess net expansion level for common groups of customers over time, we divide the aggregate Current Period Subscription Revenue for the trailing four quarters by the aggregate Prior Period Subscription Revenue for the trailing four quarters resulting in our dollar-based expansion rate.

 

We expect our dollar-based net expansion rate to remain a significant indicator of our business momentum and results of operations as existing customers realize the benefits of our software and expand their PCF subscriptions. Our dollar-based net expansion rate has fluctuated and we expect it to continue to fluctuate and decline over time as we scale our business and as a result of several factors, including the size of the transactions, the timing and terms of the deals and our customers’ satisfaction with our offering. Our dollar-based net expansion rate was approximately 150% for the three months ended August 3, 2018, 156% for the three months ended May 4, 2018 and 168% for the three months ended August 4, 2017.

 

Components of Results of Operations

 

Revenue

 

Subscription

 

Subscription revenue is primarily derived from sales of PCF subscriptions. Our customers subscribe to use our software platform for a variety of workloads, such as applications, containers or other microservices. Subscriptions are offered typically for one- to three-year terms, and we recognize revenue from our subscriptions ratably over the subscriptions’ term. We generally bill our customers annually in advance, although for our multi-year contracts, some customers pay the full contract amount in advance.

 

To a lesser extent, we generate revenue from certain historical software products sold on a perpetual license basis. Perpetual license revenue represented less than 2% of our total revenue for the three months ended August 3, 2018 and less than 3% of our total revenue for the three months ended August 4, 2017 and represented less than 2% of our total revenue for both the six months ended August 3, 2018 and August 4, 2017.  We expect the percentage of perpetual license revenue to continue to decline as a percentage of total revenue. We generally recognize revenue from our perpetual licenses upon delivery, assuming all the other revenue recognition criteria are satisfied.

 

Services

 

Services revenue is primarily derived from Labs, as well as implementation and other professional services. To a decreasing extent, services revenue also includes revenue from maintenance and support associated with the perpetual licenses described above. Our services revenue may continue to fluctuate; any services revenue growth is expected to be modest both in absolute dollars and relative to subscription revenue.

 

Cost of Revenue

 

Subscription

 

Cost of subscription revenue consists primarily of personnel and related costs, consisting of salaries, benefits, bonuses and stock-based compensation (“personnel costs”) directly associated with our customer support and allocated overhead costs. Additionally, cost of subscription revenue includes intangible asset and other asset amortization expense and certain third-party expenses such as cloud infrastructure costs and software and support fees. We expect our cost of subscription revenue to increase in absolute dollar amounts as we invest in our business.

 

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Table of Contents

 

Services

 

Cost of services revenue consists primarily of personnel costs directly associated with delivery of Labs, implementation and other professional services, costs of third-party contractors and allocated overhead costs. We expect our cost of services revenue to increase in absolute dollar amounts as we invest in our business.

 

Operating Expenses

 

Sales and Marketing

 

Sales and marketing expenses consist primarily of personnel costs including commissions. Other sales and marketing costs include travel and entertainment, promotional events (such as our SpringOne Platform Conference) and allocated overhead costs. We expect our sales and marketing expenses will increase in absolute dollar amounts as we hire additional sales and marketing personnel, increase our marketing activities and build brand awareness.

 

Research and Development

 

Research and development expenses consist primarily of personnel costs, cloud infrastructure costs related to our research and development efforts and allocated overhead costs. We expect our research and development expenses will increase in absolute dollar amounts as we expand our research and development team to develop new products and product enhancements.

 

General and Administrative

 

General and administrative expenses consist primarily of personnel costs and allocated overhead costs for our administrative, legal, information technology, human resources, finance and accounting employees and executives. Our general and administrative expenses also include professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses. We expect our general and administrative expenses will increase in absolute dollar amounts as we scale our general and administrative function to support the growth of our business. We also anticipate that we will incur additional costs for employees and third-party consulting services as we continue to operate as a public company.

 

Other Income, Net

 

Other income, net consists of gains and losses from transactions denominated in a currency other than the functional currency, net interest earned on our cash and cash equivalents and other non-operating gains or losses.

 

Provision for (Benefit from) Income Taxes

 

Provision for (benefit from) income taxes consists primarily of income taxes related to foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal, state and certain foreign deferred tax assets as we have concluded that it is more likely than not that those deferred assets will not be utilized.

 

Results of Operations (dollars in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,
2018

 

August 4,
2017

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription

 

$

97,494

 

$

64,566

 

$

187,615

 

$

117,989

 

Services

 

66,914

 

61,444

 

132,528

 

129,231

 

Total revenue

 

164,408

 

126,010

 

320,143

 

247,220

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription

 

8,105

 

7,618

 

16,234

 

15,116

 

Services

 

53,129

 

48,726

 

104,291

 

100,261

 

Total cost of revenue

 

61,234

 

56,344

 

120,525

 

115,377

 

Gross profit

 

103,174

 

69,666

 

199,618

 

131,843

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

70,550

 

52,875

 

139,688

 

105,032

 

Research and development

 

47,001

 

39,661

 

91,429

 

79,679

 

General and administrative

 

21,025

 

15,364

 

37,433

 

33,777

 

Total operating expenses

 

138,576

 

107,900

 

268,550

 

218,488

 

Loss from operations

 

(35,402

)

(38,234

)

(68,932

)

(86,645

)

Other income, net

 

237

 

1,910

 

546

 

2,631

 

Loss before provision for (benefit from) income taxes

 

(35,165

)

(36,324

)

(68,386

)

(84,014

)

Provision for (benefit from) income taxes

 

437

 

(822

)

(227

)

2,832

 

Net loss

 

(35,602

)

(35,502

)

(68,159

)

(86,846

)

Less: Net loss (income) attributable to non-controlling interest

 

(5

)

118

 

37

 

(84

)

Net loss attributable to Pivotal

 

$

(35,607

)

$

(35,384

)

$

(68,122

)

$

(86,930

)

 

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The following table sets forth our results of operations for each of the periods presented as a percentage of revenue:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,
2018

 

August 4,
2017

 

August 3,
2018

 

August 4,
2017

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription

 

59

%

51

%

59

%

48

%

Services

 

41

 

49

 

41

 

52

 

Total revenue

 

100

 

100

 

100

 

100

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription

 

5

 

6

 

5

 

6

 

Services

 

32

 

39

 

33

 

41

 

Total cost of revenue

 

37

 

45

 

38

 

47

 

Gross profit

 

63

 

55

 

62

 

53

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

43

 

42

 

44

 

42

 

Research and development

 

29

 

31

 

28

 

32

 

General and administrative

 

13

 

12

 

12

 

14

 

Total operating expenses

 

85

 

85

 

84

 

88

 

Loss from operations

 

(22

)

(30

)

(22

)

(35

)

Other income, net

 

0

 

1

 

1

 

1

 

Loss before provision for (benefit from) for income taxes

 

(22

)

(29

)

(21

)

(34

)

Provision for (benefit from) income taxes

 

0

 

(1

)

(0

)

1

 

Net loss

 

(22

)

(28

)

(21

)

(35

)

Less: Net loss (income) attributable to non-controlling interest

 

(0

)

0

 

0

 

(0

)

Net loss attributable to Pivotal

 

(22

)%

(28

)%

(21

)%

(35

)%

 

Comparison of the three and six months ended August 3, 2018 and August 4, 2017

 

Revenue

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

 

 

Amount

 

Amount

 

$ Change

 

% Change

 

Amount

 

Amount

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

$

97,494

 

$

64,566

 

$

32,928

 

51%

 

$

187,615

 

$

117,989

 

$

69,626

 

59%

 

Services

 

66,914

 

61,444

 

5,470

 

9%

 

132,528

 

129,231

 

3,297

 

3%

 

Total revenue

 

$

164,408

 

$

126,010

 

$

38,398

 

30%

 

$

320,143

 

$

247,220

 

$

72,923

 

29%

 

 

Total revenue increased by $38.4 million, or 30%, to $164.4 million during the three months ended August 3, 2018 from $126.0 million during the three months ended August 4, 2017. Subscription revenue increased by $32.9 million, or 51%, to $97.5 million during the three months ended August 3, 2018 from $64.6 million during the three months ended August 4, 2017. The increase in subscription revenue was primarily due to increased sales to existing customers and the remaining increase was due to sales to new customers. Services revenue increased by $5.5 million, or 9%, to $66.9 million during the three months ended August 3, 2018 from

 

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$61.4 million during the three months ended August 4, 2017. The increase in services revenue was primarily due to growth of customer engagements. Revenue from maintenance and support contracts associated with historical software products sold on a perpetual license basis represented less than 3% and less than 5% of total revenue in the three months ended August 3, 2018 and August 4, 2017, respectively, and is generally expected to represent a decreasing amount of revenue in future periods.

 

Total revenue increased by $72.9 million, or 29%, to $320.1 million during the six months ended August 3, 2018 from $247.2 million during the six months ended August 4, 2017. Subscription revenue increased by $69.6 million, or 59%, to $187.6 million during the six months ended August 3, 2018 from $118.0 million during the six months ended August 4, 2017. The increase in subscription revenue was primarily due to increased sales to existing customers and the remaining increase was due to sales to new customers. Services revenue increased by $3.3 million, or 3%, to $132.5 million during the six months ended August 3, 2018 from $129.2 million during the six months ended August 4, 2017. The increase in services revenue was primarily due to growth of customer engagements to enable our larger subscription customer base. Revenue from maintenance and support contracts associated with historical software products sold on a perpetual license basis represented less than 3% and less than 4% of total revenue in the six months ended August 3, 2018 and August 4, 2017, respectively, and is generally expected to represent a decreasing amount of revenue in future periods.

 

Cost of Revenue

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

 

 

Amount

 

Amount

 

$ Change

 

% Change

 

Amount

 

Amount

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

$

8,105

 

$

7,618

 

$

487

 

6%

 

$

16,234

 

$

15,116

 

$

1,118

 

7%

 

Services

 

53,129

 

48,726

 

4,403

 

9%

 

104,291

 

100,261

 

4,030

 

4%

 

Total cost of revenue

 

$

61,234

 

$

56,344

 

$

4,890

 

9%

 

$

120,525

 

$

115,377

 

$

5,148

 

4%

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

92

%

88

%

 

 

 

 

91

%

87

%

 

 

 

 

Services

 

21

%

21

%

 

 

 

 

21

%

22

%

 

 

 

 

Total gross margin

 

63

%

55

%

 

 

 

 

62

%

53

%

 

 

 

 

 

Total cost of revenue increased by $4.9 million to $61.2 million during the three months ended August 3, 2018 from $56.3 million during the three months ended August 4, 2017. Cost of subscription revenue increased by $0.5 million, or 6%, to $8.1 million during the three months ended August 3, 2018 from $7.6 million during the three months ended August 4, 2017. The increase in cost of subscription was driven by higher support personnel costs. Growth in support personnel costs was lower relative to our overall customer base and subscription revenue growth as we continue to realize economies of scale. The cost of services revenue increased by $4.4 million, or 9%, to $53.1 million during the three months ended August 3, 2018 from $48.7 million during the three months ended August 4, 2017. The increase in services expense was primarily due to an increase of $4.2 million in personnel costs.

 

Subscription gross margin increased to 92% during the three months ended August 3, 2018 from 88% during the three months ended August 4, 2017 due to economies of scale as our subscription revenue increased.

 

Services gross margin was flat at 21% during the three months ended August 3, 2018 and during the three months ended August 4, 2017.

 

Total cost of revenue increased by $5.1 million, or 4%, to $120.5 million during the six months ended August 3, 2018 from $115.4 million during the six months ended August 4, 2017. Cost of subscription revenue increased by $1.1 million, or 7%, to $16.2 million during the six months ended August 3, 2018 from $15.1 million during the six months ended August 4, 2017. The increase in cost of subscription was driven by higher support personnel costs associated with an increased subscription customer base. Growth in support personnel costs was lower relative to our overall customer base and subscription revenue as we continue to realize economies of scale. The cost of services revenue increased by $4.0 million, or 4%, to $104.3 million during the six months ended August 3, 2018 from $100.3 million during the six months ended August 4, 2017. The increase in services expense was primarily due to an increase of $4.8 million in personnel costs offset by lower cloud infrastructure spend.

 

Subscription gross margin increased to 91% during the six months ended August 3, 2018 from 87% during the six months ended August 4, 2017 due to economies of scale as our subscription revenue increased.

 

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Services gross margin decreased to 21% during the six months ended August 3, 2018 from 22% during the six months ended August 4, 2017 due primarily to the decline of maintenance and support contracts associated with certain historical software products sold on a perpetual license basis and an increase in personnel costs.

 

Operating Expenses

 

Sales and Marketing

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

 

 

Amount

 

Amount

 

$ Change

 

% Change

 

Amount

 

Amount

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Sales and marketing

 

$

70,550

 

$

52,875

 

$

17,675

 

33%

 

$

139,688

 

$

105,032

 

$

34,656

 

33%

 

Percentage of revenue

 

43

%

42

%

 

 

 

 

44

%

42

%

 

 

 

 

 

Research and Development

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

 

 

Amount

 

Amount

 

$ Change

 

% Change

 

Amount

 

Amount

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Research and development

 

$

47,001

 

$

39,661

 

$

7,340

 

19%

 

$

91,429

 

$

79,679

 

$

11,750

 

15%

 

Percentage of revenue

 

28

%

31

%

 

 

 

 

28

%

32

%

 

 

 

 

 

General and Administrative

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

 

 

Amount

 

Amount

 

$ Change

 

% Change

 

Amount

 

Amount

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

General and administrative

 

$

21,025

 

$

15,364

 

$

5,661

 

37%

 

$

37,433

 

$

33,777

 

$

3,656

 

11%

 

Percentage of revenue

 

13

%

12

%

 

 

 

 

12

%

14

%

 

 

 

 

 

Sales and marketing expense increased by $17.7 million, or 33%, to $70.6 million during the three months ended August 3, 2018 from $52.9 million in during the three months ended August 4, 2017. The increase in sales and marketing expense was primarily due to an increase of $17.1 million in personnel costs and commissions.

 

Research and development expense increased by $7.3 million, or 19%, to $47.0 million during the three months ended August 3, 2018 from $39.7 million during the three months ended August 4, 2017. The increase in research and development expense was primarily due to an increase of $6.4 million in personnel costs and $0.9 million in cloud infrastructure costs.

 

General and administrative expense increased by $5.7 million, or 37%, to $21.0 million during the three months ended August 3, 2018 from $15.4 million during the three months ended August 4, 2017. The increase in general and administrative expense was primarily due to an increase of $4.2 million in personnel costs and a $1.5 million non-cash write off of certain intangible assets.

 

Sales and marketing expense increased by $34.7 million, or 33%, to $139.7 million during the six months ended August 3, 2018 from $105.0 million in during the six months ended August 4, 2017. The increase in sales and marketing expense was primarily due to an increase of $31.6 million in personnel costs and commissions and $2.7 million associated with conferences.

 

Research and development expense increased by $11.8 million, or 15%, to $91.4 million during the six months ended August 3, 2018 from $79.7 million during the six months ended August 4, 2017. The increase in research and development expense was primarily due to an increase of $12.0 million in personnel costs, offset by lower cloud infrastructure costs.

 

General and administrative expense increased by $3.7 million, or 11%, to $37.4 million during the six months ended August 3, 2018 from $33.8 million during the six months ended August 4, 2017. The increase in general and administrative expense was primarily due an increase of $2.4 million in personnel costs and a $1.5 million non-cash write-off of certain intangible assets.

 

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Non-Operating Expenses

 

Other Income, Net

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

 

 

Amount

 

Amount

 

$ Change

 

% Change

 

Amount

 

Amount

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Other income, net

 

$

237

 

$

1,910

 

$

(1,673

)

88%

 

$

546

 

$

2,631

 

$

(2,085

)

79%

 

 

Other income, net decreased by $1.7 million, or 88%, to $0.2 million for the three months ended August 3, 2018 from $1.9 million for the three months ended August 4, 2017. Other income generated for the three months ended August 3, 2018 was primarily due to interest earned on money market investments of $2.3 million offset by foreign currency losses in our international operations. Other income generated for the three months ended August 4, 2017 was primarily due to foreign currency gains in our international operations.

 

Other income, net decreased by $2.1 million, or 79%, to $0.5 million for the six months ended August 3, 2018 from $2.6 million for the six months ended August 4, 2017. Other income generated for the six months ended August 3, 2018 was primarily due to a gain on sale of an investment of approximately $3.2 million and interest earned on money market investments of $2.6 million,  offset by foreign currency losses in our international operations. Other income generated for the six months ended August 4, 2017 was primarily due to foreign currency gains in our international operations.

 

Income Taxes

 

Provision for (Benefit from) Income Taxes

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

 

 

 

 

Amount

 

Amount

 

$ Change

 

% Change

 

Amount

 

Amount

 

$ Change

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Provision for (benefit from) income taxes

 

$

437

 

$

(822

)

$

1,259

 

153%

 

$

(227

)

$

2,832

 

$

(3,059

)

108%

 

 

As a result of the stock issued in our IPO, we are no longer included in the Dell Technologies consolidated U.S. federal return and will file a separate U.S. federal return on a go-forward basis.  The federal deferred tax assets and liabilities previously calculated on a separate return basis have been adjusted to reflect only the actual carryforward items which Pivotal will have on its separate federal tax return.  There was no impact on our provision for income taxes due to a corresponding reduction in the related valuation allowance.

 

Our provision for (benefit from) income taxes for the three months ended August 3, 2018 and August 4, 2017 was $0.4 million and $(0.8) million, respectively. Our quarterly provision is primarily driven by foreign taxes due in profitable jurisdictions and fluctuates due to variability in our services profitability in total and among the tax jurisdictions in which we operate.

 

Our provision for (benefit from) income taxes for the six months ended August 3, 2018 and August 4, 2017 was $(0.2) million and $2.8 million, respectively.  Our quarterly provision is primarily driven by foreign taxes due in profitable jurisdictions and fluctuates due to variability in our services profitability in total and among the tax jurisdictions in which we operate.

 

Non-GAAP Financial Measures

 

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP information is useful in evaluating our operating results. We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information may be helpful to investors because it provides consistency and comparability with past financial performance, and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the GAAP financial measures together with such reconciliations.

 

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Non-GAAP Gross Profit and Non-GAAP Gross Margin

 

We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, adjusted for stock-based compensation expense and amortization of acquired intangibles.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3, 2018

 

August 4, 2017

 

August 3, 2018

 

August 4, 2017

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

Gross profit

 

$

103,174

 

$

69,666

 

$

199,618

 

$

131,843

 

Add:

 

 

 

 

 

 

 

 

 

Stock-based compensation expense included in cost of revenue

 

4,599

 

1,273

 

7,115

 

2,685

 

Amortization of acquired intangibles included in cost of revenue

 

433

 

1,318

 

865

 

2,618

 

Non-GAAP gross profit

 

$

108,206

 

$

72,257

 

$

207,598

 

$

137,146

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

63

%

55

%

62

%

53

%

Non-GAAP gross margin

 

66

%

57

%

65

%

55

%

 

Non-GAAP Operating Loss

 

We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating profit and GAAP operating margin, adjusted for stock-based compensation expense and amortization of acquired intangibles.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3, 2018

 

August 4, 2017

 

August 3, 2018

 

August 4, 2017

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

Operating loss

 

$

(35,402

)

$

(38,234

)

$

(68,932

)

$

(86,645

)

Add:

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

19,044

 

5,402

 

29,805

 

11,409

 

Amortization of acquired intangibles

 

1,727

 

2,909

 

3,448

 

5,797

 

Non-GAAP operating loss

 

$

(14,631

)

$

(29,923

)

$

(35,679

)

$

(69,439

)

 

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Liquidity and Capital Resources

 

Overview

 

To date, our principal sources of liquidity have been the net proceeds we received through the sale of our common stock in our IPO, private sales of equity securities, payments received from customers using our platform and services and borrowings under our line of credit. Following the completion of our IPO, we received aggregate proceeds of $544.7 million, net of underwriters’ discounts and commissions and offering costs paid.  As of August 3, 2018, we had cash and cash equivalents totaling $671.7 million, which we intend to use for working capital, operating expenses, and capital expenditures. We may also use a portion of this to acquire complementary businesses, products, services, or technologies. Our cash equivalents are comprised primarily of money market funds. We believe that our existing cash, cash equivalents, and investments will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, billing terms of our subscription contracts, timing of collection of accounts receivable, the rate of expansion of our workforce, the timing and extent of our expansion into new markets, the timing of introductions of new functionality and enhancements to our platform and the continuing market acceptance of our platform, as well as general economic and market conditions. We may need to raise additional capital or incur indebtedness to continue to fund our operations in the future or to fund our needs for other strategic initiatives, such as acquisitions. We also foresee entering into lease and other related facilities obligations to support any future growth in our headcount.

 

In September 2017, we entered into a credit agreement and a related security agreement with Silicon Valley Bank, as administrative agent, and other banks named therein that provide for a senior secured revolving credit facility in an aggregate principal amount not to exceed $100.0 million (the “Revolving Facility”). We may also request from time to time, subject to certain conditions, increases in the commitments under the Revolving Facility in an aggregate amount of up to $50.0 million on the same maturity, pricing and other terms applicable to the then-existing commitments under the Revolving Facility. There can be no assurance that such increases will be available. Borrowings under the Revolving Facility are secured by our tangible assets. Our borrowing capacity under the Revolving Facility is based on our subscription revenue. The Revolving Facility has a maturity date of September 8, 2020. We had no amounts outstanding under the Revolving Facility as of August 3, 2018.

 

Cash Flows

 

 

 

Six Months Ended

 

 

 

August 3,
2018

 

August 4,
2017

 

 

 

(in thousands)

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

22,820

 

$

(60,966

)

Investing activities

 

$

(818

)

$

(8,458

)

Financing activities

 

$

575,375

 

$

29,735

 

 

Operating Activities

 

During the six months ended August 3, 2018, cash provided by operating activities was $22.8 million primarily due to our net loss of $68.2 million, adjusted for non-cash charges of $37.6 million and net cash inflows of $53.4 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation and depreciation and amortization of property and equipment and intangible assets. The primary drivers of the changes in operating assets and liabilities related to a $76.3 million decrease in accounts receivable offset by a $10.6 million decrease in deferred revenue and a decrease of $16.2 million in accrued expenses.

 

During the six months ended August 4, 2017, cash used in operating activities was $61.0 million primarily due to our net loss of $86.8 million, adjusted for non-cash charges of $23.5 million and net cash inflows of $2.3 million provided by changes in our operating assets and liabilities. Changes in operating assets and liabilities were primarily attributable to a $13.8 million decrease in accounts receivable and an increase in accrued expenses of $13.5 million, partially offset by a decrease in deferred revenue of $7.8 million and a decrease in amounts due to parents of $23.1 million.

 

Investing Activities

 

For the six months ended August 3, 2018 cash used in investing activities was $0.8 million, down from cash used in investing activities of $8.5 million for the six months ended August 4, 2017. Our investing activities for the six months ended August 3, 2018 were attributable to the purchases of property, plant and equipment partially offset by the sale of an investment. Our investing activities for the six months ended August 4, 2017 were attributable to purchases of property, plant and equipment.

 

Financing Activities

 

Cash provided by financing activities during the six months ended August 3, 2018 of $575.4 million was primarily attributable to proceeds from the completion of our IPO of $544.7 million, net of underwriters’ discounts and commissions, and offering costs. Additionally, we received $41.3 million in cash from DellEMC primarily representing the final federal tax sharing payments for fiscal 2018 and we received proceeds from the exercise of stock options of $9.4 million.  These inflows were partially offset by repayments of the Revolving Facility of $20.0 million which is net of additional borrowings.

 

Cash provided by financing activities during the six months ended August 4, 2017 was attributable to proceeds of $3.9 million from the issuance of common stock through the exercises of stock options and the receipt of $25.8 million from DellEMC as part of our tax sharing agreement.

 

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Table of Contents

 

Commitments and Contractual Obligations

 

During the six months ended August 3, 2018, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in our Prospectus. See Note 14, Commitments and Contingencies, in our notes to unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Off-Balance Sheet Arrangements

 

As of August 3, 2018, we were not subject to any obligations pursuant to any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably likely to have a material effect on our financial condition, results of operations or liquidity.

 

Critical Accounting Policies and Estimates

 

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

There have been no material changes to our critical accounting policies and significant judgments and estimates as compared to the critical accounting policies and significant judgments and estimates disclosed in the Prospectus.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk in the ordinary course of business.

 

Credit and interest rate risk

 

The fair values of our cash and cash equivalents are exposed to counterparty credit risk. Accordingly, while we periodically review our portfolio in an effort to mitigate counterparty risk, the principal values of our cash and cash equivalents could suffer a loss of value. Any future borrowings incurred under the credit agreement would accrue interest at a floating rate based on a formula tied to certain market rates at the time of incurrence. A 10% increase or decrease in interest rates would not have a material effect on our interest expense.

 

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Table of Contents

 

Concentration risk

 

As of August 3, 2018 and February 2, 2018, no individual customer represented 10% or more of accounts receivable.

 

DellEMC and VMware invoice our customers and collect invoiced amounts on our behalf. As of August 3, 2018 and February 2, 2018, $51.4 million and $83.3 million invoiced on our behalf by DellEMC and VMware was recorded in accounts receivable, respectively.

 

Foreign currency risk

 

Although 23% of our total revenue for the six months ended August 3, 2018 was derived from sales outside the United States, the majority of such revenue is from sales transactions that are denominated in U.S. dollars. For transactions denominated in a currency other than the functional currency, we are exposed to risks of foreign currency fluctuation and are subject to transaction gains and losses, which are recorded as other income, net in the condensed consolidated statements of operations.

 

Our results of operations and cash flows have been and will continue to be subject to fluctuations because of changes in foreign currency exchange rates, particularly changes in exchange rates between the U.S. Dollar and the British Pound, the Euro and the Canadian Dollar, the currencies of countries where we currently have our most significant international operations.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief  Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

 

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Table of Contents

 

PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The material set forth in Note 14 (pertaining to information regarding legal contingencies) of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

ITEM 1A.  RISK FACTORS

 

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in our condensed consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. Any of the following risks could have an adverse effect on our business, results of operations, financial condition and prospects, and could cause the trading price of our Class A common stock to decline, which would cause you to lose all or part of your investment. Our business, results of operations, financial condition, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.

 

Risks Related to Our Business and Industry

 

We have a limited operating history as an independent company, which makes it difficult to evaluate our prospects and increases the risk of your investment.

 

We have a limited operating history as an independent company and are scaling quickly, which makes it difficult to evaluate our business and prospects, including our ability to plan for and model future growth. As a relatively early stage company, we have encountered and will continue to encounter risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, including the risks described here. If we do not plan appropriately or do not address these risks successfully, our business and prospects will be adversely affected, and the market price of our Class A common stock could decline.

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