Pivotal stock tanks 41% and Wall Street isn't sure it can recover

On Tuesday, Pivotal Software — which is majority-owned by Dell — reported revenues that modestly beat Wall Street's expectations, but much weaker guidance for the next quarter than Wall Street predicted.

The stock closed about 40% lower on Wednesday, the first full day of trading following the report.

Pivotal attributed the weakness in part to poor execution of its sales strategy, and says it's taking steps to fix it, like hiring a new sales head for the Americas.

Analysts are more skeptical, and say that it will take a long time for Pivotal to recover, if it can recover at all.

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On Tuesday, Pivotal Software — which is majority-owned by Dell — reported earnings, and posted revenue that was above Wall Street earnings. However, it also reported guidance for the next quarter that was much lower than analysts were looking for, and the stock tanked about 41% by the closing bell on Wednesday.

Bhavan Suri and David Griffin of William Blair called it a “disappointing start to the year,” while Wedbush Securities' Daniel Ives called it a “train wreck quarter” and a “back breaker.”

“It's a company that's been more reactive than proactive in terms of solving sales execution issues,” Ives told Business Insider. “The guidance was a major head scratcher for investors. It caused many to throw in the white towel for stock.”

This quarter, Pivotal reported revenues of $185.7 million, an increase of 19% from the previous year. This modestly beat Wall Street's expectations of $184.14 million.

However, Pivotal now expects to generate revenuse of $185 to $189 million next quarter. That's disappointing to Wall Street, which expected $197.75 million. And it doesn't stop at that quarter: For the full fiscal year, Pivotal lowered its revenue outlook to $756 to $767 million, while Wall Street was hoping for a projection of $802.57 million.

“These dynamics were attributed to a combination of deal slippage driven by sales execution issues and sales cycles lengthening due to enterprises taking more time to make decisions in the increasingly complex technology landscape,” Suri and Griffin wrote in a note to clients.

A 'nightmare for investors'

To address slowing sales growth, Pivotal plans to put a new sales head of the Americas in place, improve its sales management processes, and introduce a new product that runs on Kubernetes, a popular cloud computing project used to run large-scale applications.

However, Ives says the jury is still out on whether Pivotal can recover from this major stumble, and it's a “nightmare for investors.” He said Pivotal dropped the ball when it came to navigating sales cycles and facing rising competition.

The stock is down, Ives says, because investors don't have faith that the managing team have these issues under control, and this quarter showed cracks in Pivotal's business model.

There had been some signs of a slowdown, Ives says, but this was the “straw that broke the camel's back.”

Some 'dark days ahead'

Although Pivotal has strong opportunity, Ives says that Pivotal has “some dark days ahead,” and the best-case scenario would be an acquisition. However, he doesn't see that happening in the near term, and he does not think any buyer would take a serious look at Pivotal right now.

“I've seen this movie many times before,” Ives said. “Usually it's the start of a very difficult period for a company like this. Once the execution starts to suffer and the wheels come off the car...They have a lot of wood to chop to restore credibility to the street after the disaster of this quarter.”

Jennifer Lowe, executive director at UBS, wrote that the possibility for recovery is there — the new sales hire could improve execution, but it will take some time.

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“We continue to believe that Pivotal's platform will play a key part as enterprises undergo application modernization initiatives,” Lowe wrote in a note. “However, recent go-to-market challenges in North America issues may take a few quarters to resolve and we think shares will be range-bound until growth stabilizes and execution improves.”