Pivotal & Dropbox: A Tale of 2 Cloud IPOs

Pivotal and Dropbox don't have much in common, other than being two cloud IPOs linked together in time on Friday.

Mitch Wagner, Executive Editor, Light Reading

March 26, 2018

6 Min Read
Pivotal & Dropbox: A Tale of 2 Cloud IPOs

Pivotal and Dropbox are two cloud IPOs linked together in time, but that's about all they have in common.

Pivotal which filed for its IPO on Friday, is, technically speaking, a startup, founded in 2013. But it's owned and controlled by one of the most venerable names in information technology, Dell Technologies (Nasdaq: DELL).

Pivotal is a key component of Dell's strategy to survive and remain vibrant, as the cloud threatens its traditional business model of delivering on-premises hardware. For that model of computing to remain relevant, it needs to transform.

Pivotal has a fresh business model, providing software and services based on the open source Cloud Foundry, a middleware platform for building cloud applications that are portable between public, private and hybrid clouds. Cloud Foundry automates infrastructure, to enhance developer productivity by letting developers focus on what applications do and not worry about how the applications allocate compute, storage and networking resources.

On the other hand, Dropbox, which held its IPO on Friday, is old by the standards of the cloud, founded in 2007. And it uses an old -- but still relevant -- cloud business model, software-as-a-service (SaaS). Dropbox provides cloud-based document sharing, and is mostly subscribed to by individuals rather than businesses, but those individuals use the service for work. Users are loyal, revenue is growing, losses are narrowing and Dropbox is extending into enterprise services.

Pivotal is pivotal to Dell's future
Dell sees Pivotal as important -- you might say it's pivotal -- to its strategy of moving enterprise infrastructure into the cloud era. Dell believes that strategic enterprise applications belong on premises, in private clouds, where they can be run more efficiently and at less cost than the public cloud. The public cloud still plays a vital role, for running non-strategic but important applications, such as email, as well as extending private cloud applications to the public cloud to reach new geographic regions or meet peak demand.

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Dell EMC CTO John Roese laid out that strategy in an interview with Light Reading a few weeks ago. (See Dell CTO: Public Cloud Is 'Way More Expensive Than Buying From Us' and Dell CTO Expounds 'Insane' Theory About Enterprise Complexity.)

Pivotal Cloud Foundry (PCF) plays a couple of key roles in this strategy. In addition to providing application portability, Pivotal provides a layer that allows legacy applications, including mainframe software, to connect with the cloud.

Pivotal focuses on subscription sales of its platform, to 319 subscribers as of the end of fiscal 2018, February 2. Subscription revenue was $259 million in fiscal 2018, $150 million in fiscal 2017, and $95 million in fiscal 2016, according to the company's S-1, filed with the US Securities and Exchange Commission on Friday.

Total revenue was $509.4 million, $416.3 million and $280.9 million in fiscal 2018, 2017 and 2016 respectively, with year-over-year growth of 48% and 22% for its two most recent fiscal years.

"Fiscal 2018 was the first year in which subscription revenue exceeded our services revenue, and we expect that over time subscription revenue will become a larger percentage of our total revenue as customers continue to adopt PCF and as our [system integrator] partner ecosystem ramps to directly deliver strategic services to our customers," Pivotal says in its S-1.

Net loss was $163.5 million, $232.9 million and $282.7 million for fiscal 2018, 2017 and 2016.

Pivotal was founded in April 2013, a combination of teams and contributed assets and technology from EMC and VMware Inc. (NYSE: VMW), which was at that time, majority-owned by EMC. Dell acquired EMC in 2016, and Dell now owns 80% of VMWare as well as a majority and controlling stake in Pivotal. (See Dell Buys EMC for $67B in Biggest Tech Deal Ever.)

Now, Dell is contemplating a reverse merger with VMware, to put Dell back on the public markets. (See Dell Confirms Possible IPO or VMware Merger.)

Pivotal's competition includes legacy application infrastructure from vendors such as IBM and Oracle, open source software from vendors such as Red Hat, alternative Cloud Foundry software from IBM Cloud and SAP Cloud Platform, and Amazon Web Services, Google Cloud Platform and Microsoft Azure, according to Pivotal's S-1.

Next page: Dropbox's challenging future

Dropbox's challenging future
Dropbox has a challenging future ahead, facing competitive challenges from the likes of Microsoft, Google and Amazon. But today is a good day for Dropbox, as it enjoys a nice bounce from a public offering Friday.

Dropbox's initial offering on Friday priced at $21 and closed Friday at $28.42, up more than 35%, giving it a market valuation of $12.67 billion, well above the $20 billion valuation it had in its last private funding round.

Dropbox, which trades as DBX, has a lot going for it, reporting $1.1 billion in 2017 revenue when its plans to go public were unsealed in February. And it has big growth potential going forward. It has a fiercely loyal customer base who use the service to share documents, photos, media files and more in the cloud.

Dropbox's IPO raised $756 million, in addition to $100 million Salesforce invested in the company through private placement before the offering.

But Dropbox also faces competitive pressure, as Microsoft and Google offer similar services, integrated with collaboration tools including email, spreadsheets, presentation management and more. Apple has its own document sharing service, iCloud, and is gaining ground in the enterprise. And Amazon S3 is another competitor; Amazon is the king of cloud storage.

Dropbox operates on a "freemium" model; most users pay nothing for the service, while some do pay for additional storage and enterprise tools. One of Dropbox's challenges is converting free customers to paying. Of its 500 million users, only 11 million Dropbox users pay as of December 31; others use the service for free. Paid users get enterprise tools and additional storage.

More than 90% of Dropbox revenue comes from individual users purchasing subscriptions, while other cloud vendors rely on enterprise contracts.

The company posted a net loss of $111.7 million in 2017, narrower than $210 million in 2016 and $111 million in 2015.

While Dropbox faces a highly competitive environment, that's nothing new, CEO Drew Houston told CNBC. "We've always lived in a competitive environment ... and importantly all our growth has happened in that environment," Houston said.

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About the Author(s)

Mitch Wagner

Executive Editor, Light Reading

San Diego-based Mitch Wagner is many things. As well as being "our guy" on the West Coast (of the US, not Scotland, or anywhere else with indifferent meteorological conditions), he's a husband (to his wife), dissatisfied Democrat, American (so he could be President some day), nonobservant Jew, and science fiction fan. Not necessarily in that order.

He's also one half of a special duo, along with Minnie, who is the co-habitor of the West Coast Bureau and Light Reading's primary chewer of sticks, though she is not the only one on the team who regularly munches on bark.

Wagner, whose previous positions include Editor-in-Chief at Internet Evolution and Executive Editor at InformationWeek, will be responsible for tracking and reporting on developments in Silicon Valley and other US West Coast hotspots of communications technology innovation.

Beats: Software-defined networking (SDN), network functions virtualization (NFV), IP networking, and colored foods (such as 'green rice').

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