false--01-31Q3202000015741350.0500.0150.0500.0150.0500.015P1Y426600055110000000.011055381581755142722800000P371DP364D0.400.50 0001574135 2019-02-02 2019-11-01 0001574135 us-gaap:CommonClassBMember 2019-11-29 0001574135 us-gaap:CommonClassAMember 2019-11-29 0001574135 2019-02-01 0001574135 us-gaap:CommonClassAMember 2019-02-01 0001574135 2019-11-01 0001574135 us-gaap:CommonClassBMember 2019-02-01 0001574135 us-gaap:CommonClassBMember 2019-11-01 0001574135 us-gaap:CommonClassAMember 2019-11-01 0001574135 2018-02-03 2018-11-02 0001574135 pvtl:SubscriptionMember 2018-02-03 2018-11-02 0001574135 2018-08-04 2018-11-02 0001574135 2019-08-03 2019-11-01 0001574135 pvtl:SubscriptionMember 2019-02-02 2019-11-01 0001574135 us-gaap:ServiceMember 2019-02-02 2019-11-01 0001574135 pvtl:SubscriptionMember 2019-08-03 2019-11-01 0001574135 us-gaap:ServiceMember 2018-08-04 2018-11-02 0001574135 us-gaap:ServiceMember 2018-02-03 2018-11-02 0001574135 pvtl:SubscriptionMember 2018-08-04 2018-11-02 0001574135 us-gaap:ServiceMember 2019-08-03 2019-11-01 0001574135 2018-11-02 0001574135 2018-02-02 0001574135 us-gaap:NoncontrollingInterestMember 2019-11-01 0001574135 2019-08-02 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-02-02 2019-05-03 0001574135 2019-05-04 2019-08-02 0001574135 pvtl:DellMember 2019-05-04 2019-08-02 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2019-08-02 0001574135 pvtl:VMwareMember us-gaap:AdditionalPaidInCapitalMember 2019-02-02 2019-05-03 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2019-08-03 2019-11-01 0001574135 pvtl:VMwareMember 2019-05-04 2019-08-02 0001574135 us-gaap:AdditionalPaidInCapitalMember 2019-05-04 2019-08-02 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2019-11-01 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2019-02-01 0001574135 us-gaap:AdditionalPaidInCapitalMember 2019-05-03 0001574135 us-gaap:AdditionalPaidInCapitalMember 2019-02-02 2019-05-03 0001574135 us-gaap:AdditionalPaidInCapitalMember 2019-08-03 2019-11-01 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2019-11-01 0001574135 pvtl:DellMember 2019-02-02 2019-05-03 0001574135 us-gaap:AdditionalPaidInCapitalMember 2019-02-01 0001574135 2019-05-03 0001574135 2019-02-02 2019-05-03 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-08-02 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-08-03 2019-11-01 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2019-05-04 2019-08-02 0001574135 us-gaap:RetainedEarningsMember 2019-05-03 0001574135 us-gaap:NoncontrollingInterestMember 2019-08-03 2019-11-01 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2019-08-02 0001574135 us-gaap:NoncontrollingInterestMember 2019-02-01 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-02-01 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2019-02-02 2019-05-03 0001574135 us-gaap:NoncontrollingInterestMember 2019-05-04 2019-08-02 0001574135 us-gaap:RetainedEarningsMember 2019-05-04 2019-08-02 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2019-05-03 0001574135 us-gaap:RetainedEarningsMember 2019-11-01 0001574135 us-gaap:RetainedEarningsMember 2019-08-03 2019-11-01 0001574135 pvtl:VMwareMember us-gaap:AdditionalPaidInCapitalMember 2019-05-04 2019-08-02 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2019-02-01 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-11-01 0001574135 us-gaap:AdditionalPaidInCapitalMember 2019-08-02 0001574135 us-gaap:RetainedEarningsMember 2019-02-02 2019-05-03 0001574135 pvtl:DellMember us-gaap:AdditionalPaidInCapitalMember 2019-08-03 2019-11-01 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2019-05-03 0001574135 us-gaap:NoncontrollingInterestMember 2019-05-03 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-05-03 0001574135 us-gaap:RetainedEarningsMember 2019-02-01 0001574135 pvtl:DellMember 2019-08-03 2019-11-01 0001574135 pvtl:VMwareMember 2019-02-02 2019-05-03 0001574135 us-gaap:NoncontrollingInterestMember 2019-08-02 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-05-04 2019-08-02 0001574135 us-gaap:AdditionalPaidInCapitalMember 2019-11-01 0001574135 pvtl:DellMember us-gaap:AdditionalPaidInCapitalMember 2019-02-02 2019-05-03 0001574135 us-gaap:RetainedEarningsMember 2019-08-02 0001574135 pvtl:DellMember us-gaap:AdditionalPaidInCapitalMember 2019-05-04 2019-08-02 0001574135 us-gaap:NoncontrollingInterestMember 2019-02-02 2019-05-03 0001574135 pvtl:DellMember us-gaap:AdditionalPaidInCapitalMember 2018-08-04 2018-11-02 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-08-03 0001574135 2018-05-05 2018-08-03 0001574135 pvtl:DellMember us-gaap:AdditionalPaidInCapitalMember 2018-02-03 2018-05-04 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2018-02-03 2018-05-04 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-05-05 2018-08-03 0001574135 us-gaap:AdditionalPaidInCapitalMember 2018-05-05 2018-08-03 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-02-02 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-02-02 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-11-02 0001574135 us-gaap:RetainedEarningsMember 2018-05-04 0001574135 2018-02-03 2018-05-04 0001574135 us-gaap:AdditionalPaidInCapitalMember 2018-08-03 0001574135 us-gaap:AdditionalPaidInCapitalMember 2018-08-04 2018-11-02 0001574135 us-gaap:RetainedEarningsMember 2018-08-04 2018-11-02 0001574135 us-gaap:RedeemableConvertiblePreferredStockMember 2018-02-02 0001574135 pvtl:VMwareMember us-gaap:AdditionalPaidInCapitalMember 2018-02-03 2018-05-04 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-02-03 2018-05-04 0001574135 us-gaap:NoncontrollingInterestMember 2018-11-02 0001574135 pvtl:DellMember 2018-05-05 2018-08-03 0001574135 us-gaap:RetainedEarningsMember 2018-05-05 2018-08-03 0001574135 us-gaap:RetainedEarningsMember 2018-11-02 0001574135 us-gaap:NoncontrollingInterestMember 2018-05-04 0001574135 pvtl:VMwareMember 2018-05-05 2018-08-03 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-02-03 2018-05-04 0001574135 us-gaap:AdditionalPaidInCapitalMember 2018-02-02 0001574135 us-gaap:RedeemableConvertiblePreferredStockMember 2018-05-04 0001574135 us-gaap:AdditionalPaidInCapitalMember 2018-11-02 0001574135 us-gaap:RedeemableConvertiblePreferredStockMember 2018-08-03 0001574135 pvtl:VMwareMember 2018-08-04 2018-11-02 0001574135 pvtl:VMwareMember 2018-02-03 2018-05-04 0001574135 us-gaap:AdditionalPaidInCapitalMember 2018-02-03 2018-05-04 0001574135 us-gaap:NoncontrollingInterestMember 2018-05-05 2018-08-03 0001574135 pvtl:DellMember us-gaap:AdditionalPaidInCapitalMember 2018-05-05 2018-08-03 0001574135 us-gaap:RetainedEarningsMember 2018-02-02 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-05-05 2018-08-03 0001574135 us-gaap:NoncontrollingInterestMember 2018-08-03 0001574135 us-gaap:AdditionalPaidInCapitalMember 2018-05-04 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-05-04 0001574135 us-gaap:NoncontrollingInterestMember 2018-08-04 2018-11-02 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-08-04 2018-11-02 0001574135 2018-08-03 0001574135 us-gaap:RetainedEarningsMember 2018-02-03 2018-05-04 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2018-02-02 0001574135 us-gaap:CommonClassAMember us-gaap:CommonStockMember 2018-05-04 0001574135 2018-05-04 0001574135 us-gaap:NoncontrollingInterestMember 2018-02-03 2018-05-04 0001574135 us-gaap:RedeemableConvertiblePreferredStockMember 2018-02-03 2018-05-04 0001574135 pvtl:DellMember 2018-02-03 2018-05-04 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-08-04 2018-11-02 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-11-02 0001574135 us-gaap:NoncontrollingInterestMember 2018-02-02 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2018-08-03 0001574135 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-08-03 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2018-11-02 0001574135 us-gaap:RetainedEarningsMember 2018-08-03 0001574135 us-gaap:CommonClassBMember us-gaap:CommonStockMember 2018-05-04 0001574135 pvtl:DellMember 2018-08-04 2018-11-02 0001574135 pvtl:VMwareMember us-gaap:AdditionalPaidInCapitalMember 2018-08-04 2018-11-02 0001574135 us-gaap:RedeemableConvertiblePreferredStockMember 2018-11-02 0001574135 pvtl:VMwareMember us-gaap:AdditionalPaidInCapitalMember 2018-05-05 2018-08-03 0001574135 us-gaap:CommonClassBMember 2018-04-17 2018-04-17 0001574135 pvtl:VMwareMember pvtl:PivotalSoftwareIncMember us-gaap:CommonClassBMember 2019-08-22 0001574135 pvtl:DellMember pvtl:PivotalSoftwareIncMember 2019-08-22 0001574135 us-gaap:IPOMember 2018-04-20 2018-04-20 0001574135 pvtl:VMwareMember 2019-08-22 0001574135 us-gaap:CommonClassAMember us-gaap:IPOMember 2018-04-20 2018-04-20 0001574135 pvtl:DellMember pvtl:PivotalSoftwareIncMember us-gaap:CommonClassBMember 2019-08-22 0001574135 us-gaap:IPOMember 2018-04-20 0001574135 pvtl:VMwareMember pvtl:PivotalSoftwareIncMember us-gaap:CommonClassAMember 2019-08-22 0001574135 us-gaap:CommonClassAMember us-gaap:OverAllotmentOptionMember 2018-04-20 0001574135 us-gaap:CommonClassAMember 2018-04-17 2018-04-17 0001574135 us-gaap:CommonClassAMember us-gaap:OverAllotmentOptionMember 2018-04-20 2018-04-20 0001574135 srt:MaximumMember 2019-02-02 2019-11-01 0001574135 srt:MinimumMember 2019-02-02 2019-11-01 0001574135 2018-04-06 2018-04-06 0001574135 us-gaap:AccountingStandardsUpdate201602Member 2019-02-02 0001574135 pvtl:DeferredSalesCommissionsMember 2018-02-03 2018-11-02 0001574135 pvtl:DeferredSalesCommissionsMember 2019-02-01 0001574135 pvtl:DeferredSalesCommissionsMember 2019-11-01 0001574135 pvtl:DeferredSalesCommissionsMember 2019-02-02 2019-11-01 0001574135 pvtl:DeferredSalesCommissionsMember 2019-08-03 2019-11-01 0001574135 pvtl:DeferredSalesCommissionsMember 2018-08-04 2018-11-02 0001574135 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2019-02-01 0001574135 us-gaap:LeaseholdImprovementsMember 2019-02-01 0001574135 us-gaap:EquipmentMember 2019-02-01 0001574135 us-gaap:LeaseholdImprovementsMember 2019-11-01 0001574135 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2019-11-01 0001574135 us-gaap:EquipmentMember 2019-11-01 0001574135 us-gaap:FurnitureAndFixturesMember 2019-02-01 0001574135 us-gaap:FurnitureAndFixturesMember 2019-11-01 0001574135 us-gaap:TechnologyBasedIntangibleAssetsMember 2019-02-01 0001574135 us-gaap:CustomerRelatedIntangibleAssetsMember 2019-02-01 0001574135 us-gaap:TrademarksAndTradeNamesMember 2019-02-01 0001574135 us-gaap:CustomerRelatedIntangibleAssetsMember 2019-11-01 0001574135 us-gaap:TrademarksAndTradeNamesMember 2019-11-01 0001574135 us-gaap:TechnologyBasedIntangibleAssetsMember 2019-11-01 0001574135 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2019-02-01 0001574135 us-gaap:FairValueInputsLevel1Member 2019-02-01 0001574135 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member 2019-11-01 0001574135 us-gaap:FairValueInputsLevel1Member 2019-11-01 0001574135 us-gaap:RevolvingCreditFacilityMember 2018-02-02 0001574135 us-gaap:RevolvingCreditFacilityMember 2018-02-03 2018-04-30 0001574135 us-gaap:RevolvingCreditFacilityMember 2019-05-06 0001574135 us-gaap:RevolvingCreditFacilityMember 2019-02-02 2019-11-01 0001574135 us-gaap:RevolvingCreditFacilityMember 2018-04-01 2018-11-02 0001574135 us-gaap:RevolvingCreditFacilityMember 2018-02-03 2018-05-04 0001574135 us-gaap:RevolvingCreditFacilityMember 2018-11-02 0001574135 us-gaap:RevolvingCreditFacilityMember 2019-10-22 2019-10-22 0001574135 pvtl:SubscriptionMember srt:MaximumMember 2019-02-02 2019-11-01 0001574135 2019-11-02 2019-11-01 0001574135 pvtl:ProfessionalServicesMember srt:MaximumMember 2019-02-02 2019-11-01 0001574135 2020-11-02 2019-11-01 0001574135 pvtl:SubscriptionMember srt:MinimumMember 2019-02-02 2019-11-01 0001574135 pvtl:DellTaxSharingAgreementMember pvtl:DellMember 2019-08-29 2019-08-29 0001574135 us-gaap:RestrictedStockUnitsRSUMember 2019-02-02 2019-11-01 0001574135 us-gaap:RestrictedStockUnitsRSUMember 2019-11-01 0001574135 us-gaap:RestrictedStockUnitsRSUMember 2019-02-01 0001574135 us-gaap:ResearchAndDevelopmentExpenseMember 2018-08-04 2018-11-02 0001574135 us-gaap:GeneralAndAdministrativeExpenseMember 2019-08-03 2019-11-01 0001574135 us-gaap:GeneralAndAdministrativeExpenseMember 2018-02-03 2018-11-02 0001574135 pvtl:SubscriptionMember us-gaap:CostOfSalesMember 2019-02-02 2019-11-01 0001574135 us-gaap:SellingAndMarketingExpenseMember 2018-02-03 2018-11-02 0001574135 us-gaap:SellingAndMarketingExpenseMember 2019-02-02 2019-11-01 0001574135 us-gaap:ResearchAndDevelopmentExpenseMember 2019-08-03 2019-11-01 0001574135 us-gaap:ResearchAndDevelopmentExpenseMember 2019-02-02 2019-11-01 0001574135 us-gaap:ServiceMember us-gaap:CostOfSalesMember 2019-02-02 2019-11-01 0001574135 us-gaap:SellingAndMarketingExpenseMember 2019-08-03 2019-11-01 0001574135 us-gaap:SellingAndMarketingExpenseMember 2018-08-04 2018-11-02 0001574135 us-gaap:GeneralAndAdministrativeExpenseMember 2018-08-04 2018-11-02 0001574135 us-gaap:ServiceMember us-gaap:CostOfSalesMember 2019-08-03 2019-11-01 0001574135 pvtl:SubscriptionMember us-gaap:CostOfSalesMember 2018-02-03 2018-11-02 0001574135 pvtl:SubscriptionMember us-gaap:CostOfSalesMember 2018-08-04 2018-11-02 0001574135 us-gaap:ResearchAndDevelopmentExpenseMember 2018-02-03 2018-11-02 0001574135 us-gaap:GeneralAndAdministrativeExpenseMember 2019-02-02 2019-11-01 0001574135 pvtl:SubscriptionMember us-gaap:CostOfSalesMember 2019-08-03 2019-11-01 0001574135 us-gaap:ServiceMember us-gaap:CostOfSalesMember 2018-08-04 2018-11-02 0001574135 us-gaap:ServiceMember us-gaap:CostOfSalesMember 2018-02-03 2018-11-02 0001574135 us-gaap:EmployeeStockMember 2019-11-01 0001574135 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2019-02-02 2019-11-01 0001574135 us-gaap:MajorityShareholderMember 2019-08-03 2019-11-01 0001574135 us-gaap:EmployeeStockMember us-gaap:CommonClassAMember 2018-04-20 0001574135 us-gaap:MajorityShareholderMember 2019-02-02 2019-11-01 0001574135 us-gaap:MajorityShareholderMember 2018-08-04 2018-11-02 0001574135 us-gaap:EmployeeStockMember 2018-08-04 2018-11-02 0001574135 us-gaap:EmployeeStockMember 2019-02-02 2019-11-01 0001574135 pvtl:EmployeeStockOptionandRestrictedStockUnitsRSUsMember 2019-11-01 0001574135 us-gaap:EmployeeStockOptionMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2019-02-02 2019-11-01 0001574135 us-gaap:RestrictedStockUnitsRSUMember 2018-02-03 2018-11-02 0001574135 us-gaap:EmployeeStockMember 2018-04-20 2018-04-20 0001574135 us-gaap:EmployeeStockOptionMember 2019-11-01 0001574135 us-gaap:RestrictedStockUnitsRSUMember 2018-08-04 2018-11-02 0001574135 us-gaap:RestrictedStockUnitsRSUMember 2019-08-03 2019-11-01 0001574135 us-gaap:EmployeeStockMember 2018-02-03 2018-11-02 0001574135 us-gaap:EmployeeStockMember 2019-08-03 2019-11-01 0001574135 us-gaap:EmployeeStockOptionMember 2019-02-02 2019-11-01 0001574135 pvtl:EquityIncentivePlans2018and2013Member 2019-11-01 0001574135 us-gaap:MajorityShareholderMember 2018-02-03 2018-11-02 0001574135 us-gaap:EmployeeStockOptionMember 2019-02-01 0001574135 us-gaap:EmployeeStockOptionMember 2019-02-02 2019-11-01 0001574135 us-gaap:RestrictedStockUnitsRSUMember 2019-02-02 2019-11-01 0001574135 us-gaap:RestrictedStockUnitsRSUMember 2018-02-03 2018-11-02 0001574135 us-gaap:EmployeeStockMember 2018-02-03 2018-11-02 0001574135 us-gaap:EmployeeStockOptionMember 2018-02-03 2018-11-02 0001574135 us-gaap:EmployeeStockMember 2019-02-02 2019-11-01 0001574135 pvtl:DellMember 2018-02-03 2018-11-02 0001574135 pvtl:FordMotorCompanyMember us-gaap:DirectorMember 2018-02-03 2018-11-02 0001574135 pvtl:VMwareMember 2018-02-03 2018-11-02 0001574135 pvtl:DellMember 2019-02-02 2019-11-01 0001574135 pvtl:GeneralElectricCompanyMember us-gaap:DirectorMember 2018-08-04 2018-11-02 0001574135 pvtl:FordMotorCompanyMember us-gaap:DirectorMember 2018-08-04 2018-11-02 0001574135 pvtl:DellandVMWareAgencyAgreementMember us-gaap:MajorityShareholderMember 2018-02-03 2018-11-02 0001574135 pvtl:VMwareMember 2019-08-03 2019-11-01 0001574135 pvtl:DellandVMWareAgencyAgreementMember us-gaap:MajorityShareholderMember 2018-08-04 2018-11-02 0001574135 pvtl:FordMotorCompanyMember us-gaap:DirectorMember 2019-02-01 0001574135 srt:MaximumMember us-gaap:MajorityShareholderMember 2019-02-02 2019-11-01 0001574135 pvtl:VMwareMember 2018-08-04 2018-11-02 0001574135 pvtl:FordMotorCompanyMember us-gaap:DirectorMember 2019-08-03 2019-11-01 0001574135 pvtl:FordMotorCompanyMember us-gaap:DirectorMember 2019-02-02 2019-11-01 0001574135 pvtl:DellTaxSharingAgreementReturntoProvisionUpdateMember pvtl:DellMember 2019-11-01 0001574135 pvtl:DellMember 2019-08-03 2019-11-01 0001574135 pvtl:FordMotorCompanyMember us-gaap:DirectorMember 2019-11-01 0001574135 pvtl:GeneralElectricCompanyMember us-gaap:DirectorMember 2018-02-03 2018-11-02 0001574135 pvtl:DellandVMWareAgencyAgreementMember us-gaap:MajorityShareholderMember 2019-08-03 2019-11-01 0001574135 pvtl:DellandVMWareAgencyAgreementMember us-gaap:MajorityShareholderMember 2019-02-02 2019-11-01 0001574135 pvtl:DellMember 2018-08-04 2018-11-02 0001574135 pvtl:DellTaxSharingAgreementMember pvtl:DellMember 2019-11-01 0001574135 pvtl:VMwareMember 2019-02-02 2019-11-01 0001574135 srt:MinimumMember us-gaap:MajorityShareholderMember 2019-02-02 2019-11-01 0001574135 srt:MaximumMember us-gaap:MajorityShareholderMember 2018-08-04 2018-11-02 0001574135 srt:MaximumMember us-gaap:MajorityShareholderMember 2018-02-03 2018-11-02 0001574135 srt:MaximumMember us-gaap:MajorityShareholderMember 2019-08-03 2019-11-01 0001574135 srt:MinimumMember us-gaap:MajorityShareholderMember 2019-08-03 2019-11-01 0001574135 srt:MinimumMember us-gaap:MajorityShareholderMember 2018-08-04 2018-11-02 0001574135 srt:MinimumMember us-gaap:MajorityShareholderMember 2018-02-03 2018-11-02 0001574135 pvtl:LitigationRelatedtotheMergerAgreementMember us-gaap:SubsequentEventMember 2019-12-06 2019-12-06 0001574135 pvtl:LitigationRelatedtoViolationsofSecuritiesLawsinConnectionwithIPOandThereafterMember 2019-06-14 2019-06-27 0001574135 country:US 2019-08-03 2019-11-01 0001574135 country:US 2018-08-04 2018-11-02 0001574135 us-gaap:NonUsMember 2018-08-04 2018-11-02 0001574135 us-gaap:NonUsMember 2019-02-02 2019-11-01 0001574135 us-gaap:NonUsMember 2018-02-03 2018-11-02 0001574135 country:US 2018-02-03 2018-11-02 0001574135 us-gaap:NonUsMember 2019-08-03 2019-11-01 0001574135 country:US 2019-02-02 2019-11-01 pvtl:letter pvtl:vote xbrli:pure iso4217:USD xbrli:shares pvtl:complaint xbrli:shares iso4217:USD

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

FORM 10-Q

______________________________________________



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

For the quarterly period ended November 1, 2019



☐	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

(415) 777-4868

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.01	PVTL	New York Stock Exchange

_______________________________________________________________________

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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	☐	Accelerated filer	☐

Non-accelerated filer	☑	Smaller reporting company	☐
		Emerging growth company	☑

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. ☑

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

There were 281,106,853 shares of common stock outstanding, consisting of 105,592,581 outstanding shares of Class A common stock and 175,514,272 outstanding shares of Class B common stock, as of November 29, 2019.

Pivotal Software, Inc.

Table of Contents



		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of November 1, 2019 and February 1, 2019	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended November 1, 2019 and November 2, 2018	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended November 1, 2019 and November 2, 2018	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 1, 2019 and November 2, 2018	4
	Condensed Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended November 1, 2019	5
	Condensed Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity for the Three and Nine Months Ended November 2, 2018	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	32

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	62
Signatures		63

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pivotal Software, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)



	November 1, 2019			February 1, 2019
Assets
Current assets:
Cash and cash equivalents	$	821,939		$	701,733
Accounts receivable, net of allowance of $5,511 and $4,266 as of November 1, 2019 and February 1, 2019, respectively	156,627			308,492
Due from Parent	1,627			951
Deferred sales commissions, current	35,669			39,572
Other assets, current	17,426			16,738
Total current assets	1,033,288			1,067,486
Property, plant and equipment, net	26,167			27,879
Operating lease right-of-use assets	126,416			—
Intangible assets, net	14,496			18,680
Goodwill	696,226			696,226
Deferred income taxes	300			258
Deferred sales commissions, noncurrent	34,646			35,522
Other assets, noncurrent	7,266			4,417
Total assets	$	1,938,805		$	1,850,468

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	15,238		$	18,421
Due to Parent	16,355			20,241
Accrued expenses	54,549			64,723
Income taxes payable	590			1,232
Deferred revenue, current	289,693			376,985
Operating lease liabilities, current	22,571			—
Other liabilities, current	10,687			4,373
Total current liabilities	409,683			485,975
Deferred revenue, noncurrent	47,071			89,603
Operating lease liabilities, noncurrent	116,305			—
Other liabilities, noncurrent	2,183			9,412
Total liabilities	575,242			584,990
Commitments and contingencies (Note 15)
Stockholders’ equity:
Class A common stock	1,055			901
Class B common stock	1,755			1,755
Additional paid-in capital	2,732,206			2,540,921
Accumulated deficit	(1,377,458		)	(1,284,503		)
Accumulated other comprehensive income	5,329			5,687
Total Pivotal stockholders’ equity	1,362,887			1,264,761
Non-controlling interest	676			717
Total stockholders’ equity	1,363,563			1,265,478
Total liabilities and stockholders’ equity	$	1,938,805		$	1,850,468

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

Pivotal Software, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)



	Three Months Ended						Nine Months Ended
	November 1, 2019			November 2, 2018			November 1, 2019			November 2, 2018
Revenue:
Subscription	$	139,758		$	100,775		$	403,604		$	288,390
Services	58,521			67,368			173,386			199,896
Total revenue	198,279			168,143			576,990			488,286

Cost of revenue:
Subscription	9,649			7,813			27,313			24,047
Services	51,292			53,179			154,755			157,470
Total cost of revenue	60,941			60,992			182,068			181,517

Gross Profit	137,338			107,151			394,922			306,769
Operating expenses:
Sales and marketing	83,198			70,620			247,458			210,308
Research and development	58,832			51,880			173,763			143,309
General and administrative	30,640			20,546			75,342			57,979
Total operating expenses	172,670			143,046			496,563			411,596

Loss from operations	(35,332		)	(35,895		)	(101,641		)	(104,827		)
Other income, net	2,634			1,866			10,054			2,412
Loss before provision for income taxes	(32,698		)	(34,029		)	(91,587		)	(102,415		)
Provision for income taxes	409			776			1,409			549
Net loss	(33,107		)	(34,805		)	(92,996		)	(102,964		)
Less: Net loss (income) attributable to non-controlling interest	4			(45		)	41			(8		)
Net loss attributable to Pivotal	$	(33,103	)	$	(34,850	)	$	(92,955	)	$	(102,972	)

Net loss per share attributable to common stockholders, basic and diluted	$	(0.12	)	$	(0.13	)	$	(0.34	)	$	(0.50	)

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted	277,567			258,408			272,935			207,072

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

Pivotal Software, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)



	Three Months Ended						Nine Months Ended
	November 1, 2019			November 2, 2018			November 1, 2019			November 2, 2018
Net loss	$	(33,107	)	$	(34,805	)	$	(92,996	)	$	(102,964	)
Foreign currency translation adjustments	(92		)	(194		)	(358		)	(28		)
Comprehensive loss	(33,199		)	(34,999		)	(93,354		)	(102,992		)
Less: Net loss (income) attributable to the non-controlling interest	4			(45		)	41			(8		)
Comprehensive loss attributable to Pivotal	$	(33,195	)	$	(35,044	)	$	(93,313	)	$	(103,000	)

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

Pivotal Software, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	Nine Months Ended
	November 1, 2019			November 2, 2018
Cash flows from operating activities:
Net loss	$	(92,996	)	$	(102,964	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of intangible assets	12,743			13,824
Amortization of lease right-of-use assets and other expense	22,946			—
Stock-based compensation expense	73,561			49,233
Provision for doubtful accounts	612			2,361
Deferred income taxes	(57		)	(147		)
Gain on sale of investment	(746		)	(3,234		)
Other	326			1,491
Changes in assets and liabilities
Accounts receivable	151,221			43,895
Due from Parent	(1,076		)	37
Deferred sales commissions	4,780			6,697
Other assets	(1,553		)	(2,758		)
Accounts payable	(2,851		)	(2,041		)
Due to Parent	(5,584		)	(3,337		)
Deferred revenue	(129,804		)	(10,189		)
Accrued expenses	(9,442		)	(16,186		)
Operating lease liabilities	(23,080		)	—
Other liabilities	6,039			9,970
Net cash provided by (used in) operating activities	5,039			(13,348		)

Cash flows from investing activities:
Additions to property, plant and equipment	(7,222		)	(6,929		)
Proceeds from sale of investment	1,929			3,234
Net cash used in investing activities	(5,293		)	(3,695		)

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	85,172			41,852
Proceeds from employee stock plans	8,967			—
Contribution from Dell	26,500			41,277
Borrowings on credit facility	—			15,000
Repayments on credit facility	—			(35,000		)
Net cash provided by financing activities	120,639			607,803
Effect of exchange rate changes on cash and cash equivalents	(179		)	1,032
Net increase in cash and cash equivalents	120,206			591,792
Cash and cash equivalents at beginning of period	701,733			73,012
Cash and cash equivalents at end of period	$	821,939		$	664,804

Supplemental disclosure of non-cash operating:
Operating right-of-use assets obtained in exchange for lease liabilities	8,105			—
Supplemental disclosure of non-cash financing
Amounts owing to Dell included in Due to Parent	(1,800		)	—

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

Pivotal Software, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

(unaudited)



	Class A Common Stock			Class B Common Stock			Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive income			Non- controlling interest			Total stockholders’ equity
	Shares	Par value		Shares	Par value		Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive income			Non- controlling interest			Total stockholders’ equity
Balances at February 1, 2019	90,124	$	901	175,514	$	1,755	$	2,540,921		$	(1,284,503	)	$	5,687		$	717		$	1,265,478
Stock-based compensation (Pivotal equity)							21,707												21,707
Issuance of common stock under employee equity plans	4,159	42					29,972												30,014
Vested restricted stock units	2,018	20					(20		)										—
Investment from Dell, net							26,730												26,730
Investment from VMware							33												33
Translation adjustment													(192		)				(192		)
Net Loss										(31,737		)				(46		)	(31,783		)
Balances at May 3, 2019	96,301	$	963	175,514	$	1,755	$	2,619,343		$	(1,316,240	)	$	5,495		$	671		$	1,311,987
Stock-based compensation (Pivotal equity)							25,166												25,166
Issuance of common stock under employee equity plans	1,793	18					14,852												14,870
Vested restricted stock units	539	5					(5		)										—
Investment from Dell, net							690												690
Investment from VMware							(34		)										(34		)
Translation adjustment													(74		)				(74		)
Net Loss										(28,115		)				9			(28,106		)
Balances at August 2, 2019	98,633	$	986	175,514	$	1,755	$	2,660,012		$	(1,344,355	)	$	5,421		$	680		$	1,324,499
Stock-based compensation (Pivotal equity)							26,047												26,047
Issuance of common stock under employee equity plans	6,276	63					48,637												48,700
Vested restricted stock units	629	6					(6)												—
Investment from Dell, net							(2,484)												(2,484		)
Translation adjustment													(92		)				(92		)
Net Loss										(33,103		)				(4		)	(33,107		)
Balances at November 1, 2019	105,538	$	1,055	175,514	$	1,755	$	2,732,206		$	(1,377,458	)	$	5,329		$	676		$	1,363,563

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

Pivotal Software, Inc.

Condensed Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity

(in thousands)

(unaudited)



	Redeemable Convertible Preferred Stock				Class A Common Stock			Class B Common Stock			Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive income			Non- controlling interest			Total stockholders’ equity
	Shares	Amount			Shares	Par value		Shares	Par value
Balances at February 2, 2018	147,879	$	1,248,327		4,293	$	43	65,048	$	650	$	595,113		$	(1,142,600	)	$	5,554		$	712		$	(540,528	)
Stock-based compensation (Pivotal equity)											10,526												10,526
Issuance of common stock under employee equity plans					1,087	11					6,599												6,610
Conversion of preferred stock to common stock	(147,879)	(1,248,327		)	37,412	374		110,466	1,105		1,246,848												1,248,327
Initial public offering, net of issuance costs					38,667	387					544,034												544,421
Investment from Dell, net											11,662												11,662
Investment from VMware											(51		)										(51		)
Translation adjustment																	161						161
Net Loss														(32,515		)				(42		)	(32,557		)
Balances at May 4, 2018	—	$	—		81,459	$	815	175,514	$	1,755	$	2,414,731		$	(1,175,115	)	$	5,715		$	670		$	1,248,571
Stock-based compensation (Pivotal equity)											18,747												18,747
Issuance of common stock under employee equity plans					400	4					2,810												2,814
Investment from Dell, net											255												255
Investment from VMware											25												25
Translation adjustment																	5						5
Net Loss														(35,607		)				5			(35,602		)
Balances at August 3, 2018	—	$	—		81,859	$	819	175,514	$	1,755	$	2,436,568		$	(1,210,722	)	$	5,720		$	675		$	1,234,815
Stock-based compensation (Pivotal equity)											19,151												19,151
Issuance of common stock under employee equity plans					4,885	48					32,853												32,901
Investment from Dell, net											426												426
Investment from VMware											41												41
Translation adjustment																	(194		)				(194		)
Net Loss														(34,850		)				45			(34,805		)
Balances at November 2, 2018	—	$	—		86,744	$	867	175,514	$	1,755	$	2,489,039		$	(1,245,572	)	$	5,526		$	720		$	1,252,335

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

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 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 2019 fiscal year (“fiscal 2019”) ended on February 1, 2019 and our 2020 fiscal year (“fiscal 2020”) will end on January 31, 2020.

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 of 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. 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 1, 2019 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 statement 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 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended February 1, 2019, filed with the SEC on March 29, 2019.

Our majority-controlling stockholder is Dell Technologies Inc. (“Dell”). VMware, Inc. (“VMware”), which is also a majority-owned subsidiary of Dell, and Dell are collectively referred to as the “Parent” in these notes to the consolidated financial statements. Our results of operations and financial position are consolidated with Dell’s financial statements.

Our financial information includes estimates and allocations of certain corporate functions provided to us by Dell. 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.

Proposed Merger with VMware

On August 22, 2019, Pivotal entered into an Agreement and Plan of Merger (the “Merger Agreement”) with VMware and Raven Transaction Sub, Inc., a Delaware corporation and a wholly owned subsidiary of VMware (“Merger Sub”). The Merger Agreement provides that, subject to certain terms and conditions, Merger Sub will merge with and into Pivotal (the “Merger”), with Pivotal surviving the Merger and becoming a wholly owned subsidiary of VMware.

Pivotal and VMware are both majority-owned subsidiaries of Dell. Based on the amount of outstanding capital stock reported in this report on Form 10-Q, VMware owns approximately 15.7% of Pivotal’s outstanding common stock, consisting entirely of shares of Pivotal’s Class B common stock, par value $0.01. Dell indirectly through VMware and through EMC Equity Assets LLC, a Delaware limited liability company (“EMC”), beneficially owns 100% of the outstanding shares of the Class B common stock, representing approximately 62.4% of Pivotal’s outstanding common stock.

The terms of the Merger Agreement provide that, unless otherwise specified in the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Pivotal’s Class A common stock will be canceled and automatically converted into the right to receive $15.00 in cash, without interest and subject to deduction for any required withholding tax. The terms of the Merger Agreement also provide that, unless otherwise specified in the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of the Class B common stock will be converted into the right to receive 0.0550 of a share of Class B common stock of VMware.

The Merger and the Merger Agreement have been approved by the boards of directors of each of VMware (acting upon the unanimous recommendation of a special committee of the board of directors of VMware, consisting solely of independent and disinterested directors, authorized to, among other things, negotiate, evaluate and approve or disapprove potential transactions with Pivotal) and Pivotal (acting upon the unanimous recommendation of a special committee of the board of directors of Pivotal (the “Pivotal Special Committee”), consisting solely of independent and disinterested directors authorized to, among other things, negotiate, evaluate and approve or disapprove a potential transaction with VMware).

Completion of the transaction is conditioned on the adoption of the Merger Agreement by the holders of (i) at least a majority of the outstanding shares of the Class A common stock not owned by VMware or any of its affiliates (including Dell and EMC), (ii) at least a majority of the outstanding shares of the Class A common stock, (iii) at least a majority of outstanding shares of the Class B common stock, and (iv) at least a majority of the outstanding shares of the Class A common stock and the Class B common stock, voting together as a single class, which condition is not subject to waiver by Pivotal or VMware.

Completion of the transaction is also subject to other customary closing conditions including (i) the absence of any order, judgment or decree by any governmental entity that prohibits or makes the consummation of the transaction illegal, (ii) subject to certain exceptions, the accuracy of each party’s representations and warranties and (iii) compliance in all material respects by each party with its obligations under the Merger Agreement. The transaction is not subject to a financing condition.

The Merger Agreement contains customary representations and warranties of both Pivotal and VMware. Pivotal has also agreed to customary covenants regarding the operation of Pivotal and its subsidiaries prior to the effective time of the Merger, including covenants not to, during the pendency of the Merger, solicit alternative transactions or, subject to certain exceptions, enter into discussions concerning, or provide confidential information in connection with, an alternative transaction.

The Merger Agreement contains certain customary termination rights for Pivotal and VMware, including a right for either party to terminate the Merger Agreement if the Merger is not completed by February 18, 2020, unless otherwise extended pursuant to the terms of the Merger Agreement. The Merger Agreement further provides that, upon termination of the Merger Agreement under certain specified circumstances, Pivotal will be obligated to pay VMware a termination fee of $95.0 million.

Concurrently with the execution of the Merger Agreement, Ford Motor Company (“Ford”) entered into a voting agreement pursuant to which Ford has agreed, among other things and subject to the terms and conditions set forth therein, to vote its shares of the Class A common stock in favor of the adoption of the Merger Agreement and the transactions contemplated thereby, including the Merger. Until the closing, Pivotal will continue to operate as an independent company.

Pivotal’s definitive proxy statement on Schedule 14A and amended Schedule 13E-3 were filed with the SEC on November 27, 2019. Pivotal has set the close of business on November 4, 2019 as the record date for the special meeting of

stockholders scheduled for December 27, 2019, at which stockholders will vote on, among other things, a proposal to approve and adopt the Merger Agreement.

A description of the material terms of the Merger Agreement can be found in Pivotal’s Current Report on Form 8-K filed with the SEC on August 27, 2019 and Pivotal’s definitive proxy statement on Schedule 14A.


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 upon 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 when accounting for revenue arrangements, including the determination of the standalone selling price of performance obligations, the amortization period of deferred commissions, income taxes and the related valuation allowance and the valuation of common stock options. In the condensed consolidated balance sheets, estimates are used in determining 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 and operating lease liabilities, all of which also impact the condensed consolidated statements of operations. Actual results could differ from these estimates.

Significant Accounting Policies

Notwithstanding the addition of the policy below for leases, there were no significant changes to our accounting policies disclosed in “Note 2—Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended February 1, 2019.

Leases

We determine if an arrangement is a lease at its inception. Our operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for our operating leases, we generally use an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating right-of-use (“ROU”) assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component for all of our operating leases.

Our operating leases are included in operating ROU assets, current operating lease liabilities and noncurrent operating lease liabilities in our condensed consolidated balance sheet. Leases with a term of 12 months or less are not recorded on the condensed consolidated balance sheet.

Variable lease payments, which do not vary based on an index or rate, are excluded from our ROU asset and lease liability determination. Our variable lease payments are typically usage-based and we record them in the period in which the obligation for those payments is incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Recently Adopted Accounting Pronouncement

Leases—In 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 lease expense on their statements of operations in a manner similar to current practice. The standard 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 standard is effective for annual and interim periods beginning with our fiscal 2020. We have adopted this standard on the first day of our fiscal year ending January 31, 2020, using a modified retrospective transition method. We elected the transition method discussed in ASU 2018-11 and our reporting for the comparative periods presented in the year of adoption continue to be in accordance with “Leases (Topic 840),” including the associated disclosure requirements. We elected the package of practical expedients permitted under the transition guidance, which, among other things, allows us to carry forward the historical lease classification. We did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets.

The adoption of this standard effective the beginning of our new fiscal year, resulted in the recognition of operating lease assets and liabilities of approximately $136.4 million and $149.1 million, respectively, as of February 2, 2019. The difference between the amounts, represented the deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of right-of-use assets. The adoption of the standard on February 2, 2019 did not have a material impact on our condensed consolidated statements of operations, stockholders’ equity and cash flows.

New Accounting Pronouncements to be Adopted

Financial Instruments—Credit Losses—In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 changes the impairment model for most financial assets, and will require the use of an expected loss model in place of the currently used incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This update to the standard is effective for our interim and annual periods beginning February 1, 2020. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

Intangibles—Goodwill and Other—Internal-Use Software—In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update to the standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the ASU 2018-15 prospectively or retrospectively. This standard is effective for our interim and annual periods beginning February 1, 2020. The Company is currently evaluating the impact of the adoption of ASU 2018-15 on its consolidated financial statements.


3.	Deferred Sales Commissions

Deferred sales commissions, current and noncurrent, were $70.3 million and $75.1 million as of November 1, 2019 and February 1, 2019, respectively. Amortization expense for deferred commissions costs was $13.6 million and $12.5 million for the three months ended November 1, 2019 and November 2, 2018, respectively, and was $40.2 million and $36.9 million for the nine months ended November 1, 2019 and November 2, 2018, respectively. We amortize the commissions related to sales to new subscription customers, or the expansion of existing subscription customers, over an estimated period of benefit which has been determined to be the expected customer life. We amortize the commissions related to renewals of existing subscription customer contracts over the term of the contracts. Commissions paid for services contracts are amortized over the expected service delivery periods of the services. There were no impairment losses recorded 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):



	November 1, 2019			February 1, 2019
Furniture and fixtures	$	7,844		$	7,298
Equipment	25,313			21,471
Software	7,700			6,900
Leasehold improvements	39,683			38,171
Total property, plant and equipment	80,540			73,840
Accumulated depreciation	(54,373		)	(45,961		)
Property, plant and equipment, net	$	26,167		$	27,879

For both the three months ended November 1, 2019 and November 2, 2018, depreciation expense was $2.8 million, and for the nine months ended November 1, 2019 and November 2, 2018, depreciation expense was $8.6 million and $8.7 million, respectively.


5.	Intangible Assets

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



	November 1, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	$	87,573	$	(87,560	)	$	13
Trademarks and tradenames	12,900		(12,681		)	219
Customer relationships and customer lists	55,800		(41,536		)	14,264
Intangible Assets	$	156,273	$	(141,777	)	$	14,496



	February 1, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased technology	$	87,573	$	(87,420	)	$	153
Trademarks and tradenames	12,900		(11,612		)	1,288
Customer relationships and customer lists	55,800		(38,561		)	17,239
Intangible Assets	$	156,273	$	(137,593	)	$	18,680

For the three months ended November 1, 2019 and November 2, 2018, amortization expense was $1.5 million and $1.6 million, respectively, and for the nine months ended November 1, 2019 and November 2, 2018, amortization expense was $4.2 million and $5.1 million, respectively.

As of November 1, 2019, future expected amortization expense of intangible assets is expected to be as follows (in thousands):



Fiscal Year	Amortization Expense
Remainder of 2020	$	1,274
2021	3,835
2022	3,111
2023	2,948
2024	2,693
Thereafter	635

6. Leases

We lease certain office spaces which we have classified as operating leases. Most of our leases include one or more options to renew. The exercise of lease renewal options are at our sole discretion and we included all renewals that are reasonably certain at the reporting period end date in the calculation of our ROU assets and liabilities.

Certain of our sublease arrangements include an option to early terminate the lease arrangement. We do not disclose sublease income for periods for which a termination option exists, unless we are reasonably certain it will not be exercised.

Supplemental balance sheet information related to leases were as follows:



	November 1, 2019
Operating leases:
Weighted average remaining lease term (in years)	6.6
Weighted average discount rate (in percentage points)	6.0

The components of lease expense for the periods presented were as follows (in thousands):



	Three months ended			Nine months ended
	November 1, 2019			November 1, 2019
Operating lease cost	$	7,529		$	22,946
Short term lease cost (a)	—			—
Variable lease cost	2,370			6,304
Sublease income	(1,322		)	(5,260		)
Total net lease cost	$	8,577		$	23,990

(a) During the three and nine months ended November 1, 2019, no material short-term leases were capitalized.

Maturities of lease liabilities were as follows (in thousands):



	November 1, 2019
	Operating Leases (a)
Remainder of 2020	$	9,232
2021	30,738
2022	28,639
2023	24,422
2024	21,181
2025 and thereafter	57,814
Total lease payments	172,026
Less: Imputed interest	(33,150		)
Present value of lease liabilities	$	138,876

(a) Operating lease payments exclude $16.6 million of legally binding minimum lease payments for leases signed but not yet commenced.

Our future minimum lease commitments as of February 1, 2019, as disclosed in our most recent Annual Report on Form 10-K, represent our undiscounted non-cancelable operating lease arrangements, and have not materially changed since the last Form 10-K filing.


7.	Accrued Expenses

Accrued expenses consist of the following (in thousands):



	November 1, 2019		February 1, 2019
Accrued salaries, commissions and benefits	$	31,534	$	45,645
Other	23,015		19,078
Accrued expenses	$	54,549	$	64,723


8.	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:


•	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 $821.9 million and $701.7 million as of November 1, 2019 and February 1, 2019, 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 $751.6 million and $614.2 million as of November 1, 2019 and February 1, 2019, respectively.


9.	Debt

On October 22, 2019, we terminated our credit agreement and related security agreement. As part of the termination, we accelerated the associated unamortized debt costs, which resulted in $0.3 million of expense in the period. Prior to that date, we maintained a credit agreement and related security agreement with Silicon Valley Bank and certain other banks. The senior secured revolving loan facility (the “Revolving Facility”) in an aggregate principal amount not to exceed $100.0 million, was first entered into on September 8, 2017 and amended on May 6, 2019. Borrowings under the Revolving Facility were secured by our tangible assets.

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 in April 2018. During the period from April 2018 to November 2, 2018, we did not draw down on the Revolving Facility and no amounts were outstanding under the Revolving Facility. During the nine months ended November 1, 2019, we did not draw down on the Revolving Facility.


10.	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 November 1, 2019 and November 2, 2018 we recognized revenue of $124.0 million and $103.6 million, respectively, and during the nine months ended November 1, 2019 and November 2, 2018 we recognized revenue of $319.0 million and $249.3 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 is 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.

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 one year. Our subscription contracts are non-cancelable over the contractual term. As of November 1, 2019, 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 $820 million. We expect to recognize approximately 60% of the transaction price as subscription or services revenue over the next 12 months and the remainder thereafter. As of February 1, 2019, 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 $990 million.


11.	Income Taxes

As a result of the IPO, we are no longer included in the Dell 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 Dell. 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 November 1, 2019, we have a net deferred tax asset of $0.3 million.

The income tax provision was $0.4 million and $0.8 million for the three months ended November 1, 2019 and November 2, 2018, respectively. The income tax provision was $1.4 million and $0.5 million for the nine months ended November 1, 2019 and November 2, 2018, respectively. Our quarterly provision is primarily related to foreign taxes due in profitable jurisdictions.

In April 2019, we amended our Tax Sharing Agreement (“TSA”) with Dell with regard to the treatment of certain 2017 Tax Cut and Jobs Act implications not explicitly covered by the original terms of the TSA. As a result of the amendment, Pivotal received a one-time payment of $26.5 million on August 29, 2019 from Dell for the current benefit and estimated future expense related to Pivotal’s foreign deficits included in the transition tax determination in the Dell Fiscal 2018 federal tax return.


12.	Common Stock and Stock-Based Awards

As of November 1, 2019, we had 4,000,000,000 shares of Class A common stock authorized, of which 105,538,158 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 November 1, 2019, we had reserved 19,692,191 shares of common stock available for future equity award grants under our equity incentive plans. We also had reserved 49,282,849 shares of common stock 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 2020 has been estimated on the date of grant using the Black-Scholes option pricing model.

The following table reflects our stock option activity during the nine months ended November 1, 2019 (in thousands, except weighted-average exercise price):



	Number of Shares Subject to Options		Weighted-Average Exercise Price
Options outstanding at February 1, 2019	45,901		$	8.31
Granted	—		$	—
Exercised	(11,250	)	$	7.53
Forfeited	(2,018	)	$	10.13
Expired / cancelled	(90	)	$	9.76
Options outstanding at November 1, 2019	32,543		$	8.47

As of November 1, 2019, there was $34.5 million of unrecognized compensation cost related to the unvested options, which is expected to be recognized over the remaining vesting period of the options.

Restricted Stock Units

The Company granted 11.9 million and 9.3 million Restricted Stock Units (“RSUs”) with an aggregate fair value of $199.8 million and $145.7 million during the nine months ended November 1, 2019 and November 2, 2018, respectively. 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 nine months ended November 1, 2019 (in thousands, except weighted-average grant fair value):



	Number of Restricted Stock Units		Weighted-Average Grant Fair Value
RSUs outstanding at February 1, 2019	9,501		$	15.77
Granted	11,923		$	16.76
Vested	(3,186	)	$	15.51
Forfeited	(1,428	)	$	16.80
RSUs outstanding at November 1, 2019	16,810		$	16.43

For the three and nine months ended November 1, 2019, stock-based compensation expense associated with RSUs was $19.6 million and $48.8 million, respectively. For three and nine months ended November 2, 2018, stock-based compensation expense associated with RSUs was $8.9 million and $18.7 million, respectively. As of November 1, 2019, there was $247.8 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 currently reserves and authorizes the issuance of up to a total of 6,003,420 shares of Class A common stock to participating employees. Eligible employees may elect to participate in the ESPP, upon which the employee authorizes payroll deductions 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 current offering period under the ESPP commenced on July 11, 2019 and will end on January 10, 2020. 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. As of November 1, 2019, there were 4,291,613 shares of the Company’s common stock available for future issuance under the ESPP.

For the three and nine months ended November 1, 2019, stock-based compensation expense associated with the ESPP was $1.0 million and $3.8 million, respectively. For the three and nine months ended November 2, 2018, stock-based compensation expense associated with the ESPP was $0.8 million and $2.0 million, respectively. As of November 1, 2019, there was $1.0 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over the remaining term of the 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				Nine Months Ended
	November 1, 2019		November 2, 2018		November 1, 2019		November 2, 2018
Cost of revenue - subscription	$	703	$	404	$	1,811	$	1,042
Cost of revenue - services	5,567		4,248		15,778		10,726
Sales and marketing	7,645		5,854		22,066		15,112
Research and development	8,001		5,521		22,110		13,771
General and administrative	4,248		3,401		11,796		8,582
Total stock-based compensation expense	$	26,164	$	19,428	$	73,561	$	49,233

The expense related to awards previously granted by Dell and VMware to certain of our employees was $0.1 million and $0.3 million for the three months ended November 1, 2019 and November 2, 2018, respectively, and was $0.7 million and $0.9 million for the nine months ended November 1, 2019 and November 2, 2018, respectively.


13.	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						Nine Months Ended
	November 1, 2019			November 2, 2018			November 1, 2019			November 2, 2018
Numerator:
Net loss attributable to common stockholders	$	(33,103	)	$	(34,850	)	$	(92,955	)	$	(102,972	)

Denominator:
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted	277,567			258,408			272,935			207,072

Net loss per share attributable to common stockholders, basic and diluted	$	(0.12	)	$	(0.13	)	$	(0.34	)	$	(0.50	)

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):



	November 1, 2019	November 2, 2018
Shares subject to outstanding common stock options	32,543	48,966
Unvested RSUs outstanding	16,810	9,120
Shares committed under the ESPP	1,090	752
Total	50,443	58,838


14.	Related Party Transactions

Dell and VMware Agency Arrangements

Since our formation, we have entered into agency arrangements with Dell and VMware that enable our sales team to sell our subscriptions and services leveraging the Dell and VMware enterprise relationships and end customer contracts. These transactions result in Dell 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 5.0% for both the three and nine months ended November 1, 2019 and November 2, 2018, respectively.

In aggregate, we paid Dell and VMware $1.8 million and $1.7 million for the three months ended November 1, 2019 and November 2, 2018, respectively, and $5.0 million and $7.5 million for the nine months ended November 1, 2019 and November 2, 2018, 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 Dell and VMware

From time to time, we have sold our software products and professional, software support and other services to Dell and VMware for their internal use. Revenue recognized for sales of our products and services to Dell was $4.8 million and $3.3 million for the three months ended November 1, 2019 and November 2, 2018, respectively, and $17.1 million and $10.1 million for the nine months ended November 1, 2019 and November 2, 2018, respectively. Revenue recognized for sales of our products and services to VMware was $0.3 million and $0.5 million for the three months ended November 1, 2019 and November 2, 2018, respectively, and $0.9 million and $1.3 million for the nine months ended November 1, 2019 and November 2, 2018, respectively.

Dell and VMware Transition Services and Employee Matters Agreements

We engage Dell in several ongoing related party transactions which result in costs charged to us. Dell acts as a paying agent for certain international payroll, accounts payable and other expenses.

Pursuant to ongoing shared services and employee matters agreements, we are charged by Dell for certain administrative services, including certain financial services as well as support services where Pivotal does not have a legal entity, based upon estimates and allocations. Additionally, in certain geographic regions where we do not have an established legal entity, we contract with Dell subsidiaries for support services. We are charged for overhead items such as facilities and IT systems for our employees that work from Dell office locations. The costs incurred by Dell 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 facility costs.

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 Dell for the three months ended November 1, 2019 and November 2, 2018 were $11.5 million and $5.3 million, respectively, and were $27.0 million and $21.5 million for the nine months ended November 1, 2019 and November 2, 2018, respectively.

Dell Tax Sharing Agreement

Pursuant to a tax sharing agreement Pivotal has historically received payments from Dell for the tax benefits derived from the inclusion of our losses in certain Dell 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 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 realizes from our inclusion in their unitary state returns.

In April 2019, we amended our TSA with Dell with regard to the treatment of certain 2017 Tax Cut and Jobs Act implications not explicitly covered by the original terms of the TSA. The amendment provided that we would receive a one-time payment of $26.5 million from Dell for the current benefit and estimated future expense related to Pivotal’s foreign deficits included in the transition tax determination in the Dell fiscal 2018 federal tax return. Dell’s payment to Pivotal was received in August 2019.

As of November 1, 2019, the net payable related to the TSA with Dell was $1.8 million. The balance is comprised primarily of a return-to-provision update of $2.6 million related to the finalization of our fiscal 2019 federal taxable income, partially offset by a provision for state receivables which are not yet final.

Other Related Party Transactions

Through September 6, 2018, certain of our directors were also executives of companies that are our customers. Subsequent to this date, only the director from Ford remains an executive of a company that is our customer.

Revenue recognized from sales of subscriptions and services to Ford was $2.0 million and $2.5 million for the three months ended November 1, 2019 and November 2, 2018, respectively, and $5.5 million and $9.4 million for the nine months ended November 1, 2019 and November 2, 2018, respectively. We had outstanding accounts receivable balances from Ford of $11.5 million and $1.8 million as of November 1, 2019 and February 1, 2019, respectively.

Revenue recognized from sales of subscriptions and services to General Electric (“GE”) was $0.9 million and $6.8 million for the three and nine months ended November 2, 2018, respectively. As GE is no longer a related party, no disclosures for fiscal 2020 have been provided.

Proposed Merger with VMware

On August 22, 2019, Pivotal entered into the Merger Agreement with VMware and Merger Sub. Refer to “

Note 1 --- Overview and Basis of Presentation” for details of the Merger Agreement.


15.	Commitments and Contingencies

Litigation

Between June 14, 2019 and June 27, 2019, six complaints were filed against us in state and federal court in San Francisco alleging violations of securities laws in connection with disclosures made in connection with our IPO and thereafter. The plaintiffs in those cases are seeking to have the cases certified as class actions, and also seek damages and legal fees. At this time, it is not reasonably possible to determine the ultimate resolution of, or estimate the liability related to, these matters.

As of the filing of this report, Pivotal is aware of six complaints related to the Merger Agreement having been filed: Briant v. Pivotal Software, Inc., No. 1:19-cv-09479 (S.D.N.Y. Oct. 14, 2019); Plumley v. Pivotal Software, Inc., No. 1:19-cv-01974 (D. Del. Oct. 17, 2019); Shan v. Pivotal Software, Inc., No. 3:19-cv-06814 (N.D. Cal. Oct. 21, 2019); Silverberg v. Pivotal Software, Inc., No. 3:19-cv-06977 (N.D. Cal. Oct. 24, 2019); Rothman v. Pivotal Software, Inc., No. 3:19-cv-07066 (N.D. Cal. Oct. 28, 2019); and Parada v. Pivotal Software, Inc., No. 1:19-cv-06306 (E.D.N.Y. Nov. 7, 2019). The complaints are brought by putative stockholders against Pivotal and members of our board of directors and the Pivotal Special Committee. The Shan complaint also names VMware and Merger Sub as defendants. Among other things, the complaints allege that the disclosures in our proxy statement filings violate the Exchange Act and the rules and regulations promulgated thereunder. In addition, the Shan complaint alleges that members of our board of directors breached their fiduciary duties in connection with the board of director’s approval of the Merger Agreement. The plaintiffs in these cases seek various forms of relief, including unspecified monetary damages, legal fees, and injunctive relief enjoining consummation of the Merger. The plaintiffs in all actions other than Briant and Parada seek to have their cases certified as class actions.

The defendants, including Pivotal and the members of the Pivotal Special Committee and our board of directors, believe that the claims asserted in these lawsuits are without merit. Nevertheless, the outcomes of these lawsuits are uncertain and cannot be predicted with any certainty.

Stockholders have delivered two demand letters to our board of directors under Section 220 of the Delaware General Corporation Law for various books and records related to the Merger Agreement. We are committed to cooperating with our stockholders in responding to reasonable records requests that comply with applicable law.

In addition, 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.


16.	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								Nine Months Ended
	November 1, 2019				November 2, 2018				November 1, 2019				November 2, 2018
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage of Revenue
United States	$	148,710	75	%	$	129,867	77	%	$	438,167	76	%	$	377,619	77	%
International	49,569		25	%	38,276		23	%	138,823		24	%	110,667		23	%
Total	$	198,279	100	%	$	168,143	100	%	$	576,990	100	%	$	488,286	100	%

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 Annual Report on Form 10-K. 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 Part I, item 1A in our Annual Report on Form 10-K. 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 delivered continuously 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.

•

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 generated from sales of products to handle customers’ differing workloads and needs, including Pivotal Application Service (“PAS”), Pivotal Container Service (“PKS”) and products accessed in our Pivotal Services Marketplace. We generate subscription revenue primarily from the sale of time-based subscriptions. Subscriptions are offered typically for one- to three-year terms, and we continue to recognize revenue from our subscriptions ratably over the subscription 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.

Proposed Merger with VMware

On August 22, 2019, Pivotal entered into the Merger Agreement with VMware and Merger Sub. Refer to “Note 1 --- Overview and Basis of Presentation” for details of the Merger Agreement.

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.



	November 1, 2019		February 1, 2019		November 2, 2018
Subscription customers	412		377		368
Dollar-based net expansion	135	%	149	%	150	%

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 412, 377 and 368 subscription customers as of November 1, 2019, February 1, 2019, and November 2, 2018, 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.

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 trend downward 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 135% for the three months ended November 1, 2019, 149% for the three months ended February 1, 2019 and 150% for the three months ended November 2, 2018.

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 1% of our total revenue for the both the three and nine months ended November 1, 2019 and November 2, 2018. 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 over time, 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.

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 to expand our customer footprint, deepen our relationships with existing customers, and build brand and product 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 (expense), Net

Other income (expense), 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 Income Taxes

Provision for 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						Nine Months Ended
	November 1, 2019			November 2, 2018			November 1, 2019			November 2, 2018
Revenue:
Subscription	$	139,758		$	100,775		$	403,604		$	288,390
Services	58,521			67,368			173,386			199,896
Total revenue	198,279			168,143			576,990			488,286
Cost of revenue:
Subscription	9,649			7,813			27,313			24,047
Services	51,292			53,179			154,755			157,470
Total cost of revenue	60,941			60,992			182,068			181,517
Gross profit	137,338			107,151			394,922			306,769
Operating expenses:
Sales and marketing	83,198			70,620			247,458			210,308
Research and development	58,832			51,880			173,763			143,309
General and administrative	30,640			20,546			75,342			57,979
Total operating expenses	172,670			143,046			496,563			411,596
Loss from operations	(35,332		)	(35,895		)	(101,641		)	(104,827		)
Other income, net	2,634			1,866			10,054			2,412
Loss before provision for income taxes	(32,698		)	(34,029		)	(91,587		)	(102,415		)
Provision for income taxes	409			776			1,409			549
Net loss	(33,107		)	(34,805		)	(92,996		)	(102,964		)
Less: Net loss (income) attributable to non-controlling interest	4			(45		)	41			(8		)
Net loss attributable to Pivotal	$	(33,103	)	$	(34,850	)	$	(92,955	)	$	(102,972	)

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



	Three Months Ended				Nine Months Ended
	November 1, 2019		November 2, 2018		November 1, 2019		November 2, 2018
Revenue:
Subscription	70	%	60	%	70	%	59	%
Services	30		40		30		41
Total revenue	100		100		100		100
Cost of revenue:
Subscription	5		5		5		5
Services	26		31		27		32
Total cost of revenue	31		36		32		37
Gross profit	69		64		68		63
Operating expenses:			.
Sales and marketing	42		42		43		43
Research and development	30		31		30		29
General and administrative	15		12		13		13
Total operating expenses	87		85		86		85
Loss from operations	(18	)	(21	)	(18	)	(22	)
Other income, net	1		1		2		1
Loss before provision for income taxes	(17	)	(20	)	(16	)	(21	)
Provision for income taxes	—		1		0		0
Net loss	(17	)	(21	)	(16	)	(21	)
Less: Net loss (income) attributable to non-controlling interest	0		0		0		0
Net loss attributable to Pivotal	(17	)%	(21	)%	(16	)%	(21	)%

Comparison of the three and nine months ended November 1, 2019 and November 2, 2018

Revenue



	Three Months Ended								Nine Months Ended
	November 1, 2019		November 2, 2018						November 1, 2019		November 2, 2018
	Amount		Amount		$ Change			% Change	Amount		Amount		$ Change			% Change
	(dollars in thousands)								(dollars in thousands)
Revenue:
Subscription	$	139,758	$	100,775	$	38,983		39%	$	403,604	$	288,390	$	115,214		40%
Services	58,521		67,368		(8,847		)	(13)%	173,386		199,896		(26,510		)	(13)%
Total revenue	$	198,279	$	168,143	$	30,136		18%	$	576,990	$	488,286	$	88,704		18%

Total revenue increased by $30.1 million, or 18%, to $198.3 million during the three months ended November 1, 2019, from $168.1 million during the three months ended November 2, 2018. Subscription revenue increased by $39.0 million, or 39%, to $139.8 million during the three months ended November 1, 2019 from $100.8 million during the three months ended November 2, 2018. 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 decreased by $8.8 million, or 13%, to $58.5 million during the three months ended November 1, 2019 from $67.4 million during the three months ended November 2, 2018. The decrease in services revenue was due to fewer customer engagements within the current period and a decrease in revenue from maintenance and support contracts. Revenue from maintenance and support contracts associated with historical software products sold on a perpetual license basis represented less than 5% of total revenue for both the three months ended November 1, 2019 and November 2, 2018, and is generally expected to represent a decreasing amount of revenue in future periods.

Total revenue increased by $88.7 million, or 18%, to $577.0 million during the nine months ended November 1, 2019, from $488.3 million during the nine months ended November 2, 2018. Subscription revenue increased by $115.2 million, or 40%, to $403.6 million during the nine months ended November 1, 2019 from $288.4 million during the nine months ended November 2, 2018. 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 decreased by $26.5 million, or 13%, to $173.4 million during the nine months ended November 1, 2019 from $199.9 million during the nine months ended November 2, 2018. The decrease in services revenue was due to fewer customer engagements within the current period and a decrease in revenue from maintenance and support contracts. Revenue from maintenance and support contracts associated with historical software products sold on a perpetual license basis represented less than 4% of total revenue for both the nine months ended November 1, 2019 and November 2, 2018, and is generally expected to represent a decreasing amount of revenue in future periods.

Cost of Revenue



	Three Months Ended										Nine Months Ended
	November 1, 2019			November 2, 2018							November 1, 2019			November 2, 2018
	Amount			Amount			$ Change			% Change	Amount			Amount			$ Change			% Change
	(dollars in thousands)										(dollars in thousands)
Cost of revenue:
Subscription	$	9,649		$	7,813		$	1,836		23%	$	27,313		$	24,047		$	3,266		14%
Services	51,292			53,179			(1,887		)	(4)%	154,755			157,470			(2,715		)	(2)%
Total cost of revenue	$	60,941		$	60,992		$	(51	)	—%	$	182,068		$	181,517		$	551		—%
Gross margin:
Subscription	93		%	92		%					93		%	92		%
Services	12		%	21		%					11		%	21		%
Total gross margin	69		%	64		%					68		%	63		%

Total cost of revenue decreased slightly during the three months ended November 1, 2019 from the three months ended November 2, 2018. Cost of subscription revenue increased by $1.8 million, or 23%, to $9.6 million during the three months ended November 1, 2019 from $7.8 million during the three months ended November 2, 2018. The increase in cost of subscription was primarily due to an increase in personnel and third-party labor costs of $1.9 million. Growth in cost of subscription revenue was lower relative to the growth in our subscription revenue as we continue to realize economies of scale. Cost of services revenue decreased by $1.9 million, or 4%, to $51.3 million during the three months ended November 1, 2019 from $53.2 million during the three months ended November 2, 2018. The decrease in costs of services expense was primarily due to a decrease in personnel and related costs of $3.0 million driven by less services revenue, offset by an increase in third-party partner spend.

Total cost of revenue increased by $0.6 million, or 0%, to $182.1 million during the nine months ended November 1, 2019 from $181.5 million during the nine months ended November 2, 2018. Cost of subscription revenue increased by $3.3 million, or 14%, to $27.3 million during the nine months ended November 1, 2019 from $24.0 million during the nine months ended November 2, 2018. The increase in cost of subscription was driven by higher support personnel and related costs of $4.5 million, due to the growth of our subscription revenue, offset by a reduction in intangible asset amortization of $1.1 million. The cost of services revenue decreased by $2.7 million, or 2%, to $154.8 million during the nine months ended November 1, 2019 from $157.5 million during the nine months ended November 2, 2018. The decrease in cost of services expense was primarily due to a decrease of $3.3 million in personnel and related costs driven by less services revenue, offset by an increase in third-party partner spend.

Subscription gross margin increased to 93% during the three months ended November 1, 2019 from 92% during the three months ended November 2, 2018 due to economies of scale as our subscription revenue increased.

Subscription gross margin increased to 93% during the nine months ended November 1, 2019 from 92% during the nine months ended November 2, 2018 due to economies of scale as our subscription revenue increased.

Services gross margin decreased to 12% during the three months ended November 1, 2019 from 21% during the three months ended November 2, 2018 driven by fewer customer engagements and decline in higher margin maintenance revenues that support legacy perpetual licenses.

Services gross margin decreased to 11% during the nine months ended November 1, 2019 from 21% during the nine months ended November 2, 2018 driven by fewer customer engagements and decline in higher margin maintenance revenues that support legacy perpetual licenses.

Operating Expenses

Sales and Marketing



	Three Months Ended									Nine Months Ended
	November 1, 2019			November 2, 2018						November 1, 2019			November 2, 2018
	Amount			Amount			$ Change		% Change	Amount			Amount			$ Change		% Change
	(dollars in thousands)									(dollars in thousands)
Sales and marketing	$	83,198		$	70,620		$	12,578	18%	$	247,458		$	210,308		$	37,150	18%
Percentage of revenue	42		%	42		%				43		%	43		%

Research and Development



	Three Months Ended									Nine Months Ended
	November 1, 2019			November 2, 2018						November 1, 2019			November 2, 2018
	Amount			Amount			$ Change		% Change	Amount			Amount			$ Change		% Change
	(dollars in thousands)									(dollars in thousands)
Research and development	$	58,832		$	51,880		$	6,952	13%	$	173,763		$	143,309		$	30,454	21%
Percentage of revenue	30		%	31		%				30		%	29		%

General and Administrative



	Three Months Ended									Nine Months Ended
	November 1, 2019			November 2, 2018						November 1, 2019			November 2, 2018
	Amount			Amount			$ Change		% Change	Amount			Amount			$ Change		% Change
	(dollars in thousands)									(dollars in thousands)
General and administrative	$	30,640		$	20,546		$	10,094	49%	$	75,342		$	57,979		$	17,363	30%
Percentage of revenue	15		%	12		%				13		%	13		%

Sales and marketing expense increased by $12.6 million, or 18%, to $83.2 million during the three months ended November 1, 2019 from $70.6 million during the three months ended November 2, 2018. The increase in sales and marketing expense was primarily due to an increase in headcount in our sales and marketing teams of $6.3 million, an increase in sales commission expense of $1.8 million and an increase in expenses of $4.0 million related to our SpringOne Platform Conference.

Sales and marketing expense increased by $37.2 million, or 18%, to $247.5 million during the nine months ended November 1, 2019 from $210.3 million during the nine months ended November 2, 2018. The increase in sales and marketing expense was primarily due to an increase in headcount and related costs in our sales and marketing teams of $30.4 million, an increase in commission spend of $2.6 million and an increase in spend related to the timing of our conference activity of $2.9 million.

Research and development expense increased by $7.0 million, or 13%, to $58.8 million during the three months ended November 1, 2019 from $51.9 million during the three months ended November 2, 2018. The increase in research and development expense was primarily due to an increase in personnel costs of $7.5 million, particularly around our product investments in cloud and PKS, offset by savings in infrastructure and other costs.

Research and development expense increased by $30.5 million, or 21%, to $173.8 million during the nine months ended November 1, 2019 from $143.3 million during the nine months ended November 2, 2018. The increase in research and development expense was primarily due to an increase of $31.7 million in headcount related spend and allocated overhead.

General and administrative expense increased by $10.1 million, or 49%, to $30.6 million during the three months ended November 1, 2019 from $20.5 million during the three months ended November 2, 2018. The increase in general and administrative expense was primarily due to $6.9 million of professional fees associated with the Merger, and the remainder was primarily attributable to increased headcount to support the growth of the business.

General and administrative expense increased by $17.4 million, or 30%, to $75.3 million during the nine months ended November 1, 2019 from $58.0 million during the nine months ended November 2, 2018. The increase in general and administrative expense was primarily due to $6.9 million of professional fees associated with the Merger, and the remaining amount was driven by increases in headcount and other expenses.

Non-Operating Expenses

Other Income, Net



	Three Months Ended							Nine Months Ended
	November 1, 2019		November 2, 2018					November 1, 2019		November 2, 2018
	Amount		Amount		$ Change		% Change	Amount		Amount		$ Change		% Change
	(dollars in thousands)							(dollars in thousands)
Other income, net	$	2,634	$	1,866	$	768	41%	$	10,054	$	2,412	$	7,642	317%

Other income, net increased by $0.8 million to $2.6 million for the three months ended November 1, 2019 from $1.9 million for the three months ended November 2, 2018. Other income, net generated for both the three months ended November 1, 2019 and November 2, 2018 was primarily due to interest earned on money market investments of $3.6 million and $2.6 million, respectively, offset by foreign currency losses in our international operations.

Other income, net increased by $7.6 million to $10.1 million for the nine months ended November 1, 2019 from $2.4 million for the nine months ended November 2, 2018. Other income, net generated for both the nine months ended November 1, 2019 and November 2, 2018 resulted from interest earned on money market investments of $11.9 million and $5.1 million, respectively. In addition, we had gains on sales of investments of $1.1 million and $3.2 million, respectively, offset by foreign currency losses in our international operations.

Income Taxes

Provision for (benefit from) Income Taxes



	Three Months Ended								Nine Months Ended
	November 1, 2019		November 2, 2018						November 1, 2019		November 2, 2018
	Amount		Amount		$ Change			% Change	Amount		Amount		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Provision for income taxes	$	409	$	776	$	(367	)	(47)%	$	1,409	$	549	$	860	(157)%

As a result of the stock issued in our IPO, we are no longer included in the Dell 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 income taxes for the three months ended November 1, 2019 was $0.4 million. Our provision for income taxes for the three months ended November 2, 2018 was $0.8 million. 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 income taxes for the nine months ended November 1, 2019 was $1.4 million. Our provision for income taxes for the nine months ended November 2, 2018 was $0.5 million. Our 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 and other adjustments.

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.

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						Nine Months Ended
	November 1, 2019			November 2, 2018			November 1, 2019			November 2, 2018
	(dollars in thousands)						(dollars in thousands)
Gross profit	$	137,338		$	107,151		$	394,922		$	306,769
Add:
Stock-based compensation expense included in cost of revenue	6,270			4,652			17,589			11,768
Amortization of acquired intangibles included in cost of revenue	22			340			142			1,204
Non-GAAP gross profit	$	143,630		$	112,143		$	412,653		$	319,741
Gross margin	69		%	64		%	68		%	63		%
Non-GAAP gross margin	72		%	67		%	72		%	65		%

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						Nine Months Ended
	November 1, 2019			November 2, 2018			November 1, 2019			November 2, 2018
	(dollars in thousands)						(dollars in thousands)
Operating loss	$	(35,332	)	$	(35,895	)	$	(101,641	)	$	(104,827	)
Add:
Stock-based compensation expense	26,164			19,428			73,561			49,233
Amortization of acquired intangibles	1,485			1,632			4,184			5,077
Acquisition related expenses	7,127			—			7,127			—
Non-GAAP operating loss	$	(556	)	$	(14,835	)	$	(16,769	)	$	(50,517	)

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 $544.4 million, net of underwriters’ discounts and commissions and offering costs paid. As of November 1, 2019, we had cash and cash equivalents totaling $821.9 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.

On October 22, 2019, we terminated our credit agreement and related security agreement. As part of the termination, we accelerated the associated unamortized debt costs, which resulted in $0.3 million of expense in the period. Prior to that date, we maintained a credit agreement and a related security agreement that provided for a senior secured revolving credit facility in an aggregate principal amount not to exceed $100.0 million (the “Revolving Facility”).We had no amounts outstanding under the Revolving Facility when we terminated the Revolving Facility.

Cash Flows

Pivotal Software, Inc. 10-Q