A pivotal week for Cloud Foundry, Pivotal Software

Mid-April 2018 was a momentous period for Pivotal Software and Cloud Foundry, the open source project it spawned and has bootstrapped into a half-billion dollar-a-year business. The same week that the Cloud Foundry Foundation held its North American users summit, Pivotal, the firm that originated Cloud Foundry and whose eponymous product forms the foundation of its software and subscription business, made its debut as a publicly-traded company.

This year’s summit showed that interest in the platform continues to grow, with several industry partnerships announced to an audience in part comprised of the more than three thousand developers contributing to 40 open source Cloud Foundry projects. A separate user survey detailed increased business usage of Cloud Foundry, however it was Pivotal’s S-1 filing and subsequent IPO that illustrated the financial implications as companies pay for packaged software and and support services to kick start development projects and implementations.

Cloud Foundry usage on the rise

After last year’s summit, I discussed how Cloud Foundry had become a favorite of large enterprises developing cloud-native applications that could be deployed across both internal and external infrastructure including multiple IaaS providers. More recently, I noted that the automation inherent to a structured PaaS can substantially mitigate that the turmoil resulting from emergency patches for widespread system vulnerabilities like Meltdown and Spectre. The platform’s benefits of a structured system of reusable software modules and bundled automation tools saves development time and money while providing a choice of runtime infrastructure continues to resonate with enterprises. The Cloud Foundry user survey shows not only growing adoption, but deeper usage as organizations incorporate the platform into their application development strategies with 30% of respondents describe usage as “broad”, namely across the entire company, not confined to particular departments and almost half of the companies reporting at least 50 developers using Cloud Foundry. The result is that the number of organizations with more than 50 Cloud Foundry applications increased 14 points to 40%.

At 61% a growing majority (up 12 points since the last survey in October) of Cloud Foundry implementations are at large enterprises, defined as those with at least $1 billion in annual revenue. Despite the upbeat numbers, it's important to temper them with some objectivity because, like all sponsored surveys, the data is inherently biased since the sample is drawn from solicitations made via email, newsletters, Twitter, the website and Slack channels, namely those already in the Cloud Foundry orbit, not a random sample of enterprise IT and developers. Nevertheless, there’s undeniable success with large enterprises with the Foundation claiming that Cloud Foundry is used by half of the Fortune 500 and a third of the Global 2000, including important technology companies like Fujitsu, Google, IBM, SAP, SUSE and others that contribute code and developer time to Cloud Foundry projects.

While Cloud Foundry usage is minuscule outside of North America and Europe, where its survey shows penetration is at 43% and 33% respectively, that’s sure to change since a headline announcement revealed that Alibaba Cloud will offer a Cloud Foundry and join as a Foundation member. For those of us living in the shadow of Amazon's ubiquity, it's easy to forget that Alibaba Cloud is the largest public cloud in China and third overall worldwide, operating 18 data center regions (7 alone in China) and 42 availability zones, including pan-China access under one single global account. Like other infrastructure providers, Alibaba Cloud will be available via the Foundry, a web-based marketplace for available distributions, services, add-on technology, education and services, joining AWS, Azure, Google Cloud, IBM, OpenStack and VMware as supported infrastructure providers. A separate announcement noted that Cloud Foundry is also now certified on Cloud.gov, the private as-a-service marketplace for federal government agencies that require FedRAMP compliance.

Pivotal turns Cloud Foundry into a business

As the Cloud Foundry Summit was wrapping up, Pivotal Software, the meandering company that initially developed the PaaS stack as a spinout of EMC and VMware and has spent the last five years under various joint owners before finally declaring a modicum of independence by filing for an IPO. While its corporate leash will be longer, make no mistake about who's ultimately in charge since even after the IPO, Dell Technologies, i.e. Michael Dell and his private equity investors will own 70% of the shares with almost 96% of the voting rights, and thus be considered a "controlled company" according to corporate governance rules of the New York Stock Exchange. As I pointed out when analyzing the Dropbox IPO, it's an all too common trick technology companies increasingly employ to gain access to capital markets without giving up a smidgen of control to outside investors.

Share ownership shenanigans aside, Pivotal's S-1 filing provides a useful peek into its finances and strategy and shows a company that's growing, rapidly shifting to subscription revenue and still far from profitability. Its operating statements for the last three years detail top-line growth of almost 35% annually and subscription revenues increasing at a 65% CAGR. The filing shows that Pivotal has increased the number of subscription customers by 77% over the past two years and is focused on expanding their use of the Pivotal Cloud Foundry platform.

Indeed, Pivotal’s share of revenue from subscriptions has increased from a third to just over a half in the past two years as the company focuses on expanding its software sales while relying on partners and systems integrators to deliver implementation, training and operations services. Indeed, this shift is key to Pivotal becoming profitable since gross margins on its services business are only 21%, while 88% of subscription revenue flows to the bottom line. As this excellent financial analysis of the S-1 details, Pivotal ended its first quarter of 2018 with about $300 million in annual recurring revenue (ARR), adding $110 million of net new ARR over the past 12 months.

Pivotal’s growth strategy centers on:

• Improving the platform and “extending [its] technology lead”
• Exploiting the benefits of an open source platform with thousands of contributors and a growing Cloud Foundry ecosystem
• Increasing its customer base and the Cloud Foundry usage of existing customers
• Furthering its partnerships with public cloud vendors, notably Google and Microsoft, although it acknowledges that proprietary PaaS stacks from AWS, Azure and Google Cloud are risks to its business.

The appeal of multi-cloud flexibility

The Pivotal S-1 makes clear that it sees multi-cloud flexibility as an essential competitive advantage as large enterprises look for software platforms that can exploit the benefits of public cloud services without locking them into a particular vendor. Indeed, the filing cites an IDC estimate that more than 90% of enterprises will have a multi-cloud IT architecture by 2020. As I detailed last year in reviewing the centrality of Cloud Foundry to SAP's cloud-agnostic hybrid strategy, the open source PaaS stack not only solves the lock-in problem, but significantly increases developer and IT operations productivity, another problem plaguing enterprises migrating to cloud-native applications.

Like Red Hat, it relies on selling a complete, robust, secure and supported platform to enterprises wary of DIY open source software. Likewise, Pivotal sees a competitive advantage in being able "to innovate and rapidly respond to customer needs and changing open-source software standards" with a platform that can be integrated with various technology infrastructures.

My take

PaaS stacks remain the smallest segment of the XaaS taxonomy, but they are likely the most strategic since they affect the core architecture of custom applications with ramifications throughout an organization including developers, infrastructure teams and line of business analysts. Although Cloud Foundry's overall market penetration is small, it has significant mindshare among large enterprises, many of whom become fervent adopters of the platform after a period of experimentation.

Pivotal is the leading commercial purveyor of Cloud Foundry, but as its financial filing illustrates, its modest revenues mean it only constitutes a small portion of the installed base. Although Pivotal benefits from a degree of exclusivity, it will surely attract substantial competitors like IBM, SAP and others that integrate and bundle Cloud Foundry into their products.

Furthermore, Cloud Foundry isn't the only cloud-agnostic software platform. It also faces competition from other PaaS stacks like Red Hat Openshift and Salesforce Heroku/Force.com, cloud-agnostic low-code platforms like Mendix and, most significantly, containerized designs using Kubernetes, the inherently multi-cloud orchestration platform. Indeed, the Kubernetes threat, with commercial products like Tectonic or multi-cloud SaaS products like Platform9 is significant as organizations unwilling to fully commit to a PaaS methodology and toolchain gravitate to a more flexible, if less efficient, stack-agnostic approach to multi-cloud applications.

The Cloud Foundry PaaS story is compelling, but it will be interesting to watch how the benefits of its architectural and operational purity clash with the realities of enterprise IT complexity and inertia and whether Kubernetes by itself ends up threading the needle enough to satisfy most organizations.