Has Tableau been able to add a special sauce to its business recipe?
Tableau (NYSE:DATA) reported its quarterly results last Thursday. The results were a significant beat and the shares increased by almost 15% on Friday. The company's forecast for the current fiscal year was uninspiring. It calls for 6% revenue growth and break-even EPS. Revenue growth is forecast to be more or less in line with the prior consensus. The First Call consensus EPS forecast had been for a marginal profit. Prior to the quarterly earnings release, estimates for both 2017 and 2018 had shriveled substantially.
The fastest-growing component of the company's revenues were maintenance rising by 41%. Maintenance revenues grew by 10% sequentially last quarter, an unsustainable number given the license revenue growth the company has posted. License revenue growth was modest at 14%. That is a little surprising as only 10% of license revenues were ratable, actually down by 100 bps from the prior quarter.
DATA shares are among the most controversial in the IT universe. The First Call ratings show 18 holds out of 34 analysts posting opinions compared to 14 buys and a couple of sells. So far, one brokerage has been reported as raising its price target from $50 to $55. Not particularly helpful as the shares closed at $55 on Friday. The short interest as posted on Yahoo had been 8.85%. I assume that a significant component of Friday's share price increase was related to short covering.
Let me specify that a beat is a good thing and a beat on revenues and earnings together is a better thing. Tableau has gone through a period of misses and beats in the course of the last year as investors re-rated the outlook for the company. The shares are up by 34% over the 12 months after contracting a painful 66% in the prior six months. Even last quarter had areas of weakness, and in particular, North American revenues grew by only 16% probably implying that license revenues showed just single figures. The beat came from international geos and particularly from maintenance.
While I have written on the name several times and have not been enthusiastic regarding its outlook, I confess never to having had skin in the game. Some of the volatility and irrationality has frightened me. I have consistently thought that Tableau has business problems that will not be easy to solve. The results of Q4 haven't really changed my mind in that regard, although the shares have appreciated significantly since I first wrote about the name just about a year ago.
Tableau makes a great product and for users who spend their days primarily analyzing data, it is a great solution. No one has ever disputed that. But many users do not need what this company sells and never will. Most users can get by with far cheaper tools sold by almost everyone from Microsoft (NASDAQ:MSFT) to Salesforce (NYSE:CRM) to Amazon (NASDAQ:AMZN) that are priced at as little as 10% of the list price of Tableau's products in the cloud.
Until recently, Tableau was run by its founder who had a messianic attachment to the value and the differentiation of its tool. The sales culture that evolved, with little latitude in the way of discounting or negotiation, drove away the company's VP of sales. Eventually, the culture did away with the CEO and this quarter marked the first quarter in which CEO Adam Selipsky ran the business. There is a temptation amongst some, I suppose, to suggest that a new CEO has arrived, started to clean up the mess, and that the outlook has changed and the company will return to growth. I do expect the new CEO will make a difference, and over time I imagine the cost ratios of this company will show material positive changes. But I am not convinced that Tableau can resume a rapid growth cadence and deliver profitability in the near future.
I think that Q4 may prove to be a one-off event, not because of any lack of Mr. Selipsky's abilities, but because I think the market environment for Tableau continues to have all kinds of storm clouds that will be hard to evade. The company now has hired a new VP of sales from Oracle (NYSE:ORCL) as well as a new board member who are to focus on the company's sales and marketing effort. It is also in the midst of changing its bookings mix to one that is more of a ratable model. Bookings were strong in the quarter and increased by 25%. On the other hand, the increase in ratable bookings has not yet shown up in the proportion of revenues coming from ratable licenses.
The major reason in my mind not to short Tableau shares is the potential for a take-out bid. Obviously, its principal rival, Qlik, is now private, having been taken over at a modest premium. Given the titanic spend on sales and marketing, Tableau would be able to achieve far better financial results as part of a larger organization with existing sales infrastructure. Even though Oracle, IBM (NYSE:IBM) and SAP (NYSE:SAP) have their own visualization tools inherited from their acquisitions of the major BI vendors, Tableau does have some technologies that could be interesting to acquire. Given the frothiness of the M&A market of late (the acquisition of AppDynamics by Cisco is the latest example), I think the prudent thing for investors is to stay away from this name even if it means leaving some potential profits on the table.
The new sheriff and his initial directions
Q4 was a quarter in which all of the company's headline operating metrics, EPS, revenues and license revenues showed favorable trends and handily topped earlier consensus forecasts. How did that really stack up when looked at objectively and not just versus the prior consensus? One issue of course is that on a GAAP basis, it is still taking $.91 of sales and marketing expense to generate a dollar of license revenue, while research and development expense is sill 31% of total revenues, and that is actually up a couple of hundred basis points year over year.
The company is forecasting 6% revenue growth for 2017. That is hardly the mark of growth. Mr. Selipsky talked about the BI and analytics market growing to $26 billion by the end of this decade and that is consistent with the forecasts of professional market research firms. Data analytics is not the same as Big Data and data analytics is not the same as data visualization, although they sound as though they are much the same thing. $26 billion would be a significant TAM for Tableau - but it just doesn't compete for that entire space.
The reality is that data visualization, which is essentially what Tableau's products are designed to achieve, is but a small niche of that big pie. Perhaps Tableau will grow faster than that and perhaps it will succeed in persuading users that its abilities in terms of security, governance and the ability to access multiple data sources are worth the price premiums it has tried to charge. But when a market is growing with a CAGR of less than 10%, and surveys suggest that Tableau isn't quite the leader in the space, it becomes difficult for an objective observer to forecast double-digit revenue growth.
With the forecast for 6% growth, the path to profitability is going to have to lie through significant cost cuts - and therein lies the issue. If the company institutes significant further cost cuts, will it be able to maintain revenues? Why does it really cost 90% of license revenue to sell a $1 of Tableau? What is Tableau getting for its elevated level of development spending or does it need to develop so many product variants to deal with competition?
Management speaks to the large TAM that Tableau addresses. It is a large TAM, no doubt, and one that has attracted the attention of literally dozens of competitors. CFO Tom Walker said in response to a question, "we're going to increase our investment and so we will be adding sales and marketing resources, and that is the plan to do it." The answer also talked about discipline and a more measured way where there is traction, but the point is that the company is going to raise its cost base despite the 6% revenue growth expectation. It will make the path to profitability longer still. I have to wonder why it takes such an enormous investment in sales people to keep the sales motor ticking over, even at a relatively modest growth rate.
One key issue is how organizations are going to deal with the empowerment of broad swaths of their employee base in terms of providing them an advanced and sophisticated tool such as Tableau. Last quarter saw far more enterprise transactions than had been the case for some period of time. Was that catch-up? Was that part of the effect of more flexible negotiations on price? Or is the market changing yet again to where users are willing to pay for high-end data visualization products?
Forecasting why quarters come out the way they do is not science and to a greater or lesser extent can be a random event. Mr. Selipsky, in response to a question, spoke about "So, it's really not kind of a single consistent pattern. We pointed out what happened in Q3, and we felt confident at the time. A lot of those deals were still on track. Turned out we were right, and the team managed to get those customers what they needed to conclude those deals."
My impression is that a significant amount of the upside DATA achieved in Q4 related to catch-up revenue that was built on more flexible pricing. If that is indeed the case, it might prove to be relatively difficult for the company to find magic in future quarters… well, unless they get Tom Brady and Bill Belickick to run sales in the last few days of a particular quarter.
In Q4, the company saw 25 customers spend greater than $1 million on Tableau, 14% more than the prior year. That probably sounds better than the reality of the situation as Q4 2015 was a significant disappointment in which the company was unable to close large deals at the rate it had expected. Most of Tableau's strength last quarter was in the middle of the market with deals between $100k and $1 million.
A final issue to consider is the cadence of the mix shift toward ratable license bookings. Management forecast that the mix will rise each quarter this year and will reach an annualized mix in the range of 25%-30% compared to a full-year rate of 17% in 2016. Most companies that offer subscription and cloud solutions have seen a far more rapid switch to those methods of acquisition than the company is forecasting.
At a company like PTC (NASDAQ:PTC), the swing has taken less than two years. If the mix switch accelerates, which would be typical of the trends seen at other software vendors, then the current forecast will not be realized. That might not bother investors - it certainly hasn't bothered investors in Autodesk (NASDAQ:ADSK) or PTC. My concern is somewhat different in that I think even now Tableau has been unwilling to cut its monthly pricing to levels necessary to deal with Microsoft, Amazon, CRM and others.
The company presents an analysis called trended metrics. I am surprised that the proportion of license revenues from ratable contracts has stalled at around 10% where it has been the last four quarters. I am a bit puzzled as to why the ratable license bookings mix is rising, albeit at quite slow rates, while ratable revenues are rising so slowly.
One thing to note - last quarter, ratable revenues decreased as a percentage of the total from 44% to 40%. Part of the reason for the upside to reported revenue numbers was that change in the mix. I was surprised not to see that question specifically addressed during the course of the conference call. One of the reasons for guidance being "acceptable" relates to a higher ratable mix. To the extent that isn't the case, it punches a hole in the growth story.
The company is forecasting a noticeable slowdown in capex this year to the range of $55-$60 million from last year's $77 million. I'm a bit surprised that capex hasn't been cut back further after the company's real estate binge last year. The company has stopped hiring with net employees unchanged since the middle of last year.
The company is not forecasting any material level of non-GAAP profits this year. Personally, that is something that troubles me. I'm not quite sure the combination of modest growth and no profits creates an investment case. Obviously, on Friday, it didn't trouble all that many folks.
Dilution continues unabated but at moderate rates. If the company makes a loss, average shares will increase by 4%. If it makes a profit, average shares will increase by around 10%.
Some more details about cost discipline
Part of the positive investment thesis regarding Tableau has to be effective cost management. At least from my perspective, that has yet to become visible. In fact, last quarter represented something of a regression as I measure those things. All of the comparisons below are based on GAAP cost ratios. As I have mentioned in the past, I think comparing cost ratios on any other basis but actually spending makes little sense.
Last quarter, sales and marketing expense surged by 18% sequentially. Management didn't choose to address that metric but clearly it is an issue. An 18% sequential increase in sales and marketing expense is really not what most observers might define as strong cost discipline.
Overall, license bookings increased by 25% year over year in Q4 and sales and marketing spend was up 26% in that period. Ratable bookings did show an increase in the percentage mix from 16% to 20% but still do not account for the substantial sequential rise in sales and marketing expense. Needless to say, I'm not impressed that cost discipline has been implemented with that kind.
Research and development costs rose 33% year on year and rose 6% sequentially last quarter. The growth in research and development spend is slowing noticeably and is a hopeful sign. Overall, research and development spend rose 50% last year and the current rate of increase is down to 25%. Mr. Selipsky said on the call that there were many features that have to be added to Tableau to make it totally acceptable in the enterprise. These include better security, governance and speed. I imagine that to implement all of the features discussed on the conference call is likely to propel research and development spending to grow at rates greater than revenues next year.
General and administrative costs rose by 16% sequentially and were 21% higher than the year earlier period. The increase in general and administrative costs in Q4 was part of the company's material investment in a new headquarters. Once the company started down that road, there was little it could do to limit those expenses, and hopefully, general and administrative costs will flatten out later in 2017. For the full year, and including some component of costs related to the new headquarters, GAAP general and administrative expense was 11% of revenues, a far more reasonable expense ratio than the other operating expense categories.
For the year, stock-based comp increased by 55%. In aggregate, it was 22% of total revenues, up from 18% the prior year. Stock-based comp continued to rise in Q4, reaching $49 million compared to $47 million in the prior quarter. Again, that is a surprising metric given that the company didn't increase its headcount in the quarter.
At this point, I think that the cost discipline story has lots of holes and inconsistencies that need further exploration. At least the reported numbers suggest that the discipline is more in the breach than the observance. I continue to wonder if this company can compete in the market without spending excessive amounts on both sales and marketing and research and development. That is just not a question that has been answered effectively.
Some thoughts on the market
In my mind, data visualization is more a feature than a product category. Analytics is a category. CRM is a category. HCM is a category. Data visualization is a feature that most users strongly desire to have included as a key component of the utility of their horizontal and vertical applications. Tableau has done a masterful job in trying to create a product out of a feature, but it is difficult to get users to pay for thousands of seats that are attached to existing applications.
According to the linked survey, the analytics market in total was $24 billion last year and is forecast to grow to $46 billion by 2021, a CAGR of about 14%. But data analytics is a super set of data visualization. Interestingly, the report linked above does not even include Tableau because its definition relates to what is called the embedded analytics ecosystems.
The report linked here is another analysis that was published last month and looks specifically at the sub-set market of data visualization. The numbers are quite different with the market currently (2017) said to be about $4 billion. The CAGR is forecast to be only 9% yielding a $6 billion market by 2022.
It strikes me that it is the difference between data visualization and data analytics that often leads investors to reach incorrect conclusions when it comes to evaluating Tableau's opportunity. Tableau would need to be a very different company selling quite different solutions to really participate in the larger market, based on these reports prepared by industry experts.
Tableau has one of the better tools I have ever seen in the IT space and it is intuitive enough that I was able to learn the basics of use some years ago, in a few hours. But for many people, Tableau is an unnecessary luxury and the functionality they actually need is available elsewhere for far less and is already embedded in a database or as part of an application. Tableau's most differentiating factor comes when users need to access multiple data sources simultaneously. It is a segment of the market and is probably not sufficient to support the growth positive investors look for.
The latest Gartner MQ which is about one-year-old at this point shows Tableau in third place behind both Microsoft and Qlik in terms of its overall market position - just in the data visualization space. This third-place finish is mainly because of its ability to execute. When the Gartner analysis is looked at in terms of functionality (vision), Gartner identifies 12. Both Microsoft and Qlik have significant functional leads over Tableau according to the Gartner survey.
When I speak with sales executives in the IT space, they continue to wonder where Tableau has been able to find its success. Users all want data visualization - it is a function that helps them to run their business. But most software vendors today have embedded data visualization as part of their core application. Users who choose Microsoft Dynamics are almost 100% likely to choose Power BI as their tool for data analytics and visualization. If a user chooses to use SAP or Salesforce or Workday (NYSE:WDAY) as their app vendor, they will be able to find a set of analytics and data visualization tools as an option. The tools are far less expensive than what is available from Tableau and the installation is part of the installation of the app and becomes second nature to a user. They may not have all of the features that a data analyst desires; but enterprises are not made up[ exclusively of data analysts and most businesses simply do not need to provide all of their employees with tools suitable to employees who spend their entire working time dealing with queries and visualization.
There are things that Tableau can do to lose less money and to operate more efficiently. It is likely that the new CEO will eventually provide the adult supervision, particularly with regard to costs and to professional sales management that the prior CEO could not implement. But no one can change the market dynamics and the growth of the space. At the end of the day, that is really what keeps me on the sidelines with regard to the shares - I do not think the company will have the kind of long-term growth cadence coupled with decent profitability that will make it a good investment - and there is not all that much that the best management is going to be able to do to remediate that kind of problem.
That said, it would certainly not surprise me to see Tableau bought by one of its many rivals that could use some of its technology and some of its customer relationships to achieve significant revenue synergies while being able to develop a different strategy for sales and marketing costs to make an acquisition potentially accretive. So, let's take a look at valuation and see if consolidation might make sense and at what level for this company.
DATA shares have a high beta and often can rise or fall several percent in a couple of days without any obvious reason. But I will take a look at the valuation based on the share price of $54 at the close of business yesterday. The non-GAAP weighted average share count as reported at the end of Q4 was 80.7 million which includes the dilution that will occur if the company remains profitable. On a GAAP basis, the share count would be 4 million shares lower. But as reported, the market capitalization of the shares is currently $4.35 billion. The company has a cash balance of $908 million which yields a enterprise value of $3.45 billion. The mid-point of the company's revenue guidance for 2017 is $870 million so the EV/S is 3.95X. By itself, 3.95X is not a huge valuation - the question is what is the most likely CAGR. Surely, if the CAGR is not above 5%, then the EV/S valuation metric is stretched.
Given that no earnings are forecast for next year, the P/E analysis is not meaningful. The consensus forecast going out to 2018 is only $.20. I suppose there are those readers who will say that the number for 2018 will be far different - but in which direction? The consensus growth forecast for 2018 is 8%. I simply do not see how 8% revenue growth and marginal non-GAAP earnings can support the current valuation. And I do not really see how Tableau gets 8% revenue growth in a market that is forecast to have a CAGR of 9% when it is not considered a stand-out leader by Gartner's analysis.
Free cash flow last year was $116 million. Free cash flow was impacted significantly by the completion of a new corporate HQ and satellite buildings. The headquarters is called "The Center of the Universe" by locals and offers enough space to double the size of the company's Seattle based employees. I always thought Times Square to be the Center of the Universe but the center of gravity is, no doubt, changing. While the new HQ is an attractive facility, I hate to see a company like this with a half-filled facility and an 11-year lease. Far too much temptation.
But in any event, capex is declining as mentioned earlier by about $20 million. The company is not forecasting any earnings improvement next year - in fact the reverse is true. The company's positive cash flow has been and will remain a function of stock-based comp, the growth in deferred revenues and the growth in depreciation, offset by a growth in receivables and the change in payables. Trending all of those categories, I think 2017 free cash flow could reach more than $200 billion and this would provide a free cash flow yield of almost 6%. The problems for many investors is that more than 100% of that amount is coming from stock-based comp and that the company's growth at 5% is usually associated with much higher levels of free cash flow.
Tableau's shares would have a reasonable set of valuation metrics if it really had the ability to grow revenues at mid-teens levels going forward. I do not think this is likely as explained in this article. Others obviously have a different opinion.
The quarter was a significant upside, although carefully considered the sources of the upside are likely not something that should be used to trend models and the guidance doesn't suggest that the company is convinced with regards to its own outlook. I think there are many names who compete in better segments with much "growthier" potentials. I do think that given the kinds of transactions seen in the IT world lately, the potential for this company to be consolidated cannot be ignored and that makes it too dangerous to short. I am on the sidelines waiting to see if my hypothesis regarding growth shows a bit more evidence in coming quarters.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.