March 18, 2014 - 3:20am EST by
2014 2015
Price: 28.67 EPS -$0.11 $0.00
Shares Out. (in M): 90 P/E 0.0x 0.0x
Market Cap (in $M): 2,600 P/FCF 0.0x 0.0x
Net Debt (in $M): -228 EBIT 33 0
TEV ($): 2,372 TEV/EBIT 72.0x 0.0x
Borrow Cost: NA

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Despite more than doubling its revenue between 2010 and 2013, QLIK’s GAAP income from operations has declined from $27.6mm in 2010 to $3.4mm in 2013.  QLIK is trading at an absurd valuation, and everyone knows it.  Analysts have resorted to multiples of forward revenue to justify current prices, or valuations that are based on cash flows in 5 or 10 years from today.  See below: 

    Barclays JP Morgan JMP Securities RBC Morgan Stanley
  Valuation - Method 4.0x EV/2015E Rev DCF Model1 4.1x EV/2015E Rev 4.5x Price/2015E Rev 19x 2019E FCF
  Valuation - Price Target $31.00 $36.00 $33.00 $35.00 $37.00
  1      JP Morgan's DCF derives 80% of the value from a perpetuity beginning in 2024, which assumes 5% growth in all years after 2023

As crestone discussed in his QLIK write-up from 2012 and is still the case, the majority of QLIK’s revenue comes from one-time licensing revenue.  QLIK cannot cut its astronomical sales & marketing without the valuation story falling apart, and operating margins are declining as customer acquisition costs increase due to increasing competition on both the enterprise and SMB sides, disappearing low-hanging fruit, and increasing disillusionment among existing BI customers.  We believe things will get worse for QLIK over the coming year.

Our short thesis is based on two core parts:

First, in February 2014, Microsoft officially released an application (Power BI) that mimics QlikView and is sold on a subscription basis for a steep discount to QLIK’s product.  Power BI and other data discovery/visualization competitors will encroach on QLIK’s SMB sweet spot and forcing QLIK to compete on price for customers.  A Microsoft employee said that he believes the reason QLIK has done well in the past is more due to marketing than product differentiation, but increased awareness of MSFT’s offerings may make the sales process more difficult for QLIK in the future.  We agree-- QLIK is a marginal player in a highly fragmented industry with a strong marketing team but limited product differentiation and requires significant new revenue streams to meet expectations due to the one-time nature of its licensing and professional services revenue.  Power BI is now available for $20/user/month for Office 365 Enterprise customers or $40/user/month as a standalone product.  Two components of Power BI, PowerPivot and Power View, are available for free.  Compare this with the $10,000+ ASP, 20% maintenance fees, separate viewer fees, server costs, and other assorted fees of QlikView.  Reviews for Power BI have been very good, and Microsoft is making a serious effort to market it (unlike prior business intelligence Excel add-ons that Microsoft gave away for free to Excel users).  I think that the focused efforts by Microsoft (along with other cloud-based competitors with much lower overhead/sales expenses than QLIK) to enter the SMB space at a much lower price point than QLIK will drive overall data discovery BI prices lower. 

Second, it is unlikely QLIK will be able to make the inroads in the enterprise segment it has pitched to investors due to entrenched competition offering identical features and its (currently) unresolved scalability problems resulting from dependence on RAM rather than hard disk space.  QLIK is priced for perfection, and if any of the potential catalysts materialize (see Bear Case & Catalysts) QLIK stock will decline significantly.

QLIK Overview

QLIK was founded in 1993 and has been around for 20 years.  It went public in July 2010, and is in the business intelligence space.  QLIK provides software to companies that allows those companies to extract, transform, visualize, and analyze “big data”.  Business intelligence is a highly fragmented industry with numerous public competitors, including MicroStrategy, TIBCO, Tableau, IBM, SAP, SAS, Microsoft, and Oracle.  There are also numerous other private competitors.

In the past, QLIK’s technology has provided differentiating factors including: data association, which searches for and identifies patterns that users may have not queried about, greater ease of use by end-users (non-IT staff) compared to some solutions, and creative, non-standard features for data output.  Gartner labeled the type of software offered by QLIK as “data discovery” (a sub-segment within business intelligence) due to the ability to play with and manipulate data to “discover” new conclusions, and in 2011, customers were often choosing data discovery tools over traditional BI platforms due to ease of use surpassing the improved functionality available through traditional BI solutions.[1]  This was especially true for QLIK—per a 2011 survey, more than ¾ of QLIK customers selected the product primarily for its ease of use for end users. 

However, today the features of software like QlikView are now becoming a standard offering by all vendors.  Gartner published its annual Magic Quadrant report on the business intelligence industry on February 5th, 2013 with a two sentence summary that reads as follows:

The dominant theme of the market in 2012 was that data discovery became a mainstream BI and analytic architecture. The market also saw increased activity in real time, content and predictive analytics.”[2]

We have seen this happen before many times.  An up-and-coming software company offers a fantastic, revolutionary product, and slowly dies after its offering is quickly replicated by dominant players and bundled with their existing offerings. 

Further, QLIK’s “ease of use” advantage has disappeared over the past three years.  In 2010, more than 75% of customers cited “ease of use” as a reason for why they went with QLIK’s software.  In 2011, the number dropped to 68%.  Today, it is viewed as inferior to its direct data discovery competitors when it comes to ease of use:

Customers most often select QlikView for ease of use for end users, particularly for interactive dashboards; however, the visual-based interactive exploration and analysis capabilities, experience, and time to business user authoring proficiency are generally viewed as inferior to those of its stand-alone data discovery competitors, Tableau and Tibco Spotfire. The next major release of QlikView, which is due for launch in 2013, places major emphasis on addressing this competitive limitation with a major design theme focused on delivering a "gorgeous and genius" experience. While a major update to the platform will help QlikTech better compete against the stand-alone data discovery vendors, as well as against the enterprise features of the traditional BI players (for example, Microsoft, SAP, IBM, Oracle, Information Builders and MicroStrategy), it is not without the risk of disruption for customers at a time when QlikTech is also facing a more intense competitive landscape from these same vendors.”[3]

In the past, QLIK Management has repeatedly emphasized an upcoming version of QlikView, QlikView.next.  QlikView.next is replacing QlikView 11, which was released in November 2011.  In a white paper discussing QlikView.next,[4] QLIK described QlikView.next using five phrases: Gorgeous and Genius, Compulsive Collaboration, Mobility with Agility, Enabling the New Enterprise, and The Premier Platform.  You really have to read it to see how little substance there is—pages eight to sixteen of The Vision for QlikView.next.  There are no features being proposed that are not widely available through competitors.  It’s possible that they will unveil something groundbreaking when the software is actually released and they are currently keeping it under wraps to avoid having that instantly copied, but I am skeptical.  BI has been around for a long time now, and while there were significant advances in past years to leverage advances in software engineering and data flow, developments have tapered off because have been no new changes in technology or information flow to drive BI improvements.  I do not think QlikView.next will make QLIK’s product any more marketable than it is today.  Further, during recent calls, Management has essentially said that QlikView.next would consist of upgrades rather than an entirely new product:

We view QlikView.next as a journey, not a point-in-time release, and some of the capabilities we discussed with our partners will be included in our release later this year.”[5]

“What we wanted to announce is it's not going to be a one big release at a given time. It's going to be more frequent releases as we build out the next generation of our platform.”

Many customers rave about how fast QLIK’s technology is at processing data.  QLIK evaluates data very fast by using RAM, but this also prevents it from scaling as easily as solutions that rely on hard disk memory.  It is best for users seeking instant analysis of relatively small data sets.  For large data sets, it would require impractical amounts of RAM to run properly.  This is why they are having such a hard time selling to enterprise clients and will be perpetually stuck in the SMB business, which is a much tougher sell for a business intelligence company since for it to work, the data set must be beyond what Excel/PowerPivot/Power BI can handle but not too large (20 GB of compressed data seems to be the upper cap, although it depends on system RAM, the compression rate, and other technical factors).  On top of that, the customers will (or at least should be) aware that the solutions will not be able to scale economically—so if the customer is a start-up expecting to see exponential growth in data to be analyzed, it would be in their best interest to go with another provider with a non in-memory solution.  Numerous competitors have released similar in-memory solutions alongside their hard disk solutions over the past couple years, including SAP, SAS, and Oracle.  QLIK is currently only offering a RAM-based solution.  It is true that the overall business intelligence market is large ($13.8bn per Gartner), but QLIK is in a niche part of that market.  Other unrelated complaints about QLIK’s technology include that the use of RAM rather than hard disk space makes frequent updates impractical due to the lengthy re-loading process (although QLIK has released a script that makes continuous updating possible), it lacks the capability to produce pixel perfect reports, it uses pure associative modeling rather than logical modeling (which limits analysis flexibility and prevents users from using certain techniques to analyze the data), and it takes too long to implement (weeks or months compared to minutes with certain out-of-the-box competitors).

Bull Case

The bull case is that QLIK will be able to reach $1bn in revenues (no deadline given) by making a successful transition to the enterprise market.  QLIK will do this by marketing its product as complementary to existing BI architecture.  I don’t think this will work because the most of the features in QLIK’s software are already available in enterprise customers’ existing BI platforms—companies like SAP and Oracle have added it for free over the past couple years, including the in-memory functionality and identical data discovery features.  Further, the limitations of QLIK in terms of capacity and producing reports appear to be the reason it has had such a difficult time in the past obtaining enterprise business and these have not been fixed.  However, QLIK will be releasing a new version at an as-yet-unspecified point this year, and per the CEO, this new version will address the scalability issue by offering the ability to access data using hard disk rather than RAM.  However, I believe customers are going to view this as a second-tier offering.  QLIK has been doing just RAM-based solutions since it started—even if their solution is good, customers will be wary to buy it versus solutions from vendors with established reputations for large-scale solutions.  The top attribute of QLIK software that customers consistently rave about is its speed—which comes from its use of RAM.  Buying a hard-disk solution from QLIK would be like buying pizza from a gas station—it is not their core competency, there is no reason for anyone to think that they can do it well, and customers in the market are going to realize that.

The bull case is also centered around the “land and expand” strategy—where QLIK pays top dollar to grab clients today, with the hopes of building out recurring maintenance revenue from those customers and expanding to other employees/departments at those companies for additional revenue expansion in the future.  This appears to be working—per the Gartner Business Intelligence Report:

“QlikView has among the smallest percentage of customers that plan to discontinue using the product in the future, and report among the top success scores — which are defined as expanded user deployments”[6]

However, regardless of QLIK’s success in terms of retention, the bulk of its revenue comes from new licenses.  To continue to grow the stock price, QLIK must sell more licenses in 2014 than it did in 2013 despite the fact that very similar copies of its product are being offered by numerous competitors.  JP Morgan declared that Q4 2012 was an inflection point for QLIK due to the 11 >$1mm contracts they signed during the period, and that it marked the beginning of additional large contracts which will continue coming in this year.  QLIK has no choice but to keep looking for more revenue, and their non-recurring revenue for the past year is so high that it is implausible to think they will be able to obtain that level of perpetual licensing business from SMBs during future periods, to say nothing of the growth required to justify the current stock price.  It is like the Rackspace story, where Management had been promising enterprise clients for years but gained very few because Rackspace is so expensive and lacks the scalability of its competitors.  In this case, QLIK can’t get significant enterprise traction because their software doesn’t work for large enterprise-size data sets.  This is supposed to be remedied through the new version QLIK is expected to release this year, but again, even if QLIK does offer a hard-disk solution, who would buy it from them?  It is clearly not their specialty.  In the past two quarters, Management has stealthily guided down using the excuse that they are targeting enterprise contracts with longer sales cycles.  For the reasons outlined above, I don’t believe significant enterprise clients are ever going to materialize. 

Bear Case & Catalysts

QLIK is a marginal player in a highly fragmented industry with a strong marketing team but limited product differentiation and requires significant new revenue streams to meet expectations due to the one-time nature of its licensing and professional services revenue.  It is unlikely QLIK will be able to make the inroads in the enterprise segment it has pitched to investors due to entrenched competition offering identical features and its scalability problems resulting from dependence on RAM rather than disk space.  Finally, QLIK must deal with the threat of Microsoft’s Power BI and other data discovery/visualization competitors encroaching on its SMB sweet spot and forcing QLIK to compete on price for customers.  I think that the focused efforts by Microsoft (along with cloud-based competitors with much lower overhead/sales expenses than QLIK) to enter the SMB space at a much lower price point than QLIK will drive prices lower.  QLIK is priced for perfection, and if any of the potential catalysts materialize, I think QLIK stock will decline significantly:

1)      Price competition is intensifying within the data discovery space, largely due to Microsoft entering in a big way with its Power BI platform.  Microsoft is a significant threat with its free offerings as well as its extremely cheap (as little as $20/user/month for enterprise users) Power BI platform.  Based on internet sources, it appears that Tableau and Spotfire are competing for accounts based on price while QLIK is (currently) trying to hold firm.  On top of losing customers, this makes the process more difficult for resellers to sell QlikView and easier for them to sell competing products that are willing to compete on price.  Channel partners are generally not exclusive to QLIK:

“Our channel partners may offer customers the products of several different companies, including products that compete with ours. Our channel partners generally do not have an exclusive relationship with us; thus, we cannot be certain that they will prioritize or provide adequate resources for selling our products.”[7]

Microsoft is offering free Power View along with PowerPivot.  Power View is a new tool created in 2012 by Microsoft that copies many of the features of other data discovery/visualization competitors and integrates them with Excel and PowerPoint.  Based on reviews, the current version lacks some of the features of QLIK or its competitors, but its ability to handle unstructured/poorly structured data was exceptional.  Forrester stated that it contains 80% of the features of other leading business intelligence vendors.[8]  The integration with other Microsoft products, which are universally used, provides MSFT with a huge advantage in terms of ease of use—it almost universally cancels the need for IT staff to work on it, and though there were not many user reviews, the consensus seemed to be that it was quite easy to manipulate data with.  In reality, most SMBs would be better off saving their money and simply using features offered via Excel, Power View and PowerPivot.

2)      Inability to gain enterprise customers.  Due to scalability issues and the fact that much of the enterprise market is already spoken for in terms of BI software that now offers most of the same features as QLIK, I do not think there is real room for QLIK to grow in the enterprise space.  Further, Management has been pumping this as the new growth platform for QLIK for awhile now, and it still fails to constitute a major portion of QLIK’s business

3)      Loss of existing enterprise customers as larger enterprise BI vendors offer identical services bundled with their existing offerings.  In the past, part of QLIK’s strategy has been to try to sell its software as being complementary to the offerings of BI vendors such as SAP, Oracle and IBM.  Again, as was noted in the Gartner publication, data discovery (QLIK’s bread-and-butter) is now mainstream:

“The dominant theme of the market in 2012 was that data discovery became a mainstream BI and analytic architecture.”

The offerings that previously differentiated QLIK have become commonplace and are now offered by everyone.  QLIK’s previous distinguishing factors were that it offered unique data visualization outputs for customers, it used in-memory to function, making it faster than competitors (but limited in terms of capacity) and that it offered associative search, which would find patterns or useful data that customers may not know existed.  Today, all of those functions are mandatory for competitors in the space.  One could debate whether or not competitors’ offerings are as good as QLIK’s (or vice versa), but regardless, the features that previously distinguished QLIK no longer do so.  Per Gartner:

“While Gartner estimates that the data discovery segment grew at three times the rate of the overall BI market in 2011, and QlikView was the leader in this segment, data discovery capabilities are now becoming mainstream. The market is more crowded with existing, stand-alone vendors becoming more competitive, new vendors emerging, and all leading BI vendors having added data discovery capabilities to their IT-centric platforms in 2012 as an integrated, and often bundled, license-cost-free feature, with the intent of narrowing QlikView's (and the other stand-alone data discovery vendors') opportunities for expansion.”[9]

Leadership within the data visualization is ever-changing since features offered can be quickly copied by competitors. 

4)      Movement to cloud-based SaaS BI.  This will open up the data discovery to significant competition and I believe it is bound to eventually dominate the SMB space (QLIK’s primary revenue source).  Today Pentaho and Jaspersoft conduct business solely via cloud offerings.  Both of those companies offer software that runs off of Amazon’s EC2, which makes scaling easy, and they offer far superior pricing compared to QLIK and Tableau.  Using cloud allows for more nimble competitors without the capacity to do professional set-ups to poach customers, and provides customers with an alternative to the huge upfront costs associated with the perpetual license/maintenance fee model.  QLIK could see price erosion in the future as a result.  In this case, I think deploying solutions as SaaS as opposed to paying license & maintenance fees genuinely makes sense for SMBs.  To date, QLIK has refused to offer its software under the SaaS model, although it does offer a cloud service option (but customers must still pay the perpetual license/maintenance terms). 

5)      Business intelligence is near the top of the hype cycle and businesses are beginning to realize that big data requires solid data inputs to generate usable outputs.  This may affect renewal rates, particularly among SMBs, who may not have the appropriate reward to justify significant investments in business intelligence.  In the 2013 InformationWeek Business Intelligence poll, the number one reason for not adopting BI software was data quality problems.  QLIK and its competitors have done nothing to address this and there is no reason to think they will (or even can) in the future.

6)     QLIK fails to release its new, improved version of QlikView that it has promised to put out this year (but has already been delayed for two years) to address the scalability issue as well as other usability/performance complaints, or the new version bombs or fails to wow customers.

[1] http://www.board.com/download/press/EN/Gartner_BI_MagicQuadrant_2011.pdf

[2] http://www.gartner.com/technology/reprints.do?id=1-1DZLPEP&ct=130207&st=sb

[3] http://www.gartner.com/technology/reprints.do?id=1-1DZLPEP&ct=130207&st=sb

[4] http://www.qlik.com/us/explore/resources/whitepapers/the-vision-for-qlikview-next/

[5] Q1 2013 Conference Call

[6] http://www.k3business.nl/en/news/gartners-magic-quadrant-for-business-intelligence-and-analytics-platforms/

[7] 2012 10-K

[8] Self-Service Business Intelligence Platforms, Q2 2012

[9] Gartner BI Magic Quadrant Report (February 5, 2013)

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.


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