|Shares Out. (in M):||78||P/E||NM||NM|
|Market Cap (in $M):||4,675||P/FCF||40.5||35|
|Net Debt (in $M):||-808||EBIT||1||0|
|TEV (in $M):||3,721||TEV/EBIT||NM||0|
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I recommend a long position in Tableau (ticker DATA), and believe shares are worth ~$80+ based on 7x ev/recurring 2019 revenue (4.7x ev/total revenue), representing 35% upside from current levels. Tableau is a leading data analytics platform that saw its shares fall 50%+ in 2016 after its revenue growth sharply decelerated. The market believes that Tableau will not be able to grow due to intensifying competition, principally with Microsoft (Power BI), but also with SAP, Salesforce, Amazon, and Legacy BI Vendors. In contrast, we believe that Tableau will maintain its double digit growth rate by unlocking the enterprise market and expanding its TAM through new product initiatives.
Tableau's stock fell 50% in 2016 after its revenue growth sharply decelerated. The adoption of self-service business analytics software (tools purchased, administered, and operated by end-users within corporates rather than by IT departments) drove rapid growth at Tableau through 2015.
However, a significant increase in competition in business analytics software and deficiencies in Tableau's enterprise offering caused growth to decelerate throughout much of 2016. On the competition side, Microsoft entered the data visualization market in earnest with a new product called Power BI. MSFT rapidly improved Power BI's feature set, bundled the product within O365 and made the case to IT departments within corporate organizations that it was getting a product almost as good as Tableau, nearly for free. Additionally, legacy business intelligence players have also upgraded their visualization offerings in an effort to save their existing business intelligence seats. While Tableau remains loved by end-users for its simplicity and ease of use, Tableau lacked sophistication in sales/marketing, governance, security, cloud capabilities, support and pricing architecture to effectively make the enterprise sale. Tableau’s deficiencies in serving enterprise customers, coupled with rising competition and leadership change, caused potential customers to slow decision making to evaluate alternatives.
The significant decline in Tableau's stock price reflects the market's concern regarding its future growth, specifically that (i) Tableau’s core visualization product is being commoditized, eroding its historic pricing premium and (ii) competition is advantaged in the enterprise market as Tableau's offering is lacking in critical areas necessary for broader enterprise adoption (pricing structure, governance, security, marketing, data preparation, cloud). Due to these concerns, estimates have come down significantly and now imply that Tableau’s new business will decline in 2017 and 2018 (after growing in all quarters in 2016) adjusted for the shift from perpetual to license revenue.
Estimates Imply That New Business Wins Will Decelerate in 2017 and 2018
In the last six months, Tableau has made changes in recognition of these challenges. These changes include the hiring of a new CEO Adam Selipsky (who led sales and marketing for AWS) and a new head of sales, both with extensive enterprise and cloud experience; greater focus on transition to subscription based offerings (20% of license bookings in Q4); additional partnerships with cloud providers and R&D investments in next-generation tools in an effort to rebuild its product advantages (data preparation, speed, and smart data discovery).
We believe Tableau will maintain its double digit growth rate by successfully removing barriers to wider adoption within enterprises. Longer term, Tableau will expand its TAM and build on its leading product through new innovations, including expansion into data preparation (a weakness of its current offering) and the introduction of a faster database engine to facilitate the analysis of larger data sets. Beyond driving seat-growth, these product and service enhancements will enable Tableau to retain its pricing premium over Power BI, and other competing products.
Tableau’s core data visualization / analytics market is large and in the early innings of expansion: Gartner estimates that the Modern BI and Analytics market will grow ~20% through 2020. Conversations with integrators, resellers, and CIOs confirmed that data visualization has expanded less than 20% into its TAM and that end-user driven analytics continues to proliferate within organizations. Over time, we believe that the self-service analytics market will exceed business intelligence in total number of seats. Current job postings that reference data visualization and data visualization tools (Tableau, Qlik, PowerBI, Spotfire, etc.) are less than 40% of business intelligence postings according to indeed.com. Gartner and BTIG estimate that Modern BI platforms comprise just 17% of the broader analytics market, and are half the size of traditional BI platforms in overall spend.
Tableau remains the preferred product in self-service business intelligence, and we believe it is the emerging market standard: In our research, we consistently heard that Tableau was easier to use, had more analytical functionality than the competition, and companies were willing to pay a premium for better analytics software. Tableau’s core differentiator continues to be ease of use, which is important because this enables greater adoption, wider deployment, and more effective use among customers. Customers and integrators that we spoke to compared Tableau vs. the rest of the market to MS Office vs. Google Docs or SAS vs. R (statistical software). We see a few drivers of Tableau’s long term success:
Engaged installed base of customers and end-users: Today, Tableau has a cult like following in analytics, attracting more interest in its service than much larger companies e.g. Adobe had ~12,000 people attend their summit in March 2017, whereas Tableau had over 13,000 attendees at their conference in November 2016. This installed base differs from the one owned by legacy business intelligence providers, because Tableau’s relationship is with a larger population of business users across departments, rather than centralized in report authors in IT or a reporting unit. We don’t believe that Google trends is a perfect proxy, but is indicative of Tableau’s market presence vs. its competition.
Tableau is Much More Widely Used/Searched for than its Competition
Scale economies in R&D spend in self-service analytics support Tableau’s product advantage: Similar to other SaaS companies, we believe Tableau has reached ‘escape velocity’ against new entrants and pure play competitors, and that the market size warrants this investment. Tableau’s scale in data visualization allows the company to invest more in product development and advance its product faster than competition. The gap between Tableau and pure play analytics competition in R&D will continue to widen (Tableau spent $148mn in 2015 vs. Qlik’s $75mn; and Tableau spent $211mn in 2016 vs. $73mn for Microstrategy). Because analytics software is not yet mature, product advancement continues to drive high return for customers and differentiation for vendors. Tableau’s relationship with end-users, coupled with a larger development organization, will allow it to cherry-pick next generation features from startups and deploy them across its customer base. We believe the required investment to maintain pace in analytics is why you see Tableau (and MSFT) separating themselves from the competition.
Magic Quadrant Shows Tableau and MSFT separating from the competition
Positioning as the Switzerland of data: Management touts Tableau’s positioning as the Switzerland of data, competing against players with ulterior motives. Microsoft, Salesforce, Amazon, SAP, and Google are all using analytics as a tool to lock organizations into an ecosystem, or promote the use of other products or services. Agnostic positioning removes conflict of interests for Tableau, where other services are forced to compromise e.g. Power BI deploys through the cloud and forces Azure use because the purpose of the product is to promote Azure use/adoption, leading to limits in storage, data loading, and refresh cycles. Tableau is better positioned to allow customers to use their existing data infrastructure that they either selected as a best of breed solution or if they were reticent to concentrate spending with a single vendor.
Our conversations in the channel indicate that Qlik and SpotFire’s competitiveness has declined since each company was acquired. Job postings that reference Tableau as a required skill now outpace Qlik and TIBCO Spotfire by ~10x and ~20x respectively (posts over the last two weeks). We view Qlik and Spotfire as a threat that will continue to decline overtime.
We believe other players such as Amazon, IBM, Salesforce, SAP, and Google all have solutions that don’t have the maturity (i.e. not yet “good enough”) to compete with Tableau (all five are hiring analyst roles that require Tableau experience). Amazon and IBM seem to have enterprise Tableau deployments: Amazon and IBM have 300+ and 100+ analyst roles that respectively reference Tableau. Additionally, we take some comfort that Tableau’s CEO left AWS to come to Tableau in evaluating the threat from Amazon. As Tableau gains enterprise adoption, deepens integration with data sets, and advances features and functionality we believe it will be harder for these companies to take share.
Finally, we believe competition with Microsoft is real, but the modern business intelligence market is sufficiently sized to support both Tableau’s expected growth (which we view as a low hurdle) and Power BI. We don’t believe analytics will be a winner take all market for Microsoft. Power BI is priced at a considerable discount to Tableau (PowerBI: $10/user/month; Tableau: $42/user/month), and is the closest competitor to being “good enough.” In the near term, Power BI lacks in overall user experience and functionality, and is largely used as a dashboard viewer, rather than an analytics platform. Tableau will continue to advance their product, with the aim to maintain market leadership. We track job postings that reference Tableau and Power BI as an indication for market share changes. Tableau is referenced in postings over 9x as often as Power BI on indeed and 6x as often on LinkedIn over the last 15 days, and we have not seen deterioration in this ratio over time.
Job Postings Reference Tableau Significantly More Than Power BI and Qlikview
Longer term, we believe Tableau can successfully compete with Power BI by positioning itself as a better product, and using value-based pricing in enterprise deployments. In our conversations, customers deploy Power BI more broadly than Tableau, using the lower per user pricing to buy more seats rather than lower overall spend. Discussions with customers, integrators, and partners, coupled with the low penetration of modern analytics within enterprises, make us believe there is sufficient demand elasticity in enterprise customers that Tableau can lower per user pricing and significantly increase value per customer in wide enterprise deployments.
Tableau’s is addressing deficiencies in accessing and serving enterprise customers to capitalize on its position as the market’s preferred product, and removing these barriers will allow for wider adoption within large customers:
Tableau’s CEO previously led sales and marketing for Amazon Web Services, and we think he is making the right changes for Tableau to gain wider adoption across enterprise customers, which Tableau struggled to secure in 2016. Tableau’s historic growth through a self-service model never required the development of tools in administration, security, and governance to control an enterprise-wide deployment. However, Tableau began releasing these tools in Q4 2016 and conversations within the channel have indicated to us that these were important additions that will impact the company’s ability to access large enterprise customers, confirming the CEO’s comments in recent conferences and earnings call that enterprise features are garnering significant interest. Importantly, Tableau has committed to faster update cycles to bring these features to market and is already released Tableau 10.2, after releasing Tableau 10 this fall. Tableau’s near term roadmap includes upgrades to their administrative environment, and the ability to operate Tableau on a Linux server (lowers cost of ownership through lower server expenses).
Beyond product deficiencies, the company’s sales organization struggled to move up market and sell enterprise licenses. At the beginning of 2016, Tableau’s head of sales, Kelly Wright, announced that she was planning to retire by the end of the year. As a result, the company’s sales organization was rudderless, and lacked a strategy to access, price, and close large enterprise deals. The sales organization had only been segmented into hunter / farmer and SMB / Enterprise, and Enterprise purchasing vehicles were unavailable until Q2 2016. Selipilsky’s background as head of sales and marketing for AWS is well suited to address these challenges. Selipilsky has already brought on Dan Miller from Oracle as the new Head of Sales, who previously led Oracle’s ISV/OEM and Java’s business. Miller’s has significantly more experience in dealing with enterprise customers than his predecessor who started as the first sales person at Tableau and grew with the organization. The difference in mandate can already be seen in the organization: Tableau’s hiring effort has shifted significantly from YE2015 to today – enterprise sales rep job postings have increased from 8% to ~20% of roles in the sales organization, and the company has created of new roles across the organization to support field sales (e.g. “Field Marketing Specialist”).
We believe that outperformance in the fourth quarter was driven in part by these changes. Deals over $100K increased 42% vs. Q4 2016, and the quantity of deals over $1M increased 14%. Tableau’s CEO stated that the company signed their largest customer ever during the Goldman conference in February: “In Q4, we signed our largest customer deal ever, a Fortune 50 company with the ability to display to well over 50,000 of their users. So, the demand, I anticipate the demand for those types of deals will ramp-up significantly.” Tableau has 90% of the Fortune 500 as customers, but only 29 of them spend over $1mn per year. With an improved offering and sales execution, we believe Tableau will be able to exceed estimates that imply declining new business growth over the next two years.
Longer term, Tableau can continue expanding its TAM through new innovations: Tableau will release several product enhancements and new offerings that will expand its addressable market, and protect the company’s pricing premium.
Project Maestro – Expanding Product Offering: Project Maestro aims to bring Tableau’s approach of business-user driven analytics to data preparation. Tableau currently brings Alteryx along when selling the product as a tool business users can use to integrate, cleanse, and ready data for analysis in Tableau. Alteryx is priced at a considerable premium to Tableau: Alteryx is $3995/year whereas Tableau is $500/user/year. A typical install has 1 Alteryx user per 5 Tableau users, making Alteryx nearly 1.6x more expensive on a recurring basis. We believe that Tableau will use Project Maestro to lower its total cost of ownership, deflating the data preparation market, and solidifying Tableau’s pricing as an analytics platform. Making data prep easier to perform will also expand Tableau’s addressable user base, improve efficiency among existing users, and increase the number of data sets integrated per user.
HyPer – Expanding Addressable Data Sets: HyPer will allow Tableau to ingest and analyze much larger data sets. Right now, Tableau has difficulty analyzing more than 1 TB of data, and HyPer will allow Tableau to scale to multiple TB. Tableau will be able to go back to existing customers and analyze larger data sets for them. Additionally, HyPer further improves the user experience, as it will make analyzing existing data sets feel more fluid through better performance.
Smart Data Discovery – Expanding Addressable Users: We believe Tableau is well-positioned as the market adopts more machine learning and smart analytics tools. Tableau already has a relationship with the business user and an installed position where an end-user has gone through extensive set up costs of integrating data sources. We believe Tableau can use this position to test and introduce next generation analytics capabilities. Ultimately, we believe that supplanting Tableau’s customer base by a new entrant will be more difficult than Tableau developing machine learning algorithms and introducing them to their own user base. Smart Data Discovery will further expand Tableau’s addressable user base, as smart features will allow for guided analytics for users who don’t have the current capability to perform the analysis.
We forecast that new customer wins do not decline year over year in 2017 and 2018, and new business bookings (equivalent to perpetual business) grows 5%, 5%, and 9% in 2017, 2018, and 2019. Additionally, ratable as a % of license billings in 2017, 2018 and 2019 to reach 38%, 49%, and 58% of bookings respectively. Total recurring revenues (maintenance and subscription) reach 57%, 63%, and 68% of revenues in 2017, 2018, and 2019. Taken together, we expect Tableau to reach $800M of recurring revenue in 2018, with recurring revenues growing 45% in 2017, 31% in 2018, and 23% in 2019.
Should Tableau hit these forecasts, we believe investors will revert to viewing Tableau as a growing software company with a strong, sustainable market position and a growing recurring revenue base. Tableau will be valued commensurate with its leadership position in the growing Modern Business Analytics market, receiving a 7x multiple on $800M of 2019 recurring revenues (implied 4.7x ev/sales given its on-prem/subscription mix), driving the stock to over $80 a share.
It’s worth noting, that Tableau has considerable stock based compensation expense. The company reports adjusted operating income adjusted for the stock based comp. We value the company on a fully diluted basis, assuming continued dilution from stock based compensation expenses.
Revenue Model – Significant Shift to Recurring Revenue Underway
Downside Protection: Our checks have indicated that large technology companies can develop a product in similar quality to Tableau’s existing offering for less than $1bn, which in contrast to Tableau’s $3.8bn+ EV doesn’t paint a great picture. However, we believe there is some downside protection in Tableau’s engaged, sticky user base, which is over-indexed relative to the company’s current enterprise value. Our conversations with customers indicate that users do not want to redevelop their reports and integrate data sets on a new platform. Business users push back on moving to other solutions in particular, if they feel they need to relearn a skill on a clunkier, less user-friendly service.
Switching costs, past growth rates, and low valuation on EV/sales has helped create rumors that Tableau would be an attractive takeout candidate. Tableau has been rumored to be an acquisition target as of summer 2016, and we think that the company chose to hire Adam Selipilsky instead of completing a sale process. We believe that for the company Tableau needs to generate over half of their revenue on the cloud before it becomes an interesting acquisition target for a sufficient return (which we expect to occur at YE 2018).
Tableau is undergoing a transition from traditional software pricing to subscription pricing and that transition may cause the company to revise guidance, spooking the market.
We don’t have any view on this particular quarter, but would likely view weakness as a buying opportunity.
Our thesis is wrong:
Power BI is more significant than we anticipate causing significant pricing pressure, lowering growth and/or impairing Tableau’s existing recurring revenue base.
Tableau fails to execute on their product roadmap and are unable to penetrate enterprise customers more deeply
Existing data provides, such as Salesforce, begin to restrict access to data stores
Integrated cloud/analytics platform provides an advantaged position for Smart Data Discovery
New entrant enters the market with a game changing product
Management provides metrics showing underlying business performance that was maked by subscription shift at Analyst Day on 5/25
Continued growth in underlying business metrics that are highlighted in subsequent earnings
Increase in subscription mix to over 50% of bookings
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