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Morningstar | Lack of 606 Adoption Making Comps Harder for Tableau; Raising FVE, but Shares Look Rich. See Updated Analyst Note from 03 May 2019

Tableau Software's first-quarter results were a mixed bag, as the firm missed our expectations as well as consensus estimates on the top line but delivered upside to our bottom-line projections. The ubiquity of data continues to represent a secular tailwind for the firm, and underlying demand is strong as enterprises seek efficiency and competitive differentiation by equipping their knowledge workers with analytic tools. Our no-moat rating is intact, however, as we continue to see structural headwinds endemic to Tableau and the niche in which it operates. We're raising our fair value estimate to $101 per share from $100 based purely on the time value of money. However, we do not see an appropriate margin of safety at current levels, and with shares on the cusp of 2-star territory, we would advise prospective investors to remain on the sidelines.

Revenue came in at $282.5 million, increasing 15% year over year. License revenue underperformed, growing only 8%, while the 20% rate for maintenance and services superseded our expectations. Management attributed the growth disparity to stronger-than-anticipated subscription bookings mix, which ticked up to 84% from 79% last quarter, as less license revenue is recognized up front. With the ASC 606 transition no longer obfuscating year-over-year comparisons, we will monitor the license/maintenance mix closely and anticipate that the license growth rate will start to increase as subscriptions renew and the impact of perpetual agreements become increasingly de minimis.

The firm’s margin performance was underwhelming, with adjusted gross and operating margins compressing 80 and 330 basis points respectively, to 87.6% and negative 1%. While we expect lumpiness in profitability from quarter to quarter, depending on the timing of sales deployments in the field and other outlays, the stability of recurring revenue and the concomitant leverage it facilitates should lead to sustained profitability longer term.

Management continues to exude confidence in its competitive positioning and ability to extract incremental value from customers as the business scales. The firm is seeing solid traction with its recently released role-based offerings: Tableau Viewer, Explorer, and Creator. The offerings facilitate much more flexibility on the part of customers with how they deploy the platform and can be uniquely tailored to distinct users and departments. The firm cited competitive wins and upsells during the quarter, and while the stickiness of these wins is contingent on what capabilities are being utilized (Creator, for example, is much stickier than Viewer), we are pleased with the wins and the share gains that they imply.

Even as the firm continues to engender broader use cases and expanded deployments, which could conceivably give rise to a switching cost moat source, nothing has changed fundamentally about the competitive dynamics, from our vantage point. Larger, better-capitalized players such as Microsoft and Amazon continue to co-opt the ease-of-use paradigm, which Tableau pioneered, and incorporate robust analytics tools into their more comprehensive platforms. Management has indicated that is is seeing more and more enterprises winnow their suite of analytics offerings from many vendors to just a few, to sometimes even just one. We have no reason to refute this claim and have no doubt that Tableau will continue to be on the short list of scalable BI platforms for organizations of all sizes. Still, we are hard-pressed to view the firm as competitively advantaged over the longer term, as we believe customers will find more value in the aggressively priced offerings of larger technology vendors whose solutions are more embedded in the IT ecosystem.