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Morningstar | Secular Tailwinds Don’t Translate to Structural Advantages for Tableau; Shares at a Premium

Tableau reported solid fourth-quarter results, with the top line at the high end of guidance and the bottom line marginally above the guidance range. Management reiterated their strong guidance for 2019, and we posit that the firm is benefiting from secular trends in the modern business intelligence, or BI, space. The firm’s product leadership is allowing enterprises to standardize analytics across various departments, and as data-driven insights become increasingly important for operational efficiency and competitive differentiation, customers are empowering an increasing number of knowledge workers with Tableau tools. We are raising our fair value estimate to $100 from $90, primarily due to the time value of money as the healthy growth rates over our explicit forecast are each one year closer to fruition. Our no-moat rating is intact, however, as we continue to see structural headwinds endemic both to Tableau and the niche within which it operates.

Under the ASC 606 standard, revenue came in at $336.3 million for the quarter and $1.16 billion for the full year, representing growth of 35% and 32%, respectively, from the 2017 periods reported under ASC 605. Adjusted gross and operating margins widened year over year by 0.6% and 10.7%, respectively. The confluence of their non-GAAP nature and the accounting standard transition make the relative improvement in these numbers difficult to evaluate. Nevertheless, the ratable revenue business model augurs well for margins longer term.

Management provided a maelstrom of technical examples as they tried to demonstrate revenue recognition and unit economics under ASC 606. We appreciated the effort, as it provided us with a bit more color regarding the idiosyncratic impacts to the firm’s financials when contrasted with other software companies. Management will issue guidance exclusively under the 606 standard going forward, and they maintained their preliminary 2019 sales outlook at a range of $1.33-$1.4 billion.

Management continues to exude confidence in their competitive positioning and their ability to extract incremental value from their customers as the business scales. The fact that our internally-calculated average revenue per customer has increased over the past three quarters would seem to lend credence to their conviction. We are not convinced by this evidence however, as the change in accounting standards obfuscates any year-over-year comparison.

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 indicated that they are seeing more and more enterprises winnow their suite of analytics offerings from many vendors to just a few, to sometimes even just one vendor. 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 within the IT ecosystem.