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Morningstar | Tableau Continues to Deliver; Raising FVE, but Shares Still at a Premium

Tableau’s second-quarter results superseded guidance and our expectations, as customers are embracing their term and subscription cloud offerings at a faster pace than we anticipated. While there was evidence from the quarter suggesting that the firm is extracting more value per account even as it expands its customer base, pricing headwinds remain. We still do not see switching costs inherent in the firm’s product suite that would afford it more pricing power in the long term. Consequently, we are maintaining our no-moat rating. However, we are raising our fair value estimate, to $80 from $65, after adjusting our long-term forecasts to account for the speed with which Tableau is transitioning to a subscription-based business model.

Robust top-line growth remained a staple of the firm’s results, with reported revenue of $282 million representing a 32% year-over-year increase. From our vantage point, however, the 9% sequential increase in average revenue per customer was the highlight of the quarter. We view the increase as evidence that the firm is starting to strengthen its relationship with existing customers, driving adoption of its subscription-based products and extending these offerings to broader use cases across the enterprise. The company also launched three new cloud-based subscription offerings during the quarter, and management indicated that it was seeing strong deployments and win rates.

We are mostly maintaining our top-line assumptions and expect average revenue growth in the low teens over our explicit forecast, though we now see modest upside to our previous assumptions on the margin front. Margin headwinds should continue into the second half of the year as term and subscription licenses constitute a larger proportion of revenue and bookings, but we now see operating leverage across the sales, marketing, and administrative fronts ramping up slightly more quickly than anticipated.

Management narrowed full-year revenue guidance from a range of $950 million-$985 million to $965 million-$985 million. While we view the firm’s continuing efforts to expand its presence in the enterprise as admirable, we ultimately still see Tableau’s business as competitively disadvantaged. Application software from competitors such as Microsoft remains much more deeply entrenched within the ecosystems of their enterprise clients, and these competitors have proven that Tableau’s “ease of use” selling point is replicable. We expect that better-capitalized software vendors will continue to compete on price and scale, bundling similar functionality into their own product suites that are more deeply embedded across the enterprise, which makes the cross-selling prospects more viable for these players.