After Tableau's results came out on Thursday, the market took a giant dump on the stock, sending it down by just under 50% below the previous close. That's one heck of a haircut, more a buzzcut. What happened to induce such a frenzied sell off? A number of things.
First, it is generally accepted that the markets are nervous and any sign of weakness gets punished hard. In this case, Tableau offered comparatively weak forward guidance with revenue forecast of between $160 million and $165 million for Q1 2016, significantly missing the consensus of $180 million, and losses of between 8 cents and 12 cents per share, which was significantly lower than the consensus of earnings per share of 6 cents. For 2016 as a whole, Tableau lowered their revenue outlook to a range of $830 million to $850 million from the previous range of between $845 million and $865 million and analysts hopes for $871 million.
Second, the company stated that it may never realize a deferred tax asset. Here's the text from the call:
Switching to taxes, in the fourth quarter, income tax expense was $34.1 million, primarily due to the recognition of a valuation allowance. Specifically, we recorded a $46.7 million valuation allowance against our U.S. deferred tax assets. We now have a three-year cumulative GAAP net loss adjusted for permanent tax differences and it's not likely we will have sufficient taxable income on a GAAP basis to utilize our deferred assets. This allowance is a non-cash charge has no impact on our cash flow.
Both of these factors would have been enough to trigger a sell off but the magnitude shocked many. It made me wonder what the heck really happened, despite the fact the company was able to report a beat on Q4 revenue, as it has consistently managed for many quarters (see below.) To get a sense of the problem, you need to read and re-read the earnings transcript. This is my take.
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Revising projected revenue targets is always bad for stocks that are valued on the basis of growth but when that's also accompanied by continued losses then markets suddenly remember why businesses fail and flay the price accordingly. LinkedIn took a pounding for the same reason. On this occasion, a normally assured Christian Chabot, CEO Tableau, who moved to the UK for a period to spearhead European growth, seemed both muddled and confusing in his answers to key questions. The same goes for Thomas Walker CFO, who, in my view couldn't join the various dots to establish a coherent story. The narrative was all there but it was almost content free. What do I mean?
Growth, what growth?
The story around growth doesn't stack up well. Check what was said about Q4. Again from Walker:
We did see our customers continue to expand their use of Tableau in their organizations, but not at the same cadence we historically experienced. As Christian mentioned, we closed a record number of deals over $100,000 in Q4.
The company also noted a record number of deals over $1 million. But do you notice the contradiction here? How can you talk about record deals on the one hand but still think in terms of softness? Analysts tried to get behind this but some of the answers were less than assured. For example, while Walker talked about competitive win rates as steady, a question on the extent to which Tableau might have hit a penetration wall in the Fortune 100 and Fortune 500 got this response from Chabot:
...in the vast majority of those accounts, and I don't have a statistic handy up for you on hand, but in the vast majority, the customers have only just started with Tableau. We will be alive in several groups or big in one division or big in one business unit, but not yet in IT or the opposite and so on down the line.And so we don't see any signs of market saturation there. There were a few accounts that have gone so big with Tableau. We will probably at some point hit a wall, but that is very much the sideshow and not the main story. And so with that, I can answer your question, which is, yeah, we believe we can grow the business pretty robustly going forward, continuing to sell to the existing base, saying nothing about bringing our new customers, by the way, because of that low penetration point.
Sorry guys but that's a really lame answer. And it didn't get any better with Walker ducking questions about the expand strategy except to say that the slowdown was largely restricted to the US market. As I read and reread the call transcript I started to get a very uneasy feeling. Here's why.
My past background checks have almost always suggested that Tableau plus Excel has become the killer combination at the departmental level for quick build visualizations, largely because the initial spend is very low and even an expanded deal need not break the bank. This caught many other contenders on the hop and especially those with well established but dated BI solutions. Combine that with a surge of interest on the analytics front and you'd broadly guess that Tableau, having crushed Qlik perceptually, was all set fair. Something is very wrong and the woolly answers on the conference call hardly inspire confidence.
I went back to do more market checks (hence why I'm slow on this report) and this is what I discovered:
- The demand for analytics is not going away. Check this from IT Pro Portal on projected market growth. So the market basics remain firm.
- However, there is some good evidence to suggest that establishing which is the right data to analyze and visualize is problematic. I'll expand on that in a companion piece but it could have an impact for Tableau, despite them having good ETL support from Alteryx for many data types.
- Some reports suggest that Tableau's Vizable is 'a joke.' But heh - it's free so?
- Others are concerned that Tableau has no real backend in the sense that data often has to be preformatted before it can be used by Tableau. Alteryx solves that problem but it means Tableau is always having to think about including for a third party ETL. I'm not convinced that's a particularly strong reason but I can see how it might become a gating factor in a large scale expand scenario.
- There is little doubt that Tableau faces more competition. My inbox is regularly pinged with Yet-Another-Analytics-Startup story but that should not matter to a company that has done so well in the last few years and which has caught the market's attention. The one exception to that is Domo which, while in stealth still, has quietly carved out a reputation for producing solid dashboards for complex analysis, something where Tableau is known to struggle.
- I can't see any real difference in the land and expand story from the past but it appears the expand part of the story has faltered for reasons that are as opaque as the analyst Q&A. This remains a mystery although I did pick up some clues that suggest annoying functional problems (clunky interface, performance and lack of formatting options) combined with what some consider rigid pricing policies that don't differentiate between casual and power users.
- Did Qlik's previous miss portend what we see at Tableau today? I don't know but I doubt it because the metrics for Qlik have been rough for a while. We'll get a gut check in a few days when Qlik reports.
I don't think we've got to the bottom of this and that is a real worry. It is conceivable that as Tableau gets close to the magic $1 billion revenue mark that it is experiencing something of the chasm effect that many vendors experience as they ride the market rocket ship and attempt to hit certain major milestones while selling up the food chain to more sophisticated buyers.
The tax adjustment is a big one. Any company preparing rolling forecasts as Tableau would necessarily have to, have a good idea when deferred tax liabilities and assets expire well in advance of that happening. The fact this has been dropped out of the sky suggests a more fundamental problem and possibly an accounting error. If that's the case then it is conceivably one short step to restatement, a huge red flag for any company. I am not suggesting that is what has happened but it is certainly at the back of my mind. The best case scenario is that Tableau's projections show continuing losses for some time to come. That may not matter for the moment given the company has plenty of cash. But the long term concern is genuine.
When you take it all together, the collapse of Tableau's share price starts to make a lot of sense. Now is the time when we see what the company's leadership is really made from. The next couple of quarters will tell us more.