This week’s Danger Zone pick saw its stock price rise over 140% from mid 2014 to mid 2015. In the second half of 2015, the stock would fall nearly 70%. More recently, the stock is back on the upswing and is up 23% year-to-date, while the S&P is up just 6%. The fundamentals of the business don’t justify this price move. In fact, negative margins, strong competition, and the overvalued stock price land Tableau Software (DATA: $53/share) in the Danger Zone this week.

Revenue Growth Without The Profits To Show

Tableau Software’s after-tax profit (NOPAT) declined from $4 million in 2012 to -$119 million in 2016. This decline in profit comes despite revenue growing 59% compounded annually over the same time, per Figure 1.

Figure 1: DATA’s Revenue Growth Leads to Losses


Sources: New Constructs, LLC and company filings

The company’s return on invested capital (ROIC) is currently a bottom-quintile -29% and its NOPAT margin was -14% in 2016. Additionally, Tableau has burned through a cumulative $604 million (15% of market cap) in free cash flow over the past four years. Despite impressive revenue growth, Tableau’s fundamentals are trending in the wrong direction.

Compensation Plan Misaligns Executive Interests

Tableau Software’s executive compensation plan fails to properly align executives’ interests with shareholders’ interests. The misalignment drives the profit losses shown in Figure 1. Worse, the current compensation plan allows executives to earn large bonuses while shareholder value is destroyed.

Tableau executives are eligible for base salaries, cash incentives, and long-term equity awards. The cash bonuses are tied to the achievement of target “bookings.” “Bookings” a non-GAAP metric, represent the first year of contracted revenue. However, per Tableau’s 2016 financial results press release, “bookings is not a measure of revenue or an indication of actual revenue results.” Meanwhile, management actively tracks and touts bookings as signs of success.

Long-term equity awards are given in the form of restricted stock units. The compensation committee, in consultation with the CEO, determines the size and terms of equity awards. Items taken into account during this review include role and responsibility of the executive, individual performance, competitive factors, and retention objectives. Unfortunately, these rather subjective performance metrics do little to ensure alignment of interests between the agents and owners of capital for Tableau.

We’ve demonstrated through numerous case studies that ROIC, not “bookings” or other non-GAAP metrics, is the primary driver of shareholder value creation. Without major changes to this compensation plan (e.g. emphasizing ROIC), investors should expect further value destruction. In addition, we suggest the board of directors, especially the compensation committee, consider their culpability and responsibility for the misalignment of interests.

Non-GAAP Metrics Mask The Firm’s Losses

Tableau uses non-GAAP metrics such as non-GAAP gross profit, non-GAAP operating profit, and non-GAAP net income to create the illusion of profits. Our research digs deeper so our clients see through the illusory numbers. Below are some of the items Tableau removes to calculate its non-GAAP net income:

  1. Stock-based compensation expense
  2. Amortization of acquired intangible assets

These adjustments have a large impact on the disparity between GAAP net income, non-GAAP net income, and economic earnings. In 2016 and 2015, Tableau removed over $185 million (22% of revenue) and $119 million (18% of revenue) respectively in expenses related to stock-based compensation to calculate non-GAAP net income. When added with the other adjustments, Tableau reported 2016 non-GAAP net income of $34 million. Per Figure 2, GAAP net income was -$144 million and economic earnings were -$156 million in 2016.

Figure 2: Disconnect Between Non-GAAP & Economic Earnings


Sources: New Constructs, LLC and company filings

Negative Profitability Amidst Highly Profitable Competition

Tableau Software provides tools that help clients see and understand data. Tableau operates directly in the data visualization market and more broadly in the business intelligence/analytics market. These markets are occupied by some of the largest tech firms in the world, such as Microsoft (MSFT), Oracle Corporation (ORCL), salesforce (CRM), and International Business Machines (IBM). The large competitors offer entire business analytics suites, such as Oracle Business Intelligence, salesforce Cloud, and Microsoft Dynamics.

The important takeaway from Figure 3 is Tableau’s ROIC and NOPAT margin rank below all competitors. The firms with the highest profitability in the industry are those that offer much more than just data visualization. Many of their competitors can bundle data visualization into larger services that include enterprise resource planning, supply chain management, or even database management. This bundled economy of scale allows competitors to more easily provide discounts and lower prices, as in the case of Amazon QuickSight, which claims to be one-tenth the cost of traditional solutions. Bundling can also allow firms to offer data visualization for free, as Microsoft did when it released a free version of its Power BI tool. As a standalone data visualization provider, Tableau doesn’t have the ability to bundle discounts without cutting into already negative margins.

Figure 3: Tableau Software’s Negative ROIC & Margins


Sources: New Constructs, LLC and company filings 

Bulls Case Ignores Slowing Revenue and Rising Costs

Tableau bulls will point to the firm’s impressive revenue growth and growing market as reason to invest in the company. Many will also argue that with just a few cost controls, Tableau could be a profitable firm. However, each of these viewpoints ignores the fact that revenue growth is slowing, while exorbitant costs continue to undermine the bottom line. In 2016, revenue grew 27% year-over-year (YoY), which is down from 82% YoY in 2013. In order to continue growing revenue at high (yet declining) rates, Tableau has had to increase its spending, which has led to its NOPAT margin falling from 3% in 2012 to negative 14% TTM, per Figure 4.

Figure 4: Sacrificing Profits To Grow Revenue


Sources: New Constructs, LLC and company filings.

Making matters worse, Tableau is not in a position to cut costs and reach profitability. With significant competition, the firm must enhance its product offering to provide better value or risk falling behind its better-funded competition. Heavy marketing spending is required to improve product awareness. When asked about growth vs. profitability on the recent quarterly conference call, CFO Thomas Walker noted that in order to maintain Tableau’s market position, the firm must continue innovating through investing and expansion.

Comments like these should give profit-hopeful investors pause. Tableau’s cost growth already outpaces its revenue growth, yet the firm must continue investing to maintain market share. Without willingness to give up market share in exchange for profits, this business model is no recipe for success.

Figure 5 shows that the firm’s operating expenses make up an increasingly larger percentage of revenue. In 2016, operating expenses were 105% of revenue, up from 89% of revenue in 2012

Figure 5: DATA’s Operating Expenses As % Of Revenue


Sources: New Constructs, LLC and company filings

Per Figure 6, Tableau’s research & development, sales & marketing, and general & administrative costs have grown 74%, 66%, and 49% compounded annually, respectively, since 2012. Over the same time, Tableau’s revenue has grown 59% compounded annually.

Figure 6: DATA’s Operating

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