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Edited Transcript of DATA earnings conference call or presentation 3-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Tableau Software Inc Earnings Call

Seattle Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Tableau Software Inc earnings conference call or presentation Wednesday, May 3, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Selipsky

Tableau Software, Inc. - CEO, President and Director

* Damon Fletcher

* Derek Wong

* Thomas E. Walker

Tableau Software, Inc. - CFO

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Conference Call Participants

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* Brent Alan Bracelin

Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Cloud Software and Analytics

* Jesse Wade Hulsing

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Joseph Dickerson

Jefferies LLC, Research Division - Head of European Banks Research and Equity Analyst

* Karl Emil Keirstead

Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst

* Mark Ronald Murphy

JP Morgan Chase & Co, Research Division - MD

* Philip Alan Winslow

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Raimo Lenschow

Barclays PLC, Research Division - Director and Analyst

* Sanjit Kumar Singh

Morgan Stanley, Research Division - VP

* Walter H Pritchard

Citigroup Inc, Research Division - MD and U.S. Software Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Angel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tableau Software Q1 2017 Earnings Conference Call. (Operator Instructions)

Derek Wong, Senior Director of Investor Relations, you may begin your conference.

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Derek Wong, [2]

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Good afternoon. Thank you for joining Tableau's First Quarter 2017 Earnings Conference Call. With me on the call are Tableau's Chief Executive Officer, Adam Selipsky; Chief Financial Officer, Tom Walker; and Senior Vice President of Finance, Damon Fletcher.

Our press release was issued earlier today and is posted on our website. This call is being broadcast live via webcast. Following the call, an audio replay will be available on the Investor Relations section of our website. Adam and Tom will begin with prepared remarks and then we will open the call for questions.

Before we begin, I would like to remind you that during today's call, we will be making forward-looking statements regarding future events and financial performance, including our guidance for the second quarter and full year 2017. We caution you that such statements reflect our best judgment based on factors currently known to us and that the actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, in particular our most recently filed quarterly report on Form 10-Q and our annual report on Form 10-K. These documents contain and identify important risk factors and other information that may cause our actual results to differ from those contained in our forward-looking statements. Any forward-looking statements made during this call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in the forward-looking statements even if new information becomes available.

During the call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is provided in today's press release.

The financial outlook that we have provided today excludes stock-based compensation expense, which cannot be determined at this time and are, therefore, not reconciled in today's press release. Please also note that similar to last quarter, we have updated our trended metrics table at the end of our press release. Please refer to this table for additional information regarding our bookings mix, customer accounts and deal trends and international mix.

With that, it's my pleasure to turn the call over to Adam.

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Adam Selipsky, Tableau Software, Inc. - CEO, President and Director [3]

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Thanks, everyone, for joining us today. We were pleased with the start to 2017. Revenue was up 16% year-over-year to $200 million, and our ratable license bookings mix grew to 26% of overall license bookings this quarter.

On the call today, I'll cover 3 areas: first, our ongoing shift to subscription revenue and the benefits to our customers; second, our accelerating pace of product innovation, including industry recognition from Gartner in their most recent Magic Quadrant; and third, the customer momentum we're seeing, including strong demand from larger enterprise organizations.

Let's start with subscription. Now with subscription, we generate less revenue upfront as the revenue is spread over time. While a higher ratable mix, therefore, impacts our near-term revenue growth, it speaks to the strong customer demand and longer-term revenue potential of our subscription offerings. If we do our jobs and retain our customers, this should generate strong results over the long term.

More and more organizations are demanding subscription purchasing options for the -- all of their software, and data analytics is no different. It's no surprise why, as with subscription, our customers get the full power and simplicity of Tableau with lower risk, lower upfront investment and more flexibility.

Our journey to subscription began with Tableau Online, our fully hosted cloud analytics SaaS offering. We also made strides in enterprise subscriptions in 2016, with new enterprise license agreements for deployment on our customers' premises. And in the first quarter of 2017, we began a soft launch of new subscription pricing for all Tableau products regardless of where customers choose to deploy. This resulted in the growth to 26% ratable license bookings that we reported today. Then last month, we flipped our website over to lead with subscription pricing for Tableau Desktop and Server on-premises products, and we also enabled our partners to sell these SKUs. The early customer demand has been very encouraging. Customers have been asking for more flexible purchasing and deployment models, and we're excited to offer them compelling subscription offerings that address their needs directly.

Now subscription pricing for analytics is just better for customers. It reduces their risk as they can make their buying decisions more frequently while avoiding large sunk costs. We expect this freedom will help grow demand for Tableau from both existing and new customers. We anticipate subscription licensing will grow the overall analytics market, and if we do our job and execute effectively, it will grow our share of the market as well.

The great news is that we're seeing this demand happen today. For example, in Q1, Brown-Forman, the maker of Jack Daniel's whiskey and other spirits and wines, became one of Tableau's newest subscription-based enterprise deployments. Their CIO identified the flexible pricing structure as a major factor in their decision to deploy Tableau as their analytics platform of choice. By spending less upfront, Brown-Forman was able to scale at a global level and deploy the platform to about 1,000 people initially. They plan to continue expanding Tableau quickly to all of their employees globally.

And the move to subscription itself is global, too. This quarter, Recruit Technologies, part of the Recruit Group, a leading IT and marketing company in Japan, signed a subscription agreement to accelerate Tableau usage across their organization. This agreement will allow Recruit to accelerate and expand self-service enterprise analytics across its entire portfolio of companies, groups and projects. We're very excited to work with them.

Our sales teams are now principally focused on providing subscription offerings to our customers. And for the first time, our partners will be fully enabled and incented to resell all of Tableau's subscription offerings.

Now that we're officially launched, we expect that the pace of subscription adoption will only accelerate. We continue to believe that this is the right long-term decision for all of our stakeholders and will help us to sharpen our commitment to our customers on a daily basis. Tom will give some more color on our unit financials as well as our subscription mix expectations in a moment.

Turning now to our product innovation in the first quarter. We were excited for the new capabilities that we were able to make available to customers. Q1, we released Tableau 10.2, which added advanced mapping capabilities with the new Spatial File Connector. This new connector greatly simplifies how organizations can leverage their geographical data infrastructure, with special benefits in industries like public sector and oil and gas. For example, with our Spatial File Connector, a police department can now visualize crime data by customized neighborhood, precinct and police beat geographies, a far more relevant and effective visualization compared to standard mapping by zip code. And we added new data connectors in 10.2, including Anaplan, Apache Drill and Microsoft SharePoint lists, bringing us to over 60 data connectors available to our customers.

In addition, I'm excited to announce that we now have over 15,000 beta testers for Tableau 10.3. Tableau 10.3 will bring new connectors, including a PDF connector that will allow our customers to connect directly to PDF files and identify tables. This opens up an entirely new realm of data sources that organizations can leverage and blend for rich analysis, such as economic data from the World Bank, scientific data from research institutions, public health data from the World Health Organization and the uncountable number of PDF documents that most companies have.

10.3 will also deliver new data-driven alerts for Tableau Server that will allow users to stay on top of their data and be proactively notified when specific conditions are met. 10.3 will also include Tableau Bridge, a secure connection between Tableau Online and our customers' on-premises databases that will enable more customers to use online in a hybrid manner without first having to move their data to the cloud. The 10.3 release will also include a new recommendation engine built on machine learning that will deliver recommended tables and joins.

And as I'm sure you've seen, Gartner positioned Tableau as the leader in their Magic Quadrant for Business Intelligence and Analytics Platforms for the fifth consecutive year. According to Gartner, Tableau is the gold standard for intuitive, interactive visualization given our extensive set of data connectors with both in-memory and direct query access for larger data sets. Tableau's customers score its ease-of-use among the highest of all vendors.

Turning now to our customer momentum. We're seeing strong demand from customers not just with our subscription licensing but across our commercial, enterprise and public sectors. In Q1, we added new customers like the University of Maryland Medical System; U.S. State Department and the Refugee Processing Center; New York magazine; Pinnacle Treatment Centers, a U.S.-based network of drug treatment facilities; and Media iQ, a U.K.-based marketing technology company. And we also saw existing customers expand their deployments, including Southern Glazer's Wine & Spirits, the largest wine and spirits distributor in the U.S.; Jaguar Land Rover; the Robert Wood John Foundation -- Johnson Foundation; the Cancer Treatment Centers of America; Seattle Public Schools; CNO Financial; and the California State University system.

We continue to hear from large enterprises that they want to standardize on Tableau more broadly across their organizations. One great example of the type of enterprise demand we're seeing is Kelly Services, a Fortune 500 global staffing and outsource agency with over $5 billion in annual revenue. Not surprisingly, they manage a very large amount of valuable staffing data. Kelly Services was already seeing considerable productivity gains using Tableau. And in Q1, the company signed a subscription licensing agreement to further build out an analytics platform. Kelly Services will utilize the flexibility of Tableau's subscription model to enable more users to adopt Tableau quickly in key areas, such us talent and supply chain, rapidly scaling self-service analytics within their enterprise and for their external network of vendors and suppliers.

And a quick update on our field teams. You will recall that Dan Miller, our new EVP of Sales, joined us in mid-February, and he has been quite busy meeting with customers, partners and Tableau teams globally. He's laser-focused on executing our larger enterprise strategy, including evolving our messaging, deepening our long-term customer life cycle approach with more focused account planning and enhancing our large-scale licensing frameworks. At the same time, we continue to double down on serving smaller customers and data analysts, as always. And Dan also recently consolidated the worldwide partner and channel operations under a new senior leader on his team. You'll hear more directly from Dan at our Financial Analyst Day in a few weeks.

So in closing, our first quarter of 2017 marked a healthy start to the year, especially given the strong uptake of our subscription licensing offerings. As we said on our last call, 2017 will continue to see higher subscription mix, which, we believe, benefits all stakeholders. Our priority at Tableau has been and will continue to be deliver long-term value to customers. Subscription and the flexible price that it offers marks a critical step on that journey. Expect us to continue to align our pace and path of innovation with our customers' needs, not just for subscription but across all aspects of our analytics platform. Given these opportunities to drive rapid innovation at Tableau, you can see why I'm tremendously excited for the road ahead.

I'll now turn the call over to Tom, who'll walk through this quarter's results, provide some more color on the subscription transition and share our outlook.

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Thomas E. Walker, Tableau Software, Inc. - CFO [4]

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Thank you, Adam. Good afternoon everybody. Today, I'm going to cover 3 topics in my prepared remarks: first, I'll discuss our Q1 financial results; second, I'll provide some additional color on our continued subscription transition in 2017; and at the end, I'll discuss our Q2 and fiscal year 2017 outlook.

Let's start with our results. For the first quarter of fiscal year 2017, total revenue was $199.9 million, up 16% year-over-year. This compares to $171.7 million in Q1 2016. Non-GAAP operating loss was $4.2 million, which included $10.3 million in real-estate-related consolidation charges. This compares to a loss of $1.2 million in Q1 of 2016. Our non-GAAP diluted loss per share for the quarter was $0.03.

During the first quarter, we had 294 transactions greater than $100,000 compared to 268 transactions in Q1 2016. In Q1, we had 10 customers invest more than $1 million with Tableau. Please note, we anticipate these metrics will fluctuate on a quarter-by-quarter basis when taking into account seasonality, deal cycle timing and the impact of subscription pricing.

Turning to license revenues. First quarter license revenues were $97.2 million, up 1% year-over-year. This compares to $96.4 million in Q1 2016. In Q1, 19% of license revenues were ratable compared to 9% in Q1 2016. As a reminder, Tableau Online, OEM, ELAs and term licenses are recognized ratably over the agreement period and are typically invoiced in annual installments.

First quarter maintenance and services revenues were $102.7 million, up 36% year-over-year. This compares to $75.3 million in Q1 2016. The maintenance component of maintenance and services is our largest recurring revenue stream and continues to have renewal rates exceeding 90%. The services component of maintenance and services revenue was approximately 12% of maintenance and services compared to 15% in Q1 2016.

When you combine all of our ratable revenue sources, which include the maintenance portion of our maintenance and service agreements as well as our license and subscription revenues from Tableau Online, OEM, ELAs and term licenses, our ratable revenues were 54% of total revenues in Q1, marking the first time in any period that more than half of our revenue has come from ratable sources. This compares to 42% in Q1 2016.

Turning to our geographic revenue segments in Q1. International revenues were $58.4 million, which was up 22% year-over-year and represented 29% of total revenue. Revenue from the United States and Canada was $141.5 million, up 14% year-over-year and represented 71% of total revenue.

Now let's discuss bookings. I'd like to remind you that we define bookings as the first year of contracted revenue only, and do not include additional years beyond the first year unless the customer pays upfront. This means license bookings do not include contractual backlog for future years not yet invoiced. License bookings grew 6% year-over-year in Q1 2017 compared to 24% year-over-year growth in Q1 of 2016.

As we continue on this transition path, we thought it would be helpful to provide additional insight into our fundamental demand. If we normalize our year-over-year license bookings growth rate to the perpetual license equivalent, our license bookings growth would have been 20% in Q1 2017 compared to 27% in Q1 2016. The delta between actual and normalized growth rates has increased year-over-year as we've made more progress on our subscription go-to-market strategy and our mix has increased. For the purposes of this comparison, the perpetual license-equivalent calculation factors in the ratio of perpetual prices to subscription prices, assuming the demand and discounting are held constant in the calculation. This comparison does not adjust for OEM distribution transactions. From a total license bookings percentage, ratable license was 26% in Q1 2017, which exceeded our guided range of 15% to 20%. This was driven by better-than-expected results of our soft launch of our subscription pricing model, which took place in Q1 and officially launched in early Q2. This compares to 12% in Q1 2016.

Now let's discuss margins and operating expenses. As a reminder, our margins and operating expenses are discussed on a non-GAAP basis. Please see our press release tables posted on our Investor Relations website for non-GAAP to GAAP reconciliations.

First quarter total gross margin was 88% compared to 89% in Q1 2016. Total non-GAAP operating expenses in Q1 were $180.1 million. This compares to $153.2 million in Q1 in 2016. As I stated earlier, our Q1 non-GAAP operating loss was $4.2 million. Also, as I mentioned earlier, our Q1 non-GAAP operating expense includes $10.3 million in real-estate-related consolidation charges. These charges were allocated across expense lines proportionately with headcount. We will realize the future expense savings from these consolidation efforts over the next several years. We do not anticipate any further real-estate-related consolidation charges this year.

Sales and marketing expenses for the quarter were $99.9 million, up 12% year-over-year. We ended Q1 with sales and marketing headcount of 1,392 people. We invested $60.8 million in research and development in Q1, up 25% year-over-year. We ended Q1 with R&D headcount of 899 people. General and administrative expenses for the quarter were $19.4 million. At the end of Q1, our total headcount was 3,193. This compares to 3,168 employees at the end of Q1 2016.

Our non-GAAP effective tax rate continues to be 30%. This brings our non-GAAP net loss for the first quarter to approximately $21.1 million -- I'm sorry, $2.1 million. Our non-GAAP diluted loss per share was $0.03, and our weighted average diluted share count was 77 million shares. As a reminder, in periods where we have a net loss, the basic and diluted share count are the same.

On the balance sheet, cash and cash equivalents at the end of Q1 were $954.6 million, up from $908.7 million in Q4 2016. Accounts receivables were $130.8 million, and our DSOs were less than 65 days.

During the quarter, we repurchased approximately 383,000 shares of Class A common stock for $20 million, bringing our cumulative shares repurchased to date to roughly 830,000 shares. These shares were repurchased under the $200 million repurchase program announced in Q3 2016. As a reminder, this program allows us to repurchase shares opportunistically from time to time, and we believe doing so will enhance long-term shareholder value. The repurchase authorization does not have a fixed expiration date.

Now I'd like to turn to an update on our subscription transition. Our Q1 2017 performance clearly demonstrates the continued momentum of our subscription business, as evidenced by the increase in our ratable license bookings mix. We expect this trend to persist as we continue to make progress on our subscription go-to-market strategy.

Given our recent subscription launch, I wanted to revisit our hypothetical perpetual business subscription example I detailed on the Q3 2016 call last year. This example helps illustrate the difference in the unit economics over a 3-year period. Let's take the individual user cost of a customer deploying Tableau Server as their analytics solution. Our new subscription price is now $35 per user per month billed annually. The upfront cost is $420 compared to $1,000 on a perpetual basis. On a perpetual basis, we would recognize the entire amount in year 1 as both license and maintenance revenues, specifically $800 in license revenue immediately and $200 in maintenance revenue recognized over the course of the year. Assuming the customer renews with us, we would recognize $200 in each of the years 2 and 3 under the maintenance revenue line. Now under subscription pricing, we bill the customer for $420 in year 1. And assuming the customer continues to renew, we go on and bill $420 per year in years 2 and 3 and recognize it as license revenue.

Carrying that math out, you'll see the overall effect on revenues and bookings. In year 1, we book and recognize less than half the revenue as compared to the perpetual scenario. That's $420 versus $1,000. However, in years 2 and 3, under the subscription pricing, we book and recognize more than twice the revenue in each of those compared to the perpetual basis, $420 versus $200. The economics on our Tableau Desktop products are similar.

On the expense side, we expect sales-related compensation to increase as we have aligned sales compensation strategy to be indifferent between subscription and perpetual scenarios. Going back to the subscription example, our margins would be negatively impacted by sales compensation in year 1 and favorably so in years 2 and 3. As Adam noted in his remarks, we believe that our subscription model will better align with our -- with customer value by reducing their risk and having lower upfront costs and will result in better economics for Tableau over the long term and allow us to continue to innovate for our customers.

I'll now turn to our financial targets for Q2, followed by our current outlook for the fiscal year 2017. Please note that all forward-looking guidance is being discussed on a non-GAAP basis. This outlook takes into consideration a number of factors, including our current view on the market and the demand we are seeing, our customer buying behavior, and our pipeline.

We expect second quarter total revenue to be between $205 million and $215 million. Using the midpoint of this range, this represents 6% year-over-year growth. This outlook assumes that the mix of ratable license bookings will represent approximately 30% to 35% of our license bookings for the second quarter. This compares to 16% in Q2 of 2016.

Turning to expenses. For the second quarter, we expect a non-GAAP operating loss of $2 million to $10 million. This equals a negative 3% non-GAAP operating margin when using the midpoint of the range. We expect our Q2 non-GAAP loss per diluted share to be between $0.02 and $0.09. Because we expect a non-GAAP loss in Q2, we anticipate both basic and diluted share count to be approximately 78 million shares.

Turning now to our current fiscal year 2017 outlook. We are maintaining our guidance for the year and expect the fiscal year 2017 revenue to be between $850 million and $890 million, representing year-over-year growth of 5% when using the midpoint of the range. Our revenue guidance assumes that the mix of ratable license bookings will increase each quarter in 2017 and will reach a full year mix of approximately 30% to 38%, an increase in range from 25% to 35% previously. This compares to the full year fiscal year 2016 ratable license booking mix of 17%.

Here's a little more context around our FY '17 guidance. The pace at which we transition may vary based on a number of factors. For example, we have over 57,000 customer accounts, the majority of whom have purchased Tableau on a perpetual basis. We are focused on their success and expanding their use of analytics under the model that is best for them. Some customers may to -- may elect to make additional purchases on a perpetual basis given their existing deployments. And many other customers may elect to go with subscription licensing for reasons we talked about earlier. As a result, the impact of customer purchasing preference during the transition is subject to some variation in the near term. We are also taking into consideration our maintenance revenues, which are currently the largest recurring revenue stream. And given our 90% plus maintenance renewal rates, this revenue stream can provide additional support for our operating results on our subscription transition.

Turning now to expenses. We plan on balancing our investments with an eye on the bottom line during this transition. For fiscal year 2017, we continue to anticipate a breakeven non-GAAP operating income. Our plan is to continue to grow the team and make prudent investments aligned with our long-term outlook and market opportunity. While we do not anticipate it, please note a faster-than-expected subscription transition could negatively impact our revenue targets and, likewise, lower our operating margins.

We assume our long-term non-GAAP effective tax rate will continue to be 30%. We anticipate breakeven non-GAAP earnings per share. However, as noted above, at the low end of our revenue guidance, we would expect to generate a non-GAAP loss per share commensurate with our lower operating margins.

We anticipate the full year diluted share count to be approximately 83 million shares. And in the event we have a net loss, our basic and diluted share count will be approximately 70 million (sic) [79 million] shares. We maintain our fiscal -- we are maintaining our fiscal year 2017 capital expenditures guidance of $55 million to $60 million. That's down from $77 million in fiscal year 2016.

And lastly, as a reminder, we'll be hosting our 2017 Financial Analyst Day on May 25. It will be webcast via our Investors website with registration details to come shortly. Our lineup will include Adam and myself, in addition, Dan Miller, our EVP of Worldwide Sales, Service and Support; Francois Ajenstat, our Chief Product Officer; and Elissa Fink, our Chief Marketing Officer.

In closing, I'd like to thank team Tableau for their customer focus and delivering on our mission of helping them see and understand their data. All your hard work and efforts are not lost on our customers.

Thank you for joining the call. Now I'd like to turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Karl Keirstead with Deutsche Bank.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [2]

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Thanks for broadening all the added detail around the ratable mix. So maybe this is for Tom. Tom, the portion of bookings and revenues coming from ratable seem to be at the -- generally at the high end. The number I wouldn't mind zeroing in on though is the license bookings growth of 6%, which was a [de-sell] compared to your performance last year. So I just want make sure I understand that. Is this a phenomenon where you might have done well on the subscription side but perhaps the perpetual license piece came in a little bit light and it pulled the overall number down? Thanks for clarity on that number.

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Thomas E. Walker, Tableau Software, Inc. - CFO [3]

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Sure, Karl. So it's nice to hear from you. Yes, overall, I think that's what we were looking at when I gave out the normalized number. So taking that 6%, normalizing it for a perpetual equivalent, you'll see that the year-over-year growth rate was 20% versus 27% in Q1 of 2016. So it has come down. But on an overall basis, it's growing quite well at 20%. The factors that are going into it is a lot of what we've been doing over the last year, and this launch of our new subscription pricing, we believe, is going to help us compete more and basically expand the market opportunity for analytics. And that's really, really what we're focused on. That's why we're kind of excited to finally have the subscription pricing model launched publicly.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [4]

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Got it, okay. That makes sense. And Tom, if I could ask you a follow-up on another financial metric, a different one. Operating cash flow, through the roof, I just want to make sure I understand what drove that. If you could offer color there, that would be also great.

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Thomas E. Walker, Tableau Software, Inc. - CFO [5]

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Sure, yes, very, very strong there. And so it was driven mostly by accounts receivable. Just really if you saw the AR balance at the end of 2016, we had a very good Q4. And so it's mostly that cash flow is driven by the collections and the collections team. And so for the entire year, I would still -- I don't expect it to continue to be that robust, just so you know. I would think it would fall back to more of the historic trends, cash flow from operations in the 20% range for the entire year.

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Operator [6]

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Your next question comes from the line of Mark Murphy with JP Morgan.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division - MD [7]

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Adam, did you intentionally cut over harder toward ratable deal structures in Q1 than we might have expected coming off of Q4? Or would you attribute that change in mix solely to being driven by customer demand?

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Adam Selipsky, Tableau Software, Inc. - CEO, President and Director [8]

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Mark, well, I'd say both. First, we did see very strong customer demand for subscription really across multiple geographies, multiple sectors of our business. Where we did make subscription pricing available to customers, they really took it up quite strongly. Number two, I really got to give the team credit. They really executed in Q1. We were really doing a soft launch. We hadn't announced all this new pricing publicly, and they just told us that it was the right thing for customers and that they were just going to go take it and drive it. And to be perfectly honest with you, in the absence of a real public launch and a lot of marketing support, a lot of the training, partner support, et cetera, I didn't fully now how much progress they would make in Q1, but they surprised us in the most pleasant manner because it's better for our customers.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division - MD [9]

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And just as a follow-up, you alluded to the most recent Gartner Magic Quadrant. It did seem to create a lot more competitive separation, if you will, specifically for Tableau and Microsoft relative to the rest of the field. And so it looks a bit more like a Coke and Pepsi kind of an industry structure now. How did your customers and prospects respond to that? And for instance, did bake-offs become narrower and less noisy as a result?

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Adam Selipsky, Tableau Software, Inc. - CEO, President and Director [10]

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Yes, I do think so. I think basically, customers are looking at that and thinking, "Gosh, we'd have to be crazy to not at least talk to Tableau if we're looking at an analytics platform."

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division - MD [11]

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Okay. And then a -- and just a final one for you, Tom. The headcount declined a bit sequentially. Just wondering how did that skew between voluntary or an involuntary attrition. And are the hires going to be a little more loaded into Q2 and Q3 than you might have thought?

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Thomas E. Walker, Tableau Software, Inc. - CFO [12]

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Yes, yes, overall, Q1 headcount was lower than we expected. So we want it to be higher. You could see from our website, we are hiring. We are planning on building the team and growing from there. But overall, Q1 came in lower than we expected, and we want to improve that. We've got a good pipeline, and we want to continue to build the team both domestically and internationally.

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Operator [13]

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Your next question comes from the line of Walter Pritchard with Citi.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [14]

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I think 2 questions here for Tom. The first one, you obviously maintained your annual guidance with a higher ratable mix for the year. So I guess my read on that is your underlying new business growth or license equivalent, whatever we want to call it here, is actually higher than you were assuming it would be 3 months ago. Could you help us understand any sort of magnitude around that assumption? And I assume you attribute that to the strength you saw in Q1, but I want to make sure I'm taking away the right message there.

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Thomas E. Walker, Tableau Software, Inc. - CFO [15]

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Yes, Walter. Yes, I think Q1 is a good example. We were able to exceed that ratable mix and still land inside the guided range. And so it is focusing on the new pricing, we think, will resonate more. The early indications are it resonates more with customers and their ability to expand their analytics use, specifically the Tableau use throughout their organizations. And so I think you're picking up on it correctly. It's -- the early read is very, very positive, and we want to get analytics in a much more broader fashion. You know very well that, that has always been our mission: to bring it to all people inside organizations. And so we are able to see good, early indicators, and that is reflected in our guidance.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [16]

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And then second question, kind of [reading] the numbers here. You talked about 20% growth in the license-equivalent business. And I think sales and marketing is up about 12% year-over-year, which, I guess, on the surface would speak to sales productivity improvements, but I know there are a lot of moving pieces here. Would you say that that's the right read there as well, that sales productivity did make gains year-over-year over? Or were there other factors that impacted those numbers I'm looking at?

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Thomas E. Walker, Tableau Software, Inc. - CFO [17]

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Yes. It's hard to pick on sales productivity on -- in any given quarter. It's so -- because it ebbs and flows and depending on the team. But overall, you know that we've been focused on sales productivity now for more than a year. And so it is a very, very important part of us, hiring, making sure that we're getting our sales organization, marketing organization to be able to be successful. So we are continuing to see improvements there, but there is still more to be done there. And we're anxious to make sure that the team is equipped to be able to execute at the levels that we want them to. But overall, you have the right read, but I still want to -- we still have work to do there.

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Operator [18]

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Your next question comes from the line of John DiFucci with Jefferies.

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Joseph Dickerson, Jefferies LLC, Research Division - Head of European Banks Research and Equity Analyst [19]

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This is Joe on for John. I know it's still early, but this has been a hot topic during earnings so far. Have you guys examined ASC 606 and the potential impacts? And how should we think about it for you guys, particularly as you guys go through a model change?

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Damon Fletcher, [20]

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Yes. So I think we're -- we've been looking at ASC 606 very closely. I think one of the things that we're kind of definitably stating our position is we will adopt it on a modified prospective basis. I think we're -- as we go out through the year, we're going to provide more visibility to our shareholders.

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Joseph Dickerson, Jefferies LLC, Research Division - Head of European Banks Research and Equity Analyst [21]

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Awesome. And then I appreciate the update on Dan Miller. Can you go a more in-depth about the consolidation you briefly mentioned? And then also, do we expect any other changes in the sales force structure or any other management changes?

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Adam Selipsky, Tableau Software, Inc. - CEO, President and Director [22]

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Sure. Regarding our partner ecosystem, I think since I came onboard and certainly the company even before that, we've been talking consistently about what an important part of our overall company strategy our worldwide partner ecosystem is. And we decided that now is an appropriate time to really have a single head of that system for worldwide alliances, spanning across systems integrators, consultants, technology partners and channel partners, resellers, VARs and distributors. So Dan was ever quickly hired to fill that worldwide leadership position. We'll, of course, still have localized partner resources in the field, reporting locally, so they can be very attuned to local markets. But this position is not only the hard line responsible for a lot of partner functions but also, if you will, our spiritual leader for partner activity worldwide. So I think that was important in terms of just continuing to enhance our ability to really serve our customers well through our partners. I think we'll just continue to evaluate, are there other areas which we can either streamline or just get to more effective structure for our customers? But I think we just consider that to be business as usual. It's kind of like hygiene. It's just never done.

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Thomas E. Walker, Tableau Software, Inc. - CFO [23]

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Yes. The -- this is Tom. The only thing I would add is in less than 90 days, Dan has made -- has covered a lot of ground. So he has made it his mission to go visit as many customers as he can and as many of the regions as he can so he can meet with the employees and really get a feel for what's going on and what we're doing well and what can be improved. And so he's really, really a positive presence, and we're really excited to have him.

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Operator [24]

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Your next question comes from the line of Jesse Hulsing with Goldman Sachs.

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Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Tom, I appreciate you providing kind of a bridge to what your normalized growth rate was in the quarter on the license side. I was wondering if you can, one, give us a sense of what that number looked like last year so we have something to compare it against. And two, when you look at your guidance for the full year and for the second quarter, what kind of underlying normalized bookings growth -- license bookings growth is implied in your guide?

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Thomas E. Walker, Tableau Software, Inc. - CFO [26]

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Jesse, so the numbers that we gave -- for comparison purposes are going to be Q1 normalized this year and Q1 normalized 2016. So in the prepared remarks, you heard me talk about 20% this year, the year-over-year growth rate, versus 27% in the prior year. So those are the only 2 numbers that we're disclosing at this point in time. With respect of guidance, we're not going to guide to a normalized range. We're going to stick to the revenue guidance that we had, and we'll continue to monitor it. This was just an important part. As we have now taken our public step forward in launching our subscription pricing modeling, we thought it would be very, very helpful, and I'm glad you found it helpful to kind of put it in perspective, the overall fundamental demand that we're experiencing.

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Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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Great. And then Adam, can you remind us how you're incentivizing your sales force with regards to the subscription options? I understand that there are customers that have historically bought perpetual and those may be harder to convert. But are you selling perpetual to new customers? And for the sales force, how skewed is the plan towards subscription versus perpetual?

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Adam Selipsky, Tableau Software, Inc. - CEO, President and Director [28]

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Sure, Jesse. Well, first, we really want to take sales force incentives off the table in terms of getting subscription offerings into our customers' hands and just making a decision about what's best for customers. So our sales team is fully incented to sell subscriptions. In the cases where they do sell perpetual because that's what customer's need, they certainly get full compensation for that as well. But we essentially neutralized it. There is no particular incentive for the sales team. So it really kind of falls back to what's best for the customer. In terms of the other part of your question, for new customers, in the -- we are basically selling subscriptions to new customers. It's better for customers, better for all of our stakeholders. And as you've seen, the adoption is going very well. Many of our existing customers also want to switch over to subscription. Obviously, we ended the year, last year, before the subscription pick-up really started to take off with 54,000 customers. And we're going to be respectful of those as well. And some of them are going to want to continue to have perpetual pricing for a while. Some of them will take a while to make the transition over. And we'll both work with those customers who want to transition over quickly as well as continue to, for now at least, provide perpetual licenses to existing customers. And we'll just -- so we're in this transition. We're going to monitor that over time. We'll be talking to customers, and we'll be following the situation accordingly.

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Thomas E. Walker, Tableau Software, Inc. - CFO [29]

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Yes. And Jesse, this is Tom. The only thing I would add is we think that the subscription pricing is going to be very compelling. And so as customers want to -- and we've been hearing it. Adam said this actually in his first earnings call, was -- he went out and visited customers. They're looking for ways to bring our technology throughout their organizations. And it's very, very compelling from a cost perspective. And so even people who've made investments, we have had them convert over to subscription because they want to even take it further. So we think it's the right trend. We think it's the -- we're tapping into that, and we'll continue to work on it quarter-by-quarter.

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Operator [30]

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Your next question comes from the line of Brent Bracelin with Pacific Crest Securities.

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Brent Alan Bracelin, Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Cloud Software and Analytics [31]

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I guess, Tom, first for you and then a follow-up for Adam. Tom, it's clear that the pace of subscription adoption accelerated here. Q1 ratable, 26%, well above the guided range in Q1 here. My question is really on this idea of maintain the full year guide despite a higher mix of ratable. Based on the model where you outlined you collect less than half of the subscription revenue in year 1. In order to offset the higher mix of ratable, there has to be a volume increase. I guess my question specifically is, what's driving your more bullish view on volumes this year? Is it share gains? Is it the belief that lower price will drive higher adoption? Walk me through that delta versus what you were expecting at the beginning of the year.

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Thomas E. Walker, Tableau Software, Inc. - CFO [32]

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Yes. So -- Brent. So overall, there's a number of things going on there, right. I think Adam picked up on it, at the end of this quarter, actually, we have over 57,000 customer accounts. We have a significant customer base. Some of them have made perpetual investments, and they're going to continue to make it. So that's one of the driving factors because we're going to let people invest, especially people who've already invested in our technology, continue to expand. We do think it will be more compelling to come over, but that's not going to be as fast as others. We think the new business will absolutely come over because when they come to the website, that's all they're going to see. It'd be very, very easy. The other thing that's going on with respect to the revenue guide is our maintenance business, which is an extremely strong revenue stream. So it's very -- it's always been very strong, but it has continued to grow. And so that is one of these things that helps us from an operations -- a margin standpoint during a transition year because we have 90% plus maintenance renewal rates, and that maintenance business is a very, very important part of that, which will help us navigate to this while we continue to grow. Ultimately, we do expect to expand the footprint. That is absolutely -- it's always been our mission, is to reach more people inside organizations than traditional BI ever did. And so we do expect that, but that's not so much this year as a continued journey into next year and beyond.

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Brent Alan Bracelin, Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Cloud Software and Analytics [33]

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Got it. And then on the maintenance as a follow-up to that. Obviously, as you go to subscription, you no longer collect maintenance. At what point would maintenance start to kind of flatten out here? Do you think that potentially could be this year or that might not be until next year?

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Thomas E. Walker, Tableau Software, Inc. - CFO [34]

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That's hard to say, Brent. It really is going to -- it depends. I mean, I think it's a very healthy part of the business in this year, and I expect it to be. I'm not really talking about 2018 or how fast people transition over, but it is -- it's an important part of the business because people -- again, I fallback to our 57,000 customer accounts. They've made investments. And with 90% renewal rates, they have expectations that we'll continue to innovate and support, and we will continue to do well on those obligations.

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Brent Alan Bracelin, Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Cloud Software and Analytics [35]

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Fair enough. And then Adam, now that you've been at Tableau here for the better part of, what, 7 months, can you share your thoughts on kind of the competitive and partner landscape? Maybe just compare, contrast what you were thinking when you joined the company and what you've kind of witnessed over the last 7 months. Is there anything that kind of stands out to you that's different now?

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Adam Selipsky, Tableau Software, Inc. - CEO, President and Director [36]

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Well, I think the competitive situation is pretty much dead on what I expected based on what I could see from the outside and what folks here talked to me about. I mean, this -- as you guys all know, this is a very large and very rapidly growing market space. So that -- I mean, whether you want to construe that as analytics or as data more broadly. And it's no surprise that there's going to be vigorous competition in any space that's that big and growing that quickly. In fact, it would be shocking if it were otherwise. And we have a set of, I guess, old-world to old-school vendors. And we regularly make inroads against those, against the inflexible, expensive, complicated deployments. We regularly see customers ripping those out. Now some of those are pretty deeply entrenched, takes some time to rip some of those out, but it's inexorably happening. And then there's a set of newer competitors who really -- who followed Tableau's lead into much more the type of visual, self-service, flexible analytics. It's no surprise to see new entrants in that space, no surprise to see that they're going to continue to innovate as well. It's our job to, number one, understand our customers more deeply than anybody else; number two, innovate more quickly in the things that matter most to the customers. And I see our team as being very focused on doing that. I think if we continue to do that and really focus on customer understanding and innovating on their behalf, then we will be just fine. And that's where we spend the vast majority of our focus, not on competitors per se.

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Operator [37]

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Your next question comes from the line of Raimo Lenschow with Barclays.

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Raimo Lenschow, Barclays PLC, Research Division - Director and Analyst [38]

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A quick one for Adam. Adam, if you look with Dan there and making some changes with the new subscription pricing out there, I would assume that you're not quite at 100% in terms of sales -- not sales capacity but sales performance. Where do you -- where are you seeing yourself in terms of when do you kind of reach back to that 100% level, you're firing on all cylinders, all the changes you did on the pricing, on the sales organization, et cetera, coming at -- and you're kind of working with 100% again? And then a quick one is like following on, on the competition. Actually, like, we saw that Birst, kind of, is gone. What do you think in terms of consolidation around -- in your space?

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Adam Selipsky, Tableau Software, Inc. - CEO, President and Director [39]

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Well, in terms of the first question, I guess the answer is never. We're not going to be complacent. Wherever we are, number one, we won't have been perfect in execution. There'll be chances to improve. And number two, in the market space we're in, it's moving so quickly and dynamically, that whatever the perfect answer was 6 months ago is almost going to be definitionally out of date. And so I think effective providers are going to be the ones that understand the quick and sometimes subtle movements of their customers and where they need us to be. So from a sales perspective specifically, we're going to be very focused on that. We're working on improving everything from our major account planning to really be in sync with our larger customers who are trying to deploy Tableau across the organization, all the way down to very small organizations and data analysts or data geeks as we lovingly refer to them, themselves and us, and to make sure that we have a great offering. I mean, don't forget subscription is also great for our smallest customers, many of whom do not have large amounts of cash available. And this significantly lowers the entry point even for a single copy of Tableau Server or Tableau Desktop. So I think the subscription move, I think our sales focus is not only on large organizations but also on small. All that being said, there are a lot of moving parts in the subscription roll-out, and it's almost impossible to believe that we possibly could have gotten everything right. So our job is to really monitor tightly, quickly and then turn around improvements rapidly. And we're just going to be focused on that.

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Operator [40]

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Your next question comes from the line of Phil Winslow with Wells Fargo.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [41]

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Really, just to have a -- I want to focus on new customers versus upsell through existing customers. Wondering if you can you talk about just the trends that you saw this quarter. And in particular, when you did the hard cutover beyond the website with subscription, any changes that you've noticed in the mix there versus where your expectations were?

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Thomas E. Walker, Tableau Software, Inc. - CFO [42]

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Phil, this is Tom. So yes, new customers, we added over 3,300. As far as the cutover, obviously, anybody who's brand new to the Tableau franchise after the first week of April, all they're going to know is the subscription pricing. So there's not -- if you went to the website, you try the product, all the sales motions are going to be around subscription. And so that's one of your questions. The second question was kind of your focus of upselling. And so I think we've been focused on expanding. That's the theme for -- last year, we've been really, really focusing on making sure we are getting more penetrated inside of our accounts and bringing Tableau deeper into the organizations. I think the sales team recognizes that there's a lot of opportunities once you land an account to continue to expand. And that's where a lot of our sales motions are. It's not one or the other. It's actually both. And both are very, very important for us to continue to grow, but it's -- we're focused on both, but if you had to put more weight on something, it'd obviously be the existing base, which is the larger portion of what we're currently dealing with.

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Operator [43]

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We have time for one more question. Your next question comes from the line of Sanjit Singh with Morgan Stanley.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [44]

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Congrats on the nice license bookings for this quarter as well. I guess my question, Tom, is how should we think about expense growth relative to revenue growth? You guys grew expenses pretty nicely in 2016. You did a 20% adjusted bookings growth this quarter. So I just want to get a sense of what sort of -- what -- how are you sort of thinking about expense growth and what baseline are you using? Should we be thinking about expense growth relative to overall revenue growth, which is slowing, versus maybe some of your -- the trends that you're seeing in your license bookings growth?

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Thomas E. Walker, Tableau Software, Inc. - CFO [45]

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Sanjit, a great question. I tried to cover that in the prepared remarks and the guidance. I think we are very, very focused on -- as we transition, there's obviously pressure on the top line revenue, and that puts pressure on the operating margins. We are focused on getting to breakeven this year and having a breakeven non-GAAP operating income. And so that is kind of our expense posture. It will ebb and flow in each one of the quarters. Obviously, the first half of the year will be negative with a loss position there, but growing into that. But we are being prudent, we're being thoughtful, just like we were last year, in where we're making the investments. We do want to continue to expand and make investments, but we want to do it in a way where we're watching the top line and basically the bottom line at the same time so that we can land on our targeted guidance, which we're trying to get to breakeven for the end for the year.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [46]

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Got it. And just one follow-up. As we begin this journey towards subscription, which -- and that's going to take a couple of years in terms of getting to a steady-state subscription mix. And so I want to get your thoughts, Tom, on what sort of ongoing metrics that you guys are thinking about providing. My guess is you'll probably discuss this in more detail at the Analyst Day coming up here in a couple of weeks. But is something like ARR or subscribers or any sort of metric that we can sort of assess progress on a quarterly basis -- how are you thinking about metrics going forward on the subscription transition?

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Thomas E. Walker, Tableau Software, Inc. - CFO [47]

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That's a great question, and you actually answered the question for me. We are absolutely focused on that. We think that's an important part, and we will be talking more about that at the Analyst Day. I think with respect to this quarter, we did -- we offered up a new metric around normalized licensed growth rate, and that was just an important thing just to give you a flavor for the fundamental demand that we're experiencing. And I think that's really one of the most important parts of what we need to do as we journey on this transition is make sure that everybody understands the underlying demand because we think it's an enormous opportunity, but we have to continue to show that the demand is there and that we're able to execute. But stay tuned for more because the Analyst Day is when we are focused on doing that and talking about a number of things throughout the company. Excited to have Dan there and Francois and Elissa. So we're going to have the whole company and looking forward to seeing you then.

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Damon Fletcher, [48]

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So this is Damon Fletcher. I just want to issue a small correction to the prepared remarks. For our 2017 guidance, if we have a net loss, our basic and diluted share count will be approximately 79 million shares. Early on the call, we mentioned 70 million shares. So I wanted to correct that. Thank you.

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Adam Selipsky, Tableau Software, Inc. - CEO, President and Director [49]

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Great. I think that concludes our call. Thanks, everyone, for joining us, and see you all in 90 days. I'll turn it over to you, operator. Thank you.

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Operator [50]

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This concludes today's conference call. You may now disconnect.