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Edited Transcript of DATA earnings conference call or presentation 2-May-19 8:30pm GMT

Q1 2019 Tableau Software Inc Earnings Call

Seattle May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Tableau Software Inc earnings conference call or presentation Thursday, May 2, 2019 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 & Executive Director

* Damon A. Fletcher

Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer

* Derek Wong

Tableau Software, Inc. - Senior Director of IR

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Conference Call Participants

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* Bradley Hartwell Sills

BofA Merrill Lynch, Research Division - VP

* Brent Alan Bracelin

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* Jennifer Alexandra Swanson Lowe

UBS Investment Bank, Research Division - Analyst

* Karl Emil Keirstead

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

* Keith Weiss

Morgan Stanley, Research Division - Equity Analyst

* Mark Ronald Murphy

JP Morgan Chase & Co, Research Division - MD

* Matthew David Van Vliet

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

* Richard Myron Hilliker

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Tyler Maverick Radke

Citigroup Inc, Research Division - Senior Associate

* Zane Brandon Chrane

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to Tableau's First Quarter 2019 Earnings Conference Call. (Operator Instructions) Thank you.

I'll now turn the call over to Derek Wong, Vice President of Investor Relations.

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Derek Wong, Tableau Software, Inc. - Senior Director of IR [2]

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Thanks, Rob. Good afternoon, and thank you, everyone, for joining Tableau's First Quarter 2019 Earnings Conference Call. With me on the call today are Adam Selipsky, Tableau's President and Chief Executive Officer; and Damon Fletcher, Tableau's Chief Financial Officer.

Our press release was issued earlier today and is posted on our website. This call is being broadcast live via webcast. And following the call, an audio replay will be available on the Investor Relations section of our website. Adam and Damon 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 fiscal year 2019 as well as certain long-term financial targets. 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 in the future.

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.

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

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

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Thanks, Derek, and thanks, everyone, for joining us today. For today's call, we'll cover 4 topics: first, a review of our Q1 results; second, the strong demand we're seeing for subscription; third, the growing enterprise opportunity; and fourth, the innovation we're delivering for our customers.

So let's start with our first quarter performance. First quarter revenue was $282 million, up 15% compared to last year, while our first quarter license revenue was $118 million, up 8% year-over-year. We saw strong customer demand this quarter driven by healthy customer expansion activity and continued subscription adoption as shown by a Q1 mix of 84%.

Given the strong subscription adoption in Q1, total annual recurring revenue, or ARR, grew to $902 million at the end of the quarter, up 41% from the prior year and up $61 million from the prior quarter. Likewise, subscription ARR at the end of Q1 was $510 million, up 115% from the prior year and up $67 million from Q4 2018. We continue to believe that ARR represents an important metric for tracking and measuring the overall health of our business.

Let's turn now to our subscription offerings. We launched our role-based subscriptions in April of last year to help customers scale and tailor Tableau to their needs. Since our launch, we've seen widespread adoption of our Creator, Explorer and Viewer offerings from customers around the world and across all major industries. In particular, the Viewer offering is helping to expand our addressable market to a dramatically wider audience.

In fact, our subscription ARR from role-based customers is 6x larger than it was 3 full quarters ago in Q2 of 2018, the quarter that we launched our role-based offering. And we're seeing this adoption around the world. For example, Yokogawa Electric, a global industrial automation and measurement company based in Tokyo, Japan significantly expanded their Tableau footprint via role-based subscription licensing across thousands of employees.

Yokogawa and their CIO chose Tableau as their primary BI solution after considering the flexibility and choice of our analytics platform and our ability to help deploy analytics rapidly on a global scale.

Yokogawa is looking forward to driving a more data-driven culture at the company, and we're thrilled to help them get there with the power of Tableau.

As we move forward, we'll continue to invest in our sales and our product teams to help ensure that our customers are successful in deploying, adopting and managing Tableau. We believe that these investments will not only fuel further adoption and expansion of Tableau, but also help drive healthy customer renewals over the long term.

Let's turn now to the enterprise opportunity. Q1 marked a strong enterprise quarter as large organizations continue to choose Tableau to help rapidly scale their analytics across thousands and tens of thousands of users. For example, in Q1, we closed a large enterprise deal with a global retailer to dramatically scale Tableau to well over 100,000 seats. With the flexibility of subscription licensing and the ability to assign Tableau to specific roles across hundreds -- I'm sorry, across thousands of Creators and tens of thousands of Explorers and Viewers, this organization will rely on Tableau to drive critical business insights across multiple departments and regions around the world.

We're also starting to see more and more enterprises standardize on Tableau to help drive widespread modern analytics adoption and a data-driven culture across their organization. With the ability to connect to over 75 data sources, both live and in memory, and a seamless ability to integrate with all 3 major public cloud providers, organizations can standardize on Tableau knowing that they have the choice and flexibility to foster data insights for all their data needs, regardless of where their data resides.

For example, this quarter a leading job search company selected Tableau as their business intelligence standard to help rapidly scale their analytics footprint across thousands of employees. This company will deploy Tableau on top of their own database application to help eliminate manual reporting and drive mission-critical analytics across multiple departments.

Standardization and widespread adoption of analytics at organizations of all sizes require that we innovate rapidly on behalf of customers to continue to expand the breadth and depth of our platform. Q1 marked 2 important milestones on this innovation journey: the release of our natural language capabilities, Ask Data; and our new data management add-on, which includes Tableau Prep Conductor.

At Tableau, we've always believed that every person in every organization can make impact with data, regardless of their skill or experience with analytics. This is why in Q1, we launched Ask Data, Tableau's new natural language capability. With Ask Data, customers can ask questions of any published data source in plain English and get answers instantly in the form of rich interactive Tableau visualizations. Ask Data is fully integrated with the Tableau platform so customers do not need to do any additional setup or move data to a new system.

For example, a user can now just type in the question, "Who are our largest customers by country?" And Tableau will instantly return an interactive geospatial visualization that exposes many more adjacent insights and avenues for further exploration and analysis. Customers can further refine results with follow-up questions, interact directly with the visualization, or jump into Tableau's drag-and-drop interface to dive deeper. They can also publish their insights to share with others across their organization, fostering collaboration around data.

Ease-of-use has always been a hallmark of our platform, and Ask Data represents a seminal step forward in our commitment to making analytics intuitive, visual and simple for our customers. This new level of accessibility has the potential to vastly lower the barrier of entry for analytics and fundamentally change how people interact with data.

While still early, customer engagement and feedback has been highly encouraging, and we look forward to seeing how customers transform their analytics with the power of natural language.

As more people access data to inform their decisions and as organizations seek to become more data-driven, it's more important than ever that people also work with data that's ready for analysis. To that end, our launch of Tableau Prep Builder last year has helped thousands of customers quickly and confidently combine, shape and clean their data. With the release of Tableau Prep Conductor, customers will now be able to automatically manage prep flows. With new data scheduling are learning and management features that will ensure that data is always clean, trusted and ready for analysis. Prep Conductor is also fully integrated with the Tableau platform so analytic data stewards will be able to leverage the permissions and the security of their server environment.

Prep Conductor is part of our data management add-on. And later this year, we will be including additional data cataloging capabilities in that add-on, which will offer our customers greater visibility into their data, provide enhanced governance and facilitate discovery of the right and trusted data for analysis.

And lastly, this quarter we completed our equity donation to help fund the Tableau Foundation's pledge to grant $100 million of software, training and financial support between now and the end of 2025. This support will enable the foundation to further aid nonprofits using data to take on some of the world's toughest challenges.

For example, in March we announced our commitment of more than $1 million to the nonprofit Community Solution to help eliminate veteran and chronic homelessness in 50 communities across the United States by 2025.

In closing, we kicked off 2019 with a strong start with 41% year-over-year total ARR growth, healthy customer expansion activity and substantial progress in our subscription transition. We remain relentlessly focused on our customers, which means that we will deeply listen to their needs and continue to innovate on their behalf.

Innovations like Ask Data and Tableau Prep Conductor mark important milestones in this direction. And as we move forward, we will continue to act with a sense of urgency as we execute on our mission to help people see and understand data.

I'll now turn the call over to Damon, who will walk through this quarter's results and share our outlook.

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [4]

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Thanks, Adam, and thank you, everyone, for joining us on the call today. For today's call, I'm going to cover the following remarks in my prepared remarks. First, I'll discuss our Q1 financial results. Following, I'll discuss our fiscal year 2019 and Q2 outlook.

For the first quarter of 2019, total revenue was $282.5 million, up 15% year-over-year. First quarter license revenue was $117.6 million, up 8% year-over-year. In Q1, maintenance and services revenues were $164.9 million, up 20% year-over-year.

To help put our top line results into perspective, we saw strong subscription adoption in the first quarter with our Q1 mix at 84% compared to the 59% mix in Q1 of last year and the 79% mix in Q4 2018. This strong subscription momentum impacted our license revenue growth rate given the lower upfront revenue recognized from a subscription contract compared to a perpetual contract. As a reminder, we provided an example on last quarter's earnings call that showed that for a single subscription user on an annual contract, we recognize approximately 27% of the license revenue when compared to a similar perpetual user.

Given the differences between upfront subscription and perpetual revenue recognition, we believe that ARR serves as an important metric in understanding our financial performance. As such, given the strong overall customer demand this quarter, our total ARR grew 41% year-over-year and surpassed the $900 million mark, finishing the quarter at $902 million. This marked a quarter-over-quarter increase in total ARR of $61.1 million compared to a sequential increase in total ARR of $45.7 million in Q1 of last year.

Given the high subscription uptake, subscription ARR showed healthy growth as well, growing 115% year-over-year to $510.1 million at the end of Q1, as customers continued to embrace our role-based subscription offerings in the first quarter.

Our team remains laser-focused on ensuring that our customers are successful in deploying, adopting and managing Tableau, which helps drive strong customer expansion and new ARR generation as we saw again this quarter. We continue to exceed a 90% overall combined renewal rate, which includes both maintenance on our perpetual licenses as well as subscription renewals.

Our international revenues were $85.6 million and represented 30% of total revenue. Our United States and Canada revenues were $196.9 million and represented 70% of total revenue. We saw strength in the U.S. enterprise and APAC this quarter, with particular strength in Japan. We had 16 customers purchase more than $1 million in Q1 compared to 13 customers in Q1 of 2018, an increase of 23% year-over-year.

Now let's discuss operating margins and expenses. As a reminder, our operating margins and expenses are discussed on a non-GAAP basis. Please see our earnings press release tables located on our Investor Relations website for non-GAAP to GAAP reconciliations. First quarter total gross margin was 88%, which was flat year-over-year. Our Q1 operating loss was $2.7 million and represented 1% of revenue. Sales and marketing expenses for the quarter were $139.3 million, up 18% year-over-year. We ended Q1 with sales and marketing head count of 1,903 employees. We invested $80.5 million in research and development in Q1, up 18% year-over-year. We ended Q1 with R&D head count of 1,162 employees.

General and administrative expenses for the quarter were $30.4 million. At the end of Q1, our total head count was 4,286. This compares to 4,181 employees at the end of last quarter. Our non-GAAP effective tax rate was 20% for the quarter. This brings our non-GAAP net income for the first quarter to $2 million. Our Q1 non-GAAP diluted net income per share was $0.02. Our weighted average share count used to calculate non-GAAP diluted income per share was approximately 90 million shares.

On the balance sheet, cash and investments at the end of Q1 were $1.06 billion. Accounts receivable net were $177.2 million, and our DSOs were less than 65 days. Our remaining performance obligations, or RPO, at the end of each quarter -- or at the end of the quarter was $254 million, up 122% year-over-year. During the quarter, we repurchased approximately 35,000 shares of our Class A common stock for $4.3 million, bringing our cumulative shares repurchased to date to roughly 3 million shares. As a reminder, our repurchase authorization does not have a fixed expiration. To date, we have deployed approximately $224 million of our $500 million total stock repurchase authorization.

Additionally, as we announced on our Q3 earnings call last year, this quarter, we made an equity donation to the Tableau Foundation and recorded an expense of $24.2 million to general and administrative expense based on the value of the stock on the date of donation. Given the nonrecurring nature of this equity donation, we have excluded the expense impact from our non-GAAP financial results.

I will now turn to our financial guidance for the fiscal year 2019 and Q2 2019. Please note that all forward-looking guidance other than revenue is discussed on a non-GAAP basis. As always, our outlook takes into consideration a number of factors including, though not limited to, our current view on the market environment and the customer demand we are seeing; our pipeline and our customer buying behavior as customers consider and decide on the licensing and deployments that work best for their needs, which include licensing via subscription or perpetual, multiyear versus single-year subscription contracts and deploying Tableau on-premises or on the public cloud versus Tableau Online.

Let's turn now to our fiscal year 2019 guidance. We continue to see strong customer demand for our products and services driven by healthy customer expansion activity. For the full year, we are raising our total revenue outlook to $1.34 billion to $1.40 billion, representing year-over-year growth of 19% when using the midpoint of the range.

Let me give you some perspective on the linearity of our quarterly outlook. We continue to see healthy subscription adoption as evidenced by our Q1 mix at 84%, a notable acceleration from Q4 2018. As we discussed last quarter, we will continue to see an ongoing impact from the subscription transition in Q2 given the higher percentage of perpetual licenses in the prior year. However, in the second half of this year, we will have reached a point where the year-over-year increase in our subscription mix will have less of an impact on our financial results. Accordingly, we expect our revenue growth will accelerate in the second half of 2019.

Lastly, we still expect that we will make continued progress in our subscription transition and will approach 90% mix by the end of Q4 2019. Given the strong subscription demand we are seeing, we are raising our total ARR outlook to $1.13 billion to $1.16 billion, representing year-over-year growth of 36% when using the midpoint of the range. We continue to anticipate that our maintenance ARR related to perpetual licenses will decline year-over-year, particularly now that a higher concentration of our sales are subscription.

Let's turn now to our operating margin outlook for 2019. We continue to expect fiscal year 2019 operating margins of 12% to 14% of revenue. As we discussed last quarter, given the clear growth opportunity in front of us, we are continuing to invest and hire in several key areas in 2019, specifically around international expansion, product innovation and building out operational infrastructure to lay the foundation to scale our businesses over the long term.

We estimate our non-GAAP effective tax rate for 2019 will be 20%. We continue to expect fiscal year 2019 capital expenditures to be between $55 million and $65 million, up from the $22 million in fiscal year 2018. As we noted last quarter, we expect heavier capital expenditures this year, due to the buildout of several facilities, which offer us favorable long-term economics but incur capital expenditures in the near term.

For the full year, we expect to generate non-GAAP earnings per share of $1.58 to $1.85. This assumes $18 million in other income, primarily related to interest income from our cash and investments. We anticipate the full year diluted share count to be approximately 90.4 million shares.

Turning now to Q2 2019 guidance. We expect second quarter 2019 total revenue to be between $313 million and $328 million, representing year-over-year growth of 14% when using the midpoint of the range.

Let's turn now to operating margin outlook for Q2. For Q2, we expect a non-GAAP operating margin income -- operating income of 7% to 10% of revenue. We estimate our non-GAAP effective tax rate for Q2 will be 20%. We expect Q2 capital expenditures to between $15 million to $20 million. For the second quarter, we expect non-GAAP net income per share range to be between $0.22 and $0.33, which assumes a diluted share count of $90.3 million (sic) [90.3 million]. This also assumes $4 million in other income, primarily related to interest income on our cash and investments.

Lastly, please remember that on a quarter-to-quarter basis, cash flows can fluctuate due to seasonality. For example, as you've seen from previous years, Q2 is typically our lowest cash flow quarter due to the seasonal billing trends in Q1. In addition, we expect that the ongoing impact from our subscription transition will continue to affect our cash flows in Q2.

As such, we expect operating cash flows to be slightly negative on an absolute dollar basis in the second quarter. However, we believe Q2 will mark the trough of the subscription transition's impact on operating cash flows. Going forward, we expect that our operating cash flows will begin to accelerate as our subscription renewals, which have favorable economics, become a larger percentage of our revenue base. We continue to remain comfortable with the long-term free cash flow margin of 25%-plus, as shared with you last quarter.

In closing, I would like to thank each and every member of team Tableau for your continued dedication and hard work. Without you, we would not be able to accomplish our mission of helping people see and understand data.

I'll now 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) And your first question comes from the line of Raimo Lenschow from Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [2]

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First one, more a big-picture question. If you think about the customer conversations you had this quarter, where do you think people are on that acceptance of subscription in terms of getting that mix to 90%-plus actually? Like are we fully there? Are there kind of regional differences? And that was my first question, and I have one follow-up.

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

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Raimo, it's Adam. I would say it's relatively consistent around the world. We do continue to expect to approach 90% subscription mix by the end of the year and continue to be really pleased with not only how well the team here is executing, but just how enthusiastic customers are about adoption -- adopting the subscription model.

For the vast majority of our customers subscription is better, not only because of the cash conservation, but more importantly, because of the risk reduction and their having the ability to really walk away from a provider if the provider is not doing the job. So that's really the predominant reaction we see.

Of course we, as you know, do have some existing customers who historically purchase via perpetual licensing. And we continue to have those -- some of those customers who want to continue in that model are doing so, accounting for the rest of the balance of that mix.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [4]

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Okay. Perfect. And one follow-up maybe more for Damon. As we approach the trough on cash flow in Q2, can -- what are the puts and takes we should kind of consider as we kind of think more going forward into 2020, 2021? What are things because of the subscription model that are going to change compared to where we were before?

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [5]

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The biggest difference is just the acquisition cost of a subscription customer really happens in the first year of the transaction. And then on an ongoing basis, there are less costs related to that transactions. And so as our renewal base has become a bigger part of our composition of revenues, you'll see that improve the cash flow dynamics that we've seen over the last several quarters since we began the transition in April 2017.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [6]

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Congratulations.

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Operator [7]

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Your next question comes from the line of Karl Keirstead from Deutsche Bank.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [8]

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Maybe one for Adam, one for Damon. Adam, the mix of upfront perpetual versus ratable is, I know, always super tough to forecast. But obviously, the fact that you guys on total revs came in towards the lower end of your guidance range suggests that maybe even you were surprised by the strength of that mix shift to ratable.

And I just wanted to ask you whether there was anything in terms of the demand backdrop or your own sales rep incentives that may have skewed it a little bit more towards the ratable. And then maybe I'll follow up with my question for Damon.

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [9]

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This is Damon. I would say we saw strong customer adoption of the subscription offerings. I believe role-based offerings that we launched last year certainly played a part in that. We've seen now 3 quarters in a row of really strong uptake of those offerings.

And so as we look at -- as the year unfolds, we continue to expect to reach 90% given how receptive customers have been to that. There's been no real change in the way that we incentivize the subscription offerings. I think it's just primarily related to the product incentives that we provided with the role-based offerings.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [10]

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Got it. Okay. And then my follow-up to you then is, it sounds, Damon, like you're setting us up for a fairly material second half acceleration, certainly in revenue growth and cash flow. And at the risk of asking for too much seasonal detail, should we see a fairly material acceleration in 3Q? Or are you pushing us a little bit more towards that real inflection happening in 4Q?

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [11]

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Well, I don't want to give my quarterly guidance for Q3 at this point in time. What I will say is in the prior year, Q3 and Q4 were the periods of time which we had exceeded 80% in the -- of subscription mix. I think we were 81% in Q3 and 79%, so almost 80% in Q4. And so as we've talked about since we began the transition, that was the point in time where we felt like the year-over-year growth rates in margins and cash flows would begin to improve.

And so as I look at the midpoint of our outlook for the second half of the year, it's in excess of 20%. And so -- but I can't give you anything specific on whether that inflection point will happen in Q3 or Q4, given we're not ready at this time to provide you a quarterly outlook for Q3.

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Operator [12]

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Your next question comes from the line of Brent Bracelin from KeyBanc Capital Markets.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [13]

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One for Adam and a follow-up for Damon. Adam, I was hoping you could drill down into the new 100,000-seat deal with the large retailer. Why is this retailer going wall-to-wall now? If it is an existing customer, touch on whether there was a competitive bake-off? And just any other details you could provide on why you kind of won the deal here and why they're going wall-to-wall now?

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Adam Selipsky, Tableau Software, Inc. - CEO, President & Executive Director [14]

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Sure. Thanks for the question. Well, it was a customer who's been a fairly longstanding customer of Tableau's, as many of our enterprise customers have been, you see an initial land of Tableau and viral adoption and a growing and a growing. And then I think each one of these is a little bit of a different story. There's not so much of a pattern.

I think in this case we had really been having the conversation without trying to rush the customer through anything for quite a while now, in terms of how broad their ambitions were to really expand the use of analytics and [a] they're really creating a data-driven culture very broadly across the company, different departments, different regions around the world. And I think that cake was just finally baked in the oven, if you will. And they just felt comfortable that this was the right time where they'd really have a great ROI for making the investment now.

So I don't think it was one thing that changed either at Tableau or at the company. Certainly, the launch of our subscription offerings, the ability to deploy different versions for different people, Creator, Explorer, Viewer, et cetera, helped to lock that. But of course, that wasn't a particular development this quarter.

In terms of the competitive dimension, anytime you have a company that size, you can be sure that every major tech vendor on the planet is banging down their door. So there's absolutely vigorous competition there from very large established traditional vendors. This was no exception.

But they're firmly entrenched in their desire to expand dramatically with Tableau, I think mainly given the breadth of the platform and the depth of the capabilities within it, which match up very well to their desire to really expand the use of data very broadly across the company.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [15]

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Got it. Very helpful there. And then Damon, just as we think about the acceleration in revenue growth, I just wanted to be clear here around total ARR growth. Obviously, it came in stronger than we had thought here this quarter of 41%. But the full year guide you raised to 36% does imply you'll see some deceleration over the next few quarters. Is that the right read there just as you start to anniversary some of the higher mix of ARR that you started to see last year?

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [16]

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Yes. I think as we're lapping larger and larger numbers in the prior period, we expect that number to come down and be at 36% at the end of the year. We talked about previously that over the long run, we expect kind of ARR growth rates to converge with revenue over a multiyear horizon. And so you'll just see as we're lapping larger and larger numbers, that to begin to come down.

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Operator [17]

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Your next question comes from the line of Jennifer Lowe from UBS.

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Jennifer Alexandra Swanson Lowe, UBS Investment Bank, Research Division - Analyst [18]

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My first question was one, I think, for Adam and just talking about the conversations you're having with customers around role-based pricing. And we've certainly heard customers that are enthusiastic about that, but we've also talked to some customers who are concerned that they end up paying more under the role-based pricing model and have maybe been holding off on embracing that and view that as something they're going to do over time as their capacity needs outpace their user growth.

And I'm just curious, to the extent you do hear pushbacks along those lines in your own conversations, is that something that you think there's something proactive you can do to make those customers move faster? Are you going to kind of move at the pace they move to move to role-based? How -- are you hearing that? And how do you sort of address that pushback, if you do?

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Adam Selipsky, Tableau Software, Inc. - CEO, President & Executive Director [19]

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Jennifer, well, with new customers, it is remarkable how absent any pushback is, and that's around the world. I was recently in a couple of different countries in Asia Pacific, prior to that in a couple different countries -- 3 actually -- in EMEA. And everywhere I go, I ask our sales teams how this is going and what kind of dynamic they see in this area.

And really almost universally, there's just no pushback and customers are enthusiastically embracing the subscription model. I think some of it is, it's just a good way to buy Tableau, and some of it is I think the broader software market is just moving to subscription and/or pay-as-you-go types of models and away from this old legacy way of buying software on a perpetual basis, which again, over the long term, is just not that good for most customers.

As you allude to, we do have some existing customers who have traditionally bought Tableau via perpetual licensing. And I think some of them, it just suits them to continue that and not to have to move to a new model. I think for some of them, there are accounting or financial treatment questions, internal procurement questions. And just the act of change can be difficult, of course.

And so we continue to be customer-friendly and to let those existing customers who want to, buy in that fashion. Many of them actually are transitioning over. And some of the deals that you hear us announce each quarter on these calls are transferring over from perpetual licensing.

And of course, we try and make that transition attractive. We obviously are factoring in and taking into account their existing investments in Tableau and making it a smooth transition. So -- and by the way, I don't think we're done with that. I don't think we've perfected it. I think we'll continue to make those transition programs and approaches hopefully better over time.

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Jennifer Alexandra Swanson Lowe, UBS Investment Bank, Research Division - Analyst [20]

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Great. And then just one quick one for Damon. In the past, under the -- I would like to say, first, this was a much easier model update than it's been in a while, so. May [is too full of] ASC 606, and I'm sure you feel the same way, probably more so.

But we used to get this metric around the percentage of license revenue that was perpetual, and it looks like we are not getting that metric anymore. The commentary in the call sounds like license -- perpetual declines are probably consistent with where they've been for some time, but is there any additional color you can give there, like the metric we used to get around the percentage of license that's perpetual? Or is down 40 kind of a reasonable ballpark? Just any color would be super helpful.

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [21]

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Yes. So the amount of revenue that was perpetual under the mix that we previously presented, we no longer maintain a -- our books and records under the old accounting standard, ASC 605. So that's the primary reason we no longer provide the revenue-related metric. What we have given you is the percentage of our sales that is -- are subscription and -- but that's more on a bookings basis, just to help you kind of see the trajectory we're having in our transition.

I will say our revenue, as you can imagine, from seeing kind of the shift from 59% to now 84%, that's a significant decrease in the amount of perpetual licensing that we had this quarter. And that's primarily the driver of why the -- that license revenue growth rate could have -- is 8% compared to the kind of maintenance and services line that's at 20%.

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Operator [22]

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Your next question comes from the line of Zane Chrane from Bernstein Research.

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Zane Brandon Chrane, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [23]

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Congratulations on a great ARR growth this quarter. A question for Adam. I was wondering if you could give us more detail and elaborate on Tableau Prep Conductor. How is that conversation going with customers? Is it something where they see the value proposition and it's obvious, and they're saying, "Yes. Give it to me. I'm deploying subscription and that's an easy cross-sell." Or is that something where you have to do more education and evangelism?

And then secondly, can you give us any sense of what the kind of attach rates are on that when you sign a new subscription deal?

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Adam Selipsky, Tableau Software, Inc. - CEO, President & Executive Director [24]

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Zane, well, first thing I'll say is that it's still pretty early, right, because we only released Prep Conductor as part of 2019.1 a couple months ago. So I think any discussion around this comes with that disclaimer.

But the conversations are very positive. I think if you go back to a year ago with the release of Tableau Prep Builder, which we're really just including as part of our Creator offering, it was the first tranche, if you will, of delivering on what was probably the #1 ask from customers at that time, which was to add the breadth of the Tableau platform by adding in a robust data preparation capability. And so that was really the creation of flow -- the data prep flow.

And we knew that the next thing we had to turn to was really the enterprise-scaled version of that, which is Prep Conductor, which allows enterprises to schedule and administer those flows and have it be part of their overall governance efforts. And so that's what we released recently this year. So I think it's incredibly important. Data prep is incredibly important for many organizations. And in the enterprise setting, being able to administer and govern those flows through IT is very important to adoption.

Now of course, with any new version and any new major element of the platform, of course, there are evaluation cycles. And I think all of these enthusiastic customers are just going through those evaluation cycles. I think some of them will adopt quickly, others will be medium. And as always, others will take a longer time. So we'll just have to sort of ride those different waves, if you will. But the overall tone and belief in the importance of this is very high amongst the customers that we're talking with.

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Operator [25]

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Your next question comes from the line of Tom Roderick from Stifel.

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Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [26]

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Matt Van Vliet on for Tom. I guess going back to the 2019.1 release here obviously a lot of incremental functionality that really brings the user experience to another level. Just curious in terms of what kind of uptake you've seen on the upgrade cycle, and overall what you feel like that's sort of building into the pipeline, that maybe customers were a little reticent to push out a larger deployment before. But now that some of those features are available, what do you think that's been doing to the sales cycle?

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Adam Selipsky, Tableau Software, Inc. - CEO, President & Executive Director [27]

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I would say that 2019.1, in terms of adoption, has actually been very consistent with what we've seen in other major releases of Tableau. I think we've seen the same strong but consistent uptake and upgrading to the newest version.

Obviously, there's a distribution or a histogram around that, and we see a lot of customers adopting as soon as they can. As I mentioned on the last question, as you know, there are a lot of, particularly enterprises, who do things on their own schedule and have upgrade cycles. And irrespective of what technology they're looking at, they will do it twice a year or once a year or whatever it is. And also depending on what they're implementing and where it fits in their overall IT, the evaluation times can vary significantly company by company.

So again, I think we'll see a very wide distribution of when 2019.1 gets adopted inside of an individual organization. Many have either done it. Others are racing towards it. And I imagine at the end of this year, we'll still be having this conversation about .1 at other customers. But there's -- that's really no different than I think any of our other releases and it's a very common enterprise technology adoption pattern.

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Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [28]

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And then as a quick follow-up, Damon, just curious we have been hearing at least in the channel that there were some incentives for customers to sign larger or longer-term subscription deals. Did that have any impact in terms of the contract duration on ARR? Or any kind of additional discounting impacting those metrics this quarter?

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [29]

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Thanks a lot. There's -- we don't comment specifically or release any kind of key metrics on contract duration. Obviously, contract duration is going to fluctuate quarter to quarter. And that's why we really point investors towards our ARR and our ARR guidance because of -- ARR kind of normalizes for duration.

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Operator [30]

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And your next question comes from the line of Mark Murphy from JPMorgan.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division - MD [31]

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Adam, this concept of 100,000-seat deals is such a new realm for an analytics company. I'm curious, in that type of an arrangement, presumably the majority of the seats are the Viewers. Is that kind of volume portion of the Viewers contributing as much revenue as the Creator or Explorer seats? Or should we think of that as a lot of seats with kind of immaterial revenue?

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Adam Selipsky, Tableau Software, Inc. - CEO, President & Executive Director [32]

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Hi, Mark. I think that -- first, let me say that there's no single flavor of these large deals. And we have -- we've had in recent quarters large enterprise deals of well over 10,000 seats, which have been almost all Creator. And at the other extreme, of course, we've got deals which are predominantly Viewer.

And it really just depends on the type of knowledge worker, the precise use case, the industry -- professional services at a consulting firm or a systems integrator is going to be different than a retailer or a pharmaceutical, et cetera. So I think you're going to see a lot of variation there.

In terms of the very large deals, I would take a guess going forward that the deals in the many tens of thousands or hundreds of thousands of -- 100,000-plus-seat deals, in a lot of them you would expect to see a lot of Viewers. And that is because as you reach that many employees inside of a company, undoubtedly you're talking about a lot of people who certainly don't have analyst in their title, maybe highly nontechnical but still need to embrace data and be given a product which is suitable for their level of sophistication.

So I wouldn't break it down and think so much about, well, how much revenue is coming from which component. I would view it more as, they're deploying Tableau, and it's really important that Tableau have a lot of features, which is nuanced and appropriate for each person adopting it. And the presence of Viewer is incredibly catalytic for these large deployments. Many of these large deployments would not happen without a SKU such as Viewer. And so -- but where the actual revenue comes from, Creator or Explorer or Viewer or services, any other add-ons, it's really all part of the same hole.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division - MD [33]

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Okay. And as a quick follow-up for Damon. I noticed the international growth came in -- actually, I'm not sure if I'm comparing correctly between 606 and 605. But I believe international growth came in a little slower than North American. Is there any subtle impact from Brexit or macro conditions in Eurozone area or just numbers bouncing around? And then on the flip side, is there anything that is tangible driving the U.S. strength, which you did call out in the script?

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [34]

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I'll just say, go back to what we said in our prepared remarks, that we had strength in the U.S. enterprise. Our APAC team performed very, very well. I mean obviously we're monitoring the Brexit kind of situation closely. I know Adam has recently traveled there and just kind of heard from customers kind of -- and some of our sales team just about the dynamics there. But we call out teams that perform well in the past. And certainly, our APAC team and our U.S. enterprise team performed well this quarter.

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Operator [35]

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And your next question comes from the line of Sanjit Singh from Morgan Stanley.

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Keith Weiss, Morgan Stanley, Research Division - Equity Analyst [36]

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This is actually Keith Weiss sitting in for Sanjit Singh. I wanted to ask a little bit about the competitive environment from, I guess, a little bit of a different angle. You guys are coming out with more kind of data prep type stuff with Builder and Conductor, some of the competitors in the market are sort of acquiring more into the visualization space with Alteryx buying ClearStory. Can you talk to us about how you see sort of that end of the competitive market starting to evolve on a go-forward basis?

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Adam Selipsky, Tableau Software, Inc. - CEO, President & Executive Director [37]

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Sure. This is Adam. I think that -- let's take half a step back. So our customers continue to be just deluged with data, and that trend is only going to continue to accelerate in the coming years. And as a result, there are such huge both opportunities and needs around analytics and getting their arms around that data and driving their businesses and organizations with it, that the way the world has evolved and it's going to continue to evolve is, they really need a broad and sophisticated platform with both broad and deep capabilities, to do analytics.

And so it's not about any one point in that platform. The entire point is the breadth and the full capability of the platform itself. And so it is both necessary for that analytics platform to have really robust data preparation and data management capabilities and data's mission-critical that, that same platform have really advanced, visible to customer analytics capabilities with experiences which are [grateful] and intuitive but also really powerful and over time with more and more features around augmented analytics. And explaining to you why your data is what it is, not just what it is, which are areas we're going to continue to be working on in the current quarter.

So I think companies who are really narrowly focused on one part of that platform, are in the fullness of time probably going to miss the point with customers. And we currently have a significant lead in having that breadth of capabilities, and that's why you're seeing such rapid adoption now in underlying customer demand. And it's up to us to continue to meet that customer demand going forward.

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Keith Weiss, Morgan Stanley, Research Division - Equity Analyst [38]

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Got it. And then maybe if I could sneak in one modeling one. When you're talking to us -- kind of take it in 2 conversations. When you're talking to us about sort of the maintenance base or maintenance ARR is starting to decline, but also seeing more professional license customers moving over onto subscription. How should we think about how much of that kind of subscription ARR comes from the existing base versus how -- like existing maintenance customers versus how much is just from sort of net new customers coming in the door?

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [39]

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Well, the best way I would try to help you look at that is just look at the maintenance ARR, kind of the inverse of the total ARR minus the subscription ARR, and then I'll give you kind of the correct maintenance ARR at the end of each quarter.

I think you're seeing that kind of level off but to begin to decline over the last several quarters. But it's been, I would say, a small decline quarter-by-quarter. So overall, I don't believe it has a significant impact on the overall subscription ARR growth, given that maintenance ARR is only declining a small amount each quarter.

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Operator [40]

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And your next question comes from the line of Tyler Radke from Citi.

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Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Associate [41]

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So it looks like you're raising the revenue guidance or at least taking up the low end of the guide for the full year in a quarter where maybe revenue came in a little bit slower. Could you just talk about some of the things that you saw in the quarter? Obviously, ARR was strong, but take revenue up coming out of the seasonally weakest quarter.

Did you see something change in your pipeline? Or just the overall market demand backdrop that gave you confidence to raise revenue or at least narrow the range more positively in a quarter where revenue was light?

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [42]

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Yes. I mean we saw strong demand from customers in Q1, and that's -- and you are seeing that reflected in the subscription momentum we have as well as the ARR momentum. I think as we look at the year as it is expected to unfold, again, we feel good about our pipeline in Q2 and our outlook there.

And so when we look at the second half of this year obviously we know we've crossed the kind of 80% threshold in the prior year. And so the year-over-year comparables that impact license revenue growth rate will have less of a headwind on our reported results. And so overall, we feel really strong. Again, we said we had kind of really strong customer expansion activities. And so we're having bigger and bigger conversations with customers and the enterprise momentum we feel really good about.

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Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Associate [43]

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Great. And then a follow-up for you, Damon, on operating cash flow. So I think you talked about Q2 being the trough for operating cash flow as it relates to the transition and with operating cash flow expected to reaccelerate as we get into Q3.

Can you kind of clarify what you mean by that? Are you expecting operating cash flow to maybe start to grow a little bit faster than revenue? You get this nice subscription mix and expanding margins. And any reason you don't provide a operating cash flow guide for the full year? Are there still faster moving parts that are hard to predict at this point?

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Damon A. Fletcher, Tableau Software, Inc. - CFO and Principal Financial & Accounting Officer [44]

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The timing of cash flows is more challenging to predict, particularly if you're in a subscription versus perpetual kind of a model with customers and how you engage with customers around those particular topics. I will say that we expect operating cash flows to begin to accelerate. And so we have given a long-term free cash flow margin of 25%. We still feel very comfortable with that.

If you look at the -- kind of the prior year, our mix was at 59% in Q1. Now our mix was at 84% this year. And on a perpetual deal, that's about -- versus a subscription, that's about $0.40 on the dollar of subscription billings versus perpetual billings.

And so once we've crossed over that point in time where we're the 80% in the prior year, I think we'll see the subscription renewals be able to -- which have more favorable economics, begin to cause our operating cash flows to accelerate in the second half of this year. I can't give you any specific details on the exact amount of that acceleration, but I will say that we expect to accelerate.

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Operator [45]

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And your next question comes from the line of Brad Sills from Bank of America Merrill Lynch.

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Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [46]

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One of the things we're noticing across the industry is that there's this kind of replatforming of BI across the whole stack, not just at the visualization consumption layer but all the way down to the data warehouse, with Snowflake and Amazon Redshift. Are you seeing that? Are you benefiting from that? What are your observations on that trend and what impact that might be having on your business?

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Adam Selipsky, Tableau Software, Inc. - CEO, President & Executive Director [47]

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I think we're in a time of dramatic change, where customers are doing lots of new things while at the same time sticking with lots of existing things. So we're still seeing a lot of on-premises, fairly traditional deployments. We're seeing certainly an accelerated number of deployments in the public cloud. That includes AWS and Microsoft Azure and Google Cloud. And we're seeing an increasing number of customers who also want a SaaS offering, fully managed Tableau, which is Tableau Online.

And I think that what customers need is flexibility and choice. They're going to be living in a heterogeneous world for years to come, including those database and data warehouse stacks that you just mentioned, including the analytics on top and every other piece. And so our strategy, we're really only the -- we're really the only significant modern analytics player to embrace this and to provide this -- is to really give that full spectrum of customer choice.

So regardless of where you want to deploy, regardless of cloud, on-premise, regardless of SaaS self-managed, regardless of which flavor of cloud, regardless of the data source that you want to be connecting to, regardless if you want to do that in-memory or as a live connection, we offer that option. And I think that is actually one of the core and central reasons why customers continue to embrace Tableau so enthusiastically. I think that choice and flexibility are core to these hybrid environments that our customers will be occupying for at least a while to come.

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Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [48]

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That's great. Adam, one more, if I may. Just any update on the Amazon partnership. How has that been progressing? You launched a health care solution at the conference back in October. Should we expect more of those types of joint solutions with Amazon? Just an update on the partnership.

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

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We certainly partner very well with all the major public cloud providers. And again, that's because our customers want that. And whatever our customers want, whoever they want us to partner with, we will partner with.

You asked specifically about Amazon, so I'll just comment on that one specifically. That partnership remains really strong. We're really enthusiastic about it. We continue to meet with them regularly. I'm absolutely hopeful and expectant that we'll have more joint offerings and solutions and partnerships both at the technology level as well as going into the market to customers together in the quarter to come. So feel really good about that.

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Operator [50]

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And we have time for one more question. Your final question comes from the line of Phil Winslow from Wells Fargo.

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Richard Myron Hilliker, Wells Fargo Securities, LLC, Research Division - Associate Analyst [51]

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This is Rich Hilliker sitting in for Phil. I was just wondering if you could give us a little more color on the original Prep Builder in terms of feedback from customers, now that we're about a year in so and moving towards -- through, rather -- the early days of the newer Conductor product. So any color and conversation on how that's changed now that we're a year in on Prep Builder?

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Adam Selipsky, Tableau Software, Inc. - CEO, President & Executive Director [52]

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Sure. Well, as I mentioned earlier, I think probably the most important thing about our data prep efforts, which started with Builder, as you alluded to, is that it really is just a major additional plank to the overall platform and really strengthens the entire platform. And data prep is just one of the capabilities that customers are going to want in their analytics platform going forward. So each part really helps to buttress every other part.

We've had, I think, very strong adoption in terms of the number of organizations who have used Builder. In every conversation that I have anyway, it seems to be very positive around that. And it only seems to indicate an increasing trend to want to use strong data prep capabilities, including Builder, by our customers.

So don't get me wrong. I think we have a lot of work there. Any product that's, give or take, is only a year old, you can bet we're going to have a robust road map for and are going to be super impatient on behalf of our customers to get cracking on, and Builder is no exception. The data prep space overall is no exception. So encouraged by the early adoption there, but still feel like we have a lot of work to do.

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Derek Wong, Tableau Software, Inc. - Senior Director of IR [53]

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Operator, we'll turn it over to you to close the call, please.

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Operator [54]

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Certainly, this concludes our Q&A and also concludes today's conference call. You may now disconnect.