Description

Note: Since submitting this for admission to VIC, QLIK has come down a lot, with partial realization of one part of the thesis—that European exposure would lead to an earnings miss or guidance revision. While the company did preannounce they would miss their Q2 guidance, they haven’t taken down full year guidance yet, so if correct, there could be significant additional downside due to their European exposure through the back half of the year. The other points to the thesis remain strong in my opinion, so even though the stock has come significantly already, I think it remains a good long-term short. Clearly however, the lower it goes the higher the risk of a buyout.

Short QlikTech (QLIK), a major player in business intelligence (BI) tools for data visualization.

Background:

QLIK builds software to help companies sift through large data sets, draw graphic visualizations, and discover associations in the data. QLIK has historically been easier to implement, prettier, and more flexible than traditional BI solutions like those from Oracle, SAP, Microstrategy, and IBM, and more powerful than pivot tables in Excel.  As a result, the company has generated rapid revenue growth and sported a premium valuation since its IPO two years ago.  This rapid growth, however, is unlikely to persist, and QLIK presents a compelling short opportunity for the following reasons expanded on below:

• Rapidly increasing competition
• Declining growth rate
• No operating leverage
• European exposure
• Arrogant, dismissive management
• Heavy insider selling
• Premium valuation

1)      Rapidly increasing competition

QLIK was one of the first companies to provide a modern, light alternative to traditional BI solutions, and QLIK’s rapid growth has reflected their product differentiation. Recently however, a new field of competition has entered the space and caught up with QLIK in functionality, user satisfaction, and third-party ratings, while the big traditional players have been working to refresh their solutions as well. The two closest competitors to QLIK are Tableau Software, a venture-backed company, and Spotfire, a company acquired by TIBCO in 2007. Tableau had about $68 mm in revenue last year on 100% growth, compared with QLIK’s $320 mm. Tableau and Spotfire have recently become advanced and large enough to seriously threaten QLIK’s continued growth and margins.

The following are some data on the competitive dynamic:

In its most recent annual rating of over 20 BI platforms, Gartner said the following about QLIK:

QlikTech's growing pains are more evident. The note of realism that first appeared in 2010 grew in 2011 and became a genuine concern for 2012. For the first time, QlikTech's customers reported having a poor overall customer experience (of the vendors on the Magic Quadrant only SAP, IBM, Targit and Microsoft fared worse), and below average ratings for product quality and support. Furthermore, more QlikTech customers than for any other vendor (with the exception of Oracle) said that QlikView became less successful in the previous year (that is, the product is being used by fewer users, or is being replaced by other tools).

And this about Tableau:

For the third year in a row, Tableau is the "sweetheart" of the Magic Quadrant, with customers even more enamored with it this year than in the last two. It gained overwhelmingly positive customer survey feedback across the board in all measures in the survey, including ease of use, functionality, product quality, product performance, support, customer relationship, success, achievement of business benefits and view of the vendor's future. Indeed, it earned a top or near top score in most of these key categories — even with its high revenue growth (94% in 2011), when growing pains might be expected. These stellar results in part contributed to Tableau's strong Ability to Execute position, despite its relatively small size.

Indeed, in Gartner’s 2011 report, Tableau and Spotfire ranked ahead of QLIK in Ability to Execute for the first time. http://www.gartner.com/technology/reprints.do?id=1-196WFCB&ct=120207&st=sb

Additionally, an independent, BI consulting firm, Practical Computer Applications, which does not resell any company’s products, posted the following reviews of QLIK, Tableau and Spotfire, showing a small edge for both over QLIK:
http://www.practicaldb.com/data-visualization-consulting/tableau-vs-qlikview/http://www.practicaldb.com/data-visualization-consulting/tableau-vs-spotfire/
When I called the firm to ask for more color on their rankings, the partner told me that the point scores actually under-represented how much they prefer Tableau, but as independent implementers, they didn’t want to show a strong preference for any one particular tool. They said the biggest difference between Tableau and QLIK was ease of implementation for the end user. QLIK’s architecture requires IT departments to import databases into separate data warehouses and write the scripts for the searches that the end-users want to run, whereas Tableau makes it possible for end-users to directly access databases and immediately begin creating visualizations without any IT intermediation. Tableau admits that there are certain complicated functions that QLIK’s method enables, but the company is religious about their chosen architecture and the power it puts in the hands of end-users. Seeing a live demo of Tableau being used to load 7 million rows of FAA flight data and instantly generate stunning visualizations of associations in the data was truly mind-blowing for the immediacy with which it enabled discovery. By comparison, QLIK’s requirement for weeks of initial IT implementation seems like a tough sell, though there are some users who require that control.

At QLIK and Tableau demo conferences and user group meetings I attended over the past couple months, I asked users as well as resellers why they picked the product they did, and why they didn’t pick the competing product. No user or reseller said that either of the products was superior to the other, just that they were somewhat different in approach. A senior manager at Deloitte who was a panelist at the QLIK conference told me afterwards that Deloitte is a customer of both QLIK and Tableau, and that Spotfire does what both do really well, though he said it was expensive.

In the past several QLIK call transcripts, questions about competition have increased significantly, and QLIK, while dismissive, has begun to acknowledge the new competition. In February at the Morgan Stanley TMT conference, the QLIK CEO said, “If you take the SAP HANA and Oracle's offering, I think that they are still very much old school… very expensive and very complex. It is the other end of the spectrum where we operate. It is not about empowering an end user to slice and dice and sift through information the way that they would prefer... The other end of the spectrum where we are… you see a few people following our wake riding on the wave, like Tableau, like Spotfire.” However if you go back to the Q3 ’11 earnings call, he said, in answering whether they’re seeing more competition, “I don't think there's anyone that really stands out... If you look at players that are coming out of the visualization camp like Tableau and Spotfire and the like, they remain the same as we've seen in previous quarters.”

The intensifying competitive dynamic was also confirmed by representatives of Tableau at their demo conference, who said they constantly go head-to-head with QLIK, and that 18 months ago, competition over deals was much more fierce, but that in recent months it has gotten easier for them to win, especially in cases where a company had a fresh RFP process and no previous BI relationships. The individual added that in recent months they had also scored several  major competitive take-aways from QLIK which he couldn’t disclose.

Finally, channel checks with QLIK resellers in both the US and Europe have indicated that Tableau, and to a lesser extent Spotfire, have been competing aggressively on price, while QLIK has been firm on pricing, willing to leave some business on the table, and making the sales process harder for its resellers. In addition, the resellers said that the traditional BI providers were improving their solutions, notably IBM’s Cognos and SAP’s HANA solutions, narrowing the edge QLIK has had on usability and making sales to large enterprises more difficult.

The dramatic increase in competition on multiple fronts will make it extremely difficult for QLIK to maintain the growth and margins necessary to sustain its premium valuation. 

2)      Declining growth rate

Over 60% of QLIK’s revenues are from perpetual license sales, and 30% from maintenance subscriptions that customers can choose whether to renew each year. Hence, a majority of QLIK’s revenue is non-recurring, and to simply maintain revenue levels, QLIK has to keep selling more new licenses. However, QLIK has not been accelerating in winning new customers as it has grown larger, adding a consistent 1-2k new customers each quarter for the past 10 quarters, reaching 25,000 total in Q1, and revenue growth rates have declined from an average of 45% each quarter to 26% in Q1 2012. With this revenue model and the law of large numbers, growth rates will continue to decline even if everything else goes well. Eventually this alone should result in them losing their growth multiple. Meanwhile, with low recurring revenue, the model increases the risk of a severely down quarter should competition or a souring global economy significantly hurt new license sales in any given quarter. From the high multiple given this company, it seems the market thinks QLIK is a SaaS company with strong recurring revs, but this is not the case, and when this becomes obvious a major multiple contraction should occur.

3)      No operating leverage

Due to the high sales and marketing spend required to sell each new license and an increasingly reseller-dependent revenue model, QLIK’s operating line has barely improved as revenues have grown significantly. Margins were actually two points lower last year (6%), than they were in 2009, while revenues doubled in that time. While the company is seeking to increase its average deal size, and is pursuing what it calls a “land and expand” strategy, both of which should result in some operating leverage, the core revenue and sales model are likely to prevent the company from experiencing high operating leverage in the future.

4)      European exposure

60% of QLIK’s revenues are from Europe. With a long-term recession or worse likely in Europe, cost cutting at customers and increased competition for deals should make maintaining their current rate of new license sales in Europe difficult. Yet, QLIK has guided for solid, 29% yoy revenue growth for 2012—and so far maintained full-year guidance despite pre-announcing that Q2 revenues would miss their 27% growth target due to a slowdown in Europe. Both the former Q2 guidance and the current full year guidance represent an acceleration from the 26% they grew in Q1. I do not believe that the problems which caused a slowdown in Q2 will reverse and be resolved in the back half of this year, and hence believe full-year guidance is in danger of being revised downward as the year progresses.

5)      Arrogant, dismissive management

In the company’s earnings and conference transcripts, the CEO comes across as extremely arrogant and dismissive of competition. His tone seems to fit a generally unfriendly picture of the company that has come through from other sources. For example, the partner at Practical said that QLIK treated its partners “really horribly,” and were out to “make a quick buck” rather than deeply passionate about their product. The Gartner survey noted QLIK’s declining customer service quality, and QLIK itself noted they had seen some employee attrition last quarter. Management arrogance and dismissiveness are a risk to the company operationally if these traits do indeed flow through the company in how employees and customers are treated, and how seriously the company reacts to competition, but these traits also cause me to question the truthfulness of what the CEO says about the company. While not necessarily a time-sensitive catalyst for the stock, these traits raise red flags.

6)      Heavy insider selling

Over the past year and a half, company insiders have sold over $410 mm worth of stock, with $20 mm in sales so far this year from 7 different company executives. In the history of the company there was only one stock purchase by one insider for $50k worth in 2010. Since insiders have been selling for a long time, this is simply another indicator about the quality or the valuation of the company.

7)      Premium valuation

Finally we get to valuation. With rapidly increasing competition, declining growth rates, single-digit margins, and other risks, QLIK should not be valued at 52x forward earnings, 27x forward ebitda, or 3.5x sales—despite being down 40% from where the stock was 3 months ago.  Also, note that QLIK is not a SaaS company (nor will it ever be--it has no desire to host companies' mission-critical data), and if its license revenues were normalized for a recurring model, it would trade in excess of 5x sales.  With multiples like these, it appears many investors are unaware of the increasing competitive threat, and have fundamentally misunderstood QLIK’s revenue model.

Risks:

QLIK is seeking to increase its average deal size and some reseller channel checks, as well as their most recent conference call indicate that they are making progress on this front. It’s possible that through this they could maintain growth somewhat longer and meet near-term guidance, but I do not believe this strategy is sufficient to counter the long-term threat from competition to QLIK’s valuation.

Buyout. This space has several companies that may be attractive acquisition candidates, and many industry participants believe Microsoft, which already has some light tools for data visualization in their BI stack, is the most likely acquirer. This is a risk, though one industry consultant I spoke to thought that QLIK would be a poor fit for Microsoft, and that another BI company, Panorama Software is a far more likely target, as the only BI application that is designed specifically for the Microsoft platform, and by a team that has previously sold software to Microsoft.

Catalyst

Competition or a slowdown in Europe impacts QLIK’s sales and forces a revision of guidance.