Description

COMPANY BACKGROUND

QLIK Technologies develops business intelligence software solutions which help companies analyze large quantities of stored data leading to better and ultimately more timely business decisions.  QLIK currently has about 3% worldwide market share in BI software.  The company’s main product, QlikView, is easier to implement, more flexible, and offers highly intuitive analytics that can be deployed in a fraction of the time of traditional BI solutions from competitors such as Oracle, SAP, and IBM.  

QLIK reported weaker than expected 3Q earnings and lower 4Q guidance about two weeks ago.  Americas performance was actually strong but the shortfall was caused by macro headwinds and sales execution issues in Europe and APAC.  The stock has subsequently dropped 22% (but is still up 19% YTD).

At current levels, I believe QLIK represents a compelling long idea for the following reasons:

• Tremendous growth opportunity in BI
• New product introduction over next 2 quarters
• Likely operating margin improvement
• Potential take-out provides downside protection
• Valuation not completely unreasonable for a growth company

1)  Tremendous growth opportunity in BI

Traditional BI software solutions from Oracle, SAP and IBM are clunky and have been slow to evolve.  This has created an opening for more innovative new entrants such as QLIK, Tableau and Spotfire (acquired by TIBCO in 2007).  These new entrants initially gained a foothold in the market by serving small and medium sized businesses, effectively expanding the business intelligence market.  However, these new entrants are now starting to penetrate larger global enterprise customers.  It has been estimate that he traditional BI customer base represents an addressable market of ~$13-14 billion.  The next generation BI market (QLIK and Tableau) is currently growing over 30% and on a user basis is estimated to be 3-4x bigger than the traditional BI market. 

While there has been concern over the competitive dynamics between QLIK, Tableau and TIBCO, I believe the overall market backdrop is very attractive and there is a tremendous growth opportunity for all of the next generation players.  QLIK will be a primary beneficiary of this growth trend.

2)  New product introduction

One criticism for QLIK is that its key product, QlikView, has not changed much over the past 4-5 years.  This is somewhat evident given QLIK’s lower R&D spend vs Tableau.  The biggest difference between Tableau and QLIK is the ease of implementation for the end user.  While QLIK can integrate data from a variety of different legacy systems automatically, it does require some involvement from the IT department.  Tableau, on the other hand, makes it possible for end users to create visualizations with greater ease without IT department support.  QLIK plans to roll out a newer version of its product, creatively named “QlikView.Next”, in 1Q2014.  While QLIK’s license growth is currently averaging 10-15% vs Tableau (growing 70-90%) and Spotfire (20-35%), the Next product, which offers better integration from desktop to mobile devices, cleaner visualizations and data discovery, should help them close this gap.   

I believe overall topline should continue to grow at 15-17% over the next 2-3 years given the introduction of Next and realignment of their sales force.  

3)  Operating margin improvement

Current operating margins at 7% are about half of what they were in 2010.  QLIK has been investing in building a sales force that can address large sophisticated enterprises, which has resulted in near term margin compression.  This investment is paying off (current quarter blip notwithstanding) as QLIK has been gaining a foothold with enterprise customers.  My discussions with potential and existing customers have signaled cross selling opportunities do exist and that large customers intend to increase the number of licenses they buy from QLIK by multiples over the coming years.  I believe that the bulk of sales force investments are completed and margins should revert to over 14-15% in the next 2-3 years (the company has a target of 20%)

4)  Potential take-out candidate

Given the strategic importance of next generation BI market, there are a number of potential acquirers for QLIK.  The usual suspects are IBM, SAP, ORCL, MSFT and possibly even DELL and HPQ.  MSFT and SAP have been the least valuation sensitive historically and offer the best potential strategic fit.  Currently, QLIK trades at a fwd EV/Sales multiple of 3.6x, which is well below the typical industry deal multiples of 5-6x sales.  The potential for a take-out does create downside protection for the stock. 

5)  Valuation not completely unreasonable

QLIK currently trades at about 3.6x EV/Sales based on my 2014 estimates.  This compares against 12x for Tableau.  The valuation mismatch appears unwarranted.  Furthermore, industry acquisitions have occurred at 5-6x forward EV/Sales multiples.

**For a counterpoint to this, see Crestone's short writeup here:  http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/75426 

Catalyst