Yahoo Finance Tableau Software Inc (DATA) Q3 2018 Earnings Conference Call Transcript
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Tableau Software Inc (NYSE: DATA)
Q3 2018 Earnings Conference Call
Nov. 06, 2018, 4:30 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to Tableau's Third Quarter 2018 Earnings Conference Call. (Operator Instructions)
I'll now turn the call over to Derek Wong, Senior Director of Investor Relations.
Derek Wong -- Senior Director of Investor Relations
Thanks, Chris. Good afternoon, and thank you everyone for joining Tableau's Third Quarter 2018 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 fourth quarter of 2018 and our preliminary outlook for 2019. 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.
I'd also like to remind everyone that starting with the first quarter of 2018, we adopted the new revenue recognition accounting standard, otherwise referred to as ASC 606, on a modified retrospective basis. This means that results for reporting periods beginning on or after January 1, 2018 are presented under the new revenue recognition standard, while prior period amounts before January 1, 2018 are not adjusted.
With that, it's my pleasure to turn the call over to Adam.
Adam Selipsky -- President and Chief Executive Officer
Thanks, Derek. And thanks everyone for joining us today. This quarter customers opted for subscription licensing even faster than expected, resulting in 81% of our overall license bookings recognized ratably, up from 67% just last quarter. Even with our healthy subscription mix, our third quarter revenue under ASC 605 was $240 million, up 11% year-over-year, with particular strength this quarter in our US enterprise business. Our third quarter license revenue on a 605 basis was $118 million, up 19% year-over-year compared to a 15% decline a year ago when we were earlier in our subscription transition.
Let's dive deeper into subscription. We continue to make healthy progress in the subscription transition, as customers increasingly turn to subscription licensing to help rapidly scale their Tableau footprints. And even with the launch of our role-based subscription offerings in April of this year, we've made it easier for customers to tailor Tableau to everyone in an organization, regardless of skill set, from analysts that shape management prepared data to the front-line employees that view and interact with dashboards. Q3 marked the first full quarter of our role-based subscription launch. And we've continued to see strong customer adoption and momentum with our Creator, Explorer, and Viewer offerings.
The flexibility of our subscription offerings means that customers can choose to deploy Tableau in the way that best suits their unique organizational needs. We've already seen some go all in on Creator and we've also seen customers deploy Viewer to vast expenses of their organization in ways that would not have been possible before the August -- the April launch. For example, this quarter, a large US retailer, an early adopter of our early ELA framework back in 2016, expanded their enterprise existing license agreement, effectively doubling their seat count with Tableau. This customer had previously used Tableau in various internal facing parts of their org, but now will deploy Tableau for the first time to in-store associates with mobile devices. We're thrilled to see one of our first ELA customers expanding analytics to more people in their organization, with subscription giving them the right licensing model to efficiently scale their Tableau footprint.
At the same time, our subscription offerings have also helped to attract new customers and in particular organizations that want to quickly leverage the scale of the Tableau platform via our new Viewer offering. For example, this quarter we signed the largest new customer in our Company history, as a Fortune 500 insurance company elected to deploy Tableau to over 10,000 people in their organization, with a large weighting toward our new Viewer SKU. Though this organization was new to Tableau, they found our role-based offerings to be scalable and enterprise-grade way of delivering analytics to many departments.
We've come a long way in the transition in just six quarters, but we still have more work to do in the journey to become a subscription software company. In the meantime, we worked continuously to be squarely focused on delivering highly scalable and tailored subscription solutions to more and more customers with the depth and breadth of our industry-leading analytics platform.
Before I turn to the product progress, I'd like to share some thoughts coming out of Tableau Conference after an amazing four days in New Orleans. Tableau Conference is about bringing together data enthusiasts from around the world to share ideas and best practices and to collaborate together to tackle data-centric challenges. And in doing so, the conference showcases two of our most important assets, our amazing Tableau community and our growing customer and partner momentum. The energy, excitement and passion for data that the Tableau community brings to our customer conference every year is unrivaled. Since my first TC in Austin two years ago, I've come away each year personally inspired by the incredible journey our customers have realized with Tableau. These journeys are career and even life-changing, made possible by the power of harnessing data quickly and effortlessly.
And our customer and partner momentum was clearly front and center as well. This year we had more than 17,000 customers and partners come together in New Orleans with thousands more streaming online, marking the Company's largest conference today. And more than 130 Tableau customers presented sessions, including Boeing, Charles Schwab, Chick-fil-A, Disney, Expedia, ExxonMobil, JLL, Johnson & Johnson, Pfizer and dozens more, on hand, to share their incredible experiences with the Tableau community. We left New Orleans less than two weeks ago, but we're ready looking forward to TC next year in Las Vegas to see all of our customers and partners again and hopefully meet many more new data enthusiasts on their Tableau journeys.
Let's turn now to our recent product announcements, where we continue to innovate rapidly for our customers. At TC last month, we introduced Ask Data, which leverages natural language to enable people to ask questions of their data in an intuitive, conversational manner and instantly get a response right in Tableau. For example, customers can simply type a question, such as what were my sales last month and Tableau will return an interactive visualization with no need to learn data dimension, measures, or any data structure. This groundbreaking technology will make it easier for far more people to engage with data and produce analytical insights.
And as many of you know, we launched Tableau Prep earlier this year, a new data preparation product designed to empower our customers to quickly and confidently combine, shape and clean their data, further reducing the time from data to insight. At TC, we expanded our data preparation capabilities even further with the announcement of Tableau Prep Conductor, our new add-on to Tableau Online and Tableau Server that automatically schedules flows created in Tableau Prep to ensure that clean and fresh data is always available for analysis. With Prep Conductor, IT departments will also gain increased visibility into the health of data sources by essentially managed flows and alerts. And we continue to innovate on Tableau Prep as well. Since our launch in April, we've added over 40 new features, including product localization and additional smart cleaning capability, as well as new connectors to Hadoop-based data sources, Snowflake and PDFs.
And finally, we released Tableau 2018.3 just last week, which includes features like heat maps, enabling users to find patterns and dense data in seconds; set actions enabling interactive analytics with visually defined sets and multi-table storage for extract, resulting in faster extract creation performance and decreased extract size.
Before I conclude, I'd like to speak to our recently announced pledge to grant $100 million in software, training and financial support through the Tableau Foundation between now and the end of 2025. This commitment includes an equity donation by Tableau of $25 million in early 2019 to help fund Tableau Foundation. To give you all a sense of our Foundation scale and mission, for the past five years, Tableau Foundation has partnered with leading non-profits, governments and Tableau community members to tackle some of the biggest issues facing our local communities and our planet. So far the foundation has contributed over $30 million in software, services and financial support to over 5,000 organizations working in 86 countries.
For example, Tableau Foundation and PATH partnered to create a Visualize No Malaria initiative, a multi-year collaboration with a coalition of technology partners to support Zambia's Ministry of Health to use analytics to help eliminate malaria across the African nation. The Visualize No Malaria initiative has helped drive a 90% reduction in malaria-related death in the country's Southern Province since 2014. As this example demonstrates, increasing Tableau Foundation's capacity to drive this type of impact will help more organizations to make a meaningful difference in the world in vital areas, such as health, poverty, quality and climate change.
From using data to tackle humanitarian crises, to using it to drive insightful business decisions, we're starting to enter the era of analytics ubiquity. In a world where data is everywhere, from our buildings to our cars and even our genetic code, all of this data carries the promise of insights waiting to be discovered. It's why we continue to be on our mission to bring intuitive and powerful self-service analytics to everyone, so that everybody can see and understand data. As always, this will require a relentless focus on our customers, innovating rapidly and acting with urgency across all parts of our Company. Having recently met with so many of our passionate and data obsessed customers and partners, I couldn't be more excited to get back to work.
I'll now turn the call over to Damon who will walk through this quarter's results and share our outlook.
Damon Fletcher -- Chief Financial Officer
Thanks, Adam. And thank you everyone for joining us on the call today. Today, I'm going to cover the following topics in my prepared remarks. First, I'll discuss our Q3 2018 financial results, following, I'll discuss our Q4 2018 outlook, and finally, I will offer some preliminary thoughts as we look ahead to 2019.
For the third quarter of 2018, total revenue under the new revenue standard ASC 606 was $290.6 million. Under the 605 revenue standard, total revenue was $239.6 million, up 11% year-over-year and within our guided range of $236 million to $246 million. Before we review the remaining Q3 results, I'd like to spend a moment on the subscription uptick this quarter. As Adam noted earlier, our Q3 ratable license booking mix was 81% compared to our guidance of 72% to 76%. In fact, Q3 represented the largest sequential uptick in subscription adoption since the beginning of our transition last year. While we were pleased with the subscription results, given the headwind of higher mix on reported revenue, we wanted to provide a little bit more context than usual. Specifically, if our mix had been at the high end of our mix guidance, that is 76%, and assuming constant demand, our reported 605 total revenue would have been above our guided range for the quarter.
Third quarter license revenue under ASC 606 was $138.1 million. On a 605 basis, third quarter license revenue was $118 million, up 19% year-over-year. Third quarter maintenance and services revenues under ASC 606, $152.5 million. On a 605 basis, third quarter maintenance and services revenues were $121.6 million, up 5% year-over-year. Our total annual recurring revenue or ARR consists of the annualized value of all active maintenance and subscription contracts at the end of a reporting period. At the end of Q3 2018, total ARR was $762.6 million, up 45% year-over-year and subscription ARR was $362.4 million, up 160% year-over-year. This is the first quarter our maintenance ARR sequentially declined as a result of an increasing number of customers opting for our subscription offerings over perpetual. Although this may fluctuate from quarter-to-quarter, we anticipate this trend will continue, particularly now that a high concentration of our sales are subscription. We continue to have an overall combined renewal rate exceeding 90%, which includes both our maintenance on our perpetual licenses, as well as subscription renewals.
Our international revenues under ASC 606 were $83.4 million and represented 29% of total revenue. Our United States and Canada revenues under ASC 606 were $207.2 million and represented 71% of total revenue.
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. Third quarter total gross margin was 89% under ASC 606. On an 605 basis, gross margin was 87% compared to 88% in Q3, 2017. Our Q3 operating income was $47.2 million under ASC 606. On a 605 basis, our Q3 operating loss was $11.6 million compared to our guidance of $12 million to $19 million operating loss. As a reminder, under the new accounting standard, certain sales commissions are now expensed over time versus being recognized upfront previously.
Sales and marketing expenses under ASC 606 for the quarter were $119.8 million. On a 605 basis, sales and marketing expenses were $127.6 million, up 21% year-over-year. We ended Q3 with sales and marketing headcount of 1,794 employees. We invested $68 million in research and development in Q3, up 19% year-over-year. We ended Q3 with R&D headcount of 1,123 employees. General and administrative expenses for the quarter were $24.8 million.
At the end of Q3, our total headcount was 4,101. This compares to 3,896 employees at the end of last quarter. Q3 was another strong hiring quarter for Tableau, as we're continuing to recruit and hire talented people and grow teams where we see strategic areas of opportunity across development, sales and marketing.
Our non-GAAP effective tax rate was 20% for the quarter. This brings our non-GAAP net income under ASC 606 for the third quarter to $41.3 million and our non-GAAP diluted earnings per share under ASC 606 was $0.47. Given our reported non-GAAP net income under ASC 606, our weighted average diluted share count used to calculate ASC 606 non-GAAP diluted earnings per share was approximately 88 million shares. On a 605 basis, our non-GAAP net loss for the third quarter was $5.8 million and our non-GAAP diluted loss per share was $0.07. Given our reported non-GAAP net loss under the ASC 605 standard, our weighted average diluted share count used to calculate the 605 non-GAAP diluted earnings per share was approximately 83 million shares.
On the balance sheet, cash and investments at the end of Q3 were $1.02 billion. Accounts receivable net were $187.4 million and our DSOs were less than 65 days. During the quarter, we repurchased approximately 282,000 shares of our Class A common stock for $30 million, bringing our cumulative share repurchase to-date to roughly 2.7 million shares. As a reminder, our repurchase authorization does not have a fixed expiration. To-date, we have deployed approximately $190 million of our $500 million total stock repurchase authorization.
I will now turn to our financial guidance for Q4 2018. Please note that all forward-looking guidance other than revenue is discussed on a non-GAAP basis. Please also note that unless otherwise specified, our Q4 2018 guidance has been issued under the ASC 605 accounting standard. As always, our outlook takes into consideration a number of factors, including, though not limited to, the overall progress we've made thus far in our subscription transition, our current view on the market environment and the demand we're seeing, our pipeline and our customer buying behavior as our customers consider and decide on the deployments that work best for their needs.
We expect fourth quarter 2018 total revenue to be between $266 million and $276 million, representing year-over-year growth of 9% when using the midpoint of the range. This outlook assumes that the mix of ratable license bookings will represent approximately 78% to 82% of our license bookings for the fourth quarter. Given the strong demand for our role-based subscription offerings in Q3 and anticipated subscription adoption in Q4, our Q4 mix expectations are now a few points ahead from where we -- when we last spoke. Additionally, our full year 2018 mix now assumes a range of 72% to 74%, up from a range of 68% to 71% provided last quarter. Although we are forecasting a similar mix in Q4 when compared to Q3, this is primarily due to more customers opting for subscription than we had expected in Q3. As a reminder, our mix can vary from quarter-to-quarter depending on customer purchasing preferences.
That said, as we look forward to next year, and to help you understand the trajectory of the subscription transition, we anticipate our ratable license bookings mix to approach 90% by the end of 2019, if we were to continue to report on a 605 basis. We will give additional details on our preliminary outlook for 2019 (ph) in a moment.
Turning now to margins. For the fourth quarter, we expect a non-GAAP operating loss of 4% to 5% of revenue. We estimate our non-GAAP effective tax rate for Q4 will be 20%. We expect Q4 capital expenditures to be between $17 million to $22 million. For the fourth quarter, we expect the non-GAAP loss per share range to be between $0.08 and $0.10. This assumes a basic share count of 84 million shares under a net loss scenario. This also assumes $3.5 million of other income, primarily related to interest income on our cash and investments.
I'd like to provide some additional context around the ASC 606 impact to our Q4 guidance. We currently anticipate Q4 revenue under ASC 606 will be between 18% to 20% higher than our Q4 ASC 605 revenue. As you saw in Q3, our ASC 606 revenue will vary due to a number of factors included but not limited to, the mix of our sales at our subscription, subscription contract durations and how much of our subscription businesses is on-premises. Lastly, the ASC 606 standard also results in a deferral of certain sales commissions, which we anticipate will result in a 2% to 3% decrease in ASC 606 reported Q4 non-GAAP expenses.
I'd now like to offer some preliminary thoughts on our outlook for 2019. Please note that this is an early glimpse into our growth expectations for the coming year. As always, our preliminary outlook is subject to change in accordance with the factors impacting our guidance mentioned earlier. And as a reminder, given our move to ASC 606 reporting in 2019, our preliminary outlook is being given on a 606 basis. As such, we hope that Analyst modeling their financials will build ASC 606 historicals for 2018 year-to-date in preparation for our 2019 results. As a reminder, we will no longer be providing ASC 605 guidance going forward.
For fiscal year 2019, we currently expect a total revenue range of $1.33 billion to $1.40 billion under the new revenue standard, representing approximately 20% year-over-year growth at the midpoint when compared to our implied 606 outlook for 2018. We continue to view the modern analytics market as dynamic in growing with large unreserved opportunities to help customers deploy analytics at scale. Because of the clear growth opportunity, we are committed to strategically investing in several key areas in 2019, which include fueling our international growth, investing in product innovation, as you saw on stage at our Tableau Conference two weeks ago, and continuing to build out our operational infrastructure to lay the foundation to scale our business. Accordingly, we are targeting an 11% to 13% 2019 non-GAAP operating margin. As we look ahead to 2019, we made considerable top line progress against our long-term operating framework presented at our 2017 Analyst Day, owing in large part to the pace at which we're moving through the subscription transition.
Lastly, a brief note on the Foundation grant we've announced at our customer conference. As discussed, $25 million of the $100 million pledge will be in the form of equity donation to be made in early 2019. Given the nature of this expense, it will be excluded from our non-GAAP financial results.
In closing, I'd like to recognize the valuable work of our world-class team of dedicated Tableau employees, many of whom were on-site in New Orleans helping make our largest customer conference today a resounding success for our customers and partners. Thank you, team Tableau for your work and contributions this quarter.
Now I'll turn the call over to the operator for Q&A.
Questions and Answers:
Operator
(Operator Instructions) Your first question is from Jennifer Lowe with UBS. Your line is open.
Jennifer Lowe -- UBS -- Analyst
Great, thank you. Adam, I wanted to go back to some of your opening remarks around the demand that you're seeing for some of these new user-based licenses and you talked about some deals that ended up being bigger with Viewer, some deals that we're sort of all Creator. But I'm curious if there's sort of any generalized observations around Viewer in particular and how that's impacting deal size. Is it a net gain, is there some situations where it's cannibalistic, just more color there would be very helpful?
Adam Selipsky -- President and Chief Executive Officer
Hi, Jen, thanks for the question. In general, the most market trend that we're seeing is that Viewer tends to open up more opportunities. We have a number of examples where customers have flat out told us that they were looking to deploy Tableau broadly across many, many thousands of employees and Viewer basically unlocked that door for them. So we know there are large deals, for that's been the case, we've been flat out told that. So I think if you just take half a step back, what's really going on is we're at a point in the market where we are clearly moving from early adopters to very mainstream adoption where analytics is starting to become ubiquitous inside of some of these accounts. So lot more to go in other places. But in order for that to happen, it's kind of a chicken and egg and it has to be the right product available, the right value and price point for those casual users who do not have analyst or data scientists in their titles. And this is just a natural broadening of our offering, of our analytics platform to have something that's appropriate for those more casual users.
So I think it's an important step in our evolution to be able to serve that much broader base of the pyramid, if you will. I mean, we have over 82,000 customers now statistically. Of course, there have to be cases where people chose to deploy to the same number of people, spend less than they otherwise would have. But we're certainly not seeing that as a pervasive trend.
Jennifer Lowe -- UBS -- Analyst
Great. And just one more for me. You also talked about US enterprises being a particular area of strength in the quarter and I know these things are always hard to sort of parse out with any detail, but I'd be curious to get your thoughts on how much of that is just general enthusiasm around data and digital transformation broadly versus your subscription offering maybe driving some incremental demand that you didn't see before, versus better execution. Just any additional thoughts there would be helpful as well.
Adam Selipsky -- President and Chief Executive Officer
So as you said, it's a little hard to know the exact cause and effect, we can all take our best guesses. I think that we've been talking for a couple of years now about really building enterprise capabilities across Tableau from product development to marketing, to sales, to support, and we still have a ways to go, don't get me wrong. We said it was a multi-year process and it's still going to be and customers, of course, keep moving the bar on us appropriately. But I think we have built a lot of those capabilities. The team has been executing in a lot of places well on that and I think customer starts to recognize that, you can see that in a number of seven figure deals that we did this quarter, which went up sequentially, where traditionally it's kind of dropped off from Q2 to Q3.
In terms of it being uniquely a characteristic in the US versus other geographies, I think you see variation. I think in a recent quarter we called out EMEA, and another time our commercial business. So I think there's some natural variation there, I don't think we see some big pervasive trend of one geographic or customer segment, in general, seeing pretty strong adoption across the board.
Jennifer Lowe -- UBS -- Analyst
Okay, thank you.
Operator
Your next question is from Sanjit Singh with Morgan Stanley. Your line is open.
Sanjit Singh -- Morgan Stanley -- Analyst
Hi, thank you for taking the question and congrats on a nice quarter. I had a question maybe for Damon. As we think about 2019 and given sort of the changes in accounting, how did you plan to guide next year? Is potentially ARR-- or subscription ARR a metric that you would want to point us to in terms of thinking about quarterly and annual guidance going into next year?
Damon Fletcher -- Chief Financial Officer
Thanks. That's a great question. Really what we're focused on right now is providing kind of our preliminary outlook for 2019, which we did on a 606 basis. We wanted to help you understand kind of the shape of the P&L as we head into 2019, so you could tune your models. I think as far as kind of new metrics and disclosures, obviously every year we kind of go through a process of evaluating the metrics and disclosures that we provide and what level of transparency they help investors understand the fundamentals of the business. And so we'll be doing that again at the end of this year, but as of right now, there's nothing to announce.
Sanjit Singh -- Morgan Stanley -- Analyst
Got it. I appreciate that. And then maybe one follow-up. It was a big subscription ARR quarter, as Adam mentioned in the script. Could you give us a sense of how much that was, the growth in new subscription ARR came from, maintenance customers moving over description versus maybe a pure -- whether it's a pure sort of seat expansion on subscription ARR.
Adam Selipsky -- President and Chief Executive Officer
Sure. So the first thing I'd say is the growth in our total ARR is the best way to evaluate the fundamentals of the business. When you look at the components of ARR, I think you have subscription ARR and maintenance ARR. Maintenance ARR began its kind of gradual decline that we anticipated will begin in the near term as customers embrace our subscription offerings. I'd say the predominantly driver of the subscription ARR growth rate is around new customers choosing subscription and expansion of existing customer base. I think just to a lesser degree, maintenance conversions, which you would see a more dramatic deceleration in maintenance if that was the case.
Sanjit Singh -- Morgan Stanley -- Analyst
Got it. I appreciate it. Thank you.
Operator
Your next question is from Philip Winslow with Wells Fargo. Your line is open.
Philip Winslow -- Wells Fargo -- Analyst
Thanks guys for taking my question and congrats on a great quarter. Just wanted to focus in on Tableau Server for a bit. Just give me an update on sort of just the performance you have been seeing there and sort of any change in trends?
Adam Selipsky -- President and Chief Executive Officer
Hi, Phil, good to hear from you. Adam, here. Do you mean cash flow (ph) performance, financial performance or what's the --
Philip Winslow -- Wells Fargo -- Analyst
Well both, because I know obviously at the customer conference you talked about some of the new functionality upgrades too, but sort of both, sort of the functional upgrade as well as the financial performance.
Adam Selipsky -- President and Chief Executive Officer
Well, obviously, the customers expect us to keep innovating rapidly all the time in the core functionality we provide and that's I think just kind of the price of entry, particularly as we become more and more mission critical and their needs to continue to expand. So as I mentioned in the upfront remarks, we made an exciting announcement around natural language with Ask Data and extending the breadth of our platform to include more data preparation capabilities with Conductor. We also had a lot of other announcements of Server, we announced brand new mobile application for Tableau and another breadth expansion of the platform in announcing a brand new developer program, as well as updates to our Tableau API extensions. So I think there are a lot of different areas that we have to continue to innovate. In earlier quarters we announced Hyper, a brand new data engine underpinning Tableau for all customers who download any new version of the product and things like Tableau operating on Linux.
So I think customers have a long list of things they need from us, we're executing against that list and reevaluating that list as fast as we can. I think the capabilities and performance continue to increase at a good clip, as we're trying to innovate really rapidly, which is what customers need from us. And I think in terms of the results of that, I mean, you can kind of see that in the results we've announced and sort of assess those for yourself.
Philip Winslow -- Wells Fargo -- Analyst
Got it. Thanks for that.
Operator
Your next question is from Raimo Lenschow with Barclays. Your line is open.
Raimo Lenschow -- Barclays -- Analyst
Hey, thanks for taking my question. Two questions if I may. Going back to Sanjit's question earlier, Damon, if you think about the maintenance and how that's starting to decline, in this life cycle of the subscription transition, at what point do you think that you will see more -- even more meaningful movements there? I'm just trying to make sure that we kind of model you correctly. And then one for Adam. If you think about Tableau Prep, what's the feedback from customers in terms of touch (ph) to existing customers where we -- obviously we are early in the life cycle, but what sort of a touch metrics do you see at the moment and where do you see that going? Thank you.
Damon Fletcher -- Chief Financial Officer
I'll maybe answer the first one quickly and then I'll turn it over to Adam. So I think on the maintenance decline, I think it'll be gradual. We've been working with customers to convert over to our subscription offerings since six quarters ago and I think that has been a kind of a gradual kind of acceptance of those offerings as customers want to expand with Tableau. And so I don't expect it to be any sort of noticeable shift at any one point in time.
Adam Selipsky -- President and Chief Executive Officer
Hi Raimo, Adam here. In terms of Prep, since we launched Prep back in April, we've had over 9,000 active customer accounts using Prep. So I think that initial land, if you will, it is pretty significant number. I think at the same time we all feel like we have a long way to go, it's still only been a few months of brand new capability. And certainly we want to get that in the hands of more customers, as well as increased penetration to ones that have already started to try it. I think -- so I'm encouraged by the early results, we also know that particularly in enterprises that it can take months to really kick the tires, new products and capabilities, and also that there is going to be a list of capabilities we are going to need to keep delivering on. So I think Prep Conductor was an important step in that direction. We knew that being able to schedule, as well as to manage and administer flows that come out of Tableau Prep were really important gates, if you will, particularly in the enterprise space. And I think we're optimistic with the early customer reaction to that and hopefully that will continue.
Raimo Lenschow -- Barclays -- Analyst
Yeah. Okay, makes sense. Thank you. Congrats.
Operator
Your next question is from Karl Keirstead with Deutsche Bank. Your line is open.
Karl Keirstead -- Deutsche Bank -- Analyst
Thank you. Maybe a couple for Damon. Damon, first, wouldn't mind flagging a couple of numbers that maybe don't get as much attention. But I think are interesting in the sense that they might give us visibility in 2019. And that's the RPO or backlog number you reported was up a huge 39% sequentially. And then also your deferred revenue balance of $511 million was up 39% year-over-year, that accelerated. Do you mind just touching on what the drivers of those two numbers are, I think that might be helpful? Thanks.
Damon Fletcher -- Chief Financial Officer
Thanks Karl. And thanks for noticing those on the P&L and in the balance sheet. So RPO, as for everyone who is not familiar with that concept, that is the amount of unearned revenue related to multi-year subscription contracts that will be recognized over the next several years. That has to do with, when we sell a subscription contract on our ASC 606 and we recognize the maintenance component over time. And so that's unearned revenue over time. Deferred revenue is the growth of the amount of license sales that is deferred and recognized over time. And so, those are two components of -- on the balance sheet and the disclosures.
Karl Keirstead -- Deutsche Bank -- Analyst
Yes, and in terms of why they were up so strongly, Damon, that's really what I was getting at?
Damon Fletcher -- Chief Financial Officer
Sorry, I was getting into accounting lingo. So up strongly, just generally because of the healthy enterprise adoption -- this customer, a multi-year contract. So we -- again we called out enterprise demand that we're seeing customers are embracing kind of our new role-based offerings and we saw strong demand from customers for kind of multi-year subscription contracts.
Karl Keirstead -- Deutsche Bank -- Analyst
Okay, got it. And if I could ask you a follow-up Damon on another subject. On the earnings call three months ago, you gave operating cash flow guidance of I think a little less than 20%. Do you mind updating that for 2018 and then as you think about 2019, I know you don't want to go full on in terms of detailed guidance, but can you give us any cash flow framework for 2019 that might follow that 20% top line growth? Thank you.
Damon Fletcher -- Chief Financial Officer
Thanks, Karl. So as a reminder for everyone, we said that operating cash flows for the year as a whole will be a little south of 20% when we headed into this quarter, when we gave our sort of outlook 90 days ago. Because of the kind of uptick in subscription, as you could imagine that's going to provide some headwinds as we collect less fees upfront for those offerings that we would on a perpetual basis, so the sequential uptick in subscription, both in Q3 and Q4 are going to provide us some further headwinds to the operating cash flows as we head out through the remainder of this year. I'd also like to just make sure everyone caught my remarks around CapEx in Q4, as we're building out facilities here in the Seattle area, that's going be a little higher this quarter from -- when you're thinking about free cash flows heading into Q4.
Thinking about 2019, I think it's very early, Karl, for us to kind of share a cash flow outlook. We're still finalizing our kind of operating plan for next year. What I will say is that subscription business models obviously and software are good cash flow generators. And so we expect the more quickly we move into the subscription transition, the stronger our cash flows will be over the long run.
Karl Keirstead -- Deutsche Bank -- Analyst
Got it. Okay. Terrific. Thanks, Damon.
Damon Fletcher -- Chief Financial Officer
Thank you.
Operator
Your next question is from Mark Murphy with JPMorgan. Your line is open.
Matt Coss -- JPMorgan -- Analyst
Hi, good afternoon. This is Matt Coss (ph) on behalf of Mark Murphy. The large US retailer you mentioned who's deploying Tableau to in-store associates with mobile devices, what's the use case and how are they acting on the data that's available to them? And more broadly, have you seen a common use case for these much broader deployments of Viewer among your enterprise customers?
Adam Selipsky -- President and Chief Executive Officer
Sure. This is Adam. I won't get into more detail on that particular example here on the call. But I'd say, just to take a step back. Actually, seeing a lot of interesting deployments across -- I'll say whether it's retail or sales forces in general use Tableau on the go in mobile environments. We've seen other examples like a MillerCoors for example, with their sales force who are basically pulling that Tableau and using in their convenience stores and grocery stores with their customers to understand sales and inventory trends. So a lot of different use cases like that. And if -- taking a step even further back, we're absolutely seeing across many different industries, Tableau being deployed to, what I call, front-line employees. And that ranges from manufacturing and supply chain folks to the retail and sales team examples that we just went through. Also includes financial services. by the way, where we're seeing a number of big financial services firms deploy Tableau in places like private client groups or financial advisors, are very actively using Tableau in conjunction with their end clients.
Matt Coss -- JPMorgan -- Analyst
Great, thank you. And Just one more. As you mentioned Tableau Prep, you're always thinking about the capabilities you need to deliver in the future. Is there any one capability that's top of mind for you or for your customers that you might think about iterating on the next version?
Adam Selipsky -- President and Chief Executive Officer
Clearly the biggest thing was scheduling and administration, which we just delivered in beta not two weeks ago. So I think we need to: A, get that out of beta; B, listen carefully to our customers and then assess what's next. But that team is going to keep busy for sure.
Matt Coss -- JPMorgan -- Analyst
Thank you.
Operator
Your next question is from Zane Chrane with Bernstein Research. Your line is open.
Zane Chrane -- Sanford C. Bernstein & Co. LLC -- Analyst
Hi. Thanks for taking my question. You guys are really (inaudible) obviously a great quarter and really impressive guidance. So I did notice the number of customers you added in Q3 was down slightly year-over-year for the first time, recently. Just wondering how we should interpret that. Are you becoming more saturated do you think in terms of potential customer accounts, or has there been a shift in your sales focus? There may be preferentially target expansion inside the existing base. Thanks.
Damon Fletcher -- Chief Financial Officer
Zane, that's a great question. This is Damon. So, yeah, it's more to do with a couple of factors. One, kind of shift in focus of the sales team. I think, more importantly, when we launched our role-based subscription offerings in April, we also -- we discontinued the sale of our Tableau desktop personal edition. So if you, kind of, normalize for that, those are sequentially are up year-over-year.
Zane Chrane -- Sanford C. Bernstein & Co. LLC -- Analyst
Okay. That's helpful. And just a quick follow-up to Karl's question on the RPO. How should we think about the average contract duration comprising that $192 million in RPO?
Damon Fletcher -- Chief Financial Officer
Yes. Sure, Zane. So we sell contracts either on a single year basis, which would all be in deferred revenue, obviously, or a multi-year, three-year contract is generally what we sell. Very rarely do we do -- we divert from the three-year contracts, which might only be in kind of a federal or something like that space.
Zane Chrane -- Sanford C. Bernstein & Co. LLC -- Analyst
Okay. So no information you can share on the mix of one-year versus three-year contracts there?
Damon Fletcher -- Chief Financial Officer
No, we haven't disclosed that. I think, the best way to kind of evaluate it, we're kind of concerned about duration would be to kind of focus on total ARR. I think when you look at the growth in total ARR, it would ignore any type of kind of contract duration that may impact our financial results.
Zane Chrane -- Sanford C. Bernstein & Co. LLC -- Analyst
Got it. Thanks, guys. Great quarter. Congrats.
Damon Fletcher -- Chief Financial Officer
Thank you.
Operator
Your next question is from Brad Sills with Bank of America Merrill Lynch. Your line is open.
Brad Sills -- Bank of America Merrill Lynch -- Analyst
Oh great. Thanks guys for taking my question. Just one on the new role-based pricing. Obviously, it's bringing in much bigger deals. Could you compare the mix of business coming from, say, replacement of legacy under new role-based pricing than say prior to -- are you seeing an accelerated, I guess, replacement cycle of legacy as opposed to that more additive use case that you had seen more in the past? Thank you.
Adam Selipsky -- President and Chief Executive Officer
Hi, Brad. It's Adam. Just to clarify, I mean, other legacy tools like legacy tools kind of like DBI (ph) solutions?
Brad Sills -- Bank of America Merrill Lynch -- Analyst
Correct. Yes, that's right. Traditional reporting and dashboarding type business intelligence.
Adam Selipsky -- President and Chief Executive Officer
Yes, we're definitely seeing that happen, Brad. It's hard for me to isolate to one factor and say, it's because a Viewer versus, it's because of -- I think, it's because of a lot of things, it's most fundamentally because of the increasing breadth and depth of the platform that we're building. And it's become a robust enough platform that so many people are now relying on it to do -- for mission critical use cases and applications inside their organizations. And I think, in addition, as time goes on and Tableau gets deployed more and more broadly inside a given customer, at some point they tend to look and say, well, gosh Tableau is now 10%, 20%, 30%, 40%, 50%, 60%, 70%, whatever it is. It does really make sense given that the application -- the platform future for us, it really makes sense to continue to support multiple lines. In some cases, multiple can mean many, like seven or most I've heard of is 21. And so we are seeing a fair amount of consolidation, as folks try and become more efficient and also gain more expertise and consolidate down onto Tableau or in some cases Tableau plus one other. And in those cases, many of those legacy BI tools are more and more becoming with the casualty of those decisions.
Now I hasten to say, I think, we're still early on in that movement over. I think, in years to come there will be, I would guess, a lot more of that movement. But it's definitely far more noticeable than it even was say 12 months ago. And you can really feel the momentum change in customers, not just beliefs, but their plans and future actions around that transition.
Brad Sills -- Bank of America Merrill Lynch -- Analyst
Great. Thanks, Adam. One more if I may please. Just as you're getting into these bigger enterprise type deals, how important is the global SI channel? Is that becoming more of an emphasis for the Company and what are the initiatives there, please? Thank you.
Adam Selipsky -- President and Chief Executive Officer
Sure. Well, it's always been important. I don't think it's absolutely -- if anything it's becoming more important, particularly as we just did more and more on the enterprise space. But there's no fundamental strategy change there. We've been saying for a long time it's important and we have strong relationships with not only global systems integrators, but also many, many, many regional SIs around the world, serving individual geographies or customer types locally. And more generally, if I just expand the question to the partner organization and partner activity, we continue to double down partner capabilities. We just announced some exciting additions and revamps to our global partner program at Tableau Conference. And we're going to continue to add people, as well as other investments into our global partner efforts. And that's systems integrators, because we do want to offer the choice of customers who want that help in deployment and integration, as well as technology alliances, be they all the data connectors that we support and all of the cloud vendors that our customers deploy on. And then also various channel partners from SIs to VARs, to distributors, etcetera. So, I view those as really three legs of the partner ecosystem and all three are going to get considerable focus from us.
Brad Sills -- Bank of America Merrill Lynch -- Analyst
Great. Thanks. Adam.
Operator
Your next question is from Tyler Radke with Citi. Your line is open.
Tyler Radke -- Citi -- Analyst
Great, thank you. The large deals were clearly an area of strength in the quarter, particularly over $1 million. I'm curious, since this is the first quarter that you really had the role-based pricing out there in the market, was there a kind of pent-up demand for this level of pricing, and how do you just think about the sustainability of the enterprise deal -- large deal strength that you saw? Can it continue into Q4 and into next year? Thank you.
Adam Selipsky -- President and Chief Executive Officer
Sure. Good question. Thank you. I think, that there absolutely has been some pent-up demand. I think, we've known for a while, there are customers who are -- more customers who are trying to deploy Tableau to a very large population. I mean, clearly that's been happening for a couple of few years already. But we knew there was a lot more out there, and it's not a single enabler of that, but we knew that having that type of offering, the Viewer represents, where you really do make it accessible to broader and more casual users was one important enabler.
In terms of the second part of your question, whether that's sort of a one-time phenomenon versus what kind of demand is out there in the future. I think the potential is highly significant. I think that the need for analytics is bigger than it has ever been as the amount of data in the world just continues to explode and as students get more educated in data and then come into the workforce I think that analytics is slowly but inexorably becoming a must-have for knowledge workers, and you are going to see that go from millions to tens of millions to potentially hundreds of millions of them over time, over a number of years. For that to happen, we have to deliver on a lot of different capabilities, make the platform even more intuitive, even easier to use, even more powerful than we've done today. And if we make those decisions wisely and if we execute well on them, I think there is potentially enormous demand in the enterprise space to your specific question. But it does depend on us executing in that way.
Tyler Radke -- Citi -- Analyst
Great, that's super helpful. And then a follow-up for, Damon, just on the operating income for the quarter, seems that came in better than you were expecting despite some headwinds from the subscription mix, then revenue being lower. Anything to call out there in terms of what drove the lower operating expenses?
Damon Fletcher -- Chief Financial Officer
Just some kind of timing differences on some expense items. When we look at the year as a whole, we talked 90 days ago about being in that 4% to 5% range, obviously with our guidance for Q4 at 4% to 5% that's going to land us in that ballpark. And so it's more timing on some bigger projects that we were working on.
Tyler Radke -- Citi -- Analyst
Thanks.
Operator
Your next question is from Tom Roderick with Stifel. Your line is open.
Tom Roderick -- Stifel -- Analyst
Yes, hi, thanks for taking my questions. So Damon, this is a little bit of a tricky one, but I'll go forward anyway. When you're thinking about the guidance for 606, obviously the tricky part to address here is, it's how these multi-year ELA deals that come in, in an on-premise fashion sort of impact that number. If you think about how you're projecting that pipeline of events for ELAs next year as comparing them to this year, are you expecting that type of deal to grow, kind of stay at the same rate? And obviously, what I'm trying to get to here is maybe more of an apples to apples. The 606 business is growing 20%, does that mean the 605 business that we've grown accustomed to is kind of growing at the same pace or does that get an artificial boost due to the anticipation of more of the ELA deals? That makes sense?
Damon Fletcher -- Chief Financial Officer
Yes, that's a good question. What I'd say is, obviously, the enterprise segment is the biggest contribution of our kind of multi-year subscription contracts. So you're seeing in our forward-looking kind of outlook for 2019, a reflection of both what we expect from a single year and a multi-year contract. I'd say the general trajectory under 606 underlying kind of customer demand, I'll call it bookings or demand, is the same as what we're seeing in the kind of the under 605 and 606, there's no material change in that kind of dynamic between the two standards.
Tom Roderick -- Stifel -- Analyst
That's helpful commentary, that's really good. And then, Adam, just thinking about the sales force itself. I mean there was a period going back a little over a year ago where your sales capacity sort of flattened out for a bit. You didn't add sales head. And then more recently, particularly going into this year when you saw a lot of strength coming out of Q1, seems like you guys stepped on the hiring pedal. Would love to hear your thoughts on what sales force productivity is looking like as you're going through 2018 and what you think about capacity as we exit this year. Do you want to stick with the same sort of pace of hiring or did this -- did the hires this year kind of fill the capacity needs for a while? Thanks.
Adam Selipsky -- President and Chief Executive Officer
Sure. First, I would say that we have been adding a significant amount of headcount to the Company, that's really been across the Company, it's really been in every major area. The whole thing is a single machine, which seems to operate collectively, right, needed to stay in balance. And clearly R&D in having the best, the broadest and the deepest analytics platform is always at the absolute center of our attention. In terms of sales, specifically, we have been investing there as well, as you say. We've had a very keen eye for sales force productivity. I think you need to sort of de-average that when you're running a business. You certainly need to look at ramped people and ramped markets and make sure that you're asking yourselves to continuously improve there in terms of productivity. Obviously, if you go into a new geography or if you hire a bunch of new people who aren't ramped at all, they're not going to be -- in the short term, they're not going to be as productive as the previous folks. And to me that's not a form of lower productivity, at least not on an atomic basis. It just means you're sort of changing your mix, if you will, who is on your team. So I always think about and ask the team, OK, let's talk about our productivity. It's sort of like same store sales type of metaphor here. And I think we do set a high bar for ourselves and we are asking ourselves all the time to do better and to figure out how to get more usage and drive more customer value with the same number of people, and then additional people to increase that even further.
We will continue to expand in terms of going into new geographies, going deeper into certain verticals and so forth. And again, on the surface, those can provide a bit of a headwind in your overall metrics, but once you de-average those, then I think you can, as I said before, continue to press really hard on increased productivity. And we do expect that to be a significant focus for us going forward, not to the point of where we slow down customer momentum and growth, but I think we should be asking ourselves to get more efficient even as we grow.
Tom Roderick -- Stifel -- Analyst
Really helpful. Thank you. Nice job.
Operator
We have time for one more question. Your next question is from Derrick Wood with Cowen. Your line is open.
Nick Oman -- Cowen -- Analyst
Yes, hey guys, this is Nick Oman (ph) on for Derrick. Thanks for taking our questions. Just one quick one. Can you guys give us an idea of how trade up activity has been since the introduction of Prep? I guess I'm curious whether or not you guys have seen customers trade up from Explorer, Viewer to Creator (inaudible) Tableau Prep.
Adam Selipsky -- President and Chief Executive Officer
Thanks, Nick. I would say it's very early days with our new role-based offerings for customers to be upgrading within those offerings. Customers who were previously Tableau desktop customers would have received a courtesy Tableau Prep key for 18 months as part of the launch of our new role-based offerings. And so we are seeing some -- obviously some customers who are on our perpetual legacy kind of price books convert over to subscription, because of all the benefits, be it Prep and Viewer and all of those. And so we're seeing a good healthy amount of customers who are choosing our new subscription offerings, but I wouldn't call it any particular upgrade path from Viewer to Explorer to Creator, given it's so early in the transition.
Nick Oman -- Cowen -- Analyst
Got it. Thank you.
Operator
This concludes the Q&A session for today's call. I'll now turn it back over to the presenters.
Derek Wong -- Senior Director of Investor Relations
Thanks, everyone, and thanks for joining us today on the earnings call and see everyone in 90 days. Thank you.
Operator
This concludes today's conference call. You may now disconnect.
Duration: 63 minutes
Call participants:
Derek Wong -- Senior Director of Investor Relations
Adam Selipsky -- President and Chief Executive Officer
Damon Fletcher -- Chief Financial Officer
Jennifer Lowe -- UBS -- Analyst
Sanjit Singh -- Morgan Stanley -- Analyst
Philip Winslow -- Wells Fargo -- Analyst
Raimo Lenschow -- Barclays -- Analyst
Karl Keirstead -- Deutsche Bank -- Analyst
Matt Coss -- JPMorgan -- Analyst
Zane Chrane -- Sanford C. Bernstein & Co. LLC -- Analyst
Brad Sills -- Bank of America Merrill Lynch -- Analyst
Tyler Radke -- Citi -- Analyst
Tom Roderick -- Stifel -- Analyst
Nick Oman -- Cowen -- Analyst
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