Talend云转型加速

Talend (TLND) the French data integration company, had a good Q2 which made the share price jump. But the shares have fallen back since on the correction in growth stocks and the company's $125M convertible offering.

Here is a visual of what they do, from the earnings deck:

We have a habit of providing a five year overview:

Data by YCharts

While revenue almost tripled, operationally things have deteriorated quite substantially. At first sight, it isn't surprising the stock price hasn't gone anywhere the last couple of years, despite a top at over twice the current share price a year ago:

Shifting to the cloud

The company started to build a cloud solution from the ground up years ago and it has taken quite some time (Q2CC):

We've really re-architected the cloud products from the ground up. And the reason why, when we kicked off the project about five and half years ago, the reason why it took us a couple of years to rebuild it back then, was we did the investment to make it multi-tenant and containerized and elastic and really take advantage of all of the benefits you get in the cloud.

This isn't done yet as they keep on adding features and improvements, but the solution is good enough already for business to shift slowly to the cloud as that is what an increasing number of customers want, from the earnings deck:

And indeed the momentum seems to be accelerating (earnings deck):

At the end of last year the company had 3000 customers of which 1000 were cloud customers while at the end of Q2 they had 3500 customers of which 1500 were cloud customers.

Cloud deals are also getting bigger and are now roughly on a par with on-premise in that respect. This shift has a number of consequences for Talend's results:Depressing on-premise growthDepressing service revenue growthMargin expansionReducing cash flow

The effect on on-premise growth is obvious as on-premise customers shift to the cloud and new ones are more likely to start there. On-premise customers are more service intensive so service income growth slows but this produces a positive effect on margins as services earn much lower margins, from the earnings deck:

There is another slide which provides interesting information, quantifying the impact of the shift to the cloud on revenue growth for Q3:

It turns out this is guided between 5%-7% for Q3, which is pretty substantial, but in Q2 it already had been with a 4% drag from professional services (where 1%-2% was expected).

There is also a mild depressive effect on cash flow as cloud contracts tend to be somewhat shorter. However, there is compensation for the slower revenue growth (Q2CC):

What we're finding to date is that, we are seeing a modest uplift as customers moves to the cloud, typically they end up buying a little bit more as they do that is expanding into the cloud. And for us, we see the, -- this is still very early days in the cloud migration. We expect the bulk of that to happen over the next several years.

The somewhat surprising thing is that in the face of the shift to the cloud, the company's on-premise business still keeps growing. While it might not attract net new customers, existing customers actually expand a little over the 118% company wide net dollar expansion rate, so their land and expand seems to work particularly well at their on-premise business.

Management expects the on-premise business to keep growing at a low double digit rate in H2 but they do expect the surprisingly high net dollar expansion rate to decline for the on-premise business, one should also keep in mind it's a lagging indicator.

Land and expand

The company has several solutions, from the simple onboarding of data which doesn't need specialists (it can be done by 'citizens' as the jargon has it) to the complex (earnings deck):

Through development and acquisitions, the company keeps on adding features and functionality which provide up-sell opportunities to existing customers. The company keeps on adding products and solutions (earnings deck):

Given the company's 118% net dollar expansion rate (despite some downward pressure from adopting the ASC 606 accounting standard), they are really successful at doing this as well, from the earnings deck:

Stitch

, which the company acquired late last year served as a great entry point as its customers seem to sign up for other Talend products, and management is now using this as a seeding mechanism (Q2CC):

If you're working with a customer that has a simple problems solved, we are now starting to suggest, why don't you start with Stitch you will be live in minutes. And solve that problem, then we can help you solve that the next part of your problem, when you're done with that. So, that's giving us a -- another tool in the toolkit for our sales force to use, not just as a separate frictionless motion.

The company's market position is quite well established, given its position as a leader in Forrester (earnings deck):

But also by Gartner (earnings deck):

Q2 results

From the 10-Q:

There are of course a few datapoints which management likes to highlight, which are the following (earnings deck):

The standout feature is of course another quarter of triple digit cloud growth, which is now 43% of ARR (annual recurring revenue) on its way to achieve 50% by year-end.

The company had a few notable label wins in the quarter, most notably a big biopharmaceutical company which now constitutes their biggest cloud win to date and they replaced Informatica, the dominant on-premise competitor.

It's also noteworthy that the results beat expectations by some margin, with EPS coming in at minus $0.21 which was 12 cents better than expectations

Guidance

From the earnings deck:

Guidance has been taken down by $2M as a result of a faster shift to the cloud and a slightly bigger deceleration in the growth of on-premise and also because of the economic slowdown in Europe.

Margins

Data by YCharts

Non-GAAP gross margin was 76% in Q2, down 100bp from last year. Operating expenses were up 25% versus last year, as a result of a 49% rise in R&D which is in part the result of the Stitch acquisition.

We should also notice that there is quite a large gap between GAAP and non-GAAP operating figures. The GAAP operating loss was $17.9M while its non-GAAP counterpart was a more modest $6.1M. Share based compensation ($10.5M in Q2) explains almost the entire difference with amortization of acquired intangibles ($1.3M) accounting for the rest.

Cash

Data by YCharts

While the company eked out a small positive free cash flow ($1.3M) in Q2, for the year a negative figure ($15M) is expected and that's down substantially from previous guidance (which was at minus $5M), mostly due to the shortening of contract duration. From the Q2CC:

As we got through second quarter, realized there is definitely a trend here. And so we looked at 1.02 as potentially a steady state. And it just be helpful, people look at this a couple of different ways. I mentioned in my prepared comments, the difference in growth between ARR and calculated billings as one indicator. And if you grew basically calculated billings, at the same rate as ARR, that would be about $8.5 million in the first half of the year.

If you look at the just decline in long-term defer, that's about $8.9 million, since the end of Q4. And then, I think most importantly, if you look at just change in RPO plus revenue, relative to calculate billings there is a difference of $9.7 million. So, all those kind of triangulate and give you a sense of what the true duration oriented impact was for the first half.

However, there doesn't seem to be a strong trend in the length of contracts (there is some seasonality at work with Q4 the top), from the earnings deck:

The company had $32.1M in cash and equivalents but bolstered this after Q2 closed with a $125 placement of convertible notes. In any case, they should have plenty of cash as they expected to lose $15M this year, mainly due to the shortening of contracts, but that is not likely to deteriorate further.

Given the amount of share based compensation the dilution has been pretty modest:

Data by YCharts

Valuation

Data by YCharts

Valuation is at an historic low and seems quite modest relative to other SaaS names. However, analysts expect the losses to continue, with EPS estimates of -$0.95 this year rising to -$0.66 in 2020.

Conclusion

It's understandable the initial enthusiasm after the Q2 has waned. There is a sharp market correction in growth stocks ongoing, and the company's margins and European outlook are problematic.

What's more, the economic rot can spread from Europe to the US and although we think the secular tailwinds (big data, cloud) won't be much affected by that, it might be enough to trouble the outlook further.

On the other hand, the shares aren't expensive and the company doesn't really bleed unsustainable amounts of cash. In fact, only this year is the company losing cash due to the shortening in contract length, a result of the shift to the cloud. But this is a temporary effect.

Unless we have a serious market correction, we don't see all that much downside as a result and with the growth story intact, one could start accumulating a position on dips.

Disclosure:

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.