Talend S.A.
Q1 2019 Earnings Call Transcript

Published: 9 May 2019

[Operator:]

Good day and welcome to the Talend First Quarter FY 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lisa Laukkanen. Please go ahead.

[Lisa Laukkanen:]

Thank you. This is Lisa Laukkanen Investor Relations for Talend and I'm pleased to welcome you to Talend's first quarter 2019 conference call. With me on the call today are Talend's CEO, Mike Tuchen; and CFO, Adam Meister. During the course of today's presentations, our executives will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial performance or operating performance and involve known and unknown risks uncertainties and other factors that may cause our actual results, performance, or achievements to differ materially from those contemplated by these forward-looking statements.

[Mike Tuchen:]

Thanks Lisa and thank you all for joining us today. We're pleased to start the year with solid first quarter results and strong cloud momentum. Our success comes from both new customers adopting our data integration platform and existing customers extending their use both of which are being fueled by the ongoing market shift to the cloud. We achieved a record total revenue of $57.8 million in the quarter, up 24% year-over-year. Some additional highlights in the quarter include; our subscription revenue grew 26% year-over-year or 31% on a constant currency basis; Talend Cloud our SaaS offering grew over 100% year-over-year for the 11th consecutive quarter and represented 36% of new ARR for the first quarter, up from 14% just two quarters ago. We're well underway to having half of new ARR come from cloud by Q4 this year.

[Adam Meister:]

Thank you, Mike. Today I will review our financial results for the first quarter 2019 as well as provide our outlook for the second quarter and fiscal year 2019. As a reminder, we are reporting Q1 financial results under U.S. GAAP as required when we became a domestic filer on January 1, 2019. We are pleased with our first quarter results. Annualized recurring revenue was $205.1 million as of March 31, 2019 and grew 28% year-over-year or 34% year-over-year on a constant currency basis. We define ARR as the annualized value of all active contracts, contributing to revenue at the end of a period and as a result the FX impact of this point in time measure will differ from that of subscription revenues. The strong demand for Talend Cloud contributed meaningfully to this growth. Talend Cloud represented 36% of new ARR for the first quarter, up from 25% in Q4 and 14% in Q3. We are excited with our progress toward Talend Cloud reaching half of new ARR exiting 2019. Our launch of Pipeline Designer and the spring 2019 release of Talend Data Fabric which Mike discussed will contribute to this momentum. Total revenue for the first quarter was $57.8 million, up 24% year-over-year. Subscription revenue for the first quarter was $50 million, up 26% year-over-year. In constant currency, subscription revenue growth was 31% year-over-year. The headwind from FX was larger than anticipated and the headwind to total revenue growth from professional services was slightly less than expected. Subscription revenue from Talend Cloud grew more than 100% year-over-year for the 11th consecutive quarter. As previously noted Talend Cloud -- Stitch. The growth in subscription revenue was also impacted by the greater proportion of ratable revenues related to our larger cloud mix in the quarter. Growth in enterprise customers defined as companies with $100000 or more of annualized subscription revenue was 32% year-over-year and reached 501 customers this quarter. The contribution of subscription revenue from enterprise customers remained stable at 67% in Q1, consistent with expectations as our near to medium-term strategy remains focusing on cloud lands.

[Mike Tuchen:]

Thank you, Adam. 2019 is off to a strong start, as we maintain our focus on driving cloud adoption. Our market leadership positions as well to take advantage of the industry shift to the cloud. As we look to the rest of the year, we'll remain focused on driving our continued purchase to the cloud, to enable our customers to meet the demand of ever increasing data volumes, with speed, and trust. With that, Adam, and I would be happy to take your questions, Operator?

[Operator:]

Thank you. And we will take our first question from Raimo Lenschow with Barclays. Please go ahead.

[David Rainville:]

Hey! Adam. This is David on for Raimo today. Thanks for taking my question. And just first one a little bit more high level for Mike. And I'll have a follow-up with Adam on the numbers. Mike as we think of Talend Cloud and Stitch which sit at completely opposite end of the cloud integration market, can you help us understand the different drivers or vectors of growth here, both in regards of the use cases they are used for but also whether there is some replacement from legacy on-prem technologies there?

[Mike Tuchen:]

Yeah. What's really going on is there's an overall shift to the cloud, from premise right? And you're seeing that across the entire ecosystem, not just in the data world, but really all of IT is in a long-term secular shift to the cloud. And so, what's happening to companies that are adopting cloud data warehouses is, the very first thing if you think about that just from a time line progression, the very first thing they'll do is, just start loading data in. And that's what Stitch does you can literally be live in minutes. Then, as they start building their data warehouse incrementally, normally what happens is they start saying, "Well I'd like to start doing some cleaning and blending and transformation. And start creating standardization of my data warehouse. And that's where the rest of Talend Cloud comes in. And of course there's room for data cataloging and a broader governance kind of story as well which are other components that we bring. And so, think of that as just a progression that companies adopt as they incrementally build the data warehouse, which is a very common phenomenon that we're seeing right now. I mean, I would say, one of the changes that we're seeing in the cloud these days is, that, kind of incremental building approach is one that didn't used to happen on-premise. Back in the premise days, generally speaking, given how expensive it was to create a data warehouse there was a whole lot of upfront design and effort that went in before you did anything in the data warehouse at all. And you can spend $1 million on consulting before you had a single byte in your data warehouse. These days it's flipped around. And companies really just push to get started quickly and incrementally, and then build into the more complex scenarios over time. And that's why, I think that Stitch is that on-ramp and the rest of Talend Cloud solves the more complex problems as they emerge.

[David Rainville:]

That makes sense. That makes sense. Thanks for answering that. Adam quickly, it would be helpful if you could provide a little bit more color on, what Stitch did this quarter so maybe an ARR growth on an organic basis. And also if you could double click on, what constant currency ARR growth looked like last quarter, so we have something to compare against? Thanks.

[Adam Meister:]

Yeah. Sure, David. So we're not going to break out Stitch in each quarter going forward. We -- just to give you a little bit of color, contribution was still relatively small. So think about it as a couple points of growth on an overall ARR number. But that's as much detail as we're going to give on kind of a quarterly basis. We'll update you at the end of the year with overall contribution relative to our expectations. In terms of the constant currency growth for ARR last quarter, it would have been 37% versus the 33% that we reported. So 6-point difference in this quarter versus a 4-point difference for the Q4 balance.

[David Rainville:]

You got it. Thanks so much.

[Operator:]

And our next question comes from Jack Andrews with Needham. Please go ahead sir.

[Khanh Ngo:]

Hi, gentleman. It's Khanh Ngo filling in for Jack today. I wanted to dig a little bit deeper into Stitch. So you guys talked about Stitch, so there is a frictionless degeneration. But can you talk about the -- what you kind of need to do to kind of build up this playbook. Have you seen any positive signs of expansion so far from the strategy?

[Mike Tuchen:]

Absolutely. We're seeing a number of new customers start with Stitch. So we're very, very bullish about the overall frictionless approach going forward. I think we're still early in our overall exploration of the frictionless channel. We launched a product called Pipeline Designer that I mentioned a few moments ago. And we'll be introducing a pay-as-you-go pricing for that the next several months so that in the second half, we'll become another frictionless option from the company. And so for us I think you'll see us continuing to learn and build that frictionless channel over the course of this year. And we hope going forward into the future years our -- the bet that we're making is that, it becomes a major part of our overall go-to-market strategy. But as I said in this calendar year, it's -- we're in the early days of building that out. We're very pleased with the early progress.

[Khanh Ngo:]

Great. That makes sense. And I want to dig a little bit it into the innovations that you guys made on cloud API, cloud data warehouse. So how should we think about Pipeline Designer Azure and kind of remote engines? What kind of tiles can this lead to just kind of drag customers along on their cloud data warehouse journey? Are there any gaps that you're seeing in the cloud version that you're looking to shore up?

[Mike Tuchen:]

Yes. So what we're -- what Pipeline Designer brings to us is a more complete design environment that's 100% web-based and very soon to be frictionless in nature like Stitch. And so if you go back to that progression that I mentioned where customers start by just simply loading data into a cloud data warehouse, the next thing that they want to do is start blending transforming and cleaning data. And that's the job for Pipeline Designer. So it's designed to be that natural add-on and expansion from Stitch. So that's where we expected to see and we see that also starting out in the frictionless way and then becoming an opportunity to expand with more capability for larger enterprise customers.

[Khanh Ngo:]

Great. Thank you.

[Operator:]

Our next question is coming from Bhavan Suri with William Blair & Company. Please go ahead.

[Bhavan Suri:]

Hey, guys. Thanks for taking my question and congrats. I wanted to touch a little bit more on your support for OAS version 3.0 just happened in April obviously here. It feels like you've taken another step towards addressing like MuleSoft's value proposition

[Mike Tuchen:]

Wow. Okay. So Bhavan thank you for drilling deep onto this one. So for those that haven't been following us quite as closely hopefully you guys are...

[Bhavan Suri:]

I mean I can ask you a sample question too but let's go with that...

[Mike Tuchen:]

All right. So we don't see ourselves competing with MuleSoft very much at all. We see ourselves very tangentially solving neighboring problems in the market by and large. What we -- what OAS 3 is it's really just the next generation of the Swagger stack. And so for us when we bought Restlet and which is now Talend API Services, what that allows companies to do is share data, right? So our overall value prop is collect governed transform share and API services being that final point of sharing. So if you've built a data warehouse and you want to share it with customers, partners, suppliers and so on then API services is a very natural way to do that. And in order to integrate with the latest versions of Apogee and the other cloud gateways, we needed to support the latest version of Swagger which is OAS 3. And it brings some additional capabilities as well, but that's overall what that announcement was. And we see that really being a -- primarily solving those sharing data in analytical scenarios whereas MuleSoft is primarily about connecting together applications. Many companies will do both I know that we share a number of companies and we're not really today in any meaningful competition with them and don't expect to be.

[Bhavan Suri:]

Got it. Thanks for the color. Then on pricing if you look at Talend Cloud pricing, it has moved up over the past year, so not a big surprise given you've added capabilities. But just broadly what do you guys think of in terms of pricing strategy? And so A, sort of as you think about that how do you guys think about pricing overall? And then has there been any pushback from customers? Thanks.

[Mike Tuchen:]

Yes. So the pricing actually hasn't changed. What's happening is we're selling larger deals which is why the ASP is moving up. So on a sort of per use -- per unit basis price has actually been level. The way we think strategically about pricing is that we have products at different price points that solve different parts of the customer problem. And from entry products from the Stitch family, where we really want to help customers get started really quickly and not have to make a big commitment, so to be able to pay-as-you-go and very, very inexpensively. As you solve more complex problems, we have higher price points to solve those problems, Talend Cloud being the next step in that value chain. And then other things like data catalog and so on which end up being more expensive. And so really what we do is we look to price the offerings that we have based on the value they're providing which is pretty highly correlated into the complexity of the problem they solve for our customers.

[Bhavan Suri:]

Got it. Got it. Thanks, guys, and nice job, there, congrats.

[Mike Tuchen:]

Thanks, Bhavan.

[Operator:]

And our next question comes from Tyler Radke with Citi. Please go ahead.

[Tyler Radke:]

Hey, thank you. Good afternoon, guys. Could you talk about what you saw in the on-premise Big Data business? Did you see any changes there? I think in the past net new customer add has been a weak spot, but the existing customer spend is continuing to be pretty healthy. Just curious if you've seen changes there, any commentary on the trajectory of that on-prem Big Data business?

[Mike Tuchen:]

So I'd say that the same trends continue to hold. We're seeing the vast majority of new customers are buying our cloud which is why our cloud growth is so high right now. And -- but existing customers for all our premise products including our premise big data products are continuing to buy more. And that trajectory really it remains on the same trajectory that we saw in the last several quarters.

[Tyler Radke:]

Okay. Great. And then, could you just talk about maybe some of the metrics and trajectory of deal sizes and expansion and how we should think about that as you go through this cloud transition? It looks like net expansion rate did dip a little bit this quarter at 118%. I didn't hear you call out any stats on traction with large deals. And I think you've said in the past that it might take some time as you ramp the cloud products to really get back to those larger deal sizes. Could you just kind of give us an update on what you're seeing there and how we should think about those metrics?

[Adam Meister:]

Yes. So Tyler the -- I'll just kind of walk through sequentially everything that you brought up. On overall metrics, we're absolutely focused on ARR as the best metric that cuts through some of the puts and takes around the ratable shifts. So I'd encourage analysts and investors to really watch that over the course of the year. In terms of the net expansion rate, as you mentioned, it's come down a couple of points from last quarter. That's very consistent with what we described in our last call, because there was a boost to that number associated with 606 adoption. And so that should tick down a bit more over the course of this year as it fully reflects clean comparison with 606. And then in terms of your last point around just -- I'll turn it up some more enterprise customer and the contribution of enterprise customers to the overall that was still stable at about two-thirds of revenue. We are pretty pleased with the growth enterprise customers just in terms of count. And as we've been mentioning, we're very focused on cloud wins that's absolutely the highest priority for us right now. And so we're comfortable what that mix staying about where it's at with regards to the two-thirds. We did mention that cloud ASPs are now basically in line with the overall average and so we've been pleased with seeing that continue to tick upwards over the last couple of quarters.

[Tyler Radke:]

Great. Thank you.

[Operator:]

And our next question comes from Mark Murphy with JPMorgan. Please go ahead.

[Matt Coss:]

Hi, good afternoon. This is Matt Coss on behalf of Mark Murphy. Thinking about Talend Cloud on Azure coming later this year, currently what is your view on the lead flow from Azure SQL data warehouse or Azure Data Lake store and how big could that get in terms of lead flow versus some of the other cloud data warehouses?

[Michael Tuchen:]

We're seeing a lot of interest from many of our larger enterprise customers in Azure. And so what we're -- we're actually seeing our average deal size on Azure being quite a bit higher than our average deal size in other clouds. And partly because of the -- that enterprise interest in Azure. And the overall dynamics that we see in the market is that Microsoft has built and maintains very strong relationships with the large enterprise companies. And that combined with their strong partner network really has an enterprise waiting to the leads and deals we work with there. And so that was one of the drivers for us to build into a native offering in the Azure cloud that would come out in Q3. And we expect those trends to remain over time which is a larger enterprise mix on the Microsoft side relative to some of the other clouds. And there's -- what we're seeing in the -- in Azure is strong interest in Azure SQL data warehouse and their data lake and of course in Snowflake in Azure as well.

[Matt Coss:]

Great. Thanks. And then one for Adam. Were there any $1 million ACV wins this quarter? And if not, do you see some of them in your pipeline and would expect more to close this year?

[Adam Meister:]

Yes, there's always a handful of large transactions that sit in the pipeline. We didn't see any at this quarter. I don't think that's necessarily a trend. It just quarter-to-quarter can vary, but we're pretty comfortable with big deal opportunities as we look out to the rest of 2019.

[Michael Tuchen:]

Yes, we're seeing as we mentioned the overall -- the ASP for Talend Cloud is now in line and part of that's reflected by we're starting to see larger deal mixes come into Talend Cloud. Nothing across any part of the portfolio eclipsed $1 million in Q1. But again, Q1 is not a quarter that you would typically see particularly large transactions.

[Matt Coss:]

Fair. And then lastly how much worse has FX become versus this time last quarter? I presume, it was a headwind to your full year guidance last quarter and how much worse has that gotten this quarter?

[Adam Meister:]

Yes, it's spot on. I mean from our read, it's about two percentage points change just euro to dollar, since we last gave guidance. And so that's absolutely part of the headwind associated with our holding top line guidance flat for the year.

[Matt Coss:]

All right. Thank you.

[Operator:]

We will take our next question from Brent Bracelin with KeyBanc. Please go ahead, Sir.

[Brent Bracelin:]

Thank you. Mike for you, I was wondering if you could just provide us an update on the search for the new sales leader kind of where you're at there. And then, Adam, could you touch base a little bit around kind of the cloud gross margins? I know that mix shift is pressuring gross margins this quarter. Just wanted to understand is that just early days of cloud. And you would expect the gross margins to normalize at scale, so just any sort of color on large applications of cloud would be helpful? Thanks.

[MikeTuchen:]

Yeah. Hey! Brent. On the sales leader search, we're seeing a number of strong candidates and very much in the middle of the search now. We don't have any announcements to make, but we're certainly -- we look forward to making an announcement when we have a final candidate.

[Adam Meister:]

Yeah. And then, Brent, in terms of the cloud gross margins, we've shared that there's going to be naturally a few points of pressure on our subscription gross margins associated with cloud mix shift. We're totally comfortable with that, because we think long-term cloud customers are going to be much stickier. So from the economics perspective, it's still the right move to make. That was one point in, Q1 it will be a couple of additional points over the course, of the year. And I think it's too soon to tell, when that will -- when and if it will inflect. But long term and I think that our cloud gross margin should be right in line with the best-in-class cloud businesses.

[Brent Bracelin:]

That's helpful. And then, last question for me is on ARR. As we think about that, as the best proxy for the business. This quarter it had a 6% FX headwind. That's a little different than the revenue FX you talked about being only 2% for the full year. Walk us through the FX headwind that you expect, to ARR for the full year. And just why is it a little more significant, in Q1 than at least what we are modeling? Thanks.

[Adam Meister:]

Yes. Absolutely, so first I'll clarify, the 2% points that I mentioned in a prior question was just the FX rate change, since we gave initial guidance this year. It's not necessarily the hit for the full year that we're expecting. In terms of the ARR FX impact, if you look back at Q1 of last year it was particularly pronounced. The dollar strengthened quite a bit over the course of Q2, and then started to stabilize. And so we think there is still a decent amount of FX impact in Q2. And then it should start to level off in the back half of the year. I don't think we have a precise answer on exactly it's going to be over the course of the year, but that should give you enough color to just -- to think of how it's going to narrow going -- from now into Q4?

[Brent Bracelin:]

That's helpful color. Thanks for that. That's all I have. Thanks.

[Operator:]

And this concludes today's question-and-answer session, as well as today's conference call. Thank you for your participation. And you may now disconnect.