Talend S.A.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Good day and welcome to the Talend's 2Q 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 second quarter fiscal year 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 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 are pleased to report strong second quarter results as our cloud business continues to build momentum. We are landing cloud customers at an increasing pace and laying a foundation for future growth for both new customer adoption, as well as existing customers expanding their use of Talend. The cloud market is the most important market to win, as cloud will drive the majority of future growth in the data integration market and the progress we have made in their cloud business positions us to continue to gain market share. In the second quarter, we achieved record total revenue of $60.6 million, up 22% year-over-year. Some additional highlights from the quarter include; annual recurring revenue totaled $218 million and grew 28% year-over-year or 29% on a constant currency basis. Our subscription revenue grew 26% year-over-year or 30% on a constant currency basis.

[Adam Meister:]

Thank you, Mike. Today, I will review our financial results for the second quarter 2019 as well as provide our outlook for the third quarter and fiscal year 2019. As a reminder, we are reporting Q2 financial results under U.S. GAAP, as required when we became a domestic filer at the beginning of this year. We are pleased with our second quarter results, which were driven by continued momentum in our cloud business. Annual recurring revenue or ARR grew $218 million as of June 30, 2019, up 28% year-over-year, or 29% year-over-year on a constant currency basis. We define ARR as the annualized value of all active contracts 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 contributing meaningfully to this growth. Talend Cloud represented 43% of new ARR for the second quarter, up from 36% in Q1. We are excited with our progress toward Talend Cloud reaching half of new ARR exiting 2019. We anticipated that growth in on-premise would slow as customers increasingly prefer a cloud solution and our rapid rotation to the cloud is evidence of that. As I will discuss shortly, we expect this dynamic to impact our outlook for the back half of 2019, particularly due to lower professional services attached with cloud transactions. Total revenue for the second quarter was $60.6 million, up 22% year-over-year. Subscription revenue for the second quarter was $52.9 million, up 26% year-over-year, or 30% on a constant currency basis. Most of the FX impact was foreseen with changing rates over the course of Q2, 2018 with a small incremental headwind due to changes since our last guidance. Subscription revenue from Talend Cloud grew more than 100% year-over-year for the 12th consecutive quarter. Customer additions in the quarter were strong and we now have over 3,500 customers with over 1,500 of them being cloud customers. We also reached 525 enterprise customers, defined as customers with 100,000 or more of annualized subscription revenue. Enterprise customers contributed 68% of subscription revenue in Q2 versus 67% in Q1. For the quarter ending June 30, 2019, our dollar-based net expansion rate was again 118% in constant currency. We are pleased with this result given the downward pressure during this year related to the adoption of ASC 606. As a reminder, this revenue based metric was bolstered during 2018 due to ASC 606 and is expected to come down gradually over the course of the year, as this four-quarter rolling measure fully reflects the new revenue standard. As Mike noted, we continue to see healthy retention and expansion from existing on-premise big data customers. The dollar-based net expansion rate for on-premise big data was a few points higher than our overall average dollar-based net expansion rate and has been consistently for the last few quarters. This speaks the stability of our on-premise big data install base. Professional services revenue was $7.7 million in the second quarter, flat year-over-year. This moderation is largely related to the lower average professional services requirement for Talend Cloud, which was anticipated, although the impact was more pronounced than expected in Q2. Professional services revenue resulted in a 4% drag on overall revenue growth for the quarter versus our expectation of 1% to 2% in our prior guidance. Professional services revenue can fluctuate due to project timing as well as cloud mix, but based on current trends, we expect the impact of professional services to overall revenue growth for the remainder of 2019, to be similar to the impact in Q2. Accordingly, ARR growth is the best indicator of our momentum with both new and existing customers during our cloud shifts. As Mike noted, from a geographical perspective, we've seen some softening of demand in Europe given the macro economic backdrop. Total revenue from our EMEA region grew 14% year-over-year in Q2. We're taking a cautious outlook on EMEA for the remainder of 2019. Before moving to profit and loss items, I would like to point out that unless otherwise specified all expense and profitability metrics I will be discussing going forward are non-GAAP results. A full reconciliation of GAAP and non-GAAP results can be found in our earnings press release issued today, which is posted on the Investor Relations portion of our website. Our total gross margin for the second quarter was 76% compared to 77% in the same period last year. Professional services gross margin was 13% this quarter, up from 6% last quarter. Operating expenses for the second quarter was $52.4 million, up 25% year-over-year. Sales and marketing expenses for the quarter were $31.5 million, up 20% year-over-year. R&D expenses for the quarter were $12.5 million, up 49% year-over-year, as we continue to drive investment in our cloud products and operations. It's also particularly impacted by the inclusion of Stitch for R&D accounted for most of the operating expense. G&A expenses for the quarter were $8.4 million, up 15% year-over-year. This reflects our ongoing focus to drive efficiency in the business, but G&A also benefited relative to last year due to some overhead expenses that we began allocating at the beginning of this year. We incurred an operating loss for the quarter of $6.1 million, or 10% compared to an operating loss of $3.6 million, or 7% in the second quarter of 2018. The performance versus initial guidance primarily reflects our efforts to drive efficiency during Q2. Net loss for the quarter was $6.4 million compared to a net loss of $3.6 million in the prior year period. Cash and cash equivalents totaled $32.1 million, as of June 30, 2019 versus $29.1 million at the end of March. Free cash flow for the quarter was $1.3 million. We are focusing on shaping our business around the cloud opportunity and we believe the continued strategic investment in our cloud products will position us to be a leader in data integration, innovation. We now anticipate free cash flow will be roughly $15 million negative for the year versus our prior expectation of $5 million negative. The largest contributor to the increased free cash flow burn is the impact from shortening contract duration. In Q2, we saw pre-built contact duration compressed to 1.02 versus an average of 1.08 over 2018. Note that our pre-built duration calculation exclude the impact of monthly billed customers, including much of Stitch, which is a growing part of our business. Our goal of reducing pre-built duration has worked in both new and renewal transactions and had a larger than expected impact for the first half of 2019. This is evident with the decline in long-term deferred revenue since the end of 2018. Analyzing the difference between our ARR growth and calculated billings growth is helpful to understand the impact of shortening duration on free cash flow. I'll now turn to our outlook for Q3 and full-year 2019. As a reminder, our guidance assumes similar business conditions and foreign exchange rates as of July 31, 2019. For the third quarter 2019, total revenue is expected to be in the range of $61.5 million to $62.5 million. Non-GAAP loss from operations is expected to be in the range of $7.3 million to $6.3 million. Non-GAAP net loss is expected to be in the range of $7.8 million to $6.8 million. Non-GAAP net loss per share is expected to be in the range of $0.25 to $0.22. This is based on a basic and diluted weighted average share count of 30.7 million shares. We are updating guidance for the full-year 2019 as follows. Total revenue is expected to be in the range of $246 million to $248 million. Non-GAAP loss from operations is expected to be in the range of $28.5 million to $26.5 million. Non-GAAP net loss is expected to be in the range of $30.1 million to $28.1 million. Non-GAAP net loss per share is expected to be in the range of $0.98 to $0.92. This is based on a basic and diluted weighted average share count of 30.6 million shares. Our revised guidance for the full-year reflects our expectations for one, lower professional services related to cloud; two, conservatism regarding Europe for the remainder of the year; and three, continued moderation of on-premise revenue growth. We are excited about the progress we have made in advancing our cloud strategy and exiting 2019 with Talend Cloud, as the largest contributor to new business. We remain confident that our market leadership, strong customer and ecosystem relationships and cloud-first innovation will enable us to continue to drive durable growth over the long term. With that, I'll open the call to questions. Operator?

[Operator:]

Thank you. We'll go to Bhavan Suri with William Blair & Company, first.

[Bhavan Suri:]

Hey guys, thanks for taking my questions. And, obviously, a great job there on the cloud business. I guess, I just want to touch on one comment. Mike, you made, which was about cloud deal sizes. Is that the, sort of, start trending toward the average deal size? I just want to get that clear. So, the initial cloud deal sizes, are they headed toward what the historical on-premise deal size? Were just some color there would be helpful. And then I have a quick follow-up.

[Adam Meister:]

Sure. Hey Bhavan, it's Adam. So, right now cloud deal sizes are in large -- in line with the overall average we're seeing. So, that's still a bit below kind of the max peak we saw back in 2016 related to big data, but we're very comfortable with that. Now the cloud deals and the overall deal sizes that we're seeing are in-line and we don't expect that to diverge much from this trend at this point.

[Bhavan Suri:]

Got it. It's helpful. And I got a quick follow-up. I guess it's a two-part follow up. One, I'd love to understand, where the data governance product is obviously that's pretty strategic, and sort of some of these challenges around, where transformation happens or not part of that? It's a data governance and the adoption of that? And then two, I guess what do you guys seeing in Europe, or EMEA, specifically, I guess that sort of has some concerns. Is the UK? Is it verticals? Is it new deals that people not willing to start new projects, trying to understand what gives you guys that caution? Thank you.

[Mike Tuchen:]

Bhavan, Today the governance remains a area of very strong interest with our enterprise customers. An area that we're investing in across the board from engineering to sales and services and so that business is growing strongly. We don't break it out as a separate area, but it's -- it's a strong part of our business and a key part of our enterprise sales conversation. In terms of Europe, what's going on is the, the overall demand environment seems to be in a slowing a bit due to the macro-economic and political barriers going on right there. We, -- what's interesting though is the cloud business there, is really moving fast. And so what's really happening is the premise business in Europe is where we're seeing the softening. And so, as a matter of fact, when we talk about the premise business softening, it is Europe in particular, that's running lower than we expected, where is the cloud business worldwide is really moving fast. That's really the picture that we're seeing right now.

[Bhavan Suri:]

Got it. That’s helpful. Thanks guys. Thanks for taking my questions.

[Operator:]

We'll go to Jack Andrews with Needham.

[Jack Andrews:]

Good afternoon, and thanks for taking my question. Mike, you talked about landing cloud customers at an increasing pace. I mean, that sounds like an acceleration to me. I was just wondering if you could provide some more context and growth rates and things around the actual number of customer as you're really experiencing right now?

[Mike Tuchen:]

Yeah, we had announced in Q4 -- at the end of the Q4 call, so in on our February call. That we were up to 3,000 customers and of which around 1,000 were cloud. And we just announced that we are at 3,500 customers, of which 1,500 to cloud. So, we added around 500 cloud customers in the last two quarters, which is clearly a significant uptick from where we've been prior to that.

[Jack Andrews:]

Great. But then you gave an example of customers migrating from on-premise to the Talend Cloud. Could you help us think through what the potential financial ramifications are that or for that for your company is this an opportunity to expand with customers, or do you have enough data in terms of how their behavior might change in those -- such as migration scenarios?

[Mike Tuchen:]

Yeah. So, as of right now, the way our pricing works, the pricing is leveled between premise and cloud, just to make exactly these kind of situations easier. 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.

[Jack Andrews:]

Great. Thanks for taking my questions.

[Mike Tuchen:]

You bet.

[Operator:]

We'll now take a question from Chris Merwin with Goldman Sachs.

[Chris Merwin:]

Okay. Great. Thanks for taking my questions. I was wondering, if you just talk a bit more about the integration of Stitch and how that higher velocity go-to-market is helping to drive the cloud business? And then I had a quick follow-up.

[Mike Tuchen:]

Yeah, Stitch, as we had anticipated and hope to see, Stitch is really driving a very high velocity, new customer acquisition vehicle. And that's a lot of the new cloud lands that we've talked about were through the Stitch as initial land. We are now starting to work on the expansion from a Stitch land into further parts of Talend Cloud and we're seeing nice progress on that.

[Chris Merwin:]

Okay. Great. And then just in terms of cash flow guidance, as we saw that came down a little bit, as you call out due to shorter build contract duration. I feel like that's I guess fully de-risk at this point even to receive maybe a higher influx of shorter duration deals. Just curious, how we should be thinking about that, and particularly as it relates to the cash cushion will come at the end of the year?

[Adam Meister:]

Yeah, good question. So, yes, we think we've fully de-risk it. The first quarter, we saw that shortened in duration we talked about on our prior call. 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. We think some of what we've done around efficiency in the business will ensure that it's not that large for the second half of the year as well. But basically, those are the big factors that go into the $50 million guide.

[Chris Merwin:]

Okay. Great. Thank you.

[Operator:]

We'll now take a question from Mark Murphy with JPMorgan.

[Mark Murphy:]

Yes, thank you very much. Mike, you mentioned that overall growth in the on-prem business continues to moderate. I'm just wondering if you'd be able to quantify the rate of moderation you expect there in the second half? And is your feeling that, that on-premise revenue stream is going to begin to decline year-over-year, or do you think it would continue to grow?

[Mike Tuchen:]

Hey, Mark. We talked about our overall net expansion rate of being at 118%, and we mentioned that the premise do piece of that actually is premise Big Data part, is actually even a slight tick above that. So, we see that as a very stable base for us right now. I think overall the premise business continues to moderate, ends up as a very low double-digit grower. That's our current outlook on it.

[Mark Murphy:]

Very low double-digit grower in the second half?

[Mike Tuchen:]

Yeah. And going forward, it seems to be stable at this point.

[Mark Murphy:]

Okay.

[Adam Meister:]

Hey, Mark it's Adam. I'll add on to that. I think we covered this in our last call. We predicted that that moderation of growth to low double-digits would be four to six quarters. And based on what we're seeing right now, it's probably on the shorter end of that range, but still in the range.

[Mark Murphy:]

Okay, great. And as a follow up, Mike architecturally, what work do you think remains to be done to continue to evolve your on-prem data integration engine, so that it's fully adapted for modern cloud environments? What has been done and what remains on the roadmap there?

[Mike Tuchen:]

Well, the just to make sure I answered the question. 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. And so we have a number of further enhancements that we're bringing, but I don't look at that as modifying our promising because we took that investment five years ago. What we're doing is, we're continuing to move forward to the best-in-class cloud engine, is the way I look at the investments we're making right now. And there is a bunch of things that we're doing to get probably the biggest one right now that we've announced is our Azure support coming up in this quarter, by the end of September. And the pay-as-you-go billing engine behind pipeline designer to give us a pure pay-as-you-go model. So, there are two very near term things, but there aren't anything about modifying our old on-premise architecture. It's about continued to further and expand our new cloud architecture.

[Mark Murphy:]

Okay. Got it. Thank you very much for taking my questions.

[Operator:]

We'll now take a question from Brent Bracelin with KeyBanc Capital Markets.

[Clarke Jeffries:]

Hi, guys. It's Clarke Jeffries on for Brent. As we think about the kind of assumptions that you've built in at the beginning of the year. And I guess revisiting and putting together some of the comments you just made. 43% of new ARR are being driven by cloud, but it seems like on-premise big data could still have the potential of being a low double-digit revenue grower. Is it safe to say that this acting assumptions for on-premise big data are relatively same as entering the year and that you've only seen now performance on the cloud business in terms of that were nearly 43% nearly 50% of new IRR from cloud in 2Q?

[Adam Meister:]

Hey, Clarke. It's Adam. I'd say the cloud performance has exceeded the expectations that underlie the guidance that we provided. And that's been counterbalanced a little bit by the slightly faster than we had anticipated deceleration of growth in Big Data. So, I think, you're spot on in terms of how you're framing it and really what's going into the guidance for the rest of the year.

[Clarke Jeffries:]

Great. And in terms of the migration efforts, in those discussions are they willing to purchase ahead of a core infrastructure decision? Or are those conversations really happening alongside another cloud platform product or other another cloud infrastructure decision that they're making? And that's it from me. Thank you.

[Mike Tuchen:]

It's a great question. Typically they happen in conjunction with them with customers -- with larger customers that happens in conjunction with a broader strategic move to the cloud and as they're starting to figure out their cloud strategy, whether it's a single primary cloud or two clouds that are at a relatively equal one, what level of multi-cloud and hybridization they want to go through. And those conversations tend to be going on in parallel. With smaller customers, what we're finding is, the cloud is such a superior value prop that even if they keep their analytical infrastructure on-premise in the near term. Just moving the Talend portion of infrastructure of the cloud gives them some immediate near-term benefits. So, we're seeing smaller customers just go ahead and migrate to the cloud in advance of their overall infrastructure migration. But with larger customers, it's part of that larger strategic conversation.

[Operator:]

We'll take our next question from Tyler Radke with Citi.

[Tyler Radke:]

Hey, thank you. Good afternoon, guys. Can you talk about -- you mentioned that the net expansion rate among your premise Big Data customers were – and it sounds like in the low-120s. Yet, you're expecting the growth to moderate a little bit faster than you had originally expected. So, I guess is that -- are you expecting kind of a less robust net expansion rate there going forward? Or is the new business falling off faster than you expected? If you could just walk through the dynamics there.

[Mike Tuchen:]

You know, both things are happening. We had very little expectations for new customer adds in the premise Big Data product and those -- that proved to be true. And I do expect our net expansion rate for the big data business to decline. Remember, it's a lagging metric, because it's a four-quarter rolling average. So, yes, I do expect that to decline over time.

[Tyler Radke:]

Okay, great. And maybe just provide an update on how the search for Chief Revenue Officer and Head of Sales? And in the meantime, how you're thinking about kind of managing the sales force between kind of the higher velocity Stitch and some of these new pay-as-you-go models versus kind of the larger deals that it sounds like you're having some success with here?

[Mike Tuchen:]

Yeah. So, we're seeing strong interest in the position. We've seen some very strong candidates. We don't have anything to announce right now. In terms of the, how we're managing the team right now and making that the transition to the kind of frictionless lands and expand from there. We have three very strong regional leaders and they're doing a great job of leaning into the cloud opportunity. And that's why we're seeing such terrific growth on the cloud side. And I'd say, we're excited in a related area with our -- introducing Lauren to the team as our Chief Marketing Officer, given her experience in the modern digital marketing and frictionless cloud world. And we think that's going to be an important part of us continuing to accelerate that motion going forward. We're seeing it work extremely well already with high velocity customer lands and we're just now starting to see the expands happen from that as well.

[Tyler Radke:]

Thank you.

[Operator:]

We'll go next to Raimo Lenschow with Barclays.

[Unidentified Analyst:]

Hey this is David on for Raimo Lenschow. I had a quick question on Stitch. I want to understand the go-to-market impact of having searching if the sales force has started leveraging Stitch to fell to cross-sell the full Talend suite, yeah?

[Mike Tuchen:]

Yes. So, that the rest of the Talend sales force is now starting to expand from customers that started their journey with Stitch. And now, we're also starting to use it proactively, as a seeding mechanism. 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.

[Unidentified Analyst:]

All right. So, fair to say that we're still early in that cross-sell opportunity then?

[Mike Tuchen:]

For sure. For sure. I think that's for us -- refining this and bringing pipeline designer into the mix is really the -- in the most important part of our evolution over the next couple of years.

[Unidentified Analyst:]

Thank you. And just the final question on the cloud deal sizes. I was actually surprised to hear that they're on par with your on-prems deal sizes. Do you see those deal sizes changing in the future? Do you see the cloud deals ending up being larger than on-prem?

[Mike Tuchen:]

Yeah. So, we've seen our cloud deal sizes improved nicely over the last year. I think about the current percentage growth in those is, but it's improved really nicely over the last year. And as we're seeing larger and larger cloud expansions, I wouldn't be surprised if that continued. We from my perspective, we have two countervailing things that are happening in the business and the question ultimately is how that blends ends up working. And we have larger and larger cloud expansions happening now with some very young cohorts that are in aggressive expansion phase. But we were also seeing high velocity lands a number of smaller higher velocity lands. And so, the question is how that math blends out is a good one. But if the question is -- are we seeing more and bigger cloud with engines, the answer is very definitively, yes.

[Unidentified Analyst:]

All right. Thank you, guys.

[Operator:]

And that concludes today’s question and answer session and concludes today’s call. Thank you for your participation. You may now disconnect.