Talend S.A.
Q4 2019 Earnings Call Transcript

Published: 14 Feb 2020

[Operator:]

Good day and welcome to the Talend Fourth Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, it is my pleasure to turn the conference over to Lisa Laukkanen. Please go ahead ma'am.

[Lisa Laukkanen:]

Thank you. This is Lisa Laukkanen, Investor Relations for Talend, and I'm pleased to welcome you to Talend's fourth quarter and fiscal year 2019 conference call. With me on the call today are Talend's CEO Christal Bemont 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.

[Christal Bemont:]

Thanks, Lisa. Welcome everyone to our call today and thank you for joining us. I'm excited to be here today to share with you Talend's fourth quarter and fiscal year 2019 results and offer some initial observations based on my first five weeks with Talend. It's been an incredible and busy five weeks. I've been focused on diving deeply into the business and getting to know the employees who have all contributed to growing Talend into the company it is today. We're spending time with the team to understand the priorities and the opportunities and to drive success into the business. Our employees are at the heart of our business and central to our success, and I've been impressed by the team and their conviction for Talend. In my prior role as Chief Revenue Officer at SAP Concur, I was responsible for leading worldwide sales, and I had the privilege of helping define, expand and execute our routes to market in a cloud-focused environment. In doing so, I learned how critical it is for a company to continually evolve as the market shifts, and specifically to cloud, how critical it is to embrace a discipline of scale and to provide sustainable growth. As Concur grew to be a multi-billion dollar company, it was on the back of cloud applications and similarly Talend has the opportunity through cloud data integration. Also the role of data became imperative to help companies build their systems and differentiate their products. That's why I'm excited about the opportunity to be here at Talent. And in front of us lies an amazing opportunity as Talend moves to the cloud, not only providing growth for our business, but it also allows us to meet our clients on their journey to the cloud.

[Adam Meister:]

Thank you, Christal. Today, I'll review our financial results for the fourth quarter and fiscal year 2019, as well as provide our outlook for the first quarter and fiscal year 2020. Annual recurring revenue or ARR grew to $243.1 million as of December 31, 2019, up 23% year-over-year on an actual and constant currency basis. We define ARR as the annualized value of all active contracts at the end of the period. I'll also remind everyone that Q4 was the first quarter we're lapping the inclusion of Stitch for year-over-year comparisons. We are also excited to provide Cloud ARR today, which represents all active cloud-based subscription contracts. We ended the year with $53.9 million of Cloud ARR. This compares to $41.1 million as of the end of Q3 2019 and $19.3 million at the end of 2018, representing 179% year-over-year growth. We've included a five-quarter look back of Cloud ARR in the presentation posted on the Investor Relations portion of our website. Cloud represented 50% of new ARR for the fourth quarter, achieving the goal we set in November of 2018. This percent mix has been a key measure of our sales and marketing rotation to the cloud during this year. Our measure of success for 2020 will be overall Cloud ARR. New cloud customers, continued expansion within existing cloud customers and the cross-sell to existing premise customers will each be meaningful contributors to growth. We're pleased with the retention and continued expansion of existing customers. For the quarter ending December 31, 2019, our dollar-based net expansion rate was 113% in constant currency. As discussed throughout last year, we expected this to decrease 1 percentage points to 2 percentage points each quarter during 2019 as it fully reflected the transition to ASC 606. We now have more than 4,250 total customers. Over 2,250 of which are in the cloud. We ended the quarter with 593 customers at $100,000 or more of ARR compared to 540 customers in Q3 of 2019. Enterprise customers represented 66% annualized recurring revenue in Q4 versus 65% in Q3.

[Operator:]

Thank you. We'll take our first question from Raimo Lenschow with Barclays.

[Raimo Lenschow:]

Hey, thanks for taking my question. Let's start -- could I -- I had two questions. So first on the revenue guidance, so if I do the math like in professional services, you gave us a number, but it still seems to imply that on-premises needs to be somewhat down this year. Can you just maybe talk us through like on-premise move versus cloud move and how that will play out? And then on the investments -- the second question on the investments like Talend has the history of kind of moving toward profitability, etc., and now we're taking the step down. Can you talk us a little bit through what's kind of the payback period? How do we have to think about? Is this like a one-off thing, and that sets you up for like a quick snap back or is this like a longer-term thing? Just help us understand that what's the ROI. Thank you.

[Adam Meister:]

Sure. Hey Raimo, it's Adam here. So I'll take both of those. So on the guidance, look, I think you can see very clearly from the cloud numbers that we gave for last year and what we're guiding to for this year that cloud business really is the engine of growth for us going forward. We see the premise side of the business as a really strong base that will ultimately fuel the cloud through migrations, and that's consistent with roughly $50 million that we think will contribute to the cloud for this year. Growth has come down in premise side over the last year and is in kind of the mid-single digits at this stage. And that's something that we solve, play out over 2019. And we want to be prudent for where that grows in 2020 just given the market conditions and how fast we see the industry moving. The base has been very stable from a retention perspective, which will be very thoughtful given how fast market is shifting. One other thing I would just note here, we've got a lot of questions around it. We want to address it today. Of that premise business, we're not really going to breakout the two pieces, but we have said in the past that the big data retention rate is slightly above the rest of premise and basically that was going to converge with the rest of the premise business. So big data was about a third of our ARR, and that retention rate is very consistent with what it's been for the overall premise side. And so that hopefully gives you a little bit of color for how we're thinking about the guidance and just the composition of between premise and cloud. In terms of the cash flow guide, yes, a lot of this, we do think about as important investments to make this year that will allow us to build a much more scalable foundation for the business going forward. And so, Chris will walk through a couple of those and so did I. It's about making sure we're making the right product investments and bringing new cloud products to market, and that would obviously continue in future years as well. But there is I think a decent amount of that that we're pushing for 2020. It's about continuing to invest in the sales and marketing engine that we already have and continue to refine that and then I think a component that is more one-time in nature and really focus for this year is really around the operational and some of the systems investments that we want to be able to make to help us be able to frankly increase the velocity of the business over time.

[Raimo Lenschow:]

Okay, makes sense. Thank you.

[Operator:]

Thank you. Our next question comes from David Griffin with William Blair and Company.

[David Griffin:]

Hey guys, thanks for taking the questions. Two if I could. First one for Adam. And I guess, first off, thanks for disclosing the new Cloud ARR metric. That's really helpful. And I think we have a great go-forward disclosure framework here. As we think about modeling Cloud ARR, I think it'd be helpful if you could kind of double-click on the underlying drivers of new ARR bookings by maybe giving us a sense of what the mix of new versus expansion and upsell has looked like maybe over the past few quarters here and what type of net expansion rate has been kind of embedded into the guide.

[Adam Meister:]

Sure. So cloud has a couple of drivers for growth; obviously continuing to win new business, expansion within the cloud base, cross-sell of cloud into the premise base and then actually just migrating premise customers entirely. We haven't broken out and we won't break out any specific net expansion rates for cloud. We have said in the past that they are much higher than the overall average. That continues to be true. It is off of a smaller cohort. But that will be an important part and driver of that new cloud ARR growth. Last year, the vast majority of the Cloud ARR that we added was really from new customers, and we see that shifting to be a much more balanced mix between expansions and new for this year.

[David Griffin:]

Got it. That's helpful. And then, last quarter you kind of noted the potential for some customers to temporarily pause or slowdown expansion activity as they kind of took some time to kick the tires on the new cloud product and evaluate their go-forward strategies, given the aggressive pivot here to SaaS. Can you just give us a little bit of an update on the extent to which you saw that play out during the quarter? What you're hearing from customers and kind of your expectations around maybe how much of a headwind this could be in 2020?

[Adam Meister:]

Yeah, I think we saw that largely resolve itself in Q4 as indicated by the strong add in terms of enterprise customers, and so deal cycles for cloud aren’t materially different than deal cycles overall for us and we think that frankly as we started to have conversations with customers about what a migration looks like, it's an opportunity to have a much more strategic conversation with them about their data journey and every customer that chooses to either buy us in the cloud or shift us in the cloud, we really look at that as a validation of our position going forward and really vote of confidence in what we're building here.

[David Griffin:]

Got it. Thanks for taking my questions.

[Operator:]

Thank you. Our next question comes from Tyler Radke with Citi.

[Tyler Radke:]

Hey, thank you. Good afternoon. So Adam, I was wondering if you could talk about the guide for 2020, specifically around Cloud ARR and revenue, a 12% growth. I think a lot of investors are trying to understand the kind of the long term kind of framework of reaching $1 billion with the deceleration this year. Maybe just help us understand kind of what are the moves that you're making this year that's causing that sharp deceleration in overall growth and then even if you look at the Cloud ARR guide with the conversions, it implies that kind of the net new and overall growth in Cloud ARR is down meaningfully from where it was in 2018 -- or sorry in 2019. So maybe just help us understand how much is kind of conservatism versus specific actions that you're taking. Thank you.

[Adam Meister:]

Yeah, of course. So you can see from the ARR guidance that we're giving that it results in about $46 million of new cloud; $15 million of that, you think about as migrations. If that starts to help you break down exactly how the cloud guidance is built up, that's still we think a really significant add on the base that we have, and look if there is upside there, we frankly could see upside across any fronts, whether it's new customers, faster migrations or just frankly upsell when customers migrate. But given the kind of capacity we have in the system right now, what's in the pipeline and what we saw in our ability to add to cloud last year, we wanted to be fairly prudent in our expectations. And so the other implications you can see through, and I think I already mentioned in the first question is really this guidance would assume that basically all of the growth in the businesses in cloud and that's frankly a reflection of just the strategic push we're making and the orientation that Christal and the team are bringing to the go-to-market motions.

[Christal Bemont:]

Yeah, maybe I can jump in here as well Tyler and just draft off of what Adam was just talking about, you mentioned coupling with how that gets us to $1 billion and I think it's helpful just to provide some perspectives that while Adam is absolutely right, we're being prudent about that journey. It really comes down to, in my experience and things that I've done in my prior life as CRO of Concur, is this is about investing in the right things right now because we see such a massive opportunity in front of us. And with the cutting-edge tech that we have in the -- you see that we're on fire in cloud with our growth. And now, we want to make sure that we're taking every opportunity to put the right processes and systems in place to make sure that we can scale our business and we can have long-term profitable and sustainable growth and really get prescriptive with our motions in the field and make sure that we're really lined up; in that we have -- we're directed at the right market opportunity and that we're really taking advantage of the resources we have to make sure that they're as productive as possible. And so, I believe, and we believe that this is an opportunity to really build a solid foundation to run fast at $1 billion, but we have some work to do.

[Tyler Radke:]

Great. And if I could ask a follow-up to that Christal. So I think one of the interesting things about Talend's pricing model versus the competitors, it's generally been kind of seat-based based on a data engineer or an integration expert versus something that's sold on a data throughput basis. And I'm just curious as you've thought about your goals in reaching that $1 billion and expanding the share of wallet within some of your large enterprise customers, do you find any -- do you foresee the need to potentially make any changes to pricing or is it a matter of just getting more kind of integration experts on board or how do you kind of foresee that expansion within the large enterprise accounts that that you already have and maybe arguably have already been selling to for close to five years to 10 years? Just help us understand how you see the path forward to expanding those relationships. Thank you.

[Christal Bemont:]

Tyler, it's a -- the path forward could contain a number of different lanes and avenues and we're flooring all of those. If you just simply look at even the Top 2000 or you look at the -- even Top 1000 customers or companies in the industries, even if we just focus simply on the Top 1000 enterprises and we just expand our footprint in our customer base now, that's an exceptional business and that would be a massive opportunity for us. And so looking at that in a way that, as Adam pointed out that looking at helping as they not only move to the cloud, but then also expanding our footprint in our existing customer base as we've done with AstraZeneca and a number of other customers to solve multiple problems. Just that alone has a big opportunity for us to hit $1 billion, but there is multiple opportunities all the way across our business, including from the bottom-up with Stitch. And so we'll continue to assess those opportunities and our valuation of how fast we can get there, we will continue as well. But there is a number of different ways that we can run after that.

[Operator:]

Thank you. And we'll take our next question from Mark Murphy with JPMorgan.

[Adam Bergere:]

Hi this is Adam Bergere on for Mark Murphy. With the increased focus on cloud bookings, trying to understand that a little bit better, what percent of your cloud bookings would you say related to projects with major SaaS providers, Salesforce, Workday, ServiceNow versus what percent of them relate to more modern data warehouse now like -- providers like Snowflake, Bakery, Databricks?

[Adam Meister:]

Hey, it's Adam. I'll take that. The vast majority of our cloud business is going to be connected to more of the data warehouse of the platform side. We see that that is really where there is a logical and symbiotic relationship for for sell together. Those projects oftentimes are kind of tie it up with the broader SaaS application ecosystem. And so our connectivity is critical as a big differentiator for us. And so it's not really one or the either but typically in a deal process, we're going to be mostly tied to someone deciding to shift their warehousing environment.

[Adam Bergere:]

Okay, great. That's interesting. And then a quick follow-up. You guys kind of called out strength in the APAC region and named an impressive win with Nissan. So like what's the dynamic driving that strength in that region?

[Adam Meister:]

Yeah. So APAC has been a really fast-growing market for us. The Nissan example that Christal walked through is I think really consistent with what we're seeing across all regions and all industries where data becomes a critical component of the business model and strategy for these businesses, and so their ability to connect what they have in legacy systems, core operational systems as well as things like SaaS applications and cloud environments to develop a cohesive view; in this case around a vehicle 360 project is, that's a very similar dynamic that drives a lot of our deals and a lot of our value in both the analytic side as well as operational use cases.

[Adam Bergere:]

Great. Thank you.

[Operator:]

Thank you. We'll take our next question from Jack Andrews with Needham.

[Jack Andrews:]

Good afternoon. Thanks for taking my question. I want to start off with a question for Christal if I could. I appreciate your comments on the similarities between your previous experience at Concur as it relates to Talend in terms of cloud and data. I was wondering if you could drill down a bit more and talk about specifically the go-to-market playbook. I mean, what do you think worked well at Concur that could be specifically applied to Talend, and maybe, how is Talend different from Concur as well?

[Christal Bemont:]

Hi, Jack. I'd be happy to. So when I think about the similarities, it comes down to a couple of things. Being extremely prescriptive, I see a huge opportunity here at Talend, where we have an opportunity to look at swim lanes around how we go to market, what we choose to focus our energy on, how we line up to look at market opportunity at both the top end of the market, as I was mentioning before with our enterprise customers and addressable market as well as down-market with some of our frictionless business. And so what I've seen really work well is just being very decisive in what you're going to focus on, making sure that every single one of your resources are lined up to be as productive as possible and making sure that the right systems and processes are behind them, so that you can really put the volume and the velocity through to really turn it into a massive growth engine. And I the similarities here, and the opportunities that are sitting in front of us.

[Jack Andrews:]

Great. Thanks for that. And then, if I could just follow up on the migration opportunity for you. Is this something that you are going to be actively encouraging and incenting your sales force to work on, or do you think that this is something that's going to just happen naturally, and that's how you're arriving at this projected $15 million on that front for the current year?

[Christal Bemont:]

Taking a little bit of what I just said a moment ago, we're being prescriptive about everything and very, very intentional. So we have a dedicated group of individuals, who are working alongside our existing customers and what we're doing is, we're really helping them on their cloud journey. This is more than just contemplating Talend. This is really looking at all the things that look at new stack technologies and so forth, and we believe that it's being a good partner and a good evolution of their journey to work alongside them. I think over the next couple of years, two years to three years, we really see that start to uptick even more, but we will meet our customers where they're at, and make sure that we're working alongside them, but we're going to be very intentional and prescriptive about doing that.

[Jack Andrews:]

Got it. Thank you for taking my questions.

[Christal Bemont:]

You bet.

[Operator:]

Thank you, and we have no further questions in the queue at this time. Ladies and gentlemen this concludes today's conference. We thank you for your attendance and participation and you may now disconnect.