Talend S.A.
Q1 2020 Earnings Call Transcript

Published: 7 May 2020

[Operator:]

Good day, and welcome to the Talend’s First Quarter 2020 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Lauren Sloane. Please go ahead.

[Lauren Sloane:]

Thank you. This is Lauren Sloane, Investor Relations for Talend, and I’m pleased to welcome you to Talend’s first quarter fiscal year 2020 conference call. With me on the call today is Talend’s CEO, Christal Bemont; and CFO, Adam Meister. During the course of today’s presentation, 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:]

Thank you, Lauren. Welcome to our Q1 2020 earnings call. We hope you are all safe and well. We are pleased to report a strong Q1 despite the complexities related to the COVID-19 pandemic. This is the first quarter for nearly half of Talend’s executive team, including myself. We had a great deal to accomplish in our first quarter and have made tremendous progress. As such, I want to express my gratitude to the entire Talend team for delivering a fantastic quarter. We achieved record revenue of $68 million. We ended the quarter with $246 million in total ARR, which was up 22% on a constant currency basis. Our Q1 performance was driven by the growth of our cloud solutions. Cloud ARR now stands at $61 million, up 154% on a constant currency basis. And we now have over 2,500 cloud customers. We are living in an unprecedented environment as we collectively confront the COVID-19 pandemic. And as such, Talend has taken a number of measures to ensure we navigate effectively through these times, particularly to ensure the safety of our employees and to best support our customers and partners.

[Adam Meister:]

I’ll echo Christal’s thanks to our employees for their agile response to COVID-19 and their dedication to our customers and partners. Let me walk you through our results for the quarter and provide context on the impact of the crisis and our outlook. We’re very pleased with our performance in Q1, the consistency of execution, agility of the sales team and visibility into pipeline. We’re all strong through the entire quarter. We adapted quickly to the situation and saw little impacts to our Q1 results. ARR grew to $245.9 million at the end of Q1 of 22% year-on-year on a constant currency basis. FX had a large impact on sequential net new ARR this quarter. That masks our strong performance. Cloud ARR grew to $61.1 million compared to $53.9 million at the end of Q4 and $24.4 million at the end of Q1 last year, representing 154% year-on-year constant currency growth. Our continued cloud momentum is clear in the ARR results, which included $1.3 million of migration by on-premise customers this quarter. As of March 31, we now have more than 2,500 cloud customers. We ended the quarter with 598 customers at $100,000 or more of ARR, up 20% year-on-year. These customers represent 66% of ARR as of the end of Q1. For the quarter ended March 31, our dollar-based net expansion rate was 111% in constant currency. The impact of COVID-19 will put some pressure on renewals and expansion this year that may affect this metric. Total revenue for the first quarter was $68.1 million, up 18% year-on-year and above the high end of our guidance range. Subscription revenue for the first quarter was $60.9 million, up 22% year-on-year or 24% on a constant currency basis. Professional services revenue was $7.2 million in first quarter, a decrease of 8% year-on-year. As we have stated, professional services slowed as Cloud sales had required a lower professional services attached compared to on-premise sales. We expect this trend to continue for the year. As Christal mentioned, we saw strong performance in EMEA and are pleased with the continued strength in APAC and NORAM. We believe our geographic diversification is a positive as the timing of the pandemic impact and recovery will vary across the globe. 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 between 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. For the first quarter, our total gross margin was 79% and subscription gross margin remained at 87%. We expect a modest impact to gross margins in 2020 as we continue scaling our cloud operations. Professional services gross margin was 12% this quarter. We incurred an operating loss for the quarter of $3.8 million or 6% compared to an operating loss of $9.4 million or 16% in the first quarter of 2019. This improvement was partly due to the efficiencies in the business and partly to lower expenses such as T&E due to COVID. Free cash flow for the quarter was $0.4 million compared to negative $8.4 million in the prior year period. Cash and cash equivalents ended at $177.8 million as of March 31, 2020. Let me summarize some of the puts and takes shaping our thinking before moving to outlook. We’re closely monitoring leading indicators across pipeline generation, deal cycles, renewals and receivables to inform our forecast. We did see an impact on pipeline generation in Q1 from COVID and shifted our strategy fully to digital and virtual events. The peers would be back on the right trajectory now, but from a lower base. A handful of deals were impacted at the end of March, which we offset with other short cycle transactions. We were being conservative on sales cycles and close rates this quarter, given the expected budgetary constraints. We’re watching customers in highly impacted industries closely for renewals and receivables. As mentioned earlier, we did see some pressure on renewals and down sales in Q1. And for now our forecast assume that this will continue for the second half of the year. There was a dip in March in collection efficiency and we had a few requests for flexible payment terms, but nothing particularly significant. While managing our hiring and expenses carefully as we monitor this situation. We do plan to adjust our spending in light of COVID, while maintaining our momentum on key investments. This is an important year for investment across go-to-market, product and operations, and more efficiently scale and enhance our market position. Our cash burn may increase versus initial expectations, but by no more than $5 million for the year. Our outlook for Q2 reflects these assumptions and foreign exchange rates as of April 30, 2020. For the second quarter of 2020, total revenue is expected to be in a range of $65 million to $67 million. This assumes a 1% headwind to subscription growth from FX and a little over a $1 million sequential decline and professional services revenue. Non-GAAP loss from operations is expected to be in the range of $10 million to $9 million. Non-GAAP net loss is expected to be in a range of $10.6 million to $9.6 million. Non-GAAP net loss per share is expected to be in the range of $0.34 to $0.31. This is based on a basic and diluted weighted average share count of 31.5 million shares. Q2 and Q3 will account for most of the expected cash burn for the year. Given the macro-uncertainty at this time, we are withdrawing our full year 2020 guidance. We’ll continue to provide quarterly guidance and we’ll revisit full year when the economic outlook stabilizes. I do want to focus on Cloud ARR for a moment. Our Cloud ARR has reached significant scale and explosive growth. We’re excited about its trajectory coming off strong Q1 and the opportunity from here. The current environment will impact Cloud relative to our initial target for the year. But the demand drivers and opportunities remain strong for new customers and expansions. We do expect COVID would dampen customer demand for migration projects in the near term. We’ll continue to report Cloud ARR each quarter including the impact of migrations so that you can track our progress. The current environment underscores the importance of data, speed and trust for businesses to gain insight into their operations and make decisions quickly and with confidence. We will continue to invest in product innovation to advance our technology leadership, our go-to-market strategies and continue to deliver the best customer experiences, all priorities in line with the objectives Christal discussed. We believe these actions will enable us to emerge from the crisis even stronger as a company. With that, we’ll open the call for questions. Operator?

[Operator:]

Thank you. Our first question today comes from David Griffin of William Blair.

[David Griffin:]

Good afternoon. Thank you for taking my questions and congrats on a solid performance here. So you mentioned that around 20% of the customer base is in the higher impacted industries, which is helpful. I’m wondering if you can just kind of expand on that a little bit and maybe just talk about what you’re hearing from customers in those industries as it pertains to potential down sells later in the year or maybe slip deals? Or even some signs of expected changes or requests for changes in contract terms, payment terms and things of that nature.

[Christal Bemont:]

Sure. Hi, David. Yes, let me go ahead and try to answer a few of those pieces and then I’ll give Adam a shot at some of the future things that we’re looking at. What we’re seeing right now is, there’s kind of two things that are occurring. One is the conversations we’re having with our customers today is that there’s a group of the customers that fit into that 80% that really have a reason to want to look at analyzing their business in ways that they’ve never had to look at before that’s causing them to have a conversation with us. The 20% that you’re referring to are really the industries that we’re seeing widely impacted that are really hitting the pause button would be the best way I would explain it. And either because of other priorities or because of budgetary constraints they’re taking a moment to go focus on other things. And so what we’re seeing is that we are having a much more engaged relationship on that 80% and that’s where we’re getting super prescriptive in the conversations that we’re having and the impact that we can have on those businesses. And then on the 20%, we’re seeing that they’re saying that we’re going to be talking to later on in the future year or hitting the pause button for a period of time that will – we’ll revert back to. So it’s – we’re seeing a little bit of the combination of both of those. And I think at this point, that’s where we see a very positive sign in the area of the 80% where we’re having good trajectory. And then there’s where we have a little bit of uncertainty in terms of the timing on the other 20%. And then Adam, I don’t know if you have…

[Adam Meister:]

Yes, I’ll lay around, I think the – Christal commentary on the concept of kind of a pause is important for us right now. I think a lot of companies are just feeling out the situation, trying to determine where things go from here and as a result, projects that can wait or big decisions that were teed up to be made. If you’re in one of those industries, it’s totally reasonable that you want to take a couple of weeks and see how things unfold. The important piece here is the demand environment overall and the underlying need for data integration and governance doesn’t really change. We’re just thinking about it as potentially a little bit of a shift. And so we’re going to keep watching carefully and I think towards the back half of Q2 as we start to see there’s typically a ramp and deal closers. We’ll have a better sense for how impacted those customers really are. We really – when we saw a little bit of it in Q1 at all and I think a lot of our conservatives adherence is mainly just about the level of uncertainty versus clear trends that we’re already observing our business.

[David Griffin:]

Got it. That’s helpful. And then my second question is around migration activity, some helpful disclosures there. I was hoping, maybe you could talk a little bit more about the nature of the $1.3 million of cloud migrations and kind of where pipeline development there came in relative to your expectations. And then on the customers that did migrate during the quarter, it would be great just to get some color on whether you saw any expansions in there and maybe just directionally what the overall conversion rate look like.

[Adam Meister:]

Yes. So for the pool migrations we saw $1.3 million relatively small number, but we didn’t expect it to be huge ramp early in the year anyways. So we were pretty pleased with where it landed. But as I mentioned in my prepared comments, we do think that you’ll just see a dampen impact or a dampen demand environment for those projects. They take time, they take resources and those are precious commodities for any business right now. And so again, it doesn’t come down to the demands now ultimately there. So it’s a question of when our customers can prioritize it. There was a decent amount of expansion associated with some of those deals that $1.3 million, just to reiterate, the way we describe it really reflects just the on-prem value that shifted to Cloud. So we’re not going to break out exactly how much expansion there really, but it is a trend that we’ve seen in the migrations we’ve done. And in terms of further color on what those really consist of, it’s a mix. There are some customers that are up for renewal and they see Cloud as a natural kind of evolution or upgrade path. There’s others that have a bigger cloud migration strategy shift or digital transformation that we fit as part of. It really is a mix. And I think as we mentioned in our last earnings call, we’ve got really a dedicated team that’s designed to build the pipeline here to pattern match and identify kind of what the emotions from the customer’s perspective are. So that we can best align resources. And just frankly, make sure our customers are successful as they make the Cloud move.

[David Griffin:]

Okay, great. That’s very helpful. That’s all for me. Thank you.

[Operator:]

Our next question comes from Raimo Lenschow of Barclays.

[Raimo Lenschow:]

Hey, thanks for taking my question and hope you all stay safe and the good start Christal and Adam. The – Christal first question is for you and then I have a follow-up for Adam. When you started the one big notion around the sales motion words to kind of try to engage like the more strategically just trying to try to sell them more of value, like what have you seen from your sales force and how that taking up that message and bring that message into the market. Obviously, I’m aware like we call it, it’s all a little bit different now, but like what have you seen in terms of early signs of people kind of signing up to that’s kind of new positioning?

[Christal Bemont:]

Yes, I’m happy to answer. Hi, Raimo, nice to hear from you. Well, first of all, I’m extremely pleased with the results of the quarter. I think it was executed really, really well in the face of a number of things. But to specifically answer your question, this is an evolution that’s taking place that will continue to take place over the entirety of this year. But what I’m hearing that is really matching the needs of the market right now is a conversation around not only quickly solving problems but the elevation of the conversation to other business and constituents within the organization that’s around health and quality and integrity of the data. So where we’re really seeing things land are specifically around not just how we can facilitate that the data is moving, but also how we can do that in a way that ensures that it is good quality data and the governance of that data. And so those conversations are starting to really take hold in the form of not only being able to elevate the conversation, but to also be something that I think people value more now than ever. Where before people could look at patterns of data that they could trust to engage for business and the re-instrumentation that’s required now for people to really consider, how they’re going to operate in the face of uncertainty is comes down to being able to trust the data and get access to all of it as quickly as possible. So the conversations have started to take place, I think in a way that are showing up to not only mask the current conditions, but in a way that I think will continue to increase our value with our customers and our future customers.

[Raimo Lenschow:]

Okay, perfect. Thank you. And then one for Adam. Like if you think about renewal, receivables, et cetera, like do you – like what are you seeing there in terms of like, is it more a delay or is it more like a slightly lower negotiation. So in terms of – so you have to kind of be slightly more flexible and that will impact cash a little bit. Because you know, obviously you need to work with your base. Like can you kind of double click on that a little bit?

[Adam Meister:]

Sure. Yes, happy to. So I did mention, we did feel a little bit higher down sell trend in Q1 then we had expected. And so we think that that’s largely overlapping with some of those highly impacted industries. So set of customers there that either negotiated a little bit lower on renewal or decided to forgo a handful of the licenses that they had with us. Importantly, we didn’t see really impact the customer churn. And so I think that those are all accounts that as long as we can continue to make them successful. We’ll expand over the long-term. My priority is absolutely maintaining kind of ARR base as we think about discussion renewals with customers. And so we’ve got some flexibility with our balance sheet to manage flexible billing terms or payment schedules. And to the extent we can help customers that are feeling a little bit more the pension this environment, we’re able to do that. And I think that will accrue to the benefit of our relationship. There’s a good example of a company in the travel space that came to us, requested flexible billings, given their own cash flow crunch and were able to negotiate a two-year transaction, but quarterly payments. That’s a perfect example of something that I think is a win-win where we’re helping them get through this tough period. But we’re also able to lock in a long-term relation.

[Raimo Lenschow:]

Okay. Perfect. Thank you. Well done.

[Operator:]

Our next question comes from Jack Andrews of Needham.

[Jack Andrews:]

Well, good afternoon. Thanks for taking my question and congratulations on the results. Christal, I was wondering if you could talk a little bit more about the execution around elevating your strategic message. You’ve got – sounds to me like you’ve got a couple of different variables going on. One is just again, talking about the strategic value of Talend and the other variable you addressed was sort of pivoting more towards digital channels. So how do we think about the net effect of these two variables on your business? Is there any – is it too early? Are there any changes that you see in terms of sales cycles, deal sizes living through the pipeline any commentary around that?

[Christal Bemont:]

Yes, happy to. I think there the first thing is that looking at holding in Q1, the key metrics that I mentioned steady I think was one of the first signs that it’s starting to take hold relative to what we would have expected to see some impact on those under other conditions. As well as when you start to look across the globe and start to see consistency and the performance and the way that we’re executing. The ability to balance the conditions that we’ve faced with bringing in new hygiene and new rigor as well as elevating the message that that’s a lot to get your arms around quite frankly. And so the ability to move through the quarter in the way that we did looks to be a really good indication that the beginning of the process is really taking hold. Again, seeing very early signs in Q2 as something similar to seeing us off to a great start. So I think the message resonates because it has an opportunity to not only solve the current problem that’s in front of people today around the necessity of data, but the data that they can trust. And it’ll continue as when you see the winter release that we were referencing. The ability to really look at those trust scores and to be able to take something tangible to people that they have the ability who have confidence in decisions that they’re making based on our ability to give them kind of a health of their data, if you will. When you look at how we operate, and look at the other piece on creating a digital motion, that’s really important to not only our business today, but how we’ll continue to evolve our business in really making sure that we can find ways of bringing customers through and supporting them. And quite frankly, expanding our relationship with them through the entire customer life cycle in a very digital way that allows them to self serve where needed and also allows us to provide things in a very timely manner in a way that shows up better for our customers. And so the productivity, the efficiencies that we can gain within our business has an opportunity for us to not only serve our customers better, but also run this business more effectively. So I see the two as complimentary one is to how we run the business and the other is the message that we have and the value we bring. And both are in the early stages of evolving. But I’m very pleased with the way that it’s showing up, especially in light of the condition.

[Jack Andrews:]

That’s great. Really appreciate the detail around that. And then just as a follow-up question. Adam, I was wondering if you could maybe unpack the 2Q outlook a bit by region if you could. Specifically wondering about APAC that’s historically been your fastest growing region, that was perhaps first impacted by the COVID-19 situation. So I was wondering if there’s any rebound you might be seeing there and now that things are opening up or any sort of lessons learned geographically that you could see on your business.

[Adam Meister:]

Yes, good question. So I’ll reiterate one thing that Christal was walking through. The execution was really strong across the whole globe this last quarter. And we are really pleased to see that consistency. And so I think that that’s a really good setup as we go into Q2. APAC actually did very well in Q1 and was our strongest growth region again and starting to be a pretty large base. We have high expectations in Q2 that they maintain their high growth position. I wouldn’t say that it’s particularly tied to an expectation that they’re further through recovery at this point versus other regions. I think it’s still a little too soon to tell if the economic environment there is really opening back up. And not to forgot, Singapore and some other countries that have seen a little bit of a reversion back from what they thought was a good rebound. So we’re going to watch it carefully. But I’d say the underlying principle from a geo perspective, from a guide is really the consistency we saw in Q1, we’re able to maintain into Q2.

[Jack Andrews:]

Great. Thanks for the color.

[Operator:]

Ladies and gentlemen, that concludes today’s question-and-answer session and also it ends Talend’s first quarter 2020 earnings call. Thank you for your participation. You may now disconnect.