Talend S.A.
Q4 2020 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

Good day, and welcome to the Talend Fourth Quarter FY 2020 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Damaari Drumright. Please go ahead, sir.

[Damaari Drumright:]

Thank you. This is Damaari Drumright, Vice President of Treasury and Investor Relations for Talend, and I am pleased to welcome you to Talend's Fourth Quarter Fiscal Year 2020 Conference Call. With me on the call today are 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 and uncertainties, along with 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, Damaari. Welcome to our Q4 and fiscal year 2020 earnings call. We hope you're all safe and well, and we appreciate you joining today's call. Before diving into a few highlights, I'd like to take a moment to thank the Talend team for their perseverance, dedication to our business and relentless commitment to enabling and supporting our customers. 2020 presented a series of unprecedented events that created a level of uncertainty like we've never experienced before. However, the collective effort of our employees and partners was unwavering. They put our customers first and help ensure that we achieved every one of the goals we set out as a business at the beginning of the year. The work, time, effort and sacrifices of our employees and partners are deeply appreciated.

[Adam Meister:]

Thanks, Christal, and good afternoon, everyone. I'd like to echo Christal's thanks to our employees for their contribution during the fiscal year. Our strong end to 2020 wouldn't have been possible without their hard work and dedication. There are 4 themes that I want to emphasize today as I discuss our Q4 and 2020 results and share our outlook for Q1 and 2021. First, we delivered consistent execution throughout 2020, exceeding our guidance each quarter and ending the year above the goals we set pre-COVID. Second, our efforts over 2020 are now beginning to translate into operating performance. Third, this foundation will drive growth acceleration and efficiency gains in 2021; and fourth, we will continue to invest and build for long-term growth and scale. We ended 2020 with $108.5 million of Cloud ARR, exceeding our goal of $100 million. Cloud ARR grew 101% year-over-year or 95% on a constant currency basis. Cloud is now nearly 40% of our business. We migrated $5.3 million of ARR to Cloud in Q4, bringing the total to $14.6 million for the year. This clearly shows that the majority of our growth in cloud came from new logos and expansions. We added over 2,000 new cloud customers in 2020 and now have over 4,250 cloud customers in total. Total ARR grew to $288.7 million as of December 31, 2020, up 19% year-over-year or 15% on a constant currency basis. Total revenue for the fourth quarter was $78.9 million, up 17% year-over-year. Subscription revenue for the fourth quarter was $71.8 million, up 20% year-over-year or 17% on a constant currency basis. Total revenue for the full year was $287.5 million, up 16% year-over-year. Subscription revenue for the year was $259.5 million, up 20% year-over-year. We continue to win larger scale deals with enterprise customers, particularly with cloud. We ended the quarter with 678 customers at $100,000 or more of ARR, up from 642 at the end of Q3. These customers represent 67% of our total ARR. Our dollar-based net expansion rate for the period was 107% in constant currency compared to 107% last quarter. This metric is revenue based. And as a result, does have some structural headwind as we locate our business towards the cloud due to the fully ratable recognition of those revenues. We are pleased to see net expansion stabilize in Q4. Cloud net expansion remains well above the overall average. Professional Services revenue was $7.2 million for Q4 and $28 million for the full year. Professional services revenue declined 9% year-over-year, consistent with our continued shift towards cloud, which generally requires less in Professional services. Before moving to profit and loss items, I'd like to point out that unless otherwise specified, all expense and profitability metrics discussed today are on a non-GAAP basis. 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 fourth quarter, total gross margin was 81%, subscription gross margin for Q4 was 87%. Subscription gross margin remained at 87% for the full year, in line with 2019. We expect a modest impact to subscription gross margin as our cloud business grows. Professional services gross margin was 24% this quarter, benefiting from better utilization in a remote work environment. Q4 is typically the highest margin quarter for Professional Services. We'll start discussing trends in sales efficiency each quarter. Remind our sales efficiency through our customer acquisition costs, we define customer acquisition costs as our non-GAAP sales and marketing expenses divided by the change in total R for the period, effectively the amount required to generate $1 of net new business. Given typical seasonality, we review this metric on a trailing 4-quarter basis to monitor overall trends. In FY 2020, CAC ended at 3.2, down from a peak of 3.5 as of Q2. We are particularly pleased with the trend at the end of 2020. During our Investor Day conference in the fall, we described 2020 as being a year of investment for Talend. One significant investment was developing a go-to-market strategy that better aligns our sales motions with customer needs. As Christal mentioned, we've rolled out a 4-segment strategy; small business, midsized business, enterprise and strategic enterprise accounts. We have further focused much of the team by hunter and farmer rules. These changes went into effect this January. This structure will drive greater effectiveness in each sales motion, enabling us to maintain strong new logo growth, sell new Cloud ARR into our existing customer base, and improve net expansion over time. We changed our cloud strategy for existing premise customers and will prioritize cross-selling cloud rather than specifically focusing on migrations. Seeding cloud into new initiatives and scenarios will create a more efficient pull of migrations over time. As a result, we are not depending on this large migration impact on Cloud ARR in 2021 as our sellers prioritize this cross-sell strategy. As we continue to progress towards profitability, we incurred an operating loss for the quarter of $1.4 million or 2% of revenue. For fiscal year 2020, we incurred an operating loss of $16.3 million or 6% compared to an operating loss of $19.4 million or 8% in 2019. We outperformed our guidance due to strong sales execution and careful management expenses throughout the end of the year. Free cash flow was negative $4.1 million for Q4 and negative $32.7 million for the full year, in line with our original expectations. Cash and cash equivalents ended at $163 million as of December 31, up quarter-over-quarter, benefiting from normal course, options exercised and ESPP activity as well as foreign currency benefit. Shifting to our outlook. We are pleased with our performance versus guidance and with our execution throughout 2020. With the leadership team now fully ramped and greater stability as the impact of COVID subsides, we expect to operate with tighter precision in 2021. Consistent with last year, we will be providing guidance on an annual basis for Cloud ARR and free cash flow and will provide both quarterly and annual guidance on total revenue and non-GAAP loss from operations. We will not update our Cloud ARR target each quarter. Our guidance assumes current business conditions and foreign exchange rates as of January 31, 2021. We expect to end 2021 with $160 million of Cloud ARR, representing 47% year-over-year growth, including $5 million to $10 million of migrations. We expect this continued cloud momentum to drive an acceleration of our total ARR growth in the second half of this year as cloud approaches half of ARR exiting 2021. Total ARR growth acceleration will be gradual as we further rotate the business to cloud, driven by an improvement in sales efficiency in the second half of 2021, as measured by the CAC metric I discussed earlier. We expect free cash flow to be between negative $15 million and $20 million for the full year. We remain committed to reaching cash flow breakeven on a sustained basis between the end of 2021 and the first half of 2022. Before turning to our revenue guidance, please note, Professional Services will remain a drag on overall revenue growth in 2021. Acceleration of subscription revenue growth will lag acceleration of total ARR growth. Q4 '20 subscription revenue included some multiyear premise benefit, which we don't expect to reoccur in Q1 of '21. Given currency business over the last year, FX will provide a revenue growth tailwind of approximately 5% in Q1 and 3% for the full year based on rates today. And lastly, Cloud ARR is the single best measure of our growth and progress. For the first quarter of 2021, total revenue is expected to be in the range of $77.5 million to $78.5 million. Non-GAAP loss from operations is expected to be in the range of $8 million to $7 million. For fiscal year 2021, total revenue is expected to be in the range of $327 million to $329 million. Non-GAAP loss from operations is expected to be in the range of $26 million to $24 million. Our Q1 and 2021 guidance for net income and EPS is included in our press release and investor presentation issued today and available on our website. We're excited to launch the 2021 building on last year's momentum. It's energized to see the investments we have put in throughout the year begin to take shape in 2021. We are closely watching the effect of go-to-market changes we implemented at the beginning of this year, and there's still much work and opportunity ahead of us. We will continue to transform the business for scale and sustainable growth to deliver on the expectations of our customers, employees, partners and our shareholders. With that, we will open the call to questions. Operator?

[Operator:]

. We'll take our first question from Jack Andrews with Needham.

[Jon Andrews:]

I guess, a question for Christal. I wanted to better understand. You talked about being -- your goal is -- you're moving towards a strategic solutions provider for the C-suite. So I was wondering if you could maybe just help frame us a bit more. How are you getting -- how many C-level type conversations are you having? How are you able to get in front of them? Is this -- are you able to leverage partners for these types of conversations? Or are your direct sales efforts paying off? Just any sort of context about how you're building that funnel over time?

[Christal Bemont:]

Sure, Jack. We've got a series of things that as we evolve the conversation, I think, that are going on that are important to point out. The first one is, outside of what we're doing, we see the market itself evolving in terms of the leads and the utilization and the participation of users across the entire business, showing up in things like citizens, integrators and analysts and data scientists. So we see the market itself evolving beyond the conversations which are really important that we have today with IT and moving across the entire business. In addition to that, we've talked about data health and the Trust Score, in particular. And that is an area where we really see that rolling up to the entire business and something that an entire organization has importance around in terms of how they measure the overall health of their business or line of business and then making sure that they have visibility to it. Those conversations are taking place in both of those tranches to make sure that we can support the way that the business is evolving and the needs of the users at the business level as well as at the C-suite level. So these are things that we are continuing to evolve, and we think that they're going to take hold and be even more strategic over time.

[Jon Andrews:]

Great. And just as a follow-up question, I want to ask about Snowflake. I guess, congratulations on this 1,000 customer milestone. I know you've been working with Snowflake for a long time. I remember joint press releases back 2, 3 years ago between Talend and Snowflake. So could you just help us understand what specifically has enabled you to reach this milestone? And how can you continue to gain share within the broader Snowflake customer base?

[Christal Bemont:]

Yes. We're really proud of our relationship with Snowflake and as we are with our entire ecosystem of partners. It's important as we look at how we provide strategic value in a combined way to our customers. I think we're starting to really hit our stride, in particular, with the way that we not only show up for Snowflake, in particular, to provide a place in moving the customers to the cloud, but just taking it one step further and looking at what we have going on in terms of the Talend Trust Score, and making that available. I think Snowflake when they look at what they're trying to do to make sure that there's good quality data that customers can use in a meaningful way, their strategy is aligned with ours very much in that same pattern. So we look at it as an opportunity to really start to align to provide more strategic value in a collaborative way. So we're looking forward to what we can do with them and our joint combination of value.

[Operator:]

Next we'll move to Chad Bennett with Craig-Hallum.

[Chad Bennett:]

A phenomenal job on the quarter and year-end. So just a few questions for me. So just maybe first for Christal. Just on the go-to-market changes that I think you mentioned were instituted earlier this year, the hunter and farmer model. So I guess, do you feel like just from a crosssell, upsell opportunity into the base that there was just opportunity there that -- I guess assume naturally you -- easy for me to say you'd be able to cross-sell and upsell into your base, on-prem base with your cloud products. What do you feel like there was -- you were kind of missing opportunities there in the past couple of years as the company has transitioned? And do you think this will actually -- I assume you do because you're doing it, but accelerate that net retention number as soon as the back half of the year?

[Christal Bemont:]

Well, it's really good question. And I'd say it's twofold. First of all, when we think about what we're trying to do with the business, it's about driving efficiencies. So you think about lining up resources and how you can really drive for certain profiles of individuals that are maybe more hunter or farmer as well as creating a repetitive and predictable kind of turns that allow us to really get a, what I call a flywheel going. So those are -- that's certainly one part of the strategy is making sure that we can also bring this to our reps in terms of the fact that they can benefit from waking up every day and have a repeatable process. And so we think that it's good for our customers in terms of being able to have unique conversations with them that are in our installed base as well as bringing net new logos in the door. And it's good for our business from an efficiency standpoint. And it allows us to really be, I believe, more effective in terms of tailoring that message and bringing it across. So it really is about just honing skills and really driving operational efficiencies and really increasing the effectiveness overall in terms of those conversations we're having.

[Chad Bennett:]

Got it. Makes sense. And then maybe one quick follow-up clarification for Adam. Just, Adam, you reiterated for reacceleration, I believe, in overall ARR in the second half of the year, basically what you guys said at the Analyst Day a few months back. But if I -- just want to make sure kind of we're understanding this correctly. I mean you just put up ARR growth of 19%. And I believe a few months back, at least we were conceptually talking about mid-teens ARR -- overall ARR growth accelerating up to 20% in the second half of the year. Now that we're in the upper teens, you guys have exceeded your expectations in ARR growth, does that imply overall ARR growth kind of low 20s in the second -- not to get too cute on this, but also it's kind of the same question on subscription. It's great to see the overall rev guide increase from where you had it. But you just put up a 20%-plus subscription quarter on the high end of the guide implies a mid-teens subscription growth for this year. Any more kind of color there?

[Adam Meister:]

Sure. Happy to. So first off, Chad, welcome to the call, first and foremost. So we are really pleased with where Q4 landed and Q3 as well. The consistency in growth between Q3 and Q4, I think, really shows that the glide path from here for '21 is one that's pretty clear for us and for investors, we hope. We do look at the business on both on an actual growth basis, but on a constant currency basis as well. And so as I think about just how much FX rate moves over the course of 2020, we want to make sure investors kind of look through that and can kind of understand irrespective of where currency movements are, what the underlying trajectory looks like. And so exiting this year at 19% total growth, 15% on a constant currency basis, think about that as a baseline really for how we think about acceleration, and we'll continue to report on a constant currency basis throughout the year. On the second part of your question, just around subscription revenue. It's obviously going to lag a little bit, right? Subscription revenue growth trend will follow ARR by a quarter or 2. And so really look for that inflection in total ARR, innovate a little bit for when that's going to show up in subscription.

[Operator:]

Next, we will take Tyler Radke with Citi.

[Tyler Radke:]

Christal, I wanted to ask you about the new logos that we saw in the quarter. Look like you added over 1,000 cloud customers and perhaps total customers. I guess, first, what would you kind of attribute the acceleration in new logos, too, in terms of go-to-market motion? And maybe help us -- give us a sense for, is this mainly mid-market customers that you're seeing? And how do you kind of go after those customers and expand them in 2021?

[Christal Bemont:]

Thanks. It's good to hear from you, Tyler. We are -- I think this is kind of pointing to where we see opportunity in the future with this year and how we set things up from a go-to-market standpoint. Not to put aside, but I'll just say, Q4 is where you'll start to see more of a pop for a bigger population of new logos. But I believe that what we'll really see going forward is when you start to look at, certainly, more units will come from small business and mid-market, some of that comes from our kind of digital or product led. And some of it will come from just the execution on how we start to focus and really start to lean into those lanes. But I think what you'll start to see is that those will start to pay off, I would say probably more over the back half of the year in '21 as we really get those motions honed. Looking back at Q4, we're really proud, like Adam said, of where we landed. And we think that's a really big part of how we're starting to structure the -- increasing the footprint across our customer base, but then grabbing those net new logos that will come from all the way across small business to enterprise.

[Tyler Radke:]

Great. And Adam, a follow-up for you. Just on the net expansion rate, it looked like it stabilized here this quarter being consistent with last quarter. Do you think we've kind of reached the low point there? I know you didn't use the word downsells this quarter, which is nice to hear. So just curious on your thoughts on how we should be thinking about that metric going forward?

[Adam Meister:]

Yes. Thanks for the question, Tyler. Good to hear from you. Yes, we were really happy to see that stabilize in Q4, particularly given there is just an accounting kind of mechanical headwind that we've talked about over the last couple of quarters that pressures that. So I think you can look at that as early an indication that momentum with existing customers is strong. The expansion within our cloud customers as we've continued to say, is much better than the overall. That number is really starting to get -- to be a bigger level and starting to contribute to the overall total. I'm not going to call bottom yet, right? We still have to get through some of the sales changes that we're talking through. We try to see those really come into effect strongly. The clouds are parting clearly a little bit on COVID and kind of the overhang on IT spending, but I think we want to give that a quarter or 2. But what I can say is I feel like the trend you've seen over the last couple of quarters, really the slope of that has changed. And I think we're going to operate within 1 point or 2 where we're at right now over the next couple of quarters.

[Operator:]

Next, we'll move to Pree Gadey with Barclays.

[Preetam Gadey:]

I wanted to ask a little bit more about the Snowflake metrics that you guys provided. You said business tripled in fiscal '20. Is there any metrics you can share with us in terms of the amount of revenue or ARR that kind of Snowflake or you look something like the conversion of the three products that you have to a product?

[Adam Meister:]

Pree, good to hear from me. I'll take that one. We're not going to get into any specifics on kind of revenue business breakdown with any particular partner. We have seen Snowflake have a lot of traction in the market. Obviously, that tripling is going to be a pretty significant push in the overall Cloud ARR. But look, there's a lot of success with AWS and Azure continue to have. And we think that our partnerships with all them is very important as we keep pushing forward on this overall data shift to the cloud. So we'll keep working hand-in-glove with those guys on opportunities. And as Christal mentioned, we really think that there's this very interesting backdrop where the customer demand around expectations on cloud warehousing really is going to a wall-to-wall conversation very quickly. And as Snowflake and AWS and all these payers start to encounter that conversation, there is a more urgent need for the integration and governance solution in conjunction. And that, I think, is very exciting for us, right? We've been kind of calling for a while that the cloud integration market will naturally follow the cloud data warehousing market. I think that the growth we saw with Snowflake over the last year is really consistent evidence of that. And as we see opportunities coming through in the beginning of this year, we're excited with where things go.

[Preetam Gadey:]

Great. Well, I guess a similar question around what Tyler was asking here. How close is the Stitch and the Talend Data Fabric sales working together? I just want to get an idea of all these cloud customers that you have that are on Stitch, are they being upsell to the full Data Fabric Product as well?

[Christal Bemont:]

Yes. I'll take that one. Pree, good to hear from you. We see a combination of use cases. We see Stitch as certainly something that supports a land in some cases where if you think about across an entire organization, you may -- and we believe, have different use cases that depending on who the users are in terms of the constituents within the organization, what their needs are. And we also see it as a land in a net new logo that then expands to needs that they may have over time that are more complex until we see both of those playing out, and we have customers that are leveraging the Talend data fabric as well as Stitch in both of those ways. So we think it's one of the things that makes us unique for sure to be able to, what we call, meet our customers where they're at. But I think more importantly, it's our ability to make sure that as we're working with our customers, and they maybe need to start in one place that we can grow with them. And that's really important to us from a sustainability, long-term growth company that we see that we have straight alignment on.

[Operator:]

Next we'll move to Mark Murphy with JPMorgan.

[Matthew Coss:]

This is Matt Coss on behalf of Mark Murphy. Just a quick question for you, Adam. Your net new Cloud ARR, it looks like the expansion sequentially the growth in that number was the highest it's been. I think we've been keeping track. Was there any business that was pulled forward or any sort of large deal, particularly large that might explain that?

[Adam Meister:]

Matt, good to hear from you. So I wouldn't point to anything that was particularly large that got pulled in. I think what you're continuing to see out of organization is just consistent strong execution on the pipeline that we have in the quarter. And we're really enthused with the progress we've made around that over the last year. And now with some of the sales design changes that we've rolled out, I think, that's going to be a force multiplier. So I wouldn't point to anything in particular at Q4 that would suggest a counterbalance in Q1. It's just great blocking and tackling from the sale organization.

[Matthew Coss:]

Okay. And then on your CapEx outlook, are there any other data center opening plans like Europe in December? And then maybe how should we think of CapEx for this year?

[Adam Meister:]

Yes. The data center rollouts for us are a huge CapEx item, right? So there's a little bit of over investment that we'll make in capacity for those, but they're typical kind of AWS or Azure environment. So they're very flexible. Last year, we did open a new office of course. We did open a new officing in France that we had been planning for a long time. And so CapEx was a little elevated over the course of 2020. It will go down a bit from where it was in 2020 into 2021.

[Matthew Coss:]

All right. And sorry if I missed this earlier. And maybe you didn't mention it, but what is Cloud ARR go as a percent of total ARR this year? Is that something that you mentioned?

[Adam Meister:]

Well, you just look at the total mix. So it's just under 40%, 37.5%, right, on the $108 million versus the $287 million or $288 million.

[Matthew Coss:]

Yes. And do you have ambitions for kind of where that goes -- where that mix goes for 2021?

[Adam Meister:]

Yes. It was very much in my script a little bit. So I mean I think as we exit '21, you're going to -- you should expect that cloud is approaching half of the business by the end of the year.

[Operator:]

We'll move and take our last question from Bhavan Suri with William Blair.

[Kamil Mielczarek:]

This is Kamil Mielczarek on for Bhavan Suri. Congratulations on the strong end to the year and the impressive cloud growth. Now that we're looking towards a potentially more normalized environment in the back half of this year, how are you factoring macro changes into your guidance and investment plans for 2021 relative to 2020? And how reliant are your next year growth targets on an improving macro environment? Or should we think about that as more of an upside driver?

[Adam Meister:]

Good to hear from you, and really good question. So as some of my comments suggested, we do see the clouds part, we think that the spending environment is starting to firm up. It's, I still think, going to take a little while before the dollars really start flowing. So we've been balanced in kind of the expectations for the first half of the year and how long it will take before we see a return to full kind of normalized spending patterns. So anything, I think, faster than that, you could consider probably upside. I do think that we just look at year-on-year compares, that will be helpful as well, right? Now there's kind of months past this. I mean, budgets are even -- if they're a little lower, they're just more stabilized and we're seeing not a freeze in decision the way you saw them in kind of Q1 and into Q2 last year.

[Kamil Mielczarek:]

That's helpful. And can you give us maybe a quick update on what you're seeing in the competitive landscape and how should we think about the competitiveness of internal solutions offered by public cloud and other data storage providers?

[Christal Bemont:]

Yes, I'll take that one. And Adam, if you have anything to add, please do. Yes, look, I think this is a place where we stay laser-focused on the evolution of what the business problems are. That is the best way I can put it. The problems that we look to solve are the future and the current state of where moving data and a lot of data at that is just part of the problem. And so when we look at the competitive landscape, there's a focus on that for sure, but we think it goes beyond just moving data. And that's why we believe on the other side of moving data that what you end up with in terms of the -- not just the quality of it, but really elevating it above that to say, how do you actually measure what good data looks like? And that's something that -- where we really stand alone. And we think that's where we're not only unique, but that's where we bring our strategic value to our partners and to our customers for sure. So in our estimation, there is an opportunity for us to continue to lean into that to help organizations, make sure that when they move the data and they manage the data, that they can really use it for the purposes that they needed it in the first place. And that's where we'll stay laser-focused.

[Operator:]

There are no further questions in our queue at this time. And this now concludes today's conference. We do thank you, everyone, for your participation today, and you may now disconnect.