Talend’s Growth Accelerates – CML

Top Pick Talend (TLND) reported earnings on 11-9-2020.

We maintain our Top Pick status, but also refrain from promoting it to a Spotlight.

That places the company in the outer most circle of this logic diagram.

We have another one-on-one with CEO and after that meeting will make a final determination if the company remains a Top Pick — it’s that close and is in reconsideration.

We will have our one-on-one interview with the new CEO and will share that transcription shortly.

We do point to the fact that currency fluctuations hurt the business’s reported growth, but if we take out the randomness of currency, the company actually returned to 20% growth — and that’s pretty good in the midst of an economic collapse.

Generally, we are encouraged by the results.

We added Talend to Top Picks on Aug 13th, 2019 for $39.52.

As of this writing it is trading at $41.74, up 6% in over a year.

This entry date and price has been verified by the third-party audit firm Krost. Please feel free to visit their website.

Earnings
When we review the numbers, focus not so much on the 16% growth in revenue, but the 109% growth in the cloud business, which is the hyper focus for this company.

* Revenue: $72.7 million, up 16% year-over-year, versus analyst expectations of $69.84 million.
This is a beat.

* Annual Recurring Revenue (“ARR”) of $268.9 million, up 20% year-over-year or 16% on a constant currency basis.

Please note the slowing growth even before COVID-19.

We said when this all started that there were going to be financial metrics that we would be unable to disentangle from COVID-19 and this is an example.

We don’t know if that 16% year-over-year growth has been helped by COVID, hurt by COVID, or neither.

* Subscription revenue of $66 million, up 20% year-over-year or 18% on a constant currency basis

But the growth story is in the cloud:

* Cloud ARR of $87.8 million, up 113% year-over-year or 109% on a constant currency basis

The company guided to at least $100 million in cloud ARR for 2020 which would represent 88% growth several quarters ago and reiterated that guidance in the face of COVID-19.

* Adjusted EPS: -$0.64 versus analyst expectations of -$0.38.
This is a miss.

* Next Quarter Revenue guidance: $74.7 million (at the midpoint) versus analyst expectations of $72.99 million.
This is a beat.

* Full Year Revenue Guidance: $283.8 million (at the midpoint) versus analyst expectations of $278.14 million.
This is a beat.

* Full Year EPS guidance: -$0.835 million (at the midpoint) versus analyst expectations of -$0.83 million.
This is in line.

More Metrics and Discussion
Even more important than shifting to the cloud and getting ARR, is the dollar based net expansion rate (DBNER), which is a measure of retention and growth from existing customers.

Talend’s dollar-based net expansion rate arrived at 107% on a constant-currency basis, down from 113% two quarters ago and down from 122% in Q1 2018.

Anything above 100% indicates existing clients are opting to spend more with their renewed contracts.

It’s almost impossible to disentangle the weakening of the metric from COVID-19.

For now, we will say that the fact that this metric is shrinking is a bad trend, but the fact hat it is positive while revenue is growing, in general, is a very good.

Take this altogether and we have:

* A good DBNER, but dropping, is now deserving of a discount.

* Subscription revenue growing and driving the entire business.

* ARR to over a quarter billion dollars up 16% on a constant currency basis, but 20% if we take the impact of currency fluctuations.

* Cloud revenue more than doubling for 14 consecutive quarters and hitting $100 million for 2020.

* Cloud customers rising.

* Proportion of cloud to total revenue growing.

At some point, if these trends continue, there will be a reckoning with its valuation and the reckoning could be abrupt.

I’ll say it more clearly, while it is far from certain, if Talend continues growing its subscription business, ARR, cloud business and maintains a DBNER at these levels, this could be a stock double quickly.

But, if it cannot continue in these three areas, it will get punished as a software stock that has been unable to pivot to the new version of the world — cloud, recurring revenue, with high growth from current customers.

One note that should be obvious, with $72.7 million in total revenue and $66 million of that coming from “subscriptions,” that already puts the company at 91% of revenue from subscriptions, up from 90% two quarters ago.

The goal, as the CEO has said, is to turn that number into virtually 100% and the company is wiling to give up a little bit of growth in the near term to reach that goal.

The bullish narrative here is that Talend serves more data users, needs, and purchasing behaviors than anyone else.

Analysis
It’s clear that the DevOps segment of technology is in high gear, right now.

It is not clear that any of these companies (DDOG, NEWR, PD, and more) actually have a moat.

It’s clear the switching costs are high, but it’s not clear that gaining new customers is driven by a moat.

This is the position that Talend finds itself in and 16% growth is pretty good in the midst of a global recession, 20% in constant currency terms is even better.

But we too have to be aware that in a position like this, we could make an argument that Talend should be faring better.

We are meeting with the CEO and will press this issue.

There is no time like the present for Talend, and we mean that in two ways.

1. This is a difficult time and only the best will survive.

2. If the company can’t accelerate growth out of this pandemic given how much velocity the digital transformation has given the segment, then Talend simply has not differentiated itself.

We’ll just repeat what we said earlier.

Either the company will make room for itself in an ultra-competitive DevOps, DBA SaaS world or it will not.

The thematics behind it will not fail.

Execution is up to the company.

We’re happy to give the company more time to prove its place in this industry and still believe in the new CEO as we meet with the CEO.

But we are equally happy to dismiss the company if the answers we hear from the chief executive are poor.

Snapshot
In this section, in about 25 sentences and several images, you should understand the Talend story.

Talend fashions itself at the center of the cloud data integration and integrity market.

It is a software company and fits into the cloud software as a service (SaaS) realm as an aid to data management, or really database administration (DBA).

The data explosion and chaos that comes from it are themes we have repeatedly covered and themes where several Spotlight Top Picks sit.

Talend’s growth drivers are, as the company puts it, data explosion, diversity of data users, automation through machine learning.

Data will come from many places and in many forms.

First, the number of devices that will be in consumer and business hands will grow to 30 billion in less than two-years, and 75 billion in less than six-years:

Stop and consume that information — it implies that in about five-years there will be on average 10 connected devices per person on this planet.

But most of those connected devices must run on a wireless world, and that world is going to be shaken up so enormously that I’m not sure anyone, even scientists and analysts, really understand what is just around the corner. Of course, we’re talking about 5G — the next generation of mobile network.

When we look at the IoT device count we know that each device will be a content and bandwidth vacuum, stressing our wireless networks to the maximum.

While smartphones will make up less than 25% of the total of IoT, those devices will be the major requesters of data and mobile smartphone subscription growth projections are totally absurd.

Projections call for nearly 75% growth in mobile subscriptions within six-years leading to virtually everyone on planet Earth.

Here is a visual that walks us down the path of that seemingly ludicrous forecast:

But that alone isn’t the driver — which is to say, it’s not a linear increase in data, it is exponential. Check out this next chart for data usage per smartphone:

It’s this last chart, in conjunction with the growing number of users, that lifts this network change to truly revolutionary. Here’s that same information in a single chart — note the dark orange area is data from smartphones:

And here’s the scary part — 5G will still be in its early stages in 2022 — we won’t see the real impact for another five-years after that.

Recall that we noted long ago “[a]s the [Talend] moves to a cloud-based model, it will look as though revenue growth is slowing because it will have less service revenue.”

That has happened — it’s on a small scale, but it has happened. This was expected.

Talend also brought in a new CEO, and as you will read in our one-on-one with her, she is laser focused on growth and profitability.

That’s it.

That’s the bullish thesis for Talend.

Either the company will make room for itself in an ultra-competitive DevOps, DBA SaaS world or it will not.

The thematics behind it will not fail.

Execution is up to the company.

The rest is just conversation.

Risk
There is risk to Talend.

* It’s now the unshakeable question — do DevOps companies have a moat?

* As the company moves to a cloud-based model, it will look as though revenue growth is slowing because it will have less service revenue.

While recurring revenue is the kind we like to see, and moving to cloud is even better, Wall Street may not understand this trend and the stock could get punished for it.

In fact, with a market cap of just $1.3 billion, Wall Street already discounts this company’s opportunity.

* Other risks come with execution. When a company moves from on premise to cloud, it’s in that transition that any kind of hiccup can disrupt the entire make-up of the company.

Perhaps a better way to say it is, now would be a particularly bad time for a competitor to launch a disruptive attack. Of course, in Talend’s eyes, it is they that are the disruptor, so take that risk as you may.

– Finally, COVID-19 is everything and yet we know very little about it.

Conclusion
We maintain our Top Pick status on Talend.

Thanks for reading, friends.

The author has no position in Talend (TLND) at the time of this writing.

Please read the legal disclaimers below and as always, remember, we are not making a recommendation or soliciting a sale or purchase of any security ever. We are not licensed to do so, and we wouldn’t do it even if we were. We’re sharing my opinions, and provide you the power to be knowledgeable to make your own decisions.

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