High points cut and pasted from Bert’s article to follow. Hope this is helpful on this busy 4th of July extended weekend holiday…
… The CEO said that 30% of its business is coming from cloud -based use cases. Deals like those are far less competitive for Talend because the functionality required cannot be readily be done by legacy competitors.
Another advantage of Talend is that it is agnostic between data sources. Clearly, the data integration capabilities of the application software vendors are simply not going to be deployed on the public cloud in isolation. And IBM’s product is also highly unlikely to even be sold for its ability to work on AWS or Microsoft Azure. Sometimes competitive moats take the form of market structure. In the case of Talend, one sees, technology focus, a market where innovation had been limited for several years, and now a favorable market structure.
Talend is strongly differentiated in the segments of the data integration market that are growing the fastest-but beyond that, it is also usually the low-cost alternative.
Gartner ranks Informatica highly. According to Gartner, Informatica has proven to rapidly adapt to market functionality demands and to have broad market presence in innovation around metadata management, big data and data lakes. But Gartner also says that Informatica’s hardware-based pricing and licensing models and perceived high TCO remains a key issue. Some users, according to Gartner have difficulty in understanding its (Informatica’s) licensing methods and high costs relative to the competition. IBM is seen by Gartner as having similar issues regarding costs.
Paths to Profitability
Talend is obviously still a small company, and smaller IT vendors with exclusively subscription models are unlikely to reach IFRS profitability all that rapidly. That is probably true for Talend as well.
On the quarterly conference call, management was quite explicit that it was engaged in balancing growth and a path to profitability-and there is likely to be continuing tension between the two objectives.
Gross margins slipped 100 bps year on year, primarily because of a rapid increase in professional service headcount. The company, because of its above-plan sales success, has both had to hire rapidly to augment future implementation capacity, and has had to rely on contractors and 3rd parties to perform installations at far lower margins than if it had trained personnel to complete assignments. Professional services revenues actually rose by more than 50% sequentially and given the company’s size, it is almost impossible to be able to handle that kind of incremental volume without turning to partners and contractors for assistance. That, in turn, will have the impact of lowering gross margins.
When I look at the P&L guidance holistically, I would be surprised if the company weren’t able to over attain its current forecast for earnings.
Earnings are still a couple of years away at best and I am sure that analysts recommending the shares use a variety of growth rate assumptions and time periods for hyper-growth in their analysis.
The key issue for me is that the company’s outlook has visibly improved, both in terms of near-term guidance but also in terms of its longer-term market share potential. Talend has followed the share price pattern of many other hyper-growth names and probably will continue to do so in the near term. While handicapping specific events in an earnings release and their probable impact on near term operational performance is far more of an art than a science, I think the indication that the company accelerated its salesforce hiring plans and was able to poach A+ players from the legacy data integration players is probably more significant than is reflected in the company’s current valuation.
Despite the significant share price appreciation in the several months, I feel investors should put this name on their radar screen and look forward to building a position. It has the opportunity to enjoy hyper-growth for a considerable time period and to become the best of breed alternative in the large and growing of data integration. The shares aren’t cheap, but I feel that estimates will be steadily rising to justify the valuation.
So where might the beef be for this company? Simply put, it is the leader in second-generation data integration software. That market is still growing at 14% a year. The company has major functional differentiation when compared to legacy solutions in the space (its technology has been derived from an open source model) and seems to have advantages in terms of TCO because of its pricing and packaging compared to the large, legacy vendors. It has a trivial market share of just about 2%, which suggests that it has a lengthy runway of growth as it is self-evidently a disruptor and market share gainer. Its competitors belong to much larger organizations or, in the case of market leader Informatica, have been bought by private equity. As the cloud impacts workloads, and as users need to make a choice on new data integration solutions, for re-designed and new workloads, this company has the opportunity to dramatically increase its market share, and I think that is basically the case I will try to delineate below.
I see Talend sustaining 30%+ growth for several years while ultimately becoming a leader in its space and disrupting and gaining share vis-a-vis Informatica and IBM for a leadership position within the data integration space.
The company probably will not achieve non-IFRS profitability until 2019.
I think the path to profitability is relatively straight-forward and to an extent will depend on the balance the company chooses between maximizing growth and achieving profitability.
I think that while it is not likely to see its shares increase another 54% in the second half of this year, operating results will be strong enough for the shares to deliver positive alpha.