Talend - new Bert Hochfield article

The largely positive article appeared today (7/2)on Seeking Alpha. Here’s a link:

https://seekingalpha.com/article/4085276-talend-lesser-known…

Having spent a great deal of my career dealing with data integration issues, I find Talend to be an interesting company. I’ve had first hand experience with both of their primary competitors (Informatica and Ascential/IBM). But I’ve never looked at Talend from a technology perspective.

Bert alludes puts Talend in the ETL (extract-transform-load) class of software. Many companies do not actually perform ETL, rather they use the ELT model because the destination platform (often a data warehouse) my offer considerably more horsepower than the source platform (typically a UNIX/Windows server). This is not a trivial distinction in that the transforms are at the heart of data integration. If Talend holds the programming for the transform algorithms captive, then there is less flexibility in with respect to ETL v. ELT. I only point this out as a concern, I do not know if this presents some data flow capacity limitations for Talend or not. Chances are good that they have ways around this potential bottleneck.

The other issue Bert raises and I think trivializes is data cleansing which is a subset of data quality. In my 30 year IY career I worked on numerous projects that required data conversions from older applications to newer ones. Data quality issues often comprised around 50% of the total cost of the project. It is simply impossible to automate a great deal of data quality issues. And no matter how sophisticated your ETL and analytic software might be, the old adage GIGO (garbage in, garbage out) is inescapable. Again, I don’t think Talend is in any way hampered by this in comparison to its competitors. Achieving and maintaining high quality data is largely a labor intensive effort. Data cleansing can help, but it cannot provide a total solution. A simple example might be a project management entry for ECD. Data cleansing might ensure a correct date format for a data in the future. But there’s no way that any data cleansing routine can determine if the date recorded is the actual date intended for a given project. That requires human review. During my career I was continually astonished at how reluctant management was to invest the time required to insure high quality data. The prevailing attitude was once the data is in the “system” everything about maintaining it was magically an IT issue, even though not a soul in IT would have any idea what the accurate ECD for a given project might be.

Despite these issues, I am long Talend. Every player in the data integration arena has to deal with these issues. I doubt that Talend has a real edge, but I also doubt that they are at disadvantage either.

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Thanks for this, brittlerock. I read the article early this morning. It is very helpful to have your take on it, given your experience.

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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.

sjo

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Hi brittlerock,

Excellent post, thanks for sharing your experience based opinion.
I am wondering if you can share more thoughts - so if data cleansing and other issues are more related to this class of products and not restricted to Talend, do you expect growth of “data integration tools” as category or market be hampered by these issues?

Also - i am trying to understand if this space has large potential market or is it limited.
For example, couple of years back, BI (Business Intelligence) tools (like Tablue?) were rage and stocks were growing rapidly… however, being a user of BI, I could see that the market size would be limited and growth would saturate extremely fast because these tools, while very useful, addressed one small aspect of enterprise software applications.

Wondering if data integration is just one small tool in a large tool kit that limits the market OR there is more to it that I am not seeing.

regards
nilvest

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Hi Nilvest,

I am not Brittlerock, so I hope he also weighs in. But I have been working in ERP-class software for a couple of decades, and I can say that the data integration field is HUUUGE.

As organizations continue to buy SaaS solutions, the need to integrate them will increase. The “Old school” way was to export a file using SFTP or SCP (or newer, sexier tools) that would send data out from your “system of record” to the SaaS system. Talend, and other later generation ETL tools use Restful web services/APIs to achieve two-way, real-time integration instead of periodically throwing a file over the fence. My current client (in Higher Ed) uses Talend extensively, and I can see the benefits.

So, I think it is a big tool in a growing (and large) market. Oh, and there is a lot of ‘stickiness’ to these products. Once you configure all your data integration pieces in Talend, it would be a royal pain to replace it. It sits in the center of your universe of software applications, tying them together and pumping data between them as needed. VERY hard to change to another solution later!

Just some thoughts from another IT geek.

Tiptree, Fool One guide

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Data integration is an enormous issue. It was and still is an enormous issue for companies that upgraded to servers and to new software.

The problem of data scrubbing will never go away however, unless AI can be trained to fix it. The problem is that there are human errors, differing formatting, duplicates, and a whole bunch of issues that make straight forward date migration an extreme and labor intensive pain.

It is an issue that will impact every project, and is very expensive as you often have expensive consultants cleaning up the data files.

Tinker

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The problem of data scrubbing will never go away however, unless AI can be trained to fix it. The problem is that there are human errors, differing formatting, duplicates, and a whole bunch of issues that make straight forward date migration an extreme and labor intensive pain.

My IT (data processing as we called it) days are in the remote past (last millennium?) so I don’t have much to say about data integration but I know that GIGO (garbage-in garbage-out) was always a major problem because most software didn’t spend enough resources in validating the input. My insurance company would issue documents with the end date earlier than the start date. How difficult is it to compare two dates for validation? But they just didn’t bother. There is enough garbage in data to fill an entire universe. LOL

Denny Schlesinger

Oh, and there is a lot of ‘stickiness’ to these products. Once you configure all your data integration pieces in Talend, it would be a royal pain to replace it. It sits in the center of your universe of software applications, tying them together and pumping data between them as needed.

Great point, Tiptree. This SaaS aspect is definitely the secret sauce, as I see it. I’m sure customers love that their data is always tied together so they don’t have to worry about constantly “throwing a file over the fence” as you put it. And it’s obviously great for Talend too, because they don’t just have a single event with customers and then part ways, but they have an ongoing relationship and regular/steady fees.

I’m glad you and others have spoken to the size of the market. That’s where I have to defer to those with more experience. Thanks for weighing in.

Bear

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Thank you Tiptree, very useful insight.