When I wrote up My Portfolio at the end of February I mentioned that I had one more new half-position that I was not ready to talk about yet, and said perhaps in a week or two. That position was Talend (TLND), that Bear introduced to the board earlier in the month, and I wasn’t ready to talk about it yet because it is so illiquid and I was still taking a position. Here is my summary of my notes
Feb 2017 – Bear’s Introduction (somewhat summarized).
Data Integration is another rapidly growing area within the “big data” landscape, and Talend is carving out a niche, especially integrations including cloud sources, and with Hadoop…or at least that’s my take after reading Bert’s article, with his thoughts on what their secret sauce is… I think Talend’s growth thus far speaks volumes, and I also believe big data is such an emerging tsunami that there will be plenty of integrations to go around, whether Talend gets all of them or not.
Here’s Bert’s article: http://seekingalpha.com/article/4012659-talend-getting-know-… It’s his usual phenomenal deep dive but it’s now a little dated as they’ve reported two quarters of earnings since it came out.
Here’s a little introductory video that explains what they do: https://youtu.be/7ZkwC6H3wk0
Basically, before Hortonworks can do your Hadoop distribution, your data has to be collected and organized. That’s what Talend does in general, and they specialize in some high growth areas including Hadoop.
Financially speaking, they have a massive amount of deferred revenue, though they don’t say how much. Evidently it is large enough that they were FCF positive for 2016 even though EPS was solidly negative (the non-GAAP loss equaled about 22% of revenue).
With more of this deferred revenue lump showing up as recognized revenue each quarter, revenue growth on their quarterly income statements has been accelerating.
June Q: 38%
Sep Q: 40%
Dec Q: 46%
For the Dec 2016 quarter:
-Total quarterly revenue of $30.5 million, for an eighth consecutive quarter of accelerating revenue growth
-Quarterly subscription revenue of $25.2 million, an increase of 48% year-over-year in constant currency
So basically it’s quite obvious that, like with HDP, that deferred subscription revenue is growing a lot faster than the revenue they recognize. Needless to say that’s very encouraging, and it seems like their 31% expected growth in 2017 is sure to be beaten solidly. I mean honestly even to be conservative they probably could have predicted 40% growth. But I guess big beats are nice?
Valuation wise, I’d say it’s reasonable for a SaaS company, even without adjusting for all that deferred revenue. PS is just under 7, which is a lot, but they have a lot of recurring revenue (84% of their 2016 revenue was subscription revenue). And though it’s clearly not “cheap,” that’s a lower PS than SHOP, PAYC, SPLK, HUBS, and many others I’ve looked at. But then, they aren’t growing like SHOP (yet) and they’re not profitable like PAYC or even SPLK.
Just a few numbers than might be helpful:
Market cap – $730 million
2016 Revenue - $106 million
2016 adj EPS: loss of 83 cents
Dollar-Based Net Expansion Rate - 125%
Here’s the revenue trend in millions of dollars:
2015: xx 18 20 21
2016: 23 25 27 31
Guidance
Quarter: Revenue between 31.4M - 32.4M, Adj EPS -0.18 to -0.14
2017 FY: Revenue between 141.5M - 143.5M, Adj EPS -1.09 to -1.03
As I said above, I expect they’ll handily beat on all of that. They also noted that they’re spending a lot to grow, on both sales and R&D. But they also mentioned that they intend to stay FCF positive. Seems like the right strategy.
A note on volume - I want to point out that this is not a well known company and the stock is not traded much, relatively. The volume is very light. It’s not traded even 10% as much as SHOP or PAYC. So obviously that’s a consideration.
France? - From Bert: Talend was founded in France, but it is headquartered in Redwood City, CA. It reports using IFRS standards that are equivalent to US GAAP. Currently, more than 50% of the company’s revenues are coming from outside of the US, which suggests it has a pretty substantial geographic runway to accelerate sales growth in this country. On the other hand, currency fluctuations will be more noticeable for this company than is the case for some of the other names in the software space.
Thought this was kind of weird…the CC was certainly in English and I don’t detect any accents, so…whatever? Currency fluctuation obviously hasn’t put a damper on revenue, so personally I don’t see any problem.
Conclusions - The big points to me (Bear) are the fact that growth is actually accelerating and that, like HDP, they are actually growing their billings and deferred revenue faster than the revenue they recognize. That seems to foreshadow accelerating growth for some time to come. I’m not sure why guidance is so ultra-conservative, but I liked it enough to start a position.
Bear
Note: Completed IPO and began trading on the NASDAQ on July 29, 2016. Net proceeds from the IPO were $91.6 million.
Oct 2016 – Bert’s Evaluation (summary) Note, this was from October, so some figures are out of date!
Talend has become a disruptor in the data integration space.
It went public at a share price of $18, then went to $33, and is now back to where it started trading at $24.
It has a far more reasonable valuation than most of other recent information technology IPOs.
It’s seeing accelerating growth and appears to have reasonable expense discipline for a company of its size.
It has been able to create a significant level of differentiation in the data integration space through its unified data fabric.
Talend - Small Company, Big Space, Big Opportunity?
Talend is a relatively small company, but unlike some, it has not had the extreme valuation excesses that have marked many recent offerings. Perhaps more importantly, its shares have been significantly oversold.
Talend will release its earnings for the second time as a public company in November. Expectations are for a loss for this quarter, this year, and next year as well. It is seeing accelerating sequential growth, with its year-over-year growth reaching 38% last quarter compared to 34% in the prior quarter. Talend looks at a metric that is key to a company like this which it calls dollar-based expansion, and which was 124%, which is on the high side of its experience over the past 9 quarters. The growth in sequential operating expense diminished substantially, perhaps leading to some optimism regarding a path to profitability in the foreseeable future. It is generating massive levels of deferred revenue relative to its size, and because of that, it has already become breakeven in terms of cash flow from operations (CFFO). Management has forecast that free cash flow generation will be positive for all of 2016 and beyond.
Talend was founded in France, but it is headquartered in California, and uses IFRS standards that are equivalent to GAAP. Currently, more than 50% of their revenues are coming from outside of the US, which suggests it has a pretty substantial runway to accelerate sales growth in this country. On the other hand, currency fluctuations will be more noticeable for this company than for some others.
It raised about $91 million in its IPO, and shares are trading about 1/3rd above the offering priced. There would appear to be no operating reason that it has to raise more capital in the foreseeable future.
It has a fully diluted share count of 27.5 million shares, which yields a current market capitalization of $687 million, and its current enterprise value is around $600 million. Its valuation is far lower than that of many other IPOs at less than 6X sales based on the current year forecast and 4.4X EV/S based on consensus forecast of $135 million in revenue for 2017.
What is Talend? - Basically, it offers a series of data integration tools that are part of a unified data integration fabric and allow users to create analytic applications, including those based on cloud data sources and Big Data volumes. There have been relatively few investments that are focused directly on the emerging trend of Big Data, and on the analytic applications that it has enabled. Talend is one of those companies.
Talend has some of the same demand drivers that have caused the revenue growth of Hortonworks, and that portion of Talend’s business has seen triple-digit growth. The space has some of the best prospects in the Enterprise IT universe. Talend’s future is also tied to that of Big Data and the cloud and to the increasing torrent of data that users want to analyze as part of their decision-making process. Part of its product offering is the ability to be used with Hadoop and, most particularly, Apache Spark. It’s part of the Apache Spark eco-system and is used in many Apache Spark solutions.
Talend has a far more flexible business model when compared to its competitors. It is a small company with lots of products in a very large market whose leaders have been somewhat resistant to some of the innovations that users are looking for in order to implement Big Data applications that can provide the latest analytic technology to torrents of data. It has developed an integrated data fabric that allows users to integrate data from many sources and to use it all kinds of applications, whether on-prem, in the cloud or in Big Data use cases. Surprisingly, its largest competitors cannot precisely do that.
Reducing infrastructure costs and improving performance for Big Data applications is measurable, and is something that is inevitably going to attract the attention of users. What concerns users is whether the tool works or it doesn’t, how much it costs and how the tool plays into the performance of the application. If a tool is cheaper, if it is reliable in complex environments with many data sources and if it reduces the time necessary to cleanse and prepare data, it is something that can be readily sold to users. Talend’s solutions tick all of the boxes in terms of cost, functionality and ease of use.
Does Talend really have a special sauce? - Yes, Talend does have some different ways to solve some common IT problems. It makes some audacious claims with regard to the price to performance ratio of its solution. The claims are a bit over-hyped, While it has total-cost-of-operating advantages compared to competitors, its extreme claims are restricted to a few specific use cases. It does, however, have some compelling solutions that will allow it to maintain high growth for some years to come and to successfully compete in a crowded market space.
Much of the advantage it enjoys relates to the way it prices its product, which is not based on the amount of data being processed. It sells its solutions based on a subscription model, although not all of its solutions run exclusively in the cloud. That’s a bit different than licensing models used by its competitors. For many years, the data integration space has been very stable, with the same competitors. Talend is the first disruptor in this space in many years, and it thus has a significantly greater competitive runway than might otherwise be the case.
Users are looking for something that is a bit more straightforward than the overly complex pricing models offered by legacy competitors. Because of the way the market space has evolved, the major competitors have wound up with separately siloed products that are not well-integrated and lack some of the more modern features that users seem to crave.
Talend is gaining market share and that represents one of the arguments for owning these shares. Data integration has been one of the better spaces in the enterprise software world for many years now. Talend enjoys a growth rate of 100%+ in cloud/Big Data and a 40% growth rate overall. Big Data/Cloud is about 25% of its revenue, growing at 100%, so part of the company’s secret sauce as an investment is that it has a large amount of its business coming from the high-growth segment of its market.
Its offering consists of a single data fabric which is the core of its solution. The secret sauce is an integrated platform that allows it to offer users the potential to do more with its tools without needing to own 3 sets of non-integrated data integration solutions. A user can pay 20-30% over the price of the core technology to get the total functionality necessary to achieve data integration in the cloud, and for Big Data analytics. Some would rather see Talend price on the amount of data that goes through. But that is where it gets its price to performance advantage compared to competitors.
It has just started to sell what it describes as a data preparation solution. Data preparation is a major component of the TAM it addresses and can be used by a whole raft of professionals. Its seat potential is said to be 30X that of professional developers. The Talend product is priced at 30% of the seat price of its traditional enterprise offering. Its competitors all sell different elements of data preparation separately, since basically they acquired those technologies through acquisition. This will be another significant differentiator for Talend, as the capability is part of its core platform. Obviously, data preparation has been part of data integration almost since the beginning, but it has always been a separate silo. I expect that data preparation revenue will be a growth driver by the end of 2016.
Talend has seen acceleration of its growth most recently, perhaps as it has become better known, and with more references, and perhaps due to positive reviews. The availability of its data preparation solution is likely to further accelerate its growth rate.
Some thoughts on valuation and path to profitability
For a high-growth company I think looking at sequential changes in spend and revenue make sense. Revenue growth on a sequential basis reached 12% last quarter (Q2), and in the prior year it was 8%. Talend appears to be achieving growth rates that trend to more than 40% this year and that suggests that estimates of 30% for 2017 are quite conservative.
Sales and marketing expense, despite the very strong growth of Q2 bookings on which commissions are paid and recognized before revenues start to flow, grew by only 8.6%. R&D spending actually dropped 7.5% sequentially.
G&A costs were elevated because this is a small company and the cost of an IPO is large. Nonetheless, they grew by just 10% in the quarter, still below the growth in sequential revenues. It should be noted that G&A costs included a fee paid because of the successful IPO. The success fee was about 7% of reported G&A costs in Q2 and was a one-time event.
Given the company’s size and the fact that it is continuing geographic expansion into Australia, Singapore, Spain, Italy and the Netherlands, I think the expense ratios demonstrate a strong level of cost discipline that augurs well for future profitability. Overall, Talend is forecasting an IFRS loss of about $29 million for the full year. It lost $13.3 million in the first half, and it is forecasting to lose $7.5 million in the quarter it is soon to report. Given the Q3 revenue seasonality, I expect the potential upside from that forecast to be small. On the other hand, I think the Q4 loss forecast is probably a bit more conservative than is warranted, given the strong sequential revenue growth anticipated.
As mentioned earlier, Talend is forecasting positive free cash flow for this year, which suggests that derived bookings will be strong, driven by further outsize growth in the deferred revenue balance. The CFO has suggested that such a level of growth in deferred revenues is most likely not sustainable, because this year is seeing a level of renewals that relates to contract signings three years ago. Talend is trying to reduce the length of its subscription contracts and to avoid the level of advance billings that had been on its balance sheet.
Overall, I believe the consensus is likely to see substantial upside revision as next year wears on. Talend should be able to sustain growth of well above 30% and to achieve profitably within the next 6-8 quarters on the track it is going, and that is probably worth a share value quite a bit more than 4X revenues. I think it is likely to produce positive alpha both in the short and the long term, and it is not inconceivable that it will be acquired.
Disclosure: I have no plans to initiate any positions within the next 72 hours.
Feb 2017 – Press Release
Talend makes big gains with large enterprise customers – adds 130 new logos in quarter.
We reached a milestone of 1500 active customers in Q4. The new wins included a large telecommunications provider, the world’s largest insurance company, two of the top 10 pharmaceuticals, and one of the world’s largest multinational consumer goods companies.
Feb 2016 – Dec earnings report
Record revenue of $30.5 million, up 45% and the eighth consecutive quarter of accelerating revenue growth, driven by over 100% growth in big data and cloud.
Subscription revenue of $25.2 million, up 48% yoy in constant currency
We hit a milestone of 1,500 active subscription customers, which included the addition of two of the top ten global pharmaceutical companies.
We were free cash flow positive in the quarter and for the full year, delivering on a target we set at our IPO.
For the quarter, operating net cash was $2.4 million and free cash flow was $2.2 million, up from losses of ($3.8) million and ($4.1) million a year ago.
For the year, operating net cash was $3.4 million and free cash flow was $2.0 million, up from losses of ($10.0) million and ($10.8) million a year ago.
Recent Business Highlights
• Announced the new release of Talend Data Fabric, which added self-service data preparation capabilities for big data, and support for Apache Spark 2.0, extending our differentiation.
• Named a “Leader” by Forrester Research in Big Data Fabric.
• Hosted Talend Connect, our 8th annual customer conference in Paris.
Guidance - Quarter:
Total revenue - $31.4 million to $32.4 million.
Adj loss from operations is expected to be in the range of $5.2 million to $4.2 million.
Adj net loss per share is expected to be 18 to 14 cents.
Share count - 29.3 million.
Guidance – 2017 year:
• Total revenue $141.5 million to $143.5 million.
• Adj loss from operations is expected to be in the range of $22.6 million to $20.6 million.
• Adj net loss is expected to be in the range of $22.6 million to $20.6 million.
• Adj net loss per share is expected to be in the range of 75 to 68 cents
Share count 30.1 million.
My conclusions (Saul) – I like it (obviously), but took a position limited in size because of its small average number of daily shares traded.
Saul
