TLND q3, why it dropped 45%

I’m not going to do a full review of TLND but I wanted to share why I closed my position. I don’t know the company all that well. I had opened a small position (my smallest actually) a month ago on the idea that cloud revenue was increasing 100%. I’ve since closed out my position for a combine loss of about 30%.

We are going to have to make lots of assumptions because Talend isn’t making it easy to pick this one apart, which annoys the crud out of me. Makes me feel like they are hiding what is happening. On the face of it they are saying the following.
100% cloud growth.
Accounts for 14% of ARR
36% total revenue growth.

Sounds pretty good right? Well not really because in their Conference call they mention a few other data points.

Cloud is only 14% of NEW ARR
Their legacy business has basically stopped signing up new accounts, so almost all revenue growth in their main business is from existing customers.
They expect cloud to be about half of NEW ARR by the end of 2019.

Well that is pretty disastrous, let me show you why. I’m having to infer a bunch of this so bear with me.
The new revenue is calculated by taking the delta of subscription revenue from Q4 2018, 44.6 million compared to Q3 2017 35.2million which equals 11.7 million dollars. Doing that for the last years yields the following.


Q3 2018              11.7 in millions
Q2                   11.7
Q1                   12.6
Q4 2017              10

Rather than post my whole table here I’ll just show you the calculations that I used. I couldn’t find ARR anywhere so I had to use their subscription revenue in it’s place. I know this isn’t strictly correct.

14% of new subscription revenue is 1.68 million dollars. So in q3 2019 they should be at 3.4 million of new cloud revenue, and q4 2018 should be right around 4 million dollars in new business from cloud.
Sure it is growing 100% YOY but from a TINY amount. If we assume that the other 10 million (11.7 - cloud revenue of 1.68) dollars grows 20% (which i think is generous) that means that by the end of 2018 they will only have ~12 million dollars in ARR from their legacy business and about 4 million dollars from their cloud business. Now the problem with this is they said that cloud was going to be about half not 25% of their NEW ARR. This implies that their legacy business is either going to stay the same size or shrink a little bit.

In this exercise in false precision that means over the next year growth should slow down to the mid to high 20s. If their legacy business grows a little bit then they should be in the 30-36% growth rate. No matter what though growth is slowing at TLND until cloud can take over. Even with cloud growing quickly it will still take 3 years for it to be big enough for TLND’s overall revenue growth to get back into the 40% range.

On a side note, their Conference call is pretty disastrous for hadoop. They basically say on-prem is going away.

Best,
Ethan

41 Likes

We are going to have to make lots of assumptions because Talend isn’t making it easy to pick this one apart, which annoys the crud out of me. Makes me feel like they are hiding what is happening.

Couldn’t have said it better myself.

Cloud is only 14% of NEW ARR
Their legacy business has basically stopped signing up new accounts, so almost all revenue growth in their main business is from existing customers.
They expect cloud to be about half of NEW ARR by the end of 2019.

Great summary of the problem. This really can’t be overstated, and I am EXTREMELY frustrated at how they’ve characterized this in past quarters. It’s like they’re finally being honest about it. 14% of new ARR…pathetic.

that means over the next year growth should slow down to the mid to high 20s. If their legacy business grows a little bit then they should be in the 30-36% growth rate.

Actually, Ethan, it’s worse than that. At the very end of the conference call Adam (CFO) said “overall revenue growth for 2019 is likely in the low 20’s.” (percent-wise)

Bear’s Fail
A few of you on this board have asked for my reactions to Talend’s quarter and the subsequent slashing of its share price. I’m very disappointed and I feel that the drop is justified. Talend is cheap now, but it’s cheap for a reason. I hate to sell now at what I feel must be the bottom, but I don’t feel good about Talend going forward, so as soon as I want to put some money elsewhere, I’ll probably sell Talend to do it.

I am very sorry I pounded the table on Talend. Let me be clear. I was wrong: this is not a camouflaged growth situation. This thesis is broken.

Ethan, I’ve been trying to write a post explaining my thoughts on Talend’s quarter, but have scrapped more than one draft…maybe I was too mad to make sense. Thank you for doing it for me in your excellent post.

Bear

77 Likes

bear, thanks for catching my typo

that means over the next year growth should slow down to the mid to high 20s. If their legacy business grows a little bit then they should be in the 30-36% growth rate.

Actually, Ethan, it’s worse than that. At the very end of the conference call Adam (CFO) said “overall revenue growth for 2019 is likely in the low 20’s.” (percent-wise)

I actually meant to type low to mid 20s!

Thanks,
ethan

Yep, I’m all the way back to zero from my original cost basis after a hair over a year, so I chucked this one and traded the proceeds into MDB (which I’d missed out on but is now dipping some). The latter has to have much better long-term odds.

Bear,

Don’t beat yourself up and don’t apologize to anyone. Everyone is bound to be wrong and we are all better off for what you have posted over time here.

Nobody is going to be right all of the time. I’m sure it is a frustrating drop for holders of the name. Live and learn and move on…

AJ

17 Likes

Bear at least you pointed this out. Once I was constantly posting about a company called Sigma Designs. They made digital video processors. As HD DVD players gained popularity there was a war on standards between blue ray and hd dvd. I was constantly posting about sigma designs and how they were gaining wins in the blue ray makers (sone dvd makers made only blue ray the rest made hd, sigma concentrated on blue ray). Eventually blue ray won and sigma skyrocketed in price as they got win after win. I continued to write about them as their share price went up. Eventually I saw that the competition was catching up and it was becoming a commodity as I had expected to happen eventually. So I sold. But I didn’t tell anyone. I just stopped writing about it.

Then months later as the stock fell, someone asked me about it because they bought it. It never occurred someone would be buying on my research and posts. I told them it should be sold. Although it was still higher than when I began touting it, I have no idea when they bought.

I’m not saying it’s our responsibility but it does help to post about when we think the story changes and we should no longer own rather than just stop writing about it. It makes for a more balanced board and helps drive respect. It’s ultimately the buyers responsibility by all means, but it does ass value to the board to point out you believe the story changed on a stick you own and talked about.

23 Likes

It will be interesting to see where TLND is a year from now.

Don

3 Likes

Bear:

It takes fortitude and courage to admit one’s mistakes. However…

If everyone who makes mistakes in investing were to apologize the number of board posts would at least double. Your posts are a valuable contribution to the investing knowledge of this forum. More to the point, No one here should blindly follow anyone, Saul included; rather, everything we learn here is better used as a jumping off point to perform individual analysis and our own due diligence before we even consider pulling the trigger on investments. We all own our decisions and results.

So…get up, dust yourself off, and get back to work.

Champico33 - Member of the Mistake a Week Club.

5 Likes

It will be interesting to see where TLND is a year from now.

Don

Indeed. I’ve added it to my tickler calendar.

It will be interesting to see where TLND is a year from now.

Don

Yes, I’m not as bearish on TLND as others here seem to be. I’m not convinced it’s a sell at today’s price. I also see cloud growth as a significant underlying growth story, albeit a little farther out than we’d like. I still hold shares and added minimally at $40 earlier today before reading the latest opinions here. I’m not sure whether I will sell or not. It’s only a 2.5% position for me.

I guess it’s a matter of whether there are other investments which are higher conviction and better buys (there are a lot of good stocks that are getting cheaper recently). And I would hope there’s some bounce after all the selling.

Dave

2 Likes

Champico33
It takes fortitude and courage to admit one’s mistakes. However…

If everyone who makes mistakes in investing were to apologize the number of board posts would at least double. Your posts are a valuable contribution to the investing knowledge of this forum. More to the point, No one here should blindly follow anyone, Saul included; rather, everything we learn here is better used as a jumping off point to perform individual analysis and our own due diligence before we even consider pulling the trigger on investments. We all own our decisions and results.

Indeed. If anyone’s approach were ‘99.9%’, we’d all own Bill Gates, Warren Buffet, and Jeff Bezos intoto.

Alas, it doesn’t work that way, so we all trundle along, doing the best we can, eh?

on the ground research perspective: I work in the retail industry and with all the challenges retail has to overcome with e-com, slowing sales, slowing traffic etc our company tried Hadoop but it was not good and they completely gave up on it. It was bad enough for the company to cut their losses and try something different. On the other hand we’re migrating everything to cloud and extensively utilizing Tableau.

1 Like

how is the Stich going to contribute to this growth? they may not have factored it in?

tj

“I am very sorry I pounded the table on Talend. Let me be clear. I was wrong: this is not a camouflaged growth situation. This thesis is broken.”

Well this is something rarely seen on the boards. You just gained a heck of a lot of respect from me Bear and most likely even higher respect from the members that follow you.

I tip my hat.

Chris

18 Likes

Bear, very gutsy to admit that you were wrong, but very helpful for the board, and for general feelings of trust. I keep warning people myself not to just buy what I buy but look at the facts and make your own decisions. I emphasize that I am very wrong sometimes. (I had Nectar drop 45% too before I got out, but get out I did, and it is now about 40% below that “low point” where I got out).
Saul

10 Likes

Bear,

This is really Talend’s fault. Last quarter Duma and I went over the numbers as best we could from the clues Talend left us. By doing so it looked like it would take 18 to 24 months for cloud to start carrying the company as we assumed 9% or less growth for on premise.

This quarter however the “clues” were more profound and it is clear that Talend was playing us.

What is it, 9 consecutive quarters of doubling cloud? 8, 7, either way does not matter. I was interested in it, fully examined it, tried it on, and I just dropped it. It just did not make sense how something could double for so long and yet still be immaterial to the growth rate.

I did this on the NPI board. Lets say they started with $1 million in cloud revenues, now lets just keep doubling that for 8 more quarters:

1, 2, 4, 8, 16, 32, 64, 128, 256. What Talend was bragging about, all they were talking about, what no analyst asked them to clarify, was cloud revenue that probably started at about the annual wages of a GP physician or lower. We are not even talking top 1% there. For two years, every earnings, Talend is putting out this headline number as if it really meant something! Clearly it did not. They carried as far as they could until the real business started to dry up.

Perhaps now they will need to come out with the real numbers so investors can truly evaluate the business.

It why I do no like “cheaper” valued companies because they are cheaper for some reason. This was that reason I think. I believe that there were hedge funds and the like who figured this out after awhile.

Either way, they were not growing that fast, and yet at the same time they were not leveraging earnings that rapidly either. To make it worse they were going out of their way to mislead investors. The future is the cloud. Q: If you make and update to the software do you make it to the cloud or on-premise. A: “Cloud first, cloud first is always our answer, cloud is the future.”

I remember these responses quite well. The numbers struck me as funny, and I simply did not like the fact that growth was not accelerating as cloud revenues had to start becoming material. Well, they never did.

The only lesson here is to really ask questions about the numbers that businesses refuse to disclose. If a company is going to continually promote 100%+ cloud growth, and give the headline number, to not be misleading they have to give you the underlying numbers as well. The only exception is if it would be some sort of competitive disadvantage. In this case there would have been no competition disadvantage.

Lets compare and contrast this with MDB (and who knows maybe they will collapse sometime, but not today, in fact my port is back to almost where it was pre-crash because of MDB). MDB has a rapidly growing product - Atlas. It is growing at 400% YoY. But unlike Talend MDB actually gives out the numbers (or enables the numbers to be extrapolated). The numbers are still relatively small (what, 18% of total revenues or something as of yet) but we know what they are, and they are still growing at 400% even though they are now at a quarterly amount in the low 8 figures.

That is one reason, not the only, that MDB became such a large portion of my port. That may change from time to time but I trusted their numbers and their competitive positioning. The numbers equated with the rhetoric which equated with their competitive advantage which equated to at least my understanding of how enabling software markets like this operate.

Anyway, there are lessons to be learned here. Talend is far from the worse company to be misleading in this regard. Talend may in fact turn out to be a great investment of the next 36 months or so. But given how they have, in my opinion, purposefully mislead investors (although it may be within the bounds of the law), I don’t know why you would want to continue to trust them with your money.

Tinker

25 Likes

All:

On the NPI, we did pick up the “slower than expected” transition to hidden revenue growth from the prior earnings call in August:

https://discussion.fool.com/just-did-a-brief-read-of-earnings-re…

But this probably means this is a 2-3 year storyline that may play out over much longer timeframe (10 years as suggested by CEO previously). But in the next 12 months, and until the lions’s Share of their revenue is cloud, we may see this 35-40% growth rate that fails to impress unless one looks under the hood for the sector trends.

There are some parallels with PVTL’s “hidden growth” story line IMO.

The thesis is still intact IMO…but much like PVTL, we concluded that this could be dead money for a couple years. As in PVTL, they need larger enterprises and at this moment, they are not seeing major activity with larger deals. On-prem has collapsed.

But remember that TLND’s ENTIRE storyline (including from the 2 Bert articles) was ALWAYS about the cloud…that is their forte over all other competitors.

They say they are growing cloud by 100% YoY and that “new” ARR will be OVER 50% cloud by the end of 2019.

I am assuming the ARR means “subscription” revenue which accounted for $44.6 million of total $52 million this past quarter (the lion’s share at 86% of total revenue). Big data and cloud are ALREADY 50% of subscription revenue as of this past quarter.

They are saying that 50% of “NEW” ARR will be cloud as of end of 2019 (excludes big data) and that is growing 100% YoY. They gave us loose revenue guidance for 2019 at low 20% revenue growth.

Based on that, let’s assume then do 22% revenue growth 2019 to $251 million next year from $206 million this year…net gain $45 million of which $22.5 million would be cloud ARR.

That cloud then grows 100% YoY for several years according to TLND. The cloud subscription revenue would look approx. as follows:

2020 $90 million
2021 $180 million
2022 $360 million
2023 $720 million

I think one can see how this company is a 2-3 year storyline…and why they have stated that 2019 is their major cloud transition all-in strategic singular focus…caution to the wind.

So what is a reasonable strategic move for an investor considering TLND?

  1. Parking dollars in TLND at this time will likely be stagnant for next 1-2 years unless they get acquired by MSFT.

  2. The investment thesis is STILL intact so continue to follow this one closely since there will most likely be a very favorable investment opportunity once there is clear evidence that the cloud transformation is actually occurring.

  3. They simply MUST transition to pure cloud model as their survival is predicated on pulling that singular focus off…wait for evidence that they are doing just that.

As an aside, we now have two examples of “hidden value” investing (PVTL and TLND) where “total revenue” did not reflect the “hidden value” that was occurring under the hood…perhaps a form of value investing? Nothing particularly wrong with the concept other than that timing and confirmation of a real value unlocking can be both crucial and challenging.

We also have the same two examples that must battle against a smaller number of larger enterprise customer base…much more difficult to control the pace of that change with a larger enterprise concentrated base.

Best:
Duma

11 Likes

Sorry……cut those growth numbers in half…meant to use the pure cloud ARR.

2020 $45 million
2021 $90 million
2022 $180 million
2023 $360 million

2020 $45 million
2021 $90 million
2022 $180 million
2023 $360 million

Remember, half of “new” ARR. so I don’t think I agree with these numbers at all.

But even if I did, why would you believe they can grow cloud at 100% for so long? And why would you believe anything Talend says?

Bear

3 Likes

agree, its half of “new ARR”…
with $ based net expansion rate at 118%, and expected overall growth rate in next year “in 20s” or did they say “low 20s”… either way, take away 18% from that and it seems like “half of new ARR” is somewhere between 5% to 10%"… and yes in best case scenario, it may grow at 100% annual rate for a while but it is for sure a couple years out before this one get back on strong growth (>30%)… if it does!

I missed this analysis by tinker and duma last quarter (Dont visit NPI as much as I should, may be)… and as a result, i didnt quite understand this dynamic, kept TLND and still to get out of TLND as last week was busy to pay much attention in the market…

I would agree that PVTL and TLND “may” become star growth companies again… remember TWLO went through that journey… i have SPLK for few years now and they went through exact same transition… so lets keep a watch… i feel PVTL has a better chance sooner than TLND but we have plenty of time for both.

2 Likes