Tuesday, April 25, 2017

A current AIM Fund holding: Talend ADR (TLND) by Tim Milani. “This next generation IT firm is a solid hold"

 Talend SA Sponsored ADR (TLND, $29.30): “Big Data continues to have big potential”
By Tim Milani, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary
Talend SA Sponsored ADR (NASDAQ:TLND) is a next generation information technology company that specializes in big data and cloud integration. TLND strives to help companies become more data driven by simplifying big data through its open-sourced based solutions that allow companies to act using real time and accurate information regarding their business and industry. TLND was founded in 2005 in Suresnes, France and is currently headquartered in Redwood City, CA.  
• TLND had a great finish to 2016 with fourth quarter revenues of $30.5 million, up by 45% YoY, and the eighth consecutive quarter of increasing revenue growth.  This also represented a record revenue quarter for TLND.
• The company experienced a turnaround in its free cash flow and operating cash flow from the previous years.  In 2015 operating cash flow and free cash were both negative at -$10.0 million and -$10.8 million respectively whereas in 2016 both were positive at $3.4 million and $2.0 million respectively.
• Significant gains were made by the company in big data and active customers as a milestone of 1,500 customers was reached by the end of 2016. 130 new customers were added in Q4 2016 including Hewlett Packard. Other major customers for TLND include GE, Verizon, eBay, Comcast and Citi.
• TLND could represent an attractive target for a potential acquisition by another tech firm as it is still a smaller company with a market cap of $834.4 million and an excellent record and reputation in its industry.

Key points:  TLND is coming off its best quarter yet with a significant increases in its revenues, customers and operating cash flows and is poised to continue these trends well into 2017 due to several positive company indications.

The growth potential the company has in its largest areas of its business, big data and the cloud, which together represent over 50% of new client bookings, is substantial. The big data services market is predicted to grow at a CAGR of 22% from 2016 through 2020 as indicated in the most recent 20-F.  Moreover, the cloud services market is predicted to grow at a rate of 18% from 2017 through 2020 according to a new forecast released by Gartner. In addition, the revenue from big data and the cloud has already grown consistently for eight consecutive quarters and management is predicting this trend to increase total revenues to ~$32 million and ~$142 million for Q1 2017 and the full 2017 year respectively. 

TLND has also been actively developing a greater installed user base. Customers who pay the company over $100,000 in their annual subscription fees more than doubled in 2016 and increased to a total of 224 of TLND’s 1,500 customers. The subscription based model gives TLND’s customers an alternative to typical contracts and allows them to save money up front thus attracting them to TLND. This difference in strategy gives TLND a total cost ownership advantage of 3-8 times compared to its closest competition, Informatica.

Expansions into several Asia Pacific and emerging market European countries have proved highly successful for TLND. Revenue grew well past expectations for both regions by ~30% YoY in Europe and by ~130% YoY in the Asia Pacific region.  TLND is looking to continue its trend of successful expansions with its business in India, the largest region it has opened in recently.

What has the stock done lately?
TLND’s stock price had initially been quite volatile following its IPO on July 29, 2016.  The stock opened trading at $27.66 per share, and has had a 52 week high and low of $34.49 in August 2016 and $21.02 in December 2016 respectively. However, since its addition to the AIM fund in February 2017 at a price of $22.76 (2/6/2017) the stock has grown greatly and consistently by a total of ~29% to its current price of $29.30.  News of positive cash flow from operations, a record quarter and the addition of 130 new customers have helped propel the stock upwards since the earnings press release on 2/9/2017.

Past Year Performance: After an initial period of volatility following its IPO TLND has experienced a solid year in many areas of its business. Operating cash flow and free cash flow finally turned positive and both increased this year to $3.4 million and $2.0 million respectively. However, the company also had a net loss during 2016 of -$25.92 million.  The loss was due to a large R&D expense ($19.2 million) and SG&A expenses ($86.90 million) relative to gross income ($80.18 million).  

The reason for the large SG&A expense and R&D expense is that TLND is investing heavily in sales and marketing personnel that will be able to accommodate the greater than expected demand the company has experienced allowing for greater revenues in future years. Gross income grew by 40.81% YoY in 2016 from 2015 and the company’s stock has grown in value by 5.9% since its IPO in July.  Free cash flow and operating cash flow are predicted to be positive again in 2017.


Source: FactSet

My Takeaway
TLND was just recently pitched and added to the AIM fund in February of 2017 with a price target of $33.98 representing and upside of 49.30%.  Since that time TLND has already experienced growth of ~29% due to its increase in value from its unexpected record quarter in Q4 2016. The drivers that were originally pitched in addition to TLND’s growth potential in big data revenue, growth potential in cloud revenue, increasing installed user base and successful expansion all indicate that TLND has the potential to meet its target of $33.98. Therefore, it is recommended that TLND continue to be held within the AIM portfolio at its current position. 




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