Data integration company Talend is deep into a rotation of its business away from premise-based software to cloud-based solutions. This shift has led its CFO to rethink the metrics he tracks to ensure company resources go where they need to be: activities that will lead to more cloud growth over the long-term.
“Right now, we’re in this rotation of our go-to-market strategy, so the most important measure for us internally and for Wall Street is the mix of our annual recurring revenue (ARR) that comes from the cloud, versus how much comes from premise software,” says Talend CFO Adam Meister, who joined the company last year after covering SaaS and other software companies as an investment banker. “It’s a somewhat unique metric to us right now. It’s gone from 14% in the third quarter of last year to 43% in the second quarter of this year. So, 43% of our new business in Q2 was transacted by the cloud.”
Talend is a $250-million company that sells annual term licenses for its services. It went public in 2016 and is one of the few companies to specialize in helping businesses clean and integrate data from all their different sources — financial, marketing, operational — into a single format to make analyses easier, internally consistent and helpful to executives as they try to identify new ways to monetize their data.
“Organizations are gathering data from hundreds of systems across their companies to do analytics, or even operations, and the merging and cleansing of all those systems is messy and requires a software-based approach so you can make apple-to-apple comparisons,” he said in an interview with CFO Dive. “Even more importantly for CFOs is to be able to actually govern that data, know who audited it, when it was last edited, and ensure you understand where your data resides. You can also drive revenue streams with integrated data you didn’t have before, which is why integration is a finance problem and not just a technology problem.”
Scaling for the long term
The biggest player in the space is Informatica, which, like Talend, is focused singularly on data integration, says Meister. Bigger companies — IBM, for example — also offer integration, but their services are mainly intended to integrate data so it works seamlessly with their other product offerings.
Meister says he was familiar with Talend during his investment banking days and helped the company go public in 2016. “That’s how I had a connection to [CEO] Mike Tuchen and the executive team here,” he said. “When they were looking for a CFO, they decided to look at non-traditional candidates as well. It was an opportunity I was very excited to take.”
Meister says he and the company’s executive team saw the need to zero in on the basic questions that would decide whether the company could scale successfully over the long term — what products to invest in and what markets to enter.
“It’s not that the company wasn’t faced with these decisions before, but it becomes much more fundamental for the long-term growth story at this stage,” he said. “My background in the software space and my experience getting a little bit deeper into how we think about forecasting and longer-term planning and what investors actually care about has been pretty beneficial to me in this role.”
The company already had a strong finance team in place when he came on board, he said, so he left it intact. “It was exactly what you want for a company of our size,” he said. “The breakdown of that is, obviously, core accounting, FP&A and forecasting, Treasury, quote-to-cash processes, and the legal team.”
In one change, he moved sale ops and marketing ops, which had been under the CMO, under him so he could unify the forecasting process and create a central hub for all analytics and performance measurements for the business. That way, he said, “everyone comes to us as the single source of truth. It’s been hugely helpful in making decisions that span different parts of the business and different divisions.”
Like any software business, the company’s biggest expense is its payroll, and he has no plans to cut company costs. Instead, his focus is on rebalancing expenses so they go into activities that will drive growth. “It’s about looking at the investments we’re making with a clear-eyed view of what the return on investment is,” he said. “We try to think about that at a differentiated level of granularity because of this rotation to the cloud that we're in the middle of.”
Tracking growth metrics
In addition to the mix of new ARR that comes from cloud customers versus premise-based software, he looks at two other key metrics, both of which are important to any subscription-based SaaS business: basic ARR and free cash flow.
The ARR metric, which is a non-GAAP measurement, is used to measure the scale and momentum of the company’s overall business. “It’s the best real-time measure of our success, because it tells us how much revenue we would get from the exact set of customers we have today if we did nothing more for the next 12 months,” he said.
The other metric, looking at free cash flow, provides an early warning if the company is running into trouble. The indicator tends to work in the company’s favor because of the way it bills customers. “We bill companies in advance, so there’s a negative working capital benefit to our business that helps fund our growth,” he said. “It’s a much better measure for our efficiency than operating income or net income.”
Meister says the company’s goals for the next two years are clear: finishing the sales rotation towards its cloud services and getting more companies to take a self-service approach to using their software. “How do we create a higher volume funnel of lead acquisition where customers can self discover and start using our product on a paid basis with little to no involvement or direct outreach from us?” he said. “We’re calling that a frictionless strategy. There’s a lot that goes into that but we’re seeing enough of a shift in how our users buy software that that’s going to become a pretty important part of our lead generation and, ultimately, sales efficiency.”