Description

We think TLND is a 12-month double with 10:1 up/down skew. The set-up contains hallmark traits of previous case studies in software that have generated outsized alpha and absolute returns, including (i) a next-gen software share-gainer that meaningfully disappoints buy-side expectations for the first time as a public company, combined with (ii) a wobbly tech/growth tape, and (iii) significant strategic and financial M&A appeal.

The stock trades ~3x 2020 recurring revenue. Given the highly sticky nature of the installed base, we believe the current valuation prices in significant deceleration from the 36% subscription revenue growth in the most recent quarter to a near run-off valuation. However, we think revenue growth will re-accelerate in 2020, eventually driving numbers higher and re-rating the stock.

We think the recent ~55% draw-down in the stock to the low-$30s provides an extremely compelling entry point. The CEO, CFO, and 3 board members recently purchased stock on the open market at $42. Our channel work (more below) continues to point to an opportunity for TLND multiples larger in the cloud than its historical on-premise market.  If the stock continues to languish near current levels, we believe TLND to be a highly likely take-out candidate. Precedent transactions imply >$100/share in an M&A scenario.

The Business

TLND is an open-source enterprise software company focused on data integration. Subscription revenue represents 85% of total revenue and grew 36% in constant currency in the latest quarter. Consensus expects revenue to grow 20%+ in each of the next two years.

The primary problem that TLND addresses is managing and cleansing data generated by the thousands of applications in a typical enterprise environment, often in unique data formats (e.g., different business silos, NoSQL vs. relational databases, structured data vs. unstructured log data, etc.) and stored in disparate environments (on-premise, AWS, Azure, CRM, etc.) into a common and comparable format. The traditional process is often referred to as ETL (Extract, Transform, and Load). TLND’s data platform further addresses enterprise pain points such as data governance, compliance, security, and support.   

~50% of subscription revenue is tied to traditional Data Integration and MDM (Master Data Management).  IDC/Gartner peg the combined market at ~$9bn, growing sustainably at ~HSD per year. Informatica, IBM, SAP, ORCL, SAS and Ab Initio capture ~80% of the paid market and no vendor has more than 25% share. A considerable amount of hand-coded solutions have also been built up over the years at companies with technical debt; these types of band-aid solutions are ripe for displacement and are not captured in Gartner/IDC estimates.  TLND has grown this segment consistently in the mid-teens for each of the past five years, modestly outpacing overall industry growth. Industry participants credit TLND’s open source platform, UI, and the user-based subscription pricing model as key differentiators vs. incumbents. Data Integration is often considered as “core plumbing” in the enterprise and incumbent solutions such as Informatica are very sticky. Few companies rip and replace existing solutions, limiting the number of “jump balls” created every year. We think this segment is a low churn, high margin recurring software business that can consistently deliver stable if unexciting low to mid-teens growth for many years to come.

Cloud and Big Data represent the other ~50% of subscription revenue, growing 69% in 2Q18 and 71% in 3Q18. TLND released the initial Big Data Integration and Cloud Integration products in 2011. The Big Data SKU has benefitted in recent years from enterprises tapping new and old sources of data for real-time analytics, initially through on-premise Hadoop, but more recently through cloud-based deployments. TLND shines as a better mouse-trap in these workflows because it transforms large and complex sets of data in near real-time. The problem with legacy ETL tools such as Informatica or IBM is that they continue to function mostly as batch processes (i.e., run a job that finishes in several hours or overnight for the next day). The Cloud Integration SKU is a single digit % of revenue today but bookings are growing 200%+. This product allows enterprises to pursue a hybrid and/or multi-cloud data architecture, enabling data analysts and business users to pull, combine, and analyze data whether it sits on-premise, in AWS or Azure, a cloud-based data warehouse such as Snowflake, or on a SaaS platform.

Structural Growth Drivers

We believe TLND is one of the biggest winners as analytics workloads move from batch to real-time and from on-premise to public cloud. We think the company is one of the best ways for investors to invest in the hybrid cloud and multi-cloud trend. The fragmentation of data into multiple formats and in to different environments is a significant tailwind for next-generation data integration platforms. Traditional ETL vendors such as IBM or hand-coded connectors can’t scale to these more fragmented and real-time environments.

Our work suggests that TLND is winning 30%+ of enterprise deals when production workloads move to the public cloud vs. TLND’s current ~2% market-share on-premise. We spoke to 10+ senior sales reps at the rapidly growing cloud-native data warehouses, and when a cloud customer is ready for an enterprise-grade data integration platform, they see TLND attached in 30-60% of deals. Perhaps most importantly, our channel work suggests that the move from on-premise to public cloud creates orders of magnitude more “jump balls”. It is a natural checkpoint for enterprise customers to re-evaluate their existing legacy data integration platform.

We believe that TLND can produce mid-20s constant currency subscription revenue growth in 2019. In outer years, we believe that subscription revenue growth can re-accelerate from 2019 levels as the fastest growing segment (Cloud) becomes a larger mix of the revenue base, and the non-Cloud exposed biz sustains stable mid-teens growth.

Why the opportunity exists

We have been following the slow-down in on-premise Hadoop for some time as we were previously short CLDR. Industry participants point to a pause in new logo wins for TLND’s Big Data SKU as enterprises evaluate putting new analytics workloads in the cloud. As discussed above, we believe this pivot from on-premise Hadoop to the public cloud creates an opportunity for TLND orders of magnitude larger than it has traditionally participated in. However, enterprise companies are taking 6-12 months to architect their hybrid cloud data strategy, creating an air pocket for when growth in TLND’s Cloud SKU can offset the moderating growth in the Big Data SKU.   When companies start moving critical production workloads is when industry participants see customers standardize on a next-gen enterprise-grade data integration platform, and where they see the aforementioned 30%+ win-rates for TLND.

Mgmt. has done a good job executing but a very poor job communicating to investors. On the 3Q18 call, the CFO lowered the bar for 2019 revenue growth from ~27% YoY consensus growth to “low-20s” based on a combination of (i) uncertainty in the timing of cloud driven revenue growth offsetting moderating on-premise Big Data growth, (ii) a measure of conservatism as a new and first-time public company CFO, (iii) and some accounting, rather than fundamental, headwinds.

The subsequent sell-off has been dramatic but not without precedent. We have numerous internal case studies for “multi-bagger” opportunities when next-gen software share-gainers meaningfully disappoint buy-side expectations for the first time as a public company in a wobbly tech/growth tape. What follows is typically a painful rotation of the investor base, exacerbated by what we believe to be some technical selling. Candidly, the timing of the transition to cloud also introduces uncertainty for near-term results (i.e., next 1-2 quarters). For doing the deeper industry work and taking a longer than one-quarter investment horizon, we believe that investors at this price are rewarded with the opportunity to pick up $1 at <50c.

Other Considerations

Mgmt appears to agree with us that the security is mispriced. The CEO recently purchased ~$500k worth of stock on the open market at ~$42 and suspended his 10b5 plan for at least 6 months. The CFO and 3 board members bought a combined ~$400k around the same time at similar prices.

Precedent infrastructure/devops software take-privates value TLND at $100+/share, even if we assume zero probability that revenue growth re-accelerates. Infrastructure software assets have been popular targets for financial buyers given the stickiness of the maintenance revenue. Vista bought Tibco for 8x fwd recurring revenue in 2014 (~0% revenue growth and declining software revenue) and Permira acquired Informatica for 7.9x fwd recurring revenue (HSD rev growth) in 2015.

Key Risks

·         Timing of the cloud transition may impact near-term results. We believe this is in large part why the opportunity exists.

·         Competitive environment – Informatica has been working on a cloud product for many years. Our channel feedback on that product continues to be luke-warm but we do believe they are the one legacy vendor who may retain their market share in the cloud. There is 80% of the market currently occupied by IBM/ORCL/SAP etc. without a cloud/real-time viable product, resulting in the high win-rates for TLND. We have also seen some customers get started on cloud with light-weight pre-built connectors such as Five Tran or Stitch to experiment with cloud-native data warehouses. These connectors are fast ways to get up and running (e.g., pull in my CRM data) without the need for integrating complex data sets from disparate sources or data governance. Our checks are adamant that with the exception of small cloud-native startups, customers with an existing on-premise footprint invariably select an enterprise-grade data integration platform such as TLND or Informatica as they start moving a critical mass of production workloads.  

Representative comments from our interviews in the channel:

·         “When clients make the migration to the cloud that’s a checkpoint for them to re-evaluate their data integration platform. TLND is winning most of those deals.”  -- Industry Consultant

·         “TLND’s cloud-exposed business will be 10x what it is today in a couple of years. We are on the cusp of rapid growth for real-time analytics hosted in the public cloud.  Problem with legacy ETL is that it was a batch process whereas TLND can now do it in near real time. Of 10 new [cloud data warehouse] enterprise customers, 3 or more will pick TLND,” – VP at rapidly growing cloud data warehouse company

·         “We hear users compare TLND vs. Informatica similar to real-time vs. batch processes. TLND benefits from speed of Apache Spark. Informatica’s custom language was based on MapReduce, which is a lot slower. Informatica countered with Blaze, which is also custom Informatica but more comparable to Spark. Usage is also different. Informatica is very powerful but you need a PhD to use it.” – VP at TLND Competitor

·         “TLND is a code-generator; does a lot of the work for you. Informatica can generate some code but it’s not open-source, it’s Informatica specific code that only works in an Informatica environment. On top of this, the cost of TLND is so much better than Informatica.” – Systems Integrator

·         “Informatica still can’t do cloud right. We’ve had a number of clients that have tried Informatica for 6-12 months, failed and then switched to TLND.” – Systems Integrator

·         “TLND is cheaper than Informatica, but that’s not why people buy TLND. It helps. But TLND is about architecture, getting to solutions in real-time, going to cloud. Informatica can’t match them on that.” – Systems Integrator

·         “Our TLND growth has been phenomenal. We’ve been doubling clients every year and we are on track to double our clients again in 2018, even on the bigger base. Big Data was the initial tailwind but now it’s really the move to Public Cloud driving conversion. – Systems Integrator

·         “TLND market advantage is actually bigger on the cloud. TLND is the only vendor with code native to Apache Spark. So you spin up 1000 clusters, you’re good. On-premise Hadoop is not scaling well for our customers. If I have even 100 node clusters, and 100 different teams are fighting for those resources, you have exponential complexity. Plus this is millions of dollars upfront investment. Months of staging. Now compare this to running it in the cloud – the storage is independently stored on AWS or Azure. I can launch separate Hadoop clusters for each team, and I can stand them up as I want. I can use 1000 nodes, then 0. Cheap and ready in days.” – Systems Integrator

·         “We do ~$100mm of Data integration work. $11-12mm of that is TLND. This is not TLND revenue, [this is our  professional services revenue]. We’re not a reseller. Our TLND work has grown from 2mm in 2015 to 5mm in 2016 to 9mm in 2017 to 11-12mm in 2018, expect 16mm+ in 2019. We should be more than 16. We should be growing to 25 if I had my budget the way I wanted it.” --  Systems Integrator

·         “They are not investing enough in their partner communities and in supporting new accounts to expand. That’s my biggest gripe. My outlook for the next 3 years is that they should be able to grow at least 30% in each of those years from a demand perspective but they are shooting themselves in the foot by not investing enough.”  --  Systems Integrator

Catalyst

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