It’s been quite a first half-year on the job for Adam Meister, the finance chief at data integration software firm Talend.
Since Meister took the post in October 2018, Talend has made a key strategic acquisition, wrapped up its transition from IFRS to U.S. GAAP accounting, and filed its first financial statements in compliance with Sarbanes-Oxley Section 404(b).
All of that required a lot of work, to be sure. But none of it was as consternating as a plunge in the company’s stock price, as the market questioned Talend’s progress in its ongoing transition to a cloud-based product model and the effects of adopting the new revenue recognition standard.
When the market closed on November 7, Talend’s share price sat at $62.90 — and then the company held its third-quarter earnings call. By the market opening the next morning, after-hours trading had sent the shares plummeting by 31%, to $43.09. The stock continued to sink over the next several weeks, bottoming out on Dec. 24 at almost exactly half what it had been before the earnings call.
Of course, the whole stock market was down during the last two months of 2018 — but nowhere near 50%.
During the call, Talend CEO Michael Tuchen noted that customer contracts providing annual recurring revenue topping $500,000 and $1 million had become “fewer and farther between.”
He qualified the statement by referring to the company’s push to the cloud and its short-term impact on revenue growth: “The cloud deals now are almost entirely to new customers, and customers with any new technology tend to start smaller.”
Tuchen also spoke optimistically about prospects for larger deals in 2019, but the market clearly wasn’t convinced.
However, Meister, the new CFO, puts more of the blame for the poor share-price performance on the accounting impact of the new revenue recognition standard.
He notes that the software companies most affected by the standard are those that, like Talend, sell on-premises software but charge for it on a subscription basis. (Even with the company’s transition to the cloud, a large majority of its business is still on-premises.)
Under the new standard, which took effect for 2018, such companies must immediately recognize a portion of software license sales — in Talend’s case about 10%, says Meister — and the rest ratably over time. Under the old standard, the entire sale was recognized ratably.
That caused the company’s 2018 revenue to grow about 5% more than it would have, had the previous standard still been in effect, he says. “As a result, people’s expectations for 2019 were unrealistically high,” says Meister. “So we had to reset their expectations. It was a tough decision but the right thing to do.”
He acknowledges that Talend had insufficiently communicated the revenue recognition accounting impact.
“All of the disclosure was out there. It was abundantly clear — but the investors had to find it,” Meister says. “After I got here and we began to look at what 2019 would hold, it was clear to us that investors had not [understood].”
Before joining Talend, Meister was an investment banker, most recently with Goldman Sachs, where he helped take the company public in 2016. “One of our observations, and something I keep reminding the team of here, is that a software company doesn’t have the luxury of subtlety with investor communications,” he says. “You need to be very direct and lay things out in a way that is very easy for investors to digest. So we’ve changed our strategy a bit.”
While it’s almost impossible to calculate the impact of all variables on a stock’s price, as of Monday, May 28, the shares had recovered some of the lost ground, trading around $48.
Meister’s predecessor in the CFO seat, Thomas Tuchscherer (who left the company in April 2018 and signed on last August to run finance at Snowflake, a cloud-based data warehousing firm Snowflake), was anything but a fan of the new revenue recognition standard.
He told CFO a few months before the standard took effect, “We sell a subscription to customers, and we don’t sell the software license separately from the support and maintenance. It’s one package that includes everything. That’s how customers perceive the value of what they’re buying, and that’s how they actually buy it. So having to carve out elements of our subscription revenue … is not very rational or logical.”
Asked whether he agrees with that sentiment, Meister says, “Absolutely. The standard is disconnected from how the economics of our business works.”
However, he adds, “Frankly, I don’t think the industry has yet settled on what standard practice is. The variations in the conclusions companies are drawing in order to comply with the standard are pretty broad. It’s going to take a couple of years before financial leaders and auditors come to a consensus on what the new normal should look like.”
Meanwhile, the company Talend recently acquired, Stitch, is a cloud-based data integrator. Meister said Stitch had developed an interesting lead-generation model, and the acquisition was in a sense a “conclusion to a body of work” that Talend had been performing to understand changes in buying patterns as a software company moved more of its business to the cloud.
As for the transition from IFRS to GAAP, it was necessitated because Talend, which is a public company both in France and the United States, had lost its foreign private issuer status when it passed a threshold of U.S.-domiciled stock ownership.
While the work that’s necessary to determine how the switch will affect a company’s financial reporting is quite in-depth, there was little change for Talend aside from some tax nuances, according to Meister.
“The result was somewhat related to an intentional strategy early on by Talend to take an almost U.S. GAAP-centric approach in areas where IFRS allowed flexibility,” the CFO says. “The company had always strived to look and feel like a domestic issuer.”
Talend already derives 45% of its business from North America and is most bullish on its near- and mid-term prospects there. “North America leads the market in terms of adopting new technologies, and we’re focused on that as a leading indicator for how client adoption will trail in [Europe and Asia].”