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Talend (NASDAQ:TLND)
Q4 2018 Earnings Conference Call
Feb. 14, 2019 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Talend's 4Q and FY 2018 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lisa Laukkanen. Please go ahead, ma'am.

Lisa Laukkanen -- Investor Relations

Thank you. This is Lisa Laukkanen, investor relations for Talend and I'm pleased to welcome you to Talend's fourth-quarter and fiscal-year 2018 conference call. With me on the called today is Talend's CEO Mike Tuchen, and CFO Adam Meister. During the course of today's presentations, our executives will make forward-looking statements within the meaning of the federal securities laws.

Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from those contained by these forward-looking statements. Forward-looking statements in this presentation include but are not limited to statements related to our business and financial performance and expectations and guidance for future periods, our expectations regarding our strategic product initiatives, and their related benefits and our expectations regarding the market. Our expectations and beliefs regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release that we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission.

The forward-looking statements in this presentation are based on information available to us as of the date hereof. You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements, except as required by law. Please note that, other than revenue or otherwise specifically stated, financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure in our press release. Talend customers that are referenced by name today do not endorse any vendor, product or service and do not advise any company on selection of use of technologies, products or services or vendors. And now let me turn the call over to Mike Tuchen, Talend's CEO.

Mike Tuchen -- Chief Executive Officer

Thanks, Lisa, and thank you all for joining us today. We're pleased to report a solid finish to the year as we continue our cloud momentum. Our success comes from both new customers adopting our data integration platform and existing customers extending their use. And it is being fueled by the ongoing market shifts to the cloud.

Reaching record total revenue of $55.7 million in the fourth quarter, up 34% year over year. In the fiscal year, we achieved record total revenues of $204.3 million, up 38% from fiscal-year 2017. Some additional highlights from the quarter include: our subscription revenue grew 38% year over year. Talend Cloud, our SaaS offering, grew over 100% year over year for the 10th quarter in a row and represented 25% of new ARR for the fourth quarter.

Asia Pacific has reached significant scale and revenues grew over 100% for the seventh quarter in a row. Our total customer count including Stitch crossed the 3,000th customer mark during the quarter. We are introducing a new metric, annualized recurring revenue, which totaled $198.1 million and grew 33% year over year. Before diving into our business update, I'd like to take a moment to discuss the leadership changes we announced in early January.

We expanded Laurent Bride's role to CTO and COO, as cloud operations has become increasingly important to our business. Laurent will focus on tightly integrating our R&D, product management and IT functions to further enhance our cloud offerings. We also made a change to the sales leadership to prepare us for the next phase of growth. And as a result, we're currently searching for a new sales leader.

As we continue to scale our cloud business, we'll expand our go-to-market capabilities with frictionless sales and we'll look for sales leadership to help support that effort. We believe high-velocity, frictionless cloud adoption, the way Stitch is sold today, it will be an important landing strategy to fuel our overall growth and improve our go-to-market efficiency. As we've indicated for several quarters, we are increasingly seeing cloud become the deployed model of choice for data integration. Driven by the adoption of cloud analytics and cloud data warehouse.

The move to the cloud is evident across the entire data integration market, and in particular for Big Data. As the majority of organizations consider a Big Data project, the cloud is a far more efficient and cost-effective approach. Cloud platforms are faster and easier to deploy, scale seamlessly, provide more flexibility and enable companies of all sizes to take advantage of enterprise-grade capabilities such as machine-learning. As we've discussed since beginning of 2018, this market transition has resulted in slowing demands for on-premise Big Data deployments and accelerating demand for cloud-based solutions.

However, the data integration market is massive and continues to grow. Cloud accounts for most of the growth in the market in the coming years. According to IDC, the markets for cloud data integration and integrated software is expected to reach $2.3 billion by 2022, representing a 30% CAGR from 2018. The shift in the cloud represents an opportunity to compete for significant portion of the historically on-premise integration software market that has been locked in by legacy incumbent.

As customer considers moving to the cloud, they rethink their entire data infrastructure, which puts their future data integration solution back in the market for first time in years. While most customers choose to start small and scale the deployments over time as they see success, we believe a shift to the cloud will eventually impact all types of data and data scenarios that will be a durable industrywide trend for many years to come. We believe that will improve our subscription growth rates as we complete our cloud transition at the end of 2019. And what we view as an indication of the road ahead, Talend Cloud grew over 100% and even faster than we anticipated in the fourth quarter and for the full year.

We are seeing adoption by larger companies and deal sizes gradually increasing. While most of our existing customers who are on-premise today, we've seen an uptick in conversations about migrations with our existing customers and cloud is the majority of conversations with new customers. We are excited about the opportunity to help many of our customers define and execute their cloud-migration strategies for all data over the coming years. We believe we are entering 2019 well-positioned to go after a broader customer set with the addition of Stitch and its frictionless easy-to-try, easy-to-buy online sales model.

The addition of a self-service tool for loading data into cloud-based data warehouses enables us to address customers' entire data-integration life cycle. We can help customers get live in minutes during their initial Cloud trial and also solve their most complex data challenges as they ramp up their use of the cloud. Although we're still in the early innings of industrywide cloud adoption, we're focusing on it as a key driver of our growth. We believe that over time the vast majority of data integration will be managed by the cloud, which is why we placed such an emphasis on this shift.

Let's transition to a few customer success stories to illustrate these trends. We saw a healthy mix of new wins and strong expansions in the fourth quarter. A number of exciting wins were in international markets and across a broad set of industries. In Q4, we landed $1 million ACV agreement with a Fortune 500 investment and insurance firm.

Like many companies, this customer views its reliance on legacy, on-premise data platforms and software as a major risk. They chose Talend as the best partners to move their data workloads to the cloud and make data more accessible to the business. And most importantly, they chose Talend because we could give them the flexibility to begin on-premise and migrate to the cloud over time. This was another win in collaboration with our partner Snowflake Computing and further evidence of the compelling value that our combined offerings deliver.

During the quarter, we also secured a new Talend Cloud agreement with a leading operator of membership-to-retail warehouse clubs. The company is using Talend to modernize its data management infrastructure in the cloud, starting with a project to rebuild its membership database and transition it from Terradata to AWS. We also won a number of new agreements to help customers internationally move to the cloud. One example of this is the University of Manchester, which is the largest single-site University in the U.K.

with over 40,000 students. Like many educational institutions, the University of Manchester is in the midst of a digital transformation program designed to deliver more personalized student services. At the same time, they're looking to meet new compliance requirements as a result of GDPR. The university has chosen to move to the cloud with Microsoft Azure, Cloudera and Talend as part of a major infrastructure investment.

In addition to new customer wins, we continue to expand in the number of our existing accounts as part of our land-and-expand strategy. U.S. Cellular Corporation, the fifth-largest full-service wireless carrier in United States started using Talend to automate their cell power data collection. They are adding Talend cloud APIServices to improve network reliability and uptime by delivering a centralized dashboard providing real-time network feedback, better troubleshooting and predictive maintenance.

Kansai Electric Power is the second largest electric utility in Japan. Data was scattered across the company and they did have real-time business visibility. Kansai chose Talend because it was the best fit for its multi-cloud environment that includes both AWS and Google Cloud. Using Talend, Kansai Electric Power Company plans to reduce cost by analyzing power transmission, SmartMedia corporate and customer data.

The company's also using Talend data catalog to better data governance and ensure data quality and security across the organization. Last month, we held Talend Engage, our annual sales kickoff event. The event was outstanding with a mix of keynotes, customer and partner presentations, in-depth product section and new sales ways to help prepare our global sales team to compete successfully in 2019. The customer stories were particularly powerful this year and served to further reinforce the critical role Talend plays in helping customers across a broad range of industries competing in today's marketplace.

The importance of delivering trusted data at the speed required for modern business is a unique strength of Talend and a focus of our marketing efforts in 2019. These teams were front and center of show and were reinforced by customer presentations such as the one by PointsBet. PointsBet is a cutting-edge online bookmaker from Australia. Data science and analytics is the backbone of the gaming industry and a major priority for PointsBet, who view the ability to evaluate and update product features and better segment customers in real-time as critical to their success.

The real-time usage analysis to odds creation, speed is everything to PointsBet, but its meaningless without also being able to trust the data and meet regulatory requirements. At Engage, PointsBet detailed how Talend is helping them efficiently meet a range of regulations and privacy goal as they expand into international markets. We've also continue to strengthen our relationships with leading cloud platform providers, which demonstrates our commitment to our customer success in the cloud. This quarter, we were pleased to announce the strategic partnership with Databricks, which combines the unified analytics, machine learning and data management platform in the cloud.

The integration between Talend Cloud and Databricks Unified Analytics Platform allows companies to perform real-time streaming analytics and machine learning to help optimize their business. Let me now turn the call over to Adam. He'll discuss our Q4 and fiscal 2018 financial results in more detail and provide our outlook.

Adam Meister -- Chief Financial Officer

Thank you, Mike. Today I will review the financial results for the fourth-quarter and fiscal-year2018, as well as provide our outlook for the first quarter and fiscal year of 2019. To begin, I'd like to address the feedback we've heard regarding the current complexity of our financials and their effect on our expectations for 2019. There are three structural impacts belying the momentum of our business: The adoption of ASC 606; the growing proportion of cloud subscriptions, which are entirely ratable for revenue recognition; and foreign exchange.

As Mike mentioned, we're disclosing annualized recurring revenue to provide greater clarity into our results given that it is not affected by accounting changes, cloud shift or contract duration.We'll disclose ARR as long as those factors obscure our financial results. Annualized recurring according revenue was $198.1 million as of December 31, 2018, and grew 33% year over year. We defined ARR as the annualized value of all active contracts contributing to revenue at the end of the period. This measure includes Stitch, which accounted for 2% of total ARR as of December 31.

We're breaking out the contribution from Stitch as a one-time disclosure. Please note we are reporting Q4 2018 financial results under U.S. GAAP as required when we became a domestic filer on January 1, 2019. As we've previously discussed, the translation from IFRS to GAAP did not have any impact on our financials.

Total revenue for the fourth quarter was $55.7 million, up 34% year over year. Subscription revenue for the fourth quarter was $48.4 million, up 38% year over year. Please recall under ASC 606, we recognized 10% of premise software sales immediately and the remainder ratably over the contract term. Under ASC 605, where we recognized all subscriptions ratably, subscription revenue would have been $46.8 million, representing 33% year-over-year growth.

Total revenue for the year was $204.3 million, up 38% year over year. Subscription revenue for the year was $174.9 million, up 39% year over year. Under ASC 605, subscription revenue would have been $170.4 million, representing 35% year-over-year growth. Foreign exchange negatively impacted subscription revenue growth by two percentage points in both the fourth quarter and for the full year.

The strong demand for Talend Cloud, our SaaS offering continued in the fourth quarter. Talend Cloud represented 25% of new ARR for the fourth quarter, up from 14% in Q3. We are very pleased with our progress in Q4 and continue to target Talend Cloud to reach half of new ARR exiting 2019. Most of our offerings are now available via Talend Cloud and all new products will be cloud native.

Subscription revenue from Talend cloud grew more than 100% year over year for the tenth consecutive quarter. Talend Cloud does include Stitch, which contributed $642,000 of revenue in Q4 since the transaction closed on November 9, 2018. For comparison purposes, on a stand-alone basis, for the nine months ended September 30, 2018, Stitch generated $2.2 million of revenue. Talend Cloud is beginning to contribute to growth with enterprise customers, defined as companies with $100,000 or more of annualized subscription revenue, where their number grew by 34% and reached 472 this quarter.

Although we continue to set new record highs in cloud transaction sizes, most Talend Cloud deals are new lands, which tend to be smaller than our later expansion deals. As a result, the contribution of subscription revenue from the enterprise customers remained at 67% in Q4 2018. We expect this mix to be relatively stable for the near to medium term as we focus on cloud lands. For the quarter ended December 2018, our dollar-based net expansion rate was 120% in constant currency.

As we have stated on prior earnings calls, our dollar-based net expansion rate, which excludes monthly customers, can fluctuate quarter over quarter. It is important to note that this revenue-based metric was boosted by a few percentage points during 2018 due to ASC 606 adoption. Professional services revenue was $7.2 million in the fourth quarter, up 14% year over year. For 2018, professional services revenue was $29.4 million, an increase of 30% from the prior year.

Professional services slowed in Q4 as Talend cloud sales typically have a smaller professional services requirement. Growth in professional services will moderate during 2019 as our cloud mix increases. Our primary focus remains on enabling our systems-integrated partners to supplement services demand from our customers. Before I move to profit and loss items, I would like to point out that unless otherwise specified, all expense and profitability metrics, I will be discussing going forward, are non-GAAP results.

A full reconciliation between GAAP and non-GAAP results can be found in our earnings release issued today and available on our website. Our total gross margin for the fourth quarter was 78%, compared to 77% in the same period last year. Total gross margin for 2018 was 77%, consistent with the 77% in 2017. We expect Talend Cloud to impact gross margins slightly in 2019 as we expand our cloud operations.

Operating expenses for the fourth quarter were $48 million, up 20% year over year. Operating expenses for the fiscal year were $174 million, up 29% year over year. Sales and marketing expenses for the quarter were $28.8 million, up 15% year over year. Sales and marketing expenses for 2018 were $106.4 million, up 26% year over year.

Note these results were positively impacted by the adoption of ASC 606, which requires capitalization of commission expense. Our sales and marketing headcount increased from the prior year by 26% to 459 employees. R&D expenses for the quarter were $10 million, up 35% year over year. R&D expenses for 2018 were $34.7 million, up 37% year over year.

The increase was driven by additions to the team as we scale our cloud products and operations.G&A expenses for the quarter were $9.1 million, up 20% year over year. G&A expenses for the full-year 2018 were $32.9 million, up 30% year over year. We incurred an operating loss for the quarter of $4.8 million or 9%, compared to an operating loss of $8.2 million or 20% in the fourth quarter of 2018. For the fiscal-year 2018, we incurred an operating loss of $16.7 million or 8%, compared to an operating loss of $20.2 million or 14% in 2017.

The adoption of ASC 606 benefited 2018 operating margin by five percentage points. This impact will normalize this year and we expect operating margins to improve throughout and beyond 2019. We believe prioritizing investment in our cloud transition this year is critical as we push forward to half of new ARR in the cloud exiting 2019. Net loss for the quarter was $3.9 million, compared to a net loss of $8.1 million in the prior-year period.

Net loss for the year was $15.5 million, compared to a net loss of $22.7 million in 2017. For 2018, the free cash flow was a loss of $1.8 million, compared to a free cash flow loss of $4.5 million in 2017. Cash flow for the year was impacted by $1.5 million of nonrecurring expenses related to the acquisition of Stitch and follow-on transactions. We have always taken a balanced approach to growth and cash flow and we continued to do so.

We expect to remain approximately free cash flow neutral for the full-year 2019 and as a result are comfortable with our cash position from an operating perspective. As of December 31, 2018, we had cash and cash equivalents of approximately $33.7 million. I would like to highlight the metrics that we will be providing going forward on a quarterly basis. Subscription revenue in constant-currency-adjusted year-over-year growth, total ARR in year-over-year growth, Talend Cloud as a percentage of new ARR in the periods, dollar-based net expansion rate and enterprise customer count and growth.

Going forward, we will no longer provide the combined cloud and Big Data subscription in growth rate or a combined subscription revenue contribution, given that we are providing additional disclosures for the cloud. We will continue to provide color on trends for our on-premise Big Data business. Before providing guidance for Q1 and 2019, I'll summarize the structural impacts between our Q4 '18 results and forward guidance. The adoption of ASC 606 provided a tailwind of five percentage points to subscription revenue growth.

This tailwind will not continue in 2019. We expect our increasing cloud mix will create two to three percentage points of revenue growth headwinds during 2019, given these are entirely ratable subscriptions. Based on FX rate so far this year, we expect a 2% to 3% reduction to growth for Q1 2019. Professional service resulted in a few points of drag on revenue growth in Q4 2018, and we expect that trend to continue in Q1 and for the full year of 2019.

Finally, we still expect Stitch to contribute $6 million of subscription revenue and negatively impact operating margin by approximately two percentage points in 2019. Now for the Q1 and 2019 fiscal-year guidance, which assumes similar business conditions and foreign exchange rates as of January 31, 2019. For the first quarter of 2019, total revenue is expected to be in the range of $56 million to $57 million. Loss from operations is expected to be in the range of $18.9 million to $17.9 million and non-GAAP loss from operations is expected to be in the range of $9.3 million to $8.3 million.

Net loss is expected to be in the range of $19.3 million to $18.3 million and non-GAAP net loss is expected to be in the range of $9.6 million to $8.6 million. Net loss per basic and diluted share is expected to be in the range of $0.64 to $0.60 and non-GAAP net loss per share is expected to be in the range of $0.32 to $0.29. This is based on a basic and diluted weighted average share count of 30.3 million shares. For the full-year 2019, total revenue is expected to be in the range of $248 million to $250 million.

Loss from operations is expected to be in the range of $80.3 million to $78.3 million and non-GAAP loss from operations is expected to be in the range of $27.3 million to $25.3 million. Net loss is expected to be in the range of $81.9 million to $79.9 million and non-GAAP net loss is expected to be in the range of $28.9 million to $26.9 million. Net loss per basic and diluted share is expected to be in the range of $2.67 to $2.60 and non-GAAP net loss per share is expected to be in the range of $0.94 to $0.88. This is based on a basic and diluted weighted-average share count of 30.7 million shares.

With respect to our expected revenue trends by quarter for 2019, consistent with prior seasonal patterns, we do not expect sequential growth in the second quarter and we expect revenue to increase sequentially in the third, and particularly, fourth quarters. Given the shape of this revenue curve and the ramping of expenses, investors should expect our bottom-line results to be weaker sequentially in the first half and stronger in the second half of 2019. To summarize, our total ARR growth of 33% demonstrates our strong continued momentum. That growth will moderate some over the course of this year as we scale and given our conservative assumptions for our on-premise Big Data offering.

With the impact of ASC 606 behind us in 2019, constant-currency subscription revenue growth will largely normalize over the course of this year. We are excited at our opportunity this year and particularly exiting 2019 with Talend Cloud as the largest contributor to new business. Our market leadership, strong customer and ecosystem partnerships and continued innovation position us well to take advantage of this long-term industry shift to the cloud. Let me turn the call back over to Mike for some final comments.

Mike Tuchen -- Chief Executive Officer

Thank you, Adam. 2018 was a transformative year for Talend as we strengthened our cloud capabilities amid strong traction in growing our cloud business. We further accelerated our cloud momentum with the acquisition of Stitch and enhanced our sales strategy with a new frictionless channel. Additionally, as validation of our technological leadership, for the third consecutive time, we secured our position as a leader in the 2018 Gartner Magic Quadrant for Data Integration Tools.

And for the first time, Talend was recognized as a leader in Forrester Big Data Fabric Wave. Talend is positioned to capitalize on the market shift to the cloud by scaling our business through investments in sales, marketing and R&D while maintaining cash flow neutral. As we look to 2019, we are focused on driving continued demand for our offerings and empowering our customers with the ability to work with their data in real-time, operational and the analytical scenarios, which meet their specific need. Our goal is to continue to drive cloud adoption by expanding our product and service offerings in the coming year.

We expect our cloud offerings to become an increasing contributor to our overall business and represent the majority of our new ARR in Q4. With that, Adam and I would be happy to take your questions. Operator? 

Questions and Answers:

Operator

[Operator instructions] We'll take our first question from Raimo Lenschow with Barclays.

David Rainville -- Barclays -- Analyst

This is actually David Rainville on for Raimo. And nice to see a healthy ARR number like that, so thanks for providing. Maybe I'll start with a question for Mike and then I have a follow-up for Adam. Mike, when we think of the different products groups, could you give us an update on what you're seeing in the field for the on-prem Big Data business or product? And how should we think of that installed base eventually moving to Talend Cloud? What kind of uplift and what kind of headwind we'll get in the Big Data business there?

Mike Tuchen -- Chief Executive Officer

You bet. Thanks, David. What we're seeing right now, is that as we've talked about before, the majority of our new customers are choosing Talend Cloud as the way to solve their Big Data problems. It's a far more streamlined approach, more scalable, easier to take advantage, some of the advanced cloud capabilities like machine learning and so on.

What we're seeing right now, is our existing Big Data customers, premise Big Data customers are still expanding their deployments at a healthy pace. And that's blending with a fewer new customers choosing to go with premise Big Data and instead solving their Big Data problems in the cloud. We believe that in the kind of medium term over the course of the next couple of years, that the revenue growth for Big Data probably starts to look like the overall revenue growth for our non-cloud business as it starts to have a more similar set of characteristics to the non-cloud business. Cloud business, of course, is in hyper growth, and we expect it to be in hyper growth for years to come given the overall market trends.

David Rainville -- Barclays -- Analyst

OK, that make sense. Thanks, Mike. And Adam, maybe just a quick question on the revenue guide. With ARR growing 33% this year and that's just forward-looking metric, and NER at 120% this quarter picking up, that's nice.

Basically your guide implies no net new business and I understand some of the moving parts that you discussed but can you dig a little bit deeper into, like, the assumptions and what's driving that as that -- and the expectations that NER actually goes down next year?

Adam Meister -- Chief Financial Officer

Sure, happy to take that. And really David, this connects to the structural impacts that I walked through in my comments before giving guidance. And we've laid this out actually in a bridge in the investor deck that's available on our website now on Page 23. Over time, ARR growth and subscription revenue growth are going to converge.

The ratable shift related to cloud will sustain for some period of time but in the long run, those two things should look very similar. And so taking kind of that relative to a 21% growth rate from Q1 of '19, from our guidance, there is seven to nine points of structural elements. The ratable shift, FX impact based on what we're seeing currently and the impact of PS growth moderation in Q1 that gets to that that low-20s number for Q1 and for the full year.

David Rainville -- Barclays -- Analyst

Makes sense. So no expectation for expansion rates to actually start trending down?

Adam Meister -- Chief Financial Officer

No. I think it's important to note that that expansion rate number that we have always disclosed is a revenue-based metric, and so there is -- there has been a bit of a benefit related to ASC 606 during the course of 2018 that will go away in 2019. That's a couple of percentage points.

Operator

We'll take our next question from Jack Andrews with Needham.

Jack Andrews -- Needham and Company -- Analyst

I was wondering, you continue to post some very strong international growth in particular, and so I was wondering, are there any regional changes in your go-to-market strategy that you've implemented, given that international regions may have a slightly different business mix? I mean, for example, my understanding is that international regions may not have a large on-premise who do installations like the United States does, so is there anything that you're doing differently by region that's helping to fuel that international growth?

Mike Tuchen -- Chief Executive Officer

Yes. I'd say what we're seeing is some different specific regional growth drivers and it's less about a difference in go-to-market strategy. So, for example, Europe, which has been showing really nice growth over the last year has a very strong driver in the GDPR regulation,which went into force last spring. And so that drives demand really for data broadly, as companies really need to clean up their data infrastructure to meet the compliance requirement.

Asia is in a secular growth trend as companies are going through a digital transformation. And we are seeing quite a bit of demand for Big Data in that region. The U.S. as you said had really bought into a lot of premise Big Data in the previous couple of years and is now in the midst of a rapid transition over to the cloud.

So we're seeing different specific demand drivers but that's not really as much of a go-to-market strategy as it's just simply reflecting what's going on in the regions.

Jack Andrews -- Needham and Company -- Analyst

OK. So just as a follow up, could you expand a little bit more on your comments regarding the gross margin profile of the cloud versus the on-premise business? Should these roughly be the same over time as cloud continues to scale? Or how do we think about the overall gross margin profile of your company as cloud continues to increase?

Adam Meister -- Chief Financial Officer

Sure. Over time, cloud's, obviously, going to be a slightly lower gross margin than a pure install business given the cost of cloud operations to support that. But knowing that's a huge difference, I think the impact of that in 2019 is relatively small. It's not a substantial disconnect for us as it would be for some other cloud businesses.

Operator

We'll take our next question from Tyler Radke with Citi.

Tyler Radke -- Citi -- Analyst

So I was wondering if you could talk about the profitability guidance for 2019. I know you mentioned two points of headwind from the Stitch acquisition but even if you back that out, it's looking like you're not expecting margins to improve, in fact the midpoint would suggest even at Stitch they're getting a little bit worse, yet you've improved margins for kind of the last four or five years as a company. So just wondering if you could walk us through what's implied in that outlook?

Adam Meister -- Chief Financial Officer

Happy to. We really organize the company in our budgeting process around that cash flow neutrality. And so as we think about '19, our starting place was cash flow breakeven. And so our operating margin guidance and expectations are really a function and output of that.

I think it's important to note that last year there was about a 5-point benefit to the operating margin related to 606. And so that's something you have to normalize when you're looking at the trend over the last couple of years. But really what's implied in the guidance is the way the math works out to solve for a cash flow breakeven target for the full year.

Tyler Radke -- Citi -- Analyst

I guess quick follow-up to that. Is there -- what would be driving as a wider divergence of cash-flow margin versus operating margin in 2019 relative to 2018? Is it the shift to cloud or can you help me understand that?

Adam Meister -- Chief Financial Officer

Yes. It's a little bit of a shift to a cloud, right? Because the more we have as fully ratable of transactions, there's actually a greater depression to revenue. But then it's all made up, of course, on the cash flow statement with deferred revenue.

Tyler Radke -- Citi -- Analyst

OK. And then a question for Mike. I'm curious just now that you've seen Stitch kind of integrated and you're working through some of the strategies. What have you observed just competitively in the field? Either from the larger players like the Informaticas, who I think your win rates probably could be -- you'd like to see them better than they currently are.

And then again, you mentioned Fivetran and some of these other smaller competitors. Just what have you observed from a competitive perspective now that the acquisition's closed?

Mike Tuchen -- Chief Executive Officer

Right now, we are -- actually very happy with our competitive win rate. The -- with Stitch, we are super excited about the opportunity that frictionless brings. It's a dramatically higher velocity and more streamlined go-to-market motion for us and so the number of new customers that we're able to acquire with Stitch is really exciting to us. In terms of the competitive scenarios there, I haven't seen a competitive offering from any of the large legacy incumbent players and so the competitive environment really is entirely limited to some of the new entrants.

And you mentioned one of them, Fivetran, there's another one called LUMA. So there really are only a couple of players out there. We're finding a lot of excitement among the overall partner ecosystem to work with us to help solve the broader end-to-end customer problem because uniquely on the market, we're the only player that can get you started in a couple of minutes with Stitch and then continue to scale up and solve your most complex problems as they present themselves. As you need to do more transformations, as you need to solve the data quality problems, as you need to solve the catalog and compliance and governance problems.

We are the only player in the market that can start fast and simple and get you live and also solve that broader trust problem. So we're seeing a lot of interest both from customers and from partners in going to market with us.

Operator

[Operator instructions] And we'll take our next question from Tyler -- from Brent Bracelin with KeyBanc Capital Markets.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

A couple for Mike if I could and then one for Adam. Mike, given some of the personnel changes in the sales team, I was just wondering if you could talk a little bit more about, kind of, your thoughts around go-to-market changes here, particularly as you're looking to, kind of, elevate the cloud mix? What's your current, kind of, thinking on what needs to change to, kind of, accelerate momentum around cloud?

Mike Tuchen -- Chief Executive Officer

You bet. So our previous EVP Sales, Brad, he did a really nice job. And when he came in, the company was about $60 million, helped grow the company up to $200 million, significantly strengthened the team along the way and really wish him the best of luck in his next steps, career wise. For us, as we scale from a $200 million to a $500 billion and a $1 billion company.

Scaling the business is one attribute and another one that you touched on is becoming more and more of a purely cloud company, with a strong frictionless component as a high-velocity land, followed by a significant enterprise expand. And so it's really those attributes that we're solving for. Both the overall scale, as well as this new cloud-native kind of model.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Helpful color there. And then Mike on Stitch, we picked up Shopify as a use case, using Stitch to migrate off of their legacy data lake to kind of a Google BigQuery. What are some of the use cases that are becoming more popular? Is that a use case that for Stitch that is resonating, or are there others? Any sort of, kind of, use case that you'd say is boiling to the top that customers are really migrating to that solution for. And then again, one quick follow-up for Adam.

Mike Tuchen -- Chief Executive Officer

You bet. So the use case is a super proud one and it's really anyone who's using cloud dataware housing and whether they're migrating from something else or starting in a greenfield way with a new scenario and leaving the migration for later from whatever they used to use. What we're finding is that most customers right now, want to get started with some data immediately, and prove to themselves that they are happy with their new set of technical solution providers. And so are we in the right cloud? Are we using the right data warehouse? Are we using the right analytical scenario and the eye and so on.

And so in that scenario, they really want to get live as quickly as they can with some real data and Stitch allows them to do there. They're live literally in minutes. And just a couple of clicks on the website and a swiping credit card. And so what we're finding is it's not a one specific scenario like in one vertical or anything, what it really is, broadly speaking across any analytical data warehousing scenario that's being done in the cloud, this really is turning into the preferred way to land the solution as an initial getting-started approach.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Helpful color there. And then Adam, obviously, encouraging to see kind of positive free cashflow in Q4. The guide -- the neutral free cash flow kind of that balance in 2019. I guess my question is really around net dollar retention.

You talked about may be 200 basis point benefit last year that goes away. Do you expect any sort of change in that net retention ratio above that as we think about the lands around cloud maybe being smaller? And initially, you won't get as much of a benefit. I'm just trying to think through what other factors should we kind of bake in just to be conservative around the net dollar retention as this business model shifts?

Adam Meister -- Chief Financial Officer

Sure. Happy to talk to that. So as -- I think pretty typical, those net expansion rate for companies moderate over time. And so we are brooded in how we think about the outlook.

Beyond the accounting kind of change impact that I mentioned there's nothing in the structural that would've impacted this year. There's a put and a take to what you described from the cloud perspective. Could we see migrations to -- of customers and then have some headwind? Sure. We don't price differently between cloud and on-prems, so if it's a straight migration there wouldn't actually be an issue.

And the flip side is, if cloud deals are smaller to start, we believe, and we hope that they'll actually offer much larger expansion opportunities overtime, which actually be a boost to that number. So there is some puts and takes. I think you -- what you walked through and assuming in a steady state with some moderate decline there, is probably the best way to think about it.

Operator

[Operator instructions] And we'll take our next question from Mark Murphy with JP Morgan.

Matt Coss -- J.P. Morgan -- Analyst

This is Matt Coss on behalf of Mark Murphy. Can you talk about average deal sizes in the billings duration mix for Stitch compared to Talend? Or if not, what has Stitch done to your deal sizes? And then as Stitch customers can get started pretty quickly without committing much capital. What have you seen to be the conversion rate of those customers who are just getting things up and running quickly? And at what rate do they turn into more meaningful relationships?

Adam Meister -- Chief Financial Officer

The Stitch business model is fundamentally different than Talend's. So I want to be clear that when we talk about prebuilt duration, it excluded the impact of all monthly relationships, which would be Stitch, as well as a handful that we have for Talend directly. And so as Mike has mentioned, really a high-velocity landing vehicle for us. That comes with much larger -- much smaller initial lands, a higher natural churn rate.

And so what I really think about that business as is can I run in as a positive unit economics mechanism to land new opportunities to upsell over time. And so when we talk about average deal size and duration, we're going to continue to talk about that on a committed contract basis where there is a Talend sales rep involved. That's going to be the cleanest way for you to think about the trends and really separate the two pieces.

Matt Coss -- J.P. Morgan -- Analyst

Got it. And one more -- just quickly, can you update us on the traction that you are seeing on the self-service data prep offering?

Mike Tuchen -- Chief Executive Officer

Yes. Self-service data prep right now, is -- it's an attach, all the other things that we do, it's rarely sold as a stand-alone offering. And our belief statement right now, is that it probably becomes more and more a set of features into other offerings in the market over time. Either from us or from -- we're all seeing it being integrated into some of the BI players offerings and so on.

And so I think it likely becomes a less of a stand-alone category in the next couple of years than we -- or I think much of the market was anticipating a year or two back.

Operator

We'll take our next question from Bhavan Suri from William Blair.

David Griffin -- William Blair and Company -- Analyst

This is actually David Griffin on for Bhavan. Just one quick one on the sales organization andyour investment plans there as it relates to expansion in 2019. What type of growth in sales and marketing headcount could we expect to see?

Adam Meister -- Chief Financial Officer

We ramped headcount quite a bit in the back half of the year and so there's still a decent amount of population coming up the learning curve. Sales and marketing headcount grew in the mid-20s in Q4. I would expect that to be pretty consistent next year as well. It might come down slightly.

So that's probably how you should think about sales productivity and capacity.

Operator

[Operator signoff]

Duration: 49 minutes

Call Participants:

Lisa Laukkanen -- Investor Relations

Mike Tuchen -- Chief Executive Officer

Adam Meister -- Chief Financial Officer

David Rainville -- Barclays -- Analyst

Jack Andrews -- Needham and Company -- Analyst

Tyler Radke -- Citi -- Analyst

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Matt Coss -- J.P. Morgan -- Analyst

David Griffin -- William Blair and Company -- Analyst

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