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Talend S.A. (NASDAQ:TLND)
Q3 2019 Earnings Call
Nov 6, 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 Third Quarter 2019 Earnings Call. [Operator Instructions].

At this time I would like to turn the conference over to Ms. Lauren Sloane. Please go ahead ma'am.

Lauren Sloane -- Investor Relations

Thank you. This is Lauren Sloane Investor Relations for Talend and I'm pleased to welcome you to Talend's Third Quarter Fiscal Year 2019 Conference Call. With me on the call today is Talend's CEO Mike Tuchen; and CFO Adam Meister. During the course of today's presentation 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 contemplated 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 the related benefits and our expectations regarding the market. Our expectations and beliefs regarding these matters may not materialize and actual results in the 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 the 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 as otherwise specifically stated the financial measures to be disclosed 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 historical non-GAAP financial measures to the most directly comparable GAAP financial measures 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 or use of technologies product services or vendors.

Now let me turn the call over to Mike Tuchen Talend's CEO.

Mike Tuchen -- Chief Executive Officer

Thanks Lauren and thank you all for joining us today. We reported solid third quarter results. We continue to execute well on our cloud transition with strong momentum and adding new cloud customers. We're laying a foundation for future growth from both new customer adoption as well as existing customers expanding their use of talent. We continue to believe that cloud will drive the majority of future growth in the data integration market and the progress we've made in our cloud business positions as well to continue to gain market share. In the third quarter, we achieved record total revenue $62.6 million, up 20% year over year. Some additional highlights from the quarter include annual recurring revenue total $224.8 million and grew 24% year over year were 27% on a constant currency basis, as subscription revenue grew 24% year over year for 26% on a cost of currency basis. Talend Cloud our SaaS offering grew over 100% year-over-year for the 13th consecutive quarter and represented 49% of new ARR up from 43% in the second quarter. We're well on track to hit the target we set at 50% of new ARR coming from cloud in Q4.

We now have over 2000 cloud customers and nearly 4000 total customers. And finally we strengthened our balance sheet through the issuance of EUR 140 million in convertible notes which provides additional capital for continued growth through investing in cloud innovation. We're pleased with the overall success of our cloud business during the quarter. With our Frictionless sales model we're showing our ability to rapidly land new customers who are beginning their cloud journey and looking for a simple way to load data into a cloud data warehouse. At the same time we're continuing to gain momentum supporting the strategic cloud data needs of new and existing customers with Talend Data Fabric. As customer integration projects become increasingly complex they require a modern data integration and integrity suite like Talend Data Fabric to achieve both speed and trust. We've highlighted our success in the number of new cloud customers we're adding each quarter but we're equally excited about the size of our cloud customers. At the end of Q3 we had 74 customers with cloud ARR over $100000 more than 3x the number we had a year ago.

Additionally our cloud deal sizes have become larger than our overall average deal size. This growth demonstrate success landing new enterprise cloud customers, expanding existing cloud customer relationships and cross selling telling cloud to existing premise customers deployment We're seeing in our cloud business makes us incredibly excited about the opportunity ahead. Our excitement is further bolstered by the fact that our win rates remain consistent, even as our cloud business scales exponentially. Several secular trends continue to drive market growth and cloud adoption, the explosion of global data volumes abroad transition to public and hybrid cloud environments, and increase in data privacy regulations, and rapid technological innovation and evolution. With these trends come significantly greater integration and integrity complexity and the need for a modern and complete integration solution.

Talend is at the forefront of the market with Talend Data Fabric our unified environment that shortens the time to trust data and saw some of the most complex aspects of the data value chain. In Q3 we announced the availability of Talend Cloud on Microsoft Azure with advanced integration and data quality capabilities optimized for the Microsoft cloud platform with native support for Azure services. We also announced a solution to automate migrations from on-premise data warehouses to Snowflake in the cloud. Both initiatives are part of our continued commitment to helping customers at every stage of their cloud journey. As we increasingly focus on our R&D and go-to-market resources on the cloud opportunity and as the overall market shifts to the cloud we see a continued slowdown in our premise business. As I've mentioned in the past the large majority of our new customer engagements focused on the cloud we've now reached the point where half of our overall customers are in the cloud.

We're starting to pilot migrating a small number of our existing premise customers to the cloud and we believe that the vast majority of our premise customers will migrate to the cloud in the coming years. By using Talend these customers will have a far easier path to the cloud than others who aren't using Talend yet. We saw a healthy mix of new wins and strong expansions in the third quarter. Let me walk you through a few customer success stories which illustrate this trend. An exciting new customer in Q3 is a multinational tire manufacturer who faced operational issues from silo data around the world. The company initiated its largest and most strategic technology project that will span the next five years to solve this problem. They're building a data lake in AWS that will combine many different types of data including financial ERP supply chain manufacturing and R&D into a single environment. The manufacturer evaluated companies like Oracle and Informatica and selected Talend for our platform capabilities and data quality big data data governance and cloud. When fully implemented the data lake will provide the entire business with a single source of truth to help with everything from customer engagement to regulatory compliance.

Another new customer win for Talend is one of the largest and oldest U.S. financial institutions. As part of a broader cost savings initiative the organization is migrating customer data out of Axiom into their own environment within AWS using Snowflake and S3. Working closely with Infosys and Capgemini to evaluate several options the company selected Talend based on a multi-cloud support and embedded data quality capabilities. This new customer win illustrates our continued success in joint wins with our cloud technology partners as well as the strength of our SI partner referrals. Lowe's companies a Fortune 50 home improvement company expanded its footprint with Talend in Q3. Lowe's CIO issued a directive to move 65% of its infrastructure and applications to the cloud. The flexibility of the cloud will prepare Lowe's for Black Friday the company's biggest revenue-generating event of the year. Talend was selected over competitors like Informatica for several reasons including our open source foundation our API offering multi-cloud support and ability to support modern data integration and governance needs.

With its increased investment in Talend Cloud Lowe's plans to implement a multi cloud environment running a variety of data use cases to support IoT supply chain sales financial applications in Microsoft Azure and Google Cloud Platform. Another Talend cloud customer in Q3 is a Fortune 100 company in the financial services sector serving the academic research medical and government sectors. They were looking to move away from legacy technologies and embrace a platform that would enable them to recognize the benefits of cloud and big data. The company will feed a number of databases into a single cloud data warehouse based in Amazon integrating multiple hybrid and cloud to cloud environments. They felt that the agility and extensibility of Talend's platform fit perfectly with their desired use cases and provides flexibility to adopt new technologies and address new use cases in the future. Talend Cloud was also selected by one of the largest commercial and civil contractors in the U.S. with over $5 billion in annual revenue.

As part of its broader transition to cloud the construction company is migrating its ERP systems to SAP for HANA and using their cloud data warehouse for analytics. The company selected Talend after considering alternative solutions from MuleSoft Informatica and Dell Boomi. Talend stood out from the competition because we can blend together data integration and application integration to solve the construction companies immediate challenges including cataloging their application data and understanding the impact analysis so they can selectively shift their most critical data to the new ERP system. Talend also supports their upcoming advanced use cases including IoT. Another highlight from Q3 was our annual user conference Talend Connect which took place in Paris and London last month. We featured a mix of keynotes from partners and customers which are very well received. The event featured strong customer stories including main stage presentations from AstraZeneca the global biopharmaceutical company and L'Oreal the world leader in cosmetics. AstraZeneca spoke about their data journey with Talend over the last several years where they started by dramatically improving their financial reporting system and then expanded into other use cases across the organization eventually making us their enterprisewide strategic data integration and catalog provider as they move their entire business to AWS.

One result from this expansion is streamlining how AstraZeneca develops and rigorously test drugs. Using Talend AstraZeneca estimates that it can shave one month from its clinical trials saving the company approximately $1 billion per year. Another great story we heard at connect is from L'Oral. The company is using Talend to power its research and innovation departments data lake on Microsoft Azure. With Talend L'Oreal is processing more than 50 million data entries per day from a variety of scientific IoT and marketing sources. This data is collected secured and shared in order to run cutting-edge analysis and drive new product innovation while maintaining maximum safeguards to protect data and insurance compliance with privacy regulations. Our transition to the cloud continues to build momentum. Our strategy is to land new cloud customers quickly with Stitch to allow them to load data into their cloud data warehouse in minutes and then expand by solving our customers' most important data quality and governance problems.

With a focus on solving the most complex hybrid and multi-cloud scenarios across both R&D and sales we're well positioned to succeed as the enterprise market increasingly moves to the cloud. We call this unique combination of fast land followed by enterprise expand speed and trust. In parallel we'll help our existing on-premise customers migrate to the cloud so that they can take full advantage of the cloud across their business which we expect will result in higher satisfaction and higher net expansion rates after they move to the cloud. We see the opportunities expanding ahead of us as our cloud business scales and becomes a meaningful growth driver for our business. As you've seen over the last few quarters we're prioritizing scaling our rapidly growing cloud business particularly as our premise business slows.

Our strategy is to aggressively drive our cloud business so that it becomes first our largest driver of new ARR which we expect to achieve in the current quarter and next the largest component of our total ARR and revenue in the coming years. We see this transition as a tremendous value driver for the company despite the near-term headwinds that it has caused in some of our broader business metrics. To give investors clear visibility into the scale and growth of our cloud business we'll start disclosing cloud ARR next quarter. In Q3 we saw headwinds in our European business particularly in our premise bookings. This impacted our sequential growth in total ARR. As we discussed in our Q2 earnings call the macro and political uncertainty in Europe which continues makes us cautious for the remainder of the year in that region.

Let me now turn the call over to Adam to discuss our Q3 financial results and the outlook for Q4 and 2019.

Adam Meister -- Chief Financial Officer

Thank you Mike. Today I will review our financial results for the third quarter 2019 as well as provide our outlook for the fourth quarter and fiscal year 2019. As a reminder we are reporting Q3 financial results under U.S. GAAP as required when we became a domestic filer at the beginning of this year. Annual recurring revenue or ARR grew to $224.8 million as of September 30 2019 up 24% year-over-year or 27% year-over-year on a constant currency basis. We define ARR as the annualized value of all active contracts at the end of the period and as a result the FX impact of this point in time measure will differ from that of subscription revenues. The strong demand for Talend Cloud contributed meaningfully to this growth. Talend Cloud represented 49% of new ARR for the third quarter up from 43% in Q2. We are pleased with our sustained cloud momentum and our progress toward reaching our goal of exiting 2019 with half of new ARR cloud. This percent mix has been a key measure of our sales and marketing rotation to the Cloud during this year. With Talend Cloud establishing our largest sales engine our measure of success entering 2020 will shift to overall cloud ARR.

New cloud sales continued expansion within existing cloud customers and the cross-sell of Talend cloud to existing premise customers will each be meaningful contributors to our business in 2020. In our Q4 call we will begin providing Talend Cloud ARR quarterly and we will also provide Talend cloud full year ARR guidance for 2020. I'd like to expand further on Mike's comments regarding the sequential growth in total ARR. During Q3 we added $6.8 million of new ARR. Performance in Europe weighed on overall sales for the quarter and was the largest contributor to the lower sequential growth in ARR relative to last quarter. Cloud momentum in Europe remains relatively strong but the IT spending environment there particularly impacted premise sales in the quarter for both new customers and expansions within existing customers. For the quarter ended September 30 2019 our dollar-based net expansion rate was 114% in constant currency. As a reminder this revenue based metric was bolstered during 2018 due to ASC 606. As we have previously noted we anticipated that this 4-quarter rolling measure would come down over the course of this year to fully reflect the new revenue standard. However the 4 percentage points change since Q2 2018 also resulted from lower expansions within existing European customers during the quarter.

Overall customer retention during the quarter was in line with our historical trends. Customer additions in the quarter were strong. We now have nearly 4000 customers with over 2000 of them being cloud customers. We ended the quarter with 521 enterprise customers defined as customers with 100000 or more of annualized subscription revenue. Enterprise customers contributed 67% of subscription revenue in Q3 versus 68% in Q2. We did see slightly higher down sales this quarter for customers around the $100000 level which resulted in a slight sequential decline from 525 enterprise customers in Q2. Customer retention in that group however was in line with prior periods. Downsells are common as some customers adjust the number of seats required as projects evolve from initial deployments to steady state. These are more than offset by growth within accounts from other departments or projects as evidenced by our dollar-based net expansion rate. We've made a strategic decision to prioritize cloud with both new and existing customers and we believe that this will result in some accounts deferring additional purchases as they evaluate their own cloud strategies.

And as Mike mentioned as these customers move to the cloud we expect to see their expansion rates increase. We've seen significant growth in the number of large cloud customers over the last year and ended Q3 with 74 customers with 100000 or more of cloud ARR. This demonstrates our success in expanding cloud customers and the rapid adoption of cloud among large organizations. Please note that this AR based measure reflects the ending value of cloud contracts at the end of the period. First, our enterprise customer definition which is revenue based and will lag because of sales linearity. On an error basis. Total enterprise customers grew quarter over quarter in q3. As we're focused on AR is the primary measure of the business will transition to an AR based measure for enterprise customers starting next quarter. total revenue for the third quarter was 62.6 million of 20% year over year. The impact on overall revenue growth from FX and professional services growth moderation were in line with our expectations. Subscription revenue for the third quarter was $55.1 million up 24% year-over-year or 26% on a constant currency basis. Subscription revenue from Talend Cloud grew more than 100% year-over-year for the 13th consecutive quarter.

Professional services revenue was $7.5 million in the third quarter an increase of 1% year-over-year. This moderation is largely related to lower average professional services requirement for Talend Cloud. Professional services revenue can fluctuate due to project timing as well as cloud mix. We are pleased with the continued mix shift toward subscription revenue which accounted for 88% of total revenue for the quarter. Regardless we believe ARR growth is the best indicator of our momentum with both new and existing customers during our cloud shifts. As I mentioned earlier we have seen softening demand in Europe given the macroeconomic backdrop. Total revenue from our EMEA region grew 8% year-over-year in Q3. We continue to take a cautious outlook in EMEA for the near term. Before moving 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 press release issued today which is posted on the Investor Relations portion of our website.

Our total gross margin for the third quarter was 78% compared to 77% in the same period of last year. Professional services gross margin was 16% this quarter up from 13% last quarter. Subscription gross margin reached 87% which reflects greater economies of scale as our cloud business continues to grow. Operating expenses for the third quarter were $51.9 million up 21% year-over-year. Sales and marketing expenses for the quarter were $30.2 million up 15% year-over-year. This lower growth reflects the change we made at the end of last year to focus sales hiring during Q4 to align new starts to the beginning of the year. R&D expenses for the quarter were $12 million up 48% year-over-year as we continue to drive investment in our cloud products and operations. It's also particularly impacted by the inclusion of Stitch where R&D accounted for most of the operating expense. G&A expenses for the quarter were $9.7 million or 15% of revenue versus 16% of revenue in the prior period. This reflects our ongoing focus to drive efficiency in the business.

We incurred an operating loss for the quarter of $2.8 million or 4% compared to an operating loss of $3 million or 6% in the third quarter of 2018. The performance versus initial guidance reflects efforts to drive efficiency during Q3 as well as some noncash savings including benefits from reduced tax expense related to RSU vesting and a reduction in allowance for doubtful accounts. Net loss for the quarter was $2.6 million compared to a net loss of $2.8 million in the prior year period. Cash and cash equivalents totaled $172 million as of September 30 2019 versus $32.1 million at the end of June. Our cash position includes $149 million in net proceeds from the convertible notes offering we closed in September. We now have additional flexibility to invest in the business with this long-term capital. We are focused on shaping our business around the cloud opportunity and we believe the continued strategic investments in our cloud products and go-to-market strategy will position us to be a leader in data integration innovation. Free cash flow for the quarter was negative $11.3 million given the dynamics in Europe and the lower sequential ARR growth this quarter we expect that free cash flow burn for the full year will be a few million higher than the $15 million we discussed in our prior call. I'll now turn to our outlook for Q4 and full year 2019.

As a reminder our guidance assumes similar business conditions and foreign exchange rates as of October 31 2019. For the fourth quarter of 2019 total revenue is expected to be in the range of $65.4 million to $66.4 million. Non-GAAP loss from operations is expected to be in the range of $4.5 million to $3.5 million. Non-GAAP net loss is expected to be in the range of $6.8 million to $5.8 million. Non-GAAP net loss per share is expected to be in the range of $0.22 to $0.19 which is based on a basic and diluted weighted average share count of 30.9 million shares. We are updating guidance for the full year 2019 as follows. Total revenue is expected to be in the range of $246.5 million to $247.5 million. Non-GAAP loss from operations is expected to be in the range of $22.6 million to $21.6 million. Non-GAAP net loss is expected to be in the range of $25.4 million to $24.4 million. Non-GAAP net loss per share is expected to be in the range of $0.83 to $0.80. This is based on a basic and diluted weighted average share count of 30.6 million shares. We're excited about the progress we have made in advancing our cloud strategy and expect to exit 2019 with Talend Cloud as the largest contributor to new business. We remain confident that our market leadership strong customer and ecosystem relationships and cloud-first innovation will enable us to continue to drive durable growth over the long term.

Let me turn the call back over to Mike for some final comments.

Mike Tuchen -- Chief Executive Officer

Thank you Adam. We're pleased with the progress we've made year-to-date. We're executing well on our cloud transition with strong momentum in adding new cloud customers. We're well positioned to take advantage of the market shift to the cloud.

With that Adam and I would be happy to take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Bhavan Suri with William Blair & Company.

David Griffin -- William Blair and Company -- Analyst

Great. Hey guys, This is David Griffin on for Bhavan. So first I wanted to touch a little bit on Talend Cloud. That business has obviously scaled pretty considerably over the past 5 quarters here going from less than 1000 customers and 14% of new ARR in the year-ago quarter to over 2000 and nearly 50% of new ARR today. So I think it would be a good kind of helpful if you could kind of unpack what you're seeing in terms of the expansion characteristics of cloud customers. I guess specifically can you give us some sense of what the expansion rates with the customers you've added over say the past 4 quarters here have looked like and how those compare to the expansion rates that you saw in the on-premise big data business when it was at comparable scale.

Mike Tuchen -- Chief Executive Officer

So I'll start and I'll hand it to Adam for the second part of that. Our cloud business -- our cloud expansions have actually been increasing over the last year at a really nice clip to the point where they're now materially higher than our overall expansions for the rest of our business. Really exciting to see. And I think it demonstrates not just the increasing maturity of the offering that we have but also the demand for it in the market as our -- the market is increasingly moving to the cloud. In terms of how it compares to big data at an equivalent scale is a great question. I'm not sure if we have the data going back to there. But Adam?

Adam Meister -- Chief Financial Officer

The numbers for cloud expansion are in line probably a little higher than where big data was at this scale. Part of the dynamic that is driving the actual expansion in that number for us for the last couple of quarter is just frankly the small base that we're starting with from the last couple of years and now it's really started to take off. We're seeing expansion within those cloud customer cohorts. And what's not picked up in that is the way we're framing it doesn't actually include any conversions from premise to cloud. If you added that in it would be even higher.

David Griffin -- William Blair and Company -- Analyst

Got it. That's helpful. And then as we think about the migration side of the equation. It's obviously still very early days there. But you did mention that you're starting to migrate a small number of customers. A couple of things related to that. I guess first can you talk a little bit about how those early migrations are progressing whether there's been any unexpected challenges or maybe even positive regulations? And then as we enter the fourth quarter here and we start to think a little bit more about next year how should we think about migration activity trending? It seems like your focus on delivering the bulk of incremental product innovation in the cloud than really just a broader cloud transition that we're seeing play out in the market really implied that there could kind of be a big uptick in migration activity in 2020. Is that the right way to think about it? Or do you think it could maybe take a little bit more time for that trend to build momentum?

Mike Tuchen -- Chief Executive Officer

The way we're looking at it right now is that during the first half of 2020 we will be slowly ramping it up bringing more and more partners into the mix to make it into a repeatable and scalable motion. Because remember we have about 2000 premise customers. And so over the next several years this will need to be a very high velocity motion for us. So building that overall program with partners is going to be our primary goal for the first half of the year you'll start to see us do an early ramp of higher volume toward the second half. And really in '21 and '22 we want to be really in full steam and you should see some migration is really ticking up toward the end of next year and going into the following year.

David Griffin -- William Blair and Company -- Analyst

Got it. That's helpful. Congrats on another good quarter here and thanks for taking the questions.

Mike Tuchen -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Raimo Lenschow with Barclays.

Raimo Lenschow -- Barclays -- Analyst

Hey, Mike can you talk a little bit about how competition is evolving in -- on the cloud side. I'm just -- obviously we started out with a lot of private vendors but then you got Stitch there but now you're kind of adding a lot more capabilities in pipeline build etc. Like what are you seeing in the landscape at the moment in terms of like kind of early lending spots versus kind of the expanding? And then I had a follow-up on Europe.

Mike Tuchen -- Chief Executive Officer

Right now the way we see the market hasn't changed that much over the last couple of quarters in the sense that we still see there being a segmentation of high-speed land competitors that are largely new entrants that are really doing a nice job of landing new customers quickly as we do with Stitch. And then separate from that the large incumbents really headed by informatica that can help customers solve their most complex data problems and their trust problems and governance problems. And we remain the only company in the market that can land fast help you get started solving your problems immediately and be live in a couple of minutes and then seamlessly scale up and solve your most complex problems. And that so-called speed and trust positioning remains unique in the market and we think we'll be stable for some period of time. And that really is what drives our overall win rates. As I mentioned in the prepared remarks those have remained stable as we've scaled our cloud offering dramatically over the last several years. The win rates initially grew to a really nice level. And now they're stabilized.

Raimo Lenschow -- Barclays -- Analyst

Okay. Perfect. And then on Europe like it's funny because some companies in your space like have an impact and ours just kind of are worried but I haven't seen anything. Can you talk a little bit about maybe the vertical and geographical footprint where you're seeing more or less stuff going on there? Just to maybe frame this out.

Mike Tuchen -- Chief Executive Officer

Probably the most useful segmentation that we look at internally is actually less about verticals and it's more about premise versus cloud. Because what we're seeing is our cloud business in Europe continues to grow really strongly. And our premise business is where we're seeing the impact. And the read-through that we have on that is that cloud projects tend to have a bunch of strategic drivers that customers are continuing to greenlight and continue to fund even in the face of macro uncertainty in the political environment and so on that we're seeing over there whereas delayable projects premise projects tend to be seen as more delayable because it's adding on to more of something that's already working. And so I think that's the best read through that we can give on that at this point.

Raimo Lenschow -- Barclays -- Analyst

Okay. Okay. Thank you.

Operator

Thank you. Our next question comes from Jack Andrews with Needham.

Jack Andrews -- Needham -- Analyst

Oh, good afternoon. Thanks for taking my question. I was wondering if you could drill down a little bit on the -- I think you said you have 74 customers in the cloud paying you more than $100000. I was wondering if there's any specific common use cases or partners that have really been driving that growth? Is it for example specifically focused on data warehouse use cases? Or just any more color about what's really driving that particular strength in the -- I think you said it was tripling year-over-year in terms of that metric?

Mike Tuchen -- Chief Executive Officer

That's right. It has. What we're finding is that cloud data warehousing is a very very high-volume use case for us right now and is a very frequent initial landing spot for us. As we expand typically for a customer that's using more than $100000 with us they're probably doing more than just that initial land use case. What we're finding on add on follow-on sorts of opportunities tend to be around solving things like governance helping companies solve their API problems. We mentioned in the -- on the call as well Lowe's as a customer and they're using an API-first approach. As they move to the cloud they're also looking at using APIs to share data so using our API services offering that we launched last fall has been a key part of that expansion. So I'd say the absolutely cloud data warehousing is -- underpins a lot of what we're doing in the cloud. But for the enterprise kind of accounts think of it as there's probably more going on there as we expand into solving more of their data problem solve more of their real enterprise complexity.

Jack Andrews -- Needham -- Analyst

Great. And then just as a follow-up question is there any more color you can provide in terms of how you're thinking about making use of the additional capital. You talked about further investments in the cloud. Should we be thinking about just overall hiring or perhaps more tuck-in M&A type of situations? How are you thinking about that?

Adam Meister -- Chief Financial Officer

Yes. Jack it's Adam. Really both of those will be the things we think about. And the capital gives us a lot of flexibility to keep investing in just the pace of growth in cloud. And so some of that will absolutely be just more feet on the street more marketing dollars. And then obviously we keep our eyes open for tuck-in M&A anything that would really accelerate our product road map more than anything else. And so this capital is just dry powder for those purposes. There's nothing really that we have in near sites on the M&A front.

Jack Andrews -- Needham -- Analyst

Great, thanks for taking my questions.

Mike Tuchen -- Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Chris Merwin with Goldman Sachs.

Chris Merwin -- Goldman Sachs -- Analyst

Okay, thank you, I was wondering if you don't mind talking a bit about the -- what you asked with Snowflake I guess there's an offering now that automates the migration of on-prem data to Snowflake. Can you just talk a bit about how that's different from what you were doing before? And how we should also think about this as a driver of new customer growth?

Mike Tuchen -- Chief Executive Officer

Yes. So with Snowflake we do a lot of business with Snowflake. And we see them as a very very compelling cloud data warehouse. And -- but to date the vast majority of our business with them has been with net new data warehouses. So companies that are building a new data warehouse in the cloud for some problem that wasn't being solved before on-premise. But on the other hand there's roughly $50 billion worth of spend every year on-premise data warehouses and our expectation and largely I'd say the shared expectation among us and Snowflake is that all of that is going to move to the cloud over the next decade. And so we're now working with them to help move some of those premise data warehouses to the cloud. And we see that as a really nice opportunity to help companies modernize their infrastructure take advantage of a lot of the new cloud capabilities. And with that see a strengthened relationship with Snowflake and a strong growth and expansion within those accounts in the coming years.

Chris Merwin -- Goldman Sachs -- Analyst

Okay great. And I think in the prepared remarks you mentioned that you're seeing some down sells from customers. I know that's being offset to a degree by new projects. I mean but to the extent that you see more of that from customers does it make sense to contemplate solution-based pricing just given the strategic value being delivered?

Adam Meister -- Chief Financial Officer

It's a fair question. Chris it's Adam. So reiterate what I said on the downsell side it's really a handful of customers right around that 100000 threshold. And so that's what kind of explains the sequential change in enterprise customers. But from a dollar perspective it wasn't really a material driver. We kind of constantly look at and think about pricing and packaging strategy. And over time moving to more of a solution-based sale a vast majority of use cases in the cloud is something that probably makes sense. But I don't think we have a near-term urgency around it given any particular business trend that we're seeing right now.

Chris Merwin -- Goldman Sachs -- Analyst

Great. Okay. Thank you.

Operator

Thank you. Our next question comes from Tyler Radke with Citigroup.

Tyler Radke -- Citigroup -- Analyst

Hey, thank you for taking the questions. I had a question maybe for you Mike on what you're seeing in the on-premise business. Obviously you called out some issues in Europe I think weaker macro conditions that you think had a negative impact on the on-premise business. But I guess if you were to look outside of the macro impacts how did that perform relative to your expectation? And have you had to kind of take your expectations for that business down into Q4 and next year given what you've seen here in Q3?

Mike Tuchen -- Chief Executive Officer

Well I'd say outside of Europe the U.S. business is going really strong right now. And so and that's across both follow-ons to existing premise customers as well as expansions into the cloud and new cloud customers all of the above. And so what we're seeing really is a weakness in Europe. And as we mentioned about the cloud business in Europe is actually going really well. And so that really is concentrated on the premise expansions in Europe. The -- if you were to step back and say move away from just Q3 and say what do we expect to happen over the next several years we certainly expect that the -- this transition that we've been really happy to see over the course of 2019 is going to continue. And more and more of our business becomes cloud. And more and more of our customers first add on cloud and then ultimately migrate and become fully cloud customers. So our expectation in the longer-term is that the premise business declines as a percentage and as an absolute value and the cloud becomes the majority and then all of what we sell. But in Q3 itself the trend that we saw was really in Europe on the premise side.

Adam Meister -- Chief Financial Officer

Yes. And I'll add Mike alluded to this in his response just then but it's important to just reiterate the vast vast majority of our new logo lands now are cloud. And so that's a function of customer readiness product market fit getting better. And frankly our sales organization just getting better and better at positioning cloud and generic opportunities. And so as we move into next year with cloud the biggest contributor to overall growth it's already the biggest contributor to new logo business and that trend is definitely going to continue. And we'll just keep expanding.

Tyler Radke -- Citigroup -- Analyst

Great. And maybe a follow-up there for you Adam. So obviously you kind of have this -- you have this mix dynamic where you have a large on-premise business as a percent of revenue that sounds like ultimately may start to decline on an absolute basis at some point in cloud business that's small but growing over 100%. ARR is we look at that from a year-over-year growth rate. I mean that that continued to grow kind of in the high 20s is on a constant currency basis. I mean how should we be thinking about the kind of the growth rate of that going forward just given the mix shift dynamics that you described?

Adam Meister -- Chief Financial Officer

Yes it's a fair question. I mean it's important to pull this back to the whole conversation around how we think about migrations. And so as I had mentioned in my comments next year overall dollar of cloud ARR will be really the primary indicator of how we're doing on that cloud rotation because not just new sales but also the migrations of existing premise customers to cloud become a pretty material driver and so you'll have more visibility into that. And so we think about that as being an important component of how you bridge the continued scaling of cloud versus the stability or decline of premise ARR over time. Frankly at this point in Q4 and still pretty early in budget process and season I don't want to point to anything that would really signal 2020 overall growth expectations for ARR but just the most important thing to keep iterating is the most important thing that we can do as a management team as a company is to get as much of our business to the cloud as fast as possible because that's absolutely where our customers are going and that's where the growth is going to be over the next 10 years.

Chris Merwin -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Mark Murphy with JPMorgan.

Mark Murphy -- JPMorgan -- Analyst

Great, Hey, This is pendulum on behalf of Mark. I just wanted to ask about Stitch. Could you talk about maybe the win rates and the competitive dynamics you're seeing in that particular business? Because I know there are a few companies that -- and you mentioned that lands customers fast and kind of scales from there. But what are you seeing? And also do you view Casco or you know, the streaming services? Is it kind of an alternative technology to what Stitch does? Or is it completely different?

Mike Tuchen -- Chief Executive Officer

Okay. I'll take the first one and then the second one. The first question is what do we see for Stitch win rate. And the way the Stitch business works is it's much less of a sales-driven process where we're in head-to-head competition with someone else and competing side by side. It's much more of a self service-driven evaluation process. And so the way we look at the Stitch business is it's a very very efficient way for us to acquire new customers. The payback period is really strong. The business is extremely linear and delayable and predictable. And as you've seen in the first nine months of 2019. And we acquired about 1000 new cloud customers many of them being Stitch. So that's proven to be a very very effective new logo acquisition vehicle for us.

But you really have to think about it differently where the -- given the evaluation process is largely being done in a self-service way we don't have competitive win rates because we don't see that process. It's not a sales-driven process in general. The -- in terms of how we think about selling. You know is a really strong streaming engine that's seeing great adoption. We use it internally as part of our offering. Stitch actually uses Kafka internally as well. The rest of Talend cloud use to Kafka internally. We allow you to plug-and-play and use Kafka within a pipeline if you want to create a streaming pipeline. And so we see it as almost entirely complementary to what we're doing.

Our -- since we don't provide any kind of run time our goal is to help our customers take advantage of the most capable run times out there. And for streaming I think we think Kafka is a great choice and we have a number of customers that use it. And as I mentioned we use it internally for things like machine learning run times and spark and general unstructured processing spark is really good for structured data processing things like Snowflake and sequel engines are really good. So our goal is to help customers use all of those in a really easy to use web-based design environment.

Mark Murphy -- JPMorgan -- Analyst

Understood. Very helpful. And one follow-up. On PS revenue for next year. I mean it's kind of going down I guess as a percentage of revenue. And with cloud I guess it will -- the cloud becoming a larger part of revenue in the business next year do you think it could have maybe a further drag on total revenue next year and that's why maybe [Indecipherable] the right metric to look at?

Adam Meister -- Chief Financial Officer

Yes that's absolutely right. So we have seen some moderation in PS which is largely related to the cloud growth and scale. We're going to continue to be conservative on that. And I do think that it will continue to be a drag on overall revenue probably not as much as it's been in the last couple of quarters. But we're really pleased and would like to continue to push the mix shift further toward subscription revenue.

Operator

[Operator Closing Remarks].

Duration: 48 minutes

Call participants:

Lauren Sloane -- Investor Relations

Mike Tuchen -- Chief Executive Officer

Adam Meister -- Chief Financial Officer

David Griffin -- William Blair and Company -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Jack Andrews -- Needham -- Analyst

Chris Merwin -- Goldman Sachs -- Analyst

Tyler Radke -- Citigroup -- Analyst

Mark Murphy -- JPMorgan -- Analyst

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