Talend (NASDAQ:TLND) is helping the world make sense of the information floating in the cloud.

The company's Data Fabric platform allows companies to pull data from a variety of programs into a single data lake (a repository for raw data), then use other analytics and presentation software to better understand it. This service is extremely valuable for data scientists, who experts estimate spend 80% of their time pulling and preparing data into a useful format.

The company posted solid growth in the third quarter, but shares still declined an incredible 31% on Thursday.

What's driving the sell-off for one of the tech world's more innovative companies? Let's take a closer look at Talend's results.

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Talend results: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Change
Revenue $52.1 million* $38.4 million 36%
Operating income ($9.4 million) ($4.5 million) N/A
Adjusted earnings per share ($0.09) ($0.11) N/A

Data source: Talend. Chart by author. *Revenue in Q3 2018 benefits from the new revenue regulation standard IFRS 15, which went into effect on Jan. 1, 2018. Adjusted earnings per share excludes stock-based compensation and the amortization of intangible assets.

What happened with Talend this quarter?

As a reminder, the company adopted the new IFRS 15 standard (the international equivalent of America's ASC 606) in 2018, which recognizes revenue and cash flow based upon fulfilling performance obligations. For the third quarter of 2018, IFRS 15 contributed an approximate 0.9% net benefit to revenue growth, while reducing commission expenses by approximately $819,000. Talend's third quarter 2017 results were reported under the previous standard.

That said, Talend continues to demonstrate strong top-line growth, especially in its cloud subscription business.

  • Overall subscription revenue grew 36% to $44.6 million.
  • Within subscription revenue, Talend's cloud and big data subscription revenue rose more than 100% year over year for the ninth consecutive quarter. Cloud subscriptions allow customers to integrate Talend's data integration and API services into their own apps, helping Domino's Pizza to track delivery status over a mobile phone or Air France to offer personalized travel experiences to frequent fliers. Cloud and big data subscriptions together represented about 50% of Talend's total subscription revenue in the third quarter.
  • Professional services revenue grew 36% to $7.4 million.
  • Adjusted operating margin was -6%, which was unchanged from the third quarter of 2017.
  • Talend's dollar-based net expansion rate, which compares this year's sales at existing customers to last year's, was 118% in constant currency. 

On the surface, Talend's third-quarter numbers look fine. However, management expects a fourth quarter operating loss of between $11.3 million and $12.3 million, which would be even greater than the company's loss was this quarter, and worse than what many investors had expected.

One other thing investors may have disliked is that Talend's excellent cloud growth is coming at the expense of its on-premise business. CEO Mike Tuchen mentioned during the conference call that the deceleration in growth of on-premise Hadoop deployments was "happening faster than we thought, because most new customers are now just using [sic] to solve the same problems in the cloud." As such, the company has ratcheted down its full-year sales growth expectations for on-premise Hadoop from the "mid 20s" to "sub-20%." Because on-premise deployments generate higher margins than cloud subscriptions, this shift in the product mix would lower the business' overall margin.

What management had to say

Tuchen brushed aside the weak guidance and focused on the company's strong cloud subscription growth and increasing market prominence:

Our cloud business momentum continued during the quarter with cloud subscription growing over 100% year-over-year for the ninth consecutive quarter. We crossed an important milestone in the quarter with our total customer count exceeding 2,000. In addition, we strengthened our product offerings with our Talend Fall 2018 release, which further extends our competitive differentiation and market leadership.

Looking forward

Talend also reported that it has completed its acquisition of Stitch. Stitch "provides a frictionless self-service offering to meet the needs of today's cloud data warehouse buyers," in the words of Tuchen. He further stated, "We believe this will act as a high-volume, low friction learning strategy that will further accelerate our cloud momentum."

Stitch essentially makes Talend's Data Fabric Platform more valuable to its highest-volume customers. Investors should expect this acquisition to further boost the company's cloud subscription growth rate.

Enterprise customers' obsession with cloud computing could bring in a wave of new opportunities for Talend. We'll continue to watch for subscription growth going forward.

Simon Erickson owns shares of Talend. The Motley Fool owns shares of and recommends Talend. The Motley Fool has a disclosure policy.