Teradata Corporation (TDC) Earnings Call Transcript & Summary

Good afternoon. Good morning, everyone. Thank you for joining our virtual tech conference. I'm Wamsi Mohan, IT hardware and supply chain analyst at BFA. Normally, we will be having this discussion at the Ritz in San Francisco, but clearly, these are some unprecedented times. We're delighted to have Teradata join us virtually today. We have CFO of Teradata, Mark Culhane, with us today. Mark, thank you so much for taking the time to do this. We really appreciate it.

Yes. Thank you, Wamsi. Thanks for having us.

So let's dive right in, Mark. We just heard the announcement recently of a new CEO. How should we be thinking about any shift in priorities or shift in go to market based on the management change here?

Yes. Great question. And Steve hasn't started. He starts on Monday. Although I've spoken with Steve quite a few times recently and really excited about having him join the company. I think he really understands our business and is ready to hit our ground running. It's clearly going to take him some time to get the lay of the land. But I don't think we expect any large changes to our strategy or to our priorities because at the highest level, our focus remains on getting to the cloud, getting our cloud product and improving that and overall. So I don't think that's a big change. I think he also believes there's improvement in the consulting margin side on that front as well. But that being said, it's possible, he'll look at some of the potential ancillary things we're doing or projects we're doing, and some of that might get deprioritized or canceled to accelerate our cloud efforts. But I don't -- we don't see any major shift in our strategic direction.

Okay. Great. So Mark, I get a lot of questions from investors focused really around growth and sort of the fact that it's been challenging to grow. You guys have been executing several different changes to strategy, go-to-market and business model changes. And so I guess, firstly, how much time do you think there will be before we see growth sustainable? And what do you think that growth can be?

Yes. So great questions. I mean these transformations are hard, right? And by growth, I assume you're talking total revenue growth versus recurring revenue growth.

Correct.

Because we clearly have been growing recurring revenue growth and growing AR. But as we all know, when you transform your business away from perpetual revenue to -- over time, you don't take it upfront, you take it over time, that puts pressure on total revenue growth. And clearly, we took a strategic direction with what we were doing in our consulting side as well to get that focused on what we're trying to do. So that obviously has put lots of impact on total revenue growth because like we grew ARR and recurring revenue growth 9% last year. And prior to that, we were 11%, 12%, et cetera. And we told the world, "Hey, we thought it would be at least 8-plus percent this year pre-COVID." So we're clearly expecting growth going forward. I think we felt like the biggest impacts of that perpetual decline and the pressure that's put on total revenues behind us because we ended '19 with just a little over of $100 million in revenue. And we aren't going to land at that level this year. I thought little to nothing coming into the year. I think we're going to see a little bit more than little to nothing just because in COVID-19, we're getting some indications, some customers have better clarity on CapEx and may buy the hardware portion of what they're doing on perpetual versus OpEx because they have less clarity on their OpEx budgets, but we're still going to -- so we'll have some less perpetual revenue than a year ago. But I think that's more than made up from what's happening on the recurring revenue side and the growth we see there, such that we have shots at coming out of 2020 to see total revenue start to grow in total, going forward. It will depend strategically on how we look at the consulting and where does that ultimately stabilize in land? How much do we do versus do we want partners to do, which could impact the consulting revenue line, which then affects total. But clearly, we're focused on growing ARR and recurring revenue. And over time, that translates to total revenue growth for sure. And we think that can be in the double digits.

Great. So I mean, if you play this out in reverse, right, and let's say, for whatever reason, growth becomes hard to come by. Will Teradata be open to running the business to sort of, I guess, maximize cash in sort of a harvesting scenario? And what would need to happen for this to be a possibility at all?

Well, we're clearly committed to driving operational improvement into the business even with the growth that we have because we said we want these operating margins to get back into that 20% to 25% range. We think we can do that by growing low double digits, low teens, at least. And we're committed to doing that. If the growth didn't happen for whatever reason, yes, then we'd have to go look at our expense base and say, how do we continue to drive the operating profitability back into this business to levels it was before, which is, like I said, 20% to 25%. So if the growth doesn't materialize, I guess, it would suggest customers' data volumes aren't growing like we think they're going to grow given the digital world because they have several customers and their data volumes are almost doubling every 6 months. So that trend goes away. What we're doing to address with our customers and what we're doing from the Vantage platform and the ability for them to eliminate all the data, so that trend goes away for some reason. But right now, we're focused on driving the growth and making the investments to do that. But in a way that allows us to operate in an attractive market, right? And candidly correct some of the past missteps as our cloud and Vantage offerings mature. And we're committed, and Steve's committed, I know, coming in here to drive operational performance into the business, right? So again, if somehow the growth didn't happen for whatever reason. And we obviously take the appropriate actions when called for to maximize shareholder value, right? But we'll cross that bridge when and if it ever happens, which we don't currently see. But there's lots of stuff that could happen down the road, and we'd have to react accordingly.

Okay. That's helpful. There's been a lot of competitive noise around Snowflake. And I know it's not new to you. I mean, we've sort of seen this over the last, I don't know, 15 years or so, maybe even longer. But there was Netezza and Exadata and a whole bunch of others, Vertica and the others over the years. How are you thinking about how Teradata is positioned versus Snowflake?

Listen, so Snowflake is a data mart competitor. Very similar to those we have seen for years, some of which you've mentioned back in the day, Greenplum, Netezza on and on and on, that don't do any advanced analytics and can only be deployed in the cloud. We clearly have a more scalable alternative with more advance capabilities. That also remains integrated with the on-premise environments when required because we offer choice, right, to whether they want to run on-prem? What do they want to run in the cloud? And that helps them eliminate data silos created by data mart companies like the Snowflake. So they may be very adequate for low-end use cases and smaller workloads, but clearly cannot deliver the performance needed for enterprise-class mission-critical analytic workloads, right? Thousands of concurrent users running millions of queries per hour, we have, that's what our customer base does. And so if you go to that cloud-only like a Snowflake, it starts to introduce even more data saddles. And it's lacking even some of the basic data warehousing functionality that has been in the market for a decade or more, as evidenced by what we've seen across some of our customers that have recommitted us telling us that the cost of Snowflake increases significantly more as customers try to scale on the cloud than what they could do with the Teradata, right? We have the best workload data management and optimization query workload engines on the planet, bar none, and it's not even close. And Snowflake has none of that. So all you got to do is go look at the Gartner's Critical Capabilities analysis for data warehousing, where we led in all 4 core categories and Snowflake scored relatively weak in all of them. Not to mention that Snowflake hasn't even started to support the breadth of the analytic use cases that we have and the massive scale and hybrid deployment options required. So we feel we're extremely well positioned. We don't play in the SMB market, which is where they're playing again because it's a low end use case, smaller user -- numbers of users, et cetera. So we feel very good about that.

So Mark, I appreciate the color. When you think about the markets and the geos that you're addressing, the verticals you're addressing, where do you see the growth coming from? Like what do you think, is that sort of -- I mean, these capabilities that you alluded to, clearly, BFA is a huge user of these, we do top of the house reporting stuff on Teradata. There's a whole bunch of mission-critical stuff that you guys run, whether it's United or Walmart, you're doing a lot of mission-critical stuff. Is there much growth that you see at those sort of workloads? Or are you seeing more growth in sort of the lower end workloads, which might be just good enough to use something else? Because I think investors are worried about, not that you would be displaced in the mission-critical areas, but are you going to be able to capture the incremental growth that comes from potentially smaller-sized opportunities? Or is there still plenty of wallet share to go even at these larger customers?

Well, first of all, we are seeing workload growth across our customer set, right? And we want to go when they're looking at other types of workloads that they maybe want to run in the cloud, we want to be part of that conversation. So we think there's an enormous share of wallet opportunity in our biggest customers. Again, the ones, as you know, Teradata has 1,400 customers, 1,300 customers, roughly, right? We don't have 44,000. So we're at the biggest of the big because we are competitively differentiated there, and that's where Teradata's focus has been for the last 40 years, right? For the biggest, most complex global companies on the planet. And we're seeing what they do with us. That's mission-critical, that's growing. And we also see there's opportunities for us to expand along the lines of what they've been telling us for years that they don't want all these data silos. They will not be able to consolidate this stuff. And to the extent we weren't as a proprietary of a platform as we were in the past with everything having to be stored in Teradata's high-performance system and only being able to do SQL queries and no connectors or APIs to other potential analytic engines they wanted to hit to the extent we accommodate that. The hallmarks of Teradata: scalability, high concurrency, strong resiliency, strong security, resonate with that customer -- that customer base. And so we think it's not that we got to go to the lower end or whatever, that there's still a long runway in our biggest customers we have. And across the regions, we're seeing growth in all the regions on the recurring side. Obviously, Americas for the last couple of years has had less and less perpetual compared to EMEA and APAC, but even they're now strongly shifting to subscription. And so -- and again, total revenue, it looks like not a lot of growth, but it's all coming on the recurring side, right, which then starts to turn as we kind of work through that. And now we start to see the trajectory come in where all 3 regions start to grow.

Okay. That's helpful. Can you talk a little bit about business trends that you've seen in May? And I know we're just a few days here in June, but what does customer engagement been? And you guys still do very large-sized deals compared to a lot of companies. What's been the activity? Is it like when you look at your pipeline and look at conversion rates, are those large deals coming in at a rate that you would expect? Much lower? Any changes there? Or anything you could -- any color you share there, Mark?

Yes. I mean, customer engagement remains high. We said on our Q1 call that we saw that engagement return in early April, and that's continued to remain high. But as you know, we do the majority of our business in June. But we've closed deals across April and May. We've seen the continued engagement there. So candidly, no real updates to provide. But we still are cautiously optimistic about the pipeline and what it shows us for the year. And I think it's because we are focused on existing customers and not having to go get a bunch of net new logos. And we're the incumbent, and that's beneficial to us in this type of an environment.

Okay. So when you think about sort of the recurring revenue, right, you had alluded to sort of this double-digit recurring revenue growth, you did 9% last year and, clearly, there's been many pushes and pulls on this number. But in a post-COVID world, how should we think about the growth rates just on the recurring revenue side?

Well, we said coming out of Q1, even though we pulled full year guidance that on recurring revenue growth of at least 8%, our pipeline continued to support growth at those levels. It's just we were set up to do much better but, obviously, that cushion is gone now. And we know deals are going to take longer to close in this environment, right? But the dialogue with our customers continues to be really constructive and very engaged and we fully believe over time, we expect to get back to that double-digit AR and recurring revenue growth. Exactly when does the post-COVID thing end and we get back to normal is anybody's guess, to be honest. We're hopeful it's sooner rather than later, just like everybody else.

Is COVID, I mean, there's been a lot of, I guess, a lot of people have come on and said, COVID is accelerating the move to the cloud. Do you see your cloud revenues -- do you see an acceleration in your cloud revenues? And how do you see those revenues trending over the next few years?

Well, we clearly expect cloud revenue to continue on the trajectory it's had over the next several years. We'll have to wait and see what happens with COVID because we're not seeing customers -- they kind of hunkered down, are dealing with what's happening in their business and so forth and not really want to try net new things, whatever. And that includes, "Hey, let's go move a bunch of stuff to the cloud." Right? We're not seeing customers talk about, "Hey, because of COVID, we are going to accelerate our movement to the cloud." We are not hearing that from our customer base. Now having said that, we're having conversations with every one of our customers about cloud and how they think about that. And what's their point of view. And how do they -- what are the kinds of right workloads to think about doing in the cloud versus continuing to be on-prem. And so time will tell how that plays out through this COVID crisis. But clearly, over the next few years, we expect the momentum we've seen in cloud to continue, particularly given everything we're doing around the cloud.

Okay. And Mark, when you think about some of -- historically, some of your traditionally large verticals, can you provide some context on how those are doing? And what would you call out as potential like areas that are either stronger than what someone on the outside would imagine or weaker?

Yes. Well, so we said on our Q1 call that, listen, "Hey, there are certain verticals that have been significantly impacted by COVID, right?" Clearly, travel transportation, hospitality, parts of retail, et cetera. And there's obviously parts of retail that have done very well through this. The grocery chains and some of the Walmarts and Targets of the world, which I wouldn't necessarily classify as a grocery chain, I'd say they're more general merchandisers and so forth. But -- and then we've said, "Hey, some of the verticals that have done very well, that's continue to do very well." Financial services, telecom, health care, government, and those represented over 60% of our business. And so we are continuing to see that strength in those verticals where we've continued to do some -- see some things even in some of the impacted ones as well. And so we have a pretty large, diversified customer base across multiple verticals. And we don't have any customer concentration at all. We don't have any customer that represents 5% of our overall revenue. So we think we're well diversified and so we haven't really broken down trends by vertical. We just tried to give some color to investors to give some comfort around the exposure profile of our customer base. But again, we're not in the SMB market. We're in the big, big global enterprise. And I know there's been some concern, I think, around financial services. But we serve the largest money center banks in the world. And we've not really seen a change in spending behavior there. Again, given we're probably the benefit -- we believe we are the beneficiary of our customer base because it consists of the largest and most stable companies in the world. And like I said, we have virtually no exposure to SMB.

So Mark, you mentioned earlier about perpetual sort of doing maybe a little bit more than what you thought coming into the year, what specifically is driving that?

Well, I think it's just there's -- through our engagement with our customers and deals are moving forward, they're just saying, "Hey, I've got potentially more clarity on what I can spend CapEx wise and what I can potentially spend OpEx wise". "Hey, we were originally talking about subscribing to everything, but we may decide to take the hardware portion of what we need to do with you guys on a CapEx budget." And we've seen that in a few instances. And walking into the year, that was all subscription oriented, right? And now we've seen a few that say, "Well, we may end up tapping into the CapEx budget on the hardware side." And like I said, we had $106 million last year. I don't expect us to be anywhere near that this year. But I also think it's going to be a little bit -- little more than little to nothing, right, because we put up $14 million in Q1, which is a bit higher than I expected. And -- so I don't know where we'll ultimately land there, but clearly I just wanted to point out that I thought perpetual is probably going to contribute a little more to the top line this year than we thought at the beginning of the year, but it will be nowhere near the $106 million, but obviously, higher than little than nothing.

Right. Okay. That makes sense. And then just on the wind down of sort of the nonstrategic portions of consulting, can you give us your quick thoughts on that?

Yes. So we've continued to realign our consulting services to support our new approach, to provide consulting for higher-margin consulting that drives increased consumption advantage in our target markets, right? And so we continue to expect high single digits for consulting gross margin for this year, despite the impacts from COVID-19 that's happened there. These processes take time as we work through this, but we've made solid progress in that margin expansion year-over-year. We've largely taken out some of the nonstrategic revenue portions of this thing across last year and so some of that revenue that flowed in last year as we didn't resell things, so there's a bit of an impact there. But our most important priority is to make sure our customers are happy and successful and for -- and then we're trying to deepen our relationship with our partners, right, which is an area we've not done that well in the past and make it a more vertical -- a more variable type of delivery model than just Teradata fixed employee badged folks.

No, that's helpful, Mark. So what about some of the initiatives to build closer relationships with SIs, where are you on that? And is COVID changing any of that?

Yes. So great question. We continue to focus there to be quite honest. And we actually have seen some -- we actually had a deal get done through one of the largest -- through an SI this quarter. So these investments take time, right? And we have a perception, we got to change because we've historically not done well because they viewed us as competing with them. So it takes time to rebuild that trust, but we're doing it. We're making some investments in our go-to-market there in each of the 3 regions. And we're making progress, and we're committed to that path. And so over the course of the next couple of years, we expect to see more and more of that impact. But we clearly had a lot of good initial traction with some of the largest SIs. And like I said, we had a win in this quarter working with a large SI. So it's starting to come, but these things don't get built overnight.

No, that's great to hear. We have a few questions here from the folks that are dialed in. A question on the competitive landscape. Beyond Snowflake, how do you think about your competitive position evolving compared to Google BigQuery, AWS Redshift, Microsoft Azure, Hadoop, and SAP HANA?

Yes. So when we sort of look at that competitive environment, I would say, near term, we really haven't seen a lot of change, right? And so if you look at in the on-prem world, it's largely the same competitors, right? We don't really see SAP HANA much, to be honest. We don't really see IBM that much anymore. It's largely probably Oracle. We're clearly seeing far less Hadoop. If there -- if you go back 1 year or 2, the market has certainly been evolving. And like I said, we see less Hadoop, more cloud. Whether that's the native-only folks or not, I think, the Hadoop ecosystem continues to struggle. The market awareness, I think, is rapidly increasing that. Hadoop as a technology was never well-suited to address high-end analytics at scale, to be quite honest. So I think what's interesting is that, that perceived Hadoop threat was really targeted at our core high-end enterprise data warehouse environments. I think it was -- it never really was able to live up to the hype, and all that overpromising got the attention of many of our core customers, and that headwind has faded. On the other hand, the competition from the cloud providers is more akin to the competition we've seen in the past from smaller data mart providers like the Netezzas and Greenplums in the past. And again, the cloud providers even acknowledge the cloud isn't may be ready to handle the largest most complex analytic workloads, so due to the concurrency requirements and everything else. And so I'd say, kind of near term, not a lot of change in that competitive landscape, but it's -- the players have shifted a bit.

Okay. That's helpful, Mark. Another question on free cash flow. What are the large puts and takes this year for free cash flow? And then as you look out can you get back to your historical levels of free cash flow? And if so, when?

Yes. Well -- and so clearly, I've stated that we feel that free cash flow is bottomed in '19. As you know, we put up $89 million of free cash flow that had a large component tied to restructuring, which we don't expect to have that -- clearly that much this year, right? We continue to manage prudently our cash in this COVID-19 pandemic, et cetera. But we believe -- and we've taken steps on the expense side on a lot of the discretionary stuff like a lot of other companies as well. So yes, we expect over time that free cash flow comes back to more of the historic levels. And there's no reason why we don't see that. And it tends to follow operating income improvement as well, right, because a lot of the expense, a lot of the cash disbursement side is tied to the expense levels. And so as we improve that, and on the operating income, that falls into the free cash flow side as well. So we'd expect our free cash flow to get back to those ranges that we've talked about back at the Analyst Day. It's just a matter of trying to predict exactly when that's going to happen. But we don't think that those targets are not doable. It's just a matter of when do we go achieve that.

Okay. We're getting close to our time, but I have a couple of more questions for you here from the people dialed in, Mark. So one is just around Vantage. How has the uptake of Vantage being relative to how you guys thought it would roll out? And what are the feature functionality things that people value the most within that?

Well, Vantage is the new platform we've been selling that addresses all of the ability for the biggest global companies to address all the complexity in data silos they got because it's a much more open platform. And so it's rolling out kind of how we thought. I think we said we have over 40% of our customer base on the Vantage platform. It contains hundreds of advanced analytics that weren't on the old platform that are all in that platform now, which provides us the opportunity to talk to our customers about that. But I'd say, "Hey, we've been very happy with the uptake of Vantage across the customer base." And again, I just want to remind everybody, it's the only product that we really sell going forward. So we think customers see the incremental value it provides. And the field, the go-to-market teams are out working to show customers how to take full advantage of that platform because several were probably only accessing potentially 20% of what's there. And that gives us the opportunity to get out and show them all the things they could be doing that reside on that platform, the business value impact it could have for their company, et cetera. And so we think that provides a long tail for us to -- as an opportunity for us to continue to drive new use cases well over the next several years.

No, that's helpful. And last one really here, Mark, is what are your biggest priorities here in the near term? And then, what do you think -- as you've been interacting with investors, what do you think is most misunderstood by investors about Teradata?

Well, so our priorities are pretty clear, I think, at least from our perspective, right? It's what we're doing, accelerating our migration to the cloud, clearly. That's been in the form of some incremental R&D and et cetera. We're clearly doing some things on the go-to-market sales motion to drive the recurring revenue model, investments in customer success, renewals, partner things we're trying to do. We're looking at driving more operational efficiency and a lot of modernizing our systems and infrastructure to support a recurring revenue business. Those are the big priorities. I think what's probably most misunderstood by investors about us is the perception that the high end of this market is going to the cloud and is going to go with other vendors. We're just not seeing that. So that's one. Two, I think that we're not growing our consumption growth, and that's not increasing. And being driven by Vantage, I think, that's misunderstood. And then ultimately, I think the opportunity for us to drive leverage as we emerge on the other side of this model transition is some that believe just -- they're not going to see it. And we see it come in. And like I said, we think we've hit bottom on a number of things in '19, and we're turning the corner and coming out the other side. I think those are kind of the 3 big things that really are misunderstood.

That's a great summary. Mark, we really, really appreciate you taking the time. I know it's sort of a difficult time out there to come and talk about the business for everybody, and we appreciate all the candid answers here. Thank you so much for taking the time and look forward to hopefully seeing you in person sometime in the near future.

Yes. Well, thank you, Wamsi, and thank BFA for having us. We appreciate the ability to participate in your conference. And stay safe. And yes, it would be great to see everybody face-to-face.

Thanks a lot, Mark.

Thank you