Teradata Corporation (TDC) Earnings Call Transcript & Summary

Hello, everyone. Welcome to the 4th Annual Wells Fargo TMT Summit. My name is Andy Kellam, and I'm on the software team here at Wells Fargo. Today, we're excited to host Mark Culhane, Teradata's CFO. How are you doing today, Mark?

Doing well. Thanks, Andy. Thanks for having us.

Great. So I guess let's start off maybe intro, a high level here. So Teradata has been a dominant enterprise warehouse solution for years. With the majority of your journey moving towards an entirely subscription-based model complete, can you walk us through the evolution of your journey and what the ultimate vision is?

Yes. No problem. So Teradata announced way back, probably middle of '16, early '17 there on making this transition. Probably really didn't really hit the stride until '18 on that front, right? And so for the most part, we've moved the business model to subscription. Over 90-plus-percent of our business today is done on subscription. We're really out of the perpetual game that's dropped from probably $500 million-ish or more when I joined late '17. So last year, we were $106 million in perpetual and we'll be obviously lower than that. This year, we think we did $47 million for the first 9 months. So that's really come down from that. And so really, that's what we've been driving towards and now a big push to the cloud. You're hearing a lot more come out of us about us being cloud-first and everything we're doing with Teradata on the public cloud and all that kind of thing. We haven't necessarily been thought of in that light as much as in the past, and that's shifting and changing a lot, and that's where all our focus is in terms of our spend, particularly in R&D and even our go-to-market motions and everything we're doing. So we're pleased with the progress we've made and we really tend to, I think, move, turn the corner on the business model side of things. And now, the cloud part of our business is staring to grow very rapidly and that will come to fruition here over the course of the next 12 to 24 months. So we're excited about where we're at.

That's great. So then maybe, if we can talk about maybe your installed based. So when we think about your large installed base, data-intensive industries included financial institutions like Wells Fargo, we are a very large customer of yours. What keeps your installed base coming back for more? How are these customers doing in the current pandemic backdrop?

Yes. No. Great. And yes, Wells Fargo is a very large customer of ours, and so thank you very much. I was actually on with some of the Wells Fargo execs earlier today. We're chatting about a bunch of different things. Really, for our customers, right, we have 1,200, 1,300 customers. They're all very, very large, global enterprises. And it's really because no one can perform the high-level enterprise class workload that we routinely provide to our customers. We provide basically near real-time analytics on peta size -- petabyte-sized environments, right? With thousands of concurrent users running tens of millions of queries per hour, right? No one in the industry can provide that scale and performance. Period. And our customers tell us all the time, you guys do something that just nobody else in the industry can do. And so that's why they keep coming back to us because we drive a level of performance and provide business value and solve complex problems, business problems and complex insights that nobody else has been able to do for them. And so we're shifting that perception of us that's been painted by others that we can only do that in the on-prem environment and [ shooting ], say, no, not only can we do it in the on-prem environment, we can do it in the cloud as well because what drives that significant performance advantage we have is in our software. It's not the hardware it runs on. It's based and housed in the software. We have the best data workload management and query optimization components to our software, the best in the industry. Period. It's not even close. And the native cloud-only vendors don't even have that kind of capabilities. So we're going to continue to focus on that customer base of ours, help them take to the cloud because we can equally address what they want to run on-prem and what they also want to run in the cloud. So from -- in terms of customers doing during the pandemic backdrop, clearly, our customer base has been pretty resilient. There are clearly industries that have been -- had outsized impact based on the shutdown, right, travel, hospitality and some others. But that's a relatively small portion of our customer base. The rest of our customer base is actually doing pretty well, knock on wood. So we're excited.

That's great. So then, I guess, talking about these, I don't know, some of the customer questions again. Are you seeing any net new demand from these? Or are you kind of so focused on monetizing your existing implementations and your workloads?

No, no. We're clearly seeing that new demand from our customers, right? I mean think of a Wells Fargo and the amount of data that it probably doubles every 6 months, and that's continuing across all of industries of our customer base. And how can they gather insights from that and what can it tell them and so forth. So yes, clearly, we're the beneficiary of that. We're seeing net new demand come from our customers as well as existing workload they run is just growing because that data continues to grow, right? So we'll continue to have a strong focus on our existing customer base, because we think the opportunity there is enormous and it's big, and there's a lot of untapped potential for us there.

I guess I'll maybe double-click a bit on the customer side of things. What type of customers are you seeing moving to the cloud? And how is the consumption model changing the way customers are using Teradata?

It's pretty broad-based. I don't think there's any particular type of company that's looking at things in the cloud. I would say, across our customer base, the very large enterprises, they're all going through this journey of what kinds of things should I run in the cloud versus what kinds of things am I going to continue to keep on-prem? It becomes a total cost of ownership question for them. And they're thinking through that, and they want to do certain things in the cloud, and we're having those conversations with them. But it's very broad-based across all the customers on the various industries that we have customers in. Consumption pricing's in vogue today. It's an option that provides flexibility. If you want to move in that direction and just pay for what you use, we can accommodate that. I think we have a unique, differentiated offering there because you only basically pay on completed query, a query that completes because given the way our software operates, we don't get queries that hang up and don't complete like maybe potentially some of the other native cloud vendors do where you're chewing up compute credits or whatever unit of credit measure they're charging you on, whether it returns a query or not. And we think that's a big advantage for us, and we can measure it down to that level and know given how our platform works and so forth. And so lots of interest in consumption. Today, I would say, by and large, most customers will commit to a certain level of volume because they've been smart about what workloads are going to run in the cloud, and they have a pretty good sense of what that is. And so they want to negotiate the best price by committing to a certain level. And then beyond that, it may go "on demand", if you will, or ad-hocs consumption pricing. We're not seeing anybody sign up from day 1 with the customer base that we have that's calling ad hoc on demand right from the get-go because then it becomes -- be very expensive if you don't get credit for the volume you think you're going to drive in the cloud.

So I guess a little bit more recently, then shifting our focus. What types of customers are you seeing increasing or adding new onto their current consumption patterns?

Well, we're seeing it across a lot of our customers, whether it's financial services, health care, government, manufacturing, retail, I mean, on and on and on. We're seeing customers come back and want to say, "Hey, I want you to take me to this public cloud. We're going to run these kinds of things there as well as continue to do what we're doing on-prem and so forth." So I'd say, again, it's is pretty broad-based. Again, the industries that have been pretty hard hit are being pretty judicious at the moment, and rightfully so, right? If you're an airline around the world, it's been tough, right? Or if you're in the hospitality business, whether that's hotels, restaurant chains or whatever, it can be tough. Those probably were not seeing huge event because they're trying to survive here, particularly with potentially what's going on now with the potential second major lock down. But yes, no, we're seeing broad-based demand.

So then I guess my next question is then, at what point will you more aggressively be targeting these net new customers versus expanding what you have? And then what kind of signal should we be looking for, kind of the second derivative impacts to kind of see that the shift is taking place?

So clearly, to date, we've done a lot of focus on our existing installed base, just given the size of that opportunity and so forth. We haven't been as focused on net new logo. Again, where we play is in the high end of the enterprise market, and that's where we'll continue to play. We're not going down market into the SMB market or mid-market. That's not where we're going to focus. We will look at parts of the enterprise market and go do some things. Net new logo, that will be a bigger focus in 2021 and beyond, and we'll start to see what's happening on that front. I think the overriding metric is just how our cloud business is growing. It's going to more than double this year. We think it more than doubles next year, and that will be a metric that we'll probably talk more about once we get through the end of this year and start looking at that out there and how we're going to track against that, and that will give people a sense of how fast that part of our business is growing.

That's great. That's really helpful. So then maybe switching gears here a little bit, turn -- talking about some financials in the transition. I guess, Mark, what do you think is the most misunderstood about Teradata today?

Great question. And it's the obvious one, right, that somehow we're not relevant in the cloud landscape or we're not making progress in the cloud, right? I mean, that's far from the truth. Its perception, it's being put forth by a lot of the competition out there that's not based in reality, and we're going to go more aggressively after that perception because it's just not true. And that's clearly a very misunderstood aspect of Teradata. I think people just believe we don't have a relevant place in the data and analytics market, and it's just a matter of time and we're gone. We're going away for good. And that's been a banner about for Teradata for 40 years, right, from back in the Netezza, Greenplum, Neoview, Vertica days to fast forward across other technologies to Hadoop and now, of course, all the native cloud vendors are going to take over the world and make Teradata irrelevant. And again, we do something that nobody else can do. They haven't been able to solve it for 40 years. I don't think the native call centers are going to solve it either. And so we have clearly a very relevant place in this market and where we choose to play. And at the end of the day, it's a huge, huge market. There isn't going to be just 1 vendor here. It's going to be -- there's enough room for quite a few people to do pretty well here. So that's where we're at.

Great. So then, I guess, maybe if we maybe step back a little bit at a high level. Could you possibly discuss the progress of your subscription transition? I mean some of the levers driving the acceleration of the shift towards subscription over the past year?

Yes, sure. I mean, candidly, it's is just focus. You got to be focused on driving that movement to subscription, aligning all the compensation across the entire company, not just sales compensation, but everybody's compensation in the company around that. And Teradata wasn't doing that when I joined at the end of '17, and it took until '19 to start moving that forward in the right direction. And that's -- I think the companies now understand that we are a recurring revenue model company. We're going to become a subscription-based company that ultimately, the vast majority of our business is run in the cloud. And so that's really what the progress has been on that. And again, it's just focus and saying no to perpetual deals. And the only way we're going to sell it and do it is this way.

That's great. So then my next question, kind of similarly, is how has the maintenance and subscription revenue retention rates trended over the past couple of years with the shift?

There's clearly -- I mean, in terms of dollar value, it's coming down because customers are transitioning away from perpetual to subscription in our business. The renewal rates are still really strong, but that's becoming a smaller portion of our overall business each and every year as we've seen, as it continues to decline and the subscription portion of our business continues to grow, particularly the cloud portion of our subscription business. And so we'll continue to see that over the coming years and so forth. And -- but that's the natural shift as customers that own things perpetually and can't buy any more perpetually need to buy more subscription, and then they ultimately want to potentially convert what they have with all their existing software as well, so they can take advantage of the flexibility that owning our software and subscription provides them to move it between public cloud and move it around and et cetera. So.

So I guess, how do you see that evolution of maybe people who are focusing on the license of subscription and hybrid kind of clouds going in the near-term with COVID and then maybe over the long term?

Well, I mean, it's a cloud-first world but, make no mistake, given our customer base, they're going to run significant workload on-prem for the foreseeable future. I mean they are all telling us it's clearly hybrid. It's the exception rather than the rule that a customer says, I'm taking everything 100% to the cloud in the next 12 months or next 18 months, right? They're thinking through what that journey looks like. You always find 1 or 2 that maybe will say, "Hey, I'm going all in." And we're happy to take them the public cloud of their choice. We operate in AWS, Azure and Google Cloud today. So yes. We'll see how that sort of evolves. But everybody is thinking about what should I -- how I think about their transition to the cloud and what workloads make sense to run there? What's -- again, what's that total cost of ownership look like? What makes sense and what doesn't make sense because there are certain portions of it that probably shouldn't be run in the cloud and others that should be.

Great. So I guess, my next question is that what items are at the top of your to-do list over the next 12 to 18 months as you kind of go through this transition and you kind of change the story for Teradata?

Yes. I mean, for me, top of mind is just we have to change the narrative that we are viable in the cloud with both customers' prospects and investors because it's out there that most people don't believe we are. And so that's a big top of mind for me, and that manifests itself not only in how we communicate externally, how we market, everything we're doing from a product perspective, the vast majority of our spend is cloud-based and driving towards that, how we go-to-market and show up all those kinds of things. It's all top of mind that was brought very much into focus when Steve joined as well and said, it's all about the cloud. We can't get there fast enough. And we're going to continue. But again, as I said, we know our customers are going to run a significant portion of their things also on-prem. It's going to be a hybrid world for a while. And so -- but we're all over what we're trying to do in the cloud, and that's what we're about. And in fact, just today, Gartner released their quality database warehousing, data warehousing magic quadrant, and we're a leader there. We're #1 in 3 out of the 4 capabilities and the other one, we're ranked number two. We're the cloud...

Mark, I'm sorry to interrupt. Would you be able to -- so I'm sorry to interrupt, Mark, I apologize. Would you be able to either shift to your right a little bit or close the blinds behind you? There happens to be a glare.

Sure. Sure.

Thank you so much. No, absolutely. I apologize. I wanted to help you with that.

Yes. No, not a problem. Not a problem. Let me close it. I mean, sunny San Diego, and it's about 75 degrees. It's beautiful.

Yes. I wish we had that here. It's very dark where I'm at here in Baltimore. I really do appreciate that. Thank you so much.

Yes. No worries. No worries. Yes. Sure.

So absolutely continue. I didn't mean to cut you off.

Anyway -- yes. Yes. So I mean, just even today, Gartner came out with their Magic Quadrant and we're -- for cloud-based enterprise data warehousing. And we're considered a leader there. We're ranked in the critical capabilities. Out of the 4 critical capabilities, we're ranked #1 in 3 of them and second in the other one, and the native cloud vendors are way down the list in comparison. So that's going to help when people try to indicate, "We don't think you're relevant in the cloud." Well, think again, right? So we're pleased with what came out there. So it's not just us saying that we're getting validation by others in the marketplace.

That's great. Now I'm going to throw a multiple choice question at you. So are customers indicating their budgets are looking better, the same or worse relative to 2020? Really, any color or details you can provide there would be absolutely great.

Yes. I mean, I'd be anecdotal because our customers are kind of indicating to us, they're not quite sure what their budgets are next year yet, right? A lot of them are trying to close out this year. They've got a directional view, but maybe hasn't been set in stone yet until they get a better sense of how they close out the year. But I would say, my feeling is, in my interactions with our go-to-market teams as well as some of the customer interactions that it's the same or better, but time will tell.

That's great. Now maybe we can talk about competition for a little bit. Given some of the changes in the EDW market from competing open source projects, through the emergence of analytics offerings from the cloud-native providers, what will drive enterprise spending on a traditional EDW technology?

Yes. Well, clearly, that segment of the market is growing, right? So data is exploding, which means enterprise data warehousing needs are greater. Analytics are needed to how do you analyze that data. That's all of what's driving all of the spending on EDW technology. Depending on what CIO survey you pay attention to or look at, it's one of the top 3 or 4 spend areas still, right? People are trying to evaluate what's happening in the cloud. That spend in the cloud is growing pretty dramatically. I think IDC put something out not too long ago that's about 38% growth in that portion of the market. And so that's what's really driving it is the explosion of data in this new digital world. And we're all about going after that more and more. And that's why, again, it's our focus of everything we're trying to do in the cloud, right? So they're trying to figure out how to run their business, how that's going to change because of the virtual nature of what COVID driven, and that potentially drives more analytics. And nobody has got more analytics than we do. So we like our position, but it's a healthy market out there, for sure.

Great. So then to maybe kind of snowball on that. Speaking of snowball, how do you view Snowflake as a competitor in the cloud EDW market? Maybe how do you plan to differentiate against them?

Well, I mean, we are highly differentiated against them today in terms of we run in -- we run at a level of scale that dwarfs what they do across their entire customer base. So we'll see them on the edge, not really at the core of what we do. They didn't -- I mean they didn't list us as a competitor in their public filings. They listed more of the other native cloud vendors, particularly Red Shift, I think, that they were going after it for a while. So like I said, to my earlier comments, we run a performance at scale at a cost point that's unmatched in the industry. We have capabilities that they don't have. They really don't have analytics. They're pretty much basic data [ enterprise ] for housing, and they do it well. Their user interface is very -- is really good and customers like that. But once customers try to go scale to run enterprise-class workload, they figure out very quickly that the cost of that is very prohibitive. And it just -- it doesn't -- it becomes a problem for them. So again, at the lower end of the market, the SMB part of the market that they tap into and then try to grow from there, they're having great success because they're growing tremendously. And so we wish them well and we look forward to competing more and more of them as we migrate more and more of what we're doing to the cloud.

That's great. So I guess my next question, maybe you can talk about your -- the hyperscale cloud providers, what are your expectation for Vantage as a service in the coming year or 2? With that product out now for some time, is there some sort of underlying existential threat that these partners will kind of become greater competitors over time?

Well, I mean, at the end of the day, we think those hyperscale cloud player, what they really want is the compute and storage. So yes, they do offer some certain analytics or whatever, but they know that we can bring a size and scale to their environment that they can't do with their product. And so we have conversations with them a lot. We partner with them quite a bit. And so yes, you got to worry about, is it coopetition? Or is it really a more partnering approach? But like I said, we do and drill a little scale that's unmatched. And at the end of the day, they want your compute and your storage. Yes, they'd like to sell you some other ancillary things, but we can help drive scale to them at a pace they'd never be able to do on their own.

Great. So then as you shift from focusing on hardware, do you -- focusing more on software, what changes have you had to make on your sales force? And how is your long-term productivity going to benefit from these changes?

Yes. Well, I mean, this has been a shift for -- over the last 5, 6, 7, 8 years from hardware to software inside Teradata. So companies largely made that shift, right? I mean we do nothing proprietary in hardware that they did 10, 15 years ago, right? And that maybe drove some of the competitive advantage. It's all been housed in the software. So we're not a hardware company. We do sell it. Our software -- software doesn't run on its own. It's got to run on something. And so we've made that shift and the go-to-market teams get it and they're making the shift from a very traditional upfront license model to a recurring over time model.

Great. So then maybe a couple more questions here because we're kind of getting a little bit low on time. How significantly has your service offerings contributed to a new business? And how are you going to be using this to kind of leverage things going forward?

Yes. I mean our consulting is very important to what we do. We have 40 years of consulting. We have a rich deep history of solving some of the most complex issues across our customer base that only we've been able to solve. There's that deep IP well within our consulting organization. And so that's unmatched in the industry, clearly, compared to the native cloud-only vendors. They don't have that at all, and we can bring a level of expertise and experience that's just unmatched. It will continue to be important. But it's got to be the right kind of consulting that drives more consumption of our software, where in the past, we did a lot of consulting, maybe just for consulting's sake. And that's the part we've rationalized out of our consulting organization and we've embraced partners to do more and more of that because we want to focus on more of the high-value consulting components of what truly drives more consumption of our software.

That's great. So I'm going to try to sneak in 1 more question because I think we have just about out of time, right, maybe see if we can get a high-level question here. If we're sitting, again, hopefully, in Vegas in 5 years instead of this virtual given the pandemic, what trend do you think will happen to spread faster or maybe spread quicker than individuals are expecting it to? So if you can maybe talk about that as our kind of wrap up question here?

Yes. Well, that's a very open-ended question. I would say, from my interactions with some of our technologists, our deep technology thinkers and solvers, it's going to be interesting what goes on with augmented reality, right? I think, in terms of -- you think about edge analytics with IoT and 5G, that probably accelerates augmented reality. So I'm sitting here wearing glasses and maybe somebody's wearing contact lenses, who knows, but I'll be sitting there going, I'll be able to identify you, be told about how you met potentially, right? Maybe some interesting facts about you and based on your social media present, what topics might be of interest to you and all that kind of stuff, right? So it will be interesting from a business perspective then, or help consumers be more informed. Lots of choices, I think, and might render phones potentially less relevant, except as an edge device. It will be interesting to see how that plays out. But I think there's that potential that could happen over the course of the next 5 years.

That's Great. I really do appreciate all the feedback today. It was great to have you as I talked to our investors today, and we hope to see you soon and have further conversations down the road, Mark.

You bet. All right. Thanks, Andy. Appreciate it. See you.

Thanks, Mark. Have a great day.