Teradata Corporation (TDC) Earnings Call Transcript & Summary

Good morning, and thanks to all of you for joining Bernstein's Strategic Decisions Conference. My name is Keith Murray. I am Bernstein's tech and payment sector specialist. And I'm very happy to be joined today by Steve McMillan. He's the President and CEO of Teradata, which is a leading and multi-cloud enterprise data platform provider. Just one quick housekeeping item before we get to the discussion. [Operator Instructions]. So with that out of the way, let's begin. So Steve, thank you very much for joining us today. It's a pleasure to have you.

Keith, it's a pleasure to be here.

Thanks very much. Maybe to start, we might have some people in the room and on the line that are not overly familiar with Teradata. So maybe can you just provide some high-level thoughts on how exactly Teradata enables its customers to leverage their data, solve problems, improve business outcomes, et cetera. If you can just kind of give us an overview of exactly how that works?

Yes, that's great. I think reflecting back on Teradata, it's been around for over 40 years now. So we've got a fantastic heritage. I think you could almost say that Teradata invented the enterprise data warehousing marketplace. I think it's interesting to start from where our customers are today. Our customers are demanding optionality in the environments that they have, in the technology environments that they have. They don't want to be locked into single ecosystems or providers, and that's translating through into customers wanting a real multi-cloud capability that can work across all of the major hyper-scalers, all of the public cloud environments. And they want to be able to realize value quickly so that they can control their costs as they take advantage of these new cloud technologies and ensure that as they increase potentially the complexity of their environment, it doesn't significantly increase costs. What we've been finding, Keith, is that people are choosing Teradata because we have a lens and a solution against all of these major customer challenges. And our secret sauce is really in our software, and the investments that we've made in our software to make it truly cloud-native. Also, the fact that we've got great workload optimization and query optimization enables us to deliver better price performance than our competition, with lower TCL and more predictable outcomes. So we think that these capabilities are significantly ahead of our competition. And when we combine that technology with the deep industry knowledge that Teradata has developed over the last 40 years developing data models. I was talking to one of our consultants and I said, how long have we been developing this particular industry data model? And she said, well, my son is 25, and we started work on it just before he was born. So we've got tremendous intellectual capital in terms of a viewpoint on how industry should work and what those data models should be. As well as that, over the last 12 months, I'm celebrating, I think, my 12-month anniversary around today with Teradata, we've really made significant investments in our technology to enable an ecosystem where Teradata can query data and federate and orchestrate data and analytical insights across the company's data fabric, no matter where that data resides. Now [ the Teradata, we've all wanted to get all data standing ] on a Teradata storage device. We know that, that's not what customers want now. So it's really -- it's an amazing capability where we can give customers access to those insights no matter where that data is. And as our customers want to take advantage of the cloud service providers, first-party services to give really modern application development technologies to their DevOps teams, we've done a lot of integration now. We really think about Vantage as a platform where we integrate into these cloud service provider environments, enabling a true sense of choice for our customers so that they can get that modern development experience. But whilst utilizing all of those first-party services and having Teradata Vantage enable a modern data fabric in the background, serving applications the data they need so that the business users can get the insights that they need. So Teradata, we think the leading connected multi-cloud data platform for enterprise analytics.

Appreciate that. So you mentioned, Steve, that you've just been, I think, just over a year now in the seat of CEO. If you look back over the past 12 months or so, what do you think are the most important things you've accomplished? What are the things you're kind of most proud of in the beginning of your tenure here?

Look, I think business is really all about people. And so I've had the great pleasure of starting to assemble a really fantastic team and getting the right team in place. We appointed a new Chief Product Officer. We brought in a new Head of Product Engineering. We brought in a new Chief Strategy Officer, a new Chief Revenue Officer, to name a few of the appointments that we made at the C-level. And then we've been bringing in experience in cloud operations, a new CIO for the company. And we just recently brought in a new Senior Vice President and General Manager of our cloud business and to give us a real focus on our relationships with the cloud service providers. When we embarked on this transition and transformation of Teradata, we really set out 3 principles for the company, and that was to be market and customer-driven, be agile in all that we do and be accountable to one another. And I think those 3 principles of transformation have really helped bring the company together to respond to what's going on from a competitive perspective, what's going on in the marketplace. And we've elevated, I think, the company from the perspective of a focus on diversity, equity and inclusion, and some of our ESG activities that I've been talking about on some of the earnings calls. The other amazing thing that we did was this pivot towards cloud-first. Not cloud-only, but being a cloud-first company. And there's no better example of that pivot to being cloud-first than how we reallocated our research and development dollars. We spend over $200 million a year in R&D -- over $300 million, actually, a year in R&D. And we pivoted about 70% of that, so more than $200 million towards investments in the cloud, building those cloud-native integrations, investing in our QueryGrid technology as an example, to provide true multi-cloud capabilities and also an ability to reach back into on-prem environments where that's important for a customer, and enabling our customers to bring all that together in a truly modern customer experience. And then the transformation continued in terms of, we're modernizing our go-to-market motions to think really about what it means to be a cloud and subscription-based business, be it customer success or renewals, looking at how we transform our consulting business. If we look back over time, we've really optimized the size of our consulting business, focusing on what Teradata is. We are a technology platform company so that -- our revenues from our consulting has really shrunk down over the past few years. It's got to the perfect size where we feel we can work successfully with SIs and partners. And really it's now all about establishing our position as that connected multi-cloud data platform for enterprise analytics. So it's been an exciting 12 months. We've kept busy.

So I know things often certain look one way on paper. And then when push comes to shove and rubber hits the road, things could be different. So if you look back over the 12 months, what have kind of been the biggest surprises that have played out, both positive and negative? And obviously during a pandemic to lead a company it's -- makes challenges on its own. But just curious what have been the biggest surprises that you faced?

I'd just start off by saying I've just been really proud of how the Teradata team has responded in such a challenging environment. And I hope everybody is -- and their families are keeping healthy as we are hopefully coming to the end of this pandemic. So I've been really proud of how the Teradata team have responded to that, how they've kept their focus on the customer. But not only that, how they have really embraced and really had that appetite for transformation and execution over the last 12 months. I think as we declared our intent to be the leader in the cloud, we reinvigorated the organization with a tremendous sense of energy, but the resilience of our people and the company through the last 12 months has just been fantastic. The one thing that I was surprised about was that the company hadn't really fully embraced the cloud. As I said, we've -- everyone knows that we've been a leader and probably the creator of the enterprise data warehousing space and knows that we are a rock-solid on-prem technology. But the surprise was, we had to do that pivot towards the cloud and to being cloud-first. Not cloud-only, but again, I've been really happy how our teams have embraced that cloud focus, pivoted the company and how we're now taking that message to the marketplace. And I think you can see that in terms of when we announced over $100 million of cloud ARR, I thought that was a real turning point for the company in the perception of Teradata in the marketplace. We did really well in the Gartner Magic Quadrant for cloud database management systems and being a leader in that quadrant, a leader in the Forrester Wave Analysis. And I think our teams and the Teradata teams are really embracing that cloud focus and getting reenergized in terms of what they can do and what they can deliver in the marketplace as we reestablish that leadership position.

That segues to my next question. I mean the transition to the cloud is obviously a key -- you could argue, the key part of the story for Teradata. Can you just give us your sense of kind of where you are in that transition? I don't know if we want to use the bad baseball analogy of what inning we're in? Or use an American football analogy, what yard line you're on, et cetera? But where are you on that? And then maybe secondly, what are the attributes that set Teradata Vantage apart from what other offerings are out there in the marketplace?

Yes. I think if you look at -- I've been involved in a number of organizations' transition to the cloud. And I think there's 2 aspects to it: one is the business model transition where you move from that perpetual to business model on-prem to a subscription business model. And I think that largely, we're through that transition. We've made the switch towards that -- from those perpetual revenue streams to having a subscription revenue stream. And to use the term, we've pretty much swallowed the fish, yes. And you can start to see that now in terms of our free cash flow growth, as our subscription revenues are such a significant part of our overall revenue streams now. I think the big change in the past, although we've had that advantage in the public cloud environment, I think the real delta and the real transformation is really putting all the wood behind the arrow in terms of our cloud-based technology set and making it available on all 3 public clouds, making it available in private cloud environments that are running on VMware, as well as still delivering that rock-solid on-prem technology. So we've got that range of choice now in the marketplace, so that customers can deploy Teradata Vantage where they want to get the best possible data ecosystem and the insights that they need from analytics. As we've worked with organizations to move their technologies to the cloud, I think a lot of organizations have kind of cracked the code on moving compute to the cloud. But how do you move data to the cloud, especially with the ingress, egress charges that some of the cloud providers put in place? So by us having a true multi-cloud environment, we can have Teradata Analytics capabilities next to the customer's data, be it an Azure or AWS or Google and back on-prem, to minimize those ingress, egress. So we only pass the results of queries between the clouds. So we can create a really optimized environment for data, so that you can respect where the data gravity is of the organization. If you put all of your customer data in Azure and all your supply chain data is in AWS, to get real insights across your enterprise data set, you have to orchestrate that data together. And so what sets us apart, we believe, is the ability to orchestrate that data no matter where it's deployed in the ecosystem. And you wouldn't hear many organizations say this, but we have a benefit here of being born on-prem. You hear a lot about technology companies being born in the cloud. Because we were born on-prem, we are used to squeezing every ounce of performance and capability out of every bit of storage, every bit of IO and every bit of compute. And when we take the Teradata technology to the cloud, we still do that exact same thing. So we help organizations control their cost of operation in the cloud and make sure that they have the best possible TCO. So we are super-excited about that differentiation. We've just -- we won some new deals in Europe recently, working through the evaluation. It really proved out our thesis in terms of what makes Teradata unique, and we're really excited about the future.

So Steve, we have a related question from the audience, maybe we'll go to that. The question is, what's the total cost comparison between Teradata Cloud, Teradata on-premise and cloud data warehouses such as Snowflake?

Yes. There's a really interesting white paper available on our website, teradata.com from BEZNext, which actually talked about the comparison between running Teradata and how it compares for different types of workloads to both cloud -- the cloud-native competition from the CSPs and Snowflake. And what we see is that when you're orchestrating data at scale, we are -- we have a significant TCO advantage to the competition. I think maybe a part of the question was as well is, when we move our customers from on-prem to the cloud, how do the economics change? What we've seen largely so far is the total customer value remains at least the same on that initial move, but starts to expand more rapidly because of the elasticity of the environment. So they put more data, more workloads, more queries through the system. But I would really encourage folks to go check it. That's an independent survey by BEZNext that's available on our website.

So for existing customers that have transitioned to the cloud, what's been the response so far? Are there any specific new features that they highlight as being most impressive or most useful post-transition?

I think just being able to embrace the cloud ecosystems that they're moving into, so really being able to use those first-party cloud services. We really think about Vantage as a platform. So if you want to use the native data ingestion tools that are available in the cloud, if you want to link to Amazon or Azure's Data Mart technology, then we -- in Teradata, we built these integrations out so that you can get that modern experience. One of the things that we've released recently is native object store capability so that we can look at the data that's stored in a native object store. Got some really interesting thoughts on how we will continue to improve that technology into the future. But that is -- if you think about -- if there's -- is there a change in ethos in Teradata, being able to query data that's stored in a native object store and not spend in a Teradata environment, is a key part of how we've become more cloud-native and more cloud relevant.

Excellent. I don't know if this would be helpful, maybe is there a specific example you can provide of maybe a company that was shifting to the cloud, what type of workloads do they move? How long does a transition like that take? Is there an average time line or can it vary? And sort of which features, low-code, no-code analytics, that they kind of go for on the transition. So how does that particularly play?

Yes. I think -- yes, a couple of things. We've seen a number of our customers start to take advantage of real-time streaming data and real-time streaming data services that are available on the cloud service providers. As that data lands in [ nodes ] for them, then being able to do the queries and analytics through and onto that data. What I will say is the time to migrate from Teradata to Teradata in the cloud, it's the same code base. So you can use -- you don't have to rewrite your queries, you don't have to re-architecture data structures. You can essentially lift and shift here. Performance of our on-prem environments are -- is higher than in the cloud. So I think there will always be use cases where those on-prem highly [ tuned ] use cases are going to continue to remain relevant. As the CSPs continuously upgrade their infrastructure and capabilities, that gap might start to narrow. So we -- as we serve enterprise customers, the deals that we're doing in the cloud tend to be fairly large deals and big migrations, in terms of moving those capabilities to the cloud. So it's really difficult to give you an average, yes. But it's interesting, we think about our expansion rates as we move into the cloud. If we're moving out a $5 million per annum customer, they're spending $5 million on data warehousing and we move them to cloud and they're spending maybe $5.1 million, our expansion rate there is low from a percentage perspective, but high from a dollar factor, yes. So it's going to be interesting as we continue to move our customers, looking at our expansion rates as we move forward, so -- but I think we've seen our customers recognize the value of being able to move from that on-prem Teradata system with no significant recoding and put that in the cloud environment.

There's another question from the audience. It's, how many workloads currently on Teradata are mission-critical versus more discretionary/easier to move data sets?

Yes. I think if there's one thing that we've been renowned for in our existing customer base, is having a bulletproof technology that can run mission-critical workloads on-prem. Our mission is to provide that same experience in the cloud. But what we find is the way that customers get insight into their organizations is to be able to orchestrate data across all of these data sets. So if customers essentially slice some workload out of an on-prem system and put it in the cloud, then how do you reintegrate that data to get a true insight? And that's the problem that Teradata has been looking to solve for and with our customers. So that you can still use Teradata as that advanced query engine and still then access all of that data, no matter where it is in the ecosystem. And if it's been put into cloud or if it's remaining on-prem, but still give organizations the ability to get true analytical insight across that data, no matter whereabouts it is.

Maybe we'll switch a little bit to the pricing side of things. Maybe you can provide a little bit of color on the flexible cloud pricing options, what the customer reaction has been to those options?

Yes. We launched a consumption-based pricing model in third quarter of last year. And I think there's been a lot of interest in that model. A high percentage of our sales engagement have included at least a request for some consumption pricing. We're finding that a blended pricing model is working best for most of our customers where they'll commit to a fixed amount and then will do some form of burst in consumption on top of that. We're continuously looking at our pricing mechanisms, but that consumption-based pricing model was a big change for us, and moving from really more of a fixed cost model to get that true consumption-based pricing model for our customers. So yet another part of the transformation and being a true cloud company as we move forward.

The next relates to the overall question of percentage of data that's actually going to move to the cloud versus not. So given the mission-critical nature of some of the workloads that are currently on-premise, what percentage of workloads would you expect will eventually move to the cloud? Do you have a ballpark in mind?

Yes. No, I think -- again, it varies from industry to industry, I think, Keith, right? So the -- if you think of the telcos, they'll always have a fantastic data gravity on-prem, yes. But even our telcos want to take advantage of some of these cloud-native capabilities, yes. So we're seeing an increase in new and existing workloads moving to the cloud. But we don't believe that all of the workloads will move to the cloud in many of our customer segments. The data is really sensitive, you can imagine, like government data and credit -- like critical banking data or highly regulated industries. Our customers have told us, look, we're going to keep that mission-critical, sensitive data, and we're going to keep that on-prem. Again, our focus is -- our customers tend to have these massive data sets but we want to give our customers the highest degree of choice, and -- so that they know that they can get the benefits of Teradata irrespective of where they may have moved their data or the data gravity has moved to. And that, I think, has given us a real differentiating capability in the marketplace.

Maybe a follow-up on the regulatory angle. Are you seeing the regulatory focus on data, where it's stored, et cetera? Is that changing? Do you see a heightened focus on that around the globe? I'm just curious what the backdrop on the regulatory front looks like.

Yes, we see it. It certainly varies from geography to geography, with Europe and especially the U.K. having some fairly interesting regulatory discussions with the banks, as an example, in the U.K. about what data can be where and also time to restore operations. If there's a failure, demonstrate that you can keep your organization running in a certain time frame. So I think it does vary by industry, by geography. One of the things that -- because we've always had an industry orientation, especially in our consulting organization, we are able to give a real viewpoint to our customers on how best to take advantage of these modern technologies in the cloud. What to keep on-prem, what to put in the cloud. How to orchestrate that workload together? So it's a real opportunity to look at that hybrid and multi-cloud environment.

It's a good segue. We have one that came in from the audience, and it dovetails with a question that I had. So basic question is, what's customer interest in the hybrid and multi-cloud look like? And then the question from the audience was, how many customers take advantage of hybrid and multi-cloud? And what percentage of workloads would you expect to be on-premise forever?