Teradata Corporation (TDC) Earnings Call Transcript & Summary

All right, everyone. Good morning. I'm Tyler Radke. I co-lead our U.S. software coverage here at Citi. And welcome to Day 2 of our Global Technology Conference. To kick off the software track with me today, we have the CEO of Teradata, Steve McMillan. Thank you for joining us, Steve.

Hey, Tyler, great to be here as always. Good to spend time with you.

Yes, absolutely. And I know you've been busy. You just had a big Analyst Day last week, kind of the first one since you joined the company a little over a year ago.

I thought we could just lead off maybe recap us. Kind of what were the 2 or 3 biggest takeaways from the event that you were hoping investors would walk away from?

Yes. We were really proud and excited to deliver the analyst investor message to The Street. If I had to boil it down to 3 things, Tyler, I think, first, we're a profitable growth cloud company, which I think is a reset of expectations around the company. Second, we've got a unique connected data platform with a strong competitive position and differentiation. And the third thing that we were keen to point out is that by 2025, we're going to have over $1 billion in cloud ARR and over $500 million of free cash flow. So really kind of backing up that profitable growth cloud company message.

Yes. Yes, absolutely. Maybe just to hit on a few things from the Analyst Day. And I thought there was a lot of really interesting content, ranging from product to the updated targets like you mentioned and just kind of hearing from all the new leadership that you guys have brought in. I guess starting with product. Hillary Ashton, your Chief Product Officer, she had an interesting slide that showed Teradata's price per query being orders of magnitude cheaper than cloud-native vendors. I think that perception is -- or that slide kind of countered probably the perception out there. Could you expand on this? Was this in a scenario with a lot of scale and complexity? Or would this price per query kind of apply across the board?

Yes. Look, I want to start out by saying this wasn't our benchmark. This was an external benchmark that was executed by BEZNext. It was conducted in February 2021. And you can actually pull that benchmark, I believe, from teradata.com, and customers can really get an insight into what the detail was behind the workloads. I think what Hillary's point in her presentation was that enterprises need to run a variety of different workloads to get the insight and analytical outcomes from their data. And so what was executed in that benchmark was what we would consider some real-world tests, and it was all running on AWS infrastructure where the Teradata platform executing that multitude of workloads incredibly well gave that price per query. And you saw the price per query differential compared to the competition. And as you said, it's orders of magnitude different. So we're pretty pleased by that.

Yes. And I guess, as you think about all the product improvements you've made on the cloud side, how are you thinking about your ability to land new customers in the cloud? And I know that you had talked about some early success with the new logo front. But how do you think about the ability to land those new customers in the cloud versus on-premise?

Yes. A couple of points around that, that I think are really important, Tyler. Teradata had essentially -- the previous strategy was to focus on the existing customer base which, by its very nature, is constrained, yes. We have opened the aperture now to the top 10,000 enterprises in the world across 7 key industry areas. And that really has, by orders of magnitude, had opened up the target addressable marketplace for us just by the aperture increase. But we are already starting to see new customer wins in the cloud. One that we spoke about on the Analyst Investor Meeting was Volkswagen, a really modern use case, one that we're excited by. It's a really great example of -- if you think of some of the key drivers of digital transformation with 5G and IoT and so forth, Volkswagen are capturing IoT data from shop floor robots into AWS-native object store and then using Teradata's significant query and analytic capabilities to query that data to give insights that allow them to improve quality on the shop floor. So that's just one example of a major auto manufacturer in Europe. But we are seeing wins for our cloud capability now across all of our geographies which is really great to see because this is a new motion for us and a motion that we are just starting to invest in and build up. So as we look forward, we're really optimistic what that can deliver for the future.

Okay. Okay, great. And I think if I go back to the Analyst Day, where we got most of the questions was probably around the financial targets which, I guess, is not a surprise given our audience base here. But I think the strong cloud growth with over $1 billion of cloud ARR expected by 2025 really surprised people. I guess first question, Steve, is why provide 2025 targets in the first place? I mean it seems like there has been a considerable amount of change at the company, a lot of good change, but new leadership, particularly new CFO. Just help us understand kind of the reason behind those targets and what gives you the conviction.

Yes. I think one of the reasons for providing the guidance was to really illustrate our conviction in the company; the product; the strategy that we're putting together; the market opportunity that's in front of us; and to your point, the team that we've got to execute that; and the fact that we're in this for the longer term, yes, that we see a great road map for the company as we move into the future. We wanted to have the opportunity to illustrate all of these points and that we are confident that we can deliver from a shareholder return perspective. And this is part of our continuing repositioning of Teradata as a profitable cloud company. Yes, I think in order for us to do that, we have to demonstrate what market we're really looking at, what's changed for the company, how does that actually manifest in value for our shareholders. And I think the other thing that we wanted to point out was that our conviction is actually based upon the success that we're seeing with existing and new customers. Our net expansion rates in the cloud, we took the opportunity to disclose some new metrics, which I know you and the analyst community are always really interested in. Having the expansion rates in the cloud of over 130%, looking at our customers, our existing customers, moving workload to the cloud with us, utilizing the industry knowledge that we have to deliver real use cases for expansion and, as we just discussed, our increasing ability to win net new customers gives us real conviction around the numbers that we put out there and some confidence around them.

Okay. Okay, makes sense. And if we could just touch on how you get from, I think, last year exiting a little north of $100 million to $1 billion by 2025, quite the ramp. How should we think about the drivers of that growth between conversions, moving your existing installed base from on-premise to cloud, new customers like VW and then just overall expansions from existing customers that are in the cloud?

Yes. Yes, I'll start off by routing that in the market and the market opportunity that we've got. If we think about that market moving from $85 billion in 2021, something around there, to $150 billion by 2025, clearly, it's a large and growing marketplace. Now if you break that down a little bit more, $50 billion of on-prem today, pretty flat moving to FY 2025, $57 billion or so. But still, [ $7 billion ] of growth, you can't snap at that. But then if you look at the cloud business growing from like $35 billion to over $90 billion, we see a massive opportunity from a market perspective to take our share of that growth. And we believe that we are really well positioned to win and take share in that marketplace. To the point you asked. New customers, it's clearly a new motion for us and one that we build over time. We've made the investments here to really open the aperture in that Global 10,000. We know we're not going to be a mom-and-pop answer or solution. We're not going to have the credit card -- at least not initially, the credit card swipe to purchase a Teradata system. We also know that our existing customers want to utilize the cloud in 3 ways, which gives a different pattern to our business. Some of them want to migrate their entire estate to the cloud. They've made that decision that they want to get out of the data center business. Some are migrating part of their workload to cloud. And some are using the cloud for new workloads. We've seen all 3 of these motions in terms of as we grow and expand. But we see really good opportunity to continue the net expansion rate that we outlined during the day. And adding new customers to that mix, we believe, will give us even more opportunity to accelerate beyond the guidance that we gave.

Great, great. And just shifting back to the management team, I think in the 15 months or so that you've been at the company, there's been a pretty significant overhaul of the executive management team. Maybe help us understand kind of your thoughts and strategy for making such an overhaul. And I assume the answer to this is yes, but do you kind of feel like you have the right team in place now?

Yes. Look, the 20 years of experience that I've had in leadership in the IT industry says that the key to execution is really getting the right people into the right jobs and giving them the environment and support to execute. And I think that's what we're doing in Teradata. We've both promoted from within the company. Hillary, our Chief Product Officer, was already at the company. Molly, who became our Chief Legal Officer, is a long-time Teradata employee. But I think it's a key requirement for us to bring in talent that understands transformation, understands how to execute in the cloud and the hybrid world, can help us open up that aperture, and that we bring in talent that can subsequently attract the best and the right talent in the industry to come to Teradata. And I've seen all of those capabilities demonstrated by the team that we've now got in place. So it's great to see.

Great, great. So I think one of the big highlights -- you've been focused on a lot, so I don't want to undersell your responsibilities as CEO. But one of the big highlights has been cloud and Vantage, certainly, the new disclosure and triple-digit growth that we've seen. My question is, as you think about Teradata's customers, I mean many of them have some of the most complex kind of analytical query requirements in the world, right? I mean they are using Teradata for that reason, right? There's very few substitutes for the technology. And so as we think about some of these workloads that aren't well suited for the cloud, how far through the cloud transition do you think we are? And I guess, as you think about those workloads, like when do those move over? Do you think they never move over? Just curious how you view these like very high performance, unique kind of requirement set of workloads.

Yes. I think I would characterize it that we're just at the beginning. We see a tremendous opportunity here. What I will say as well is we're incredibly proud of our on-prem capabilities. One of our customers described us as the 1,000-pound gorilla, right? We can do things with data on-prem that nobody else can and nobody else can really touch. But the opportunity for us to continue the growth in the cloud is really exciting and really significant. Over the past year, we've increased our customer account in the cloud by 50%. And we do see our customers realizing that some workloads are better suited to a hybrid approach. And when I look at the customers that we've got from a cloud perspective, a number of those are operating in a hybrid world. That's why we put forward that ethos of connected data and what connected data means to us. And we're starting to see our customers have data gravity and lots of different environments. I know on-prem -- telcos, for example, are heavily weighted to on-prem data, where they want to get the best of that data out of their on-prem systems. But they may have marketing or sales solutions set in Azure or AWS or GCP. And they want to be able to integrate that both operational data and business data together to get real insights. And so that's why we have the belief that the future for the industry is around that connected data. Not all data should or would be in a single platform. The most important thing is to be able to get insights out of that data no matter where that data is: on-prem, in the cloud or in other ecosystems. And that's something that we believe that we can deliver uniquely to our customer set and something that's really resonating well in the market.

I see, okay. And as we think about the composition of ARR today, I think about 1/3 of your total ARR is kind of considered legacy ARR, maintenance on hardware and kind of nonsubscription ARR. And that's been slowly declining in the mid-teens. I guess as you think about this transition, how are you thinking about the pace of that decline? And how much of that kind of migrates into subscription versus cloud?

Yes. I think I refer to our cloud business most often as we continue to make that pivot of the company. And the pivot of the company is really important because we need to be seen as modern and relevant in the cloud. And I think that's what you're seeing in terms of the success of our cloud business is that our customer base is now starting to see us as being modern and relevant in the cloud and being able to deliver them the capabilities that they need. By doing that, it ensures that we have a place in the future data architectures of our customers. I think a lot of our customers had the opinion of, "Well, we'll always have a place for Teradata because we'll always have that on-prem big data environment." But now what they're seeing is, "Hey, we can really take advantage of that fantastic technology in a modern context, in a cloud context and deploy that against new workloads and new use cases." So that's been really great to see. What I would say is that our on-prem business is still incredibly strong. For customers that want to get the best out of data that's in their on-prem environment, Teradata is the best solution for them. We are winning new Teradata customers on-prem, which takes a lot of people by surprise. If you think about it from a market perspective, you saw Horowitz articles and reports recently indicating the importance of hybrid for customers that are operating at scale where they might be able to get better cost efficiencies, cost effectiveness by really building and growing their on-prem capabilities. And so that gives us some confidence in on-prem. But we are really committed to the cloud, really committed to that cloud growth. We do see a solid base there. But the market is growing in the cloud, and we're going to grow in the cloud ahead of the market growth rates. So we are really excited by the opportunity that we've got there.

Yes, got you. And I want to kind of come back to the conversion topic. But just to follow up on kind of what you mentioned on the on-prem side around winning new customers, would be curious just kind of what you're seeing, lay of the land there. I mean, certainly, it seems like there's been some challenges for the Hadoop vendors. A number of -- I think both yourselves and Snowflake have called out some success in migrating there. Curious what you're seeing there as well as kind of elsewhere in the on-prem data warehouse space, whether it's Netezza or Oracle, with their autonomous data warehouse solution.

Yes, we continue to see wins from our traditional on-prem competition. In fact, we had a -- I spoke in the last earnings call about a new logo win in the Middle East actually, that was against some tough competition from Oracle. And so we're seeing good traction against our traditional on-prem competition across the regions, maybe particularly in regions where cloud technologies are less mature or less pervasive. What I would say is that the guidance that we've given in our Analyst Day, we've not assumed any new on-prem wins. So we think there's lots of opportunity to continue to demonstrate success in that significant $50 billion market, and it's going to remain solid over the next 4 to 5 years. And if you think -- how do you win against an Oracle as an example? I think it comes to our perspective on having that open connected data platform where we're not saying to customers, "Hey, if you're on Oracle, you're stuck to moving to Oracle Cloud. If you're on Oracle and you move to Teradata, we can take you to any of the 3 clouds and we can keep you on-prem and have that hybrid capability," which is really attractive in terms of opening up that ecosystem for our customers. From a Hadoop perspective, we've recognized that our customers want to store data in those relatively cheap data stores, native object stores, that's fine. So our approach to that now is, "Hey, you can keep your data in Hadoop." I think Hillary used the term use data, don't move it, yes. And that's really resonating with our customers. Keep the data that you need in those Hadoop data stores, use Teradata to get the analytical insights out of that data that gives you real business advantage and use Teradata as the connected multi-cloud data platform for enterprise analytics that enables you to get answers from that data and unlock that data from the store that it's in no matter where it is in your data ecosystem. And that's the message that's really resonating with our customers and giving us an ability to really win against Hadoop, win against some of our traditional competition.

Yes. And I think the native object store capabilities with Vantage has been something you've talked a lot about seeing good success there. So that's interesting. I guess as we think about your on-premise customers making that migration to the cloud, obviously, this isn't the first kind of cloud migration story we've seen in software. So how would you encourage investors to think about that, right? Is there -- how does kind of the price that a customer is paying on-premise compare to the cloud? And do you see an immediate uplift? Or do you kind of hope to see that uplift longer term as they are more easily able to add new workloads? Just help us understand that kind of conversion math.

Yes. So in terms of the workloads from existing customers that we've migrated, we have typically seen expansion in terms of the spend commits from those customers, yes. So as a customer, if they move their entire real estate, they'll think about moving that estate and also -- but they're looking at it with an eye to, "Hey, I know that I'm going to add these associated workloads into our data solution there." So we typically see expansion as we move from an on-prem environment into the cloud. But the real benefit from an investor perspective is the expansion rate. Once those capabilities are in the cloud and once customers realize -- I think Brinker -- like there was a quote in Hillary's same presentation from Brinker about how easy it is, from an elastic perspective, to expand the Teradata environment to deliver more results and more capabilities. That's resulted in that net expansion rate in the cloud of more than 130%. So we see the real economic advantage to Teradata to move workload to the cloud and experience those net expansion rates. And that's what we're really excited about from a unit economics perspective.

I see, okay. So it seems like the expansions in what customers are paying you is primarily driven by workload expansion versus some type of pricing mechanic when they make that conversion?

Yes, that's absolutely right. I think it's -- you've seen our price per query and the economics. Clearly, our customers are thinking about -- they put a financial lens on to everything that they're doing. It's clearly not the only lens; innovation, time to value and so forth. Our customers see us as the least risk, quickest way, least cost way to get their significant data estate. I think in the AIM presentation, I mentioned about 750 petabytes of data globally that are in Teradata systems. Imagine moving that to the cloud, enabling organizations to add more data into those ecosystems to get more levels of insight that allow them to differentiate in the market. And that's another area of differentiation for us. We know how customers use their data. We -- actually, we've got an industry consultant that works for us, and I was talking to her about the industry data models that she's been working on. I said -- I asked her, "How long have you been working on these data models?" And we were looking at a retail example. And she said, "Well, my son is 24 years old now, and I've been working on that for a year before he was born." So we have like real extensive understanding of how retails or telcos or financial services organizations use data for advantage. And what that gives us -- if you think about that from a customer success motion, what that gives us is the advantage of being able to talk to customers in their business terms about, "Okay, what's next?" If you're looking at customer experience from a telco perspective, what can you add in to capabilities to improve customer service to make a difference to your customers that's going to ultimately improve your bottom line as a telco. And those kind of discussions just mean that we get really great expansion opportunities. I think one of the things I found in, say, Teradata is there's lots of hidden gems of capability. And it's really just been our job to unlock those and take them out to our customers in a broad way to make sure that we return value to our customers and shareholders.

Got you. Got you, okay. Maybe going back to the product side for a moment. We talked a lot about Vantage. And I guess for investors watching the Analyst Day, there was a lot of different things to like, I think, about the Vantage platform, everything from QueryGrid, to be able to do kind of native object stores and analytics and federated queries. I guess what -- if you had to kind of pick 1 or 2 new capabilities that we've seen released in Vantage over the last year or so, like what are the areas that are seeing the strongest uptake and really having that impact on expanding customers' workloads and consumption?

Yes. Our patented capabilities in workload management and query optimization at the core of our engine continue to enable us to differentiate. But the new capabilities and features, our cloud road map, being able to connect that data from lots of different ecosystems is super exciting. One of the examples that we gave, which I think every CIO is struggling with just now, is how do you develop a customer 360 view. And everybody's got a viewpoint on developing that customer 360 view. But we've developed connectors into Salesforce and into ServiceNow and other SaaS providers that enable our customers to get levels of insight and a customer 360 view without having to spend incremental license funding with those SaaS providers or utilize their proprietary and SaaS analytics ecosystems. They can use Teradata, link into all of the other data, all of the financial data that might be inside the organization or, if you're a telco, all of the operational data that might be inside the organization to get some really great insights. So that multi-cloud analytics capabilities are really resonating well in the marketplace.

I see, okay. Okay. And from an R&D perspective, I think you have ramped up some hiring there. And I think more importantly, though, is it seems under your leadership, particularly you kind of shifted the percentage of R&D focused on cloud. So you've moved that higher and kind of proportionately adjusted that on the on-prem side. I guess, first, from an organizational perspective, like how are you executing this? Is it the broad reorg? Just help us understand kind of the execution, those changes because clearly, it sounds like a big kind of resource allocation.

Yes. I think we did bring in a new Head of Engineering reporting to Hillary. And I think I'm really proud to say that we have unlocked the potential of our engineering organization. It's more really of a cultural shift than an organizational shift. We're providing our teams the opportunities to deliver in key technologies, which are really modern and relevant. And as you might imagine, that's something that they were really motivated to do. And those capabilities allowed us to integrate into the cloud service provider environments and our customer environments. And it's been great to see what that unlocking of capability has enabled. It's also -- what we've seen is Teradata employees that kind of lost faith with where the company was headed, they've started to come back. They're coming back to a company that they love. So it's great seeing that engineering team under Hillary and [ Van ] being unleashed to execute. So I'm really proud of that.

Yes. No, that's good to hear. As we think about the -- it sounds like, number one, increased prioritization on cloud R&D and maybe even increased productivity just for people being more motivated to come into work, how should we think about kind of your cadence or velocity of new features being released in Vantage? Are you -- how are you kind of expecting to push those features out going forward?

Yes. Hillary put up a slide in the AIM presentation, which we're really excited about, the 3 key areas of the future road map from an R&D perspective. Clearly, continuing in that multi-cloud journey, that focus on enterprise scale and price performance and then open analytics and data access, that connected data platform and making sure that we continue to leverage that. From a multi-cloud perspective, one of the really interesting things that the team are working on, and it goes back to that Hadoop question, that Hillary talked about a unique capability that Teradata has, that hyperspace ability because of our file system, the ability to jump to the right piece of data at the right time really super quickly and being able to extend that hyperspace ability to create intelligent object stores. So imagine having the power of data -- the power of Teradata unleash the data that's in all of those Hadoop environments on a worldwide basis. That's super exciting from a multi-cloud perspective. From an enterprise scale and price performance, we are looking at how we can get analytic ops and enterprise feature stores built in to the platform. And then from that open analytics and data access, that connected data platform, enabling developers really to get the best out of that so that they can unlock the power of data for their applications and what they're delivering to their end users is super exciting.

Yes. Yes, interesting. Okay. I wanted to talk just competitively in terms of the hyperscalers, cloud native offerings, including Snowflake. I guess what are you seeing from a competitive perspective there? I think on the most recent Snowflake earnings call, they talked about Teradata displacements being up 30%. So how are you just kind of competing in that market? And does the increased success you've seen in cloud, has that positively impacted your win rates and renewal rates?

Yes. I think 4 real dimensions of competitive capabilities once our customers get past maybe tire-kicking some of the cloud-native solutions. First, technology differentiation, our ability to deliver complex mixed workloads better than the competition and, in some cases, being able to deliver a solution that cloud-native providers can't even deliver against, that technology differentiation is always going to be something for us. Second is our industry knowledge and differentiation. That 40-plus years in the data market, building up that industry knowledge, capabilities, real use cases, built on real data models that can be implemented and working with SIs to make them a reality for our customers. And then enterprise support. Supporting the G10000 and supporting enterprises is very different from a service-level perspective and the expectations around service. So the fact that we know how these big customers run their data environments and the service capabilities that they need to put around that, we think that our capabilities from that perspective, given our 7,000 people around the world, we're operating at scale, they are delivering that enterprise service to our customers every single day. And then the fourth point, as we started off the discussion around, was that enterprise price performance, the total cost per query as a real surprise as organizations start to look at the real cost of running real workload in these cloud environments. So we're really confident in our competitive position and how we can drive that forward.

Okay. And I think those are some interesting points. And maybe just to double-click on one of them. When you say running complex mixed workloads, like what exactly do you mean there? Is it -- I know Hillary had a slide of the different types of analytics workloads. Maybe just help frame that for investors who aren't super deep in the weeds.

Yes. So 4 types of queries. You've opened up a problem now, Tyler, because you'll never get me to stop talking about our technology and how we differentiate here. So there is simple strategic queries, which is, is there a vacancy of a room in a hotel, as an example. Then there's a complex strategic query, which is, if you're -- how should you make a reservation across a multichannel environment. And then you have simple tactical queries, so should a customer be entitled to a promotion based on the customer's lifetime value. And then a complex tactical query, which is the next time you go to a hotel or you check in an airport, what's the next best offer to increase your customer loyalty. Now as you might imagine -- and that was just like a hotel or travel example there. To be successful, companies have to execute all 4 of those types of queries. And that's what we mean by mixed workload. If you have to execute mixed workload, if you want to provide these kind of customer experiences and have the analytic capabilities behind delivering these customer experiences, that's where a technology like Teradata really shines. And what we've found is all customers need that mixed workload. The enterprise scale is just one benefit. But everybody wants to be able to provide these types of either employee experiences or customer experiences. And to do that, you need the capabilities that a technology like Teradata has got.

Okay, okay. No, that's helpful. I wanted to ask you, so as it relates to renewal rates, I think in Q1, there was some churn. I think ARR was flat sequentially on a constant currency basis despite some pretty nice growth in cloud. Can you just give us a sense for kind of the dynamics that you saw in Q1 and how we should be thinking about churn and renewal rates going forward?

Yes. As we look at it over the long term, we don't really see any different churn patterns from previous quarters and years. And overall, our expansion is outpacing our churn. So we're seeing that growing ARR base, generally speaking. Longer term, with the investments that we're making and our sales motions and customer success, the execution of our strategy, taking part in that growth market, we believe that our expansion will far outweigh any churn and also the activities that we've got in place to reduce churn. We have been conservative in our modeling, however. So as we start to reduce that churn and increase that expansion rate, we're pretty confident about the future.

Okay, okay. And I guess in the couple of minutes we have left, maybe just leave us kind of with your biggest priorities now that you're 15 months into the role, obviously, assembled a really good team, put out some targets. What are kind of the biggest things you're focused on?

It's all about execution, Tyler. I think we're in a great market. We've got a great strategy, a great technology. We've got a great team in place. And now it's just all about delivering to our customers and delivering the shareholder value that we committed. And that's why we held that AIM session, so we can really articulate that out to our stakeholders and give a view of the future and the confidence and conviction that we have as a management team in the future of Teradata as a profitable cloud company. Probably a unique statement in terms of saying a profitable cloud company in the data space, but we're proud to be able to say it.

Yes. Yes, absolutely. All right. Well, I think we are out of time. Steve, thanks so much for joining us. This is a great discussion. And thanks, everyone, for participating. We'll see you later.

Thank you very much, Tyler.