Teradata Corporation (TDC) Earnings Call Transcript & Summary

All right. Thank you very much for joining us here as we make our way through the morning session of our day 2 of this virtual 2021 TIMT Conference. I'm really excited for this next meeting. This is a company that I've known for a long time, but in many ways, it's a completely different company. With us today is Teradata. We have CEO, Steve McMillan. Chris Lee, IR, is with us as well here off camera. But guys, we're really excited to have you today, and I really want to kind of talk about why this is, in many regards, a different Teradata than a lot of us remember who have covered the name for 15 years or more. Before we can do that, though, a lot of investors that have been listening in have been really good about so many questions through either the portal or e-mailing them to me directly. Please do that. I mean I can sit here and talk to Steve for an hour. And it would be a fun conversation, but it tends to be more interesting and more interactive when you submit questions for these guys. And so I'll intermix them as we go. But without further ado, Steve, thank you. Thank you very much for joining us today.

Hey, Matt, it's great to be here and happy to answer all the questions that you and the team and the folks watching have. That's great to have the opportunity.

Cool. Well, okay, let's start out with kind of the obvious. And you and I and Chris and the whole team, we've been talking a lot over the past year. And this is -- it sounds trivial, but it is a different Teradata on so many levels. And I think it starts with the executive team, yourself, Hillary, Claire, the whole gang really is taking a new perspective, a cloud-first perspective on the world. And so maybe just start out by maybe drilling down a bit more on that. And obviously, it's a generic question, but I think just to set the table on why this is a different Teradata. And if you hadn't looked at it in a while from an investor perspective, it bears looking.

Yes. I think when people think about Teradata, they are kind of distracted by our 40-year heritage of essentially inventing the enterprise data warehouse, right, from an on-prem perspective. When I joined the company just over a year ago and what I found is just a continuing set of hidden gems from our patent portfolio to our technology set. And the real opportunity for Teradata was to, as you said, shift towards that cloud-first focus to really ensure that we were becoming meaningful and relevant from a cloud perspective inside both our existing customers and also new customers. And I think you'll probably want to ask these questions about that as we get into some of the details. But what that meant was it's an entire shift of ethos inside the company. And so we've had to transform nearly every dimension of the company and the operating model, and we've seen some really great success. And that goes from the leadership team. We brought in a new leadership team, a new head of sales, a new head of strategy, recently brought in a new CFO. We appointed a new Chief Product Officer to really bring together all of the capabilities within Teradata from a cloud perspective and continue to focus on our innovation and development. So this is really all about being -- about taking the fantastic assets that Teradata has, put them into a cloud context so that we can drive success into the future in a really large and growing marketplace for us.

So that's a great lead-in here. I think Teradata, before you and a lot of the -- and Hillary and some other folks got there, I mean I think Teradata was going to be focused on cloud, but I don't know that they were necessarily sort of like all in, right? And like everything that you guys do from a go-to-market to an up-sell from a product development is all cloud facing. Can you talk about sort of the heavy lifting that's been done really to position Vantage to where it is today, where it is a modern data warehousing cloud solution that from an ROI perspective -- and RBC is a big Teradata customer, it still is best-in-class from an ROI perspective on a cloud-native side? I don't think a lot of people sort of recognize that.

Yes. So you touched on a lot of topics there. So we -- a lot of companies declare that they're cloud first, yes, especially enterprise companies that are very -- they have been very successful in the on-prem marketplace. We put wood behind the arrow, Matt, in terms of where we spend our dollars. We inverted our research and development envelope. We had 30% of our R&D in the cloud when we started in 2020. And we inverted that to have 70% of our research and development budget to be focused towards developing cloud-based capabilities. That pivot happened around August, September of 2020. And it completely accelerated the level of delivery of cloud-based functions, features and capabilities around the Vantage product. We also announced like general availability on GCP in the second half of last year, and that was accelerated as well by that shift of development resources. So we are now available on all of the 3 public -- major public cloud providers available in their marketplaces. And we've put real investment into our relationships with CSPs. You may have noticed a strategic collaboration agreement with AWS, which we announced recently. But we see that partnership with those CSPs as a real fundamental change in how we are operating as a business. So we're putting real wood behind the arrow in terms of that cloud-first strategy. We're completely changing our sales motions in terms of working with partners, working with SIs. Teradata at one point had over $700 million, I think, of consulting and services business. We've been taking that down over the last years because, really, it's not strategic for us. We are, at our core, a technology platform company. And our focus is on delivering that technology platform across the public cloud environments and in private cloud environments and also still, a lot of our customers use our appliance technology on-prem.

So I want to get to some of the technology differences because I think people throw out data lake, data warehouse, and you've had a really interesting approach to, I think, bringing analytics to the data. Before we do that, though, Steve, I think a lot of us can appreciate the -- your comments on how you've inverted your R&D to cloud spend. And I think that's certainly evident to us when we look at the products and talk to customers. I think the more challenging aspect, from my perspective and I think a lot of investors, is the sales and marketing side, convincing the market that Teradata is not only a viable alternative to maybe some cloud-native sort of names that work similarly like a Snowflake or a Databricks, but that it's superior in a lot of regards. Talk about sort of the heavy lifting on the go-to-market side to help back up the heavy lifting that's already been done on the sales and marketing side or on the R&D side to really change the perception of the market.

Yes. I think there's a couple of dimensions to that. One is our approach to our existing customer base. We are continuously proving out that we are the only viable path to the cloud for the enterprise scale and complexity of some of the world's largest organizations, especially when we consider enterprise price performance. We can operate at orders of magnitude lower cost to some cloud-native solutions from a cost-per-query perspective. And our cost per query from the vantage point of our customer is directly related to business value. So business value, you get business value from your data when you ask that, when you get a result or an analytic outcome from that data. Our cost per query is industry-leading and continues to be industry-leading in the cloud. Not only that, we found that our on-prem technologies with workload management and query optimization, we have financial governance capabilities in the cloud that our competitive products just can't match the cloud-native solutions. Their answer to complexity is to scale up compute or scale up storage. That results in incredibly expensive environments for complex or large workloads. The ethos that we have as a company now is to essentially enable customers to get the advantage out of data no matter where it is in the ecosystem. And I think we'll talk a little bit more about that. But from a transformation of the sales teams, we've had to completely retool the sales teams to have these conversations with customers about how we can natively integrate into their future architecture from a data perspective, how we can integrate with the CSPs and the cloud-native solutions inside our customers' architectures and then working with SIs and enabling SIs to really leverage Teradata in terms of as a key component of unlocking enterprise data or new innovations that they are delivering to their customers. So that whole process is continuing an evolution. Not only that, Teradata was not actively prospecting new logos before the start of 2021. So we have created that new logo muscle. And we saw more new logos in Q3 than in any other quarter. And we'll see more new logos in Q4 than any other quarter. So we are incredibly optimistic about how we're driving forward our pipeline and our focus from an execution perspective.

I know you touched on a lot of really good things. We're getting some great questions from investors, so I'm going to pivot to those because it really fits in well with our conversation here. But your last comment on adding more new customers in Q3 than prior quarters and the expectation of more in Q4, you know this because we've talked about this. But I think your ability to articulate that in numbers, granted we're starting on a small base, coming from 0 historically of new customers, I think will be well received by The Street. So as you -- as I'm sure you are aware, the ability to articulate that, I think, would go a long way to showing people that this is not just moving dollars from an existing customer from on-prem to the cloud, but actually a multiplier effect on the land, but -- and also the expand. So I want to -- you know that, but just to sort of say it publicly here. So there was a question from an investor. You talked about some of the differences versus sort of cloud-native people. There was a question specifically on Snowflake. And there were some granular pieces that I think are interesting to this question. Effectively, it said, now this is relative to Snowflake. How are you different when it comes to concurrent user ability, separation of compute and storage layer and really just kind of that ROI pricing as it relates to Snowflake?

Yes. We have complete separation of storage and compute inside our cloud environments. Indeed, that points to the new ethos of Teradata. And it's actually -- Snowflake have actually got an ethos that's very similar to Teradata as a whole where they want to get all of the data inside a Snowflake environment. We have an ethos now of being -- having a connected multi-cloud data platform for enterprise analytics. Frankly, my focus for the company is to be a profitable growth company. I think what caught investors' attention was the fact that we have a really -- a large and growing, rapidly growing, cloud business, going from approximately $100 million to approximately $200 million this year. But not only that, we're going to deliver more than $400 million of free cash flow. And you can see that free cash flow being durable for the future. Being part of that profitable growth, what does that mean? When you think about that, I don't actually make all that money from much margin from AWS compute and storage. I make money from the usage of our software in those environments. And so our belief is to create an enterprise data platform and an analytics environment that can use data no matter where it's stored inside the ecosystem. And that's a very different philosophy from all of the CSPs and all of the cloud-native organizations that want to create essentially that data lake in, say, their own environment. So we've been investing in technologies that essentially create that mythical data fabric or data mesh and what we call a query fabric across our customers' organizations where you put the query engine close to where the data is as opposed to moving the data to the query engine. And that means that customers can have a much more effective solution for data, and it's also a much more cost-effective solution for data. It's a radically different approach. But the approach is magnified because of Teradata's ability to operate at enterprise scale and enterprise complexity from a concurrency perspective, as the question pointed to, from a complexity of query perspective. All of these dimensions, we execute in Teradata, utilizing the technology and the software that we've abstracted from our on-prem that we've got patents around in terms of that workload management and query optimization to deliver a really great solution for data analytics. That's a very different way to operate compared to history. And that's part of the new Teradata and the new ethos we're bringing to the market. We are really excited about taking those messages to our customers and our partners and what they can do with that in terms of implementation.

I think an important piece -- I get a lot of questions from investors on what -- well, Teradata is a data warehouse story. And I don't believe in data warehouses in the future. I think it's more of a data lake strategy. But what you just said was that you think it's both, right? Your ability to put SQL, inject SQL where the data is effectively is a data lake strategy. And I think there's that misconception still in the market that, oh, they're just a data warehouse, right? And data warehouses are going away. It's much more of a complex question and answer to that. And you effectively alluded to that in your answer, so I appreciate that. The follow-up question to that one, in terms of like the cloud ARR component, and it kind of gets to the storage and the compute. But just a finer point on that question, and so the question is, is all cloud ARR product? Or is there some hosted cloud revenue in there as well?

Yes. We wanted to be really clear on that. So our public cloud ARR is only revenue that is Teradata software running in any of the public cloud environments, AWS, Azure or Google Cloud as a service. We do have a managed offering where we run on Teradata hardware and a colo. But our public cloud business, we set out being very deliberate because we knew we didn't want to cause confusion in the marketplace. This is real cloud dollars. This is real dollars that are generated on top of those public cloud environments, not a hybrid. And I would also stress because people are surprised by it, this is -- the technology that we utilize is core infrastructure technologies from the CSPs. This isn't us landing Teradata technology inside our cloud data center. This is very much utilizing the native services, the native storage services, the native compute services of the cloud service providers as well. So it's a very pure, pure cloud ARR number.

That's great. That's great. By the way, Steve, we're getting a lot of really, really good questions from -- I thank everybody for submitting these. We're going to keep working through these. This next one is one that I know the answer to, but I'm going to ask it. And I guess -- so the question just is how much of cloud ARR growth is from net new versus conversion from the base? And I know you haven't disclosed that. How do you think, though, about -- I mean you'll talk to it and you just said you've added some new customers. I mean how do you expect to talk about that? Maybe put some numbers around that in the future.

Well, I think we are really heartened by what we're seeing from a new logo perspective. Interestingly, Matt, we are actually winning new logos on-prem and in the cloud. And so -- and when we think about a new logo to Teradata, I just want to be really clear on this, we talk about this as an entire new company coming into the Teradata ecosystem. We add new users, new workloads, new departments, new divisions of existing companies all the time into the Teradata environments, both on-prem and in the cloud. What we've done, though, from a modeling perspective, we've been fairly conservative in our both short-, medium- and long-term guidance around new logo acquisition. And the reason for that is we want to prove that out. I think my thoughts from -- giving guidance to The Street is that we give guidance that we have a plan to meet and beat, yes? And that's really where we want to be from that perspective. So we're modeling fairly low numbers of new logos, both on-prem -- we've modeled 0 actually, and we're winning new logos on-prem and fairly conservative in terms of new logo growth in our medium- and long-term guidance. So a lot of our cloud ARR growth is actually migrating from existing on-prem capabilities to the cloud. Now that, for us, is a really good thing to do because we actually -- even although in our guidance, we've kind of modeled out a dollar-for-dollar transition from on-prem to the cloud, we actually usually see expansion from that on-prem into the cloud because the customer is not just a lift and shift. They're usually lift and shift and adding new workloads into their cloud-based environments. But as we migrate that workload, our net expansion rates, which is something that we started to disclose now, are well north of 130% for our cloud business. And so what that means is we are driving really good expansion of those workloads as they land in the cloud. The other thing about new logos, you mentioned it, is these tend to start small and grow fast. And we have seen that exact model as well. We have some contrary to that as well. We did a deal with a really large automotive manufacturer in Europe to take their shop floor data from robots. They were streaming that into AWS in the cloud. And then they were utilizing Teradata Vantage on AWS to analyze that data in Native Object Store to get analytics insight for the quality of manufacturing and the quality of the production process. That is a use case -- was an incredibly powerful use case and something that the organization wanted to invest in fairly significantly. But that is an example as well -- goes to the point on data lake versus being able to access that Native Object Store, being able to access Hadoop data stores, not really -- we don't really mind where the data is. We want to be the query engine and the capability that gives insights into the data inside an organization.

Two questions from investors that are kind of similar. It all -- it revolves around the expansion of cloud workloads. So I'm going to kind of -- for those that ask these questions, I'm going to try to blend them together. Effectively, the question is, what trends are you seeing in expansion rate for these cloud customers? And the follow-up to that is you just said it's north of 130%. The question was, why not give an exact disclosure to kind of help us understand the magnitude of the expansion happening there rather than just north of 130%?

Well, I think we wanted to give an indication of how we built our plan and our long-term guidance as we get to over $1 billion of ARR by FY 2025. And the other thing is we are experiencing really significant growth in our cloud business just now, taking it again from that about -- just over $100 million to just around $200 million for this year. So as we've modeled that out, we wanted to model against that 130%. But clearly, we're seeing expansion rates more than that. As we get more mature with our cloud business, I think we'll get more pinpoint specific in terms of expansion rates and also look at other disclosures as we move forward.

Perhaps new customers or something of that nature?

Yes. I think once that new customer motion is getting up to a mature speed and we continuously -- we're seeing an engine of tens of customers every single quarter and we can guide to that, then that's certainly something that we're going to look to do as we move forward.

That's great. That's great. There's a question really around the cloud ARR trajectory. And thank you for asking that question. I guess as -- and we have 7 minutes left, Steve. This is -- again, I knew this will go fast. And these questions are fantastic. I really appreciate everybody submitting these things. The question is around kind of the long-term cloud ARR guidance. But I wanted to put a finer point on what happened on the Q3 quarter because a lot of the stock sold off as you lowered your cloud ARR expectations this year being one of -- arguably one of the most important metrics on the new Teradata. Can you describe to me -- because we had a great conversation off-line about what happened in Q3, what happened subsequently in October and presumably March. And what are you trying to signal The Street in terms of your ability to sort of hit and exceed these numbers on a go-forward basis? And then I'm going to ask the question that's a little bit longer term in nature.

Yes. So we are really happy with the engine that we are building up around our cloud execution. Indeed, we did more cloud deals in Q3 by volume than any other quarter by an order of magnitude. Clearly, if you do the math, you can work out that there were much lower average ARR from that perspective. However, we were disappointed in Q3 that a handful of deals slipped into Q4. It was a small number of deals, but meaningful from an ARR perspective. And I think that's indicative of the fact that we're working with the largest companies in the world to help transform and migrate their data from on-prem into the cloud. And so those transactions are new for both our sales team and new in many cases for our customers. And so there's a learning process in terms of how these deals get done. Now the great news is we've closed most of those deals already in the quarter. And we'll close all of those deals by the end of Q4. And we see a fantastic pipeline of opportunity for Q4. What we did though was we wanted to set an expectation with The Street that we have learned from Q3 and the execution in Q3. And we wanted to set some guidance. We can still see a path to north of our guidance in terms of what we issued. But we wanted to set some guidance -- that we knew we can set that guidance we had a solid plan to execute against.

It sounds like you're sitting in the data center right now. The Teradata data center is just humming. So that's great. I mean because I think what I took away from our call back was it's a timing thing more than anything. And you are so really encouraged with what you're seeing early in 4Q, but want to build that repetition on being able to exceed guidance and you're still sort of early in this sort of cloud trajectory. And so it seemed to me like it was more conservatism than anything. But it sounds like 4Q is off to a strong start. Now the question that the investor asked and this was really a dovetail to that is does the revision to the '21 cloud ARR guidance affect the previous guidance given for 2022 cloud ARR growth of 70%?

No, we don't see impact in that long term. I think, Matt, you hit on it. I would say this is a question for most of our large customers of when and not if. And yes, no data center anymore in the Teradata. It's -- the benefit of living in the Northeast is getting some leaves blown. So that's what that was. But yes, this is a question of when, not if, with the transition of these customers to the cloud. The great thing is, I think we've proven out to our existing customers and proven out to customers that have kind of tried out cloud-native solutions that Teradata is a great path to the cloud for their data. And our approach around this connected multi-cloud data platform is really gaining traction in terms of thought leadership in the marketplace. And the work that we've done with Gartner and Forrester, positioning the product, being a leader in the cloud database management system ordering, you would never have thought that Teradata would hold -- would be a leader in those assessments and being able to run analytic use cases in the cloud better than anybody else.

So that's great, Steve. So it sounds to me like what happened in Q3 and the Q4 guide doesn't have a bearing on 2022. And the follow-up question to that, does this alter the growth trajectory required to hit $1 billion cloud ARR by 2025? And I presume the answer is no, but it was their -- that was the question.

Yes. No, the answer is no. In fact, if you took what we presented at our Analyst and Investor Meeting, you can see that we were going to be over $1 billion by 2025. So as I said, with -- against the current execution, we've taken some conservative modeling estimates both in terms of 1:1 migration from on-prem to the cloud where we see expansion today, but also modeling out 130% net expansion rates where our expansion rates today are well north of that. Those expansion rates for Q3 continued to be well north of 130%. So we're solid in terms of the future guidance from a medium- and long-term perspective.

So maybe just -- we have 2 minutes, and I can use 32 more minutes. To wrap up, Steve, we started the conversation with this is a different Teradata. And I think you've talked to a lot of points of why, in fact, it actually is. And it sounds like there's going to be some additional disclosures that can further drive that point home. For those investors that are still maybe on the skeptic side or nonbelievers, what would you tell us around your level of confidence here? I'm not talking just about 1 quarter, but I'm talking about multiple years of execution. How high is that confidence that you have that we'll look back in 2025 and maybe you're more than $1 billion of cloud ARR? Where is your confidence level? And where should our confidence level be there?

Look, I think we wanted to say guidance that we know that we can achieve. We wanted to set up a plan that we know that we can achieve. The fundamentals of Teradata are incredibly solid. Our ability to generate free cash flow, $400 million of free cash flow with a commitment to return at least 50% of that to shareholders as we move out over time, that profitable part of our company is something that's incredibly important to us. But we see today that we are capturing growth in the cloud. And that is the growth part of the marketplace. That positions us well with both our existing customers and new customers. We have more experience than anybody else in the world about how enterprises can get the best out of their data. We have presence globally that is turning to enabling our customers to take advantage of Teradata technologies in the cloud and growing those workloads on a day-to-day basis. We are super bullish on the future of the company.

If we're talking about $1 billion of cloud ARR, I think investors can be optimistic that the stock won't be a $47 stock if that does, in fact, play out. And so I think, yes, from our perspective, Q3 in many regards because I think sort of the growing pains of progression towards $1 billion. But listening to you, it certainly feels like the confidence level is high. And so really, we're out of time, unfortunately. So I see, for anybody on the line here, thank you for the questions. Those were really good. Feel free to reach out to me. I can put you in contact with Chris or Steve and the rest of the team. But really, guys, from all of us at RBC, thank you. I think it was a great conversation to sort of continue this education that it is a different Teradata. From all of us, the best of luck as you sort of close out Q4 and look towards next year. But thank you again for your time, Steve.

Thanks, Matt. Look forward to future conversations. Great to be with you.

Thanks, everybody. Bye-bye.