Teradata Corporation (TDC) Earnings Call Transcript & Summary

Thank you, everyone, for joining us and those virtually online listening. First off, yes, I was just thinking, congratulations on 6 months.

Thank you. Yes, I know, time flies.

I know. I was like where did that half a year go. But I guess, maybe why don't we level set things with that. I mean, obviously, we kind of review sort of your experience since joining Teradata, sort of what has really stood out to you in terms of how the company is changing and is evolving?

Yes. It just -- I mean, in the last 6 months, but also in the last 18 months, I mean since the middle of last year, -- It really is a new Teradata, which is really exciting. So I've joined at really exciting time. Just for those of you less familiar with the Teradata story, middle of last year, we had a new CEO come in and has completely pivoted the company to be cloud first. So I think in the past, Teradata has been known for being enterprise data warehouse, on-premises, leading edge and great technology, but on-prem. In the last 18 months, we have completely pivoted everything that's going on at Teradata to be cloud first, but not cloud-only, to really focus on what our customers need, to make sure that we've got leading technology and to really just change the way we are operating in a really dynamic market right now, which is growing really, really fast. So it's really exciting. And yes, a lot has been happening in the last 18 months. So...

Yes. Let's stick with the theme of the new Teradata because you mentioned several new senior hires at Teradata, like sort of a whole new team. So maybe sort of walk us through sort of what the renaissance looks like internally? And think about sort of the leadership roles, who's taken them? And how are you thinking about sort of evolving these leadership roles going forward?

Yes. I mean it all started, as I said, middle of last year with a new CEO. And in that time, we have promoted a new Chief Product Officer in Harry Ashton. We have a new Chief Revenue Officer. I'm new, as you said, in the last 6 months. So the caliber of the leadership team is very exciting, but not just the leadership team, throughout the company it's been evolving. So whether it's our go-to-market operations team, the customer success, really focused on customer experience, all of that has changed. So we're really excited about the caliber of the leadership team that's with us and working with us as we go through this transformation. We've still got more work to do, for sure. I mean, it's a journey, but the progress we've made thus far, and it's all about having the right strategy, the right technology and clearly in a very dynamic and growing market, which is really exciting.

Yes. There's never a destination in software. It's always the next thing. It's like is no destination, yes. There's just the next place to go.

Exactly, exactly.

So we should make it fun. But the -- well, let's talk about transition to cloud and cloud first, as you mentioned. One of the questions I get is how you think about sort of just the unit economics and sort of the uplift of taking those cloud agreements relative to sort of the comparable on-prem deployment?

Yes, it's a very good point. And so what we're actually seeing is much better economics in the cloud. So we, first of all, went through a transition from perpetual to subscription, and we're through that transition, and we saw better economics as we move to subscription. And then as we've moved to the cloud, we've seen even better economics. And I think the fact that we're in the cloud, the technology that we have enables flexibility and scalability in the cloud really helps us from an economic standpoint. I mean if you think about it, on-premises, you're -- by definition, you're restricted by infrastructure. You're restricted by the hardware. And so being able to move on cloud gives us better economics and gives us better elasticity, scalability, flexibility, which is really helping us from an economic standpoint as well.

Yes. No, that's great. No, the -- yes, it's amazing. But you even brought, some say, some of the aspects of Teradata from, as you pointed out, the constraint on-premise environment, we're able to leverage those in the cloud is a differentiator, too. And it's like we'll come back and hit that. But a little preview of the question you got. But the -- let's talk about total ARR. Obviously, total ARR has been growing 5% to 10% year-over-year and as you've talked about the impressive inflection in the cloud business. What do you say to investors that, hey, we're just simply seeing the same customers move to the cloud versus actually acquiring new cloud first customers?

Yes. I mean we have a very strong customer base, for sure. So from on-premises, we're the biggest, most successful enterprise customers. So we have a great customer base that we are leveraging from, for sure, and we are focused on migrating and expanding with those customers. I think what's important though is even as we migrate those customers, we are seeing really, really strong expansion rate. so in excess of 130% right now. So that is just, again, that scalability, that flexibility that you have in cloud that you didn't have on-premises. Our customers are taking advantage of immediately. So they are -- so we see the expansion rates. And we've modeled -- just long term, we've had this 130% net expansion rate assumption, but we're seeing actually, at the moment, much higher than that, which is great. In addition to that, something that the new Teradata has been focused on is new logos and new logo acquisition. So this is something that in the past had been turned off.

We've talked about this before. Exactly. I like that new strategy a lot better. New customers are a good thing, yes.

Yes. Exactly. So this was completely turned off. So this is a new muscle for us that we're rebuilding, and this has been a focus in the last 6 months since I've joined and building the new team, building the expertise, being proactive from a new logo acquisition standpoint. So -- and we're seeing success already. I mean it's a very new muscle for us right now. but we're already seeing success, and we're seeing success in the cloud. But because we're building those capabilities from a selling relation standpoint and getting out and being proactive with existing and future customers, we're also seeing benefits on-premises. So we're seeing new logos come in on our on-premises business but also in the cloud. So I think the fact that we see such strong net expansion rates and the fact that we have these new logos, both on-premises in the cloud, I think are proof points to show that there's a lot of opportunity out there for us.

As you mentioned, Teradata is known for size deployments. Your top 10 customers are big customers.

Yes.

What do you see from them in their journey to the cloud? Are they taking portions of the workloads? Or are they looking at net new workloads in the cloud to leverage also what's on-prem? Or is it like nobody I'm sure like lift and ship the whole thing up just because Teradata [ is ] big deployments. But what are you seeing from those big customers that Teradata is known for?

Yes. I think the great thing about Teradata is our customer relationships that we have and they've gone back for years and years. So we're working with them to make sure that as they move to the cloud, we're doing it in sync with them step by step and based on what works for them. And every customer naturally is different. So what we see the majority of times with the big enterprise customers, though, is there's a preference to be hybrid. So they want to move existing workloads to the cloud. They want to put new workloads in the cloud, but a lot of the big customers are still anticipating having a hybrid approach, which is where Teradata comes into its own because we can offer that hybrid, we can offer on-premises, we can offer cloud. And the other area where Teradata differentiates itself is the fact that we can go across the different cloud service providers. Many of our big, big customers are in the banking industry, for example, and they have regulation requirements where they can't be only connected to one cloud service provider. There's things like called stress exits and things like that. And I think, again, so being having hybrid on-premises and the cloud and then having this offering across multiple clouds, really is a key differentiator for us. And we're working with our customers. Some want to move really quickly, some want to move slowly and small workloads and expand over time. What I'd say though in terms of the general trend is every customer is moving to the cloud. It's a kind of a when, not an if. But we're not anticipating 100% of their workplace to be in the cloud. And I think, again, going back to the scalability and flexibility, that once they've moved some existing workloads, they then quickly put new workloads in, which is why we're seeing such strong net expansion rates again.

I mean, to your point, sort of the destination is known, but sometimes the path is uncertain in a point, it's sort of it's actually kind of a new muscle for Teradata and customer moving in the cloud. But one of the things you talked about on the Q3 call was that some cloud deals slipped from Q3 to Q4. I mean just going back to the idea of sort of 2 new muscles, it's like Teradata and the customer, what are some of the things that Teradata is doing, whether it be from a sort of a customer success perspective, what have you or just with the sales team working with customers, to sort of get greater visibility to where customers are and their timing?

Yes. I think, I mean it's new for many of our customers, as you were saying, and in some cases, new for us. So we did see some slip deals. Now the great news is that those are slip deals that are closing in Q4. So we haven't lost deals. It's not competitive issues. It's just timing. And so the great news is we're seeing them all closing in Q4, as expected. So that's great progress there. The other thing I would say is what we're doing, we're obviously learning from that. We are continuing to work with our customers. We're finding actually the from inside our customers, just the number of people involved, the number of different functions. Coordinating cloud migrations is complex, especially with the big customer enterprise base that we have. But again, it's a win, it's a timing, and we do see the feed that we get back from the customer, they're telling us that it is the most efficient, the fastest way with Teradata, with Vantage to be able to move to the cloud. So the good news is the customers are getting the experience that they want. They're seeing the benefit. But as you said, in Q3, we saw a few deals that were kind of just slipped in terms of timing. And that's something that we're just learning from, changing the way that we work with our customers, making sure we're leveraging from those experiences. Some customers and some industries are doing this for the first time. So we can take those learnings apply them to other customers, which is very helpful. And our industry experience and knowledge is really helpful here. So because we're focused, and this is again a change we made in the last 18 months, focused on industry specialists, we can take those learnings and make sure that we're applying it across all of the customers in that industry. So yes, I mean, definitely learnings for us as we progress, but good momentum in Q4 as we continue to move forward.

Yes. Good start. It's a good start. It's always better than the opposite. But let's spend a little bit of time talking about new logos. This is something we kind of talked about on the Q3 call back. But when you think about sort of just the pace of new business from new logos versus, let's say, call it expansion and migration of the existing customers. Obviously, you've given sort of near-term guidance and multiyear guidance, kind of walk us through how you see sort of the evolution of those almost like 3 kind of layers of the cake sort of providing growth?

Yes, absolutely. So without both medium and longer-term guidance, we've tried to be conservative, to be perfectly honest. Obviously, as a leadership team, we take it very seriously that we need to meet or ideally beat the guidance and the estimates that we've put out there. So in our modeling, in terms of from a medium- and long-term standpoint, we've mainly focused on migrations and expansion. So using that long-term modeling rate of 130%, we see a higher rate today, and we expect that to continue, but we wanted to be conservative in our assumptions. So the majority of our growth that gets us to $1 billion of cloud in 2025 is from migrations and a conservative set of assumptions. There's a small amount embedded in there from new logo acquisitions. But because we knew it was a new engine, because we knew that it was something evolving, we were very conservative. So from that standpoint, both -- with on-premises, we modeled 0 new logos, and we're seeing them every quarter, and we're seeing them, so that's upside to our long-term modeling. And then on cloud, we were fairly -- it was a fairly small amount that we factored in there. And so again, we see that as an opportunity to be able to exceed that -- those modeling assumptions.

Got it. So still a high degree of confidence in that $1 billion cloud area you're talking about?

Absolutely. Yes. I mean, as you mentioned, we -- despite the timing potentially that we see, because it is timing, because we're closing those deals, there's nothing that we see right now that changes our long-term estimates for the future, which is really exciting.

Got it. So let's talk about, competitively speaking, how are you thinking about sort of incremental share of cloud workloads? How do you see that sort of evolving over time versus where we are right here?

Yes. So I think we anticipate -- obviously, we've got our existing share on-prem. We're going to be gaining share in the cloud as we move and migrate to the cloud with many of our existing customers as we get new logos as well is a good way for us to gain share, and then this expansion rate that we have as well. So some of the growth will definitely come as the market grows itself, but we are anticipating to grow much faster than the market. So gaining share as we move forward. And I think with the technology that we have and the differentiation we have, the uniqueness of the way that Vantage in a cloud works, we're seeing actually even those that may be going off to try other solutions coming back to Teradata, especially the large enterprise customers. One of the biggest areas that we see as an advantage for us for share gains is our enterprise price performance, for example. So because we have this on-prem history and we've been able to eke out all of the benefits of on-prem in a constrained environment, although you don't have that constrained environment in the cloud, we've taken that, those learnings. We've taken that knowledge and experience to the cloud, which means that we are able to offer really good price performance. We've got the lowest cost per query for our customers. And for big enterprise customers with a huge amount of data they have, the huge number of queries that they're running that is really important. So I think what we're finding -- and because we look at end-to-end solutions with our big enterprise customers rather than function by function or team by team, whether it's the CFO, whether it's the Chief Digital Officer or the Chief Information Officer, they have that control, they have that governance and they have that understanding of how much this is going to cost them on an ongoing basis, and it won't spiral out of control. So that's a really -- I think where Teradata is unique in the market right now from a cloud standpoint.

Yes. I think it was August last year when I was talking to folks about this point like workload management where it's like, wow, this thing that we use Teradata for in a constrained environment because it was a box sitting in our data center, we can now apply that to the cloud because, at the end of the day, the cost of cloud is a matrix of time and compute. Yes. So I was like if you can help me with that equation and leveraging sort of the idea of constrained to actually optimize time times compute, then you've got something special.

Yes. And to your point, I think the fact that we don't have those restrictions, is obviously an advantage to our customers. but it can grow exponentially. The cost can grow. The data is growing as we're seeing. So being able to know that with Teradata and with Vantage, you have that best price performance in the industry, and not just coming from our assessment, it's external companies that are assessing Teradata's cost per query and enterprise price performance and saying it's best-in-class, which is great.

Okay. Let's talk about the hyperScale because you have sort of friend and foe dynamic here. So actually, that is sort of the question. How do you talk about sort of the friend versus foe? And how -- what was it? How is it sort of evolving?

Yes. I mean, as I mentioned, we're working across all 3 of the major cloud service providers, which is great. We give optionality and choice to our customers. We come from a storage background, for sure. I think the difference again with Teradata is we're not looking to be in the storage industry, we're not looking to compete with them when it comes to storage costs. We don't make a lot of money on storage. So we're not trying to compete with them when it comes back to our technology. So the way that Vantage works in the cloud at Teradata is the fact that we don't have to move the data to be able to do the data queries. We can use the data wherever it is, across multiple clouds, across multiple applications. So we use the data where it is to be able to then do the queries. So for us, cloud storage is not where we're focused on, unlike some of our competitors. And therefore, that is an advantage for us when working with the cloud service providers. So they want to work with us because we have this great enterprise base that they want to have that storage cloud facilities on their cloud. And we are looking to be pure software in the cloud and make our money from the analytics and the data queries that are happening. So that's helped us with regards to our relationship with the cloud service providers because we're not competing in that storage space.

Yes. Focus on the platform or the infrastructure.

Exactly, exactly. And I think -- I mean, we've seen really good evolvement of our partnerships with them. So just recently, we announced a new partnership agreement with AWS, for example, and maybe we'll talk about that.

Yes. I was going to -- that was actually my next question. So we can just go right into that.

So yes, I mean, I think that shows that the relationships that we have with the cloud service providers is evolving, is developing, is growing. And the AWS agreement that we have is basically where we are co-selling, co-marketing and co-engineering. So -- and we both have reasons and options to be able to drive forward together. So the sales teams are incentivized, both in AWS and in Teradata, for example, to work together to co-sell. The same with the marketing teams, the same with the engineering team. So that's a big step forward for us. I mean, we've done it with AWS. We're looking to build those kind of relationships and partners -- partnerships across all the cloud service providers, but we're really excited about that. And we're seeing -- I mean, we're obviously tracking the number of leads and everything, even since we've signed that just last month. And yes, the growth in terms of leads and opportunities are exponential. So it's really exciting.

Yes. No, when I saw that come across, it was like this doesn't seem like just a normal press release.

No, no. Exactly. Yes.

Yes. I've seen those press release where it's like just stamp the 2 names on there. I was like this one feels a little different.

No, they definitely really both parties brought into this, and we'll benefit from it going forward, which is great.

Yes. Okay. Let's focus on go-to-market, then R&D. We'll kind of switch gears a little bit here. You mentioned sort of some of the go-to-market changes. Maybe you could just walk us through the transformation that you saw in that. And then what changes are you thinking about kind of making going forward?

Sure. So on go-to-market, yes, a lot of changes. I mean just a change to do the pivot to cloud first, obviously, was a big change, to change the focus to be on industry and using the experience that we have on industry, was a big change. But one of the other really big focus areas, and I mentioned about when we talked about the leadership team with regards to customer success. I would say historically, Teradata have been a little bit reactive, I would say, in terms of managing the relationships, et cetera. We're really changing and transitioning to be proactive. So being involved with the customer on an ongoing basis, really understanding what's happening today and what's happening in the future and being proactive with regards to that. So a lot of changes there with regards to go-to-market efforts and customer success. And that helps us obviously with our existing customers but will also help us with the new logo acquisitions. We've created a whole new separate team for new logos, whereas before it was kind of, as I said, not even a focused area for Teradata. So really multiple areas happening, compensation plans, I mean, that was a big change as well to make sure that the sales teams are being compensated now on this cloud first but not cloud-only strategy that we have now.

Yes. Now let's switch gears to R&D and on innovation because one of the things that we've seen is obviously R&D as a percentage of revenues is in the mid-teens, that used to be high single digits just 5 years ago. And so it seems like you're leaning on the development side. Help us understand sort of where those dollars are going on? And obviously, at the Analyst Day, you talked about sort of cloud first and pivoting the team. But you maybe walk us through that and where you're seeing sort of the best ROI?

Yes. No, absolutely. So I think the one thing I would say is, I mean, we're -- it's really important to us to take a disciplined approach to our investments. And we are seeing strong profitability, and we're all about profitable growth, and we're seeing really strong profitable growth right now with really strong cash flow generation. So it's important to us to reinvest back into our technology, to reinvest back into the company, and R&D is a great way for us to do that. One of the big changes we made in R&D in the last 18 months was, previously, 30% of our R&D was spent on the cloud, and 70% was spent on premises. We completely invest that. So 70% now of R&D is spent on the cloud and 30% on-prem. We're still going to still continue to invest in on-premises because as I mentioned, many of our customers want a hybrid solution. So we're still anticipating to grow and to develop on-premises as well. But in the cloud, clearly, that's where we see the opportunity. And we believe that we have, as I said, a differentiated, unique offering, but it's important for us to continue to involve that. So every quarter, we want to be enhancing our engineering, enhancing our offering to our customers, so it continues to stay industry-leading. And hence, why we really do want to use the profitable and cash flow -- profitable income and cash flow to reinvest that back into -- to be able to continue our research and development and continue our capabilities and development in the cloud area. So yes, really excited about the fact that we're focusing on more dollars on R&D. But as I said, 70% of that is going to our cloud offering.

Awesome. Fantastic. Last 5 minutes here, I'd just pause for a moment. I've got a bunch more to questions, but I can't ask, but I was like I don't want to hog the whole time. But are there any questions out in the audience? You can just raise your hand and call in you. Otherwise, I'm going to keep going.

You can go through your left.

Okay. If you do have one, just raise your hand in the future, I'll keep an eye up. But let's talk about SIs because that's obviously something you've highlighted in the past couple of quarters at the Analyst Day. So how should we think about the investment and just growth in this channel going forward, particularly sort of in the context of the consulting services revenue that Teradata does?

Yes. No, absolutely. So I mean, we talked about the partnerships with the cloud service providers. Another area that we've pivoted, another change as part of all of the changes that we've been making in the last 18 months is the focus on partners. And one of the areas is we do have and we did have a big consulting business, but we were out there competing with the big SIs, on things that I would say that Teradata, not necessarily the areas that where we should be focusing. So what we've done, we still got a consulting business, but it is declining intentionally so that where we do focus our consulting efforts is where we can add value in Teradata. So we're not competing with the big SIs on just any consulting project. We're focusing on where we bring value from a Teradata standpoint. And that means when then talking about friend and foe, we're not competing with the SIs, and then they have an invested interest to work with us with our customers and rather than competing with us, and we will bring our consulting business absolutely, but where we can add the Teradata value as opposed to competing them in kind of, I would say, day-to-day consulting activity.

It's always better to get the software gross margin. Then the services growth might [indiscernible] , you make that trade all day.

Absolutely. Absolutely. Yes. And I would rather this SI be bringing us in business and helping us to get leads, whether it's new logos or helping us with migrations of existing customers. So definitely a win-win for both of us there.

Yes. Got it. I'll pause for one more second. Otherwise, we have time for one last question. Okay. I'm going to take the last question then. What do you think about sort of the does? Obviously, you've already done a lot in 6 months, and you mentioned as a team is a lot in 18 months. How do you think about what your priorities are as a CFO and a management team to hit those medium- and long-term targets? Like what are the boxes we need to check?

Yes. I mean we need to keep the momentum going, absolutely. It's a journey, to your point, it's always a journey. It never stops. We're going to be continuingly to go forward. So whether it's continued development from an engineering and R&D standpoint or it's continued evolution of our go-to-market activities. From a CFO standpoint, really focusing on the financial fundamentals. We have really strong financial fundamentals, so making sure that we're growing profitably. Profitable growth is our strategy with sustainable, long-term strong free cash flow generation. I mean we're currently in the current fiscal year planning to generate over $400 million of free cash flow, and that is sustainable. And I talked about at least $550 million in longer term. So you can see that, that level of free cash flow generation is sustainable over time. So as a company, as a strategy, working, being customer focused, being cloud first, to continuing to develop our R&D capabilities, continuing to develop our go-to-market alongside with our customers, with the cloud service providers with the SIs, as we've talked about, but to really generate shareholder value to really generate free cash flow and drive profitable growth.

Awesome. Well, the 30 minutes went fast. Thank you for the time. It's always amazing to me. It's like 30 minutes goes a lot faster when you're on stage.

It does, it does.

Awesome. I appreciate your time. Thank you for coming down. It's great seeing you in person.

Thank you. It great.

Not just [indiscernible] it's kind of funny with [ 3D ].

Thank you. I know. It's great to do. Exactly, exactly. Thank you so much.

Awesome. Thank you.

Cheers.

Awesome.