Teradata Corporation (TDC) Earnings Call Transcript & Summary

All right. Good morning. Day 2 of the Cowen TMT Conference. I'm Derrick Wood, senior analyst covering software at Cowen. And we've got Steve McMillan, CEO of Teradata. Steve, thanks for coming.

Thanks, Derrick. Great to be here.

I think we all know what Teradata does. So I just want to start off talking about -- you've been at the company now for 2 years. Maybe give us a sense for when you joined the company, what changes you thought that needed to be made, how that progress has gone and where it stands today?

Yes. No, thanks. I think we executed the change on 2 dimensions: one, from a business perspective and secondly, from a cultural perspective inside the company. From a business side, I think we probably changed and started a transformation across every single aspect of the company from the product to the go-to-market team to our customer support and services and most recently into our marketing organization. And really, the pivot was to move the company towards that cloud first. Teradata had been very, very focused on the on-prem business. And so this is very much a transformation story from an on-prem hardware business, incredibly successful, incredibly profitable towards a cloud-focused organization. A lot of companies declare that they're cloud first and really don't do anything about it. But we actually put wood behind that arrow. We transformed entirely our research and development envelope, which was 80% focused on on-prem and 20% focused in the cloud, and we pivoted that in 2020, a couple of months after joining and putting in a new Chief Product Officer. And that really helped transform and accelerate our progress in the cloud. So what we saw in 2020 was a real acceleration of our cloud-based capabilities. We went general availability on Google Cloud, really growing that product capability. But how we actually take that to market is incredibly important, too. So we've done a number of things to transform the go-to-market organization, including working with partners is incredibly important for us, changing the emphasis of the sales team to promote them more towards cloud and incentivize them towards cloud. And also just generally looking at how we execute from a sales perspective. So that transformation started as well in 2020. So I'm pretty happy with the foundations that we've built through 2020. Clearly, we had good results in 2021 in terms of getting over $200 million in cloud ARR and generating significant free cash flows in 2021, kind of gives us a unique position as a cloud software player. So 2022, I think we see as a year of continued acceleration. So really looking forward to that.

Great. And there's a bunch of things we could kind of double-click on. So on the product side, is there anything -- where does it stand in terms of feature parity with the on-premise version? And I don't know, I mean, is there any kind of key milestones over the last couple of years that you guys have hit?

Yes. I think Teradata over the course of a number of years has been really changes in emphasis to be more of a software company instead of a hardware and appliance company. And so the -- and our secret sauce is really in our software. And so abstracting that software off our dedicated hardware platform and moving that into the cloud means that we start off with absolute feature parity with -- between cloud and on-prem. . Our cloud-first focus means that all of our new development and new features appear in the cloud product first. So things like supporting native object stores and each of the cloud providers, that's a key part of our new development on our new ethos from a product perspective. And then that then gets translated into utilizing native objects to our on-prem. So Dell, as an example, have a native object store technology on-prem, and we've been able to access that for a number of years now. So I think the software focus that we have inside the company, our ability to abstract that into the cloud environments has really generated an interesting capability in the marketplace.

Could you give us a sense what the -- how easy it is to move workloads from on-prem to the cloud? What are those migration projects look like, how long do they take? How easy is it to do it?

Yes, we would say to our customers, and I think our customers agree that we, for them -- for an existing Teradata customer, we are the fastest least risk, least expensive journey to the cloud for Teradata workloads that are currently on-prem. The timing of that depends really on the complexity of the workloads that are running on the Teradata system, third-party applications that might be involved in that. So there's no real cookie-cutter equation there. But what we do see is that because the feature parity is the same -- and the software is essentially very similar in terms of the APIs and the calls that applications make to the Teradata systems in the cloud then it certainly gives a much easier path for organizations to take advantage of the cloud. And that's what we've seen. If we think about our cloud business, it's really being powered by existing customers migrating to the cloud, and that's given us a lot more certainty in terms of our business model.

Is there any kind of natural progression of what workloads move first? And then kind of where your more mature customers sit, what workloads then -- they've been in the cloud for a year or two? Are they -- does it start off with disaster recovery and then go more into production workloads, how does that look?

You nearly answered the question. So -- yes, the workloads that go first are dev/test. So they tend to be smaller environments, smaller in size. As our customers can prove out the capabilities in cloud and start that, the initial steps towards the migration of that production workload. So dev/test is a really good starting point. DR, as you said, is a really good starting point for our customers. So that they may have an on-prem system and then they're doing disaster recovery to the cloud. . From a Teradata perspective, we truly believe in that multi-cloud and especially hybrid cloud capability. I think a lot of our customers are realizing that they'll always have some form of on-prem capability and some data gravity that stays on-prem. And when we look at our number of customers in the cloud, about 60% of those customers operate in a hybrid environment. So they've still got Teradata on-prem and they're utilizing Teradata in the cloud. So they're looking at Teradata in the cloud to enable them to utilize native cloud services to develop new applications, new experiences for their users. So it's really exciting to be putting Teradata in the center of the development community for our customers again.

You think that hybrid [indiscernible] and that 60% of customers who are using cloud, they're doing hybrid, do you think that will kind of remain that for a while?

Yes. I mean, Teradata's focus is -- the [ G10,000 ] the biggest companies in the world running the most complex workloads. And so we've got a really established customer base in those incredibly large complex organizations running their absolutely mission-critical systems. And I think as I talk to the CTOs and CIOs of those organizations, they've all got a hybrid future in mind, even companies I was talking about telco in the U.K. yesterday, even a company has declared we're going to be -- we're all in on cloud. Their network operations is -- for their cellphone networks is always going to have it -- an on-prem presence and an on-prem capability. So being able to leverage our technology across on-prem and into the cloud is incredibly important. But we see tremendous growth from a cloud perspective, 60% to 70% CAGR for that cloud market as we grow forward. As we set out a goal of being over $1 billion by 2025, that means more than half of our -- well, about half of our ARR is going to be in the cloud by 2025. I think that's incredibly realistic goal, and it kind of represents the fact that a lot of the growth is in cloud. Our on-prem business, I think, is going to remain incredibly stable as we move forward.

Could you give us a sense for what percentage of the base has adopted cloud? And how much more there is to go? I mean, obviously a lot that have done hybrid and they'll probably do more of that, what percentage of the base has adopted cloud?

We've still got a massive opportunity in terms of moving your existing base to the cloud. So it is nowhere near 30%. It's not near 30% in terms of the customers that we've got, certainly not near 30% in terms of our ARR. If you think about the -- we moved Teradata from a perpetual licensing model to a recurring revenue subscription model. So if you think -- you can do the math, right, if there's roughly $1.4 billion of recurring revenue on-prem, and we ended 2021 with $200 million of recurring revenue in the cloud, then a 7% to 14%, something like that.

What was the 30% number you were referencing?

It was just -- it's nowhere near the -- nowhere near that.

Yes. What's -- lastly, you mentioned GCP, but I mean originally on AWS and Azure, which one is the most kind of popular? Is there any trend?

Yes. I mean we've been available on AWS for a longer time than being available on the other platforms. And we've got fantastic relationships with all 3 cloud providers. We've got a strategic collaboration agreement with AWS, where their sellers are also incented to sell the Teradata solution. We're on the Azure market. We've got a strategic partnership with Microsoft. And again, a growing partnership with Google in terms of their cloud services. And so we kind of reflect the marketplace from that perspective. So AWS has got the biggest share. Azure is strong and growing, especially in Europe enterprise segments, we see that as a really attractive partnership. And then GCP would be third, but growing rapidly.

Yes. Okay. And the concept of moving to the cloud, it takes friction out of driving expansion business. What do you typically see when you get workloads move to the cloud? I know you guys gave some metrics around that, but does it speed up that ability to drive more workloads and more of your base?

Yes. I think it's really interesting in terms of how that unlocks the Teradata system. During COVID, we actually provided capacity on demand for our on-prem customers. so that they could utilize more Teradata system capacity to deal with the impacts of COVID in their business, whether it's analyzing the supply gain or working out a new retail model. And so as we gave that capacity on demand to our customers, they immediately used it. And so as we move customers to the cloud and in that much more elastic environment, they can expand those systems much, much more easily. . And so once we've gone through that migration and implementation and they've got that production workload running in the cloud, which takes a little bit of time, then they start to expand, they start to put in new workloads because it is a lot easier to do that in the cloud environment clearly than it is on-prem. And that helps to fuel our kind of 130% net expansion rate, which is what we've kind of modeled out to get us to that over $1 billion in cloud ARR by 2025.

Yes. That's impressive. All right. Let's move on to the go-to-the-market. I know to go to market, I know one of the initiatives you had was to kind of bring back focus on new logo generation. Walk us through what you've built there. You have a dedicated team, how much focus, what the TAM, it looks like, for that?

Yes. I think if you think about Teradata's strategy before I joined was to really focus on their existing customer base. So if you think about that as the top 1,000 customers, 1,000 enterprises in the world. By saying we're going to focus on the [ G10,000], I kind of immediately increased our TAM by 10x, maybe not in dollars, but certainly in number of customers. And so by unleashing our sales force that's absolutely dedicated to prospecting and those customers for new workloads has been successful. We're seeing that to start to grow quarter-on-quarter in terms of new customers. They tend to start off small, and they rapidly grow, may be for some initial environments. The one thing that Teradata has is a real industry understanding and understanding of how organizations can utilize Teradata technology in a particular use case. So may be supply chain optimization, that's a big topic just now in terms of if you look at some of the supply chain restrictions around the world, we can actually -- we have a solution and a thought point for each of our critical industries on what supply -- a supply chain data model should look like, so that they can plug into that and utilize that immediately. We had a win in Europe, recently a new logo, Volkswagen in Europe. They wanted to improve their manufacturing quality initiative, and they had shop-floor robots, streaming data from shop-floor robots into S3 storage and AWS, and they utilize Teradata to analyze that live streaming data to identify quality problems on the manufacturing line, which allows the robot in realtime to reweld a point on a car. And so it completely changes their quality initiative inside the company by using real-time powerful analytics. And so it's use cases like that where the team aren't just going out and saying, "Hey, we've got a data warehouse for you, but it's a real like industry use case with some real customer value." And I think even in a challenging environment and a challenging economic environment, customers are still looking for that value. They're still looking for how do I increase my revenue streams? How do I reduce my cost base? How do I do things more effectively and more efficiently, and that's the problems that we solve for our customers.

Okay. Nice win in Europe. The -- and on the partner side, I know that's been a focus for a while, and it's always an evolving effort, I'm sure. But when you think about kind of key SI partners or key ISVs to work with, where are you focused?

Yes. I think one of the really interesting things was we've really crystallized Teradata strategy to be a cloud technology platform company, not a services company, not a consulting company. If you look back through the history of Teradata and think why is Teradata's revenues over a longer horizon, much before I came, was kind of flat. What had been happening was that we've been strategically reducing the amount of consulting and services revenue that had been inside the business. It tends to be a lower profit revenue stream for us anyway. So we're still able to maintain margin and the margin profile of the business. But as we have strategically lowered that revenue, it's given us the ability to bring in SIs and consulting organizations, to essentially not just deliver the revenue that we used to be delivering, but also enabling them to add their value on top. And so the SIs that we work with wouldn't surprise you. It's Accenture, it's Deloitte, the big 4 or 5 as they're used to be called. And now with Wipro and Kyndryl, and so forth. So we've really put an investment in our partner team and enabling our SIs around the world to [ delivering ] the Teradata ecosystem. And of course, these SIs are the ones that are advising customers on their future strategic data platforms. But what we've seen is reputational -- maintaining their reputations in the industry is incredibly important. So we have had SI organizations that have started down the path of a modernization, data modernization strategy for a customer realizing that they weren't going to be able to implement it on that chosen technology and then choosing Teradata in the cloud, because the capabilities of Teradata in the cloud enabled them to deliver that successful outcome, that successful modernization of data for their customers.

Do you -- I don't know if I've seen this metric, but do you guys measure kind of percentage of projects that are kind of influenced by SI partners or you have longer-term targets? Or...

So we -- this has been a big change for the organization. We actually declared we are partner first. So when we have an opportunity in our pipeline that doesn't have a partner involved, we actually inspect that to make sure that the team are holistically thinking about who's engaged in this customer, who's engaged in the data program and the data project so that we're broadening the horizon there. So -- we want to get it to the point where it's an exception to not have a partner engage with us in a particular customer situation, which is why on the earnings call, I kind of like stress the wins, which have an SI involved.

Okay. How about the approach with the marketplace and data sharing that's one of the benefits of cloud is to be able to do that, and that kind of brings in the idea of bringing ISVs to be in your marketplace, and what -- have you guys built anything around that?

Yes. We've been doing data sharing for decades now interestingly. Our perspective on data sharing though, is that the winner from a data sharing perspective isn't going to be a proprietary single data marketplace. We believe that the winners for data sharing are going to be the CSPs. They have the most mature marketplaces from a technology and services perspective. And as they start to gear up their data sharing capabilities in the data marketplaces, we believe that AWS, Azure and Google are actually going to win the data sharing battle. And so we have architected the Teradata platform to utilize those data sharing capabilities to enable our customers to have an incredibly open data sharing environment. So -- and it's, again, a part of the change of the ethos of Teradata. We're not trying to be all things to all customers. We're focusing very much on where the Teradata technology set can execute for the biggest companies in the world. And that's enterprise scale, high complexity, high performance requirements. And we see that as a requirement and all of the top 10,000 customers in the world. So we're really excited about the opportunity that we've got there.

Shifting gears, just what's super topical is the macro? And if there's any change in demand behavior? Talk about what you guys saw in Q1 and what you've talked about in terms of what you're seeing in your pipeline?

Yes. I think from a full year perspective, we set out a goal to say we're going to grow our cloud business by 80% year-on-year from a cloud ARR perspective. We're super confident in doing that. The reason, even in this macro environment, that I can be confident in saying that is the bulk of that growth is actually coming from existing customers and migrating existing customers from on-prem to the cloud. So our teams have intimate knowledge of those customers, intimate knowledge of their plans, how they expect to execute. And so as we look at the pipeline of opportunity that we've got across the year, even in this macro environment, we continue month-on-month, quarter-on-quarter to see that pipeline grow. Q4 is traditionally our highest quarter from a sales perspective. One of the transformation challenges I have as a CEO is to try and improve that linearity across the year. But like I spent many years in IBM and many years in Oracle, and we still got that enterprise software sales focus where it's the last quarter of the year, the last month of the year, the last week of the year when all of the big transactions get done. So we're still going to see that, I think, and that kind of illustrates the shape of the pipeline that we've got. But because we're dealing with known equations, known factors in terms of the customers that we're going to execute with, we're confident on that 80% year-on-year growth.

Now Snowflake reported last week, was it last week, interesting, we're seeing kind of what a consumption model can look like in a different environment, and they had some bigger customers that are consuming below what they had originally planned. You guys have a kind of similar consumption model where it really can ebb and flow based on usage patterns in a given quarter or whatever. And I guess, -- what did you see out of your consumption patterns in Q1?

Yes. And so yes, our -- we've had a consumption model since 2021 available in the market, but most of our customers actually have a blended model where they have a fixed capacity, which tends to be the bulk of our commitment from an ARR perspective and then a consumption model on top of that. The reason that our customers commit to that fixed capacity is because the commercials for them and the economics for them in terms of commitment to that fixed capacity is much more attractive. And they tend to know -- like if I look at Teradata Systems on-prem, they tend to be running really super close to 100% capacity. And so when they move to the cloud, they know exactly how much they have to contract for and a fixed element in the cloud. . So we believe that our base of cloud ARR is super stable because we've got that fixed capacity commitment inside our ARR, and we use consumption to essentially spike on top of that. But as a percentage, it's lower. So from a business model perspective, it kind of derisks our future revenue more durability in terms of that revenue...

That's a good point. And the fact that customers tend to run near 100% capacity. The -- and there's more questions around maybe the tech vertical that companies that were growing so fast, maybe are not. Remind us what -- I don't think start-up tech is a big focus for you guys, but what's kind of the bigger verticals for you?

Yes. I think we highlighted this in our Analyst Investor Day, and you wouldn't be surprised it's financial services, it's retail, it's health care, it's government, it's manufacturing and transportation, the usual set of key verticals for enterprise organizations to work with. We do actually see traction with tech, and we are actually very interested in tech companies and also any company which can start small and grow. So -- and when we go to those companies with a firm point of view on what their data model requirement is, it means that they can essentially take something off the shelf from us and implement it quickly, which is what a lot of these start-up and hyper growth companies want to do. So -- but again, from a -- those would be new logos for us, as we look at our business model going into the future and for this year, actually, we haven't plumbed in a lot of expectation around new logos. And we know that, that's a muscle and a motion that we're building up over time. And so again, I think as we look at our business model, both for this year and out towards 2025, we see a lot of stability in that in the forecast that we've put out there.

Okay. Touching on competition, I mean, anything you'd highlight in terms of what are key differences between you and some of the newer cloud-first, cloud-only, Snowflake, BigQuery, I know you guys have QueryGrid, which is, I think, differentiated. But what would you call out key technology differences? And maybe we could talk about kind of pricing differences too?

Yes, I'll start with pricing. I think -- as I talked to our Chief Product Officer, we believe that we're 3 to 4 years ahead of cloud native providers from a price performance perspective. And that's been really proven out by third-party analysis and analytics from that perspective. So a key differentiation for organizations that are running at scale and queries at scale, yes. And the reason for that is based on our technology. We have patented capabilities and technologies that we've had for decades around workload management and query optimization. And workload management and query optimization is all about getting the best out of compute and storage in a particular environment. And so that means when you run Teradata in the cloud, you can execute a lot more workload; one, in a very controlled manner, you can set out a financial governance around the workload that you're executing, but also we utilize software to solve critical problems whereas our competition tends to more compute to solve critical problems. So they tend to be much more expensive to when they get up to scale and are executing what we do in terms of maybe 15 million queries a day for a particular customer. That gets incredibly expensive in a scale-out architecture where most of our competition is. And then our perspective is very different from some of the cloud natives. If you think about the Teradata business model, this is the change in the ethos of the company. The Teradata business model evolved used to be try and get all of your data into a Teradata system. As a cloud provider and running in the cloud, it wouldn't surprise you to find out I don't make much money to resell in Amazon or Google's compute and storage services. Our customers just wouldn't pay for it. So where I actually make the money is by organizations utilizing our software in the cloud and that utilization increases by making as much data as possible available to those Teradata systems. So you mentioned QueryGrid and so we have a patented capability in QueryGrid where we push queries close to the data. And so that is a much more optimal solution for creating data measures, data grids and query grids for our customers, and it's something that our competition just can't do. So it's an exciting technology, and we're starting to see our customers take advantage of that. So we have customers who are executing queries in AWS. And then they pushed down a part of that query back to their on-prem system. The results came back up to AWS and get combined into a complete answer. No other cloud provider -- no other native cloud solution can actually do that kind of workload. So when we say we are an open connected multi-cloud data platform for enterprise analytics, we really deliver on that promise today.

And then when you say 3 to 4 years ahead, that you're referring to some of that technology... capability.

Yes.

Yes. And I guess just from a branding perspective, you mentioned that, too, just in our last minute that we have, what -- I mean Teradata is the 40-year-old plus old company. What are you doing to kind of freshen up the brand and the image and you mentioned marketing being an important part of that?

Yes. I think you just have to reflect 2 years, we're kind of 2 years into this cloud pivot. If you think back to 2014, did anybody know who Snowflake was in 2014? So what is in front of us. We've built the foundations. We've got a great product in the cloud. We've transformed our sales organization. We've got the customer references. We've got the partners in the marketplace. And now it's all about accelerating that with more brand recognition. And I think what you're going to see, even over the next couple of weeks is a lot more emphasis on putting Teradata front and center from a brand perspective. And maybe taking it to the competition in terms of our marketing and advertising capabilities around the Teradata brand. We just appointed a new Chief Marketing Officer, Jacqueline Woods, a lot of tenure, a lot of experience in terms of driving marketing organizations, and we're super excited about what she's going to deliver for us.

Great. We're out of time. Thank you, Steve. That was great.