Teradata Corporation (TDC) Earnings Call Transcript & Summary

Here at Bank of America's Global Tech Conference, day 1. Delighted you all for joining us here today. We're super happy to be hosting Teradata CFO, Claire Bramley, who is with us today, Teradata. You've been the CFO for Teradata. Just coming up on your 1-year anniversary in about a weeks' time. So we're delighted you could join us. And I think we might need to fix the name of the company here. But well, thank you again, everyone, for coming here today, and we appreciate all of you taking the time.

So for those of you who don't know, Teradata has been an enterprise data warehouse company that has pivoted to a cloud strategy and has been executing super well on that, and we're going to hear a lot more about that, I'm sure, from Claire. But Claire, to kick it off, maybe since you joined the company, how have you seen Teradata transform? What brought you to Teradata? And just maybe talk a little bit about your midterm priorities and then we can get into the...

Thank you, Wamsi, and pleasure to be here. Thanks very much, everyone. So yes, Teradata is on a very exciting transformation journey, as Wamsi said. We're about 18 months or so into that transformation. And about 18 months ago, we changed our strategy to be cloud-first, but not cloud-only. And since then, we've made great strides on multiple areas, starting with the product and really creating a best-in-class cloud product and a cloud software product, abstracting what we learn on-prem as a legacy on-prem company. We were able to abstract that information and that technology and make it into a software -- industry-leading software cloud products. So we came through on the product side. Then through last year 2021, we'll focus on our go-to-market transformation. We'll focus on customer success, so making sure we have the relationships with our customer, really working on our customer health journey. And as we exit 2021 with a new CMO, new Chief Marketing Officer on board, really now starting to work our marketing and our messaging and making sure that we can take our experience and business cases and reference cases to our customers. So a lot has been done. I'd say we're still on that transformation journey, still moving forward, but that gives us a lot of opportunity in '22 and beyond. So very excited about that. And I think to your point, Wamsi, what does that mean for us in terms of meeting our kind of medium-term goals. I think because we've built that infrastructure, we started with strong financial fundamentals but with a best-in-class, industry-leading software cloud products with the strong relationships with existing customers and a strong customer base. Plus other areas we're focusing on like new logo acquisition engine and our partner ecosystem, that gives us a lot of opportunity to really be able to grow our cloud and overall total ARR in 2022 and beyond. And we're -- moving forward, we have a lot of confidence. We're planning to grow 2022 cloud ARR 80% year-over-year, and we're seeing a really strong pipeline to be able to support that, which is really exciting. So yes, great journey so far. We've made great strides in the last 12 months in terms of on that transformation and lots more to do, but really good momentum moving forward.

I'll throw the macro question that's on everyone's mind right out there. It's just -- I mean people are very concerned about going into an economic slowdown. How is Teradata positioned to weather any economic deceleration? How do you think about the portfolio, the levers you have? And sort of what you typically see from customers in terms of if there isn't more of an enterprise demand slowdown, you guys are much more mission critical, so do you see as much of disruption as on a relative basis compared to a lot of other companies?

Yes. I think -- so I think we're actually positioned extremely well. We're not seeing any impact from the macroeconomic environment. And actually, I've been explaining to some of the people who have been meeting today that our pipeline is actually improving month by month, quarter by quarter. So we're actually seeing strengthening in our pipeline, which is a great opportunity. And I think the reasons for that is a lot of our growth is coming from existing customers. So we have those relationships. We're working with them in terms of what does that migration to the cloud look like for them, what works for them both from a timing standpoint but also in terms of a cadence. And they can see, I think, as they work with us, when we work with them on their strategic solutions that they're looking for, we are the lowest cost, lowest risk path for them to the cloud. So I think that's protecting us because we have that existing relationship with them. They're working with us day to day. I think also to your point, a lot of the data analytics and queries we have with our customers are mission-critical. So -- and we see that actually in our pricing. A lot of our pricing is fixed pricing with some consumption on top because they know it's mission-critical. They know that this is something they're going to need. So they're quite happy to lock in a fixed pricing as opposed to it to be purely consumption. And I think, again, that goes to show that we're more protected when you have less consumption-based pricing built into your existing and future customer base, that protects you also in a macroeconomic environment. And that's all driven, to your point, by the fact that it's mission-critical workplace. So we're seeing a lot of areas like that, that are working in our favor. And I think we think are going to help us and protect us in this current environment.

So when you spoke about sort of an improving pipeline, what do you think the customers are -- what about the customer behavior is driving that improvement in pipeline?

I think naturally, as you would expect, a lot of enterprise customers are looking at the end-to-end ecosystems, looking at the end-to-end infrastructure and saying how can we make this more efficient, how can we make this more effective so that it helps them from an overall -- total cost of ownership standpoint but also from a performance standpoint. So they're bringing us to the table to say, okay, work with us, help us find solutions in our long-term strategy, and I think that's the advantage that we can bring. And because we can give the customer choice. We're able to give them choice in terms of whether it's a hybrid environment or pure cloud. We can give them choice in terms of the cloud service providers that they can use. And they don't have to sacrifice on performance. They don't have to sacrifice on cost, and we give them that ability to be flexible and work with them on the best solution for their company. And I think that's one of the things that maybe many people don't know about Teradata is the way that our software works, we have this patented technology, which is a pushdown query. So we use the data for data and analytics where the data is today. We don't have to move the data. So it doesn't matter if you're on-premise, it doesn't matter which storage hardware you're using, it doesn't matter which cloud service provider you're using, we're able to use the push-down query technology and capabilities that we have to do the data and analytics where that data is today. And I think, again, that helps from a total cost of ownership and a cost of migration but also gives flexibility and choice to our big enterprise customers.

You're referring to your query grid availability to be able to go and sort of distribute that query across multiple databases wherever the data might be residing to ultimately cumulatively collect and answer that question.

Absolutely. Yes. It's -- the query grid is our patented technology. That does exactly that, Wamsi. That uses the data and is able to bring it together regardless of where it is without actually moving the data to be able to do the analytics.

You mentioned, Claire, earlier about fixed pricing and then sort of consumption based on top of that. And that's great for existing customers who sort of use Teradata for a long time, understand the mechanics around their own consumption. Newer customers start typically at a much smaller scale. Do you have a vision for newer customers to have a different pricing from that?

So to your point, we still have new customers joining Teradata. We actually turned back on our new logo acquisition. So again, for people maybe that don't know the history of Teradata, this was a functionality and a muscle that was completely turned off in the past. So surprisingly, this is something that we now have turned back on. We've built it back up and now focusing on new logo customers. They do start small. What we definitely see as the trend is that new customers come in both on-premises and cloud. They tend to start small and then they expand over time. Now we offer all our customers choice. So whether if they want full consumption pricing, they have that on offer. We've had that since 2021. But we also offer fixed or a combination of the 2. And interestingly, the majority of the customers, both existing and new, like to have the predictability in the cost. So if they know that they're going to expand over time, they like to be able to predict that cost. And so an element of that fixed pricing is or does seem to be the preference from most of our customers, but then having the flexibility and the elasticity of the consumption model on top. So we see that as a trend, both for new customers and existing customers. We do have some customers on -- fully on consumption, and they do tend to be our new logo acquisition customers. But we still have a mix even in the new logo acquisition. So I think that's quite interesting. And I think that, again, comes back to people wanting to be able to predict what the cost is going to be, be able to understand how this evolves. And one of the things we've actually seen as a trend is a lot of customers when they kind of boomerang back to Teradata, one of the main reasons that they come back is because the total cost gets out of control, and they don't have that predictability and it can get very expensive very quickly as they scale up and scale out with our competitors. And that -- I think they're protected partly because of our performance at scale but also because we're able to accurately predict what that cost is going to be over the longer period of time.

Okay. That's a really interesting point about the story, and you alluded to this a few times before. These boomerang customers that are coming back, are you seeing that -- sort of what has been the trend of that? Is it accelerating? Are you seeing more and more customers do that? Or are they -- were there more workloads at sort of a cloud-based solution that people are pulling back? Like what are some -- can you share any color that you're seeing around these boomerang customers?

Yes. So I think, I mean, as I mentioned, we're kind of 18 months into our journey. So some customers have gone to competitors previous to us having -- being a cloud-first but not cloud-only customer company. And so some have gone and moved, I would say, at scale and then realize that cost becomes an issue and then come back. Others are kind of trying both. They're exploring small data workloads to see how they can see that potentially evolve. And I think one of the things or 2 areas that boomerang customers tend to focus on when they come back, it's the performance at scale and the cost of the complex queries. And there's a lot of external data out there, not just Teradata data but external data out there that shows that we are -- when you're looking at complex queries, we're 4x cheaper when it comes to the cost per query. So that's a really interesting data points that for large enterprise customers, that makes a huge difference if you're 4x cheaper. Also I think the other thing as well is that we are able to scale up and scale out very efficiently and that have come back to our performance. And as I mentioned at the beginning, because we started on-prem in a restricted environment, we have to eke out the best possible performance from the hardware because customers didn't always want to reinvest in an additional hardware infrastructure capabilities. So we learned very early on, and that's where we come from, is how do you get the best performance out of on-prem. Now we've been able to abstract that and move that to the cloud so that now our performance capabilities are best-in-class and industry-leading in the cloud as well as on-prem now. So that makes a big difference as well in terms of performance but also this cost element. So they are the things that we're hearing from boomerang customers. Some of them have moved large amounts and then had to back track. Some of them have just been doing exploratory areas and then realized that for where they've got hybrid environments where they've potentially got multi-cloud, where maybe regulations require them to have a stress exit, so some of the financial companies across the world from a regularity standpoint have to have a way to move quickly on to another cloud service provider or move into on-prem. We're able to offer that with our software because the way that it's set up and way the technology works.

So you guys are going on a journey from being historically on-prem to now having capability across multi-cloud. One of your primary competitors or anyway one of your competitors has got the opposite approach in some ways where they started out in the cloud, Snowflake. And then now there are -- we've heard announcements about them taking that data, moving it on to, call it, Dell storage that might be on-prem. So how do you view the difference in sort of their approach relative to yours? Is that just an acknowledgment that your earlier point about these boomerang customers, is that what they're trying to address by doing that? What specifically do you think they're getting at? And how are you covering that?

Yes, I think it's very interesting. So as I mentioned, our strategy is cloud-first but not cloud-only. And it always has been because we have been working with our enterprise customers for many, many years. We know them well. and we knew that they would need hybrid. We knew that, that was what they were looking for, that they were anticipating both in the short, medium and longer term. So we come with that true hybrid solution. I think some of the native cloud companies, and Snowflake being one of them, are now appreciating that at the enterprise level, Hybrid options are needed. So to your point, they're now having to come up with solutions to how do they offer that because it's not something that they are capable to offer today. Interestingly, specifically on Snowflake's announcement, with regards to Dell, that is very -- it's still through the cloud. So they're still going to have ingress/egress charges. Everything still has to go through the cloud. It's not pure on-prem. And what they're doing is they're kind of using going into the Dell -- hardware Dell infrastructure with a specific software capability. Our software already has that built in. I mean we've been able to offer that from the beginning, and it's not just Dell. It's across all hardware storage options, all capabilities. So it doesn't -- we're not restricted to it being just Dell hardware. We can do it on any hardware database, and we've been able to do that from day 1. So for us, I think it's reaffirmation that we know our customers well. We knew what they were looking for, which was going to be hybrid. Yes, we were born on-prem rather than native cloud, but the fact that we're using that experience of our customers, using that experience in terms of technology, performance and cost to our benefit as we then work with our customers to provide them the choice, both cloud and on-prem.

So it's actually a very hard thing to do for a company to go from being an on-prem player to having substantial presence and capability on the cloud. How does that come about? Are there gaps in your product that you think that you need to improve on? What's happening with the R&D investments? Maybe you can share some flavor around that.

Yes, absolutely. So we have been investing in the cloud now for at least 18 months. We've turned around our R&D investments, whereas previously in the past, we only spent about 30% on cloud a couple of years ago. Now we're actually up to 80% of our R&D investments go into the cloud because we see this as a big opportunity for us but also for our customers as we move forward. I think the great thing is the product today is recognized as industry-leading and best-in-class. Like I mentioned, from a cost standpoint, from a performance standpoint, we already have a product out there with great capabilities that is very competitive. But like any software company, we're not just going to sit and not extend. We have patents that will protect us for a few years. But it's really important for us to continue to enhance our products. We are expecting some new announcements coming in during the rest of this year, actually on product enhancements and really focusing on the kind of analytics capabilities of what we can offer. So whether it's AI, ML, really those data analytics capabilities are the areas that we're focusing on. And I think that, coupled with what we already have today, it's just going to continue to accelerate our market position with regards to our software capabilities.

Yes. No, it's very impressive the way that you guys have been able to pivot and build this product, which you now have enterprise customers running at scale in the cloud, which is quite amazing. If we step back, one of the comments you made earlier was you're seeing this 80% growth in public cloud ARR. And as we think about that, some of that is coming from migrations, coming from existing on-prem customers. Can you help us think through, a, what is that pipeline looking like? What are some of the key drivers that contribute to that 80% stellar growth?

Yes, absolutely. So -- and to your point, the majority of our growth is coming from existing customers, and that's a combination of migration but also expansion. Our current expansion rates are approximately 130%. Our cloud expansion rates are higher than our on-premise expansion rates. And we're seeing 2 different types of expansions. We see actually, when customers migrate, we actually originally modeled 1 for 1, so $1 on-premise equals $1 on the cloud. What we actually have been seeing over the last 12 months is actually it's more than that, so that's a good opportunity of upside for us. And then once customers are in the cloud, that expansion rate is much higher as well. So we've got combination of the migration; the uplift at migration; and then also future expansion, either as they expand existing workloads or add new workloads over time. And what we've seen is actually, if you look at the unit economics, for example, the cloud unit economics are higher than subscription, and then subscription is higher than perpetual. So I definitely see that opportunity in terms of growth as we migrate existing customers to the cloud. It's not just 1 for 1. It's actually an uplift giving us much stronger unit economics in the cloud than we see when they were on-premise even when there is subscription.

So when you think about the $1 for $1 assumption and why you're seeing that track higher? Why is that tracking higher? Is that a pricing element to that? Or is it a consumption element? Or is it just a combination of both of those?

No. I mean we have seen -- every company is seeing data proliferation. So I think on-premise because you have that restriction, they've kind of done -- they've tried to set it up in the most efficient way but in a constrained environment. I think as soon as you move to the cloud and you have that opportunity to uplift that, even existing workloads have the opportunity to expand, plus then you see new data workloads. It's a combination of the 2, but I think just because on-prem has -- a lot of customers have been working at 100% capacity as soon as you kind of release that constraint on-prem to move to the cloud, customers want to take advantage of that and move forward. So I think we're just seeing that natural progression of the data proliferation, the opportunity that they've not been able to take advantage of on premise because of the restrictions. And so immediately, they want to take advantage of that as they move to the cloud. And then over time, they just continue to expand.

So given that the on-premise model is a little bit more constrained, I know you've said in the past that you're still continuing to see very strong new logo acquisition in on-prem. So how do you reconcile those 2 things when the on-prem guys weren't actually use the elasticity of the cloud, but the new customers are coming more so -- and not more so, but at least coming very strongly in on-prem?

Yes. It's interesting, actually. So to your point, when we set up the new logo acquisition team, we were expecting all of the new logos to come from the cloud. So we actually modeled in our long-term estimates that we laid out at the Investor Day last September, we assume 0 on-premise new logos. We have seen every quarter a combination of both on-premise and cloud, and the trend of those new logos have been very promising as well. So all through 2021, we saw sequential growth in our new logo customers, which is great. And this year, we continue to see year-over-year growth in the first quarter that we've just seen. So that momentum. Now interestingly, it is both on-premise and the cloud, and that gives us opportunity in the future because those on-premises customers then have future migration to the cloud opportunities. And I think in terms of why are we seeing that, I think there are some customers -- many customers out there that still anticipate needing both on-premise in the cloud, like I mentioned. They want hybrid, and so they want to make sure that they have the best on-premise solution and then they're able to then have the possibility to move with us to the cloud. So I think the fact that we're offering cloud and on-premise, some customers who maybe were happy with where they were before but now want to go on that cloud journey are looking at as an opportunity to say, "Oh, let's do that with Teradata because we can start with them on the premise and then move with them to the cloud as they move forward." So I mean, we still are investing. I mean we're still investing in our on-premise technology and software. So I mean it's still best-in-class. I mean we've known for that in the past, and so we're still getting those at best for on-premise new logos as well, which is exciting.

Yes. No, absolutely. When you think about some of the concerns that investors have, it's really about do you have a longer-term trajectory that is sustainable on the cloud side of things, given that the bulk of what's happening is coming through migration? So how do you think about the longer-term trajectory? I understand that you have a pipeline of new customers coming to on-prem. Is that the primary way that you keep refreshing your on-prem base, but then at the same time, you have a percentage that goes over to the cloud? Or do you think that the new logo acquisition engine is going to -- as cloud maybe gets to $1 billion in ARR, like suddenly, that takes off in terms of new logos? How do you think about that longer-term trajectory?

I think it's a mix of many things, Wamsi. So I think to your point, and as I mentioned, a lot of our customers are hybrid. So there's always the opportunity to continue to move those existing work ways to the cloud longer term. The expansion piece, there's -- I mean the number of new workloads, and you can see it in the TAM growth, the cloud TAM growth is significantly higher than on-premise. And so I think just again, that data proliferation and the new opportunities. And I think as we enhance our data and analytics, the number of use cases, the number of different workloads and queries that can be done both in the cloud and on-premises is just going to evolve over time. So I think there's multiple options. There's the fact that we have existing customers still with hybrid that can grow. We have new workloads and new capabilities that can grow. We are having more and more new logo acquisition customers both in the cloud and on-premises that can grow. So I think it's going to come from multiple different areas to be able to continue that growth momentum. And to your point, we're predicting to be at least $1 billion of cloud in 2025, and that's when we're going to have good scale at that point, and I think we'll be able to continue to use those net expansion opportunities to be able to continue to grow. And that would bring out, as you can imagine, if we've got more than 50% of our business in the cloud growing at a much higher rate, that brings up the overall total company growth opportunity as well.

Sure. And then from a profitability standpoint, as you migrate to the cloud, can you maybe help investors think through what are the profitability implications as you scale from where you are to the $1 billion?

Yes, absolutely. And right now, our cloud margins are below our average recurring margins because they're much smaller, so we don't have that benefit of scale that we do in our subscription recurring on-premises revenue. We have seen great improvement already, though, since we started out in the cloud in 2020 to where we are today. The gross margin has already significantly improved so I'm actually pleased with the progress we've made so far. And as we continue to scale in terms of our own costs, we'll become more efficient. We're planning to automate our processes more, which will help us improve our margin. And also as we get bigger and more relevant, we also anticipate being able to get better negotiations and lower cost with the cloud service providers. So there's multiple areas that we see opportunities as we scale our cloud business to be able to continue to grow our margin profile as it continues out to 2025.

On that same note, about maybe transitioning to free cash flow, when you think about sort of the $400 million-ish like range for this year going to $550 million over the next few years, but what is going to be the key driver for you to be able to achieve those targets? And how linear is that path of going from $400 million to $550 million?

Yes, I mean, as you mentioned, we have a really strong durable free cash flow generation, which is part of our financial fundamentals, which we're really happy with. So $400 million is anticipated for 2022 with the $550 million out to 2025. I mean it's a combination. As we continue to grow as a company, our strategy is profitable growth. So yes, we're very much focused on cloud, but it needs to be overall total company growth as well. So a combination of growth but also really kind of from a working capital conversion cycle and efficiency cycle, we've seen some improvements already, but I see further opportunities for improvements in that area as well. So it's a combination of top line growth, profitable growth -- profit growth and our cash conversion cycle efficiencies as we anticipate to scale up to the $550 million in 2025.

And as you think about deploying that cash flow, tech valuations have come in and software quite a bit. How are you looking at the landscape? Are you seeing interesting opportunities? Anything of size and scale? Any color you can share there?

Absolutely. So as we laid out in our Investor Day last September, M&A is part of our capital allocation strategy. So we've been on a transformation up until now, so very much kind of focused on what we can do ourselves internally. But it definitely is part of our medium- and long-term capital allocation strategy. Keeping an eye on the market, to your point, very interesting time right now. And I think it's important that we make sure that we have the right fit for Teradata. So M&A definitely is part of that. Nothing currently planned in the very short term. But we'll keep an eye on the market, make sure that if we see the opportunities, to your point, the right valuation, right return to our shareholders, then we would definitely be interested. Right now, we've been reinvesting back into Teradata, whether it's R&D, go-to-market type investments for marketing. So really investing back into the business because we think that we can get a really strong return on investment on those as we continue to grow. And also, we've been doing some share repurchase as well, being able to return some of that free cash flow back to shareholders in the share repurchases. We see -- we feel that we're very undervalued right now, there's a big valuation opportunity for us. So that's a good return on investment for us right now as well.

Sure. Yes. I mean what would you consider doing? Like maybe taking on some leverage and doing a large ASR?

Yes. So we did an ASR, as you know, at the beginning of the year. So it was a $250 million accelerated share repurchase. We still actually have a lot of capacity on our balance sheet. So we have a lot of opportunity there to continue to do share repurchases to your point, to potentially look at M&A. So it's going to be very much based on what's the best return on investment, what's the best use of that cash. So I think the fact that we have such a strong balance sheet and cash flow generation gives us a lot of opportunities, both in the short term and the medium term.

To your point about the stock being undervalued, right, I mean I think we actually get a lot of questions about why do you have such a high-quality asset in technology that is valued at current valuations and not being taken private? Is there interest from private equity? Is there interest from to the degree you can comment on it from other strategic buyers? Because it feels like you could be a great fit for a lot of different companies that we can think of...

Yes. I mean, I think I'm sure there's a lot of work being done. I'm not going to comment on anything, but nothing in play at the moment, but not that I think I'll be in a position to comment. But nothing in play right now. I think it's a question that we commonly get asked and it's going again. The right thing for the company, the right thing for the shareholders, given our current valuation, if we -- when we get to 50% and over $1 billion in cloud, I think the valuation opportunity is huge. So it's important that any investment that's made either by us or into us, it needs to take that into consideration. So -- but yes, I mean it's -- to your point, it underpins our message that we're undervalued today.

Yes, absolutely. We're almost out of time, but I did want to get your perspective on what do you think about the story is really misunderstood by investors, because clearly, you have this valuation disconnect. It feels like a lot of the heavy lifting that needed to be done is behind us in terms of model transition to subscription, in terms of investing and proving that you can operate at scale of cloud. And now we're sitting at a point where it's just execution and delivery of this. And so do you think that there is just a lack of -- like what do you think there is lack of appreciation of that people aren't really seeing in there or not being able to give you maybe credit for sustained growth over time? What do you think the misconceptions are?

Yes. I think in the last 12 months it's very much been educating about our product. I think there was definitely -- it previously misunderstood about where our product is today. I think a lot of people thought there were still product gaps. There's not. As you mentioned, we have a best-in-class industry-leading products. So we've been working on that over the last 12 months. So I think that's been in the past a misconception. But I think as we've educated the market, as we've educated customers that we're definitely -- and I think that's one of the reasons why we're seeing pipeline coverage improvement because people are understanding that story, understanding the product that we have to offer. I think also one of the things that our people -- it's a wait-and-see type mentality. Unfortunately, we've inherited kind of inconsistency maybe in performance from the past. So although we've laid out our kind of long-term and midterm expectations and estimates, I think there's a kind of a wait and see. And people want to see that consistency in performance. I mean we've seen it over the last 5 or 6 quarters in terms of doing what we said we'll do. But it's a new management team. It's a new Teradata with a new strategy. I think a lot of people are kind of like we want to see that continued execution and consistency in doing what we said we'd do. And that's something that myself and the leadership team take extremely seriously. And I think you'll see as we move forward in our journey, there is a lot of opportunity for upside. But I think there's a little bit of hesitancy out there right now because of the past, and we're a new team with a new strategy.

No, could not agree more. Well, unfortunately, we're out of time over here. Claire, thank you so much for taking the time. Really appreciate it. And good luck for the rest of the year.

Thank you, Wamsi.