Teradata Corporation (TDC) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Day 2 of the Wells Fargo TMT Conference. My name is David Unger. I'm a research analyst at Wells Fargo. Today, we have Claire Bramley, Teradata's CFO. Claire, thank you very much for being with us today.

Thank you. It's a pleasure to be here.

Great. Claire, let's start it off with earnings you reported earlier this month. Can you talk about some of the 8-figure deals that you landed? What drove those customer decisions?

Absolutely, yes. So we had -- we're very pleased with our performance in Q3, especially given the current economic environment. So as many of you may be aware, we're on a transformation and transition to the cloud. So our new strategy in the last couple of years has been cloud first and not cloud only. And I think in our most recent earnings in Q3, it showed the strength of that migration to the cloud and the expansions that we're seeing. And we saw in constant currency, for example, nearly 100% year-over-year growth in our cloud ARR. So great performance in the current environment. And some of that was from 8-figure deals, as you mentioned, David. So seeing really good, I would say, a mix, really large, big enterprise workload deals, kind of 8 figures. And just to clarify, that 8 figures is an ARR number. So if you think about it as a TCV number, total contract value, obviously significantly larger than that. And -- but also, there was a large number of smaller deals as well. So actually, Q3 was the second largest quarter in terms of cloud, in terms of the number of deals that we did and closed and also in terms of the dollar growth that we saw in that quarter. So that leads us nicely and gives us momentum going into Q4. Q4 is a big quarter for us. We had a great Q4 last year, seasonally our biggest quarter. So yes, that gives us some good momentum as we go into Q4, which we're obviously doing now.

Excellent. I appreciate that. The cloud transition, a big part of the story you alluded to. Can you walk us through just how the transition is going? What are the key investment focus areas on the journey to $1 billion in 2025?

Yes, absolutely. I mean, as I mentioned, we're really happy with the progress we're making. This was a journey that started back in June of 2020 when we have the new CEO come on board. And up until that point, Teradata hadn't prioritized cloud and very much focused on on-premise. A lot of our investment R&D dollars have gone into on-premise and he made a lot of changes 2 years ago, and we're starting to see the benefits of that in 2021. We saw some benefits, but also in 2022. And some of the things that we've done, for example, on that transition, and it's still a transition. I mean it's still -- we're at nearly $300 million of cloud ARR, which is still a small portion of our title ARR, but it's growing, as I mentioned, extremely fast, almost 100% year-over-year. So what we've been doing over the last couple of years, one of the first things we did was increase the amount of investments, R&D, go-to-market, customer support marketing that is going specifically to the cloud. So that was the first thing we did. And that R&D investment, where we're now at over 80% of our R&D investments are spent in cloud rather than on-premise, that has culminated into a new product launch, for example, that we did just back in August at the New York Stock Exchange. So that was very exciting. And we launched Teradata VantageCloud Lake and ClearScape Analytics. And this is an evolution of our cloud software platform. And the great thing about it is it brings all of the performance at scale, really good total cost of ownership, but also is a cloud-native product. And our ClearScape Analytics is an enhancement of all the in-built analytics that we've seen -- that we see in our software on-prem, in our VantageCloud enterprise version and now we're putting that into a cloud-native product, which is VantageCloud Lake. So that's been super exciting this last quarter, not a big contributor right now to our growth because we just launched the product. But that's, again, something that gives us momentum as we move into 2023. So David, that's kind of one of the examples that we've been investing and focusing on in the last few years. We've also done a lot in terms of our go-to-market investments. We built a new logo engine. So -- we built a team of people and sales team -- a sales team who only focus on new logos. Again, historical decisions, they have only focused on existing customers, not focused at all on new logos. So that's something that we've very much been focused on in the last 18 months. And again, just making sure that we have those relationships with existing customers, the loyalty and the relationship and the knowledge that we have with existing customers, we think is really valuable and really is helping us with this transition of migration and expansion to the cloud. So we're investing in that. We're investing in customer support, customer success as well. So lots going on in the last couple of years. And yes, as a result, the cloud is growing really strongly right now.

That's great. And on the earnings call, you talked about some strength in different verticals. Can you talk -- can you maybe expand a little bit on some of the verticals that you're seeing the most interest in out of the gate? And then maybe broadly, just talking about the economics in the cloud transition, the uplift, cross-sell, just those dynamics in general?

Absolutely. So yes, so we -- as I mentioned, we pride ourselves on the knowledge of our customers, not just only the knowledge of them as a company as an enterprise, but also in their industry. So we see it as our role to bring them solutions, bring them business opportunities for them to really get true value from what they're doing. And to your point, so we're very much -- very strong in like financial services, for example, very strong in transportation, communication, sports. Actually was a big opportunity for us right now in terms of sports analytics, that's growing and growing. And another area as well is health care. I mean the amount of data in health care and the amount of data, for example, in financial services is just huge. And so with that industry expertise that we have, and that we're bringing to existing customers and also can be transferable across our customers is adding a huge amount of value. So that's what we pride ourselves on is knowledge of the customer, but knowledge of the industry as well. So there's some of the strengths that we're seeing and have seen in the last couple of quarters. To your question on unit economics. So one of the great advantages and why we're focused so much on the cloud and migrating with existing customers but also new logos in the cloud is because we do see better unit economics in the cloud. So we first did the shift from perpetual to subscription, and we saw an uplift in economics there. But as you move to on-prem subscription to the cloud, I think because of the elasticity that you see in the cloud, being able to scale up and scale out real time, that expansion opportunity and the unit economics is much stronger for us in the cloud. I think the other reason as well why the cloud transition focus has been so important is it gets us a seat at the table with our customers in their future ecosystem and their future infrastructure. And the fact that we can offer a hybrid environment so we can continue to support them on-prem and some mission-critical workloads if staying on-prem. That's what we've seen, but then certain areas, certain workloads customers are focusing on moving to the cloud. Those intend to maybe need to scale up and scale out real time. They're the workloads that our customers want to move to the cloud. So having that flexibility with our customers to say, we can transition you to the cloud but we can also support you on-prem, and it's -- a seamless ecosystem is really what we are hearing from our customers that they're looking for. So that true hybrid offering, and we see it investing as the kind of lowest risk, lowest cost to be able to have that hybrid environment across all of their different workloads.

That's all great. And I apologize for asking this one, but macro, everyone's asking about macro, so we need to hear your opinion. So what are you hearing in terms of macro differences by geography, by vertical?

Yes. I mean for us, 2022 has been a challenging from a macro standpoint. There's been 2 very large headwinds, and I talked about this on the earnings call and for those of you maybe not so familiar, I actually include in our earnings presentation, quite a bit of information with regard to the impact. The 2 big impacts we've seen, which have been macro in 2022 are the exit of Russia operations. So that was big for us. A $60 million of revenue in the year, very accretive from a margin standpoint. But very happy with the decision we made there. It was the right decision to exit Russia earlier in the year, given the situation there. But that's been a big headwind for us in 2022 and linked to macro, things out of our control at macro environment. And the other big one as well has been currency. So we've had a big headwind in 2022 year-over-year with regard to the currency impact. So we're obviously not happy about the fact that it's such a big negative impact to our growth and our profitability in 2022, but what I am happy about is the fact that we got ahead of the curve. So we were talking very early in the year. We made a decision very quickly on Russia. We were talking very early in the year about those currency headwinds. And so the advantage means that I haven't had to keep updating my guidance, I haven't had to keep updating the situation throughout the year. We kind of called it down very early in the year, and then we're kind of doing what we said we would do. I'm so happy with what the team managed to do there that we got ahead of it. And that's the approach we take. We are monitoring everything closely. We're monitoring our pipelines, the length of our deals, how long is it taking to go through the deal cycle? Right now, we are not seeing a major impact other than currency in Russia. We're not seeing a big slowdown or decrease in our sales pipeline or our sales coverage, which is very encouraging. And I think the main reason for that is because a lot of our big deals is migrations with existing customers. And a lot of the work that we are doing is mission-critical workloads. So these are not things they can turn off. We're running the businesses that they need this analytics and data to be able to run the company, whether it's health care, whether it's airlines, that's another -- I talked about transportation, airlines, whether you're talking about banking or financial services, a mission-critical workloads to our customers. So they're not just in a situation where they can turn it off. But I think that's helped a lot with regards to giving us a little bit of protection against the current macroeconomic environment. The one area that I think is being impacted more broadly and for us as well, but is a small portion of our growth is new logos. Obviously, in the current environment, new logo acquisitions are more difficult. They do take longer. People are kind of challenging whether they want to take on this additional expense in the current environment. I think the good news for us though is, going back to our Investor Day of last year, we were very conservative with regards to the growth coming from new logos because it was a new engine for us. And so we don't see any impact with regards to the current year from the macro, and we still have line of sight for our target, which is $1 billion of cloud ARR by 2025. So that's very encouraging, considering the macroeconomic environment. I think one thing I would add just on that, which is well kind of gives us a little bit of protection, the amount of our business that's on consumption pricing is still very low. A lot of our customers are adopting, I would say, a hybrid approach, a blended pricing model. So a lot of it is fixed and then the consumption comes on top. So with that fixed amount. That also is a protection because it means the swings that we're seeing from the consumption changes is not material at this point. So I think that's something to bear in mind when thinking about how we are going to be impacted. A lot of growth coming from migration expansions of existing customers, but also not a big portion of our ARR is from consumption pricing. So therefore, the variability is much less.

And I was going to get to managing growth versus profitability, but just you mentioned expansions, I'd love to get into the trends you're seeing, the 117% and just what's going on there? What's kind of the long-term target there? How to think about expansion?

Yes. Expansion has been a very interesting evolution for us. So we were originally modeling to be around approximately 130% with regard to our net expansion rate in the cloud. What we're actually seeing, to your point, the last 2 quarters has been flat, and it's been 117%. So on face value, you think well actually then, you're lower than you expect it to be, but we still are on track with the numbers that we said. So what we're seeing is at the point of migration, we're seeing more expansion at that point. So as people are migrating to the cloud, we originally modeled dollar for dollar, so effectively 1 for 1 at the point of migration and then expansion over time. What we've actually seen is a higher expansion at the point of migration and then lower expansion over time. So we're just getting it earlier, which is fine by me as long as the overall number is the same. But yes, that expansion at the point of migration is not included in our net expansion rate because they wouldn't have been cloud customers with us 12 months previously.

Okay. And managing growth versus profitability. You have the very tough view being the CFO. We're hearing different things from different CFOs. I would just love to get insight from you and how you think about managing growth versus profitability?

Yes, we -- our strategy at Teradata has always been a profitable growth strategy, and we are not deviating from that at all. So we are focused on growth. We are focused on cloud growth, and that's what we've seen really strong performance on -- in 2022. '23 and beyond, our focus is very much the total ARR growth. So obviously, not going to try and predict the future in terms of currency headwinds or things like that. But I'd like to think that we have a good opportunity, and we see good potential to grow total ARR as well as strong growth in public cloud in 2023. However, we want to do that profitably. So we will see profitable growth, operating income, EPS growth at the same time. We take a very disciplined approach in terms of cost management, but we also know that we need to invest now for the future. So we are very much focused, as I mentioned, a lot of investments in R&D over the last couple of years, been investing go-to-market, customer support and now marketing, you've started to see in 2022 and beyond an uplift in our investments in marketing. So we know we need to invest back into the business. But there's many opportunities that we've been focused on in terms of cost discipline and cost reductions. One of them, for example, is our real estate infrastructure, we are not seeing a lot of people going into the office. So we're using that as an opportunity to take out costs. So we're always pushing ourselves to be as efficient as we can to be as productive as we can. We're also focused on margin. We don't want to grow for the sake of growing. We want to grow with making money as well. So I think we have a very balanced approach, which I think has set us up well in 2022 and also set us up well for '23 and beyond.

Great. And back to go-to-market, can you just talk broadly about the partner -- the partnership model you have, how that ecosystem is? How it's progressing in an interval milestones you'd like to call out there?

Yes, I would actually. It's a great question, David, and a big focus area for us right now. So as I mentioned, a lot of things that have been changing over the last couple of years. One of the decisions that was also made 2 years ago was we decided to strategically reduce our consulting business so that we were not competing at the same customers with SIs. But what we were getting feedback on from SIs and many partners is, we don't really want to partner with you because you're at -- the company is competing with us from a consulting standpoint. So we have really focused our consulting business to be purely Teradata value-add consulting when we bring something different, something specialized to the table rather than generic consulting. So you'll see in our numbers that our consulting business has declined. Revenue has declined over the last couple of years intentionally so that we're not competing with system integrators and so that we can partner better with them. So that's been a big focus for us, and we're starting to see the benefits of that. So that's from an SI standpoint. The partnerships with the cloud service providers were across all of the 3 major cloud service providers, lot of investments, a lot of agreements with them in terms of co-selling, co-investments in R&D, so really good progress there as well in terms of that partnership. And then just the general partner ecosystem is really -- has been growing over the last couple of years. So that's starting to pick up. For example, just in the last quarter, we increased the number of partners that we have by 50. So -- and now we're over 300. And so that's really starting to pick up. And I think a big opportunity for us. Teradata historically have been very focused on direct selling. We are still very focused on direct selling, but we want to increase our relationship with the partners and the amount of business that comes to partners. And we're starting to see some good deals coming through a couple of the deals that we talked about in our earnings at Q3, came through partners -- for Teradata and partners working together. So I think we're going to see more and more of that. And I think that's great because it's a very efficient way to be able to continue to grow profitably.

And you talked about a little bit on your earnings call, capital allocation. Can you just remind investors prioritization, how you think about capital allocation?

Absolutely. Yes. So what we laid out at our Investor Day last year was, I would say, a multipronged approach. So first of all, we do want to invest back into the business. So as I mentioned, a lot of investment, a lot of progress being made. So definitely, we're investing back into Teradata for future growth opportunities. The other thing that we have committed to as well is at least 50% of share repurchases, we are significantly ahead of that in 2022. So that, I would say, is the minimum 50% of free cash flow in terms of share repurchases well over 100% year-to-date. So share repurchases is a big opportunity. We have a very strong stable balance sheet, and we're generating a lot of cash flow. I mean, approximately $400 million of cash flow this year, over $400 million of cash flow last year. So we have a very strong generation of cash. So share repurchases has been a big focus for us as well. And we're not excluding M&A type activity. So again, we take a very return on investment-based approach and it's kind of where can we get the best return. We haven't done any big M&A, a lot of internal focus as you've heard over the last couple of years in terms of transforming ourselves, an internal focus in investment. But M&A is also a part of our capital allocation if we get the right investment at the right place. That would definitely be something that we are continuing to look at the market, the opportunities. And I would anticipate it to be more kind of tuck-in adjacency type M&A rather than anything else, not done anything today, but it is something that we continue to analyze.

Okay. Great. I'm going to jump around a little bit, the product launch you mentioned. Let's talk about VantageCloud like a little bit and just the differentiation there maybe for investors that are still trying to learn about the cost per query and how that compares to some of your competitors? We love some detail there.

Yes, absolutely. So we have had a software product, a VantageCloud Enterprise. We had a product out now for a couple of years, but it wasn't a cloud-native product. It was kind of an evolution of our on-prem software that we were able to use in the cloud. So the thing that our new product, which is VantageCloud Lake product brings, is the cloud native ecosystem. And the advantage that, that gives is it really can be used for experimental departmental workloads. Historically, Teradata have sold in, I would say, at the kind of corporate IT level because we used to be on-prem, it was big investment, hardware, et cetera. It very much was based on corporate IT type spending. And then over the last couple of years, we're starting to see that evolve with regards to line of businesses, departmental type work. And I think this new product, which still has extreme high performance, the best-in-class cost per query, to your point, but can be much more self-serve. You don't need to have a big corporate IT project or program to roll it out. It's much more self-serve. We see that as an opportunity for the needs kind of ad hoc queries, exploratory type workloads, which previously, I would say, was an area that we didn't have good traction in. So that kind of opens up more workplace for us. And to your point, in terms of cost per query, we've got a couple of external analysis that show we're 2.5x cheaper than any of our competitors with regards to cost per query, and that makes a difference. When you're in large enterprise customers, our focus area is the Global 10,000. So we're always talking about large enterprise customers, the amount of data, the amount of queries. What we've seen is as the volume scales quite often at our competitors, it can get out -- the cost can get out of control. So we've even had what we call boomerang. Customers come back to us saying, this doesn't work for us, we don't have the right controls, we don't have the right governance, the cost is too high. And we don't -- we can't continue to operate at this level. So we've had customers coming back to us. And then that's what with the new product, but also our existing products we're able to offer. We're able to offer that governance, that infrastructure that controls centrally about how much is being spent, what's happening, but also now to be able to give departments that opportunity to be able to explore, to experiment and to try new workloads. So that's pretty exciting because it's kind of like we have this portfolio now that we can offer for multiple different purposes with our enterprise. And we're working with our customers to really focus on that cost for them. I mean, in the current environment, everyone is focused on cost, everyone is focused on how can they optimize more. And so giving them control centrally across the whole portfolio and being able to offer the best cost of query is a big opportunity for us.

I mean that's a great differentiator. Is there anything you can call out in terms of -- it may be too early to say, but win rates or trends you're seeing with the pipeline, and you mentioned boomerang that could help investors think about more advancements going forward?

Yes, absolutely. So I'll answer that in 2 parts, David. So first of all, specifically to our new products, so the VantageCloud Lake, we have -- we just launched the product sort of thing. So we're building -- we're seeing a good pipeline. We're seeing a lot of interest. We've been out across the world in multiple cities in the U.S., talking to existing customers and potential new customers about the product, and a lot of interest, a lot of focus, a lot of follow-up calls. I'd say the interest is there. it's not a material part of our 2022 business, but it will start to grow in 2023. But really good momentum, I would say, in interest as we've gone through this launch over the last few months. With regards to generally what we're seeing in terms of the pipeline and the coverage and things like that, we are seeing boomerang customers. We are seeing maybe where doors have been closed in the past because we didn't have a cloud product 2 years ago or didn't have that reputation in the cloud. We're seeing doors reopen sort of seeing people coming back, wanting to understand more. So it's very much an education like with existing customers and with new customers. And yes, as a result, we're seeing a very strong pipeline, very strong sales coverage. So like specifically, I'm expecting to be more material in 2023 as that product grows and we start to do deals then. And yes, it will become more and more meaningful part over the next couple of years of our cloud growth.

It's terrific. Claire, I wanted to give -- we have a couple of minutes left. I wanted to give you the floor. Any closing remarks you'd like to give the audience today?

Yes, absolutely. So well, open to any questions, if anyone has any follow-up questions. Just remind people, this is like a transformation story. We've made a lot of progress in the last couple of years. We're very excited about the new product launch. We think that's a big opportunity as a game changer because we -- a lot of the criticisms has been, "Oh, it's a great product, it's a great performance at great cost but it's not cloud native. " Now those arguments go away. We have a very high-performing best-in-class, cloud-native products. And we're seeing those win rates with existing customers, with new customers and we're continuing to do that profitably and generating a significant amount of free cash flow. So I think this is -- we're still on the journey. We still have more work to do. We've had headwinds in 2022, but I'm very optimistic about our growth -- profitable growth opportunity for '23, '24 and '25. And the fact that we still have even in the current environment and headwinds that everyone is seeing line of sight for that $1 billion in 2025 is very exciting.

Excellent. Do you have a question?

Yes, sure. So the question, I think I'll just repeat the question so that they can hear it maybe on the webcast and it's recorded. So the question was, even though the consumption part is small, what are the trends that we're seeing with regards to that consumption piece. So right now, we haven't seen any significant changes. So I think we -- but we haven't seen sort of huge peaks, but we haven't seen huge drop-offs as well. So it's actually been fairly consistent. It is something, though, to your point, we're watching extremely closely. I think right now in -- especially in the second half of 2022, the momentum is still there. People are still running a lot of workloads. They're doing a lot of analytics. So we haven't seen any drop off. It's something that we're watching pricing as we go into 2023, to see if we see any different trends in Q1 and Q2. But right now, it's actually been very stable. As I mentioned, small portion of our total ARR. So -- but based on what we see, no material movements right now. The one thing we are -- I would say we are seeing from the macro that we're talking about, it's just the time to close new logos and the size of new logo acquisition deals. That's where I'm seeing the macro impact. Now fortunately, I was very conservative in terms of my growth assumptions on that. So it's not impacting us currently and not impacting our goal to get to the $1 billion. But that's where I'm seeing maybe it takes longer to close a deal, the size of the deal is potentially a bit smaller in the new logo space. But with existing customers, with migrations, with expansions and the consumption with existing customers has been extremely stable. And actually, we're seeing this kind of -- the usual seasonal Q4 demand. I mean Q4 is a big quarter for us, and this quarter is no exception. A lot of demand, a lot of deals being done, a lot of people wanting to close deals this quarter sort of thing. So -- but making sure that we continue to watch the pipeline for Q1 and Q2 as well.

That's great. Thank you, everyone. Thank you, Claire.

Thank you.