Teradata Corporation (TDC) Earnings Call Transcript & Summary

Does it work? Good, time is running. So let's do the technology part. And then we can start clear. Hi Claire, this is my first fireside in 2 years. So if I'm a bit rusty and stuff -- it's nice to be back, guys. It's nice to be back in person. Everyone got tired of my zoom backgrounds from the conference in the last few years.

Maybe like I kind of wanted to open up, like you guys are on a nice kind of cloud journey, and this from a company that has been around for a while, it's kind of a different proposition. It's a different challenge than it is for like someone that just starts up at all fresh and can go to the next-generation straightaway. Like talk a little bit about the evolution from kind of where Teradata was to kind of where we're going and how do you see the company in the future with that?

Yes, absolutely. Thank you, Raimo, and good morning, everyone. It's a pleasure to be here. We're on a journey, absolutely. You said it right, Raimo. And I would go as far to say it's a transformation at Teradata. I know that keyword is sometimes overused, but it truly is the transformation happening at Teradata. And it started a few years ago, there was a kind of a transition from perpetual business to subscription to the point now we have approximately 80% of recurring revenue as part of our business. So that's a great transition. But as you said, the big transformation that's been happening over the last couple of years is that we changed our strategy to be cloud first, but not cloud-only. We were known for high-end on-premise data and analytics solutions and software. But -- and we've been able, over the last few years to create and now we have and just launched a cloud-native version of our software. And we're working with existing customers and working with new customers to be able to transition to the cloud. We know that, that is something that's important for us as a company to be able to have a seat at the table with our existing customers and new customers. We do believe that cloud is a really important part of our customer strategy, but we know that they also want that hybrid option. So that smooth transition to be between on-premise and cloud. And with the new product launch that we did just back in August at the New York Stock Exchange. It's a Teradata VantageCloud Lake. We're very excited now that we have that cloud-native product to be able to give us access to even more workloads, experimental workplace, department went through workloads as well as the big IT corporate initiatives that we had already been working on over the last couple of years. So very exciting times, a lot of work and investments going in to making that happen, but I am sure we'll talk a little bit about that as we continue.

And then the -- it's funny like it's 2 European on stage, usually, I would ask the questions like so in these call terms in which innings are we something like that is still in the World Cup and I'm not. So where are you on that journey in terms of like I know innings well in soccer game it doesn't really work like 90 minutes. But like where do you feel you are in that journey?

Absolutely. So we -- I would say we've made great progress in the last couple of years. It really was about investing in the right areas, investing in the product. And that culminated with the launch I just mentioned in August. We've been investing in our go-to-market organization in terms of the structure they set up, but also the capabilities to be successful in the cloud. We've turned back on our new logo engine, which there was no focus in terms of new customers, new logos. But with the software offering and product that we have now, we believe that's an opportunity for us and another big investment and focus area that we've invested in is customer success and customer support. There was -- we have some huge existing customers in the Global 10,000 across many, many industries and that connection in with them and being part of their future journey was really important. So we've invested in customer success to make sure that we're working regularly with our customers and not just coming back at the end of renewal time or something like that. So in terms of where we are, I'd say we've made great progress. We are still on that journey. We're looking -- we have a plan to get to over $1 billion by 2025. So we just reported our Q3 earnings, and we were $279 million. So you can tell we have some way to go to get to that $1 billion so we have really good line of sight. We're very excited about the feedback that we're getting from existing customers and new customers. So we have a lot of confidence in that $1 billion. And I think that's the point when we'll get to scale. And from that point onwards, I think you can kind of say, yes, that's now when it becomes kind of 50-50 as part of your business that, that's kind of the status quo. But we're still ramping right now. So we've still got a couple of years of investments to go of working with customers of migrations and expansions. So we're definitely not at the beginning of that journey, and we've definitely made a lot of progress, but there's still a couple more years to go until we feel that we're going to be at scale. But we think by 2025, that's going to be a good time for us.

That would be exciting and the -- from your perspective as the CFO, like it always says like, oh, we're going to the cloud. I think, okay, great. But like what does it mean from -- in terms of the changes to your operation, you talked a little bit about the sales kind of approach, go-to-market approach. Like talk a little bit about the nitty-gritty stuff that you've been working on.

Yes, absolutely. So across the company, it's a very new leadership team so -- and we brought experience and expertise all across technology and particularly in the cloud. So for example, our Chief Revenue Officer, who joined back -- actually previous to me, so back in January of 2021, he spent a lot of time making sure he's got the right capabilities, the right skill set, the right discussions that are happening with customers, the right compensation. We've completely changed the operating cadence of the company in terms of what are the metrics that we're looking at, what is the pipeline coverage, the deal cycles they really have. A lot of investment has gone into developing those skills, those capabilities and processes to be able to support us through this transformation. More recently, back in December of 2021, we had a new Chief Customer Officer and a new Chief Marketing Officer. And a lot happening also there. So we've seen a lot through 2022 from the -- from the marketing team and that's about how do we build those business cases, the demand generation type focus areas. So obviously, it was important to have the product. So that became first, then have the right skill set and capabilities in our go-to-market team. And since then, we've just been building on that with customer success and marketing. So a lot has changed in the last couple of years at Teradata.

Yes. And then how did -- like more from a CFO perspective, like in terms of what are the implications that we should consider in terms of cash billings, how that's coming in? And obviously, it's a journey because you're getting [ 606 ], you get like a lot of upfront, now it's kind of the more clouds you have, it's more kind of properly ratable. Like talk a little bit about the things that you need to consider as well as you kind of think about cash generation.

Absolutely. So as I mentioned, 80% -- approximately 80% of our revenues return, so that's great in terms of a predictability standpoint, in terms of a P&L from 1 quarter to the next, which is great. What we've also been very much focused on is our cash generation. I mean we're approximately $400 million of cash regeneration in 2022. We were above that in 2021. So to your point, that kind of recurring subscription approach is fantastic for us from a durable cash flow generation standpoint. And we've also been focusing from a working capital standpoint also. With regards to our profitability, we've always said that our main objective is profitable growth. So although we are looking to grow at the total level and to really grow our cloud ARR and revenue, we're only interested if we're doing that profitably for the company. We think that's important in terms of our shareholder returns. And so we're really focused on profitable growth. So that means that we don't get into silly discounting. That means that we're continuously focused on cost optimization, all the way through the P&L. And that's something that I spend a lot of time on making sure that we have that discipline, in terms of cost optimization, making sure that we take a real true return on investment approach when we're making investments. And it makes sense to invest, it makes sense to spend money when you get that return over time. But without that, it's not just growth for growth's sake. So that's something to your point, when you talk about margin and you think about that trajectory up to $1 billion in 2025, we need to do it profitably. And I'm actually expecting as we grow good margin expansion across the cloud and the overall operating margin expansion as we continue to grow. And that obviously generates strong durable free cash flows, and we've got some very, very strong management over our working capital. I mean, our cash conversion cycle has been consistently improving over time. So a combination of margin expansion and working capital discipline, really is great for us in terms of operating margin expansion and free cash flow generation.

Yes. I mean, that's credit to you as well because like there is like if I look at the cash flow generation and the cash flow, kind of ever since you joined -- that is kind of a lot better. Yes, well then just maybe on the -- you touched on the point earlier is, with the cloud, things need to change a little bit. And the one thing that kind of always comes up is like how do you get CEOs to kind of sell now kind of cloud subscription deals because in the olden days, you sold that 1 big renewal with -- and that was a 20 million deal and you go to home with your 5% commission, and that was the end of the year for you. Now it's a lot more, you need higher velocity, you have smaller deal sizes, et cetera. Can you talk a little bit about that journey in terms of kind of getting the sales guys on board? Like where are we on that? What did you change there?

Yes, absolutely. So we've actually separated the sales team. So you've got those who are working on existing customers because we think it's really important to come with a kind of industry expertise, the knowledge and support of that particular customer and then we have a separate sales team that are focused on new logos. So having them separated tends to mean that you haven't got that kind of overlap and the people in the -- what we call the new logo velocity team, they can really focus on how are they generating new customers. And it's a different sales service, acquiring new customers versus working with existing customers. It's a different skill set. We compensate them in different ways to really make sure that they have targeted approaches. Because to your point, your logos tend to start small. So if you're looking at your compensation plan as a salesperson and you've got small new logos to potentially sell or a large expansion deal or cloud migration you can do with the best customer, the new logos will always be smaller. So we've dedicated a sales team that we built through the end of 2021 and through 2022. So we've been building that specialized sales team that only focused on new logos, have different skill sets, different compensation, different list of customers that they're going after. And then the existing sales team, to your point on the cloud, we've been doing a lot of training. We're doing a lot of change in terms of capabilities, as I mentioned earlier. So it's a combination of bringing new skills in. We have invested in that area, bringing new people in with the experience already, but also training up existing salespeople. The one thing that we hear from customers over and over again, and I've had the pleasure to meet with a lot of customers this year because we've been doing a possible event series. We've been going around multiple cities around the world and meeting with a lot of our customers, partners and employees. And the feedback we get from customers is that relationship that -- the way that we look after our customers, the way that we understand their business and help them find value-add solutions. So we still want that. We still want the skill set that we had previously. So we didn't want to just get rid of all of the sales teams. So we've just been training those of them that maybe needed some training, [ have ] training others. They took to it very naturally. But I mean most sales teams are motivated by compensation. So getting the compensation right at the beginning, which is what we did and we continue to evolve that as we go through our journey. But that's an important part of the process.

Yes. And then, I mean, talking about the new customers that's in the cloud in a way should make it easier. Because like I remember like a few years back, to get new customers, we had like the 2,000 appliance, which is kind of slightly less heavy than the 6,000 appliances like. But cloud now fundamentally should change the game, correct?

Completely. And not just cloud. I mean we had our enterprise cloud offering but at the new cloud native offering, so our VantageCloud Lake offering fundamentally changes the game because it makes it very easy for self-service, it makes it very easy not to have a big IT complex program to be able to explore with our software. So it does change the game completely in terms of just new workloads with existing customers like departmental, experimental workloads. So it helps with existing customers. But to your point, also with new logos, new customers, where we can start small, much lower price point, which I think you were inferring the much lower price point as little as a 5000-a-month type approach that customers can come in and do data really advanced data and analytics on our new cloud-native software. So that's really exciting.

And I mean do you have any proof points here already. I mean it's -- we're early in that journey because you kind of only build out that muscle again. Do we have any -- from your perspective, do you have any proof points that you can share already? Or should we discrete a little bit?

On the Lake product? Yes. So we just launched the product in August. So we have had a very large amount of interest. A lot of customers working with us to close deals, to see whether it works for them. So definitely seeing that momentum. It was never expected to be a big part of our 2022 plan -- it's going to ramp over time. So it will become more and more meaningful as we move through 2023. So the proof points I have is, yes, we're signing deals on our new Lake products. We're hearing great things from our customer in terms of implementations and expansions on the product, it's too early to tell at this point. But as you would expect, we will be tracking it really closely.

And like I mean the customer adds -- new customer adds, there must be like an exciting change on story for the organization because I remember like a few years ago, it was like, okay, we are -- like here we are, this is our customers, we kind of serve them, but like new, we don't. Now you're kind of really out there, again, like how does it change from your perspective in terms of the motivation in the team like seeing the momentum building there that must be given the whole organization like new feeling?

Yes, absolutely. I mean to your point, it was completely turned off, like new logo acquisition, it just was not a focus area a few years ago in Teradata. Steve McMillan, the CEO, who joined 2 years ago was like that's not the right thing for us. We want to drive profitable growth. We can get growth from existing customers naturally through expansions but we also see an opportunity, especially with the products advancements and releases that we've just done. We see an opportunity to grow the total company over time with new logo acquisition. So it is exciting. As with all new logo acquisition teams, it starts small, it builds over time, but being able to have those conversations, being able to bring our industry expertise and our use cases from existing customers to other customers that we haven't worked with before. It definitely is exciting. And I'm looking forward, I think in '23 with the new product with that for that momentum to continue. I mean we've seen increasing new logos every quarter through 2022, but I think that momentum will continue in 2023 with our VantageCloud Lake?

Yes, yes. Okay. So that's yes. Okay. That's great to hear. And then I want to shift gear a little bit like and obviously, you have a lot of one-on-ones today as well and you kind of go to your other conferences. And you get that investor sentiment like there's that 1 guy not to be named now that kind of apparently is there. But in terms of competing with you. If you look at the real win-loss situation and look at your kind of spreadsheet, who are you actually really seeing like in terms of what's the competition? What's the competitive landscape really looking like in real life?

Yes, it's very mixed, I have to say. I think -- so yes, we -- the competitive environment, it's a big -- it's a big market out there. So my view on the competitive margin, you're going to see multiple names on several deals that you've come across but it's a big market, and I think there's multiple winners in that market. And I think the one thing I look at is and we do regular win-loss reviews and understanding at how that works. But what I see and gives me the confidence in that $1 billion I was referring to in 2025 and just our numbers, for '22 and beyond is that the pipeline that we see, the size of the deals, you have a real barbell -- but what Steve McMillan would call it a barbell of deal. So you have lots of smaller deals, kind of maybe 6-figure deals, but then you've got some much larger deals. And I'm talking ARR, so it will be obviously much bigger. It's much -- you can talk about kind of 8-figure deals type thing as well. So the further we're seeing more and more of that, the pipeline is strengthening, the win ratio as well as improving. That's a good sign. And I think that's the sign that people are understanding our technology, people appreciate the investments that we're making, whether it's product, go-to-market, customer support. So yes, that is exciting, and I think we should be building on that momentum, and we absolutely intend to as we move in 2023. New logos is always the hardest, I think, to execute in a difficult macro environment. So it will be interesting to see what happens over 2023 that, that relationship that we have with existing customers actually just become stronger in that kind of environment. So it's actually a positive on the existing customers because they want to stick with what they know. We have the relationships. They know our software, so whether it comes to migrations to the cloud expansions, existing customers actually want to not take any risk and do the kind of lowest risk quickest, easiest and cheapest migration to the cloud. And they know that they can do that with Teradata if they're one of our existing customers. So I think that gives us a lot of opportunity with our existing customers. And if we can just keep that momentum on the new logos, even if they start small, have future growth over time. So it's definitely worth that investment.

You mentioned a few times like who knows what's going to happen in 2023, and I'm not going to ask you to give guidance, but you saw [ Paul Compton ] in the opening remarks, talked about like the Fed rate hikes kind of need to play through the system. So that will kind of impact the numbers. Like -- and I'm sure you saw like the kind of reporting season last week from like the bigger kind of off-cycle guys. Anything that you want to point out like in terms of what you're seeing out in the field since you reported. I am not going to think you changed guidance here or anything, but like what are you seeing like in terms of out there in the field?

Yes. I mean as you would expect, we have a very disciplined operational review. We have weekly reviews in terms of what our sales coverage looks like, how the deals are closing as we go through. So actually, no major changes or concerns or issues actually looks very good, still exactly the same confidence that we had a few weeks ago when we had earnings 2022 results. So no changes there. I think to your point, these deals, people may have been reporting different updates. But the deals that we're working on, we've been in discussions with the customers for either a few weeks or a few months. It takes a big decision for them to suddenly change their mind. So I'm actually very, very happy with what we're seeing. We have that discipline. To your point, we -- I feel like if we have the right level of visibility, we use our own analytics to show trends, we are able then hopefully to get ahead of any future things. I feel like we did that in 2022 with the currency. And we're one of the first customers back in March and April to start talking about currency. We brought our guide down to reflect currency impacts. And since then, we've been able to maintain that even though we've had additional currency headwinds. So we're either offsetting them or we're predicting them well in advance. So that, I think, is great. So we'll continue to keep that operational discipline to try and do what we said we'll do. We take that very seriously as a leadership team and give out numbers that we have good and high confidence to deliver. And that's what we see for 2022, and will be giving an update, as you said, in 2023 in our next earnings.

Yes. Like if you look at the quarter, like Q4 is going to be a big quarter for you. Like -- and obviously, then everyone is like Q4. But talk a little bit about that. Is that -- I mean, I would assume there's a lot of that is existing customers doing something. It's not like you need this kind of crazy number of new customers to make your numbers for this year. So that should give you some confidence, right?

Yes, absolutely. I mean the confidence comes from it's seasonal. We've done it before. It's kind of how it's customer-driven. I mean, naturally, as the CFO, I don't want to have such a big Q4, I'd much rather be doing it spread throughout the year, but it's very much customer-driven. And so when it's customer-driven, that's what gives you the confidence. We have specific deals, we have specific pipelines. And so if it was just kind of a high level set of numbers, I wouldn't have that confidence, and I'd probably be being even more conservative. But I see the deals. I see updates on how the deals are progressing, and I see it coming from the customers. So that's what gives me the confidence.

Yes. Okay. Perfect. And the last few minutes, I wanted to shift gear a little bit towards more profitability and cash. If you think about it like with more kind of fully cloud-native rather than like subscription with on-premise and subscription recognition, you kind of lose that upfront revenue component. Like can you talk a little bit about the puts and takes around margin and cash that you're kind of seeing there more margins?

Yes. So I mean as we move -- so first of all, in terms of the upfront revenue, so we have had that impact coming through to your point, in 2021 and into 2022. That should level out in 2023. I'm not expecting any big swings or big movements from one quarter to the next with regards to upfront revenue. So that's nice. That's been a bit of a journey for those maybe not as familiar with the Teradata story, we do include all of our information and bridges on upfront revenue and things like that in our earnings presentation. So to make it clear what the impact is seen with currency and the other big headwind we had this year was Russia, and we exited the operations in Russia. So we laid that out so people can understand all of the impacts on a quarter-by-quarter basis, but I'm not anticipating that to be a material swing or impact to us additionally in 2023. However, with regards to that migration to the cloud and how that impacts us. There is a dilutive effect right now, but the -- as I mentioned, $279 million of ARR, of our total ARR, which is almost $2 billion, we're still not at scale. So right now, there is a margin dilutive impact coming from cloud, but we do have a good line of sight as we scale, as we continue to automate, as we continue to be able to negotiate better deals with the cloud service providers, we do see that margin expansion so that it becomes -- it's not dilutive to the overall group gross margin. So -- so that's something that we're very focused on in terms of as we move to the transition, but we do have that interim migration. Other than that, I mean, the other thing that people ask us a lot about is consumption pricing. Obviously, as you move to the cloud, at the moment, so we offer consumption pricing, full consumption pricing. We offer fixed pricing or a hybrid of both. What we see because our workloads tend to be mission-critical, customers can't have the risk of having to turn it off if it gets too expensive over time. So they like to understand what the cost impact is going to be over the longer term. So they tend to once to sign up to a fixed cost and then just have the user consumption pricing for peak times. So actually, the amount of consumption pricing for us right now is very small. So that also helps us in the current macroeconomic environment because a lot of our pricing is blended with the focus on being fixed. So that's good as well. And I think that will continue, as I mentioned, because of the mission-critical factor.

And then if you think about it, like it's not you, it's more like the kind of the crazy growth guys that kind of invested more than they kind of actually got it in revenue and now like you have to kind of scale it down. In terms of like that mixture of margins versus growth at the moment, how do you see this in this environment? And like maybe 1 extra point? Like I mean the course you were kind of trying to work on efficiency and organization, yes, I would assume you have a lot less fat than like some of the other guys that never kind of had around or do any restructuring?

Yes. I mean, I always think that there's an opportunity to continue to optimize cost. I mean just over the last year, just even things like real estate and things like that, I see opportunities as we go into 2023 and beyond. So there's kind of infrastructure costs. There's other cost optimization opportunities for us, as I mentioned, as you scale. So whether it's at the margin level or the OpEx, scaling and growing definitely gives you an opportunity to become more efficient from a cost standpoint. So -- and that's why I mentioned, we're really focused on profitable growth. We think total growth is really important. We've had some headwinds in 2022 that have -- if you adjust for those, we're growing. But unfortunately, with Russia and the currency, they have been big headwinds for us in 2022. But in 2023 and beyond, we see that opportunity for that total growth. And -- but we think it is important to have that mix of investments. So we do think investing back into the company. Otherwise, we would never have what we have today. We wouldn't be launching a new product. We wouldn't have a regenerated sales team. We wouldn't have a new customer support team or new logo team. So there's many investments that we are making but some of them can be self-funded through tradeoffs elsewhere, so infrastructure costs and other cost reductions and some of that can be funded through scale as you grow, you obviously can increase your investments. And as I mentioned earlier, the return on investment is how we have that disciplined approach, and we're continuing to review the investments we've made, the return that we're getting what are the right trade-offs. And I think that's important. I want the company to be really disciplined. That doesn't mean we don't invest. I mean, we invest in our people, merit. Salary increases next year will be a big investment which I am sure many companies are opting because of inflationary pressures and things like that. It's important that we invest absolutely, but we need to do it in a very disciplined way and make sure that we are continuing to review that return that we're getting back on that investment. So -- and that's why it's focused total growth, absolutely growing the cloud is fantastic, but we need to grow total ARR, total revenue, and that's our focus, going forward, and we plan to do it profitably and continue to expand our margins over time.

And I only have like 30 seconds, so I have like my last question, so how do you think about usage of cash now in this environment there?

Absolutely. So -- and we haven't changed our capital allocation strategy since our investor conference last year. So investing back in the company, as I mentioned, is important. We also do share repurchases. So we've been very active in share repurchases this year and share repurchases will be continued part of capital allocation. But M&A is also a part of our capital allocation strategy. So we continue to look out there if there's adjacencies or companies with the right capabilities at the right price, again, very much a returns-based approach. So all of those 3 are currently part of our capital allocation strategy, and we continue to look at where do we get the best returns in terms of where do we invest our cash.

Perfect. Steve, Claire. That was really fun. Thank you. Thanks for joining us again.

Thanks for joining us. Thank you.

Thank you again.