Teradata Corporation (TDC) Earnings Call Transcript & Summary

Hello, everyone. My name is Drew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions] I'd now like to hand the conference over to your host today, Christopher Lee, Senior Vice President of Investor Relations and Corporate Development. You may begin your conference.

Good morning, and welcome to Teradata's Fourth Quarter and Full Year 2022 Earnings Call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today; followed by Claire Bramley, Teradata's Chief Financial Officer, who will discuss our financial results and our outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our SEC filings. Please note that Teradata intends to file the Form 10-K for the year ended December 31, 2022 later this month. These forward-looking statements are made as of today, and we undertake no duty or obligation to update our forward-looking statements. On today's call, we will be discussing certain non-GAAP financial measures, which exclude such items as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items, such as free cash flow and constant currency revenue comparisons. Unless stated otherwise, all numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.teradata.com. A replay of this conference call will be available later today on our website. And now I will turn the call over to Steve.

Good morning, everyone. Thanks for joining us, and thanks, Chris, for the introduction. Teradata delivered a robust fourth quarter, capping off a strong year. We are very pleased that we had all of our key metrics for the full year, especially considering the macroeconomic challenges from ceasing our operations in Russia. Demonstrating our momentum as a cloud leader, the fourth quarter was our largest cloud quarter ever as the team delivered public cloud ARR of $357 million, a year-on-year increase of 81% in constant currency, nearly 45% larger than Q4 of last year. This incredible growth was propelled by customer demand for our differentiated platform, resulting in new incremental workloads that drove healthy migrations and expansions. Our total ARR also finished the year very strong, up 2% year-over-year in constant currency. We generated $108 million of sequential growth in the fourth quarter, driven by outstanding cloud activity. In addition, our on-prem subscription business remained steady even in light of healthy migrations to the cloud. It's great to see that the team's performance in cloud is fueling overall total ARR growth. Looking at our tremendous progress across the board, our results showcased the positive impact of our strategic transformation. Just over 2 short years ago, we declared that Teradata would be cloud-first, and the entire team stepped up and executed with determination and consistency. Once we set our sights on our cloud-first future, we have delivered more than a sixfold growth in cloud, just remarkable results with growth well ahead of the market. Our strategic pivot is right, and I am very proud that these results illustrate our successful transition to a market-recognized leader in cloud data and analytics. The customers we serve are among the world's most demanding and complex enterprises, and we regularly hear from them that they need the best data and analytics capabilities possible, capabilities that Teradata absolutely provides to help them extend their edge and their markets. We meet customers where they are now with the technology that they need now with their best-in-class lake house or data warehouse, whether in the cloud, on-prem or a hybrid model. Our dedication to customer success and the strength of our technology gives customers full confidence that Teradata will keep bringing their analytics and data capabilities they will need in the future. We are seeing migrations remain high as customers transition workloads to the cloud, and we are also pleased to see that when customers start with Teradata in the cloud, they expand with Teradata. Our net expansion rate in cloud remained solid at 117% in the quarter. Our momentum accelerated in the fourth quarter as our sellers added new customers in the cloud and new logos. We brought in nearly 20% more new logos last year than in 2021. Our new accounts come from across all geographies and multiple industries. I'd like to share just a few examples. Kyndryl is modernizing its data platform and building out capabilities in the cloud to acquire and [ curate ] data, while delivering key insights of this business. They selected Teradata on Azure as a key component of that strategy, leveraging our company's go-to-market alliance and with its internal Chief Data Office team being [ client 0 ]. Leveraging Teradata for its internal use positions Kyndryl in an excellent position to address the challenges businesses face. A major Japanese consumer electronics manufacturer chose Teradata on AWS to help it provide analytics on IoT data derived from the products. A large Australian government agency has procured Teradata on Azure as the basis of a strategic data platform, underpinning the department's enterprise information initiative. This program will uplift its entire enterprise data management and analytics practices to better enable information sharing and collaboration within the department across the government and with Australia's strategic international partners. This new customer was [ won ] with KPMG and with a competitive [ win ] against a number of other vendors. These wins are a testament to the people of Teradata, our culture of being market-driven, agile and execution and accountable to each other truly helps us win as we have transformed the company, and it has been amazing to see everyone lean and embrace the future. You've heard us say that we do what we say we will do. This has been our mantra throughout our transformation as all facets of the company acted with urgency and commitment in our successful pivot to the cloud. Our fantastic engineering organization completely rearchitected our analytics and data platform to cloud native, and we launched Teradata Vantage Cloud Lake and ClearScape Analytics at the end of Q3. We are quite pleased with the incredibly positive market response to the launch of these powerful capabilities. Our pipeline is building, and we have customers already leveraging our powerful new lake products to get meaningful business value. When we [ win ], we increasingly [ win ] with partners, and we continue to strengthen our partner-first approach. In 2022, we made major strides building out our partner motion, significantly advancing their capabilities, training thousands of partners employees and building a leading partner-centric organization from the ground up. Our robust cloud growth is intrinsically tied to the deep partnerships our team have built with the leading cloud service providers, [ systems ] integrators, ISPs and resellers. In fact, 75% of our largest cloud deals were won in partnership with key systems integrator partners and cloud service providers. Looking ahead, we remain committed to partnering as a key element in our growth. We will continue to invest in building deep partnerships and accelerating market momentum in this area. Capping off our fantastic year was the very positive news that Teradata received continued recognition from Gartner in 2 important reports with the no cloud leadership. We remained a cloud leader in the 2022 Gartner Magic Quadrant for cloud database management systems. This makes an impressive 20 years in a row of being named a leader in data analytics. We had another consecutive year of running streak as we again garnered the highest scores in all 4 use cases in the Gartner Critical Capabilities for cloud DBMS for analytical use cases report. Teradata scored #1 in data lake, #1 in traditional data warehouse, #1 in logical data warehouse and #1 in streaming analytics. This is the second year in a row that Teradata has made a full suite, leading in each of these use cases. We're proud of this recognition that validates our strength as a leader among leaders into cloud analytics and data. Being a market leader also comes with the duty to act as a responsible corporate citizen, an obligation we hold paramount. In 2022, we made great strides in our ESG program, processes and governance. It's very rewarding to be included in key reports such as JUST Capital 2023 ranking of America's most JUST Companies and Newsweek's [ list ] of America's Most Responsible Companies. Our commitment to ESG is deep and broad and recognition as one of the leading sustainability-driven companies, we remained in Dow Jones' Sustainability North American Index for the 13th year in a row, and we're included in its World Index for the eighth time. You'll be hearing more about our unwavering comment to ESG throughout the year, and I'm confident that you will like what you hear. As I turn the call over to Claire, who will share more about our financial performance, I want to emphasize that we made tremendous progress in 2022, and we have great confidence in our future. Our entire team is preparing to take another significant step forward in 2023. We remain steadfastly focused on generating profitability, and we look to extend our strong track record of delivering on our earnings per share targets. Our 2023 non-GAAP diluted earnings per share outlook is almost $2 per share at the midpoint. This is more than a 20% increase year-over-year. We forecast accelerating growth in both 2023 cloud and total ARR, and we remain on track to meet our goal of $1 billion plus of cloud ARR in 2025. We firmly believe our strategic transformation is right for Teradata and the proof is in our results. Our technology is differentiated in the market, our people remain dedicated to customer success, and we will continue our strong sales execution and good cost discipline. We firmly stand in our commitment to profitable growth and delivering durable free cash flow. Let's now turn the call over to Claire.

Thank you, Steve, and good morning, everyone. I share Steve's enthusiasm on our strong finish to '22. Teradata delivered on all metrics for both the fourth quarter and the full year. These results demonstrate great progress and momentum in delivering on our strategy we outlined in our 2021 Investor Day. Some quarterly and annual highlights include: Public cloud ARR grew 81% year-over-year in constant currency and 77% as reported, showing our ability to drive cloud ARR growth at scale and on track to achieve our fiscal 2025 target of over $1 billion. Total ARR of $1.482 billion, 2% growth year-over-year in constant currency and a 1% decline as reported despite a 4-point negative impact from ceasing our Russian operations. Fourth quarter recurring revenue of $357 million, which is a 3% growth year-over-year in constant currency and a 2% decline as reported. For the year, we achieved $1.419 billion of recurring revenue, a return to annual ARR and revenue growth after excluding the impact of exiting Russia and currency. Fourth quarter non-GAAP diluted earnings per share of $0.35, which is $0.03 above the high end of our outlook range, full year non-GAAP diluted earnings per share was $1.64, which is $0.02 above the high end of our outlook range. Fourth quarter free cash flow of $120 million, resulting in a full year free cash flow of $403 million. I am proud of the entire team's performance in the current environment, which enables Teradata to remain on track with achieving our cloud-first profitable growth strategy. Let me now share some more details on our financial results, starting with revenue. Fourth quarter recurring revenue was $357 million. The 3% constant currency growth was driven by strong execution by our go-to-market team, resulting in strong cloud revenue growth year-over-year. Recurring revenue as a percentage of total revenue was 79%, which is up over 2 percentage points from the same period last year. In the quarter, there was a tailwind from net positive upfront recurring revenue of approximately $7 million. This was offset by headwinds related to exiting Russia and currency. Our earnings presentation provides the impact to ARR and revenue in the fourth quarter and full year, demonstrating the underlying growth of the business. Fourth quarter total revenue was $452 million, flat year-over-year in constant currency and a 5% decline as reported. The year-over-year decline is primarily due to exiting Russia and declines in the consulting business, given our strategic pivot to develop a robust partner ecosystem. Moving to profitability. The fourth quarter was another period of healthy profit generation. We reported $269 million in gross profit and a fourth quarter gross margin of approximately 60%. The primary driver of a healthy gross profit dollar generation continues to be the higher mix of recurring revenue. For the year, we reported $1.1 billion of gross profit for a gross margin of 61.6%. This is in line with the approximate 200 basis point decline year-over-year we provided in our outlook at the start of 2022, primarily driven by an increasing mix of cloud revenue as our cloud business continues to scale. Fourth quarter's operating profit was $62 million, or an operating margin of 13.7%. We continue to maintain cost discipline, while prioritizing positive return-generating investments that are focused on our future growth. Total operating expenses were flat sequentially and down slightly year-over-year. Fourth quarter non-GAAP diluted earnings per share was $0.35, which is above the high end of our outlook range by $0.03. We saw a slight benefit from upfront recurring revenues and currency, partially offset by higher taxes. Turning to free cash flow and capital allocation. We generated $403 million of free cash flow in 2022, in line with the outlook we gave at the start of the year of approximately $400 million. We continued to take advantage of our strong balance sheet and return to shareholders 96% of our 2022 free cash flow. For the full year, we repurchased approximately 9.4 million shares or approximately $387 million in total. Before I provide our annual financial outlook for 2023, I'd like to make some comments to set the context. We intend to leverage our momentum from 2022 to drive growth in both cloud and total ARR. In the cloud, we continue to be focused on direct and indirect activities that drive adoption of our VantageCloud platform, resulting in the workplace, migrations, expansions and new logos. We will enable total ARR growth with the best hybrid solution in the market. On total gross margin, we continue to expect a slight headwind as we grow cloud revenue. We anticipate a solid improvement in cloud gross margin year-over-year as we progress on achieving scale benefits. On operating margin, we will maintain our cost discipline and continue to make prioritized investments that we expect to result in an attractive return. Regarding free cash flow, I'd like to remind everyone that we had a onetime tax refund of $50 million, a nonrecurring benefit to free cash flow in the first quarter of 2022. The forecasted higher profit in 2023 will convert into durable free cash flow, but will be more than offset by higher cash tax payments and the restructuring payments we mentioned on our last quarter's earnings call. On capital allocation, we have been and remain committed to returning significant capital to shareholders, while continuing to invest in growth. Demonstrating this commitment, we are increasing our return of free cash flow target from at least 50% to at least 75%. We have confidence in the resilience and sustainability of our free cash flow and in our disciplined returns-based approach to capital allocation. We believe Teradata has a resilient business model given our strong enterprise customer relationships and the mission-critical workloads that run on our platform. We continue to keep a close eye on the macroeconomic environment and are starting to see increased scrutiny on enterprise spend. It is not yet pervasive, but it has influenced our thinking to be prudently conservative in our 2023 outlook. Our annual outlook for 2023 is as follows: Public cloud ARR is anticipated to grow year-over-year in the range of 53% to 57%. Total ARR is projected to grow year-over-year in the range of 6% to 8%. Total recurring revenue is expected to grow year-over-year in the range of 4% to 7%. Total revenue is anticipated to grow year-over-year in the range of 1% to 4%. Non-GAAP diluted earnings per share is projected to be in the range of $1.90 to $2.06. Free cash flow is expected to be in the range of $320 million to $360 million. Here are some modeling assumptions for 2023: a non-GAAP tax rate of approximately 25%, weighted average shares outstanding of 101.3 million and other expense of approximately $40 million. For the first quarter of 2023, we anticipate non-GAAP diluted earnings per share to be in the range of $0.60 to $0.64. We project the non-GAAP tax rate to be approximately 28% and the weighted average shares outstanding to be 102.1 million. Before we open the call for Q&A, I'd like to provide a brief overview on our progress towards the 2025 financial goals we provided at our September 2021 Investor Day. We remain on track to achieve over $1 billion of cloud ARR in 2025. The total ARR, recurring revenue and total revenue using the exit of fiscal 2022 as a starting point. We forecast future growth in line with the lower end of the compound annual growth rates that we provided at Investor Day. We've talked about the 2022 exogenous headwinds, which we believe are now behind us, and we are building on the strong momentum we've just demonstrated in the fourth quarter. We also remain on track with the margin profile we shared with you at Investor Day. Improving gross margins in the cloud to drive an operating margin profile in the low 20% range. We are introducing a range for free cash flow in 2025 of between $450 million to $500 million, which accounts for the exit of Russia and conservatism based on the current macro environment. I'd like to conclude by restating that we are excited about what we achieved in 2022 and look forward to driving future profitable growth and a healthy return to shareholders. Thank you very much for your time today. Operator, can we please open the call for questions?

[Operator Instructions] Our first question today comes from Tyler Radke from Citi.

Claire, on the commentary on the macro environment, I'm wondering if you could expand on that a little bit. Obviously, it was a really strong Q4. As you pointed out, ARR and cloud ARR were in line to ahead of your guidance. Where are you seeing the elevated decision-making taking place? Were there deals that maybe slipped out of Q4? And just how are you incorporating that into your outlook for 2023?

Tyler, thank you for the question. So as we all know, 2022 and also 2023 is pretty volatile from a macroeconomic environment. We are not seeing any significant changes to customer behavior. We are seeing a little bit of scrutiny, but as I mentioned in my prepared remarks, that's not pervasive. So we were very pleased with the team's execution of our Q4 and 2020. We had a strong pipeline, as we mentioned at our last earnings, and the team delivered extremely well on that strong pipeline. So we are excited about the momentum that we have in 2023 and going into the new year, but we also want to make sure that given the volatility that we are conservative, and we have factored that into 2023. As a way, we will monitor closely. We've done that throughout 2022, and we will continue to update you and the team and update our models with the latest information.

I'd just add to that, Tyler. We're a player in the data and analytics marketplace. And I think if you look through all of the industry reports, you still see that there is robust demand for data and analytics solutions in the marketplace. And that's certainly something that we're seeing from our customers. So they want to use data to help them respond to these turbulent macroeconomic times. It's really interesting seeing the rise in interest of artificial intelligence. We like our customers believe that artificial intelligence without great data is just artificial. And so being the provider of the best possible quality data inside our customers really sets us apart from really providing these engines of capability to our customer set. We're seeing a lot of uptick in terms of the usage of the analytics capability that are built into the Teradata engine, that enable that complex AI and ML model of activities for example. So from -- even though everybody is experiencing these macroeconomic times, I think from an industry segment perspective, we're in a fantastic marketplace, and we're seeing results that reflect that fantastic marketplace opportunity.

And as a follow-up, Claire, just on the long-term update for free cash flow. Obviously, it's come in a little bit lower relative to your initial long-term guidance, which understandable given Russia and currency. But I'm wondering if you could unpack that a little bit further. What are you kind of assuming for gross margins? And then any change on your long-term tax assumptions? I think tax rates for next year appear to be a bit higher than some of the modeling assumptions from the Analyst Day. So if you could just kind of unpack all the puts and takes driving that downward revision in the free cash flow?

Yes, absolutely, Tyler. So as you said, the biggest impact is because of the exertion of headwinds that we saw in 2022, so being Russia and currency, as you highlighted. So -- that's why we've kind of changed our financial goals looking from the end of 2022 out to 2025. On free cash flow, specifically and how much of that is margin. We are actually keeping our operating margin rate goals aligned to what we laid out in Investor Day, which is in the low 20% range. So that, obviously, our public cloud ARR numbers are the key ones that we kept in line with our Investor Day in 2021. The free cash flow came down mainly due to those exogenous headwinds and partly due to a higher tax rate as we're paying higher cash taxes as we look forward. And obviously, we're paying more taxes on the higher income that we're generating. The one thing that we did get the benefit from, as I mentioned in my prepared remarks in 2022 with that tax refund in Q1 of 2022. So obviously, that's a nonrecurring onetime benefit that comes out for 2023 and moving forward.

Our next question today comes from Erik Woodring from Morgan Stanley.

Steve, I wanted to just build on something that you just said. Generative AI today, I feel like it's all the rage. And so I just wanted to kind of double click on your comment about how these types of workloads are impacting either your cloud ARR growth or generally the interest in the Teradata Vantage platform? Would just love to know if there has been any change in the last, let's call it, month to 3 months if this has been around for a while, and this is just status quo for you guys? I would love if you could just unpackage your comments, maybe a little bit more double click there? And then I have a follow-up.

Yes. Thanks, Erik. Yes, one of the reasons that we launched and branded our analytics capabilities at the end of Q3 in terms of ClearScape Analytics was really to emphasize that the Teradata platform, it's more just your grandmother's enterprise data warehouse. We're a data warehouse. We're a data lake. We're an analytics engine for our customers. And the model ops capabilities, the data ops capabilities, the fact that we can train tremendous numbers of models for retailers, for banks, for use cases like risk and fraud management is really powering AI models inside our customers today. So we're making that really real in terms of business outcomes for our customers. And not only that, they know that they are basing those models on real and high-quality data that's inside Teradata because it's not an extracted copy that may have been modified, it's utilizing the data that's absolutely core to the mission credit core activities of that customer. So if it's a near line, that's looking at optimizing flight operations for sustainability using those advanced analytics and AI models or ML models. If it's a bank, looking at how to reduce its risk profile, if it's a retailer looking at next best action for a customer, we see all of those really driving use cases and utilizing Teradata and say the customer to maximize business value. Hopefully, that answers the question, Erik?

No, that's very helpful, Stephen. And maybe if I can just follow up with another one is, you made the comment earlier in the call about 20% more new logos in calendar '21 -- excuse me, calendar '22 than in calendar '21. Maybe if you just take a step back and think high level, can you maybe help us better understand the profile of this new cohort of customers anything look different? What looks similar? Again, maybe just providing some more detail on those new logos that you were able to bring in the door over the last 365 days?

Yes, sure. I'll get a step back as well and just reflect from the last 2.5 years that we've had as a journey to transfer into a cloud-first company. In those 2 -- short 2.5 years, we have grown a cloud business of over $350 million, and our outlook for 2023 is to take that well over $500 million of Cloud ARR. The new logo engine and activity that we started as we executed that transformation journey is still growing in terms of its execution and capability. It's expected by us that those new logos will be much smaller in size when we compare it to some of the migration activities that we're doing, but we expect those new logos to start small and grow rapidly over time as we take all of the business insight that we have from looking and working with the biggest companies in the world with the most complex use cases and making those kind of solutions available to customers that are just starting out with us in the cloud. So the new logo motion for us is a key part of how we see our future buildings, but it's a small part that we see going into the future.

Our next question comes from Derrick Wood from Cowen & Co.

It's Andrew, on for Derrick. Congrats on the quarter. Steve, on the on-prem ARR business was strong, that would, I think, imply a strong renewals quarter. Can you talk about how those renewals tracked versus your expectations? How is visibility on this business change over the last few months? And could you ballpark size for us how large your renewal base is this year versus '22?

Yes, I'll let Claire comment maybe on sum of the numbers. I'll just give you a little bit around the management of our renewals business. From a renewals perspective, the team landed a great quarter from a renewals and expansion of our on-prem business. As we said and as Claire said in her prepared remarks, our on-prem ARR stayed very steady, even though we're taking some of that on-prem cloud ARR and migrating into the cloud and turning them into cloud customers. And then a market, if you look at the industry reports, they say that the on-prem marketplace is flat to low single-digit growth. So we were really pleased to see a steady renewal space, fantastic execution by the team in terms of our renewals pipeline to get to the results that we saw for Q4 and for 2022 overall. No unanticipated activities in terms of bringing opportunities forward or stepping opportunities out of the quarter. I think the renewals engine that we have executing inside Teradata is really generating reliable, robust, consistent results.

Yes. The only thing I would just highlight on the numbers is the fact that clearly, obviously, strong cloud ARR growth, but the fact that if you adjust for Russia and currency, we have a really strong total ARR growth as well, that's really positive. So -- and in our on-prem, we continue to see expansion. As Steve talked about, we continue to see good renewals, as you mentioned. And so we're very pleased with that momentum as we come out of Q4. The way the team executed throughout 2022, given those headwinds that we saw, and we're continuing to see that as we kick off 2023.

Yes, that's great. And Claire, on the cloud ARR guide for this year implies about 30% net new ARR for 61% this year. Maybe just walk us through your assumptions in there? You made the pervasive scrutiny -- or sorry, the enterprise scrutiny comment, but not yet pervasive. What are you assuming, it does the same or gets worse? And any kind of cloud migration activity assumptions as well would be helpful?

Yes, sure. So very similar to 2022, we're anticipating the majority of our cloud ARR growth in 2023 to come from migration and expansions. We're still seeing a strong expansion rate -- net expansion rate in the cloud, and that is anticipated to continue as we saw in 2022. And as you can see, strong renewals on-prem, so continued big opportunities from a migration standpoint. As Steve mentioned earlier to Erik's question about new logos. New logos is -- will become a slightly more significant part of 2023 for us as we continue to land and expand, but it's still the smallest portion of our expected growth. And we've been pretty conservative there knowing that the macroeconomic environment is pretty volatile right now. So most of it coming from migration and expansion, some new logos. And with our new VantageCloud Lake launch that happened in 2022, we see that, that as a big opportunity to help land those smaller new logos, whether it's departmental or experimental-type workloads, a good opportunity for there as we move through 2023. I did mention a little bit of additional scrutiny. As I mentioned, it's not pervasive. No significant changes to customer behavior, but we just thought that was important to take into consideration and derisk our 2023 outlook.

Our next question today comes from Chad Bennett from Craig-Hallum.