Teradata Corporation (TDC) Earnings Call Transcript & Summary

Getting started. All right. Thank you, everybody, for coming. I'm Derrick Wood, senior analyst covering enterprise software at TD Cowen. And today, we've got Teradata. Claire Bramley, CFO. Thanks for coming, Claire.

Thank you for inviting me. It's a pleasure to be here.

Yes. So what's -- let's talk about, I guess, I mean, there's two major things that everyone wants to talk about macro and AI. And cloud is going to be an important thing for you as well. But let's talk about what you guys have seen around the macro the last couple of quarters and how you're thinking about the year?

Yes, absolutely. So I think given that a lot of our customers, large enterprise customers, our strategy is the Global 10,000. A lot of the workloads that we have with our global enterprise customers are mission-critical. So the advantage that we have on that with regards to the macro is they are not workloads that they can afford or are willing to reduce. So that's giving us like effectively a moat around our business right now. So we are seeing fairly limited impact to the macro. One of the things we're watching very closely, as you would imagine, is our pipeline, sales coverage as we look out to the full year. We had a very strong Q1, strong growth, both in total ARR and in the cloud. So that was a good start to the year given the macro environment, and we have really good, strong coverage of our outlook for the full year as well. So one of the things that I've talked about previously is maybe a little bit of additional scrutiny on deals that you tend to see maybe more people in the approval line and things like that. So we have started to see a little bit of that over the last couple of quarters. But I think the good news is we're not actually seeing a significant impact from the macro right now. However, I tend to take a conservative approach as I do my guidance. So making sure that we can absorb any potential changes that may happen in the rest of the year. So we have -- we're very happy with the position right now. And I think our strong start to the year is good proof point on that considering the environment. I think the other thing as well, in addition to the mission-critical workloads is the fact that a very small amount of our business is consumption. Because of the mission-critical workloads, whether it's on-premise or in the cloud, a lot of our customers want to have fixed pricing so that they don't get surprises in terms of costs and things like that. And that is helping us also minimize that impact in terms of the cost optimization, and some of our peers and competitors are seeing a kind of a big impact from that. And we are seeing less of an impact because we have less consumption pricing built into our -- into the mission-critical workloads with our customers.

So even in -- with cloud, it's a lot of fixed pricing and -- I mean, that's working very well for you now because people overbuy and now there's a lot of scrutiny on some other platforms out there, and you guys haven't had that problem.

Yes, exactly. So yes, even in the cloud, we do offer full consumption pricing, so customers can take that offer. But as I said, they tend to choose the hybrid model. They want to have a fixed cost, so they know that their mission-critical workloads and queries and data analytics, and they know how much that's going to cost. And then they use the consumption pricing for additional kind of burst queries or where they would like to have more capacity. So for us, consumption pricing becomes more of an upside because it means that they're using more than the fixed cost, which is what we kind of built into our overall guidance and ARR. So yes, so even in the cloud, we have that element of protection as well, which is great.

So that seems like an advantage. The other advantage is versus maybe the pure-play cloud vendors out there. So you offer hybrid. And there's still a lot of companies who want to keep their data and their data warehouse deployments on-prem. Is -- you think that will be a long-term strategy for customers to want to have a hybrid approach?

Yes, absolutely. I mean, of all our customers that are in the cloud, 60% of them are hybrid. And I see that being a long-term strategy for our customers. They may be moving more workloads to the cloud, so expanding workloads in the cloud, but there are some core queries, core workloads, which we anticipate staying on-premise. And I think what's interesting as well as we actually saw in Q1 expansions in our on-premise business as well. So it's not just a case of keeping data workloads that are there today. Some customers are choosing to actually increase their on-premise workloads as well. So we do believe that being a true hybrid player and having a true hybrid offering gives our customers the best choice and is the most efficient way to do it. You don't need to migrate all of your queries to the cloud, but it does -- there are advantages for doing that, especially if you want to have that kind of real-time scalability and capacity adjustments for certain workloads.

Yes, I was going to ask about that. I mean, what is the incentive to move to the cloud? I mean, I guess, consumption gets easier. You can procure infrastructure a lot quicker, add new use cases, things like that. I mean, is there a lower TCO, too, in general?

Yes. So what we are focused on is being able to bring -- so because we came from and were born on-premise, we had the highest performance with the lowest total cost of ownership and the lowest cost per query. So what we've been doing in the last 3 years is significantly increasing the investments in our cloud business. So the R&D shift that we've made to now more than 80% of our R&D is focused on the cloud. We've been able to take that performance and that total cost per query benefits that we have compared to our competitors into the cloud as well. So that's something that I think actually a lot of experience have -- a lot of companies that have maybe potentially gone with other companies are seeing higher costs in the cloud, whereas we're able to still be able to offer the best leading industry total cost of ownership in the cloud, just because -- and at scale, we come into our value when you're doing large amounts of data, complex queries at scale. That's where we can really truly bring value, which is why our strategy is very focused on the Global 10,000. And we still believe that we have that best total cost of ownership and the best cost per query for complex queries at scale.

I get questions about the type of workloads customers are putting in the cloud for you guys and that could be more storage-oriented, like disaster recovery and backup or it could be analytics-oriented, around analytical processes and things like that. I mean, is there a stepping stone that typically happens? Or just walk us through the type of workloads that you see moving to cloud.

Yes. I mean, absolutely. So we've got a very, very broad range of different workloads that are currently in the cloud with us ranging from how do you run the day-to-day operations in health care? How do you run the day-to-day operations and flight operations for an airline? We have examples where real -- and this is where it kind of gen AI comes in like retailers are using real-time insightful data to be able to provide suggestions real time to customers when they're in their stores and things like that. So it does range. We do disaster recovery as well, and sometimes that may be one of the first types of workloads that transfers. But we're actually seeing a very broad range of different types of workloads being used in the cloud very successfully today.

Okay. So yes, that's interesting. A lot of operational workloads that -- good use cases there. I mean, you mentioned generative AI. What does -- what -- how is Teradata positioned to kind of embrace that secular theme and monetize them?

Yes. I mean, it's obviously the hot topic at the moment in terms of generative AI. And I think -- for us as a company, Teradata see this as an opportunity. There's a potential increase to our overall total addressable market if this continues to increase and continues to increase workloads and data analytics and queries. I think where -- Teradata are well-positioned when it comes to generative AI. The way that our software works is very much about accessing the data where it is. So using our patented push down query capabilities to use the data wherever it is. If -- for generative AI, the quality of the output is very much about the quality of the inputs. If you've got access to all of the data across the company, and you can use our push down queries to access that data, the chances of the quality of the output that comes out through generative AI, the quality will be better and higher. So we think Teradata is well positioned. You don't have to move the data to be able to use it. It's less costly to be able to do that. So we believe that Teradata are very well positioned. And we have within our ClearScape Analytics platform, which is embedded into our cloud software you -- AI and ML is already built into that. So you can use already embedded -- the analytics capabilities embedded with our software that then is accessing your data across the whole organization. So for us, as people prioritize where they want their use cases to be in generative AI, we think that we're very well-positioned to be able to work with our customers to support them, and we have a couple of use cases already that have already in play. I mentioned retail is one of them. We have a retailer who are real-time giving like proposals and recommendations to shoppers. Literally, it is like a shopping cart that talks to the person. And they -- as they go around the store to -- based on all of the data that has been provided to that retailer. And that's a classic example of generative AI because it's giving a suggestion, it's giving new information based on all of the data inputs that it's already got. So...

Cool. And I mean, open AI and other large language models, are you guys going to build APIs so customers can train models with the data that's sitting inside of Teradata?

Yes. I mean, like I said, our value is being able to give access to all of the data that's around so that then they can use all of that data to do additional analytics and queries. And that can be generative AI or open AI. It can be normal AI, ML, kind of machine learning, when it comes to predictive forecasting analysis. I mean, in the supply chain industry, that being able to -- be able to have that kind of predictive real-time forecast updates and predictions when it comes to supply chain management and things like that are really critical. So that's -- it's at the core of everything that we have been doing for years on-prem. We now have a cloud native product that has the same level of performance at a good competitive total cost of ownership. And this AI capability is what we do. It's embedded into the software. So we're really excited because more data, more queries, more workloads, more use cases for our software moving forward.

Okay. You guys had a big win in Q1, and that's a nice start to the year. Can you share a little bit more information on that deal?

Yes. We had one of our biggest deals that we have done, significant 9-figure deal that has a huge TCV, very happy with that. And I think these kind of deals are not -- they don't happen overnight. The teams have invested, worked together over a number of months to be able to come up with that. But I think for me, it's that increasing signal that large enterprises are committing to Teradata in the long term are making those big commitments. And what I'm happy about as a CFO is that we are getting those big deals, but we also have a good range of different sized deals. So we're not just relying on the 1 or 2 big deals to get to our guidance. We have a large number of different sized deals that make up the overall mix. And I think what also was interesting as well is it was an expansion opportunity. So it wasn't just a migration. It was actually an expansion opportunity, which is really important because we're committed to growing total ARR, not just cloud ARR. And so as we see new workloads or those expansions happening both in the cloud and on-premise, that's our path to be able to really accelerate our total ARR growth.

Can you give us a sense of how big of an expansion it was?

I mean, -- so if you look at our overall quarter in Q1, we saw strong growth. We had $29 million of total cloud ARR and more than 50% of that was coming from expansions. And that was kind of one of the first times where we saw more growth dollars, sequential growth dollars coming from expansions than we did migrations. There's always going to be a mix depending on the deals that we do in the quarter, so there will all be a mix. But the fact that more than 50% in Q1 was coming from expansions, I think is...

Of that new cloud ARR?

Yes, exactly. So that was good. We had a strong quarter, and the majority of that came from expansions.

And in terms of your guidance this year on cloud ARR, you've given some net revenue retention rate numbers. I mean, what's kind of the base assumption for the year?

Yes. So we are -- mid-50% is -- so 55% is the midpoint of our overall cloud ARR, so above-market growth. We have good line of sight for that. Very happy with the coverage and pipeline that we've got to be able to meet that. We saw an increase actually in our net expansion rate in Q1. So we increased -- we've been running on an average at 117%, and that increased to 119% in Q1. So that was, again, coming back to the fact that we're seeing an uptick in expansions as opposed to just migration. So one of the questions that we got asked with such a strong Q1, we didn't raise our full year guide. And I'll be honest, just derisking Q4. Q4 is always a huge quarter for Teradata when it comes to growth. So just making sure that we've got some coverage knowing that we are in a fairly volatile and uncertain macro environment. So I think it was important to be able to reaffirm what is already a very strong cloud and total ARR outlook for the full year and be able to just continue to build in some conservatism into that number as we continue to execute. And I think that's the thing. I mean, Teradata, we have a long history. We've been very successful on-premise. But I think that consistent execution is what the leadership team are really focused on, doing what we said we'll do, no surprises. So -- as you would expect, we're kind of making sure that we build in enough conservatism to absorb currency. Currency actually was a headwind for us. So the fact that we kept our guide, you could say it was an operational raise if you wanted to. But I feel that it's our job to be able to absorb those kind of things to be able to absorb deal timing impacts and things like that and a certain amount of macro. So I'm happy that we're able to do that.

But Q4s are still quarters that you see a lot of renewals, a lot of deal signings and all that. So it still should be a strong seasonal quarter, but...

No, it will be. I mean, Q4 is still going to be our biggest quarter when it comes to cloud and total ARR growth. It always has been at Teradata. It tends to be at most software companies. That's when the deals get done to your point. So yes, Q4 is still going to be seasonally our biggest quarter. But if we can, I would say de-risk that, the size of Q4 and bring some of those -- that earlier in the year, I think that's a good thing for us, especially in the current macroeconomic environment.

Do you think that large deal in cloud in Q1 is a referenceable customer that you could start to see other customers to take that kind of -- I mean, was that unusual? Or are there other like 9-figure kind of deals that you could start to see more of down the road?

No, I definitely think we will start to see more and more. Like I said, those kind of deals do take a long time to kind of ultimately come to fruition and roll out. So I do think that will continue. I don't want to be over reliant on those kind of what I call mega deals. So I think it's important to have a good range of size of pipeline because we're lumpy as it is when it comes to deal signings. If you come overly reliant on those mega deals, that will also be a challenge from a forecasting predictability standpoint. So -- but do I think there will be more over the course of the next 6, 12, 18 months? Absolutely. And from a referenceable standpoint, what we find very helpful, and I believe we will do the same with this customer as well, is peer reviews and peer references like sitting down, talking about how did you make the decision, how is the process going, what experiences you've had. And we're seeing more and more of that. And I think that absolutely helps in terms of reputation, helps in terms of showing that you're not going to get unexpected surprises. As people have been doing some big migrations, I think with some of our competitors, they get surprises in terms of cost. They've had surprises in terms of how long it takes to migrate. And we're having a lot of success in terms of speed of migration, being able to control and predict the cost accurately of those migrations and then be able to then expand as we're talking about with regards to our net expansion rate once they get to the cloud. I think one of the other things that's been really interesting as a trend as well and when we laid out our original long-range plan back in 2021, which we're still on track to deliver the $1 billion of cloud by 2025, was a goal that we set out back in our Investor Day in 2021, and we're still well on track to be able to meet or beat that number, which is great. But one of the things that we've seen in the last year or so is not just the strength in terms of the expansion rate once the customer is on the cloud, but also the additional workloads at the point of migration. So as -- we tended to -- historically, we would be modeling like $1 for $1 at the point of migration and then the expansion to come later. Interestingly, we have seen more add-on workloads, more additional -- more expansion at the point of migration as well, which is definitely a positive sign.

Yes. I don't know if it's coincidental, but one of your competitors, Snowflake has had some struggles on growth and optimization kind of at the same time that you're seeing some increasing strength in cloud. Do you think that, that -- I mean, there is a kind of a view that maybe there was more workload competition by them a couple of years ago, and maybe that you guys have kind of really matured your cloud efforts. That dynamic has changed a bit. I mean,...

Yes. I do -- I mean, it's been a journey for Teradata over the last 3 years. We were not even talking about being cloud 3 years ago until Steve McMillan, our CEO, came on Board in June of 2020. So that was the first time we even started focusing on cloud. As I mentioned earlier, we now invest more than 80% of our R&D into our cloud business and the evolution of that cloud. And that investment and that change that we've made has culminated in the launch of our cloud-native product. And I think people were a little bit -- we were known for on-prem, but we weren't known for being a cloud. Our first cloud version was not a cloud -- software version was not a cloud-native version. So a little bit of skeptics there. But now the fact that we do have a cloud-native offering, the firm that we have referenceable customers where the migrations have gone well. I think we have been going through a journey and a transformational journey. And we've been able to bring all of the strong capabilities from our software that we had on-premise, and customers can see that it's working in the cloud. And I think that was just a little bit of -- well, it took us time to come out with a cloud-native product. Once we started investing, it came to fruition, which is great. But I think that journey takes time. And Snowflake are what, 10 years ahead of us in terms of having a cloud-native product and being out there talking to customers about what they can do. So I think what we've managed to achieve in the last 3 years is actually fantastic. And the fact that we are being able to compete successfully in the market. And I do believe it's very -- it is linked in the sense of people have confidence in what we can do in the cloud. They see -- I think the other thing as well, there's a slight move. That everything 5 years ago or 3 years ago, everyone thought everything was going to the cloud. I think a lot of enterprises realize now that it's actually going to be hybrid. And we are the true hybrid, we have the true hybrid offering. We are the true hybrid player. And I think that works in our favor as well as, like I mentioned in terms of consumption, Snowflake is completely consumption-based, they move around a lot. I think they have to update their guidance based on the May consumption data they were seeing. And the way that we work with our customers in terms of being able to have forecasted predictable spend. For them, it's forecast predicts will spend, no surprises. For us, that means to forecast predictable ARR and financials. So it works for both of us.

Okay. The other, I think, focus for investors is it's great you're getting lots of unlock out of your installed base. What about new customers and focusing on that and how to dial that up?

Yes, absolutely. So one of the things that we've done, many changes we've made in the last 3 years, as we talked about the focus on cloud, the focus on our customers as well. So we invested in customer success so that we are at the table driving that value with our customers proactively rather than just being complacent and just turning up at renewal time. So there's some investments we've made there, which I think are really helping with our expansion efforts. And to your point, new logos. We did not focus -- prior to 3 years ago, the company was not focused on new logos. We now are. We do have a new logo team, and we've invested in that engine muscle, setting that team up to be successful. It's still a small portion right now, but I think just having that investment, having that focus and the opportunity means that we can start small, we can land and then expand over time. The current macro is probably not the best macro for a new logo sales team, let's be honest. There is kind of -- it's a little bit challenging. So -- but again, we've been very conservative in our assumptions for this year and even for our 3-year plan of how much we need to come from new logos to be able to hit those numbers. So for me, anything that we can do in the new logo area is going to bring value for us over time, but we're not overly reliant on that to be able to hit our long-range goals, which is I think is the right position to be in right now.

What kind of color have you given on new logo? I don't know if -- I don't think we've gotten a count really, but we've gotten some growth numbers or double digit?

Yes, yes. We tend to -- we haven't given sort of like customer numbers or size of numbers. But to your point, we're continuously talking about double digits, the fact that we've gone from 0 to anything. Obviously, the growth in our new logos is significant, which is great to see. And interestingly, we are seeing new logos once -- now that we've invested in the new logo engine, we see new logos, both in the cloud but also on-prem as well, which is great because opportunity for us on-prem but also future migration opportunities, future expansion opportunities as well. So it's interesting that not all of the new logos necessarily come from the cloud or -- we're seeing them consistently across on-prem and cloud. And for us, that's all opportunity for either future expansion or migration. So...

Any questions?

Can you go back to Snowflake for a second? It seems fair to I think -- you remember you said that there was a time when you were losing some business to them. Can you talk at all to how that trend has been changing?

Yes, absolutely. One of my favorite topics. So no, I mean, 3 years ago, we didn't have a cloud product. So if customers have made a decision they wanted to go to cloud, they would not even be talking to Teradata. They wouldn't be looking at us until the last 3 years. So there was -- we said we had some customers who made the decision to go to the cloud and so therefore, went to a competitive 3 years ago. We've also had customers who want to experiment. So what -- like doing a little bit with Teradata, doing a little bit with Snowflake, experimentation on what works, what doesn't work. I think what we're consistently seeing, and we call them boomerangs, is what we do well at Teradata is large-scale complex migrations. We do it well. We do it efficiently, we do it quickly and with no issues. What we're hearing both from some customers, but also from SI. So some of our partners that some of the migrations are either taking too long, costing too much money. And actually, then we have these boomerang customers that come back and go, okay, can you help us, how -- can you -- what do you have to offer? So that's quite exciting for us as well to be able to see some customers coming back or reconsidering their choices. They may have made a decision on certain workloads. It's not gone as well as they said or it's not as performing or it's more expensive. And they're like, okay, actually, let's see, again, let's have another look at this. And now that we have a cloud-native product, now that we have much better reputation in the cloud, they kind of like come back to us and say, what can you do? And then we have good referenceable customers. They can talk to peers that have been through it, which is changing the dynamic, I think, in the market compared to where we were several years ago. So I think that's great. And I think it continues to be an opportunity. The more customers you get, the more that you can reference and have peer reviews, the more use cases we can bring. I mean, we can bring -- we're very much focused on industry verticals, whether it's financial services, whether it's health care, airlines. We can say this is what we've done with one of your peers, and this is the value that it's brought, and this is how much it costs and how quickly it could be done. And we have people -- we have our customers that have gone through major migrations and because it is mission-critical workloads, they can't afford any downtime. You kind of got to do it in a weekend. You've got to do it -- if you're going to transfer onto the cloud, you've got to do it very quickly and very effectively. And we've even had customers come back and say, we didn't even know that we've done the migration. And that's what you want. You want those kind of customers talking to other customers saying, we've had a great experience. It's gone well. We haven't had surprises. And also now, yes, the channel partners, those SIs are also saying the same. And that's whether it's Deloitte, Accenture, and they -- we're seeing that they're bringing us to the table more because we have those referenceable customers, because we've had that success. So I think it's been -- it's a transformation. It's a journey. But I think the fact that we are having a strong year and a strong quarter and a strong year in a time where there's a lot of uncertainty out there and others are not doing quite so well I think is testament to the foundations that we've built and can continue to expand on.

That's a pretty good conclusive. We've 30 seconds left to go, I think we'll just leave it right there.

Okay. Well, thank you very much. It was a pleasure to be here, Derrick. Thank you.