Teradata Corporation (TDC) Earnings Call Transcript & Summary

Hi. Good morning, everyone. Welcome to Day 2 of BofA's Global Technology Conference. I'm Wamsi Mohan. I cover IT hardware and also software companies. So welcome to our session here with Teradata. We're welcome to -- we're delighted to welcome Claire Bramley, CFO of Teradata. Claire has been in this role since 2021, so some pretty tough years as demand backdrop for -- as a CFO. So Claire, welcome. Thank you for joining us here today.

Thank you, Wamsi. Pleasure to be here.

So maybe to kick it off. You reported a very good Q1, and there were some really, I think, standout things within Q1, which a lot for you to unpack a little. You announced one of the largest AWS marketplace in AWS' history, which is quite amazing. What drove this deal? And what caused customers to choose -- that customer to choose Teradata?

Yes. So as you said, we were very happy with Q1, Q1 seasonally for Teradata, is not necessarily always our biggest quarter when it comes to growth, both from a cloud perspective and total ARR. So to see really strong cloud ARR growth, we were 89% year-over-year in Q1 and -- but also total ARR was great to see. And as you said, we did see some different dynamics in Q1 that we've seen in the last couple of years. Some of them were linked to the fact that we had this big deal. It was an 8-figure ARR deal, which we've got 9-figures TCV deal in the health care space. And the reason that we were really excited about that deal was it was a kind of a long-term commitment. It was in the pipeline for a while and just kind of showing existing customers committing to us not just in terms of migrations, but what was exciting about that deal was that it was an expansion deal with existing customers. So showing that it's not just kind of moving from on-premise to the cloud but our customers also making very large commitments with us with regards to expansion. That was very exciting. And the fact that Q1, for example, we had our growth, more than 50% of our growth in Q1 did come from expansions, I mean, obviously helped by that large deal but also other expansions as well. And so that's one of the first times we've seen more than 50% of our growth coming from expansions. In the past, we've been seeing more come from migrations of existing customers. So that was very exciting. And as you said, it was one of the largest deals to be done on Amazon Marketplace, and we did that with a partner as well. So I think all of those are really good indications of the foundations we've been putting in place in the last 2 to 3 years. We've dramatically changed our strategy. We've heavily invested in relationships with partners rather than just direct. We're looking at really building those relationships with existing customers through investing in customer success. So all of these things that we've been working on and when you start to see some of those results coming through shows that we're seeing the results even in the current macroeconomic environment, which is still pretty volatile.

Would you say that -- how long was this deal in your pipeline? I mean, it's a tremendously large deal. But your cloud product is not that bold. So to make a decision to do something in the cloud, how long does it take this customer to sort of really evaluate and get there?

Yes. I mean, we have fairly long deal cycles, especially with -- when these such big deals. I mean, we can have a big range. A deal can take up to a year sometimes, but sometimes it can be done in a matter of -- in a 30-day sort of thing. So it does very much depend on where the customer is, the discussions that we've been having. But this one, it was a longer deal cycle for sure. And it was about getting the right mix between migrations, expansions, what are the workloads that they want to be focused on and really focusing on the value add with the customer. So I would say it was on the longer side of the deal cycle. It's a big investment, goes through lots of reviews and approvals, especially in the current environment, so yes. But again, the fact that they were willing to make that commitment in the current environment, I think, says a lot to their confidence in our cloud product and the opportunities that we have moving forward.

And when you think about the infrastructure of this existing customer had or they moving everything now to the cloud or is it part of their workload so they are moving to the cloud?

So it will be -- because this was expansion, mainly this deal, so it was a combination of migration and expansion. So they haven't necessarily moved everything but they've moved -- they've migrated some existing workloads that they want to have that kind of scalability, that flexibility, really get the benefit out of our ClearScape Analytics product which is embedded in our cloud software. So some workloads were moving but the rest was actually new workloads, new analytical capabilities and -- which is why it was an expansion deal. So they still have -- that customer specifically still has existing on-premise workloads with us, which potentially over time can either be migrated, or we do really truly believe that customers will keep a hybrid approach. So they will choose the workflows that potentially are stable but maybe a little bit less complex in terms of analytical capabilities needed. We'll remain on-premise even in the medium, longer term. And then those that you kind of need a little bit more, either the scalability, either the -- I would say, the more advanced complex analytics, which you can get from our cloud, ClearScape Analytics, they're the workloads that tend to be moving to the cloud. But it varies customer by customer. Some customers have a strategy that they want to move everything to the cloud, but a lot of the very large enterprise customers, which this was in the health care space, tend to, want to have a hybrid approach and they foresee that happening for several years to come.

Yes, yes. No, that's really a testament to how far you guys are coming, making progress on the cloud side. The other point I wanted to hit about the quarter was ARR growth. It was not just in public cloud but also in total ARR. And just kind of want to understand how do you view the sustainability of this. Because in the past, I think people have worried about the fact that although you had cloud ARR growth, your total ARR was not growing. And so now you're focused on expansions as well, so if you could just bring those things together.

Yes, absolutely. We see the possibility of expansions, both on-premise and in the cloud and we're seeing that across the board. So that clearly helped us in terms of total ARR growth. Yes, we were very excited to see that. We do see it as sustainable. We have a '23 outlook that does grow total ARR, which is very similar actually in terms of percentage-wise to what we saw in Q1. So although we are normally very kind of back-end loaded from a growth standpoint, it was nice to see our linearity improve a little bit this year and have more growth coming in the first half of the year than we saw, for example, last year. So yes, I would say in terms of total ARR growth and its sustainability, we do anticipate that in '23 and beyond, we are very confident with the dynamics that we're seeing with our customers that whether it's in the cloud or on-premise, that there's a lot of new opportunities. I mean, with all of the things that are coming out with regards to AI/ML, and we've got some big use cases already where we're taking advantage of that. We're very confident that it's not just a migration play that it is an expansion play and that we'll continue to see strong expansions both in the cloud but also on-prem. We're also continuing to see some on-prem expansions too, which I think says a lot again for that hybrid opportunity and that total ARR growth opportunity. I don't anticipate it just coming from cloud, although clearly, cloud is going to grow much faster than on-premise.

From your seat as CFO, I'd love to understand your perspective on AI, both sort of how you're leveraging AI within your own organization and what you've already looked at and what the opportunity there could be from a productivity standpoint. And then secondarily, like from a Teradata and product standpoint, how do you view AI?

Yes, I'm going to take the latter part of your question first and I'll come back to the functional view. We're already seeing some great uses, some great use cases. We talked about in earnings as a retailer out there using kind of generative AI and using Teradata to provide the data and analytics to then be able to inform customers of potential choices that they could make. So the example that we talked about in earnings and is a very interesting example is a retailer where you effectively have a shopping cart that talks to you and provides you suggestions. And it brings in huge amounts of data, so it can be, obviously, your historical data, where you're living, what the weather is, what's available in stock and they can use all of that data that comes together and then provide suggestions to the shopper as they're going around store with the shopping carts. So that's something that already is happening and companies are using Teradata for that type of analysis. And I think what's really interesting for us, and we see this whole focus on AI and generative AI as a kind of a TAM expander for us because ultimately, you need good data and good analytics for the output to be helpful, to really add value. So for generative AI to be able to be making really, I would say, intelligent, informed and helpful value-add suggestions and proposals, you need to have the right data and analytics platform to be able to inform that and drive that. So I feel that Teradata is really well positioned to be able to do that with our capabilities that we've already got embedded in our software. It's not like we need to develop the products, and we will always continue to develop the product, but that is already available today. And I'll be honest, I think there's a lot of capabilities within the product, which some of our customers may not necessarily be getting the full benefit from. And as AI becomes an area that they want to invest in, want to experiment in, they'll find that they can use the Teradata capabilities that already exist today to help them do that. So I think it's very exciting from a Teradata possibility standpoint, so I'm very excited about that. And I think, yes, we'll see more and more of these examples use cases of how companies are using the Teradata software to be able to do generative AI or just continue to expand the AI and ML capabilities.

Where within the tech stack is that? How do we think about the tech stack for that, for generative AI? Is it when you talk about leveraging all the data, I can understand sort of the architecturally, like you are kind of providing the foundation of all the data inputs, the historical data, the purchasing patterns or weather, all these things. So all that's part of Teradata but now you have a top layer of generative AI that is querying the database and then coming back and sort of synthesizing all those results?

Yes, exactly. I mean, we're not going to be coming up with our own -- necessarily our own generative AI language or solution. But I think the fact that we have to push down query capabilities at Teradata, where we can use any data where it is, makes a big difference. And that's why I think our customers can quickly get the benefit from that because they don't have to copy and paste the data to be able to use it, to be able to add it into that stack. They can just -- we can use the data where it is, bring it up, provide the analytical capabilities. And then they will probably choose to use what generative AI kind of language models that they want to use moving forward. So we're not going to try and be at every point in the game, but partnering with those -- with our customers and other partners to be able to just ensure though that the quality of the data and the access to all of the data available, we can provide that with our existing capabilities. So that's pretty exciting.

Yes. No, it is. And it's also interesting because you also have the back-end capability to then say, as these various SKUs that are being purchased by folks, the back-end capability go back and talk to the supply chain and say, yes, there is -- this product that needs to be replenished and this is moving faster than something else...

Exactly, yes. I mean, exactly, so not only being able to make sure that the recommendations are linked to the existing stock, what's in stock, but being able to say, well, you're seeing trends happening in terms of best buying in certain areas. So you need to then feed that back into supply chain to ensure that you have kind of this just-in-time availability of products. So there's so many different use cases and which is why we think that this is definitely an opportunity for us as more and more companies are focused on how can they use it, how can it bring value to them. And I think every company is, and you mentioned -- you asked what do I see as kind of functional opportunities. It's interesting. We've just been through a piece of work actually where we're trying to come up with what is our point of view, what are the different use cases. And I've got pages of ideas sort of thing of what we can do. I think what we will be doing and what every company out there doing though is truly, truly identifying those value-add cases. I mean, you can use generative AI or AI to -- on so many different areas. But I think what I would be planning to do is I want to invest in the areas that truly add value, whether it's efficiency, whether it's business insights in terms of predictive analytics, where can we really add huge amounts of value that makes it worthwhile investing. And the great thing is we can use our own product as well. So we're already -- I'm already using, from a finance standpoint, the [ VantageCloud ] software that we have. I use that to close all my books. I use that for my forecasting and analytics. So what I need to decide is how important is it to use the generative AI capabilities and the ClearScape Analytics capabilities? Where can I get that to benefit from? And I think predictive analytics and forecasting, I think, is going to be a really interesting one. So yes, at the moment, we have a long list of ideas and so we'll be working through those. But it's an exciting time, I have to say. And so being in the data and analytics market and being a CFO, and I have the advantage of also being responsible for IT as well as security, and there's so many use cases that we have come up with in those functional areas that I think are going to add a huge amount of value to us as a function but also then be able to use that to benefit Teradata and also use cases for our customers. I have a lot of peer-to-peer discussions with some of our customers. And it's exciting to hear what their plans are and for us to kind of show what we're doing with our product. And I'm doing more and more of that actually right now, which is really interesting to kind of say, well, this is how I use the Teradata Analytics capabilities. How are you using it within your function? And can we share and leverage best practice in terms of really pushing the boundaries and getting the maximum use out of it. And that's -- yes, that's something that we're going to do more and more, just really try to make sure people are getting the true value from the software.

No, that's great. Claire, your net expansion rates, and you touched on expansions, were very strong actually improved when you look versus fourth quarter. What is it that creating this change in sort of the better than maybe what people expected expansions?

Yes. So we -- so I think it just comes down to the fact that we are spending more and more time either preparing solutions for customers. So we're at the table. I think historically, unfortunately, Teradata, if you go back kind of 5 years-plus, historically, we weren't necessarily as proactive as we could have been or should have been in terms of working with our customers on the true value that you can get from the software even from an on-premise standpoint. There was a lot of I would say, uncapped value at times. So we've really tried to make an effort to be able to say, let's be at the table, let's bring ideas and solutions. And I was just using a few examples of things that I'm doing at the CFO level. But if you've got a whole customer success team, a whole go-to-market team and that are with our customers and showing them, these are the capabilities that we have. This is where you could get better use out of it. And here's also some more and more examples of where we've done this successfully with our -- with other customers in your industry or in your area. So we're really kind of focusing on that vertical expertise, which I think is really important, really focused on kind of customer success and just bringing solutions and ideas to the table. And I think that's just had a huge impact to many of our customers and is helping us show the value, helping -- make it easy for the customers to say, actually, yes, I would like to do that, show me how to do it and let's go, and they're willing to kind of make some investments to do that. So I think just more and more of that. And also the product has been developing. I mean, we've been investing heavily in R&D over the last 3 years in the cloud space specifically. For those that are familiar with the story, remember, we used to spend about 70% of our R&D on on-premise and 30% on cloud, and we've shifted that completely where we're spending slightly more than 80% now on cloud R&D. And I think we're seeing the benefits of that. We obviously got the new Cloud Lake product launch that was -- went into general availability at the beginning of this year on AWS. But in addition to that, we just keep adding and adding functionality into our software and showing customers what that is, how they can use it, how it brings value to their business, whether it's running their day-to-day operations, whether it's supply chain management, to your point, whether it's even disaster recovery, there's many -- so many different use cases and making our customers aware of that and showing them how they can easily adopt it, implement it and benefit from it is helping us clearly, which is why we're seeing such strong expansion rates. And we believe that they're sustainable moving forward, which is good.

And are you seeing this as very broad-based? It's not like a few very large kind of expansions that are driving it but it's more sort of a lot of customers that are in the cloud, you are seeing this much more broad-based?

Yes, absolutely. So we track, as you can imagine, we track all of the customers that are in the cloud. And we see, on average, really good, strong expansions across the board. So it's not just a case of 1 or 2 big customers that have big expansions that bring up our expansion numbers. We see it consistently in a consistent way across all of the customers that go to the cloud. And that's why we've pushed the migration to the cloud so hard. That's why Steve McMillan, our CEO, knew that this was a big growth -- total growth opportunity for us because you are restricted when you're in on-premise. You don't have that capacity -- extra capacity to be able to add workloads, add different types of analytics, add users, add data because you're constrained. And we knew that. We knew that this kind of releases that kind of constraint and means that we can do more and more with existing customers, and we're seeing that across the board very broadly, which is great.

Yes. No, that's clearly amazing. There's a lot of concern around the macro slowdown. What have you seen within sales cycles and just how much time people are evaluating products? And what's happened to your pipeline conversion rates?

Yes. So interestingly, we're not losing customers. So to your point, we track very closely every single deal through the entire pipeline. And the interesting thing is we're not losing deals. But some of the deal cycles can be elongated in some cases. And -- but we haven't seen any major impact so far from the macro. Definitely more scrutiny. I mean, definitely more scrutiny, more levels of approval, et cetera. But we picked up on that very early actually. And the sales team have got very good in the last year or so of being able to ensure that we truly understand what is the cycle that it needs to go through. Do we understand who are all of the people that need to approve this deal. And if it doesn't need CFO, CEO approval, kind of just double checking because quite often big cloud deals do these days. So we've become, I think, much more informed, much more proactive in terms of understanding that so that when we're doing our own forecasting, we can be a lot more predictable. But it's still lumpy. I mean, they're big deals. A deal can move from one week to the next, one month to the next very easily. Just need some -- an important signature to be on vacation and suddenly, it takes -- there's an extra week added sort of thing. But I mean, our deal cycles tend to be on the longer side. But interestingly from a macro standpoint, we're just seeing a little bit more scrutiny, additional approvals and things like that, but not a significant impact but we're watching it very closely. It's one of the reasons we had a very strong Q1. And kind of just having that additional conservatism on the macro was one of the reasons why we didn't raise our full year guide. We want -- we reaffirmed our full year guide for 2023, which I still feel very happy with the 55% midpoint growth on cloud ARR. But a few people are kind of saying, you've had such a strong Q1. Should you be raising? But I think it's important to keep an element of conservatism into those outlook numbers that we're giving to accommodate the macro environment.

Are you seeing anything change from a competitive dynamic standpoint? Are you either like anything that we can track from a win rate perspective or that you're tracking from a win rate perspective?

Yes. So we are -- one of the big ones that we track very closely is kind of -- yes, to your point, win-back. So customers that kind of boomerang back to Teradata, I think that has definitely been an interesting dynamic over the last 12 months, I would say, because what we're finding is because of the macro and because of the extra scrutiny around costs, and people talk about kind of cloud cost optimization, I think because people are being pulled back, they're taking another look at how their migrations to the cloud are going, how much it's costing them, how much is the cloud consumption, how much that's costing them on a month-to-month, quarter-to-quarter basis? So what we found with our customers is that they prefer to have like almost fixed costs or so that it's predictable for them. So we offer consumption pricing. We offer fixed pricing. We offer hybrid. Most customers to give them flexibility but also predictability tend to take the hybrid pricing option. So the majority of their usage would be fixed price. So they know how much it's going to cost even in the cloud, no surprises. But they have that flexibility to be able to move to consumption pricing if they want to use more or do more than they originally anticipated. So that's what a lot of our customers are doing. And I think that when they see that that's an option and they see that, that we can maintain -- really show them that the migration with Teradata is not too expensive, it's not high risk and also the cost per query at Teradata on average is significantly lower than all of our competitors. I think the more we educate existing customers and new customers of those benefits, and we also show them alternatives maybe to existing migrations that they're doing, we're seeing some come back and say, actually, can you show me what you can do? Can you show me where maybe previously a couple of years ago, they've made the decision to go to a competitor. So that's a good sign in terms of getting those boomerang customers back, getting people to take another look at alternatives. And a lot of customers will have more than one -- use more than one software. So even if it's not existing workloads, if they're planning new workloads, from expansion purposes, they'll come and bring us to the table. So we're seeing more and more of that, of customers wanting to bring us back to the table or ask to give them examples of what we're capable of doing. So I think that's also a benefit. And that's being reinforced. What's really important is this partner approach. I think what's being reinforced is the partners are talking about great experiences and great migrations with Teradata and reinforcing that we know that Teradata can be successful here when it's large, when it's complicated and that we can keep control of risk, keep control of costs. So I think when you've got external partners also being your kind of supporters and recommending Teradata, we're seeing more and more of that as well, which is -- which makes a big difference.

Yes, for sure. When you think about the new logo uptake, there's been -- I think you called it out that you have seen both on, on-prem and in cloud, still not a significant contributor. Is there anything that Teradata can do to change sort of the rate and pace of that, especially given that you do have some minimum threshold on spend? Maybe why do we have that? Like why isn't that gone to maybe accelerate like the growth at new logos?

Yes. So we -- so I mean, the current macroeconomic environment is not the ideal situation to be able to get new logos. But to your point, we continue to refine our approach. But we know that this is an important opportunity for us. So they do start very small. We are seeing good new logo traction on-premise and in the cloud, but they do start very small and then we have a kind of land and expand approach. So with our new Cloud Lake product, that is helping us in terms of that minimum workload, that minimum cost. So we can go into much smaller areas now in terms of departmental workload, experimental workload, ad hoc workloads. So our new Cloud Lake product is helping us in the sense of that not really a minimum. The minimum amount is very small. And bearing in mind that our customer market is the Global 10,000, our minimum amount now is nothing for those kind of customers sort of thing. So that, I don't think that is an issue or is a constraint anymore. I think the biggest constraint we've got right now is the macro and just bringing in somebody that knew, that they don't have an existing relationship within the current environment is hard. But we are -- we're continuing to do that. We're continuing to make some traction. And I think again, the partnership development that we've had will make a big difference in that as well because if we don't have the existing relationship, then the partners can have -- potentially have that relationship as well. So whether it's an Accenture or Deloitte, some of the big global system integrators. And on-prem to your point, we've just done a recent partnership deal with Dell, so that's another opportunity again. Like they have existing customers that we don't have and vice versa. So that's another opportunity for us to continue to have new logos on-premise, for example. And we see that as an opportunity for total growth because they're new logos. They can expand on-prem, but they could also then migrate and then expand in the cloud as well. So I think it doesn't matter whether it's on-prem or cloud. If you're bringing in new logos, bringing in new workloads, it's always a value add to the company's total growth, which is what our strategy is, as you know, it's like total profitable growth. So it's not growth at all costs. It's really important that it's profitable, that it's generating strong free cash flow. And so that's kind of our mantra. And we've got lots of opportunities with partners but also with our new logo team of being able to continue to accelerate that over time.

We're almost out of time, but I do want to ask you like maybe to talk about 2 quick things: one, on free cash flow, longer term, confidence on getting to north of $500 million. And secondarily, maybe just I want to give you the opportunity to talk to investors about why Teradata is a good investment at this point in time.

Yes, absolutely. So just in terms of free cash flow, we're already generating strong free cash flow. But I think with the opportunity that we have for total growth, the opportunity that we have for operating margin expansion and continued efficiency across our working capital, very confident in our ability to be able to continue to grow our free cash flow over time out to 2025 and beyond. And I think we've shown that the strength of our free cash flow generation over the last couple of years has been good, and I'm very confident in us being able to grow that over the next 2 to 3 years. With regards to investors and the key things to take away, we are growing at the total cloud level. We've got very strong growth. Like I said, 55% is our midpoint for our outlook for cloud, mid-single digits in terms of total recurring revenue growth. 82% of our revenue is recurring revenue. So from a stability standpoint, that's good. Strong profitability that we've continued to deliver in terms of profitable growth. Strong free cash flow. And we're undervalued. I mean, if you look at our valuation and our multiples today, they are still very low. So I think it is a great opportunity. We had a lot of exogenous headwinds last year that kind of pulled unfortunately, meant that we weren't able to grow total revenue in 2022. But I think we're through that now, and we have good confidence in our outlook, which shows strong profitable growth for 2023 and beyond.

Excellent. Well, thank you. Unfortunately, we're out of time. Thank you so much, Claire. Really appreciate the time.

No, I appreciate it. Thank you.

Thank you.