Teradata Corporation (TDC) Earnings Call Transcript & Summary

All right. So why don't we go ahead and get started. Look, we're just delighted to have Teradata joining us today at the Citizens JMP Technology Conference in San Francisco. And sitting to my left is the CFO, Claire, who -- we'll talk a little bit about your background for anyone who doesn't know. And then I just have a whole bunch of questions.

So, Claire, where are you from?

I'm originally from England, from the Southeast of England.

So you've been at Teradata for almost 3 years, right?

That's right.

And prior to that, you were at HP for 15?

Yes, almost 15 years. Yes.

Yes, so tell us about when you joined HP and what you're doing? And let's do a quick career progression through HP.

Sure. [indiscernible]. So yes, good morning, and great to be here. So yes, I started HP actually originally when I was in the U.K. I had a big financial planning and analysis background, but really enjoyed supporting, supporting the business. So I do a number of roles around Europe, in the U.K., in Geneva, even spend a little bit of time in Germany actually for a while, just supporting the business, supporting the salespeople, really kind of learning the kind of operational foundation of HP. I then have the opportunity to move to the HP head office in California as the corporate head of FP&A across the whole company. And our advantage of doing that is you're running all of the different FP&A functions across all of the businesses. So hardware, software, services, retail, enterprise. So that was a great experience. And then from there, went to run the retail business, the PC and printer business for the whole of EMEA. And at the time, it was about a $15 billion, $16 billion division in EMEA, so went to run that, and then went back again to California, so moved around a lot to be the Corporate Controller of HP, and that kind of gave me the -- because I do have an accounting background, I've been into accounting, believe it or not since the age of 14, it's quite as nerdy to say that I'm wanting to be in an accountant, ambition...

I will add a question to my list here. Okay.

So I am little bit nerdy saying that I wanted to do accounting from the age of 14. So I have accounting background, but that accounting kind of technology background combined with supporting the business, helping the operations, and then being the Corporate Controller, looking at it from a kind of corporate strategy standpoint was really exciting and great experience for me.

Yes. So, how big -- what's HP's revenue footprint when you're the global controller? This was post the split, right?

No, this was pre-split.

Oh, it is, wow.

It was pre-split. So it was like $120 million. I mean -- yes. And then they split. So that was pre-split. And then at the split, that's when I moved back to Switzerland to run the -- now the HPQ EMEA division.

Well, all right. So, before we go to Teradata, so why were you doing accounting at age 14, is this family business or something? Or is it no?

No. I decided for some reason. At the age of 14, I wanted to go to college and study accounting and financial management. And so at the school I was at, they have kind of after-school programs and to help you kind of in additional interest. So the business studies teacher there he kind of had an economics and business studies teacher at my high school, who had a big interest in financial management and accounting. So we used to do a little bit together at school before I went to study accounting and financial management at university.

So I forget whose [ kid ] is. But today, if you don't have a one-on-one, and you are around at 03:00 0'clock. We had something called the world of Gen Z, you know about this. It's my favorite panel. So it's basically teenagers teaching portfolio managers, how they use social media.

Love it. Love it.

That's great. It's great. And one of the participants on the panel, I forget which one, when their parent was explaining why they should be on the panel said that she had used social media to advertise her summer camp. It's like, well, that makes sense, while there was a summer camp. And the summer camp was financial literacy.

Wow, there we're going.

[indiscernible] she was 14. And she was teaching her classmates about financial literacy. Okay. So, what led you to go from HP to Teradata?

Yes. So I'll be honest, I don't know, like a huge time about Teradata before someone reached out about the opportunity. But I did a lot of research, as you would expect.

And this is mid-2021, right?

Yes, yes.

Okay.

Yes. Yes. So I did a lot of research about the company. And whether I was speaking to people that work there or people -- customers of Teradata, and what clearly became apparent that is that Teradata is extremely well known for its technology and client base and customer service to its clients, but there was clearly also an opportunity for transformation. We needed to have more focus on moving to the cloud, we needed to revitalize the go-to-market organization to be more focused on -- less on direct and more on partnerships. And one of my role at HP was to support the channel business, so -- as well as the direct sales team. So that was kind of interesting to me. So the technology, the customer base, the transformation journey the company was on all seems like a great opportunity, an exciting opportunity. And then just the culture. I'll be perfectly honest, Teradata is a great company to work for. Steve McMillan and the rest of the leadership team have -- we've driven a really strong trusted culture. And I think we do it all from a personal culture standpoint, but then we also feed that through in the sense that we have a trusted culture at Teradata, and we have to have trusted data. So we bring that through into our strategy as well in terms of we pride ourselves on providing companies with trusted information, which I think in the current AI and generative AI environment is becoming more and more important because if you can't trust your data, you don't know whether the insights that it's giving you can be trusted as well. So...

So, slight aside. So [ Tom Steve ] in that chair in a couple of sessions before. And last week, he told me to get this book...

Okay, what is ChatGPT...

Yes, what is ChatGPT and why does it work? And it's 100 pages, I'm on page 2, right? But already on page 2, I have learned what temperature is with LLMs which I totally didn't understand before, and you work at AI companies, so I'm sure you understand, but highly recommended. Plain English. Okay. So I guess we should -- well, let's just launch it to it. So let's start with big picture house business, what would you say?

So yes, we just finished our 2023 fiscal year at the end of December. Lots of highlights. We're now over $0.5 billion, our cloud ARR, which I think if anyone had thought about that Teradata being in that position about 4 years ago, I think they would have struggled to predict it. That was for the year, a 48% growth rate, strong profitability and free cash flow generation. So we're generating $355 million of cash, growing total ARR as well. in the mid-single digits. So lots of highlights. I would say we're really pleased with the transformation journey that we're on. But we did have some surprises at the end of Q4, which we were disappointed with, and we saw a handful of deals slip out from 2023 into 2024. And just due to kind of deal elongation cycle. So just taking a few -- a bit longer than we had anticipated. So we're disappointed that we didn't see that earlier. We are very historically and today, we have a lot of our growth that comes in the last month of the year, in the last few weeks of the year, very much driven by kind of historical behavior at Teradata. So our linearity is very H2 heavy. And so unfortunately, we did have that -- those surprises at the end of the year. I think the good news, though, is to look at the silver lining is that we haven't lost any of those deals. So it's very much -- it's not a competitive issue. It's specific things happening at those customers. And we do pride ourselves at Teradata for working closely with the customers on their time line, not kind of giving extra pricing or pushing them into a corner to make decisions that don't work for them. So disappointing that we got some surprises and a handful of our cloud deals slipped, which meant that we've slightly missed the cloud ARR guide that I had given at the beginning of the year. But the rest of the P&L, the cash flow, the profitability, was all in line with the guide I had given at the beginning of the year. And we're, as I said, 48% growth in cloud ARR was -- and being over $500 million was a good outcome.

I mean, from my perspective, that alone is worth more than the market cap of the firm. But, so that's the kind of bizarre dynamic about Teradata, right?

I would agree with you.

Yes, that's the odd thing about Teradata. Okay. But let's talk a little bit more about the slip deals. First of all, have any of them closed?

We have. Yes, we've closed one of them in Q1 already. Obviously, Q1 ends at the end of March. So we still got another months to go. But one of those handful of deals have already closed. We do -- we try to be prudent as we -- as I gave my 2024 outlook. So we've assumed that the majority closed throughout the year, but it was good to see one of them closed in Q1.

Yes, you didn't necessarily assume they closed at the beginning of the year.

No.

So that's nice, right?

That's good, yes.

Okay. And can you maybe take one of the deals and walk us through an example or just maybe give us some idea of what happened?

Yes. I'll give you a couple of examples. So one of them -- one of the larger ones, in particular, was actually corporate development. So one of them we did actually see coming at the beginning of December, and I talked about it at a conference at the beginning of December. And that's kind of M&A type activity that's happening at that customer. As a result, they wanted to -- they kind of pretty much put all other projects on hold so they could manage through that. And again, we're anticipating that deal to close in the first half is my current assumption, but that very much beyond our control and that made sense for the customer at the time. Another one, for example, they...

So they were being acquired or they're acquiring.

Acquiring.

They're acquiring something. Okay.

Yes, yes. The other -- another example I would give, which is very interesting, I think, in the current dynamic and macro environment. So one of the customers -- we're still deciding which CSP to use. So that decision took a little bit longer than we anticipated. And naturally, we can offer our software on all CSPs. So it doesn't matter, which one they choose, but they do need to make a decision. So the decision making in that, for example, got pushed out. So therefore, our discussions with the customer got pushed out as well. So there's kind of a couple of examples of what we said.

Okay. So -- these are typically your clients are big, right?

Yes.

So this person -- this is a big company, I'm guessing, right?

Yes, yes.

And they're trying to decide should we use Amazon, Google or Microsoft.

Yes.

You think they would have already made that decision. So I'm curious how did that -- you know what I mean?

Yes. No. I mean some have already made the decision. Some are using more than one, which is interesting. And I think a lot of the what we've seen at the moment in the sense of who -- a lot of the -- Microsoft in terms of the AI capabilities and things like that. I think a lot of customers are kind of -- they're not we reconsidering, but they're kind of taking another look at the long-term path and making sure that they -- as well as usual pricing and capabilities. So some have already decided, some tend to use more than one. I think the good news is, and for people to be aware of is quite often our customers. And to your point, the Global 10,000, Global 1000 customers. They tend to make commitments to the CSPs and then they can use Teradata spend to as credits [ toward ] their as spend commitment. So I think that's a big incentive as well in the sense of, okay, who are you going to do this deal with and what commitments are you going to offset?

Okay. Have these guys decided on their CSP?

I believe they have. So...

Very interesting.

Yes, should be able to continue to move forward.

Yes. And so -- are they an existing Teradata customer and they're trying to decide whether to...

Yes. Most of the deals that slip are existing customers that are migrating and expanding. So one of the things that we do see as companies migrate to the cloud with us is that -- at the point of migration, we see an expansion. So it impacts our cloud ARR, but it also has a bit of an impact on our total ARR as well. And that's great because I remember when I first joined, as you say, nearly 3 years ago, when we were modeling out our assumptions in terms of expansion and migrations, we were fairly conservative in the sense of should that -- would you see an uplift at the point of migration. And initially, we thought that we wouldn't see much of an uplift in that. People would want to migrate the kind of dollar for dollar and then expand over time. And actually, we've seen both. And I think that's one of the things that make me excited and confident about our kind of path to $1 billion in 2025 is the fact that we're seeing expansion at the point of migration. And once the customer has been with us for 12 months, we're then seeing an expansion rate of above 120%. We're currently running our trailing 12-month net expansion rate, for example, is 124% right now. So yes, we tend to...

We are going to come back to that.

So that's good that we're kind of seeing those different points of expansion. And we still have over $1 billion in on-premise business, which is future opportunity for migrations and expansions over time.

Yes, I'll come back to that, too. I want to -- so I just want to complete this thought.

Sure.

So if you're an existing customer, you're using Teradata on-prem, you're ready to go to VantageCloud? Is that what you would then be going to?

Yes. We have two offerings. We have VantageCloud Enterprise and VantageCloud Lake. VantageCloud Lake is our native cloud offering. VantageCloud Enterprise, it has the same capabilities, but it's not native to the cloud.

Okay. So you're going to go to VantageCloud Lake, but you have to decide at that time if you wanted to run on top of Microsoft, Google or...

Yes.

That's super interesting. Do they all work equally well?

So VantageCloud Lake do. They all work equally well, so let me just get the yes in there that we're at different points of GA there. So AWS went GA at the beginning of 2023 with Microsoft Azure, it was in the middle of 2023, and Google is in the first half of '24.

Okay. So Google [indiscernible] that's super interesting. Okay. So how happy were you with the performance of the sales organization at the end of Q4, and benefited 2020 hindsight, what could they be doing better?

Yes. I think -- I mean, Steve will say -- Steve McMillan our CEO will say the sales results are the enterprise scorecard. So we all take accountability. So it's not just about the sales team, it's about how we, as a company, are performing. And as I mentioned, a lot of highlights, I mean 48% growth from Cloud ARR standpoint, but we got surprised at the end of the year. So we all jointly took accountability for that. We all looked at as a leadership team and beyond what can we do to prevent those kind of surprises. And what we have realized that we've done is just a continual assessment and challenging of the pipeline conversion assumptions. We, I mean, people have been talking about deal elongation all the way through '23. We hadn't seen it, but we did then see for a few of these larger deals at the end of the year, we did see those deals, as I mentioned, get slip into 2024. So we've analyzed that, looked at that, factored that into our outlook for 2024, rather than just assuming that we will catch up and everything will continue as it was. We've factored that in as we've done our outlook for 2024 to ensure that we will be able to absorb that deal elongation trend that we've seen towards the end of 2023 into '24 .

Okay. How are you conservative would you say your 2024 guidance is?

So we take very seriously that we do what we said we will do. So I would say we take a bottoms-up view. We take a top-down view. We add some conservatism on top with a view that we should be able to meet or beat our 2024 outlook.

Is it the same level of conservatism you had for last year?

I would say it's a similar level of conservatism, but some of the base assumptions have changed, as I mentioned, with regards to deal elongation assumptions and things like that. So what proportion of our pipeline will convert? How long it will take us to convert that pipeline? Those base assumptions have been updated for 2024. So that naturally builds in more conservatism and different assumptions in '24 than in '23.

Okay. All right. And so then the other thing which came up was this idea of on-premise erosion.

Yes.

Right. So that was a new term for me, on-premise erosion. So what is on-premise erosion?

Yes. Let me tell you about what erosion is. So we talk about erosions because quite often, we have people -- have customers that if they're going to leave Teradata they don't necessarily to leave completely. They don't switch everything off. So an erosion is the fact that their spend with us has reduced. So the total ARR has eroded down. So we talk about erosion. Sometimes it can be a full erosion and the customer leaves us. But quite often, it's kind of -- is a partial erosion. So that's why we talk about erosion. So -- and to your point, we have seen over the years, I would say, normal levels of on-prem erosion that we've been able to incorporate into our outlook. We did see an impact in Q1 specifically with regards to a couple of, I would say, large on-prem erosion customers which had been talking about leaving us for a number of years, but have found that very difficult. Decisions made, I think, even before Steve joined Teradata, which was over 3, nearly 3.5 years ago because they were looking for cloud products, cloud-native products at the time, then they were looking for cloud native products. We didn't have that until the beginning of 2023. And quite often, some customers will say, I don't just want a cloud-native product. I want it to have been GA for 12 months, for example. So there's a couple of customers that did -- are leaving Teradata at the beginning of Q1. It wasn't a surprise for us. We've been obviously working with those customers trying to win them back over the past couple of years showing them new product introductions. Some customers we've been successful in terms of winning them back, but there is a couple of large customers that are leaving Teradata at the beginning of Q1. But that's kind of -- it was anticipated from a kind of a long-range plan standpoint, but wasn't anticipated in terms of the exact timing because it's super difficult to predict because they kind of wait until everything has been set up in the parallel system and then they kind of say, right, we're ready to turn it off. But so you only -- you don't get necessarily much advanced notice on that.

Yes. And what was the parallel system?

Their competitive systems. So I think one of them was -- definitely at least one of them with Snowflake. And I think potentially one of them. I don't know what the other one was actually, I need to check, but I think Snowflake was definitely one of them. I think one of them was BigQuery, I do know. One of them was BigQuery. One of them was Snowflake. And we see -- I mean, we're seeing customers as all software companies, you have a certain level of churn, you have certain numbers. I think we've seen very stable levels at Teradata, both on-premise and in the cloud, which we're very happy with. Yes, we see a slight elevation in Q1 of 2024, but we are very confident that, that will smooth out as we move through the year and definitely in '25 and '26. And I think one of the things that Steve has done, he brought in a new Chief Customer Officer, and we have a very, I would say, data-driven, detailed early warning system so that we don't get surprises in terms of the customer health, whether they're -- what the risks are, multiple different metrics that we use, and so we weren't surprised about the customer being at risk just very difficult to predict the exact timing.

Yes, you need -- I don't know how you figure that out. So you need someone on the IT team who is going to tell you who are almost ready...

On that customer, yes, exactly.

Okay. Why don't we see if we have any questions from our audience.

One quick question. I'm tempted to ask about the deals [indiscernible] kind of what's maybe more interesting because [indiscernible] what, what about competition, I know [indiscernible] you competing with? Are there some old legacy competitors for new [indiscernible]?

Yes. So I think a lot of the competition that we see tends to be from a cloud standpoint. I mean, naturally, we do have on-premise competition. But just given the legacy and the foothold we have in the on-premise market, it's less competitive on-premise. It's very much the competitive environment is more aggressive and more difficult from a cloud standpoint. I think what we've -- we see Snowflake, we see Databricks, we see BigQuery kind of, I would say, the top 3 competitors. And I think what historically, because our products are fairly new to the market, one of the things that we've been doing over the last couple of years is educating. Educating our existing customers, educating the market about the Lake, Lake native products that we now have on the market and its capabilities. And I think what we've been able to do is bring a lot of the technology benefits from on-premise into the cloud. So performance of scale, for example, when you scale up and scale out with Teradata, you can get a really, really competitive total cost of ownership. We have -- we know from external benchmarks that we have the lowest cost per query, which makes a huge difference as customers -- Global 10,000, Global 1000 customers as they scale with the amount of data and queries and users that they're doing, that best and lowest cost per query is extremely important. I think other things that we've heard, great feedback on as we move forward is having a governance and operations dashboard. So embedded into our software, although departmental workload can be spun up locally, the IT department or the people that are running kind of data and analytics across these large enterprises have -- some have had bad experiences about costs getting out of control and not having full visibility of the kind of consumption, billing and spend. And we have embedded like kind of governance operations dashboard to have really good -- really good governance around that and controls. I think finally, the other thing I'd say is our ClearScape Analytics, like our -- what we have embedded also in our software with regards to AI, ML, and some new offerings that we have in private preview kind of, for example, one I'm super excited about is our AI unlimited offering. That's in private preview right now. It's going to be embedded into Microsoft Fabric. And that's all about serverless, self-serve, being able to run data and analytics really, really easily. And I think historically, Teradata in terms of self-service, serverless, ease of use, they're all the things that we weren't necessarily known for in the past. And I think -- so from a competitive standpoint, we've really kind of closed that ground and closed that gaps that we've had historically, to be able to be competitive, not just at scale, but also in new logos in smaller workloads as well.

Okay. So the bear case is competition and the erosions and things slipping.

Yes.

How confident are you in getting to your $1 billion in cloud ARR?

Yes. I mean, I think maybe just quickly to explain, the assumption that we need to get to the $1 billion and the path of $1 billion is to maintain an approximate 120% expansion rate. We're running at 124 now -- but if you assume a 120%. And then you only need kind of a reasonable amount, kind of $100 million plus/minus to be able to migrate and expand at the point of migration and new logos per year to get to the $1 billion. So I think if you believe in the 120% that we've seen consistently moving forward. We have good confidence to be able to deliver that path up to $1 billion.

Yes. And this, right now, we're less than a $4 billion market cap and you're looking at a $1 billion cloud business in a year or 2?

Exactly that. And we're profitable, and that's the only thing.

And they're profitable.

Strongly profitable. We've got strong operating income percentage. And we've generated $355 million. I'm anticipating at least $360 million in free cash flow in 2024. So it's strong profitable generation, and strong free cash flow and good growth.

Awesome. Well, Claire, thank you so much.

Thank you, Pat.

It's great to have you here. Thank you so much.

We appreciate it.

Appreciated.