Teradata Corporation (TDC) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to day 2 of the conference. I'm Pinjalim Bora, I cover SMID Cap software at JPMorgan. Delighted to have here with me CEO of Teradata, Steve McMillan; and CFO, Claire Bramley. Welcome.

Thank you.

Great to be here.

Maybe you can start with a quick introduction about yourself and maybe a little bit on Teradata for the people in the audience that do not know about the company.

Sure. My name is Steve McMillan. I've been the CEO of the company for nearly 4 years now. Teradata right in the middle of the data and analytics space, a company with a 40-year heritage, you could say Teradata invented enterprise data warehousing. Over the last 4 years, we've been pivoting aggressively towards being a cloud business and deploying our technology in the cloud and advancing our technology in the cloud. Over that 4-year period, we've grown our cloud revenues or cloud ARR to over $0.5 billion a year. And we're doing that under a profitable growth strategy. So we commit to a large free cash flow return to our shareholders, more than 75% of our free cash flow. And we just guided for next year that we're going to deliver $450 million of free cash flow. So a profitable data and analytics company growing extremely well in the cloud.

Great. Claire?

Yes. So Claire Bramley, I'm the CFO at Teradata, have been here just under 3 years and originally come from HP, where I did a number of different finance roles there. So I've been supporting Steve and the company on the transformation for the last 3 years, lots of changes that we've been making. So lots of things changed. We started with the product to make sure that we have like an industry-leading product from day 1, and that was something that Steve came in with the attitude that we need to make sure that we've got the best product. And then around that, we've built the infrastructure, and we've changed our go-to-market operations. We've changed things like compensation. We've changed a lot of the customer success management and various different areas to be able to support the cloud product, which we have a cloud-native product across all of the cloud service providers to be able to charge forward with that cloud growth that Steve mentioned and being able to do that in a way that we can still ensure that we have strong financials -- strong financial fundamentals, and as Steve mentioned, strong free cash flow and profitable growth.

Yes. That's a great introduction. I want to start with a little bit of a zoom-out question, right? You're playing in the data analytics, cloud, data warehousing market. The space is constantly changing and evolving with the latest risk being GenAI and AI, in general. Based on your customer conversations, do you think customers are having to rethink their core data architectures at this point to kind of infuse their organizations with the AI magic dust? What are you hearing there?

Yes. I think when I talk to customers about how they're thinking about their AI strategy, they're thinking about it, I think, in kind of 3 horizons. So first horizon being how can we improve our internal operations, things like Copilot, improving effectiveness, efficiency, maybe improving the effectiveness and efficiency of supply chain. We see lots of our customers working with our technology to feed data into those kind of activities. Second horizon being how do you embed AI into your product or service. We're doing that in, say, Teradata. We'll talk about -- a little bit about that in the coming questions. But having things like, we call it ask.ai, which gives a much more natural language-based interface into using the platform. And then the third horizon is how do you use AI to change your industry. So affecting a very fundamental change to how the company operates in the industry and how they define their industry. As -- we've actually just done our survey recently with C-level execs across the landscape -- across our customer landscape, we focus on the G10000 so the biggest enterprises in the world. That's where our technology differentiates and trust comes up as one of the key factors. And so when I think as organizations are thinking about their data platform and their data strategy, they have to think about it in terms of can you trust the outcome from these AI-based models and especially GenAI models where you might have a GenAI hallucinations if you feed it in the wrong kind of data. Is it ethical? So is the AI recommendation engine ethical? Can you track the lineage of the data that's inside the platform? And then finally, is it's sustainable? You read a lot recently about the cost of these AI systems being incredibly expensive to run. And so what we're finding is that customers want to solve those 3 problems and if you've got the right data platform in place, you can essentially address those challenges from a technology perspective. Now we, in Teradata, are the custodians of probably the most trusted data in the world. You call it the gold standard in terms of helping the biggest banks in the world close their books on a regular basis or running their supply chain or run their customer experience based on the data that's in our platform. And we do that at an enterprise scale and a price performance scale that enables these AI solutions to access that data in a very effective and efficient way. So it's a really interesting we were using our technology to address the issues and challenges of AI.

Yes. Interesting. You touched on this earlier when you were giving your introduction, but let's double click on it. From a product strategy standpoint, talk about the transformations that you have gone through? Where are we in that journey at this point?

Yes. So within the first 3 months of joining the company, we actually pivoted our entire research and development organization. It was focused 80% on-prem and 20% in the cloud. And we pivoted that to 30% on-prem and 70%, 7-0 percent, in the cloud. And the reason to do that was we wanted to build a truly cloud-native capability and platform. We actually announced that and went general availability on AWS in January of last year, we went general availability in Azure in June of last year. And we went -- we're going to go GA with Google before the end of the second quarter.

And that's the VantageCloud Lake?

Our VantageCloud Lake platform is a truly cloud-native capability with absolute separation of compute and storage, but still bringing all of the enterprise class and enterprise performance capabilities from our on-prem systems and our existing cloud solution to a whole new set of customers and users. That technology also enables us to have really tight integration into the cloud service providers and the capabilities that they offer. And I think a lot of our customers are recognizing that the CSPs don't necessarily give them a price or a cost advantage. The CSPs give an advantage in terms of the native services that they offer. So GenAI services being particularly interesting just now. And so our focus with our new technology platform is tight integration with those services in an open and connected way.

Yes. So you said AWS in January of '23, I think if I wrote that correctly. It's been a year. And even in Azure, what has been kind of the feedback that you received? What kind of traction are you seeing?

Yes, I think we're seeing lots of interest across all of our new product set in terms of the capabilities that it can provide. We've actually started migrating customers directly from their on-prem Teradata solution directly into VantageCloud Lake now. We're seeing some successful launches from that perspective. We're also seeing lots of customers starting to use VantageCloud Lake for new use cases, experimental use cases. And our technology really differentiates because it enables our customers to have an enterprise data warehouse or a data lake or a data lakehouse. So in terms of how to utilize structured data both in a lake context, but also in an enterprise data warehouse context. And that, I think, differentiates us from the competition. We've just recently announced support of open table format where you can essentially store your structured data and native object store utilizing an open table format, and it provides that lakehouse capability to our customers.

Yes. Open table i.e. Iceberg tables?

Iceberg and Delta. So we actually support both, many of our competition of [ PEG1 ] path. From an open table format perspective, I think that technology is going to continue to evolve in the marketplace. And our strategy is to have a platform that can support multiple of these capabilities in the industry.

Yes. Maybe Claire, bringing to the conversation, talk about the transformation of the business model, right? Cloud ARR versus maintenance ARR, total ARR. How has that transformed and where is it going?

Yes, historically, Teradata had a very perpetual operating model. And then what we see, and especially in terms of the unit economics, when we move through the life cycle. If you go from perpetual to subscription, you tend to see an uplift on the unit economics. And then actually, when you move from on-prem subscription to the cloud, we also see an uplift. And that's the reason we're definitely working at the customers' time line and what they want to do, but it definitely is a good thing. If we continue to migrate, as Steve said, like looking to opportunities for customers to migrate over to the cloud or to attract new logos into Teradata. One of the biggest opportunities we see is we see both expansion at the point of migration. So we see an uplift at the point of migration, but we also then have this net expansion rate ongoing in the cloud at the moment, the trailing 12 months is 123%. So that kind of unlimited capacity that you have in the cloud environment compared to on-premise, obviously, is an opportunity for us, opportunity for our customers to continue to do experimental new workloads and we see that in the net expansion rates that we're seeing in the cloud. So that's definitely something that we see the uplift, and that's what's driving our total ARR growth as we move forward. With regards to our on-prem business, we do see -- after migrations, we do see low single-digit growth, flat to low single-digit growth, but the opportunity for growth, obviously, as a company really comes from that expansion in the cloud once we either migrate or attracting new logos into the business.

Yes What is -- I don't know if you have disclosed this publicly, but the uplift that you see at the point of migration at the point of time...

Yes. We haven't disclosed the exact number, just if you think about it in a very similar to the net expansion rate, it obviously varies greatly from one customer to the others. Some customers will expand at the point of migration. Some customers will expand over time. So I think using that net expansion rate of approximately 120% is the right assumption to use. And it's interesting because when we were originally modeling back in 2021 when we did our Investor Day, we didn't actually anticipate that expansion at the point of migration. We thought it would be more one for one, to start with. So it's good to see that we actually have that expansion at the point of migration, but it also then continues over time.

Yes. Understood. Let's switch gears a little bit to macro. You have highlighted and everybody has highlighted macro as a headwind in software. But talk about the current spending environment. How broadly has macro impacted you? But -- are there pockets where you're seeing better improvements versus some pockets where maybe there is a headwind?

Yes, I think we definitely saw some -- we referred to it as deal elongation in Q4, which really pushed some opportunities out into 2024. That -- I think we've seen that pattern continue, but we think it's going to ease up as we go into the second half as customers have defined their AI and data strategies. What we saw, I think, as we went through Q4 is a lot of strategic decisions being made by our customers in terms of what platform do we want to use? Do we want to use AWS or Google? Or do we want to use Azure? Certainly, we're seeing a rise in Microsoft and being a very popular target platform for us. So one of our customers actually said, okay, we're not going to deploy on Google anymore. We're going to move that to the Microsoft Azure platform. And that obviously pushes out some deals. I think as well from a spending environment perspective, we see the spend starting to ease up in the second half of the year. Certainly, if we look at our pipeline strength, it builds into the second half.

Yes. Yes. Understood. Some of the deal elongation, deal slippages that you talked about in the December quarter into Q1, have you closed those already at this point?

Yes, we've closed a few of those deals. We have a good line of sight into when they're going to do -- when they are going to close. What we said in our Q4 earnings was that we would close the majority of them in FY '24.

Majority in FY '24. Got it. Also I wanted to touch upon this point on some on-premise erosions that you have talked about, right? I think in the December quarter, you talked about it. Maybe elaborate on that, what led to those erosions. Are those kind of onetime events at this point from your conversations? Or is there further risk in '24/'25?

Yes, I think what we saw was the execution of a strategy that was set out many years ago, in fact, before I joined Teradata in terms of the technology strategy. I know that decision was made in some of these very large customers at a point in time where Teradata did not have that cloud product or capability at the level of maturity that we have today or, in fact, even had 2 to 3 years ago. As I said, we deal with the largest companies in the world. We have -- we are integrated into their operations. So we know exactly what's going on in our key customers around the world and what our technology strategy is. We can see that in terms of how they're utilizing the platform and the instrumentation that we have around the platform. So we knew what was happening with those particular customers. We did see for FY '24 that because, again, we deal with the largest enterprise in the world. They can be fairly large deals and large impacts in terms of the impact to the total business. And so it was important for us to be transparent in terms of what we saw in the impact of the business as we went through the year. And so we pointed to that impact for first quarter. But we did say that we saw FY '24 as an anomalous year from an erosion perspective, and we would go back to a normal level of erosions and discussions around how our customers are using the platform as we would move into 2025 and beyond.

Yes. And I think maybe if I can just add to that. We've obviously included into our full year outlook, the estimates that we expect to see from an erosion standpoint in 2024. And I think what we saw at the beginning of the year to what we see now hasn't changed at all. So we still see exactly the same profile. And I think that's very -- that's a good sign that these were specific deals outside large erosion deals that we knew were coming, but the exact timing is always difficult to predict, but we knew they were coming. And the fact that even and now we're obviously in May and still see the exact same profile that we had at the beginning of the year. I think it points to the fact that it is kind of expected to get back to historical levels as we look forward.

So these decisions you said were made before you came large companies. But can you give us an understanding what is the profile of that? Like what are these companies trying to go towards? Are they going towards some of these Snowflakes and Databricks kind of things? Or what are they doing differently?

Yes. I think most of these organizations wanted to have a cloud-first strategy, which wasn't reflected in the Teradata strategy at the time. So when -- from June of 2020 onwards, we actually declared that Teradata would have that cloud first strategy. And I'm pretty proud of the company and our execution in that time frame. If you think about it growing at $0.5 billion cloud ARR business over 4 years, there's not many organizations they can point to that, execute on that pivot and actually having that level of growth in the cloud. And I think that's just a testimony to how much our customers depend on that technology, how much they want to take advantage of new technologies in the cloud and now with things like Generative AI and AI services in the cloud, I think that's becoming more and more important. If I also reflect on our cloud business, about 70% of the customers that are in the cloud with us are still -- are on-prem. So we're working in that hybrid environment. And our capabilities from a Teradata perspective of having a hybrid capability they can work across all of the major cloud providers, but also back to on-prem as a real differentiating capability, the largest organizations in the world are very interested in taking advantage of.