Teradata Corporation (TDC) Earnings Call Transcript & Summary

Good morning, everyone. Tyler Radke here at Citi's Co-Head of U.S. Software, and welcome to Day 2 of our tech conference. And we have Teradata, the new CFO, John Ederer, here. John, thank you very much for making it to the Citi Tech Conference. I thought it would be great if you could just give a quick background of yourself and what led you to join Teradata.

Yes. Absolutely. And thanks for having us. Really appreciate the opportunity to be here today and to attend the conference and looking forward to a good day of one-on-ones and the discussion here. So -- yes. I guess in terms of my background, I actually started in your chair once upon a time. So I was a Wall Street analyst covering Healthcare and eventually enterprise software. So I beat my head on that wall for about 10 years or so and then finally made the switch to the corporate side. And on the corporate side, I've principally focused on enterprise software, obviously, in finance. I had a mix of experience between public companies and private equity-backed businesses. So I've seen both of those types of models. Most recently, I was at a company called Model N, which is a vertical SaaS business, publicly traded -- was publicly traded. And there, we ran a very successful profitable growth strategy over the 4 years I was there.

Got it. And since joining, yes, I guess, what were sort of the things that attracted you to Teradata? And what have kind of been your first impressions?

Yes. Well, the first impressions have been very good. I think we've got a very good team. I know we have a newer team that's come together on the executive leadership team. But I would say both the ELT and the finance team, we've got a lot of really solid people and have been really encouraged by the team. And I would say there's a real sense of urgency with the team. And I think maybe some of that's market driven with some of the things that are going on from an AI standpoint. But certainly, there's an eagerness to engage and a sense of urgency around the company. In terms of my background, I felt like as I looked at what was happening with Teradata. There were a couple of things. One, obviously, the company has gone through a business model transformation. And for better for worse, I've done a number of SaaS transitions through my career. So I had a good sense for what that looked like and how I might be able to help and also the value that ultimately comes out the other side of that. And then I think also with my mix of background in both public and private equity-backed businesses, I've seen different models in terms of how to address the cost side of the equation and how to really drive durable free cash flow. And so I felt like there were some things that I could bring to the table that would help Teradata in terms of where we are today.

Okay. Okay. Great. And that's a good segue into kind of your biggest priorities. Obviously, Teradata has been on this transition to the cloud and the subscription and free cash flow is kind of gone through fits and starts of improving and deteriorating. So how do you kind of assess where we're at, what the growth in free cash flow business of this business can ultimately become?

Yes. I think that for me coming in, and I think for the company overall, certainly, we have to recognize where we are, and we had some challenges in FY '24. And so we're stabilizing the business this year. And some of the impacts from those headwinds are still running through the P&L this year. But I think as we do the work this year, we're starting to set ourselves up for FY '26 and beyond. And I think that from my perspective and in terms of kind of my priorities from a financial point of view, first and foremost, it's driving a profitable growth strategy. We did the same thing at Model N. We made sure that we invested in the right areas to drive growth each year, but we also are dedicated to dropping incremental benefit to the bottom line. And so I've seen how that can work, and I think we can deploy the same type of strategy here. Second is really starting to make some meaningful progress on the Rule of 40. And got a little bit of ways to go. But the first steps are encouraging, and I think that we can start to develop a path that will ultimately get us there. And I think that will result in durable free cash flow growth. And I think when we -- we kind of step back and say, where are we today? Obviously, we're stabilizing in FY '25, I think setting ourselves up for those next steps in '26 and beyond.

Got it. And zooming out, just kind of thinking about some of the big picture trends, obviously, there's a lot of negativity in the software market right now, more so on the application side, just with seat models and concerns around SEO or UI, UX disruption. I think on the data side, there's -- we've seen some pretty healthy results from the -- obviously, the hyperscalers, some of the cloud consumption models. Even Q2 for you was better than recent trends. So where -- what are you just seeing in terms of the AI and data modernization conversation? And is that starting to show up for you in a positive way?

Yes. No, it's interesting. I guess I have lived through a few of these transitions in the market and different technologies coming in and kind of dominating the landscape in today's flavor is certainly AI. And one of the things that happens in something new like that comes on the scene is it just gets a lot of focus and attention. And oftentimes, you see investment dollars from customers going towards that or going towards trying to figure that out, and you can sometimes see it get pulled from other areas. So it's just sort of a natural IT rebalancing. So I do think we're seeing a little bit of that. I don't know that I fully subscribe to the death of applications at this point, but that's not really our game anyway. But from an overall perspective, what that's doing for our business is, I think we're really starting to see a shift. And so when you think about the demands of AI, whether it's GenAI, Agentic AI, certainly in an enterprise setting, you're causing increased demand on the data side of things. And so that ultimately bodes well for companies like Teradata, if we're going to see increased workloads and that sort of thing from AI. But I think that the other side of it is that certainly, enterprise customers are looking for a safe and secure way to deploy those models. And they're ultimately going to need to be able to do it at scale, not just at scale but efficiently at scale. And so I think that those elements actually bode well for Teradata. I think that starts to tilt the market back in our direction a little bit.

Okay. And -- I mean, is there signs of that, that you can see whether it's in the numbers? Obviously, ARR is one thing, but even pipeline or -- even earlier stage in lead gen? Or anything you could point to where you're seeing that uptick?

Yes, certainly. And I think actually, Steve to some of these things on our earnings call, but we're seeing a lot of enthusiasm around the topic. And certainly with some of our recent product announcements around Enterprise Vector store, the MCP server, AI factory, those are generating a lot of interest and a lot of discussions with customers. From an internal perspective, yes, we are seeing it start to influence our pipeline. And so that's a good early indicator. We're also seeing a good number of proof of concepts being done with customers. And so that's another good leading indicator. I think we're also kind of indirectly seeing it with some of the partner interaction that we've had. And again, Steve talked a little bit about this on the call. But with partners like ServiceNow and Salesforce and NVIDIA, we're starting to see more engagement around the AI topic.

Right. Right. Okay. But I think is this something that you think plays out in the coming quarters? Or is this like a next year thing? Just a sense on the timing on when it can improve growth?

Yes. I think -- I mean certainly, we're making progress around the proof of concepts that we're doing with customers. And I think that where we could potentially see it first is in some of the more regulated industries, maybe some of those that are facing higher cost pressures. And so I think I'm encouraged by what I'm hearing from the team and from the sales effort. I think the timing is a little bit hard to pinpoint. I think if you see what's happening with customers today, and this is kind of what I alluded to earlier. You have this new technology of this new paradigm that's out there. There's a lot of eagerness around it. There's a lot of excitement around it. People are trying to figure out exactly what that means for them in their business. And then how do they go about it. And with kind of all that excitement, there's obviously lots of new tools and models and different things to evaluate. And so I think we're still kind of early stages. A lot of people are evaluating and trying to put their strategy together, but there is a lot of excitement out there for sure.

Right. And just going back to this last quarter, you saw a pretty healthy ARR performance. I think you talked about some deal timing benefits. Could you just recap some of the highlights of the quarter, how you're feeling about the year? If that was simply timing? Or do you think there's kind of a turn in the business, better execution, renewal rates, et cetera?

Yes. I think if I step back and look at the first half overall, I would probably sum it up to better execution. I think that -- we made some changes from a go-to-market standpoint last year, brought in some new leadership. We did some things from an organizational standpoint, from a process standpoint. And I just think there's just better hygiene around pipeline and execution internally. And you saw a little bit of that benefit in Q2 where you were able to pull in some deals that were slated for later in the year and ultimately landed in Q2 a little bit early. So I think that's all very good. We've also done some things on the retention side that are playing out in the numbers and the results that you saw over the first half. And so -- yes. I think FY '24 was a little bit of an anomaly from an erosion standpoint. But I don't want to underestimate the things that we've done from a process standpoint internally to try and drive better results there. And so we've really done some good work with our customer success organization. I think we've got better visibility on risk factors that could ultimately result in an erosion event. And so we're catching those things early. We're working with the customers early, and we're seeing better results over the first half of this year. And so I think that's very encouraging.

On that point, is that just better engagement kind of person to person? Or is there kind of additional telemetry that you've been able to add into the usage to kind of look at that?

Yes. I would describe it as both. I mean, in some ways, the telemetry came first, right? And so just having better visibility into what's happening, identifying risk factors early, getting people engaged with the customer. And so that's resulted in better performance.

Yes. We've heard some of the cloud vendors, whether it was Microsoft last call, even Snowflake and AWS, Google as well call out strong migration trends. And I'd just be curious, are you seeing -- it sounds like you feel better about kind of the erosion risk and everything. But is there any additional risk you see from some of those cloud native migrations? Or maybe there -- you think those migrations are coming from a different competitor, whether it's IBM or Hadoop or some of the other legacy vendors out there?

Yes. It's a fair question. It's hard for me to speak to what's happening at some of the other vendors in this space, but what I can speak to is what's happening at Teradata. And we've actually seen improvement, as we just discussed on the retention side of things. And then even internally, I would say there's been less dependence on migrations this year versus prior years. And so we've been at this for kind of 4 or 5 years now, maybe 5 or 6 years in terms of migrating our own customer base over to the cloud. And we had some great success with that. But I would say that we're kind of on the other side of the bell curve now. And so that's less of a factor in FY '25. And so I'd say what we're now seeing is that kind of the low-hanging fruit, if you will, made the move. But now again, with the rise in AI and the interest in investing in that particular area, I think you're seeing customers standing path a little bit more, recognizing that a hybrid environment in a lot of ways is a better way to go. And they can make their investments in AI and do it where the data resides today as opposed to going through a migration and then thinking about how do they take the next steps forward. And so I think that we've seen a little bit about, I won't call it a full waning of that activity, but we've certainly seen a little bit of a diminishment there.

Interesting. So as you think about that impact on you, I mean, is there -- is that deflationary at all to growth? Or is it -- I mean, obviously, you have -- you support the on-prem environment well and you should see the stronger demand show up there, but -- yes.

Yes, we're still seeing our highest growth in the cloud and you saw that in the Q2 results. And so I'm not trying to suggest we're moving away from that. But I do think that going forward, we're seeing increased interest in a hybrid environment and recognizing that the cloud may be good for some instances and an on-premise solution might be better in other instances. And so we want to be able to provide both of those to the customer. And so increasingly, I would say, our focus is on growing total ARR. That's ultimately what's going to drive our model and drive the return to growth overall and then subsequently trickle down to free cash flow. And so if there's a slight change in our emphasis, that's the point is that we want to try to grow the overall pie in addition to the cloud.

Right. And I think on those growth targets a few years ago, well -- before your time, hold you these targets, there were plans to kind of return the company to double-digit growth and part of that was like $1 billion cloud target and everything. How do you -- like given this dynamic that you've seen, do you feel like you can get back to double-digit growth with kind of this hybrid nuance you added in? Or does that kind of rely more on the cloud?

Yes. I certainly think that some of the dynamics that we're seeing in the market, certainly around AI and around the opportunity for a hybrid platform bode well for us and should enable us to drive future growth. And the first step to that is getting back to positive territory this year, and that's what our guidance has us at for FY '25. I won't comment on the longer-term outlook at this point. But I do think that we recognize the need to be able to drive strong organic growth, and we're going to continue to make investments to do that. And so I think that that's critical and that's important to us as well.

Right. Right. Okay. And on some of the changes, last year, I think there was a roughly 10% restructuring, which is one of the biggest in quite some time, but -- what's -- yes, I mean, what's sort of been the fallout or not fallout in a bad way, but kind of the postmortem on that? Have there been any headwinds that you've had to work through or maybe this has just kind of created a new sense of focus and you talked about the team moving with more urgency. But just give us a quick rundown of all the changes.