Good morning, everyone. Welcome to day two of the conference. I'm Pinjalim Bora. I cover mid-cap software at JP Morgan. Delighted to have here with me, CEO of Teradata, Steve McMillan, and CFO, Claire Bramley. Welcome.
Thank you.
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's Steve McMillan. I've been the CEO of the company for nearly four 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 four 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 four-year period, we've grown our cloud revenues, or cloud ARR, to over $500 million 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.
We just guided for next year that we're gonna deliver $450 million of free cash flow. So a profitable data and analytics company growing extremely well in the cloud.
Yeah, great. Claire?
Yeah. So, Claire Bramley, I'm the CFO at Teradata. Been here just under three 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 three years. Lots of changes that we've been making, so lots of things changed. We started with the product to make sure that we had, like, an industry-leading product from day one, and that was something that Steve came in, you know, 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, you know, things like compensation.
We've set, you know, 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, you know, 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 a strong financials, strong financial fundamentals, and as Steve mentioned, strong free cash flow and profitable growth.
Yeah, that's, that's a great introduction. Why don't we start with a little bit of a zoom-out question? Right, this... You are, you're playing in the data analytics, cloud data warehousing market. The space is constantly changing and evolving, with the latest twist being Gen AI 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?
Yeah, 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 three 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 inside 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, you know: 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. We've actually just done a survey recently, with C-level execs, across the landscape, across our customer landscape. We focus on the G 10,000, 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 at about, about it in terms of, can you trust the outcome from these AI-based models, and especially GenAI models, where you might have, 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 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 three 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 know, you call it the gold standard in terms of, you know, helping the biggest banks in the world close their books on a regular basis, or run 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 way we're using our technology to address the issues and challenges of AI.
Yeah, 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?
Yeah, so, within the first three 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%, 70%, 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, in general availability on AWS in, January of last year. We went general availability in Azure in June of last year, and, we're gonna go GA with, Google, before the end of second quarter.
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 Gen AI 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.
Yeah. So you said AWS in January of 2023, 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've received? What kind of attraction are you seeing?
Yeah, 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 do you 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.
Yeah, open table, i.e., Iceberg tables?
Iceberg and Delta.
Okay.
So we actually support both. Many of our competition have picked one path. From an open table format perspective, I think that technology's gonna continue to evolve in the marketplace, and our strategy is to have a platform that can support multiple of these capabilities in the industry.
Yeah. Maybe, Claire, bringing you into the conversation, talk about the transformation on the business model, right? Cloud ARR versus maintenance ARR, total ARR. How has that transformed, and where is it going?
Yeah, so historically, Teradata had a very perpetual, perpetual operating model. And 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 up, you know, 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 customer's timeline 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 is 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, that at the moment, the trailing 12 months is 123%. So, you know, 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... You know, we see that uplift, and that's what's driving our, you know, our total ARR growth as we move forward.
With regards to our on-prem business, you know, we do see, after migrations, we do see low, single-digit growth, you know, 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, into the business.
Yeah. 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, what is that?
Yeah, we haven't disclosed the exact number, just, but just to be clear, if you think about it, it, you know, very similar to the net expansion rate. It, you know, it obviously varies, you know, greatly from one customer to the others. Some customers will expand at ex- you know, at the point of migration. Some customers will expand over time. So I think using that net expansion rate, you know, 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.
Yep, 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, you know, some pockets where maybe there is a headwind?
Yeah, 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 gonna 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, "Well, 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 in being a very popular target platform for us.
So one of our customers actually said, "Okay, we're not gonna deploy on Google anymore. We're gonna 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.
Yeah. Yeah, 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?
Yeah, we've closed a few of those deals. We have a good line of sight into when they are gonna close. What we said in our Q4 earnings was that we would close the majority of them in FY 2024.
Majority in FY 2024. Got it.
Yeah.
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 those erosions? Are those kind of one-time events at this point from your conversations, or is there further risk in 2024, 2025?
Yeah, I think what we saw was the execution on a strategy that was set out many years ago, in fact, before I joined Teradata, in terms of the technology strategy. 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 two to three 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 their 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 2024, that, because, again, we deal with the largest enterprises 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 and the impact to 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 2024 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.
Yeah, and I, and I think maybe if I can just add to that. We've obviously, you know, included into our full-year outlook the estimates that we expect to see from an erosion standpoint in 2024, and I think, you know, 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... You know, that's a good sign, that these were specific deals, you know, outsized, 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, you know, now we're obviously, you know, in May, and still see the exact same profile that we had at the beginning of the year, it, you know, I think is, it, you know, points to the fact that it is kind of expected to, you know, 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 Snowflake and Databricks kind of things, or what are they doing differently?
Yeah, 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, 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, timeframe. If you think about it, growing a $500 million cloud ARR business over four years, there's not many organizations that can point to that, executing 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 they're working in that hybrid environment. And our capabilities from a Teradata perspective of having a hybrid capability that can work across all of the major cloud providers, but also back to on-prem, is a real differentiating capability that the largest organizations in the world are very interested in taking advantage of.
Yeah. One interesting point, you have erosions, which were before your time, but then there were also instances where some companies actually went away from Teradata, came back to Teradata. There was, I remember a telecom company, I believe, that came back. So talk about why did that happen the other way around?
Yeah, so I think, you know, we live in a competitive environment, and if you think about one of the key differentiators of Teradata is our enterprise price performance. You know, the Teradata technology, if I can put it simply, was born on-prem in a limited capacity environment, 'cause you're running on a fixed set of hardware. If I look at our cloud-native competition, they live in an abundant or an infinite environment, so they solve their problems by expanding compute usage. Whereas we solve data platform challenges with great software that can operate in a limited environment.
And so our enterprise price performance, our financial governance, is delivered with some key patented capabilities that we have in Teradata around workload management and query optimization, which means that the total cost of ownership and running our platform is much less for complex mixed workloads. But also, our platform can actually execute these incredibly complex queries that might have high levels of concurrency, whereas some of our competition can't get to that scale effectively.
Yeah. So the customers that left Teradata, are you still in discussions with them, and could there be a potential that they actually come back?
I think that is exactly the conversation that we have on an everyday basis. You know, once an organization commits to a new cloud provider and a new data platform, you know, they are certainly committed to it. I think as those organizations start to come up for renewal, and they start to look at what's the total cost of running this platform compared to, you know, what they were spending on Teradata, that's a great entry point for our sales team to re-engage with that customer.
And even although it's very, very difficult to migrate off of Teradata, because you have to refactor all of your data and all of your workloads, it's very easy to move back into Teradata, and even into our new solution, which utilizes open table format and Native Object Store, which can give a real exponential difference in terms of the cost of running that platform in the cloud.
Yep.
Yeah, I'd even go as far as say one of the outside erosions that we saw at the beginning of the year in Q1, we are actually talking to them actively about-
Mm
... new workloads. You know, so keeping that relationship ongoing, because we've come a long way in the last three to four years, it, you know, compared to when they originally made that decision to migrate. So the technology's come a long way. The offering's come a long way. As we mentioned, you know, we have, you know, cloud-native product on all three cloud service providers. The AI capabilities, analytical capabilities, continue to develop because we're investing 70%-80% of our R&D in the cloud, and I think they see that, so, you know, they, they are staying in touch with us and talking about new workloads as well.
To Steve's point, there's always the opportunity. We've had that in the past. We call them boomerang customers, where they potentially have had a difficult, you know, a failed migration off of us and then have come back. And now we have the product and the capabilities in cloud-native environment to be able to, you know, to offer what they were looking for originally.
Yeah. Maybe talk about the pipeline going into Q2. Are you seeing kind of similarly challenging environment? Are you seeing pockets of improvement now going into Q2?
Yeah, I think we're starting to see that improve. So, you know, we had a successful Q2 in 2023. And I think, you know, we're expecting our 2024 to be along similar lines in terms of execution. So I think that spending environment is starting to free up. We are a very back-end loaded opportunity pipeline, and so Q4 always represents over 50% of our total growth and cloud growth. It's, that's the enterprise software sales motion coming through in terms of how we are executing in the cloud and from a total growth perspective. So we do see that. We do see Q2 starting to pick up and then start to see acceleration as we go into Q3 and Q4.
Yeah, no, I'd just reiterate what Steve said. You know, H2 is always a much bigger half than H1. You know, based on historical linearity, Q3 and Q4 will be our biggest quarters, but we obviously anticipate an acceleration of growth in Q2 compared to Q1.
Yeah. Maybe talk about the go-to-market changes, a little bit, that you have recently made, go-to-market efforts, you know, around the new products, that you have. Any particular focus going into 2024?
Yeah. So it's really interesting, as we've gone through our transformation, we did try a number of different incentive patterns to get the sales force to behave in the right, in the way that we wanted. We think we've got the right pattern from a sales incentive and execution perspective now. Just when I think about our internal account executives and sales force, the... And they are motivated in growth.... And so that's why when Claire talks about, you know, expansion at the point of migration, that's only an attractive sales deal if there is growth in the total spend from that customer in the environment.
And our sales teams now see lots of different opportunities in terms of capturing that growth inside their customers with new workloads, and also the continuing expansion and growth of data that our customers want to have in a very trusted platform. The other motions that we've developed, from an external perspective, working with strategic partners, SIs, CSPs, and also regional systems integrators and regional sellers, to take our message to the marketplace, is continuing to build traction. But also our customer success motion, so understanding how our customers are utilizing the platform, how we can expand that usage in the cloud, enabling that customer success team to really take a message of expansion to our customers, is really helping to promote that over 120% net expansion rate in the cloud.
What about the focus on new logos versus, versus existing?
Yeah, I mentioned on our last earnings call that we put over 100 new logos into the pipeline over the last few months. And I think that's just an acceleration both of our technology capabilities from our VantageCloud Lake platform, but also an acceleration of our on-prem capabilities with our partnerships with organizations like Dell. So you can run Teradata software on Dell Technologies. That's really our... As we focus on being a software company, that is where we see our differentiation in the future and our margin generation in the future. So I think all of these things coming together, as well as the enablement and focus of the sales team, are enabling us to get to that new logo generation from a pipeline perspective.
Yeah. Maybe on that point, talk about the change in the CRO, Chief Revenue Officer side. There's a change in sales leadership. Are you expecting any kind of a disruption, and why is this leader... I think it was an internal promotion as well.
Yeah, it was. Yeah.
What's your confidence in him at this point?
So it's great to have Rich Petley as our new Chief Revenue Officer. We actually recruited Rich a couple of years ago to run our EMEA division. He's been promoted every year subsequently. Actually, he's run in EMEA and then run in our international division. Taking on that global sales role is a logical step forward. He knows our business, he knows our technology, he knows our people, he knows our customers, and he had demonstrated performance. If you look at the performance of our EMEA team and international team in the time that he ran it, it was materially ahead of our other geographies. So it's great to have his leadership and focus, bringing all of that capability that he delivered in our international business to the global team.
Really enthusiastic about what he's gonna deliver through this year and into the future.
Yeah. Let's talk about the topic that everybody talks about is GenAI. You have talked about AI Unlimited, I think ask.ai, you said. Maybe elaborate, what are these solutions exactly doing?
Yeah, I think, you know, if you look back in August of 2022, we announced ClearScape Analytics. And that just, that's our capability that means that we're not just a data platform, we're also an analytics platform. So taking all of our AI and ML capabilities around declarative and predictive AI, and integrating that with GenAI capabilities, gives a full suite of, analytics and advanced analytics to our customers. We've actually made that available, in a form factor called AI Unlimited, which is a serverless query engine. And it is being announced. It's actually generally available in, the Microsoft Azure environment.
It's in private preview in the AWS environment, but it's gonna be one of five ISV solutions that is gonna be native to Microsoft Fabric announcements that are gonna happen over the coming weeks. So we are the one external query engine that's gonna be integrated into the Microsoft Fabric as a natively available capability. So you can use all of the power of an enterprise-class query engine in the Microsoft Data Fabric. So that's a super exciting new go-to-market motion for us, new capability in the marketplace. We see it as a great introduction for developers, DevOps, people that have never used Teradata before to get an experience of the power of the platform.
We see it as a great hook to get them interested into our VantageCloud Lake deployment into the future. A brand-new motion for us, integrated right into the heart of Microsoft's new data strategy.
So that could allow people to query Fabric, or the data in Fabric.
And also data outside of Fabric. So it's a super interesting capability to create an integrated query fabric, we call it, because you have query engines both inside Fabric and also outside Fabric, and how do you integrate those together for the best result for an organization?
Got it. And, and how are you, some of these other, Gen AI products, how are you, how are you monetizing them? Is that a separate SKU?
Yeah, so, AI Unlimited is gonna be a separate SKU for us. One of the great things about it is the Teradata platform is that you get all of these capabilities built right into the platform. Our advanced analytics, our capabilities are actually available right now. But what we see that enabling us to do is having really advanced workloads and new large workloads being deployed in Teradata that has to use all of these advanced analytic capabilities. I think we did one of our, the third-party, analyst organizations did an analysis, and we have five times more analytic functions built right into our database compared to, you know, the leader from a competition perspective.
Yeah, interesting. Let me see if anybody else have any questions. Oh, we have lots.
Thanks for taking my question. In your enterprise customers, how do you deal with data silos? Is that an issue with an enterprise that you work with, uses other platforms that store important data? How do you get access to that data and you know-
Yeah
... leverage your analytical tools there?
Yeah, when we set our cloud strategy, we wanted to be open and connected. One of the things that we do, we have an ethos, and it's resonating with our customers, of using data and not moving it. And so our ethos there is move the query engine to the data rather than moving the data to the query engine. And then creating a fabric, what we call a query fabric, across those different environments. And that enables the Teradata platforms to actually query data that might be in Oracle and might be in IBM, could even be in a Snowflake solution or a BigQuery solution, so that you can get access to all of that data, no matter where it is.
We firmly believe that once customers experience the levels of performance and analytic capability that they can get from Teradata, they will actually start moving data into the Teradata ecosystem over time. And so that open and connected gives us access to all of the data inside a customer's ecosystem. We don't think many of our enterprise customers will always have, you know, a couple of data solutions in their environment, and so our ethos is: how do we make sure that we can integrate that and be the query engine of choice for all of that data?
Thanks.
Hey, guys. Thank you. Quick question on the new logos contribution. If you look at the last couple of years, your total ARR is up slightly $60 million. But then if you kind of go back to your initial comment about 120% expansion when they move to the cloud, net- net, like, I mean, it looks like ARR hasn't really changed. I'm kind of curious as like, how should we think about the new logo contribution? And then is it fair to assume, like, is your growth pretty much coming just from the migrations to cloud?
Yeah, absolutely. Yeah, and, and you're spot on. So, historically, Teradata hadn't been focused on new logos at all. That was a new approach when Steve came on board as the CEO. And to your point about the contribution of new logos, it's been very small in the past three to four years. And that's why we're excited about the pipeline that we see, the fact that we have over 100 in our pipeline of new logos, 'cause that is different for Teradata to have that, you know, kind of numbers in the pipeline as we look forward. And I think what we'll see is, we continue to grow that pipeline, we continue to convert that pipeline, and new logos can start to become a bigger proportion of our growth, and that's the opportunity.
We have been focused very much, you know, especially at the beginning, you know, on migrations, you know, on, you know, existing customers. But as we've built out the new products, as we've built out the new go-to-market operations. And I think that's one thing that we've seen from the CRO, Rich, you know, what he's been doing in EMEA and in Asia, he has been very focused on that new logos, leveraging partners to be able to drive that new logos. Which is why we're, you know, another reason why we're excited about he can bring that to the global business, because we think it's a big opportunity for us going forward. So I think absolutely right, that historically the growth has been very, very small from new logos, and they tend to start small and then expand over time.
But I think that's a good opportunity for us, from a growth standpoint as we look out into the future.
Does the fiscal 2025 targets has any contribution from new logos and new erosions?
Yeah, so the question was, "Has 2025 got any contributions?" I've been very, I would say, conservative in my assumptions, that there is a small amount of contribution expected in 2024 and in 2025. But it's not significant. It's not a significant uplift. And so I think that's an opportunity for us to outperform, and an opportunity to do better, 'cause I've been very conservative on those assumptions.
Unfortunately, we are out of time.
Okay.
But thank you so much.
Thank you very much.
Thank you.
Thank you. Thanks.