Thanks, everybody. Appreciate the attendance. Steve McMillan, President, CEO of Teradata. We've got Chad Bennett, IR and Corporate Development in the audience, so appreciate everyone's attendance here. Steve, maybe we could just start at a high level. Could you talk about where Teradata sits competitively? Maybe the company's focus on analytics in a hybrid, multi-cloud world. You know, ultimately, what's your vision for the company versus peers? Talk about pricing, customer ROI, etc.
[Dan pipe it down. Just for people that don't know the Teradata story, we are a data and analytics company, actually 40 years old. Being in the industry for a long time, we built our capability around a massively parallel architecture. Over that course of that time, have attracted some of the world's largest organizations, and we actually process all of the data and analytics for some of the world's biggest companies. I joined the company about four years ago and really pivoted the company towards cloud. We were well known for our on-prem capabilities, but we hadn't exploited our capabilities in the cloud quite as much.
So over the last four years, we've really focused on growing our overall cloud business and having that hybrid capability so we can meet our customers where they want to be met in terms of if they want to have an on-prem capability, if they want to operate in the cloud, and they can have a platform that serves their needs in a very hybrid environment, in a multi-cloud environment. And that differentiates us from the competition in terms of being able to execute workload on-prem very effectively and efficiently, and also being able to operate in the cloud very effectively and efficiently. And to one of the points that you asked, that gives us the ability to have some great differentiation from a price performance perspective when it comes to executing some of the largest and most complex data and analytic workloads in the world.
In the world of AI, and I know that we'll come on and talk about that in a little bit, almost all workloads are incredibly complex and operate at incredible scale. And so we are uniquely positioned in terms of the capabilities that we provide to our customers to enable them to execute their data and analytic strategy. Just from a competitive perspective, we see a lot of new entrants into the marketplace and also organizations that are growing. What's been really interesting, and I mentioned it on our last earnings call, is that customers that have tried out some of these technologies are actually coming back into the Teradata technology set because of the unique differentiation that we've got and the way that we can execute workload.
So I referenced in the last earnings call a customer that came back from Snowflake. They were actually wanting to run their enterprise data warehouse, and we're now running that in Amazon for them at a much better price point. I gave another example of a Latin American bank where, from an analytics perspective, they were using Databricks, and then they tested out the Teradata platform and saw that they could operate the analytics that they were running in Databricks at about twice the speed and half the cost of the Databricks platform. These kind of technology capabilities are allowing us to differentiate in the marketplace and win market share and growth in the market.
That's great, and two, maybe more background questions than we'll kind of get into it. You mentioned you've been there four years, and you started to talk a little bit about it, but you've really undergone quite the transformation of the company in four years. Maybe you could review that a little deeper, you know, what you saw, some of the decisions that you made, what's gone on here really in four years to really reposition the company.
Yeah, I think as we reposition Teradata, there's a lot going on under the covers if you look at our overall financials. But during that four-year period, we've taken our cloud business from essentially close to zero to over $500 million in that four-year period. We said that we were going to focus on being a technology company. Over time, Teradata had developed a large services capability. So really doubling down on being a technology company and a platform company. And we took those design principles and we essentially reimagined the whole company. We completely inverted our research and development envelope so that we were focused on the cloud. We built partnerships with AWS, with Microsoft, with Google. We have an innovation partnership with Microsoft as an example where our Teradata query engine is natively integrated into Microsoft Fabric.
We were one of only five ISVs that actually did that and one of the only query engines apart from Microsoft's native query engines that are inside that environment, so a huge transition of the company in terms of our focus, of tremendous cloud growth that we've had over the past four years, and we expect that to continue as we execute over the next couple of years.
Great. And then a couple of names that came up in your introductory comment there, Databricks and Snowflake. I mean, that's as investors, that's a common question that we get. And maybe help level set us, you know, where do you play within them kind of in this new data platform layer?
So I think it's super interesting. So if we look at how we're looking at our growth for this year, our cloud growth is actually pretty in line with Snowflake, who are considered, you know, a hyper-growth organization. But the strategy from a Teradata perspective is totally from a profitable growth perspective. So we are in a great position where we generate a lot of free cash flow and we return that free cash flow to our shareholders. But what we see in terms of that competitive environment is whenever we can get the opportunity with a customer to run a proof of concept side by side with one of these other platforms, we tend to win. And we win based on the technologies that we have.
That's enabled us to demonstrate to our customers that we have that differentiated capability that we can actually go head to head with some of these players inside the marketplace and win.
Okay, great. That's some good background questions there. Maybe into the details a little more here. You know, a lot of moving pieces over the last couple of quarters. Could you just help us, you know, think back to Q2, kind of what happened there in terms of the demand environment, you know, details around the RIF recently? What organizational changes have you made and making in light of the restructuring efforts, I guess?
Yeah. So Teradata, we are a large enterprise organization. We focus on large enterprise customers. And that means that our deal set tends to be a minimum of six figures usually. But then most deals are in the six, seven figure range, and we have a lot of deals that are in the eight figure range. And what we experienced at the start of the year, and actually it was a kind of hangover from Q4 of last year, was deal elongation. So for these very, very large deals that we were working with some of these huge companies on, we saw those deals stretch out in terms of the close times that we were looking at.
And as we looked at those deals and those deal mechanics, we actually took the opportunity to reset what our outlook was for growth, especially from a cloud perspective for the remainder of the year. We also took the opportunity to appoint a new sales leader in the first half of the year. And from a go-to-market perspective, actually executed a restructuring to enable a refocus into the sales team on some of these large transactions, putting the best talent that we have in terms of leading these transactions in the marketplace. And we also took the opportunity to really look at our cost basis as we move forward. As I said, our focus is profitable growth.
As we looked out in time to maintain our free cash flow to ensure that we were generating the earnings per share that we were looking for, we took that opportunity to execute and announce a restructuring. I'm glad to say that didn't really negatively impact our sales execution in the field. We kept all of those relationships constant, but we did eliminate layers of management to enable us to get more senior leadership closer to some of these mega transactions that we've been working on.
That's great, and then maybe if we think about this past quarter here, could you talk about maybe the change in customer behavior for some of those large cloud migration deals? You know, it seemed like maybe there was some downsizing. Is that something, you know, trends you've been seeing? We talked about the last couple of quarters. Is that specific to you? Is it just cloud migrations in general?
Yeah, I think it's been interesting as we've gone through Q3 as an example, and I encourage you all to review our earnings from a Q3 perspective in terms of we had a very solid execution in Q3. The fundamentals of the business are incredibly strong. You know, we beat consensus across a whole range of metrics from the revenue side and from a profitability perspective, from a free cash flow perspective, and so but we did see the cloud mix of our deals, so if you think about the spend that our customers have with us in a hybrid environment is spread across both on-prem and the cloud, and we have been seeing in very, very large deals, eight-figure ARR deals, which can be up hundreds of millions of dollars in terms of a commitment from a customer, and we have seen those continue to elongate.
And indeed, one of the deals, an eight-figure deal that we were expecting to close in Q3, actually closed in the first weeks of Q4. Just looking at the deal complexities that you have in terms of executing against those very, very large deals. And we've kind of seen that continue as we've gone through into Q4. But what we are seeing is it doesn't really change the overall spend commitment that our customers have with us. And in many cases, those customers continue to increase their spend commitment with us.
That's great. You talked about the confidence there around spend commitments, et cetera. Maybe, you know, drill down into some of that a little more. You know, what gives you confidence around, you know, your cloud growth ARR guidance at this point? You know, it sounds like the deals are pushed out, some are closing, you know, confidence around that deal pipeline and then the ARR growth outlook.
Yeah, I think from as we look at Q4, we actually see our customers starting to leverage the strength of our platform. And our platform essentially enables our customers to operate simultaneously from an on-prem perspective and a cloud perspective. And it gives the opportunity for those customers to actually stage their migrations to the cloud. So what would usually or could be an eight-figure deal from a migration perspective turns into a seven-figure deal. And so we saw that pattern in terms of our customer buying behavior and how they wanted to stage their migrations to the cloud over time. I think we've seen in the market and the industry a number of organizations really thinking about their cloud strategy, the cost of the cloud environments that they're running, can they have an optimal deployment across both on-prem and the cloud?
From a Teradata technology perspective, that's something that we enable our customers to do. However, what that doesn't do is actually decrease the overall levels of spend that our customers have with us. So we actually reiterated our total ARR numbers for this year and also pointed to the fact that we were going to have growth in total ARR as we moved into next year. In terms of looking at our go forward projections, we still see strength in our fundamentals. We still see good growth in our cloud business, probably similar to 2024. That's really powered by, you know, we see good retention rates in our current customer base. We see increasing spend commitments from our current customer base in terms of both how they're growing with us in the cloud, but also how they're growing with us from an on-prem perspective.
And then, as cloud becomes a bigger and bigger part of our total ARR, you know, as it gets up to $500 million, you know, well over a third of our business now is in the cloud, that dollar number becomes more significant as our higher growth rate in the cloud gets applied to those higher dollar numbers.
Great. And then maybe, you know, thinking about cloud growth into next year, you know, what are some guardrails or maybe building blocks for 2025? You know, what are the most important drivers to continue on with that cloud growth into next year?
Yeah, I think we're super excited from a technology perspective in terms of the announcements that we've got coming in terms of the availability of our platform across multiple cloud providers, also the analytics capabilities that we have in our platform. We're seeing our customers utilizing GenAI and language models, both inside the platform, but also without moving data outside the Teradata, leveraging large language models and integrating large language models with the data, the trusted data that they have inside the Teradata ecosystem. So I think that technology foundation will set us on a good path for growth as customers want to deploy in production some of these more complex workloads. But just from a mechanics perspective, if we look at the P&L, I know that all the financial analysts want to get under the technology and work out, you know, how does that translate into numbers for us?
You know, migrations and expansions from a cloud perspective are still going to drive a lot of our growth as we move into next year from a cloud perspective. The fact that we do have very good expansion rates, our trailing 12-month expansion rate is 120%. That means that as customers move to the cloud with us, they grow with us inside the cloud. And we've still got a lot of real estate where we can actually leverage our on-prem ARR and our on-prem relationships with customers to help them with that modernization journey and that cloud journey. And that's essentially going to enable us to continue to propel our growth. And on our last earnings call, our CFO, Claire, actually said, you know, we still see the path to get to $1 billion by 2026.
It's an ambitious goal for us, but we still see that path in terms of the overall demand environment and the overall relationships that we have with our customers.
Great. And then maybe thinking about that billion dollar goal, I think it's a 26 number. You know, what are some keys to that or what maybe not needs to go right, but continues to go right or could move in your favor to create a better path to that target?
Yeah, I think what we're seeing from a cloud perspective is, you know, organizations aren't moving to the cloud from a cost perspective now, and there's a lot less mandates in terms of, okay, we're going to shut down our data centers and we're just going to be delivering inside the cloud, so I think that whole hybrid environment is going to be key for us in helping our customers unlock innovation. It's really interesting. There's a recent Deloitte study where they said that, you know, over 70%, I think, of the GenAI proof of concepts that have been running inside organizations have not translated into production, and the reason for that is they can't operationalize those GenAI workloads at scale in an effective and efficient and cost-effective way, and what we've been demonstrating to our customers is that we can do that on a daily basis.
And we can do that not just in the cloud, but we can do it on-prem. And I think as customers start to take advantage of that true hybrid capability, they're going to grow their cloud business with us, but also utilize their on-prem assets in a much better way.
Great, and then maybe, you know, GenAI has come up a couple of times here. Maybe, you know, where does Teradata sit in a GenAI world? You know, why would a customer use Teradata over competitors for GenAI workloads? And then maybe beyond what you're doing, what else could you do from a GenAI perspective to kind of drive the traction there? And finally, around GenAI, everyone wants to know monetization. How do you monetize it?
Yeah, I think what we've seen, if you look back in time, Teradata actually back in 2010 bought a company called Aster Technologies, which was a pretty pioneering analytics organization. They had a lot of AI and ML capabilities. Teradata hadn't really exploited that asset. One of the changes that we made as we went cloud first was to integrate all of the AI, ML, analytics capabilities that we had inside the Teradata ecosystem right into our database. What that means is we can execute AI, ML workloads at scale incredibly well. Not very many people know, but the Teradata database is actually a vector database. The way that the Teradata technology works is it's vectors. We operate vectors at scale through a massively parallel architecture.
For the techies out there, they will recognize that that pattern is actually the same pattern that AI and GenAI workloads require to operate. So when you have those capabilities built right into the database and you utilize those in conjunction with running a language model, for example, inside the Teradata platform, it enables you to execute very efficiently and effectively those kinds of workloads and move them from proof of concept into a real production-oriented delivery. I would say from a large language model perspective, the battle for language models has started and it's far from ended. You know, you look at, you know, the choice of language models that organizations have in the marketplace. Our approach to language models is to be an open platform, open and connected.
That's really resonating with our customers in terms of you can bring any language model into the Teradata environment. We've actually been running with a couple of the large banks in North America, and we've just actually taken these use patterns and are working with some banks in Australia to actually look at running language models on-prem inside the Teradata environment. And because of the way the Teradata technology works, we can actually run smaller language models like Hugging Face more effectively and efficiently than you can in a CPU architecture than you can run those language models in a GPU architecture. But we haven't stopped there. What we announced in our last earnings call and our last marketing event was a partnership with NVIDIA.
That partnership is essentially to take all of the Teradata capabilities in terms of operating with data at scale and leverage the NVIDIA GPU architectures to run very large language models inside the Teradata environment on GPUs, tightly coupled with their data so that they don't need to move data around into different constructs. You don't need to move your data between different providers. You can utilize your data where it is with the world's most advanced technologies from a language model perspective. We see that as a catalyst for really driving usage of the Teradata platform as we move forward.
That's great. Very comprehensive. Now, just I wanted to flip back because you'd mentioned cloud expansion rates and we kind of had a couple of different directions we could go there. But could you just talk about or weigh maybe the expansions, migrations, and net new customers? You know, I think retention is their expansion, maybe, you know, ticking down a little bit again in the fourth quarter here. But if you could just weigh those three maybe versus expectations.
Yeah, I think it comes to, you know, how we build confidence into our guidance for 2025 and growing our ARR into 2025, which will also enable us to increase our free cash flow and also our commitment in terms of returning free cash flow to our shareholders. And so as we build up that ARR picture, there's a number of different factors. One is as we've gone through this year, we've seen an increase in our retention rates. And we expect those retention rates to continue to increase and improve as we move into 2025. So the overall foundational base of our business is even stronger as we move into 2025. Our migration and expansions, we expect those to power most of our growth.
We are seeing new logos starting to utilize Teradata. Got a number of super interesting new use cases that are driving new interest in the Teradata platform, and the cloud growth that we have in terms of expansion will make a more meaningful impact in terms of our overall results, and then some of those workload patterns from an on-premise perspective are giving us confidence that we can actually grow and continue to grow our on-prem business slower than the cloud, of course, but with all of those components coming together, it gives us confidence as we move into 2025 in terms of how we are viewing the business and our expectations.
That's great. And then we're bumping up on, you know, last five minutes or so. Are there any audience questions? We're happy to entertain those. No questions. All right. You know, a couple of things that we're asking all companies at the conference. We're kind of past the election here. Uncertainty around that's cleared up. You know, are you seeing customers more willing to spend here perhaps? Any thoughts around two things here, I guess, against around one, the new administration, and then two, perhaps a calendar year-end budget flush?
Yeah, I think, you know, from a Teradata perspective, we have made that pivot and transformation to become a recurring revenue organization, so we have long-term spend commitments from our customers. What does that mean? It means, generally speaking, that we don't receive the benefit of any spend flush towards the end of the year, right, so as we look at our business, our business has been built on some solid fundamentals in terms of a very strong recurring revenue base as we move forward. We see in terms of the overall environment, there's a lot more certainty now, and you can see it in the overall market and the volatility reducing from an overall market perspective, and I think that's going to continue to drive a little bit more confidence in terms of the commitments that we can see from our customers.
At the end of the day, Teradata is built on long-term relationships, delivering some of the most complex workloads in the world for some of the largest enterprises in the world. That gives us that steady base to continue to grow against as we move into the future.
Great. And then, you know, you mentioned this earlier, but how do we think about the balance between growth and profits? I know, Steve, you're very focused on the cost and profit side of that. You know, what controls do you have over the business internally to optimize costs and, you know, drive that margin higher?
Yeah, I think if you look back over history and you look at our Q3 results in terms of our earnings per share and free cash flow, how we've grown them from a year-over-year perspective, our EPS outlook for 2024 is very positive. So we have demonstrated that we are good stewards of our shareholders' capital in terms of how we invest that, how we make sure that we get a balance between growth and profitability. And we continue to grow on both axes, right? So we'll continue that good stewardship. We ensure that we invest in the right areas, be it with the NVIDIA partnership or the work that we're doing from a language model perspective, the continuing innovations that we have in our overall platform and technology that's going to drive our growth as we move into the future.
But we do that in an optimized way to make sure that we're spending our dollars wisely to get the best return for our customers.
That's great. Then lots going on. Maybe one question to wrap it up here. What excites you the most about future Teradata?
Yeah, I think, you know, I'll end where I started. You know, when I joined the company, I said that we were going to pivot and become a technology company, and the thing that excites me most is actually all the technology innovations that we are developing based on the real core technologies that Teradata has as a company, the patented capabilities that we have, utilizing those to differentiate us in the marketplace and really getting some outstanding results for our customers. I'll end on one story. We had one of the largest healthcare providers in the country come and talk at our company meeting about their transformation journey from on-prem to the cloud, and this enormous healthcare provider basically said that, you know, we utilize Teradata technology every day to help improve patient outcomes and ultimately save lives.
That's a real motivational aspect of working with Teradata every single day.
Great ending there. Appreciate it, Steve. Thank you. Thank you, Chad.
Thank you. Thanks, everybody. Thanks, Dan.