Teradata Corporation (NYSE:TDC) Q1 2024 Earnings Call Transcript

Teradata Corporation (NYSE:TDC) Q1 2024 Earnings Call Transcript May 6, 2024

Teradata Corporation misses on earnings expectations. Reported EPS is $0.1998 EPS, expectations were $0.56. TDC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Joel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata First Quarter 2024 Earnings Call. All lines have been on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to hand the conference over to your host today, Mike DiLoreti, Vice President of Investor Relations and Corporate Development. You may begin your conference.

Mike DiLoreti: Good afternoon, and welcome to Teradata’s 2024 first quarter earnings call. Steve McMillan, Teradata’s President and Chief Executive Officer, will lead our call today, followed by Claire Bramley, Teradata’s Chief Financial Officer, who will discuss our financial results and outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today’s earnings release and in our SEC filings, including our most recent Form 10-K, and in the Form 10-Q for the quarter ended March 31, 2024, that is expected to be filed with the SEC within the next few days.

These forward-looking statements are made as of today, and we undertake no duty or obligation to update them. On today’s call, we will be discussing certain non-GAAP financial measures which exclude such items as stock-based compensation expense, and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow, constant currency comparisons, and 2024 revenue, and ARR growth outlook in constant currency. Unless stated otherwise, all numbers and results discussed on today’s call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.teradata.com. A replay of this conference call will be available later today on our website.

And now, I will turn the call over to Steve.

Steve McMillan: Thanks, Mike, and thanks everyone for joining us. Today I will start with some comments on our quarterly results, recent changes to our leadership team, new growth initiatives, and examples of customer success. Claire will conclude with our detailed financial results and an update on our outlook. Total ARR was $1.48 billion in Q1, down 1% in constant currency. While this is within the constant currency range we provided, we are not satisfied with this result. In Q1, Teradata achieved $525 million of Cloud ARR, up 36% year-over-year in constant currency. Teradata started out the year firmly focused on improving execution across the business and taking actions to improve performance, and we are continuing our work to drive better execution.

When customers move to the cloud with us, they see value and are expanding. Our cloud net expansion rate remained strong at 123%, and we continue to see approximately 75% of our cloud customers operating in a hybrid environment. We believe our hybrid multi-cloud platform is differentiated and what our customers—among the world’s largest enterprise companies—need in today’s dynamic environment. As we indicated last quarter, some customer decision-making cycles have been elongated. In setting our 2024 outlook, we factored the impact of these longer deal cycles continuing throughout the year. That said, in the first quarter, we closed one of the large, slipped deals from 2023, and we remain on track to close the majority of them this year, as we previously stated.

The on-prem erosion activity we discussed last quarter occurred in line with expectations. We continue to view the first part of 2024 as an outlier, and we do expect our total net expansion rate to remain positive for the year. In a moment, I’ll address more about the customer success actions we are taking that will maintain long-term customer relationships. Finally, we generated non-GAAP earnings per share of $0.57, at the top end of our quarterly range. While we ended Q1 as we had indicated, this is not the overall growth level we expect going forward, and we are acting with urgency to improve our growth trajectory. To that end, we recently appointed Rich Petley as our Chief Revenue Officer. Rich is a standout and experienced sales leader with a proven track record of enterprise sales success, growing customers, and pipeline.

We have been intentional in our talent management planning, and two years ago we recruited Rich as the head of sales of our EMEA region. The growth of that region gave us confidence in expanding his responsibilities last year to include all international sales. Under Rich’s leadership, over the past two years these sales organizations have delivered results meaningfully ahead of our overall growth rate. Rich has consistently shown improvements in driving predictability, adoption of partners, and growing new logos. He has a deep understanding of our customers, technologies and business, and will bring greater discipline in deal management to help Teradata scale our value and drive profitable growth. Rich is the right person for the job now, and we expect to see a positive impact as he takes over our sales organization.

We have also been steadily building out our customer success capabilities, and the organization has developed a more disciplined process and more thorough and objective assessment of account health, enabling active engagement to maintain and grow customers. Our Customer Success team has also instituted AI Innovation days, where we are bringing together our customers and prospects with our subject matter experts to promote deeper understanding of our AI and data lake capabilities, how customers can improve their growth through analytics, and realize increased value from their Teradata investments. We are hosting these sessions around the globe and are seeing high interest and engagement from customers. As an example, we recently had over 100 representatives from one of our banking customers participate with us in building their strategy for AI.

Additionally, we have sharpened our focus on key operational success levers, including driving new logos and improving sales enablement. Through a dedicated cross-functional effort of targeted demand generation, we are seeing positive momentum. Over the last few months, we’ve seen well over 100 new logos added to our pipeline and our teams are focusing on moving these opportunities through the funnel. Ultimately, it’s our technology that customers rely on to achieve success. Today, businesses everywhere are exploring how AI can help them be more productive, more innovative and deliver better experiences for their customers, and are looking at which technology can best support them. Teradata is well-positioned to help companies bridge the gap between the possible and the actual with respect to AI.

But impactful results are only possible through the ability to manage analytics and models at massive scale. At Teradata, this is a core strength, and we believe our technology is fundamental to what companies need today, and we will continue to innovate here. For example, a global investment bank that has been a customer for years tells us that Teradata is a business-critical system, running many of their most important and complex workloads in wealth management and corporate finance. We have earned their trust. Our hybrid capabilities and our AI analytics roadmap enable us to continue to build for the future together. We’ve architected our technology to grow and expand as and when customers need. When a leading European telco adopted a cloud-first direction, this customer was able to easily migrate their on-prem environment to Teradata on Azure.

We helped them harmonize digital customer interaction data so they could execute high-quality customer experiences. Following the successful cloud migration, the customer expanded and is now leveraging ClearScape Analytics to perform exploratory AI use cases. A U.S. healthcare company was a decade-long on-prem customer and became an early adopter of Teradata on Azure to deliver digital health solutions to its clinicians and patients. Their Python AI models run in-database using ClearScape Analytics to identify risk and predict patient population for remote patient monitoring. As a result, this customer has seen a 520% increase in patient engagement aligning to care programs and leading to better health outcomes. These are just a few examples of customers improving their business with our foundational Teradata technology.

We remain committed to investing in innovation that broadens our ability to drive value for our customers and for us. An example from the first quarter is with a major financial institution that operates in over 30 countries. They selected VantageCloud for the fastest, least-risk and lowest-cost transition to the cloud, as well as our hybrid capabilities that support their regulatory compliance needs. They value ClearScape Analytics, our QueryGrid functionality, and our ability to accelerate their analytics and data mesh goals. We recently held a briefing with C-level execs, and they walked away excited about our roadmap and are looking forward to partnering with us to deliver on their highest priority business outcomes, leveraging ClearScape’s ability to scale their AI needs.

We recently made announcements that strengthen our foundation for trusted AI, including AI Unlimited, our on-demand and cloud-native AI & ML engine that we announced in Q4. This technology is moving into public preview in both AWS and Microsoft marketplaces. AI Unlimited is designed to enable developers, data scientists and engineers to seamlessly explore data, conduct experiments, and operationalize AI use cases without risk to mission-critical production environments. Along with AI Unlimited, we announced support for open table formats Apache Iceberg and Linux Foundation Delta Lake as we work to deliver the most open and connected ecosystem for Trusted AI. We see OTFs as the next round of industry disruption, this time at the storage layer.

Companies are looking at OTFs to allow them to store all their data in a single location at the lowest possible cost and apply the best engine for the job to the data. We believe we have the best platform with VantageCloud Lake and AI Unlimited. Our strength is in high performance with optimized and parallel processing of shared data, and we believe we are offering customers unparalleled choice in data management. With this announcement, we are confident that we offer the most open and connected ecosystem for OTF integration. From the private preview uses, we are already seeing AI Unlimited adding value. In one example, a major airline is exploring how AI Unlimited, coupled with ClearScape Analytics, enhances the robustness and predictive power of their models.

In another, a major healthcare provider is leveraging AI Unlimited to experiment with different data sets in order to gain a better understanding of customer behavior and quality of experience. Because AI Unlimited is on-demand, users can freely experiment and explore new use cases without affecting their production systems, and this sets up the opportunity for new workloads on VantageCloud. These announcements highlight our commitment to a fully open and connected approach that allows enterprises to employ modern data strategies to execute trusted AI at scale. Our technology leadership also continues to be acknowledged in the market. Forrester recently named us a leader in its report on enterprise data fabric. The report notes that Teradata excels in data fabric and highlights our superior roadmap which focuses on AI and Large Language Models.

It additionally acknowledges our strong partnership ecosystem that supports large, complex fabric deployments. Forrester also noted how ClearScape Analytics helped a customer achieve an impressive ROI of nearly 250%. In a new Total Economic Impact study, Forrester found that ClearScape Analytics had enabled the organization to increase data scientist productivity and time-to-market as it builds ML models, thereby quickly activating, scaling, and driving results from Trusted AI. We were also pleased that Teradata was named Tech Partner of the Year by FICO, recognizing that our joint customers can quickly operationalize analytic models, including for AI. FICO also noted our jointly designed banking fraud solution that focuses on real-time payments to help stop the rise in payment fraud.

I am also proud of Teradata being named by Ethisphere as one of the World’s Most Ethical Companies for the 15th year in a row. This designation is important as it recognizes our dedication to ethical business practices in all aspects of our operations. Our technology is well-positioned to benefit from the big secular growth drivers in enterprise data & analytics: AI & Machine learning, cloud adoption, real time, streaming and embedded analytics, and data governance and security … at scale. Over time, we firmly believe in our ability to expand our customer base in the cloud, to migrate non-cloud customers, and to attract new logos. In the near term, we expect cloud ARR and total ARR growth to reaccelerate as we progress through the year. As Claire will describe in more detail, our growth outlook for 2024 remains within the ranges we’ve provided.

Importantly, as shareholders expect, we are focused not only on the topline, but also on profitability, protecting and growing our free cash flow and on return of capital. We will continue to invest in our technology differentiation, and we are equally committed to achieving our margin, free cash flow, and capital return targets. I will now turn the call over to Claire.

Claire Bramley: Thank you, Steve, and good afternoon, everyone. In the first quarter, cloud ARR growth remained healthy at 36% year-over-year in constant currency, supported by a cloud net expansion rate of 123%. Even though Q1 is traditionally our lowest growth quarter, the sequential growth from migration and expansion activity was slightly below expectations. As we expected in the first quarter, we had a sequential decline of Total ARR, driven by specific on-prem erosions. The Total ARR decreased by $76 million on a constant currency basis, within the range we provided in February of 4% to 5%. The impact from currency was one percentage point. Let me now share more details on our quarterly financial results, starting with revenue.

First quarter recurring revenue was $388 million, flat as reported and 1% growth year-over-year in constant currency. We saw strong growth in cloud revenue, offset by headwinds from upfront revenue, the anticipated on-prem erosions, and currency. Net upfront revenue was a positive $22 million in the quarter versus $34 million in Q1 of last year, driving a three-point headwind year-over-year. Recurring revenue, as a percentage of total revenue, was 83%. First quarter total revenue was $465 million, down 2% year-over-year as reported, and down 1% in constant currency. The year-over-year change is primarily due to lower perpetual and consulting revenues. Moving to profitability and free cash flow, we were pleased with our profitability. Total gross margin was $289 million in the quarter.

Operating profit was $89 million and operating margin was 19.1%. Both gross margin and operating margin were impacted by a higher percentage of public cloud revenue, offset in part by continued expansion in our cloud margin rate. Non-GAAP diluted earnings per share was $0.57, at the top end of our outlook range. We generated $21 million of free cash flow in the quarter which is lower on a year-over-year basis by $84 million. Approximately $20 million is due to lower net income and approximately $30 million from working capital dynamics, with the remaining change largely due to lower billings. None of these impact the full-year outlook and therefore we are still on track to land within our 2024 free cash flow range. In the first quarter, we repurchased approximately $124 million of stock, or 3.2 million shares.

We remain committed to returning at least 75% of free cash flow to shareholders in the form of share repurchases. Moving to our full-year 2024 outlook, As a reminder, our outlook ranges are in constant currency for the ARR and revenue metrics. We are retaining the ranges provided in February, but we currently expect to come in at the low end of the ranges, driven by lower Total ARR expansion as on-prem customers continue to migrate to the cloud. However, as it relates to Cloud ARR, we remain confident in the mid-point of our range due to the strong pipeline of customers planning to migrate and expand with us in the cloud. Please refer to our Q1 earnings presentation on our investor relations website for a complete list of the 2024 outlook ranges previously provided.

We anticipate acceleration of Cloud and Total ARR dollar growth throughout the year. We expect the fourth quarter to be the strongest quarter and deliver 50% or more of the growth, in line with historical seasonality. We anticipate Total ARR to be relatively flat from Q1 to Q2. Some updated modeling assumptions for 2024 include, using the end of April currency rates, we anticipate year-over-year headwinds of approximately 230 basis points on revenue, which is an incremental 100 basis points compared to the January rates, 130 basis points on Total ARR, and 170 basis points on Cloud ARR, weighted average shares outstanding of approximately 98.5 million, other expense of approximately $50 million. We continue to project our Non-GAAP tax rate of approximately 24.2%.

Regarding our outlook for the second quarter of 2024, we anticipate non-GAAP diluted earnings per share to be in the range of $0.46 to $0.50. We project the non-GAAP tax rate to be approximately 24% and the weighted average shares outstanding of 98 million. We remain highly focused on profitability and FCF growth. As we look to 2025 and beyond, we have multiple levers available, including top-line growth, gross margin expansion, operating expense optimization, and further working capital improvements to increase FCF generation. We continue to invest in areas that will drive long-term growth, including AI, demand creation, and brand perception. We are still on the path to achieve the 2025 goals of at least $1 billion in Cloud ARR, an operating margin in the low 20% range and free cash flow of at least $450 million.

However, we expect it will take slightly longer to achieve our 2025 total ARR and revenue growth metrics. We continue to operate in this growing market with differentiated product capabilities and strong customer loyalty and therefore remain optimistic about the profitable growth opportunities ahead. Thank you very much for your time today. Let’s please open the call for questions.

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Q&A Session

Operator: [Operator Instructions] The first question is from the line of Erik Woodring with Morgan Stanley. Your line is now open.

Erik Woodring: Amazing, guys. Thank you so much for taking my questions. Steve, maybe if we could start with you, can you just expand a bit on the broader kind of deal and demand landscape? Clearly, you mentioned closing one of the slipped deals, but you’re now guiding to the lower end of your ranges for total ARR and cloud, total ARR for the full-year. So, are decision-making cycles any longer than three months ago, kind of what are you hearing from customers, are there any new holdups? We just love to hear what you’re seeing kind of boots on the ground and maybe how that behavior has kind of continued into April? And then I have a follow-up. Thank you.

Steve McMillan: Yes. Thanks, Erik for the question. We’re still seeing a very positive demand environment across the full-year. We did refer to some deal elongation in last quarter’s earnings call, and that’s been factored into our full-year guide, and that hasn’t really changed. As data analytics and AI becomes a strategic decision point within our customers, we see that more people getting involved in those decision-making journeys and inside our customer base. But that has been factored into our full-year guidance. Although, Q1 was slightly below expectation, we are confident in the midpoint of our outlook from a cloud perspective, because it really is supported by the pipeline that we have and the strong interest that we have in our cloud platform.

Erik Woodring: All right. Thank you very much for that color. And then, Claire, maybe just turning to you, maybe to ask a similar question just on the cloud ARR side. I think last quarter we talked about slight sequential expansion in cloud ARR dollars, obviously down about $3 million sequentially. So, can you just maybe dig in a little bit more specifically into some of the headwinds that you faced in the quarter? What were kind of the main factor or factors for why that metric kind of slightly underperformed? And then, obviously, keeping the full-year cloud ARR midpoint unchanged. What kind of changes as we go into 2Q and 3Q and 4Q? Would just love if you could unpackage that for me. Thanks so much.

Claire Bramley: Yes. Thanks, Erik. So, to your point, we anticipate a slight growth in constant currency is what we are expected kind of the low single-digits and mid single-digits as we came into Q1. We did actually see a negative impact from currency of about $5 million in the quarter on our cloud ARR as our mix with regards to our international business continues to grow. So, we did see that low single-digit growth in constant currency to your point, then net of currency on a reported basis, it was a slight decline. It’s a slightly below, a few million dollars below what we were expecting coming in and given that Q1 is always anticipated to be our lowest growth quarter, we don’t believe that that will materially impact our overall ability to hit the midpoint of the guide.

And as Steve mentioned, we have a strong pipeline to support that. So, that’s what enables us to be able to keep that midpoint. We always anticipate an acceleration of that growth. So, we see that, we expect acceleration in Q2, Q3, Q4 with Q4 remaining our biggest growth quarter in line with our historical seasonality and approximately 50% is what we’ve seen in Q4 historically. So, we’re anticipating the same in 2024.

Erik Woodring: Thank you. The next question is from the line of Wamsi Mohan with Bank of America. Your line is now open.

Wamsi Mohan: Yes. Thank you so much. I was wondering maybe, Claire, just to go down this point again on public cloud, there are sequential trends. Obviously, FX, you called out as an impact. But I think in your prepared statements, you also said sequential growth from migration expansion activity was slightly below expectations. Now, when I look at sort of your comments around confidence in a reacceleration, you do point to migration and expansion. So, could you maybe just give us some sense of what’s driving that confidence that that pipeline that you see you will be able to convert, and that there won’t be more kind of maybe hesitancy or pause with spending in that area? Why should we feel more comfortable about the conversion of that pipeline as we go through the course of the year?

Steve McMillan: Hey, Wamsi, it’s Steve. Thanks for the question. I’ll take it and then hand to Claire if she can any other color to add. I think if we take a step back, it’s important to recognize that in 2023, we grew our cloud ARR faster than the broader market and our 2024 outlook says that we’re going to do the same. So, we have great confidence in our business and our ability to grow cloud. Couple of things that lead us to that conclusion, one is that once customers are in the cloud, they tend to expand with Teradata once they’ve migrated. And then, we’re going to get the base of that cloud business growing over time and that’s going to be a more substantial impact to our overall growth rate. The other thing is we’ve got a great migration pipeline in terms of major enterprises migrating to the cloud with us.

There’s still a great recognition that we are the best path to the cloud for our customers for the least cost, least risk, quickest path. So, that if they want to take advantage of these new AI/ML capabilities in the cloud, we’re definitely the best way to do that. I think that’s building our pipeline in terms of our overall pipeline and execution. As Claire pointed out, Q4 is always our seasonally our largest quarter. We always tend to do more than 50% of our business in that Q4, but we’re seeing a good pipeline as we move into the second-half of the year and a good market environment to execute in.

Wamsi Mohan: Okay. Thank you, Steve. Appreciate the comments. In your prepared remarks, you also noted, you’ve seen well over a 100 net new logos added to your pipeline, can you give us some sense of sort of where you’re seeing this traction? Should we expect continued traction of net new logos? And in sort of your bridge to getting to the billion, is now the new logo part any more important or any more larger size than what you had anticipated previously? Thank you so much.