Teradata Corporation (NYSE:TDC) Q2 2023 Earnings Call Transcript

Teradata Corporation (NYSE:TDC) Q2 2023 Earnings Call Transcript August 7, 2023

Operator: Good afternoon. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Second Quarter 2023 Earnings Call. All lines have been place on mute to present any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] I would like to hand the conference over to your host today, Christopher Lee, Senior Vice President of Investor Relations and Corporate Development. You may begin your conference.

Christopher Lee: Good afternoon, and welcome to Teradata’s 2023 second 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 our 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 June 30, 2023, 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 excludes 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 and constant currency revenue comparisons. 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, Chris, and hi everyone. Thanks for joining us today. Teradata executed another very solid quarter in Q2 2023. I am pleased that the organization is making progress in many key areas of the business. In the second quarter we accelerated total ARR growth increasing 10% year-on-year as the team executed well on the profitable growth cloud strategy. We brought in another quarter of strong growth with public cloud ARR growing 77% year-on-year. As customers migrate to the cloud with Teradata, we see them expanding workloads and use cases as they realize business results from our Teradata Vantage Cloud Analytics and Data platform. Our trailing 12-month cloud net expansion rate was 121% in Q2, up from 119% with large expansions coming from across various industry verticals with financial services, healthcare and telecommunications leading the way.

We delivered $462 million in total revenue in the second quarter, an increase of 10% year-over-year in constant currency. This quarter marks the first meaningful year-over-year total revenue growth at Teradata since Q2 2021, a key milestone enabled by our growing cloud business and its impact on total company results. Our broad based momentum across the business and our ongoing technology innovation and industry recognition as a leading cloud analyzing data platform and better partners, this momentum paired with our financial discipline all led to our non-GAAP earnings per share of $0.48 beating the high end of our guidance range. I’m really proud of the execution across the board. We’re delivering on our commitments and are confident in our strategy.

Today, I’ll cover some highlights on the ongoing straits we are making and the strengthening of our differentiated technology, our purposeful and effective sales and marketing execution, our increasing partner engagement and finally some big commitments in the area of ESG. Let’s start with Teradata’s technology innovations. Just a few weeks ago, we announced Teradata VantageCloud Lake on Microsoft Azure. Our cloud native architecture now available on Azure globally offers the enterprise scale our customers need including end to end support for AI and ML. We’re excited that ClearScape Analytics our robust analytics capabilities of VantageCloud Lake is enhanced by integration with Microsoft services such as Azure Machine Learning. This means VantageCloud Lake on Azure is designed to dramatically increase customer’s ability to deploy and manage AI and ML including generative AI and large language models within their businesses today.

We are well positioned and are already helping customers as they begin to explore how gen AI can drive value and business outcomes. As we continue to accelerate our product roadmap, we were pleased to announce the acquisition of Stemma, a cloud native, fully managed data catalogue solution. We’re excited that the Stemma team has joined our products organization and will apply their expertise to our growth objectives. Stemma’s pioneering use of AI and ML helps users discover, trust and use their data and metadata more effectively. We intend to integrate Stemma’s innovative technology into our analytics platform to help our customers get greater value from the Teradata investment. We all see that the hot topic of today is AI and gen AI. At Teradata, we view AI as a part of the much broader strategic imperative that our platform already addresses.

Business leaders today are facing unprecedented pressures in continuously increasing data complexity. We believe Teradata is uniquely positioned to help them take advantage of AI to solve the most complex challenges and create massive enterprise business value. We see the promise of AI and gen AI as bringing in new opportunities to deliver brand new use cases, increased productivity and innovation. We’re excited to bring our complete cloud analytics and data platform for AI to help our customers generate that value. Let me share an example. One of our customers, a global hospitality company serving over 1 million guests daily uses AI models against Teradata platform to predict order availability times. The AI model takes into account meal cook times to go and dine in order volume, third party application orders and historical information to accurately forecast each order’s cook time.

This results in timely preparation and ensuring hot food for guests which result in a positive guest dining and to-go experience. Additionally, this customer uses an AI model for health and safety. The model monitors and predicts restaurant cleanliness based on a number of variables and provides triggers to alert restaurant operators if a change in behavior is needed. This results in cleaner, healthier, and safer dining experiences. This is just one example of AI and use at a customer. Well, the new frontier of AI is certainly exciting. We are maintaining our cloud leadership as well. Early in the quarter, we received a new recognition from Forrester Research acknowledging our cloud leadership and its cloud data warehouse way. The report noted Teradata’s strong vision focuses on a strategy that includes AI, ML at scale.

Forrester also pointed out Teradata’s strengths and end database analytics, scale out optimization, deployment options, multi-regional support, and a broad set of analytics use cases. AI and ML require volumes of data and extensive use of analytics, both longstanding differentiators of Teradata. We will continue to work in support of bringing significant value to our customers. I also mentioned our deliberate focus on sales and marketing execution. In the second quarter, we continued to see large transactions including some in the seven figures, and we are adding VantageCloud customers with all three of the leading hyperscalers. Vodafone, a longstanding Teradata customer has renewed their strategic relationship with Teradata. The EMEA based telco provider has chosen to modernize their on-prem data ecosystem and migrate to VantageCloud enterprise on Google in several key markets, including Germany and the UK to support their business strategy, marketing campaigns and sales commissions.

We signed a large deal with a Fortune U.S. 30 healthcare company as it migrated and expanded in the cloud with Teradata on AWS. Moving to the cloud positions this customer to accommodate business intelligence requirements for month end, quarter end, and yearend financial reporting, as well as provide analytic support for the annual open enrollment for their members. A major telco and internet service provider in Latin America is migrating to the cloud with VantageCloud Lake on Azure. The customer is in the process of redefining its future analytical architecture. Our team faced some heavy competition and Excel demonstrating our capabilities and not only meeting, but exceeding this customer’s scale and service level requirements. This enterprise executed a thorough evaluation of vendors and determined that Teradata not only fully complied with its requirements, but did so at the lowest risk.

A world leading auto manufacturer headquartered in Japan selected Teradata Vantage as its core analytics and data platform to enhance cybersecurity and governance. The customer moved to Teradata as it realized the competitor’s offering was unable to expand to meet its needs for advanced analytics and machine learning capabilities to prevent cyber-attacks and fraud in the future. Vantage’s power will allow the customer to bring more sophisticated analytics to cybersecurity operations, enhancing overall governance with fewer resources. An example of a customer expanding their environment with us was at one of the major U.S. airlines. We won this business because a competitor’s system couldn’t meet the customer’s needs to scale when using temporal data.

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This customer grew its environment by 25% as it moved workloads and business applications to VantageCloud. Customers remain at the very forefront of all we do. Our customer base of large global enterprises know they need powerful analytics and data to survive and thrive in these dynamic times. We are absolutely dedicated to being a trusted partner and know that there is none better at helping them achieve their goals than us. We believe that partnerships are a central component to achieving customer success, and we’ve continued to execute our strategy in this area. Being partner first means we are challenging ourselves to deliver greater value for our customers through stronger partner engagement. In June, we hosted two key events that focused on and energized our partner trajectory.

Our partner advisory board comprised of executives from the most respective IT companies met with our executive team to guide and bolster our partner first strategic plans. We also hosted our Teradata partner forum bringing more than 100 of our top partners to discover new ways we can drive exponential results for customers. We’ll continue building a strong future together with partners. Last quarter, we announced that we had partnered with Dell to bring together our company’s best of breed technologies and integrate Teradata Vantage with Dell’s converged infrastructure. A U.S. energy company is one of our first customers for this joint offering, utilizing the platform to provide their clients with the best possible customer experience and resulting in a seven figure deal for Teradata.

ClearScape: I’m also proud to share that in the quarter we state a stronger position in our ESG efforts, declaring ambitious commitments to carbon neutrality and net zero emissions. Teradata is deeply committed as a company that takes a responsible and ethical view of our impact on society and the planet. We have resolved to be carbon neutral in Scope 1 and Scope 2 emissions by the end of 2024 and net zero for Scope 1, 2, and 3 emissions by 2050. We’ve made our commitment public and transparent as we hold ourselves accountable to our employees, customers, shareholders, communities, and other stakeholders. So I look at the incredible progress we have made and I’m very proud. We continue our transformation as a cloud analytics and data platform market leader.

We’ve leaned into operating with a partner first mindset. Our sales and marketing efforts are resonating in the market, and importantly, customers are growing with Teradata. As I turn the call to Claire, I have great confidence in our future and I’m pleased to reaffirm our 2023 outlook. Claire, over to you.

Claire Bramley: Thank you, Steve, and good afternoon everyone. Our second quarter was filled with many highlights including strong year-over-year and sequential dollar growth in both total and public cloud ARR. We continue to see momentum from healthy customer demand for the Teradata Vantage platform resulting in public cloud ARR growth of 77% year-over-year as reported and total ARR growth of 10% year-over-year as reported. On a sequential basis, we’ve reported $26 million of public cloud ARR growth and $17 million of on-prem subscription ARR growth. Organic expansion activity was the primary driver for growth in the quarter as an increasing number of existing customers added new incremental workloads onto our platform, driving up our trading 12 months cloud net expansion rate to 121%, strengthening ARR under [indiscernible] and improving recurring revenue growth performance and a healthy generation of profit dollars.

This resulted in non-GAAP diluted earnings per share of $0.48, slightly above the high end of our guidance range, another highlight in the quarter. I am pleased with the financial results we’ve reported in the second quarter because it continues to demonstrate the company-wide execution against our cloud first profitable growth strategy. Let me now share some more details on our financial results, starting with revenue. Second quarter recurring revenue was $371 million, 8% year-over-year growth as reported, and 10% year-over-year growth in constant currency. Growth was driven by the continued execution of our go-to market team over the last several quarters, resulting in multiple large expansion deals across various industry verticals. This dynamic contributed to healthy cloud revenue growth year-over-year.

Recurring revenue as a percentage of total revenue was 80% [ph]. Recurring revenue growth was broad based with EMEA and the Americas leading the way. Performance in EMEA was strong overcoming currency headwinds and more than offsetting declines in the APJ region, which includes a wind down in China that started earlier this year. This quarter was the first period where there was no impact on growth from ceasing operations in Russia. There was the minimus year-over-year impact from upfront recurring revenue of quarter in line with our expectations. Second quarter total revenue was $462 million, 7% year-over-year growth as a reported and 10% year-over-year growth in constant currency. The year-over-year change is primarily due to the strength in recurring revenues and a consulting business that is stabilizing its revenue run rate as anticipated.

Moving to profitability in the second quarter, profit dollar generation was healthy. We achieved $280 million in gross profit and a gross margin of approximately 61%. The primary drivers of our strong gross profit dollar generation in the quarter was both higher volume and improving cloud and on-prem margin rates year-over-year. Operating profit was $72 million on an operating margin of approximately 16%. Total operating expenses were flat year-over-year, but up sequentially with modest increases in both R&D and sales and marketing expense. We continue to remain cost disciplined as well as prioritize positive return generating investments that focus on our future growth. These activities resulted in non GAAP diluted earnings per share of $0.48, which includes a benefit of $0.02 from a lower tax rate in the quarter versus our prior guidance.

This is simply a timing difference since our assumption for the full year tax rate is unchanged. Turning to free cash flow and capital allocation, we generated $46 million of free cash flow this quarter, which was in line with our expectations, but different from a historical cash flow linearity. This was due to the timing of invoicing and incremental cash tax payments of approximately $35 million that we mentioned on our earnings call this past February. We are still on track to achieve our annual free cash flow guidance. Given the sales pipeline that supports our 2023 financial outlook. We continue to take advantage of our strong balance sheet to repurchase shares, resulting in a return of 106% of our first half free cash flow to shareholders ahead of our annual target of at least 75%.

As Steve noted, the acquisition of Stemma Technologies is an opportunity to add great people and complimentary technology to our platform. We believe it was also a great example of our discipline capital allocation. We remain committed to returning at least 75% off free cash flow in 2023 via share repurchases. With regards to the 2023 outlooks, I would like to provide some context on the third quarter and the rest of the year. We reaffirm all elements of our 2023 outlook. We continue to see the midpoint of our annual outlook as our best view of the year. Given our historical fourth quarter seasonality and the macroeconomic environment, we forecast sequential public cloud ARR dollar growth from the second quarter to the third quarter. Given the demand for our Teradata VantageCloud platform, we continue to expect that our fourth quarter will be the strongest quarter for public cloud ARR dollar growth.

We anticipate our cloud year-on-year growth rate to moderate in the second half of 2023 because of both tougher year-over-year comparisons and better linearity versus 2022, where almost 80% of our 2022 public cloud ARR growth came in the second half. We have one modeling assumption update for 2023, which is weighted average shares outstanding of approximately $103.1 million. This is due to the increase in our share price versus our prior outlook. There’s no change to the non-GAAP tax rate of approximately 25% and other expense of approximately $55 million. Our outlook for the third quarter of 2023 is as follows. We anticipate non-GAAP diluted earnings per share to be in the range of $0.40 to $0.44. We project the non-GAAP tax rate to be approximately 18%, and the weighted average shares outstanding is the same estimate as before here.

Thank you very much for your time today. Let’s now open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] The first question will be from the line of Matt Hedberg with RBC Capital Markets. Your line is now open.

Matt Hedberg: Great. Thanks guys for the questions and Steve, congrats on the quarter. I wanted to start with the, the cloud performance. Continue to deliver strong results there and seeing the acceleration in cloud and ARR was great to 121. I just wanted to double click on that and maybe get a better sense for, some of the most important elements that are driving the success there. Obviously, I heard the comments about the second half on comps, but just wanted to kind of double click on some of the successes that you saw in Q2 there.

Steve McMillan: Yes. Hey, Matt. Thanks for the question. As Claire said in her prepared remarks, organic expansion was the primary driver of our growth, and we saw that across all geographies and across industries. As I said in my prepared remarks, finance, healthcare telco leading the way in terms of some of the deals. The other great thing that we saw in Matt was a good range of deal sizes and deal volumes. So we had a number of, seven figure deals and a number of six figure deals that were driving those expansion numbers. And I think it’s a testimony to how robust our business and commercial model is in terms of driving that overall level of performance. But I think, what we see is as well is that customers continue to migrate to the cloud with us.

They recognize the strength of our open and connected platform, how it differentiates from the competition, how they can deliver mission critical workloads in the cloud, and how they can continue to expand those workloads. And we saw some really interesting competitive base [ph] through Q2 and some great successes. And I think it really, the, the feedback that we got recently from Gartner and Forrester was really demonstrated in terms of those wins that we had with those customers. So again, that net expansion rate up to 121 from 119, and that continuum progression it was great to see in the quarter and it was a whole balance of different wins, but really based on technology innovation. Matt,

Matt Hedberg: That’s great to hear. Maybe then, just as a follow up, I think you went a couple minutes and into your prepared remarks before you mentioned gen AI, but obviously that’s a topic that every investor wants to hear about. I think I had some interesting comments there. I’m curious, do you foresee, I guess the question really gets down to monetization. I mean, do you foresee an opportunity to articulate success there on the monetization and attribute some future growth to gen AI initiatives? Just sort of wondering on the actual monetization of that would be helpful. Thank you.

Steve McMillan: Yes, as we see AI and AI, particularly large language models and gen AI as a real tailwind for the Teradata business, our cloud data and analytics platform, having that open and connected capability linking in with cloud native services like Azure ML gives us the ability to deliver real AI outcomes for our customers today against a trusted corpus of data. So the things like ethical AI and AI that you can trust based on trusted data is something that Teradata can deliver every single day. And we already, we’ve already helped a number of different customers operationalize AI strategies to improve either customer experience or employee experience in terms of how they execute. And one of the biggest challenges with AI is actually putting these AI solutions and data science projects into production.

And that’s where Teradata, surpasses the competition. Our ability to process massive amounts of data and score that data utilizing those AI models is basically unmatched by the competition. So we can help the biggest organizations on the planet operationalize AI quicker than our competition. And we’re seeing that as a real lift to the business.