Operator: Our next question comes from Derrick Wood from Cowen & Co. Your line is now open.
Unidentified Analyst: Hey, guys. It’s (ph) on for Derrick. Thanks, and congrats on the quarter. Steve, on the on-prem, ARR business was strong. That would, I think, imply a strong renewals quarter. Can you talk about how those renewals tracked versus your expectations? How has visibility on this business changed over the last few months? And could you ballpark size for us how large your renewal base is this year versus 2022?
Steve McMillan: Yes, I’ll let Claire comment maybe on some of the numbers. I’ll just give you a little bit around the management of our renewals business. From a renewals perspective, the team landed a great quarter from a renewals and expansion of our on-prem business. As we said — as Claire said in her prepared remarks, our on-prem ARR stayed very steady, even though we’re taking some of that on-prem cloud ARR and migrating into the cloud and turning them into cloud customers. And then a market, if you look at the industry reports, they say that the on-prem marketplace is flat to low single digit growth. So, we were really pleased to see a steady renewal space, fantastic execution by the team in terms of that renewals pipeline to get to the result that we saw for Q4 and for 2022 overall.
No unanticipated activities in terms of bringing opportunities forward or (ph) opportunities out of the quarter. I think the renewal engine that we have executing inside Teradata is really generating reliable, robust consistent results.
Claire Bramley: Yes, the only thing I would just highlight on the numbers is the fact that clearly, obviously, strong cloud ARR growth. But the fact that if you adjust for Russia and currency, we have a really strong total ARR growth as well, that’s really positive. So — and in our on-prem, we continue to see expansions, as Steve talked about. We continue to see good renewals, as you mentioned. And so, we’re very pleased with that momentum as we come out of Q4. The way the team executed throughout 2022, given those headwinds that we saw and we’re continuing to see that as we kick off 2023.
Unidentified Analyst: Yes, that’s great. And Claire, on the cloud ARR guide for this year implies about 30% net new ARR for 61% this year. Maybe just walk us through your assumptions in there? The pervasive scrutiny or — sorry, the enterprise scrutiny comment, but not yet pervasive, what are you assuming? Is that the same or it gets worse? And any kind of cloud migration activity assumptions as well would be helpful. Thanks.
Claire Bramley: Yes, sure. So, very similar to 2022, we’re anticipating the majority of our cloud ARR growth in 2023 to come from migration and expansion. We’re still seeing a strong expansion rate – net expansion rate in the cloud and that is anticipated to continue as we saw in 2022. And as you can see, strong renewals on-prem, so continued big opportunities from a migration standpoint. As Steve mentioned earlier to Erik’s question about new logos, new logos is — will become a slightly more significant part of 2023 for us as we continue to land and expand, but it’s still the smallest portion of our expected growth. And we’ve been pretty conservative there knowing that the macroeconomic environment is pretty volatile right now.
So, most of it coming from migration and expansion, some new logos. With our new VantageCloud Lake launch that happened in 2022, we see that as a big opportunity to help land those smaller new logos, whether it’s departmental or experimental-type workloads, good opportunities there as we move through 2023. I did mention a little bit of additional scrutiny. As I mentioned, it’s not pervasive. No significant changes to customer behavior, but we just thought that was important to take into consideration and derisk our 2023 outlook.
Unidentified Analyst: Great. Thank you.
Claire Bramley: Thank you so much.
Operator: Our next question today comes from Chad Bennett from Craig-Hallum. Your line is now open.
Chad Bennett: Great. Thanks for taking my questions. So, just to follow-up on the cloud ARR drivers, I think, at the start of this past year, I think, Steve, you mentioned on the migration side that you’d see a incremental amount of buying ahead, right, or buying more kind of consumption or migration at the initial deal. Do you expect that to continue at the rate it is? And at what point do you think if we do annualize that, do we see net expansion actually potentially accelerate if you do? Thanks.
Steve McMillan: Thanks for the question, Chad. Yes, I think we made the point in terms of our net expansion rate at 117%, but it was taken into account the fact that a lot of customers were actually increasing the capacity in the cloud at the point of making — constructing a deal for that migration. So, a good job from the sales team in terms of forward anticipating the workload that, that customer is going to require in the cloud and encapsulating that in a commercial construct that is attractive for the customer to execute at that point of saving that deal to migrate to the cloud. I think one of the great things that we’ve got and it kind of relates to one of the prior questions on the call, as we had great visibility into the workloads that our customers run in terms of the mission-critical nature and also the historical growth patterns that have happened from an on-prem perspective.
And it’s the very fact that we have that insight into some of the biggest customers in the world that allow us to construct that initial commercial value proposition that encourages them to increase the forward capacity as they move from on-prem to the cloud. So, to simply answer your question, yes, we do expect that to continue in terms of migrations growing at the — in terms of contract value growing at the point of migration. Our net expansion rate at 117% for an as-a-service business, I think it’s pretty healthy in, say, the industry, but we do see opportunity to continue to grow that, and we’ll do that from a couple of basis — from a couple of factors. One, we’ll continue to grow that mission-critical workload with our customers. Two, we’ll utilize the new product launches like Cloud Data Lake where we can actually save could data lake use cases to save the enterprise data warehouse and save their customers, but also analytics.
Everybody’s talking about AI, machine learning, how you utilize that data from an AI perspective, and how you really derive great insights from the data that you’ve got inside your organization, our ClearScape Analytics value proposition will allow that expansion too. So, we are enabling our sales force this year to really drive new use cases, new value propositions into our customers to drive that overall expansions number. Hopefully that answers the question, Chad.
Chad Bennett: Yes. It did. Thanks. And one quick follow-up. Just on the cloud lake, VantageCloud Lake, I know it’s only been out a few months, maybe four or five months, but is there — well, maybe two questions real quick. I mean, how much of whether it’s ClearScape or Data Lake are factored into cloud ARR, just kind of roughly in your target this year, your guide this year? But secondly, maybe more importantly, do you sense from a market perception standpoint, especially around VantageCloud Lake, that the awareness is out there of your ability to handle unstructured data and kind of be in more of a broaden cloud data management platform? Just any kind of early sense there on that, then I’ll hop off. Thanks.
Steve McMillan: Yes. So, I think a couple of things, Chad. We are seeing tremendous interest and traction with both new and our existing customers on our cloud lake capability. We’re never going to break out what’s VantageCloud enterprise versus VantageCloud Lake. From our perspective, it’s kind of immaterial, right? We respond to the use cases and workloads that our customers demand from us. And so, if it’s — what we wanted to do from a cloud lake launch perspective at the end of Q3 was, to your very point, make the market aware that not only can they access the very best enterprise data warehouse utilizing Teradata VantageCloud technology, they can also have the very best data lake solution, utilizing VantageCloud technology.
And one of the propositions that we are taking to our customers just now is, hey, you may have been thinking about how you deploy native objects or maybe on-prem or maybe in the cloud. We enable you to have an intelligent-native object store and we can lower your cost of using native object store of accessing and getting the best insights out of unstructured data using a Teradata engine that can deliver high-performance analytics across all of the types of data that you have. And that’s why the Gartner — becoming Number One in all four analytical use cases, far outpacing Databricks, far outpacing Snowflake as a key part of the message that we’ll continue to take to the market.
Chad Bennett: Okay. Thank you.
Operator: Our next question today comes from Wamsi Mohan from Bank of America. Please go ahead.
Wamsi Mohan: Yes. Thank you. Good morning. Could you share some thoughts around the upfront dynamics that we should be thinking about in 2023? Should we consider that to be net neutral to revenue and earnings in 2023? And given the dynamics that we’ve seen so far, is it right to assume that we would get a positive uplift in 1Q and 4Q of 2023 and a headwind in 2Q and 3Q?
Claire Bramley: Good morning, Wamsi. Yes, let me take that. So, as you said, we’re starting to go through the cycle of our upfront recurring revenue impact. So, I think to your point, with ’23 compared to ’22, no significant changes expected year-over-year, but we will see that kind of similar seasonality that we saw in 2022. So, a slight upfront, to your point, benefit in Q1 and then less of a benefit throughout the year. So, very similar seasonal impact. But when you look at the total year year-over-year, we’re not anticipating material changes, and that’s what we’re factoring into our outlook as well.
Wamsi Mohan: Okay. Thanks, Claire. And then, just a follow-up on your longer-term comments around cash flow and margins, particularly around margins. I think you said exiting 2022, if we take that the base and look at the revenue trajectory coming in towards the low end, you’re still maintaining your margins. Is there incremental OpEx actions that you’re anticipating, taking what might be the size of that if there is? Or if not, is it sort of a higher blend up in gross margins, that’s the offset? Any color there? And Claire, if you could, sorry, one more on — just on the free cash flow in ’23 versus ’22. Could you give us some sizings on what might be the potential cash tax headwind that you’re anticipating? And does that (ph) changes in the R&D tax credit? Thank you so much.
Claire Bramley: Absolutely. So, yes, so first of all, with regards to our gross margin and operating expenses assumptions as we look out to 2025, Wamsi, so we had already assumed an improvement in our cloud gross margin as we scale through 2025, we’re making good progress on that. So that definitely is an opportunity for us from the exit of 2022 out to 2025, an opportunity for us to grow our gross margin rate coming from that scaling of our cloud business. To your point, we also are anticipating operating expenses efficiency improvement. So, although we’re not anticipating to cut significantly out to 2025 with dollars, again, as we continue to grow, we are anticipating efficiencies there. So that’s what’s driving that operating income improvement.
As you know, we have big headwinds, whether it’s currency, whether it’s Russia, we weren’t able to offset all of those headwinds. There were significant headwinds to us from an EPS standpoint, but we did mitigate some of that. So, thanks for the cost discipline approach that we have, we know that we can operate efficiency. So, we’re not planning any significant changes and reductions over time. We have done some restructuring, as we mentioned. We mentioned it last earnings call and this earnings call, but nothing materially incremental looking forward. So, it’s purely coming from public cloud gross margin improvement and expansion and operating efficiencies as we continue to scale both at the gross margin and operating expenses perspective.
Moving to your kind of second question, I think, with your follow-up question in terms of free cash flow bridge from 2022 to 2023. So, again, we were pleased that we were able to still meet that $400 million, but we did have that $50 million one-time benefit in Q1 of ’22. So, if you take that kind of underlying number that we have as kind of a recurring free cash flow, take into account the fact that we are growing profitability, so we, obviously, get a benefit and durable free cash flow from that. That, unfortunately, is being offset by restructuring. So, restructuring — we have incremental restructuring in 2023 versus 2022 and those higher cash taxes. So that’s the bridge as you get from ’22 to ’23 free cash flow to get to our new range of $320 million to $360 million.
Wamsi Mohan: Okay. Thank you so much.
