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 Fourth Quarter and Full Year 2023 Earnings Call. [Operator Instructions] I would now 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.

Good afternoon, and welcome to Teradata’s fourth quarter and full year 2023 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. Please note that Teradata intends to file the Form 10-K for the year ended December 31, 2023, later this month. 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 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.

Thanks, Chris and thanks everyone for joining us today. We are continuing to execute on our long-term strategy to build the leading hybrid multi-cloud analytics and data platform company for trusted AI. At the core of this strategy is our strong focus on helping our customers—, many of the world’s industry leaders—, succeed by improving business performance, enriching customer experiences, and integrating data across the entire enterprise. We innovate and deliver trusted solutions for their toughest data and analytics challenges. We believe our strategy and customer focus is winning in the marketplace, as we see more and more companies putting their trust in Teradata to help create value from their data, and navigate the evolving analytics landscape, particularly with the rise of AI. Underpinning our strategy is a disciplined financial plan which seeks to balance growth in ARR with profitability and re-investment in the business with capital return to shareholders. We closed 2023 with $528 million of cloud ARR and $1.57 billion of Total ARR, representing growth of 48% and 6%, respectively. We generated $74 million of cloud ARR growth in the fourth quarter. Cloud ARR now accounts for more than 1/3 of our Total ARR, a significant milestone in our cloud journey. Additionally, all regions grew cloud ARR, both sequentially and year on year, driven primarily by migration activity. Our Cloud Net Expansion Rate was 124%, and more than 75% of our cloud customers now operate in a hybrid environment. These statistics validate that our VantageCloud platform is delivering breakthrough business performance across a hybrid environment. We delivered 2023 revenue growth within our outlook range. We exceeded full year non-GAAP earnings per share expectations, and we generated more than $350 million of free cash flow, all demonstrating our ongoing dedication to our cloud-first profitable growth strategy. Despite a year…

Thank you, and good afternoon, everyone. In 2023, Teradata delivered profitable growth with operating margin expansion of over 200 basis points year-on-year and non-GAAP earnings per share of $2.07, above the high end of the annual outlook range and growing 26% year-on-year. We delivered free cash flow of $355 million. We continue to demonstrate our commitment to capital returns by delivering 87% of free cash flow to shareholders, exceeding our annual target of 75%. Recurring revenue for 2023 was approximately $1.5 billion, growing 5% year-on-year as reported and 7% in constant currency. This was in line with the midpoint of the annual outlook range. Total revenue was also within our outlook range at approximately $1.8 billion in 2023, growing 2% year-on-year as reported and 4% in constant currency. Our cloud net expansion rate remained strong at 124%, a sequential increase of 1%. Our ending cloud ARR was $528 million, growing 48% year-on-year versus our outlook range of 53% to 57%. Total ARR grew 6% as reported and 5% in constant currency compared to our outlook range of 6% to 8%. As Steve mentioned, the 2023 outlook did not fully capture the unexpected deal cycle elongation we saw during the final weeks of the year. Even though linearity improved in Q4 of 2023 versus the same period last year, we still had approximately 60% of the new cloud ARR dollars land in December, with many of those deals closing at the end of the month. We are taking measures to quickly adapt and improve our internal processes. We are paying extra attention to pipeline composition and conversion rates. We are also focusing on sales enablement to continue improving sales productivity. In addition, we are taking cost optimization actions to continue driving efficiencies across the entire company. All of these initiatives helped…

[Operator Instructions] Your first question comes from the line of Tyler Radke. Your line is open.

Yes. Good afternoon. Thanks for taking the questions. So a lot to unpack here between the moving pieces of the slip deals and the churn event in 2024 on the on-prem side. I guess first question, just to understand kind of the moving pieces here. So if I think about your cloud ARR guidance, I think that did come in below consensus a bit for 2024. Seemingly, that’s not negatively impacted by this churn event. But to kind of hit the $1 billion in 2025, there is not too much room for the growth to slow there. So I guess what’s giving you the confidence in kind of the strong 2-year cloud outlook? And then secondly, can you just unpack the on-prem erosion event? I think many of us on the call were not expecting that, but it sounds like you’ve been expecting that for a while. So if you could just add a little bit more color and just let us maybe frame if there is any of these other events in the coming years? Thank you.

Yes. Thanks, Tyler, for the question. Just to take a little step back, we’re really proud of our execution over the last 3.5 years. You’re looking at 10x cloud growth. It just demonstrates that we are in a great market, data analytics, all of the new interest that AI is generating, the technology advancements that we are putting into the market continuously, give us a lot of confidence in terms of how we’re going to drive forward, really says that we’ve got the right strategy, we’ve got the right technology platform, and we’ve got the right team to execute. So when we give our guidance for 2024, clearly, we want to make sure that we are being realistic and prudent in that guidance. And we are going to execute as we go through 2024 with some real focus and determination. Our net expansion rate increased 124% in Q4 was a really good sign of the core interest that we have in our platform and that when we deploy with our customers and these major customers into the cloud that they are really committed to it and they continue to grow their data and analytics capabilities with us in the cloud. Now to unpack the two events, just to your point, we don’t see any lack of demand for our solutions. This was purely a timing event from our cloud ARR deals. As we pointed out in our prepared remarks, many of our deals are large and closed in the last month this quarter and many closed in the last few weeks. What we tended to see was as data analytics and AI become more and more interesting in a strategic board level discussion within our customers, that we have the opportunity to engage more broadly inside our customers with lots…

Yes, I appreciate it. It was a multipart question. Just a quick follow-up, as it relates to the expansions that you’ve seen, net retention rate in cloud ticked up another point, which was great to see. How are you thinking about the contribution from expansions in 2024 in terms of driving that cloud growth? Is there room for that expansion rate to tick up further? And presumably, those are not seeing the same timing issues as it relates to deals slipping.

Hey, Tyler, Claire – this is Claire. I’ll take that question. So – just to confirm, we continue to assume a net expansion rate of 120% as we model forward to 2024 and out to 2025 to get to that part of $1 billion, as Steve mentioned. Nothing to do, to your point with the slip deals or anything like that. So we did see an uptick in Q4, as you mentioned, up to 124%. We’re pleased with both the expansion that we see once customers are on the cloud with us after 12 months. But also, we’re seeing good expansion at the point of migration as well. So good trends there. I think very much indicating the demand that we see for our products. But we think it’s prudent to continue to assume that 120% mark, as we look out for our outlook for 2024 and also to 2025.

Thank you. The next question is from the line of Chad Bennett with Craig-Hallum. You may proceed.

Great. Thanks for taking my question. So I imagine we’re going to kind of be all over these moving parts, I’ll call. But just to make sure I understand correctly, the two customers that are eroding, they represent the, call it, 4% to 5% of total ARR on – or yes, total ARR, representing $60 million to $80 million of business that’s going away? Is that correct?

Yes. Hi, Chad, it’s Claire here again. So yes, we’ve got two large on-prem erosions that Steve mentioned and then kind of ongoing erosions that we would see as part of our everyday business. So to your point, that on-prem erosions is driving the 4% to 5% sequential decline in ARR in the first quarter of 2024.

Okay. And then – so if these were known or have been known for years, so are we still comfortable with our other targets in ‘25 around ARR growth and recurring revenue growth that we gave out a couple of years ago since we knew about these erosions?

Yes. So to your point, Chad, I think Steve mentioned that the overall erosion and the risk of these customers was known, we’ve been tracking them very closely, so no surprise. The timing is always much more difficult to predict. So that’s what stand up recently in terms of the exact timing of that. I haven’t given a formal update on my 2025 outlook. But as we mentioned, we are continuing on that path to 2025. These rightly incorporated into our numbers for 2025, so no additional surprises there.

Thank you. The next question is from the line of Erik Woodring with Morgan Stanley. You may proceed.

Hey, guys. Thanks so much for taking my questions. Maybe Steve, if I start with you. You mentioned some comments around pipeline – initiatives to address pipeline composition, conversion rates, sales enablement. You talked about some cost optimization, which feels just a bit more severe than a few cloud deals slip that we will get back next year, and there was some on-premise erosion that was an outlier. So are we looking at a longer-than-expected transformation than the goals you set out in 2021? Or how do I just balance kind of those comments you made with kind of the more bullish stance that you took on some of the slippage that occurred in 4Q and what you’re talking about for 2024? Thanks.

Yes. Thanks for the question, Erik. Look, I think as you look at transformations across the IT industry, they are rarely linear in terms of how they manifest. And again, I will just restate this was not an uncertainty in demand for us. It was uncertainty in timing. We are on a cloud-first path in terms of the cloud deals that we are executing against. And so we want to make sure that when we set guidance around those deals that we have right control and deal management to ensure that they don’t slip out of the year. What we see is, again, a handful of $2 million deals that slipped from 2023 and the last weeks of 2023 and to 2024. That does not give us a concern around the execution of the company or our ability to execute or deliver on both the guidance that we have issued for 2024, which again, we always make sure that we deliver and provide prudent guidance that we believe that we can execute against, or in terms of as we look at our 2025 goals, we had a number of these different business impacts factored into those goals as we gave out that guidance back in 2021. So, I think from a company perspective, we are still on a path to achieve those goals. We are – we have got some management system improvements that we have to execute to ensure that we close those deals in a timely fashion, and we are confident in the guidance that we put out for 2024.

Okay. That’s helpful. Thank you, Steve. And then maybe just a follow-up on one of the original questions, I am at the top of Q&A. I guess maybe my question is, like it’s not new that you are engaging with multiple decision-makers at different customers or prospective customers. And you haven’t really seen deals slippage to-date that I can recall you calling out. So, I guess the question is just why now, 1st of December, it was just one large figure deal related to something company-specific, but it expanded beyond that. So, what makes you think that this is purely isolated to this quarter and not something broader? And that’s it for me. Thanks so much.

Yes. I think we are just continuing to see great interest in the platform and the opportunities that we had in play. We understand the root causes against every single one of those opportunities. We know whether it may have been an uncertainty on which CSP that they wanted to use or which capabilities that they wanted to use or the different business units that are involved in those decisions. So, we think we have got a good handle on those particular deals at those handful of deals that were over $2 million in terms of how they are going to close out in 2024. Look, if I take a step back from it, we had great momentum in 2023. We grew our cloud ARR by 48%. If you compare that, that is way ahead of the cloud data and analytics growth that are – that’s happening in the marketplace. And as we look forward to 2024, we are still seeing good growth for 2024, and we are continuing to grow our total ARR in 2024. So, all of our business dynamics are positive. We did commit that we would execute a profitable growth strategy. And therefore, we are being prudent in our cost and expense for 2024 to make sure that we can still deliver that value to our shareholders. And that value is being delivered both in terms of our free cash flow commitment that Claire outlined, but also in terms of our earnings per share. And you saw that from a business perspective in 2023, we had a very successful earnings per share result and also generating the free cash flow that we had indicated for 2023.

Thank you. The next question is from the line of Wamsi Mohan with Bank of America. You may proceed.

Hi. Thanks for taking my questions. It’s Ruplu filling in for Wamsi today. Claire, can you help with respect to the deal timing of the eight-figure large deal. I mean is that something you are expecting to come in, in the first half of the year, or is that like a back half close? And also can you help me bridge the cash flow guidance that you have given? It looks like it’s flat year-on-year, but how should we think about the timing of free cash flow?

Hi. Yes. Wamsi, thanks for the question. So, just with regards to the deal that we mentioned back in December, we continue to work with the customer on that. And as Steve said, there is no competitive threat or issue there. So, it’s just the case of working through with the customers to be able to close and working them – with them on new timing. I think H1 is a good expectation with regards to that specific deal. As Steve mentioned, we are expecting to close the majority of those slip deals in 2024. Some of them will be in the first half of the year, some of them will potentially could move out into the second half of the year. With regards to the free cash flow guidance, so to your point, there is a slight growth year-over-year if you take the midpoint. Obviously, we have put a range around that. The timing of that, I did mention it in my prepared remarks, but just as a reminder, because of the growth profile that we are seeing both from a revenue standpoint, recurring revenue, and therefore, profitability. A lot of that free cash flow is generated, obviously, by our – the fact that we are generating profitable income. And therefore, the cash generated will be towards the – more towards the second half of the year than we saw in 2023. We have really good confidence in that free cash flow generation. It’s mainly driven by profitable growth and a great cash conversion cycle that we saw through 2023, and we expect to continue into 2024.

Thank you. The next question is from the line of Derrick Wood with TD Cowen. You may proceed.

Great. Thanks. Steve, if we assume ARR growth gets close to, I guess 0% in Q1, and you have got targets for 4% to 8% for the full year. That does assume pretty significant build in net new ARR through the year. So, just any more color to share on what gives you that confidence that you see such an improvement in ARR built through the year?

Yes. I think we always see seasonality in terms of Q4 being our strongest year. Derrick, that enterprise sales motion is geared towards the last quarter. And as we pointed out, the last – can be up to the last weeks in the year in terms of execution. We know and understand our customers. We know and understand what their plans are and how they are going to execute. We see strong demand in terms of the marketplace. We have made some fantastic enhancements to our technology platform to enable our customers to put AI and ML workloads into the Teradata platform. As cloud ARR becomes more strategic in terms of the split of our total ARR, and we said that it’s now over a third of our total ARR is in the cloud. And then sort of we compound that with our net expansion rates, again, that was 124% for Q4, and we are modeling out 120%. We believe it just gives us that ability to continue to compound the overall growth as we move through the year. We do have a pipeline of a number of major transactions that will drive both our cloud ARR and total ARR. They are currently slated to close in the second half of the year. So, all of these factors combine to give us confidence in the gains that we put out there for 2024. I think as you look at the marketplace generally, I think everybody knows that we have the ability in Teradata to take advantage of consumption-based usage from a cloud perspective. We are starting to see consumption tick up in the marketplace generally, but a number of the cloud and data and analytics players are seeing. We think that we will benefit from that. But the guidance that we have put out is prudent in terms of what we believe that we are going to deliver through the course of this year given the underlying dynamics of the business.

Great. That’s helpful color. If I could just – a quick follow-up for Claire on the cost optimization efforts, just wondering to get a little bit more color on is this going to take place in certain regions or job functions? When do you expect it to be completed and any quantification on the cost savings?

Yes. We are focusing on generating – non-revenue generating areas, as you would expect. They continue – we are seeing some great cost optimization efforts happen through the quarter of 2023, and we expect them to continue in 2024. The other thing we do is very much focused on a returns-based approach. So, where we see opportunity to reinvest dollars into areas that we think will generate a higher return, we also do that. I think a few things I called out in our prepared remarks, for example, AI, big area, especially obviously in the engineering space from a demand generation standpoint as well and something we continue to invest in. So, really just focusing on are we getting the returns that we are expecting from the investments we are making, making those right trade-offs and specifically focus on efficiency in the non-revenue generating areas.

Thank you. The next question is from the line of Chirag Ved with Evercore ISI. You may proceed.

Hi. Thanks for taking the question. You mentioned that 75% of your cloud customers are operating on hybrid environments and where the macro right now where the hyperscalers and several consumption-based cloud names are seeing migration projects to the cloud resume. So, do you think we have had a fundamental shift for customers, especially large customers are increasingly preferring hybrid deployments for cloud only, or is there a renewed focus in customers prioritizing their cloud-first projects again? And how does all this impact Teradata’s position moving forward? Thank you.

Yes. Thanks for the question. Look, I think from a cloud migration perspective, we never saw a slowdown from the Teradata platform. We have had tremendous success migrating Teradata customers to the cloud, and that has continued as we have strengthened our technology and strengthen the platform. What we see is the benefits of the Teradata platform that we can operate in a hybrid environment. So, we can actually ensure that customers do not want to put some of the data into the cloud, maybe for some governance reasons or regulatory requirements or performance-based characteristics. If you are a telco, you want to keep your network data on-prem, the Teradata platform enables them to deploy in a completely hybrid environment. We operate some of the world’s most critical workloads and some of the largest data sets in the world. What our customers know and find is that the best way for them to modernize their data solution set to get the benefits out of these new AI and ML capabilities is to use the Teradata platform as their core technology platform for data and analytics, both on-prem and in the cloud. And so we know that we are the best in terms of enterprise scale and enterprise price performance, enabling our customers to actually get these AI models out of a proof of concept and enter production and deploy in the way that our customers want to deploy. So, they want to have a data lake or a data warehouse or a lake-house, these are all deployment options and data architectures that the Teradata platform supports. It’s very differentiated from how our competitive – how our competitors address that marketplace and it uniquely positions us to execute from both a hybrid perspective and to help customers move 100% of the workload to the cloud with the Teradata platform. So, I am not concerned that there is going to be an increase in competitive pressure to move from the Teradata platform to some of these more niche cloud data and analytics providers that can perhaps address the complexity.

Thank you. The next question is from the line of Raimo Lenschow with Barclays. You may proceed.

Great. This is Sheldon McMeans on for Raimo. Thanks for taking our questions. You have previously discussed turning back on the new customer acquisition engine. I want to ask how these initiatives are going? How do you rate your performance in fiscal year ‘23? And does your fiscal year ‘24 guidance assume a greater contribution from new logos than last year, or are you still taking a rather conservative stance regarding new logo contribution?

Yes, we are happy with the progress that we are making from a new logo perspective. In Q4, we added more new logos than any other quarter. And as we went through 2023, we want that momentum to continue into 2024. As we have always said, these new logos tend to start very small and grow quickly. We are super excited about things like AI Unlimited that we had, which will start to get new users and new customers, utilizing Teradata capabilities in the marketplace, and that will be a great introduction into Teradata ecosystems for new logos across the world. So, yes, we don’t expect a huge dollar contribution from new logos as we move forward. However, we are happy with the progress that we are making from that new logo engine.

[Operator Instructions] The next question is from the line of Matt Hedberg with RBC Capital Markets. You may proceed.

Hi guys. This is Simran on for Matt Hedberg. Thanks for taking our questions. Just one for me. Can you talk about the 2024 pipeline coverage in dollars? And how does it look this year compared to last year? Thanks.

Yes. I think we don’t go into a lot of details about our pipeline coverage specifically. What I would say is that we are seeing the marketplace being super attractive, right. And our performance in the market and the cloud marketplace has been great. We grew at 48% in 2023, that was way ahead of the market growth rates. We are seeing strong interest in our platform. We are seeing that new logo engine starting to come online. So, I think as we look at the guidance that we have issued for 2024, we always issued that guidance based on a prudent approach and a realistic approach to execution.

Thank you. The next question is from the line of Howard Ma with Guggenheim Securities. You may proceed.

Thank you. My question is also on the 2024 outlook. So, leading up into today’s earnings trend, I was under the strong impression that Teradata is an accelerating total ARR story driven by cloud, but with the 2024 outlook ranges, it’s unclear if that’s still the case. So, Steve and Claire, you have adequately explained the on-premise erosions. But putting that aside, can you just answer – and you kind of hit on this earlier, but can you answer if – are your customers – are they still executing on their cloud journeys on Teradata with as much as fervor as before? And if not, has competition picked back up, or is there anything else that we should – that should prevent you from accelerating total ARR growth in 2024?

Yes. I think from a customer perspective, we are still seeing great interest. You just look at the range of different wins that I highlighted in the prepared remarks. We are seeing a lot of interest to utilize our cloud platform and that being the vehicle of their modernization journey. As we look at how we assess our customer environments and whether strategically, they are going to be long-term customers, but we very much matured our customer success motion, so we understand what’s happening with those customers and the strategic plans that they have in place. And that’s given us the opportunity to ensure that we can serve them. We are not seeing really any change in the competitive environment. Some of the things, I think they are boosting demand for us and give us confidence in terms of our execution. It’s a fairly unique approach that we have to having a platform that really supports an OpenAI approach, you can use multiple different types of language models. We are working with some of our on-prem customers in terms of deploying AI capabilities that they couldn’t potentially do with other providers. And we see a lot of different opportunities in terms of driving growth in terms of the overall business.

Thank you. The next question is from the line of Nehal Chokshi with Northland Capital Markets. You may proceed.

Yes. Thanks. I apologize in advance if these questions have been asked. But Steve, you mentioned that greater than 75% of cloud customers are now operating hybrid. Could you give us a sense as far as what percent was it a year ago?

Yes. I think if we look – as we look back, we have said it was 50% to 60%, and that’s a number we have quoted in the past, so in terms of customers that are operating in a hybrid environment. And clearly, now that we have got hundreds and hundreds of our customers and in the cloud with us, the major corporations in the world, we are seeing great interest and the hybrid capability that we have is clearly a unique differentiator in terms of working across and creating that query fabric across both cloud and on-prem environment. Thanks Nehal.

Thank you. There are no further questions in queue. I would like to turn the call back over to Steve McMillan for concluding remarks.

Thanks everyone for joining us today. As we look ahead, we are going to continue to innovate as the complete cloud analytics and data platform company for AI. We remain absolutely focused on delivering the harmonized data, trusted AI and faster innovations that empower our customers to make better, more confident decisions and improve their overall business performance. We really are excited about our future in this truly dynamic market. Thanks very much.

This concludes today’s conference call. You may now disconnect.