Good afternoon. My name is Joe, 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. [Operator Instructions] 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.

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 the 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.

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're 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, needs 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 activities 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 success actions…

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 were 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 1 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 3-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…

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

Steve, maybe if we can start with you. Can you just expand a bit on the broader kind of deal in 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 3 months ago? Kind of what are you hearing from customers? Are there any new holdups? So I'd 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.

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 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.

All right. 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 can unpackage that for me.

Yes. Thanks, Erik. So to your point, we anticipate slight growth in constant currency is what we are expecting as kind of the low single digits to 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 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.

The next question is from the line of Wamsi Mohan with Bank of America.

Yes. I was wondering maybe, Claire, just to go down this point again on the cloud ARR 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 reacceleration, you do point to migration and expansion. So could you maybe just give us some sense of what's driving that confidence that the 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?

Wamsi, it's Steve. Thanks for the question. I'll take it and then hand it to Claire if she's got any other color to add. I think as 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 cloud. A couple of things that lead us to that conclusion. One is that once customers are in the cloud with us, 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 lease cost, lease 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. And 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 it.

Okay. Thank you, Steve. Appreciate the comments. In your prepared remarks, you also noted you've seen well over 100 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 $1 billion, is now the new logo part any more important or any more larger size than what you had anticipated previously?

Yes, we continue to win new logos in the quarter, and it was really great to see our demand generation activities, but over 100 new logos added into the pipeline in the last few months, we're not seeing any change in shape to those new logos. They tend to be small to start with and they grow over time. If we dig into that a little bit, we've seen some great traction in our international business by partners, and we think there's a lot of lessons that we can learn there in terms of bringing that to global sales motions and using partner relationships in the Americas as an example to drive more new logos as we move forward. I think the new logo pipeline with offers like AI Unlimited, which we refer to on the prepared remarks, gives us an ability to interact with a new set of buying and a new set of users for the Teradata platform. I think being integrated -- being one of the only ISPs with a query engine being natively integrated into the Microsoft fabric offering is going to be really exciting in terms of generating new logos. From a materiality perspective, though, our business from a cloud perspective in 2024 is still going to be driven by expansions and migration activity.

The next question is from the line of Howard Ma with Guggenheim.

Claire, I want to ask you about your guidance, which implies that you need to add about $200 million of cloud ARR in about 3 quarters. And as you and Steve just mentioned that mostly in the second half and in Q4, so I was hoping you could comment in terms of expansion versus migration. On the expansion side, are you expecting an acceleration in expansion rates maybe? Or maybe any pricing benefits as contracts renew? And then on the migration side, should we essentially assume that subscription ARR will then be flat at best this year and then become a material contributor to cloud growth perhaps starting next year?

Yes. Thanks for the question, Howard. So just to confirm, we're not modeling an acceleration in our net expansion rate. We saw a good net expansion rate again this quarter of 123%. We continue to model approximately 120% as we model out to get to the midpoint of our 2024 guide and also as we model out to get to the $1 billion in 2025. The rest we then would expect to come from migration. And as we mentioned in our prepared remarks, we are seeing a really strong pipeline and even increasing pipeline of the number of large existing enterprise customers that want to migrate with us to the cloud. So that's why we feel comfortable about those assumptions, we're not anticipating an acceleration. To your point with regards to subscription, with regards to subscription, once you take into account, obviously, the impact of migrations from subscription to the cloud, we still anticipate expansions to be positive. So we still expect growth in the low single digits with regards to subscriptions, but once you've taken out the impact of migrations.

Okay. And I just have a quick follow-up either for you or for Steve. I wanted to ask about the strategic collaboration agreement with AWS. Are there any changes in terms of the economic terms of that agreement worth calling out that would impact either revenue or gross margins?

Yes. Thanks, Howard. Yes, we're really happy with our relationship with AWS. It continues to go from strength to strength, and it's felt really upon that growing cloud business in the AWS environment. One of the things that we have always discussed is that as we continue to scale up and scale out our cloud business, it will give us the opportunity to have better strategic relationships and strategic agreements with the hyperscalers and thus the AWS agreement is one of those. And we see it as another element in terms of how we continue to expand our cloud margins going forward.

The next question is from the line of Nehal Chokshi with Northland Capital Markets.

I do have 2 questions. First one is that, Claire, can you give a little bit more detail on why migration and expansion activity was slightly below expectations?

Yes, certainly. So yes, as I mentioned, we weren't expecting a significant growth in Q1. It was slightly below our expectations by a few million dollars, and that was kind of split equally between migrations and expansions. As you can see, we do continue to see a strong net expansion rate. So that doesn't cause us any concern, and it's not anything that is -- we believe is going to be an issue as we accelerate our growth throughout the year. So just a couple -- a few deals here and there that potentially sort of we were expecting potentially to close in Q1, but no issues from an overall outlook standpoint and no changes with regards to competitive environment or anything. So just kind of the usual puts and takes as we would see in the quarter, driving a few million dollars lower in Q1 compared to our expectations.

Okay. And then sticking with you, Claire, you mentioned multiple levers give you confidence in continuing to drive free cash flow growth into calendar '25. You listed 4 levers. What are those 4 levers do you have greatest confidence in actually being the biggest driver of that being the top line growth with gross margin expansion, operating expense optimization or working capital improvement?

Yes. No, actually, we're going to expect -- in terms of my confidence, I'm confident across all of those drivers. I mentioned for 2 of them linked to how we can improve our operating margins. And so as I mentioned, with regards to 2025, I have very good confidence to get -- to increase our operating margins and be in the low 20% range and that is driven by cloud margin expansion. As we continue to see as we increase our scale and size within cloud, we continue to see that margin expansion. So that gives me good confidence with that. We have a great track record with regards to optimizing OpEx, especially as we grow. We -- the top line growth is going to be driven by the continued growth we see in cloud, which gives me confidence in that. And then with regards to working capital dynamics, we have a very strong cash conversion cycle. I still see a small opportunity with regards to improving, for example, our DSOs. They're kind of in the low 60 days' range. I think we can still get a few days improvement over time in our DSOs as well. So I would say the biggest drivers do come from the operating margin expansions and top line growth, but also have great confidence across all of those drivers.

The next question is from Raimo Lenschow with Barclays.

This is Sheldon McMeans on for Raimo. I first wanted to ask about some of your newer announcements, AI Unlimited, open table format support, the expanded AWS partnership. Are any of these impacts embedded in the reacceleration in guidance? Or is it more what you're seeing in your existing pipeline for existing workloads that's giving you confidence?

Yes. Thank you for the questions. Yes, we are most super excited about our announcements around AI Unlimited and support for open table format. We really believe there is a differentiated capability in the industry, supporting both Iceberg and Delta Lake formats from an open table format perspective. The AI Unlimited is certainly a facility that's going to enable us to attract new workloads into the Teradata ecosystem and new users into the Teradata ecosystem. In terms of creating an impact or a meaningful impact to our total ARR and total cloud ARR, we see these as fueling the pipeline and I think is a catalyst for us so that we can discuss with those customers a move into VantageCloud offers that we have and accelerate that overall expansion of VantageCloud environment for our existing customers, but also when those new logos. And as was pointed out, we had over 100 new logos added to the pipeline in the last few months. It's the strength of our technology and the strength of our road map that's enabling us to have those conversations and put across our uniquely differentiated value proposition. So really excited about the technology landscape that we have and the offers that we've made available over the last couple of months.

Great. And then a quick follow-up. Did the headwinds from a couple of large on-prem erosions fully play out in Q1? Or is there still some impact expected to fall in Q2? And is that expected -- is that why ARR is expected to be relatively flat quarter-over-quarter in Q2?

Yes. So from a total ARR perspective for Q1, we executed pretty much as we expected. From an overall ARR in the -- what we saw in terms of our customer base, we are -- we will see some impacts in Q2. As we noted in last quarter's call, it's pretty consistent. There's been no change in the last 90 days in terms of the overall landscape, and we still have good faith in terms of our full year guide.

The next question is from the line of Chirag Ved with Evercore ISI.

Good to hear from you. So as we continue through the initial stages of this AI cycle, many companies today want to start incorporating new GenAI capabilities. We've heard that many of these companies don't have the modernized data stack required to support AI implementation today. I just wanted to get your thoughts on whether there was some level of data quality issue in the market overall, how companies were making inroads on addressing this and whether you view these market dynamics as a tailwind for Teradata looking ahead?

Yes. Thanks for the question. So I think the way that we see the AI marketplace playing out is that organizations that have a modern data stack and can leverage their enterprise data warehouse, which is where the most trusted data from an enterprise exists, but also combine that with data that is in a late construct and also a lake house construct, that is really going to be the winning formula for data platforms going forward, and it certainly underpins our technology strategy in terms of having a data platform with the broadest choice of deployment options. The other really important thing is in those analytics environments to be able to deploy those advanced analytics AI and GenAI models at scale very efficiently without letting costs run out of control. That is something in that financial governance is something that Teradata is very accustomed to. Our platform has unique differentiated capabilities in terms of moving some of these most complex models into production at scale. Some examples of that from the prepared remarks, we're really looking at health care organizations that were at a massive scale, improving patient outcomes by running multiple models against all of the patients that they have in their ecosystem. And to do that effectively, we have to combine data from multiple sources to enable them to do that. And then just from a governance and data governance perspective, that's something that Teradata has always been strong in with our added capabilities, looking at data lineage and trust in the data that we have in, say, the organization, it really does enable Teradata to be a trusted AI solution for our customers and that's getting some great traction in terms of the discussions that we're having across all industries just now actually. So really well placed from a technology perspective. I think to the point that you brought up, I think that's what customers are looking for from a solution and is what Teradata can deliver today.

The next question is from Tyler Radke with Citi.

This is [indiscernible] for Tyler. We have a lot of questions around ARR already, so I'm not going to go there. My question is around on-track erosion. Good to hear that the erosion was as expected and we have an outlier for this year. But for investors, they're trying to seek some comfort is if this a onetime event? Could you provide some of the actions that you've taken and what was already accounted for on this erosion?

Yes. Thanks for the question. As we look at the erosions for full year, we don't see any changes to our outlook today versus 90 days ago, and that is all factored into our outlook for the year. As we take a step back, we absolutely run the most complex and mission-critical workloads for the world's largest enterprises. And we do have a very detailed understanding of what's going on inside those customers. We created a customer success function a few years ago. And they have a really disciplined approach that says I can help, what's going on inside the customer, our level of engagement, we have telemetry now in terms of understanding what's going on for the environment, how we're engaging partners and save that organization. So we really do have a great 360-degree view of the customer and what's happening. And so we do see 2024 as being an outlier to our renewal rates, and we anticipate that to improve into 2025, and we've got a handle on all of the levers to do that.

Got it. That makes sense. I have a follow-up for Claire around your confidence on the renewal for like the back half of the year, specifically excluding some of the slipped deals for '23, how does that aged renewal looks like versus the same time from a year ago?

Yes. So as Steve just mentioned, we are seeing a strong traction with regards to the transparency and visibility that we have with renewals. We've especially seen that in Q1, we were pleased with the renewals that we saw, and we're expecting that to continue throughout the year. And net expansion rate remains strong at 123%. So that also gives us a good indication as we're moving out the year. And we're modeling, as I mentioned, kind of in the approximate 120% range, which factors in obviously all of our assumptions from a renewal standpoint. So I don't think we're seeing any significant changes or -- and I think we're modeling fairly conservatively from a cloud ARR standpoint, considering that we're currently running at 123% and we're modeling approximately at 120%. So happy with that, and that kind of gives us that confidence in the midpoint for the range for the full year.

The next question is from Cole Erskine with TD Cowen.

This is Cole on for Derrick. Steve, I want to talk about sales execution and just see if there's any changes that Rich is making to kind of drive better rep execution and make sure that deals get across the finish line as we move towards the second half of the year and don't see a repeat of last year?

Yes. So thanks for that, and thanks for bringing up Rich. We were delighted to appoint Rich Petley as our CRO. He joined Teradata over 2 years ago to lead our EMEA region. Given the growth that we've had in EMEA and the success we had in EMEA, we actually promoted him to run all of international sales. And during that time, he's delivered results meaningfully ahead of all of our overall growth rate as a company over the last 2 years. Rich as the sales executives brings us super disciplined approach to deal management. He has demonstrated success in terms of driving predictability in the business. But not only that, in terms of executing in marketplace, his adoption of partners, the growth in new logos, the execution of expansions and migrations inside his region has been fantastic. We're looking forward to bringing that capability to the entirety of our global sales execution. He really does know our business, knows our technology, knows our people and we're delighted to have him in this role.

Great. And then just one follow-up. On the open table format, on Iceberg, it's good to see. Do you guys anticipate any headwind on storage revenue from that?

Yes. I think what we see is there's going to be a requirement to utilize and deploy lots of different storage technologies and storage capabilities. So for certain workloads, open table format, it's going to be absolutely the right choice. And for certain workloads, high-performance storage built right into the Teradata platform is going to be the right choice. We see the capability of open and support an open table format. It gives us the ability to access and utilize even more data than we could previously. And that will drive a source of expansion for us as we move forward, as we increase the utilization of the Teradata platform to query massively more amount of data inside our customer ecosystem. I was talking to one of the banks up in Canada a couple of weeks ago, and they have an order of magnitude, more data stored in native object store than they do inside their structured enterprise data warehouse. By combining the power of Teradata and the query engine that we have in Teradata, to look at these open table format data stores and native object stores, it's going to massively increase the ability for our customers to get insights from the data no matter where it is. So we see it as something that's going to expand our total addressable market and something that we can leverage to grow our overall cloud ARR and ARR in total.

The next question is from the line of [ Oliver Crookenden with Citizens JMP ].

Great. I'm on for Pat. So I just wanted to touch on one of the customer examples you gave. You noted a major financial institution that selected VantageCloud. I'm wondering is that a new logo or an existing customer migration? And then are they considering competitors heavily? Like what were the main selling points in that deal competitively?

That was an existing customers migrating to the cloud with us. And they -- it was a competitive situation where they did choose VantageCloud as their solution. And the reason that they did it was because they saw the migration of the Teradata environment would be least cost, least risk and the lowest complexity from a migration perspective. They also saw that the real value of ClearScape Analytics and our QueryGrid functionality, which are truly differentiated compared to the competition. We also used that to actually do some briefings with their executive team in terms of the value that the Teradata platform can bring to their business. We took a number of different use cases from -- across banks in the world to bring the very best that Teradata to them and our understanding of the industry combined with our technology platform really was a differentiating capability there.

The next question is from the line of Matt Hedberg with RBC.

This is Simran on for Matt Hedberg. Just one from me. I just wanted to double-click on 2025 total ARR and revenue targets being pushed out. Do you still expect to achieve these targets in the back half of 2025? Or could they be delayed further out? And what are the assumptions that are embedded in these targets? And then on achieving $1 billion in cloud ARR, what are you seeing in 2024 and beyond that gives you the confidence to achieve this target on time?

Yes. Thank you. I'll start with the second part of your question, and then I'll go back to the first part. So with regards to the $1 billion in cloud ARR, what we've done there is assumed, as I mentioned, a net expansion rate of approximately 120% that roll forward from 2024 into 2025 and now we're running slightly above that, but we think it's prudent to assume approximately 120%, especially as we move out to 2025. I think given that and the fact that we have a strong pipeline in '24 and also pipeline going into 2025, a strong migration gives us that confidence to be able to deliver the $1 billion in terms of cloud ARR. With regards to our total ARR, as I mentioned in 2024, and we're kind of expecting a similar trend in 2025, we're seeing total ARR growth slightly lower and at the lower end of our '24 guidance, and we expect this trend to continue out. And the main driver for that is because of these stronger and larger migrations from existing on-prem customers. So with that, we're kind of seeing maybe lower on-prem expansion activity. But we know that over the longer term, as we get out from '25 and into '26, given that net expansion rate as we migrate those on-prem customers to the cloud, that continues to give us much more growth opportunity, but looking further out into the future. So we'll see that additional expansion coming from those migrations in '24 and '25 as we progress out an exit '25 into 2026. I think the other factor to remember when you're thinking about our overall total growth rate as you look out into the future is the fact that we've always said that as cloud becomes scale and becomes more than 50% of our total ARR, which we expect as we exit 2025, that is going to help our growth rate accelerate and increase as we look to '26 and beyond. So that still applies. And so we're looking forward to seeing that total growth uplift from '26 and beyond.

There are no further questions at this time. I would like to turn the call back over to Steve McMillan for his final remarks.

Thank you very much, operator, and thank you, everyone, for joining us today. We're looking ahead with confidence as we build on our healthy cloud growth rate and expand our customer base in the cloud. We absolutely believe we've got a differentiated position with our enterprise scale platform for trusted AI. And as the conversation rotates to data and analytics and also about AI, we have the right solution for our customers. We're going to build on that reputation of driving value for our customers as we accelerate cloud and total ARR growth throughout the year. Thank you very much for joining us today.

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