Teradata Corp (TDC) Q2 2024 Earnings Call Transcript Highlights: Cloud Growth and Cost Reduction Strategies Amid Revenue Challenges

• Total ARR: Decline 2% to 4%.
• Cloud ARR Growth: 28% to 32%.
• Total Revenue: Decline 2% to 4%.
• Recurring Revenue: Flat to down 2%.
• Free Cash Flow: $270 million to $290 million.
• Non-GAAP Earnings Per Share: $2.20 to $2.26.

Release Date: August 05, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Cloud ARR growth of 32% year-over-year in constant currency, reflecting strong performance in cloud services.
• Cloud net expansion rate remained robust at 123%, indicating high customer satisfaction and expansion.
• Teradata Vantage Cloud Lake launched on Google Cloud, expanding the company's cloud offerings.
• Recognition by Gartner as a customer's choice for cloud DBMS, highlighting customer satisfaction.
• Proactive measures to reduce operating expenses by $75 million to $80 million annually, aiming to improve profitability.

Negative Points

• Total ARR declined by 3% year-over-year, indicating challenges in overall revenue growth.
• Elongated deal cycles and delayed customer decision-making impacting revenue and ARR growth.
• Lower expansion activity and on-prem erosions contributing to the decline in total ARR.
• Revised financial outlook for 2024 and 2025 due to uncertain macro environment and longer deal cycles.
• Reduction in headcount by approximately 9% to 10%, which may impact employee morale and operational efficiency.

Q & A Highlights

Q: Steve, your cloud ARR growth forecast models a 120% net expansion rate, but you are falling short on cloud ARR. What's the biggest headwind outside of net expansion impacting cloud ARR?
A: Stephen Mcmillan, President, Chief Executive Officer, Director: We did grow by $19 million in constant currency in Q2, but some deals pushed into the second half, below our expectations. The pipeline remains strong, but customer decision cycles are elongating, impacting our cloud ARR. We're not losing deals, but the decision to migrate to the cloud is being delayed.

Q: Given the volatility and challenging macro environment, what gives you the confidence to provide metrics for 2025?
A: Claire Bramley, Chief Financial Officer: Our confidence stems from several factors: strong cloud business growth, improved retention rates, and proactive cost reduction measures. We anticipate cloud ARR growth of 28% to 32% in 2024 and similar growth in 2025. Additionally, our cost reduction activities will allow us to reinvest in growth areas.

Q: What is different now about the deal elongation conversations compared to three to six months ago?
A: Stephen Mcmillan, President, Chief Executive Officer, Director: We are seeing an exacerbated change in customer buying behavior, with more scrutiny on spending decisions. The competitive environment remains consistent, but large deals are under more scrutiny, leading to longer decision cycles.

Q: Can you provide more details on the restructuring and its impact on free cash flow?
A: Claire Bramley, Chief Financial Officer: We anticipate reducing operating expenses by $75 million to $80 million annually, with $15 million to $20 million expected in 2024. The total cash impact from severance payments is anticipated to be $45 million to $50 million, with $30 million to $35 million in 2024. We expect a net benefit of $15 million to $20 million in 2024 from these cost reductions.

Q: What steps are you taking to mitigate potential future erosion and incentivize existing customers to leverage Vantage Cloud?
A: Stephen Mcmillan, President, Chief Executive Officer, Director: We have a robust customer success function and proactive save plans in place. Our strategy is to execute a cloud-first approach, demonstrating the value of our new technology developments. We also offer commercial incentives for customers to move to the cloud, and our cloud business has been successful, with many customers growing with us.

Q: Have you seen any changes in the competitive environment?
A: Stephen Mcmillan, President, Chief Executive Officer, Director: The competitive environment remains consistent. We are launching new technologies, such as Vantage Cloud Lake on Google Cloud and Teradata AI Unlimited, which enable us to compete more effectively. These innovations position us well in the market.

Q: Can you discuss the linearity in the quarter? Did things deteriorate as the quarter went on?
A: Stephen Mcmillan, President, Chief Executive Officer, Director: Our linearity is typically back-end loaded, and we saw customer decision-making cycles impacting our results towards the end of the quarter. This led to the deal elongation and slippage we experienced.

Q: What is the impact of the restructuring on account coverage and your confidence in closing deals in Q4?
A: Stephen Mcmillan, President, Chief Executive Officer, Director: We have streamlined our go-to-market organization, promoting top talent and reducing management layers. The deal ownership is clear, and we are focusing on non-revenue-generating areas for further restructuring. We are confident in our team's ability to close deals.

Q: How do you see the data analytics market evolving over the next few years, especially with open table formats like iceberg?
A: Stephen Mcmillan, President, Chief Executive Officer, Director: We support multiple open table formats and believe the battle is in the query engine. Our open and connected ecosystem allows customers to take advantage of the most advanced analytic capabilities. We are well-positioned to address various storage tiers and workloads, ensuring flexibility and performance.

Q: Can you elaborate on the reduction in the ARR outlook and its impact on restructuring?
A: Stephen Mcmillan, President, Chief Executive Officer, Director: We don't anticipate disruption from restructuring. The reduction in ARR outlook is primarily due to continued deal elongation and customer decision-making cycles. We have a strong pipeline and are confident in our go-to-market execution.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.