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spk06: Good afternoon. My name is Donyell, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata third quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. 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.
spk08: Good afternoon and welcome to Teradata's 2022 third 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 September 30, 2022, 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 our forward-looking statements. 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 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.terradata.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.
spk07: Thanks, Chris, and good afternoon, everyone. Thank you for joining us today. In Q3 2022, we accelerated our cloud momentum and delivered profitability at the top end of our Outlook range. I am pleased with our ongoing progress as we delivered our second largest cloud quarter ever. Cloud ARR was $279 million, growing nearly 100% year over year in constant currency. We achieved cloud ARR growth in all geographic regions year over year, driven by improving win rates. As we accelerate our cloud ARR, we are also increasing the volume of cloud transactions we are executing. nearly doubling the amount year to date. We continue to build and maintain long-term relationships with our customers as they move to the cloud with us and realize the value that comes when unlocking insights from all of their data. In the quarter, we signed a number of large deals, including an eight-figure cloud migration, as well as an eight-figure expansion with a cloud customer that has been with us for less than 12 months. These large transactions were in addition to a number of smaller migrations and expansions. It is encouraging that we continue to see a balanced portfolio of transaction sizes. As customers often start small, they discover that Teradata is the fastest path to the cloud with the least risk and lowest cost and can scale easily as they achieve breakthrough results from their data. Our strong cloud growth demonstrates that our customers recognize the value in Teradata's mission-critical capabilities as we deliver the best cloud analytics and data platform in the market to navigate through the macroeconomic pressures and recessionary concerns that exist today. Our total ARR was flat in constant currency and declined by 4% as reported. As we've discussed before, this was primarily due to continued currency headwinds and the effects of ceasing our operations in Russia. To put these results into context, I'd like to take a moment and remind everyone where we are on our transformation journey. When I joined just two years ago, we advanced our strategy and pivoted our business to cloud first. Our third quarter's achievements reflect another step on that journey. Our strategy is designed for continued rapid cloud growth balanced with delivering profits and return of capital to our shareholders. If our sellers are faced with the option to sell a small on-prem expansion or wait and subsequently help our customers migrate to the cloud with Teradata, they lead with the cloud. As a result, we are helping our customers effectively achieve their ambitions in the cloud while securing Teradata's place in the customer's future architecture. We now have hundreds of our existing customer base realizing value from the Teradata cloud environment. We've also built out a set of sales plays that drive sticky analytic workloads based on our recently announced ClearScape analytics capabilities. And we've invested in our long-term customer success team, ensuring we keep our lens on account health and driving outstanding cloud experiences that set us up for ongoing expansions and future migrations. We've been relentlessly focused on executing against our cloud strategy and assertively moving forward in the market. Cloud growth is exactly the goal we set out to achieve and our sales teams have embraced it and are performing strongly. With our top priority on selling cloud, there is a natural give and take with on-prem ARR expansion. Q4 is seasonally our strongest quarter and gives us conviction to reaffirm our 2022 financial outlook Claire will cover more details in her remarks, but I want to touch on our 2022 ARR guidance. While we did not accelerate total growth on a reported basis, we are committed to growing faster next year and beyond, especially as our cloud business becomes a greater portion of our mix. And we are pleased with the rapid and sustainable growth in the cloud that is leading to stickier and longer lasting economics. Our eyes remain firmly on the growth horizon as we look to the full year and beyond. We know that companies need the best insights possible, and that is what we deliver. We enable our customers to extract value from all of their data, empower users, and drive smarter, faster innovation at scale at a highly competitive cost point. We remain committed to our strategy and are confident in our ability to deliver on it as a profitable multi-cloud analytics and data platform leader. In the third quarter, we took major steps forward in our technology innovations, announcing our most significant offerings in years. We proudly launched Teradata Vantage Cloud Lake, our first product built on an all-new, next-generation cloud-native architecture. Vantage Cloud Lake is designed to be automatically elastic and leverage low-cost object storage at its core. yet with the power that Teradata is known for, and it's easy to use and expand as needed. As a result, we expect Lake to provide faster access, better governance, and more powerful analytics at massive scale, all at a lower total cost of ownership. Vantage Cloud Lake extends our technology beyond mission critical enterprise needs and expands the reach of our differentiated capabilities to departmental, exploratory, and ad hoc use cases without moving the data. We believe these advances open up entirely new markets and opportunities for our customers. More importantly, it empowers our customers to drive more innovation. We also introduced ClearScape Analytics, expanding the high-performing analytics that Teradata is known for. With ClearScape Analytics, customers can take advantage of the most in-database analytic functions anywhere in the market along with critical AI ML model management tools to meet growing analytic demands and solve their organization's most complex problems. We took our analytics capabilities even further by introducing more than 50 new end database, time series and ML functions and integrated model ops that are designed to rapidly operationalize AI and ML initiatives. These game changing announcements are the result of two years of great engineering with a laser focus on cloud. I believe we are fundamentally changing the ethos of our industry, moving the query engine to the data as we bring forth cloud first and an entirely new model that enables powerful open and connected analytics at scale, massive flexibility and faster access with governance and lower total cost of ownership. We believe that we have the best cloud analytics and data platform, period. With a fully cloud-native deployment and our expanded ClearScape analytics capabilities, we're meeting the full spectrum of our customers' needs with our best-in-class lake, lake house, or data warehouse. I am incredibly proud that with Vantage Cloud, we enable all of these design patterns at enormous scale with better economics. Immediately following our announcements, we took our message on the road, meeting with more than 1,000 customers, prospects, and partners, and helping them discover strategies to generate value and accelerate their business through analytics and data. It has been great meeting live with customers from around the world and seeing their enthusiastic response for generating increased interest that contributes towards ongoing pipeline growth. The game-changing capabilities of our newly announced Teradata Vantage Cloud Lake are opening the door to incremental market opportunities. A Fortune 500 insurance customer is an early adopter of Vantage Cloud Lake. This customer runs actuarial analytics and closes its financials on its Teradata environment today. Our new Lake product will enable it to easily spin up compute clusters for exploratory analytics without impacting any of their production workloads. I'd like to share a few more examples of our momentum in the cloud. A package and delivery industry leader and one of our long-standing customers chose to modernize in the cloud with Vantage Cloud on Azure. A successful initial migration gave the customer the confidence to commit further to Teradata and migrate its remaining workload to the cloud. It expanded its business continuity and disaster recovery workloads in the process. Teradata on Azure provides the flexibility, elasticity, and industry-leading price performance this business demanded to continue to use data as a strategic asset and drive value. One of the world's leading financial services institutions has selected Teradata Vantage Cloud on AWS as its cloud-based enterprise data and analytics platforms. This customer will migrate existing on-prem Teradata workloads to the cloud while evaluating opportunities to expand the use of Vantage across additional business segments. Vantage Cloud on AWS will enable the bank to continue to innovate and lead in its industry. One of Chile's largest retail and commercial banks migrated to Vantage Cloud on Microsoft Azure to achieve its digital transformation goals and enable richer customer experiences With Teradata, this customer is arming its decision makers with data-driven insights that will help them innovate faster and reduce time to market for new financial products and services. In the quarter, we were honored to again be recognized as an industry leader in IDC's FinTech Top 100 rankings. Teradata was named a fast-track FinTech, recognizing the role we play in helping financial institutions drive digital transformation by leveraging the full power of analytics and data. As we've been strengthening our reputation and prowess as a cloud market leader, we've also been strengthening our partner ecosystem to extend our reach and bring incremental value options for our customers. We now see SI involvement in a meaningful portion of our pipeline. We also recently announced a new strategic global SI relationship with Kindrel, By bringing together our unmatched analytic capabilities with Kindrel's experienced consulting teams, we will enable our joint customers to leverage advanced analytics, AI, and ML, accelerate business outcomes, and speed time to value. As we move forward, we are also advancing our commitment to strong ESG practices. We were pleased to be recognized recently by EcoVadis for our commitment to sustainable and ethical business practices We are proud of this designation as many of our enterprise customers rely on EcoVadis to assess their suppliers across a number of sustainability dimensions, including environmental, labor and human rights, ethics and sustainable procurement. Companies around the world are increasingly reviewing the sustainability of the cloud environment and challenging their supply chain partners to reduce emissions and improve their carbon footprint. We are committed to doing our part in addressing the devastating effects of climate change as we develop our platforms. We are pleased to note that in an analyst firm's comparison of cloud data platforms, our Vantage Cloud had the lowest cost and generated the lowest carbon footprint for the enterprise workload use case, our sweet spot. You can be assured that we will keep sustainability at the front and center of our efforts. You've heard us say that we've built a resilient business model that provides stability during times of volatility. We cultivate strong customer relationships and consistently deliver mission-critical workloads for our customers' needs at scale. As our customers look to move to the cloud to take advantage of the innovation and the efficiencies of cloud solutions, we are at their side. These success factors position us well to execute on our cloud guidance for the remainder of the year. I am very excited about our new offerings and the new capabilities and value they bring to our customers, along with the incremental value they will bring to us. As we prepare to enter 2023, we know our strategy is right. Customers are moving to the cloud with Teradata, and the market is recognizing our differentiated positioning as a leader in cloud analytics and data. We compete in a dynamic growth market, and like all great companies committed to profitable revenue growth, we continuously evaluate and adjust to optimize our cost structure while focusing on our employees, customers, and stakeholders. We are operating with conviction to keep our momentum, remain customer driven, and be a profitable growth company. we will refine and adjust as needed to keep a sharp focus and align our investments with our priorities to continue to accelerate our growth. As I turn the call over to Claire, we remain convinced that our technology can continue to unlock even more of our total addressable market opportunity, reinforcing our confidence about achieving our goal of over $1 billion of cloud ARR in 2025. Thanks, everyone. I'll now turn the call to Claire.
spk05: Thank you, Steve, and good afternoon, everyone. I am pleased with Teradata's execution in the third quarter, especially considering the volatile macroeconomic environment. Two key highlights in the quarter include $45 million of reported sequential cloud ARR growth, or $50 million in constant currency, That results in a growth rate nearly doubling year over year. We also delivered non-GAAP earnings per share of 31 cents at the high end of our outlook range and demonstrating the company's continued focus on profitability. We remain on track to achieve all elements of our fiscal 2022 outlook. We are doing what we said we would do, and I continue to be excited about the opportunities ahead of us. We are making progress on our multi-year transformation as a differentiated cloud analytics and data leader. But we still have work to do, and we remain relentlessly focused on driving future ARR and revenue growth. Let's get into the quarterly results, starting with ARR. Total ARR was $1,374,000,000, which is flat year over year in constant currency, and a decrease of 4% as reported. Persistent currency headwinds continue to obscure the underlying sequential growth in our business. On a reported basis, total ARR declined sequentially by approximately $16 million. Of that amount, there was an approximate $28 million currency headwind in the third quarter. The resulting positive $12 million represents sequential growth in constant currency. which was primarily driven by increases in cloud ARR dollars in all of our geographic regions, as well as on-prem expansions in EMEA. Year over year, currency had an approximate 4% negative impact in the reported growth rate, as shown in our quarterly earnings presentation on page six. This is in addition to the 4 percentage point negative impact that was associated with ceasing business operations in Russia that we shared with you earlier this year. In cloud, ARR grew 99% year-over-year in constant currency and 89% year-over-year as reported. This was a strong performance, demonstrating progress against our cloud-first strategy and keeping us on track to achieve our long-term goals in the cloud. Customers continue to make meaningful commitments to us as they unlock new insights and achieve significant business outcomes from their Teradata environment. This ongoing customer success model results in more resilient and durable cloud subscriptions. Cloud ARR growth in the third quarter was driven primarily by migration. In addition to the eight-figure cloud deal that Steve mentioned, we also had a number of seven-figure cloud migrations. These commitments came from an increasing number of existing on-premises customers that are new to the cloud with Teradata. Expansion activity in the quarter was also solid. Our net expansion rate was 117%, consistent with last quarter. The rate was supported by an increasing number of existing cloud customers that are adding new incremental workloads to the cloud. Total new logos grew year over year, better than historical seasonality, and with a weighting towards the cloud. We added new customers in the financial services, healthcare, and government sectors, to name a few. Moving to revenue. Total revenue was $417 million, a 4% decrease in constant currency and a 9% decrease year over year, as reported. recurring revenue was $331 million, a 2% decrease in constant currency and a 6% decrease year-over-year as reported. As a percentage of total revenue, recurring revenue was 79% in the third quarter. As shown in this quarter earnings presentation, there was a negative year-over-year impact in the reported growth rate of approximately 9% for total revenue and approximately 6% for recurring revenue. Those were affected by ceasing of operations in Russia and the continued strength of the US dollar. For context, more than 40% of our total revenue is outside the United States. Now to add additional color to this quarter's revenue. There was an approximate $16 million of total revenue removed from our results due to exiting Russia. As it relates to upfront revenue, there was a net negative $11 million in line with our assumptions for the quarter. For reference, this compares to a net negative $10 million impact in the third quarter of 2021, so no impact year over year. Regarding the declines in perpetual and consulting revenue, we continue to execute against our strategy, moving to a higher margin subscription revenue model and collaborating more with partners to drive higher adoption and greater consumption of Teradata. Moving to profitability, Teradata's reported third quarter gross margin rate was 62.6% and gross margin dollars were 261 million. The year-over-year decrease of 21 million in gross margin dollars is primarily due to currency headwinds and ceasing our business operations in Russia. Cloud gross margin dollars are higher both year-over-year and sequentially as we continue to scale our cloud revenue. Operating profit margin, as reported, was 12.9% in the quarter, and the year-over-year decline in operating profit margin was primarily due to lower revenue. We continue to invest in cloud, sales and marketing, and R&D while also demonstrating cost discipline. This resulted in non-gap earnings per diluted share of 31 cents, which was at the high end of the outlook range previously provided. Turning to free cash flow and capital allocation. Free cash flow generated in the quarter was $31 million, increasing year over year, driven by efficient cash conversion. We continue to sustain a positive operational trend of cash collections over the last six quarters. We also saw the benefit of efficient inventory management with our continued transformation of being a cloud-first company. In the third quarter, we repurchased approximately 1 million shares, or $31 million in total, as we believe our shares are significantly undervalued. Under the current market conditions, we will continue to be opportunistic in the fourth quarter. Year to date through September 2022, we have returned 123% of our year-to-date free cash flow to shareholders, significantly ahead of our 50% annual target. We remain committed to capital allocation that drives shareholder returns. Moving to our outlook. We reaffirmed all of our 2022 outlook elements. This includes approximately 80% growth year-over-year in cloud ARR as reported and in constant currency, and free cash flow of approximately $400 million. We narrowed our range for non-GAAP earnings per diluted share to be $1.58 to $1.62, maintaining the midpoint at $1.60. Our complete 2022 outlook can be found in our third quarter earnings press release and presentations. I'd like to make a couple of comments to help frame our 2022 full-year outlook. We know that our fourth quarter is seasonally our highest quarter from a sales perspective. This and our current sales pipeline give us confidence that total ARR and cloud ARR dollar growth will accelerate sequentially. We have absorbed the incremental quarter-over-quarter currency headwinds of approximately 50 basis points in our full-year outlook. If currency headwinds persist or increase, then our results may be towards the lower end of our outlet ranges. We are planning various actions to continue optimizing our cost structure. We do not anticipate any impact from restructuring to 2022 non-GAAP EPS and only an immaterial impact to 2022 free cash flow. We will provide details of the 2023 impact on the next quarter's earnings course in conjunction with our 2023 financial outlook. Before we move to questions, here are some modeling considerations for the rest of the year. For the fourth quarter of 2022, we anticipate non-GAAP earnings per diluted share to be in the range of 28 cents to 32 cents. We project the non-GAAP tax rate to be approximately 27% in the fourth quarter and approximately 25% for the full year. We forecast the weighted average diluted shares outstanding to be approximately 104 million shares in the fourth quarter and approximately 106 million shares for the full year. Thank you very much for your time today. Let's please open the call for questions.
spk06: At this time, I would like to remind everyone in order to ask a question, press the star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. In the interest of everyone and opportunity, we appreciate that you limit yourself to one question and one follow-up. Your first question comes from the line of Eric Woodring of Morgan Stanley. Please proceed.
spk11: Hey, guys. Thank you for taking my questions tonight. Congrats on the results. Steve, I'd like to direct my first question to you, and it's a fairly simple one, and that is, in your prepared remarks, you didn't make a number or that many comments on the macro environment, so I'd love to just get your download on how you see the macro evolving, meaning how have your conversations with customers evolved? Did anything change in 3Q relative to 2Q? Is macro starting to have an impact on your customers' businesses? you know, any color in terms of lengthening of sales cycles or downsizing of deals, any commentary that you could share there would be super helpful. And then I will follow up. Thanks.
spk07: Yeah, thanks, Eric. Yeah, we are continuously assessing the impact to our customers and their spend patterns. You know, we've got a very rigorous operational discipline around that. We're not seeing any significant changes to our customer behavior patterns at this time. We also don't see any significant deal delays that are out of the ordinary. What I would say is I think we've talked about the strength of the Teradata business model. The types of workloads that we execute inside our customer environments tend to be absolutely mission critical. The commitments that they have with us tend to be longer term. And we're really proud of the buying patterns in terms of the continued interest in the cloud capabilities that we have. Our new product launch with Vantage Cloud Light I think cements is into advanced technology architectures inside our customers. And so we see them taking advantage of the capabilities to take Teradata to the cloud. And I think that's what enabled us to have that second highest ever cloud quarter from a Q3 perspective. But we do take it very seriously in terms of looking at the macroeconomic environment and making sure that we've got the right responses throughout the organization.
spk11: Okay, that's really helpful. Thank you, Steve. And then, Claire, maybe I'll direct one for you. Obviously, you've held on to your annual cloud ARR growth target since first introducing it earlier this year, despite some of these emerging headwinds we've been seeing, exiting Russia, stronger US dollar. I believe at least your expectations for FX headwinds for the full year and for 4Q uptick this quarter. So, Can you just help us kind of, one, understand what's giving you the confidence in reaching your year-end growth target for Cloud ARR? And then, two, how you're able to offset what is now a larger FX headwind than you thought 90 days ago? And that's it for me. Thanks.
spk05: Thanks, Eric. Yeah, great question. And, yeah, we're very happy, obviously, to be able to maintain all elements of our outlook for the full year. especially our cloud ARR growth target of approximately 80%. We are seeing our currency headwinds. We are expecting there to be a delta between our reported and our constant currency numbers for the full year. But we think that that gap will narrow specifically for cloud ARR because the deal mix in the US will slightly increase in Q4. But even factoring that in, to account. Given the good pipeline coverage that we see, as Steve mentioned, not seeing any significantly different behavior from our customer behavior, we are very confident to be able to reinforce that number of approximately 80% both on a reported basis and in constant currency.
spk04: Great. Thank you so much.
spk05: Thank you.
spk06: Your next question comes from the line of Derek Wood of Cowan & Co. Please proceed.
spk12: Thanks. Thank you. And I'll echo my congratulations on a really strong cloud quarter. You guys, I don't know if this is for Steve or Claire, maybe Claire, but you guys talked about kind of seeing bigger lifts and shifts when companies decide to make the cloud migration move. Is that still a pattern you're seeing in Q3? Has that changed at all? I mean, if this is a trend you expect to continue, where do you think the kind of cloud net revenue retention rate should level off at?
spk07: So I'll take the first part of that question, Derek. So just from a pattern, yeah, our sales team, I think I mentioned this in my prepared remarks as well, our sales teams are certainly focusing on those large-scale migrations and moving the customer to the cloud. We still obviously have a lot of hybrid deployments where our customers are in the cloud and on-prem, but the focus for the sales teams are those larger deals. We do have a good portfolio of deal sizes across the sales team, so we're not overly dependent on those mega deals. We certainly have lots of opportunity to move you know, some of these huge customers and major workloads into the cloud. And the sales teams are definitely focused on that. I think if that did anything, it probably, if they have the choice of doing, you know, an on-prem expansion or pushing that deal out to focus on a cloud migration, they're incented to really go for the cloud migration. And I think that's what we're seeing in terms of the behavior of our sales teams. But I'll hand it to Claire to talk a lot about the net expansion rate.
spk05: Yeah, absolutely. Thanks, Steve. And thanks, Derek, for the question. So as I mentioned, we saw 117% in the Q3 results, and that was actually consistent quarter over quarter. So I think that's a good stable rate at this point. And as Steve mentioned, we're seeing great strength in our migrations. We're seeing that expansion. at the time of conversion, and we're very confident in our full year cloud ARR growth at that level of expansion rate.
spk12: Got it. Thanks. Helpful. One follow-up here. I guess, Steve, you mentioned that, you know, you'll continue to refine and adjust operations as needed. You know, in light of FX headwinds, in light of tougher macro, any – I've seen a lot of companies having to kind of pause headcount growth, maybe even prune headcount. Just when you're looking at the kind of growth versus profitability trade-off and maybe having to adjust to the environment, how are you thinking about headcount growth or changing discretionary spend or things that you have in control that can kind of manage operational costs?
spk07: Yeah, and you know, Derek, my commitment has always been that Teradata will be a profitable revenue growth company. company. And so we continuously assess our overall cost and expense structure to make sure that it's optimized in the right way. Clearly, we're taking advantage of, as a lot of organizations are, optimizing our real estate footprint as an example. So we've taken some great action from that perspective. We continuously assess where we're spending money to make sure that we're investing in the right areas of the business. to make sure that we're investing in cloud growth especially. Our new product launch from our engineering team really demonstrates how we optimize our investments to deliver something in the marketplace, and we'll continue to do that, and we'll continue to have that operational rigor as we move forward to deliver on the commitments that we've made.
spk12: Got it. Thanks. Congrats on a solid quarter. Thanks. Thanks, Eric.
spk06: Your next question comes from the line of Tyler Ramke of Citi. Please proceed.
spk02: Thank you. Good afternoon. I wanted to ask you about the comments you made around next year for 2023. Just wanted to confirm that you referenced improving ARR growth So I would assume that means accelerating ARR growth. Maybe just unpack that a little bit. Is that a constant currency X Russia number? So if we think about kind of a 4% ARR growth this quarter, X those issues, is it an acceleration from that? And then just give us a sense on what drives that confidence. Is it kind of the expansions in cloud? Just help us understand what gives you that confidence. Thank you.
spk07: Thanks, Tyler. I'll start and then maybe hand over to Claire for some of the more technical financials. Our sales teams are executing on our strategy and we are going to get back to total growth as well as cloud growth. We are getting those long-term commitments from our customers as we move to the cloud, running sticky mission-critical workloads. I think that is an advantage for us in this challenging macroeconomic environment. But I think you'll see us continue to accelerate total ARR as more of our ARR mixes in the cloud and the elastic environment of the cloud that we have brought is much easier. We've also got plans for lots of sales plays and motion to drive expansion with more sticky workloads and analytic use cases. We've invested in our customer success team, but also I'm very excited about the work that we're doing with the SI partners. to help customers transform their environments. And that transformation in the times of turbulent macroeconomic, our customers still have that desire, whether it's to optimize the supply chain, utilizing data and analytics to do that, optimizing their operations. So I think we are seeing in the cloud and data analytics market space, continuing good opportunity as we move forward. But Claire, I'll let you answer maybe on the FX points and so forth.
spk05: Yeah, absolutely. So first of all, just to confirm, Tyler, we're not giving any guidance or updates for 2023 at this time. So we will provide an update on that at our next quarterly earnings call. Clearly, we've had significant headwinds in 2022, both from the ceasing of operations in Russia and currency. So we'll be factoring that in as we give final guidance at our next earnings. I don't want to pretend I can predict what currency is going to happen next, but as always, we monitor this on an ongoing basis. We always include the very latest rates and situation into our outlook. So we were pleased with the fact that despite, for example, there are additional headwinds between Q3 and Q4, for example, we were able to absorb that in our full-year outlook.
spk02: Great. Thanks for the color. And just going back to some of those large deals you referenced in the quarter, I think a number of eight-figure deals, which is very impressive to see in this environment. I guess, help us understand a couple things. First, did any of those close early? Maybe stuff that got pulled in from Q4. I know typically Q4 is when you tend to close those eight-plus-figure transactions. And then secondly, for those deals that were cloud deals, it sounded like cloud conversions. Give us a sense on how much those contracts expanded relative to what they were spending on premise. Thank you.
spk07: So, yeah, both of those deals had expansion in terms of from what they were spending on premise to what they're spending in the cloud. We were really excited clearly about doing those very large deals for their customers. It certainly represents a great commitment in terms of forward execution. I think we didn't see a significant level of pull forward from Q4 to Q3. I would also say our Q4 pipeline, as Claire mentioned in the prepared remarks, is looking healthy. So, you know, everything's pointing to the fact that, you know, we maintain our outlook on approximately 80% year over year for cloud ARR growth by the end of 2022. So great execution by those sales teams. They're clearly out there selling the advantages of Teradata in the cloud.
spk02: Thanks so much.
spk04: Thanks, Harold.
spk06: Thank you. The next question comes from Ramo Lencho of Barclays. Please proceed.
spk10: Hey, thank you, and congrats from me as well. Stephen, the one thing that surprised me at the launch of your lake was, like, the positive news from some of the existing customers that kind of really liked the separation of compute and storage, but also, like, kind of like how Vantage gives them a really nice clear path into the cloud. Can you speak to what you've seen since the launch in terms of like customer feedback that you have received so far and how that's helping build pipeline?
spk07: Yeah, no, absolutely. We took that message on the road, as you know, after that initial launch and met with thousands of customers around the world. And it's great getting out and meeting those customers in person and getting the real feedback from them in terms of their evaluation of the technology and how we're taking the cloud-first strategy and making it real for them. We're getting lots and lots of interest. I think we've already got customers up and running and using CloudLake, which is great. But I think as well, our launch and announcement around ClearScape Analytics and pointing to the end database analytic capabilities that are now available as part of the platform that drives immensely complex and sticky workload, gives our customers the opportunity to deploy some really interesting use cases on the Teradata platform. The Cloud Lake announcement, to your point, enables us to have an offering where we can provide As we always have done, the very best enterprise data warehouse. But now we can provide a data lake, a data lake house. We can do it on-prem and in the cloud in terms of those deployment options, which a lot of our competition isn't able to do. We utilize native object storage right in the core. of the technology so that, you know, we can get an optimized cost for our customers as they deploy our technology. So it's an exciting time. We're getting some great feedback.
spk10: Yeah, perfect. And then I don't know if you kind of, I'm sure you looked at the Azure numbers and the AWS numbers and you can see like a little, you know, a little bit of a deceleration there and people are optimizing cloud spend. It seems different with you and you touched on, mission critical and getting value out of that and being kind of all too early in the lifecycle going to cloud there. What do you see in terms of customer willingness to engage with you in this kind of uncertain times? Are you kind of following the cloud guys? Is it slightly different? How should we think about that?
spk07: Well, I think we've mentioned about the strength of our business model before in terms of how we construct our long-term agreements and contracts with our customers. utilizing blended pricing models that have a fixed capacity built in. And our customers actually utilize that fixed capacity to have the best in the industry financial governance of their data and analytics environment. And our customers see that as a real strength. Because we have the patents around workload management and query optimization, our customers can run uh you know more workload inside that fixed capacity in an optimized way compared to how a competition does it or analytics capabilities enable customers you know optimize x stack so that they can you know reduce dependency on maybe one-off analytic providers inside their environment and utilize the capabilities inside teradata So I think our sales teams are using the microeconomic environment as some good reasons why Teradata is better in the cloud than some of the cloud-native solutions that don't have those patented capabilities right now.
spk10: Yeah, okay, perfect. Makes total sense. Thank you, and good luck.
spk04: Thank you.
spk06: Your next question comes from the line of Chad Bennett of Craig Hallam. Please proceed.
spk03: Great. Thanks for fitting me in. So just Claire or Steve, just a question on the on-prem subscription business. And just in terms of, you know, it seems like a lifetime since anybody's analyst day and targets if they did them late last year or mid last year, but Just in terms of how you're thinking about that business over the next, you know, 12 to 24 months or over your target timeframe, from a growth standpoint, you know, I think, you know, you were talking about even net of migrations being able to grow your on-prem subscription business. Is that still the case? And then maybe any insight into gross churn around that on-prem subscription business this year? That would be great.
spk07: Yeah, so from an on-prem perspective, I think I look at it as kind of flat in terms of our overall economics. And certainly the macroeconomic environment would say that, you know, it's not going to be a growth engine for us. So from a churn perspective, you know, we experience churn levels, but the best way to prevent that churn is actually to move them to the cloud. Yep. And so when we look at the overall business, we're not seeing any surprises there. And certainly when we move that customer to the cloud, we get a long-term commitment so that they're locked in with us. So that's really the growth factor that we're looking at.
spk03: Okay. And then maybe one follow-up. Just if you look at kind of where you are year-to-date in cloud ARR growth, which has been great, obviously, you guys are an outlier in terms of hitting your target and growing at the rate you are at some decent scale now also. But if you look at kind of the components of where we are today or at the end of the third quarter, Steve, whether it's migrations or net expansion or new logos, has it played out the way you thought it would or have there been any variations in terms of, nobody has a crystal ball, but in terms of kind of how you got to where you are today?
spk07: I think what we're seeing is more increased ARR on migration, whereas the pattern that we had seen was sales teams migrated some of the customers' environments and then expanded that out subsequently. I think the sales teams are now going for the big deal right out of the box. So if I think about it, that's certainly a difference to our initial planning, but As we model that through and look at the expansion rate that we're currently seeing, you know, it still gives us the number of getting to, you know, the approximately 80% year-on-year for cloud ARR growth. So I think broadly we're in line with what we said at Investor Day to make that slight change of mix. You know, new logos, we did new logos in Q3. We are pleased with the momentum that we've got from that perspective. It is more challenging, to be absolutely clear with you, it's more challenging to win new logos in the microeconomic environment. But the criticality of the workloads that we deliver, the value propositions that we've got for our customers continue to assert that we've got great growth potential. And the data and analytics marketplace is a great marketplace to be in.
spk03: Got it. Thanks much. Nice job on the quarter.
spk07: Thanks, Chad.
spk06: Your next question comes from the line of Matthew Hedberg of RBC Capital Market. Please proceed.
spk01: Hey, this is Simran for Matt Hedberg. Thanks for taking our question and congrats on the quarter. My question is that The customer feedback you spoke about with the Vantage Cloud platform seems great. Can you dig in a little bit more on a traditional customer journey and then any insights you can provide on how this platform could pave the way to hire new logo ads in 2023, 2024 versus this year, as well as any new market opportunities that you're particularly excited about? Thank you.
spk07: Yeah, sure. Thank you for the question. So Enterprise Edition is the bulk of the business that we did in Q3. What we're seeing is that our customers are taking their Vantage platform on-prem straight to the cloud and landing that on Vantage Cloud Enterprise today. That's where we're getting the bulk of the business and those big deals today. I have a good component of Vantage Cloud Enterprise. Vantage Cloud Lake gives us the opportunity to start small with customers, see the value, and then grow. And the price point, the initial price point of Vantage Cloud Lake we put in so that it's attractive for those customers to start using it because we believe that the elasticity that's enabled by that technology will drive good growth into the future. As we look at our guidance for FY22, we didn't have a large assumption around Cloudlight or that fundamentally changing the trajectory of our business. Most of the business that we will do in Q4, like Q3, will be on Vantage Cloud Enterprise. We look at Cloud Lake as an opportunity to get into different workloads, experimental, ad hoc workloads inside our customers. And it's going to be a future catalyst of driving growth as we move forward.
spk01: Great. Thanks for the call.
spk04: Your next question comes from the line.
spk06: of Wamzi Mahan of Bank of America.
spk09: Please proceed. Yes, thank you. Steve, just going back to the on-prem side of the business, one of the hyperscalers seems to have created a displacement of a long-time on-prem customer. Are you seeing anything change in that pipeline? Do you view that as sort of a one-off, or are you seeing... that the on-prem pipeline is changing in some competitive way with the hyperscalers at all? And I will follow.
spk07: Yeah, I think what we're seeing there, Wansi, is if we have major customers moving to alternative technologies, it tends to be a decision and an activity that they started and planned and executed on based on a decision that was made years back before we had the cloud capabilities that we've got to today. I think now what we're seeing with the progress that we've made over the last two years is customers recommitting to, based on the technology architecture, the product announcements that we've made recently, the fact that we can take them to the cloud in a very effective way is of great interest to them. We work in partnership with the hyperscalers, clearly, because we are available on all three of the hyperscalers. But we're not frightened to compete either. We do have the best data and analytics platform. When our customers experience it and get to use it in the cloud, they realize that they can take workloads from on-prem and take them to the cloud in the most effective, least cost way. And so we're seeing a lot of execution from that. And once they're in the cloud with us, we become part of their future technology architecture. The best way that we will continue to engage with all of these customers in the future is to give them the best possible data and analytics capabilities where they need it, be it on-prem or in the cloud. And a lot of these really large organizations are realizing that they can optimize their environment by having both an on-prem component and a cloud component. And we can execute in both of those deployment models.
spk09: Okay, thank you, Steve. That's very helpful. And Claire, maybe as we think about the trajectory from this $400 million to your longer-term target on free cash flow, how should we think about how linear the progression should be? And I know you're not guiding 2023, but any large puts and takes that we should be thinking about in terms of free cash flow looking into 2023? Thank you.
spk05: Yeah, Wendy, thanks for the question. And as you mentioned, not planning to guide at this earnings pool for 2023, but we are really happy with the efficient cash conversion cycle that we've seen on a continuous basis throughout fiscal 2022. So that is a continued opportunity moving forward in 2023. And obviously, as we talked about, you know, looking for you know, that momentum in terms of growth as we come out of the headwinds that we've seen in 2022 from Russia and currency. So nothing out of the ordinary that I would say, but just the fact that we've seen consistent cash conversion cycles for multiple quarters now in a row, and we think that that's very easy to extend and continue to perform from an efficiency standpoint on cash flow into fiscal 2023. Yeah, thanks, Claire. Thank you.
spk06: There are no further questions at this time. I will now turn the call back over to Steve McMillan for his final remarks.
spk07: Yes, thank you, operator. Thanks, everyone, for joining us today. We are really pleased with our ongoing momentum and our accelerated cloud growth. We are absolutely committed to our strategy and are confident in driving differentiated value for our customers and returns for our shareholders. as we reaffirm our 2022 financial outlook. We hope you all have a happy and healthy year end. Thank you very much.
spk06: This concludes today's conference call. You may now disconnect.
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