Teradata Corporation

Q1 2023 Earnings Conference Call


spk06: Good afternoon, my name is Frances and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata first quarter 2023 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 star two. 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.
spk09: Good afternoon and welcome to Teradata's 2023 first quarter earnings call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today followed by Claire Bramley, Terriata'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 March 31st, 2023, 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.
spk08: Thank you, Chris, and welcome, everyone. Thanks for joining us today. Teradata is off to a great start in 2023, building on our market momentum. We achieved another quarter of robust cloud growth, driven primarily by expansion activities. Our cloud ARR was up 89% year on year in constant currency, and we also experienced solid sequential dollar growth. We delivered on key financial metrics in the quarter, and we continued to strengthen our position as a cloud leader. We also accelerated our growth in total ARR to $1.506 billion, growing both sequentially and year over year. we experienced our highest sequential growth in Q1 in more than five years. In addition to driving total ARR growth, we also delivered healthy profits. Recurring revenue grew by 4% in constant currency, which contributed to generating more than $300 million in gross profit and over $100 million in free cash flow. I am very proud of the team's execution across the board in the quarter, a clear indication that our transformation is moving full steam ahead. Our differentiated position in cloud analytics and data is recognized and growing, and we are advancing our market reputation and driving our pipeline. Organizations everywhere are investing in advanced analytics, including generative AI and machine learning, to drive automation and agile decision-making. To enable a future of AI-driven business, enterprises will require trust in data and the ability to massively scale with price performance. Teradata's deep data management capabilities, proven stewardship of the most trusted data in an enterprise, and high performing AI and ML at scale are fundamental requirements for organizations as they move into this new world. Let me share a recent example where we helped a customer deliver its retailer of the future model with advanced personalization in store by training a generative AI, think ChatGPT, large language model in AWS SageMaker and running that model at scale in Vantage Cloud to provide real-time retail product recommendations to its shoppers. Building upon this example, we recently announced our integration with Google Vertex AI, rounding out our cloud service provider ML integrations, thereby extending analytics capabilities for customer use cases. We also announced the integration of Vantage Cloud with Microsoft Azure Machine Learning. We are combining the scalability and openness of Teradata Vantage Cloud and Clearscape Analytics with Azure ML's ability to simplify and accelerate the ML lifecycle. Together, we are providing a platform designed to ensure that customers can execute complex analytics and AI ML on massive datasets and incorporate the preferred data science tools, including Azure ML. This helps customers unlock the potential of their AI ML investments as they deploy sophisticated models, including generative models and production faster and with confidence. In addition to these customer benefits, we also delivered new visualizations that provide consumption transparency for Vantage Cloud Lake, our new product built on our next gen cloud native architecture. We're continuing to see adoption of Vantage Cloud Lake and are already bringing out enhancements. Customers can now see their consumption actually against plans across all of their environments. They can see their consumption patterns on an hourly, weekly, monthly, and quarterly basis. This transparency helps our customers avoid end of quarter surprises, which is critical to enterprise customers. In times of financial uncertainty, having this type of financial governance is a major driver of value for our customers and a major differentiator against our competition. We further strengthened our open approach and integrated with DBT to enhance our developer experience and enable more use cases for the important developer community. We are adding integration to this modern tool set that is popular with data engineers and is part of the modern data stack. It saves engineers and analysts valuable time while allowing them to focus on high value pursuits and accelerate time to outcomes with advanced analytics. A real win-win. In another win-win, I'm particularly pleased with our continued customer momentum in the quarter. We've added or expanded customers across industries, geographies, and use cases. I meet with many customers and they are relying on analytics grounded in the trusted data we provide to help them remain resilient during pains like the current economic environment. Let's walk through a few representative examples. We closed one of the largest deals measured by total contract value in Teradata's history at a US-based healthcare service provider. This deal was won with one of our valued partners and included an eight-figure cloud expansion and quarter. Our customer signed a strategic multi-year cloud agreement to lighten Teradata on AWS and ClearScape analytics to support areas such as customer engagement, Medicare, Medicaid services, and most importantly, cost of care. as it serves its 100 million plus members. These analytics will be instrumental in continuing to drive the cost of healthcare down by providers and increase the level of care to consumers. One of the largest integrated financial technology solution providers in the US, supporting the success of more than 2,400 financial institutions and representing more than 7.7 billion transactions annually, selected Vantage Cloud on AWS and a multi-phase modernization program that includes our consulting services. It will now have the ability to scale on demand and perform macro level analytics on aggregated data to drive the most value within areas including marketing, predictive insights, and member insights. An investment in commercial bank in the Middle East is a new logo for us. This customer is working to build small business solutions to serve specific departmental needs. The ability to tailor our world-class analytics to fit each specific use case was a key to success in fulfilling the customer needs for the future. I mentioned that expansion activity was a key driver of growth in the quarter. I'm pleased to note that our CloudNet expansion rate was 119% ahead of Q4's rate and customers who migrated to the cloud from just last year are already expanding on our platform in Q1 of this year. Additionally, we're seeing customers expand at the point of migration, adding incremental workloads and use cases. This is a manifestation of customers realizing the value and our ability to provide best-in-class hybrid cloud environments, meeting them wherever they are on their journey to cloud. A key tenet of our transformation is building strong and lasting relationships with partners. They are a force multiplier for our business. In Q1, we saw growth with the hyperscalers, capitalizing on our win-win relationships with AWS and Microsoft Azure. In the quarter, we also deepened our relationship with Dell Technologies. Teradata and Dell have committed to jointly offer private cloud solutions that give the flexibility of the cloud with the control and security of on-prem. We have co-engineered and are bringing together our best of breed technologies, integrating Teradata Vantage with Dell's converged infrastructure. These solutions are ideal for companies wanting hybrid cloud analytic environments that include an on-prem element of the ecosystem such as regulatory compliance. This is one more example of meeting customers where they are with what they need today and offering a seamless path to the future. With customer adoption already underway, I'm excited about the market opportunity for both of our companies. In the ESG arena, we are exceptionally proud that Teradata was named one of 2023 World's Most Ethical Companies by Ethisphere for the 14th consecutive year. This designation is a testament to our fundamental ethos of operating with the highest integrity and commitment to doing business the right way every day. As we turn the call to Claire, I want to underscore that we are incredibly pleased with our strong start to 2023. Our resilience and growth this quarter gives us confidence in the market need for our connected multi-cloud analytics and data solutions. With our Vantage Cloud platform, we are strongly positioned across all data formats and deployments in the cloud, multi-cloud, hybrid, and on-prem. You've heard me say we meet customers where they are and help them seamlessly get to a better, more efficient, and more competitive place. Our results reflect the market need and open and connected approach. Our teams are demonstrating the ability to be relevant and remain resilient in driving total ARR and cloud ARR growth at scale in the uncertain economic environment. Our technology continues to garner kudos as it outpaces the competition and our customers are building and growing their analytic futures on Teradata. Our Q1 performance gives us significant confidence in the year ahead. We are committed to our outlook for 2023, and we remain on track to achieve our fiscal 2025 target of more than $1 billion in cloud ARR. And now I'll pass the call to Claire.
spk07: Thank you, Steve, and good afternoon, everyone. As our results show, Teradata continues to have good momentum and is off to a strong start in 2023. A clear highlight of the quarter was year-over-year growth in total ARR of 6% as reported and 7% in constant currency. The sequential growth of $24 million is the first time we have seen growth from the fourth quarter to the first quarter for three years. Another highlight was our year-over-year public cloud growth of 86% as reported and 89% in constant currency. Sequential growth was $31 million, which was more than four times greater than the growth in the same period last year. Free cash flow of $105 million and non-GAAP diluted earnings per share of 61 cents puts us on track to achieve our annual outlook for both metrics. Our first quarter's financial results reflects the company's dedicated execution against the cloud-first profitable growth strategy we introduced just over two years ago. These results give me confidence to reiterate our 2023 outlook amidst the current macroeconomic environment. Let me now share some more details on our financial results, starting with revenue. First quarter recurring revenue was $389 million 4% growth in constant currency, and 1% as reported. Growth was driven by the strong execution of our go-to-market team last year and this quarter, including several large expansions and migrations in the seven and eight figure range. This dynamic contributed to strong cloud revenue growth year over year. Recurring revenue as a percentage of total revenue was 82%, which is up four percentage points from the same period last year. In the quarter, we experienced a very healthy renewal rate of on-prem subscription contracts that was better than previous years. This contributed to a net positive upfront recurring revenue of approximately $34 million, resulting in a year-over-year increase of $5 million, or one point of growth. This growth was more than offset by the loss of revenue recognized from the Russian operation that we ceased partway through the first quarter of 2022. First quarter total revenue was $476 million, that year over year in constant currency and down 4% as reported. The year over year change is primarily due to a strategic transformation, impacting perpetual and consulting revenue. Moving to profitability in the first quarter. Profitability was healthy. We reported $306 million in gross profit and a gross margin of over 64%. The primary driver of our strong gross profit performance continues to be the higher mix of recurring revenue. There was also a benefit of approximately two percentage points related to the net positive impact of upfront recurring revenue. Operating profit was $108 million, or an operating margin of approximately 23%. Total operating expenses were flat year over year and down sequentially, despite higher SG&A expenses due primarily to increased fixed and variable compensation. We continue to maintain cost discipline as well as prioritize positive return-generating investments that are focused on our future growth. Non-GAAP diluted earnings per share for $0.61, which is in line with our outlook range. Our strong quarterly results enabled us to absorb an approximate $0.07 impact in other expense from unplanned currency devaluation in various geographies, such as Egypt and Pakistan. Turning to free cash flow and capital allocation. We generated $105 million in the quarter, driven by both solid income generation and an efficient cash conversion cycle. We continue to take advantage of our strong balance sheet to repurchase shares, resulting in a return of 84% of our first quarter's free cash flow to shareholders, ahead of our annual target of 75%. With regards to the 2023 outlook, I'd like to provide some context on the second quarter and the rest of the year. We reaffirm all elements of our 2023 outlook. The midpoint of our annual outlook remains our best view of the year, even though our first quarter results were ahead of last year's linearity. We have absorbed a slight sequential currency headwind in our 2023 outlook. We do not currently see any other material headwinds impacting our business. We will continue to monitor the macroeconomic environment very closely. Given the strength of our first quarter and the improved linearity versus the same periods last year, we are not expecting an acceleration of total ARR and cloud ARR dollar growth from the first quarter to the second quarter. We do expect greater sequential dollar growth for cloud ARR in the second half of the year, given the increasing market awareness for our Vantage Cloud platform and in line with historical seasonality. We continue to anticipate that our fourth quarter will be the strongest quarter this year for both total ARR and cloud ARR dollar growth. We expect a solid improvement in cloud growth margin year over year as we achieve scale benefits. The increasing revenue mix shift to the cloud results in a slight headwind to total company growth margin in 2023, as noted on last quarter's earnings call. We also anticipate less of a gross margin benefit from upfront recurring revenue for the rest of the year as compared to the first quarter. We are on track to achieve our annual outlook for non-GAAP earnings per share and are narrowing our range to $1.92 to $2.04 with the completion of the first quarter. Some updated modeling assumptions for 2023 include Weighted average shares outstanding of approximately $102.3 million and other expense of approximately $55 million. There is no change to the non-GAAP tax rate of approximately 25%. Our outlook for the second quarter of 2023 is as follows. We anticipate non-GAAP diluted earnings per share to be in the range of 43 to 47 cents. We project the non-GAAP tax rate to be approximately 23%, and the weighted average shares outstanding is the same estimate as the full year. Before I open the call for questions, I would like to share that we are pleased with the team's execution, resulting in a great start to the year across all of our key metrics. We are excited about the year ahead as we maintain our relentless focus on our cloud-first profitable growth strategy. Thank you very much for your time today. Now let's move to Q&A.
spk06: At this time, I would like to remind everyone in order to ask a question, press star to the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. In the interest of giving everyone an opportunity, we appreciate that you limit yourself to one question and one follow-up. The first question comes from the line of Chad Bennett with Craig Hallam. Please go ahead, Chad.
spk10: Great. Thanks for taking my questions. Great job to start the year. I mean, the cloud ARRs is pretty staggering, especially in light of what we've heard from the hyperscalers and cloud guys. So I guess first question, and pardon me, I hopped on kind of midstream and prepared my remarks, but Steve or Claire, Just on the outperformance of the public cloud ARR you saw in the quarter and kind of reiterating the year, was there any kind of pull forward or accelerated migrations that boosted that number? And I apologize if you mentioned it in the prepared remarks.
spk08: Hey, Chad, I think we covered that a little bit, but no, we didn't have any significant pull forwards from Q2. This was just great execution by the team think it really proves that the strategy the company uh the whole team getting behind that strategy and executing well in q uh one as we said on the call the predominant uh growth was from expansions we're incredibly proud of that in terms of you know seeing real traction for the teradata vantage cloud platform inside our customers so yeah nothing unusual from a transaction perspective
spk10: Got it. And if that's the case, I guess, you know, just in terms of, you know, whether it's kind of maintaining, you know, or improving your churn levels on your on-prem business, subscription business, or it's actually seeing net new workloads, which I think you're hinting towards on a once converted basis. Like what, you know, considering the backdrop of, you know, all the consumption models, right, coming in, you know, people utilizing less, every hyperscaler is saying, you know, we're trying to optimize our customer spend, i.e. spend less. I know you have a different kind of model and your ROI pitch is extraordinary, but, like, how are you seeing the net expansion and workloads and maybe everybody else is decelerating? Just kind of any characterization there would be great. Then I'll hop off. Thanks.
spk08: Thanks, Chad. So, yeah, the financial governance that we enable and deploy with the Teradata platform is clearly a differentiator for us and gives our customers faith in expanding the workloads that they have on the Teradata platform in the cloud. Our patented capabilities with workload management and query optimization mean that customers essentially have a very predictable cost model in the cloud, and clearly they don't get that with entirely 100% consumption-based solutions. In terms of your question about the types of expansion, we're continuing to see workload expansion and data growth in the Teradata platform. And also, using our open and connected methodology, we see more data becoming available to the Teradata Vantage Cloud platform, and that is causing those expansions to happen. we talked about a really big uh eight figure deal and that is arr the total tcv for that deal was into the nine figures probably the biggest aws marketplace uh deal that's been done we also had a lot of six and seven figure deals across the portfolio so a good spread of different uh deal sizes um a good spread of different use cases workloads and data expansion happening but doing that data expansion in a very controlled way, which is really resonating well with our customers. Thanks for the question, Chad.
spk06: The next question comes from Howard Ma with Guggenheim. Please go ahead, Howard.
spk12: Great. Thank you. Steve, I also want to ask a related question about how Teradata is performing with respect to cloud optimization and delays in multi-year projects that we're hearing about across the board. Can you talk about how Teradata, as one of the major incumbents in the industry, may be benefiting in this environment relative to your cloud-only peers? Are you seeing more customers that had planned to migrate to a cloud competitor now more inclined to stick with Teradata and migrate and expand on Vantage?
spk08: I think what we're seeing, Howard, is a real commitment to the Teradata Advantage Cloud Platform. Clearly, even in turbulent or maybe especially in turbulent macroeconomic times, organizations want to be nimble, innovative. They want to be able to respond quickly. And they do want to take advantage of cloud-based technologies. And so they want to get to the cloud as quickly and easily as possible with the least amount of risk. And then when they get to the cloud, they want to have a financial environment that's very controlled. And that's exactly what Teradata delivers. The Teradata Vantage Cloud is the quickest, fastest, least risk path to the cloud for our customers. I think they are seeing that, the fact that we can integrate, and I mentioned some of the integrations with the AI ML capabilities across AWS, Google, and Azure. The fact that they can start using these capabilities in new ways to deliver new value to their customers is something that they are really seeking out and something that Teradata Vantage Cloud Platform can deliver. And certainly, having that Vantage Cloud capability, a completely differentiated capability compared to our competition, is giving our customers the confidence to commit and recommit and grow with Teradata in the cloud. And our expansion activity in Q1 is something that I'm very, very happy with.
spk12: Oh, that's great. It all makes a lot of sense. And I have a follow-up for Claire. Claire, I see that operating income outperformed, as you mentioned in your prepared remarks, but EPS was near the low end of guidance and operating cash flow was a little bit light, at least relative to our models. It looks like the variance is in the other income line. What is in that other income line? Is that the reason for the, you know, the very modest operating cash flow guide down the full year? Thank you.
spk07: Thanks, Howard. Yeah, so I did mention it briefly in my prepared remarks. We did see some other income and expense headwinds in Q1 related to currency. and the devaluation in a couple of geographies specifically to do with Egypt and Pakistan. So those currencies did devalue in Q1 and so therefore we had to take that hit in our Q1 other income and expense. So that's what we saw there. With regards to the overall impact on operate the cash from operations. So we have reiterated our free cash flow guide and we still believe the midpoint of the guide that we have given is our best view. We have a few movements between our capital expenditures and our cash from ops. So that's why we've made a slight adjustment to the full year cash or box outlook, but still have great confidence in that free cash flow generation of the outlook that we previously gave and the reaffirmation that we've given today.
spk06: The next question comes from Tyler Radke with Citi. Please go ahead, Tyler.
spk03: Yeah, thanks for the question. So Steve, clearly the cloud ARR performance has been very impressive, frankly, since you joined the company. But I'm curious, just as you think about the implications for the perception of Teradata, to what extent have you started to maybe see some, some boomerang customers come back or, you know, customers that, that maybe have communicated their plans to migrate off Teradata, you know, years down the road, kind of reverse those plans. I'm just wondering if you could comment on that and to what extent that that has been a driver here in the performance.
spk08: Yeah, Tyler, I think I'd comment on the strength of the company in three dimensions. One is our technology and our technology capability. We have translated that into a cloud context, which is uniquely differentiated. And that certainly gives customers who didn't see a cloud strategy from Teradata in the past, the confidence that they can migrate and transform their environments into a modern context on a hyperscaler in a very effective way. The technology advances that we've made and the differentiation that we have with our competition is significant. I think the second thing that's leading to strength is our business model. The fact that we offer fixed capacity contracts, and remember, most of our customers run at over 90% utilization of the Teradata systems. It gives us a very solid base in terms of the recurring revenues that we have that are contracted in a fixed capacity model. And then the third area I think where we have some differentiation is just the relationships we have with customers that are cross-industry, cross-geography, multiple, absolutely mission-critical workloads. And I think what our customers are seeing is that The way that they can get those mission-critical workloads at the performance and scale that they require to the cloud means that Teradata is the absolutely logical choice. So we continuously see customers committing and recommitting to Teradata, and I'm very proud of all of the team inside Teradata's contribution to get us to that point.
spk03: Great. Claire, so just on your updated guidance methodology, I guess a couple questions. One, just wanted to clarify and better understand your comments on Q2 seasonality with respect to acceleration. Are you expecting ARR to grow sequentially in Q2, just not at the same pace as Q1? And then given that this was such a strong performance in Q1 and doesn't really seem to be you know, timing related, why not, you know, increase the full year outlook here given, you know, you're not really seeing any headwinds in the business and this seems like a clean out performance.
spk07: Yeah, thanks, Tyler. So just on the linearity question, so we obviously are very happy with the Q1 start and I'm particularly happy with the improved linearity that we've seen this year compared to last year. I think it's also important to reiterate the point that we are growing total ARR sequentially for the first time in three years. I mentioned it in my prepared remarks, but that's a big milestone for us as a company. So as you said, great start to Q1. As you look at the Q2 acceleration, as you know, we don't guide further quarter, so we're really focused on that full year number. But my comments that I was leading to there is previously, if you use last year linearity by quarter as a starting point, we would normally see a sequential acceleration in dollar growth each quarter. So each quarter, the growth is getting higher and higher because we have obviously seen better linearity and a better performance in Q1 this year compared to last year. Just highlighting that we probably won't see an acceleration in in the dollar growth, but we are absolutely expecting sequential dollar growth in Q2. We're just not expecting to see an acceleration. So hopefully that answers your first question with regards to Q2. And then as it comes back to the full-year guide, again, we see this as an improved linearity within the year, and we have great confidence in our full-year outlook. But we think it's important to be realistic and prudent Not forgetting that Q4 is still going to be our biggest growth quarter, both for cloud ARR and total ARR. And there's still a lot of macro uncertainty out there. So just keeping that conservative approach in terms of our outlook methodology, we still believe that the midpoint of our outlook is the best view for the full year.
spk06: The next question comes from Nahal Chokshi with Northland Capital Markets. Please proceed.
spk02: Yeah, thank you. And Mike, congrats as well on by far the strongest incremental ARR on a total and cloud basis for fiscal first quarter. You answered all the questions related to that. So I want to pivot towards a little bit more longer term looking here. Question, you talk about continuing to invest to see future growth. Can you talk about what are those areas in which you are investing to see that future growth?
spk08: Thank you for the question. Yeah, we continuously assess our investment envelope to ensure that we're taking those dollars and we're putting them in the right areas of the business to get traction. Clearly, our focus on analytics is absolutely key. One of the recent analysts reported that many of our customers don't use all of the analytics capabilities that are built into this platform today. And we believe that those analytics capabilities can provide differentiated capabilities for our customers as you move forward. So that's going to be a key area of investment for us. And it's going to manifest in that continuing integration with AI ML stacks on the cloud service providers. You know, we have a unique approach where, you know, when we say that we look at the Teradata Vantage Cloud as a platform, it means that we want to open that platform up so that data scientists can utilize the tooling and the tools that they use on an everyday basis to get access to the data that's stored in Teradata, the most valuable data probably in the world. And so that is where our investment from a product capabilities is going to be focused in terms of artificial intelligence and machine learning. We will continue to invest in motions like our customer success motion, which drives expansion along with our sales teams. we're going to continue to invest in ensuring that we get more market awareness. I think what we've seen over this past quarter is that market awareness for the Teradata platform continues to grow. I think we had a note from Forrester that really backed that up from our perspective. And so we are absolutely committed to being a profitable growth company. As Claire mentioned in her remarks, You know, we absorbed some currency headwinds in terms of our full-year guidance and increased our operational guidance from that perspective. But we are very proud of how the company is executing.
spk02: As a follow-up to that, you know, one of the areas that seems like from a product innovation perspective possibly would be data sharing from companies an existing customer to any of their collaborative partners. And then also, my understanding is that going to a cloud-based analytics structure then can enable you to unify both OLTP and OLAP. Is that something that's in your roadmap?
spk08: So, Nihal, a couple points there. Data sharing is something that Teradata has done for years and years. Our perspective on data sharing is that the data sharing capabilities that are provided by native services by the CSPs is going to give customers the most valuable data sharing ecosystem. And so we integrate with all of the data sharing services, cloud native services from the hyperscalers. That essentially enhances the built-in data sharing capabilities that are in our platform today. We are very proud of our governance and the fact that we can enable our customers to really control and manage their data inside the Teradata ecosystem. Just in terms of the future from a cloud database management systems perspective, I'd refer you to the Gartner reports where they look across a number of different use cases with different types of workloads. And in all four Gartner use cases, Teradata comes up as number one. So we're the best enterprise data warehouse, the best data lake, the best analytical use cases deployed on the platform. And so we really believe that our platform and capability is solidly differentiated from our competition and allows all of those workloads to converge on the Teradata platform in the cloud.
spk06: The next question comes from Derek Wood with TD Cowan. Please go ahead, Derek.
spk04: Great. Thanks and congrats on a solid quarter. Steve, you guys have a lot of revenue from financial services, a lot of customers in that vertical. This has certainly been topical in terms of trying to get a pulse on the demand behavior out of customers in the banking vertical. How did you guys see business activity in Q1, and have you sensed any change in behavior when you're looking at your pipelines, especially when it comes to the appetite to migrate to cloud?
spk08: Yeah, thanks, Derek. Just a couple of points to note. Just in terms of the bank failures that have happened on a global basis, we haven't had any direct exposure or impact from those financial services organizations. We deal with the largest, most successful, most robust financial services organizations in the world, and we still see a demand from them to want to transform, want to build the bank of the future, build the financial services organization of the future. I was talking to one of our South American banking customers yesterday, and they have a tremendous appetite to continue to use data in a cloud context to transform the customer experience that they deliver every single day. And I don't think any organization is kind of backing off the fact that in turbulent times, they have to be nimble, they have to be agile, they have to have the right solutions in place to drive the outcomes for their organization. And I think that the experience that Teradata has, the use cases that we have, the working through turbulent times and growth times. Those use cases and experiences give us the capability to give a unique perspective to our customers and help them transform and migrate to the cloud better than anybody else.
spk04: Okay. And Claire, nice job on gross margins. You had a pretty good jump sequentially in recurring revenue gross margins. Can you give us a sense for what drove this in the quarter? And I know you guys don't break out public cloud gross margins, but can you give us a sense of where they are today or kind of how much room there is for improvement as you scale that part of the business?
spk07: Yeah, absolutely. So as you can see, we've had really strong performance from a gross margin. And as you look at recurring revenue as a percentage of total revenue, it's now up at 82% and our recurring revenue runs at much higher margin. So that's great from an overall mix standpoint for total gross margin. As you specifically look at the recurring margins, we also had a strong performance, as you said, at 75%. We were helped as we are normally in Q1 with regards to higher upfront revenue recognition. So there is a couple of points there that help us from an overall performance, but that's in line with normal seasonality. And we are seeing strong renewals, and that's also helped us from a recurring revenue standpoint and helped to keep that margin strong. So overall, happy with the performance to your point there, Derek. With regards to our cloud margins overall, as you say, we don't disclose the numbers, but I'm pleased with the progress that we're making. We still are making good margin expansion progress on our cloud margins as we continue to scale. And with the strong performance that we've seen in Q1 and being able to reaffirm the full year growth, we anticipate those cloud growth margins to continue to expand. They still are a dilutive impact on our total growth margin, but they are improving year over year and continuing to expand. And we're definitely on track with our overall plan with regards to cloud growth margins.
spk06: Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is now open.
spk01: Hi, it's Rupalu filling in for Wamsi today, and I have two questions for Claire. The first one, Claire, just as a follow-up to the prior question, so you got some benefit from upfront recurring revenue payments in the first quarter. Can you give us your thoughts on the rest of the year? Should we expect any benefit in any of the remaining quarters? And if not, should we expect the margins on the recurring revenue side to kind of moderate as we go through 2Q, 3Q, 4Q? So just if you can talk about the puts and takes that can drive either the margins to sustain or moderate lower.
spk07: Yeah, so thank you, P, for that question. We do anticipate the impact of upfront margins in the rest of the year to be lower than what we have seen in Q1. And again, that is in line with normal seasonality as we move throughout the year. And overall, for fiscal 23, we are expecting the impact to be less than we saw in 22, and 22 is less than we saw in 21. So this definitely is becoming less of a material impact as we get through that kind of refresh cycle and we continue to renew and expand with existing on-prem customers. So the main thing with regards to our gross margin as we move through the year is what I was saying about our cloud margins and the cloud mix shift. So as we move throughout the year, the proportion of our business that will come from cloud will increase, which is great to see. At the moment, as I mentioned, it's still a dilutive impact. So we will see a decrease at our overall gross margins as our cloud business continues to grow. But this is something that's built into our outlook, built into our long-range plan and the guidance that we gave at last earnings with regards to a long-range plan. And that will just take us another year or so to get our cloud margins up to the overall average of our total gross margin. So yes, a slight headwind. as we move through the year to our gross margins coming from that great growth in cloud that we are seeing. And that's all factored into the Oval Outlook. And as you saw, we were able to reiterate the midpoint abandoned gap EPS range. So I'm on track to deliver that to you.
spk01: Okay. Thanks for the details there, Claire. Can I ask you a follow-up on capital allocation? So you're still targeting at least 75% of – returning at least 75% of free cash flow. So a couple of points there. How should we think about the linearity of free cash flow? And then when you trade off buybacks versus maybe taking out more debt, can you kind of give us your thoughts on how we should think about that? What is the pace of buybacks we should expect? And how should we think about interest expense? Are you targeting to take out any debt, reduced debt, or – or just your thoughts on buybacks versus M&A versus other uses of cash. Thank you so much.
spk07: Sure. Yeah. So we haven't changed our overall capital allocation strategy. So it's all about returning value to shareholders, and it's focused on a number of different items. So we obviously want to reinvest back into the business and see if mentioned about some of those areas that we are investing in to be able to drive a future profitable growth another key area is share repurchases we have committed um to deliver at least 75 of free cash flow in fiscal 2023 which was an increase from fiscal 22 from the target that we had but we obviously over delivered on that target in 22 so at least 75 of free cash flow will be return to shareholders in the terms of share repurchases. And Q1, we are on track to execute and deliver that. M&A does continue to still be part of our strategy. We're very much looking at what's out there, but nothing, as you have seen, that's not something in the current market that has been a big part of our capital allocation. But they're all the areas that we are focusing on. It's very much return-based. We're still committing to that 75%. We're on track to deliver that. You saw that we were at $88 million in Q1 in terms of share repurchases and recommitting to the 75%. I think you asked a question on free cash flow linearity. So I was very pleased with the $105 million of free cash flow generation in Q1. And if you think about the rest of the year, I would just say looking at last year's kind of linearity for the rest of the year is probably the best approach and to still use our midpoint of the guide that we have given, which is a range of $320 to $360 million.
spk06: The next question comes from Ramo Lenshow with Barclays. Your line is now open.
spk11: Hi. This is Sheldon on for Ramo. Thanks for taking our question. It looks like EMEA and APJ underlying revenue growth improved from Q4. Can you speak to any demand trends across these regions? Are conversations starting to trend more positively? And then along with, you know, the slightly slower activity internationally, are there any differences in willingness to migrate to the cloud or preferences for contract types that you see from domestic versus international? Thank you.
spk08: Yeah, thanks for the question. Clearly, one of the strengths that we've got is a diversified portfolio. I mentioned the diversification from an industry and sector perspective, but also that diversification across the different geographies gets us some strength as well. We saw some really great migrations to the cloud. Ener, EMEA, and APJ businesses, as we've gone through the last 12 months, some critical mission, critical workloads being migrated by some really large enterprises across the world in terms of driving that. But Claire, do you want to make some points in terms of that revenue position?
spk07: Yeah, absolutely. So for the EMEA business, obviously we're seeing the impact of currency still year over year on the revenue reported numbers. So there actually is a slight decline in constant currency. And what we have to remind you of, the Russia exit was not fully removed from our Q1 of 22. So there was still $10 million of total revenue in our Q1 22 results, which obviously is all in EMEA. So that does need to be taken into account. I think the underlying business is growing. The underlying business, we are seeing good momentum and good traction in the market, as Steve said, and we're pleased with that. With regards to Asia, again, we see the overall impact of currency. We also see the impact of our kind of strategy there in terms of reducing the overall consulting and perpetual business and seeing some pressure on China as well. So we have made the decision to move out of the direct business in China. So there's a slight impact there as we come through, but from an overall impact and materiality to the companies. result, it isn't material.
spk11: Got it. And then a quick follow-up, if I may. Can you speak more to the potential opportunity from the expanded partnerships that you talked about today with the CSPs and the integration of more ML model capabilities, Dell, DBT, which we've seen as very popular? Any of these initiatives you're particularly excited about that could be incremental in the near term?
spk08: Yeah, we're really proud of our integrations with the hyperscalers and the teamwork that we've got with the hyperscalers. Doing successively enormous deals on the AWS marketplace certainly gives us confidence in our partnership with AWS. Our partnership with Azure and Microsoft in terms of really generating fantastic enterprise capabilities is awesome. If I can think about the largest deal that we did, really proud of that eight-figure deal with a healthcare organization in the United States. We, as a company, believe that data can transform how businesses work and people live. And what we're really excited about is helping healthcare organizations in the US lower that total cost of care And we're doing that in partnership with the hyperscalers, and it's great to see those partnerships pay off. Just from a DBT perspective and opening the platform to data science tools, you know, if I think about the retailer of the future example that I gave where we're using large language models, you know, think of like ChatGPT, where the feature engineering is done on Vantage Cloud, and then the training is done in AWS SageMaker. And then the scoring is done in Vantage Cloud so that that model can be deployed successfully. That's a real great example of integration utilizing mission-critical trusted enterprise data and a Gen-AI context to deliver real business outcomes. We see that that's going to grow, that marketplace is going to continue to grow. And then the final partnership was with Dell that we mentioned. You know, we've now got to the point where our software can run on Dell conversion infrastructure and therefore we're super excited about the private cloud capabilities of Teradata Vantage and really enabling our customers to come up with a hybrid cloud environment that's optimized to how they want to work into the future.
spk06: We now have a question from Eric Woodring with Morgan Stanley. Please go ahead.
spk05: Hi, this is Maya. I'm for Eric. Just one question from me for Steve. I appreciate you providing the overall net expansion rate for customers in the quarter, but for your customers that have already primarily migrated to the cloud, how should we think about their net expansion and how that trended in March? And how do you think about that trending over the next few quarters? Thank you.
spk08: Yeah, I think we mentioned in our prepared remarks that we were really happy with customers that have even started with us on Vantage Cloud in the last quarter in Q4, expanding with us into Q1. So, you know, as we modeled out our next expansion rate, you know, around that 120%, we're pleased with the 119%, especially since we get the expansions at the point of migration, which isn't included in that number. And so, and the fact that, you know, if you look at our overall growth for the quarter and that 89% year-on-year cloud ARR growth being predominantly driven by expansions, just tells us that there's faith in the Teradata platform, that people are moving more data, more workload into the Teradata platform and getting more business benefit out of the platform. So we see it as a really strong indicator for the rest of the year, Maya. Thank you for the question.
spk06: At this time, I will turn the call back over to Steve McMillan for his final remarks.
spk08: Thank you, operator. Thanks, everyone, for joining us today. We're really pleased with our strong start to the year, and we've got great confidence that our people and our technology innovations are going to keep us moving ahead. We look forward to talking with you all next quarter. Thank you very much.
spk06: This concludes today's conference call. You may now disconnect.

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