Teradata Corporation

Good afternoon. My name is Joel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata fourth quarter and full year 2023 earnings call. 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, please 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.

Good afternoon, and welcome to Teradata's fourth quarter and full year 2023 earnings call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today, followed by Claire Bramley, Teradata's Chief Financial Officer, who will discuss our financial results and outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our SEC filings. Please note that Teradata intends to file the Form 10-K for the year ended December 31, 2023, later this month. These forward-looking statements are made as of today, and we undertake no duty or obligation to update them. On today's call, we will be discussing certain non-GAAP financial measures which exclude such items as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items, such as free cash flow, constant currency comparisons, and 2024 revenue growth outlook in constant currency. Unless stated otherwise, All numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the investor relations page of our website at investor.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.

Thanks, Chris, and thanks, everyone, for joining us today. We're continuing to execute on our long-term strategy to build the leading hybrid multi-cloud analytics and data platform company for trusted AI. At the core of that strategy is our strong focus on helping our customers, many of the world's industry leaders, succeed by improving business performance, enriching customer experiences, and integrating data across the entire enterprise. We innovate and deliver trusted solutions for their toughest data and analytics challenges. We believe our strategy and customer focus is winning in the marketplace as we see more and more companies putting their trust in Teradata to help create value from the data and navigate the evolving analytics landscape, particularly with the rise of AI. Underpinning our strategy is a disciplined financial plan which seeks to balance growth and ARR with profitability. and reinvestment in the business with capital return to shareholders. We closed 2023 with $528 million of cloud ARR and $1.57 billion of total ARR representing growth of 48% and 6% respectively. We generated $74 million of cloud ARR growth in the fourth quarter. Cloud ARR now accounts for more than one third of our total ARR, a significant milestone in our cloud journey. Additionally, all regions grew cloud ARR both sequentially and year on year, driven primarily by migration activity. Our cloud net expansion rate was 124% and more than 75% of our cloud customers now operate in a hybrid environment. These statistics validate that our Vantage Cloud platform is delivering breakthrough business performance across a hybrid environment. We delivered 2023 revenue growth within our Outlook range. We exceeded full-year non-GAAP earnings per share expectations, and we generated more than $350 million of free cash flow, all demonstrating our ongoing dedication to our cloud-first profitable growth strategy. Despite a year of solid progress on our strategic and financial milestones, we ended the year below our 2023 outlook for cloud and total ARR. This was primarily due to deal timing issues. Let me explain. We're seeing that Teradata is becoming even more strategic to corporations and touching all levels of our customers' organizations. For example, we have historically dealt primarily with IT. Over time, we have moved beyond IT with multiple business units now relying on Teradata. This brings in more executive decision makers, including the board, in order to close the deal. These dynamics caused a number of transactions to move into 2024. Of these, there were a handful of large deals that slipped out of December, and each were worth $2 million or more of cloud ARR growth. This includes the low eight-figure deal Claire mentioned at an investor conference in December. We are already taking actions to address the miss in the ARR expectations we had set. We have reviewed the root causes of each slip. Our teams are executing plans to address each unique customer situation and are diligently working to close the majority of these deals in 2024. To be clear, we had uncertainty in timing, not uncertainty in demand. In our remarks, Clear will speak more to the actions we are taking. As we look ahead, we see the AI-enabled future. Just about every organization everywhere is looking at AI and particularly generative AI. This means the entire world is looking at data. Data and analytics are what we know and do best and where we innovate. Our people have the knowledge and expertise to help companies trust in and get massive business value from their data. This becomes even more important as AI comes of age. We see AI as a catalyst for growth, particularly over the long term. As AI uses grow, so does the need to trust in the information. This ties directly to our belief that people thrive when empowered with trusted information. That's why we built Vantage Cloud. a complete cloud analytics and data platform. It is the engine companies need as they explore AI as we provide an open, multi-cloud approach to leveraging the language models they want. GenAI is trained on large language models that require extensive amounts of data. With Clearscape Analytics, our engine for launching end-to-end AI and ML pipelines, we can deliver highly optimized analytic functions and expand the high-performing analytics Teradata is known for. Given the global reach of our enterprise customers, we believe that we serve as custodians of much of the world's most trusted and well-governed data. As I mentioned, data is the critical factor to success with GenAI. The data must be well-managed, it must be trusted, ethical, and sustainable. And companies need to leverage all of their data at extreme scale to innovate and win with AI. Our proven record and ability to get customers to trust they need in the data to innovate and make impactful business decisions is a real differentiator for Teradata. We are confident that we are better positioned than any other company to help organizations take advantage of AI. We believe that we have the best cloud analytics and data platform, period. By delivering harmonized data, trusted AI, and faster innovation, we can empower our customers and our customers' customers to make better, more confident decisions at every level of the enterprise. We are seeing this at customers now. Teradata is becoming even more strategic to corporations. More lines of business are trusting in Teradata and relying on our analytics and data platform as data is democratized and trusted. we are continuing our strong innovation. Our technology innovation engine was in high gear in Q4 as we maintain our focus on speeding the releases of new analytic offerings that help customers take advantage of AI. After nearly a year in development, we launched Teradata AI Unlimited, our AI and ML engine in the cloud that delivers a completely self-service and serverless experience to help those who want to explore AI. AI Unlimited can enable customers to drive faster, easier and cost-effective AI innovation. It is designed to provide access to vast amounts of data as well as extreme flexibility to securely explore, experiment and operationalize new AI use cases at scale. Further, Teradata was one of a small set of companies selected by Microsoft to have our product, AI Unlimited, be natively integrated with Microsoft Fabric to help data innovators operate at their best and find new patterns of innovation. AI Unlimited users will be able to access data in one lake, Microsoft's open table format service offering. AI Unlimited also supports other open file formats, which enable users to leverage their language and tools of choice. For example, data scientists, data engineers, and developers can leverage native integration with Python to call analytic functions, execute Python code, and import Python models directly into Teradata AI Unlimited. AI Unlimited is available on both Microsoft and AWS marketplaces and is consistent with our commitment to an open and connected ecosystem. Since its launch in November, we're receiving strong, positive feedback on AI Unlimited. We already have customers from transportation, retail, and healthcare exploring use cases with this new AI engine, and more are on the horizon. Our open and connected platform meets the full spectrum of customers' needs, where they are today, and where they want to go with our best-in-class cloud lake, lake house, data warehouse, or a hybrid combination. With wins in the quarter at Audi, HCA, HSBC, and more, let's walk through a few examples that cover the breadth of our offerings. In an eight-figure cloud deal, one of Australia's leading banks is migrating its analytic ecosystem to the cloud with us. This banking powerhouse relies on peridata across many business units and is moving to Vantage Cloud on AWS in a competitive win for us. The bank's data science community has also been exploring AI use cases with us in support of its modernization plan. We partnered with Kendrel on a sizable new logo win. One of the largest daily manufacturers in APJ has committed to Vantage Cloud Lake on AWS to improve its business operations. Another eight-figure deal was an on-prem expansion with a Fortune 50 US company. This giant utilizes Teradata in areas of finance and health plan administration and is working with us to add AI models to improve predictive medical treatment. These AI models are designed to help improve quality and value-based care for tens of millions of potential patients. One of the leading healthcare services providers in the US is moving critical operational data and analytic workloads to Teradata on Google Cloud as part of its cloud modernization initiative. This continues our history of helping the customer innovate with analytics and data. One of our recent new logo wins was with one of the largest banks in the Middle East. In this highly competitive win, the bank chose Teradata to help it deliver an outstanding customer experience and improve its campaign management efforts. These examples illustrate that customers are placing their trust in Teradata across all of our deployment options, including Lake. Q4 of 2023 was our highest quarter yet of adding Vantage Cloud Lake customers, and we continue to see strong interest. We also saw an acceleration of wins with partners, another important element of our profitable growth strategy. We do see, however, some headwinds this year, as we expect a few large on-prem erosion to negatively impact total ARR in the first half of 2024. They are related to customer decisions that were made more than three years ago before we introduced our Cloud First strategy and Vantage Cloud platform. While we have known that these erosions were contemplated for some time, we've improved our visibility into the timing and are now able to factor these actions into our 2024 outlook. Due to these few on-prem decisions, we view our 2024 erosion rate as an outlier, and they have always been factored into our 2025 goals. We will continue to work every day to deliver breakthrough business value for our customers, and we are receiving industry acknowledgement of our strength in driving innovation. Vantage Cloud again received the highest score in logical data warehouse and traditional data warehouse use cases, from Gartner and its critical capabilities report for cloud database management systems for analytical use cases. Gartner also recognized our cloud vision and execution and its magic quadrant for cloud database management systems. Gartner noted our strengths in technology innovations with our optimized ecosystem through Teradata query grid, our deep and robust analytic capabilities through ClearScape analytics including AI and ML integration, and he noted that we have the strongest workload management offering in the industry. We were also honored to learn that customer ratings earned Teradata the top spot in the Trust Radius Best Of Awards in all three categories in data warehousing. Number one in best value for price, number one in best feature set, and number one in best relationships. Software marketplace G2 also recognized Teradata for excellence in the leader, enterprise, and momentum categories in its winter 2024 report. We value these types of recognition as they are wholly determined by customer reviews. All of these distinctions reinforce our commitment to innovation and value while keeping customers at the forefront. While we are always pleased to earn recognition for our technology, we're equally pleased when our strong culture is acknowledged. In November, Teradata again earned the highest score of 100 on the Human Rights Campaign Foundation's 2023 Corporate Equality Index, demonstrating our ongoing support of LGBTQ plus workplace equality. We are proud of this tribute of our core principles in action. In closing, I want to emphasize that everyone at Teradata is relentlessly focused on winning as the complete cloud analytics and data platform company for AI. Since we moved to our cloud-first strategy, we have delivered ten-fold cloud growth in less than four years. Our cloud growth in 2023 was far ahead of the market. In addition, the team has made solid progress around our technology innovations and partnerships. We will continue to build on our profitable growth strategy. And as we do, we are firmly focused on operational excellence as we strengthen our processes and capabilities. We remain on the path to achieve over $1 billion of cloud ARR by year-end 2025. Now, let's turn the call to Claire to go through more details.

Thank you and good afternoon, everyone. In 2023, Teradata delivered profitable growth with operating margin expansion of over 200 basis points year on year and non-GAAP earnings per share of $2.07, above the high end of the annual outlook range and growing 26% year on year. We delivered free cash flow of $355 million. We continue to demonstrate our commitment to capital return by delivering 87% of free cash flow to shareholders, exceeding our annual target of 75%. Recurring revenue for 2023 was approximately $1,500,000,000, growing 5% year-on-year as reported and 7% in constant currency. This was in line with the midpoint of the annual outlook range. Total revenue was also within our outlook range at approximately $1.8 billion in 2023, growing 2% year-on-year as reported and 4% in constant currency. Our cloud net expansion rate remains strong at 124%, a sequential increase of 1%. Our ending cloud ARR was $528 million, growing 48% year-on-year versus our outlook range of 53% to 57%. Total ARR grew 6% as reported and 5% in constant currency, compared to our outlook range of 6% to 8%. As Steve mentioned, the 2023 outlook did not fully capture the unexpected deal cycle elongation we saw during the final week of the year. Even though linearity improved in Q4 of 2023 versus the same period last year, we still had approximately 60% of the new cloud ARR dollars land in December, with many of those deals closing at the end of the month. We are taking measures to quickly adapt and improve our internal processes. We are paying extra attention to pipeline composition and conversion rates. We are also focusing on sales enablement to continue improving sales productivity. In addition, we are taking cost optimization actions to continue driving efficiencies across the entire company. All of these initiatives help to inform the accuracy of our 2024 outlook and continue to position the company for durable, profitable growth. Let me now share more details on our quarterly financial results, starting with revenue. Fourth quarter recurring revenue was $372 million, growing 4% year-on-year as reported and in constant currency. recurring revenue as a percentage of total revenue was over 81%. Year-on-year recurring revenue growth was led by a strong increase in cloud revenue as we continue our intentional mixed shift to the cloud. All three regions experienced strong cloud revenue growth year-on-year. Upfront recurring revenue in the quarter was a net negative $1 million, which was in line with the expectations we shared with you last quarter. The impact of upfront recurring revenue in 2023 was $20 million, compared to $19 million in 2022. Fourth quarter total revenue was $457 million. 1% growth year on year as reported and in constant currency. Quarterly consulting revenue continues to be stable. As expected, perpetual revenue continues to decline given the mixed shift for the cloud. Moving to profitability and free cash flow. Teradata's reported fourth quarter total gross profit was $283 million. The 5% year-on-year increase in gross margin dollars was primarily due to higher cloud and subscription gross margin, driven by both rate expansion and greater volumes. Quarterly operating profit was $89 million, and operating margin was 19.5%. Continued cost discipline and operating leverage contributed to a 2023 operating margin of 18.1%, an expansion of approximately 220 basis points year on year. We continued to invest prudently in our business during 2023, focusing on opportunities that generate attractive returns and position the company for future growth. These activities resulted in quarterly non-doubt diluted earnings per share of 56 cents, exceeding the high end of our quarterly outlook range. We generated $168 million of free cash flow this quarter, driven by a more efficient cash conversion cycle. Our DSO increased to 58 days in Q4 of 2023 versus 74 days in the fourth quarter of 2022. Before I provide our annual financial outlook for 2024, I'd like to make some comments to set the context. Related to Steve's comments regarding on-prem erosion, we forecast an approximate 4% to 5% negative impact to total ARR in the first quarter of 2024. This, in turn, negatively affects recurring revenue, creating a two percentage point impact for the full year. We anticipate an approximate 1% headwind in 2024 related to upfront recurring revenue. This is because the net impact expected at the end of the year is nominal. Based on currency exchange rates at the end of January 2024, we anticipate a negative currency impact of 1% to 1.5% to our 2024 ARR and revenue outlook components. The cloud ARR, we forecast sequential dollar growth throughout the year. with the second half of 2024 being much larger than the third half. For total ARR, following the decline in the first quarter, we forecast positive dollar growth in the second quarter and sequential dollar growth for the remainder of the year. For both cloud and total ARR, we continue to anticipate our fourth quarter to be the strongest quarter of the year, in line with historical seasonality. For the full year, we expect cloud ALR growth to exceed on-prem erosion, thus enabling total ALR growth. For cloud net expansion, we continue to estimate a rate of approximately 120%. On total gross margin, we expect a slight headwind versus 2023 as we continue to increase the mix of cloud, but anticipate cloud gross margin expansion as we continue to achieve scale benefits. On operating margins, we expect to maintain our 2023 level as we continue to optimize costs across the company while driving efficiency. We will also continue investing in areas that generate growth, such as AI, demand creation, and brand awareness. These investments will be balanced with cost discipline in non-revenue generating areas as we continue to prioritize where we spend. Regarding free cash flows, we expect our results to be more back-half-weighted than 2023, driven by the anticipated growth profile in 2024. On cash flow allocation, we continue to commit to a minimum of 75% return of free cash flow to our shareholders. Finally, we have carefully evaluated the fourth quarter dynamic impacting cloud ARR, along with the steps taken to address and incorporated these factors and the macro environments to prudently set our 2024 outlook. Our annual outlook for 2024, which is on a constant currency basis for ARR and revenue, is as follows. Cloud ARR is anticipated to grow year-on-year in the range of 35% to 41%. Total ARR is projected to grow year-on-year in the range of 48%. Total recurring revenue is expected to increase year on year in the range of 1 to 3%. Total revenue is anticipated to increase year on year in the range of flat to 2%. Non-GAAP diluted earnings per share in the range of $2.15 to $2.31. Free cash flow is expected to be in the range of $340 to $380 million. Here are some modeling assumptions for 2024. A non-GAAP tax rate of approximately 24.2%, weighted average shares outstanding of 99.5 million, other expense of approximately $45 million. For the first quarter of 2024, we anticipate non-GAAP diluted earnings per share to be in the range of 53 to 57 cents, We project the non-GAAP tax rate to be approximately 24.5% and the weighted average shares outstanding to be 101.3 million. To close, 2023 was a solid year, with cloud ARR ending at over half a billion dollars and with historical and future cloud growth rates that are stronger than the market. We generated profitability and durable free cash flow. We continue to make good progress against our cloud-first profitable growth strategy. We expect cloud ARR to exceed $700 million by the end of 2024, which continues to drive total ARR growth and enables us to remain on the path to achieve over $1 billion of cloud ARR by the end of 2025. Thank you very much for your time today. Let's please open the call for questions.

Absolutely. At this time, I would like to remind everyone that in order to ask a question, press 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 giving everyone an opportunity, we appreciate that you limit yourself to one question and one follow up. Your first question comes from the line of Tyler Radke. Your line is open.

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

Yeah, thanks, Tyler, for the question. Just to take a little step back, So we're really proud of our execution over the last three and a half years. You look at 10X cloud growth. It just demonstrates that we are in a great market, you know, data analytics, all of the new interests that AI is generating, the technology advancements that we are putting into the market continuously give us a lot of confidence in terms of how we're going to drive forward. Really says that we've got the right strategy, we've got the right technology platform, and we've got the right team to execute. So when we give our guidance for 2024, clearly we want to make sure that we are being realistic and prudent in that guidance. And we are going to execute as we go through 2024 with some real focus and determination. Our net expansion rate increasing to 124% in Q4 was a really good sign of the core interest that we have at our platform, and that when we deploy with our customers and these major customers into the cloud, that they are really committed to us and they continue to grow their data and analytics capabilities with us in the cloud. Now, to unpack the two events, just to your point, we don't see any lack of demand for our solutions. This was purely a timing event from our cloud ARR deals. As we pointed out in our prepared remarks, many of our deals are large and closed in the last month's quarter and many closed in the last few weeks. What we tended to see was as data analytics and AI become more and more interesting in a strategic board level discussion within our customers, that we have the opportunity to engage more broadly inside our customers with lots of different use cases. However, it did make the decision-making cycles inside our customers slightly elongated as they have to consider things like data placement, which CSPs they want to use, which language models they want to use and leverage. So the great thing about the Teradata platform is that we give a whole range of choice to our customers in terms of that technology. And so we give them the flexibility to deploy on absolutely the right technology that they want to use. going forward. But for those large deals where a lot of those complex decision-making criteria come into play, we saw a handful of deals over $2 million slipping into 2024, and that included an eight-figure deal that Claire mentioned at an investor conference in December. Clearly, I want to make absolute point here. The majority of those deals are going to close in 2024. They're not competitive in nature, but we are absolutely focused to make sure that we're building that better pipeline management and visibility, and that the deal cycles and decision-making is something that we are more on top of, as well as deploying a much more complex deal construct for some of these larger deals. So that really encapsulates what happened to cloud ARR growth. for Q4, and then if we look at our total ARR for 2024, you're absolutely correct. We have two major on-prem erosions that we've known about for some time. In fact, multiple years before we actually launched our Vantage Cloud platform, we've known about these intent to erode that on-prem capability. Clearly, that does not impact our cloud ARR, but it does impact our total ARR. The timing of those erosions in 2024, as we work with the customers to nail down when the timing is of those erosions, we are able to factor that into the 2024 guidance that we just gave. we had also factored those erosions, because we'd known about them for some time, into our 2025 goals when we set those goals. And so when we put those two very different factors together, what happened in Q4 from a cloud perspective, plus what's happening from an on-prem perspective in 2024, then we've included that in our guidance for 2024. But we do believe that our 2025 goals, which we're all fed with these being known elements, are still very achievable. And we're confident in our execution and our technology and our people as we move forward. Long answer there, Tyler.

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

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

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

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

Yeah. So, hi, Chancellor, here again. So, yeah, we've got two large on-prem erosions that Steve mentioned and then kind of ongoing erosions that we would see as part of our everyday business. So, to your point, that on-prem erosion is driving the 4% to 5% sequential decline in ARR in the first quarter of 2024. Okay.

And then, so if these were known or have been known for years, so are we still comfortable with our other targets in 2025 around ARR growth and recurring revenue growth? that we gave out a couple years ago since we knew about these erosions?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you. As a reminder, if you could kindly keep your questions to only one question. The next question is from the line of Matt Hedberg with RBC Capital Markets. You may proceed.

Hey, guys. This is Zimmerman for Matt Hedberg. Thanks for taking your question. Just one for me. Can you talk about the 2024 pipeline coverage in dollars and how does it look this year compared to last year? Thanks.

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

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

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

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

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

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

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

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

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

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