Teradata Corporation

At this time, I would like to welcome everyone to the Teradata third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to hand the conference over to your host today, Chad Bennett, Senior Vice President of Investor Relations and Corporate Development at You may begin your conference.

Good afternoon and welcome to Teradata's 2024 third quarter earnings call. Steve McMillan, Teradata's president and chief executive officer, will lead our call today, followed by Claire Bramley, Teradata's chief financial officer, who will discuss our financial results and outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, They are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our SEC filings, including our most recent Form 10-K and in the Form 10-Q for the quarter ended September 30, 2024, that is expected to be filed with the SEC within the next few days. These forward-looking statements are made as of today and we undertake no duty or obligation to update them. On today's call, we will be discussing certain non-GAAP financial measures which exclude such items as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow, constant currency comparisons, and 2024 revenue and ARR growth outlook and 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 our 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, Chad, and thanks everyone for joining us today. In Q3, Teradata grew our cloud business, delivered enhanced technology innovations that strengthen our hybrid trusted AI position, and added to our partner ecosystem all core elements of our strategic plan. Cloud ARR grew 26% year over year, as reported in Q3, with a solid cloud net expansion rate of 120%. and we have already closed one eight-figure cloud deal in the fourth quarter. Despite strong growth in cloud ARR, we have recently seen a change in our large transformational deals. Customers are planning to migrate workloads to the cloud in a more staged process. The total customer spend with Teradata is unchanged, and there is no impact on our total ARR. However, this shift results in a reduction to our cloud ARR and we are therefore lowering our 2024 outlook to 18 to 22% for the full year. We see an ongoing healthy growth in our cloud business and continued migrations, which we anticipate is going to help us increase the mix of clouds in the future and help drive total ARR growth in 2025. The strength and the fundamentals of our business is clear, serving customers needs across both our cloud and our on-prem businesses. We are increasingly seeing customers leverage our hybrid capabilities as they look to transform and commit to Teradata technology for the long term. As we have shared, we see that Teradata is increasingly becoming more strategic. The very large organizations we work with have both data in the cloud and on-prem, and we believe we are uniquely positioned to address their needs with our differentiated hybrid platform. We remain comfortable in closing deals over time, as evidenced by the eight-figure deal I mentioned. We're seeing signs of greater engagement with both customers and prospects and improvement in renewal rates. These are primarily the result of our go-to-market restructuring. We're in the early stages of our go-to-market reorganization and expect to see improving execution as we move into 2025. Our teams are taking AI to our customers. and more than 20% of our pipeline includes an active AI sales engagement. In the third quarter, we continue to add new logos and grow our new logo pipeline. Teams are actively working on closing the large deals in the pipeline. Teradata remains true to being customer and market driven, and we have adjusted the timing of deals to align with our customers' extended decision making on these strategic opportunities. Teradata remained highly profitable in the third quarter. Profitability increased with non-GAAP earnings per share of 69 cents versus 42 cents in Q3 of 2023 and free cash flow of $69 million compared to $36 million in Q3 of 2023. We will uphold our commitment to maintain margins, protect and grow free cash flow, and return capital to shareholders. When we look ahead, we see opportunity. As companies embrace AI, they need data at scale. Data at scale is the foundation of GenAI applications, and data at scale has always been at the core of Teradata. We've made great strides advancing our perception and our innovations, as I'll now explain. I'll start with recognition received for our market position in trusted AI. Fintana Research rated Teradata as an overall leader and a top rated analytic data platform company and is one of the best in meeting product and customer experience requirements. Fintana also ranked Teradata as exemplary in Fintana's AI and MLOps platform gains. We're also very pleased with the response from our recent possible events in London and Los Angeles. where we receive positive feedback from customers, prospects, partners, and analysts. We heard consistent comments on our clear strategy, differentiation on trusted AI, and on partnerships that strengthen our open and connected ecosystem approach that customers want. Across the board, we heard from attendees that they were impressed with the breadth of customers who shared their insights into the value Teradata brings to their organizations. One analyst noted that customers and partners alike continue to view Teradata as their strategic vendor around analytics and called out the potential we bring to help them with Gen-EI workloads. Another noted our strong pace of innovation, our differentiated hybrid capabilities and our superior pricing economics for customers. It was from these customer events that we announced a sweeping set of innovations that support and advance our differentiated possession and trusted AI. Starting with enhancements to ClearScape Analytics, our analytics engine for AI innovation. These enhancements are designed to enable organizations to maximize the return on investment of their AI and ML investments. They are also intended to boost data science productivity to achieve business outcomes faster and more efficiently. We have brought Spark to ClearScape Analytics. Data scientists are now able to easily convert PySpark code to Teradata machine learning, eliminating the need for re-engineering or data movement. This significantly reduces complexity and costs. Customers can leverage Vantage Cloud's enterprise-grade workload management, security, and data integration that is designed to operationalize trusted AI at scale. In one example, a large Latin American bank recently trialed a migration of some Databricks workloads to Vantage Cloud using this capability. The workloads were to perform daily data analytics for 16 million credit card records and 75 million consumer transaction records, the results were dramatic. 56% faster processing with Vantage Cloud and 47% cost savings with Vantage Cloud compared to Databricks, all without moving data in and out of their data warehouse. In October, we announced our new bring your own or BYO LLM capability designed to enable customers to simply and cost effectively deploy Gen AI use cases at scale. Organizations are recognizing that larger language models aren't best suited for every use case and can be cost prohibitive. Bring your own language model allows companies to choose the best model for their specific business needs, including small or medium domain specific language models. from open source providers like Hugging Face. Many models are free to use, inexpensive to run, and can be tailored to industry and horizontal use cases for real world value. For customers with more complex generative AI needs, including training or fine tuning, ClearScape now also provides them with the flexibility to strategically leverage either GPUs or CPUs depending on the complexity and size of the large language model. Teradata's ability to leverage GPUs can allow customers to develop and operate LLMs for purpose-built Gen-AI business applications and not be constrained to siloed AI tools that require complex workflows or large amounts of data movement. In addition to these models being easier to deploy and more cost-effective overall, we bring the language models to the data so that organizations can also minimize the expense of data movement and maximize security, privacy, and trust. With these ClearScape announcements, we are continuing to deliver what we see as the most powerful, open, and connected AI and ML capabilities in the market today. All Vantage Cloud customers have access to ClearScape analytics with these new features. Our focus on driving innovation has never been stronger and I'm pleased to report that we have appointed Lewis Landry as our chief technology officer. I'm excited that Lewis will bring his expertise in advanced engineering and emerging technologies to help accelerate the pace of innovation at Teradata. Lewis has led our technology and innovation office and his knowledge of Teradata technologies, deep engineering, and years of experience leading technology innovations at larger enterprises make him an excellent CTO for Teradata. Hilary Ashton, our Chief Product Officer, will be leaving Teradata at the end of the year and will facilitate a smooth transition out of her role. As we build on our innovations and strengthen our open and connected ecosystem, our focus on partnerships remains front and center. We recently announced integration of NVIDIA's AI accelerated computing platform with our Vantage platform for the development and deployment of GenAI applications to accelerate trusted AI workloads, both large and small. Vantage Cloud Lake's integration with NVIDIA's platform is designed to enable our customers to more affordably deploy everyday GenAI use cases faster and in their environment of choice for immediate return on investment. We also announced that the Teradata platform is now integrated with dbtCloud, We bring our ability to manage complex, large-scale data sets with enterprise-grade reliability, robust security and governance, and combine that with DBT's transformation tools to turn raw data into actionable insights. Together, we believe that we can enable unparalleled data management and agile analytics, empowering engineering teams to transform data at scale with less manual effort. all in service of helping organizations accelerate their AI and ML initiatives. Finally, we introduced a generative AI-driven customer complaint analyzer solution built on Vantage Cloud Lake in concert with Edge Solutions and Consulting. Customer Complaint Analyzer is designed to continuously capture data signals in order to identify, address, and prevent customer complaints. The powerful solution is designed to help companies improve their customers' experience and reduce churn. And we already have a healthy opportunity pipeline for this new AI use case. We've had great customer reaction to our announcements. For example, our team demonstrated how we can help companies more effectively integrate signals from customers into their workflows and quickly act on them. We used hugging face models leveraging the Bring Your Own Model feature in ClearScape Analytics to analyze and summarize customer calls or classifying the output and automating treatment of next best action, all in a single integrated analytic workflow without moving data. This AI-driven solution provides faster responses to customers, and we demonstrated how an entity could analyze and address 300,000 calls a day up from 30,000 a day with our manual process. We are seeing great interest as the benefits can be far reaching, including cost savings, improving customer satisfaction, and increasing the lifetime value of the customer. These announcements and our customer engagement events are executed with one goal, help our customers achieve massive value with trusted data and trusted AI. I'll wrap up with a sampling of some of our recent wins that should illustrate this goal in action. A US insurance company and member of the S&P 500 migrated to the cloud with Vantage Cloud Lake on AWS. The account had implemented a cloud strategy and migrated its Hadoop data lake to Snowflake years ago before we had a cloud offering. Our team introduced Vantage Cloud Lake, and demonstrated that Teradata was the best and most cost-effective solution for the company's complex workloads, and we won this business back. Our late offering on AWS will support the customer's business insurance division and more. We're collaborating with Cognizant on the migration. We also had a significant win with one of the largest banks in Asia Pacific. In this competitive win, the bank chose Teradata on AWS to achieve the robust performance and reliability needs. It runs risk compliance and regulatory reporting on Teradata. We will also integrate Vantage Cloud Lake as an innovation platform so that the bank can develop AI ML use cases without the constraints of working with production data. This move marks a significant evolution to enhance their agility and innovation capabilities. And finally, a Fortune 500 insurance giant added Vantage Cloud Lake on AWS to run additional analytic workloads for its finance department. As I close, I'll reiterate that we remain committed to accelerating growth and innovation. We see strong market opportunity that aligns to our strengths, and we are delivering AI innovations and value for customers. We have proven that Teradata can and does evolve with changing market dynamics as we've grown our cloud ARR business to more than half a billion dollars in under four years while aggressively returning capital to shareholders. We believe we are well-positioned with a hybrid, trusted AI platform as enterprises begin to commercialize AI uses. We have been and will continue to take actions to improve growth. We have made meaningful leadership changes in products and go-to-market. With Rich now in the CRO role for two quarters, we have made material changes in our go-to-market organization designed to improve execution. We believe we are taking the right actions to return us to growth. And while it's still early in seeing the results from those changes, we firmly believe in our differentiated technology, our people, and in our future. Now I'll pass the call to Claire.

Thank you, Steve, and good afternoon, everyone. In the third quarter, cloud ARR grew to 38% of our total ARR, up from 30% at this time last year. We continue to demonstrate strong improvement in operating margin, profitability, and free cash flow generation. Year-over-year free cash flow nearly doubled, and our operating margin increased over 800 basis points. As Steve mentioned, we anticipate a different migration path within our large transformational cloud deals. The durable nature of our business model remains intact, with over 80% of our revenue being recurring, delivering a gross margin of over 70% and a total operating margin of 20%. With the reiteration of our total ARR outlook, we continue to expect improvement in our overall retention rates going forward. Let me now share more details on our quarterly financial results, starting with revenue. Third quarter recurring revenue was $372 million, up 3% year-over-year as reported and 5% year-over-year in constant currency. Recurring revenue was driven by the strong growth in cloud revenue. We saw a small net benefit from upfront revenue in the quarter. Recurring revenue as a percentage of total revenue was 85%, up from 82% from the prior year period. Third quarter total revenue was $440 million, flat year over year as reported, and up 2% in constant currency. The year over year constant currency growth in recurring revenue was partially offset by lower consulting revenue. Moving to profitability and free cash flow. Total gross margin was 61.6% at 130 basis points year-over-year, driven by our strategic focus on recurring revenue. Operating margin was 22.5%, up over 800 basis points year-over-year. Non-GAAP diluted earnings per share was 69 cents, exceeding the top end of our guidance range. The primary drivers for the EPS outperformance were currency and upfront revenue. We generated $69 million of free cash flow in the quarter, which is a $30 million increase sequentially and nearly double on a year-over-year basis. In the third quarter, we repurchased approximately $15 million, or half a million shares. Year-to-date, we have returned 144% of free cash flow in the form of share repurchases and we remain committed to returning at least 75% on a four-year basis. Moving to our four-year 2024 outlook. As a reminder, our outlook ranges are in constant currency for the ARR and revenue metrics. We reaffirm our previous outlooks for total ARR, total revenue, recurring revenue, and free cash flow. Although total ARR is unchanged, we are seeing a different mix between cloud and on-prem. For cloud AOR, we now expect more stage migrations for the large transformational deals and anticipate growth of 18% to 22%. We are increasing the non-GAAP earnings per share outlook. It is now $2.30 to $2.34. Additional full-year outlook assumptions include Rated average shares outstanding of approximately $98 million. Other expense of approximately $48 million. We project a non-GAAP tax rate of approximately 25%. On net expansion rate, we anticipate a slight deceleration, but to still be in line with historical levels. Regarding our outlook for the fourth quarter of 2024. We anticipate non-GAAP diluted earnings per share to be in the range of 40 to 44 cents. We project the non-GAAP tax rate to be approximately 22.1% and the weighted average shares outstanding of 97.5 million. Previously announced cost reduction actions remain on track and ensure the durability of our margin profile as we return to total ARR growth next year. Free cash flow growth remains our focus, and we are committed to return 75% of free cash flow to shareholders in the form of buybacks. We will provide an update to our fiscal 2025 outlook during our Q4 earnings call in February. Thank you very much for your time today. Let's please open the call for questions.

At this time, I would like to remind everyone 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 Matt Hedberg with RBC. You may proceed.

Great. Thanks for taking my questions. Maybe one for Steve and then one for Claire. You noted sort of at the top of your box that there was a change in how customers are thinking about cloud migration. I'm curious if you could just maybe double-click on that a bit more. Is this an industry-wide thing? Do you think it's something that's sort of unique maybe to your base? And I'm just sort of curious, does it change sort of the medium-term outlook on cloud mix and kind of overall growth when obviously that cloud mix is a big part of sort of the total company acceleration and

Thanks, Matt, for that question, and I'll let you come back to ask Claire a question afterwards. Fundamentally, we are seeing strength in our business, both from a cloud perspective and from an on-prem perspective. But as I said in my prepared remarks, we have seen recently a material change in the buying behavior in a handful of our large conversion deals. The way these customers are approaching their cloud strategy is in a more staged nature. They're breaking down that cloud migration into smaller deals. And as they're doing that, they're actually leveraging the hybrid nature of our platform where they can run both in the cloud and on-prem. So to your point, we are seeing a mixed change of committing in the cloud and on-prem. And so while initially we're less in the cloud, we don't see a change to the total commitment or opportunity And that's why we reiterated our full year 24 total ARR guide. And in 25, we talked about returning to growth from a total ARR perspective. So we saw a handful of eight-figure deals essentially in some cases convert into a set of seven-figure deals.

Got it. That's super helpful, Steve. And then maybe sort of a related question for Claire. You know, to me, it feels like, you know, there's a bit more higher priority on Q4 on-premise spending within your base. And I guess I'm wondering, you know, I think a lot of us are wondering, do we see maybe a bit more of a December budget flush this year? And I'm wondering, did your guidance contemplate maybe a bit more of that, given that historically budget flush, I think, tends to impact more on-prem than cloud? And then You know, when you think about, you know, sort of cloud growth and maybe even re-acceleration, you know, what are the building blocks of that essentially?

Hi, Matt. Yeah, so just on your first part of your question with regards to budget flush, we haven't factored any uplift from a budget flush. We've done a customer-by-customer pipeline analysis, and as Steve said, looked at what we expect to close in 24. and factor that into our updated assumptions for both total ARR and cloud ARR. So no budget flush assumed for on-prem at the end of 2024 in December. With regards to as you look forward into the future, I think just generally on 2025, I would say we're still driving towards the metrics that we talked about last quarter. As Steve just mentioned, that means total ARR growth in 2025. and also growth in our free cash flow year over year in 2025. And we continue to anticipate a robust growth in cloud ARR in 2025 as well. So, naturally, we're not providing detailed guidance, and this quarter we'll provide it at our Q4 earnings, which is in line with when we would normally provide it, which is in February of next year.

I appreciate the answers from both of you. Thanks a lot. Thanks, Matt. Thanks, Matt.

Our next question comes from the line of Chirag Ved with Evercore ISI. Your line is open.

Thank you so much for taking the question. Steve, if you think about the business over the next couple of quarters, given the mixed change and customer approach to cloud, does this change how much you're indexing on cloud versus on-prem in terms of your approach to innovation, contracts, renewals at this point? What are you seeing to support and guide that decision-making process?

Thanks, Raj, for the question. So I just want to reiterate, we are completely committed to our cloud-first strategy. We believe it continues to repossession Teradier in the marketplace as modern and relevant for our customers. And we believe that the innovations that we develop from a cloud perspective, they actually enable additional capabilities on-prem. So as an example, I was talking about being able to bring your own language model. We are actually able to leverage our technologies and technology development to actually deliver that capability both in the cloud and on-prem. So the focus from a strategic perspective is very much to keep on that cloud-first mission. Cloud-first but not cloud-only is absolutely our strategy. I would say as well that as we look forward, the strength of our cloud pipeline still remains intact. We expect these customers to continue a migration path for the cloud with Teradata, and we have continuously demonstrated that we are the least risked path to the cloud for some of the largest organizations in the world to move that complex, large workload to the cloud and utilize the Teradata technology set in the cloud. Because we're not seeing that, we're not seeing any deterioration overall in the pipeline. We're just seeing that timeline of migration pushing out into the future. We remain committed to that cloud strategy and cloud execution. And we believe that it will still remain a fundamental part of our growth strategy as we move forward.

Great. And then, Claire, maybe one for you. Recurring revenue came in, ahead of where the street was at for Q3, and you maintained the full year guide. Can you talk through what happened in Q3 and what you're expecting in Q4 from the recurring revenue point of view?

Yeah, so I think it's just more of a linearity in the modeling, Chirag, so not a big difference in terms of what we're expecting internally. We did see a slight benefit from more upfront revenue. which hits both total revenue and recurring revenue, but that was more of a linearity change. So no overall change to what we're expecting, just a slight shift between Q3 and Q4, which is why the full year guide remained unchanged.

Perfect. Thank you both.

Thank you. Thanks.

Our next question comes from the line of Tyler Radk with Citi. Your line is now open.

Thanks for the question. Steve, I wanted to go back to the commentary you made around the staged migrations that you're seeing with customers in terms of moving the cloud. I guess, why do you think this is happening and why now? I mean, is this a macro budgetary driven decision? I mean, it would seem like budgets have been tight for a while. So what's kind of your theory on why this is happening and why now? And Just to clarify, is this only customers that you saw in Q3? What makes you think that this was just a function of the sample size versus a broader trend that extends in the next year?

Yeah, Tyler, thanks for the question. Over the past couple of months, we've ran our customer marketing events both in London and LA. It gave us the opportunity to talk in depth with a number of our customers regarding what their plans are and how they plan to move forward. Now, we're seeing an impact in a handful of our really very large deals. Looking at those eight-figure deals and where we've had appetite for customers to make migration pathways and migrate their entire real estate to the cloud in one program, just like the deal that we signed early in fourth quarter, the eight-figure deal that we signed. But we are seeing a handful of customers that are choosing to essentially take, from their perspective, a less-risk approach to these major transformational programs that they are executing. They're still committing to Teradata, and in many cases, they're committing incremental spend with Teradata across both on-prem and the cloud. But for the cloud deals, we expect those to close in a more staged process. So, you know, instead of one eight-figure deal, they will close multiple seven-figure deals over a longer time period.

Very helpful and follow up on that for Claire. So last quarter you talked about seeing similar cloud growth as your prior guide in 2025 is 2024, which I think was around 30% and a billion in cloud in 2026. Do you still expect a billion in 2026 or does this sort of change the trajectory of that cloud business ramping to a billion?

Yeah, so Taya, just on that, I would say we still see a path to the billion dollars for cloud ARR in 2026. Naturally, we're working with these customers on the detailed timing of their stage processes. So we will obviously update the cloud ARR for 2025 in February. We don't anticipate to recover all of this in 2025, but definitely we anticipate as Steve mentioned, some of these additional stages to close in 2025. So we'll come back on the 2025 cloud ARR, but we do still see that path to the $1 billion, because as Steve said, they're still committing to migrate with us over time.

Great.

Thank you.

Thank you.

Thanks, Tara. Your next question comes from the line of Eric Woodring with Morgan Stanley. Your line is open.

Great. Thanks so much for taking my question, guys. Steve, maybe I'll start with you. It feels like Teradata has faced a bit of a perfect storm of headwinds this year between some on-prem erosion, some deal elongation, and now some migration timing dynamics. And I'm just wondering, how can you be sure that the headwinds that you have encountered this year have nothing to do with competitive pressures? For example, elongating sales cycles are taking longer to migrate to the cloud. Is there a sign that those are, or is there a risk that those customers are potentially evaluating maybe other cloud-native platforms? Just help us gain some comfort that this isn't a kind of competitive risk and this is more just related to timing and maybe company-specific issues. And then I have a quick follow-up. Thanks so much.

Yeah, thanks, Eric. Look, we absolutely expect to convert these opportunities over time that are in the pipeline. And I wanted to refer to the fact that those customers are actually making commitments to us from both an on-prem and a cloud perspective. So we expect them to start those cloud journeys with us. So we're just seeing essentially a more staged approach to the execution. From a competitive perspective, I'm very proud of how we're doing from a competitive perspective. I mentioned in my prepared remarks one customer that had migrated to Snowflake that has recently made the decision to come back to utilizing the Teradata platform in the cloud. But I'm also really happy with how we're doing from a competitive perspective against newer players like Databricks. I made the reference to a Latin American bank that had migrated workloads from Databricks And actually they are utilizing Teradata and they're doing it twice as fast in terms of processing speed and at half the cost. And we're continuously building up that catalog of competitive execution, competitive win backs. We are absolutely convinced of our lowest cost per query and comparison to the competition. I think what we see as we look at these very large deals in some of the largest organizations in the world, it's really all about risk appetite. And what they see with Teradata is the least risk way of actually migrating to the cloud and getting the benefits of cloud technology. So I think the way that they're using and deploying our technology set in terms of our hybrid capabilities is something that none of the other competition can actually deliver against. And so leveraging that hybrid capability as they execute through in a migration gives us a differentiated position. So that's how we can be more assured that we're doing well from a competition perspective.

Okay. Thank you, Steve. That's really helpful. And then maybe my follow-up is for you, Claire, which is, can you maybe just talk a little bit more about the changing gross margin profile of your recurring revenue base, given some of these mix-shifting dynamics, and really when you expect that recurring revenue gross margin profile? to kind of bottom and stabilize and start to expand? Has that timeline changed as you've now kind of thought about the different underlying mix between on-prem and cloud in your business? Thanks so much.

Thanks, Eric. Yeah, so just with regards to growth margin, we've actually been very stable with our total growth margin and our recurring growth margin over the last couple of quarters. And I'm pleased that even though we've been increasing the mix of cloud ARR, we've been able to offset the negative impact that that has by an improvement in our cloud margin rate. So seeing a continued improvement in cloud margin rate year over year and quarter over quarter and expecting that to continue. And we're seeing that offset the negative impact from the mix change. And I think as we look out into the future and we continue to increase the mix of cloud ARR, we will continue to maintain that stability.

Great. Thanks so much. Good luck, guys.

Thank you.

Your next question comes from the line of Howard Mao with Guggenheim. Your line is open. Thanks.

Steve, I want to understand, you already gave a pretty thorough explanation of the stage migrations, but what can you point to further? I mean, maybe, so I was just brainstorming. I was thinking maybe it's it's verbal customer commits around the timing of migration expansions, you know, even if it's not contractual, right? Maybe, you know, maybe you can share some data on conversations or maybe it's telemetry data on that support the stickiness on Teradata or, you know, maybe you have a pronounced on-premise renewal base next year. So really anything more concrete that could instill confidence that slower pod migrations or, you know, where you call them stage migrations won't translate into, future competitive losses?

Yeah, thanks for the question. Look, I start off by saying, like, we are strategically positioned in all of these accounts that we're talking about. And overall, our pipeline remains strong. And our deal opportunity hasn't really changed at the aggregate level. It's just changed shape in terms of timing of execution. And also, to the point we were just talking about, we've not had any lost cloud opportunities from that large deal set. And in fact, our total ARR remains unchanged. So the total customer commitment and spend commitment with Teradata has remained unchanged. If I look specifically in second half in terms of our execution, we've actually got better renewal and retention rates in the second half of 2024. And that's going to help power some of our total ARR growth as we move into 2025.

Got it.

And for Claire, speaking of 2025, I respect that you're not giving any discrete guidance so far, but you're making some pretty big initiatives. I mean, there's product initiatives at your recent customer conference. Your go-to-market reorg is underway. Can you paint a picture for us and help us understand when these initiatives will kick in? I mean, we're in November already, right? So as we look around the quarter to next year, how will they kick in into the numbers. And on the back of that, why should we not expect significant acceleration next year?

Yeah, so we are committing to a total ARR growth in 2025, Howard. So we are committing to an increase and improvement compared to 2024. And the three main drivers of that supporting that total ARR growth in 2025 include a higher percentage of cloud. That obviously drives more growth, so we are anticipating robust growth in 2025, and that will increase the percentage of cloud. The other things as well is we are expecting a meaningful improvement in our retention rates for the full year in 2025. And finally, we expect on-prem expansion improvement year over year as well. So there's multiple things, including robust cloud growth, that will be helping us to move back to total AR growth next year, which obviously I would say is a meaningful improvement compared to where we are in 2024. Okay, thank you.

Thanks. Your next question comes from the line of Nihal Chokshi with Northland Capital Markets. Your line is open.

Yeah, thank you. Help us understand what it means in terms of change in year-end total workloads on Teradata, given the takedown cloud ARR, but no change in total ARR.

Hi, Nihal. Thanks very much for the question. As we've been executing these customer events recently, I've had the opportunity to talk to a lot of our customers And what we see is that, you know, they still have the requirement to operate data at an enormous scale and do that in the most effective and efficient way. And Teradata is definitely the platform that can enable them to do that. When we talk to them about the most recent capability developments we've had both from an analytics perspective or analytic capabilities in database or in platform or utilizing the analytic capabilities of the environment in which they're working, These are all ways that our customers want to utilize the Teradata technologies. The thing that really resonated with our customers is the fact that we meet our customers where they want to be met. So if they want to leverage the Teradata platform in the cloud, they can do that. If they want to leverage on-prem, they can do that. And if they want to do that in a hybrid environment, that's something that Teradata can deliver uniquely in the marketplace in terms of giving that one platform across those environments. So we still see a real demand in terms of utilizing the Teradata platform for these modern workloads and in modern environments.

So the reason why I asked that question is because I thought that when a on-premise customer converts a certain amount of their on-premise estate to cloud, there's an expansion associated with that. So if you have a slowdown in the cloud migration, you would actually have less total ARR. Is that not correct?

Yeah, so that's a good point. So we do normally and on average see an uplift at the point of migration. In the grand scheme of things, in terms of our total ARR range that we guided, we were able to absorb that in that range. So yes, there is an impact linked to the reduction. of the cloud ARR, but we've been able to absorb that in our total ARR previous numbers.

I see. Understood. Okay. And then of the 50 million takedown for cloud ARR for calendar 24, is there a significant concentration within that 50 million to like, you know, just a couple of customers?

I mentioned in the prior questions that there is a handful of customers where the deals have moved from eight figures to seven figures. And clearly, you know, you just need a few of those and you quite rapidly build up that cloud ERR number. What I would say is, and it goes to that, the question about is it something systemic inside the marketplace? We're still seeing our customers committed to it and committed to executing that cloud migration with us. And we'll clearly capture the expansion that we've been talking about. But we are also seeing those customers actually looking to expand their overall spend with Teradata and the combination of both on-prem and cloud in many cases.

And then if I can sneak one more in. Steve, you started a few customer within a quarter boomeranging back to Teradata, either from Databricks or Snowflake. What's the frequency of this type of customer case and any change in that frequency that you're seeing relative to a quarter or a year ago?

Yeah, we're definitely seeing as our platform becomes more and more performant and also the capabilities in our platform from an analytics perspective, enabling us to compete for those data science workloads, for example, from Databricks. So as we continue the development in our Cloudforce strategy, it's enabling us to, you know, go back with a win-back message and the ability to address customer requirements and customer needs that we haven't been able to in the past. So I believe our competitive position will continue to improve over time. Thank you.

Your next question comes from the line of William C. Mohan with Bank of America. Your line is open.

Yes, thank you. Steve, can you perhaps just address the broader macro trends as well? Where are you seeing, maybe just in terms of expectations of spend going into 25? And large deal cadence, are you seeing any changes in the way those are progressing, not just in these cloud migrations that you've spoken about, but just in the base business as well? Can I have a follow-up?

I think the fundamentals of our business remain very strong. We don't see increased competitive pressures. I talked to my prepared remarks about winning a bank in the Asia-Pacific region against a highly competitive environment. But we see the customer spend commitment to Teradata remaining strong both now and into the future. And clearly, you know our business very well. We deal with some of the largest organizations in the world. So having that commitment has given us the confidence to say that we're going to return to total ARR growth next year. From a spend perspective, You know, we are working to increase our addressable market with the capabilities that we're developing from an AI perspective. You know, we're working with some large banks in the U.S. where we're actually deploying generative AI use cases in the Teradata platform using Hugging Face language models as an example. So we're starting to expand not only make sure that we might maximize our presence in enterprise data warehousing and data lake and data lake house, but also in terms of the analytical workloads that we can operate against. So I'm confident in terms of the opportunity that we will have as we move into the future.

Okay, thanks, Steve. And I guess just to follow up on your point around AI also, you said 20% of your pipeline includes active AI sales engagement. What do you think about the rate and pace of this business? Is this something that's got pretty long proof of life, proof of concept like timing? Or do you think that you have something that will translate much faster and this 20% pipeline will significantly grow a quarter from now?

Yeah, I think as we look at the AI and Gen AI, those data science projects, a number of them are failing. recent study said that, you know, more than 50, 60% of AI and gen AI workloads are not moving out of proof of concept into production. One of the reasons for that is operating at scale. What we're able to demonstrate for our customers is that we can actually take them from that idea and concept and then operationalize that at scale with all of their trusted data inside their ecosystem. And so I think as we look at our pipeline of opportunities and we're able to prove that out to our customers that we can take them, not just deliver on a proof of concept, but actually help them deploy these solutions at scale in the production environment, that's really going to act as a tailwind for us as we move into the future.

Your next question is from the line of Derek Wood with TD Cohen. Your line is open.

Great. Thanks. My first question, Steve, there's a lot of talk about growing adoption of Iceberg and the broader data analytics ecosystem. What are you guys seeing from your customers? And do you think this changing cloud migration behavior has anything to do with companies contemplating data storage movements to Iceberg?

Yeah, I think we talk to nearly every single one of our customers about how they plan to leverage an Open Table format on Native Object Store. And we see that as a great opportunity for us. Our Cloud Lake platform supports Open Table formats, and we don't lock our customers into one particular Open Table format. We have a strategy that we want to support both Iceberg and Delta as an open table format. Now, if we look at that from a Teradata perspective, we see that, again, as looking to increase our TAM. As we look at the amount of data that is in native object stores and put in structure around that data in native object stores, that's something that the Teradata ecosystem only touches in a light way just now. As we look to the future, we look at that as an opportunity again, expand our addressable marketplace and the opportunities that we have in terms of that unstructured data is often an order of magnitude larger than the structured data inside an organization.

Your next question comes from the line of Patrick Walravens with Citizens JMP. Your line is open.

Oh, great. Thank you. So, Steve, I think you mentioned in your remarks that Hillary is going to be moving on and you're looking for a new chief product officer. What are sort of the top characteristics that you're looking for in that individual?

Hi, Pat. Just to be clear, you know, Hillary is going to move on, but we're taking this opportunity to actually leverage the bench strength that we have inside the organization. from both a product management, a product engineering, and a chief technology officer perspective. So I announced that Lewis Landry is going to be appointed as our chief technology officer. As we move into the future, I'm actually elevating the product management focus we have inside the company and the product engineering focus that we have inside the company to have those roles report directly to me.

Your next question comes from the line of Ramo Lenshow with Barclays. The line is open.

Perfect. Thanks for squeezing me in. Two quick questions. Claire, on the cash flow side, you outperformed this quarter, but yes, the full year unchanged. Anything around timing of things that came in in Q3, et cetera, that you want to point out? And then I have one follow-up to Steve.

Yes, to your point, Remo, we were pleased with the performance of free cash flow. We anticipate there to be a slight linearity impact with regards to our working capital, so slightly overperformed on DSO and DPO compared to our previous expectations. And so that would just be a linearity impact between Q3 and Q4. But we feel good about the meeting being in the range of our free cash flow guide for the full year. And it will be a similar increase in cash flow that we saw this time last year.

Your next question comes from the line of Austin Dietz with UBS. Your line is open.

Great. Hey, Steve or Claire. I know we've spent a lot of time on migrations and their more staged nature on the call so far. The cloud net expansion rate this quarter, it seemed to slow several percentage points, and I believe it's a trailing 12-month metric to where the end quarter piece would have slowed by more than that. So do you mind just unpacking what you saw from a net expansion perspective this quarter, and then how should we think about that cloud net expansion rate over the near to medium term?

Yeah, thank you, Austin, for the question. So as you mentioned, net expansion rate was 120% in Q3, and it is a trailing 12-month metric. So that's a deceleration. And that was mainly driven by our healthcare vertical and also some of our European business. We do expect further deceleration into Q4, given the mix of migration versus expansion. And as we look forward, we will obviously continue to monitor with the stage migrations that we see what the impact will be in 2025. As a reminder, expansion at the point of conversion for the first 12 months is not included in our net expansion rate, so we're also impacted by that as we update the migration timing of our customers' migration.

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

Thank you, and thanks, everybody, for the questions. The fundamentals of our business are strong, firmly believe in Teradata's differentiated technology and future growth. We all remain focused on improving execution and accelerating that growth, and we remain committed to protecting and growing our free cash flow and returning that capital to our shareholders. Thank you all.

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