Q4 2022 Teradata Corp Earnings Call
[music].
Hello, everyone. My name is true and I'll be your conference operator today at this time.
I would like to welcome everyone to the carriage H out fourth quarter and full year 2022 earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I 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'd 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 morning, and welcome to <unk> fourth quarter and full year 2022 earnings call.
Steve Macmillan Securities President and Chief Executive Officer will lead our call today, followed by clear Brambly surety as Chief Financial Officer, who will discuss our financial results and our outlook.
Our discussion today includes forecasts and other information that are considered forward looking statements.
While these statements reflect our current outlook they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These.
These risk factors are described in today's earnings release and in our SEC filings. Please note that <unk> intends to file the Form 10-K for the year ended December 31, 2022 later this month.
These forward looking statements are made as of today and we undertake no duty or obligation to update our forward looking statements.
On today's call, we will be discussing certain non-GAAP financial measures, which exclude such items as stock based compensation expense.
Special items described in our earnings release.
We will also discuss other non-GAAP items, such as free cash flow and constant currency revenue comparisons.
Unless stated otherwise all numbers and results discussed on today's call are on a non-GAAP basis.
A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at Investor Teradata Dot 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.
Good morning, everyone. Thanks for joining us and thanks for the introduction.
<unk> delivered a robust fourth quarter capping off a strong year.
Very pleased that we had all of our key metrics for the full year, especially considering the macroeconomic challenges from ceasing operations in Russia.
Demonstrating our momentum as a cloud leader fourth quarter was our largest quarter ever as the team delivered public quiet <unk> of $357 million a year on year increase of 81% in constant currency, nearly 45% logic and <unk>.
Q4 of last year.
Incredible growth was propelled by customer demand for our differentiated platform, resulting in new incremental workloads that drove healthy migration and expansions.
Our total <unk> also finished the year very strong up 2% year over year in constant currency, we generated $108 million of sequential growth in the fourth quarter driven by outstanding quiet activity. In addition, our on Prem subscription business remained steady even in <unk>.
<unk> upheld the migrations to the quiet.
Great to see that the team's performance and quiet is fueling overall total growth.
Looking at our tremendous progress across the board our results showcase the positive impact of our strategic transformation.
Just over two short years ago, we declared the CAD data would be quite first and the entire team stepped up and executed with the termination and consistency once we set our sights on a quiet first feature.
A levered more than a six fold growth in cloud.
Just remarkable results with growth well ahead of the market, our strategic pivot right and I am very proud of these results illustrate our successful transition to a market recognized leader in cloud data and analytics.
The customers we serve are among the world's most demanding and complex enterprises and we regularly hear from them that they need the best data and analytics capabilities possible.
<unk> abilities that carry data absolutely provides to help them expand their edge and their market.
We meet customers, where they are now with the technology that they need now with a best in class late late has our data warehouse whether in the cloud on Prem or a hybrid model.
Dedication to customer success and the strength of our technology gives customers full confidence that teradata will keep bringing analytics and data capabilities they will need in the future.
We are seeing migrations remains high as customers transaction, what was required and we're also pleased to see.
But when customers start with Teva data in the cloud they expand with carrier data.
Our net expansion rate and cloud remains solid at 117% in the quarter.
Our momentum accelerated in the fourth quarter as our sellers added new customers in the cloud and new logos.
Brought in nearly 20% more new logos last year and in 2021.
Our new accounts come from across all geographies and multiple industries.
To share just a few examples.
Tangible is modernizing its data platform and building our capabilities and required to acquire and curate data.
<unk> key insights as business and selected Teva data on issuer as a key component of that strategy leveraging our company's go to market aligns with its internal chief data officers team being client zero.
<unk>, Canada data for its entitled reduce possessions Kendall in an excellent position to address the challenges businesses face.
A major Japanese consumer electronics manufacturer chose teradata on AWS to help them provide analytics on Iot data derived from the products.
A large Australian government agency has procured Terry data on Azure as the basis of its strategic data platform underpinning the departments enterprise information initiatives.
This program will uplift its entire enterprise data management and analytics practices to better enable information sharing and collaboration within the department across the government and with still a strategic International partners. This new customer was one with KPMG and with a competitive.
Against a number of other vendors.
These wins are a testament to the people of carrier data, our culture of being market driven agile and execution.
Voting each other truly helps us win.
As we have transformed the company and has been amazing to see everyone Leanne and embrace the future.
You have heard us say that we do what we say we will do.
This has been our mantra throughout our transformation is all facets of the company acted with urgency and commitment and our successful pivot to the cloud a fantastic engineering organization completely re architected, our analytics and data platform to cloud native and we launched tailored data vantage quite late.
Clear escape analytics at the end of Q3.
We're quite pleased with the incredibly positive market response to the launch of these powerful capabilities. Our pipeline is building and we have customers already leveraging our powerful new light product to get meaningful business value.
When we win we increasingly win with partners and we continue to strengthen our partner first approach and.
In 2022, we made major strides building out our partner motion.
Significantly advancing our capabilities training thousands of partner employees and building a leading partner centric organization from the ground up.
Our robust cloud growth is intrinsically tied to the deep partnerships. Our teams have built the leading cloud service providers systems integrators, Isps and resellers.
That 75% of our largest quiet deals were won in partnership with key systems integrator partners and cloud service providers.
Going ahead, we remain committed to partnering is a key element in our growth. We will continue to invest in building deep partnerships and accelerating market momentum in this area.
Capping off our fantastic was the very positive use that heavily data received continued recognition from Gartner in two important reports that the no.
<unk> leadership.
It named a cloud leader in the 2022, Gartner Magic quadrant for cloud database management systems. That's makes an impressive 20 years in a row of being named a leader in data analytics.
We had another consecutive year winning streak as we again garner the highest scores in all four use cases and the critical capabilities for cloud Dbms for analytical use cases report Terry.
Terry data scored number one and data Lake number one and traditional data warehouse number one and logical data warehouse and number one in streaming analytics. This is the second year in a row that carrier data has made a full suite leading each of these use cases.
We're proud of this recognition validates our strength as a leader among leaders in cloud analytics and data.
Being the market leader also comes with the Judy type responsible corporate citizen and obligation we hold parliament in 2022, we've made great strides in our ESG program processes and governance.
Very rewarding to be including key reports such as just capital 2023 ranking of America's most just companies and Newsweek's list of America's most responsible companies.
Commitment to ESG is deep and broad and recognition as one of the leading sustainability driven company, we renamed and Dow Jones sustainability, North American index for the 13th year in a row and were included in its World Index for the eight pain.
You'll be hearing more about our unwavering commitment to ESG throughout the year and I'm confident you will like what you hear.
As I turn the call over to Claire who will share more about our financial performance I want to emphasize that we made tremendous progress in 2022, and we have great confidence in our future.
Our entire team is preparing to take another significant step forward in 2023.
Remain steadfastly focused on generating profitability and we look to extend our strong track record of delivering on our earnings per share target.
Our 2023 non-GAAP diluted earnings per share.
With almost $2 per share at the midpoint. This is more than a 20% increase year over year.
We forecast accelerating growth in both 2023 cloud and total IRR and we remain on track to meet our goal of 1 billion plus dollars of acquired <unk> in 2025.
We firmly believe our strategic transformation is right the teradata and the proof is in our results. Our technology is differentiated in the market people remain dedicated to customer success, and we will continue our strong sales execution and good cost discipline.
We firmly stand on our commitment to profitable growth and Delevering durable free cash flow.
Let's now turn the call over to clear.
Thank you Zee and good morning, everyone.
Sadly enthusiasm on a strong finish to 2020.
Paradise or delivered on all metrics for both the fourth quarter and the full year.
These results demonstrate great progress and momentum and delivering on our strategy, we outlined in our 2021 Investor day.
Quarterly and annual highlights in place.
Public cloud <unk> grew 81% year over year in constant currency and 77% as reported.
Sharing our ability to drive cloud AOR growth at scale and on track to achieve our fiscal 2025 target of over $1 billion.
Total ore of $1 billion $482 million.
2% growth in constant currency and a 1% decline as reported despite a four point negative impact from ceasing our Russian operation.
Fourth quarter recurring revenue of $357 million.
Which is a 3% growth year over year in constant currency and a 2% decline as reported.
For the year, we achieved $1.419 billion of recurring revenue.
A return to annual IRR and revenue growth, excluding the impact of exiting Russia and currency.
Fourth quarter non-GAAP diluted earnings per share effective with this.
Three.
At the high end of our outlook range.
non-GAAP diluted earnings per share was $1.64.
<unk> <unk> above the high end of our outlook range.
Fourth quarter free cash flow of $120 million, resulting in a full year free cash flow of $403 million.
I am proud of the entire team's performance in the current environment, which enable teradata to remain on track with achieving our cloud fast profitable growth strategy.
Let me now share more details on our financial results starting with revenue.
Fourth quarter recurring revenue was $357 million or 3% constant currency growth was driven by strong execution by our go to market team, resulting in strong cloud revenue growth here is again.
Recurring revenue as a percentage of total revenue was 79%, which is up over two percentage points from the same period last year.
In the quarter that was a tailwind from net positive upfront recurring revenue of approximately $7 million.
This was offset by headwinds related to exiting Russia and currency.
Our earnings presentation provides the impacts to <unk> and revenue in the fourth quarter and full year, demonstrating the underlying growth of the business.
Fourth quarter total revenue was $452 million.
And again in constant currency and a 5% decline as reported.
Year over year decline is primarily due to exiting Russia and declines in our consulting business, given our strategic pivot to develop a robust partner ecosystem.
Moving to profitability.
The fourth quarter was another period of healthy profit generation.
We reported $269 million and gross profit in our fourth quarter gross margin of approximately 60%.
The primary driver of our healthy gross profit dollar generation continues to be the higher mix of recurring revenue.
For the year, we reported $1 1 billion of gross profit or a gross margin of 61, 6%.
This is in line with the approximate 300 basis point decline year over year, we provided an outlook at the start of 2022.
Primarily driven by an increasing mix of cloud revenue.
Cloud business continues to scale.
Fourth quarter operating profit was $62 million.
On an operating margin of <unk>, 7%.
We continue to maintain cost discipline, while prioritizing positive return generating investments and are focused on actually check right.
Total operating expenses were flat sequentially and down slightly year over year.
Fourth quarter non-GAAP diluted earnings per share was <unk> 95.
Which is above the high end of our outlook range by <unk> <unk>.
We saw a slight benefit from upfront mccarron revenue and currency, partially offset by higher taxes.
Turning to free cash flow and capital allocation.
We generated $403 million of free cash flow in 2022 in line with the outlook. We gave at the start of the year of approximately $400 million.
We continue to take advantage of our strong balance sheet and return to shareholders, 96% of our 2022 free cash drag.
For the full year, we repurchased approximately nine 4 million shares.
Approximately $387 million in title.
Before I provide our annual financial outlook for 2023, I'd like to make some comments to set the context.
We intend to leverage our momentum from 2020 to drive growth in both cloud and telco era.
In the cloud we continue to be focused on direct and indirect activities that drive adoption of our vantage platform.
<unk> and <unk> migration expansions and new logos.
He will enable total iron ore grades with the best hybrid solution in the market.
On total gross margin, we continue to expect a slight headwind as we great cloud revenue.
We anticipate a solid improvement in cloud gross margin year over year progress on achieving scale benefits.
On operating margin, we will maintain our cost discipline and continue to make prioritized investments that we expect to result in an attractive return.
Regarding free cash flow.
Like to remind everyone that we had a onetime tax refund of $50 million and nonrecurring benefit to free cash flow in the first quarter of 2022.
The forecasted higher profit in 2023 will convert into general free cash back, but will be more than offset by higher cash tax payments and the restructuring payments, we mentioned on our last quarter's earnings call.
On capital allocation, we have been and remain committed to returning significant capital to shareholders, while continuing to invest in growth.
Demonstrating this commitment we are increasing our return of free cash flow target.
<unk>, 50% to at least 75%.
We have confidence in the resilience and sustainability of our free cash flow.
In a disciplined returns based approach to capital allocation.
We believe Teva data has a resilient business model, given our strong enterprise customer relationships and the mission critical work like that.
On our platform.
We continue to keep a close eye on the macro economic environment and are starting to see increased scrutiny on enterprise spend.
It is not yet pervasive, but it has influenced our thinking to be prudently conservative and our 2023 outlook.
Our annual outlook for 2023 is as follows.
Public cloud IRR is anticipated to grow year over year in the range of 53% to 57%.
Total IRR is projected to grow year over year.
Here in the range of 6% to 8%.
Total recurring revenue is expected to grow year over year in the range of 4% to 7%.
Total revenue is anticipated to grow year over year in the range of 1% to 4%.
non-GAAP diluted earnings per share is projected to be in the range of $1 90.
$2 six.
Free cash flow is expected to be in the range of $320 million to $360 million.
As a modeling assumption for 2023.
Our non-GAAP tax rate of approximately 25%.
Weighted average shares outstanding of 101 3 million.
Other expense of approximately $40 million.
For the first quarter of 2023.
We anticipate non-GAAP diluted earnings per share to be in the range of 60 to 64.
We project, our non-GAAP tax rate to be approximately 28% and a weighted average shares outstanding to be $102 1 million.
Before we open the call for Q&A.
Like to provide a brief overview on our progress towards the 2025 financial goals, we provided at our September 2021 Investor Day.
We remain on track to achieve over $1 billion of cloud era in 2025.
The total of our recurring revenue and total revenue.
Do you think the exit of fiscal 2022 as a starting point, we forecast future growth in line with the lower end of the compound annual growth rates that we provided at Investor day.
We've talked about the 2022 exogenous headwinds, which we believe are now behind us.
And we are building on the strong momentum, we just demonstrated in the fourth quarter.
We also remain on track with the margin profile, we shared with you at Investor Day.
<unk> gross margins in the cloud to drive an operating margin profile in the low 20% range.
We are introducing a range for free cash flow in 2025 of between $450 million to $500 million.
To account for the exit of Russia, I'm conservatism based on the current macro environment.
I'd like to conclude by restating that we are excited about what we achieved in 2022 and look forward to driving future profitable growth and a healthy return to shareholders.
Thank you very much for your time today, operator can we please open the call for questions.
At this time I would like to remind everyone ambulatory ask a question press Star then the number one on your telephone keypad, where posted just a moment to compile the Q&A roster any interested giving everyone. An opportunity. We appreciate that you limit yourself to one question and one follow up.
Our first question today comes from Tyler Radke from Citi. Your line is now open.
Good morning.
On the commentary on the macro environment I'm wondering if you could expand on that a little bit obviously it was a.
Strong Q4, as you pointed out.
<unk> and cloud era, where in line to ahead of your guidance. What are you seeing the elevated decision, making taking place where they're deals that maybe slipped out of Q4.
And just how are you incorporating that into your outlook for 2023. Thank you.
Good morning, Thank you for the question.
So as we all know 2022 and I will say 2023 is a pretty volatile from a macro economic environment. We are not seeing any significant changes to customer behavior.
We are seeing a little bit of scrutiny, but as I mentioned in my prepared remarks, that's not pervasive.
We're very pleased with the team's execution of our Q4 and 2020 today, we had a strong pipeline as we mentioned at our last earnings and the team delivered extremely well.
That strong pipeline.
We are excited about the momentum that we have in 2023 and going into the media, but we also want to make sure that given the volatility that we are conservative and we have factored that into our 2023 at the way we will monitor closely we have done that throughout 2022, and we will continue to ups.
Thank you and the team and update our models with the latest information.
I'd just add to that Tyler.
We are a player in the data and analytics marketplace and I think as you look through all of the industry reports you still see that there is robust demand for data and analytics solutions in the marketplace and Thats certainly something that you are seeing from our customers. So they want to use data to help them respond to these turbulent macroeconomic.
Pains as really interesting in the rising interest in artificial intelligence, we like our customers believe that artificial intelligence without great data is just artificial and so being the provider of the best possible quarterly data and say the customers really sets us apart.
From really providing these engines of capability to our customers that we're seeing a lot of uptake in terms of the usage of the analytics capabilities that are built into the <unk> data engine that enable that complex AI and ml model ops activities. For example, so from even though.
Everybody is experiencing these macroeconomic times I think from an industry segment perspective, we're in a fantastic marketplace and we're seeing results that reflect that fantastic marketplace opportunity.
Thanks.
As a follow up there just on the long term update for free cash flow, obviously, it's come in a little bit lower relative to your initial.
Long term guidance, which understandable, given Russia and currency, but I'm wondering if you could unpack that a little bit further.
What are you kind of assuming for for gross margins and then any change on your long term tax assumptions I think tax rates for for next year appear to be a bit higher than some of the modeling assumptions from the analyst day. So if you could just kind of unpack.
Other puts and takes driving that downward revision in our free cash flow.
Yes, absolutely.
As you said the biggest impact is the cause of the exogenous headwinds that we saw in 2020 case being.
Being Russia and currently as you as you highlighted.
That's why we've kind of changed our financial goals looking from the end of 2022 out to 2025 on free cash flow.
Specifically.
How much of that is margin, we ought to be keeping our operating margin rate goal aligned to what we laid out in investor day, which is in the low 20% range. So that obviously public have IRR numbers are the key ones that we kept in line with our Investor day in 2021, the free cash flow came down.
Mainly due to these exogenous headwinds and partly due to a high attach rate.
As we are paying higher cash taxes, as we look forward and obviously, we're paying more taxes on the higher income that were generating.
The one thing that we did get a benefit from as I mentioned in my prepared remarks in 2022 with that tax refund in Q1 of 2022. So obviously, that's a nonrecurring onetime benefit that comes out for 2023 and moving forward.
Thank you.
Thank you very much John .
Our next question today comes from Erik Woodring from Morgan Stanley . Your line is now open. Please go ahead.
Great. Thank you so much.
Steve I wanted to just build on something that you just said and generative AI today I feel like it's all the rage and so I just wanted to kind of double click on your comment.
About how how these types of workloads are impacting either your cloud IRR growth or generally the interest and the Teradata vantage platform would just love to know if there has been any change in the last let's call. It months to three months of this has been around for a while and this is just status quo for you guys would love if you could just unpack that.
Your comments, maybe a little bit more double quicker and then I have a follow up thanks.
Yeah. Thanks, I guess one of the reasons that we launched in branded our analytics capabilities at the end of Q3 in terms of clear scape analytics was really to emphasize the vitale data platform, it's not just.
Your grandmother's enterprise data warehouses, where data warehouse for a data lake for an analytics engine for our customers.
The modal ops capabilities the data capabilities. The fact that we can train tremendous numbers of models for retailers for banks for use cases like risk and fraud management.
Really powering.
<unk> models and cider customers today, so were more.
Making that really a real in terms of business outcomes for our customers and not only that they know that they are facing those models on real and high quality data and <unk> data because it's not an extracted copy that may have been modified.
Utilizing the data.
Absolutely core to the mission critical activities of that customer. So if it's an airline that's looking at optimizing flight operations for sustainability using those advanced analytics and AI models or AML models, if it's a bank looking at how to reduce the risk profile.
Retailer looking at next best action for a customer we see all of those are really driving use cases, and utilizing carrier data and say their customer to maximize business value hopefully that answered the question Eric.
No. That's very helpful. Thank you, Steve and then maybe if I could follow up with another one is you made the comment earlier in the call about 20% more new logos and calendar 'twenty one excuse me calendar 'twenty. Two then in calendar 'twenty one.
Maybe if you just take a step back and think high level can you maybe help us better understand the profile of this new cohort of customers anything different what looks similar again, maybe just providing some more detail on those on those new logos that you were able to bring in the door over the last year at 65 days.
Yes sure.
I'll take a step back as well and just reflect on the last two and a half years that we've had as a journey to transform to a quiet first company.
And those two in a short two and a half years, we have grown our cloud business of over $350 million on our own.
For 2023 years to take that well over $500 million of quite a bit.
The new logo engine and activity that we started as we executed that transformation journey.
Growing in terms of execution and capability.
Expected by us that those new logos will be much smaller in size.
When we compare it to some of the migration activities that we're doing but we expect those new logos to start small and grow rapidly over time as we take all of the business and say that we have for looking and working with the biggest companies in the world with the most complex use cases and making them.
Those kind of solutions available to customers that are just starting out with us in the cloud so.
The new logo motion for us as a.
A key part of how we see our future buildings, but its a small part that we see growing into the future.
Super Thanks for the detail Steve.
Thanks, Eric.
Our next question comes from Derrick Wood from Cowen and kind of your line is now open.
Hey, guys, it's Andrew on for Derik, Thanks, Congrats on the quarter Steve.
The on Prem business was strong but there are three.
I think imply a strong renewals quarter can you talk about how those renewals tracked versus your expectations. How is visibility on this business changed over the last few months and could you ballpark size for us how large your renewal basis this year versus 2002.
Yes ill, let clear comment maybe on some of the numbers I'll just give you a little bit around the management of our renewals business from from a renewals perspective, the team landed a great quarter from a renewals and expansion of our on Prem business as we said the <unk>.
Our prepared remarks.
Our on Prem IRR stayed very steady even though we're taking some of that on prem quite IRR and migration to the cloud and turning them into cloud customers and then market. If you look at the industry reports they say that.
The on Prem marketplaces flat to low single digit growth.
So we were really pleased to see steady.
New space fantastic execution by the team in terms of that renewals pipeline.
To get to the results that we saw.
For Q4 and for 2022 overall.
No.
Unanticipated activities in terms of.
Bringing opportunities forward of selecting opportunities out of the quarter I think the renewal of engine that we have executing and saved Terry data.
It's really generating reliable robust consistent results.
Yes, if anything I would just highlight on the numbers.
Is the fact that clearly obviously strong cloud era.
Right, but the fact that if you adjust for Russia and from currency.
<unk> already strong titles.
Yes.
As we're all that that's really positive.
In our on Prem.
We continue to see expansion as Steve talked about we continue to see good renewals as you mentioned.
So we're very pleased with that momentum as we come out of Q4, the way the team executed a.
Throughout 2022, given these headwinds that we saw and we are continuing to see that as we kick off 2023.
Yeah, that's great and clear on the cloud are our guide for this year implies about 30%.
Or for 61% this year, maybe just walk us through your assumptions in there.
The pervasive scrutiny or sorry.
<unk> enterprise scrutiny comment, but not yet pervasive.
Are you assuming.
Does the same or gets worse and any kind of cloud migration activity assumptions as well would be helpful. Thanks.
Yes sure.
So a very similar to 2022, we're anticipating the majority of our.
Cloud Arab break in 2023 to come from migration and expansion, we're still seeing a strong expansion rate net expansion rate in the cloud and that is anticipated to continue as we saw in 2022 and as you can see strong renewals on Prem they continued uptake opportunities.
Migration standpoint, as Steve mentioned earlier to Eric's question about new libraries, new lasers is at will become a slightly more.
And more significant part of 2023 for us as we continue to land and expand but it's still the smallest portion of our expected growth and we've been pretty conservative that knowing that the macroeconomic environment is pretty volatile right now but.
Most of it coming from migration and expansion some limit.
And without any advantage tablet launch that happened in 2020, we see that as a big opportunity to help run the smaller new logos.
It's departmental or experimental type workloads and good opportunity for that as we move through 2023, I did mention a little bit of additional scrutiny as I mentioned is not pervasive no.
<unk> changes to customer behavior, but we just thought that was important to take into consideration and de risk our 2023 outlets.
Great. Thank you.
Thank you so much.
Our next question today comes from Chad Bennett from Craig Hallum. Your line is now open.
Great. Thanks for taking my questions.
So just to follow up on the cloud are our drivers I think.
At the start of this past year I think Steve you mentioned on the migration side.
You would see a incremental amount of buying ahead right or buying more.
Consumption or migration at the initial deal do you expect that.
To continue at the rate it is and at what point do you think.
If we do annualize that do we see net expansion actually potentially.
Accelerate if you do thanks.
Thanks for the question Chad, Yes, I think we made the point in terms of our net expansion rate at 117% that it.
It was taken into account the fact that a lot of customers were actually increasing the capacity and the cloud at the point of making <unk>.
Strengthen the deal for that migration. So a good job from the sales team in terms of forward anticipating the workload that that customer is going to require.
The cloud and encapsulated in that and our commercial construct that is attractive to the customer to execute at that point.
Same in that deal to migrate to the cloud I think one of the great things that we've got in kenna relates to one of the prior questions on the call as we have great visibility into the workloads that our customers run in terms of the mission critical nature and also the historical growth patterns that are popping from <unk> 10 per se.
Okay.
It's the very fact that we have that insight into some of the biggest customers in the world that allow us to construct that initial commercial value proposition that encourages them to increase the forward capacity as they move from on Prem to the acquired so to simply answer your question, Yes, we do.
Do you expect that to continue in terms of migrations growing at the port in terms of contract value growing at the point of migration.
Our net expansion rate at 117% for an as a service business I think is pretty healthy and save the industry, but we do see opportunity to continue to grow that and we'll do that from a couple of basis.
From a couple of factors one we will continue to grow that mission critical workload with our customers to utilize the new product launches like cloud data Lake, where we can isolate sidecar data lake use cases to say the enterprise data warehouse and data customers, but also analytics.
Everybody's talking about AI and machine learning how to utilize that data from an AI perspective, and how you.
How do you really derive great insights from the data that you would go and take your organization a clear state analytics value proposition will allow that expansion too. So we are enabling our sales force. This year to really drive new use cases, new value propositions and to our customers to dry.
That overall expansions number let's say that answered the question Chad.
It did thanks, and one quick follow up just on the cloud Lake Vantage cloud like I know, it's only been out for a few months, maybe four or five months.
But is there maybe two questions real quick I mean, how much of whether it's clear scape or data lake are factored into cloud air or just kind of.
Roughly.
And your target this year your guide this year, but second and maybe more importantly.
Do you sense from a market perception standpoint, especially around vantage cloud lakes that.
The awareness is out there of your ability to handle on structured data and kind of be more of a broad and cloud.
Data management platform.
Just any kind of early sense, there on that and then I'll hop off thanks.
Yes, so I think a couple of things that we are seeing tremendous interest and traction with both new and existing customers on our cloud late capability.
We're never going to breakout whats vantage cloud enterprise adverse advantage quite like from our perspective is kind of immaterial right.
We respond to the use cases and workloads that our customers demand from us.
And so.
We wanted to do from a claim late launch perspective at the end of Q3 was to your very point make the market aware that not only can they access the very best enterprise data warehouse utilizing teradata vantage cloud technology. They can also have the very best.
Data Lake solution, utilizing vantage point technology, and one of the propositions that were taken to our customers now as.
You may have been thinking about how you deploy native object store may be on prem or maybe in the cloud.
We enable you to have an intelligent native object store and we can lower your cost of using native object store of accessing and getting the best insights out of unstructured data using a Terry data engine that can deliver high performance analytics across all.
All of the types of data that you have and that's why the Gartner.
And number one in all four analytical use cases foray pacing data breads borrowed pacing snowflake is a key part of the message that we will continue to take to the market.
Okay. Thank you.
Our next question today comes from Ramsey Manhattan from Bank of America. Please go ahead.
Thank you good morning.
Could you share some thoughts around the upfront dynamics that we should be thinking about in 2023 should we should we consider that to be net neutral to revenue and earnings in 2023, and given the dynamics of those themes. So far is it right to assume that we would get a positive uplift in <unk>.
One Q4, Q of 2023, and a headwind in <unk>.
Good morning, guys, Hey, Yeah, let me take that.
As you said we are starting to.
That's really the cycle of upfront recurring revenue impact I think to your point with 23 compared to 22 nice significant changes expected year over year, but we will see that kind of similar.
Send out a seasonality that we saw.
In 2022 side of the slide.
Upfront here for <unk> benefit in Q1, and then less of a benefit throughout the year stays very similar seasonal impact, but when you look at the total year.
For the year.
Not anticipating material changes.
And that's what we're factoring into our records.
Okay. Thanks.
And then just a follow up on your longer term comments.
<unk> cash flow and margins, particularly around margins.
I think you said exiting 2022, if we take that as the base.
Look at.
The revenue trajectory coming in towards the low end, you're still maintaining your margins is there incremental opex actions that youre anticipating take.
Taking.
What might be the size of it.
There is.
Or if not is it sort of a higher blend up in gross margin subsidy offset any any color there.
And Claire if you could sorry, one more just.
Just on the free cash flow in 23 versus <unk> 22.
Could you give us some sizing on what might be the potential cash tax headwind that you're anticipating.
They can be changes in the R&D tax credit. Thank you so much.
To date, they said, yes they festival.
<unk>.
Our gross margin and operating expenses assumptions as we look out to 2021.
One day, so we had already assumed an improvement in our cloud gross margin as we scale through 2025, we are making good progress on that so that definitely is an opportunity for us from the exit of 2022 out to 2025.
An opportunity for us to grow our gross margin rates coming from that.
That that scaling of our cloud our cloud business to your point, we also are anticipating operating expenses.
Patient fee improvement.
We're not anticipating too.
Significantly after 2025, but again as we continue to grow.
We are anticipating efficiency back, but that's what's driving that operating income.
Treatment, we as you know we have big headwinds, whether it's currency whether it was Russia.
We weren't able to offset all of those headwinds that were significant headwinds.
From an EPS standpoint, but we did mitigate some of that so thanks to the cost discipline, a price that we have and we.
We know that we can operate efficiency, but we're not planning.
Any significant changes and reductions at the time, we have done some restructuring as we mentioned as we mentioned it last earnings call and this earnings call, but nothing materially incremental looking for what they are purely coming from gross margin improvement and expansion and operating efficiencies as we continue to.
Okay.
The gross margin and operating expenses.
<unk>.
Moving to your second question was I think a follow up question in terms of free.
Free cash flow bridge from 2022 to 2023 that again, we were pleased that we were able to meet that $400 million, but we did have that $50 million one time benefit in Q1 of 'twenty two.
So if you take that kind of underlying.
Number that we had this kind of a recurring free cash guide takes into account. The fact that we are growing profitability. So we obviously get a benefit and durable free cash based on that that unfortunately is being offset by.
Restructuring.
Actually we have incremental restructuring in 2023 back to 2022 and those higher cash taxes. So that's the bridge as you got from 22 to 23 free cash right and to get to our new range of $320 million to $360 million.
Okay. Thanks, so much.
Thank you Anthony.
Our next question comes from Pat will reasons from JMP Securities. Your line is not like them.
Oh, great. Thank you and let me add my congratulations.
Steve how would you say the competitive environment.
<unk> today has changed from what it was three years ago.
Hey, Scott Thanks for that that's a.
Very directly to the point and question.
In terms of the competitive environment I think we've repositioned the company.
So.
We've gone from a company that was focused on being the best on Prem enterprise data warehouse.
And we have repositioned the company as a leader in cloud database management systems.
In the marketplace.
Our customers are listening to us now as being the right choice to continue their investment in data and analytics, but not only that moved the most complex workloads that they have in their on Prem systems that they were unable to migrate to the cloud and take those required now.
Now with the launch of the vantage quite light and clear state analytics. That's just building on the capabilities that we have from a credit perspective, and setting apart our differentiated value proposition.
And I mentioned, a little bit earlier in the Q&A session.
And also in my prepared remarks, if you will.
Look.
That's what this company has done in the last two and a half years.
<unk> increased its quired ALR six fold to over $350 million of quite a bit.
Don't do that without significantly changing your positioning in the marketplace.
<unk> views and how our customers utilize that in terms of being a strategic platform that can integrate into their environments of the future to deliver the most complex workflows and capabilities that they have that they need to address the environment that we're working on so I think compared to three years ago, where we are.
A completely different company.
Yeah, I agree I agree and and.
But what are you in terms of who you're competing against how has that evolved.
And I know this is big picture, but I think it's helpful. I think.
Yes, I think if any details as the Gartner magic quadrant and can really.
You can see the competitive landscape from a cloud dbms perspective.
From as we look at competition, we think about it in three segments. We think are better from a traditional competitive perspective with the oracles, the ibms, where clearly we've got a fantastic differentiated capability, we think about it in terms of native capabilities Csp's.
Like redshift from AWS or.
The maintenance services from.
Microsoft or.
And then you've got the kind of new cloud native entrants like.
Snowflake and data <unk>, our new next generation platform and enables us to win across all three segments of the competition that we see we can differentiate from a capabilities perspective from an enterprise performance perspective from a cost per port cost per query perspective in <unk>.
So just the fundamental capabilities of the Teradata platform have completely changed so we can we feel very confident in our sales teams feel very confident now going out.
And possession and carrier data as a future platform to take on the likes of data breaks.
When by workload from Snowflake and to win against competition in the marketplace and certainly all of the all of the decisions that we've come across from a migration perspective or from a new logo perspective is against competitive activity.
Customers are smart customers. They wanted to make sure that you will get the best possible deal in the marketplace and I'm really proud how the terra data capability stack up competitively against the new cloud native providers against this ESP capabilities against our traditional competitors in terms of delivering something that none of those.
Organizations can deliver alone.
Awesome. Thank you.
Thanks Pat.
Our last question today comes from Howard <unk> from Guggenheim Securities. Your line is now open.
Okay, great. Thanks for fitting me in.
One question for Steven a follow up for Claire.
First for Steve.
Wanted to ask you about your go to market strategy and how that will continue to evolve in 2023 to put vantage cloud products more at the forefront of our customers' buying decisions that you mentioned, making a significant investment in the partner ecosystem in 2020 twos to specifically this year what are you doing incrementally from a from a partner <unk>.
Endpoint also from a sales incentive standpoint, or any notable changes in our pricing and packaging.
Yes, I think thanks for the question.
Just from a I'll start in the reverse order from a pricing and packaging perspective.
Launched a new pricing model through 2022 is probably one of the most flexible and dynamic pricing models.
That said in the marketplace, we certainly believe that in terms of having both effects and consumption based.
Approach, which gives us certainty in terms of our P&L and our outlook for 2023.
From a sales incentive perspective, where incentive our sales force even more to be working with partners, where incentives are consulting teams to ensure that they are there to help and enable si's and resellers in terms of working with the teradata ecosystem, we're investing in capabilities.
And as being part of the.
Developer ecosystem in 2023, that's an investment area for us in terms of ensuring that we capture the hearts and minds of developers.
Insider and save our customers and potential customers and then continuing to invest both with the CSP and the systems integrators.
<unk> said that.
In the prepared remarks, 75% of the large transactions that we executed and systems integrators engagement goal, we'd like to take that to 100%.
We see tremendous interest from the <unk>. All mentioned Accenture is an example of that some of the strategic partnership that we have with Accenture in terms of jointly taking industry value propositions to our customers, having those system integrators invest and solution capabilities built on <unk>.
Carrier data that.
Utilized capabilities that only teradata can perform and execute at scale given the masses of data that some of these industry solutions require we're going to continue to see an acceleration of that.
I know you've got a question for clear so I'll stop there and let you ask that.
Okay. Thank you.
Thank you for that really good color for clarity.
A quick one the last question that your 2023, according to our guidance that implies about $200 million of.
Incremental growth for.
For this year at the midpoint versus $155 million in 2022 should we expect the vast majority of that to be weighted in Q4 or.
Because of the migration is going to be more of a smooth smoother cadence of net adds throughout the year. Thank you.
So thank you Howard and good morning, and say, yes.
Seasonality that we've seen in 'twenty, one 'twenty two will continue in 2023.
We are anticipating growth to sequentially accelerate.
Throughout the year, which ultimately does mean.
More comments from Q4 than the earlier quarters.
You should bear to say that acceleration as we go throughout the year, what we saw in 2022 and we anticipating the same seasonality in 2020.
Okay, great. Thank you so much.
Thank you.
There are no further questions at this time I will now turn the call back over to Steve Mcmanus for his final remarks.
Thank you very much for joining us this morning, and I Hope you all have a great day. Thank you.
This concludes today's conference call you may now disconnect your lines.
Okay drew thank you very much.