Q1 2023 Teradata Corp /DE/ Earnings Call
Clear indication that our transformation is moving full steam ahead.
Our differentiated position in cloud analytics and data is recognized and growing and we are advancing our market reputation and driving our pipeline.
Organizations everywhere, we are investing in advanced analytics, including generative AI and machine learning to drive automation and agile decision, making.
To enable a future of AI driven business enterprises will require trust and data and the ability to massively scale with price performance.
<unk> deep data management capabilities probing stewardship of the most trusted data in an enterprise and high performing AI and ml at scale are fundamental requirements for organizations as they move into this new world.
Let me share a recent example, where we help the customer deliver its retailer of the future model with advanced personalization and store by training a generous as AI chat.
Chat GPT Raj the language model and AWS stage maker and running that model at scale and vantage cloud to provide real time retail product recommendations to shoppers.
Doubling upon next example, we recently announced our integration with Google with vertex AI rounding out our cloud service provider ml integrations, thereby extending analytics capabilities for customer use cases.
We also announced the integration of vantage cloud with Microsoft Azure machine learning we.
We are combining the scalability and openness of Teradata vantage cluttered and clear escape analytics with Azure ml ability to simplify and accelerate the ml lifecycle.
Together, we are providing a platform designed to ensure that customers can execute complex analytics and AI ml when massive datasets.
And incorporate the preferred data science tools, including Azure ml.
That helps customers unlock the potential of their AI ml investments as they deploy sophisticated models, including generative models and production faster and with confidence.
In addition to these customer benefits. We also delivered new specializations that pervade consumption transparency for vantage quiet of late our new product built on our next Gen cloud native architecture.
We're continuing to see adoption of vantage closed lake and are already bringing it enhancements come.
Customers can now see their consumption actual against clients across all of their environments.
They can see their consumption patterns on an hourly weekly monthly and quarterly basis.
This transparency helps our customers avoid end of quarter surprises, which is critical to enterprise customers.
In times of financial uncertainty, having the best type of financial governance, as a major driver of value for our customers and a major differentiator against our competition.
We further strengthened our open approach and integrated with CEB team to enhance our developer experience and enable more use cases for the important developer community.
We are adding integration that's modern tool set that is popular with beta engineers and as part of the modern data stack.
It saves engineers and analysts valuable pain, while allowing them to focus on high value pursuits, and accelerate time to outcomes with advanced analytics.
A real win win.
In another win win I'm, particularly pleased with our continued customer momentum in the quarter.
Added or expanded customers across industries geographies and use cases, I meet with many customers and they are relying on analytics grounded and the trusted data we provide to help them remain resilient during times like the current economic environment.
Walk through a few representative examples.
We closed one of the largest deals measured by total contract value and Tara Davies history at a U S based healthcare service provider.
This deal was one with one of our valued partners and included an eight figure cloud expansion in the quarter.
Our customer signed a strategic multiyear credit agreement to license <unk> data on AWS and clear scape analytics to support areas such as customer engagement Medicare Medicaid services, and most importantly cost of care as it is.
It's 100 million plus members.
These analytics will be instrumental in continuing to drive the cost of health care down by providers and increase the level of care to consumers.
One of the largest integrated financial technology solution providers in the U S. Supporting the success of more than 2400 financial institutions and representing more than seven 7 billion transactions annually.
<unk> advantage cloud on AWS and a multi phase modernization program that includes our consulting services.
I'll now have the ability to scale on demand and perform macro level analytics on aggregated data to drive the most value within you use including marketing predictive insights and member insights.
And investment and commercial banks in the Middle East as a new logo for US that's customer is working to build small business solutions to serve specific departmental needs.
Ability to tailor our world class analytics.
At each specific use case was a key to success in fulfilling the customer needs for the future.
I mentioned that expansion activity was a key driver of growth in the quarter I am pleased to note that our client net expansion rate was 119% ahead of Q4's rate and customers who migrated to the cloud from just last year are already expanding on our platform in Q1 of this year.
Additionally, we are seeing customers expand at the point of migration, adding incremental workloads and use cases.
This is a manifestation of customers realizing the value and our ability to provide best in class hybrid cloud environments meeting them wherever they are on their journey to cloud.
A key tenant of our transformation is building strong and lasting relationships with partners.
We are a force multiplier for our business in Q1, we saw growth with the hyper scaler capitalizing on a win win relationships with AWS and Microsoft Azure.
In the quarter, we also deepened our relationship with Dell technologies carrier data and Dell have committed to jointly offer private cloud solutions that give the flexibility of the cloud.
<unk> and security of on Prem.
We have co engineered and are bringing together our best of breed technologies integrating <unk> advantage with <unk> converged infrastructure.
These solutions are ideal for companies wanting hybrid cloud analytic environments that include an on prem element of the ecosystem.
Such as regulatory compliance this.
This is one more example of meeting customers where they are.
What do you need today and offering a seamless path to the future.
With customer adoption already underway I'm excited about the market opportunity for both of our companies.
And the ESG Arena, we are exceptionally proud that carry data was named one of 2023 world's most ethical companies by Ethisphere for the 14th consecutive year.
This designation is a testament to our fundamental ethos of operating with the highest integrity and commitment to doing business. The right way every day.
I'll now turn the call to Claire I want to underscore that we are incredibly pleased with our strong start to 2023.
Resilience and growth this quarter gives us confidence in the market need for our connected multi cloud analytics and data solutions.
With our vantage cloud platform, we are strongly positioned across all data formats and deployment and the cloud multi cloud hybrid and on Prem.
You've heard me say, we meet customers, where they are and help them seamlessly get to a better more efficient and more competitive place.
Our results reflect the market need and open and connected approach.
Our teams are demonstrating the ability to be relevant and remain resilient and driving total <unk> and cloud <unk> growth at scale and the uncertain economic environment.
Our technology continues to garner kudos is it outpacing the competition and our customers are building and growing their analytic futures on Terra data.
Our Q1 performance gives us significant confidence in the year ahead.
We're committed to our outlook for 2023, and we remain on track to achieve our fiscal 2025 target of more than $1 billion in cloud.
Sure.
And now I'll pass the call to clear.
Thank you, Steve and good afternoon, everyone.
I was out Shay Paradise that continues to have good momentum and is off to a strong start in 2023.
A clear highlight of the quarter, which areas of your quake entitled Era at 6% as reported and 7% in constant currency.
The sequential growth of $24 million is the fast time, we have seen growth from the fourth quarter to the first quarter of three yes.
Another highlight was our year over year public cloud grade of 86% at Cortez and 89% in constant currency.
<unk> was $31 million, which was more than four times greater than the growth in the same period last year.
Free cash flow of $105 million and non-GAAP diluted earnings per share of 61.
<unk> on track to achieve our annual outlook.
Check.
Our first quarter financial results reflect the company dedicated execution against a cloud fast profitable quite strategy, we introduced just over two years ago.
These results give me confidence to re estimate our 2023 outlets and met the current macro economic environment.
Let me share some more details on our financial results starting with revenue.
First quarter out of our current revenue with $389 million, 4% growth in constant currency and 1% as reported.
This was driven by the strong execution of our data market came last year and this quarter, including several large expansions and migration and the seven and eight figure range.
Dynamic contributed to strong cloud revenue growth year over year.
Recurring revenue as a percentage of total revenue was 82%, which is up four percentage points from the same period last year.
In the quarter, we experienced a very healthy renewal rate of on Prem subscription contracts that was better than previous years.
This contributed to a net positive upfront and recurring revenue of approximately $34 million.
Resulting in a year or anything an increase of $5 million or one point of growth.
This growth was more than offset by the loss of revenue recognized from the Russian operation that we ceased partway through the first quarter of 2020 case.
First quarter total revenue was $476 million flat year over year in constant currency and down 4% as reported.
Again, I think no change is primarily due to our strategic transformation.
Packaging perpetual and consulting revenue.
Moving to profitability and the fact quarter.
Profitability was healthy we reported $306 million in gross profit and a gross margin of 64%.
The primary driver of our strong gross profit performance continues to be the higher mix of recurring revenue.
That was also a benefit of approximately two percentage points related to the net positive impact of upfront recurring revenue.
Operating profit was $108 million or an operating margin of approximately 23%.
Total operating expenses were flat year over year and down sequentially. Despite higher SG&A expenses, due primarily to increased fixed and variable compensation.
We continue to maintain cost discipline as well as prioritize positive return generating investments.
Correct on after you took race.
non-GAAP diluted earnings per share was 61.
Which is in line with our outlook range.
Our strong quarterly results enabled us to absorb an approximate seven impact in other expense from unplanned currency devaluation in various geographies.
As Egypt and Pakistan.
Turning to free cash flow and capital allocation.
We generated $105 million in the quarter, driven by solid income generation and an efficient cash conversion cycle.
We continue to take advantage of our strong balance sheet to repurchase shares resulting in a return of 84% of our first quarter's free cash flow to shareholders ahead of our annual target of 75%.
With regard to the 2023 Outback I'd like to provide some context on the second quarter and the rest of the year.
We reaffirm all elements of our 2023 outback.
The midpoint of our annual outlook remains our best view of the year, even though our first quarter results were ahead of last year's linearity.
We have absorbed a slight sequential currency headwind and our 2023 outlets.
We do not currently see any of that material headwinds impacting our business.
We will continue to monitor the macroeconomic environment very closely.
Given the strength of our first quarter and improved linearity versus the same period last year, we are not expecting an acceleration of total error and cloud era tonic right from the first quarter to the second quarter.
We do expect greatest sequential dollar growth for cloud Iraq in the second half of the year, given the increasing market awareness for our vantage cloud platform and in line with historical seasonality.
We continue to anticipate that our fourth quarter will be the strongest quarter. This year, the base casual era and cloud era Delek right.
We expect a solid improvement in cloud gross margin year over year as we achieve scale benefit there.
The increasing revenue mix shift to the cloud results and a slight headwind to total company gross margin in 2023 as noted on last quarters earnings call.
We also anticipate less of a gross margin benefit from upfront and accounting revenues for the rest of the year as compared to the first quarter.
We are on track to achieve our annual outlook for non-GAAP earnings per share and are narrowing our range to $1 92.
And for tenants with the completion of the first quarter.
Some updated modeling assumptions for 2023 include weighted.
Weighted average shares outstanding of approximately $102 3 million and other expense of approximately $55 million.
There is no change to the non-GAAP tax rate of approximately 25%.
Our outlook for the second quarter of 2023 is as follows.
We anticipate non-GAAP diluted earnings per share to be in the range of 43 to 47.
We project, our non-GAAP tax rate to be approximately 23% and a weighted average shares outstanding is the same estimate as the full year before.
Before I open the call for questions I would like to share that we are pleased with the team's execution.
<unk> and a great start to the year across all of our key metrics.
We are excited about the year ahead as we maintained a relentless focus on our cloud first profitable growth strategy.
Thank you very much for your time today now let's move to Q&A.
At this time I would like to remind everyone in order to ask a question press star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Interest is giving everyone an opportunity. We appreciate that you limit yourself to one question and one follow up.
The first question comes from the line of Chad Bennett with Craig Hallum. Please go ahead Jan.
Great. Thanks for taking my questions great job to start the year I mean, the cloud era is pretty staggering.
Especially in light of what we've heard from the Hyperscale and cloud guys. So I guess first question and pardon me I hopped on kind of midstream and prepared marks but Steve are clear just on the outperformance of the public cloud you saw in the quarter.
And kind of reiterating the year was there any kind of pull.
Pull forward or accelerated migrations that that boosted that number and I apologize if you mentioned in the prepared remarks.
Hey, Chad I think we covered that a little bit but no. We didn't have any significant pull forward from Q2. This was just great execution by the team I think it really proves that the strategy the company and the whole team getting behind that strategy and executing well in Q1, as we said on the call the predominant.
Growth was from expansions, we're incredibly proud of that in terms of seeing real traction for the Teradata vantage cloud platform and our customers. So nothing unusual from a transaction perspective.
Got it.
If that's the case I guess you know just in terms of you know whether it's it's it's kind of maintaining.
Or improving your your your churn levels on your on Prem business subscription business or it's actually seeing net new workloads, which I think you're hinting towards honored once converted basis like what considering the backdrop of.
All the consumption models right coming in.
People utilizing less every every hyperscale are saying you know, we're trying to optimize our customer spend I E spend less I know you have a different kind of model and your ROI pitches is extraordinary but like how are you seeing the net expansion of workloads and maybe everybody else's <unk>.
<unk>, just kind of any characterization there would be great and then I'll hop off thanks.
Thanks, Chad so depending on to governance, we enable and deploy whats. The teradata platform is clearly a differentiator for us and gives our customers face and expanding the workloads that they have on the teradata platform in the cloud our patented capabilities with workload management and query optimization.
I mean that customers essentially have very predictable cost model in the cloud and clearly we don't get that west entirely 100% consumption based solutions in terms of your question about the.
The pace of expansion, we're continuing to see workload expansion and data growth.
And the Teradata platform and also using our opening connected.
Methodology, we see more data becoming available to the Teradata vantage cloud platform and that is causing those expansions to happen and we talked about are really big.
And that is <unk>.
Poodle PCB for that deal with the nine figure is probably the biggest AWS marketplace deal. That's been done. We also had awarded six and seven figure deals across the portfolio.
So a good spread different deal sizes am I good.
Spread of different use cases, workloads and data expansion happening, but doing that data expansion in a very controlled way, which is really resonating well with our customers. Thanks for the question Chad.
The next question comes from Howard MA with Guggenheim. Please go ahead Howard.
Great. Thank you.
Steve I also wanted to ask a related question about how their data is performing with respect to cloud optimization and delays in multiyear projects that were that were hearing about across the board can you talk about how tier data as one of the major incumbents in the industry may be benefiting in this environment relative to your cloud only peers or are you.
Seeing more customers that had planned to migrate to a cloud competitor now more inclined to stick with teradata and migrated and expand on vantage.
Yes, I think what we're seeing Howard just a real commitment is at Teradata vantage quite platform clearly even in turbulent Rs, maybe especially in turbulent macroeconomic teams.
Organizations want to be nimble innovators, we wanted to be able to respond quickly and they do want to take advantage of cloud based technologies.
And so they wanted to get to the cloud as quickly and easily as possible with the least amount of risk and then when they get to the cloud we want to have a financial environment is very controlled and that's exact import parity that delivers the parenting advantage quite as the quickest practice.
Lease dress paths of the code for our customers I think they are seeing that the fact that we can integrate and I mentioned some of the integrations with the.
The AI ml capabilities across AWS, Google and assure the fact that they can start using these capabilities and new ways to deliver new value to the customers is something that they are really seeking out and something that teradata vantage quite platform can deliver and certainly having that advantage cloud.
<unk>, a completely differentiated capability compared to our competition is giving our customers the confidence to commit and recommit and grow with Terry data in the cloud and our expansion activity in Q1 is something that I'm very very happy with.
Oh, that's great, but it all makes a lot of sense and I have a follow up for Claire clearer I see I see that operating income outperformed as you mentioned in your prepared prepared remarks, but EPS was near the low end of guidance and operating cash flow was a little bit light at least relative to our model it looks like the variance in the other.
Income line what is in that other income line is that the reason for the very modest operating cashflow died down the full year. Thank you.
Thanks, Howard, Yes, so am I.
I've mentioned it briefly in my prepared remarks, we did see.
And other and other income and expense headwinds in Q1 related to currency and the.
Devaluation in a couple of geographies and specifically to do with Egypt and Pakistan.
Currencies devalue in Q1, and this is X and so therefore, we have to take that and hit in our Q1 other income and expense. So that's what we saw that with.
Regards to the eyes will impact on.
The cash from operation. So we have I reiterated our free cash flow guide and we still believe the midpoint of the guide that we have given is our best view, we have a few movements between our capital expenditures and our cash from Ops Guide. That's why we've made a slight adjustment to our to the full year cash outlet.
I still have great confidence in that free cash generation of the outlook that we previously gave and the reaffirmation that we've given today.
Yeah.
The next question comes from Tyler Radke with Citi.
Please go ahead Tyler.
Yeah. Thanks for the question so Steve clearly the cloud they are our performance has been very impressive.
Frankly since since you joined.
The company, but I'm curious just as you think about the implications.
Patients for the perception of tier data.
What extent have you started to maybe see some some boomerang customers come back or customers that maybe have communicated their plans to migrate off teradata years down the road kind of reverse those plans.
Just wondering if you could comment on that and to what extent that that has been a driver here and the performance.
Yeah, Tyler I think I'd comment on the strength of the company in three dimensions, one as our technology and our technology capability. We have translated that into a cloud context, which is uniquely differentiated and that certainly gets customers who didn't see our cloud strategy.
They did in the past the confidence that they can.
Migrate and transform their environments and modern context, one of hyper scaler in a very effective way.
The technology advances that we've made and the decorating changed and that we have with our competition is significant I'm going to say.
The thing that's leading to strength as our business model. The fact that we offer.
Capacity contracts and remember most of our customers run at.
Over 90% utilization of the Terra datasets <unk>. It gives us a very solid base in terms of the recurring revenues that we have there are contracted and that kind of fixed capacity model and then the third area I think where we have some differentiation is just the relationship.
We have with our customers that our cross industry Cross geography, multiple absolutely mission critical.
And I think what our customers are seeing is that the way that they can get those mission critical workloads at the performance and scale they require to the cloud means that Terry data is absolutely logical choice.
We continuously see customers committing and recommitting to Terry beta and I'm very proud of all of the team and cytarabine as contribution to get us to that point.
Great.
Claire So just on your updated guidance methodology.
Yes, a couple of questions. One just wanted to clarify and better understand your comments on Q2 seasonality with respect to acceleration or how.
Are you are you expecting.
There are to grow sequentially in Q2, just not at the same pace as Q1, and then you know given that this was such a strong performance in Q1 and it doesn't really seem to be you know.
Timing related why or why not.
Increase the full year outlook here given.
Youre not really seeing any any headwinds in the business and it seems like a clean out performance.
Yeah. Thanks, China just on the linearity question. So we obviously are very happy with that the Q1 start and I'm, particularly happy with the improved linearity that we've seen this year compared to last year. I think it's also important to reiterate the point that we are all growing caito Ara.
Kelly for.
For the first time in three years I mentioned it in my prepared remarks, but that's a big mouth type process a company. So as you said great start to Q1 as he looked at me and the Q2 acceleration as you know we don't guide for the quarter. So we're really focused on that full year number, but my comment that I was leading to that it previously.
And if you use last year linearity by quarter as a starting point, we would normally see a sequential acceleration in dollar growth each quarter each quarter, the great with getting higher and higher because we have obviously seen better linearity and a better performance in Q1 this year compared to last year just at <unk>.
Highlighting that would probably wait see an acceleration in the dollar growth, but we are absolutely expecting a sequential dollar growth.
In Q2 were just not expecting to see an acceleration.
I think that answers your question with regards to Q2 and then as it comes back to.
The full year guide and again we.
Where do you see this as an improved Liang linearity within the year and we have great confidence in our full year outlook, but we think it's important to be realistic and prudent not forgetting that Q4 is still going to be our biggest grace quota based or cloud era, and total error and there's still a lot of macro uncertainty out there.
Just keeping that conservative approach in terms of our outlet the methodology we.
I still believe that the midpoint of our outlook is the best view for the full year.
The next question comes from.
Chuck she with Northland capital markets. Please proceed.
Oh, yeah, Thank you and the market.
My congrats as well on by far the strongest incremental air or on a total and cloud basis, where fiscal first quarter.
You answered all the questions that are related to that so I wanted to.
Pivot towards a little bit more longer term looking here question, you talked about continuing to invest to seed future growth can you talk about what are those areas.
You are investing to see that future growth.
Let me answer the question, yes, we continuously assess our investment envelope to ensure that we're taking those dollars and we're putting them in the right ear.
As a business to get traction clearly our focus on analytics is absolutely key.
Well one of the recent analyst reported that.
Many of our customers don't use all of the analytics capabilities that are built into the platform today and we believe that those analytics capabilities can prevail decorating sheet capabilities for our customers as you move forward. So that's going to be a key area of investment for us and it's going to manifest in that continuum integration with AI.
Ml bags on the cloud service providers, we have a unique approach where.
We see that we look at the Teradata vantage quite it is a platform that means that we want to open that platform up so the data scientists can utilize the tooling and the tools that they use on an everyday basis to get to.
The data that's stored in Terra data the most valuable data probably in the world and so that is where our investment from our product.
Product capabilities is going to be focused in terms of artificial intelligence and machine learning.
We will continue to invest in motion like a customer success motion, which drives expansion along with our sales teams, we're going to continue to invest in ensuring that we get more market awareness and I think what we've seen over the past quarter is that market awareness for the Teradata platform continues to grow.
I think we had a note from Forrester that really back that up from our perspective, and so we are absolutely committed to be in a profitable growth company as Claire mentioned in our remarks.
Absorbed some currency headwinds in terms of our full year guidance.
And.
Increased our operational guidance from that perspective, but we're very proud to have the company is executing.
As a follow up to that.
One of the areas it seems like from a product innovation perspective.
Possibly would be data sharing.
From.
An existing customer to you there.
Collaborative partners and then also.
My understanding is a.
Going to a cloud based analytics structure.
Then can enable you to unify both <unk> and oil Apd.
Is that something thats in your roadmap.
So anyhow a couple of points there data sharing and it's something that Teradata has done for years and years our perspective on data sharing is that the data sharing capabilities that are provided by native services by the CSP is going to give customers. The most valuable data sharing equal.
And so we integrate with all of the data sharing services cloud native services from the Hyperscale.
And that that essentially enhances the belt and data sharing capabilities that are in our platform to date.
We are very proud of our governance and the fact that we can enable our customers to really control and manage their data and say the Terry data ecosystem.
Just in terms of the future from a a.
Cloud database management systems perspective, I'd refer you to the Gartner reports, where the work across a number of different use cases.
With different types of workloads and then all of the.
For Gartner use cases, Terry data comes out number one so we have the best enterprise data warehouse the best data like the.
The best analytical use cases deployed on the platform and so we really believe that our platform and capability is.
So obviously differentiated from our competition and allows all of those workloads to converge on the Terra data platform in the cloud.
The next question comes from Derrick Wood with TD Cowen. Please go ahead Derek.
Yeah.
Great. Thanks, and congrats on a solid quarter, Steve you guys have a lot of revenue from financial services, a lot of customers in that vertical.
This has certainly been topical in terms of trying to get a pulse on the demand behavior out of customers in the banking vertical.
How did you guys see business activity in Q1 and have you sensed any change in behavior when you're looking at your pipelines, especially when it comes to the appetite to migrate to the cloud.
Yeah. Thanks there.
Just a couple of points to note just in terms of the bank failures that have happened on a global basis, we haven't had any direct exposure or impact from those.
Onshore services organization, we deal with the largest most successful our most robust financial services organizations in the world.
We still see a demand from them to want to transform that want to build.
The bank of the future write downs of financial services organization of the future I was talking to one.
One of our South American banking customers yesterday, and they have a tremendous appetite to.
Tell you to use data in a cloud contacts to transform the customer experience that they deliver every single day and I don't think any organization as kind of backing off the fact that in turbulent times they have to be nimble they have to be agile. They have to have the right solutions in place to drive the outcome.
For their organization and I think that the experience that Teradata has the use cases that we have.
<unk>.
Working through turbulent pain and growth pains, and those use cases and experiences give us the capability to get a unique perspective to our customers and help them transform and migrate to the cloud.
<unk> than anybody else.
Okay and Claire.
Nice job on gross margins, you had a pretty pretty good jump sequentially in recurring.
Revenue gross margins can you give us a sense for what drove this in the quarter and I know you guys don't break out <unk>.
<unk> cloud gross margins, but.
Can you give us a sense of where they are today or kind of how much room. There is for improvement as you as you scale that part of the business.
Yeah, absolutely. So as you can see we've had really strong performance from our gross margin and as you look at recurring revenue as a percentage of total revenue. It is now.
83% and our recurring revenue runs at much higher margin. So that's great from an overall mix standpoint for caito gross margin as you specifically look at the recurring margins. We also had a strong performance as you said at 75% we warehouse as we normally in Q1 with regards to <unk>.
Higher upfront revenue recognition. So there was a couple of points that helped.
From an April .
Performance that that's in line with normal seasonality.
And we are seeing strong windows a muscle health.
It helps us from a recurring revenue standpoint, and how to keep that margin strong. So overall happy with the performance.
To your point that Derek with regard to our cloud margins like what would you say, we think just by the numbers.
I'm pleased with the progress that we're making we still are making a good margin expansion and progress on our cloud margins and as we continue to scale and with a strong performance that we've seen in.
In Q1, and being able to reaffirm the full year Grace, we anticipate based cloud gross margins to continue to expand they still are at a diluted impact on our total gross margin, but they are intriguing you already began and continuing to expand and we're definitely on track without idle.
Plan, which would constitute cloud gross margins.
Our next question comes from the line of Whimsy <unk> Mohan with Bank of America. Your line is now open.
Hi, it's roku filling in for Onesie today, and I have two questions for Claire.
The first one just as a follow up to the prior question. So you've got some benefit from upfront and recurring revenue payments in the first quarter can you give us your thoughts on the rest of the year should we expect any benefit in any of the remaining quarters.
And if not should we expect the margins on the recurring revenue side to kind of moderate as we go through two Q3 Q4. So just if you can talk about the puts and takes that can drive either the margins to sustain or moderate lower.
Yeah, Okay. Thank you pay for that question.
We do anticipate the impact of upfront margins than the rest of the year to be lower than what we have seen in Q1 and again that is in line with normal seasonality as we made through out the year and overall for fiscal 'twenty. Three we are expecting the impact to be less than we saw in 'twenty, two and 'twenty two.
Less than we saw in 'twenty, one and say that's definitely is becoming less of a material impact as we get to that kind of refresh.
Michael Adams, and B continue to renew and expand with existing on Prem customers. So.
The main thing with regards to our gross margin as we May say to you is what I was saying about our house.
Margins in the cloud mix shift as we made throughout the year the proportion of our business that will come from cloud.
We'll increase which is great to see at the moment as I mentioned, it's been a diluted impact. So we will see a decrease at our eyes with gross margins at our cloud business continues to grow but this is something that's built into our outlet so into our long range plan and the guidance that we gave last ankur Sagar shallow mines.
And that will just take us another year or so to get a cloud margin op. Two tas will average about titles like margin say, yes, a slight headwind as we may see the year to our gross margins coming from back at great growth in cloud that we are seeing and that's all factored into the April outlet and.
As you saw we were able to reiterate the midpoint around non-GAAP EPS range. They are on track to deliver that Kid.
Okay. Thanks for the details there clear can I ask you a follow up on capital allocation. So youre still targeting at least 75% of returning at least 75% of free cash flow.
So a couple of points there how should we think about the linearity of free cash flow and then when you trade off buybacks versus maybe pigging out more debt.
Can you kind of give us your thoughts on how we should think about that what is the pace of buybacks we should expect.
How should we think about interest expense are you targeting to take out any debt reduce debt or.
Just your thoughts on buybacks versus M&A versus.
Other uses of cash thank you so much.
Sure Yeah. So are we.
Haven't changed our Idaho capsule allocation strategy. So it's all about returning value to shareholders and it's based on a number of different items. So we obviously want to reinvest back into the business and Steve mentioned about some of those areas that we are investing in to be able to drive future profitable growth another key area.
Share repurchases, we have committed to deliver at least 75% of free cash flow in fiscal 2023, which was an increase from fiscal 'twenty to from that target that we had but we obviously over delivered on that target in 22 states at least 75% of free cash flow will be returned.
Shareholders in the tanks and in the terms of Chevy patch stays out in Q1, we are on track to execute and deliver that M&A does continue to still be part of our strategy.
Very much looking at what's out there, but nothing as you have seen that is not something you know in the current market that has been a big part of our capital allocation, but that all the areas that we are focusing on it's very much Mccann say.
We're still committing to that 75% we're on track to deliver that you saw that we were.
At $88 million in Q1 in terms of share repurchases.
And recommitting to the 75%.
You asked a question on free cash flow linearity.
So I was very pleased with the $105 million of free cash flow generation in Q1, and as you think about the rest of the year.
Just say I'm looking at last year kind of linearity for the rest of the year, that's probably the best approach and to still use a midpoint of the guide that we have given which is a range of $3 $20 million to $368 million.
Okay.
The next question comes from Raimo <unk> with Barclays. Your line is now open.
Hi, This is sheldon on for Raimo. Thanks for taking our question it looks like EMEA and AP J underlying revenue growth improved from Q4 can you speak to any demand trends across these regions are conversations starting to trend more positively and then along with the slightly slower activity internationally are there any differences in willingness.
<unk> to the cloud or preferences for contract types that you see from <unk>.
Domestic versus international Thank you.
Yes. Thanks for the question, Sean clearly one of the strengths that we've got a diversified portfolio I mentioned diversification from an industry and sector perspective, but also diversification across the different geographies are against.
Get some strength as well we saw some really great migrations to the cloud.
In our EMEA and a P J businesses as we've gone through the last 12 months. Some critical mission critical workloads be migrated by.
Large enterprises across the world in terms of driving that.
Claire do you want to make some points in terms of that.
That revenue progression.
Yeah, absolutely so the EMEA business, obviously, we're seeing the impact of currency there year over year on the revenue recorded numbers say that actually.
The slight decline in.
In constant currency and what we have to have a mic right after that the Russia exit was not silly.
<unk> from our Q1 of 'twenty, two but that was still a $10 million of title revenue in our Q1 'twenty results, obviously as OLED EMEA and so that does need to be taken into account I think the underlying business is growing the underlying business. We are seeing good momentum and good traction in the market as Steve said and where.
Pleased with that and with regards to Asia again, we see the actual impact of currency. We also see the impact of that kind of strategy. There in terms of what you think the April .
<unk> and perpetual business.
And I'm seeing a little and some pressure on China.
China as well, but we I have made the decision to.
And it lays out of the direct business in China has a slight impact that.
As the country, but from an overall impact of materiality to the company's results and it is it isn't material.
Got it and then a quick follow up if I may can you speak more to the potential opportunity from the expanded partnerships that you talked about today with the CSP and the integration of more ml model capabilities, Dell DBT, which we've seen is very popular any of these initiatives, you're particularly excited about that could be incremental.
In the near term.
Yes, we're really proud of our integrations with the Hyperscale orders and the teamwork that we'd go with hyper scaler.
Doing successively enormous deals on the AWS marketplace.
Certainly it gives us confidence in our partnership with AWS, our partnership with them Azure and Microsoft in terms of really generating fantastic enterprise.
Enterprise capability he says it all.
Awesome.
Do you think about the largest deal that we did really proud of that that eight figure deal with a health care organization in the United States.
The company believes that data.
Beta can transform how businesses work and people left.
And we're really excited about it as helping.
Health care organizations in the U S law that total cost of care and we're doing that in partnership with the Hyperscale orders and it is great to see those partnerships pay off just from a DVT perspective and opening the platform.
Data science tools, if I think about the retailer of the future example, that I gave where we're using large language models like.
Chad GPT, where the feature engineering done on vantage clouds, and then the training is done in AWS HMA.
And then the scoring is done in vantage closed so that that model can be deployed successfully and thats a real Great example, all fun integration utilizing.
Machine critical trusted enterprise data and a journey II context to deliver real business outcomes, we see that that is going to grow.
That marketplace is going to continue to grow.
And then the final partnership was with sales that we mentioned.
We've now got to the point, where our software can run on Dell converged infrastructure.
And therefore, we're super excited about the private cloud capabilities.
Teradata vantage and really enabling our customers to come up with a hybrid cloud environment. That's optimized to have they want to walk into the future.
We now have a question from Erik Woodring with Morgan Stanley . Please go ahead.
Hi, This is Mike on for Eric just one question from me for Steve.
I appreciate you providing the overall net expansion rate for customers in the quarter, but for your customers sort of already primarily migrated to the cloud how should we think about theyre not expansion on how that trended in March and how do you think about that trending over the next few quarters. Thank you.
Yes, I think we mentioned in our prepared remarks that we were really happy with the customers that they've even started with us on vantage quiet in the last quarter in Q4.
Finding weapons and end to Q1 so.
As we modeled out our net expansion rate around that 120%. We're really we're pleased with the 119%, especially since we get the expansions at the point of migration, which isn't included in that number.
And so and the fact that.
What kind of overall growth for the quarter and that 89%.
Year on year, cloudy or our growth being predominantly driven by expansions just tells us in this space and the Teradata platform that people are moving more data more workload into the tenant data platform and getting more business benefit.
The platform. So we see it as a really strong indicator for the rest of the year. My Thank you for the question.
At this time I will turn the call back over to Steve Macmillan <unk> for his final remarks.
Thank you operator, thanks, everyone for joining us today, we're really pleased with our strong start to the year and we've got great confidence that our people and our technology innovation or are going to keep us moving ahead, we look forward to talking with you all next quarter. Thank you very much.
This concludes today's conference call you may now disconnect.
Well next quarter. Thank you very much.
Yeah.
This correct.