TDC - NYSE

Good afternoon. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Second Quarter 2023 Earnings Call. All lines have been place on mute to present any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] I would like to hand the conference over to your host today, Christopher Lee, Senior Vice President of Investor Relations and Corporate Development. You may begin your conference.

Good afternoon, and welcome to Teradata's 2023 second 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 our outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our SEC filings, including our most recent Form 10-K and in the Form 10-Q for the quarter ended June 30, 2023, that is expected to be filed with the SEC within the next few days. These forward-looking statements are made as of today, and we undertake no duty or obligation to update them. On today's call, we will be discussing certain non-GAAP financial measures, which excludes such items as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow and constant currency revenue comparisons. Unless stated otherwise, all numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.teradata.com. A replay of this conference call will be available later today on our website. And now I will turn the call over to Steve.

Thanks, Chris, and hi everyone. Thanks for joining us today. Teradata executed another very solid quarter in Q2 2023. I am pleased that the organization is making progress in many key areas of the business. In the second quarter we accelerated total ARR growth increasing 10% year-on-year as the team executed well on the profitable growth cloud strategy. We brought in another quarter of strong growth with public cloud ARR growing 77% year-on-year. As customers migrate to the cloud with Teradata, we see them expanding workloads and use cases as they realize business results from our Teradata Vantage Cloud Analytics and Data platform. Our trailing 12-month cloud net expansion rate was 121% in Q2, up from 119% with large expansions coming from across various industry verticals with financial services, healthcare and telecommunications leading the way. We delivered $462 million in total revenue in the second quarter, an increase of 10% year-over-year in constant currency. This quarter marks the first meaningful year-over-year total revenue growth at Teradata since Q2 2021, a key milestone enabled by our growing cloud business and its impact on total company results. Our broad based momentum across the business and our ongoing technology innovation and industry recognition as a leading cloud analyzing data platform and better partners, this momentum paired with our financial discipline all led to our non-GAAP earnings per share of $0.48 beating the high end of our guidance range. I'm really proud of the execution across the board. We're delivering on our commitments and are confident in our strategy. Today, I'll cover some highlights on the ongoing straits we are making and the strengthening of our differentiated technology, our purposeful and effective sales and marketing execution, our increasing partner engagement and finally some big commitments in the area of ESG. Let's start with Teradata's technology innovations. Just a few weeks ago, we announced Teradata VantageCloud Lake on Microsoft Azure. Our cloud native architecture now available on Azure globally offers the enterprise scale our customers need including end to end support for AI and ML. We're excited that ClearScape Analytics our robust analytics capabilities of VantageCloud Lake is enhanced by integration with Microsoft services such as Azure Machine Learning. This means VantageCloud Lake on Azure is designed to dramatically increase customer's ability to deploy and manage AI and ML including generative AI and large language models within their businesses today. We are well positioned and are already helping customers as they begin to explore how gen AI can drive value and business outcomes. As we continue to accelerate our product roadmap, we were pleased to announce the acquisition of Stemma, a cloud native, fully managed data catalogue solution. We're excited that the Stemma team has joined our products organization and will apply their expertise to our growth objectives. Stemma's pioneering use of AI and ML helps users discover, trust and use their data and metadata more effectively. We intend to integrate Stemma's innovative technology into our analytics platform to help our customers get greater value from the Teradata investment. We all see that the hot topic of today is AI and gen AI. At Teradata, we view AI as a part of the much broader strategic imperative that our platform already addresses. Business leaders today are facing unprecedented pressures in continuously increasing data complexity. We believe Teradata is uniquely positioned to help them take advantage of AI to solve the most complex challenges and create massive enterprise business value. We see the promise of AI and gen AI as bringing in new opportunities to deliver brand new use cases, increased productivity and innovation. We're excited to bring our complete cloud analytics and data platform for AI to help our customers generate that value. Let me share an example. One of our customers, a global hospitality company serving over 1 million guests daily uses AI models against Teradata platform to predict order availability times. The AI model takes into account meal cook times to go and dine in order volume, third party application orders and historical information to accurately forecast each order's cook time. This results in timely preparation and ensuring hot food for guests which result in a positive guest dining and to-go experience. Additionally, this customer uses an AI model for health and safety. The model monitors and predicts restaurant cleanliness based on a number of variables and provides triggers to alert restaurant operators if a change in behavior is needed. This results in cleaner, healthier, and safer dining experiences. This is just one example of AI and use at a customer. Well, the new frontier of AI is certainly exciting. We are maintaining our cloud leadership as well. Early in the quarter, we received a new recognition from Forrester Research acknowledging our cloud leadership and its cloud data warehouse way. The report noted Teradata's strong vision focuses on a strategy that includes AI, ML at scale. Forrester also pointed out Teradata's strengths and end database analytics, scale out optimization, deployment options, multi-regional support, and a broad set of analytics use cases. AI and ML require volumes of data and extensive use of analytics, both longstanding differentiators of Teradata. We will continue to work in support of bringing significant value to our customers. I also mentioned our deliberate focus on sales and marketing execution. In the second quarter, we continued to see large transactions including some in the seven figures, and we are adding VantageCloud customers with all three of the leading hyperscalers. Vodafone, a longstanding Teradata customer has renewed their strategic relationship with Teradata. The EMEA based telco provider has chosen to modernize their on-prem data ecosystem and migrate to VantageCloud enterprise on Google in several key markets, including Germany and the UK to support their business strategy, marketing campaigns and sales commissions. We signed a large deal with a Fortune U.S. 30 healthcare company as it migrated and expanded in the cloud with Teradata on AWS. Moving to the cloud positions this customer to accommodate business intelligence requirements for month end, quarter end, and yearend financial reporting, as well as provide analytic support for the annual open enrollment for their members. A major telco and internet service provider in Latin America is migrating to the cloud with VantageCloud Lake on Azure. The customer is in the process of redefining its future analytical architecture. Our team faced some heavy competition and Excel demonstrating our capabilities and not only meeting, but exceeding this customer's scale and service level requirements. This enterprise executed a thorough evaluation of vendors and determined that Teradata not only fully complied with its requirements, but did so at the lowest risk. A world leading auto manufacturer headquartered in Japan selected Teradata Vantage as its core analytics and data platform to enhance cybersecurity and governance. The customer moved to Teradata as it realized the competitor's offering was unable to expand to meet its needs for advanced analytics and machine learning capabilities to prevent cyber-attacks and fraud in the future. Vantage's power will allow the customer to bring more sophisticated analytics to cybersecurity operations, enhancing overall governance with fewer resources. An example of a customer expanding their environment with us was at one of the major U.S. airlines. We won this business because a competitor's system couldn't meet the customer's needs to scale when using temporal data. This customer grew its environment by 25% as it moved workloads and business applications to VantageCloud. Customers remain at the very forefront of all we do. Our customer base of large global enterprises know they need powerful analytics and data to survive and thrive in these dynamic times. We are absolutely dedicated to being a trusted partner and know that there is none better at helping them achieve their goals than us. We believe that partnerships are a central component to achieving customer success, and we've continued to execute our strategy in this area. Being partner first means we are challenging ourselves to deliver greater value for our customers through stronger partner engagement. In June, we hosted two key events that focused on and energized our partner trajectory. Our partner advisory board comprised of executives from the most respective IT companies met with our executive team to guide and bolster our partner first strategic plans. We also hosted our Teradata partner forum bringing more than 100 of our top partners to discover new ways we can drive exponential results for customers. We'll continue building a strong future together with partners. Last quarter, we announced that we had partnered with Dell to bring together our company's best of breed technologies and integrate Teradata Vantage with Dell's converged infrastructure. A U.S. energy company is one of our first customers for this joint offering, utilizing the platform to provide their clients with the best possible customer experience and resulting in a seven figure deal for Teradata.

I'm also proud to share that in the quarter we state a stronger position in our ESG efforts, declaring ambitious commitments to carbon neutrality and net zero emissions. Teradata is deeply committed as a company that takes a responsible and ethical view of our impact on society and the planet. We have resolved to be carbon neutral in Scope 1 and Scope 2 emissions by the end of 2024 and net zero for Scope 1, 2, and 3 emissions by 2050. We've made our commitment public and transparent as we hold ourselves accountable to our employees, customers, shareholders, communities, and other stakeholders. So I look at the incredible progress we have made and I'm very proud. We continue our transformation as a cloud analytics and data platform market leader. We've leaned into operating with a partner first mindset. Our sales and marketing efforts are resonating in the market, and importantly, customers are growing with Teradata. As I turn the call to Claire, I have great confidence in our future and I'm pleased to reaffirm our 2023 outlook. Claire, over to you.

Thank you, Steve, and good afternoon everyone. Our second quarter was filled with many highlights including strong year-over-year and sequential dollar growth in both total and public cloud ARR. We continue to see momentum from healthy customer demand for the Teradata Vantage platform resulting in public cloud ARR growth of 77% year-over-year as reported and total ARR growth of 10% year-over-year as reported. On a sequential basis, we've reported $26 million of public cloud ARR growth and $17 million of on-prem subscription ARR growth. Organic expansion activity was the primary driver for growth in the quarter as an increasing number of existing customers added new incremental workloads onto our platform, driving up our trading 12 months cloud net expansion rate to 121%, strengthening ARR under [indiscernible] and improving recurring revenue growth performance and a healthy generation of profit dollars. This resulted in non-GAAP diluted earnings per share of $0.48, slightly above the high end of our guidance range, another highlight in the quarter. I am pleased with the financial results we've reported in the second quarter because it continues to demonstrate the company-wide execution against our cloud first profitable growth strategy. Let me now share some more details on our financial results, starting with revenue. Second quarter recurring revenue was $371 million, 8% year-over-year growth as reported, and 10% year-over-year growth in constant currency. Growth was driven by the continued execution of our go-to market team over the last several quarters, resulting in multiple large expansion deals across various industry verticals. This dynamic contributed to healthy cloud revenue growth year-over-year. Recurring revenue as a percentage of total revenue was 80% [ph]. Recurring revenue growth was broad based with EMEA and the Americas leading the way. Performance in EMEA was strong overcoming currency headwinds and more than offsetting declines in the APJ region, which includes a wind down in China that started earlier this year. This quarter was the first period where there was no impact on growth from ceasing operations in Russia. There was the minimus year-over-year impact from upfront recurring revenue of quarter in line with our expectations. Second quarter total revenue was $462 million, 7% year-over-year growth as a reported and 10% year-over-year growth in constant currency. The year-over-year change is primarily due to the strength in recurring revenues and a consulting business that is stabilizing its revenue run rate as anticipated. Moving to profitability in the second quarter, profit dollar generation was healthy. We achieved $280 million in gross profit and a gross margin of approximately 61%. The primary drivers of our strong gross profit dollar generation in the quarter was both higher volume and improving cloud and on-prem margin rates year-over-year. Operating profit was $72 million on an operating margin of approximately 16%. Total operating expenses were flat year-over-year, but up sequentially with modest increases in both R&D and sales and marketing expense. We continue to remain cost disciplined as well as prioritize positive return generating investments that focus on our future growth. These activities resulted in non GAAP diluted earnings per share of $0.48, which includes a benefit of $0.02 from a lower tax rate in the quarter versus our prior guidance. This is simply a timing difference since our assumption for the full year tax rate is unchanged. Turning to free cash flow and capital allocation, we generated $46 million of free cash flow this quarter, which was in line with our expectations, but different from a historical cash flow linearity. This was due to the timing of invoicing and incremental cash tax payments of approximately $35 million that we mentioned on our earnings call this past February. We are still on track to achieve our annual free cash flow guidance. Given the sales pipeline that supports our 2023 financial outlook. We continue to take advantage of our strong balance sheet to repurchase shares, resulting in a return of 106% of our first half free cash flow to shareholders ahead of our annual target of at least 75%. As Steve noted, the acquisition of Stemma Technologies is an opportunity to add great people and complimentary technology to our platform. We believe it was also a great example of our discipline capital allocation. We remain committed to returning at least 75% off free cash flow in 2023 via share repurchases. With regards to the 2023 outlooks, I would like to provide some context on the third quarter and the rest of the year. We reaffirm all elements of our 2023 outlook. We continue to see the midpoint of our annual outlook as our best view of the year. Given our historical fourth quarter seasonality and the macroeconomic environment, we forecast sequential public cloud ARR dollar growth from the second quarter to the third quarter. Given the demand for our Teradata VantageCloud platform, we continue to expect that our fourth quarter will be the strongest quarter for public cloud ARR dollar growth. We anticipate our cloud year-on-year growth rate to moderate in the second half of 2023 because of both tougher year-over-year comparisons and better linearity versus 2022, where almost 80% of our 2022 public cloud ARR growth came in the second half. We have one modeling assumption update for 2023, which is weighted average shares outstanding of approximately $103.1 million. This is due to the increase in our share price versus our prior outlook. There's no change to the non-GAAP tax rate of approximately 25% and other expense of approximately $55 million. Our outlook for the third quarter of 2023 is as follows. We anticipate non-GAAP diluted earnings per share to be in the range of $0.40 to $0.44. We project the non-GAAP tax rate to be approximately 18%, and the weighted average shares outstanding is the same estimate as before here. Thank you very much for your time today. Let's now open up the call for questions.

[Operator Instructions] The first question will be from the line of Matt Hedberg with RBC Capital Markets. Your line is now open.

Great. Thanks guys for the questions and Steve, congrats on the quarter. I wanted to start with the, the cloud performance. Continue to deliver strong results there and seeing the acceleration in cloud and ARR was great to 121. I just wanted to double click on that and maybe get a better sense for, some of the most important elements that are driving the success there. Obviously, I heard the comments about the second half on comps, but just wanted to kind of double click on some of the successes that you saw in Q2 there.

Yes. Hey, Matt. Thanks for the question. As Claire said in her prepared remarks, organic expansion was the primary driver of our growth, and we saw that across all geographies and across industries. As I said in my prepared remarks, finance, healthcare telco leading the way in terms of some of the deals. The other great thing that we saw in Matt was a good range of deal sizes and deal volumes. So we had a number of, seven figure deals and a number of six figure deals that were driving those expansion numbers. And I think it's a testimony to how robust our business and commercial model is in terms of driving that overall level of performance. But I think, what we see is as well is that customers continue to migrate to the cloud with us. They recognize the strength of our open and connected platform, how it differentiates from the competition, how they can deliver mission critical workloads in the cloud, and how they can continue to expand those workloads. And we saw some really interesting competitive base [ph] through Q2 and some great successes. And I think it really, the, the feedback that we got recently from Gartner and Forrester was really demonstrated in terms of those wins that we had with those customers. So again, that net expansion rate up to 121 from 119, and that continuum progression it was great to see in the quarter and it was a whole balance of different wins, but really based on technology innovation. Matt,

That's great to hear. Maybe then, just as a follow up, I think you went a couple minutes and into your prepared remarks before you mentioned gen AI, but obviously that's a topic that every investor wants to hear about. I think I had some interesting comments there. I'm curious, do you foresee, I guess the question really gets down to monetization. I mean, do you foresee an opportunity to articulate success there on the monetization and attribute some future growth to gen AI initiatives? Just sort of wondering on the actual monetization of that would be helpful. Thank you.

Yes, as we see AI and AI, particularly large language models and gen AI as a real tailwind for the Teradata business, our cloud data and analytics platform, having that open and connected capability linking in with cloud native services like Azure ML gives us the ability to deliver real AI outcomes for our customers today against a trusted corpus of data. So the things like ethical AI and AI that you can trust based on trusted data is something that Teradata can deliver every single day. And we already, we've already helped a number of different customers operationalize AI strategies to improve either customer experience or employee experience in terms of how they execute. And one of the biggest challenges with AI is actually putting these AI solutions and data science projects into production. And that's where Teradata, surpasses the competition. Our ability to process massive amounts of data and score that data utilizing those AI models is basically unmatched by the competition. So we can help the biggest organizations on the planet operationalize AI quicker than our competition. And we're seeing that as a real lift to the business.

Thank you. The next question will be from the line of Raimo Lenschow with Barclays. Your line is now open.

Hey, thank you. Congrats from me as well. Well done. Two questions, one for Steve, one for Claire. On the first one on for Steve, like on Vantage as you see momentum building there, what's the nature of the projects done there? Is that like existing customers moving over their on-premise deployment to you, or do you see an expansion of workloads as well? That's my first question.

Yes, I think the primary driver for growth was expansions actually from a cloud perspective, Raimo. But clearly our migration activities is something that we're very happy with. Our customers are seeing that the only way that they can move those large mission critical workloads into the cloud and operate them with a level of price performance that they've come to expect from their on-prem systems and do that migration at the lowest possible risk, is something that's been very attractive for those customers, is they want to modernize their data environment and take advantage of modern CSP native services. And because of the way that we've re-architected the Teradata VantageCloud platform, that level of integration with cloud native services gives our customers the ability to utilize, modern services AI type services better than some of our competition. So we see both driving our overall cloud growth, but very proud of the expansion activity for Q2.

Okay. Perfect. Well done. Yes, that's really interesting. And then Claire, like if you look at cash flow, so cash flow was the one number this quarter that we somehow all mismodeled a little bit, is there anything in terms of the second half that we need to be aware of in terms of timing as well, or was it just, just the tax, a little bit of extra timing? So Q3, Q4 is just normal then?

Yes, good question, Raimo. So what I would say is, to your point, our linearity this year on our cash flow within the year is slightly different than last year. The main drivers of that was the cash tax payments, which was fully included into our full year guide and firm seasonality and timing of billings. Just want to reiterate, we have full confidence in our full year number, so high confidence in the outlook that we've given for the full year. So no impact there. And to your point, as you model through for the years the, rest of the year, I would say Q3 you can assume a similar number for free cash flow versus Q3 of last year. And then Q4 will be the remainder of the number to get to the full year guide.

Thank you. The next question will be from the line of Wamsi Mohan with Bank of America. Your line is now open.

Hi, thank you for taking my questions. It's Ruplu filling in for Wamsi today. I have two questions and I guess both for Claire. Claire, public cloud ARR against all a very strong quarter with 77% growth, slightly lower than the 89% growth you had in the first quarter. So can you help us parse what drove the growth in the quarter? Can you help us rank order the contribution from migrations versus expansions versus new logo growth? And when we look at the second half of the year, looks like year-on-year compares are tougher for 3Q versus 4Q. So should we expect year-on-year growth to accelerate going from 3Q to 4Q and how should we think about sequential revenue growth going from 2Q to 3Q and then 3Q to 4Q?

Okay I got in there. So let me try and cover that. So to your point, we're very pleased with the performance that we saw in Q2 and the majority of that growth did come from expansion. So as Steve mentioned, we are seeing a strong net expansion rate in the quarter. That's the 121%, but we also see at the point of migration, so we see expansion at the point of migration, which is not factored into that net expansion rate. And that was positive in the quarter. So yes, we're still migrating, we still see a strong performance there, but if you want to look at the contribution, most of its coming from expansion, then followed migrations and then a much smaller amount from new logos. As you look into the second half of the year you set it. We have tougher compares in the second half of the year, especially in Q4. We are pleased with the fact that this year we're managing to improve our linearity. So that has been a focus area for us. But as you look out to the rest of the year Q4 still will be our biggest growth quarter for both cloud ARR growth and total ARR growth. And as you look at Q3 to from Q3 to Q2 you can anticipate the cloud ARR a slight increase in dollar growth in Q3 compared to Q4, but Q4 as I mentioned, will remain at our biggest growth quarter. So that's the kind of the story behind – ARR as you're looking at revenue. I think if you focus on recurring revenue, that's obviously the biggest growth driver for us. Although we did see consulting stabilize in the quarter, so we saw a low growth in the quarter from consulting this quarter, which was good. But recurring revenue is the biggest growth driver from us, and if you look at our H1 versus H2 is probably a better way to look at it. So we're averaging around 4% growth in recurring revenue to date in H1. And then that implies to get to the midpoint of our full year guide around a 7% growth in the second half, which is in very similar to what we saw coming out of Q2 so on track to deliver the midpoint of our full year outlook.

Got it. Thanks for the details there. Let me ask you a follow up on gross margins. So recurring revenue, gross margins declined the 300 bps sequentially to 72%. What was the contribution of upfront recurring revenue on gross margins? And should we expect any benefit in the remaining quarters in 3Q, 4Q? So just your thoughts on gross margins for recurring revenue as you go through the second half of the year.

Yes, absolutely. So as you said Q2 gross margin and recurring revenue is a slight decline from a rate standpoint compared to Q1 that is normal seasonality and is driven by that upfront recognition seasonality. We saw this last year as well I mentioned in my prepared remarks that the upfront revenue impact in Q2 was de minimis. It's a negative $3 million, so not a big number, whereas in Q1 you will remember that it was a positive $34 million. So the remainder of the year we're kind of expecting less of an impact as we've seen in Q2 going into Q3 and Q4. So if you look at the full year, I would say the full year 2022 upfront revenue, for example, that we reported was $19 million, and we're expecting fiscal 2023 to be lower than fiscal 2022 for the full year. So that hopefully that helps with the modeling.

Thank you. The next question will be from the line of Chad Bennett with Craig-Hallum. Your line is now open.

Great. Thanks for taking my question. So just to follow up on maybe the eighth iteration of the, the ARR in the second half on the call just on cloud ARR just want to make sure I understand you, Claire. I think you're saying cloud ARR in dollar terms should be up sequentially in the third quarter here, and then obviously seasonally up a material amount in the fourth quarter. How about if we looked at it from a net new ARR standpoint on the cloud side, do you think net new ARR dollars grow year-over-year in the third quarter, second half in the, on the cloud side?

Yes. If you look at the second half in total we are, we should be able to deliver a higher growth dollars year-over-year.

Okay, great. And then I think this is the first quarter in about a year where subscription on-prem subscription ARR growth went positive, and I'm just, considering the strength you saw in the cloud ARR in the quarter to put up a positive, on-prem subscription ARR growth year-over-year, just in terms of how to think about that on-prem subscription ARR going forward or in the second half, I guess was there anything in the second quarter that was unique there and how should we think about the growth rate of that on-prem subscription in the second half? Thanks.

So yes, there was nothing abnormal, so we were pleased. As you can imagine with the performance in Q2, again we're seeing strong expansions on both on-prem and in the cloud. So that's good to see. I think as you move forward in terms of what the overall impact is for the full year, we'll start to see more of a migration impact in the second half of the year. So second half of the year we're expecting migrations to outweigh expansions, whereas so far in the first half of the year, it's been expansions, outweighing migrations, so still anticipating good projection on our total ARR as based on our outlook that you can see, but I wouldn't necessarily anticipate as the migrations would outweigh the expansions in the second half.

Thank you. The next question will be from the line of Howard Ma with Guggenheim Securities. Your line is now open.

Okay, great. Thank you for taking the question. I have one for Steve and one for Claire. I'll start with Claire and I just want to ask about the, what's implied in second half cloud ARR guidance in a slightly different way? Take it into consideration what you just said. So with about five months left the year, how would you describe the, how you feel about visibility into the new ARR that's required? And specifically, you just talked about, the, excuse me, the migration expected in the second half to outweigh expansions, but is there, can you comment on any large deals and how, in how they'll ramp, so how do you feel about migrations and expansions relative to kind of what you already have in the bag, if you will?

Yes, absolutely. So I think based on the pipeline that we're seeing, we've got a very good coverage as we look forward, which gives us high confidence in our full year outlook. We do need to do more in dollars to your point on cloud ARR, but that's normal seasonality in the second half and particular in Q4. So as we look at our pipeline, and to your point, the deals that we're working through right now, we have very high confidence in being able to meet the full year outlook that we've given.

Okay, great. That's encouraging. And one for Steve, I want to ask about Lake. Are you still on track to move the entire base of VantageCloud Enterprise customers onto Lake by year end? And a related question is, we were wondering how seamless is that migration process from enterprise to Lake and once customers are on Lake, do you expect higher expansion relative to enterprise, due to its superior architecture or, for other reasons? Thank you.

Yes, thanks Howard for the question. So just in terms of migration of our -- of the entire VantageCloud enterprise customer set to like we haven't actually announced when we would migrate that customer population over. What we're seeing is the adoption of VantageCloud like is really been driven by departmental and experimental use cases so utilizing the AI or ML models against the VantageCloud Enterprise data. And so it's really a great expansion play for us. By the end of this year, we're going to have some great opportunities to start essentially coalescing our VantageCloud enterprise technology with our VantageCloud lake technology. And we're looking forward to being able to do that because as we do that, because of the very nature of the ability to expand VantageCloud Lake because of its nature from a self-service perspective, because it's highly dynamic, because it's a fully cloud native solution, and we're pretty excited about how that's going to drive expansion for us into 2024.

Thank you. The next question will be from the line of Erik Woodring with Morgan Stanley. Your line is now open.

Hey guys. Thank you for taking my questions. Congrats on the quarter. Steve, maybe if I just start with you, can you maybe just share some color on how your customer conversations trended over the last 90 days in terms of desire to spend on data and analytics needs versus concerns about the macro and really not the ability or the inability of customers to potentially open their budget, could that come more in 2024? Just maybe if you could just to post maybe the caution versus desire to spend on data and analytics from your customers that would be helpful. And then I have a follow-up. Thank you.

Yes. I think we're seeing still a robust demand from a data and analytics perspective in the market. Certainly, it stays in the top three priorities for our customer spend. I think a lot of our customers are looking at and have already declared business value generation from data analytics, AI and gen AI activities. Lori Beer from JPMC recently went out in some public remarks and was talking about the over $1 billion in returns from AI projects. And I think that is really taking the interest of our customers and kind of putting off any macro risks that may be out there. The other thing I would add to that is just from a Teradata perspective, we've got a strong business model, which is more insulated from macro environment, given the fact that we're not consumption-related – a high degree of our revenues are already in a fixed capacity as opposed to a consumption model. And so a lot of organizations are talking about cloud optimization and macro environments where the customers are trying to reduce spend. We have a very predictable capability in site Teradata in terms of squeezing out every part of compute and storage for our customers for some of the mission-critical workloads. So we're kind of insulated from those macro environments because every customer needs to continue to close their books. But we're certainly seeing a lot of tailwind from data analytics, AI, large language models in terms of driving interest and demand in the market.

Great. That's really helpful. Thank you, Steve. And then, Claire, maybe if I just ask my second question to you, sorry to beat a dead horse here. At least it's not – it's not an ARR question. It's a free cash flow question. Just taking into account your comment on 3Q free cash flow, it does imply the strongest 4Q free cash flow kind of as far back as I can track the data. I know you have confidence in it, that's not what I'm questioning, but maybe just give us more comfort in why 4Q is so big relative to history understanding linearity looks different, but really what comes in 4Q versus, and then versus normal historical seasonality and why specifically 4Q versus other quarters? And that's it for me. Thank you so much.

Sure. No problem. So yes obviously, a combination -- if you're looking at it on a year-over-year, we've got strength coming through our net income line, we're also seeing a strong performance in working capital, as particularly also our deferred revenue benefit is higher and also our other assets and liabilities. So we've got a number of different items in our cash provided from operating activities, which has given us strength, not giving us strength. It is going to be a big Q4 to your point. But I think with the biggest impact coming through our receivables, if you look at our day sales outstanding, for example, of Q4 of last year, it was unseasonably high. So I think that's something that we're not anticipating to be as high in Q4 of this year and does give us a big benefit from a cash flow standpoint.

Thank you. The next question will be from the line of Tyler Radke with Citi. Your line is now open.

Thanks for taking the question. I wanted to ask you, Steve, just on the competitive landscape. So I mean your public cloud ARR growth is about double that of your closest public competitor you talked about some wins against the competition in the quarter. And clearly, your business has been executing well. So could you just talk about any color, you could share in terms of win rates or what you're seeing out there? And when you did talk about those customer examples in the quarter, was that primarily from legacy on-prem customers -- or sorry, legacy on-prem competitors or more modern competitors? Thank you.

Yes. Thanks, Tyler. I think we haven't really seen much change in the competitive landscape. I've kind of categorized in the past with traditional kind of on-prem competitors like IBM in the Oracle of the world, the cloud native providers from the big cloud service providers and then kind of born in the cloud Snowflake data breaks; we tend to see a whole mix pop up in terms of competitive battles. And what we tend to find is that as customers do the due diligence, they go through all of the benchmark and they look at price performance, they look at the total cost of running the environment. They look actually at can those competitive solutions actually execute the workloads that we are executing from an on-prem perspective. And we have such great differential advantage in terms of helping them move to the cloud in the at least risk way that gives us that capability. I think the other point I would make is, as our customers migrate to the Cloud, what is the increase their commitment to us in terms of expanding those environments as they move to the cloud. And so that's given us some growth in terms of that migration activity from on-prem to the cloud. But it was great to see that expansion this past quarter were the highest driver of our growth. And I think that just demonstrates that as customers move to the cloud with this, they utilize the platform, they start to get incremental benefit from the platform to put new data into the platform and new use cases against the platform. And that's certainly our strategy as we move forward to continuously grow that.

Thanks. And a follow-up for Claire. So you've delivered a couple strong quarters here to start off the year. Yet you've reiterated the full year guidance two times in a row here, despite what seems like an uptick in terms of cloud net expansion rate and just some of the timing of the deals in the first half. Could you maybe just talk about what are potentially some of the offsets? I mean, there's obviously a lot of momentum in the business, but are there sectors or verticals that you're mindful of that maybe could be taking away from some of that momentum? Or just how should we frame the outperformance in the first half relative to kind of the unchanged full year targets? Thanks.

Yes. Thanks, Tyler. So naturally, we are pleased with our performance in the second quarter and for the first half. I think a lot of that is coming from improved linearity though. It has been a focus for us to try and improve the linearity and take some of that growth out of the back half of the year. So we're pleased with the progress that we're making there. I think also, as we've mentioned on the call, we've got easier compares. We've got much better linearity this year and so the compares in H1 are much easier than H2. We still have a lot of growth to deliver in the back half of the year, both from a total ARR standpoint and particularly from a cloud ARR standpoint. So we do believe, as a result, the midpoint about output remains our best view of the full year. And it also gives us some room to make sure that there's no surprises as we close out the year. So the macroeconomic environment seems to be stabilizing, but can still be very volatile with many companies continuing to scrutinize their spend closely. So we think it's important to be prudent. And we're pleased with the fact that we're improving the linearity and have good line of sight for our full year outlook.

Thank you. The next question will be from the line of Patrick Walravens with JMP Securities. Your line is now open.

Hey. Thanks for taking the question. This is Owen Hobbs on for Pat. So I was wondering kind of returning to the theme of AI, if you all feel that you have enough PhD-level AI talent to capitalize on the opportunities you see there?

Hey, Owen. Thanks for the question. Yes. Fortunately, from a Teradata perspective, being a global company, having 7,000 employees around the world that are all focused on making sure that we get the – our customers get the absolute best from data and analytics I mean that's been our passion. That's been our core for over 20 years. And so we've built up that capability across the world. We're very proud of our consulting capability and execution capability. But also I'd point to the fact that we have a partner first strategy and we're working with the world's leading SIs like Accenture to work on our platform and work on delivering business value for our customers. The technology platform that we have in VantageCloud is designed to democratize artificial intelligence and data science so that you don't need to be a data scientist to get the best or to deploy artificial intelligence or complex models. You can utilize the tools and work bench that you – that those organizations already use. And so a combination of our – the people capability that we've got inside the company, our partner strategy, plus our technology strategy, we believe, is a winning formula to help our customers get the best from artificial intelligence, large language models and what they have to deploy in the future.

Thank you.

Thank you. The next question will be from the line of Nehal Chokshi with Northland Securities. Your line is now open.

Yes. Thank you for taking the question. Nice quarter. I want to focus on a little area of the competitive landscape, and that's particularly in the area of data prep. What are you guys seeing in that area? And how do you see gen AI impacting that area as well?

Yes. I think one of the reasons that we bought Stemma was for some of those reasons and exact challenges. If you think about Stemma, the two challenges that Stemma addresses for a customer is data discovery. So actually fan in the data and say the ecosystem and then ensuring that you've got data lineage on that data. And when you think about trusted AI or ethical AI, those capabilities are absolutely essential. So bringing the Stemma [indiscernible] and the capability they have the people to the technology that they've got is a great addition to the Teradata platform in terms of the solutions that we can deliver to our customers. So it's a continuing evolution. And that data prep, the feature engineering from a data perspective is something that the Teradata platform is super strong. And scoring those models once they're – once they've been developed to put them into production is something that we're super strong in. And with the addition of Stemma from that data discovery and data lineage perspective, it has given us even more capabilities in that area.

Great. Could you discuss who do you see as the primary competitors of Stemma?

I'm sorry, could you ask that question again? I didn't quite catch it.

Who are the primary competitors of the Stemma acquisition?

Yes. We saw Stemma is pretty uniquely placed in the marketplace in terms of the offering that they're developing and the capability that they've got in the marketplace, and we saw it as a great add to the team. Certainly, they're not in the data catalog area, but they are – they have got a number of different capabilities that ensures that organizations have the best possible data to feed into their analytical models and analytics platform.

Thank you. The next question will be from the line of Derrick Wood with TD Cowen. Your line is now open.

Great. Thanks for taking my questions. I wanted to ask about how you're thinking about go-to-market strategies between selling a Cloud Data Warehouse and a Data Lake, if you will. I mean we've seen some vendors that take approach, an approach of really selling two different platforms, different buying motions, different buyers, different use cases. Others have taken more of a kind of single centralized approach and maybe running different underlying data stores, but all on one platform. What is your -- and Data Lake is fairly new for you guys, but what is your kind of longer-term strategic approach at addressing both these types of environments?

Yes. Our philosophy is different to our competition from this perspective. We believe that our platform can service all three of those different choices. And we really do look at it as a deployment choice. So whether a customer wants to deploy a data warehouse in the cloud, a Data Lake in the cloud or Data Lake House in the cloud, our underlying technology will enable all three of those models and enable our customers to utilize data that's stored in any one of those data deployment models and the cloud and integrate that data together better than any of our competition can. So the recent announcement in terms of VantageCloud Lake, which we just announced on the Microsoft platform at the start of June, extend our capability to have that Lake and Lake house deployment in the Azure ecosystem and obviously, building on our industry-leading cloud data warehouse capabilities. The ability to integrate all those together and take away the choice that our customers may have to have in terms of select multiple technologies to service that is something that we think is differentiating in the marketplace, Derrick.

Steve, thanks for that. Sorry, I got on late, but – so sorry if this has been asked. But Claire, I know you guys don't have the same kind of optimization dynamics and headwinds that we've heard from kind of pure consumption-based models in the cloud. But just curious to get an update on spending behavior, the macro, how it's – how it feels like it's changed over the last three to six months and whether generative AI discussions have started to become any workload movers yet or that's still too early.

Yes, sure. Thanks very much. So yes, what we're seeing is good strength in our expansion business. So we mentioned earlier in the call that seeing strong performance expansion both in the cloud but also on-prem. That's reflected in our net expansion rate, but we're also seeing strong expansions at the point of migration. So I think that comes back to you the confidence that our customers have in our platform. They're not wanting to take risk, the fact that they have mission-critical workloads that they want to maintain on the Teradata Vantage platform. So very happy with those dynamics and the conversations that we've been having with customers, and that's what gives us the strong pipeline as we look forward to the second half of the year. I think that macro, from a macro standpoint, there's a little bit less volatility out there, but we're still being very prudent. We're still obviously watching the macro very closely. We continue to see that kind of higher level of scrutiny on deals, but not – still not seeing deals disappear or move away because of the macro. So that's a good sign moving forward. And I think to your point, with the importance of gen AI, AI the importance of the quality of the data and the quality of the data analytics that go into that analytics, it's important to have a strong platform like Teradata Vantage to support it. So I think that opening door is becoming a tailwind for us as well in the gen AI space as Steve mentioned earlier in the call. So really good strong conversations, macro not having an impact from pipeline or deal closures at this point, but we obviously continue to monitor very closely.

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

Thank you, and thanks, everyone, for joining us today. We're really pleased with our continued innovation and progress in Q2. There's a strong customer adoption of our VantageCloud analytics and data platform, and as customers recognize its differentiated benefits, we're seeing really healthy expansion rates. We've got unmatched years of experience in handling the most complex data challenges and providing trusted data at massive scale and we believe we are uniquely positioned to help companies take advantage of the emerging world of AI. We're really confident in our strategy and in our commitment to meet our year-end guidance as we execute our plan. And we're all looking forward to speaking again with you next quarter. Thank you so much.