Earnings Call Transcript - TDC Q1 2024

Operator, Operator

Good afternoon. My name is Joe, and I will be your conference operator today. I would like to welcome everyone to the Teradata First Quarter 2024 Earnings Call. I would now like to hand the conference over to your host today, Mike DiLoreti, Vice President of Investor Relations and Corporate Development. You may begin your conference.

Mike DiLoreti, Vice President of Investor Relations and Corporate Development

Good afternoon, and welcome to Teradata's 2024 First Quarter Earnings Call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today; followed by Claire Bramley, Teradata's Chief Financial Officer, who will discuss our financial results and outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause the 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 March 31, 2024, that is expected to be filed with the SEC within the next few days. These forward-looking statements are made as of today, and we undertake no duty or obligation to update them. On today's call, we will be discussing certain non-GAAP financial measures, which exclude such items as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow, constant currency comparisons and our 2024 revenue and ARR growth outlook in constant currency. Unless stated otherwise, all numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.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.

Stephen McMillan, President and CEO

Thanks, Mike, and thanks, everyone, for joining us. Today, I will start with some comments on our quarterly results, recent changes to our leadership team, new growth initiatives and examples of customer success. Total ARR was $1.48 billion in Q1, down 1% in constant currency. While this is within the constant currency range we provided, we're not satisfied with this result. In Q1, Teradata achieved $525 million of Cloud ARR, up 36% year-over-year in constant currency. Teradata started out the year firmly focused on improving execution across the business and taking actions to improve performance, and we are continuing our work to drive better execution. When customers move to the cloud with us, they see value and are expanding. Our cloud net expansion rate remained strong at 123%, and we continue to see approximately 75% of our cloud customers operating in a hybrid environment. We believe our hybrid multi-cloud platform is differentiated and what our customers, among the world's largest enterprise companies, need in today's dynamic environment. As we indicated last quarter, some customer decision-making cycles have been elongated. In setting our 2024 outlook, we factored the impact of these longer deal cycles continuing throughout the year. That said, in the first quarter, we closed one of the large, slipped deals from 2023 and we remain on track to close the majority of them this year, as we previously stated. The on-prem erosion activities we discussed last quarter occurred in line with expectations. We continue to view the first part of 2024 as an outlier, and we do expect our total net expansion rate to remain positive for the year. In a moment, I'll address more about the customer success actions we are taking that will maintain long-term customer relationships. Finally, we generated non-GAAP earnings per share of $0.57, at the total end of our quarterly range. While we ended Q1 as we had indicated, that is not the overall growth level we expect going forward, and we are acting with urgency to improve our growth trajectory. To that end, we recently appointed Rich Petley as our Chief Revenue Officer. Rich is a standout and experienced sales leader with a proven track record of enterprise sales success, growing customers and pipeline. We have been intentional in our talent management planning. And 2 years ago, we recruited Rich as the head of sales of our EMEA region. The growth of that region gave us confidence in expanding his responsibilities last year to include all international sales. Under Rich's leadership over the past 2 years, the sales organizations have delivered results meaningfully ahead of our overall growth rate. Rich has consistently shown improvements in driving predictability, adoption of partners and growing new logos. He has a deep understanding of our customers, technologies and business and will bring greater discipline in deal management to help Teradata scale our value and drive profitable growth. Rich is the right person for the job now, and we expect to see a positive impact as he takes over our sales organization. We have also been steadily building out our customer success capabilities, and the organization has developed a more disciplined process and a more thorough and objective assessment of account health, enabling active engagement to maintain and grow customers. Our customer success team has also instituted the AI innovation days where we are bringing together our customers and prospects with our subject matter experts to promote deeper understanding of our AI and data lake capabilities, how customers can improve their growth through analytics and realize increased value from the Teradata investments. We're hosting these sessions around the globe and are seeing high interest and engagement from customers. As an example, we recently had 100 representatives from one of our banking customers participate with us in building their strategy for AI. Additionally, we have sharpened our focus on key operational success levers, including driving new logos and improving sales enablement. Through a dedicated cross-functional effort of targeted demand generation, we are seeing positive momentum. Over the last few months, we've seen well over 100 new logos added to our pipeline and our teams are focusing on moving these opportunities through the funnel. Ultimately, it's our technology that customers rely on to achieve success. Today, businesses everywhere are exploring how AI can help them be more productive, more innovative and deliver better experiences for their customers and are looking at which technology can best support them. Teradata is well positioned to help companies bridge the gap between the possible and the actual with respect to AI. But impactful results are only possible through the ability to manage analytics and models at massive scale. At Teradata, this is a core strength, and we believe our technology is fundamental to what companies need today, and we'll continue to innovate here. For example, a global investment bank that has been a customer for years tells us that Teradata is a business-critical system, running many of the most important and complex workloads in wealth management and corporate finance. We have earned their trust. Our hybrid capabilities and our AI analytics roadmap enable us to continue to build for the future together. We've architected our technology to grow and expand as and when customers need. When a leading European telco adopted a cloud-first direction, this customer was able to easily migrate their on-prem environment to Teradata on Azure. We helped them harmonize digital customer interaction data so they could execute high-quality customer experiences. Following the successful cloud migration, the customer expanded and is now leveraging ClearScape Analytics to perform exploratory AI use cases. A U.S. healthcare company was a decade-long on-prem customer and became an early adopter of Teradata on Azure to deliver digital health solutions to its clinicians and patients. Their Python AI models run in database using ClearScape Analytics to identify risk and predict patient population for remote patient monitoring. As a result, this customer has seen a 120% increase in patient engagement, aligning to care programs and leading to better health outcomes. These are just a few examples of customers improving their business with our foundational Teradata technology. We remain committed to investing in innovation that broadens our ability to drive value for our customers and for us. An example from the first quarter is with a major financial institution that operates in over 30 countries. They selected VantageCloud for the fastest, least-risk and lowest-cost transition to the cloud as well as our hybrid capabilities that support their regulatory compliance needs. They value ClearScape Analytics, our QueryGrid functionality and our ability to accelerate their analytics and data mesh goals. We recently held a briefing with C-level execs, and we walked away excited about our roadmap and are looking forward to partnering with us to deliver on their highest priority business outcomes, leveraging ClearScape's ability to scale their AI needs. We recently made announcements that strengthened our foundation for trusted AI, including AI Unlimited, our on-demand and cloud-native AI and ML engine that we announced in Q4. This technology is moving into public preview in both AWS and Microsoft marketplaces. AI Unlimited is designed to enable developers, data scientists and engineers to seamlessly explore data, conduct experiments and operationalize AI use cases without risk to mission-critical production environments. Along with AI Unlimited, we announced support for open table formats, Apache Iceberg and Linux Foundation Delta Lake as we work to deliver the most open and connected ecosystem for trusted AI. We see OTFs as the next round of industry disruption, this time at the storage layer. Companies are looking at OTFs to allow them to store all their data in a single location at the lowest possible cost and apply the best engine for the job to the data. We believe we have the best platform with VantageCloud Lake and AI Unlimited. Our strength is in high performance with optimized and parallel processing of shared data, and we believe we are offering customers unparalleled choice in data management. With this announcement, we are confident that we offer the most open and connected ecosystem for OTF integration. From the private preview uses, we are already seeing AI Unlimited adding value. In one example, a major airline is exploring how AI Unlimited, coupled with ClearScape Analytics, enhances the robustness and predictive power of their models. In another, a major healthcare provider is leveraging AI Unlimited to experiment with different data sets in order to gain a better understanding of customer behavior and quality of experience. Because AI Unlimited is on-demand, users can freely experiment and explore new use cases without affecting the production systems, and this sets up the opportunity for new workloads on VantageCloud. These announcements highlight our commitment to a fully open and connected approach that allows enterprises to employ modern data strategies to execute trusted AI at scale. Our technology leadership also continues to be acknowledged in the market. Forrester recently named us the leader in its report on enterprise data fabric. The report notes that Teradata excels in data fabric and highlights our superior roadmap, which focuses on AI and large language models. It additionally acknowledges our strong partnership ecosystem that supports large, complex fabric deployments. Forrester also noted how ClearScape Analytics helped a customer achieve an impressive ROI of nearly 250%. In a new Total Economic Impact Study, Forrester found that ClearScape Analytics enabled the organization to increase data scientist productivity and time-to-market as it builds ML models, thereby quickly activating, scaling and driving results from trusted AI. We're also pleased that Teradata was named Tech Partner of the Year by FICO, recognizing that our joint customers can quickly operationalize analytic models, including for AI. FICO also noted our jointly designed banking fraud solution that focuses on real-time payments to help stop the rise in payment fraud. I'm also proud of Teradata being named by Ethisphere as one of the world's most ethical companies for the 15th year in a row. This designation is important as it recognizes our dedication to ethical business practices in all aspects of our operations. Our technology is well positioned to benefit from the big secular growth drivers in enterprise data and analytics, AI and Machine Learning, cloud adoption, real-time streaming and embedded analytics and data governance and security at scale. Over time, we firmly believe in our ability to expand our customer base in the cloud, to migrate non-cloud customers and to attract new logos. In the near term, we expect cloud ARR and total ARR growth to reaccelerate as we progress through this year. As Claire will describe in more detail, our growth outlook for 2024 remains within the ranges we've provided. Importantly, as shareholders expect, we are focused not only on the top line but also on profitability, protecting and growing our free cash flow and on return of capital. We will continue to invest in our technology differentiation, and we are equally committed to achieving our margin, free cash flow and capital return targets.

Claire Bramley, Chief Financial Officer

Thank you, Steve, and good afternoon, everyone. In the first quarter, cloud ARR growth remained healthy at 36% year-over-year in constant currency, supported by a cloud net expansion rate of 123%. Even though Q1 is traditionally our lowest growth quarter, the sequential growth from migration and expansion activity were slightly below expectations. As we expected in the first quarter, we had a sequential decline of total ARR, driven by specific on-prem erosions. The total ARR decreased by $76 million on a constant currency basis, within the range we provided in February of 4% to 5%. The impact from currency was 1 percentage point. Let me now share more details on our quarterly financial results, starting with revenue. First-quarter recurring revenue was $388 million, flat as reported and 1% growth year-over-year in constant currency. We saw strong growth in cloud revenue, offset by headwinds from upfront revenue, the anticipated on-prem erosions and currency. Net upfront revenue was a positive $22 million in the quarter versus $34 million in Q1 of last year, driving a 3-point headwind year-over-year. Recurring revenue as a percentage of total revenue was 83%. First-quarter total revenue was $465 million, down 2% year-over-year as reported and down 1% in constant currency. The year-over-year change is primarily due to lower perpetual and consulting revenues. Moving to profitability and free cash flow. We were pleased with our profitability. Total gross margin was $289 million in the quarter. Operating profit was $89 million, and operating margin was 19.1%. Both gross margin and operating margin were impacted by a higher percentage of public cloud revenue, offset in part by continued expansion in our cloud margin rate. Non-GAAP diluted earnings per share were $0.57, at the top end of our outlook range. We generated $21 million of free cash flow in the quarter, which is lower on a year-over-year basis by $84 million approximately $20 million is due to lower net income and approximately $30 million from working capital dynamics, with the remaining change largely due to lower billings. None of these impact the full year outlook, and therefore, we are still on track to land within our 2024 free cash flow range. In the first quarter, we repurchased approximately $124 million of stock or 3.2 million shares. We remain committed to returning at least 75% of free cash flow to shareholders in the form of share repurchases. Moving to our full year 2024 outlook. As a reminder, our outlook ranges are in constant currency for the ARR and revenue metrics. We are retaining the ranges provided in February, but we currently expect to come in at the low end of the ranges, driven by lower total ARR expansion as on-prem customers continue to migrate to the cloud. However, as it relates to Cloud ARR, we remain confident in the midpoint of our range due to the strong pipeline of customers planning to migrate and expand with us in the cloud. Please refer to our Q1 earnings presentation on our Investor Relations website for a complete list of the 2024 outlook ranges previously provided. We anticipate acceleration of cloud and total ARR dollar growth throughout the year. We expect the fourth quarter to be the strongest quarter and deliver 50% or more of the growth, in line with historical seasonality. We anticipate total ARR to be relatively flat from Q1 to Q2. Some updated modeling assumptions for 2024 include: using the end of April currency rate, we anticipate year-over-year headwinds of approximately 230 basis points on revenue, which is an incremental 100 basis points compared to the January rate; 130 basis points on total ARR and 170 basis points on cloud ARR; weighted average shares outstanding of approximately 98.5 million; other expense of approximately $50 million. We continue to project our non-GAAP tax rate of approximately 24.2%. Regarding our outlook for the second quarter of 2024, we anticipate non-GAAP diluted earnings per share to be in the range of $0.46 to $0.50. We project the non-GAAP tax rate to be approximately 24% and the weighted average shares outstanding of 98 million. We remain highly focused on profitability and free cash flow growth. As we look to 2025 and beyond, we have multiple levers available, including top line growth, gross margin expansion, operating expense optimization and further working capital improvements to increase free cash flow generation. We continue to invest in areas that will drive long-term growth, including AI, demand creation and brand perception. We are still on the path to achieve the 2025 goals of at least $1 billion in cloud ARR and operating margin in the low 20% range and free cash flow of at least $450 million. However, we expect it will take slightly longer to achieve our 2025 total ARR and revenue growth metrics. We continue to operate in this growing market with differentiated product capabilities and strong customer loyalty, and therefore, remain optimistic about the profitable growth opportunities ahead. Thank you very much for your time today. Let's please open the call for questions.

Operator, Operator

The first question is from Erik Woodring with Morgan Stanley.

Erik Woodring, Analyst

Steve, can we start with you? Could you elaborate on the current demand landscape for deals? You mentioned closing one of the delayed deals, but now you’re guiding to the lower end of your total ARR range for the year. Are the decision-making cycles taking longer than they did three months ago? What feedback are you getting from customers? Are there any new delays? I’d love to know what you're observing on the ground and how that has played out into April. I have a follow-up after that.

Stephen McMillan, President and CEO

Yes. Thanks, Erik, for the question. We're still seeing a very positive demand environment across the full year. We did refer to some deal elongation in last quarter's earnings call. And that's been factored into our full year guide, and that hasn't really changed. As data analytics and AI become a strategic decision point within our customers, we see that more people getting involved in those decision-making journeys inside our customer base. But that has been factored into our full year guidance. Although Q1 was slightly below expectation, we are confident in the midpoint of our outlook from a cloud perspective because it really is supported by the pipeline that we have and the strong interest that we have in our cloud platform.

Erik Woodring, Analyst

All right. And then, Claire, maybe just turning to you, maybe to ask a similar question just on the cloud ARR side. I think last quarter, we talked about slight sequential expansion in cloud ARR dollars, obviously down about $3 million sequentially. So can you just maybe dig in a little bit more specifically into some of the headwinds that you faced in the quarter? What were kind of the main factor or factors for why that metric kind of slightly underperformed and then, obviously, keeping the full year cloud ARR midpoint unchanged? What kind of changes as we go into 2Q and 3Q and 4Q? Would just love if you can unpackage that for me.

Claire Bramley, Chief Financial Officer

Yes. Thanks, Erik. So to your point, we anticipate slight growth in constant currency is what we are expecting as kind of the low single digits to mid-single digits as we came into Q1. We did actually see a negative impact from currency of about $5 million in the quarter on our cloud ARR as our mix with regards to our international business continues to grow. So we did see that low single-digit growth in constant currency to your point then net of currency on a reported basis. It was a slight decline. It's slightly below a few million dollars below what we were expecting coming in. And given that Q1 is always anticipated to be our lowest growth quarter, we don't believe that, that will materially impact our overall ability to hit the midpoint of the guide. And as Steve mentioned, we have a strong pipeline to support that. So that's what enables us to be able to keep that midpoint. We always anticipate an acceleration of that growth. So we see that. We expect acceleration in Q2, Q3, Q4 with Q4 remaining our biggest growth quarter in line with our historical seasonality and approximately 50% is what we've seen in Q4 historically, so we're anticipating the same in 2024.

Wamsi Mohan, Analyst

Yes. I was wondering maybe, Claire, just to go down this point again on the cloud ARR sequential trends. Obviously, FX, you called out as an impact. But I think in your prepared statements, you also said sequential growth from migration expansion activity was slightly below expectations. Now when I look at sort of your comments around confidence in reacceleration, you do point to migration and expansion. So could you maybe just give us some sense of what's driving that confidence that the pipeline that you see, you will be able to convert and that there won't be more kind of maybe hesitancy or pause with spending in that area? Why should we feel more comfortable about the conversion of that pipeline as we go through the course of the year?

Stephen McMillan, President and CEO

Thanks for the question. I'll address it and then let Claire add any additional insights. Looking at the bigger picture, it's clear that in 2023, our cloud annual recurring revenue grew faster than the overall market, and we expect this trend to continue in 2024. We have strong confidence in our business and our cloud capabilities for several reasons. First, once customers migrate to our cloud services, they tend to expand their usage with Teradata. Additionally, our cloud business is expected to grow over time, which will significantly enhance our overall growth rate. We also have a robust migration pipeline, with many major enterprises making the switch to our cloud solutions. There is a strong belief that we offer the best path to the cloud for our customers, providing the least cost, lowest risk, and the quickest transition. This positions us well to leverage new AI and machine learning capabilities in the cloud, which strengthens our pipeline and execution. As mentioned, Q4 is typically our largest quarter, accounting for over 50% of our business, and we are seeing a solid pipeline as we enter the second half of the year, alongside a favorable market environment for executing our plans.

Wamsi Mohan, Analyst

Okay. Thank you, Steve. Appreciate the comments. In your prepared remarks, you also noted you've seen well over 100 new logos added to your pipeline. Can you give us some sense of sort of where you're seeing this traction? Should we expect continued traction of net new logos? And in sort of your bridge to getting to the $1 billion, is now the new logo part any more important or any more larger size than what you had anticipated previously?

Stephen McMillan, President and CEO

Yes, we continue to acquire new clients this quarter, and it's encouraging to observe our demand generation efforts, with over 100 new clients added to the pipeline recently. However, we have not noticed any significant shifts among these new clients; they typically start small and expand over time. Looking closer, we’ve experienced strong growth in our international business through partnerships, and we believe we can apply these insights to enhance our global sales strategies and leverage partner relationships in the Americas to attract more new clients moving forward. The new client pipeline, particularly with offerings like AI Unlimited mentioned earlier, enables us to engage with a fresh set of buyers and users for the Teradata platform. Furthermore, being one of the few integrated service providers with a query engine embedded in Microsoft’s fabric offering presents exciting opportunities for generating new clients. Nevertheless, from a materiality perspective, our cloud business in 2024 will still predominantly rely on expansions and migration activities.

Howard Ma, Analyst

Claire, I want to ask you about your guidance, which implies that you need to add about $200 million of cloud ARR in about 3 quarters. And as you and Steve just mentioned that mostly in the second half and in Q4, so I was hoping you could comment in terms of expansion versus migration. On the expansion side, are you expecting an acceleration in expansion rates maybe? Or maybe any pricing benefits as contracts renew? And then on the migration side, should we essentially assume that subscription ARR will then be flat at best this year and then become a material contributor to cloud growth perhaps starting next year?

Claire Bramley, Chief Financial Officer

Yes. Thanks for the question, Howard. So just to confirm, we're not modeling an acceleration in our net expansion rate. We saw a good net expansion rate again this quarter of 123%. We continue to model approximately 120% as we model out to get to the midpoint of our 2024 guide and also as we model out to get to the $1 billion in 2025. The rest we then would expect to come from migration. And as we mentioned in our prepared remarks, we are seeing a really strong pipeline and even increasing pipeline of the number of large existing enterprise customers that want to migrate with us to the cloud. So that's why we feel comfortable about those assumptions; we're not anticipating an acceleration. To your point with regards to subscription, with regards to subscription, once you take into account, obviously, the impact of migrations from subscription to the cloud, we still anticipate expansions to be positive. So we still expect growth in the low single digits with regards to subscriptions, but once you've taken out the impact of migrations.

Stephen McMillan, President and CEO

Yes. Thanks, Howard. Yes, we're really happy with our relationship with AWS. It continues to go from strength to strength, and it's felt really upon that growing cloud business in the AWS environment. One of the things that we have always discussed is that as we continue to scale up and scale out our cloud business, it will give us the opportunity to have better strategic relationships and strategic agreements with the hyperscalers, and thus the AWS agreement is one of those. And we see it as another element in terms of how we continue to expand our cloud margins going forward.

Nehal Chokshi, Analyst

I do have 2 questions. First one is that, Claire, can you give a little bit more detail on why migration and expansion activity was slightly below expectations?

Claire Bramley, Chief Financial Officer

Yes, we weren't anticipating significant growth in Q1. It came in a few million dollars short of our expectations, with the shortfall evenly divided between migrations and expansions. However, our strong net expansion rate gives us confidence, and we don't foresee any issues as we look to accelerate growth throughout the year. There were a few deals we expected to finalize in Q1, but overall, our outlook remains positive with no changes in the competitive landscape. It's essentially the usual fluctuations we experience in a quarter that led to being a few million dollars lower than we had anticipated.

Nehal Chokshi, Analyst

Okay. And then sticking with you, Claire, you mentioned multiple levers give you confidence in continuing to drive free cash flow growth into calendar '25. You listed 4 levers. What are those 4 levers do you have greatest confidence in actually being the biggest driver of that being the top line growth with gross margin expansion, operating expense optimization or working capital improvement?

Claire Bramley, Chief Financial Officer

Yes, I am confident in all the factors mentioned. Specifically, I have strong confidence for 2025 in our ability to increase operating margins into the low 20% range, which will be supported by the expansion of cloud margins. As we grow in size and scale within the cloud sector, we are seeing continuous margin improvement, which reinforces my confidence. We have a solid history of optimizing operating expenses, particularly as we expand. The growth in our revenue will primarily come from the ongoing expansion in cloud services, which further bolsters my confidence. In terms of working capital, we maintain a robust cash conversion cycle. I also see some potential for improvement in our days sales outstanding, which are currently in the low 60 days range. I believe we can enhance that by a few days over time. Overall, the main contributors to our growth will be the expansion of operating margins and revenue growth, but I also have strong confidence in all the factors mentioned.

Sheldon McMeans, Analyst

This is Sheldon McMeans on for Raimo. I first wanted to ask about some of your newer announcements, AI Unlimited, open table format support, the expanded AWS partnership. Are any of these impacts embedded in the reacceleration in guidance? Or is it more what you're seeing in your existing pipeline for existing workloads that's giving you confidence?

Stephen McMillan, President and CEO

Yes. Thank you for the questions. Yes, we are most super excited about our announcements around AI Unlimited and support for open table format. We really believe there is a differentiated capability in the industry, supporting both Iceberg and Delta Lake formats from an open table format perspective. The AI Unlimited is certainly a facility that's going to enable us to attract new workloads into the Teradata ecosystem and new users into the Teradata ecosystem. In terms of creating an impact or a meaningful impact on our total ARR and total cloud ARR, we see these as fueling the pipeline and I think it is a catalyst for us so that we can discuss with those customers a move into VantageCloud offers that we have and accelerate that overall expansion of the VantageCloud environment for our existing customers, but also when those new logos. And as was pointed out, we had over 100 new logos added to the pipeline in the last few months. It's the strength of our technology and the strength of our roadmap that's enabling us to have those conversations and put across our uniquely differentiated value proposition. So really excited about the technology landscape that we have and the offers that we've made available over the last couple of months.

Sheldon McMeans, Analyst

Great. And then a quick follow-up. Did the headwinds from a couple of large on-prem erosions fully play out in Q1? Or is there still some impact expected in Q2? Is that why ARR is expected to be relatively flat quarter-over-quarter in Q2?

Stephen McMillan, President and CEO

Yes. From a total ARR perspective for Q1, we performed largely as anticipated. In terms of our overall ARR and customer base, we expect to see some impacts in Q2. As mentioned in last quarter's call, our outlook remains consistent. There has been no significant change in the landscape over the past 90 days, and we maintain confidence in our full year guidance.

Chirag Ved, Analyst

Good to hear from you. So as we continue through the initial stages of this AI cycle, many companies today want to start incorporating new GenAI capabilities. We've heard that many of these companies don't have the modernized data stack required to support AI implementation today. I just wanted to get your thoughts on whether there was some level of data quality issue in the market overall, how companies were making inroads on addressing this and whether you view these market dynamics as a tailwind for Teradata looking ahead?

Stephen McMillan, President and CEO

Yes. Thanks for the question. So I think the way that we see the AI marketplace playing out is that organizations that have a modern data stack and can leverage their enterprise data warehouse, which is where the most trusted data from an enterprise exists, but also combine that with data that is in a lake construct and also a lake house construct, that is really going to be the winning formula for data platforms going forward, and it certainly underpins our technology strategy in terms of having a data platform with the broadest choice of deployment options. The other really important thing is in those analytics environments to be able to deploy those advanced analytics AI and GenAI models at scale very efficiently without letting costs run out of control. That is something in that financial governance is something that Teradata is very accustomed to. Our platform has unique differentiated capabilities in terms of moving some of these most complex models into production at scale. Some examples of that from the prepared remarks, we're really looking at healthcare organizations that were at a massive scale, improving patient outcomes by running multiple models against all of the patients that they have in their ecosystem. And to do that effectively, we have to combine data from multiple sources to enable them to do that. And then just from a governance and data governance perspective, that's something that Teradata has always been strong in with our added capabilities, looking at data lineage and trust in the data that we have in, say, the organization. It really does enable Teradata to be a trusted AI solution for our customers and that's getting some great traction in terms of the discussions that we're having across all industries just now actually. So really well placed from a technology perspective. I think to the point that you brought up, I think that's what customers are looking for from a solution and is what Teradata can deliver today.

Unknown Analyst, Analyst

This is Tyler. We have many questions about ARR, so I won't address that. My question is about on-track erosion. It's reassuring to hear that the erosion was as anticipated and that we encountered an outlier this year. For investors seeking reassurance, is this a one-time event? Could you share the actions you've taken and what has already been factored into this erosion?

Stephen McMillan, President and CEO

Yes. Thanks for the question. As we look at the erosions for the full year, we don't see any changes to our outlook today versus 90 days ago, and that is all factored into our outlook for the year. As we take a step back, we absolutely run the most complex and mission-critical workloads for the world's largest enterprises. And we do have a very detailed understanding of what's going on inside those customers. We created a customer success function a few years ago. And they have a really disciplined approach that says I can help, what's going on inside the customer, our level of engagement, we have telemetry now in terms of understanding what's going on for the environment, how we're engaging partners and save that organization. So we really do have a great 360-degree view of the customer and what's happening. And so we do see 2024 as being an outlier to our renewal rates, and we anticipate that to improve into 2025, and we've got a handle on all of the levers to do that.

Unknown Analyst, Analyst

Got it. That makes sense. I have a follow-up for Claire around your confidence on the renewal for like the back half of the year, specifically excluding some of the slipped deals for '23, how does that aged renewal look versus the same time from a year ago?

Claire Bramley, Chief Financial Officer

Yes, we are experiencing strong momentum regarding the transparency and visibility of our renewals. We were particularly pleased with the renewals in Q1 and expect this trend to continue throughout the year. Our net expansion rate is robust at 123%, which gives us a positive outlook for the remainder of the year. We are projecting a net expansion rate in the vicinity of 120%, incorporating all our assumptions related to renewals. We do not foresee any significant changes, and we believe our modeling is reasonably conservative given our current performance at 123% and the projected 120%. We are satisfied with this, as it reinforces our confidence in achieving our full-year targets.

Cole Erskine, Analyst

This is Cole on for Derrick. Steve, I want to talk about sales execution and just see if there's any changes that Rich is making to kind of drive better rep execution and make sure that deals get across the finish line as we move towards the second half of the year and don't see a repeat of last year?

Stephen McMillan, President and CEO

Yes. So thanks for that, and thanks for bringing up Rich. We were delighted to appoint Rich Petley as our CRO. He joined Teradata over 2 years ago to lead our EMEA region. Given the growth that we had in EMEA and the success we had in EMEA, we actually promoted him to run all of international sales. And during that time, he's delivered results meaningfully ahead of all of our overall growth rate as a company over the last 2 years. Rich as the sales executive brings us a super disciplined approach to deal management. He has demonstrated success in terms of driving predictability in the business. But not only that, in terms of executing in marketplace, his adoption of partners, the growth in new logos, the execution of expansions and migrations inside his region has been fantastic. We're looking forward to bringing that capability to the entirety of our global sales execution. He really does know our business, knows our technology, knows our people, and we're delighted to have him in this role.

Cole Erskine, Analyst

Great. And then just one follow-up. On the open table format on Iceberg, it's good to see. Do you guys anticipate any headwind on storage revenue from that?

Stephen McMillan, President and CEO

Yes. I think what we see is there's going to be a requirement to utilize and deploy lots of different storage technologies and storage capabilities. So for certain workloads, open table format, it's going to be absolutely the right choice. And for certain workloads, high-performance storage built right into the Teradata platform is going to be the right choice. We see the capability of open and support an open table format. It gives us the ability to access and utilize even more data than we could previously. And that will drive a source of expansion for us as we move forward, as we increase the utilization of the Teradata platform to query a massively larger amount of data inside our customer ecosystem. I was talking to one of the banks up in Canada a couple of weeks ago, and they have an order of magnitude more data stored in native object store than they do inside their structured enterprise data warehouse. By combining the power of Teradata and the query engine that we have in Teradata, to look at these open table format data stores and native object stores, it's going to massively increase the ability for our customers to get insights from the data no matter where it is. So we see it as something that's going to expand our total addressable market and something that we can leverage to grow our overall cloud ARR and ARR in total.

Oliver Crookenden, Analyst

Great. I'm on for Pat. So I just wanted to touch on one of the customer examples you gave. You noted a major financial institution that selected VantageCloud. I'm wondering is that a new logo or an existing customer migration? And then are they considering competitors heavily? Like what were the main selling points in that deal competitively?

Stephen McMillan, President and CEO

That was an existing customer migrating to the cloud with us. It was a competitive situation where they chose VantageCloud as their solution. The reason for this choice was that they recognized the migration of the Teradata environment would involve the least cost, least risk, and lowest complexity. They also valued the unique benefits of ClearScape Analytics and our QueryGrid functionality, which set us apart from the competition. We used this opportunity to brief their executive team on the advantages that the Teradata platform can offer to their business. We presented several use cases from banks worldwide to highlight the strengths of Teradata, and our industry understanding combined with our technology platform proved to be a distinct advantage.

Simran Biswal, Analyst

This is Simran on for Matt Hedberg. Just one from me. I just wanted to double-click on 2025 total ARR and revenue targets being pushed out. Do you still expect to achieve these targets in the back half of 2025? Or could they be delayed further out? And what are the assumptions that are embedded in these targets? And then on achieving $1 billion in cloud ARR, what are you seeing in 2024 and beyond that gives you the confidence to achieve this target on time?

Claire Bramley, Chief Financial Officer

Yes. Thank you. I'll start with the second part of your question, and then I'll go back to the first part. So with regards to the $1 billion in cloud ARR, what we've done there is assumed, as I mentioned, a net expansion rate of approximately 120% that roll forward from 2024 into 2025 and now we're running slightly above that, but we think it's prudent to assume approximately 120%, especially as we move out to 2025. I think given that and the fact that we have a strong pipeline in '24 and also pipeline going into 2025, a strong migration gives us that confidence to be able to deliver the $1 billion in terms of cloud ARR. With regards to our total ARR, as I mentioned in 2024, and we're kind of expecting a similar trend in 2025, we're seeing total ARR growth slightly lower and at the lower end of our '24 guidance, and we expect this trend to continue out. And the main driver for that is because of these stronger and larger migrations from existing on-prem customers. So with that, we're kind of seeing maybe lower on-prem expansion activity. But we know that over the longer term, as we get out from '25 and into '26, given that net expansion rate as we migrate those on-prem customers to the cloud, that continues to give us much more growth opportunity, but looking further out into the future. So we'll see that additional expansion coming from those migrations in '24 and '25 as we progress out an exit '25 into '26. I think the other factor to remember when you're thinking about our overall total growth rate as you look out into the future is the fact that we've always said that as cloud becomes scale and becomes more than 50% of our total ARR, which we expect as we exit 2025, that is going to help our growth rate accelerate and increase as we look to '26 and beyond. So that still applies. And so we're looking forward to seeing that total growth uplift from '26 and beyond.

Operator, Operator

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

Stephen McMillan, President and CEO

Thank you very much, operator, and thank you, everyone, for joining us today. We're looking ahead with confidence as we build on our healthy cloud growth rate and expand our customer base in the cloud. We absolutely believe we've got a differentiated position with our enterprise scale platform for trusted AI. And as the conversation rotates to data and analytics and also about AI, we have the right solution for our customers. We're going to build on that reputation of driving value for our customers as we accelerate cloud and total ARR growth throughout the year. Thank you very much for joining us today.

Operator, Operator

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