Good afternoon ladies and gentlemen. My name is Julie and I will be your conference operator today. I would like to welcome everyone to the Q2 2019 Teradata Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] With that, I would now like to turn the call over to SVP of Finance and Investor Relations, Nabil Elsheshai. Please go ahead.

Good afternoon and welcome to Teradata's 2019 second quarter earnings call. Oliver Ratzesberger, Teradata's President and Chief Executive Officer will lead our call today followed by Mark Culhane, Teradata's CFO, who will then discuss our financial results. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements may 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 Teradata's 10-K, and 10-Q and other filings with the SEC. On today's call, we will be discussing certain non-GAAP financial information, which excludes such items as stock-based compensation expense and other special items described in our earnings release, including acquisition, reorganization related cost, asset impairments, and capitalized software development costs. We will also discuss other non-GAAP items, such as free cash flow and constant currency revenue comparisons. A reconciliation of our GAAP results to our non-GAAP results and other information concerning these measures is included in our earnings release, which is accessible at investor.teradata.com. A replay of this conference call will be available later today on our website. Teradata assumes no obligation to update or revise the information provided during this conference call, whether as a result of new information or future results. And now, I will turn the call over to Oliver.

Good afternoon everyone. I'm pleased to provide an update on our business and the positive strides we are continuing to make as we execute on our strategy. We are uniquely helping the world's leading companies achieve competitive advantage with data analytics to our best-in-class Vantage Analytics platform for real-time intelligence at scale. Everyone is aware that today businesses must operate in a digital environment. Data analytics are no longer a byproduct of doing business; rather they are at its foundation. Teradata is uniquely positioned to guide and enable our customers to excel in this digital environment. Our unmatched technology available in multi-cloud, hybrid cloud and on-prem and our relentless focus on customer success are keys to why we win. On today's call, I will share three key takeaways with you, and then Mark will then cover our financial results. First, we are advancing our cloud position and seeing increased interest in our cloud offers. A great value Teradata provides is the same powerful analytics inside and answers in the cloud as on-premises. And today, I will provide a number of examples. Second, we are continuing our strong transformation to a software driven subscription-based recurring revenue business. Third, customers are recognizing the value that comes from investing in Advantage Analytics ecosystem that aligns to the needs of today and tomorrow. And we're far beyond the old-school data warehousing to an environment where autonomous decision making is an essential capability. And this is our sweet spot. Let's start with the cloud. While both on-prem and hybrid cloud remain important environments to businesses, we are seeing more and more enterprises beginning to move to the cloud. You are all aware that we are making big investments, building out our cloud capabilities, adding cloud first talent and we announced new offers with AWS and…

Thanks Oliver and good afternoon, everyone. We delivered a solid quarter in Q2, highlighted by ARR and recurring revenue growth and solid operating margin performance. As Oliver stated, 90% of our new and add-on bookings were subscription-based as we continue to make progress on our transition. We continue to expect 70% or more of our bookings for the year to be subscription-based. In terms of our reported results, recurring revenue, which includes revenue from subscription-based transactions and perpetual license-related maintenance and upgrade rights, was $338 million in Q2, a year-over-year increase of 8%, 11% in constant currency. Perpetual revenue came in at $29 million, which consisted predominantly of perpetual hardware purchases. Consulting revenue, which was $111 million in Q2 decreased 18% from Q2 2018 and 15% in constant currency as expected. Our strategy is to focus our consulting resources on engagements that drive customer value via solutions uniquely enabled by the Teradata platform, and we are significantly reducing the consulting engagements that are not Teradata-related. ARR grew $31 million from the end of Q1. Year-over-year, ARR increased 11% and 12% in constant currency. As our bookings mix continues to shift to subscription, we see our subscription-related ARR growing and ARR related to perpetual license maintenance software upgrade rights decline. Our backlog was approximately $2.5 billion, up 2% from Q1 2019 and up 39% from Q2 of 2018. It is important to note that our backlog growth in 2019 will be impacted by our desire for shorter deal durations versus what we added in 2018. To help affect this intended change, we are only compensating our sales team on up to three-year deals versus up to five-year deals in the past. As a result, bookings calculated using backlog and backlog growth will not be a good indicator of business trends until…

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Wamsi Mohan with Bank of America. Please go ahead, your line is open.

Yes, thank you. Sorry, I joined the call a little late but I -- apologies for that if you really address this. But your recurring revenue guide is just slightly below our estimates for the next quarter. And I know you called out some FX headwinds that you are facing but also you had -- you're going into somewhat easier comps going into next quarter. I was just wondering if you could address that in the overall scheme of your trajectory of recurring revenues. And I have a quick follow-up.

Yes. Wamsi, this is Mark. Yes, so for Q3, it's really just timing of deals. Yes, our guide for this Q4 compared to Q3 is good, but we have a -- we also expect acceleration in Q4 just like we saw in the prior year as well. So, it's really just due to the timing of when deals happen and then when do they start to flow the revenue.

Okay, great. Thanks a lot. It's actually pretty impressive that you guys are maintaining in this much weaker macro environment your overall guide. As my follow-up, what is the customer feedback on Vantage all over? And can you talk a little bit given that you are sort of -- you've got a list price on Vantage that's higher, it's not translating into any ASP benefits yet? Or is it really translating more into folks trying to sort of look at moving over to subscription in any faster way at all? And what did -- who did you see the most from a competitive standpoint in the quarter? And what were your win rates there? Thank you.

Okay. So just to remind, Vantage part of our strategy just released October last year. Analytics platform really bringing together capabilities that are going beyond what data warehousing is. So this is really broadening the application of data in the enterprise bringing together advanced capabilities, machine learning, time series, IoT, and there is new features that previously Teradata did not have in the portfolio. And it's also combining the feature sets of other products that we had in the past. And so we see a lot of interest in Vantage. In fact, Vantage continues to be the fastest-adopted product release in Teradata in quite some time. And that is very positive momentum that we are seeing out there. We have given a couple of examples today of customers that are adopting Vantage to take their data and do advanced analytics with it. Several of the examples in today's call we given are in the cloud, where customers really need to bring together traditional financial data, but also with new digital and IoT examples to drive digital transformation at scale. And so this is where we're seeing the big interest. We see good adoption, as I said, fastest-adopted product release in our history and the slight uptick on pricing that we have on Vantage is because of all the extra features in there. And we are actually not seeing in our target market customers that are questioning why we do that. In fact, they are enjoying interest of -- this is a lot cheaper than going with, let's say, a competitor product and then having to package on two or three other products in order to get to similar capabilities. And so from a TCO perspective, just recently had a customer compare us to some of the cloud alternatives that they have and Teradata comes in very favorably when it comes to Vantage in the cloud. So, no change in competition and what we are seeing out there, same -- the same competitors that we saw the prior quarter. What we do see is a lot less Hadoop out there that is really, really hitting hard and coming across globally now. And so in general, more shift to the cloud, a lot of interest there for Teradata Everywhere, Vantage everywhere. Good momentum.

Thanks for the color Oliver.

Your next question comes from Derrick Wood from Cowen and Company. Please go ahead, your line is open.

Great. Thank you and nice job on the rebound and net new ARR. Can you give us some color on whether you are able to close your slip deals? And how you're feeling about getting back on track with sale cycles and close rates? And Mark, I thought maybe we'd see given the net new ARR more positive impact to recurring revenue, just wondering if there was anything else to call out, maybe it was due to linearity or FX, but maybe why that didn't just kind of come through a little bit more.

Yes. So, yes, we've signed agreements with those customers in Q1. In terms of the flow through to Q2, it's just timing -- linearity and timing of when that starts really. Nothing specific there.

Okay. And maybe I'd touch on the cloud business because it definitely seems like you guys -- there is a bit more enthusiasm in terms of what you're seeing out of the interest in the cloud. What are you doing to help facilitate more adoption through AWS and Azure? And what are the common stepping stones you're seeing from your customers? Is it a lift in shift of existing footprints or is it more about Greenfield?

It's a mix of that. In general, as you said, we are seeing an uptick in cloud interest in our target customer market that includes the mega-data, but also our commercial segments that we have and have put more focus on this year. The way in the past customers have moved was trying, testing depth -- depth test systems. They're certainly more production workloads that we are seeing out there. So yes, some of them are doing lift and shifts and expanding. Usually, we see new workloads being added to that or existing workloads being growing on the platforms. In general, we see a lot of emphasis on security, making sure a lot of customers spend some extra time on making sure that the move to the cloud is done in a sensible way and that they are exposing themselves to unnecessary security risks, especially in the mega-data space, that is a paramount concern of -- in our customer base. But as we are working with them and as we are applying our enterprise experience to that, that is certainly driving more interest in mega-data and commercial to move to cloud. And in part, we are also seeing an increase uptick of customers that have tested other cloud offerings out there and that coming away quite disappointed, quite honestly. And are saying, you know what, Teradata, not just in the on-premise world but also in the cloud, certainly is superior and is cheaper than the competing offerings out there and that's for us the combined interest from the customer base.

Great. Thanks for the color.

Your next question comes from Katy Huberty from Morgan Stanley. Please go ahead, your line is open.

Thank you. Good afternoon. Other hardware -- enterprise hardware technology companies are talking about weaker demand as they went through the second quarter, and the macro starting to impact conversations around capital spending plans for the year. Did you see any weakness in June? Or early in the current quarter in the month of July that would suggest that your business may face this headwind? And if not, why do you think you're immune? Thanks.

No, we don't see any such headwind or macro things happening to our business. Also, we -- as we turn primarily to a software-subscription company, clearly that is somewhat separated from the hardware. But no, not seeing that, in fact, one of strong interest on Vantage and software and what we are doing there with our customer base.

That's great to hear. Just as a follow-up, Mark, I think you said last quarter that backlog was up 43% year-on-year. What's the comparable figure exiting the June quarter?

From June a year ago, I think we said--

I think March quarter; you said 43%, just wondering what that was exiting this quarter.

Yes. Year-over-year, June 2018 versus June 2019, about 39%. But we don't look at it compared that because that's a duration thing. And we're doing less duration deals as we said in our prepared remarks.

Got it. Congrats on the quarter.

Thank you. Thanks.

Karl Keirstead from Deutsche Bank. Please go ahead, your line is open.

Thanks. Two questions. Mark, you mentioned in an earlier question that you're expecting to see some acceleration in the fourth quarter. So if I just run the math and you hit the midpoint of your 3Q guide on recurring revs. To hit the high end of the 10% to 11% recurring revs guide, I think 4Q needs to see an acceleration to roughly 16% growth. Could you just talk a little bit through why you're seeing that? Is it that just visibility into the deal pipeline where maybe some 3Q stuff is spilling into 4Q? Thanks a lot.

Yes. So, a lot on that, Karl, yes, there is -- if we go back and look at what happened in fourth quarter a year ago, we had a very large sequential increase Q4 over Q3. So, yes, I'm aware that our guide also implies that and based on the forecast we see deals happening earlier in Q4 like we saw a year ago. I think for customers trying to get stuff wheeled in and get it done before they got to shut down anything moving in there before they shut down from holidays and anything else.

Okay, that's helpful, Mark. And then a follow-up on the balance sheet, I see that long-term DR came down fairly hard sequentially, is that all the deal duration you're talking about? And assuming it is I thought the sales comp issue that might affect that was made in late 4Q. So, that really wouldn't explain the Q1 to 2Q decline in long-term DR. So, maybe there is another duration-related explanation to help us figure that one out. Thanks a lot.

Yes. So, long-term defer, short-term defer doesn't have anything to do with deal duration. It actually have to do did you get paid on multi years and took more than 1 year's cash on a multiyear deal, which we have not seen anything this year. Where, again, a year ago, we saw that quite two or three different types, particularly in Q2 a year ago, we saw a very large multiyear deal all get paid from Q2 of 2018. So, the sequential from March to June is just kind of your normal typical. We haven't had any multiyear cash receipts this year that are driving up, so I don't expect long-term defer to continue to decline across the balance of the year.

Brad Reback with Stifel. Please go ahead, your line is open.

Hey, thanks very much. Oliver, switching back to the cloud commentary. As customers begin to move, what type of pricing flexibility are you providing around consumption-based workloads versus just long-term contracted opportunities there?

Yes, as I probably said earlier this year, and as we announced at last year's Universe Conference, one of the rollouts that we are doing this year is consumption-based pricing. And we have engineering now completed on that task and we have several customers that have been -- also on data testing that with us. We see -- we clearly see interest for choice from our customer base. They love the ability that they can now get Teradata in a consumption model and it's -- the assets have different price points that obviously we set with that, just like the cloud defines ad hoc usage and pre-committed usage of different price points, and we are really modeling after the industry norms that we see out there. And that sees a lot of interest from the customer base. Having said so, customers also like the subscription offering. So, it's not necessary that the customers are saying we don't want to go through a consumption model. But for certain use cases and for certain applications, the consumption-based model is something that gives customer the choice for capacity on demand and that elasticity and it's being received very well in the customer base. And it's going to be one of our offerings in the model that we have. Having said so, not every customer wants that choice either. We've also got very feedback that some customers also like the predictability of our subscription model that yes we might upgrade during the year of -- they like the predictability of the financial model of our subscription model over a pure consumption model. And so you will see us continue investing into this and make it easier to consume for our customer base. And again, Teradata Everywhere, as we started it two and a half years ago, was all about choice. And this is, again, to give customers that choice and the reception and the customer base is very positive.

Excellent. And then one quick follow-up. With the hiring of Scott Brown, do you expect any meaningful changes in the sales force structure that were go-to-market in the back half of the year? Or does more of that modification happen next fiscal year? Thanks.

No, don't expect changes. In fact, Scott is all about stability and execution. He's about take the execution model that we have in place, drive it, drive it hard. And he's quickly getting his feet on the ground, quickly making an impact here. So, we are very encouraged to have him on board. This is not about more changes in 2019, this is about taking what we have and what we have set up and really executing hard on it.

Excellent. Thanks very much.

Phil Winslow from Wells Fargo. Please go ahead, your line is open.

Hey thanks guys for taking my question. Oliver just wanted to follow up on some of those customer use cases you talked about in your prepared remarks. I mean when you talk to customers, how does Vantage's support of getting a -- integration with multiple languages, not just SQL, but R and Python and also there's multiple data formats. How is that influencing customers' views of Vantage and how are they thinking of Vantage? And that support let's say the Point guys that might do a sequel or it might actually another one supporting R and Python machine learning. Just how are -- what's the feedback from customers on that?

Yes. So, this is -- there's are a couple of forces out there in the market that are really coming together. And if you look at pervasive digital that is starting to take hold in more and more companies around the world. And they are realizing that they need to bring traditional financial marketing customer data closer together with mobile sensor, IoT and other data sources. And traditionally, that led them to build siloed systems, time-series data would go into a time series system. And unstructured data would go into an unstructured data link. And what they are starting to realize is that, that proliferation of data of silos is extremely hard to operationalize or when they need to combine the different types of data, it makes it extremely hard. What we are doing with Vantage is really as we have put together Vantage, we've brought 2D traditional sequel and advanced sequel, we brought time series, we brought virtual control of data or temporal into the system. We brought these new languages; we brought event-based and path-based capabilities straight into that system. What that allows these customers to do and yes, you have a couple of examples even on today that allows, for example, well data or sensor data or machine data or mobile data, all to get -- put together with all of the other financial ERP customers' supply chain data and for the first time, it allows companies to really get a holistic view up -- all the way up to the CEO of these companies. And that's something that we really focus on. So, like how do we make it as simple as possible to bring that diverse set of data together into a few instances of data, so customers can iterate in an agile quick way and drive the analytics that they need to do in order to make the impact to the business and drive the business outcomes. And so Python and R are the languages, of course. The different storage formats are for the different types of data whether it's sensor or structural relation of data. And all under one hood is really allowing them to quickly train people or taking existing talent and setting them loose billions and trillions of data points combined with millions or hundreds of millions of customer data. And that's where certainly the opportunity for Vantage is. What they want and where our roadmap for Vantage will be for the next several years.

Great. Thanks. And then also Mark, just a follow up on your gross margin comments for the year, thanks for those. Obviously, you also gave some gross margin color at Analyst Day. Can you help us maybe through some sort of progression there to those longer term targets? I mean how should we think about from a line item perspective?

Yes. I mean we expect gross margins to improve each and every year as we expected, right? I mean more and more of the mix is shifting to recurring, you get gross margin lift off of that, clearly less perpetual year-on-year, which becomes a drag. And then as we've said, we are improving our overall focus on what we're doing with consulting and expect improved consulting margins as well. All of that's contributing to where we are for this year and how we continue to progress across 2020 and 2021 to those Analyst Day numbers. We feel good about where we're at and where we see that going.

Great. Thanks guys.

Raimo Lenschow from Barclays. Please go ahead, your line is open.

Hey, thank you. Two quick questions for Oliver. Can you talk a little bit about the different clients? When I look at the customer examples you gave earlier in the presentation, there was a lot of Azure in there. I'm wondering is that kind of a slightly better relationship because AWS has with Redshift obviously a competitor? Or is it more because the geographic footprint is broader? And then I had a quick follow-on question.

No. We see -- we've seen general good interest across both AWS and Azure. You probably see given our focus on mega-data companies and enterprise, you see maybe some more enterprise examples on Azure. They are very strong in the enterprise, right? And that's where their sweet spot is. And so naturally, there's a little bit more of a customers' affinity between our customer base and where Azure is. But other than that, no. This is good partnership of both sides. And we see interest on the various different public cloud fronts. And you will hear more from us in that space in coming quarters.

Okay, perfect. And then the other question I had was on, if you think about competition and you mentioned some of the cloud guys before, where would you -- I mean in theory, I would assume you see it more in the commercial part of the market because Teradata as a solution is significantly -- is very, very powerful. So, for enterprise, you probably ready need Teradata and I would assume if competition is more in commercial. Is that a fair assessment? Can you talk to that, please?

Yes. So, you'll see the competition primarily in the small data mark space, of course. Is that tense, yes, we see more of it in the commercial. It's also however, very interesting now that we launched the commercial sales force this year and put some extra focus on commercial, we are seeing a lot more cloud opportunity also come our way. Because it's that space that has experienced the likes of Snowflake and Redshift now for the last 12, 18 months or some of them even longer. And some of them have made different experiences where they say but it's still not working even after commercial scale for us. So, a lot more deals in the funnel in commercial where customers come to us and point out that they need something else than what the competition has to offer. And so in general, what we are saying is quite a positive momentum and a little bit of a surprise on the commercial side. So, how much interest we are seeing there in the cloud, especially driven by competitors falling short of their promises.

Perfect. Interesting. Thank you.

[Operator Instructions] Your next question comes from Tyler Radke from Citi. Please go ahead, your line is open.

Hey, thank you. Oliver, I wanted to ask you about Vantage and maybe just clarify for us when you're talking about the adoption being among the best in terms of product releases. Are you talking about kind of the latest version of the Teradata platforms that customers are upgrading to? Or are you talking about the uptake of some of the add-ons like the graph engine? And then maybe just talk about how through the install base is in terms of the Vantage adoption and if you're seeing any type of uplift you could quantify? Thank you.

So, we don't break out the numbers in particular. But yes, it is the latest versions of our software that make up Vantage that is being adopted. Vantage is a set of capabilities that goes through various different engines. And we have launched that last year as of October, seeing strong adoption in existing customer base but also in new customers that we talked about some of the examples. Vantage is certainly driving interest in the customer base as to also helping them simplify their ecosystem. Many of them are realizing they have too many systems and too many technologies driven by the inability of a single platform to do that for them. And so this is various features, functions, programming languages, as we said, that all come together in Vantage. And the interest in machine learning and autonomous decisioning obviously is out there in the market. You hear a lot about customers having really problems with AI deployments around the world because it's hard to take a standalone software and flapped it against and unmanaged data leak and get repeatable results. With Vantage and the governance that it allows customers to implement a diversion control and the structuring and future extraction of data, this is where Vantage really puts machine learning into the customer's hands that is much more repeatable and that's where the interest in the customer base right now is.

Great. And then maybe a follow-up either for you, Oliver or Mark. Just looking at the geographic revenue, obviously there is kind of a mix bag of growth rates there. I presume, some of that has to do with the various stages, geographies with respect to the subscription transition. Maybe just talk about how execution was by geos? Anything to call out in those numbers we're looking at?

Yes. So, both EMEA and APAC have been pleasantly surprised with the movement to subscription this year. It's been great. Looking at year-over-year, if that's what you're looking at, we had a huge big deal that came down in Q2 in APAC. That's what was driving the compare there. So, it's subscription transition, it's what's impacting that. So, we're pleased with where we're headed and what we're seeing moving forward on both APAC and EMEA.

Okay. Thank you.

I will now turn the call back over to your President and CEO, Oliver Ratzesberger for closing comments.

Thanks everyone. We are all working during an incredibly exciting time of ongoing momentum at Teradata and we are continuing to make very positive strides. We are advancing our cloud positioning, continuing our strong transformation to a software-driven subscription-based recurring revenue business and developed our Vantage platform to address the needs of today and tomorrow. And we are firmly established to continue our strong focus on driving customer success. We've aligned the internal team and are relentlessly focused on delivering ongoing value to our customers and shareholders. Thank you very much.

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