Earnings Labs

Teradata Corporation (TDC)

Q3 2019 Earnings Call· Thu, Nov 7, 2019

$25.81

-2.49%

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Transcript

Operator

Operator

Ladies and gentlemen thank you for standing by and welcome to the Q3 2019 Teradata Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today Nabil Elsheshai. Thank you, please go ahead sir.

Nabil Elsheshai

Analyst

Good afternoon and welcome to Teradata's 2019 third quarter earnings call. Vic Lund, Teradata's Executive Chairman and Interim CEO will lead our call today followed by Mark Culhane, Teradata's CFO. 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, 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, 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 Vic.

Vic Lund

Analyst

Good afternoon, everyone. Before Mark discusses our results, I want to take a few minutes to talk to you about our recent announcement regarding our CEO change. As you are aware, we announced that Oliver has stepped down as CEO. The Board of Directors and Oliver agreed that this was an appropriate time for a change in leadership. Oliver did a fantastic job of defining our strategy and developing our vision centric on customer success. Our strong ARR growth this quarter demonstrates our strategy is working and that our customers are embracing it. However, the skills that make a great visionary are not always those that drive great execution. Our Board believes we are at a point in our transformation, where strong executional skills are required to continue to drive to a successful completion of our strategy. It is for this reason that the Board decided a change was required at this time. The Board is immediately commencing a CEO search to propel Teradata forward. We have an excellent search committee who will dedicate their efforts to finding the best person they can for this important role. I will not be a candidate, but I will support the new CEO through his or her on boarding to ensure that we have a seamless transition. We have the right strategy and vision. A solid team committed to our customer success and market leading technology innovation, all of the right ingredients for us to be successful. As Interim-CEO, I along with the rest of our leadership team will ensure that our eyes are focused on execution and will drive to a successful 2020. Now I'll turn the time over to Mark.

Mark Culhane

Analyst

Thanks, Vic and good afternoon. I will center my remarks on our financial and business results. Starting with the news that we're at the high end of our expectations for ARR and guidance for recurring revenue, and that Teradata had a strong quarter, with customers moving to subscription at a record rate, demonstrating our strategy and action. I will start by covering our business update with three key takeaways all centered on driving customer success, which in turn drive success for Teradata and value for our shareholders. First, we continue to move forward in the cloud. We have developed a strategy to position Teradata to lead the market in cloud-based data analytics. And we recently announced a major set of capabilities to help companies move from analytics to answers wherever they are on their cloud journey. Second, we are continuing to build momentum with Teradata Vantage growing adoption of new and expanded capabilities, including machine learning and time series analysis that increased consumption. And third, the power of Vantage in the cloud is opening possibilities for us to strengthen our go to market. Let's start with our cloud trajectory. We continue to move forward in the cloud by providing our customers choice based on the industry's strongest hybrid and multi cloud offer. Along those lines, we made several important product announcements at our recent user conference. We announced a new strategic partnership with Google. Our customers can leverage the full power of Vantage across the top three global public cloud providers AWS, Azure and soon Google Cloud. Only Teradata provides the same functionality in both hybrid and multi-cloud environments, giving customers the utmost choice and flexibility. We also announced true consumption or pay-as-you-go prices giving Vantage customers the freedom to perform complex analytics on virtually any amount of data and…

Operator

Operator

[Operator Instructions] Your first question comes from a line of Wamsi Mohan from Bank of America. Your line is open.

Wamsi Mohan

Analyst

Yes, thank you. Mark can you elaborate on the Q4 weakness in recurring revenues, last quarter you had spoken about being comfortable with and acceleration Q3 to Q4. Can you talk about what's changed either from a macro perspective, was it more macro, was it more execution driven and thoughts on free cash flow please for 2019 and 2020. And I have a follow up?

Mark Culhane

Analyst

Yes, so thanks Wamsi. So first of all timing is changed a bit from the linearity expectations we had and secondly, we're taking a much more conservative approach to Q4 given the overall uncertainty around the IT spending environment and other uncertainties in our Q4 outlook.

Wamsi Mohan

Analyst

And on free cash flow Mark?

Mark Culhane

Analyst

Yes free cash flow is really impacted by the faster move to subscription. There are significantly less perpetual revenue running through this for Q3 and Q4 than we expected and honestly we don’t collect that cash it’s going to get collected into the future, which gives us the confidence that 2019 is the bottom from a EPS and free cash flow perspective.

Wamsi Mohan

Analyst

Okay. And if I could Vic the CEO transition has been very quick. It feels almost too quick to judge execution if you were pleased with the strategy why did the Board decide not to give some incremental time on the CEO transition clearly it adds more disruption at a time when you're doing a lot?

Vic Lund

Analyst

Yes, Wamsi thanks. So our Board has an obligation to understand when it's time to do something - Oliver great visionary, loved him. He had never been a CEO before, put him in place and watched, I stayed close, Board stayed close and we just reached a decision that we had reached a point where we had to be more focused on execution. Oliver's a great visionary. He did a wonderful job, but it was the collective decision of the Board that we just needed to drive more concrete execution across the entire organization. So it's - sometimes the things and I said this in my opening comments thing that makes a great visionary doesn't often make a great executioner. And I just think that in the Board's estimation, and I believe I was one of them with them that we had expected that waiting more time would not result and benefit for the organization or any different outcome. Oliver is a good friend of mine, he still is a good friend of mine but you know the truth is what the truth is. And when you realize it, it's time to do something about it and that's what the Board did. We have good Board. Obviously not done on a whim. We watched it for a while, thought about, we'd had discussions. And we just decided it was time. I mean, after watching - in your judgment, you make decisions so that what we did and I - strategy strong, customer reception is good, organization is still here, but we have to start guiding things like consulting and stuff and making those happen to drive better performance. I mean, it's simply unacceptable.

Operator

Operator

Your next question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.

Katy Huberty

Analyst

Hi thanks welcome back, Vic. Couple questions just a follow-on Wamsi’s, is the company went through a CEO search several years ago and didn't - from an external view you didn't seem to come up with any good options. Why do you think this time will be different? And then as a follow-up, you're going through clearly a pretty tricky business model transition, it creates a lot of volatility in the near term, but the end game is a more stable business long-term, the market doesn't seem to be giving you credit. And so does the board think about or why not? The idea of doing this in the private market instead or thinking about other strategic alternatives?

Vic Lund

Analyst

So I'll try to remember every part, and if I don't, then you can remind me. So just - So we'll go through that where we are. So first thing a few years ago, we actually did not do an internal search and external search. We went through that process. I came in for period of time and we decided that there were a lot of just basic blocking and tackling we got through where we got and a year ago we felt like we're getting to top up. We had to have good performance and hitting our metrics everything we wanted to do. Oliver was great. We knew that Oliver was a new CEO, great visionary. And we decided from the stability of the company, well-liked by all of us, it would be better for the company if we could work through that and if it worked out it would be great, that would be the best transition for our company. Unfortunately, that isn't the way it worked out. So we didn't do the external search at that time. We are highly confident that we can find. The Board is there. We have our committee together and they're starting that process today. And I think we will find a good candidate. One of the advantages I think we have today is we know the characteristics we need in the business now better than we did in there, a strong business, but for all of you they've been around a long and there is really a major difference between having a feel for driving executional assets. So what it has to be and the kind of skills and interest interestingly enough to drive that outcome. And I think we will make sure this new leader that we have that. As to your last question, we think the plans we've got in place here will drive great shareholder value. Our Board is obviously always aware of their fiduciary obligations, but the plans we've got in place will drive value. It's good value. You know just - I mean, everybody talks about this stuff, how do you live where you live, but I own a lot of stock personally, I've never sold a share, and I do not intend to sell a share. I believe this there's a lot of near term value here. We have been through this, the street hasn’t understood it. And if we can start throughout showing, which we will do next year, the advantage of both a great strategy and a strong executional programs I think then we start to get credit, but I am not a believer in PR and your way to the top. It takes quarter after quarter of strong performance hitting the goals you want and the metrics that you put in place. And we will see that we do that going forward.

Katy Huberty

Analyst

Thank you for that. Just a quick follow up. Mark you talked about EPS and free cash flow next year. How would you at this point think about the revenue trajectory now that perpetual has run off and you precise the consulting business?

Mark Culhane

Analyst

Yes, we'll have more to talk about I think on the 2020 outlook when we get on our Q4 call, but again, we said I think 2019 is the balance that we get incremental growth from here across all key metrics.

Operator

Operator

Your next question comes from line of Raimo Lenschow from Barclays. Your line is open.

Raimo Lenschow

Analyst

Thanks for squeezing me in. I'm slightly puzzled Mark, maybe you can help me like I get the faster transformation. And so perpetual is running off and certain professional services running off. But you’re guiding down also recurring and ARR, which is kind of the stuff that infused the good stuff. So I'm just trying to if I look at the picture from high up, it's like with the CEO change, it looks like my pipeline for Q4 is kind of slightly emptier than you afford at this point. And that's why the guide on is all levels, but maybe I'm just miss reading it. Can you help me kind of put some kind of more color on them? Thank you.

Mark Culhane

Analyst

Yes, I think what we've said is, we are taking a more conservative approach to our Q4 outlook due to the overall uncertainty around the IT spending environment and other uncertainties. And that's really what's driving the guide.

Raimo Lenschow

Analyst

Yes. And so if I look at the - then if I look at the geographic performance, can you talk to that a little bit in terms of, if I look at the numbers in Americas, EMEA, APAC, is there anything you see differently in some of the regions or is that kind of?

Mark Culhane

Analyst

No, they're all moving to subscription at a fantastic rate. That's why you see the revenues have come down across '19 and all three regions. Yet the segment gross profits are all increasing because it's being driven away from perpetual to subscription where we carry a much more higher gross margin profile and that's really what's happening it's playing out how we thought.

Operator

Operator

Your next question comes from the line of Derrick Wood from Cowen. Your line is open.

Nick Altman

Analyst

This is Nick Altman on for Derek. Thanks for taking our questions. How long do you guys expect the CEO search to take, and what are some of the qualities you're looking for in the new CEO?

Vic Lund

Analyst

Well, so we are starting a committee has identified search firm they're going to use in the individual there and then, and we have signed anything yet, so they don't like you to name that they have that. We will start interviewing candidates as soon as they can pull it together, and who knows on this, right? Because we're just starting, but my guess is six to eight months. I think you're going to get a lot - you got to get through your head and people got to collect their bonuses and all that kind of stuff and then they get more ready to be where they are. But I would think likely six to eight months, we should be in good shape and then apparently short transition, I would think. That's our thought process today. And of course we'll see where that's at. And the qualities we're looking for are, we would love someone who has been through a transitioned before, who has good operational experience and can leverage where we're at to strong growth. Further, I think the thing that we could really see that would benefit our approval, we have a very strong team in place now. All of the hires are excellent people. We have a really strong team in place and the other characteristic this leader has to have is the ability to properly use a seasoned executive team and work through them. Let it percolate bottoms up as opposed to top down, so you will allow your people to do the best they can. And I think the ability of the team to be turned loose and do their capabilities will also increase their operating performance.

Nick Altman

Analyst

And then just given the results in the Q4 guide and the CEO transition, how are you guys thinking about your previously issued 2021 framework or can you give us a sense as to when you might revisit that?

Mark Culhane

Analyst

Yes, we'll hold an Analyst Day in the first half of next year where we'll give more insight on that.

Operator

Operator

Your next question comes from the line of Tyler Radke from Citi. Your line is open.

Tyler Radke

Analyst

Thanks for taking my question. Maybe a question for Vic, I guess just on the CEO transition, one of the things that I had heard from multiple customers with all of their taking over was just kind of sense of positivity of having a product visionary, at that leadership position. And I think a lot of employees were also inspired by that. But just how confident are you that, potentially this transition isn't going to dampen the morale among both your employees and customers and, how, are you working through what could be kind of viewed as challenging next few months?

Vic Lund

Analyst

Well, so for me personally, I've been here before. I know that people, they know me. I have spent two days in meetings with people. I - the reception I've had is very positive. I know for sure the field is excited about it most of them not because of an adjustment one way or the other, but different management styles and power and cost people to grow differently than they would. And I think they're excited about that. I know a lot of our big customers, I'm with them, DT, and I know that people there are some of the big deals we did in, so I know those customers. So it is true that Oliver is a great visionary and he brings a lot that standard. But we have the benefit of his vision in our product today. He is still a friend of mine, still a good friend of the company. And so there won't be any animosity. Customers and businesses at the end of the day, I think love vision, but they buy outcomes. And so our job is to make sure all the things we've talked about deliver value to our customers, not inspiration for the future and that's what we're going to focus on in the next year.

Tyler Radke

Analyst

Great. And then just to follow up, I guess, has there been any change on the pricing or packaging with respect to Vantage and I know one of the topics discussed at the recent user conference was potentially a move towards pay as you go pricing, but just curious if that’s having any impact on some of the outlook we're seeing or if there's anything to call out from a new product or pricing perspective here?

Mark Culhane

Analyst

No, Tyler, no, we said in our prepared remarks, we did announce, a consumption pricing model at our customer conference that has gotten lots of attention and interest from customers because it's market leading. You only pay for completed queries, so - which is unique in the industry. So, nothing specific there. There'll be actually additive to how we move forward.

Operator

Operator

[Operator Instructions] There are no further questions at this time. Mr. Victor Lund I turn the call back over to you.

Vic Lund

Analyst

Thank you very much. Thank you to all of you for joining our call. I know a lot to digest here. But I want to leave you with our commitment to drive execution, make this the bottom of our transition turn around that shows strong growth both earnings per share and revenue as we go forward, and to demonstrate a continued record of hitting the targets that we put out in front of you. So I understand we've got something to learn here. We will do that. And again, thank you so much for being on the call.

Operator

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.