Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 Teradata Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to your speaker today, Matt Garvie, Senior Manager of Investor Relations. Please go ahead, sir.

Good afternoon. And welcome to Teradata's 2020 third quarter earnings call. Steve McMillan, Teradata's President and Chief Executive Officer will lead our call today. Followed by Mark Culhane, Teradata's CFO, who will discuss our financial results. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release, Teradata's most recent 10-K filed with the SEC and in the Form 10-Q for the quarter ended September 30, 2020, expected to be filed with the SEC in the next few days. We undertake no duty or obligation to update our forward-looking statements. On today's call, we will be discussing certain non-GAAP financial measures, which exclude such items such 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. 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 with, I will turn the call over to Steve.

Good afternoon, everyone. Thanks for joining us today. I'm pleased to report that Teradata executed extremely well in Q3 and delivered good results for our shareholders. We exceeded our expectations and guidance, and for all key metrics, including ARR, recurring revenue, free cash flow and non-GAAP earnings per share. The strong performance comes as a result of concentrated efforts from across the organization. The team delivered very well, delivered solid sales execution in all regions, provided ongoing support for our customers to help them obtain the greatest value from the data assets and significantly advanced the technology for the cloud. We also stepped up and directly address outdated market perceptions with clear market messages and implemented focused cost discipline as well. As a testament to a growing momentum in the cloud, I will start today's remarks by sharing examples of our code-first success with customers. We are starting from a great base and a well-established a strong commitment to helping customers leverage their data assets and solve their complex data challenges at scale. We are therefore seeing substantial growth in our cloud business across regions, industries and public cloud platforms. Loblaw's, a large Canadian retailer is migrating key applications and database technologies to the cloud with Teradata. This customer is a great example of her ability to operate in a hybrid multi-cloud model, and Loblaw's now runs Teradata Vantage in more than one public cloud platform. A leading truck manufacturer in Asia has selected Vantage on AWS and its cloud data analytics platform. The customer will leverage Vantage in the cloud from real time analysis of vehicle data to reveal insights from vehicle functionality and performance, drive predictive maintenance and determine value-added services to offer its customers. Next one, we are partnering with a regional provider of Integration Services. A…

Thank you, Steve. And good afternoon, everyone. I am pleased to report that the company delivered a strong quarter with better than expected recurring revenue, ARR growth, non-GAAP earnings per share and free cash flow generation. We accomplished these strong financial results, while making further progress in realigning our R&D and product management organization, and investing to support our cloud first initiatives, as well as taking actions to reduce and streamline our overall cost structure. Before I continue to highlight a few key elements of our Q3 operating results, I want to make it clear that unless stated otherwise my comments today reflect Teradata's results on a non-GAAP basis, which excludes items such as stock-based compensation expense, and other special items identified in our earnings release. Additional commentary on key metrics and segment trends can be found in the earnings discussion document on the IR website at investor.teradata.com. We delivered $365 million in recurring revenue, which was above our guidance range, and was 6% growth year-over-year. We generated $47 million in incremental ARR this quarter, and exited the quarter with a total ARR balance of $1.501 billion, an 8% increase over Q3 of 2019. We were particularly pleased with the strength we saw in our EMEA and APJ regions, which helped drive recurring revenue and ARR ahead of our expectations. Perpetual revenue came in as expected at $17 million, slightly up from the prior year. Although the mix of deals varied from expectations, driving better than expected gross margins. Consulting revenue declined to 28% as expected, as we continue to refocus our consulting business on higher margin engagements to drive increased software consumption within our customer base. In addition, we had continued impact from the ongoing COVID-19 pandemic, as some customers cancelled certain projects as they continue to manage their…

Thank you. [Operator Instructions] Your first question comes from Katy Huberty from Morgan Stanley. Your line is open.

Yes, thank you. Good afternoon. Mark, can you help us reconcile the really strong third quarter results? Steve's bullish comments on Vantage cloud adoption, your comments about accelerating cloud adoption in the fourth quarter with the guidance that doesn't necessarily imply sort of normal fourth quarter, you know, strong seasonality. Is there anything in terms of timing of when deals are closing? That's impacting the recurring revenue guidance for the fourth quarter? And then I have a quick follow up.

Yeah, well, first of all, we're taking a conservative approach just as we did in Q2 and Q3 when we laid it out, not expecting much in terms of contribution from whatever business we close in Q4. Not all the ARR that exists at the end of Q3 starts to flow to revenue on October 1, the start dates can be out further. Clearly, we're seeing lots of momentum in the cloud, and we're seeing interest in our consumption model in the cloud and you start working when you have consumption deals, you don't take revenue ratably, from the AR perspective, you take it as it's consumed and that can vary as well. So overall, it's a conservative posture we're taking and we are bullish about what we see in our business for Q4.

And Mark, coming into this year, you view 2020 as the year of inflection for really all financial metrics. And we certainly saw it in free cash flow, which has been credibly strong this year. But when you think about revenue, EPS and free cash flow growth, do you think that we could see the trifecta in 2021? Obviously, understanding that you're not guiding to specific numbers yet?

Yeah, well, you know, we we've said all along, we thought sort of 19 becomes the bottom across a lot of our metrics, certainly for free cash flow for EPS, given the midpoint of our Q4 guide, that puts our full year at $1.19. Well, ahead of the prior US$5, and that, you know, includes probably $0.07, $0.06, $0.07 cents of FX headwinds compared to the $5 in the prior year, even at the dollar $19. So, yes, we believe we're focused on profitable growth, growing the top line as well as growing the margin profile of the business. And we'll lay that out on our Q4 call.

Thank you, and congrats on the quarter.

Yes. Thank you.

Your next question comes from [indiscernible] from Bank of America. Your line is open.

Yes, thank you. Mark, your EPS guide for the fourth quarter suggests maybe about $10 million or so more expense than that what we talked previously. And you alluded to some of the things, including incremental marketing efforts that Steve mentioned, to address misperceptions about club performance and cost. Is this something that you view as a one rate expense that we should be analyzing into calendar '21? I know you also said that there was $80 million, $90 million of savings such had come through. So just trying to think through the moving pieces over here whether or not this incremental sales and marketing expense is going to continue into 2021? And I have a follow up?

Yeah, so a couple of things. As I mentioned in my prepared remarks, you know, Q3 EPS came in much higher than we anticipated. Some of that was a shift out of expense out of Q3 to Q4, clearly, some things that we were thinking were going to happen in Q3 that have now been sort of scheduled into Q4, that's having an impact on the EPS delta. Better than expected gross margins, we're not expecting the gross margins at 61% in Q4. So both of those things are reflected in why the EPS guide is where it is not. We do not expect that the Q4 number annualized to be the run rate going forward. Clearly, there are some one-time things that we're doing in Q4. That will persist across next year. And, as you adroitly pointed out, given the actions we've taken to date, it potentially has savings next year prior to any of our reinvestment and what we're doing. But - and we'll weigh all that out when we get to our Q4 call.

Okay. Thanks, Mark. And Steve, these increase investments for cloud first, how will you be measuring the success of these investments? And should investors expect incremental disclosure on what's happening in terms of you know, new customer ads in terms of maybe cloud specific ARR or any other metrics or GCP [ph] or some sort of metrics that you might be able to share down the road here?

Hey, Vonzi [ph] hope you're doing well. And yeah, we are looking at Tera close investments, it's really, you know, accelerating our existing customers adoption of cloud, but also giving them the capability to when net new workloads in the cloud with the customer base. And that's going to manifest then, you know, a strong cloud recurring revenue growth. And that's really the key metrics that we're looking at. Mark and I have been having a discussion around incremental disclosures about our cloud business. We don't have anything planned in the short term. But I think you should stick with us and as we go through next year, we'll certainly - that's a consideration for us.

Okay, thanks a lot. Good luck.

Thank you.

And your last question comes from Reynold Vancho [ph] from Barclays. Your line is open.

Hey, this is a [indiscernible] Congrats on the quarter first off. You know, with, I guess cloud being a little bit more of a focus going forward, with cloud in there, I feel like it muddy, the ARR number, the bookings numbers, billings. So what's I guess the best way to view how Teradata is doing going forward, like a normalized metric?

Well, I'll take the first part of it. And then Steve can add to it. So I mean, we clearly are looking at how much of ARR is moving and shifting to the cloud, whether that's from existing customers, moving workloads to the cloud, net new customers, and so forth. So clearly, it's going to manifest itself in what's happening in our ARR metric, which we already talked about every quarter. At the end of the year, we break down the components of what represents our ARR balance across subscription, managed services, maintenance, upgrade rates, et cetera. And as Steve alluded to, we'll look to see whether we start to augment some of those metrics, with specific cloud metrics, as components of that, at some point across 2021. But we are seeing strong, strong momentum from our customer base and prospects as to what we're doing in the cloud and what we're capable to do this at scale versus the native only. Native cloud only, only providers. And so we're excited about how things are lining up. Stay tuned, and we'll work our way out 2021 when we get through Q4.

All right, great. Yeah, look forward to seeing those cloud metrics. I guess staying on the cloud topic. If you could give us a little bit more color on what type of customers you're seeing, moving to the cloud, and you know, how the consumption model, you know, might be changing the way customers are using Teradata? And, you know, kind of are you picking up new customers that you never would have before? Or is this mainly on-premise targeted customers that are shifting some workloads to the cloud as well?

I'll take that. And we are - we're seeing all of the elements that you just outlined. And I think you saw in some of my opening comments that we're seeing tremendous success with our existing customers. So our cloud wins are really a mix of on-prem migrations, as well as net new workloads. And we're being really aggressive on that migration front, because we want to make sure that we take customers on the cloud journey. And our consumption pricing model is essentially given as a lot less friction and moving clouds - moving customers to the cloud. And so we see the opportunity of both our technology advances and our commercial models, as providing opportunities for both existing and new customers to really try out Teradata in the cloud, experience the real differentiator capability and [indiscernible] operating with performance and scale and delivering real business advantage. One of the things that Teradata is fantastic out there, when it's on-prem, or in the cloud, is our query optimization and workload management. What that means is that our customers and that are using Teradata either in the client - either in public cloud environments or on-prem, can make sure that their critical workloads are executing at the most effective and efficient cost point, yeah. So having that consumption pricing option has a really affordable [indiscernible] you go, usage phase capability, really does give us that incremental capability to get new customers with us. And as you heard in the prepared remarks, I think we've got some good examples of customers that are taking advantage of that.

Thank you.

There are no further questions at this time. I turn the call back over to Steve McMillan.

Thank you very much, operator. And thank you for all pf the questions. I'm really proud that the Teradata team for delivering a strong financial performance in the quarter and a solid execution across the company. Customers are increasingly adopting our cloud data analytics platform and we're going to keep up the momentum there. We made good progress in our transformation and in atomizing our business model for ongoing future success. And we all plan to stay focused on the task at hand and finish the year on a strong note. So thanks, everyone.

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