Ladies and gentlemen, today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Ladies and gentlemen, thank you for standing by, and welcome to Teradata's Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions]. I would like to hand the conference over to your speaker today, Christopher Lee, Senior Vice President, Investor Relations and Corporate Development. Thank you. Please go ahead.

Good afternoon, and welcome to Teradata's 2020 Fourth Quarter and Full Year 2020 Earnings Call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today; followed by Mark Culhane, Teradata's Chief Financial Officer, 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 Form 10-K and Form 10-Q filed with the SEC and in the Form 10-K for the year ended December 31, 2020, that is expected to be filed with the SEC later in February. 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 as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow and constant currency revenue comparisons. 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.

Good afternoon, everyone, and thanks for joining us today. I'm very pleased to lead off our call by sharing that Teradata delivered another solid quarter in Q4, culminating in a strong finish to 2020. We exceeded expectations in the fourth quarter on recurring revenue, EPS and free cash flow, and we also exceeded expectations for the full year on ARR growth, EPS and free cash flow. I'm incredibly proud of our team's performance and strong execution, particularly given the impacts of the global pandemic. We have effectively completed our transition to a subscription model that generates recurring revenue and are vigorously executing our transformation to a Cloud-First company. The team drove another quarter of solid year-over-year and sequential growth in total ARR. This was especially true for public cloud ARR, which exceeded $100 million. The growth we are seeing demonstrates that our Cloud-First positioning is resonating with the market. More importantly, it shows that customers are increasingly seeing the value of Vantage in the public cloud, powering effective analytics at scale and delivering meaningful business returns. Public cloud ARR of $106 million at the end of 2020 was a 165% increase from the prior year. Cloud-First is overarchingly important to our strategic focus. As such, we are now disclosing our public cloud ARR in our earnings release and intend to continue providing this metric going forward. To provide some color on our momentum, I'd like to highlight a handful of our public cloud wins. One of the world's largest airlines committed to Teradata on Azure for its next-generation analytics in the cloud. We were chosen ahead of Snowflake because of our low-cost price performance and our best bet technology, allowing this customer to meet its advanced analytics goals. This win is a great demonstration of the essential role Teradata serves…

Thank you, Steve, and good afternoon, everyone. Before I discuss our Q4 operating results, I want to indicate 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 our Investor Relations web page at investor.teradata.com. I share Steve's view that Teradata had a strong finish to 2020 in a global environment impacted by the pandemic. I am pleased to report that the company delivered another quarter with better-than-expected recurring revenue, earnings per share and free cash flow, while effectively completing our pivot from a perpetual license model to a subscription license model. We also exceeded our original guidance for the full year for ARR growth, earnings per share and free cash flow despite the impact of COVID-19. We ended the year with $1.587 billion in ARR, which was 11% growth year-over-year and beat guidance of 8% ARR growth given at the beginning of the year. We delivered $86 million in incremental ARR in the fourth quarter. The $1.587 billion of ARR breaks down as follows: $960 million represents subscription and cloud ARR. As Steve noted in his introductory remarks, to give investors better insight into our cloud business and momentum, we are disclosing our public cloud ARR for the first time. Public cloud ARR totaled $106 million at the end of 2020, which was a 165% increase from the end of 2019. Public cloud-related ARR is comprised of Teradata Vantage running on the public cloud, AWS, Azure and Google Cloud and does not include private cloud, which continues to be included in subscription ARR. We are not including private cloud as our…

[Operator Instructions]. Your first question comes from Wamsi Mohan from Bank of America.

And thanks for breaking out the public cloud ARR and congrats on crossing the $100 million mark here. Can you talk about your public cloud ARR guidance of at least 100% growth for the full year? You're clearly now available across a much broader set of platforms. Just wondering in that at least 100%, what's your assumption around the mix of revenue that's going to be just software bought through the public cloud marketplaces versus the revenue where customers are paying for infrastructure from you as well?

Yes. Wamsi, thanks. Yes. So clearly, we're seeing lots of momentum in our public cloud interest with Vantage on the cloud. Time will tell how much comes is just software-only versus are they going to procure the infrastructure through us. Clearly, we don't think our biggest customers are likely to do that, given what we know today. So that's why we're saying at least 100%. We would hope that would be higher than that, and we'll have to see how the year plays out as that moves to determine whether -- is it all coming to us or just the software portion only?

Wamsi, it's Steve. Thanks for the question. I'd also say on the customers buying the infrastructure through us, we see that as a key differentiator, being able to operate Teradata Vantage inside the customers' environment is something that differentiates us inside the industry. A lot of the cloud business that we have done to date and a significant portion of our $106 million, we actually provide the full stack from infrastructure through the application stack. So we're offering a full range of deployment options in the cloud that we think is really differentiating.

No, that's great, Steve. If I could just ask on the sales comp changes that you mentioned to incentivize more growth in the cloud, any more color you can share there? And what are you seeing at your public cloud customers in terms of pricing choices? Is it going more towards blended pricing or consumption-based pricing?

Yes. Wamsi, I'll take that as well. It's a great question. So we've redesigned our compensation scheme for this year, so that our sales teams get accelerated compensation when they sell ARR, the results in growth inside a customer account, if it's an existing customer, and they get a multiplier on it when that growth includes growth in the cloud. So we've designed a compensation scheme that we believe protects both the base and encourages the sales team to execute growth in the cloud. The other thing I would say is we're encouraging our sales teams to prospect. We believe that, as you pointed out, our consumption-based pricing model enables us to go after new customers in a very effective way. So we're not just focusing on our existing base. We're going to actively prospect. And our new sales leader, Todd Cione, is looking at deploying a hunter-based sales model to go after new logos. So we're incredibly excited about that. We see the blended pricing model has been very popular in terms of when our customers look at how they want to operate in the cloud because it gives them some benefits commercially if they know that they know they're going to execute a certain volume of transactions, and they want to be able to spike according to different workloads. So that blended pricing model is really exciting for customers that are just starting with us. That consumption model is really exciting. So I think we'll see both models being pretty successful in uptake from the customer base.

Congrats on the strong execution.

Thanks, Wamsi.

Your next question comes from Tyler Radke from Citi.

Steve, you talked a lot about several kind of Fortune 100, Fortune 500 public cloud wins. And I'd say in the past, this hasn't been something that you've seen a ton of in terms of the wins and obviously, the strong growth in cloud ARR. I guess from a product or execution perspective, is there anything that you could identify that you think has kind of changed your momentum there? And then a follow-up for you or for Mark, is just in these cloud wins, maybe help us understand how much uplift you're seeing from customers from a dollar basis as they move to the cloud and they're either expanding capacity? Or you just see a natural uplift from taking on that infrastructure?

Yes. Thanks, Tyler. I'll take the first part of the question, and I'll let Mark talk a little bit about the expansion that we've seen when the existing customers move to the cloud. I think the excitement around our cloud product has really accelerated as we went through the year. As we went through the year, we shifted our research and development investment to be predominantly in the cloud. If you -- just roughly 30% of our investment prior to our changes in 2020 went to cloud and 70% went to on-prem. We swapped that around. So 70% of our R&D investment is now dedicated to the cloud. That's about $200 million, a significant investment in building up our cloud capabilities. And what we've been able to do is really build out our integrations across all of the cloud platforms, AWS, Azure and announced in Google Cloud. Also, the -- our ethos now is to be able to extract value from data no matter where it sits in the ecosystem. So introducing native object store and being able to use native object stores on the public cloud environment is really attractive to our customers. And as we look forward into 2021, we're known just now to be great at delivering that performance and scale on the cloud. In 2021, we're going to get even better. We're adding third-party application ecosystem integration in the cloud. We've got more cloud-native integrations with third-party applications in the cloud. You can bring your own analytics, you are integrating with cloud-native services. This is a complete modernization of Teradata Vantage and the cloud environment. And we think our customers are seeing that, and they want to use that technology to get the best business results as we possibly can. So lots of investment there. Mark, do you want to take -- talk a little bit about expansion?

Yes, sure. So to date, it's largely been our existing customers moving some or all of what they're running with us on-premises to the cloud. And the growth in ARR can vary. It depends. Are they procuring the infrastructure for us or not? Because if they're not, you could see minimum or some less ARR moving. Importantly, for us, what we've experienced is that when -- for the growth we experienced across 2020, the customers who are already in the cloud with us, they grew over 50% with us during 2020. And those that moved something from on-premises to the cloud with us, while it may have been neutral or up slightly when they moved or potentially slightly down, we saw that once they moved with us to the cloud, we saw almost approximately 40% growth from where they started with us in the cloud, which is obviously very important for us, which is why I made the comment in our prepared remarks that if we see customers that want to procure the instance of the software -- to date, we haven't seen it, but our bigger customers may go that direction. It may seem like an initial decline in ARR. But once we have them there, we see the growth that can occur. And as I mentioned, that's a trade-off we'd gladly make. Obviously, the margin profile of software only coming to the cloud versus us incurring the infrastructure cost is better as well. And so those would be trade-offs we would gladly make because we all know we want our customer base to move to the cloud with us in Vantage in the cloud. So we're excited about the trends we've seen across 2020 and the growth we've seen there. And we're also very excited about what we've seen in the pipeline and the momentum building of our existing customer base in the cloud. And the perception of us in the marketplace is now starting to rapidly change on that front.

[Operator Instructions]. Your next question comes from Katy Huberty from Morgan Stanley.

Congrats on a really strong quarter. I wanted to ask, Mark, if you can talk a little bit about the margins in your cloud revenue today versus subscription margins overall? And then when do you expect the two to converge? And then I have a follow-up.

Sure. Well, clearly, Katy, as we've mentioned, the margins we experienced in the cloud are lower than what we intrinsically experienced on-prem because we're at $106 million in the cloud today. We're not at scale. So we would expect over time that we view 70% as sort of the benchmark you got to hit and exceed in the public cloud. We're going to see -- the revenue threshold to get us there is clearly beyond the $106 million. Is it $300 million to $500 million? Time will tell. But we clearly expect those to converge on that front, for sure.

Okay. That's great. And then just -- also, Mark, just looking at your earnings guidance, $0.38 in the March quarter. And then if I just divide your annual guidance by 4, that would also suggest a similar sort of $0.38, $0.39 run rate through the year. Should we expect that now that you've transitioned to subscription that EPS is going to be quite stable and we won't see historical seasonality? Or are you ramping investments through 2021, and that's why you're not seeing EPS expansion off the March space?

Yes. As you probably know, we've experienced seasonality historically. I think we still experienced some of that here in 2021 as well despite the completion of perpetual to subscription because now we're in the next phase of that on-prem subscription moving to cloud. And does that largely go consumption-based or not? Because if it goes consumption-based, we recognize revenue based on what's consumed, not a ratable spread of what they've signed up for. And you do that each and every month, which could create some variability in terms of recurring revenue and what's happening. And then we'll see what happens with the portion of our customers that have done something with the cloud but do -- maintain something with us on-prem, that may change the way contractually that falls to our revenue, which could create some potential seasonality as well. So I don't expect it to be sort of stable $0.38 range across the quarters throughout the sequential part of the year. There is still going to be some seasonality here.

Your next question comes from Derrick Wood from Cowen.

Great. This is actually Nick Altmann on for Derrick. For my first one, can you guys maybe talk about customers who have shifted to the consumption-based pricing model and maybe touch on how the expansion motions are playing out there?

Nick, I'll talk about it at a high level and then ask Mark to comment a little bit more. What we've seen from customers who have moved from an on-prem motion to subscription in the cloud using consumption is actually that -- the overall level of ARR and many of those customers has increased. And that's as they've brought new workloads to the cloud. So obviously, when you're working in an on-prem environment, you have a constrained physical infrastructure footprint. And when we move customers to the cloud, it kind of unleashes their ability to expand their use cases and deployment. An interesting thing for our response to COVID and when we are helping some of our customers respond to COVID, we gave them some capacity on demand into their infrastructure. And they immediately used that capacity on demand. We're seeing a very similar pattern in terms of -- as our customers move from on-prem to the cloud, they can take advantage of those elastic environments. And it's given us a great opportunity to talk to them about some of the more advanced analytic use cases that you want to deploy and incremental workloads that we can put on Teradata. So it's pretty exciting.

Great. And then can you guys just give us a sense of how the installed base has trended just in terms of willingness to buy or expand mainly as it pertains to the macro environment? How much improvement have you guys seen there sort of as the year progressed? And then looking ahead, are you starting to see more projects from distressed verticals come back online? Or is it a bit too early to tell there?

So we are really, really happy with our execution in Q3 and Q4 from an ARR growth perspective. And I'll refer you to one of the customer examples that we gave in my prepared remarks, which was one of the airlines committing to Teradata in the cloud. Now clearly, a distressed industry. But what we're seeing is that customers who are in an industry which has challenges, if they have the vision to utilize data to get better business results and business outcomes, they can use that data to optimize their operations at a rapid pace to ensure that they can adequately respond to the challenges that are in front of them. So I gave the example -- one example, an airline, another couple of examples around health care, where it's such a critical -- critically important for these organizations to be able to respond to the challenges that are in front of them. So we're starting to -- we're seeing even industries that you might consider distressed just now using the power of data to really respond to the environmental challenges that they have. Great question, though, Nick.

Your next question comes from Pree Gadey from Barclays.

Congrats on a great quarter. If I look to the math for cloud ARR and total ARR guidance, it suggests that almost all the new ARR that you're adding is coming from the cloud. Is this a basic assumption that there will be no on-premise expansions during this year?

Pree, thanks. Yes. No, we'll see our on-prem business expand. But clearly, we're seeing movement from on-prem to the cloud in a major way. So we would expect the cloud that we said is going to grow at least 100%. At the same time, we're still going to have customers that are going to be on-prem that haven't done things to the cloud, and we expect some of that to move as well. Overall, subscription or on-prem subscription, we would expect would be lower by the end of this year compared -- potentially compared in total might be. But right now, we're expecting subscription to grow, but not at the same rate that we have seen it grow in the past because it's moving to the cloud. So the vast majority of the overall subscription growth is coming in the cloud. But at the end of the day, total ARR is growing, on-prem subscription ARR is growing, but the growth is being driven by what's going on in the cloud.

Got it. Ex migrations on-premise is still growing?

Yes. It's still growing.

As far as where the cloud product is right now, can you give us an idea of how much of the product itself is cloud-native versus just the existing Teradata product that's being hosted on the cloud?

Pree, I'll take that one. So we're really happy with the advances that we've made from our product team. They have completely redesigned certain elements of the product, and we continue to transform the underpinnings of the product. What I will say is that we've really improved our cloud-native integrations. In AWS, we integrate with 17 of their cloud-native services. We've got the same level of integration with AWS and Google's first-party services. That clearly makes us a great partner for the cloud service providers. The thing I want to point out, though, is some of our key differentiation and the reason that we are winning in the cloud is because of the technology, the Teradata technology that our customers are used to, the level of performance, the level of scalability is delivered in the cloud successfully across all of the dimensions that our customers want to stress the -- an enterprise data warehouse and analytics capability, whether it be volume or data, concurrent queries, the complexity of those queries, the scalability, the -- all of those capabilities that our customers are used to from the Teradata platform, we deliver inside the cloud environment. I mentioned a little bit earlier, we're -- turned around our investment to have -- to around $200 million of investment in terms of developing our cloud product. It's just going to get better and better over time. We've completely rethought our R&D team so that we're moving to much more regular and frequent releases of cloud-based technologies and capabilities. So it's a great transformation story. It's great to see that technology coming online for our customers.

Our last question comes from Zane Chrane from Bernstein Research.

I wanted to ask about the ETL process and migration with customers moving to the newer cloud and subscription offerings. One of the pieces of feedback we heard from the early adopters of customers a couple of years ago that moved from on-premise IDWs to subscription or Teradata in the public cloud or managed cloud was that the process of migration and rebuilding the ETL pipelines was more labor-intensive and clunky than they had expected. So I'm kind of curious what you've done in the last year or 2 to simplify and maybe automate the process of data migration and rebuilding the ETL for data ingress. And then separately -- or actually possibly related, can you talk about what you're doing to capture the growing opportunity in streaming analytics for data in motion, whether it's integrating with something like data flow on Google or Apache Beam, et cetera?

Thanks, Zane. I'll take a stab at those. So yes, I think our integration with cloud-native services has really helped some of that migration effort as well as some of the tools and techniques that we've developed to help in migration. As we look to compare moving an existing customer of Teradata to the cloud, we've been able to demonstrate to those customers that given our knowledge of their environments, given the tooling that we have available that we can do it much more effectively and efficiently, really reducing the time to value of running Teradata in the cloud and getting the business value that they want from their data delivered to them as quickly as possible. One of the wins I referred to actually in our prepared remarks was a customer that was experiencing that challenge in terms of that data migration, and they came back and asked Teradata instead of them moving to a cloud-native product, "We want to move to Teradata in the cloud. We see that as a much easier migration. And we know that you and your consulting team can help us deliver that." So I think we've got a much better value proposition in terms of that. The integration with the cloud-native services allows us to integrate with those modern ETL capabilities. And that also applies to streaming. We're seeing a lot more interest in terms of real-time data analytics, especially with 5G and IoT use cases. And our streaming capabilities is -- we have streaming capabilities in the product just now, but we're also investing to develop more streaming capabilities as we go through 2021.

I see. And you view the streaming opportunity as being something you'll focus on organic development for, it sounds like, maybe more so than partnering with open source or third-party vendors, is that the right way to think about it?

Look, I think what we're thinking about -- as we think of Teradata Vantage, we're really thinking about it as a platform. And so we are building some capabilities inside the product to help support streaming, but we're also integrating with the cloud service providers, first-party services around streaming to be able to address that. So I think leveraging those cloud-native capabilities is going to be incredibly important. And something our customers really want from us. That's how they want us to focus as a platform on what we just excel at, and they can use some of the first-party services from their cloud providers to do some of the streaming-type activity. So it's a nice blend of activity.

That's great to hear. It sounds like a solid strategy, and congrats on a really nice quarter. It seems like getting the right captain for the ship. It's getting it back on track, so congrats.

Thank you, Zane. Thanks very much. So I'd like to close out the call today. I'd like to thank you all for joining us. Thank you for the questions. I'm incredibly proud of our progress, and I'm really confident in the future. Our continued solid results, particularly in these challenging times, are a testimony to the hard work of everybody at Teradata. And I just really want to thank and congratulate the team on a great Q4, a great 2020 and looking forward to a great 2021 with them. We remain staunchly focused on our Cloud-First transformation and ensuring that we execute and deliver the best multi-cloud data platform to gain customers and gaining the greatest advantage from the data assets. Thank you very much.

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