Good afternoon. My name is Charlie and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Second Quarter 2021 Earnings Call. [Operator Instructions] Thank you. I would like to hand the conference over to your host today, Christopher Lee, Senior Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead.

Good afternoon. Welcome to Teradata’s 2021 second 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. 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 and in our SEC filings, including our most recent 10-K and in the Form 10-Q for the quarter ended June 30, 2021 that is expected to be filed with the SEC tomorrow. These forward-looking statements are made as of today and 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. The discussion on today’s call reflects Teradata’s results on a non-GAAP basis, unless indicated otherwise. 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. 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. 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. Thanks for joining us today. I am pleased to report Teradata delivered a solid second quarter. Our worldwide sales and operational execution as well as our continued cost discipline resulted in year-over-year growth and outperformance in key financial and operational metrics, including 157% growth in public cloud ARR as well as growth in recurring revenue, non-GAAP EPS and free cash flow. We will maintain our executional focus and with this ongoing attention, we expect to drive sustained revenue growth margin expansion and an increased stream of free cash flows. I am also pleased to report our cloud business continues its upward growth trajectory. Our large enterprise scale customers are accelerating their digital transformation agendas to address the ongoing challenges of the global macro environment. Organizations need data and analytics to provide the business insights that will help them manage through these changing environments. They need access to all relevant data as they address new customer buying behaviors and remote work models stemming from the pandemic as well as ever-increasing volumes of data coming from AI, machine learning, 5G and IoT. Teradata has proven that we can help customers get real insights from their data regardless of where it resides, whether in public cloud or in on-prem environments. We are competing and winning in a large and growing market. There is not a day that goes by with less data than the previous one. The technologies we deploy help customers get the most value from their data environment at enterprise scale and with outstanding price performance giving us an advantage in the hypergrowth enterprise market. Our purpose to transform how businesses work and people live through the power of data, gave the alignment of our entire team, and the team executed quite well in Q2. Customers increasingly see…

Thank you, Steve and good afternoon everyone. I am excited to join you all today for the first time. I was drawn to this incredible company because we value the same thing: world-class technology, a true customer focus and creating a strong culture that helps people thrive. I am truly honored to be part of this very talented and motivated leadership team as we look to take advantage of the huge opportunities ahead of us. In the second fiscal quarter, Teradata delivered solid financial and operating results. Here are some of the highlights. Our sales and product teams executed well, delivering in line with our outlook and growing public cloud ARR by 157% year-over-year and growing recurring revenue by 16% year-over-year as reported. Our operational execution was very efficient across the Board, driving an operating margin of 23.8% and non-GAAP EPS of $0.74, which is above the previous outlook. Finally, our cash collections were strong, enabling us to generate $219 million in free cash flow. These results demonstrate that Teradata combines strong financial fundamentals and operational discipline. Together with our market-leading technology, these qualities differentiate Teradata in the market and give us a robust base to continue to grow from. With regards to ARR, as Steve highlighted, customers are adding mission-critical workloads that drive increased adoption and consumption of Vantage in the cloud, on-premises and in hybrid environment. These digital transformation activities resulted in total ARR growing by 9% year-over-year as reported and by 7% year-over-year in constant currency. Total ARR grew by $22 million sequentially. We achieved growth in both public cloud and subscription ARR across all 3 geographical regions year-over-year and sequentially. Public cloud ARR grew by $15 million sequentially, of which more than half resulted from customers migrating to Vantage in the cloud from on-premises perpetual and…

[Operator Instructions] Our first question comes from Tyler Radke of Citi. Your line is open. Please go ahead.

Hey, good afternoon everybody. Thanks for taking my questions. I wanted to just ask you generally how you feel about second half pipeline. I know, as you mentioned in the script, you did have a really nice second half last year, but given some of the – what looks like kind of new customer momentum and some of the migrations you referenced, could you just kind of compare and contrast maybe the cloud pipeline that you see in the second half this year relative to last year and just how we should be thinking about that?

Hey, Tyler. Good to talk to you. This is Steve. We are clearly seeing really good momentum in the marketplace. And even though the motion is new, actually seeing new customer logo wins is something that’s very – that we see very positive. We do see a good pipeline – we know that seasonally, our fourth quarter is our highest quarter from a sales perspective, and we expect similar from a cloud ARR perspective, pipeline would support that just now. I think another great thing that we’re seeing is the expansion of our existing customers in the cloud. If you think about when we pivoted towards a cloud focus, around the middle of last year that we had some really good product announcements that helped us build a really good Q3 and Q4. So, 157% so far in Q2. We still are very confident on our full year outlook of 100% year-on-year growth for cloud.

Great. And if I can just ask a follow-up maybe for Claire, I think the third quarter guidance implies cloud ARR growth dipping below 100, which would be a pretty significant deceleration from the second quarter, yet it seems like you would expect that to kind of bounce back higher in Q4 and – just wondering if you could talk through that dynamic? Is it simply related to a difficult compare from last year or are you expecting the year to be more back-end loaded?

Tyler, yes, as Steve just said, the fourth quarter does tend to be our biggest quarter, especially with regards to cloud ARR growth, and that’s in line with our historical seasonality. So that is what we’ve reflected in our Q3 and full year guide.

I think the other point, Tyler we are a large enterprise-focused organization. And so our deals can be lumpy because they’re large. So – but again, we’re confident in our Q3 guide and also in our full year guide for cloud ARR.

Thank you.

Our next question comes from Wamsi Mohan of Bank of America. Your line is open. Please go ahead.

Yes, thank you. Claire, congrats on the new role and look forward to working with you. Can you maybe bridge the 3Q EPS guide quarter-on-quarter? How do we go from $0.74 to 30-something cents next quarter and then $0.20 or so in the fourth quarter when typically you have the stronger seasonality? If I caught it right, you attributed a few pennies of impact from incremental investments, but ex that, what really accounts for that large differential?

Good afternoon, Wamsi and looking forward to working with you as well. First of all, I’d just like to say we’re very pleased with the increased full year guide that we gave on EPS, so we’ve increased our EPS guide by $0.30, of which $0.12 is in the second half. To your point, we are seeing linearity between H1 and H2. First of all, we are increasing our investments, particularly in R&D and go-to-market operations to accelerate our growth momentum in the cloud, but also we are seeing the impact of the upfront revenue that we saw in H1 and the pull forward that has an impact in H2 also.

Okay. So it’s really the margin flow through from the pull-forward revenue, but you also mentioned that there is some impact, some assumption your best guess of how much more there could be in the second half. So there is some consideration of that that’s baked into the guidance to clarify?

That’s correct. There is a modest amount that we factored in to H2 at this time.

Okay, great. And Steve, if I could just follow-up on the public cloud ARR. I think last quarter, you guided to $15 million to $20 million. You came in at the low end of that at $15 million in the quarter. You’re guiding for another $15 million – at least $15 million sequential increase. But your presence in sort of across more public clouds is more prevalent now. You have had a little bit longer period to address more customers and use cases. So, why shouldn’t this be accelerating at a faster pace? I understand the growth is very solid and well above your full year target. But conceptually, are there anything – anything that you can point to within customer conversations or hesitancy or anything of that sort that would help explain some of the deceleration?

Yes, Wamsi, I think I pointed to some of it. Again, our business can be lumpy due to the large contracts that we execute – we certainly – we always want to set guidance that we are comfortable with that we know we don’t want to disappoint our investors. We do expect a very strong fourth quarter, again, to the point from earlier. As we go through the year, we have more difficult compares. In terms of the shape of the cloud business, we are pretty much in line with the marketplace in terms of the distribution of our cloud customers. We started obviously earlier with the AWS and our GCP release was in third quarter from last year. We are seeing really good growth as well with Azure. So we’re pretty happy with how we have been represented across each of the CSPs. I think the CSPs are also starting to see the fact that when they deploy Teradata and their ecosystem, there is no cone impact in terms of their sales of first-party services which – because we’re well integrated into those environments now. It’s given some momentum and focused from the CSP sales folks to put Teradata into their proposals. We are also seeing good expansion from our existing customer set from a year-on-year perspective and the cohorts of customers from each of our prior years are growing nicely. So, we are still bullish on 100% year-on-year growth for the full year. It will be focused in the fourth quarter from an achievement perspective, but we are really bullish on our cloud business. Thanks for the question, Wamsi.

Thanks, Steve.

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

Thank you. Good afternoon. Claire, welcome. Looking forward to working with you. I want to start by asking, Steve a question just looking at the ARR metrics year-to-date relative to where you exited 2020 total ARR is flat, up about $1 million. Cloud ARR is up $33 million. So that would imply that there is some churn in your on-prem business. Can you just talk about what that looks like? Is that maintenance contracts running off? Is that subscription churn that is not being offset? I just want to understand the dynamics there. And also, would you expect this dynamic to normalize by the end of the year, just given some of the lumpiness that you are talking about?

Yes, Katy, thanks for the question. I think there is a number of different dynamics that are happening within the business. One is the conversion, as you said, between the different lines inside the business. And if we convert cloud business to – if we convert subscription business to cloud ARR, there is – clearly, that’s net neutral. However, we do see expansion in growth when we execute that conversion, which is positive for us. Every quarter, we experience and anticipate some amount of churn and the activity this past quarter was not really different from prior quarters, nor are we forecasting anything significantly different from a churn perspective on a year-on-year basis.

Okay. Thank you. And Claire, I imagine we will hear more about this at the Analyst Day, but if we look at past subscription transitions, typically, a company exits with free cash flow that’s 1.5 to 2x what the free cash flow of the business was before that transition. So for Teradata, that would mean you started at $300 million, you could end up in the $450 million to $600 million range as normalized free cash flow. Is that fair for your business? Or is there something different given the hardware component?

Good afternoon, Katy. And thank you for the warm welcome. You’re absolutely right. We will be sharing more information with you on our long-term plan and free cash flow generation and capital allocation strategy at our Investor Day in September. One thing I would say is we are pleased with the cash flow generation that we saw in Q2, but also the fact that we were able to increase our full year guide to at least $400 million.

And Katy, I think you’re absolutely right. You’ve seen the declines in terms of our perpetual business. To use the term, we’ve kind of swallowed the fish now from that conversion. And we think the fundamentals of the company are well positioned to propel us forward.

Great. Thank you.

Our next question comes from Derrick Wood of Cowen. Your line is open. Please go ahead.

Great. Thanks. This is actually Nick Altmann on for Derrick. Thanks for taking our questions. Maybe to start, there was a report that you guys were working with IBM in outsourcing some of your on-premise support. So maybe can you just confirm whether or not that’s true? And maybe just touch on what drove you to make that change and what kind of savings you guys expect there?

Hey, Nick. Good to talk with you. We are – as we look at our business operations, we always put the customer at the center of the decisions that we make. And we are always looking to provide the best experience for our Teradata’s customers around things like on-premise support and execution of that capability. We’ve, for many years, outsourced elements of our hardware support business to reliable third-party companies. We don’t really get into the details of the names or the details of those agreements. But they are just a normal part of how we ensure that we deliver the best possible service to Teradata customers whilst also enabling us to strategically focus on and invest in the – in our business as we move forward. So clearly, we do expect that to be a win-win for both our customers and Teradata in terms of execution and it will have positive impact to our gross margin.

Got it. Got it. That’s helpful. And then you guys launched consumption-based pricing last year. I guess what are you guys seeing from your installed base there just in terms of the initial commitment versus the actual usage relative to your expectations?

Yes, it’s early days still. The – our consumption-based pricing clearly has been met with great interest inside the market, a good percentage of our sales engagement opportunities have included at least a request for consumption-based pricing. The really interesting thing – because our customers know their environment – it’s a very stable business that they tend to execute on top of Teradata. They see a real value in terms of blended pricing program where they commit a fixed amount to us with bursts of consumption on top and many are choosing that option. That reduces our volatility from a consumption perspective. But we’re just really happy to be able to give customers that choice in terms of how they interact and engage with Teradata, but it’s been pretty successful. We will continue to refine and improve our pricing models as we move forward. Again, I would just point you to the general growth that we’re seeing in our cloud ARR. And as I mentioned a little bit earlier to one of the other questions, the cohort growth of our existing customers when they are operating in the cloud where a lot of best consumption-based pricing is active, has been very strong.

Got it. Thanks guys.

Thank you.

Our next question comes from Matt Hedberg of RBC Capital Markets. Your line is open. Please go ahead.

My congrats as well on your new role. Looking forward to working with you. Steve, I think what stood out to me is that the success is not just in the base, but it’s net new customers, new to franchise. That said, I’m wondering, could you talk – and obviously, you’ve had a lot of success on the cloud side. Could you talk, though, about just how you think about operating in a hybrid environment, right? Because clearly, we sort of have one foot on both sides at this point, but your success in the cloud is interesting. And obviously, I think what what’s getting all the attention. But the hybrid approach, just talk about how well positioned you’re there, you see there relative to competition?

Yes. Clearly, we see the ability that we have from a hybrid perspective as real differentiation when we compare to cloud native or born-in-the-cloud solutions. And indeed, what we see in our customer base is they are being very judicious about how they utilize and place their data from both a performance and cost perspective. So they really – customers really want that optionality between cloud and on-prem. They also want to try and avoid that hyperscaler cloud vendor lock in, a lot of the enterprises we work with are seeing that for many of their use cases, they have the kind of economies of scale that make an on-prem solution very attractive. So it was great in the prepared remarks when I referred to a tax authority in the Middle East, selecting us over more traditional competition that really demonstrates the fact that we can win on-prem, we can give a vision of hybrid cloud to move forward, and the customers can really realize value quickly whilst optimizing their existing environments. And I think it’s a core strength for Teradata as we move forward, especially as financial operations of data management and data in the cloud becomes more important for our customers.

That makes a ton of sense. And then I guess, obviously, you’re investing a bit more now in front of the opportunity given the success on the cloud side. How do you think about the go-to-market focus? Are you bringing in a new set of reps, a little bit more or a different skill set than maybe previously? Just how do you sort of continue to leverage the products that have obviously had a lot of investments with – continuing to kind of think about the go-to-market effort?

Yes. I think just a couple of things. We announced that we brought on a new go-to-market leader towards [indiscernible] at the start of this year. We brought in a new leader of our Americas business in March of this year. And they are ramping up really well. They have got a lot of experience in cloud-based selling, and they are bringing and up-leveling a lot of talent throughout our organization. I think the other thing is we’re making sure that we have the right incentive plans in place for our sellers to make sure that they are motivated towards selling our capabilities in the cloud. And I think one of the investments that we’re making in the second half of the year is a real ramp-up of that, if I can use the term hunter capability to go after new logos. Again, that is a different Teradata strategy than what has been in place previously. And it was really great to see in the quarter new logo wins in each of the three regions, even though that muscle is fairly small inside the company just there.

Congrats on the results base.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from Pat Walravens of JMP. Your line is open. Please go ahead.

Great. Thank you. And let me add my congratulations. So Steve, it seems like a lot of things are going right. You’ve built out the team nicely. What are your top two or three sort of strategic imperatives for the next 12 months?

Yes. I think it’s a great question, Pat. Thanks for asking it. I think what you’re going to see in terms of our execution perspective, as a number of investments were related to our go-to-market organization and build – continuing to build that go-to-market organization, the focus on new and additional headcount from new logo hunting, incremental, investments in terms of our cloud-focused headcount from a go-to-market perspective. We’re making a lot of investments in terms of enablement to really help the transition of the sales force to sell our complete portfolio of more modern cloud-based solutions because with that comes the ability to execute on expansion. Also, inside our go-to-market motion in terms of investment, we are really doubling down on our customer success investment, leveraging our heritage from an industry data model perspective to really take new use cases through our customer success motion to our customer base. From an R&D perspective, we’re really excited about the investments that we’re making from an R&D perspective in terms of development of the product. We will continue to improve the tight integration with the first-party services of the cloud service providers. We’re also focused on improving our data management capabilities and data governance capabilities. And finally, I give a highlight and a point to from our technology around QueryGrid. We believe that this positions Teradata uniquely. We can have a Teradata instance in AWS querying native object store data and AWS without that data been in Teradata and combine it with query results from Teradata and Azure or on-prem, again, either – in either environment querying native object store data combining the results of those queries together to provide business insights that nobody else can provide in the industry. And so our entire focus from a query-fabric, a data-fabric perspective, gives us a unique ability to work with our customers and it’s great to see our customers getting as excited about that capability as we are.

That’s great. Thanks very much.

Thanks, Pat.

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

Thank you very much, Charlie, and thanks to everyone for joining us today. We are really proud of the progress that we’ve made. Our execution and our differentiated multi-cloud data platform is making a difference for customers right now. We’re going to continue to drive clear and compelling value for our customers and lasting value for our shareholders. We hope that you all joined us on September 9 for our Investor Day. We’re really looking forward to sharing more information on our strategy, our direction and our long-term growth plans. With the pandemic ongoing, meeting is going to be conducted virtually. I hope you are all keeping safe. We’re going to make sure that we have the opportunity to have live Q&A with a selection of our leadership team and our new leadership team here in Teradata. Have a great day. Thank you.

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