Good afternoon. My name is Tania, and I will be your operator for today’s call. At this time, I would like to welcome everyone to the Teradata Third Quarter 2021 Earnings Call. All lines will be placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [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. You may begin your conference.

Good afternoon, and welcome to Teradata's 2021 third 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 and our outlook. 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 September 30, 2021 that is expected to be filed with the SEC tomorrow or in the next few days. 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. 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.

Thanks, Chris. Good afternoon, everyone. Thank you for joining us today. At our Investor Day, we provided some fresh and pace into our strategic direction, differentiated product and value proposition and our financial model. We've continued our transformation journey, executing on our strategy as a cloud-first profitable growth company. In Q3, we met our expectations for revenue once again. And importantly, our recurring revenue as a percentage of total revenue increased approximately 5 percentage points versus last year, and is now approaching 80%. This is meaningful because recurring revenue pervades for predictable and durable streams of cash flow. In addition, both GAAP and non-GAAP EPS were above our expectations. Claire will address our financial metrics and outlook in more detail. In the third quarter, our public cloud ARR was $148 million. This was a substantial 83% growth rate over Q3 of 2020. We had a handful of large deals slip out of the last day of Q3 and to the fourth quarter related to customer timing. We have already completed transactions that more than cover the $7 million that we expected in Q3, and we have closed most and are confident, we will close all of these transactions in the fourth quarter. We continue to build upon our execution engine, which delivered more cloud deals in Q3 than in any other quarter. Looking ahead to the fourth quarter, our pipeline is robust and we are working on bigger cloud deals. Looking at Q3 in more depth, we had numerous proof-points that our strategy is solid. We are executing and are making progress within our target market of leading enterprise accounts. Q3 was our highest quarter yet for new cloud customers. We added tens of new large enterprise accounts across all of our regions. We are determined to keep up the…

Thank you, Steve and good afternoon, everyone. In the third fiscal quarter Teradata delivered revenue and profit in line or better than expectations. Quarterly highlights include recurring revenue of $352 million or growth of 7% year-over-year as reported. Gross profit margin of 61.3%, up 30 basis points year-over-year, operating margin of 15.4%, up 60 basis points year-over-year and non-GAAP EPS of $0.43 in line with prior year and $0.11 above the midpoint of our previous outlook. I am pleased that these results keep us on track to achieve or beat our fiscal 2021 outlook on many of our key financial metrics. Some of our year-to-date highlights include total ARR growth of 7% versus the prior year, which is in line with our 2021 full-year outlook range of mid-to-high single-digit growth. Year-to-date recurring revenue growth of 14% versus the prior year compared to our full-year outlook range of high single to low double-digit growth. Earnings per share of $1.86 against our previous full-year outlook range of $1.92 to $1.96 and year-to-date free cash flow of $347 million compared to our full-year outlook of at least $400 million. Despite many highlights, it is unfortunate that a handful of our transaction slipped into Q4, which impacted our cloud ARR in the third quarter by $7 million. As Steve noted, we have already covered this amount in the early days of Q4. We have a robust Q4 pipeline, the strongest we have ever seen, and we continue to successfully close deals with good economics. We therefore remain confident that our customers want and value our products. Over the last 18 months, as we have undertaken our transformation journey, Teradata has had a renewed focus on driving greater rigor, discipline and accountability in the business. We are focused on driving improved intra-quarter linearity, increased investment…

[Operator Instructions] The first question is from the line of Katy Huberty with Morgan Stanley. Please proceed.

Yes. Thank you. Good afternoon. A couple of questions from me. First, I think it would be helpful to hear more about why you think you saw deal slippage in the third quarter and given that you've now closed most of those deals, why is there such a material impact on your cloud ARR outlook for the fourth quarter?

Hi, Katy. Thanks for the question. As we said in the prepared remarks, it was just a few deals, a handful of deals that slipped into Q4 and it was predominantly for timing reasons. It was a significant $7 million of ARR. When we look at the quarter, what we learned was although our teams are fantastic at closing on-prem deals, as we're taking some of the biggest companies in the world to the cloud with their most complex workloads, the approval processes for our customers were a surprise to both the customer teams and the Teradata sales teams as we’re closing those deals. As we look at the quality of the pipeline that we have for Q4, we see good strength in that pipeline. We've got a largest pipeline we've ever had from a cloud deal perspective. We have deals of seven and eight figures for ARR cloud growth. But as you know, we like to be transparent in our guidance, we like to set guidance that we are confident in and given the learnings that we had from Q3, we wanted to set an expectation of being approximately $200 million for cloud ARR and 90% year-on-year.

Okay. Thank you. And I guess connected to that, it was really encouraging, Steve to hear your comments that in the third quarter you saw a record number of new cloud customers, such that that new logo sales team is starting to execute. But how do we reconcile that record number of new logos in the quarter with a $9 million sequential cloud ARR growth, which is the lightest in recent history. Just talk about the deal sizes for new logos and how that's playing out?

Yes. We built an execution engine, which delivered more cloud deals in Q3 than ever before. That cloud growth really remains front and center for us in terms of our execution. We do have a – if you like a barbell in terms of the shape of our cloud deals, and that means we've got a – a set of deals are very large, multi-million dollar deals and a whole set of smaller deals that we're executing on. Clearly, the large deals introduce complexity just given the types of workloads that we are running for our customers. And when those large deals swept given where we are from a process of scaling our cloud business, it does introduce volatility into our results. As we look at Q4, as I said in the prepared remarks, Q4 is our biggest quarter from an ARR growth perspective. We've got a great pipeline of opportunity and the team is incented and focused on executing against that pipeline of opportunity in Q4.

Okay. And if I can just seek one more in. How meaningful is the AWS partnership in terms of any just qualitative impact to your view of potential cloud ARR growth as you go into 2022? And do you think that was there any awareness that this AWS integration was coming such that maybe that had some disruption in the pipeline of cloud deals?

Yes. We are super excited with the strategic collaboration agreement with AWS and what that it translates into a number of dimensions. One is in terms of joint marketing activities with AWS, joint sales execution with AWS sales team around the world and integration from a product development and product engineering, getting our best engineers from Teradata together with the best engineers from AWS. It's really a forward play for us. So that – it didn't impact the timing or execution of deals and in the third quarter, that was purely driven by linearity in the timing of those deals. We are looking at the AWS partnership as something that can drive significant value and accelerate the business as we close out Q4 and enter into 2022. Thanks for the question.

Great. Thank you.

Thank you, Mr. Huberty. The next question is from the line of Chad Bennett with Craig-Hallum. Please proceed.

Great. Thanks for taking my question. So Steve, just following up on the migration topic. The conversations that you're having right now and the pipeline you see right now, I guess, we started last year extremely fast in terms of converting that base and migrating that base to the cloud and got off to a good start. Pretty good start, first half of this year also. I guess, are the – migration conversations or sales cycles or migration cycles, are they more challenging today or just because you've done so many, its honestly getting more – it's an easier conversation and more kind of predictable sales cycle or conversion cycle?

Hey Chad. Thanks for the question. I think what we're starting to see across the team is that execution engine in terms of having those conversations with customers really building. One of the things that we've done is investing in cloud sales specialists and Teradata salesforce that have been successful in executing those migration discussions with our customers, so they are guiding and mentoring the rest of the sales team and [indiscernible] Teradata to continue to accelerate those customers to the cloud. In terms of our existing customer base, we still got a lot of opportunity from a migration perspective. We've still got a lot and that's reflected in our Q4 pipeline. As I said, it's a significant pipeline, lots of very, very big deals and tied more deals from a cloud and a migration perspective than we've seen in the past. So we believe that we are advancing our transformation in the right direction. We're continuing to see increasing interest in our cloud offerings across all three of the public cloud providers, and we're executing those deals globally, taking the most complex mission critical workloads and migrating them to successfully to the cloud and our customers really see the value in Teradata in terms of executing that mission.

Okay. Then maybe one for either yourself or Claire. You had an Analyst Day a month and a half ago, two months ago, and you gave long-term targets for the business and specifically, the cloud portion of the business. I assume you still feel comfortable with those targets.

You go ahead, Claire.

Yes. I was just going to say, with regards to our cloud ARR and the information we shared at Investor Day, because this is a timing situation and we're still planning to close these deals and we expect to close all of these big deals in Q4. We are still very confident in our medium and long-term projections. Obviously, we'll provide a more formal update next quarter on 2022, but we anticipate no impact on our medium and long-term projection shared with you at Investor Day.

Perfect. Thank you. And then maybe one quick one, real quick. So just on the new logo, Steve, and I understand they're small deals initially, but just can you give any insight into the competitive landscape on those wins and who you saw?

Yes. And we won new logos, Chad, both on-prem and in the cloud. And we tend to see our whole range of competition from – traditional competition like Oracle and IBM who are always happy to beat the cloud native providers in terms of the offerings from AWS, Microsoft and Google, and also the Snowflake and Databricks of the world. And so winning these new logos definitely demonstrates the proof-point and relevance of Teradata and our capabilities that we can deliver in the cloud. Really proud of the team in terms of – it's a star of emotion, really proud of the team in terms of how they're taking that to market and how we're winning new logos.

Great. Thanks for the color.

Thank you, Mr. Bennett. The next question is from the line of Matt Hedberg with RBC Capital Markets. Your line is open.

Hey guys. Thanks for taking the question. Steve, one for you. I mean, I think, the success in new logo wins is really great to see. And I guess, as you start to think about a reopening situation, obviously I think we've all sort of thrived in a hybrid work environment, but how do you think about your reps getting out in the field to a greater extent? I mean, do you think that could have a positive impact on new business trends? Certainly, it could also help upsell, but could that help with new business pipeline even to a greater extent?

Yes. Matt, I haven't met a salesman or spoken to a salesman, that isn't really looking forward to getting out and meeting customers again, especially from a new logo perspective. One of the strengths that we have is fantastic customer relationships and our existing customer base where we can – we know that folks and we can have those conversations to help migrate them to the cloud. But in terms of executing that new logo motion, being able to do that from a face-to-face perspective, we really believe will enable us to accelerate that motion as we move forward.

Got it. Okay. That's helpful. And then obviously, you guys aren't much of a hardware model these days. But I have to ask about the supply chain piece. I mean, still on-premise deals – customers might be trying to procure new additional hardware. Did you guys notice anything from that perspective in this quarter? Or have you contemplated that in your fourth quarter outlook?

Yes. I'll let Claire to talk a lot about this, but I think the value of Teradata is really in our software, and customers using our software to get the best out of their data insight – their data environments, clearly from a cloud perspective, our cloud growth isn't impacted by any supply chain or technology impacts at all. But Claire, do you want to talk a lot about with the supply chain?

Thank you, Steve. Yes. We are not seeing a material impact on supply chain as Steve mentioned, not impacted due to the software nature. Anything that we would see in terms of the economic impact is already baked into our forward-looking guide.

Thank you. The next question is from the line of Wamsi Mohan with Bank of America. Please proceed.

Hi. Thank you for taking my questions. It's actually Ruplu filling in for Wamsi today. Claire, it's been a long time since recurring revenue actually declined sequentially. It was down 6% quarter-over-quarter and also margins were down 400 basis points sequentially. Were the upfront deals as you had expected and what was the impact on margins from that pull forward revenue?

Hi, Ruplu. Thank you for the question. And indeed we are seeing that seasonality impact quarter-over-quarter from the upfront recognized in the first half of the fiscal and the net negative impact we saw in Q3. So just as a reminder, we had over $20 million in Q1 and Q2, and we have a net negative impact in Q3. So yes, we are seeing an impact from a revenue standpoint and a margin rate standpoint as a result of the achievement. The underlying business is performing well. I'm really pleased with the traction we're getting on our cloud margin, strong momentum both quarter-over-quarter and year-over-year.

Okay. Thanks for that. Maybe one question for Steve. You've talked a lot about new logos, but in the past you've also talked about something called the boomerang customers, the customers who leave Teradata and go to competitors and then they come back. Did you see more of that this quarter? Any slowdown or uptake in that rate of customers coming back?

Yes. I think our customers are continuing to recognize the challenges of migrating their complex and large workloads to the cloud. And they see in Teradata partner that can help them do that and help them accelerate that transformation to the cloud. Certainly, it's something our sales team uses every day in terms of discussions with customers. And the fact that we can actually demonstrate that workloads successfully migrating as I referenced in the call, the American Airlines was a great example of a successful migration of a very complex environment into the cloud. As we're demonstrating these proof-points, I think our customers are certainly recognizing that Teradata can give them a fantastic path to the cloud.

And if I can just sneak one more in. Thanks for the details so far. I know you've said that public cloud ARR you're taking a more conservative approach and that's why you're taking down the full-year guidance to 90% year-on-year. When we look out into 2022, I think your guidance at the Analyst Day had called for 70% ARR growth. Is that still in the cards? Is there any change to that?

Hi, Ruplu. We're not giving a formal update this quarter. I will give a formal update next quarter, but I do want to reemphasize that we do not anticipate any impact on the medium or long-term projections that we gave at Investor Day. So that is still our best view at this point in time. As a reminder, this was timing slippage, so deals just shifting from one quarter to the next and just increased timing volatility as we close out the year. So we are expecting to close all of these deals and no impact on our medium or long-term projections.

Okay. Thanks.

I would just add to that. I think as we look at the pipeline for Q4, the biggest pipeline in terms of cloud deals that we've seen, we've got the biggest cloud deals we've ever seen in the pipeline. And it's a real validation that we've got the right strategy, a great value proposition, a great technology solution for our customers. So we are super excited to provide the long-term plan for Teradata.

All right. Thank you so much.

Thank you, Mr. Mohan. The next question is from the line of Tyler Radke with Citi. Your line is open.

Hey, sorry about that. Can you hear me now?

Hey, Tyler.

Hey, Steve. First question for you, so it looks like this year, we're seeing kind of one of the most backend loaded kind of Q4 that I can recall in some time with the vast majority and net new ARR kind of projected to hit in that quarter. And it kind of goes somewhat counterintuitively just given that in theory cloud, you should see faster and more straightforward expansions because you're not provisioning new on-prem hardware. I guess, what about this year is making this such an unusual Q4 and just how are you thinking about kind of improving the linearity throughout the year going forward? So we're getting a little bit more consistent net new ARR on a quarterly basis.

Yes. Tyler, a couple of things and then I'll maybe ask Claire to comment as well. I think seasonally, we see Q4 as always our strongest ARR growth quarter. I think that tends to be because our history of terrific success in on-prem enterprise agreements tending towards the fourth quarter, tending towards the last month and then even the last week of the quarter. And what's really driving the cloud business is migration activity of existing customers as they migrate large and complex workloads to the cloud. Now the point in time where we can actually – we find it beneficial to have those discussions with customers is the point of renewal of their existing contracts. So we tend to engage with customers in a similar pattern to how we have previously sold on-prem subscription revenues, and also how we are taking them forward in terms of merging their on-prem solutions and their cloud solutions. So a real focus for us as to continuously drive that steady progression of cloud business through the year as we get into those expansion motions. I think what you'll continue to see is lumpiness from Azure a high degree of volatility from a quarterly perspective, but we're also working on how do we change that intra-quarter linearity so that we can bring deals out of the last weeks of the quarter. And I think that will really help with all of our execution. Claire, do you want to make some points?

I'll just add to that. Our confidence at Q4, despite being a very big quarter to your point in terms of cloud ARR, our confidence comes from that robust people pipeline that we see. As I mentioned in my prepared remarks, it is the strongest we have ever seen. So the fact that we have that pipeline gives us that confidence in our big Q4 that we are currently in, and we've had a great start to the quarter in October as well. So really focusing on that intra-quarter linearity in Q4 and beyond. And I think as we make the increased investments that we're making in cloud sales, R&D, go-to-market and strengthen our partnerships across CSPs and SIs that's all going to help us with regards to our acceleration in the cloud.

Yes. And Claire, maybe to follow-up with you, total ARR this quarter decelerated to 6% growth in constant currency. And I know the long-term financial model had 8% to 12% CAGR for total ARR. So certainly reacceleration. Given what you're expecting to see here in Q4 with a bunch of these deals and a good pipeline, is 6% kind of the low point you think on ARR and it just reaccelerates from here?

Yes. So to your point, our guide for this year, we have found our guide to the mid-to-high single-digit growth as we get the cloud acceleration and the momentum from the pipeline that we are seeing. To your point, we are expecting that to continue to accelerate into 2022 and beyond.

Thank you.

Thank you, Mr. Radke. The final question is from Derrick Wood with Cowen. Your line is open.

Yes. Great. Thanks guys. This is actually Nick Altmann on for Derrick. Thanks for taking our questions. The channel is becoming a much larger focus for you guys. And you mentioned one deal that was aided by an SI. Can you maybe just talk about like how much traction you're getting there and maybe how meaningful that can be over the next several years?

Yes. Thanks Nick. That's a great question. This is a complete pivot for us as an organization. If you think that over time Teradata had built up its consulting and services business. We have committed to our partners that we will not compete with them for work inside our joint customers. And that is getting some real traction, the investment that we've made with Accenture in terms of creating that migration factory, the work that we're doing to educate those partners on the Teradata value propositions and frankly, how they can deliver the most – some of these really complex projects that help transform their customer environments. We see that as a really important catalyst as we move forward. That was a great question. Thank you.

Great. Thanks. And then just building on one of the earlier questions just in regards to the deal slippage, you guys mentioned that some of those deals had closed, but lowered the public cloud ARR guidance. So I'm just wondering that maybe some of those deals come in a little bit lighter on an ACD basis versus your expectations, or can you just give any more colors to how to reconcile the guidance and the close deals that slipped versus sort of your outlook?

Yes, sure. What I would say is the deals – it was purely to do with linearity. We are keeping financial discipline on the deals that we're executing, so that they're mutually beneficial for both Teradata and our customers. Our customers see a lot of value in what we're providing and the size of deals that we see in the pipeline and the complexity of those deals are the key reasons why we see that timing of closing them as being more of a challenge. Certainly when we compare it to our on-prem business, those cloud deals are more complex to execute, but we feel that we've learned from what happened in Q3, we've put in place a set of robust actions. They can really help drive what we see currently in the pipeline, which again, more cloud deals than we've ever seen, bigger cloud deals than we've ever seen, and it gives us confidence both for Q4 and as we move into 2022.

Thank you, Mr. Wood. There are no further questions at this time. I will now turn the call back over to Steve McMillan for his final remarks.

Yes. Thank you. Thanks everyone for joining us today. As I talk with customers every week, I remain convinced that we've got the right strategy. Our technology is unmatched and our people are among the best in the business. Our connected multi-cloud data platform for enterprise analytics is exactly for the world’s leading enterprises are telling as they want and need. And we are going to help keep that momentum going, winning against the competition and driving shareholder value. Thank you so much.

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