Teradata Corporation

Good afternoon, ladies and gentlemen. My name is Julie and I will be your conference operator today. I would like to welcome everyone to the Q2 2019 Terra Data Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, you may press the pound key. With that, I would now like to turn the call over to SVP of Finance and Investor Relations, Nabeel Elshishai. Please go ahead.

Good afternoon and welcome to Teradata's 2019 Second Quarter Earnings Call. Oliver Ratzisberger, Teradata's President and Chief Executive and the rest of the Board of Trustees. A replay of this conference call will be available later today on our website. Teradata assumes no obligation to update or revise the information provided during this conference call whether as a result of new information or future results. And now I will turn the call over to Oliver.

Good afternoon, everyone. I'm pleased to provide an update on our business and the positive strides we are continuing to make as we execute on our strategy. We are uniquely helping the world's leading companies achieve competitive advantage with data and analytics through our best-in-class Vantage analytics platform for real-time intelligence at scale. Everyone is aware that today businesses must operate in a digital environment. Data analytics are no longer a byproduct of doing business. Rather, they are at its foundation. Teradata is uniquely positioned to guide and enable our customers to excel in this digital environment. Our unmatched technology, available in multi-cloud, hybrid cloud, and on-prem, and our relentless focus on customer success are keys to why we win. On today's call, I will share three key takeaways with you, and then Mark will cover our financial results. First, we are advancing our cloud position and seeing increased interest in our cloud offers. The great value Teradata provides is the same powerful analytics, insights, and answers in the cloud as on premises. And today, I will provide a number of examples. We're continuing our strong transformation to a software-driven, subscription-based recurring revenue business. Third, customers are recognizing the value that comes from investing in a Vantage Analytics ecosystem that aligns to the needs of today and tomorrow. Going far beyond the old-school data warehousing to an environment where autonomous decision-making is an essential capability. And this is our sweet spot.

Let's start with the cloud.

While both on-prem and hybrid cloud remain important environments to businesses, we are seeing more and more enterprises beginning to move to the cloud. You are all aware that we are making big investments, building out our cloud capabilities, adding cloud-first talent, and we announced new offers with AWS and Azure in the quarter. While we still have work to do, were encouraged by our progress. And while cloud has provided companies with flexibility in managing their infrastructure, enterprises have also realized that trying to run their large and complex analytics environments in the cloud requires the power and scale of Teradata. They're over the hype of the cloud-only startups and have realized that they require a robust engine that can deliver the performance they need at the scale they need. They're over the hype of the cloud-only startups and have realized that they require a robust engine that can deliver the performance they need at the scale they need, and that is exactly what we deliver. In competitive situations, we see cloud-only players having to spin up multiple instances, throwing cost instead of efficient scalability at the problem and also creating complexity. yet still failing to analyze data at the speed required in this world of digital information flows. These cloud-only players can only service small sets of users running limited numbers of queries, yet customers require a solution that scales to thousands of users and billions of data points, creating real-time insights across the enterprise. We see more and more instances where the cloud-only players fail to deliver on their overhyped claims and this is where Teradata's strengths are validated. We are taking the same knowledge and capability gained from providing the most efficient and scalable analytics platform proven with the largest companies and we are now delivering the same capability in the cloud. The cloud only players are still learning how to scale even in simple environments and are still providing only limited capability in the cloud. I'd like to share a number of our cloud wins. YPF, Argentina's leading energy company, has chosen Teradata to be their strategic partner for advanced analytics. With Teradata Vantage running on Microsoft Azure, YPF will develop a standardized data platform bringing together exploration, development, and well data for delivering sensor data management, predictive asset maintenance, smarter well planning, and well control. An IoT win comes from a leading international mining company which is investing in Vantage on Azure to keep up with the scale needed to gain insights from its volumes of sensor data. Tabcorp, a world-class diversified gambling entertainment group from Australia, has partnered with us to use Vantage in the public cloud to transform its data and analytics offering. A global hospitality company added Teradata to the public cloud to better manage its finance and customer analytics after the customer said Snowflake failed to deliver on its commitments. The customer determined that Teradata on EWS provided better agility and scalability than the competition. A top North American airline is adding a new vantage platform on Azure to extend its capabilities in the cloud, supporting business continuity for this always-on enterprise. The second point I want to cover is our subscription business. As customers transition more of their production environments to the cloud, we continue to see strong transition to subscription-based bookings. In Q2, We achieved subscription bookings of 90%, with customers responding positively to territorial shift and focus to a software-centric business model. In a world of recurring revenue, it is ever more important to build and maintain lasting customer relationships that are the lifeblood of the business. We have a long-standing tradition of focusing on the needs of our customers and the focus will only continue to grow. To deepen our skills here, in June we brought in Scott Brown as our Chief Revenue Officer. Scott's wealth of experience in creating customer success and maintaining lasting customer relationships align perfectly with our objectives. He has led global sales and consulting teams through business transformation, delivered consistent revenue growth including via the cloud, and guided organizations to subscription-based business models. And just this week, we announced another great addition to our leadership team as we brought on Kathy Cullen-Cote as our Chief Human Resources Officer. She joins us from PTC where she was responsible for guiding the cultural evolution as the company executed its successful business transformation. I'm very excited Looking at the environment facing organizations today, the ever-growing stream of information coming from digital transformation is not stopping. In fact, keeping up with data and governing this is now a C-suite issue. Organizations must automate the gathering and analysis of data to drive to the answers they need, at the scale they require, to compete and win. This means the world of traditional data warehousing is no longer good enough. The large global enterprises we work with know they need something more, and Teradid is at the forefront of this revolution. Unlike every other vendor in the market today, with Teradid Advantage, we have gone beyond traditional data warehousing, empowering our customers to leverage their data with pre-built analytics across any infrastructure at the scale they require. And we are the very best at delivering this value at scale. We have progressed beyond the data warehousing of the likes of Snowflake, Oracle, and many of the cloud startups. Here are a few examples. The largest e-commerce and internet company in Japan has selected Terran Advantage and our new machine learning capabilities in order to become the leading online travel agency in the Asia Pacific region. The full Vantage Suite will be used to further its digital transformation and expand the customer experience with more personalized offers with the goal of increasing both sales and market share. China Everbright Bank, a longstanding Teradata customer, is expanding its Teradata environment to help advance its digital transformation efforts. The bank relies on Territ Advantage to provide an efficient, high performance, and scalable platform for key initiatives around improving its customer journey, finance and risk management, and compliance regulations. A multinational investment bank and financial services company expanded its Territ Advantage footprint to support new use cases that have been migrated from a competitor. in order to simplify and consolidate applications onto Teradata. These examples are just a sample from our growing Vantage success. We are winning because of our unparalleled strengths in delivering the answers that businesses need to be ready to address the future, and we provide the same capabilities whether multi-cloud, hybrid cloud, or on-premises. This is a tremendous benefit to our global customers. In closing, I want to emphasize my key takeaways. First, Teradata is steadily advancing our cloud position and we will continue to take our market-leading analytics software platform and deliver business outcomes in the cloud. Second, we are continuing our strong transition to a subscription-based business model and building upon our strong heritage of customer success to drive continued adoption of our software. Third, customers are recognizing the value that comes from investing in our Vantage Analytics ecosystem that takes them beyond traditional data warehousing, both in the cloud and on-prem. Mark will now walk us through the financial results.

Thanks, Oliver, and good afternoon, everyone. We delivered a solid quarter in Q2, highlighted by ARR and recurring revenue growth. and solid operating margin performance. As Oliver stated, 90% of our new and add-on bookings were subscription-based as we continue to make progress on our transition. We continue to expect 70% or more of our bookings for the year to be subscription-based. In terms of our reported results, recurring revenue which includes revenue from subscription-based transactions and perpetual license-related maintenance and upgrade rights was $338 million in Q2, a year-over-year increase of 8%, 11% in constant currency. Perpetual revenue came in at $29 million, which consisted predominantly of perpetual hardware purchases. Consulting revenue, which was $111 million in Q2, decreased 18% from Q2 2018 and 15% in constant currency, as expected. Our strategy is to focus our consulting resources on engagements that drive customer value via solutions uniquely enabled by the TerraData platform. And we are significantly reducing the consulting engagements that are not TerraData related. ARR grew 31 million from the end of Q1. Year over year, ARR increased 11% and 12% in constant currency. As our bookings mix continues to shift to subscription, We see our subscription-related ARR growing, and ARR related to perpetual license maintenance software upgrade rights declining. Our backlog was approximately 2.5 billion, up 2% from Q1 2019, and up 39% from Q2 of 2018. It is important to note will be impacted by our desire for shorter deal durations versus what we added in 2018. To help affect this intended change, we are only compensating our sales team on up to three-year deals versus up to five-year deals in the past. As a result, bookings calculated using backlog and backlog growth will not be a good indicator of business trends until deal durations normalize, likely in 2020. Before I continue to highlight a few key elements of our Q2 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. Turning to gross margin. Gross margin of our recurring revenue was 71% versus 74% in Q2 2018. As expected, the lower margin year over year was due to the recurring revenue mix in Q2 2019 having more subscription-based revenue, which carries lower margins than revenue from perpetual license-related maintenance and software upgrade rights as a result of embedded hardware rentals in our subscription business. We continue to expect our recurring revenue margin to be in the low 70s for the full year. Gross margin of our perpetual software license and hardware revenue was 20.7%, as compared to Q2 2018's 30.9%. As expected, the lower margin was due to this revenue mix becoming primarily hardware related as more of our business shifts to subscription, particularly software sales. In addition, our hardware gross margin was negatively impacted by currency swings on intercompany transactions in regions where we cannot hedge currency fluctuations. We have had these currency impacts affecting hardware gross margins in the past. But now that our perpetual revenue has become much smaller and predominantly hardware related, the impact of these currency fluctuations has an outsized impact on total perpetual gross margins. As a result of these currency moves, we now expect perpetual hardware margins to be in the mid-30s for the full year. And overall gross margin was 52.7% in the second quarter versus 48.9% in the second quarter of 2018. The margin percentage expansion was a result of a higher mix of recurring revenue and improved consulting margins, which offset lower perpetual margins. We continue to expect overall gross margin to be up 300 to 400 basis points for the year. Turning to operating expenses. Total operating expenses declined 20 million or 9% in Q2 versus the prior year period. This decline was driven by our prior actions to align our go-to-market organization to focus on our enterprise and commercial target market. Operating margin for the quarter was 10.7% versus 8.3% in Q2 2018. We continue to expect operating margins to expand roughly 200 basis points year over year. Caridata's non-GAAP tax rate of 26.1% for the second quarter was higher than expected due to a Ninth Circuit Court of Appeals ruling during the quarter that resulted in a discrete tax charge recorded for a tax contingency. However, we continue to expect our full-year tax rate to approximate 20% for the year. Turning to cash flow, net cash provided by operating activities was $55 million in Q2 2019, including $17 million in ongoing restructuring payments. We spent $13 million on capital expenditures and additions to capitalized software, which resulted in total free cash flow of $42 million for the quarter. As a reminder, the company's transition to a subscription-based model impacts the timing of billings and cash collections, and therefore year-over-year comparisons may be less meaningful than in prior years. In addition, comparisons to the prior year Q2 are skewed by a large multi-year transaction cash payment received in Q2 of 2018, which we discussed on last year's earnings call. During the second quarter, we were aggressive in our stock buyback and bought 117 million of Teradata stock, or approximately 3.1 million shares. Year to date, we have bought approximately 4.3 million shares for 175 million. In addition, our board has authorized an incremental $500 million of share repurchase authorization. We now have $620 million of share repurchase authorization and will continue to be opportunistic in repurchasing our shares. Turning to guidance. Our guidance remains unchanged from our Q1 update. All year ARR growth in the range of 11 to 12% and recurring revenue to increase 10 to 11%. Both of which include one to two percentage points of currency headwind. And as I previously mentioned, we continue to expect subscription-based transactions will comprise 70% or more of our full year bookings. Consistent with prior expectations, 2019 perpetual revenue is expected to decline at the high end of the $150 to $200 million range from 2018. And consulting revenue is expected to decline approximately 20% versus 2018 as the company realigns its consulting business to focus on Higher Value Add Consulting Services. Teradata expects 2019 full-year GAAP earnings per share to be in the $0.42 to $0.52 range. On a non-GAAP basis, which excludes stock-based compensation expense and other special items, the company continues to expect earnings per share in the $1.45 to $1.55 range. Recurring revenue in the third quarter of 2019 is expected to be in the $340 million to $344 million range. GAAP earnings per share in the third quarter of 2019 is expected to be in the $0.17 to $0.21 range. Third quarter non-GAAP earnings per share, excluding stock-based compensation expense and other special items, is expected to be in the $0.38 to $0.42 range. And finally, we continue to expect and many more. In closing, we had a solid Q2 and our customers continued to aggressively shift to our subscription-based options and increase their consumption of Teradata. And with that, Operator, we are ready to take questions.

We will now begin the question and answer session. As a courtesy to all participants, please limit yourself to one question and one follow-up question. If you have a question, please press star, then the number one on your telephone keypad. If you wish to be removed from the queue, you may press the pound key. Once again, you may press star, followed by the number one to ask a question. Your first question comes from Wamsi Mohan with Bank of America. Please go ahead. Your line is open.

Yes, thank you. Sorry, I joined the call a little late, but apologies for that. If you already addressed this, but your recurring revenue guide is just slightly below our estimates for the next quarter, and I know you called out some FX headwinds that you're facing, but also you're going into somewhat easier comps, going into I was just wondering if you could address that in the overall scheme of your trajectory of recurring revenues and have a quick follow-up.

Yeah, Mamsi, this is Mark. So for Q3, it's really just timing of deals. Yes, our guide for this Q4 compared to Q3 is good, but we also expect acceleration in Q4 just like we saw in the prior year as well. So it's really just due to the timing of When deals happen and then when do they start to flow to revenue?

Okay, great. Thanks a lot. It's actually pretty impressive that you guys are maintaining in this much weaker macro environment your overall guide. As my follow-up, what is the customer feedback on Vantage, Oliver? And can you talk a little bit, given that you are sort of You've got a list price on Vantage that's higher. Is that translating into any ASP benefits yet or is it really translating more into folks trying to sort of look at moving over to subscription in any faster way at all? And who did you see the most from a competitive standpoint in the quarter and what were your win rates there? Thank you.

Okay, well, so just to remind, Advantage, part of our strategy, just released October last year, analytics platform, really bringing together capabilities that are going beyond what data warehousing is. So this is really broadening the application of data in the enterprise, bringing together advanced capabilities, machine learning, time series, IOT, and various new features that previously Teradata did not have in the portfolio. And it's also combining the feature sets of other products that we had in the past. And so we see a lot of interest in Vantage. In fact, Vantage continues to be the fastest adopted product release in Teradata in quite some time. and that is very positive momentum that we are seeing out there. We have given a couple examples today of customers that are adopting Vantage to take their data and do advanced analytics with it. Several of the examples in today's call we've given are in the cloud where customers really need to bring together traditional financial data but also with new digital and IoT examples to drive digital transformation at scale. And so this is where we're seeing the big interest. We see good adoption, as I said, fastest adopted product release in our history. As I said, fastest adopted product release in our history. And the slight uptick on pricing that we have on Vantage is because of all the extra features in there. and we're actually not seeing in our target market customers that are questioning why we do that. In fact, they're all showing interest of this is a lot cheaper than going with, let's say, a competitor product and then having to package on two or three other products in order to get to similar capabilities. And so, from a TCO perspective, just recently had a customer compare us to some of the cloud alternatives that they have and it really comes in very favorably. when it comes to Vantage in the cloud. So no change in competition in what we're seeing out there. Same competitors that we saw the prior quarter. What we do see is a lot less Hadoop out there that is really, really hitting hard and coming across globally now. And so in general, more shift to the cloud, a lot of interest there for Teradata everywhere, Vantage everywhere, good momentum.

Your next question comes from Derek Wood from Cowan and Company. Please go ahead. Your line is open.

Great. Thank you. And nice job on the rebound in net new R. Can you just give us some color on whether you were able to close your slip deals and how you're feeling about getting back on track with sales cycles and close rates and And Mark, I thought maybe we'd see, given the net new ARR, a more positive impact of recurring revenue. Just wondering if there was anything else to call out. Maybe it was due to linearity or FX, but maybe why that didn't kind of come through a little bit more.

Yeah, so yes, we've signed agreements with those customers from Q1. In terms of the flow through to Q2, it's just timing, linearity and timing of when that starts, really. Nothing specific there.

Okay. And maybe I'd touch on the cloud business because it definitely seems like you guys, there's a bit more enthusiasm in terms of what you're seeing out of the interest in the cloud. What are you doing to help facilitate more adoption through AWS and Azure? And what are the common stepping stones you're seeing from your from your customers? Is it a lift and shift of existing footprints? Or is it more about Greenfield?

It's a mix that in general as you said we are seeing an uptick in cloud interest in our target customer market that includes the mega data but also our commercial segments that we have you know put more focus on this year and the way you know the way in the past customers have moved was trying testing death that test systems. There's certainly more production workloads that we're seeing out there. Yes, some of them are doing lift and shifts and expanding. Usually we see new workloads being added to that or existing workloads being growing on the platforms. In general, we see a lot of emphasis on security, making sure a lot of our customers spent some extra time on making sure that the move to the cloud is done in a sensible way and that they're not exposing themselves to unnecessary security risks, especially in the megadata space. That is a paramount concern in our customer base. But as we're working with them and as we are applying our enterprise experience to that, that is certainly driving more interest in Megadata and Commercial to move to cloud. And in part, we're also seeing an increased uptick of customers that have tested other cloud offerings out there and that are coming away quite disappointed, quite honestly, and are saying, you know what, Teradata, not just in the on-premises world, but also in the cloud, certainly is superior and is cheaper then the competing offerings out there and that drives the combined interest from the customer base.

Great. Thanks for the color.

Your next question comes from Katie Huberti from Morgan Stanley. Please go ahead. Your line is open.

Thank you. Good afternoon. Other hardware, enterprise hardware technology companies are talking about weaker demand as they went through the second quarter and The macro starting to impact conversations around capital spending plans for the year. Did you see any weakness in June or early in the current quarter in the month of July that would suggest that early in the current quarter in the month of July that would suggest that your business may face this headwind? And if not, why do you think you're immune? Thanks.

No, we don't see any such headwind or macro things happening to our business. Also, as we turn primarily to a software subscription company, clearly that is somewhat separated from the hardware. But no, not seeing that. In fact, a lot of strong interest on Vantage and software and what we're doing there with with our customer base.

That's great to hear. Just as a follow-up, Mark, I think you said last quarter that backlog was up 43% year on year. What's the comparable figure exiting the June quarter?

From June a year ago, I think we said...

I think March quarter you said 43%, just wondering what that was exiting. This quarter.

Yeah, year over year, June 18 versus June 19, about 39%. But we don't look at it compared that, you know, because that's a duration thing. And we're doing less duration deal than we said in our prepared remarks.

Got it. Great. Congrats on the quarter.

Thank you. Thanks.

Carl Kirstead from Deutsche Bank. Please go ahead. Your line is open.

Thanks. Two questions. Mark, you mentioned in an earlier question that you're expecting to see some acceleration in the fourth quarter. So if I just run the math and you hit the midpoint of your 3Q guide on recurring REVs, to hit the high end of the 10 to 11% recurring REVs guide, I think 4Q needs to see an acceleration to roughly 16% growth. Could you just talk a little bit through why you're seeing that? Is it just visibility into the deal pipeline where maybe Some 3Q stuff is spilling into 4Q. Thanks a lot.

Yeah, so on that, Carl, yes, there is, if you go back and look at what happened in fourth quarter a year ago, we had a very large sequential increase, Q4 over Q3. So yes, I'm aware that our guide also implies that, and based on the forecast, we see deals happening you know earlier in Q4 like we saw a year ago I think for customers trying to get stuff wheeled in and get it done before they got to shut down anything moving into there before they shut down for the holidays and anything else.

Okay that's helpful Mark and then a follow-up on the balance sheet I see that long-term DR came down fairly hard sequentially excuse me is that all the The deal duration you're talking about, and assuming it is, I thought the sales comp issue that might affect that was made in late 4Q, so that really wouldn't explain the Q1 to 2Q decline in long-term DR. So maybe there's another duration-related explanation to help us figure that one out. Thanks a lot.

Yeah, so long-term deferred, short-term deferred doesn't have anything to do with deal duration. it actually has to do did you get paid on multi-years and took more than one year's cash on a multi-year deal which we have not seen anything this year where again a year ago you know we saw that quite two or three different times particularly in Q2 a year ago we saw a very large multi-year deal all get all get paid from Q2 of 18. So the sequential from March to June is just kind of your normal typical. We haven't had any multi-year cash receipts this year that are driving up, so I would expect long-term deferred to continue to decline across the balance of the year.

Brad Reebok with Stiefel. Please go ahead. Your line is open.

Thanks very much. Oliver. Switching back to the cloud commentary, as customers begin to move, what type of pricing flexibility are you providing around consumption-based workloads versus just long-term contracted opportunities there?

Yeah, as I probably said earlier this year, and as we announced at last year's Universe Conference, one of the rollouts that we're doing this year is consumption-based pricing. and we have the engineering now completed on that task and we have several customers that engineering now completed on that task and we have several customers that have been alpha and beta testing that with us. We clearly see interest for choice from our customer base. They love the ability that they can now get terror data in a consumption model and it's a different price point that obviously we set with that just like the cloud defines ad hoc usage and pre-committed usage at different price points and we're really modeling after the industry norms that we see out there and that sees a lot of interest from the customer base. Having said so, customers also like the subscription offering So it's not necessarily that customers are saying we all want to go to a consumption model. But for certain use cases and for certain applications, a consumption-based model is something that gives customers the choice for capacity on demand and that elasticity. And it's being received very well in the customer base. And it's going to be one of our offerings in the model that we have. Having said so, not every customer wants that choice either. We've also gotten very very clear feedback that some customers also like the predictability of a subscription model that yes they might upgrade during the year but they like the predictability of the financial model of a subscription model over a pure consumption model and so you will see us continue invest into this and make this easier to consume for our customer base and again everywhere as we started it two and a half years ago was all about choice and this is again to give customers that choice and the reception the customer base is very positive.

Excellent and then one quick follow-up with the hiring of Scott Brown do you expect any meaningful changes in the sales force structure or go to market in the back half of the year or does more of that modification happen next fiscal year?

Thanks. Don't expect changes in fact In fact, Scott is all about stability and execution. It's about, you know, take the execution model that we have in place, drive it, drive it hard, and he's quickly getting his feet on the ground, quickly making an impact here. So, you know, we are very encouraged to have him on board. This is not about more changes in 2019. This is about taking what we have and what we have set up and really executing hard on it.

Excellent. Thanks very much.

Phil Winslow from Wells Fargo. Please go ahead. Your line is open.

Hey, thanks guys for taking my question. Oliver, I just wanted to follow up on some of those customer use cases you talked about in your preparative remarks. I mean, when you talk to customers, how does Vantage's support of integration with multiple languages, not just SQL, but R and Python and also those multiple data formats, how is that influencing customers' views of Vantage and how do they think of Vantage and that support relative to, let's say, the point guys that might do SQL or it might actually be another one supporting R and Python for machine learning. What's the feedback from customers on that?

Yeah, so there's a couple forces out there in the markets that are really coming together. And if you look at pervasive digital that is starting to take hold in more and more companies around the world and they're realizing that they need to bring traditional financial marketing customer data closer together with mobile, sensor, IOT and other data sources. And traditionally that led them to build siloed systems. Time series data would go into a time series system and unstructured data would go into an unstructured data lake. And what they all are starting to realize is that that proliferation of data of silos is extremely hard to operationalize. Or when you need to combine the different types of data, it makes it extremely hard. What we're doing with Vantage is really, as we have put together Vantage, we brought 2D traditional SQL and advanced SQL. We brought time series. We brought version control of data or temporal into the system. We brought these new languages. We brought event-based and path-based capabilities straight into that system. What that allows these customers to do, and yes, you heard a couple examples even on today, that allows, for example, well data or sensor data or machine data or mobile data all to get put together with all the other financial, ERP, customer, supply chain data. And for the first time, it allows companies to really get a holistic view all the way up to the CEO of these companies and that's something that we really focus on. It's like how do we make it as simple as possible to bring that diverse set of, it's like how do we make it as simple as possible to bring that diverse set of data together into as few instances of data so customers can iterate in an agile, quick way and drive the analytics that they need to do in order to make the impact to the business and drive the business outcomes. Python and R are the languages, of course. The different storage formats are for different types of data, whether it's sensor, structured, or relational data. And all under one hood is really allowing them to quickly train people or take existing talent and setting them loose on billions and trillions of data points combined with millions or hundreds of millions of customer data. And that's where certainly the opportunity for Vantage is what they want and what our roadmap for Vantage will be for the next several years.

Great. Thanks, guys. And then also, Mark, just to follow up on your gross margin comments for the year, thanks for those. Obviously, you also gave some gross margin color at Analyst Day. Could you all help us maybe through sort of just progression there to those longer-term targets? I mean, how should we think about the problem from a line item perspective?

yeah I mean we expect gross margins to improve each and every year as we expected right I mean more and more the mix is shifting to recurring you get gross margin lift off of that clearly less perpetual year-on-year you know which becomes a drag and then as we've said we are improving our overall focus on what we're doing with consulting and expect improved consulting margins as well. All of that's contributing to where we are for this year and how we continue to progress across 20 and 21 to those analyst day numbers. We feel good about where we're at and where we see that going.

Great. Thanks, guys.

Raimo Lencho from Barclays. Please go ahead. Your line is open.

Hey, thank you. Two quick questions for Oliver. Can you talk a little bit about the different clouds? When I look at the customer examples you gave earlier in the presentation, there was a lot of Azure in there. I'm wondering is that kind of a slightly better relationship because AWS has with Redshift obviously a competitor or is it more because the geographic footprint is broader? And then I had a quick follow-on question.

Now we see in general good interest across both AWS and Azure. You probably see, given our focus on mega data companies and enterprise, you see maybe some more enterprise examples on Azure. They are very strong in the enterprise, right? And that's where their sweet spot is. And so naturally, there's a little bit more of a customer affinity between our customer base and where Azure is. But other than that, no, this is a good partnership on both sides. And we see interest on the various different public cloud fronts. And you will hear more from us in that space in coming quarters.

Okay, perfect. And then the other question I had was on, if you think about competition, and you mentioned some of the cloud guys before, where would you, I mean, in theory, I would assume you see it more in the commercial part of the market, because, you know, Teradata as a solution is significantly, you know, it's very, very powerful. So for enterprise, you probably really need Teradata. And I would assume if competition is more commercial, is that a fair assessment? Can you talk to that, please?

Yeah, so you see the competition primarily in the small data market space, of course, and that hence, yes, we see more of it in the commercial. It's also, however, very interesting now that we launched the commercial sales force this year and put some extra focus on commercial, we're seeing a lot more cloud opportunity also come our way because it's that space that has experienced the likes of Snowflake and Redshift now for the last you know 12, 18 months or some of them even longer and some of them have made therefore experiences where they say but it's still not working even at the commercial scale for us so a lot more a lot more deals in the funnel in commercial where customers come to us and point out that they need something else than what the competition is to offer and so in general what we are seeing is quite a positive momentum and a little bit of a surprise on the commercial side of just how much interest we're seeing there in the cloud, especially driven by competitors falling short of their promises.

Perfect. Interesting. Well done. Thank you.

As a reminder, if you have a question, please press start. As a reminder, if you have a question, please press star 1 on your telephone keypad. Your next question comes from Tyler Radke from Citi. Please go ahead. Your line is open.

Hey, thank you. Oliver, I wanted to ask you about Vantage and maybe just clarify for us when you're talking about the adoption being among the best in terms of product releases. Are you talking about kind of the latest version of the Teradata platform that customers are upgrading to or are you talking about you know the uptake of some of the add-ons like the graph engine and then maybe just talk about how far through the install base is in terms of the Vantage adoption and if you're seeing any types of uplift you could quantify. Thank you.

So we don't break out the numbers in particular but yes it is the latest versions of our software that make up Vantage that is being adopted. Vantage is is a set of capabilities that goes through various different engines. And we have launched that last year as of October, seeing strong adoption in the existing customer base, but also in new customers. We talked about some of the examples. Vantage is certainly driving interest in the customer base as to also helping them simplify their ecosystem. many of them are realizing they have too many systems and too many technologies driven by the inability of a single platform to do that for them and so this is various features, functions, programming languages as we said that all come together in Vantage and the interest in machine learning and autonomous decisioning obviously is out there in the market. You hear a lot about customers having really problems with AI deployments around the world because it's hard to take a standalone software and slap it against an unmanaged data lake and get repeatable results. With Vantage and the governance that it allows customers to implement and the version control and the structuring and feature extraction of data, this is where Vantage really puts machine learning into the customer's hands that is much more repeatable and that's where the interest and the customer base right now is.

Great. And then maybe a follow-up either for you, Oliver, or Mark. You know, just looking at the geographic revenue, obviously there's kind of a mixed bag of growth rates there. I presume some of that has to do with the various stages of geography with respect to the subscription transition. Maybe just talk about how execution was by DOs, you know, anything to call out in those numbers we're looking at.

Yeah, so both, you know, EMEA and APAC, I've been pleasantly surprised with the movement to subscription this year. It's been great. You know, looking at year over year, if that's what you're looking at, you know, we had a huge, big deal that came down in Q2, and APAC, that's what was driving the compare there. So, You know, the subscription transition, you know, is what's impacting that. So we're pleased with where we're headed there and what we're seeing moving forward on both APAC and EMEA.

Okay, thank you.

I will now turn the call back over to your President and CEO, Oliver Ratzisberger, for closing comments.

Thanks everyone. We are all working during an incredibly exciting time of ongoing momentum at Teradata and we are continuing to make very positive strides. We are advancing our cloud positioning, continuing our strong transformation to a software-driven, subscription-based recurring revenue business and developed our Vantage platform to address the needs of today and tomorrow. And we have firmly established and continue our strong focus on driving customer success. We've aligned the entire team and are relentlessly focused on delivering ongoing value to our customers and shareholders. Thank you very much.

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