Teradata Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 Teradata Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Nabil El-Shashai. Thank you. Please go ahead, sir.

Good afternoon, and welcome to Teradata's 2019 third quarter earnings call. Vic Lund, Teradata's executive chairman and interim CEO, will lead our call today, followed by Mark Culhane, Teradata's CFO. Our discussion today includes forecasts and other information that are considered forward-looking statements. and many more. These risk factors are described as 10K, 10Q and other filings with the SEC. On today's call we will be discussing certain non-GAAP financial information which excludes such items as stock-based compensation expense, other special items described in our earnings release including acquisition, reorganization related costs, asset impairment and many more. Thank you.

Good afternoon, everyone. Before Mark discusses our results, I want to take a few minutes to talk to you about our recent announcement regarding our CEO change. As you are aware, we announced that Oliver has stepped down as CEO. The Board of Directors and Oliver agreed that this was an appropriate time for a change in leadership. Oliver did a fantastic job of defining our strategy, and developing our vision centered on customer success. Our strong ARR growth this quarter demonstrates our strategy is working and that our customers are embracing it. However, the skills that make a great visionary are not always those that drive great execution. Our board believes we are at a point in our transformation where strong executional skills are required to continue to drive to a successful completion It is for this reason that the Board decided a change was required at this time. The Board is immediately commencing a CEO search to propel Teradata forward. We have an excellent search committee who will dedicate their efforts to finding the best person they can for this important role. I will not be a candidate, but I will support the new CEO through his or her onboarding to ensure that we have a seamless transition. We have the right strategy and vision, a solid team committed to our customer success, and market leading technology innovation, all of the right ingredients for us to be successful. As interim CEO, I, along with the rest of our leadership team, will ensure that our eyes are focused on execution and will drive to a successful 2020. Now, I'll turn the time over to Mark.

Thanks, Vic, and good afternoon. I will center my remarks on our financial and business results, starting with the news that we're at the high end of our expectations for ARR and guidance for recurring revenue, and that Teradata had a strong quarter with customers moving to subscription at a record rate, demonstrating our strategy in action. I will start by covering our business update with three key takeaways, all centered on driving customer success, which in turn drives success for Teradata and value for our shareholders. First, we continue to move forward in the cloud. We have developed our strategy to position Teradata to lead the market in cloud-based data analytics, and we recently announced a major set of capabilities to help companies move from analytics to answers wherever they are on their cloud journey. Second, we are continuing to build momentum with Teradata Vantage, growing adoption of new and expanded capabilities, including machine learning and time series analysis that increase consumption. And third, the power of Vantage in the cloud is opening possibilities for us to strengthen our go-to-market. Let's start with our cloud trajectory. We continue to move forward in the cloud by providing our customers choice based on the industry's strongest hybrid and multi-cloud offering. Along those lines, we made several important product announcements at our recent user conference. We announced a new strategic partnership with Google. Our customers can leverage The full power of Vantage across the top three global public cloud providers, AWS, Azure, and soon Google Cloud. Only Teradata provides the same functionality in both hybrid and multi-cloud environments, giving customers the utmost choice and flexibility. We also announced true consumption, or pay-as-you-go pricing, giving Vantage customers the freedom to perform complex analytics on virtually any amount of data and to only pay for what is used based on completed queries, a true innovation in the industry. This innovation continues our commitment to help customers move to or expand their current Teradata system, providing financial and operational flexibility. and we added native support for low-cost storage via Amazon S3 and Azure Blob. Low-cost object storage captures and retains data at a granular level from sources like sensors, click streams, customer service calls, social media and more. This addition opens up new use cases to gain value from the power of Vantage Analytics. thereby expanding our market opportunity. We are increasingly seeing our customers utilize the public cloud. The great value TerraData provides comes from the same powerful analytics, insights, and answers in the cloud as on premises. And today I'll provide a few examples. Canal Flux Group, a leading French TV broadcaster and a longstanding Teradata customer has successfully migrated to Teradata Vantage on AWS to improve the digitization of their customer interactions. A global home furnishings market leader is becoming a more analytic-driven company with the support of Teradata. This new customer is using machine learning and Vantage running on Azure for advanced analytics. A world-leading car manufacturer based in Japan has selected Teradata as its partner to innovate on its next-generation products and services. By analyzing Telmatics data with Teradata Vantage on AWS, the customer is looking to improve its maintenance quality and gain deep insights into how its cars are being used. Now let's look at the second key takeaway. are continued progress with Vantage. We keep raising the bar on Vantage, our most successful platform in history. I mentioned earlier that we added Vantage support for low-cost native object store. In addition, we launched two new products designed for important users, Vantage Customer Experience, which enables marketers to have a 360-degree view of their customers, and Vantage Analyst, which brings the power of Vantage Advanced Analytics to business users. Now I'd like to share a few of our recent Vantage customer wins. A global pharma leader selected Teradata to help realize its long-term R&D strategy of reducing time and cost of developing new drugs. With Vantage and its machine learning capabilities, the customer will address the challenge of data integration and advanced analytics. and help its scientists analyze complex data sets generated from lab machines that deliver better and faster patient outcomes to the market. With Teradata Advantage running in the public cloud on AWS, we are also supporting the customer's global IT digital transformation journey. A large US retailer chose Teradata Advantage as this advanced analytics platform to provide a 360-degree view of its customers to provide a superior customer experience. Analytics will provide the answers needed to personalize its customers' omnichannel journey while streamlining back office processes for supply chain and order fulfillment. One of the largest healthcare payers in the world, based in the Americas, doubled down on Teradata with Vantage Consumption. Now, one of our largest customers is better suited to focus on business value realization, ensuring the value is captured in line with the investment. At a large U.S. outdoor retailer and hospitality group, we replaced a competitor to help the customer have an enterprise view of its customers, spanning all of its retail and hospitality brands, as well as its manufacturing divisions. We are helping our customer improve the lifetime value of its customers by integrating retail, hospitality, and warranty transactions. Earlier, I mentioned that the capabilities of Vantage are available to customers whether in the cloud or on-premises. And through this functionality, we are positioned to go to market expansion through new partnerships that can open new markets and new channels. Just last week, We announced a strategic partnership with Deutsche Telekom to bring the power of bandage to small and medium enterprises in Germany. This partnership will help customers in this large market take advantage of the enormous potential of best-in-class data analytics. Deutsche Telekom will leverage bandage to develop and take to market analytics uniquely targeting the SMB segment that Teradata has not addressed through our direct sales organization. Now I want to spend a few moments on a few key factors driving our financial results, including our faster than expected transition to a recurring revenue model and the related impact on our reported results, an update on our consulting transformation, and our updated financial outlook Given our faster transition to a subscription-based business, plans to accelerate our company execution and consideration of the uncertain IT spending environment. First, our go-to-market organization drove a solid quarter, exceeding our expectations for incremental ARR growth in Q3. After our go-to-market reorganization earlier this year, the team has settled in and we added incremental depth to our sales leadership with new heads of Americas and APAC bringing dozens of years of enterprise sales experience. We are proceeding along our transition to a subscription-based business model at an unprecedented rate. In fact, during the quarter, one of our largest customers materially increased consumption while moving to subscription for the first time. As a result for the full year, we now expect subscription-based bookings mix to be approximately 90% versus our original expectation of 70% or more. Therefore, as of the end of this year, we will be substantially through our transition to a subscription-based business model and expect little to no perpetual revenue next year. Consequently, Next quarter will be the last quarter that we provide a bookings mix metric. The accelerated pace of our transition to subscription obviously has implications for our near-term financial metrics. It results in lower perpetual revenue than we expected coming into the quarter for both Q3 and Q4, as well as the resulting implications that has to our operating income Earnings Per Share and Cash Flow for our second half results, but clearly sets us up for incremental improvement in 2020 and beyond. On the other hand, the transformation of our consulting organization is taking longer than we expected, and gross margin improvement is trailing our expectations. It is important to understand that certain types of consulting are a very important part of delivering customer success and driving increased consumption of Teradata software. So our priority is to make sure we sustain those capabilities to support our customers. The transformation of our consulting organization includes three key strategic steps. Eliminating consulting work that is unrelated to driving incremental consumption advantage, simplifying our products in order to automate areas that are currently handled by consulting, and deepening our partnerships with strategic system integrators that are in a strong position to efficiently deliver these services. We made strong progress in refocusing our consulting on advantage-oriented offerings that will increase consumption. while exiting non-strategic consulting engagements, resulting in a 27% decline in consulting revenue in Q3, which was greater than expected. Taken together, these items are putting additional pressure on our near-term financial results, but are critical to setting up Teradata for strong, predictable, long-term profitable growth. A faster transition of our business to recurring revenue means that we now expect perpetual revenue to be around $90 million for the year, a decline of roughly $250 million from 2018. We now expect our consulting revenues to decline year over year by approximately 25% versus prior expectations of roughly 20%. However, We are not going to see the corresponding consulting margin improvement in 2019 as we expected, though we remain confident in our ability to ultimately increase our consulting margins significantly as we execute on our strategy. Therefore, consulting margins will likely be similar to last year's level for the full year. As a result of all of these items, We now expect our full-year non-GAAP EPS for 2019 to be approximately $0.95 to $1 and the full-year free cash flow to be approximately $85 to $90 million, with the cash used for restructuring actions now being expected at the high end of our prior $60 to $80 million range. A significant portion of the decline from prior expectations is due to the faster transition to subscription than previously expected, while the remainder is primarily a result of slower than expected execution against our 2019 operational plan, as well as a higher annual tax rate. With these factors in mind and understanding of external data points showing a more mixed overall IT spending environment, We are taking a more conservative approach to our outlook for Q4. We are now expecting full year ARR growth of at least 8% reported, which includes a point of currency headwind. We expect recurring revenue for Q4 of $348 to $350 million, which results in recurring revenue growth of 8% to 9% for the year or 10 to 11% in constant currency. For this quarter, we put additional financial detail on the IR website, providing greater color on key financial metrics. We have made many significant investments in 2019 and remain confident that the company is positioned for significant incremental improvement in 2020 and beyond. As a result, We believe 2019 should be the trough in our EPS and Free Cash Flow metrics as we pass the peak of our model transition and we expect substantial improvement in 2020. We will provide more details relating to our expectations for 2020 during our Q4 earnings call and we expect to hold an analyst date in the first half next year to provide additional color on our business and an update on our long-term financial targets. Operator, we are now ready to answer questions.

As a reminder, to ask a question, you will need to press star and then one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Wamsi Mohan from Bank of America. Your line is open.

Yes, thank you. Mark, can you elaborate on the Q4 weakness in recurring revenues? Last quarter, you had spoken about being comfortable with an acceleration Q3 to Q4. Can you talk about what's changed either from a macro perspective? Was it more macro? Was it more execution-driven? And thoughts on free cash flow, please, for 19 and 20, and I'll have a follow-up.

Yeah, so thanks, Wansi. So first of all, timing has changed a bit from the linearity expectations we had. And secondly, we're taking a much more conservative approach to Q4 given the overall uncertainty around the IT spending environment and other uncertainties in our Q4 outlook.

And on free cash flow, Mark?

Yeah, free cash flow is really impacted by the faster move to subscription. There are significantly less perpetual revenue running through this for Q3 and Q4 than we expected, and obviously we don't collect that cash. It's going to get collected into the future, which gives us the confidence that 19 is the bottom from an EPS and free cash flow perspective.

Okay, and if I could, Wick, this CEO transition has been very quick. It feels almost too quick to judge execution. If you were pleased with the strategy, why did the board decide not to give some incremental time on the CEO transition? Clearly, it adds more disruption at a time when you're doing a lot.

Well, yeah, Wamsi, thanks. So a board has an obligation to understand when it's time to do something. We, you know, Oliver, great visionary, loved him. He had never been a CEO before. Put him in place and watched. I stayed close. Board stayed close. And we just reached a decision that we had reached a point where we had to be more focused on execution. Oliver's a great visionary. He did a wonderful job, but it was the collective decision of the board that we just needed to drive more concrete execution across the entire organization. So it's sometimes the things, and I said this in my opening comments, the thing that makes a great visionary doesn't often make a great executioner. And I just think that in the board's estimation, and I believe I was one of them with them, that we expected that waiting more time would not result in a benefit for the organization or any different outcome. Oliver's a good friend of mine. He still is a good friend of mine. But, you know, the truth is what the truth is. And when you realize it, it's time to do something about it. And that's what the board do. We have a good board. Obviously not done on a whim. We watched it for a while. It was thought about. We've had discussions. and we just decided it was time. I mean, you have to watch and in your judgment you make decisions and that's what we did. You know, strategy's strong, customer reception's good, organization's still here, but we have to start driving things like consulting and stuff and making those happen to drive better performance. I mean, it's simply unacceptable.

Okay. I appreciate the colorway. Thank you.

Your next question comes from the line of Cady Hubert from Morgan Stanley. Your line is open.

Hi, thanks. Welcome back, Vic. A couple questions just to follow on Wamsi's. The company went through a CEO search several years ago and from an external view didn't seem to come up with any good options. Why do you think this time will be different? And then as a follow-up, You're going through clearly a pretty tricky business model transition. It creates a lot of volatility in the near term, you know, but the end game is a more stable business long term. The market doesn't seem to be giving you credit. And so does the board think about or why not the idea of doing this in the private market instead or thinking about other strategic alternatives?

So I'll try to remember every part, and if I don't, then you can remind me. So just...

Okay, thank you.

So we'll go through that where we are. So first thing, a few years ago, we actually did not do an internal search, an external search. We went through that process. I came in for a period of time, and we decided that there were a lot of just basic blocking and tackling. We got through what we got, and a year ago, we felt like we'd gotten a stop up. We hit had good performance in hitting our metrics and everything we wanted to do. Oliver's great. We knew that Oliver was a new CEO, a great visionary, and we decided from the stability of the company, well liked by all of us, it would be better for the company if we could work through that and it worked out, it would be great. That would be the best transition for our company. Unfortunately, that isn't the way it worked out. So we didn't do the external search at that time. We are highly confident that we can find, the board is, we have our committee together, they're starting that process today. And I think we will find a good candidate. One of the advantages I think we have today is we know the characteristics we need in the business now better than we did then. A strong business, but for all of you that have been around a long time, there is really a major difference between having a feel for driving executional assets or what it has to be at and the kind of skills and interest, interestingly enough, to drive that outcome. And I think we will make sure in this new year that we have that. As to your last question, we think the plans we've got in place here will drive great shareholder value. Our board is obviously always aware of their fiduciary obligations, but the plans we've got in place will drive value. It's good value. you know just I mean everybody talks about this stuff how do you live where you live but I I own a lot of stock personally I've never sold a share and I do not intend to sell a share I believe this there's a lot of near-term value here we have been through this the street hasn't understood it and if we can start throughout showing which we will do next year the advantage of both a great strategy and a strong executional program I think then we start to get credit but I am NOT a believer in PR in your way to the top. It takes quarter after quarter of strong performance hitting the goals you want and the metrics that you put in place. And we will see that we do that going forward.

Thank you for that. Just a quick follow-up, Mark. You talked about EPS and free cash flow next year. How would you at this point think about the revenue trajectory now that Perpetual has run off and you've resized the consulting business?

Yeah, we'll have more to talk about, I think, on the 2020 outlook when we get on our Q4 call. But again, we said, you know, I think 2019 is the bottom, that we get incremental growth from here across all key metrics.

Thank you.

Your next question comes from the line of Raimo Lentro from Barclays. Your line is open.

Hey, thanks for taking me, squeezing me in. I'm slightly puzzled, Marc. Maybe you can help me. Like, I get the faster transformation and so perpetual is running off and professional services is running off. But you're guiding down also recurring and ARR, which is kind of the stuff that is in theory the good stuff. So I'm just trying to, you know, if I look at the picture from kind of high up, it's like with the CEO change, it looks like my pipeline for Q4 is kind of slightly emptier than you thought at this point. And that's why, you know, the guide down is on all levels. But maybe I'm just misreading it. Can you help me kind of put some kind of more color around that? Thank you.

Yeah, I think what we've said is we are taking a more conservative approach to our Q4 outlook. due to the, you know, overall uncertainty around the, you know, the IT spending environment and other uncertainties. And that's really what's driving the guys.

Yeah. And so if I look at the, then if I look at the geographic performance, can you talk to that a little bit in terms of if I look at the numbers in America's EMEA APAC, is there anything you see differently in some of the regions or is that kind of

Now, they're all moving to subscription at a fantastic rate. That's why you see the revenues have come down across 19 in all three regions, yet the segment gross profits are all increasing because it's being driven away from perpetual to subscription where we carry a much more higher gross margin profile. And that's really what's happening. It's playing out how we thought.

Okay, perfect, thank you.

Your next question comes from the line of Derek Wood from Cohen. Your line is open.

Yeah, hey guys, this is Nick Altman on for Derek. Thanks for taking our questions. How long do you guys expect the CEO search to take and what are some of the qualities you're looking for in the new CEO?

Well, so we are starting, the committee has identified and the search firm they're going to use and the individual there. They haven't signed anything yet, so they don't like you to name that, but they have that. We will start interviewing candidates as soon as they can pull it together. My, and who knows on this, right, because we're just starting, but my guess is six to eight months. I think you're going to get a lot of, you've got to get through your end. People have got to collect their bonuses and all that kind of stuff, and then they get more ready to be where they are. But I would think likely six to eight months we should be in good shape and then, you know, a fairly short transition, I would think. That's our thought process today and of course we'll just see where that's at. The qualities we're looking for are we would love someone who has been through a transition before, who has good operational experience and can leverage where we're at to strong growth. I think the thing that we could really see that would benefit our improvement, we have a very strong team in place now. All of our hires are excellent people. We have a really strong team in place and the other characteristic this leader has to have is the ability to properly use a seasoned executive team and work through them, percolate bottoms up as opposed to top down so that you allow your people to do the best they can. And I think the ability of the team to be turned loose and do their capabilities will also increase our operating performance.

Got it. Okay. And then just given the results in the Q4 guide and the CEO transition, how are you guys thinking about your previously issued 2021 framework or can you give us a sense as to when you might revisit that?

Yeah, we'll hold an analyst day the first half of next year where we'll get more insight on that.

Got it, thanks.

Your next question comes from the line of Tyler Radke from Citi. Your line is open.

Hey, thanks for taking my question. Maybe a question for Vic. I guess just on the CEO transition, one of the things that I had heard from multiple customers with Oliver taking over was just kind of a sense of positivity of having a product visionary position at that leadership position. I think a lot of employees were also inspired by that. How confident are you that potentially this transition isn't going to dampen the morale among both your employees and customers? How are you working through what could be viewed as a challenging next few months?

Well, so for me personally, I've been here before. I know the people. They know me. I have spent two days in meetings with people. The reception I've had is very positive. I know for sure the field is excited about it, most of them. Not because of an adjustment one way or the other, but different management styles empower and cause people to grow differently than they would. They're excited about that. I know a lot of our big customers. I'm with them. DT, I know that people there are some of the big deals we didn't know. So I know those customers. So it is true that Oliver is a great visionary and he brings a lot that's there. But we have the benefit of his vision in our product today. He is still a friend of mine, still a good friend of the company's. And so there won't be any animosity. Customers and businesses at the end of the day I think love vision, but they buy outcomes. And so our job is to make sure all the things we've talked about deliver value to our customers, not inspiration for the future. And that's what we're going to focus on in the next year.

Great. And then just to follow up, I guess, has there been any change on the pricing or packaging with respect to Vantage? And I know One of the topics discussed at the recent user conference was potentially a move towards pay-as-you-go pricing, but just curious if that's having any impact on some of the outlook we're seeing or if there's anything to call out from a new product or pricing perspective here.

No, Tyler, no. We said in our prepared remarks we did announce A consumption pricing model at our customer conference that has gotten lots of attention and interest from customers because it's market leading. You only pay for completed queries, which is unique in the industry. So nothing specific there. It'll be actually additive to how we move forward.

Okay, thank you.

Again, if you would like to ask a question, please press star and then one on your telephone keypad. There are no further questions at this time. Mr. Victor Lund, I turn the call back over to you.

Thank you very much. Thank you to all of you for joining our call. I know a lot to digest here, but I want to leave you with our commitment to drive execution, make this the bottom of our transition turnaround, This shows strong growth, both earnings per share and revenue as we go forward, and to demonstrate a continued record of hitting the targets that we put out in front of you. So I understand we've got something to earn here. We will do that. And again, thank you so much for being on the call.

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