Teradata Corporation

earnings release, and in our SEC filings. Please note that Teradata intends to file the Form 10-K for the year ended December 31st, 2021, later this month. 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.terradata.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, and good afternoon, everyone. Thanks for joining us. I'm pleased to start by sharing our strong results demonstrating Teradata is successfully executing our strategy, significantly growing our cloud customers, and driving profitable growth. Our efforts are reflected in our results, Teradata closed out 2021 on a strong note, meeting or beating all of the 2021 financial outlook elements we provided. We finished the year with our public cloud ARR business at $202 million, growing more than 90% year over year. We grew total reported revenue in all regions, And in 2021, we achieved total revenue growth for the first time in three years. Our disciplined focus resulted in healthy GAAP and non-GAAP profitability with $2.43 of non-GAAP earnings per share and free cash flow of more than $430 million. We are delivering on our commitments and our transformation is on track. 2021 was proof of our momentum. Our clear emphasis on cloud paid off. Let's look at our cloud momentum. In Q4, we delivered our largest quarter ever of cloud ARR growth at $54 million, more than doubling what we achieved in the prior year Q4. For the full year of 2021, we delivered nearly 70% growth in new cloud customers compared to 2020. Of course, everyone is a testament to our competitive strength in the large and growing data and analytics market. Our sellers compete well and focus on the tremendous value that our customers can achieve from using data to manage and transform their businesses. Here's a handful of customer successes from the quarter that show the breadth of our wins. NatWest Group, a prominent bank based in the UK, is migrating its on-prem data center to Vantage on AWS. Teradata has provided data and analytic services to NatWest for many years, but before its move to the cloud, the customer initially considered another platform. Upon further evaluation, it determined Teradata offered the lowest risk, lowest cost, and fastest migration path, accelerating its advanced analytics journey and their ability to adopt pervasive data science at scale quickly and efficiently. A Fortune 500 US insurance company migrated to Vantage on AWS as it modernizes its data estate. The customer utilizes Vantage to interact in real time with its insurers in areas like claim status. Its long-term goal is to develop a more personalized touch with its customers, and it will leverage AWS services like SageMaker with Vantage to extend its analytic capabilities. Primary drivers for this win were the simplicity of migrating Vantage to the cloud and our consumption pricing model, which will facilitate IT's ability to charge back to the business and result in a more cost-optimized environment. Telefónica Spain, one of the world's largest telecommunication companies, is migrating its on-prem data analytics ecosystem to Vantage on Google Cloud. The customer's primary decision factor was Teradata's ability to offer the fastest and lowest risk path to the cloud. The customer intends to take advantage of the advanced analytics capabilities Vantage offers, including integration with Google Cloud AI applications, such as voice recognition for call centers, to speed its digital transformation journey. Teradata is working with in-country SI partners on this migration. A large healthcare services company in Asia is initiating a data-driven order to cash excellence initiative with Vantage on Azure. This new Teradata customer will utilize Vantage to integrate data from its ERP system with data from many standalone on-prem systems to improve its capabilities. EPG Telecom, one of Australia's largest telco providers, is migrating its on-prem data center to Vantage on AWS. The customer is migrating to the cloud as it plans for the consolidation of multiple data warehouses following a merger and will leverage Vantage on AWS initially for financial reporting with plans to add more analytical use cases, business functions, and users going forward. TPG chose Vantage over Snowflake and Redshift. A US Fortune 500 logistics leader is migrating to Vantage on Azure. The customer will utilize Query Grid in a hybrid environment to access and connect on-prem data and its new Vantage on Azure instance, supporting both legal and international custom services. In addition to our CloudWinds, we continue to expand as well as attract new on-prem customers. A major automotive manufacturer in China and a new Teradata account selected Vantage on-prem as its analytics platform for diagnostics trouble code tracking to manage component failures. We worked jointly with a local reseller partner on this competitive win. Our success with both new and existing customers was the result of every element of the organization doing their part in contributing to our positioning as the connected multi-cloud data platform for enterprise analytics. A critical factor in our growth and success with customers is continually advancing our market-leading technology and our R&D team stayed on task and delivered some outstanding innovations in the quarter. At the end of 2021, our innovation labs ran a powerful test of our emerging cloud technology. which showcased very impressive scale capabilities in line with the data and analytics demands of today and tomorrow. In this test of more than 1,000 nodes running on AWS, over 1,000 users submitted thousands of concurrent queries. The test was the largest Teradata system ever. In fact, twice the size of our largest on-prem customer today. proving Teradata's unparalleled enterprise scale in the cloud. This next generation cloud native architecture brings the best of Teradata with our tremendous scale and elasticity to the cloud. This test demonstrates that the largest enterprises can be confident that with Teradata, they can not only put their current workloads into the cloud at scale, but as their data and analytics grow, we all know it well, Teradata can scale right along with them. Why is this important? A single system requiring no duplication of data drives down the total cost of ownership and provides the ability to get to outcomes quickly without moving data around, which is what the competition requires. Our scale of enterprise and currency is designed so that customers can have a single, connected data environment with the lowest total cost of ownership in the market. In today's hyper-competitive markets, speed of decisions can make or break a company. With this scale and analytic power, a customer can bring streaming IoT data and vast amounts of customer journey clickstream data and combine these data elements with enterprise financial data for rapid decisions. Our customers can then out-compete in their industry, truly market redefining. We look forward to bringing this highly differentiated, next-generation cloud maintenance technology to the market. With our years of experience, we understand what industries need to drive business outcomes, and now we've updated our manufacturing data model to include capturing environmental data and spatial referencing. An example of how our data model helps customers get to value faster is a new logo win at a European auto manufacturer. This customer has a data strategy to address digital transformation, and it needed to connect separated data silos and prepare for massive scaling of use cases for connected car and IoT data. They realized that data needs to be integrated and organized properly to get optimal business outcomes. And our manufacturing data model was a key factor in its decision to choose Teradata. Here, we won against both cloud native and legacy vendors. In 2022, our investment in cloud is planned to be more than 80% of our overall R&D budget. and we will keep the pace on driving innovation that our customers need to get the business outcomes they require. We also kept high energy around partnerships in an area we are continuously strengthening. I'll share a few recent ones. We just announced a global partnership with Microsoft to integrate Vantage with Azure, strengthening our already strong business with Microsoft. This partnership agreement reflects both companies' commitment to help customers successfully execute their cloud strategies and modernize their data analytics workloads with security, reliability, and elasticity at enterprise scale. Customers have seen double-digit improvements in migration speeds when modernizing in the cloud with Vantage on Azure. We also deepened our technology integration with Google Cloud integrating Vantage with Google Cloud Data Catalog, helping users simplify data discovery and facilitate exploration so they can reduce their time to analytics. We expanded our native Query Grid connector to Google BigQuery, allowing customers to combine data in Vantage with data in BigQuery. With Query Grid, our intelligent data fabric that connects data across multi-cloud ecosystems We ship the query engine to the data so customers can use data, not move it. Additionally, we strengthened our capability to deploy AI applications. We introduced a set of analytic integration components for DataIQ. This integration is designed to drive greater agility for analytics and machine learning initiatives, speeding time to value for joint Teradata, DataIQ customers. Along with customer and partner momentum, the market is taking note of our capabilities. Teradata took clear cloud leadership positioning in two recent Gartner studies. First, Vantage was ranked the highest in categories in Gartner's critical capabilities for cloud database management systems for analytical use cases. While you may hear a lot about various cloud startups, Let's be clear on how Teradata is stacked up in the application scenarios that Gartner has described as the most important. Teradata is number one in cloud data warehouse, number one in cloud logical data warehouse, number one in cloud data lake, and number one in cloud operational intelligence. We'll be glad to walk you through where our competitors fall in the line behind us. In the second report, Teradata was again named a leader in the 2021 Gartner Magic Quadrant for cloud database management systems. Gartner noted that our years of experience positioned Teradata to deliver on modern data fabric requirements and that our hybrid multi-cloud approach meets customers wherever they are on their cloud journey. Gartner further notes our operational reliability, high throughput, price predictability, and financial governance. This third-party recognition spotlights our ability to meet the data analytic needs for both today and tomorrow of the world's largest and most demanding customers. We're obviously pleased that our differentiation is validated. We know the unparalleled capabilities of our cloud technology and our ability to deliver the business outcomes customers need far outshine recent noisy market entrance, and these reports backed that up. Given our bias for customer obsession, it was also great to receive recognition of the highest customer satisfaction among data warehouse vendors by the European-based analyst firm, The Information Difference. As we continue our transformation, we continuously look at opportunities to optimize our execution and accelerate. And I'm pleased to share a couple of key executive announcements. We recently created a new integrated global customer services organization designed to drive optimal customer experiences, maximize customer value and achieve greater synergies to accelerate growth, especially in the cloud. The combined new group is all about customer obsession and delivering the capabilities of a modern cloud company. It will work to exceed customer expectations every step of the way. The organization combines our prior customer success and customer support and services functions into a tightly integrated team to maximize impact and value across all customer support areas. We appointed Mike Hutchinson as Chief Customer Officer to lead this new team. Mike brings a long history of dedication to customer service and driving outstanding customer experiences. We also added an outstanding new CMO. We have built a far-reaching brand and have brought in Jacqueline Woods, an accomplished transformational marketing leader to modernize the brand and make it even more relevant and known to our target market. Looking ahead, we will continue to sharpen our expertise as a cloud leader and expand our marketing with partners as we continue deepening relationships with customers, adding new logos, and accelerating growth. Before I turn over to Claire, I would like to touch on corporate citizenship, part of the very fiber of Teradata and a core tenet of how we do business. Our commitment to environmental stewardship is one arena where we are stepping up. Our ambition is to hit a target of net zero carbon emissions, and last year we increased our targets on reducing greenhouse gas emissions by over 100%. It was great to again be included in the Dow Jones Sustainability Indices for both the world and North America. In fact, the 12th consecutive year for the North America Index. Teradata scored in the 96th percentile of companies in the global software industry. Our commitment to inclusion is second to none. We truly believe you get the best outcomes from diverse perspectives, and we were really pleased that Teradata has just earned the designation as a best place to work for LGBTQ plus employees in the Corporate Equality Index of the Human Rights Foundation scoring a perfect 100 out of 100. Our purpose is to transform how businesses work and people live through the power of data. In a recent example of our purpose in action, our talented data scientists supported the Northwestern University Transportation Center in developing an interactive dashboard of COVID-19 vaccine distribution across the US. The center needed a platform to ingest real-time data allowed queries and statistical summaries of this vital transportation issue and Teradata met this challenge with our technology and our expertise. We have been committed to ESG for many years and we will continue to strengthen our efforts. We actively engage with our people in support of a culture where they bring their genuine, authentic selves to work. We believe it's our responsibility to be a good steward of the environment, promote DE&I and anti-racism, be a positive force in the communities where we live and work, and act ethically in everything we do. Being a responsible corporate citizen is a crucial part of our ethos. It's the right thing to do for our world, and it makes Teradata a place where people really want to work. I am incredibly proud of our team for transforming Teradata into the cloud leader it is, expanding our customer base and driving profitable growth. To get to where we are, every part of the organization contributed. And despite the seemingly endless upheavals from the pandemic, our people kept their focus and executed well. We are carrying our momentum into fiscal 2022 We are increasing our outlook for cloud ARR growth to approximately 80%, up from the preliminary estimate of at least 70%, which we provided at our investor day in September 2021. And we are also raising our EPS outlook, given our ability to deliver profitable growth. We are increasing our return of capital to shareholders for 2022, given our strong balance sheet and projections of cash generation. As we look forward to 2022, our strategy is exactly what is needed by the world's leading enterprises. Our target market is large and growing. Our data analytics technology is unmatched for delivering the best business outcomes from start to enterprise scale. and we will remain customer obsessed as we acquire new logos and expand our customers. Teradata's future is bright. Now, I'll turn the call to Claire.

Thank you, Steve, and good afternoon, everyone. I'm very pleased with our strong finish to 2021. Teradata delivered on what we said we would do, executing upon our strategy to deliver profitable growth and increase shareholder value. Some fourth quarter highlights include public cloud ARR growth above market at 91% versus prior year and 92% in constant currency. Recurring revenue of $364 million, which is a growth of 5% versus prior year and 6% in constant currency. Non-GAAP earnings per share of 57 cents growth of 19 cents versus prior year and 30 cents above the midpoint of our previous outlook, and free cash flow of $85 million, resulting in full year free cash flow of $432 million. As Steve mentioned, these highlights contributed to 2021 results meeting or exceeding all elements of the annual outlook we provided. Our actions continue to demonstrate that Teradata is delivering value to shareholders, combining operational execution and financial fundamentals that result in quality revenue growth, increasing gap and non-gap profitability, and durable streams of free cash flow. Let's get into the results, starting with ARR. Public Cloud ARR was $202 million, a $96 million increase from the prior year and a $54 million increase from the prior quarter. More than half of the cloud ARR growth in the fourth quarter came from customers migrating to Vantage in the cloud, continuing the positive migration patterns seen throughout the year. Customers continue to choose Vantage for their journeys to the cloud. Teradata's enterprise reliability and price performance are clearly highlighted by industry analysts as well as supported by a net cloud customer growth rate that has accelerated each quarter throughout 2021. In addition to record cloud migration activity, our cloud net expansion rates continue to be robust and in excess of 130%. We added more total new customer logos in the fourth quarter in both cloud and on-premises than any other quarter in several years. continuing the positive upward trend seen since the beginning of 2021. Total new customers grew in the double digits across all three regions and in the energy, financial services, government, and healthcare industries, to name a few key verticals. While our company's strategy is cloud-first, new on-premises logos demonstrate the significant value we provide to many customers in hybrid environments, and can create future opportunities for cloud migration and expansion. Total ARR was $1.492 billion at the end of 2021, representing annual reported growth of 5% and 7% in constant currency, in line with our annual outlook. Our total ARR is composed of $202 million in public cloud ARR, $898 million of subscription ARR. This is an 8% increase from last year's restated amount of $829 million. Our on-premises subscription business continues to grow ahead of market growth rates, demonstrating that existing and new customers use Teradata for its recognized combination of unparalleled technology at scale. and the best price performance in the industry. We also saw ARR of $392 million related to maintenance and software upgrade rates, which is a decrease of 20% year over year and in line with our strategy as we continue to convert customers to on-premises subscription and to the cloud. Our ARR results were primarily driven by increasing partner involvement on existing customer migration and new logo accounts, and deeper participation by cloud specialists on account teams. We are encouraged by the operational discipline and rigor demonstrated, and we intend to continue this momentum into 2022 to drive even more migration, expansion, and new logo acquisitions. Turning to revenue, this solid execution contributed to our growing subscription-based recurring revenue. In the fourth quarter, recurring revenue grew 5% versus prior year and 6% in constant currency, driven primarily by a higher mix. Recurring revenue was 77% as a percentage of total revenue. In the fourth quarter, the net impact from upfront recurring revenue arrangements was approximately a net negative $6 million. in line with our expectations. This negative amount is due to revenue pulled into the first three quarters of the year, partially offset by upfront recurring revenues recognized in the fourth quarter, all related to the renewal or expansion of on-premises deals with existing customers. For the full year, reported recurring revenue growth was 12% year-over-year and 11% in constant currency, in line with our annual outlook. There was approximately 2.5% of positive impact from the net positive $30 million of upfront revenue in 2021. Both perpetual and consulting revenue were lower year over year given the strategic shift made to a higher margin subscription model and greater collaboration with partners that drive higher adoption and consumption of Terra data. Fourth quarter total revenue was $475 million. A 3% decline year over year and a 2% decline in constant currency. The year over year decline is primarily due to the strategic shift in the consulting business. In 2021, total revenue growth year over year was over 4% and 3% in constant currency, in line with our annual outlook. there was approximately 1% of net positive impact from upfront revenue in 2021. Moving to profitability, we had a strong year of profit generation, and the fourth quarter was no different. We reported $300 million in gross profit, a fourth quarter gross margin of 63.2%. The primary drivers of a healthy gross profit dollar generation continues to be a higher mix of recurring revenue, as well as improved cloud margins versus the prior year. This was partially offset by the modest negative impact about 40 basis points from upfront revenue arrangements pulled forward from the fourth quarter into the first three quarters of 2021. Fourth quarter's operating profit was $90 million, or an operating margin of 18.9%. Operating profit was driven by the combination of a lower cost structure from prior year, continued cost discipline during 2021, and lower variable compensation, partially offset by investments in go-to-market and R&D. Total operating expenses were flat sequentially and down 6% year over year. Fourth quarter earnings per share of 57 cents beat our outlook by 30 cents at the midpoint. Of the 30 cents, approximately 17 cents relate to activities that benefited the quarter. Approximately 8 cents primarily relate to annual variable compensation adjustments and differences between planned and actual tax rates. The remaining 5 cents deliver a recurring benefit to our profitability due to structural improvements. Our strengthening business model gives us the opportunity to continue reinvesting in our business. I will share more details regarding the go-to-market and R&D investments we are planning for this year later in my remarks. Turning to free cash flow and capital allocation. We had a strong generation of free cash flow in 2021 of $432 million, above our outlook of at least $400 million. In the fourth quarter, free cash flow was $85 million, driven by strong profitability. As expected, the increase in days sales outstanding was primarily driven by growth in deferred revenue. There was also a decrease in days payable outstanding that was primarily driven by timing. We continue to take advantage of our strong balance sheet and are buying back stock to offset dilution. For the full year, we repurchased over 5.8 million shares, or approximately $244 million in total. This equates to a return to shareholders of 56% of 2021 free cash flow, consistent with our commitment of returning at least 50%. As I shared with you at our Investor Day this past September, we use a disciplined approach to capital allocation. Investing in our business to drive innovation and scale and returning capital to shareholders. We are able to do so because we are growing revenue, increasing profitability, and generating more durable free cash flows. Given our projections for healthy cash generation, along with our strong balance sheet, we plan to meaningfully exceed our capital return target in 2022. To date, in fiscal 2022, we have already purchased $50 million of shares And today we intend to enter into a $250 million accelerated share repurchase program that we plan to enter into in the first quarter of the year. The ASR is a demonstration of our confidence in and commitment to our strategic roadmap. With the actions I just described and based on our current 2022 free cash flow outlook of approximately $400 million, we are expecting to be well north of our annual target of returning at least 50% of free cash flow. Additionally, we still have flexibility to buy back shares when we see opportunities to retire shares at attractive levels. I'd like to make some comments to set context for the 2022 outlook. Regarding upfront recurring revenue and its impact on EPS, We are modeling a less positive impact in 2022 than the approximate 20 cents benefit received in 2021. We anticipate the same quarterly shape of net upfront recurring revenue as we experienced in 2021. Regarding gross margin, we expect the following business activities to drive an approximate 200 basis points decline year over year. First, a lower repairing revenue gross margin rate coming from a higher mix of cloud revenue forecast in 2022 at a gross margin rate similar to 2021. In addition, we forecast less of a positive impact from upfront repairing revenue. Second, we are investing in activities that continue to drive increased adoption and consumption advantage, including greater efficiencies with cloud service providers offset by enhancements to our consumption pricing model. Lastly, mixed assumptions related to our consulting and perpetual businesses are updated from what we shared at Investor Day. In line with our continued strategic focus on higher value work, we forecast a low double-digit decline year-over-year in 2022 consulting revenue and expect to maintain the 17% margin rate we achieved in 2021. Aligned with our strategy, perpetual revenue continues to decline, and we anticipate lower margin rates compared to 2021. Moving to investment impacting operating margin. As we shared at Investor Day, we are accelerating on innovation. We are increasing our planned cloud R&D spend to be more than 80% of the total R&D budget versus over 70% last year. We expect our investments will extend our differentiation in areas such as intelligent multi-cloud query fabric in database analytics and the most open and connected platform at enterprise scale. We are also accelerating our go-to-market investments in our cloud and customer success teams to drive growth and lifetime value with new and existing customers. Overall, we expect these investments to be an approximate 20 cent impact on 2022 earnings per share. Regarding our outlook philosophy, beginning in 2022, the outlook for cloud ARR will only be provided annually. This better aligns with how we manage the business, is more closely aligned with the company's long-term view of value creation, and avoid the quarterly volatility due to the lumpiness created by the timing of the purchasing decisions of our large enterprise customers. We will continue to report out on cloud ARR each quarter and provide data and commentary that clearly demonstrates progress towards our annual Outlook goals. Our Outlook practices for the other metrics we share remains the same. With that, let me provide you with the linearity we anticipate for 2022. We expect cloud and total ARR growth to accelerate sequentially throughout the year, and total revenue and recurring revenue to generally follow historical linearity patterns. Now for an update on our 2022 annual outlook. Public cloud ARR is anticipated to grow approximately 80% year over year from the ending 2021 balance of $202 million. This is a higher growth rate than the estimate of at least 70% growth year over year provided at Investor Day. Total ARR is projected to grow in the mid to high single digit percentage range year over year. Total recurring revenue is expected to grow in the low to mid single-digit percentage range versus 2021. Total revenue is anticipated to be flat to low single-digit percentage growth year over year. Non-GAAP earnings per diluted share is projected to be in the range of $1.82 to $1.92. This is a raise from the range of $1.60 to $1.70 provided at investor day. And free cash flow is expected to be approximately $400 million. For the first quarter of 2022, we anticipate non-GAAP earnings per diluted share to be in the range of 63 cents to 67 cents. We project the non-GAAP tax rate to be approximately 28% in the first quarter and between 23 and 24% for the full year. We also forecast the weighted average shares outstanding to be approximately 109 million shares in the first quarter and for the full year. I'd like to conclude by restating that we are excited about what we achieved in 2021. We reaffirm our long-term targets and we have great conviction that we are on the path to achieve the profitable growth trajectory and shareholder value creation outlined at our investor day. With that, Operator, we are ready to take questions. Thank you.