Teradata Corp

NYSE:TDC

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Second Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Mr. Gregg Swearingen, Vice President of Investor Relations, you may begin your conference.

[Gregg Swearingen, Teradata Corp.]

Good afternoon, and thanks for joining us for our 2018 second quarter earnings call. Vic Lund, Teradata's CEO, will lead our call today. Oliver Ratzesberger, our Chief Operating Officer, who is joining the call from Europe, will then provide an update on our strategy and customer activity. Then CFO, Mark Culhane, will discuss our financial results and guidance.

Our discussion today includes forecast and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in Teradata's 10-K, 10-Q 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 and other special items described in our earnings release, including acquisition, reorganization, and transformation related costs, asset impairments, and capitalized software development costs.

We will also discuss other non-GAAP items such as free cash flow and constant currency revenue comparisons. A reconciliation of our GAAP results to our non-GAAP results and other information concerning these measures is included in our earnings release and on the Investor page at teradata.com. 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 Vic.

[Victor L. Lund, Teradata Corp.]

Good afternoon, everyone. First, I'd like to express my thanks to the entire Teradata team for another outstanding quarter. Our results this quarter again demonstrate that our strategy is working and is being well received by our customers. We saw a year-over-year revenue growth from both regions and a continued increase in our pipeline. As noted in our earnings release, we are adjusting our guidance. Mark will provide greater detail, but I want to highlight the adjustments were driven by three factors.

First, as we have previously stated, customers are moving to subscription license faster than anticipated. In fact, in the first half of 2018, roughly two-thirds of our new business transactions are on subscription. And we continue to see subscriptions trend above our previous guidance. The accelerating conversion from one-time perpetual license to subscription revenues is great news for us, as it reflects our customers' acceptance of our new flexible pricing and deployment options, and sets us on course for a more dependable and predictable revenue stream.

Second is the strengthening U.S. dollar and I know you've already heard about this from others. This has a double impact on us, however. Our revenues when converted to U.S. dollars are reduced, but since our products are primarily produced in the U.S. we don't get a corresponding reduction in our cost of goods sold. My perspective on this is straightforward. Don't panic when the dollar strengthens, and don't celebrate when it moves in your favor.

Third, our perpetual upfront revenue is weighted towards lower-margin hardware as customers are primarily purchasing our software on subscription. While the impact of these hardware sales is positive on the revenue, it reduces margin rate because as we all know hardware margins are lower than software. As I mentioned earlier, you will hear more specifics from Mark, but I wanted to give you my perspective that the changes in guidance primarily reflect the accelerating shift to subscription, as well as FX impact.

And as Oliver has fully stepped into the COO role, I am now spending much of my time on the road to hear directly from our customers and team how we are progressing on the execution of our strategy. I visited the U.S., Europe, China, and Japan in the last quarter. Everywhere I went, I found strong enthusiasm and support from both customers and our Teradata team. It is very gratifying and encouraging to see the positive reaction to our strategic direction.

Customers are naturally at very different stages in their own analytic journey, whether they are starting to rationalize our analytics ecosystem, adopting elements of our Teradata Everywhere or beginning to consider our Teradata Analytics Platform. The overwhelming message from the large global enterprise that comprise our customer set is that Teradata remains a trusted advisor delivering tangible business results and value.

In the end, our transactions demonstrate that our customers are giving us the opportunity to prove our capabilities. Here are a few examples of my recent customer interactions. In China, a large financial institution is deploying our Unity offering which automates tasks and enables multiple systems to work together. This allows the customer to scale our analytic environment, while at the same time, better supporting their backup need.

In Japan, I met with an online content provider that is expanding its Teradata platform to accommodate new analytic solutions that they are developing in conjunction with our consulting team. This is a good example of our consulting leading to more consumption of Teradata software. And in Europe, a large telco is expanding its Teradata environment throughout its global operations as Teradata Everywhere affords it better control of its cost by reducing the number of systems support as that moves more data to the Teradata platform.

The key to our strategy is that it allows our customers to move forward on their own timeline in a reduced risk environment and knowing our solutions will deliver solid business benefits and performance scale. The other key attribute to all of these examples is that they demonstrate we are expanding our role as a trusted adviser. We are involved with our customers on an ongoing basis to help them drive better business outcomes based on the effective use of technology. This in turn should drive greater revenue and earnings both of us (00:07:28). And over time, a more predictable business model for Teradata.

With that, I'll turn the call over to Oliver, who will provide an update on our strategy, our differentiation, and some additional new use case.

[Oliver Ratzesberger, Teradata Corp.]

Thanks, Vic, and good afternoon, everyone. It is my pleasure to provide an update on great progress we are making in our strategic transformation. On today's call, I will emphasize three key takeaways.

First, our strategy is on point and addressing market needs as enterprises around the world take on digital transformation. Second, our strategy is resonating with our customers. I will share some new customer use cases that are propelling increased adoption of our Teradata Everywhere strategic offering, including our Teradata Analytics Platform and IntelliCloud-as-a-service offering. And third, we have real-world proof of Teradata's differentiated value. These three takeaways confirmed why we at Teradata are very confident in our strategy and direction.

And our Q2 revenue growth both in our Americas and International regions validates our momentum. The digital transformation continues. Companies worldwide are acquiring digital capabilities throughout their organizations to improve efficiency, enhance customer value, build new business models, and drive growth. The large global enterprises we serve recognize that analytics is mission critical to address the digital transformation and is key to competitive advantage.

Our strategy of helping customers achieve high-impact business outcomes through enterprise analytics at scale directly addresses this market need. We are meeting the needs of our customers and driving increased consumption of our software through our Teradata Everywhere strategic offering.

Our four key tenets of Teradata Everywhere help customers leverage analytics to analyze anything, deploy anywhere, buy any way and to move anytime. With our flexible deployment and the pricing options and the powerful technology, our extensive Teradata Everywhere strategy remains unmatched in the industry. No other company provides the breadth of analytics leadership. Another indication of our momentum with Teradata Everywhere is that we are increasingly seeing customers move Teradata to the cloud as they realize that Teradata offers the fastest path to secure scalable analytics in the cloud.

In the quarter, two of our top 500 customers made decisions to move to Teradata on Azure in the public cloud. One, a multinational consumer packaged goods or CPG manufacturer, will perform advanced analytics on its global consumer data to improve direct-to-customer communications and support extreme personalization of messaging and offers. And a large government agency is moving to the cloud and running its operations as-a-service in the cloud.

The key advancements to Teradata Everywhere is our new Teradata Analytics Platform. This strategic product is differentiated from competitive offers by providing an agile and enterprise-ready infrastructure that combines multiple data types for connected and trusted analytics and enables companies to operationalize analytics at scale with the flexibility for both business analysts and data scientists to leverage multiple tools, languages, and workbenches of their choice.

Asset analytics is an example of a new class of business problem that we are addressing with the Teradata Analytics Platform. Simply put, asset analytics helps companies predict failures before they occur, avoid service disruption and ensure high asset utilization by leveraging diverse and new data types such as from IoT sensors, geolocation or weather data.

This new use case brings new insights including emergent themes such as connected factories and digital twins which in turn drive new analytic workloads. We have a number of customers already leveraging the Teradata Analytics Platform. One of the world's leading telcos is enhancing customer journey analytics and is testing use cases to improve subscriber retention and expansion, driving line additions to existing customers, thereby adding to top line growth.

Another large telcos improved its new customer acquisition model which is expected to translate into several millions of dollars added to their top line. This customer can now score more than 250 million customer records in under 25 minutes, a 10x advance over its previous ability and can increase its scoring accuracy by generating models based on a much greater volume of data.

A multinational manufacturer is evaluating our new 4D analytics capabilities to optimize their manufacturing and supply chain processes through faster crew (00:13:00) performance and overall improved system resource availability. In fact, this customer saw dramatic reductions of up to 99% in query time of system resources, allowing them to process 100 times more sensor data and informed us that these results were outstanding.

These examples illustrate that Teradata Everywhere is ideally suited to address today's market dynamics. It is being well received by our customers and how our Teradata Analytics Platform is helping customers generate business outcomes in a dramatically simplified analytical environment. This is the new Teradata in action.

At our upcoming Annual User Group Conference, Teradata Analytics Universe attendees will see more of the new Teradata and the power of Teradata Everywhere, including the Teradata Analytics Platform. We have created an outstanding next-generation analytics conference and are bringing together the smartest minds in data analytics to explore, collaborate and learn how to solve the toughest global business challenges for better business outcomes.

Teradata Analytics Universe will be held in October in Las Vegas and will showcase our strong momentum this year as our strategy continues to resonate with our customers and transform how enterprises operate around the world. The innovative solutions and value we provide for our customers is impacting the industry and has been noticed and recognized. It is very gratifying to receive industry acknowledgment of our differentiated value.

Teradata was one of only a handful of cloud-based analytics providers that were recently recognized by Gartner as a Customer Choice winner for the Best Data Management Solutions for Analytics of 2018, based on 200-plus customer reviews of real-world users. We were also named as one of the 2018 Top 100 Tech Leaders by Thomson Reuters, identified as an industry-leader with the right mix of big ideas and the wherewithal to achieve them into the future, one that is poised to thrive.

As these recognitions and customer use cases demonstrate, our strategy is on point as we meet and even define market needs in the industry. I can assure you that we are on a mission to thrive. We remain steadfast in our conviction that we have the right strategy, the market-leading technology and most skilled consultants for enterprise and cloud-based data analytic solutions.

Now, let's hear from Mark on the details.

[Mark A. Culhane, Teradata Corp.]

Thanks, Oliver, and good afternoon, everyone. Our strong momentum continued this past quarter and I'm pleased to once again report better than expected quarterly results, not only in terms of revenue, non-GAAP EPS, and free cash flow, but even more importantly, two-thirds of our new and add-on bookings were subscription-based, exceeding the revised expectations given on our last earnings call of 50% to 60% of our bookings mix for the full year to be subscription-based.

Since, we are seeing our bookings mix increasingly shift to subscription-based transactions, we are increasing our expectation for our bookings mix to be 65% to 70% subscription-based for the full year. In terms of our reported results, total Q2 revenue was $544 million, which was above our guidance range of $520 million to $530 million.

Recurring revenue, which includes revenue from subscription-based transactions, perpetual license-related maintenance and upgrade rights was $312 million in Q2, a year-over-year increase of 11%, 10% in constant currency.

Perpetual software license and hardware revenue, which is revenue from on-premise perpetual transactions, was $97 million. We had a governmental customer purchase via perpetual versus our forecast as a subscription due to their year-end budgetary opportunity, which resulted in a perpetual revenue higher than our expectations and drove total revenue ahead of our expectation. We continue to expect that perpetual revenue will decline year-over-year in the second half of the year as our bookings mix shifts more towards subscription-based transaction. If customers are choosing to buy upfront on a perpetual license, it is predominantly hardware related.

In consulting revenue which was $135 million in Q2 decreased 4% from Q2 2017 as we have shifted our strategy to focus on the top 500 analytical opportunities, as well as business consulting, we are doing less lower margin implementation related services. AR growth was $26 million in Q2 excluding the negative currency movement during the quarter. After negative FX, ARR increased 7% year-over-year. Within total ARR, subscription based ARR increased approximately 150% year-over-year.

As our bookings mix continues to shift to subscription, we see our subscription related ARR growing while perpetual license-related maintenance and upgrade rights declining. Our backlog was approximately $1.8 billion, an increase of approximately 5% from March 31, 2018, 11% from year-end 2017, and more than 55% from the end of Q2 2017.

Before I continue to highlight 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. EPS in the second quarter was $0.26, higher than both our guidance range of $0.17 to $0.19, and the $0.22 reported in Q2 2017. Upside to EPS was driven by the better than expected perpetual revenue in the quarter.

Turning to gross margin. Gross margin of our recurring revenue was 74% versus 77.2% in the second quarter of 2017. As expected, the lower margin year-over-year was due to the recurring revenue mix in Q2 2018 having more subscription-based revenue, which carries lower margins than revenue from perpetual license related maintenance and software upgrade rights. We continue to expect our recurring revenue margin to be in the low 70%s range in the second half of 2018.

Gross margin of our perpetual software license and hardware revenue was 30.9% as compared to Q2 2017's 50.5%. As expected, the lower margin was due to this revenue mix becoming predominantly hardware related as more of our business shifts to subscription, particularly software sales. We expect perpetual revenue margins to improve in both Q3 and Q4 from current Q2 2018 levels and be in the low-40%s range for the full year given the current profile of forecasted second half perpetual transaction.

And gross margins of our consulting revenue improved to 3.7% compared to 2.1% in Q2 2017. We expect margins to continue to improve in the second half of the year as there is a clear seasonal trend to the profitability of this business. The margin profile of this business is an area of focus for the company and we expect our consulting margins to improve meaningfully from Q2 2018 levels and be approximately 10% to slightly better for the full year.

Overall gross margin was 48.9% in the second quarter versus 51.9% in the second quarter of 2017. We expect gross margins in the second half to improve from the Q2 2018 level, and be approximately 50% for the full year.

Turning to operating expenses. Selling, general and administrative expense was $149 million in Q2, increasing $3 million or 2% from the second quarter of 2017. We expect SG&A expenses to increase second half versus first half with Q3 2018 flat with Q2 2018, and Q4 2018 increased because of our sales and marketing activities related to Teradata Analytics Universe, our annual user group conference in October.

Research and development expense was $72 million, the same as in the second quarter of 2017. We expect slight increase in Q3 and Q4 2018 as compared to Q2 2018 level. Total expenses increased $3 million or 1% in Q2 versus the prior year period. Operating margin for the quarter was 8.3% versus 9.4% in Q2 2017. We expect operating margin to improve from this level in the second half.

Teradata's non-GAAP tax rate of 22% for the second quarter was lower than the 37.8% in Q2 2017 as expected largely due to recently enacted U.S. tax reform. We continue to expect our full year tax rate to approximate 20% and fluctuate quarterly depending upon pre-tax income levels and the effect of quarterly non-GAAP discrete tax items.

Turning to cash flow, net cash flow provided by operating activities was $106 million in Q2 2018 compared to $61 million in the second quarter of 2017. Cash from operating activities was better than expected and higher than in the prior year period driven in part by receipt of a customer payment on the multi-year contract from the government customer mentioned previously.

The positive impact of this payment was partially offset by the timing of various working capital items as well as the impact of the company's ongoing transition to subscription-based purchasing options which results in the company collecting less cash upfront as customers pay over time.

Capital expenditures were $32 million in Q2 more than doubling the $14 million of capital expenditures in Q2 2017. The increase in CapEx was primarily driven by the increased mix of transactions moving to subscription. Additions to capitalize software were $2 million in the second quarter of both years. As a result, free cash flow for the second quarter was $72 million versus $45 million in the second quarter of 2017.

We are now raising our expectations for the full year free cash flow to be $175 million to $200 million with Q3 free cash flow expected to be negative and Q4 free cash flow expected to be slightly positive. Turning to our balance sheet, we had $882 million of cash as of June 30, 2018. During the first half of 2018, we repatriated $525 million, mostly to buy back shares and pay down our term loan. We expect to bring back approximately $800 million in total in 2018. We plan to use a portion of these repatriated funds to buy back shares and keep the remainder for general corporate purposes.

During the second quarter, we bought $81 million of Teradata stock or approximately 2.1 million shares. Year-to-date, we have bought approximately 4.1 million shares for $157 million. We currently have $379 million of share repurchase authorization remaining, and we'll be opportunistic in repurchasing shares during the second half of 2018.

Total deferred revenue was $570 million as of June 30, 2018, which was $71 million higher than on December 31, 2017, due to increasing subscription-based transactions and the seasonality of maintenance billings.

Now turning to guidance. As I have previously mentioned, we are experiencing increased movement to subscription-based transactions which we now expect will be 65% to 70% of our full year bookings, a significant increase from our original expectation at the beginning of the year and our last earnings call guidance which was 50% to 60% in 2018.

In addition, as you are all aware, we have seen significant negative foreign currency movements and we now expect 1 to 1.5-point less revenue in 2018 than we estimated 90 days ago. Because of these two factors, our 2018 full year and third quarter reported revenue, margins, operating profit, EPS, and free cash flow are expected to be impacted particularly by the anticipated increase in subscription-based bookings.

Therefore, we now expect total revenue in 2018 to be approximately $2.13 billion to $2.15 billion, with Q3 revenue expected to be $530 million to $540 million. As a result of these new assumptions and the lower perpetual revenue margins due to the mix of perpetual revenue expected to be predominantly hardware related, we are now estimating our 2018 full year non-GAAP EPS to be approximately $1.20 to $1.24. This is based on full year weighted average shares outstanding of approximately 123 million. And Q3 non-GAAP EPS is now expected to be $0.30 to $0.32 range based on 122 million weighted average shares outstanding in Q3.

During the quarter, we announced the closure of our Dayton location and move of our corporate headquarters to San Diego. Our current estimate of this closure is approximately $35 million to $45 million of expense, the majority of which will be in 2019 versus 2018 cash flow. We intend to call the expense out separately and will provide more information on the timing impact as we proceed.

We continue to expect our 2018 full year non-GAAP effective tax rate to be approximately 20%. We also expect our Q3 effective tax rate to be approximately 20%.

Now I'd like to provide you with an update on our full year expectations for the following key metrics. In terms of ARR, after adjusting for 2% negative currency movement, we expect approximately 10% growth in 2018. Keep in mind the currency impact is on over $1.2 billion of ARR. Adjusted for negative currency movement and after the Q2 government transaction that went perpetual versus our prior forecast as a subscription, we expect recurring revenue to grow 9% in 2018.

While we expect our bookings mix in the second half to move faster to subscription than previously expected, there is not a significant contribution to 2018 recurring revenue growth, given the limited months left in 2018 to amortize revenue. The faster move to subscription will positively impact 2019. And we now expect 65% to 70% of 2018 new bookings mix to be structured as subscription-based transactions. As we have said during the course of the year, to the extent this mix percentage increases beyond our current expectation, our current year financial results could be negatively impacted.

In closing, we had a fantastic Q2 and our customers are shifting to our subscription options even faster than our recently revised expectation as they increase their consumption of Teradata, demonstrating that our strategy is working. This is extremely positive for the future of the company and its financial results.

And with that, operator, we are ready to take questions.

[Operator]

And your first question comes from the line of Wamsi Mohan from Bank of America. Your line is open.

[Wamsi Mohan, Bank of America Merrill Lynch]

Yes, thank you. Good afternoon. Can you address what assumptions you're making specifically in the second half for the lowered guide? It looks like FX is a net maybe $15 million or so hurt in the back half, and your overachievement in 2Q, and I know it's driven by this unique deal and from the government. When you put that together with the slightly tight (33:45) for 3Q, it implies that for 4Q revenue is quite a bit sharply lower organic by maybe $30 million or so. How much of that would you attribute Mark due to the shift to subscription or is it changes in demand?

[Mark A. Culhane, Teradata Corp.]

Well, so thanks. Yeah. Thanks, Wamsi. There is no shift in demand here or reduction in demand. It is all due to the movement to subscription. We are expecting in the back half of the year a significant decline in our perpetual revenue year-over-year. That is the biggest impact of why total year revenue is down from what we thought 90 days ago, given the significant move upward to subscription given our customers' strong interest in our strategy.

[Wamsi Mohan, Bank of America Merrill Lynch]

Okay. Thank you. And if I could, Oliver, you mentioned customers Azure, but we also heard of other moves to AWS. Could you give us some sense or examples that customers willing to Teradata on AWS? Give us some sense of what sort of applications are being run there? Thank you.

[Oliver Ratzesberger, Teradata Corp.]

Yeah. Thank you, Wamsi. In general, we are seeing our Teradata Everywhere strategy being adopted by a lot of customers and that includes the public cloud. What we see with our customers is simply their ability to choose the form of deployment and de-risk their decisions in terms of what type of cloud or hybrid cloud deployment they can go to.

These are in part existing applications that are moving into the public cloud. In part, these are internal use cases where customers are testing new use cases against new types of data. And we think it's both on AWS, as well as on Azure, and the two callouts that we had in today's call were significant customers that went to Azure on public cloud.

[Wamsi Mohan, Bank of America Merrill Lynch]

Thank you.

[Operator]

And your next question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.

[Kathryn Lynn Huberty, Morgan Stanley & Co. LLC]

Thank you. Good afternoon. Two questions from my end. The first is given the expected move to subscriptions, which is really great to see, could we now have a setup for free cash flow to actually stabilize in 2019? I think, we've talked about when we get to about three-quarters of bookings from subscriptions that, that could potentially happen. Just curious whether you think that, that's a possibility next year?

And then secondly, hardware lumpiness is a bit of a distraction to the successful transition to subscription. And so, just a bigger-picture question, is it necessary that Teradata delivers its software on branded ware, or could we see the company move towards a software-only model over the long term, some other hardware companies have done successfully in the recent past? Thank you.

[Mark A. Culhane, Teradata Corp.]

Sure, Katy. This is Mark. I'll take the first one and then I'll have Oliver talk a bit about the second one. So, yes, the faster move to subscription given the customers' interest in – strong interest in our strategy is clearly moving that. And yes, it is possible that free cash flow stabilizes, come out of this year and grows into next year. We'll see where we end up through the full year but that's definitely a possibility.

[Oliver Ratzesberger, Teradata Corp.]

On the second part of that Katy, regarding hardware versus software. The first part of – and I think we discussed that last time already around – a big important part of our Teradata Everywhere strategy is the separation of software and hardware, and the fact that we offer customer choice for them to deploy in the way they feel most relevant or that is most appropriate to their business model.

We see this actually as a unique differentiator and a big plus of our strategy because customers are telling us that this really gives them increased flexibility, and then having a hardware option available for that is something that many of the top 500 customers that we are targeting are really valuing as an option.

This is not to say that other options aren't as important, but that portfolio of options in Teradata Everywhere, be deploy everywhere, it move any time portions of that strategy are absolutely critical and it gives our customers the choice to pick between their own data centers, their own hardware, the public cloud, specialized cloud. And so for the foreseeable future we see this as part of our strategy. Of course, our focus has shifted to software and that's what we're driving but ultimately giving our customers the choice of picking where they want to deploy, we believe is a big part of a hybrid cloud strategy.

[Kathryn Lynn Huberty, Morgan Stanley & Co. LLC]

Thank you.

[Operator]

Your next question comes from the line of Brad Reback from Stifel. Your line is open.

[Brad Robert Reback, Stifel, Nicolaus & Co., Inc.]

Great. Thanks very much. From a higher-level perspective, Vic or Oliver, if you think about gross profit per query to Teradata, how does it look when someone deploys an Azure or AWS versus previously on-prem? Thanks.

[Victor L. Lund, Teradata Corp.]

So, just to understand your questions better, you would like to understand if the profit per query a customer runs is different in the public cloud compared to on-prem deployments?

[Brad Robert Reback, Stifel, Nicolaus & Co., Inc.]

Exactly.

[Victor L. Lund, Teradata Corp.]

So...

[Brad Robert Reback, Stifel, Nicolaus & Co., Inc.]

I mean, if that is same amount of money or less?

[Victor L. Lund, Teradata Corp.]

So, the first thing is we – obviously we don't necessarily calculate profit by query or queries. This is why TCore is an important metric for us to normalize deployments between different options, deployment options within our Teradata Everywhere strategy. In general, what we're seeing is that the performance is similar across the different platforms, and the profit potential or the profit that we're seeing from software is similar across these deployment options. But other than that, I can't really go into cost per query or profit per query because that's highly dependent on a customer's workload.

In general, what we're seeing, the top 500s are demanding very, very high query workloads. As you know from us, we do tens of millions of queries a day, often billions of queries a month on these platforms. We know that we can deliver these at fractions of pennies at all deployment options that we have. And that's really a core part of our Teradata Everywhere strategy. So for us, we believe that the choice of deployment ultimately derisks our customers' decisions. And for us from a business model, we like the deployment of every single one of these deployment options.

[Brad Robert Reback, Stifel, Nicolaus & Co., Inc.]

Great. Thanks very much.

[Operator]

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

[Raimo Lenschow, Barclays Capital, Inc.]

Hey. Thanks. Hey, Oliver. If people go to subscription, can you kind of handle or kind of help to drive the software only to subscription or is it a customer choice? I'm just trying to understand like the comments earlier around hardwares toward more perpetual. I'm just wondering. I mean, in theory, it's almost good for you because you just get on with it. Like can you help me? It's like – is that a dynamic that you can influence or is it just full customer choice there? And I have one quick follow-up.

[Oliver Ratzesberger, Teradata Corp.]

Yeah. Raimo, a great question. We absolutely are influencing this through multiple ways. First of all, the complete Teradata Everywhere portfolio, including the Move Anytime, our customers can only get if they're on subscription. That was the first step that we introduced last year. As we are deploying new, new capabilities, we are offering them on a subscription-based model, and so incenting customers to really go for the subscription choice.

We've also told you earlier this year that for the first time in the history of Teradata, we have incentives go to market and sales to sell subscription over perpetual. And in part what you're seeing is all these factors are coming together, that's why the percentage of our subscription mix is increasing rapidly as these incentives are coming together and our goal is absolutely to sell subscriptions to every new customer in the future.

Having said so, we also understand that there are certain customers like government agencies and others that have fixed budgets that they want to spend at a given point in time and we will be flexible with our customer base to make sure that in the top 500 for those customers that we target on that we have the best possible solution and flexibility as they need.

[Raimo Lenschow, Barclays Capital, Inc.]

Okay. And then quick question, a follow-up for Mark. Mark, the – I get your – the higher percentage of subscription in the bookings, but obviously we only see that in the recurring revenue line. But there are other moving parts in there obviously as well. At what point do you think that pure subscription is getting big enough to kind of start moving the needle? Is that already like towards in the back of the year or is that more 2019?

[Mark A. Culhane, Teradata Corp.]

Yeah, we haven't broken that out. We'll take a look at that. It's not the back half of this year, it will be in – we'll evaluate it in 2019 and see where we see that heading as we update our three-year model in our Analyst Day later this year.

[Raimo Lenschow, Barclays Capital, Inc.]

Okay.

[Mark A. Culhane, Teradata Corp.]

But clearly growing fast and faster. Yeah. At – with the traditional perpetual license, related maintenance upgrade rates decline because we're focused largely on our install base.

[Raimo Lenschow, Barclays Capital, Inc.]

Yeah. Okay, perfect. Thank you. That would be nice to hear. Thank you.

[Operator]

Your next question comes from the line of Derrick Wood from Cowen & Company. Your line is open.

[J. Derrick Wood, Cowen & Co. LLC]

Great. Thanks. We saw the strongest growth in the Americas in over four years, I think. And obviously the perpetual deal probably helped it, but it's really converged and caught up with international growth and now it's potentially outpacing. Just wondering if you could flesh that out, is it demand, is it sales productivity, is it maturity of the model? And then, compare that to what you're seeing internationally. And then I have a quick follow-up.

[Victor L. Lund, Teradata Corp.]

Yeah. This is Vic. We are seeing strengthening in the U.S. and I think part of that was driven around we had more when we came in disruption in our field teams in the Americas than we had internationally at the time we made the change in strategy. And I think that was part of it, and it's starting to come around a little better. I think that's probably the primary driving thing behind it. But we are starting to see a lot more interest globally. And particularly in the last six months, I would say, the interest in the U.S., the engagement we're getting is at a higher level in the organization and I think that's starting to pay off as well.

[Mark A. Culhane, Teradata Corp.]

And just one comment as well, Derrick, this is Mark. The perpetual transaction that we referenced was an international transaction, not an Americas' transaction.

[J. Derrick Wood, Cowen & Co. LLC]

Okay. And then, Mark, obviously there's a big perpetual and you said 66% of bookings was ratable and perpetuals in that bookings number. So that suggests you had a pretty strong overall bookings number. You also called out 55% growth in backlog. Is there a way to quantify like what growth was on a perpetual equivalent or an ACB basis, or at least give us some directional color?

[Mark A. Culhane, Teradata Corp.]

Yeah, I mean, we don't calculate things based on perpetual equivalent sort of any longer, but we clearly had an extremely robust subscription bookings quarter. And as I've said, I expect over the back half of the year, our perpetual bookings to decline significantly year-over-year given what we see in the forecast across Q3, Q4 on a subscription basis.

[J. Derrick Wood, Cowen & Co. LLC]

Okay. That's helpful. Thanks.

[Operator]

Your next question comes from the line of Jesse Hulsing from Goldman Sachs. Your line is open.

[Jesse Hulsing, Goldman Sachs & Co. LLC]

Hey guys. Thanks for taking my question. I have two. The first one is just a housekeeping question. Mark, I think you said ARR growth increased 7% in constant currency. But what was the absolute dollar number? Was it $1.226 billion or something like that because I think you added $26 million quarter-over-quarter?

[Mark A. Culhane, Teradata Corp.]

Yeah, we said it was 7% after FX year-over-year and the total number is a bit over $1.2 billion, that I made in the comments on ARR.

[Jesse Hulsing, Goldman Sachs & Co. LLC]

Got you. And then, a question for Oliver. I guess if you look at the customers that have started to move to the cloud, you called out those are your customer, but there's some other releases around customers that have looked at cloud options. Are these for existing Teradata workloads that are migrating? So just moving to a different set of infrastructure essentially, or are you starting to see traction with newer use cases in these early cloud customers? Thank you.

[Oliver Ratzesberger, Teradata Corp.]

Yeah. Jesse, thanks. It's really a mix of both that we're seeing there. Yes, there's obviously existing use cases moving to cloud and customers like the flexibility that they're getting with this. But it's also new use cases and we gave some examples of the advanced analytical functions that are being started to be utilized by these customers.

And especially when we look at sensor data and new types of data forms that in part originated in the cloud for some of our customers. Moving Teradata to the cloud or instantiating it into the cloud is a choice that we are seeing customers are making. And it's clearly also a validation of what we have seen early on when we announced the Teradata Analytics Platform on top of Teradata Everywhere and the interest we are getting from a lot of customers around the world that tell us that their existing infrastructure, their existing systems have gotten too complicated, too many different moving parts, too many systems, too much technology that's hard to integrate and that they're looking for a single platform like the Teradata Analytics Platform.

And so, as we have rolled out new capabilities towards that new analytical functions, new integrations, customers are adopting that and some of those use cases are absolutely in the public cloud in addition to other Teradata Everywhere deployment choices.

[Jesse Hulsing, Goldman Sachs & Co. LLC]

Thanks, Oliver. That's super. And one quick clarification question, Mark. If the 7% was at constant currency, what was the reported growth rate of ARR?

[Mark A. Culhane, Teradata Corp.]

Yeah, you're right. It was 7% in constant currency, a bit higher in reported.

[Jesse Hulsing, Goldman Sachs & Co. LLC]

Thank you.

[Operator]

Your next question comes from the line of Srini Nandury from Summit Insights Group. Your line is open.

[Srini Nandury, Summit Insights Group]

All right. Thank you for taking my question. Oliver, a big picture question for you, if I may. Can you please talk about the competition in general and how do your competition compete with you and what do they use to talk about you guys?

[Oliver Ratzesberger, Teradata Corp.]

Well, yes, competition is a topic for us. Competition has always been a topic for us. Teradata in market – having said so, a couple of things here. First of all, our go-to-market and our strategy are fairly uniquely positioned compared to our competition.

The Teradata Everywhere strategy is unique compared to the competition that we are seeing out there, the choice of multiple public cloud options, the private cloud options, the – running on their own hardware, running on our hardware stack is unique in the industry for analytics.

Our target of top 500, the largest enterprises in the world and the fact that they run billions of analytical queries every month on these platforms further differentiate us, and there is currently no other platform out there that can match us at that scale. Having said so, yes, there's competition out there, small use cases, departmental use cases, no concurrency, simple queries have always been the hallmark of some of the competitors and they're often advertised as big wins.

In reality, when it comes to the complex workloads, to the high concurrency, to the billions of queries that need to be run, and especially now as we are extending into the Teradata Analytics Platform with new advanced machine learning, deep learning models built straight into that platform, we know we are further differentiating us from the competition out there in the field. And so, we are watching competition very closely. We are seeing obviously various startups and companies out there trying very hard to win business out there. But overall, we are seeing a very strong interest for Teradata.

And as I said earlier, one of the big things that we see with customer is over the last couple of years, the complexities of infrastructures have really grown and has made it very difficult for many companies to operate their systems at scale, in part because they've brought in so many different solutions and they've tried so many departmental solutions that they are facing a lot of silos. And in part, what you're seeing is customers realizing that they need to consolidate some of that technology silos that they have out there and Teradata is the unique platform out there at scale that can do that.

[Srini Nandury, Summit Insights Group]

Thank you.

[Operator]

We have enough time for one more caller. Your last question comes from the line of Phil Winslow from Wells Fargo. Your line is open.

[Philip Winslow, Wells Fargo Securities LLC]

Hey, guys. Thanks for taking my question. Obviously, you called out some pretty sizable wins here both for you and the cloud and on-premise. I mean, are we starting to see more of sort of what we used to talk about? Floor sweeps kind of coming through your business again, and I guess, maybe you also call them cloud sweeps now, sweeping the data center into the cloud. But how do you kind of think about just sort of like size of the transaction? Are you seeing that sort of that floor sweep impacting this or are there other dynamics also happening here?

[Oliver Ratzesberger, Teradata Corp.]

So, interesting that you call them cloud sweeps. First of all, we – no, we don't believe that it's a floor sweep or cloud sweep dynamic that we are seeing here. What we're seeing is there's pent-up demand from our customers for integrated SQL platforms that make it easier for them to operate and answer the business questions that they run every day.

In particular, operating the results of their data scientists and integrating them into what they are doing with the business and that requires the latest technologies, that requires the latest versions. And we have made a lot of improvements over the last two years in our overall technology stack of Teradata Everywhere, and it's really driving a lot of customers to look at how do we get to the forefront of that technology because they want to adopt all of these capabilities of Teradata Everywhere because it's ultimately de-risking their platform decisions, and that has started to drive the demand and the increase of customer interest for Teradata Everywhere as a technology stack, Teradata Analytics Platform that we have several customers already deployed and have some phenomenal results that they're seeing out there.

And so this is starting to make – to create demand and it leads to, yes, of course, some floor sweeps or cloud sweets, but it's ultimately the wish of our customers to be at the forefront of these technologies and the ability to leverage the elasticity, the flexibility of the Teradata Everywhere Platform and our analytical capabilities.

[Philip Winslow, Wells Fargo Securities LLC]

Yeah, if you want to use cloud (56:30). All right. Thanks a lot.

[Victor L. Lund, Teradata Corp.]

All right. Everyone, thank you so much for joining our call today. We're excited about where we're going, getting nice traction across big customers. And I think our strategy and our customer base are well aligned. Thank you for your interest and we look forward to answering your questions 90 days from now.

[Operator]

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