Gregg Swearingen - Teradata Corp. Victor L. Lund - Teradata Corp. Oliver Ratzesberger - Teradata Corp. Mark A. Culhane - Teradata Corp..

Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Wamsi Mohan - Bank of America Merrill Lynch Raimo Lenschow - Barclays Capital, Inc. J. Derrick Wood - Cowen & Company LLC Karl E. Keirstead - Deutsche Bank Securities, Inc. Jesse Hulsing - Goldman Sachs & Co. LLC Philip Winslow - Wells Fargo Securities LLC Abhey Lamba - Mizuho Securities USA LLC.

Good afternoon. My name is Shauntelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Q1 2018 Earnings 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.

Gregg Swearingen, VP of Investor Relations, you may begin your conference..

Good afternoon. And thanks for joining us for our 2018 first quarter earnings call. Victor Lund, Teradata's CEO, will lead our call today. Oliver Ratzesberger, our COO, will then discuss our technology advancements, differentiation 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 also 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 may also discuss some of the non-GAAP items such as free cash flow. 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 of teradata.com. A replay of this conference call will be available later today on that website.

Teradata assumes no obligation to update or revise the information provided during this call, whether as a result of new information or future results. And now, I'll turn the call over to Vic..

Good afternoon, everyone. I'm very pleased with our strong start to 2018. Our first quarter reported revenue and our non-GAAP EPS were better than expected. Not only were our reported revenues up versus Q1 2017, but on the old perpetual basis, our revenues in Q1 of 2018 exceeded those of Q1 2016, a clear indication that consumption is growing.

In addition, more of our bookings mix were subscription-based than we had originally expected, and therefore our Q1 performance was even better than it appears on the surface. Our strategy is clearly working. Customers are moving to our subscription-based options faster than we expected.

This trend is being driven by Teradata Everywhere, our flexible and scalable offering that reduces the risk of our customer's analytic investments. The net result is that our pipeline, ARR, deferred revenue, and backlog are all growing. I'd like to spend a few minutes on what we are doing to drive these positive results.

Fundamentally, today's Teradata is a very different organization than it was two years ago. We have added subscription-based purchasing options, have developed Teradata Everywhere, and are deploying new capabilities of our Teradata Analytics Platform throughout 2018.

We are developing cloud offerings that run on AWS and Azure, in private cloud and on-prem.

We have transformed our go-to-market strategy and built a field team that is able to engage with customers and address their needs not only on the technology front, but also and importantly to help them solve their most pressing business problems with market-led analytics.

Further, we have changed our compensation structure and now incentivize our teams to sell subscription. Also, we have built a sales operation organization to assist in the global deployment of best practices. We introduced and instill new rigor in a formal account planning process.

Our sales teams now have modern tools like Salesforce.com that help them develop, track and monitor customers. We have changed the skillset at Teradata by combining the people who developed the software that makes Teradata uniquely positioned to drive analytic performance at scale with new talent in areas like cloud and AI.

We recently brought all of our consulting teams into one global organization to drive revenue and support our customers with a goal of bringing us in line with industry benchmarks for sales and profitability.

We have also strengthened our leadership team, bringing in an experienced CFO, CRO, CHRO and, in the last quarter, we added a CMO, who will enhance our brand and help us develop a more disciplined approach in delivering our message to the market.

As I've mentioned last quarter, we promoted Oliver to the position of COO to sharpen our focus on all the aspects that touch our customers. The new leadership team is seasoned, driven and committed to successfully completing our transformation.

And while we have been adjusting all these levers, we are continuing investments in our infrastructure to enable us to become more efficient as we move forward.

And finally, while driving revenue and customer engagement remain key, there are still multiple areas where we can continue to improve the effectiveness of our cost structure and we will exploit all of those opportunities.

Looking back, we have accomplished a great deal, yet as a team, we know we are still in the early stages of this exciting journey. I would like to thank the entire Teradata team for all their efforts to drive these results. Many folks said we were crazy to take something like this on in a public form.

But the team has validated my belief in them and their commitment to succeed. And with that, I'll turn it over to Oliver..

a global CPG company is running Teradata on AWS to optimize their consumer promotions, improve sales planning and enhance supplier contract negotiations. A very large telco chose Teradata's new on-premises cloud to provide more elastic expansion capabilities to meet unpredictable workloads, improve service levels, and reduce data center costs.

And a leading U.S. healthcare organization adopted Teradata to help ensure that its data remain highly reliable and available as the company moves into predictive analytics and machine learning. This last example illustrates how we are driving new advanced analytics capabilities that help companies increase their internal investment in IoT.

As part of our Teradata Analytics Platform, we recently announced 4D Analytics. This advanced functionality is especially relevant in edge computing applications with constantly changing time and location variables.

We integrate analytics for where and when, primarily geospatial, temporal and time series data and combine them with operational and customer data, enabling our customers to operationalize IoT. This new functionality will help lead the IoT revolution and is the foundation of digital transformation.

It enables new use cases like making smart cities smarter by analyzing patterns of trains, taxis and cars, traffic lights, restaurant traffic and general citizen movement to provide insights for improving traffic flow.

And another use case like optimizing fleet management by studying sensor data from a vehicle fleet, predicting the probability of a breakdown, and proactively addressing and minimizing the business impact.

With the power and scale of our advanced analytics, we are seeing companies increase consumption and TCore as they add new use cases, including a major manufacturer is running factory analytics on Teradata; a leading energy company added supply chain analytics; one of our world's leading interactive entertainment companies is enabling GDPR compliance analytics; a global machinery manufacturer is running predictive maintenance; a large U.S.

healthcare company is improving clinical outcomes; and a multinational petrochemical company is improving yield management. It is also important to note that Teradata continues to garner excellent recognition from industry analytics for both our customer dedication and our technology innovations.

We started off the year by being acknowledged as the number one for customer satisfaction in the Forbes Just 100 rankings. We additionally were named a visionary leader in Gartner's Data Management Solutions for Analytics and further attained the highest scores in their Critical Capabilities for Data Management Solutions for Analytics report.

As I turn the call over to Mark, know that we remain fully committed to continue leading the market and helping our customers drive differentiated value from their data and analytics solutions.

We are operating with fierce urgency to help the world's leading companies get on the fastest path to the cloud for analytics at scale and are excited to earn the ongoing validation from our customers. The entire Teradata team is bullish on our new growth strategy and we are in it to win. Mark..

we expect approximately 50% to 60% of 2018 new and add-on bookings to be structured as subscription-based transactions. To the extent this mix percentage increases beyond this range, our financial operating results will be negatively impacted.

And we continue to expect high-teens TCore growth in 2018 as we continue to see increased consumption of Teradata from new use cases at existing customers and the addition of new customers. In closing, it's clear our strategy is working as our customers are shifting to our subscription options faster than anticipated.

This is extremely positive news for the future of the company despite the short-term impacts to our financial operating results. And with that, operator, we are ready to take questions..

Your first question comes from Katy Huberty with Morgan Stanley. Your line is open..

Thank you. Good afternoon. A quick question on the quarter then I have a big picture question.

Why was the international gross margin so weak this quarter?.

Hi, Katy. This is Mark. The mix of revenue in international, they probably have over 60% of our total consulting revenue. It's much, much larger overseas than it is in the U.S. and obviously consulting margins are much, much lower than the overall margin profile..

Okay. And then, Oliver walked through a number of good examples where you're getting pulled into AI, IoT automation use cases.

And I wonder if you can just spend a couple minutes explaining what products that's pulling from Teradata whether you think you have a full portfolio to address and to gain the largest wallet within those type of projects, because that seems like it's a big opportunity going forward..

Yeah. Thanks, Katy. Completely concur. We believe this is a very large opportunity for us going forward. And this is – there's a couple of things coming together from that portfolio. The first thing is the Teradata Everywhere foundation, the fact that we can deploy in multiple deployment forms the various product offerings that we have.

And on top of that is really the Teradata Analytics Platform that is bringing together the different engines, the different languages, the different tools.

And this is where we hear from C level executives around the world from our customer base that they have really – they have been struggling with complexity, they have been struggling with silos, they have been struggling with one-off technology that is very hard to operationalize, maintain, keep up and running, and operate.

And so, the Teradata Analytics Platform is what is resonating extremely well with the customer base.

And I talked a little bit about a recent release about 4D Analytics, which is one step towards that, or the next step towards it, which really brings together this location-based, time-based, version based view of data that allows customers to prepare the data for the algorithms.

AI is only as good as the feature extraction, the data pipelines, the data science pipelines that you can build for the infrastructure. And this is what we feel that we have a very strong product offering. And customers, again as I said, just came back from Universe in EMEA with 24% more customers out there.

Every single one of their executives talked about how these capabilities are game changing for their digital transformations that they are going after..

Thank you very much..

Your next question comes from the line of Wamsi Mohan with Bank of America. Your line is open..

Yes. Thank you. Good afternoon. Can you talk a little bit about the linearity this year? You have just under 50% of revenues in the first half, but only 26% of EPS. Sounds like you have some larger hardware transactions in Q2 which could put some pressure on margins that might reverse.

But what else changes in the back half of this year for profitability?.

Yeah. Hi, Wamsi. This is Mark. So, you're right. I mean Q1 has always been our lowest revenue quarter. Q4 has been our highest revenue quarter. Q4 is our highest revenue consulting quarter, so we see nice margin profile on the consulting in Q4. And if you look at what it's been historically even across 2017, it was in the low-double-digits in Q4 of 2017.

Yes, we have some transactions that are largely hardware relating to that are putting pressure in there. But from an EPS perspective, the back half particularly Q4 has always been the largest EPS quarter, certainly was across 2017 and we expect that again in 2018.

But yeah, we see the back half moving on the EPS side much more dramatically than the first half..

Okay. Thanks Mark. And your revenue guide for recurring revenue is still at 12% but you're moving faster to subscription as you alluded to.

So can you talk about what is happening at your customers from a maintenance perspective which is probably the offset? And just if I could, a little surprised to see the gross margin profile on the consulting business.

Is there anything that is changing for you as a company in a particular fashion? Maybe it's incremental training or whatever it might be that is not allowing you to benchmark appropriately even for the full year at that mid-single digit or high-single-digit margins..

Yeah. So on the recurring revenue guide, first, we're only through one quarter and we had a great quarter and a great shift in subscription and I'm continuing to expect that to happen which is why I haven't moved that off to 12% at this point in time. Yes, we are seeing shifts from maintenance and upgrade rights to subscriptions.

We're seeing uplifts when that happens and so forth. And so obviously, we take a look at that across the balance of the year and we'll determine whether or not how that impacts overall recurring revenue growth.

But clearly within recurring revenue, our subscription-based revenue is growing in excess of 100% and more than doubling year-over-year which is what we expect and we continue to see that happen. So that's happening sort of on that front.

What was the second part of that question?.

Just on the consulting gross margin profile..

Yeah. Well, so if you look across what happened in 2017, they were negative in Q1, they became slightly positive in Q2, a bit more positive in Q3, low double-digits in Q4. And I said in my prepared remarks, we expect that same phenomenon to happen.

I expect quarter-over-quarter across the balance of the year we will see our consulting margins exceed 2017 levels both on a quarter basis and a full year basis. The change has been we've now had our consulting organization. It's one organization where in the past it wasn't. It's all managed and organized. We brought that together.

That's creating some efficiencies. And as I said on the call, this is a big area of focus for us going forward because historically we've seen those margins be much, much higher in the past and we're going to, over the transformation over the next couple of years, get them back to that level. Big area of opportunity for us, we believe..

Thank you..

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

Thank you for taking my question. Question for Oliver. Oliver, can you talk a little bit about the competitive environment if you go and sell Teradata now in the new fashion as a subscription model that is kind of more looking at the cloud as well in deployment anywhere.

Is that kind of predominantly kind of the old guys, is it kind of the new guys like Snowflake, are you competing with the Redshifts of this world, just help us understand this a little bit better. Thank you..

Yeah, Raimo, thanks for the question. Of course, there is competition in our market right and we have seen competition over the years. And as you said, it was Redshift a few years ago that was predicted to be the big competitor and there's other names like Snowflake that are going around today making a lot of noise.

Here is something really interesting. Our strategy is really to focus on the largest analytical opportunities out there, the top 500, as we talked about, right.

And Teradata Everywhere is resonating extremely well with them, why is that the case? Well those are customers that operate at the largest end of the scale, right? They have petabytes of information, they have thousands of users and applications, they expect from their analytics platforms to do it all at the largest scale with the biggest amount of complexity and so forth.

The competitors that we see out there, and while they are very, very noisy, they are good at small siloed deployments. Yeah, they can bring up a data mark for a small department, but they really struggle to scale beyond that. And that is now becoming visible, yet again, in our customer base.

Those customers that have tested and tried some of these new capabilities are validating that at scale they are not working. I told you about a large fintech company that doubled down Teradata investment in Q1, doubled their TCores with us, went completely to subscription.

They have tested both Redshift and Snowflake and they told us it became cost prohibitive and impossible to scale to go onto these platforms. And so, yes, yes we see this, yes we hear that. This is why we believe we are differentiated the most. And for those customers in the top 500, hybrid cloud is a big deal.

They need to be able to say, I move some workloads into the public cloud, I use some workloads into the private cloud and they're all – they're moving some workloads into their private data centers. And so you need a solution that runs unchanged in all of these environments. That's the other side of some of these competitors.

They are either cloud only or one cloud only and that really limits the applicability for most of the use cases that we're seeing in our customer base..

Perfect. A quick follow-up for Mark. Just can you define – how you define ARR, Mark? Thank you..

ARR is annual recurring revenue. It's a combination of our subscription business and the historical perpetual license maintenance upgrade business..

And do you calculate it as – how do you calculate it? Do you take like last quarter's and then multiply it by four or is it including forward-looking numbers?.

No, no. It's in forward-looking. That's the next 12 months. That's an annual recurring revenue run rate. It's not a backwards 12 months. It's a forward 12 months..

Okay. Perfect. Thank you..

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

Great. Thanks. And Mark, thanks for all those numbers and color. It's nice to get some more granularity. Real quick, on the last quarter, you talked about pipeline up 2x.

I don't know if you'll be updating that regularly, but any commentary on how it looks today versus three months ago? And any other color on the pipeline, especially since you had a lot of new field executives you brought in?.

Yeah. This is Vic. Pipeline is up again from where it was before, it continues to grow. And so, we feel good about it. New opportunities coming. And so, we feel just as strong about our pipeline now as we did last quarter..

Okay. And kind of a higher level question. I mean one thing we're hearing – I know you guys have talked about this in the past, but customers have wanted the cloud optionality in the database world. But even if they're not really ready to move their database infrastructure to the cloud.

So, I guess, first, is there a way to measure quantitatively or qualitatively how having that option for cloud has improved your ability to get budget approval or budget approval cycles? And second, has public cloud gained a whole lot of adoption at this point or can you give us a sense for, in that subscription line, what the mix looks like between term, hosted and public cloud?.

Yeah. So what you're talking about is the core of Teradata Everywhere. And it first started out last year when we first shared that really with customers where they were very positive about the fact that, oh, I have optionality; I have choice.

As you say, they might not be ready to move everything into one particular cloud, but they want to know that wherever they go, they can move any time to any other deployment form. And so, it helps executives and companies around the world to really de-risk their buying decisions.

And it has become very obvious as more and more customers were adopting that and the success stories are coming out how easy it was for them to shift from on-premise to managed cloud in public cloud.

And to be able to do that in 70 days as we had one example that we shared with you for very large-scale deployments without rewriting a single line of code for the applications that were originally written for the on-premise world. That is a lot of – getting us a lot of momentum with executives in the conversations that we are having with them.

And it's really helping us together with the new bundled pricing and subscription pricing with the choice of where you can deploy, but also the ability to move at any time without having to relicense, that all comes together.

And again, if you apply that to the top 500, and if you apply that to our core customer segments, that is what is driving the positive customer momentum that we're seeing. The feedback has been absolutely great from the customer base on that..

Okay. All right, thanks..

Your next question comes from Karl Keirstead with Deutsche Bank. Your line is open..

Thanks. A question for you, Mark. Mark, it looks like you reclassified a fair amount of consulting revenues into your recurring bucket. So, I've got two questions there.

First, just from a definition standpoint, what were the consulting services that sort of moved over and that were, in your definition, more recurring, because most people think of consulting as frankly being non-recurring? And then secondly, the piece that moved over into the recurring bucket, did it have any different growth or margin profile than the segment that is currently retained in the consulting bucket? Thanks so much..

Yeah. So, what got moved over is our managed services. Those are all sold on subscription predominantly, so that's all under subscription contracts that renew. So that's a recurring item and that's why it's sitting in the recurring bucket. The growth profile of that has been largely – pretty small, it's been pretty flat.

So that's not what's helping drive any recurring revenue growth at all. It's all the subscription that's driving the recurring revenue growth. That's pretty flat. It does have some differentiated margin profile.

Obviously, the managed services margin on that, given their subscription and largely fixed fee have a higher profile than standalone consulting margin..

Got it. Okay. That's very helpful. Thank you. And then if I could ask one follow-up, just on the pure subscription revenues. I know you haven't disclosed it in the past, but if I remember correctly, I think you suggested on the last call that you think the subscription revenue growth could be north of 100% in 2018.

So I just wanted to just recheck on that guidance.

Do you still feel comfortable with that, assuming I had that number correct?.

Yes, we do..

Okay..

Grow in excess of 100% and more than double in 2018 over 2017..

Got it. Thank you..

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

Yeah. Thank you. On the recurring margins or gross margins, I should say, they ticked down year-over-year. And I'm just wondering where you think those can go as you go through this transition and, I guess, scale up that revenue base.

I'm curious your thoughts on the full-year 2018, but also I guess over the medium-term and long-term, where do you think those margins can go?.

Yeah. So the recurring revenue down year-over-year is a mix. It's obviously more subscription-based revenue versus a perpetual license legacy maintenance upgrade. And those have different margin profiles.

So that's what you're seeing and you'll see across 2017 that they declined across 2017 as more of that subscription revenue came into the recurring revenue line.

Over time, we expect these to grow from the low 70s that we expect across the balance of 2018 and approach closer to 80%, which we think is best-in-class in the subscription world when you start to – I mean, they're very good candidly in the low 70s compared to a lot of the other SaaS companies out there and so forth.

But yeah, we expect to drive them even higher than from the low-70s going forward..

Got you. And Mark, just so I am looking at the right numbers and doing the right math. When you say recurring revenue growth of 12% which is also what you guided to on the fourth quarter call, is that on last year's reported ASC 605 numbers or on the ASC 606 numbers? I'm not totally sure..

Well it's on – the 2018 numbers are ASC 606, we did not recast the comparable 2017 numbers to go back to ASC 605. So the 12% on that basis, the ASC 606 adoption was a headwind to our recurring revenue growth across the year as compared to the prior year..

The guidance is on your ASC 606 (00:47:55)..

Yeah. All our guidance is on a ASC 606 basis..

Okay. Got you. Thank you..

Your next question comes from Phil Winslow with Wells Fargo Your line is open..

Great. Thanks, guys, for taking my question. As Vic mentioned earlier, when I do the back of the envelope math to sort of with your recurring portion versus last year, it did seem that we see a pretty solid uptick in just product growth, just for that perpetual – that ratable mix year-over-year.

I remember Q1 being a particularly good quarter last year. You talked about it and it essentially like a tough comp here in Q1 because of a large deal.

But what are you – coming sort of what drove that year-over-year strength there in Q1, particularly in the context of that tough comp? Was it big deals again, was it just sort of just buying the (00:48:43) business across customers, just sort of what's driving that up that tough comp?.

So a little bit of everything, but I guess the big thing and I – we saw versus last year an uptick in international. We were surprised at how quickly international jumped on board this year. We quite honestly expected for that to be a little slower, that's what happened last year and it accelerated significantly in Q1.

So that would be the number one factor that caused that percentage to increase and be better than last year..

Great. And then just one quick follow-up to that, just the pricing environment that you're seeing in Q1 and kind of how you're thinking about that in Q2 and beyond relative to just sort of what you were seeing last year..

So, we're putting discipline. We've talked about discipline in the field and where we are at. And we are not giving product away or anything like that. We are holding our price line.

When you go through the deals with the big customers we got, sometimes they're very complicated, how you get it all done and get them to a subscription base and that can create some issues. But in terms of pure pricing, we're holding strong with where we are. We believe in what we've got.

I've told our team they got to have swagger, they got to believe in what they sell and it's worth our offering. And so we are holding where we're at. We aren't feeling any pressure. And in fact, we continue to not try to close deals at quarter-end to get a deal done. First of all, it doesn't matter that much under a subscription basis.

But secondly, we don't need to do that. So we have a product which is fairly priced and we think we're treating our customers fair and we expect a fair return. So pricing pressure is not anything that I'm overly worried about..

Great. Thanks, guys..

We have time for one more question. Your next question comes from the line of Abhey Lamba with Mizuho Securities. Your line is open..

Yeah. Thank you. Mark, this is the first time we're getting the revenue breakdown the way it is.

Can you talk a little bit about what's in the recurring bucket different – relative size of each of them? And how should we think about their respective growth rates? And is it also safe to assume that incremental gross margin on some of those recurring buckets is going to be pretty high, in the high-90s?.

Well, so, yeah, we've shifted to a recurring revenue presentation, perpetual hardware presentation and consulting presentation. So within the recurring revenue bucket, yes, we expect those margins over time to improve based on comments I made to Jesse's question that we expect those to improve from the low 70s going forward.

Clearly, maintenance software upgrade rights have a blended margin profile that's higher. Clearly, you got software and hardware in those numbers but in software's high 90s and hardware's lower than that, right? But over time, as this shifts and moves to subscription, we see margin improvement moving higher.

And so we fully expect to see that a bit across 2018 but clearly more as we get into 2019 and 2020 as we complete the movement away from perpetual..

Got it. And Oliver, if I can ask one last one, can you talk about the competitive landscape in terms of adoption of Hadoop for ETL workloads? At some point in the past, you had quantified a potential range of your workloads that could be at risk of migration away to Hadoop.

Any color on that in terms of what you're seeing currently in the market would be helpful..

Yeah, absolutely. And I've been quite outspoken that we have used Hadoop as a tool for the right use cases before. What we're seeing particularly over the last year and I think the whole industry is seeing is that Hadoop use cases are actually shifting quite a bit to cloud-based architectures.

And this is really intersecting very well with what we are doing with Teradata Everywhere and our focus on cloud deployments. We're seeing very few Hadoop installations move into the cloud. The vast majority of adoption in the cloud is on cloud native architectures, S3 and EC2 and all other technologies that the cloud vendors offer that.

And this is what we really have focused over the last couple of years with Teradata Everywhere as we are rolling out. So, there's a very nice intersection that we're seeing there that's coming together. We expect Hadoop to be a tool out there.

We expect it to be used in customers around the world, but we certainly don't see a lot of workloads moving off of Teradata to it..

Thank you..

You're very welcome..

There are no further questions at this time. I will now turn the call back over to Mr. Lund..

Thank you, everyone, for joining us today. I think you've all sensed the enthusiasm that we have about where we are today and our future and where we're going. I'm personally enthused by not only there (00:54:07), but all the areas that we still have opportunity to improve our operation in.

You've talked about some of them, consulting and driving to a better operated company and those are what our infrastructure investment is around. All in all, very, very positive about where we're going, good trends, confident for the year.

We are going to be hosting an Analyst Day here in San Diego sometime in Q4 and updating you on our outlook, as we are getting some more clarity around conversion rates and where we are headed as a company. So, we will be able to provide you a little longer view at that time, and we will get those dates to you.

Again, thank you very much for joining us today, and we look forward to our call at the end of Q2..

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