Good afternoon. My name is Mariama and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 Teradata 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. [Operator Instructions] Thank you.

I would now like to turn the call over to Gregg Swearingen, VP of Investor Relations. You may begin your conference..

Good afternoon and welcome to Teradata's 2019 first quarter earnings call. Oliver Ratzesberger, Teradata's President and Chief Executive Officer will lead our call today; followed by Mark Culhane, Teradata's CFO who will then discuss our financial results.

Our discussion today includes forecasts 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 related cost, asset impairments, and capitalized software development cost.

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 which is accessible at investor.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'll turn the call over to Oliver..

Good afternoon everyone. Since my appointment as CEO, I've spent significant time with our customers and internal teams in all regions of the globe and these interactions have been truly energizing.

In numerous meetings with senior executives and our megadata customers, they understand that addressing the complexities and challenges of today's analytics landscape is critically important.

As they are recognizing that Teradata can uniquely bring the power of pervasive data intelligence so that they can integrate and leverage their organization's data regardless of scale, volume, or complexity. This provides an excellent starting point for today's conversation. As it is clear we have the right strategy and are executing to win.

In Q1, we grew recurring revenue by 13% in constant currency grew ARR by 12% in constant currency and exceeded guidance for EPS. We also remain very pleased with the rapid rate that customers are continuing to adopt our subscription model. Mark will cover these and other financial results in more detail in a few minutes.

Today, I will highlight four key takeaways for you. First, we have made significant progress in executing our strategy. Second, strong demand continues for our Teradata Vantage platform and we are increasing our competitive position because of this powerful solution.

Third, we have introduced new asset serving offerings for Vantage to help customers apply their focus to getting the answers they need rather than managing their infrastructure. And finally, I will share some of the outstanding recognition our technology is receiving from leading industry analysts.

As we get started, it is important to note that we have made significant progress in executing our strategy and realigning our go-to-market model. We focused on and completed the alignment of our sales teams to provide differentiated coverage of our target megadata customers.

As a reminder these megadata companies are the world's most demanding large-scale users of data requiring massive scale and speed. We're also making progress in aligning our consulting resources to higher value and higher-margin engagements. This will drive increased consumption of our software by the megadata customers.

We have seen strong demand and adoption of Teradata Vantage. In the quarter we had two new megadata customers who recognized that Vantage transforms the data they have into the answers they need to help them grow and succeed in today's data-driven world.

We also saw existing customers, increasingly turn to Vantage to help and utilize their data to find the answers to their toughest challenges. Let me highlight a few examples.

Air France-KLM group is expanding its analytic ecosystem with Vantage performing cross-channel analytics for improving services and customer experiences, as it analyzes the sequence and path of the customers interactions through different channels.

A global medical equipment manufacturer uses Teradata as an analytics hub that supports its entire business. It is accelerating its business processes and driving new supply chain in services analytics using Vantage machine learning and graph functions to streamline manufacturing and reduce equipment downtime.

One of the world's largest transportation companies has chosen Vantage as the most reliable and robust solution for reducing data silos and harnessing different data at scale. It is leveraging Vantage to deliver improvements in business operations including lowering fuel cost, increasing safety and plenishing the network.

Barclays has invested in a new Vantage platform to support strategic initiatives in advanced analytics and in modernization of its enterprise decision capabilities.

And an S&P 500 oil and gas producer selected Vantage delivered as a service to acquire and integrate real-time sensor data from its fleet of rigs, helping to drill well safer, faster and on target. And our drilling data as-a-service solution delivers answers on mobile and desktop devices.

These are just a few examples that illustrate Vantage is changing the game for our customers and they are recognizing its power to deliver answers to all parts of their organization. The unmatched power of Vantage is also strengthening our competitive position. We're winning against both newer cloud startups and our traditional competitors.

In the quarter, we beat Snowflake in a number of opportunities. The amount of negative feedback we are hearing on over-promised Snowflake capabilities is increasing. Companies are having to add more technology to try to get Snowflake working, but even then it does not meet performance expectations or deliver enterprise business results.

Here are a few examples of our competitive wins. We won against a cloud competitor and Sony Pictures Entertainment helping Sony achieve success in maximizing value in sales forecasting, greenlining, competitive information and customer experience. One of the largest European DIY megastore chains is adding Vantage for retail analytic business cases.

The retailer extensively considered competitive offerings of Vantage's capabilities demonstrated the power of pervasive data intelligence and won the deal.

A major American professional sports league signed up for Vantage as a service, running on AWS, leveraging the significant analytic capabilities of Vantage to better understand lifetime value, drive personalized targeting and messaging to enhance its fan experience. We won despite the company's long-standing partnership with a competitor.

Vantage is tailor-made to help enterprises get the most return from their investments and focus on what truly matters, getting answers not managing their IT infrastructure.

With our recently announced as-a-service offerings, we are now further helping customers simplify their operations and drive an improved experience of adopting and leveraging Vantage to help them expand their analytic use cases whether on-prem in the cloud or hybrid environment.

Our technology is getting serious recognition from leading industry analysts demonstrating that our offerings are meeting customer and market needs and that our technology innovation continues. Teradata ranks the highest in every use case in Gartner's report on critical capabilities for data management solutions for analytics.

This report is based on feedback from real-world users and provides excellent external validation that our strategy is on point. And Teradata was again named as a leader in Gartner's Magic Quadrant for data management solutions for analytics.

We were recognized for our ability to simplify analytical ecosystems with Teradata Vantage and our focus on delivering analytics that matter. Lastly, Teradata was acknowledged for our market-leading customer data management and analytics capabilities in Forrester Wave for real-time interaction management.

This recognition demonstrates that we are driving market-changing innovation.

So, as I turn the call to Mark, I would like to remind you of my four key takeaways, first, we've made significant progress in executing our strategy; second, we are seeing strong demand and adoption for Teradata Vantage and are increasing our competitive position; third, our new as-a-service offerings for Vantage help customers focus on getting the answers they need rather than managing their infrastructure.

And finally, our innovations continue to garner outstanding recognition. The Teradata team remains persistent in our drive to increase our momentum, advance our market leadership, beat the competition and set the bar high for the entire industry.

We are moving faster than ever before and the Teradata team is leading the conversation around the power of data to reshape the world.

By the way, challenging the status quo and moving at such an accelerated pace is not easy and I want to reinforce, how proud I am of our Teradata people and their commitment to execute our strategy, make a difference and win. This team is energized focused, and committed to bringing value to our customers and shareholders.

And I could not be more proud of our outstanding people. Now, let's turn to Mark..

payments related to reorganization and restructuring of our go-to-market and operations functions, which totaled $29 million in Q1 2019. Meaningfully higher variable compensation payments, resulting from Q4 full year 2018 financial performance.

And meaningfully lower billings, due to shift to subscription-based transactions, which changes the timing of billings versus historical perpetual license related transactions and renewal of maintenance and upgrade rights.

Historically, the vast majority of perpetual license maintenance and upgrade rights expired on 12/31 and were built in January, which resulted in significant Q1 billings and cash collections and increases to deferred revenue.

Now with the movement to subscriptions, billings occur in the quarter the move to subscription occurred and the billings happen more throughout the year versus historically in Q1. Cash used for capital expenditures and additions to capitalized software development cost was $16 million in Q1, a decrease from $28 million in Q1 2018.

As a result, reported free cash flow for the first quarter was $33 million compared to $156 million in the same period of 2018. As mentioned earlier, Q1 free cash flow included $29 million of cash related to reorganizing and restructuring our go-to-market and operations functions.

Given the transition to subscription-based transactions, we believe quarterly year-over-year comparisons of cash flow are not as meaningful as annual full year comparisons. Turning to the balance sheet, as of March 31, 2019, cash was $723 million.

Deferred revenue at the end of Q1 was $669 million, an increase of $74 million from the end of 2018, and an increase of $65 million from the end of Q1 2018. The sequential increase was due to the shift to a subscription model and the timing of maintenance billings related to legacy perpetual contracts.

And the year-over-year increase was mainly due to the shift of our business model to a subscription-based transaction model. During the first quarter, we bought approximately 1.2 million shares of Teradata stock for $58 million. At the end of Q1 2019, we have approximately $230 million of remaining share repurchase authorization.

Turning to guidance, which is dependent on many variables including the mix and timing of bookings, currency fluctuations and other factors, we now expect regarding currency approximately 1% to 2% point of headwind on our full year-over-year revenue comparisons, with a 2% to 3% point headwind for the second quarter.

We continue to expect 70% or high full year bookings mix to be subscription-based transactions. We continue to expect annual ARR to grow approximately 11% to 12% in 2019, and full year recurring revenue to increase approximately 10% to 11%. For Q2, we expect $336 million to $340 million of recurring revenue.

For the full year, we expect perpetual revenue to decline at the high end of our prior decline guidance range of $150 million to $200 million from the prior year.

And we expect consulting revenue, to decline at the high end of our prior 15% to 20% decline guidance as we realign and focus our consulting resources on higher value, higher margin consulting engagements in our megadata target market. We continually expect recurring revenue gross margin in 2019 to be in the low 70% range.

Longer term, we expect our recurring revenue gross margin to improve, as we increasingly gain efficiencies and leverage our Vantage and cloud-related investments.

We continue to expect perpetual gross margins to be approximately 35% to 40% for 2019 and we now expect consulting gross margins in high single-digits for the full year 2019 as we continue to align the consulting organization to our strategy.

In total, we expect overall gross margins to improve about three to four points from 2018 levels and we expect operating margin to improve a couple of points over the prior year. We continue to expect our full year non-GAAP tax rate to be approximately 20%, which is in line with 2018's full year tax rate.

As a result, we continue to expect non-GAAP EPS to be $1.45 to $1.55 for the full year. This is based on full year weighted average shares outstanding of approximately 119 million shares.

And for the second quarter, non-GAAP EPS is expected to be in the $0.28 to $0.30 range, based on a 22% non-GAAP tax rate and 119 million weighted average shares outstanding. Turning to our expectations regarding free cash flow.

Reported annual 2019 free cash flow is expected to be approximately $140 million to $160 million, which includes payments for our reorganization realignment of our go-to-market and operations functions.

As we've had more time to evaluate and estimate the cash associated with our realignment and reorganization efforts, we now expect those cash payments to be approximately $60 million to $80 million. Excluding these cash payments, our 2019 free cash flow would be approximately $200 million to $240 million.

Our projection of free cash flow is subject to many variables including, but not limited to subscription bookings mix, the amount of capital expenditures required to support new subscription transactions as well as the billing frequency of such new subscription transactions.

As I close, I want to emphasize that we are encouraged with the increased customer interest and excitement in our Vantage Analytics Platform. We are off to a good start in Q2 and our deal pipeline is robust which gives us confidence to achieve our guidance for full year.

And I also want to thank Gregg Swearingen for his many years of dedicated service to Teradata. Greg will be leaving Teradata for personal family reasons and will be transitioning through the end of the year. And I am very pleased to welcome Nabil El Sheshai to Teradata who will be taking over for Greg.

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

[Operator Instructions] Your first question comes from Brad Reback with Stifel. Your line is open..

Great. Thanks very much. Oliver, if you think about the competitive wins this quarter, especially against the cloud vendors and Snowflake. How much do you think of that had to do with the new tech stack versus some of the new compensation plans that you've put out there for the sales force? Thanks..

I think -- just two parts to the competitive wins. First of all, Vantage as a technology stack is clearly superior compared to what we've seen from some of these cloud vendors. And the second thing is we are seeing customers as I said before who have tried out technologies like they have done in the past with Greenplum and with Netezza.

And they are just finding a lot of shortcomings. So just coming together in – is allowing us to really enable our customers with Vantage, to deliver the business results that they need that they cannot get out of solutions like Snowflake..

Great. Thank you very much..

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

Great. Thanks. Mark, I want to clarify the comments you made on the two large deals that slipped. And you mentioned that ARR I think would've been double. I suspect you're talking about growth rates and I mean – and it sounds like you're insinuating one has closed one is it still in the process.

Just – can you flush out some more detail around those slipped deals?.

Sure. Yes, Derrick. So yes, we had a few deals push out to Q1 and maybe either closed or in the process of closing. Had those occurred in March like we originally anticipated the reported ARR the $12 million constant currency $11 million as reported would've been more than double that.

These were sizable transactions that, like I said have either already closed or in the process of closing..

Okay. And – I mean, you guys made a number of structural changes at the beginning of the year. You've got an external transition around a new head of sales. You've changed the go-to-market to ARR more dedicated focus on megadata customers.

Can you just touch on how it's gone so far? And kind of now that you're into it little bit more what you expect the dividends to be as you – over the next several quarters?.

Yeah. Derrick, this is Oliver. First of all, we made some very good progress in the first quarter doing this restructuring. We are now behind they are done, right? As you said, we are also looking for a New Chief Revenue Officer to really help us take that software subscription business to the next level and are making good progress there.

So we feel the hard work that we have to do beginning of the year is done. And it sets us up within optimized structure worldwide to drive the amount of subscription, software sales and increase in ARR and recurring revenue that we said, we will be driving..

Yeah. And that's why Derrick, we said we're very comfortable with growing ARR 11% to 12% for the year. We feel really good about where we sit..

Got it. Okay. Thanks..

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

Yeah. Thank you. Mark just to clarify on this prior question around deal push outs.

As you are closing those deals there in Q2, why is that not leading to a stronger guide in that recurring revenue growth in the second quarter? And just to clarify is that also tied to the business environment in EMEA? I mean, it looks like the business declined a lot more in that region versus other regions. And I have a follow-up for Oliver..

Yeah. So to your first question these deals – they've closed or in the process of closing. So we're not going to get a full quarters of revenue recognition amortization in Q2. Secondly, we've had further FX headwinds now that that are impacting one to two on a full year but it's two to three points in Q2 up from where we were before.

So that's had some impact. These were not related to EMEA. EMEA's revenue year-over-year is down because of a significant decline in perpetual. That's what's driving that..

Okay. Thanks for that. And then Oliver, you mentioned winning against Snowflake in some instances can you talk a little bit about the scale of the installation? Where you guys have won these head on? And what sort of workloads the customers were targeting? Thank you..

Yeah. We have seen Snowflake primarily at the low end of scale. Data mart like applications in – what we are seeing is that when customers have tried to take workload to that that they have ended up with multiple instances of Snowflake that they required.

In addition to that, pretty much all of them are also telling us they had to supplement it with other technologies and other databases, in order to get the workloads to run. In general, we see Snowflake primarily at the very low end of our smaller customers.

And even there we are hearing that the scale and the complexity problems are outweighing the benefits that they first thought they would get with it. And so that's a big part of that shift in momentum..

Thank you..

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

Thank you. Just from a high level what should we make of the fact that perpetual is falling off faster than you expected, but you're not seeing a coincident upside in ARR and recurring revenue? Then I have a follow-up..

Yes. Katy, this is Mark. So we still feel really good about full year guide on ARR. So we expect that we're on track. But yes, perpetual is going to be at the higher end of that $150 million to $200 million decline. Clearly our comp plan is being excluded and we're seeing that in our international markets where we thought maybe it wouldn't move as fast.

But it is..

When -- just as a follow-up to that question. Just in Europe where you said that you saw big drop off in perpetual.

Are all of those customers planning or in the process of moving to a subscription model that will build into your recurring revenue as we go through this year?.

Yes..

And then just as a follow-up on free cash flow. Mark, three months ago you knew you were going to do the restructuring and reorg, but you're taking down free cash flow today.

It sounds like on the back of those costs, just I mean, what changed over the past quarter in terms of the outlook around free cash flow?.

Okay. So first of all, I'm not taking down free cash flow. There's not been a change. I said excluding the reorg charges we're $200 million to $250 million.

And we didn't have a great range of what the reorg charges were going be, because we were executing through that at the time of the Q4 call in early February and now we have a better feel for what that is.

The $60 million to $80 million, which is still in that $200 million, just call it $240 million because we said it could be as much as $90 million in payments. We don't think that now probably closer to $80 million.

And so what I said is if you include those then it's $140 million to $160 million, excluding those we're $200 million to $240 million which is where we said we thought we would be on the Q4 call..

Okay. Thank you..

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

Hey, question for Oliver. As you talk with guys about Vantage, can you see where they are in terms of taking that as a overall concept in terms of like on-premise deployments and cloud deployments versus actually already going to the cloud? Where are we in that life cycle? Thank you..

Raimo thank you. And by the way first of all thank you to Barclays for investing significantly into Vantage here recently. We see Vantage adoption throughout the hybrid cloud.

Clearly, there's existing customers that implement Vantage on-premises and are supplementing it with cloud instances, as I've given you also examples today several new customers are deploying Vantage as a service in the cloud in the various forms of cloud that we offer. So it's a mix. We have Vantage available both in hybrid and in multi cloud.

And we see that mix going forward. Our megadata companies right now are predominantly in the on-premises world but a lot of new business that is coming in is in the cloud and this is where Vantage it really differentiates itself against other cloud providers..

Perfect. Well done. Thank you..

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

Hi, guys. Thanks guys for taking my question. I'm just curious we used to talk about floor sweeps in terms of refreshing your old product. I know obviously things are shifting towards software online and cloud. But just for the legacy customers that still have those box on-premise.

I mean, any sort of color that you could give on sort of your sort of big floor sweeps big upgrades.

I've been seeing whether it'd be this quarter or maybe last couple of quarters or what do you see in the pipelines? Sort of more color there and maybe kind of how people are buying if that's still the way they are thinking about it et cetera that would be helpful..

Yes. I think in terms of what we are seeing is that the vast majority of growth that we are seeing in adoption is new workloads. Yes, existing customers sometimes do that as part of floor sweeping existing technology into this.

And by the way, the fact that Vantage is fully backward compatible with prior Teradata offerings makes that easy for customers to execute on. But the majority of growth in the ARR that we see and as we see in the funnel is really about adoption of new capabilities and Vantage. And it's what's driving our confidence..

Great. Thanks guys..

I will now turn the call back over to Oliver Ratzesberger for final comments..

Okay. Thanks everyone. We remain exceedingly confident in our strategy and our direction. Our customers are validating they need to leverage their data in service of their business and are rapidly adopting Teradata Vantage to provide the answers they need most. And we are winning against competition in the market.

Our people are amongst the best in the business and remain enthusiastically focused on and committed to delivering value to customers and shareholders. We look forward to updating you next quarter. Thank you. Bye..

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