Teradata Corporation (TDC) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Derrick Wood, senior research analyst covering software at Cowen. And today, we've got Teradata, including Mark Culhane, CFO. Thanks, everyone, for joining. [Operator Instructions] So thanks, Mark, for joining us, and let's just hop right in.

Yes. Thank you.

Topic du jour -- yes. You guys reported recently. So maybe we could just dive into what you saw navigating through the end of Q1 and what kind of behavior you saw into April? And yes, we'll start there.

Yes. Perfect. Well, yes, as we had mentioned on our Q1 call, clearly, the last sort of 10 business days of March, we -- as everyone was trying to figure out what this shelter-in-place means and where do I do it? And is my family, okay? All that good stuff. We clearly saw some customer engagement fall off pretty dramatically that the ability to get all the deals done that we had forecasted to get done didn't happen. And cash collections, et cetera, were difficult to get receipts on time and so forth. And we literally had PO show up on April 1 through the first week, 2 weeks of April. So we got lots of those deals done in April. We clearly got the cash collected in April as well. So it was really a timing difference for us. What we saw kind of come the second week of April was customers reengaged as they got settled into their shelter at home, the engagement came back. We've been heavily engaged with them ever since -- across Q2. We think that we're the beneficiary of the fact that our customer base, our large global enterprise, as we virtually have no exposure to the SMB market at all, which is why we have 1,200, 1,400 customers, not 12,000, 14,000 customers or 22,000, 24,000-type customers, right? These are big global enterprises. We've had long-standing relationships with them 30 -- 20, 30, 25 years-plus. And as the incumbent, we're probably the beneficiary of that. It's very difficult in that environment -- in this environment to establish new relationships, those require face-to-face, over time. But certainly, once you've established those, you can certainly maintain and then -- and we're doing that. And so we've seen a significant amount of reengagement. We're engaged with all our customers. We're not seeing fall off in the pipeline. We didn't see things just disappear. We clearly expect things will take longer to get done in this kind of environment. But we feel with our customer base, where we're focused on existing customers and not trying to go hunt net new logos and greenfield, things that -- as the incumbent, that's going to be -- play to our favor here as we progress through this pandemic, and we're seeing it in the level of engagement we've got with our customer base. So we're cautiously optimistic at the moment.

Can I drill into that? Because you mentioned that on the earnings call as well that the level of engagement -- sales engagement was high. What does that mean? Or what's the message? It means that you're still talking to buyers, you're still talking to users. They're not -- it's mission-critical. They're not using it, right? But I guess when you say that, what does that mean? And how does that -- does that make you feel that like once budgets come back, that they're going to be quick to reengage? Or what's the message?

Well, I think, first and foremost, we reached out proactively to our customer base. Scott, on the conference call, Scott Brown, our CRO, outlined the number of things we did. We reached out to every one of our customers, saying, we're here. What can we do to help? We talked about things we did. As you know, Derrick, a lot of times our customers, which are largely on-prem today, have more capacity than they're licensed for. And we said, "Hey, do you need more capacity? We're willing to release that for free for a period of time to help you get through these tough times." And a number of our customers took us up on that, whether -- because their analytic needs, skyrocketed with COVID-19, whether they were health care companies trying to figure out what was going on in their business, government customers, telecommunication, all -- a bunch of them took advantage of that. And as the incumbent, while we get to be the beneficiary because we have those long-standing relationships, we also felt that, that comes with a level of responsibility for our customers to how can we help. So we did things like that. Certain customers ask, "Can I -- I owe you money in Q2. Can I pay you some in Q2? Can I pay you some in Q3? Or I always stop in early Q3, can I spread it to late Q3, Q4?" And we entertain those things. And largely ring-fence them within 2020, but try to accommodate those customers' requests. Clearly, COVID-19 impacted our consulting business way more so than our software/hardware pipeline or AR growth pipeline. And so given we had resources available, we offered those to our customer bases, how we can come in and help. A lot of our health care customers have a lot of information, but they don't necessarily share the information. But across our customer base, there's a lot of information. And we along with other some tech companies joined in to help the White House try to combat this COVID-19 and help predict where and when, and how many hospital beds are needed in this particular geography, given certain pandemic models and things like that. And so we offered up a bunch of consulting to our customers as well, all of which has been very well received by our customer base. And we went to our go-to-market teams and said communicate often with our customers, let them know we're here, let them know we're here to help, what can we do to help out, that kind of thing. And we went to all our customers on that front. And so we proactively engaged there. And then obviously, we got a lot of engagement back from our customers. And then -- on deals we were working in Q1, deals we're working in Q2. So we've seen that level of engagement. We've seen deals get done that we hope to get done in the last 2 weeks of March, got done in April. We've seen other deals get done. We've seen customers that took advantage of some of that free capacity on demand, come back and buy it because they just decided, you know what, we can't go back to the former state, we've gotten used to this, we need it. And we closed some of that, which we never -- we hoped we might, but it was never part of how we looked at it. We just said this is the right thing to do for our customers. And so we've done a number of those things to help address this crazy time we're in with our customer base. And I think it's helped. We've gotten a tremendous amount of positive response from our customers, how we've treated them through this, vis-a-vis potentially other customers. I personally received several e-mails from company CFOs thanking Teradata, thanking me for helping them out through these tough times. And the fact that this kind of a relationship is not lost on them and so forth, which I think is -- bodes well for us down the road. Because again, we've had these long-standing relationships, but people like to say our customers are all thinking of us differently in this new cloud or wherever, I don't know. We're -- we've done a lot to change the image of Teradata throughout this.

Yes. Good. Well, acting as a trusted partner, I'm sure that's appreciated. A question on the -- being flexible with contract terms. Is that just on payments? Or is there something you're doing that would impact revenue and I guess cause revenue to maybe have some acceleration as you're pushing out some rev rec into later quarters? Or is it more just around the payment side?

It was largely around payment terms, can we help there in some of these troubled sectors to help them out versus any kind of rev rec implication kind of thing. So we haven't seen that. The only kind of rev rec implications are around our consulting business because like Teradata, and IT reports to me, we're not entertaining a bunch of new stuff with net new vendors through this, and our customers are doing the same thing. And we've looked at where are we using outside consultants, could we use our own internal people instead as a way to protect our employees and things like that. And we're seeing that from our customers, and it clearly had a rev rec implication in March over the last couple of weeks. And it's clearly having a rev rec implication across the balance of the year, which we talked about on the Q1 call. But that's probably the only thing. But on the AR growth side, not so much and not a rev rec issue. It's really more just payment terms, can we help out there and we try to accommodate that as much as possible and have it be -- still falls in 2020. It just may move from Q2 to Q3, Q3 to Q4.

And maybe we can dig into verticals a little bit. And I think you mentioned 12% of revenues from distressed verticals or customers that you see, 60% is, I think, was not seeing much impact. Is that -- how do you feel about the distress -- I mean, is there any better visibility today on the distressed verticals? And then on the healthier ones, like financial services, that's a big vertical for you guys. I mean are there any that are seeing a lot more data volumes because of what's going on? And do you think that once budgets clear up, there'll be more demand for capacity increases?

Yes. I mean, we clearly have seen data volume analytic needs increase through this COVID-19. And that's not just limited to sort of health care and government where you suspect you would see a lot of that happening. It's other places as well, other verticals that we're in. You mentioned, yes, the verticals that had the most significant impact because of COVID-19 travel, think of airlines, rental car companies, hospitality, hotels, clearly, parts of retail. There are parts of retail that are doing very well, supermarkets, the grocery guys, the Walmarts, the Targets, are doing well. But the general merchandising, some of those fashion apparels, where they've had to close stores and weren't considered essential, couldn't be open though. Those parts have been severely impacted. But when you look at that, that's 12% of our revenue. Over 60% of our revenue was in financial services, telecom, health care, government, which is doing pretty well. And so yes, we are hopeful we'll see that those continued analytic workloads that they're taking advantage of -- by accessing some of the capacity on demand without charge, and will turn into something before the end of the year. But time will tell on that front. But even without that, we see engagement across our customers, clearly, thus far through Q2, where we're closing deals in April and May. And so we're -- we believe we're going to see AR growth. The magnitude of which time will tell, but it's -- those will certainly take longer to get done.

Got it. Got a question from the audience on the competitive landscape, and you mentioned that you have basically no SMB exposure. So churn risk there from a kind of business -- the company going out of business is pretty low. But what about just competitive environment you're in? I mean, have you seen any change in win rates or any losses to a competitor? Or how do you -- do you see perhaps maybe a delay in companies looking to go to a competitive solution or a piece of technology that would be with a different vendor?

Yes. I don't think we've seen any big change in the competitive front. It's still the same sort of folks that we've traditionally seen. We highlighted some key wins on our Q1 call, where I think people are starting to realize that maybe some of the native cloud-only vendors have a tough time scaling to the needs of what they were doing in Teradata at an order of magnitude as much as 5x more costly and have recommitted to Teradata. And we knew those proof points were going to come. They weren't going to come initially. It takes sometimes 18 months to 2 years for that stuff to play out, which is played out over the last 40 years with Teradata, with all the technologies that we're going to displace Teradata. The latest ones are all the native-only cloud vendors. But at enterprise at workload at scale, we're the cheapest in the cloud, we scale the best, et cetera. So we haven't seen that change. And like I said, we're starting to see more and more proof points where customers have started to realize, well, maybe it's not quite as advertised.

And then I guess for your own cloud initiatives, if you think about what your pipeline look like in terms of customers wanting to migrate or stand up new workloads in the cloud with your own cloud, how that looked at the beginning of the year and how that looks today? I mean, do you think that will be slowed down, accelerated? What's the feedback from the installed base?

Well, the feedback from them -- so coming into the year, we saw momentum there, right? Because we announced we're going to go and be in Google Cloud, and we've had some pent-up demand there, for sure. We've continued to -- as you know, we're in AWS and Azure today and soon to be in Google Cloud later this year. And we've had a number of customers asking us over the past year to take them into the Google Cloud. They don't want to go directly with Google, they want to go with us. And so that pipeline coming into the year was clearly building momentum across '19, and it's still there. We have not seen any acceleration of people wanting to move to the cloud because of COVID-19. Wholesale moving things from on-premise to the cloud in mass is like moving an ERP system to the cloud. That is significant investment dollars, head count and time, and our customers are not entertaining that kind of a thing in this COVID-19 environment that we're in, that's just -- so unlike maybe other companies that are maybe more application-oriented or end user, we aren't seeing that phenomenon in our installed base and our customer base. It's almost quite the opposite, we're staying where we are, we're staying with the incumbent. We're not entertaining, trying to go do something significant, whether it's to the cloud or otherwise.

What happens when a customer goes -- Chapter 11 bankruptcy does a reorg? I mean, I think you mentioned one that you saw, and there's a couple of retailers and car rentals. I don't know if they are customers are not, but they've got to keep the lights on, right? They've got to keep running their business to some degree, even if they file bankruptcy. So does that -- do you have any of those customers? And do they keep the lights on? Or is there some risk on churn there?

Yes. No, we've had certain customers that have gone into bankruptcy, and some of the recent ones are customers or whatever. But what we have traditionally found is that they're running their business on our stuff and that they need to continue to do that to operate even through bankruptcy. And so we have weathered that storm pretty well, that -- whether it was back in the day for the California folks, PG&E to Sears to whatever, now you've got some other recent apparel-type companies, some of which are not customers, some of which are smaller customers. But typically, we have found that we're an approved vendor that they need to continue to operate the business on. And so we come through that pretty well.

Just a couple of questions out there, but if I can paraphrase here. Where are we in the shift to subscription? And typically, when you do shift a customer to subscription to a term license, there's -- I think there's some level of revenue uplift. So can you just give us some color where we are in that cycle and if that kind of uplift is still taking place like you saw a couple of years ago?

Yes. And so '19 was a big year in the movement away from perpetual to subscription. 88%, 89% of our new and add-on bookings in '19 were all subscription-based. We ended the year at $106 million of perpetual revenue, largely hardware, almost all hardware, down from $340 million at the end of '18. So the biggest impacts of moving away from perpetual to subscription are behind us. And we made that comment on the Q4 call. And I have stated, I feel '19 was the bottom in terms of turning that corner. And so then it depends, okay, a customer is going to move -- because the only way we're selling our software and have been for the last 2 years has been on a subscription basis. So -- and customers have not come to us to say, I don't need to buy anything more from you, I just want to convert my existing perpetual licenses to subscription. We don't see that. We see it because customers need more from -- more software from us, and they want to buy more, they have to buy it on subscription. So then it becomes a question of, does that customer want to convert their existing perpetual licenses as well or not. And some have, and a lot of them haven't. And they say, I'll keep my perpetual, but everything I'm buying new, I'll buy in subscription. So we have probably, I don't know, probably 50 or less customers that have fully converted everything, and there's probably another 100 that own both perpetual and subscription, and then there's a long tail that still own everything on a perpetual basis. So it depends on -- then the next filters, are they running it on-prem or not? If they are, unlike a pure software company that only sold software that -- the traditional everybody says, I get 3x of it when they convert their maintenance to subscription. Well, that's because you're now selling them cloud infrastructure in your private and public cloud and the customer's got to pay for that, which they didn't have to do before, it's never in your maintenance rate, right, because you're only selling software; and two, they don't have to manage it or operate it anymore like they did on-prem because you're doing it all from in the cloud. And that's a large driver of what drives that 3x uplift, are those 2 components as well as, a, you're moving them from an older version of software to a newer version of software that clearly has more bells and whistles, features, functionality, all the good things of why you want to do that. So yes, we see uplift when a customer -- because one, they're buying more. And if they're buying both hardware and software on a subscription basis, we see a bigger uplift than when they're just buying software only. Some customers have converted all their existing perpetual to subscription plus bought more. We've seen as much as a 3x uplift on those. We've seen it be 1.5, 1.25, it just depends on how much more they're buying. When a customer goes to the cloud, it depends on are they moving everything or a portion. If they're moving everything and they go to the cloud, there's a few phenomenons there. Now you got to pay for the infrastructure, where previously you owned it on a perpetual basis. We're going to manage it for you. So there's uplift. And third, you're not going to get the same performance in the cloud that you get on-prem. When you run the software on-prem on dedicated hardware, solely dedicated to run in Teradata, you're going to get better performance than when you're running on shared infrastructure in a public cloud environment. We're still going to be better than any of the native cloud-only folks, given the workload management that we have in the query optimization software we have, which is the best in the business, bar none. It's not even close. There's nobody that's -- and none of the native-only cloud people even have that -- don't even have that functionality. And we're the best in there. And that's really why we perform much better in the cloud than anybody else, even on shared infrastructure. So there's potentially some uplift there. If they're going to run the same amount of workload in the cloud than they do on-prem on shared infrastructure, you're going to need more shared infrastructure, which means you're going to need some more -- probably more TCore software than what you ran on-prem. And then -- so yes, there'll be some uplift, but it just depends on how much are they moving? Are they moving everything? Or they're moving some of it? And then over time, maybe they move more. But longer term, we'll ultimately get more in the cloud than we would have on-prem because they don't own anything anymore. And we're managing that environment for them, and the performance isn't going to be the same, which is why for the big -- for our customer base, which you know is big global enterprise, there's going to be stuff they're going to continue to run on-prem for a long, long time, and there's going to be stuff they're going to run in the cloud, for sure. And -- but they're not going to move everything in mass because total cost of ownership makes more sense for them to do certain huge enterprise workload mission-critical on-prem. And other stuff, it's going to make sense to do in the cloud, and they'll look at it as a total cost of ownership kind of thing. And we want to be able to take them to the cloud and address their on-prem needs because we're the 1 unique vendor that can do it, what the native-only cloud people can't.

And you mentioned on the call, expectation of higher perpetual, which is mostly hardware, why is that? That's -- I guess that was a little bit of a surprise.

Yes. I mean, so Derrick, I walked into the year saying, listen, I think there's going to be little to no perpetual revenue this year. And we put up $14 million in Q1. It was a bit higher than I expected. And we're seeing, as we got into April, that, hey, customers felt like they had better visibility into their CapEx than they did their OpEx. A lot of our customers, while we're engaged in deals, are moving forward, still don't know ultimately what their OpEx spending is for the year yet. And so they're indicating to us that, hey, some of the hardware that I was going to do on a subscription basis might go the way of CapEx now. Software will continue to go OpEx, just because they have less visibility into their OpEx than they do under their CapEx at the moment. And so I made the comment that, hey, we're seeing a bit of sign of that to the point, I think we're going to have more than a little to no perpetual revenue this year, given those comments. Now I certainly expect the perpetual revenue to be way less than $106 million that we put up last year. But is it -- I don't know, is it going to be $40 million, $70 million, $50 million? I don't know. But even if it's $40 million for the year, to me, that's more than little to nothing, right? And so that's why I made the comment that we're seeing some signs of that. But despite that, we still have a pipeline that supports some really good AR growth. I don't see it impacting that. But we might see a few cases here and there that someone's going to pull the hardware down on a perpetual license, not on a subscription license. And in this environment, you've got to be sensitive of that.

Right. Right. On the consulting side, obviously, seeing some pressure there. Does that change your strategic view on what to do? I mean, you've been winding down some of the nonstrategic areas of consulting. You've been trying to get the mix down a little bit lower. Is that mix target still the same? Or are you changing your view on what to do?

No, no. Fundamentally, what we were trying to do across 2019, and we didn't get after it till late in Q4, for all the reasons we talked about last year. But we are heavily fixed delivery model today, meaning fixed Teradata employee, and we're trying to move it to a much more variable model, right, leveraging partners, leveraging a GDC or GDC that can flex up and flex down pretty quickly. So that we have more of the flexibility and don't have to worry about, do I got a -- do I have a fixed cost in the form of, I've got a lot of people sitting on the bench, what do I do? Because things ebb and flow. And you want to be able to flex to say, hey, I've got a more variable model I can pull from. And if I don't see the demand, I don't need as much of that variable. That's the fundamental change that we've been trying to drive to. We've largely moved the nonstrategic stuff out of our business. We did a good job of that across '19, which is why consulting came down as much as it did. And just said, that's not -- we have to fulfill what we signed, go through that backlog, but we're not going to go chase a bunch of that net new stuff. And we've largely done that, right? Now we have some COVID-19 impacts of delays and things like that, and so we're taking a look at -- we expect revenue to be down more. But we're moving more and more to this variable model that then brings some flexibility on what it means to our consulting margins because that can't just get hammered and impacted by the fact that the top line drops out. And so we got to get to a more variable delivery model. And across all 3 regions, we're going to execute against that.

Okay. We only have a minute or 2 left, but I wanted to touch on the leadership. And Scott Brown has been there for about a year. Just curious what his agenda is on the go-to-market side and how that's progressing. And then you announced a new CEO, can you just remind us when he starts? And maybe some of the puts and takes on the decision on bringing him in specifically, what attributes he's going to bring to Teradata?

Yes. So let's start with Scott first. Yes, Scott's coming up on being here a year. He's been largely focused on driving the whole customer success team and building that out, our customer for life, which is all the renewal motion. That customer success renewal motion has been a big initiative of Scott's. He's doing that. We're making progress. It's been well received as we've started to roll it out in a couple of geos in the Americas and EMEA and APAC. It's been very well received by our customers and wished we would have had it a long time ago, and we should have had it. It's been something that we've been wanting to do and needed to do in a subscription-based business, you just have to have that. So that's been a big initiative of what he's doing. The partner organization and partner resources in region and things Scott's talked about there of what we're doing to embrace that and change the perception of Teradata that we're not partner-friendly. We are partner-friendly. And we're doing more and more and more with partners, whether that's on the sales side and/or the consulting side. So those are big things that he's doing, and then just refining the go-to-market motion execution angles to it. In terms of Steve coming on board, I think the Board felt like, hey, we want a technology executive who's been through a transformation, hardware to software, on-prem to cloud. And Steve's certainly been through that at both Oracle and F5. They wanted somebody who gets cloud, which Steve totally gets. He ran the cloud-managed services for Oracle. He did a lot at F5 as well. He ran the SaaS customer -- global customer success for -- at Oracle, et cetera. So he checked that box. They wanted a proven executive from an operational execution perspective, someone that has a proven track record of driving execution and operational rigor, and Steve checked out on that very highly as well. And then lastly, leadership skills, right? Is it the right kind of leader that can come in and call less the executive team, along with the rest of the company because they have the necessary leadership skills, style. And Steve rated out the highest of all the candidates they had, including sitting CEOs that were interested in this role, and Steve rated the highest. And we're excited to get him on board. He clearly gets what we do, he's been through this before. He's been through these transformations. He gets hardware to software. He gets cloud, and he's got a proven track record across his career of very strong execution, which -- we're excited to get him on board. He starts June 8, and so we're excited once he gets on board. I'm looking forward to having him come in. We don't expect huge strategy resets. Because really, Derrick, at the end of the day, the overarching part of our strategy is to get to the cloud. That's not changing, right? So we aren't going to see a big strategic reset with Steve coming on board. It will be a refinement and -- of the execution and how we go about that.

Right. Great color. Thank you, Mark. Great to spend time with you today. Thanks, everyone, in the audience. Have a great day.

Great. Thank you. Appreciate it.