Teradata Corporation (TDC) Earnings Call Transcript & Summary

All right. Well, good morning, everybody. My name is Tyler Radke. I do software equity research here at Citi, as evidenced by the logos on my polo and in the background. So we're very pleased to have Teradata kickoff the data and analytics track here at the tech conference. From Teradata, we have Mark Culhane, who is the CFO; and then also Gregg Swearingen, who I'm sure most of you are familiar with. He's gratefully filling in Investor Relations duties in the short term. So gentlemen, thank you very much for joining us. I hope you had a great Labor Day weekend.

Mark, I thought maybe we could just start off at the executive leadership level. Obviously, there's been a lot of changes in your 3 years here at the company with several changes at the CEO level. Most recently, you had Steve McMillan come in as CEO. He came from F5. Could you just talk about some of the leadership changes? And give us a sense on some of the initiatives that Steve is focused on?

Yes, sure. Great. And thanks for having us, Tyler. I appreciate it. So yes, I mean -- so in terms of Steve joining -- I mean first and foremost, Steve is focused on accelerating our cloud initiatives. As he mentioned on our earnings call, our Q2 earnings call, there's a number of things that we're going to be doing and that's a total sort of organizational transformation. And some of the examples were everything we're doing in product development, focusing on our cloud-first innovation. He talked about a number of go-to-market motions and modernizing those to be successful in a cloud-first world, such as with our customer success and some of the things we're doing there. He talked about our marketing organization, also working to change the perception of us so that our customers realize that we have become the most robust cloud-first analytical provider. Looks like Teradata was universally known as the market leader in the on-premises world. We believe, Teradata can clearly be the market leader in the hybrid cloud world as well. And so that's really where he's brought that focus for the rest of the company. I think in terms of other executive changes over my tenure, which is, yes, just slightly short of 3 years at this stage, it's really been building out the rest of the executive team for where we're headed and what we're doing going forward, which again, is all about our cloud initiatives.

Great. And maybe if we could shift a little bit towards the near-term momentum. I think the second quarter results were much stronger than expected, with solid incremental ARR growth. And I think just overall, the commentary was that the business environment was improving relative to Q1. Obviously, I think there were some deals that slipped out of Q1 that you did close in Q2, that you had that benefit. But maybe just talk about some of the dynamics that you saw in the second quarter? And like how should investors think about the sustainability of that incremental ARR growth or just kind of mid to high single-digit ARR growth, which you reported in the quarter?

Yes. So great. Yes. So clearly, as we said, even on our Q1 call as well as our Q2 call, the last 2 weeks of March were challenging, for sure, in terms of the ability to get deals done, collect cash, get renewals done on time, all the above, right? Because everybody was scrambling to shelter in place. And so we said, yes, there were some deals that we thought we would have closed that ultimately closed in the early part of Q2. We've -- a bunch of our cash that we thought we'd collect in the last 2 weeks all came in in Q2, et cetera. But we also said that we saw the level of our engagement with customers return really second week of April and continued to build throughout April and continued candidly, through May, June, July and even through August. So we've been really pleased with that. So clearly, those deals did help. But Q2 in and of itself was -- the linearity was better than we anticipated, at least walking into Q2, given all the unknowns related to COVID. We outlined a number of things that we were doing to help our customers who were in need, some of which were around freeing up capacity that existed on their systems for free for a period of time to help them crank through analytic workloads that they needed to get through, to get their hands around what was going on in their business related to COVID, et cetera. And that -- we benefited from that as we saw a few customers come and contract for that because they just determined, hey, we can't live without this additional capacity. And so that clearly was helpful as well. We did a number of other things in terms of providing free consulting to some customers to help them think through some of their big analytic challenges. We have probably the most -- we have the most expertise in analytics that's out there from a data and analytics provider, 40 years of rich history that's been built up over the years. So there's a number of things there that we did that also help drive the results in Q2 that were -- that yes, clearly, it was a very, very solid quarter. In terms of what we see going forward, we have said, since the beginning of the year, we were set up for a very strong year in terms of ARR growth, recurring revenue growth, et cetera. And our pipeline still continues to support, obviously, with less leeway given what -- with COVID, but still, it shows positive growth there. Clearly, recurring revenue growth, given what happened in Q1, won't be quite where we thought at the beginning of the year but it's still -- we're going to show recurring revenue growth, clearly greater than -- it will be positive. And clearly, the ARR growth, we're cautiously optimistic at this stage, given what we see sitting here with 4 months to go in the year and so forth. So we're excited about what we see ahead. It's clearly -- I think we're the beneficiaries of the long-standing relationships we've had with our customers over these last 4 decades and so forth. So we feel good about that.

Great. And just before I move on, I want to remind investors on the line that if you have a question, just shoot me an e-mail, it's tyler.radke@citi.com. So Mark, I think that maybe we could just dive a little bit deeper into the COVID-specific dynamics at Teradata. And I think the perception of the Teradata sales cycle and traditional go-to-market motion would be that it's a pretty technically complex sale that requires a lot of on-site work. I guess how accurate is that? How have you adjusted those motions during the pandemic? And maybe just recap kind of the puts and takes and what you've learned so far and kind of what gives you the confidence in being able to kind of put up the numbers here in a difficult environment.

Yes. Well, first, I'd say that, that perception is inaccurate. We've had long-standing deep relationships with our customers and it's because we solve very complex business problems for them which, frankly, no one else can solve. We -- our customers are the biggest, most stable global companies in the world that have big complex problems that given our performance at scale, et cetera, only we can solve. And our customers tell us that, that we do something that only we can do. However, that doesn't mean our sales motion is technically complex. It is not. And I think that's been demonstrated by our ability to sort of successfully service our customers remotely during this pandemic, right? You -- we have, in a lot of cases, 4 decades of experience with our customers. And you can't establish these relationships remotely. You have to do them face-to-face. But once you have them established, you can certainly maintain them remotely. And I think that works as a huge advantage for us in this COVID pandemic, right? And I think you're seeing that play out in the market, that this incumbency is a big advantage for us and it's manifested itself in the results we've put up, right? So I think we've seen -- we haven't seen sort of wholesale moves of someone saying, I'm moving my enterprise data warehouse to the cloud in this type of an environment. So I think there's been a bit of, hey, we're all trying to figure out what's going on in their businesses and how their businesses are going to prevail in this COVID environment, given all that uncertainty that was created. We've also been educating our customer base on what we're doing with our cloud offering. And when we think that part of the market opens back up, we'll be in a better position to win those deals before candidly, maybe before COVID-19 hit. We -- I mentioned in my answer to your last question some of the puts and takes that we did. We clearly were helping our customers through this, given our relationship, I think whether that was freeing up capacity on demand for a period of time or let them access more, whether it was providing additional consulting to them for free to help them think through their key analytic challenges that arose because of COVID-19. There were certainly certain cases of customers that asked for help in terms of payment terms, which we largely granted to our customers, to help them get through particularly in those segments of the market that were the most impacted by COVID, is where we saw that. We provided a fair amount of free learning and training to customers through COVID. So we took a number of steps that we can do as the incumbent vendor in our customer base to help them get through all of this. And I think it has been very well received by our customers. I think it's to help change the perception of who Teradata is and who we are, et cetera. And so we think that only bodes well for us moving forward. Again, because when you're talking enterprise-class workload at the scale our customers drive, we're doing it for them in a way that nobody else can do it. So we think in a lot of respects, this COVID-19 pandemic has made our business fairly resilient here because our customers are telling us they're not going out and trying a bunch of net new projects with a bunch of new vendors and doing a bunch of proof of concepts and all those kinds of things during this time frame. And so we believe that will continue as long as this -- as we continue to work our -- everybody is working their way through this pandemic and trying to figure out when does the economy really reopen, and is it a V-shaped recovery? What is it? But right now we're -- as I said, our pipelines are strong. We feel we'll put up good results that potentially allow us to meet some of our initial guidance walking into the year.

Got it. And I wanted to follow-up, Mark, on something you mentioned there, and we've also had some questions come in, in response to it as well. But I think you said that in some of your customers where they had had potentially large cloud migration projects, those have been put on hold because of the COVID environment. I just wanted to clarify that that's kind of what you're seeing, and maybe to what extent you're seeing that. And do you think that is Teradata benefiting from potentially existing customers that were perhaps looking to move off in terms of moving to cloud? And I guess a follow-up to that would be, like how do you kind of convert those customers eventually to Vantage, your own cloud offering?

Yes. Yes. Yes. Great question. And so I mean, clearly, we all know it's a cloud-first world, right? So what we haven't seen is en masse, an entire enterprise data warehouse, trying to move to the cloud. What you're seeing, customers evaluate things for the cloud that maybe aren't moving quite as fast as more -- what kinds of workloads can go there. It may be more a smaller departmental sort of side workloads kinds of things that they're thinking, hey, can we do this in the cloud, should we do it in the cloud, what does that total cost of ownership look like because our customers are saying, "Hey, they believe it's probably a hybrid world here for quite a while." And we believe we uniquely address both their on-premises needs as well as what they can do in the cloud. We just haven't been thought of as the cloud folks, and that's the big perception that Steve outlined that we're going to -- we're changing. And so we haven't seen en masse, entire enterprise data warehouses and say, "Hey, we're going to the cloud." Maybe over time, people have plans to figure out how to do that, but we're not seeing that happen en masse. And so yes, so is there -- as we continue to innovate on our cloud offering and build on the cloud momentum that we've built over the course of the last year and that we expect to continue to see our cloud ARR more than doubled last year, more than double this year, and we expect it will more than double next year. And so in some sense, maybe we are going to be the beneficiary here of what's happened from the pandemic, but time will tell. But it's clearly a cloud-first world, and we're embracing that in a much more robust, bigger way than Teradata has ever done since I've joined. So yes, we -- that's -- I think that's kind of what we've been seeing. But every customer we're having conversations with about their journey to the cloud and what are they doing, spend more data mart like things that I think they've evaluated initially, and some of those have been put on pause. What we have not seen is just entire enterprise data warehouses saying we're moving that to the cloud during this pandemic.

Great. So maybe we could talk a little bit more, just as we think about the cloud ARR dynamics. But just overall, I mean, the company made a transition to subscription model several years back or announced it. And obviously, that's been ongoing, and you're pretty far through it in terms of having most of your revenue in subscription versus perpetual. Maybe just for investors who may be relatively new to the story, kind of walk them through the evolution of the subscription model. I believe there are, as you alluded to, there's several kind of key components of ARR being kind of on-premise rentals to traditional software to cloud. You touched on how you're thinking about cloud growth kind of more than doubling this year and next. So maybe how investors should kind of think about the moving -- the other moving pieces within ARR.