Teradata Corporation
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Good afternoon. My name is and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata's First Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Thank you. I would like to hand the conference over to your host today, Christopher Lee, Senior Vice President, Investor Relations and Corporate Development. Thank you. Please go ahead.

[Christopher Lee:]

Good afternoon, and welcome to Teradata's 2021 first quarter earnings call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today; followed by Mark Culhane, Teradata's Chief Financial Officer, who will discuss our financial results.

[Steve McMillan:]

Good afternoon, everyone, and thanks for joining us today. Teradata is off to a very good start in fiscal 2021. We had solid growth in revenue and free cash flow and we exceeded our quarterly outlook on public cloud ARR growth, and both GAAP and non-GAAP EPS. You all saw that we issued a release on April 21, pre-announcing our first quarter 2021 results as our quarterly EPS performance was higher than the guidance issued during our fourth quarter 2020 earnings call. We saw significantly higher EPS resulting from strong performance in revenue and gross margin, as well as continued solid expense discipline. With our customer base among the world's largest enterprises, and with large transactions, we can have non-linear quarters, which is why we encourage you to focus on a full-year outward and results rather than quarterly. During his remarks, Mark will explain in more detail. Now, on to the quarter. Teradata grew in all three geographic regions. Growth was driven by large cloud and subscription deals from customers making meaningful commitments to Teradata, adding to or expanding the workloads on Vantage. We also executed higher margin and a small fast-growing contribution from new customers and partners. Our focus on profitable growth is as strong as ever, and we generated more profit dollars both year-over-year and sequentially. We are resolute and dedicated to keep that momentum going and are building upon our solid fundamentals to energize growth. In Q1, we continue to advance our cloud transformation, tightening the aperture on the strategy, and growing close momentum with customers, prospects, and partners by reinforcing our cultural ethos of inclusion and accountability.

[Mark Culhane:]

Thank you, Steve and good afternoon, everyone. Before I discuss our Q1 operating results, I want to indicate that unless stated otherwise, my comments today reflect Teradata’s results on a non-GAAP basis, which excludes items such as stock-based compensation expense, and other special items identified in our earnings release. Additional commentary on key metrics and segment trends can be found in the earnings discussion document on our Investor Relations webpage at investor.teradata.com. I also want to remind everyone of the financial reporting change that we made for 2021 and announced on our prior earnings call since it appears that some street models use numbers not reflective of the reporting change. To reiterate, beginning in fiscal 2021, we reclassified managed services related ARR and revenue from recurring revenue and into non-recurring consulting revenue. And we reclassified third-party software related ARR and revenue out of recurring revenue and into non-recurring perpetual revenue. Accordingly, the year-over-year comparisons that I will cite in my comments are based on the reclassified amounts for the first quarter of 2020. And the full-year 2021 outlook that I provided on our prior earnings call is based on a comparison to the reclassified amounts for the full-year 2020. For more information and those reclassified numbers, please refer to our earnings discussion document for the fourth quarter of fiscal 2020 on our Investor Relations page at investor.teradata.com. Let's move on to the results for the quarter. We are off to a very solid start to the fiscal year as Teradata exceeded the quarterly outlook we provided for public cloud ARR, as well as GAAP EPS and non-GAAP EPS. The company exceeded the outlook we provided due to solid execution by our go to market team, strong product market fit for our customers, our team's continued focus on profitable growth, and a strong focus on cash flow. We pre-announced our preliminary results two weeks ago once it became evident that we would materially exceed our first quarter expectations in GAAP EPS and non-GAAP EPS. As Steve noted, we released this information during our normal quiet period, and we could only provide limited context as we had not completed our full analysis of results at that time. I will go through the drivers of the quarter. But before I do, I want to remind everyone that Teradata engages in large transactions with large enterprise customers. We provided an annual outlook for fiscal 2021 ARR in revenue versus quarterly forecasts because of the reasons explained during our Q4 2020 earnings call that can create more variability in our quarterly results and make quarterly forecasts more difficult. Let's start with ARR. Public cloud ARR grew sequentially by over 18 million, ending the quarter at 124 million as reported or 176% growth year-over-year. We exceeded our outlook of 165% growth year-over-year, due to continued natural momentum of our Vantage multi-cloud platform. We continue to see customer demand for Vantage across all three leading public clouds. While today, we have mostly been focused on our existing customers, we are encouraged by the potential new customer activity we see in the cloud pipeline as we move forward into the future with our new efforts on customer acquisition. Importantly, we are also very pleased to see continued good organic growth by our annual cloud customer cohorts, especially from those customers who moved to the cloud with Teradata during the first quarter, where we saw strong double-digit growth during the quarter. Expansion rates continue to be very healthy. We are very pleased by the value our customers see for Vantage in the cloud, which gives us confidence to reaffirm our outlook for fiscal 2021 public cloud ARR year-over-year growth to be at least 100%. Total ARR increased to 1.404 billion at March 31, 2021 from 1.254 billion at March 31, 2020. Total ARR grew 12% year-over-year as reported. On a sequential basis total ARR was down 1% as reported and flat in constant currency given very strong FX headwinds. Consistent with prior years, our first quarter ARR sequentially declined, as it is our seasonal low point for ARR, and the fourth quarter is our seasonal high for ARR. As such, we continue to see and expect growth in subscription and public cloud ARR during 2021 and we reaffirm our full-year 2021 total ARR year-over-year growth of mid-to-high single-digit percentage. Turning to revenue, we had strong performance in all revenue categories, which increased total revenue to 491 million as reported from 434 million, an increase of 13% year-over-year, and 10% in constant currency. As a reminder, this is our first quarter reporting with our new revenue classifications, which has no impact on total revenues, but has the net impact of moving certain revenues out of recurring revenues into perpetual and consulting revenues. I’ll refer you to this quarter's supplemental financial schedules, and our prior quarter’s earnings discussion document for proper comparisons to prior reporting periods on the investor relations website at investor.teradata.com. Recurring revenue as reported increased to 372 million from 311 million, a 20% increase year-over-year, and a 17% increase in constant currency. There were two key drivers for this increase. First, we had a very strong Q4 2020 ARR growth, both public cloud and subscription, which contributed to the foundation for the strong year-over-year increase in recurring revenue. And second, as I mentioned in our fourth quarter earnings call, we expected that given our high-end enterprise customer base, we may see many of our existing customers operate Vantage on premises, as well as in the cloud. And that may change the revenue recognition for some existing on premises contracts to a different ratable recognition period, other than quarterly. We experienced a few significant transactions, principally driven by two significant renewals, one from a major health services company and another from a major Telco company where these customers made substantial commitments to Teradata and extended and expanded their arrangements with us not only on premises, but also added the ability to use Vantage in the cloud. Ultimately, the terms of these arrangements resulted in components of on premise software recurring revenue being recognized on a recurring annual basis, rather than on a recurring quarterly basis under U.S. Generally Accepted Accounting Principles. We have not changed our accounting policies. These few significant transactions resulted in approximately 24 million of 2021 recurring revenue recognized in the first quarter, rather than ratably across each of the four quarters of 2021. This will not impact the full-year 2021 recurring revenue associated with these transactions. Only the timing of recognition within 2021 was impacted. There will not be any impact of fiscal 2022 and beyond revenue. We plan to see the same amount of recurring revenue in the first quarter each year in the future during the multi-year term of these contracts. The variability in recurring revenue caused by these types of arrangements is a significant reason why we stated in our prior earnings call, we were not providing quarterly recurring or total revenue outlooks, but rather encourage you to focus on our annual outlook. The overall economics of these transactions have not changed. Only the timing of recognition of recurring revenue. And importantly, these few transactions are not included and did not impact the 176% year-over-year growth and public cloud ARR we reported this quarter. Turning to perpetual and consulting revenue, perpetual revenue of 23 million as reported showed flat growth year-over-year, but was ahead of the outlook comments we provided at the beginning of the year. While we are not emphasizing perpetual in our go-to-market model, perpetual revenue performed better than we anticipated, due primarily to deal mix in EMEA and third party software products. Consulting revenue as reported decreased to 96 million from 100 million a 4% decrease year-over-year. As we noted in our outlook comments last quarter, we anticipated consulting revenue to decline by 15% year-over-year in the first quarter of 2021, and to gradually improve throughout fiscal 2021. Our first quarter performance was well ahead of that trajectory as we saw better execution of engagements around the world, from both direct engagement with customers and joint engagement with partners that resulted in increased revenue in the quarter. Turning to gross profit, Q1 gross margin was 64.2%, approximately 10 percentage points greater than last year's period and approximately 5 percentage points greater than last quarter. We generated 315 million in gross profit dollars, which is 80 million higher than the same period last year, and 24 million better than last quarter, despite our total revenues been unchanged sequentially. The primary reasons were

[Operator:]

Thank you, sir. Your first question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.

[Katy Huberty:]

Yes, thank you. Good afternoon. Mark, can you talk about whether there is a pipeline of additional deals that would cause you to recognize revenue on an annual versus a quarterly basis? Like what happened in the March quarter, and if so, if there's any in the pipeline, what are you assuming in terms of conversion of those in your guidance?

[Mark Culhane:]

Yeah, great. Thanks, Katy. Right now we see a few deals like this in Q2. We don't have line – I don't have line of sight in the pipeline as to what deals in Q3 or Q4 could go that way. And we'll have to wait to see what happens in Q2, but I do expect we'll see a bit of it, given we're seeing strong interest from our existing customers wanting to operate Vantage on premises as well as in the cloud. So, I'm expecting some impact in Q2, but nothing in my guidance is reflected in Q3 or Q4 at this stage.

[Katy Huberty:]

Okay. And so that, in your guidance, you assume that some of those converts and you get an annual revenue recognition. And then can you just provide a little bit more detail because I'm not as familiar with the accounting treatment of what is the element or characteristic of these deals that are causing you to recognize the revenue annually instead of quarterly? And can you just talk about whether in the past, you know, there were deals like this, that were, you know, that were recognized differently or what has changed?

[Mark Culhane:]

So, under revenue recognition rules, there are a variety of factors that can result in other than ratable recognition ? Whether it goes to in the on prem world, what is the right to use the software? What is the committed amount of consumption that's involved with that? Is there hardware involved? Because hardware can fall outside of the software revenue recognition, they go under a standard called 842. So, for us, it was certainly on premise software elements that drove some of this annual recognition, not all software components, but a certain portion of components because of somewhat of the interaction of what are they going to use on prem versus what do they want to use in the cloud? And how does that impact what's committed to be used and so forth. And so depending on how those nuances play out, you certainly can get revenue recognized on something other than ratable. And that's how a couple of these – few of these deals, particularly these two big renewals came down. So that's what drove it. Given we're focused on, you know, we were talking to all of our existing customers, because given our strength and our cloud cohort, and momentum we see there it behooves us to get our customers to the cloud as quickly as possible, but we know they're going to want to operate both Vantage on prem, as well as in the cloud. And just depending on how that plays out, you know, I said, on our Q4 call could drive some revenue recognition things, and obviously, we experienced a few of those in Q1.

[Katy Huberty:]

And is this the first time that you've had revenue recognition of deals like this?

[Mark Culhane:]

Yes. We rarely had anything other than ratable in the past. Other than perpetual, but these has nothing to do with perpetual.

[Katy Huberty:]

Right. Okay. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Wamsi Mohan - Bank of America. Your line is open.

[Wamsi Mohan:]

Hi, yes, thank you. I have one for Mark, and then one for Steve. Mark, I got all the adjustments that you spoke about. So, even if we take out the $0.16, because of the timing of the transactions, you're roughly at $1 in earnings on the first half, but if I look historically, second half versus first half, even taking into account some of the headwinds that you mentioned from share count and taxes, seems like the second half is much more sub seasonal than what you have done historically. So, any color you could share, is this EPS also reflective of revenues or is there something else that I'm missing in that bridge? And then I have a follow up with Steve?

[Mark Culhane:]

Yeah, so no, Wamsi you’re right. So, right now, given the annual recognition that flowed into Q1 and out of the remaining quarters, I mean, not across Q1 to Q4. So, you know, revenue is not happening on these deals in Q2, Q3, and Q4. You know, I don't have line of sight today in the pipeline as to what deals might go a certain direction that could drive revenue higher in those quarters to make up for the revenue that isn't going to naturally be recognized in Q3, and Q4, because it was recognized in Q1. And we may see a bit more, as I mentioned, on to answer Katy's question in Q2, which right now, I'm not modeling in impacts of additional things that could happen in Q3, and Q4. So, it's a conservative estimate on Q3, and Q4 in terms of revenue, and obviously, the EPS impact that I suspect, depending on how the rest of the year plays out, we could see those coming up. I'm not trying to model that in at this stage because I just don't have the visibility.

[Wamsi Mohan:]

Okay, all right thanks, Mark. And then Steve, your 18 million in incremental sequential public cloud ARR, you're guiding roughly in the same range out of top that you would have been able to drive a little bit of acceleration now that you have, you know, a little bit more resources dedicated to this. Maybe can you share some thoughts around, you know, what you're seeing in the pipeline? I also heard you mentioned, new logos may be starting to show up in the pipeline when those can start to create new incremental tailwind? Thank you.

[Steve McMillan:]

Yeah. Hey, Wamsi, how are you doing? We are really confident in the annual guidance that we've issued o fat least 100% growth year-over-year. We've got real confidence in that because we're seeing our customer existing customers demand for Teradata in the cloud and having interoperability between the environments. And the new used cases that we're seeing, I mentioned some of them in the prepared remarks in terms of IoT data, data this and on some of the public cloud environments, really opening up new ways to use Teradata Vantage, as well as really thinking about Vantage as a platform. It's . So, we're really confident in the capabilities that Vantage is providing. We are conservative in our guidance, based on the timing of our deals. We're working with our customers in terms of what their approach strategies are, and how they want to use Teradata and the cloud, but still got a really strong on prem business. The, cloud business that we're working with our customers on is, is extending the capabilities and modernizing their data architectures and creating a complete data fabric, and a multi-cloud environment. So, conservative for our annual guidance, but we're solid on 100% year-on-year growth.

[Wamsi Mohan:]

Thank you.

[Operator:]

Thank you, sir. Your next question comes to the line of Tyler Radke from Citi. Your line is open.

[Tyler Radke:]

Hey, good afternoon, guys. My question for, I think, Mark, you know, just looking at Q1 ARR that was flat sequentially on a constant currency basis, I think that's comparable to what you did in Q1 last year, obviously, last year was a challenging year with COVID, but, you know, felt like you saw, kind of much stronger than normal activity in Q1. I mean, Steve referenced several customers moving to the cloud, it sounded like a lot of a lot of good momentum. So, I guess just curious, given all that momentum, and the strength that you did see in cloud ARR, sequentially, like what kind of drove just the sequentially flat ARR performance? Was it kind of mix shift away from hardware, just kind of customers, you know, procuring a software only product, just help me understand maybe why that didn't grow sequentially? And was kind of in-line with last year on a quarter where you seemingly saw a lot more activity.

[Mark Culhane:]

Yeah, thanks Tyler. If you look back even in my tenure, we've had it be flat to slightly down in Q1 beyond not just 2021, but years prior, as well. Clearly, a big headwind from a sequential was FX, so that was a huge impact this quarter. So that was part of it. Second is just Q1 tends to be the lowest bookings quarter and Q4’s the largest and so it's kind of a seasonal thing. That's why we've always said, we do large transactions that can fall at, sort of any time and I tend to look at what's going on an annual basis, not a quarterly basis, you know, whether it's not what we wanted, or it was way over and said, well, we got to really balance it across the full-year. So, we're excited about what we're seeing in the cloud, clearly, we have good cloud momentum. We're excited about the interest we're seeing and the change in perception we're starting to feel in the marketplace, as customers are – and our prospects are clearly taking a different view of us. That gives us a lot of confidence and why we reiterated our full-year of ARR growth. So, I don't think there's a thing, you know, other than FX in Q1, that was really the big driver of the flat, you know, the constant currency, you know, flat on a constant currency basis.

[Tyler Radke:]

Great, and a follow-up for Steve. Maybe we could talk about your win rates and just overall positioning in the cloud, it seemed like you rattled off a lot of wins, and some of them for snowflake, but how do you feel like win rates are trending? And then, you know, were there any deals that that maybe you hadn't forecasted or thought you had lost that perhaps came your way at the end? Thanks.

[Steve McMillan:]

Tyler, we're seeing really great interest. You know, in the examples I gave, we had and retail entertainment, health care, distribution, manufacturing. So, we're, we're really happy with how we are taking our message to our customers. The other thing that's working well as our consumption based pricing models, are generating some real interest in our customers. They see the benefit of having a blended pricing model. And as we are really improving the perception of Vantage as a service in the cloud. And the fact that Teradata and the cloud can give a highly performance offering and be a really easy and low risk way to migrate from on prem into the cloud that has given us a real competitive advantage that, you know, is causing our customers to think about using Teradata in the cloud and having that multi-cloud capability and a data fabric that spans across both on prem and into these public cloud environments.

[Operator:]

Thank you, sir. We have our next question from the line of . Your line is open.

[Unidentified Analyst:]

Hi, this is an team. Can you hear me all right?

[Mark Culhane:]

Yes.

[Unidentified Analyst:]

Great. Thanks for taking my question. Could you talk about what you're seeing specifically, as it relates to the COVID impacted industries? Now that vaccines are inside? I see that consulting was better than expected this quarter. Would you say it was partly a function of the reopening and recovery in these industries?

[Steve McMillan:]

Yeah, I'll take that question. Yeah, I think like most technology companies, we're seeing an uptick in the digital transformation programs and projects that organizations are executing. You heard in my prepared remarks that we are seeing projects with some of the airline companies coming back online both in terms of, you know them wanting to improve their operational effectiveness and efficiency, making sure that they are using the right technologies to enable their future transformations. So, we're very excited about that. The retail environment, we believe is starting to pick up and we're seeing some of the retailers really invest. And then we're also seeing some of the organizations or packaged delivery organizations that benefited from COVID carrying on with a really strong , that when I mentioned in the European Theater on Google Cloud, that was to really help bolster their digital transformation and move to the cloud. So, it's an exciting time. It’s going to be a really great year, we think.

[Unidentified Analyst:]

Got it. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Derrick Wood from Cowen. Your line is open.

[Derrick Wood:]

Great, thanks for taking my questions. First one, Steve, you named a number of customers migrating from on prem to cloud, is there, you know, what's most common moving a small portion of workloads or a big portion or, you know, all the workloads to the cloud, and then the customer starts a cloud migration? How long does it typically pick? And how do you, kind of help your customer migrate without having to double pay?

[Steve McMillan:]

Yeah, so, we are seeing a mix Derrick in terms of customers that are moving their – they want to move their whole system on to the cloud, and customers that are moving certain workloads, you know, we continue to invest in on prem capabilities as well. So one of the things I talked about was having access to native object stores on prem. And as we look at Teradata as a platform, you know you've got a number of ways to actually deploy that. You know, if you can keep data in north on prem, and then Teradata systems anywhere can access that. And then another used case is having AWS, Teradata instance that can use to connect back to on prem Teradata that’s gotten also on prem. And so, if you think about building that fabric, it gives your customers an immense choice in terms of how they migrate workloads to the cloud. And obviously, if we are providing that software capability, both on prem and in the cloud, we have a real competitive advantage to help the customer with that, you know, double bubble costs of that migration. So, we think that's a super competitive advantage for Teradata.

[Operator:]

Thank you, sir. There are no further questions at this time. I will now turn the call back over to Steve McMillan, for his final remarks.

[Steve McMillan:]

Thank you. And thank you, everyone for joining us today. We're off to a really great start to 2021, and we're remaining absolutely focused on profitable growth. We're dedicated to delivering that value to all of our stakeholders, especially our customers, shareholders, and employees. We’re looking forward to a great 2021. Thank you all.

[Operator:]

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