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Text: Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today; followed by Claire Bramley, Teradata's Chief Financial Officer, who will discuss our financial results and our outlook.
We will also discuss other non-GAAP items, such as free cash flow and constant currency revenue comparisons.
A replay of this conference call will be available later today on our website.
At our Investor Day, we provided some fresh insights into our strategic direction, differentiated product and value proposition and our financial model.
We have continued our transformation journey, executing on our strategy as a cloud-first profitable growth company.
In Q3, we met expectations for revenue once again.
Importantly, our recurring revenue as a percentage of total revenue increased approximately five percentage points versus last year and is now approaching 80%.
This is meaningful because recurring revenue provides for predictable and durable streams of cash flow.
In addition, both GAAP and non-GAAP earnings per share were above expectations.
Claire will address our financial metrics and outlook in more detail.
In the third quarter, our public cloud ARR was $148 million.
This was a substantial 83% growth rate over Q3 of 2020.
We had a handful of large deals slip out of the last day of Q3 into the fourth quarter related to customer timing.
We have already completed transactions that more than cover the $7 million that we expected in Q3, and we have closed most and are confident, we will close all of these transactions in the fourth quarter.
We continue to build upon our execution engine, which delivered more cloud deals in Q3 than in any other quarter.
Looking ahead to the fourth quarter, our pipeline is robust, and we are working on bigger cloud deals.
Looking at Q3 in more depth, we had numerous proof points that our strategy is solid.
We are executing and are making progress within our target market of leading enterprise accounts.
Q3 was our highest quarter yet for new cloud customers.
We added tens of new large enterprise accounts across all of our regions.
We are determined to keep up the pace in winning new logos in the cloud and on-prem.
Our dedicated new logo sales teams are coming on board, ramping up and are already starting to win.
We are gating the world's largest companies, often with extreme scale and complexity in their data environment to smoothly migrate to the cloud.
These global enterprises depend on their mission-critical Teradata platform every single day to help them extract the greatest value from their enterprise analytics.
As many of our large enterprise customers are transitioning to the cloud for the first time, managing through these types of transactions can take some time, requiring planning and coordination with multiple stakeholders across numerous functions and migrating to the cloud requires careful consideration of the interconnectivity of all aspects of the customer's on-prem analytic ecosystem.
Customers are recognizing that Teradata with our connected multi-cloud data platform for enterprise analytics is the best solution to overcome these challenges, and they are increasingly migrating to the cloud with Teradata Vantage.
In the quarter, healthcare, transportation and government led the pack in terms of our target verticals.
Just one recent example of a seamless migration to the cloud is American Airlines, a Teradata on-prem customer for more than 14 years.
American just migrated its massive Teradata EDW to Teradata on Azure Our collective team of employees from Teradata and American Airlines executed very efficiently for a highly successful migration.
The airline's Teradata platform provides virtually every department access to analytics and reporting capability and supports thousands of users for many business initiatives, including revenue management, network planning, technical operations, cargo and marketing.
The migration is part of the airline strategy to provide greater agility, speed to market and frictionless scalability to its business community.
We have been told that its business users are extremely pleased with the speed and performance of the Vantage platform and Azure.
Cloud growth remains front and center for us.
The move to cloud is a clear direction and often a mandate for many organizations.
It's an issue of when, not if.
We are pleased that each of our regions saw growth in cloud customers in the quarter.
Additionally, we are seeing that once customers start in the cloud, they grow with Teradata.
Our quarterly trend of healthy net expansion rates in the cloud continues to be greater than 130%, as customers add more use cases, more data and workloads and more users to their Teradata multi-cloud portfolio platform.
Here's a handful of examples where we are competing and winning in the market.
The ANZ Banking Group is migrating its Teradata enterprise data platform to Vantage on Google Cloud.
This multinational financial services company has been a Teradata customer for more than two decades.
Its Teradata platform is core to its critical business applications, supporting more than 2,000 users for many different business initiatives, including regulatory reporting, customer analytics, product profitability and responsible lending.
The migration is part of the bank's broader cloud mandate.
Here, we are partnering with a leading global SI on the customers' migration to the cloud.
A leading global oilfield services company is deploying Vantage on Azure to support center data management and advanced analytics.
This new Teradata customer is committed to continual innovation using technology to improve safety, productivity and quality of life in the oil and gas industry.
This transaction is one of the large deals from Q3 that fell just over the line and closed on day one of Q4.
BNSF, one of the largest freight transportation companies in North America is migrating its Teradata data platform to Vantage on Azure Cloud as part of a long-term plan to have the majority of its analytic ecosystem in the cloud.
Here, we won against cloud native competition, and Teradata will provide analytics and reporting for finance, operations and marketing.
Teradata Consulting will be leading the migration effort with support from our partner, Microsoft.
As part of this effort, Teradata will be integrated into a hybrid-analytic environment with both IBM Mainframe and Microsoft Azure components.
Another airline, one of the world's largest and most admired, is migrating its long-standing Teradata environment to Vantage on AWS-as-a-Service.
The company's modernization efforts include increasing analytics for HR, finance, loyalty and customer care and will leverage both Teradata and AWS services as well as solutions from advanced analytics vendors.
The ability to leverage [Indecipherable] capabilities to utilize AWS three data and make it available for richer analytics was an important factor in migrating Vantage to the AWS cloud.
The customer considered cloud-native competition before selecting Vantage on AWS, Accenture was a supportive partner during their evaluation and leading the migration process.
[Indecipherable], a leading tech equipment manufacturer based in [Indecipherable] as a new cloud customer, choosing Vantage on Azure as its cloud data and analytics platform.
The Vantage on Azure environment will be used for development work, POCs with customers, demos and applications testing.
Our purpose, transforming how businesses work and people live through the power of data has never been more relevant, and we are successfully supporting customers in building and driving meaningful business value in their analytic environments, whether multi-cloud, cloud-only, on-prem or a hybrid combination of any or all.
To keep Teradata's differentiated market-leading position, we continuously develop and evolve our technology and Q3 was no different.
In the quarter, we advanced our innovations on multiple fronts.
We released a significant enhancement to Vantage, adding 30 new end database functions that enable customers to use partner tools of their choice to leverage the power of end database analytics, delivering performance at enterprise scale.
We introduced Vantage Streams in the cloud providing near real-time data, leveraging native object stores, AWS3, Azure Blob and Google Cloud Storage to help accelerate new business outcomes.
Customers can now stream IoT data, stock data, weather or website click-stream data to deliver new analytic use cases.
This is exactly what is needed by our target market and a recent research study by independent research firm, Vanson Bourne, 87% of IT decision makers felt that they must leverage these emerging technologies to remain competitive.
We also delivered an update to our bring-your-own model capabilities that allows customers to bring their own analytic models, built with third-party tools and languages into Vantage to run enterprise analytics at scale.
And in keeping with our focus on customer and market drivers, we brought enhancements to our communications data model with full support of 5G network activity, including intelligent network optimization.
We are furthering the transformation and our go-to-market organization to execute with greater agility and help us accelerate the move to the cloud and build an increasingly strong partner ecosystem as well.
These actions are designed to drive results for Teradata and an exceptional customer experience.
We know that when our customers succeed, we succeed.
We're investing to drive faster cloud execution to help our customers maximize the value of the data and get optimal results from the Teradata environment in the cloud.
We are deploying senior cloud specialist sellers and cloud specialist architect teams in each region to progress and execute more quickly to close cloud deals.
We are doubling down on building mutually beneficial partnerships to drive scale and strengthen capabilities and have added senior cloud expertise to our global partner organization.
Strong partnerships create a flywheel effect and accelerating successes in the cloud and in data analytics.
Here's a few new partnerships that will help propel us forward.
Today, we announced a strategic collaboration agreement with AWS.
We are both committed to increase product integrations and development with AWS Cloud services and launch joint programs to help customers migrate, modernize and derisk the cloud adoption journey with Vantage on AWS.
With this exciting announcement, we are working together to make it simple to use Vantage on AWS across the broad array of AWS services at enterprise scale.
We are very excited about the strategic collaboration that will make it even easier for customers to get the most value from their enterprise analytics at scale in the cloud, helping us both accelerate growth.
In important and growing AI arena, we recently announced a strategic partnership with H2O.
ai and the integration of H2O.
ai's hybrid cloud platform with Vantage.
This integration enables our joint customers to quickly and easily build and deploy AI solutions that inform new insights from machine learning and drive more meaningful business outcomes.
We're also pleased to be deepening our partnership with Accenture.
Together, we are building a global Vantage cloud data migration factory to enable joint customers to easily migrate to Teradata Vantage in the cloud.
The powerful combination of Accenture's recognized global capabilities and our unparalleled ability to harness data at scale will help drive smooth transitions to the cloud for our joint customers.
I'm seeing the team operate with a stronger sense of urgency, accountability and enthusiasm, and I'm pleased that we are progressing in our go-to-market organization and across the company.
We are resolute in executing our growth strategy.
Looking ahead, Q4 is traditionally our largest quarter for ARR growth.
We have a robust pipeline for the quarter, and we are seeing trends of more cloud deals and larger cloud deals, some in the seven and eight digit range.
Given these dynamics, you can be certain that the entire team will be focused and dedicated to closely managing the business, especially with the planning and coordination associated with closing some of these large transactions.
We believe our cloud business will be approximately $200 million by the end of the year.
We have a path to grow more than 100% year-on-year.
However, given the timing we experienced in Q3, we believe it is prudent to lower our cloud ARR growth outlook from 100% year-over-year to approximately 90% year-over-year.
We remain pleased with this very strong annualized growth rate in our cloud business, a substantial cloud business that is based on a competitive product and differentiated position in a large and growing market.
At our Investor Day in September, I stated that Teradata is a profitable growth company in a large and growing market with the right technology, the right strategy and the right people.
That remains true today.
And we remain incredibly dedicated to adding customers, growing and expanding existing ones and providing an outstanding customer experience with our connected multi-cloud data platform for enterprise analytics.
Our focus is clearly on executing to keep winning and delivering shareholder value.
This confidence is reflected in the new $1 billion repurchase authorization that we announced today and our strong commitment to returning capital to shareholders via share repurchase.
Now I'll pass the call over to Claire for additional insights.
In the third fiscal quarter, Teradata delivered revenue and profit in line or better than expectations.
Quarterly highlights include recurring revenue of $352 million or growth of 7% year-over-year as reported.
Gross profit margin of 61.3%, up 30 basis points year-over-year.
Operating margin of 15.4%, up 60 basis points year-over-year and non-GAAP earnings per share of $0.43 in line with prior year and $0.11 above the midpoint of our previous outlook.
I am pleased that these results keep us on track to achieve or beat our fiscal 2021 outlook on many of our key financial metrics.
Some of our year-to-date highlights include total ARR growth of 7% versus the prior year, which is in line with our 2021 full year outlook range of mid- to high single-digit growth.
Year-to-date, recurring revenue growth of 14% versus the prior year compared to our full year outlook range of high single to low double-digit growth.
Earnings per share of $1.86 against our previous full year outlook range of $1.92 to $1.96 and year-to-date free cash flow of $347 million compared to our full year outlook of at least $400 million.
Despite the many highlights, it is unfortunate that a handful of our transactions slipped into Q4, which impacted our cloud ARR in the third quarter by $7 million.
As Steve noted, we have already covered this amount in the early days of Q4.
We have a robust Q4 pipeline, the strongest we have ever seen, and we continue to successfully close deals with good economics.
We therefore remain confident that our customers want and value our products.
Over the last 18 months, as we have undertaken our transformation journey, Teradata has had a renewed focus on driving greater, rigor, discipline and accountability in the business.
We are focused on driving improved intra-quarter linearity, increased investment in our cloud go-to-market activities globally, and we are seeing increasing benefits from stronger partnerships with CSP and SI partners to accelerate migration to the cloud.
Now let's get into the results, starting with ARR.
Our customers continue to drive digital transformation activities in multi-cloud environments, and this keeps driving our growth.
Total ARR increased 7% year-over-year as reported and 6% year-over-year in constant currency.
Total ARR grew by $11 million sequentially.
Subscription ARR increased 18% year-over-year and 2% sequentially.
We grew in all three regions from both existing and new enterprise customers.
We added on-premises new logo customers at a faster pace than last quarter, even though our new logo acquisition efforts are emerging.
These are all positive proof points that customers continue to choose Teradata for our differentiated value from a great product that provides a combination of best price and performance at scale, along with Teradata's industry knowledge and expertise.
Public cloud ARR grew 83% year-over-year and 6% sequentially.
Growth occurred across all three geographic regions year-over-year and sequentially in the Americas.
In both APJ and EMEA, we saw a slight sequential decline in growth resulting from transactional delay.
Of the $9 million sequential growth, a little more than half resulted from customers migrating to Vantage in the cloud from on-premise perpetual and subscription licenses and most of the remainder from expansion.
We continue to experience healthy expansion rates that are in excess of 130% in the cloud, sustaining the positive trends that we outlined in our recent Investor Day.
We also added more new logo cloud customers in the quarter, a proof point of executing against our strategy.
While the deal sizes can be small at the start, we see future growth opportunities with these new customers as they try, buy and expand.
Now turning to revenue.
Total revenue was $460 million, a 1% increase year-over-year as reported and in constant currency.
We continue to build on a higher base of recurring revenue, which grew 7% year-over-year and 6% in constant currency.
This growth is primarily driven by a higher mix of recurring revenues.
As a percentage of total revenue, recurring revenue was 77% in the third quarter.
Regarding upfront revenue arrangement.
In the third quarter, the net impact of upfront revenue was materially lower when compared to the first two quarters of the fiscal year.
In the third quarter, there was an approximate net negative $10 million impact related to upfront recurring revenue.
This was in line with our expectations.
For reference, this compares to a net positive $22 million impact in the second quarter and $24 million in Q1.
The negative $10 million is due to revenue pulled into the first half of the year from the third quarter, partially offset by upfront recurring revenue recognized in Q3, all related to the renewal or expansion of on-premises deals.
As anticipated, both perpetual and consulting revenue were lower year-over-year, given the strategic shift made to a higher-margin subscription model and greater collaboration with partners that drive higher adoption and consumption of Teradata.
Third quarter gross margin was 61.3%, which was approximately 30 basis points higher than last year's third quarter, primarily due to a higher mix of subscription-based recurring revenue.
This was partially offset by the negative impact from upfront revenue arrangements pulled forward from the third quarter into the first half of fiscal 2021 as well as a small unfavorable impact from perpetual mix and a slightly lower consulting margin rate.
Third quarter's operating margin was 15.4%, 60 basis points higher than last year's third quarter, driven by the combination of a lower cost structure from cost discipline, partially offset by sequential investments made in activities supporting the cloud in both go-to-market and R&D.
Total operating expenses were up 5% sequentially and flat year-over-year.
Third quarter earnings per share of $0.43 exceeded our outlook range of $0.30 to $0.34 by $0.11 at the midpoint.
Of the $0.11, $0.05 related to actual expenses being lower than expected, $0.04 related to cost delays and $0.02 related to favorable recurring revenue mix.
Turning to free cash flow and capital allocation.
We are on track to achieve our fiscal 2021 guidance of at least $400 million in free cash flow.
Through the end of September 2021, year-to-date free cash flow was $347 million.
In the third quarter, free cash flow generated was $23 million due to the seasonality of billings.
Our cash conversion metrics showed slight improvement quarter-over-quarter, driven by an increase in days payable outstanding due to the timing of invoices received.
Our days sales outstanding remained strong, although it did increase by about two to three days sequentially.
We continued to take advantage of our strong balance sheet, buying back stock to offset dilution.
In the third quarter, we repurchased approximately 1.1 million shares or $58 million in total.
For the first nine months of the fiscal year, we spent $179 million on share repurchases for a return of 52% of year-to-date free cash flow to shareholders.
For the full year, we are on track to return at least 15% of free cash flow to shareholders via share repurchases while continuing to make investments in the company to support our strategy for profitable growth and cloud acceleration.
We now have a total of approximately $1.3 billion authorized under this open market share repurchase program, in effect immediately until the end of 2025.
This action is consistent with the capital allocation framework and our commitment to increase shareholder value that we outlined at our Investor Day.
Let me move to our outlook.
Overall, we have a very healthy growth rate on a large and scaling cloud business.
Given the strength of our products, along with our robust pipeline in Q4, we do see paths to achieve at least 100% growth in cloud ARR for the full year.
However, it is also possible we will continue to see the timing volatility as we saw between September and October due to how difficult it is to predict the close date of some of our very large pipeline deals.
As Steve stated, our updated cloud ARR outlook is approximately 90% growth year-over-year or approximately $200 million.
With regards to earnings per share, we are raising our non-GAAP earnings per diluted share to be in the range of $2.11 to $2.15, while still continuing to invest in the business, an increase of $0.19 from the midpoint of the previous range.
For the fourth quarter, we expect non-GAAP earnings per diluted share to be in the range of $0.25 to $0.29.
We anticipate the tax rate to be approximately 26% in the fourth quarter and approximately 23% for the full year.
We also anticipate the weighted average shares outstanding to be approximately $113 million.
We are reaffirming our fiscal 2021 outlook for the following key metrics.
Total ARR growth, which is expected to be in the mid- to high single-digit percentage range; total recurring revenue, which is expected to grow in the high single to low double-digit percentage range year-over-year; total revenue, which is anticipated to grow in the low to mid-single-digit percentage range year-over-year; and free cash flow for the year, which is expected to be at least $400 million.

user
q3 non-gaap earnings per share $0.43.
q3 revenue rose 1 percent to $460 million.
sees q4 non-gaap earnings per share $0.25 to $0.29 excluding items.
sees q4 gaap loss per share $0.01 to $0.05.
incremental $1 billion share repurchase authorization for open market share repurchases until end of 2025.
full year 2021 non-gaap earnings per diluted share now expected to be in range of $2.11 to $2.15.

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