Teradata Corp (TDC) 2022 Q2 法說會逐字稿

Good afternoon. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Second Quarter 2022 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your host today, Christopher Lee, Senior Vice President of Investor Relations and Corporate Development. You may begin your conference.

Good afternoon, and welcome to Teradata's 2022 Second Quarter Earnings Call. 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.

Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our SEC filings, including our most recent Form 10-K and in the Form 10-Q for the quarter ended June 30, 2022, that is expected to be filed with the SEC within the next few days. These forward-looking statements are made as of today, and we undertake no duty or obligation to update our forward-looking statements.

On today's call, we will be discussing certain non-GAAP financial measures, which exclude such items as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items, such as free cash flow and constant currency revenue comparisons. Unless stated otherwise, all numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.teradata.com. A replay of this conference call will be available later today on our website.

And now I will turn the call over to Steve.

Thank you, Chris, and good afternoon, everyone. Thank you for joining us today.

Teradata's momentum continued during the second quarter of 2022. Our results demonstrate our business resilience during volatile economic times, and these results are driven by our solid business model, the critically important work we do for customers and our cloud momentum. Our strategy is right, and our business fundamentals are solid. In the second quarter, we delivered public cloud ARR of $234 million, growing 75% year-over-year in constant currency. Our cloud ARR dollar growth accelerated as more customers committed to Teradata in the cloud, both year-over-year and sequentially, and they committed more substantially as well.

Recurring revenue is now 80% of our total revenue, which not only demonstrates the mission-critical value we provide to our enterprise customer base, but also underpins the healthy generation of durable free cash flows. We also generated more than $100 million of free cash flow in the quarter, and we exceeded the high end of our quarterly outlook for non-GAAP earnings per share. On both metrics, we have passed 60% of our annual outlook.

Our ongoing execution reflects our clear focus on our strategy as a profitable multi-cloud data and analytics platform leader and gives us conviction that we are reaffirming our annual outlook, including an expanded outlook range for total ARR. Claire will share more in her remarks. We are intent on keeping our momentum doing what we said we would do, even in the current challenging macro environment.

Our strategic customer focus is in leading global enterprises diversified across many industries. Our customers are strong, stable businesses that require the best data and analytics to succeed. And when they place their trust in Teradata, they make multiyear commitments. As a result, our business model is resilient with predictable revenue. We all know that every day, the amount of data grows and right along with it grows the need to capitalize on that data, extract the greatest value from it and make the best business decisions faster.

Our platform is designed to deliver a unique advantage that enables cost-effective growth. With Teradata, companies can access and use the data without duplication or data movement. We take the query and analytics engine to the data. There is no need to copy and move it to get value. As a result, the Teradata platform provides efficiencies over others. Competitor's costs increased disproportionately higher and faster than the growth in analytics. Use it, don't move it is a differentiator for us and a real benefit for our customers. Using data where it resides allows businesses to create advanced analytics with the entire universe of available data and not waste money moving and duplicating it.

With Vantage, the foundation for game-changing analytics is already in place. It is a simple and very efficient effort to add data elements to bring better insights and greater value. Just one example, if a company is doing a forecast model for inventory needs during the holidays, it might need a subset of weather data to build a more accurate model and make more informed decisions. With competitors' platforms, the company would have to copy all of that data and move it into their system. Doing the time-series forecasting would require additional data movement, which always leaves more time and more cost to the customer. But with Teradata, all of that can be done without moving the data. A much smarter and more efficient solution that only we deliver and one that drives more consumption for Teradata.

Particularly now, companies need insights provided by the powerful data and analytics Teradata provides. Studies are pointing out the C-suite leaders, and notably, CIOs are planning for technology-enabled growth and efficiency during unpredictable times of challenge and uncertainty. Companies need data at enterprise scale to review, rethink and rapidly adjust to changing market conditions. We have seen these secular drivers play out during the uncertainties of the pandemic and the need for data and analytics is, and is likely to remain a C-suite imperative. High priority areas are directly in our sweet spot, including cloud, data and analytics.

Each quarter, we provide updates on our technology, demonstrating our continued growth as a cloud leader. I'm very excited about our announcement that it's just around the corner as we take the next big step with our cloud data and analytics platform. Later this month, we will make our most significant cloud capabilities announcement yet, bringing our industry-leading enterprise data and analytics platform, best-in-class workload management and patented analytics capabilities into the next generation so that companies can scale smarter, innovate faster and grow stronger in the cloud.

Organizations support their largest and most complex workloads with outstanding cost efficiencies and enterprise price performance with Teradata today, and we are taking our capabilities even further. They will be enabled to accelerate their highest value opportunities, unlock data through our flexible and scalable platform, and activate their analytics through more data-driven decision-making. Ultimately, to solve mission-critical challenges and generate returns. We will share more at the time of our launch; but rest assured, we’ll do it better than anyone else.

Following our announcement, we will be taking our message on the road, coming to all of our regions around the globe with our events series, entitled Possible. Our marketing team is accelerating to drive greater awareness of Teradata’s differentiated capabilities. Throughout this global series, we will showcase proven approaches to create value from data and analytics, and accelerate results, even in dynamic business environments. Exactly what our customers need now.

To help customers address their analytics needs, we are ensuring they know of our capabilities. We have driven ongoing expansion in our pipeline of opportunities in the cloud through the first half of 2022. We have actively worked on expanding the pipeline with a number of drivers, including greater awareness of the differentiated capabilities of our platform and brand as the connected multi-cloud data platform for enterprise analytics, greater experience in selling cloud-first, and in selling with partners.

Our results are clearly showing the strength of our efforts to grow through migrations to the cloud, by continuing to expand hybrid environments, as customers maintain their on-prem environment while adding new, incremental workloads in the cloud with Teradata, and winning new logos, both in the cloud and on-prem.

We expect customer successes to continue as we look ahead to the second half of the year. Let’s walk through a few examples. A Fortune 500 insurance company is migrating its entire Vantage on-prem environment, development, production, and disaster recovery systems to Vantage on AWS. The customer chose Teradata because of the ease of migration we offer, our proven scalability to manage increasing analytical workloads, and our roadmap that aligns perfectly with their long-term strategy for data and analytics. PetroRio, the largest independent oil and gas company in Brazil, has chosen Vantage on AWS as its enterprise data and analytics platform. As a new Teradata customer, PetroRio is relying on Teradata to build a logical and flexible environment it can leverage for business analytics.

One of the largest boutique healthcare labs in the US has chosen Vantage as the foundation for its data and analytics strategy. This new Teradata customer is integrating disparate data from several legacy databases and homegrown systems into a hybrid Vantage environment. Workloads will primarily be deployed on-prem to start, then ultimately migrate to Vantage on AWS. This customer will leverage Vantage to improve its personalized services and develop unique therapies to treat cancer. American Airlines, one of our long-standing customers, migrated to the cloud with Vantage and Microsoft. Vantage on Azure provides the flexibility, elasticity, and industry-leading price performance this airline titan needs for its business-critical operations. I encourage you to watch the videos on our website that outline this successful migration and the results achieved from data and analytics running on Vantage.

I am very proud of how our team performed and drove wins in the quarter. We did not see anything unexpected, as we executed our strategy in a competitive market and challenging macro environment. There were no surprises or deal delays in the quarter.

I am really enthusiastic about the strength of our pipeline as we enter the second half of the year. I mentioned wins and pipeline growth with partners. As a data platform leader, we are steadily enabling partners to extend our reach and drive adoption and consumption of Teradata. We have recently made some great partnership announcements that address important and emerging needs.

We recently announced the integration of our Vantage platform with Amazon SageMaker. With the enterprise scale of Vantage, we empower even the largest organizations to execute complex analytics on massive datasets while using their favorite data science tools and languages – like SageMaker. With Vantage and the machine learning capabilities of SageMaker, AI and ML projects are able to move into wide-scale production in weeks instead of months, so that our joint customers can rapidly accelerate their AI/ML projects and get to value faster.

Also, just announced was a new collaboration between GE Digital, Microsoft and Teradata. We are working together to support the imperative of addressing the devastating effects of climate change. Together, we will develop an offering designed to help provide aircraft operators tackle and reduce carbon emissions, and Teradata Vantage will be the underlying data and analytics platform to support this environmental sustainability initiative.

Operating sustainably is a core element of ESG, and ESG is a core element of all aspects of our business. Our annual ESG report has just been released, and it outlines the depth of our increased attention and focus as well as the actions we have taken and the progress we have made as a responsible corporate citizen. I invite you to read through it on our website.

Another significant element of ESG is governance, and we’ve just added new strength to our Board of Directors. I’m incredibly pleased that Todd McElhatton joined our board in the second quarter, and I’m excited that Teradata will be able to benefit from his deep financial experience and proven track record in successful transformations to the cloud. Teradata continues to be recognized as an ESG leader and has been named in the 50/50 Women on Boards Gender Diversity Directory. Diversity, Equity and Inclusion are cornerstones of our company, and I am proud that we are walking the walk.

As I turn the call over to Claire, I remain very confident in our future. We are growing in cloud. We have powerful technology that keeps on getting better. All this increases our total addressable market. A market that is large and organically growing from the never-ending need for data and analytics. I am enthusiastic about accelerating in the second half of the year, driving profitability, generating free cash flows and returning shareholder value.

Now, I’ll turn the call to Claire.

Thank you, Steve, and good afternoon, everyone.

In the second quarter, we reported $25 million of sequential cloud ARR growth or $30 million in constant currency. We also delivered earnings per share, $0.03 above the high end of the previously provided range and generated another quarter of very healthy free cash flow. This quarter was in line and consistent with the forecast that underpins our fiscal 2022 outlook. Our forecast is driven by our cloud-first, profitable growth strategy and by our solid financial fundamentals. Despite the current challenging economic environment and persistent currency headwinds, we are doing what we said we would do, and we remain on track to achieve our fiscal 2022 outlook.

Let's get into the quarterly results, starting with ARR. Total ARR decreased by approximately 3% year-over-year as reported and grew 1% year-over-year in constant currency. On a year-over-year basis, there was approximately 4% of negative impact in the reported growth rates associated with exiting Russia as shared with you last quarter. On a sequential basis, total ARR declined by approximately $37 million, with approximately $32 million related to currency headwinds. Cloud ARR grew 68% year-over-year as reported and 75% year-over-year in constant currency.

Cloud ARR grew in all 3 geographic regions, both year-over-year and sequentially, continuing the momentum we have seen throughout the year. Cloud ARR growth in the second quarter was driven primarily by migrations, including a number of 7-figure deals. This migration activity came from a healthy number of existing on-prem customers new to the cloud with Teradata. Total new logos for the quarter were in the low double digits. This amount grew sequentially and year-over-year, better than historical seasonality. Total new logos included both on-prem and cloud customers, representing the financial services, government and transportation industries to name a few. This new logo momentum is a proof point of executing our strategy.

Regarding cloud expansions, our net expansion rate was approximately 120%. This is below our planned rate, but we are still on track to deliver our outlook of approximately 80% growth year-over-year in cloud ARR as reported and in constant currency. In the quarter, we had more customers expanding versus the same period last year. These enterprises are starting their expansion on the Vantage cloud platform with smaller test and development workloads with the potential for even greater growth ahead.

In addition, we see 2 other trends that are not in the net expansion rate calculation that point to future growth. First, customers are expanding more than one-for-one at the point of migration that we originally modeled. Second, we are seeing new incremental cloud workloads from existing on-premise customers who are expanding their hybrid environment. These trends, along with our seasonally stronger second half and excellent cloud pipeline give us confidence in our ability to achieve this year's cloud ARR growth target.

With regards to non-cloud components of total ARR, subscription ARR decreased 3% year-over-year as reported and maintenance and software upgrade rights ARR decreased 24% year-over-year as reported. Both were driven primarily by customers shifting their Teradata spend to term or cloud subscriptions and were also impacted by currency headwinds and the ceasing of Russia operations, which was in last year's numbers.

Moving to revenue. Total revenue was $430 million, a 12% decrease year-over-year as reported and an 8% decrease in constant currency. Recurring revenue was $345 million, an 8% decrease year-over-year as reported and a 5% decrease in constant currency. As a percentage of total revenue, recurring revenue was 80% in the second quarter, a new high for Teradata. There was a negative year-over-year impact in the reported growth rate of approximately 15% of total revenue and approximately 14% for recurring revenue. Both were affected by the ceasing of operations in Russia, the impact of upfront recurring revenue and currency headwinds. We have provided a slide in this quarter's earnings presentation that shows the impact by quarter to ARR and revenue. It also clearly demonstrates the underlying business is growing as expected.

To add additional color on this quarter's recurring revenue, there was approximately $12 million of recurring revenue that was removed from our results due to exiting Russia. There was also less year-over-year benefit from upfront recurring revenue arrangements. The impact was a negative $6 million versus a small net positive amount we had expected in the quarter. For reference, this compares to a positive $22 million impact in the second quarter of 2021.

Looking ahead, we see a change in the quarterly shape for net upfront recurring revenue in the second half of 2022. We continue to expect a net negative amount in the third quarter, but now anticipate a net positive amount in the fourth quarter. As a result, we now anticipate a net $0.20 benefit to earnings per share related to upfront recurring revenue, similar to last year. Regarding perpetual and consulting revenue, we continue to execute against our strategy, moving to a higher-margin subscription revenue model and collaborating more with partners that drive higher adoption and greater consumption of Teradata.

Moving to profitability. Teradata's second quarter gross margin rate was 61.2% and gross margin dollars were $263 million. The year-over-year decline in gross margin dollars is primarily due to negative currency impacts, ceasing our business operations in Russia, and the negative impact from upfront revenue arrangements in the quarter. Cloud gross margin dollars are improving as we continue to scale our cloud revenue.

Operating profit margin was 12.8% in the quarter and the year-over-year decline in operating profit margin was primarily attributable to lower revenue. We continue to invest in cloud, go-to-market and R&D to drive greater adoption and consumption of our platform while also continuing solid cost discipline.

Second quarter earnings per diluted share of $0.33 exceeded the high end of the previously provided outlook range of $0.30 even after accounting for a $0.02 benefit from the more favorable tax rate.

Turning to free cash flow and capital allocation. Free cash flow generated in the quarter was $102 million, driven primarily by efficient cash conversion sustaining our positive operational trends of cash collections over the last 5 quarters. In the second quarter, we repurchased approximately 2.1 million shares or $67 million in total. Of this dollar amount, $50 million related to the completion of the ASR transaction we entered into in February, and $17 million related to incremental shares repurchase during the quarter as we believe our shares are undervalued. We will continue to be opportunistic during the second half of the year.

For the first half of 2022, we have returned 126% of our year-to-date free cash flow to shareholders. As a reminder from our Investor Day, we committed to an annual 50% return target. We remain committed to capital allocation that drives shareholder returns. That includes share repurchases but also continued investment in the company that supports our strategy, the cloud acceleration and profitable growth.

On our capital structure, we upsized and extended the maturities of our debt facilities this past June, securing better pricing and increased flexibility for the company. In conjunction, we also entered into new interest rate and cross-currency swaps to reduce interest expense and minimize risk.

With regards to 2022 outlook, I would like to provide some context on the third quarter and the rest of the year. We continue to have confidence that cloud ARR dollar growth will accelerate sequentially throughout the year. We know that our fourth quarter is seasonally our highest quarter from a sales perspective, and we expect a similar pattern from total ARR and cloud ARR growth in 2022. The strength of our weighted pipeline continues to improve. As Steve mentioned, customers continue to commit more substantially to Teradata in the cloud. We see that in our increasing win rates. Despite the current economic environment, we still have strong conviction in our cloud ARR outlook. We are building in conservatism and widening the outlook range for total ARR to account for on-prem deal timing given the macroeconomic environment.

We have reviewed our 2022 financial forecast against the end of July currency exchange rates. Despite the continued strengthening of the U.S. dollar since April 2022, we are pleased to reaffirm our outlook for all other elements in constant currency and on a reported basis, though we could be towards the lower end of our ranges if currency headwinds continue to worsen. We will continue to focus on the fundamentals that drive healthy profitability and durable free cash flow generation.

With that, we reaffirm our 2022 financial outlook. This includes approximately 80% growth year-over-year in cloud ARR as reported and in constant currency. Free cash flow of approximately $400 million and non-GAAP earnings per diluted share to be in the range of $1.55 to $1.65. For total ARR, we are widening the outlook range to decline in the low single-digit to mid-single-digit percentage range year-over-year as reported and grow in the low-single-digit to decline in the low-single-digit percentage range year-over-year in constant currency. Our complete 2022 outlook can be found in our second quarter earnings press release and presentation.

For the third quarter of 2022, we anticipate non-GAAP earnings per diluted share to be in the range of $0.27 to $0.31. We project the non-GAAP tax rate to be approximately 21% in the third quarter and approximately 25% for the full year. We also forecast the weighted average diluted shares outstanding to be approximately 106 million shares in the third quarter and approximately 107 million shares for the full year.

Thank you very much for your time today. Let's please open the call for questions.

(Operator Instructions) Your first question comes from the line of Chad Bennett with Craig-Hallum.

So just on the cloud -- public cloud ARR in the quarter. Last quarter, we really, despite the FX impacts on the rest of the business, revenues and ARR, we didn't get a call out for FX impact on public cloud ARR. What kind of change this quarter? And I guess I was under the impression that the majority of our public cloud business was being priced in U.S. dollars?

Yes, this is Claire. Thanks for your question. So yes, we did see an impact, as you say, between the 68% year-over-year and 75% year-over-year between reported and constant currency. You may have noticed we did keep our full year guide of approximately 80% in reported and constant currency. So it's just a mix that we're seeing in the current quarter for Q2 that has a bigger impact on the currency impact. But for the full year, the mix is unchanged and in line with what we laid out to you previously.

So do we expect a headwind in the second half of the year from FX to public cloud? I know you reiterated reported in constant currency, but is the delta we've seen in the quarter something we should expect?

No, I think as you move towards, there may be a small impact in Q3, but as you look to how we're going to finish in Q4, that mix is more weighted to your [point] in contracts in U.S. dollars. So the second half will not see a significant headwind with regards to currency.

Okay. And maybe one quick follow-up for me, if I could. Just on net expansion, Claire or Steve, for that matter, just the 120-plus, and I understand kind of the development and test use cases initially and kind of the language around that. But just -- it's a trailing 12-month metric. So how do we think about from a cohort standpoint? And I know we don't have years and years and years of cohorts necessarily, but maybe 24 months back or 12-month cohort in kind of aging those cohorts and how they've kind of -- how expansion has played out, if you can provide any detail there.

Yes, Chad, I'll start off. Thanks very much for the question. It's really interesting when we look at the cohorts. I think what's actually playing out with our migration of our customer base to the cloud as the sales team are executing exactly on strategy and are [incented] to maximize their cloud ARR and that start of the migration. So we are seeing incremental cloud ARR compared to on-prem ARR at that first point of migration. And so they're actually capturing more expansion on that first point of migration, and for those cohorts, it's then impacting the subsequent net expansion rate. But overall, it actually means that we are still very solid in terms of the models that we have to achieve our cloud ARR, both and for the guidance for this fiscal year, and also for the goals that we've set out for 2025. So simply said, we're seeing more expansion on migration, and that is subsequently reducing the expansion through the life of that cohort, we expect to see that continue to improve as we move through time.

Your next question comes from the line of Tyler Radke with Citi.

Claire, could you just help us understand some of the assumptions that are going into the wider range on total ARR. I guess first on the macro side, are you embedding any more conservatism in terms of close rate, deal timing? And then secondly, just because you are seeing more cloud expansions, and it does feel like you feel pretty good about the cloud ARR number. I guess if you see more cloud conversions, does that help or hurt total ARR just in terms of the economics between on-prem and cloud? Just help us understand those moving pieces as we think about the wider range.

Yes, thanks for your 2 questions. So first of all, with regard to the extended range on total ARR. Absolutely, we are adding in some conservatism there as we look towards the end of the year. That expansion is really to take into account potential on-prem deal timing impact that we may see in Q4 given the current macro volatility and also knowing that Q4 you see is really our highest quarter of total ARR growth.

With regard to your second question in the terms of -- it actually is good economics for us. What we see is as they are converting more as of the point of migration. We may then see a little bit less expansion, but the expansion over time is very strong and continues to be strong. So that's what gives us that confidence, not just in the full year 2022 guide of approximately 80%. But we are, thanks to what we're doing today, we're on track also for the long-term estimate of approximately $1 billion in 2025. So very happy with where we are today based on what we see and also the coverage and the wins -- the customer wins that we're seeing today and the benefit that we will continue to see in the second half of this year and as we get to over $1 billion to 2025.

And Claire, just on free cash flow. So obviously, maintaining the guide for the full year despite some currency headwinds is impressive. It does look like if we look at the second half implied free cash flow, the seasonality or mix of free cash flow is a bit higher than you saw last year. Maybe just help us understand kind of the levers at your disposal, how you're able to offset those currency headwinds and why seasonality might be a little bit different than last year?

Yes, absolutely. So as you said, very happy with the guide of approximately $400 million of free cash flow. And the fact, actually, that in the current macroeconomic environment, we are maintaining this quarter our full year guide on EPS compared to our guide last quarter. So very happy with that. With regards to the cash flow generation, our biggest opportunity is in working capital. We've seen some great trends in our cash collections, for example, and a generation of working capital. And we've done that again in Q2, as you've seen with $100 million of free cash flow generation. So we're confident that we can keep that healthy balance sheet and strong working capital and cash conversion cycle as we continue through the year.

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

If we look at your total ARR at constant currency, your initial outlook at the beginning of the year was high single-digit growth. And today, at the midpoint, it's flat. And I know 4 points of that is Russia, which you couldn't have anticipated. But given your more mission-critical enterprise workloads, it would seem that you should be relatively more resilient to a macro downturn. And Steve, you noted some of that resiliency in your prepared comments, you also noted us a strong pipeline. So can you just help square the change in your constant currency total ARR from sort of the beginning of the year through now -- through that lens, if possible? And I have a follow up.

So the -- we -- as you said, Wamsi, the biggest (inaudible) to total ARR are clearly Russia and currency, yes. What we see in the business, and you had it right on the head, our workloads that we run inside our customers are absolutely mission critical. Unlike many of our competitors, we don't run discretionary workloads around marketing campaigns or sales campaigns. We are helping these organizations, operate, close their books, run their supply chains, run the critical operations of the business. And that means that our ARR is very sticky and solid in our customer base. Our pipeline -- our cloud pipeline for the second half of the year continues to strengthen in both quantity and quality as we progress those opportunities. So I guess, the biggest delta is from a Russia and FX perspective.

Okay. And Claire, your gross margins on recurring revenues were at the lowest level in a while. And can you just talk about the moving pieces here? How much of that is relative to changing upfront payments? How much of that is maybe FX? And on upfront side, I think you called out sort of a delta versus expectations in the second quarter and now maybe more upfront in the fourth quarter. Can you talk about what is the underlying cause that's actually driving that change?

Absolutely. So yes, to your point with regards to recurring revenue margin, 2 factors that we see both quarter-over-quarter and year-over-year. So first of all, we have a full quarter in recurring revenue of the impact of Russia. So an impact there. We also, obviously, see the currency impact and the upfront impact. And just in case people haven't seen it on Page 8 of our earnings presentation, we have actually laid out the impact across ARR, total revenue and recurring revenue by quarter of those 3 headwinds that we're seeing. So upfront revenue, FX in Russia. And as I believe everyone will remember from last earnings, Russia was an accretive business for us. So we did have a drop to the bottom line out of FX and the upfront revenue year-over-year decline that we're seeing in Q2. So just as a reminder, I said in my prepared remarks, we saw a negative impact of $6 million in the current quarter compared to a positive of 22.

To your point, Wamsi, on timing, so just as a reminder, that is purely driven by the kind of renewal and expansion of our on-premise customers. It has always been difficult to predict, which is why we tend to give high-level estimates. So there was a slight difference with what we were expecting in Q2, as you said, slight negative versus a small net positive. And it's just the deal timing. And that's the same as well as we look out to H2.

Your next question comes from the line of Erik Woodring with Morgan Stanley.

This is [Sabrina] on for Erik Woodring. I guess our first is you beat 2Q EPS out your outlook by $0.05 the midpoint, but kept the full year EPS guide unchanged, which implies the second half is coming down slightly. Can you talk about why that is, given your revenue outlook hasn't changed? And then I have a follow-up.

Yes, absolutely. So actually, the $0.02 of the $0.03 above the top end of the range was actually from the favorable taxes. So that's not a knock-on benefit. Our overall tax rate for the year is unchanged. It's just a seasonality of our tax rate, [Sabrina]. And so actually -- and also with the additional currency headwinds, we have seen a slight -- if we look forward to the second half of the year, we have seen a slight deterioration in the currency rate by approximately 25 basis points. So we're absorbing that into our full year EPS as well. So they are the kind of big drivers from an EPS standpoint. I missed your follow-up question, sorry.

Yes. And just a follow-up is, can you talk about how your customer conversations have evolved since the end of the quarter? Have there been any changes by geography, deal size or the pace of customer decision-making given the macro environment?

[Sabrina] no -- this is Steve. Thanks for the question. We're not seeing deltas from that perspective. Again, we -- we're very solid in our existing customer base. We understand what those customers are doing. We've got long-term relationships with our existing customer organizations. We haven't seen any demand signal weakness for our offers or for what the customers are buying either in this past quarter or for the rest of the year. And as I mentioned earlier, we're actually seeing our cloud pipeline continue to increase. So that gives us some good demand signal from a cloud perspective. That point that we're mission-critical and (inaudible) our customer base means that committed ARR and those multiyear agreements that they've signed with us gets us some stability around our business model and financial results.

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

This is Anushtha for Matt Hedberg. Maybe to start with, could you talk about how you're thinking about the pace of hiring in the remainder of 2022, given the inflationary environment? And what will be the key areas of investment?

Thank you for the question. Yes, we we're going to continue hiring critical talent, especially cloud talent. Even in the past quarter or so, we've recruited a new head of our EMEA organization. We are looking very prudently across all of our investments. Our focus is to make sure that we maintain profitable growth. We will continue to invest in the business in key areas where we think that growth will be driven from, especially from a cloud perspective, cloud skills capabilities and continuing to advance our strategy. We haven't seen any challenges from a recruitment perspective. I think that one of the real strengths of Teradata is actually the culture of the company. People love coming to work for Teradata. They can bring their genuine and authentic selves. And I think that culture and the environment that we create, creates a really positive place for people who want to stay with us, they want to demonstrate great results, but also enables us to attract in the right kind of talent. But again, from an investment perspective, we are going to be prudent on our investments to ensure that we have that profitable growth.

Got it. And then in the current environment, as enterprises increasingly prioritize ROI investments, could you talk about the durability of Teradata's platform in a recessionary scenario? And in addition to the functionality, how does -- does better price performance than competitors serve as a benefit in landing new logos?

Yes. Absolutely. Price performance is a key way, one that we win new logos, it also increases the stickiness of our platform. The workloads that we run for our customers are absolutely mission critical. So the durability of the platform is incredibly strong. I actually look at it from an AI and ML and analytics perspective. Our customers tend to only use about 20% of the capabilities of the platform. So we see that as a key opportunity for us and for our customers to utilize those capabilities, perhaps reduce spend on other platforms that they have inside their technology stack and use Teradata capabilities that they're already paying for and they are already in the Teradata platform. So that as well gives us opportunity and also enables us to, again, be very stable and [favor] customer environment.

Your next question comes from the line of Raimo Lenschow with Barclays.

This is [Sheldon] on for Raimo. We are certainly hearing different perspectives on the challenging macro environment by region. And in the quarter, it looks like the Americas segment for revenue declined 8% in constant currency versus a strong double-digit growth last quarter. This is a little surprising given the [inflation] from Russia and FX and the mission-critical nature. Was -- is that a surprise to you? And is there any moving parts there to consider? Would it be the less upfront recognition in the quarter?

Yes. So absolutely, towards the end here, you hit them on the head. As you saw, we're actually growing in constant currency Americas for the first half, but specifically in Q2, as you said, we are declining and the big impact there in constant currency is from the upfront revenue recognition. So it's a seasonality impact between Q2 of this year versus Q2 of last year. But for overall for the half, we are seeing constant currency growth in the Americas.

Very clear. And then a quick follow-up, if I may. How has the reception been from customers on the blended pricing with both the capacity-based piece and the consumption element, and how did that consumption element specifically perform versus your expectations in the quarter?

Yes. So we are seeing some of our customers take advantage of that blended pricing model, but by far and away, the bulk of our revenue is actually in fixed capacity agreements, which gives us that, again, financial surety around our business model and results for the year. We are starting to see our customers utilize those consumption agreements for (inaudible) in the workload. We think as well it's a great way to win new logos, so that customers can start small with us and then grow. But even in those agreements, what we see is customers really want to get the best of a blended model because they can contract with us at a reduced rate for fixed capacity. And then just (inaudible) for what you need, that gives us a real insight into the financials of our cloud business as we move forward. So it's an attractive model that our customers are taking advantage of. But by far and away, it's a small part of our existing recurring revenue streams.

Your next question comes from the line of Derrick Wood with Cowen.

I jumped on late. But from what I've heard so far, it sounds like you're not seeing a material impact from the macro. You remain confident in the demand and pipeline around cloud. But perhaps there was some delay in on-prem renewals, and I wanted to touch on that. If I look at the on-prem ARR, I come up with about 6% decline in constant currency, which was down versus a 3% decline last quarter, or maybe flat in Q4. Was that an area that was a little weaker? And with respect to your guidance for total ARR, are you expecting that to make that up in terms of stronger renewal of that business in the second half? Or do you assume perhaps that some of those renewals slip?

Yes, let me just start on the the impacts that we're seeing on total ARR. So you may have missed it that we have added a new disclosure on Page 8 of our earnings presentation, which breaks down the impacts that we're seeing across total ARR revenue, total revenue and recurring revenue. And what you'll see there is that across currency and Russia year-over-year, we're actually seeing 8% impact year-over-year. So a combination of currency and Russia being a significant headwind. And actually, that increases to, if you include upfront revenue and the timing and seasonality we were talking about, that's 15% impact from total revenue and 14% impact on recurring revenue year-over-year. So once you look at that and have a look at that additional disclosure, hopefully, that clarifies that actually the underlying business is growing as expected. And I'll just pass to Steve to talk about the macro.

Yes. From a macro perspective, Derrick, as you know, we are rock-solid in our customers, executing mission-critical workloads that gives us a lot of stability of the revenue platform. And in addition to that, our business model being now 80% recurring revenue gets great revenue stability as we move through the rest of the year. The commitment -- the multiyear commitments around fixed capacity that we have for our customers also gets this confidence in our second half financial performance. So from a macro perspective, clearly, there are impacts, but we have a very, very strong financial model.

Okay. That's helpful. And then back on the question, clarity around free cash flow. I mean you guys have done a great job in light of the FX headwinds, Russia and really kept that -- the health of the free cash flow this year. Are there -- I know you don't guide beyond this, but are there -- were there onetime impacts this year that you were able to pull levers on that could be tough to be repeatable going into next year? Or is that just like cash conversion focus, something that can be durable?

So I believe the cash conversion focus is durable, Derrick, absolutely (inaudible) great, consistent performance. So absolutely, cash conversion cycle is durable. We did have a tax refund benefit, which I talked about in Q1, which is a benefit in the quarter, but I do have absolutely confidence in our long-term generation of durable free cash flows. And as we laid out at Investor Day last year, we still have good line of sight of approximately $550 million by 2025.

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

Thank you, Lisa.

As we sign off, I've got great confidence in our future. Our strategy in the company is absolutely right. We are growing in the cloud, and we're driving a strong pipeline for the second half of the year to accelerate that momentum. Our Vantage data and analytics platform remains mission-critical for enterprises all over the world, and I'm incredibly excited about our upcoming announcement that takes our industry-leading capabilities into the next-generation so that companies can scale smarter, innovate faster and grow stronger in the cloud. We remain really focused on delivering shareholder value. Thanks for joining us today.

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