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Teradata Corp (NYSE:TDC)
Q4 2020 Earnings Call
Feb 4, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Operator: Thank you for standing by and welcome to Teradata's Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Christopher Lee, Senior Vice President, Investor Relations and Corporate Development. Thank you. Please, go ahead.

Christopher Lee -- Senior Vice President, Investor Relations

Good afternoon and welcome to Teradata's 2020 fourth quarter and full year 2020 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 result.

Our discussion today includes forecasts and other information that are considered forward-looking statement. 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, Teradata's most recent Form 10-K and Form 10-Q filed with the SEC and in the Form 10-K for the year ended 31, 2020 that is expected to be filed with the SEC later in February.

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. 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.

Steve McMillan -- President and Chief Executive Officer

Good afternoon, everyone, and thanks for joining us today. I'm very pleased to lead off call by sharing that Teradata delivered another solid quarter in Q4, culminating in a strong finish to 2020 and we also exceeded EPS and free cash flow. I'm incredibly proud of our team's performance and strong execution, particularly given the impacts of the global pandemic. We have effectively completed our transition to a subscription model that generates recurring revenue and are vigorously executing on transformation to a cloud-first company.

The team drove another quarter of solid year-over-year and sequential growth in total ARR. This was especially true for public cloud ARR, which exceeded $100 million. The growth we are seeing demonstrates that are cloud-first positioning is resonating with the market. More importantly, it shows that customers are increasingly seeing the value advantage in the public cloud, powering effective analytics at scale and delivering meaningful business returns.

Public cloud ARR of $106 million at the end of 2020 was a 165% increase from the prior year. Cloud first is overarching really important to a strategic focus, as such, we are now disclosing our public cloud AAR in our earnings release and intend to continue providing this metric going forward.

To provide some color on our momentum, I'd like to highlight a handful of our public cloud wins. One of the world's largest airlines committed to Teradata on Azure for its next generation analytics in the cloud. We were chosen ahead of Snowflake because of our low cost price performance and our best treat technology, allow invest customer to meet its advanced analytics goals

This win is a great demonstration of the essential role Teradata established for our customers. Leveraging all relevant data to help our customers navigate through tumultuous times, its crucial, and no one does that better than we do.

We signed a long-term agreement at a Fortune 100 insurer, as it modernizes its IT infrastructure, less competitive win against several cloud native vendors came after the customer recognized that Teradata provides significantly higher value and quality at significantly lower cost than others.

One of the largest non-profit healthcare systems in the US chose Vantage on Azure for his patient experience and the data analytics capabilities enabled by our data platform. We conducted an extensive evaluation of Vantage on Azure versus credit only competitors. Our customer selected Teradata for unsurpassed workload management capabilities, platform ability and ability to reliably and securely execute company's more than 26 million queries per day. Teradata is partnering with Capgemini, one of our global consulting partners on less customers migration to the cloud, and its future growth opportunities.

A North American based global e-commerce marketplace reconnected to Teradata to modernize its analytics environment. After it tested the cloud native offering, experienced in technical challenges and extended migration delays brought the customer to the realization that it would not achieve the business value they expected from its intended move to Snowflake. Selecting Vantage on AWS offered a seamless transition to the cloud ensures its mission critical production workload is maintained and allows its people to focus on creating gold forward business value.

A Fortune 50 healthcare company selected to Teradata on AWS to continue to run its business intelligence reporting and analytics for claims, case management and provider efficiency. This too, was a competitive win against multiple cloud native vendors with Teradata's ability to scale and handle very high workload volumes as the main differentiators for this growing customer. And we are helping a leading retailer and APJ transition to the cloud with Vantage on Azure. This customer chose our consumption pricing model pervasive elasticity to quickly scale and address the changing retail market environment. These are just a few examples that illustrate how well our teams kept the focus and executed to drive the pandemic.

Organization, who is proving offerings and capabilities to customers. The company's resolute cloud first focus and commitment came to the forefront throughout 2020, and was manifested across the entire business.

Some of our advances from the last few months include, launching of Vantage trial program. This trial program places the power of Teradata, directly in the hands of customers to help companies quickly, easily and at no cost experienced the capabilities of Vantage in the cloud. This free trial is preloaded with ready to use examples to get customers started.

Users can also upload their own data to see how Vantage advanced analytic functions enable faster evaluation and accelerated time to value. And as with every Teradata environment, there is no limit to the number of complexity of queries that maybe submitted.

Only Vantage enables analytics across multi cloud, on-prem and hybrid environments, and to offer maximum flexibility and choice for our customers. Vantage is available across the top public cloud vendors, Google Cloud, AWS, and Microsoft Azure.

We also recently announced that Teradata Vantage is now available in AWS, Azure, and Google Cloud marketplaces. These new purchasing channels offer another means to make it easy for customers to purchase and use Vantage. With full multi-cloud support, their software is consistent across all of these environments, making processes easier, reducing risk and de-levering faster team to value and all with the scale, security, availability and performance customers rely on from Teradata. This is a tremendous benefit to our customers as many have multi-cloud strategies and roadmaps.

With Vantage, companies can leverage all of the data, all of the time and that scale being need to achieve breakthrough business results from their analytics. Our support of multi-cloud environment combined with our new flexible pricing options make it easy for customers to benefit from data analytics in the cloud as we unlock that value in the data assets.

Additionally, with the latest release of Teradata QueryGrid, we are making it easier for customers to connect to data sources, regardless of where the data resides and the quote and multiple clouds are on-prem. This is important as organizations increasingly transition to the cloud and need to be able to access and combine information from all of the data environments at the same time and its scale.

Our R&D team is relentlessly working to ensure that Vantage is the fastest, lowest risk, highest performing and most cost effective path to the cloud. The focused organization has delivered more cloud capabilities in 2020 than ever before. It's a driving force behind our cloud growth and will continue to accelerate as we architect our software for the cloud.

I am confident in our accelerating cloud roadmap, a rapid cloud migration work and the growth it will deliver. Our development efforts remain centered on driving complete and compelling cloud offerings at scale and the team is bringing forth cloud native integrations at record pace. Companies must take advantage of all of the data that is available to them to succeed. And we will remain steadfast in providing the enterprise scale and flexibility they need with our cloud data warehouse and the analytic capabilities we enable as a platform.

As I referenced last quarter, we undertook a careful review of our operations to align our cost to better support our cloud growth objectives. We will be investing 75% of all R&D spends or over $200 million in fiscal 2021 in our cloud initiatives. We are making these investments while also planning to improve operating margins and increased free cash flow.

Looking ahead, as we begin 2021, we anticipate significant year-over-year growth in public cloud ARR. Additionally, we expect year-over-year growth in total revenue, profitability and free cash flow. Going forward, a majority of our revenue will be recurring and we expect total revenue growth for the first time since 2018, as the shift to a subscription model is no longer a headwind for our reported results.

Mark will talk more about that in his comments, along with financial reporting changes we anticipate making in 2021 as a result of the way I am looking at and operating the business. We are a cloud software platform company and our future lies in bringing enterprise data warehousing and analytics software to the world's leading organizations.

Consulting services and third party software sales don't equate to high quality recurring product revenue. Therefore, we believe the changes Mark will describe for eight new and seeing our true progress. We have taken clear actions to prepare for growth in 2021. One of the ways, we strengthened our execution during 2020 was focusing on driving awareness and demand for our cloud offerings.

We have made meaningful headway and are stepping up our efforts to further focus our marketing and sales teams, refined our sales compensating our salespeople to grow also simplified and aligned our marketing message to cloud first and are taking the message to the market to drive awareness and demand for Teradata Vantage on public cloud within our target markets and customers.

Additionally, we received a significant industry endorsement of Teradata's emerging strength as a leading cloud First Data platform as Teradata was named a leader in Gartner's cloud database management magic quadrant. The report noted that our move to the cloud, a new pricing models make our price performance more apparent and furthermore the report encouraging customers to run a proof of concept to understand how competitive Teradata's price performance is.

Teradata garnered the highest scores in three out of four use cases in Gartner's report on critical capabilities for Cloud Database Management Systems for analytical use cases. This evaluation clearly demonstrates Teradata's ability to meet the largest and most demanding customer's data analytics needs from all industries.

We are continuing to add strong leadership to our executive ranks. I am very pleased that we named Todd Cione as Chief Revenue Officer. Todd brings to Teradata more than 25 years of experience in global sales, marketing, channel and operations at large multinational technology organizations, including most recently at Apple and previously with Oracle, Rackspace and Microsoft. He drive for results has a track record of delivering predictable and profitable growth, and has successfully led organizations through cloud-based transformations, with an intense focus on delivering lasting value for customers, Todd has already hit the ground running and is deeply engaged with our go-to-market teams.

Before I turn the call over to Mark. I would like to highlight the recognition Teradata recently received regarding our ongoing Environmental, Social and Governance, or ESG efforts. I am pleased to share that Teradata was named in the Dow Jones North American Sustainability Index for the 11th consecutive year, and we have also been included in the Corporate Equality Index for the first time. We believe social responsibility, sustainable business practices and responsible governance are good for our world and right for our business.

We will continue to build on our commitment to sustainable corporate citizenship that leads to long-term value creation for all of Teradata stakeholders. We look forward to share more on our corporate strategy including ESG at an Analyst Day later this year.

In closing, I would like to reinforce critical dimensions, whether that'd be data volume, the number or complexity of queries, response times or managing SLAs of different business needs. This is where Teradata technology excels, and a rapidly growing cloud ARR shows the customers are recognizing this value from Teradata.

And with that, I'll turn the call to Mark for more details on our results.

Mark Culhane -- Chief Financial Officer

Thank you, Steve and good afternoon everyone. Before I discuss our Q4 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, 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.

IShares' view that Teradata had a strong finish to 2020 in our global environment impacted by the pandemic. I am pleased to report that the company delivered another quarter with better than expected recurring revenue, earnings per share and free cash flow, while effectively completing our pivot from a perpetual license model to a subscription license model. We also exceeded our original guidance for the full year for ARR growth, earnings per share and free cash flow despite the impact of COVID-19.

We ended the year with $1.587 billion in ARR, which was 11% growth year-over-year at the beginning of the year, delivered $86 million. And -- the $1.58 7 billion of ARR breaks down as follows; $960 million represents subscription and cloud ARR.

As Steve noted in his introductory remarks to give investors better insight into our Cloud business in momentum, we are disclosing our public cloud ARR for the first time. Public Cloud ARR totaled $106 million at the end of 2020, which was a 165% increase from the end of 2019.

Public Cloud-related ARR is comprised of Teradata Vantage running on the public cloud, AWS, Azure and Google Cloud, and does not include private cloud, which continues to be included in subscription ARR. We are not including private cloud as our cloud first strategic focus is on public cloud.

The remaining subscription amount of $854 million represents on premises and private cloud subscriptions in grew 30% year-over-year. The remaining ARR balance of $627 million represents; maintenance, software upgrade rights and other ARR down 14% year-over-year, and reflects our strategic move to subscription and the cloud.

Moving into recurring revenue. In Q4, we generated $383 million in recurring revenue, which was above our guidance range of $371 million to $373 million and represented 9% growth year-over-year. Better than expected ARR growth and consistent sales execution throughout the quarter both positively contributed to the increase in recurring revenue.

Moving on to consulting revenue. Consulting revenues declined 27% year-over-year, as expected, as we continue to refocus our Consulting business on higher margins engagements that also drive increased software consumption within our customer base. In addition, we experienced the impact from the ongoing COVID-19 pandemic as some customers cancelled or delayed certain projects as they continue to manage their discretionary spending, especially for onsite consulting engagements. We expect consulting revenues to start to stabilize during 2021 and expect consulting revenues to decline at a significantly lower rate than we have experienced over the last few years.

Turning to gross margins. Total gross margin came in at 59.3%, up 610 basis points a year-over-year. The improvement was driven by the continued favorable revenue mix shift to higher margin recurring revenues and away from lower margin perpetual and consulting revenues, as well as increased recurring revenue and perpetual revenue gross margins year-over-year.

Cost savings of about $6 million from the actions announced during our Q3 2020 earnings call aided our gross margin in the fourth quarter, and will also benefit our gross margin dollars in 2021. Recurring revenue gross margins was 17.5%, up 190 basis points from the fourth quarter of 2019 and up 10 basis points sequentially.

The year-over-year increase in recurring revenue gross margin the expected recurring revenue growth. However, the greater than expected recurring revenue dollars and our cost saving actions both drove the better than expected recurring revenue gross margin.

Consulting gross margin was 8.4% versus 14.9% in the fourth quarter of 2019. Consulting margins declined year-over-year and sequentially as revenue decreases outpaced cost reductions. As part of our restructuring actions, we have moved to a more variable consulting cost structure starting in 2021 to improve the future profitability of our Consulting business and enable more consulting with third-party partners.

Turning to operating expenses, total operating expenses were up 4% year-over-year. The primary driver of this increase were additional incentive plan expenses, given our strong Q4 performance. Excluding incentive plan expenses, total operating expenses decreased slightly year-over-year.

On our Q3 earnings call, we disclosed that the restructuring efforts we announced were expected to result in expense reduction between $80 million to $90 million on an annualized basis. We expected to invest a portion of these savings into our cloud first and related go-to-market initiatives and return the remainder to investors through increased earnings.

As an update, the actions taken resulted in approximately $80 million of total cost savings. Of this amount, approximately $12 million benefited operating income in the fourth quarter. We will discuss the impact in 2021 when I get to guidance shortly.

Turning to earnings per share, earnings per share of $0.38 exceeded our guidance range of $0.23 to $0.25 provided last quarter. We cleanly beat expectations as we generated about $0.09 from better than expected revenue growth and about $0.08 of EPS from the cost actions discussed on the Q3 earnings call, partially offset by the primarily lower consulting margins and higher incentive planning expenses as previously mentioned.

Turning to free cash flow, we had another solid quarter of free cash flow generation driven by higher operating margin, strong cash collection, and other favorable working capital timing differences. Free cash flow in the fourth quarter was $45 million, which contributed to full year free cash flow of $216 million, well ahead of the annual free cash flow guidance of $150 million we provided at the beginning of the year.

As a reminder, we expected to make cash payments of approximately $75 million related to the restructuring actions that we discussed during our Q3 earnings call, of which approximately $15 million were expected in the fourth quarter.

Our current forecast for total cash usage is now approximately $65 million, down $10 million from the prior estimate. Of the $65 million, $23 million was paid in the fourth quarter. The remaining $42 million is expected to be paid during 2021. However, even after taking the restructuring cash payments into account, our Q4 free cash flow was still better than we expected.

Turning the guidance. Let's start by discussing the two key assumptions underpinning our 2021 outlook. First, I would like to inform you of our financial reporting change starting in Q1 2021 that Steve mentioned in his introductory remarks.

To better align our financial reporting with how Steve is managing the business going forward, we will be reclassifying managed services related ARR and revenue out of recurring revenue and into non-recurring consulting revenue as these services are principally consulting delivered services.

In addition, that ARR and into other non-recurring software will not be a focus for us, but rather will be driven directly to the third-party software partner. The reporting change will result in no change to previously reported total revenue or total gross profit or gross margin percentage.

We are making this change to better reflect and disclose the important revenue and margin metrics that Steve and our company are focused on driving moving forward. See the earnings discussion document on the Investor Relations webpage for more information regarding the revenue and gross margin component impacts of this change.

I would like to provide you the reclassified amount of ARR at December 31, 2020 by category reflecting these changes. After reclassifying managed services and third-party software ARR, total AAR was $1.425 billion at the end of 2020 which still grew over 11% year-over-year. And it consisted of the following $917 million of subscription and cloud related ARR, which increased 38% from the end of the prior year with public cloud ARR of $106 million of this total and $508 million of maintenance and software upgrade rights related ARR, which decreased 17% as expected, due to our shift to a subscription model.

Second, we look to continue our growth in the cloud as we accelerate our product roadmap, focus our go-to market to grow cloud while protecting our base and drive awareness and demand for our platform, a mix the ongoing pandemic. Given our cloud momentum and the purchasing behavior of our high-end enterprise customer base as more of them move to Vantage in the cloud, we expect that we will contract differently with our customer base versus what we have historically done on-premises.

We anticipate that some or many of our customers may choose to purchase or use committed volumes of cloud instances directly from the public cloud providers rather than through us. This could create variability in our total ARR and recurring revenue in subsequent quarters. As only the ARR and recurring revenue associated with our Vantage software will flow through our P&L rather than that plus the cloud infrastructure. However, we are happy to take that trade-off as that recurring revenue has a higher gross margin for Teradata and it is easier for our customers to a elastically consume Teradata in the public clouds versus on-premises.

Additionally, as more customers and workloads move to the cloud, it is likely more of our business will be consumption based and will not necessarily be recognized ratably creating more variability in the recurring revenue we report by quarter. Furthermore, many of our customers will operate Vantage on-premises as well as in the cloud. And thus we expect that may change our on-premises contracts with customers, which could result in on premise revenue recognized other than ratably which also may create more variability in the recurring revenue we report by quarter.

As a result we anticipate it becoming more difficult to forecast our recurring revenue, especially on a quarterly basis. Therefore, we will not be providing guidance for recurring revenue by quarter. With that said, our 2021 annual guidance, which considers the week is expected to grow total ARR is anticipated to grow in the mid to high single-digit percentage range year-over-year. We expect total recurring revenue to grow in the mid to high single-digit percentage range year-over-year.

We expect total revenue growth for the first time since 2018. We anticipate total revenue to grow in the low single-digit percentage range year-over-year. Non-GAAP earnings per share are expected to be in the range of a $1.50 to $1.58 which would be about 18% year-over-year growth at the midpoint and we expect free cash flow of at least $250 million.

Now I'd like to provide some color on 2021 to help you understand our business, which again considers the reclassification I recently mentioned we expect public cloud AR to become a more meaningful part of total AR within the total revenue guidance we provided, we anticipate mid single-digit percentage reduction in consulting revenue year-over-year and a continued reduction of perpetual and other revenue, by at least half in 2021 versus 2020.

We expect our total gross margin rate in 2021 to be approximately the same as in 2020, given our significant movement to the cloud. And we also expect recurring revenue gross margins to be in the low 70% range. Perpetual another gross margin is expected to be in the mid 20% range and consulting gross margin to be in the low teens percentage range.

We expect to improve operating margins by 100 to 150 basis points as we continue to drive efficiencies in our operating model to drive profitable growth, while increasing our investment in cloud sales and R&D capabilities. As previously discussed, the majority of the $80 million of expected annual run rate cost savings are being reinvested back into R&D and go to market, cloud initiatives. However on a net basis, we anticipate 5 to 10 said some benefit to 2021 EPS. This is on top of the benefit recognized in EPS for the fourth quarter of 2020.

Non-GAAP earnings per share includes the cost savings I just mentioned. The free cash flow guide, I mentioned, reflection is reduced by the $42 million of restructuring cash payments previously discussed. We anticipate approximately $27 million of the $42 million being paid during the first quarter.

We expect our non-GAAP effective tax rate to be approximately 23% for the full year and assume $112 million fully diluted shares outstanding. We plan to be opportunistic about share buybacks during 2020, while we are focused on executing against our full year guidance we wanted to provide you with a few markers to assist you with your modeling of Q1 2021, which again considers the reclassifications I previously mentioned.

They cloudy are is expected to grow 155% or more from the $44 million in Q1, 2020 probably cloud ARR or about 10 million to 15 million increase sequentially from the end of 2020. Total revenue in the first quarter is expected to be higher year-over-year, but lower sequentially which is consistent with our historical seasonal pattern however, we anticipate that decline rate for total revenue from Q4, 2020 to Q1 2021 while we expect -- and with that operator, we are ready to take questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Wamsi Mohan from Bank of America. Please go ahead.

Wamsi Mohan -- Bank of America. -- Analyst

Hi, yes. Thank you and thanks for breaking out the public cloud AR and congrats on crossing the 100 million mark here. Can you talk about your public cloud AR guidance of at least 100% growth for -- you're clearly now available across much broader set of platforms. Just wondering in that at least 100%, what's your assumption around the mix of revenue that's going to be just software bought through the public cloud marketplaces versus and revenue where customers are paying for infrastructure from you as well.

Steve McMillan -- President and Chief Executive Officer

Yeah. Hey, Wamsi. Thanks. Yes. So clearly we're seeing a lot of momentum in our public cloud interest vantage on the cloud. Time will tell how much comes is just software-only versus are they going to procure the infrastructure through us, clearly we don't think our biggest customers are likely to do that, given what we know today. So that's why we're seeing at least a 100%. We will hope that that would be higher, but the math and we'll have to see how the year plays out as that moves to determine whether, is it all coming to us or just the software portion only.

Wamsi Mohan -- Bank of America. -- Analyst

Okay, thanks.

Steve McMillan -- President and Chief Executive Officer

Hey, Wamsi.

Wamsi Mohan -- Bank of America. -- Analyst

Yeah.

Steve McMillan -- President and Chief Executive Officer

Hey, Wamsi. It's Steve. Thanks for the question. I'd also say on the customers buying the infrastructure through us. We see that as a key differentiator, being able to operate Teradata data advantage, and say that the customers' environment is something that differentiates us inside the industry. A lot of the cloud business that we have done to-date and a significant portion of our $106 million we actually provide the full stake from infrastructure through the application stack. So we're open-up a full range of deployment options in the cloud but we think it's really differentiated.

Wamsi Mohan -- Bank of America. -- Analyst

No, that's great, Steve. Thanks for that clarification. If I could just ask on the sales comp changes that you've mentioned to incentivize more growth in the cloud. Any more color you can share there? And what are you seeing at your public cloud customers in terms of pricing choices? Is it going more toward blended pricing or consumption based pricing? Thank you.

Steve McMillan -- President and Chief Executive Officer

Yeah. Wamsi, I'll take that as well. It's a great question. So, we've redesigned our compensation scheme for this year, so that our sales teams get accelerated compensation when they sell. They are the results in growth and say the customer account if it's an existing customer, and we get a multiplier on it, when that growth includes growth in the cloud. So we've designed a compensation scheme that we believe protects both the base and encourages the sales team to execute growth in the cloud.

The other thing I would say is we're encouraging our sales teams to prospect. We believe that, as you pointed out, our consumption based pricing model enables us to go after new customers in a very effective way. So, we're not just focusing on our existing base. We're going to actively prospect on our new sales leader, Todd Cione is looking at deploying a hunter-based sales model to go after new logos. So we're incredibly excited about that.

We see the blended pricing model has been very popular in terms of when our customers look at how we want to operate in the cloud, because it gives them some benefits commercially as they know that they're going to execute a certain volume of transactions and they want to be able to space according to different workloads. So, that blended pricing model is really exciting for customers that are just starting with this that consumption model is really exciting. So, I think we'll see both models being pretty successful and uptake from the customer base.

Wamsi Mohan -- Bank of America. -- Analyst

Thanks. Thanks a lot and congrats on the strong execution.

Steve McMillan -- President and Chief Executive Officer

Thanks Wamsi.

Operator

Your next question comes from Tyler Radke from Citi. Please go ahead.

Tyler Radke -- Citi -- Analyst

Hey, thanks a lot for taking my question. Steve, you talked a lot about several kinds of Fortune 100, Fortune 500, Public Cloud wins. And, I'd say in the past, this hasn't been something that you've seen a ton in terms of the wins, and obviously the strong growth and cloud ARR. I guess from a product or execution perspective, is there anything that you could identify that you think is kind of changed the momentum there.

And then a follow-up for you or for Mark is just in these cloud wins -- maybe help us understand how much uplift you're seeing from customers, from $1 basis as they move to the cloud. And, they're either expanding capacity or you just see a natural uplift from taking on that infrastructure. Thank you.

Steve McMillan -- President and Chief Executive Officer

Yeah. Thanks, Tyler. I'll take the first part of the question. And I'll let Mark talk a little bit about the expansion that we've seen from existing customers move to cloud. I think the excitement around our cloud products has really accelerated as we went through the year. As we went through the year, we shifted our research and development and investment to be predominantly in the cloud, just roughly 30% of our investment, prior to our changes in 2020 went to cloud and 70% went to on-prem. We swapped that around. So 70% of our R&D investment is now dedicated to the cloud, as you know, about $200 million a significant investment in building up our cloud capabilities.

And what we've been able to do is really build out our integrations across all of the cloud platforms, AWS, Azure, and announced in Google Cloud, also our resource now is to be able to extract value from data no matter where it sits in the ecosystem. So introducing native object store, and being able to use native object stores on the public cloud environments is really attractive to our customers.

And as we look forward in 2021, we're known just now to be great at delivering that performance and scale on the cloud. And 2021, we're going to get even better. We're adding third party application for system integration in the cloud. We've got more cloud native integrations with third party applications in the cloud. You can bring your own data analytics, we're integrating with cloud native services. This is a complete modernization of Teradata advantage and cloud environment.

And we think our customers are seeing that, and they want to use that technology to get the best business results that they possibly can. So lots of investment there. Mark, do you want to talk a little bit about expansion?

Mark Culhane -- Chief Financial Officer

Yeah, sure. So, today that's largely been our existing customers moving some or all of what they're running with us on-premises to the cloud. And the growth in ARR can vary, it depends, are they procuring the infrastructure for us or not, because if they're not, you could see minimum or some less ARR are moving.

Importantly, for us, what we've experienced is for the growth we experienced across 2020, the customers who are already in the cloud with this, they grew over 50% with us, during 2020. And those that move something from our on-premises to the cloud with us. While may have been neutral, or up slightly, when they moved or potentially slightly down, we saw that once they moved with us to the cloud, we saw almost approximately 40% growth from where they started with us in the cloud, which is obviously very important for us, which is why I made the comment in our prepared remarks that if we see customers that want to procure the instance of the software, to date we haven't seen it, but our bigger customers may go that direction, there may seem like an initial decline in ARR.

But once we have them there, we see the growth that that can occur. And I'd say, as I mentioned, that's a trade off we'd gladly make, obviously the margin profile of a software only coming to the cloud versus incurring the infrastructure costs is better as well. And so those would be trade offs, we would gladly make, because we all know, you know, we want our customer base to move to the cloud with us an advantage in the cloud.

So we're excited about the trends we've seen across 2020 and the growth we've seen there. And we're also very excited about what we've seen in the pipeline and the momentum building of our existing customer base in the cloud, and you know, the perception of us in the marketplace is now starting to rapidly change on that front.

Tyler Radke -- Citi -- Analyst

Great, thanks so much.

Operator

[Operator Instructions] Your next question comes from Katy Huberty from Morgan Stanley. Please go ahead.

Katy Huberty -- Morgan Stanley -- Analyst

Thank you, good afternoon, and congrats on a really strong quarter. I wanted to ask Mark, if you can talk a little bit about the margins in your cloud revenue today versus subscription margins overall. And then when do you expect the two to converge? And then I have a follow up?

Mark Culhane -- Chief Financial Officer

Sure. Well, clearly, Katie, as we've mentioned, the margins we experience in the cloud are lower than what we personally experienced on-prem because we're at 106 million in the cloud today. We're not at scale. So we would expect over time that you know, we view 70% is sort of the benchmark you got to hit and exceed in the public cloud, you know, we're going to the revenue threshold to get us there is clearly beyond $106 million, is it $300 million to $500 million, time will tell. But we clearly expect those two converge, on that front, for sure.

Katy Huberty -- Morgan Stanley -- Analyst

Okay, that's great. And then just also Mark, just looking at your earnings guidance, $0.38 in the March quarter, and then if I just divide your annual guidance by four, that would also suggest, a similar sort of $0.38 to $0.39 run rate through the year. Should we expect that now that you've transitioned to subscription that, EPS is going to be quite stable. And we won't see historical seasonality? Or are you ramping investments through 2021? And that's why you're not seeing EPS expansion after March base?

Mark Culhane -- Chief Financial Officer

Yeah. We -- we had, as you probably know that we've experienced seasonality historically. I think we still experienced some of that here in 2021 as well, despite the completion of perpetual to subscription, because now we're in the next phase of that on-prem subscription moving to cloud. And does that largely go consumption based or not? Because if it goes consumption based, we recognize revenue based on what's consumed, not a ratable spread of what they've signed up for. And you do that each and every month, which could create some variability, in terms of recurring revenue and what's happening.

And then we'll see, what happens with the portion of the of our customers that have done something with the cloud, but do something or maintain something with us on-prem, that may change the way contractually that falls to our revenue, which could create some potential seasonality as well. So, I don't expect it to be sort of stable $0.38 range across the quarters, throughout the sequential part of the year, there is still going to be some seasonality here.

Katy Huberty -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

Your next question comes from Derrick Wood from Cowen. Please go ahead.

Nick Altmann -- Cowen -- Analyst

Yeah, great. This is actually Nick Altmann on for Derrick. Thanks for taking my questions. For my first one, can you guys maybe talk about, customers who have if it's the consumption based pricing model? And maybe touch on, how the expansion motions are playing out there?

Mark Culhane -- Chief Financial Officer

Hey, Nick. I've talk about it at a high level. And then, I ask mark to comment a little bit more. What we've seen from customers who have moved from an on-prem motion to as a subscription and the cloud using consumption is actually but the overall level of ARR. And many of those customers have increased.

And that's as they brought new workloads to -- to the cloud. So obviously, when you're working in an on-prem environment, you have a constrained physical infrastructure footprint. And when we move customers to the cloud, they can un-leashes their ability to expand their use cases and deployment.

And interesting thing for our response to COVID and when we are helping some of our customers respond to COVID, we gave them some capacity on demand and to their infrastructure. And they immediately use that capacity on demand.

We're seeing a very similar pattern, in terms of, as our customers move from on-prem to the cloud. We can take advantage of those elastic environments. And it's given us a great opportunity to talk to them about some of the more advanced analytic use cases that you want to deploy, and incremental workloads that we can put on Taradata. So it's pretty exciting.

Nick Altmann -- Cowen -- Analyst

Great. And then can you guys just give us a sense of, how the install base is trended just in terms of willingness to buy or expand, mainly as it pertains to the macro environment? How much improvements have you guys seen there sort of, as the year progressed? And then, looking ahead, are you starting to see more projects from distressed verticals come back online? Or is it a bit too early to tell there?

Mark Culhane -- Chief Financial Officer

So we are really, really happy with our execution in Q3 and Q4, from an ARR growth perspective. And I'll refer you to one of the customer examples that we gain and my prepared remarks, which was one of the airline's committing to Taradata and the cloud. No clearly a distressed a distressed industry but what we're seeing is that, customers who are in an industry, which has challenges, if they have the vision to utilize data to get better business results and business outcomes, they can use that data to optimize their operations at a rapid pace to ensure that they can adequately respond to the challenges that are in front of them. So, I gave the example -- one example in the airline, another couple of examples are in healthcare, where it's subject to respond to the challenges that are in conflict, we're seeing even -- and it really respond to the environmental challenges that they have. Great question, though. Thanks.

Nick Altmann -- Cowen -- Analyst

Got it. Thank you.

Operator

Your next question comes from Peabody from Barclays. Please go ahead.

Peabody -- Barclays -- Analyst

Hi, everyone. Congrats on the great quarter. If I look through the math for how there are in total ARR guidance, it's just that almost all new ARR that you patent is coming from the cloud. Basically it's assumption that there will be no on-premise expansions during this year?

Mark Culhane -- Chief Financial Officer

Hey, Pea, thanks. No, we will -- we'll see our on-prem, business expand. But clearly, we're seeing movement from on-prem to the cloud in a major way. So we would expect, cloud that we said going to go at least 100%. At the same time, we're still going to have customers that are going to be on-prem that haven't done things to the cloud. And we expect some of that to move as well.

Overall subscription, our on-prem subscription, we would expect would be lower by the end of this year compared -- potentially compared in total, might be but right now we're expecting subscription to grow, but not at the same rate that we have seen it grow in the past because it's moving to the cloud. So the vast majority of the overall subscription growth is coming in cloud. But at the end of the day, total ARR is growing, on-prem subscription ARR is growing, but the growth has been driven by what's going on in the cloud.

Peabody -- Barclays -- Analyst

Got it. Ex migrations on-premise is still growing. As far as where the cloud product is right now, can you give us an idea of how much of the product itself is a cloud native versus just an existing Teradata product that's being hosted on the cloud?

Steve McMillan -- President and Chief Executive Officer

Hey, Pea, I'll take that one. So we're really happy with the advances that we've made from our product team. They have completely redesigned certain elements of the product, and we continue to transform the underpinnings of the product. What I will say is that we've really improved our cloud native integrations, you know, in AWS, we integrate with 17 of their cloud native services, we put the same level of integration with AWS and Google's first party services. That clearly makes us a great partner for the quality service providers.

The thing I want to point out, though, is some of our key differentiation, and the reason that we are winning and the cloud is because of the technology, the Terradata technology, that our customers are used to, the level of performance, the level of scalability as delivered and acquired successfully across all of the dimensions that our customers want to stress, an enterprise data warehouse and analytics capability, whether it be volume of data, concurrent queries, the complexity of those queries, the scalability, all of those capabilities that our customers are used to from the Teradata platform, we deliver in state the cloud environment.

I mentioned a little bit earlier, we turned around our investment to have -- around $200 million of investment in terms of developing our cloud product is just going to get better and better over time. We've completely rethought our R&D team so that we move into much more regular and frequent releases of cloud-based technologies and capabilities. So it's a great transformation story. It's great to see that technology coming online for our customers.

Operator

Our last question comes from Zane Chrane from Bernstein Research. Please go ahead.

Zane Chrane -- Bernstein Research -- Analyst

Hi, thanks for fitting me in. Wanted to ask about the ECL process in migration with customers moving to the newer cloud subscription offerings, one of the piece of the feedback we've heard from the early adopters of customers. A couple of years ago that move from on-premise IGW's to subscription or you Teradata in the public powdered managed cloud was that the process of migration and rebuilding the ECL pipelines. What's more labor intensive and clunky than they had expected. So I'm kind of curious, what you've done in the last year or two to simplify and maybe automate the process the data migration and rebuilding the ECL for data in breadth?

And then separately, or actually possibly related. Can you talk about what you're doing to capture the growing opportunity and streaming analytics for data in motion whether it's integrating with something like data flow and Google or Apache beam etc? Thank you.

Mark Culhane -- Chief Financial Officer

Thanks. I'll take a stab at those. So yeah, I think for integration were quite and services has really helped some of that migration effort as well as some of the tools and techniques that we are, we've developed to help and migration. As we look to compare moving I had an existing customer or Teradata to the cloud. We've been able to demonstrate to those customers that given our knowledge of their environment given or the tooling that we have available that we can do it much more effectively and efficiently reducing the timing to value of running Teradata and the cloud and getting the business value that they want from their data delivered to them as quickly as possible.

One of the wins I referred to, actually, in your prepared remarks was a customer that was experience in that challenge in terms of that data migration and they came back and Teradata instead of them move into a cloud native product, we want to move to Teradata and the, we see that is a much easier migration and we know that you and your consulting team can help rise deliver that. So I think we've got a much better value proposition in terms of that, the integration with the cloud native services allows us to integrate with those modern ETL capabilities and that also applies to streaming.

We're seeing a lot more interest in terms of real-time data analytics, especially with 5G and IoT use cases and our streaming capabilities is we have streaming capabilities in the product just now, but we're also investing to develop more streaming capabilities as we put through 2021.

Zane Chrane -- Bernstein Research -- Analyst

I see. And you view the streaming opportunity is being something you'll focused on organic development for it sounds like maybe more so than partnering with open source of 3rd-party vendors, is that the right way to think about it?

Mark Culhane -- Chief Financial Officer

Look, I think what we're thinking about, as we think about Teradata advantage, we're really thinking about it as a platform and so we are building some capabilities and say the product can help secure streaming. But we're also integrating with the cloud service provider's, first party services around streaming to be able to address that. So, I think and leveraging those cloud native capabilities is going to be incredibly important and something our customers really want from is that the one I was to focus as a platform on what we just sell at and they can use some of the first-party services from their sericce device providers to do some of the streaming tape lease. So it's a nice blend of activity.

Zane Chrane -- Bernstein Research -- Analyst

That's great to hear. So it's like a solid strategy, and congrats on a really nice quarter. I think it seems like getting the right capital for the ship is getting it back on track, so congrats.

Mark Culhane -- Chief Financial Officer

Thank you, Zane. Thanks very much. So, I'd like to close out the call today, I'd like to thank you all for joining us. Thank you for the questions. I'm incredibly proud of our progress and I'm really confident and the future. Our continued solid results, particularly in the challenge in teams are a testimony to the hard work of everybody at Teradata and I just really want to thank and congratulate the team on a great Q4, a great 2020 and looking forward to a great 2021 with them. We remain staunchly focused on a cloud first transformation and ensuring that we execute and deliver the best multicloud data platform to gain customers in gaining the greatest advantage from the data assets. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Christopher Lee -- Senior Vice President, Investor Relations

Steve McMillan -- President and Chief Executive Officer

Mark Culhane -- Chief Financial Officer

Wamsi Mohan -- Bank of America. -- Analyst

Tyler Radke -- Citi -- Analyst

Katy Huberty -- Morgan Stanley -- Analyst

Nick Altmann -- Cowen -- Analyst

Peabody -- Barclays -- Analyst

Zane Chrane -- Bernstein Research -- Analyst

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