Good afternoon. My name is Charlie, and I will be your conference operator today. I would like to hand the conference over to your host today, Christopher Lee, Senior Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead.
Good afternoon, and welcome to Teradata's 2021 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. 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 10-K and in the Form 10-Q for the quarter ended June 30, 2021, that is expected to be filed with the SEC tomorrow. 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. The discussion on today's call reflects Teradata's results on a non-GAAP basis, unless indicated otherwise.
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. 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. A replay of this conference call will be available later today on our website. Now, I will turn the call over to Steve.
Good afternoon, everyone. Thanks for joining us today. I am pleased to report Teradata delivered a solid second quarter. Our worldwide sales and operational execution, as well as our continued cost discipline, resulted in year-over-year growth and outperformance in key financial and operational metrics, including 157% growth in public cloud ARR, as well as growth in recurring revenue, non-GAAP EPS, and free cash flow.
We will maintain our executional focus, and with this ongoing attention, we expect to drive sustained revenue growth, margin expansion, and an increased stream of free cash flows. I am also pleased to report our cloud business continues its upward growth trajectory. Our large enterprise-scale customers are accelerating their digital transformation agendas to address the ongoing challenges of the global macro environment. Organizations need data and analytics to provide the business insights that will help them manage through these changing environments.
They need access to all relevant data as they address new customer buying behaviors and remote work models stemming from the pandemic, as well as ever-increasing volumes of data coming from AI, machine learning, 5G, and IoT. Teradata has proven that we can help customers get real insights from their data regardless of where it resides, whether in public cloud or in on-prem environments.
We are competing and winning in a large and growing market. There is not a day that goes by with less data than the previous one. The technologies we deploy help customers get the most value from their data environment at enterprise scale and with outstanding price performance, giving us an advantage in this hypergrowth enterprise market.
Our purpose to transform how businesses work and people live through the power of data guides the alignment of our entire team, and the team executed quite well in Q2. Customers increasingly see Teradata as being uniquely able to support their multi-cloud strategies through our ability to seamlessly support multiple cloud environments on-prem or a hybrid combination.
We have a 40-plus year track record providing unparalleled expertise in helping customers with the largest data environments leverage their volumes of data to get great insights and achieve breakthrough business results. This is certainly a differentiator for us. Our expertise, combined with our powerful Vantage connected multi-cloud platform, is driving cloud growth across our targeted verticals around the globe and with each of the leading cloud service providers. A robust growth in the cloud is coming from both new customers and existing accounts.
Since June of 2020, we've experienced more than 50% growth in cloud customers, and we are adding new logos in each of our three geographic regions. While starting numbers are small, the trend is clear. As companies realize they receive tangible business results from Vantage in the cloud, just as they do with their on-prem environments, they continue to expand their Teradata cloud environment.
Our top 10 customers in terms of cloud ARR at the end of June last year grew significantly year-on-year, and these types of ongoing success and ease of scalability are help driving growth. We further saw broad-based subscription ARR growth in every region and across many of our target industries, including financial services, healthcare, and government, as our customers realize the enterprise scale and price performance of Vantage. Let's look at a few examples of our wins from the quarter.
One of the world's largest automakers based in Europe is a new cloud customer. It chose Teradata to help optimize production as part of its strategic cloud plan. Vantage on AWS will manage significant volumes of IoT data captured from robots on the plant floor to boost quality across its smart manufacturing initiative. One of Europe's top financial services groups and a long-standing Teradata customer is migrating to Vantage on Google Cloud as part of its public cloud transformation strategy.
This customer was an early cloud adopter with Vantage on AWS and considered adding a BigQuery environment. However, our multi-cloud capability demonstrated that Vantage in the cloud would be the best in helping this institution comply with governmental regulations to support its operations in the event of a stressed exit.
Teradata and Accenture are collaborating closely to help this customer continue to grow with Vantage and now in a multi-cloud environment. This customer is a great example of companies realizing the value of Teradata Vantage as the fastest, lowest risk, and most cost-effective path to a modern cloud deployment. We are taking this financial use case forward to other institutions facing the same compliance mandate. Kobe Steel, a major manufacturer in Japan, is another one of our new cloud accounts.
It selected Vantage on AWS to improve analytics in its research division, gaining greater understanding of the properties it produced in its manufacturing processes. As this industrial giant proceeds with digital transformation for all aspects of its business, it plans to add IoT data at the machine and factory level. Banco Itaú, the largest financial institution in Latin America, is migrating its on-prem Teradata environment to Vantage on AWS.
Vantage supports most of the bank's major applications, including cost, purchasing, and regulatory reporting. Here we are positioned as a key partner for the bank well into the future, establishing Vantage as the customer's preferred cloud data warehouse platform and paving the way to deliver increased business value through new use cases. Consumption-based pricing was really important to this customer, enabling it to pay for exactly what it needs and uses.
Many of our large customers now operate in a hybrid cloud environment of connected on-prem and cloud ecosystems. Customers also continue to have substantial data environments on-prem. This portion of our business remains healthy. The enterprise scale customers we serve realize that to win in this new era, they must leverage all of the data possible, all of the time, irrespective of deployment option and often in blended environments. I'd like to share one hybrid and one on-prem win.
A large U.S.-based healthcare services company has chosen Vantage on Azure as it revamps its analytical environment to scale and support aggressive agile development and deployment processes. This customer chose Vantage on Azure as its first step towards implementing a hybrid cloud strategy, leveraging a flexible and transparent consumption pricing model, along with the inherent advantages provided by a cloud infrastructure provisioning.
A Middle Eastern tax authority joined the ranks of Teradata customers in Q2, selecting Vantage on-prem to help it develop analytical use cases, including risk mitigation, fraud prevention, taxpayer segmentation, and behavioral analytics. Working in concert with a local SI, we replaced Oracle and beat a cadre of legacy vendors.
Winning factors included our deep expertise in helping tax authorities around the world, our focus on tangible outcomes for the agency, and showing how Teradata provides the fastest and most reliable path to the cloud when this entity is ready to migrate. This sampling of wins from Q2 are great examples of the differentiated position we hold and our ability to deliver in whatever environment the customer has, connecting a suite of multi-cloud ecosystems or connecting cloud and on-prem as the customer moves through digital transformation.
This is where Teradata excels and is a key reason we have significant momentum across the market. We are continually innovating. In the quarter, we brought out enhancements to QueryGrid, our patented technology that enables a data fabric across multi-cloud ecosystems and multiple data platforms. QueryGrid allows customers to federate queries without requiring unnecessary data movement.
This functionality optimizes SLAs and costs in hybrid and multi-cloud environments, delighting business users who can now seamlessly get access to the data. Here's one recent example. A world-leading manufacturer of consumer electronics is using QueryGrid to enable business agility throughout its extended data ecosystem. With new functionality and enhancements to QueryGrid, performance was improved by orders of magnitude from 10-15 hours to just over three minutes.
The performance boost improves this tech leader's ability to rapidly share data between lines of business and make better informed decisions across its federated enterprise. Our world-class industry data models are another facet of our technology that helps customers get to value faster. In the quarter, we brought out enhancements to our media and entertainment data model. These models are the backbone for modern data management and provide high-value business information to support customers in their vertical industry.
We have also been strengthening our partnerships with leading SIs and ISVs as we grow. In the quarter, we announced a joint initiative with Deloitte to help customers easily and efficiently migrate from on-prem to Vantage in the cloud. We're collaborating with Deloitte to take the complexity out of data migration and equip organizations for a modern cloud future. While customers are recognizing the value in our multi-cloud solutions, so is the industry.
In July, Teradata again garnered recognition of our strength in the cloud in Gartner's new solution comparison for cloud data warehouse platforms. Gartner noted that cloud data warehouses are central to organizations and compared a number of vendors. Teradata scored exceedingly well, receiving the highest score possible in more attributes than any other vendor. We intend to keep earning these types of recognition.
We also remain dedicated to being a socially responsible corporate citizen, and just recently, we issued our annual environmental, social, and governance report. You can find the full report on our website, but I'd like to share a couple of highlights. Our report notes our pledge to the UN Global Compact principles of ethical behavior and human rights, the careful monitoring and reduction of greenhouse gas emissions, and specifically, the reduction of total Scope 1 and Scope 2 emissions of about 40% since 2018.
Our strength lies in our people, and our report notes the various actions we took in support of diversity, equity, and inclusion to ensure an inclusive workplace and to reinforce our commitment to creating a culture of belonging. In 2020, the company participated in the Corporate Equality Index of the Human Rights Campaign Foundation, demonstrating allyship to our LGBTQ employees.
The company scored 90 out of 100, and we are using the inputs and learning how to better support our LGBTQ colleagues. Furthermore, we were recently recognized by Sustainalytics for our conscientious management of ESG issues. The solid performance in the quarter came up from across the organization, reflecting our focus and operational rigor. In our go-to-market organization, our transformation is accelerating.
We have added seasoned sales talent in our regions and have further strengthened our customer success and renewals organization. Complementing our go-to-market efforts and to accelerate our momentum, we have added highly experienced cloud leadership and talent dedicated to driving growth across the leading cloud providers. I am particularly pleased to welcome Claire Bramley as our new CFO. Claire joined us in mid-June from HP, and she has already proven to be a great addition to the management team.
Claire's extensive senior leadership experience in corporate finance and accounting, as well as her deep knowledge of the technology industry, is a perfect fit for us. Claire's appointment continues our commitment to building the strongest team possible to execute our strategy and accelerate profitable growth. I know she is looking forward to spending time with all of you.
As I turn the call over to Claire, I want to reiterate that we are committed to capitalizing upon our differentiated position as the connected multi-cloud data platform for enterprise analytics. We remain relentlessly dedicated to meet and exceed customers' expectations and achieve outstanding business outcomes from their data. Our capabilities across multi-cloud, on-prem, and hybrid are what customers need today and into the foreseeable future, and we will continue to innovate to address tomorrow's needs as well.
We have an incredibly talented team who keeps the customer at the center of all we do. These are the healthy fundamentals of our company, ones that we believe will deliver significant shareholder value. Claire, over to you for a more in-depth look at our financial results and our 2021 outlook.
Thank you, Steve, and good afternoon, everyone. I am excited to join you all today for the first time. I was drawn to this incredible company because we value the same things, world-class technology, a true customer focus, and creating a strong culture that helps people thrive. I am truly honored to be part of this very talented and motivated leadership team as we look to take advantage of the huge opportunities ahead of us.
In the second fiscal quarter, Teradata delivered solid financial and operating results. Here are some of the highlights. Our sales and product teams executed well, delivering in line with our outlook and growing public cloud ARR by 157% year-over-year, and growing recurring revenue by 16% year-over-year as reported.
Our operational execution was very efficient across the board, driving an operating margin of 23.8% and non-GAAP EPS of $0.74, which is above the previous outlook. Our cash collections were strong, enabling us to generate $219 million in free cash flow. These results demonstrate that Teradata combines strong financial fundamentals and operational discipline. Together with our market leading technology, these qualities differentiate Teradata in the market and give us a robust base to continue to grow from.
With regards to ARR, as Steve highlighted, customers are adding mission critical workloads that drive increased adoption and consumption of Vantage in the cloud, on premises, and in hybrid environments. These digital transformation activities resulted in total ARR growing by 9% year-over-year as reported, and by 7% year-over-year in constant currency. Total ARR grew by $22 million sequentially.
We achieved growth in both public cloud and subscription ARR across all three geographical regions year over year and sequentially. Public cloud ARR grew by $15 million sequentially, of which more than half resulted from customers migrating to Vantage in the cloud from on-premises perpetual and subscription licenses. We also continue to experience healthy expansion rates in the cloud, maintaining the positive trends that we have seen over the last several quarters.
To top things off, we added several new name brand customers in the quarter that provide us with future expansion opportunities. We saw strong growth in subscription ARR, driving a 20% increase year over year, and approximately a 5% increase sequentially. We grew in all three regions from both existing and new enterprise customers. These customers are choosing Teradata for the combination of best price and performance at scale in hybrid environments. Now turning to revenue.
Total revenue was $491 million, a 7% increase year-over-year, and 4% in constant currency, driven by strength in all three revenue components. We continue to build on our higher base of recurring revenue, growing 16% year-over-year and 13% in constant currency. We also benefited in the quarter from the timing of revenue recognition of certain on-premises customers expanding or renewing their contract with us.
Similar to last quarter, the economic structure of these arrangements resulted in the upfront recognition of approximately $22 million in recurring revenues in the second quarter. We expect this to recur annually in the same quarter of the following years during the multi-year term of these contracts. This $22 million was approximately $4 million higher than what we forecasted in our second quarter outlook and will lower recurring revenue in the next three quarters by approximately $7 million per quarter.
I plan to cover this again when I update you on our outlook. Both perpetual and consulting revenues performed slightly better than we expected due to demand. We continue to perfectly manage perpetual revenue down given our shift from a perpetual to a subscription model. We also continue to gradually manage a decline in consulting revenue, given our strategic shift to increase collaboration with partners in order to drive higher adoption and consumption of Teradata.
Moving to profitability. Second quarter's gross margin expanded to 64.8%, which was approximately six percentage points higher than last year's second quarter, primarily for four reasons. First, we continue to shift our mix to subscription-based recurring revenue, which carries a higher margin. Second, our continued operational execution drove sustainable efficiencies in both subscription and cloud recurring revenue gross margin.
Third, the margin benefit associated with the upfront recurring revenue recognition. Fourth, rate and mix improvements impacting perpetual and consulting margins. Second quarter's operating margin expanded to 23.8%, significantly ahead of what we anticipated, driven by the combination of benefits flowing through gross margin and a lower cost structure as a result of last year's cost actions and continued cost discipline.
Total operating expenses were down 2% year-over-year and flat sequentially. Consistent with what we said previously, we are reinvesting savings back into the business and will continue to expand our cloud investments into the second half of the year. I'll comment further on this in a few moments. Second quarter earnings per share of $0.74 exceeded our outlook range of $0.47-$0.49 by $0.26 at the midpoint. Of the $0.26, $0.18 flows through to full year EPS.
The remaining $0.08 only benefits the second quarter. The $0.08 includes $0.03 from additional upfront recurring revenue, $0.02 from currency, $0.02 from cost delays, and $0.01 related to tax rates and weighted average share assumptions. Turning to free cash flow and capital allocation. We have already exceeded our annual free cash flow outlook with first half free cash flow of $324 million. In the second quarter, greater operational efficiency on cash collections resulted in free cash flow of $219 million.
Second quarter's DSO was 55 days, which was 12 days better than last quarter and 13 days better than last year. While we look to maintain our collection efficiency, we view 55 days as exceptional and generally not sustainable. We continue to take advantage of our strong balance sheet, buying back stock to offset dilution.
In the second quarter, we repurchased approximately 850,000 shares, or $36 million in total. For the first half of the fiscal year, we spent $121 million on share repurchases, or a return of 37% of year-to-date free cash flow to shareholders. For the full year, we anticipate returning approximately 50% of free cash flow to shareholders via share repurchases, while continuing to make investments in the company to support our strategy for profitable growth and cloud acceleration.
Looking to the second half of the fiscal year, we expect total ARR growth to peak in the fourth quarter, in line with historical seasonality. We anticipate tougher public cloud ARR comparisons in the second half, resulting from Teradata's cloud-first focus that accelerated under Steve's leadership in July of 2020. We could see more upfront recurring revenue.
Although difficult to predict, we have included our best current views for this activity in our raised fiscal 2021 EPS outlook. As noted previously, this activity may impact revenue linearity in the second half of fiscal 2021 and in fiscal 2022. As I mentioned earlier, we are continuing our plans to increase spending in cloud that support R&D and go-to-market activities.
These incremental investments are anticipated to have a $0.02-$0.03 impact on EPS in each quarter in the second half. Free cash flow generation in the second half is expected to be positive, but not as strong as the first half. This is due to the earnings impact of the items previously mentioned, an anticipated increase in billings at the end of the year, which is in line with normal seasonality, and less favorable working capital dynamics, particularly with regard to collections.
With that, let me take you through our outlook. The outlook for the third quarter of fiscal 2021 is public cloud ARR is expected to grow at least 90% year-over-year, or by at least $15 million sequentially. non-GAAP earnings per diluted share to be in the range of $0.30-$0.34. Of the fiscal second quarter operational outperformance, about $0.04 flows through as sustainable improvement in the quarter, offset by the incremental investments I previously mentioned.
We anticipate the tax rate to be between 17%-18%, and the weighted average shares outstanding to be between 113 million-114 million. For the year, we are reaffirming our fiscal 2021 outlook for public cloud and total ARR growth year-over-year.
Public cloud ARR growth is expected to be at least 100%, and total ARR growth is expected to be in the mid to high single-digit percentage range. We are raising several elements of our fiscal 2021 outlook. Total recurring revenue is now expected to grow in the high single- to low double-digit percentage range year-over-year.
Total revenue is now anticipated to grow in the low to mid single-digit percentage range year-over-year. Non-GAAP earnings per diluted share is expected to be in the range of $1.92-$1.96. We anticipate the tax rate to be approximately 23%, and the weighted average shares outstanding to be between 113 and 114 million. Free cash flow for the year is now expected to be at least $400 million.
I am very encouraged by the strength of Teradata's fundamentals and see real opportunity to build on these in the future. Our operational execution and disciplined investing enables Teradata to deliver innovation to our customers, expand adoption and consumption in the modern marketplace, and drive profitable growth. It truly is an exciting time to be at Teradata today. I look forward to speaking with you about how we will execute our future strategy and continue to drive increased shareholder value at our Investor Day on September 9th. With that, let's please open the call for questions. Thank you.
At this time, I would like to remind everyone. Our first question comes from Tyler Radke of Citi. Your line is open. Please go ahead.
Hey, good afternoon, everybody. Thanks for taking my question. I wanted to just ask you generally how you feel about second half pipeline. I know, as you mentioned in the script, you did have a really nice second half last year, but given some of what looks like new customer momentum and some of the migrations you referenced, could you just kind of compare and contrast maybe the cloud pipeline that you see in the second half this year relative to last year and just how we should be thinking about that?
Hey, Tyler. Good to talk to you. This is Steve. We're clearly seeing really good momentum in the marketplace. Even though the motion is new, actually seeing new customer logo wins is something that we see very positive. We do see a good pipeline.
We know that, seasonally, our fourth quarter is our highest quarter from a sales perspective, and we expect similar from a cloud ARR perspective. Pipeline would support that just now. I think the other great thing that we're seeing is the expansion of our existing customers in the cloud. If you think about when we pivoted towards a cloud focus, around the middle of last year, we had some really good product announcements that's helped us build a really good Q3 and Q4.
Our 157% so far, in Q2, we still are very confident on our full-year outlook of 100% year-on-year growth for cloud.
Great. If I could just ask a follow-up, maybe for Claire. I think the third quarter guidance implies cloud ARR growth dipping below 100%, which would be a pretty significant deceleration from the second quarter. Yet it seems like you'd expect that to kind of bounce back higher in Q4. I'm just wondering if you could talk through that dynamic. Is it simply related to a difficult compare from last year, or are you expecting the year to be more back and loaded?
Good afternoon, Tyler. Yeah, Steve just said the fourth quarter does tend to be our biggest quarter, especially with regards to cloud ARR growth. That's in line with our historical seasonality. That is what we've reflected in our Q3 and full year guide.
I think the other point, Tyler, we are a large enterprise-focused organization, and so our deals can be lumpy because they're large. Again, we're confident in our Q3 guide and also in our full-year guide for cloud ARR.
Thank you.
Thanks, Tyler.
Our next question comes from Wamsi Mohan of Bank of America. Your line is open. Please go ahead.
Yes, thank you. Claire, congrats on the new role and look forward to working with you. Can you maybe bridge the 3Q EPS guide quarter on quarter? How do we go from $0.74 - $0.30 something next quarter and then $0.20 or so in the fourth quarter when typically you have the stronger seasonality? If I caught it right, you attributed a few pennies of impact from incremental investments. X that, what really accounts for that large differential?
Good afternoon, Wamsi Mohan, and looking forward to working with you as well. First of all, I'd just like to say we're very pleased with the increased full-year guide that we gave on EPS. We've increased our EPS guide by $0.30, of which, $0.12 is in the second half. To your point, we are seeing linearity between H1 and H2. First of all, we are increasing our investments, particularly in R&D and go-to-market operations to accelerate our growth momentum in the cloud. Also we are seeing the impact of the upfront revenue that we saw in H1, the pull forward that has an impact in H2 also.
It's really the margin flow through from the pull-forward revenue, but you also mentioned that there is some impact, some assumption, your best guess of how much more that there could be in the second half. There is some consideration of that that's baked into the guidance to clarify?
That's correct. There's a modest amount that we factored in to H2 at this time.
Okay, great. Steve, if I could just follow up on the public cloud ARR. I think last quarter you guided to $15 million-$20 million. You came in at the low end of that at $15 million. In the quarter, you're guiding for another at least $15 million sequential increase. Your presence in sort of across more public clouds is more prevalent now.
You've had a little bit longer period to address more customers and use cases. Why shouldn't this be accelerating at a faster pace? I understand the growth is very solid and well above your full-year target. Conceptually, are there anything that you can point to within customer conversations or hesitancy or anything of that sort that would help explain some of the deceleration? Thank you.
Yeah, Wamsi. I think I pointed to some of it. Again, our business can be lumpy due to the large contracts that we execute. We certainly, we always want to set guidance that we are comfortable with, that we know that we don't want to disappoint our investors. We do expect a very strong fourth quarter. To the point from earlier, as we go through the year, we have more difficult compares.
In terms of the shape of the cloud business. We are pretty much in line with the marketplace in terms of the distribution of our cloud customers. We started obviously earlier with AWS, our GCP release was in third quarter from last year. We're seeing really good growth as well with Azure. We're pretty happy with how we are being represented across each of the CSPs.
I think the CSPs are also starting to see the fact that when they've deployed Teradata in their ecosystem, there is no core impact in terms of their sales of first-party services, which, because we're well integrated into those environments now, it's given some momentum and focus from the CSP sales folks to put Teradata into their proposals.
We're also seeing good expansion from our existing customer set from a year-on-year perspective, and the cohorts of customers from each of our prior years are growing nicely. We're still bullish on 100% year-on-year growth for the full year. It'll be focused in the fourth quarter from an achievement perspective, we're really bullish on our cloud business. Thanks for the question, Wamsi.
Thanks, Steve.
Our next question comes from Katy Huberty of Morgan Stanley. Your line is open. Please go ahead.
Thank you. Good afternoon. Claire, welcome. Looking forward to working with you. I want to start by asking Steve a question. Just looking at the ARR metrics year to date relative to where you exited 2020, total ARR is flat, up about $1 million. Cloud ARR is up $33 million. That would imply that there's some churn in your on-prem business.
Can you just talk about what that looks like? Is that maintenance contracts running off? Is that subscription churn that is not being offset? Just want to understand the dynamics there, and also, would you expect this dynamic to normalize by the end of the year, just given some of the lumpiness that you're talking about?
Katy, thanks for the question. I think there's a number of different dynamics that are happening within the business. One is the conversion, as you said, between the different lines inside the business. If we convert subscription business to cloud ARR, clearly that's net neutral.
However, we do see expansion and growth when we execute that conversion, which is positive for us. Every quarter, we experience and anticipate some amount of churn, and the activity this past quarter was not really different from prior quarters, nor are we forecasting anything significantly different from a churn perspective on a year-on-year basis.
Okay. Thank you. Claire, I imagine we'll hear more about this at the Analyst Day, if we look at past subscription transitions, typically a company exits with free cash flow that's one and a half to 2x what the free cash flow of the business was before that transition. For Teradata, that would mean you started at $300 million, you could end up in the $450 million-$600 million range as normalized free cash flow. Is that fair for your business? Is there something different given the hardware component?
Good afternoon, Katy, and thank you for the warm welcome. You're absolutely right. We will be sharing more information with you on our long-term plan and free cash flow generation and capital allocation strategy at our Investor Day in September. One thing I would say is we are pleased with the cash flow generation that we saw in Q2, but also the fact that we were able to increase our full year guide to at least $400 million.
Katy, I think you're absolutely right. You've seen the declines in terms of our perpetual business. To use the term, we've kind of swallowed the fish now from that conversion, and we think the fundamentals of the company are well-positioned to propel us forward.
Great. Thank you.
Our next question comes from Derrick Wood of Cowen. Your line is open. Please go ahead.
Great, thanks. This is actually Nick Altmann on for Derek. Thanks for taking our questions. Maybe to start, there was a report that you guys were working with IBM in outsourcing some of your on-premise support. Can you just confirm whether or not that's true, and maybe just touch on what drove you to make that change and what kind of savings you guys expect there?
Hey there, good to talk with you. As we look at our business operations, we always put the customer at the center of the decisions that we make, and we are always looking to provide the best experience for our Teradata customers around things like on-premise support and execution of that capability. We've, for many years, outsourced elements of our hardware support business to reliable third-party companies.
We don't really get into the details of their names or the details of those agreements. They're just a normal part of how we ensure that we deliver the best possible service to Teradata customers, whilst also enabling us to strategically focus on and invest in our business as we move forward. Clearly, we do expect that to be a win-win for both our customers and Teradata in terms of execution, and it will have positive impact to our gross margin.
Got it. That's helpful. You guys launched consumption-based pricing last year. I guess, what are you guys seeing from your installed base there, just in terms of the initial commitment versus the actual usage relative to your expectations?
Yeah, it's early days still. Our consumption-based pricing clearly has been met with great interest inside the market. A good percentage of our sales engagement opportunities have included at least a request for consumption-based pricing. The really interesting thing, because our customers know their environment, it's a very stable business that they tend to execute on top of Teradata.
They see a real value in terms of our blended pricing program, where they commit a fixed amount to us with bursts of consumption on top. Many are choosing that option. That reduces our volatility from a consumption perspective. We're just really happy to be able to give customers that choice in terms of how they interact and engage with Teradata, but it's been pretty successful. We'll continue to refine and improve our pricing models as we move forward.
Again, I would just point you to the general growth that we're seeing within our cloud ARR. As I mentioned a little bit earlier to one of the other questions, the cohort growth of our existing customers when they're operating in the cloud, where a lot of this consumption-based pricing is active, has been very strong.
Got it. Thanks, guys.
Thank you.
Our next question comes from Matt Hedberg of RBC Capital Markets. Your line is open. Please go ahead.
For Mike, congrats as well on your new role. Looking forward to working with you. Steve, I think what stood out to me is that the success is not just in the base, but it's net new customers, new to franchise. That said, obviously, you've had a lot of success on the cloud side.
Could you talk, though, about just how you think about operating in a hybrid environment, right? Clearly, we have one foot on both sides at this point, but your success in the cloud is interesting, and obviously, I think what's getting all the attention. The hybrid approach, just talk about how well-positioned you think you're there relative to competition.
Yeah, clearly, we see the ability that we have from a hybrid perspective as real differentiation when we compare to cloud native or born in the cloud solutions. Indeed, what we see in our customer base is they are being very judicious about how they utilize and place their data from both a performance and cost perspective. Customers really want that optionality between cloud and on-prem.
They also want to try and avoid that hyperscaler cloud vendor lock-in. A lot of the enterprises we work with are seeing that for many of their use cases, they have the kind of economies of scale that make an on-prem solution very attractive. It was great in the prepared remarks when I referred to a tax authority in the Middle East selecting us over more traditional competition.
That really demonstrates the fact that we can win on-prem, we can give a vision of hybrid cloud to move forward, and the customers can realize value quickly whilst optimizing their existing environments. I think it's a core strength for Teradata as we move forward, especially as financial operations of data management and data in the cloud becomes more important for our customers.
That makes a ton of sense. I guess, obviously, you're investing a bit more now in front of the opportunity, given the success on the cloud side. How do you think about the go-to-market focus? Are you bringing in a new set of reps with a little bit more or a different skill set than maybe previously? Just how do you sort of continue to leverage the products that have obviously had a lot of investments with continuing to kind of think about the go-to-market effort?
Yeah, I think just a couple of things. We announced that we brought on a new go-to-market leader, Todd Cione, at the start of this year. We brought in a new leader of our Americas business in March of this year, they are ramping up really well. They've got a lot of experience in cloud-based selling, and they're bringing and upleveling a lot of talent throughout our organization.
I think the other thing is we're making sure that we have the right incentive plans in place for our sellers to make sure that they're motivated towards selling our capabilities in the cloud. I think one of the investments that we're making in the second half of the year is a real ramp-up of that, if I can use the term hunter capability to go after new logos.
Again, that is a different Teradata strategy than what has been in place previously, and it was really great to see in the quarter new logo wins in each of the three regions, even though that muscle is fairly small inside the company just now.
It really-
Great work. Congrats on the results, guys.
Thanks.
Thank you.
Oh, sure.
Our next question comes from Pat Walravens of JMP. Your line is open. Please go ahead.
Oh, great. Thank you. Let me add my congratulations. Steve, it seems like a lot of things are going right. You've built out the team nicely. What are your top two or three sort of strategic imperatives for the next 12 months?
Yeah, I think it's a great question, Pat, and thanks for asking it. I think what you're going to see in terms of our execution perspective is a number of investments related to our go-to-market organization and to continue and build out that go-to-market organization, the focus on new and additional headcount from new logo hunting, incremental investments in terms of our cloud-focused headcount from a go-to-market perspective.
We're making a lot of investments in terms of enablement, to really help the transition of the sales force to sell our complete portfolio of more modern cloud-based solutions, because with that comes the ability to execute on expansion. Also inside our go-to-market motion, in terms of investment, we are really doubling down on our customer success investment, leveraging our heritage from an industry data model perspective to really take new use cases through our customer success motion to our customer base.
From an R&D perspective, we're really excited about the investments that we're making from an R&D perspective in terms of development of the product. We'll continue to improve the tight integration with the first-party services of the cloud service providers. We're also focused on improving our data management capabilities and data governance capabilities.
Finally, I'd give a highlight and a point too from our technology around QueryGrid. We believe that this positions Teradata uniquely. We can have a Teradata instance in AWS querying native object store data in AWS without that data being in Teradata, and combine it with query results from Teradata in Azure or on-prem, again, in either environment, querying native object store data, combining the results of those queries together to provide business insights that nobody else can provide in the industry.
Our entire focus from a query fabric, a data fabric perspective gives us a unique ability to work with our customers, and it's great to see our customers getting as excited about that capability as we are.
That's great. Thanks very much.
Thanks, Pat.
There are no further questions at this time. Steve McMillan, I turn the call back over to you.
Thank you very much, Charlie. Thanks to everyone for joining us today. We are really proud of the progress that we've made. Our execution and our differentiated multi-cloud data platform is making a difference for customers right now. We're going to continue to drive clear and compelling value for our customers and lasting value for our shareholders.
We hope that you all join us on September 9th for our Investor Day. We're really looking forward to sharing more information on our strategy, our directions, and our long-term growth plans. With the pandemic ongoing, the meeting's going to be conducted virtually. I hope you're all keeping safe. We're going to make sure that we have the opportunity to have live Q&A with a selection of our leadership team and our new leadership team here in Teradata. Have a great day. Thank you.
This concludes today's conference call. You may now disconnect.