Teradata Corp (TDC) 2017 Q1 法說會逐字稿

Good morning.

My name is Carol, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q1 2017 Teradata Earnings Conference Call.

(Operator Instructions)

At this time, I would like to turn the call over to Gregg Swearingen, Vice President of Investor Relations.

Good morning, and thanks for joining us for our 2017 first quarter earnings call.

Victor Lund, Teradata's CEO, will begin our call this morning with an update on our transformation and his view of our progress.

Karen Thomas, EVP of Americas Sales, will then provide an update on our sales force realignment.

Then Steve Scheppmann, Teradata's CFO will discuss our first quarter results.

John Dinning, EVP and Chief Business Officer, is also joining the call this morning and will be available for Q&A.

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 risk and uncertainties that could cause actual results to vary materially.

These risk factors are described in Teradata's 10-K, 10-Q and in other filings with the SEC.

On today's call, we will also be discussing certain non-GAAP financial information, which exclude such items as stock-based compensation expense and other special items including asset impairment, acquisitions, reorganizations and transformation-related costs as well as the Marketing Applications business, which was sold in 2016.

We will also discuss other non-GAAP items such as free cash flow and constant-currency revenue comparisons.

A reconciliation of our non-GAAP results to those reported GAAP results and other information concerning these measures is included in our earnings release and on the investor page of Teradata's website.

A replay of this conference call will be available later today on our site.

Teradata assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results.

And now we'll hear from Vic.

Good morning, everyone, and thank you for joining us on our conference call today.

We delivered a solid quarter financially, I think, this quarter, and at the same time, we're about transforming our company.

And we're going to give you some highlights on that today.

I have a couple of key points that I'm going to go over.

I'm not going to go in detail too deep because Steve and Karen are going to cover that in their comments, but I have a few highlight issues I'd like to cover with you and give you my sense of where we're going.

I guess first and most important to me is that I remain extremely confident in our strategy.

We've had great reception on the part of our customers.

I have had numerous customer visits since we had our last call, and in every case, the customer has been receptive.

The things that we're doing around our offerings, our pricing, the consultative help we're offering are all well received by our customers.

And it's very encouraging to see that, and it gives us a lot of confidence that we're on the right track.

The second point I always look at is what am I hearing back from the field.

And the field is enthused and excited about where we are going.

They're having engagement with our customers in the way they didn't before.

They have new things to talk about, things that our customers are interested in.

And we are about the process of redefining Teradata for our people, but, more importantly, for our customers and when they think about technology, what they expect Teradata has the capabilities to do and what we will deliver.

Those 2 points give me great confidence that our strategy is on track and that we're headed the right direction.

Obviously, 2017, as we laid out in November, is a year of investment.

We took cost out of the business in 2016.

We are redeploying those costs in new ways to execute and grow our strategy.

We are focused on our technology.

We are realigning our field teams to see that they are focused on the accounts that matter to Teradata as opposed to a broad approach to the market.

We are building out our consulting organization, one that is focused on our strategy and will deliver the results that we have promised our shareholders.

And finally, we are working with our customers to make sure they understand the options that Teradata now presents in terms of pricing, deployment and assistance on our analytics.

The next phase is that we must execute well.

And to execute well, we have to be focused on what matters to our strategy and what matters to our customers.

As you can imagine, going through this process is never predictive.

It gets a bit messy.

There are things that occur that you haven't counted on, and our obligation as a company and as a management team is to make sure that we stay focused on the things that matter and are not distracted by the things that do not, that we have the courage to see our strategy through to completion and that we don't lose sight of the promises we've made to our customers, to our people and to our shareholders.

And I can promise you that those things are key to us and we think about them every day.

One of the advantages, I think, of the experience that I've had as I've gone through these things, I know that it's challenging.

I know that investment precedes revenue, and that requires that we as a top management team keep our customers and our people informed, up to speed and ready to handle the challenge.

One of the advantages of my experience over my business career is that I've been involved in successful transformation, and I know that it is not a straight-line process, that it requires an organization that is capable of adapting, changing and meeting the requirements as they roll themselves out.

I'm very pleased to say that our organization is up to that.

Our team has its swagger back.

There's a -- swagger is, in my mind, a term of confidence and not of arrogance.

The first is great and the latter is a death sentence.

And we understand that swagger with confidence is what we have to have.

I tell the team all the time that what we're about is one of the biggest rushes they'll ever have in their business career.

There is nothing like taking on a challenge, figuring it out and executing.

We believe in what we're doing, confident about where we're headed, and we're going to win.

And with that, I'm going to turn it over to Karen, who's going to talk about our field organization a bit and what we're doing there to give you an update on that.

Karen?

Thank you, Vic.

Good morning.

The Americas go-to-market is progressing to plan, and we're realigning our organization to focus on the top 500 analytic opportunities.

To improve on our sales execution, we've been focusing on our account plans.

Our teams have been focused on driving their account planning process to encompass our strategy around our business-led capabilities and our best-in-class technology offerings.

These plans are core to aligning to our key customer challenges and initiatives that they have in place and to align our solutions to best meet those needs.

We've also spent time with our teams in training on our new deployment, purchasing options and our consultative sales approach.

Since this time, over the last quarter, we've seen a nice increase in our pipeline.

Our teams are also effectively positioning our new 4-tier pricing strategy with our customers and prospects, and we're seeing positive results.

As Vic mentioned, our customers are extremely receptive to our new strategy, and every conversation that we have with our customers are positive on our key offerings and what we're providing to them and bringing to the market.

We're focused on working with them to focus on net new business areas to drive value from Teradata solutions and to focus on driving value for their business.

We're seeing strong momentum with our customers on cloud and our subscription model, with a growing pipeline for cloud deployment.

We are seeing our customers take a little longer to make decisions as they consider our various cloud and subscription options.

We do expect it to be short term as we work with our customers on the choices that they now have from Teradata.

In Q1, we had a fantastic win with a very large customer who recommitted to Teradata for 5 years, focused around our business-led analytic approach and then steering with us in terms of how they were going to leverage Teradata in supporting their analytic ecosystem for the future.

This further engages around how our strategy is working in the market and how customers are excited about Teradata.

We're also making great progress on our hiring plans to our new go-to-market model.

We're adding great talent into the organization.

We're focusing in and around business-led consultative sales individuals to align to our strategy around business-led consulting.

And we're also adding net new talent into our consulting organization to focus around opportunities in ecosystem architecture to realign with our customers' needs.

As Vic mentioned, there is tremendous excitement and momentum within our field organization against our 2017 plan and beyond.

Thanks, Karen.

We continue to see strong customer interest and activity in our subscription-based purchase deployment options.

In the first quarter, we added $50 million of subscription-based product revenue that was not included in our reported results but rather will be recognized over time.

We were pleased with this result, which was in line with our expectations that we provided last quarter.

Again, to emphasize, these are subscription-based transactions that were added in Q1.

This is not a cumulative number from prior quarters.

Adding the $50 million of subscription-based revenue to our Q1 reported revenue would equate to an increase of -- from Q1 2016 reported revenue.

We are experiencing good activity with large customers.

For example, during Q1, we had a large U.S. company recommit to Teradata and sign a deal that is structured to generate more than $130 million of revenue over the next 5 years.

I highlight this to demonstrate that we have strong activity in our sales funnel that Karen mentioned, much more than what was reflected in our Q1 revenue.

We are aggressively training and realigning our global sales force to focus on the largest Global 500 analytical opportunities and operationalizing our 2017 go-to-market strategy.

We have more than half of our largest 500 accounts as active customers and have approximately 3/4 covered by our direct sales model.

To provide visibility into our activity as well as highlight the progress we are making on our transformation, we are providing the following metrics.

Tcore growth or growth in Teradata consumption in Q1 increased more than 30% from the Tcore consumption growth in Q1 2016, and we expect Tcore to grow more in 2017 than in 2016.

We had $252 million of recurring revenue in Q1, which was a 7% increase in constant currency from Q1 2016.

Annual recurring revenue or ARR was approximately $1 billion, up 4% from Q1 2016.

And in support of our strategy to help customers achieve high-impact business outcomes, total business consulting revenue, which is one of the key elements that drive our strategy of becoming business outcome-led, increased 10% from Q1 2016.

Now as I discuss our operating results, my comments reflect Teradata's going-forward business on a non-GAAP basis, which exclude stock-based compensation expense, transformation-related charges, the Marketing Apps business sold in 2016 and other special items as identified in our earnings release.

Teradata reported total revenue of $491 million for the first quarter of 2017, which compares with $511 million in Q1 2016.

In addition to providing product and services revenue on our income statement, we are now providing a new schedule in our earnings release, Schedule E, that provides more detail on revenues by type.

I've already mentioned one of these -- some of these metrics, but I also wanted to point out that our subscription, cloud and upgrades revenue increased 10% in constant currency.

Turning to the regions.

Americas revenue decreased 10% in constant currency versus Q1 2016.

However, if you add the subscription-based transaction signed in Q1, the Americas revenue would have increased mid-single digits in constant currency versus 2 -- Q1 2016.

We continue to see increased interest in our subscription-based purchasing options and cloud offerings.

However, as Karen mentioned, it is taking some time for customers to evaluate which of these new options are best for them and then pursue them.

Our international region had a good quarter, with revenue increasing 7% in constant currency.

We haven't seen customers move to our subscription options in the international region at the same pace as the Americas.

However, we have not seen the same level of headwind related to CapEx transactions in the international region as compared to the Americas.

Within international, EMEA revenue increased 10% in constant currency while APJ revenue increased 5% in constant currency.

Product gross margin in the first quarter was 67.5%.

Although we provided you a non-GAAP product gross margin rate of 59.6% when we reported our Q1 2016 results, but recall we no longer capitalize and amortize certain software development expenses in our non-GAAP results, which had a positive impact on our product gross margin rate.

On a comparable basis, product gross margin Q1 2016 would have been 67.2%.

The improvement in progress (sic) [product] gross margin was largely due to a favorable product mix.

Services gross margin in the quarter was 42.8%, a decrease from the 46.6% in Q1 2016.

Service margins were negatively impacted by an increase in milestone-based consulting projects, where we incur and expense the consulting services costs before we will recognize the corresponding revenue, which should provide a margin benefit in a future quarter; as well as the investments we are making in analytical business consulting, as I described before as being a driver of our business-led strategy.

These investments will impact services gross margins throughout the course of the year.

As a result, overall gross margin was 51.1% in the quarter compared to 54.2% in Q1 2016.

Turning to operating expenses.

SG&A expense of $127 million was down 3% from Q1 2016.

As expected, R&D was up meaningfully.

Reflecting in the change of capitalization of certain software development costs or FAS 86, research and development expense of $66 million was $12 million or 22% higher than Q1 2016.

However, keep in mind R&D is a major area of investment for Teradata's business transformation.

Of the $100 million of increased OpEx expenses in 2017 that we described at our Analyst Day, approximately half will be in R&D.

As a result of lower revenue, lower services gross margin and the investments we are making for Teradata's business transformation, operating margin in the first quarter was 11.8% compared to 18% in Q1 2016.

Our non-GAAP effective tax rate for the first quarter was 35.1% versus 30.3% in the same period in 2016.

The increase in the effective tax rate period-over-period was largely driven by a favorable discrete item recognized in Q1 2016 as well as the higher percentage rate impact of normal discrete items driven by the lower pretax earning denominator period-over-period.

On an annualized basis, we expect our full year 2017 non-GAAP effective tax rate to be approximately 27% compared to the full year 2016 of 26%.

Turning to cash flow.

We got off to a solid start for the year.

Net cash provided by operating activities was $248 million in Q1 2017 compared to $250 million generated in Q1 2016.

After $18 million of capital expenditures and additions to capitalized software versus $26 million in Q1 2016, we generated $230 million of free cash flow versus $224 million of free cash flow generated in Q1 2016.

The increase in free cash flow from Q1 2017 versus Q1 2016 was primarily due to the timing of working capital items, mainly collections and receivables.

I do want to point out that due to our change in accounting method, away from capitalization of certain software development costs, the additions to capitalized software development costs will be much smaller going forward, most likely a couple of million dollars each quarter, while, due to our transformation, capital investments for equipment will likely increase meaningfully as we invest to build up and support our managed cloud and subscription offerings.

In Q1, capital deployed for property and equipment increased 100% from $8 million in Q1 2016 to $16 million.

For the full year, we continue to expect free cash flow to be approximately $250 million, plus or minus $25 million.

So even though we got off to a good start in Q1 in terms of free cash flow generation, we expect to be making more capital investments in equipment as we move through the remainder of the year associated with our subscription-based purchasing options.

During Q1, we used $43 million of domestic cash to repurchase approximately 1.4 million shares of our common stock.

As of the end of March, we had approximately $485 million of remaining authorization in our open-market share repurchase program.

As of March 31, 2017, we had total debt of $563 million, all in the form of a term loan.

As Teradata's customers have begun to shift to the company's new cloud and subscription-based offerings, it is difficult to estimate how much full year 2017 reported revenue could be impact by the ratable manner in which revenue is recognized for these new purchasing options.

Given the likely impact of these uncertainties, Teradata will not be providing 2017 full year revenue or earnings per share guidance.

However, our most current forecast is still for full year revenue to be in line with our prior view that 2017 reported revenue could likely be down 5% to 10% from 2016.

We are providing our expectations for Q2, but these projections are highly dependent on key operating assumptions, including the conversion rate to subscription-based transactions.

For Q2, we project revenue in the $510 million to $530 million range and anticipate a non-GAAP EPS in the $0.25 to $0.30 range.

We estimate that product gross margin may be about the same as our Q2 2016 product gross margin, slightly down from Q1 but in the mid-60s.

Services gross margin is estimated to approximate the Q1 services gross margin rate in the low 40s as we continue to invest in the business.

We estimate that SG&A will be up, on a percentage basis, high single digits as we hire additional sales and sales support resources and invest in our infrastructure, all as planned.

R&D expense is likely to increase 30% to 40% from Q2 2016 as we invest heavily in cloud, core analytical solutions as well as field development for our analytical business solutions.

Now let me briefly update you on ASC 606, the new revenue recognition rules that we will adopt effective Q1 2018.

We plan to use the cumulative effect transition approach, which means we will not restate prior periods but we will provide you with a set of financials for 2018 that will align with the basis on which we reported on in 2017 so that you can see the year-over-year comparison.

This approach will then provide you with a clear picture of how the conversion to subscription affects our 2018 financial performance since we will provide you the data for both the new revenue recognition approach as well as what it would have looked like under the prior revenue recognition rules.

We are still refining our estimates as to the impact of adopting ASC 606.

But from what we see now, the material impact will be to the subscription-structured transactions.

Those that we add in 2017 that may not be fully reflected in our revenue in the future periods, depending on how they're structured, and those that we had in 2018 and beyond may be recognized upfront instead of over time under the current rules.

However, as you likely know, this change in how we recognize revenue will not have an impact on our cash flows.

In summary, our technology remains best of breed as recognized by our customers and industry analysts.

Our technology leadership has never been challenged.

The need for data and analytics remains a top priority, and we are seeing that a majority of companies want a proven partner to help them, one who offers end-to-end solutions and delivers real business value in a seamless and pragmatic way.

However, the way customers want to procure and utilize technology has definitely changed.

We continue to change as well to make Teradata easier to buy, with new subscription licensing options and pricing tiers; as well as making Teradata easier to deploy with our hybrid cloud offerings, which provide portability of the license no matter where deployed, on premise, in a private cloud, a public cloud or in our managed cloud.

As a result, we are well positioned to continue to drive more consumption of Teradata.

In Q1, we continued to execute against our transformation road map to address this need, especially in terms of advancing our technology and the ways it can be purchased and deployed; hiring experienced cloud talent and we continue to broaden our portfolio of cloud solutions; realigning our sales force to intensify our focus on largest revenue opportunities as well as to hire new sales and sales support talent that have experience selling cloud and subscription-based offerings; investing in our infrastructure, including the sales process and the tools we use to manage our business; and finally, investing in our global analytical consulting group to increase our capabilities to reach business users with solutions that are business outcome-led.

And with that, we are ready to take questions.

(Operator Instructions) And our first question this morning is from Wamsi Mohan from Bank of America Merrill Lynch.

Can you talk about the profile of the customers that are adopting the subscription offerings and the mode of deployment that they're choosing?

Is it largely on prem or cloud?

Are they leaving the hardware, buying hardware?

What are you seeing so far?

And Steve, could you just clarify, in your guide, the tax rate that you're embedding for Q2 and expectation of how much subscription transition you're expecting in the Q2 revenue guide relative to the $50 million this quarter?

Wamsi, so we're seeing our customers look at our subscription models across very different profiles.

So we don't have one standard profile that are actually reviewing this.

As customers look at different deployment options in terms of how they're going to consume Teradata for now and in the future, they're evaluating how our subscription model will help them be able to consume Teradata in a noncapital way.

So we don't have a specific profile, but we're seeing our customers review our subscription model across all types of our customer models, both large and medium, small.

Yes, Wamsi.

And what I want to do, touch base with you on the effective tax rate.

Yes, the effective tax rate in Q1 is higher due to discrete items.

But Q2, I'm looking for a rate similar to -- in the low 30s with respect to those discrete items.

But for the year, that effective tax rate, for a non-GAAP basis, so approximately 27%, based on last year's 26%.

So I see it normalizing -- coming down in the second half of the year.

But it's purely driven by discrete items in this first half.

And with respect to subscription or perpetual equivalent into Q2, the number I'm looking at or targeting in Q2 compared to the $50 million in Q1, which in Q1, was substantially 1 large customer, I'm targeting about $30 million to $40 million in Q2.

But that's driven by a handful of customers.

So again, we're seeing good interest in the subscription model in the funnel and that one large customer driving the Q2 target range of $30 million to $40 million.

Your next question comes from Derrick Wood from Cowen and Company.

I wanted to reconcile a couple of numbers.

You said you had a $50 million subscription contract with a large customer, and I think you mentioned $130 million commitment from what sounded to be the same customer.

Is the delta there a consulting engagement?

Maybe just reconcile the difference between the 2 numbers.

No, Derrick, the $130 million is the total value over the 5-year period for that.

And this particular customer, there is hardware, professional services, software, maintenance, all components in the -- in that entire transaction.

And again, what makes it difficult to predict for the year with respect to this conversion to subscription is that the -- how does the customer handle the hardware side.

And this particular customer bought the hardware.

Another large transaction last year, they rented the hardware.

We have another large customer looking at both options.

So that creates a lot of difficult in predicting what that transition rate might be for that transition to subscription.

But there is basically 4 components: the term license for the software, the maintenance and upgrades, the hardware and then the consulting services.

So there's basically 4 components that roll up into that $130 million.

And yes, that was the same customer, that large customer in that $50 million.

Got it.

That's helpful.

And then, Karen or Steve, I mean, you mentioned longer decision cycles out there.

Your -- relative to your guide for Q2, it's still up mid-single digit, which is not so dissimilar from prior Q2s, and you are going through a model shift.

So your guidance doesn't look like there's any meaningful deal pushouts.

But some of your commentary kind of suggested that could be going on.

So I just was hoping to drill in on that a little bit.

So I think that what we're seeing right now is just a -- as our customers are evaluating our different options in terms of how they are reviewing our model.

So I don't think we're seeing any significant changes from prior year just in terms of how our customers are evaluating our options.

And I think, remember, that the prior year wasn't a kickass quarter, right?

So part of that is comparison.

Our next question comes from Raimo Lenschow from Barclays.

So first quick one is, Karen, can you talk about how is your incentive structure for the sales force?

Are you kind of having them pushing any particular SKU or a way to -- for a customer to purchases?

Or are you going totally neutral and the customer really has to decide and your sales guys get compensated accordingly?

Yes.

Our compensation is much more neutral-based, so that is based on what the customer wants to leverage from our product set.

So whether that's subscription-based, whether that's cloud-based or whether that's perpetual, our field is incented to do what's best for the customer.

Okay.

And the $130 million deal, so -- I mean like that's obviously like -- we always thought like subscription is basically less upfront commitment from the client, and over time, they probably pay more because it's a better lifetime value for you guys.

These are like still very big commitments that we see there.

Are these kind of in the category of what we used to call kind of floor sweeps and this is a guy that kind of now has a floor sweep coming up and needs to make a decision?

Or how do I have to think about these kind of big deployments?

So these deployments could take on the characterization of a floor sweep but not all.

We're looking at our customers in terms of how they're going to leverage our capabilities from a term or subscription basis in terms of how they drive increased consumption for Teradata.

So those models give them much more flexibility when they're considering whether they want to deploy in an on-premise or they're looking to deploy within the cloud.

It gives them those opportunities to look at the longer term and flexibility around how they may want to drive consumption with Teradata.

And that could be in terms of a move to our new IntelliFlex platform or in our hybrid cloud.

So it's not just about a floor sweep, but it's about providing them with a flexible alternative in terms of how they want to grow.

Our next question comes from Jesse Hulsing from Goldman Sachs.

Steve, can you clarify this quarter what you mean by subscription bookings?

I think last quarter, you said it's perpetual equivalent metric.

Is that still the case when you say $50 million?

And can you give us a sense of what the conversion rate is?

And then, last quarter, you provided some guidance as to what you expected for the first quarter for that metric.

What are you expecting for the second quarter?

Yes, Jesse.

What we're expecting is that $30 million to $40 million range, and it's made up of more number of customers in that bundle, where Q1, that target of $50 million was primarily driven by one large transaction, that $130 million 5-year transaction.

And so what I see very optimistically in that funnel is, again, the number of customers entertaining that pricing deployment option.

And so that $30 million to $40 million is made up of more customers than Q1.

Now when I share that number, that is a perpetual equivalent of that subscription.

So it's not -- it's, of that transaction, what that transaction -- what it equated to on a perpetual basis for hardware, software.

And also, Jesse, I should say that will include that same number as it relates from the cloud activity -- or the cloud transaction, too, what that perpetual -- or hardware software equivalent would have been on a perpetual basis.

Okay, that's helpful.

And it sounds like you're having traction with bigger deployments or at least one big customer has moved in that direction.

But I guess, when you look at your pipeline or early customers of the new kind of Teradata Cloud options, how would you categorize the usage here?

Is this primarily experimental, test and development, kind of kicking the tires type of deployments or smaller sidecar type of deployments?

Or are you seeing full-scale movement of larger data warehouses to the cloud?

So this is Vic.

I -- we're seeing everything.

I think we're finding a customer base who is very curious about the cloud, who wants to understand what it is but are trying to sort out -- because, as you all know, there's not just a cloud.

There's multiple deployment options, and customers are trying to sort out exactly what that deployment option would look like.

But we have some big customers who are looking at going completely into the cloud and trying to figure out what that means to them.

We've got others that are doing other things.

But we've got -- up and ready for them to try all things.

But I think this is a new -- for large customers, to figure out what they want to deploy in the cloud is not a simple "make a decision in 1 month and [run at it]." You have to think about where your data is stored, what kind of latency you can live with, the difficulty of moving data.

There's all kinds of things that have to be considered.

So we're seeing people in all sizes in our funnel who are looking at it.

So there's, again, much like Karen said, not one classification we put out there.

But they're looking at it.

We're doing our best to make sure they think about what is best for their deployment options and how they do that and helping them think about what the issues are they've got to be considering.

So across the board, everybody's interested in the cloud.

I don't believe that everybody will move everything to the cloud.

And a lot of our big customers are looking at keeping a substantial portion on prem.

Some of them are looking at private clouds.

And so it's -- the gamut runs.

And I think the larger the company, the more complex, obviously, those decisions are.

Our next question comes from Katy Huberty from Morgan Stanley.

I just want to come back to the second quarter guidance.

If you look, the past 3 years, you were up 7% to 10% sequentially in 2Q on revenue.

You're guiding 4% to 8%, and yet, there's not as much of a headwind on subscription revenue based on that $30 million to $40 million range, so a little bit lighter than seasonal.

And also, if I look at it year-on-year, adding back that $30 million to $40 million, it would imply that revenue is at best flat, potentially down year-on-year versus the growth in the first quarter.

So can you just compare your outlook for 2Q versus the better first quarter?

Is this just a function of lumpiness and you had the big customer win in the first quarter and you don't expect a big customer win in the second quarter?

Is there something else going on?

And then just related to that, could you comment on how much of the $130 million 5-year deal was recognized in revenue in 1Q?

Yes, Katy.

I'll start with that, and then, Karen, if you can jump in here.

Katy, no real changes in the methodology or the approach for the outlook -- for setting up our expectations in Q2.

Yes, it comes down to that traditional Teradata, we're lumpy.

Particularly in the quarter, that one large transaction, very lumpy in Q1.

So really, nothing changes with respect to any implications or what does that imply with respect to our -- the interest in Teradata's technology and solutions.

So I don't see anything that creates me any uneasiness as we look at the Q2 funnel and the Q2 expectations.

What I see from the -- from that large transaction, again, they bought the hardware upfront.

So there is a piece of it if you look at that, call it, $130 million.

Let's call it, 1/5 of that -- 1/6 of that is on the hardware side, and the rest would be ratable over that period of time.

And then, again, it depends on the PS side because PS will be more as incurred.

And then the maintenance and the software, the term license will be over that 5-year period.

So the hardware piece is the one that's upfront on it . So Karen, anything you want to add on the sales activity in Q3?

Yes.

Thanks, Steve.

Yes, I think I would just add that our Q2 activity, we're obviously seeing a strong funnel growth happening there.

We're also seeing many more volume of transactions versus the large sale that we saw in Q1.

So I think it's not that we're seeing a slowdown.

We're just seeing more volume and a growing pipeline for Q2 versus the larger transaction that we saw in Q1.

Got it.

And Steve, just a quick follow-up.

Was -- is all the hardware booked in 1Q?

Or does the hardware roll out over multiple quarters associated with that deal?

It's all -- Katy, in this transaction, it's all Q1.

Our next question comes from Brad Reback from Stifel.

Vic, can you give us an update on the CEO search?

I know in your proxy, you talked about looking at internal candidates?

So what's the expectation of having a permanent CEO some time this year?

We already have one.

It's me.

So in terms of who's going to take over for me when that time is right, we are in the midst of building a pipeline here, getting executives here internally ready, expanding their capabilities, their experience and everything.

And by the time the board decides to make that decision, obviously, they'll think about all fiduciary responsibility they have.

But I think, as I've said to our team and I've said to our board, and the board's on task with this, I have 2 responsibilities.

The first is to make sure that the strategy is executed and works well, and the second is to make sure there's a smooth transition to the next CEO.

So we're on that.

I think about it all the time, doing a lot of work around it, helping our team come up to speed.

And then when the time is right, the board will consider candidates internally.

And if they feel that, from a fiduciary responsibility, they have to look externally, they'll do that as well.

So we're all about it.

I'm here for a while and see that this works and see that we have a smooth transition.

That's my commitment to the board and the organization.

Our next question comes from Fatima Boolani from UBS.

I apologize if I missed this, but just wanted to get a sense of your priorities around bolstering the consulting organization.

I know the margins were down this quarter for the unit, and it's been a focus area for you, as I think back to the Analyst Day.

So just wondering about the revenue acceleration cadence for that business unit and the sort of requisite investments you expect to keep that capacity up.

Okay.

Well so -- well, you didn't miss anything, I don't think, about our forward-looking things.

So obviously, consulting for us in this strategy is the biggest change in our customers' perception of where we are and where we're going.

So Karen talked about our account plans.

We put those together.

We're looking at those and then figuring out what kind of consulting capabilities do we have to lay against that.

And so we're working on it.

We have people -- we're matching all our people up.

And I would say that our consulting, in Europe, it's working far better.

We had an organization in place there, and I think you see that in their revenue this quarter.

In the U.S., we are building more of an organization.

I think we didn't have quite the depth and capability in the U.S. that we had in Europe, and so we're pulling against that, trying to get that all in place.

We are -- we formed a formal plan.

We've got -- we brought in new talent from the outside that understands how to help our existing talent deploy against the business-led model.

So -- and then we're figuring out exactly how is the best way to do that because, at the end of the day, we aren't trying to be a consulting organization.

We're trying to consult in a way that helps our customers, and we have to think about and make sure that, that has a pull-through effect over time, right?

We aren't interested in just doing consulting for consulting sake.

That's not where we're going.

We're looking for help and where we can drive that.

And so we're in the middle of that.

We're working at it.

I think the second quarter is going to be another quarter for us to build on that and get that put together.

And I really look for the acceleration of that to occur in the second half of the year.

As you can imagine, in any transition you have, when you go through this, there is a bit of a pause internally about exactly what does this mean, how do I go about that.

And I think we saw that in the first quarter.

We -- as we figured out the new account plans and where we were going, we had -- our utilization wasn't what we've seen in the past.

But we -- as Karen mentioned, she's completed our account plans.

We're putting those together, and we will start deploying and facilitating with some new talent to join our organization, and a lot of them are here already, and start deploying that.

So I would think, in all honesty, I'd love to tell you it's going to all happen in the second quarter, but I think there's a part of change -- change takes time.

And I would say the second half of the year is when we'll start to see some acceleration in the consulting.

But it's on track, it's doing exactly what we thought it would.

This is a change for us, a change for the perception of our customers.

And -- but it's being well received.

And we're coming out, and I just wish we had more -- the #1 area, interestingly, that we have seen a quick and broad-based interest from our consulting organization is in ecosystem consulting.

And so it's what I talked about before about customers trying to figure out how -- what should their ecosystem look like, how do you analyze data, how do you go about it.

And that's where our UDA comes in and everything.

But that, I think, has been -- I mean, everybody is really, really anxious for us to do that.

So we're trying to build those teams as fast as we can to get out and handle the request of our customers.

And just interesting things.

I haven't had a single customer visit where they didn't ask for assistance in that.

Some of them, I've offered it, and over half, I didn't, they'd just ask.

So I think there's a lot of opportunity here.

We just got to make sure when we roll those teams out, they're ready, they're confident and they deliver what our customers expect of Teradata.

And that's an honest assessment of where they are and our views about how they should go forward.

So that's where we are on at.

This is the one area of most where it's -- it's the messiest part for us moving forward.

That's really helpful context, Vic.

And another one, if I could sneak one in for Steve.

I don't know if you're planning on suspending the maintenance consulting breakout.

It sounds like it collapsed just into the services line.

But just looking back historically, maintenance revenues, while having declined, had been fairly resilient in spite the downtick on the product growth.

So I'm wondering what are some of the puts and takes in the resilience of that, this revenue line.

And that's it for me.

Yes.

And I should clarify.

You should see in the supplemental schedules that we will continue on that maintenance and the consulting breakdown.

So that information will be supplied on those schedules.

It should be on the Schedule E that I referenced to in the prepared remarks and in the earnings release.

So you should see that coming through.

And there -- again, from a performance perspective, nothing unusual in that -- in those numbers in Q1 that would indicate any trend that I would want to highlight at this point in time.

Our next question comes from Abhey Lamba from Mizuho Securities.

Steve, just continuing on that last topic.

Maintenance last -- I know you mentioned you don't want to extrapolate much from Q1.

But when we look at last year as well, maintenance grew by 4% while your subscription was up about 2% and your products were down about 20%.

So how long can maintenance continue to grow if products are declining at that pace?

Is there a chance that maintenance can start kind of decelerating or declining?

Yes.

What we see on the maintenance side is, yes, new product is one driver for the maintenance revenue.

But again, as we continue to expand the consumption of Teradata and the focus on the 500, I still see maintenance still growing low to mid-single digits in '17 where the -- hardware maintenance.

The software maintenance will continue to grow.

The hardware maintenance will be relatively flat, but there still will be growth in maintenance in '17.

Again, as Karen referred to before, key item, I think -- I can't remember who asked on the floor sweeps.

Our whole focus on these transactions is to grow, increase the consumption of Teradata, not focusing on a pure floor sweep play and the consumption does not grow.

Our whole focus on these is driving the increased consumption.

And with that, the software maintenance of that should generally continue to grow even though new customers or product revenue may be down.

But our whole focus on new customers is that target largest 500 analytical opportunities in the world.

And so I could -- again, long story -- long answer longer.

Software maintenance, increasing; hardware maintenance, relatively flat, but the overall maintenance should increase low to mid-single digits.

Got it.

And are we still on track for spending $100 million incrementally in OpEx this year?

And how was your hiring versus the plan in Q1?

Could we see some escalation in expenses as we go

(technical difficulty)

Still on track for the $100 million increase in spending on OpEx over '16.

But I want to leave you with the message that we're constantly evaluating how we optimize and leverage all of our resources and the investments that we make in this transformation.

So yes, that's where our focus is, but it is a constant evaluation and challenging our people on those investments as we go through '17.

But right now, still targeting the $100 million OpEx increase over '16.

Our next question comes from Philip Winslow from Wells Fargo.

This is actually Michael Baresich on for Phil.

Appreciate you guys breaking out the historical perpetual versus cloud and subscription licenses.

I was wondering -- you've been very helpful on also providing the kind of like perpetual equivalent now that you're rolling out more and more subscription deals.

But prior to 3Q of 2016, I was wondering if there was any kind of equivalent of that going back a little bit further or if we should look at the -- for example $120 million and $154 million in licenses and products as kind of the all-encompassing, with everything else being more traditional subscription.

Yes.

It was -- prior to Q4, it was relatively one large customer, and that -- for that first 3 quarters, less than $50 million and one large customer.

The activity really picked up in Q4 and forward.

And so when we look at year-over-year comparisons, we'll start giving you that dynamic also where you take out the prior quarter 1, too.

But right now, we're just referring to, as you indicated, the perpetual equivalent as it relates to that specific transaction.

There's really nothing material in there from the prior periods.

Our next question comes from Greg McDowell from JMP Securities.

I want to ask a question maybe stepping away from the financial model for a minute.

Vic, in your prepared remarks, you talked about some of the things that matter and things that don't matter.

And I was just hoping that you could expand a little bit on -- as we on The Street sit here and analyze Teradata and how the transformation is going -- and you rolled it out back in November, so here we are sitting 5, 6 months later.

Maybe what are some of the things that matter and things that don't matter?

And maybe where is the transformation progressing as you expected?

And maybe where is the transformation, so far, not progressing as you originally expected when you rolled out the plan back in November?

Okay.

So a broad question and a good question.

I said in November, and I'll repeat here, this is early days, right?

It's like 1 quarter into rolling it out and, as you can imagine, a great deal of activity.

I really -- I don't have any that aren't progressing as well as -- so I'll step back.

The things that are working well, I guess, the things that matter: first, customer reception, number one.

Customer reception, right?

You can have the greatest strategy in the world and if your customers don't like what you're doing, then it is -- I mean, that's unreliable, right?

So -- but we've had great, great reception by our customers.

Now -- and you've heard some discussions.

There's been questions asked around, "How have your customers been?" They really like what we're saying.

They like what we're doing.

But this is a change for them and for us.

And so working through that.

It's a -- so that everybody gets up to speed.

It's been -- but we've had great customer reception, and so I'm very pleased with that.

Our team is excited and loves that they have more to talk about.

I think the product folks are great.

They've had a lot of stuff, they get to do it, they have money to do it the way they need to do it now.

So all those things are great.

What are -- I wouldn't say things that aren't going away, but what are the things that I think we're pushing on hardest right now that are harder to put right in a box and grasp.

So not everything is roses and all that kind of stuff.

I think this consulting organization, make sure we get it right.

How do we go to the customer?

How are we going to lead with this?

And not -- and make sure that we're careful -- I said all this, but to expand a little bit, make sure that we are careful when we build a consulting organization and that consulting organization is focused on bringing good outcomes for our customers, but also Teradata.

So not, as I say continue, I don't want to build a consulting organization.

I want to have consulting that is a complement to the Teradata organization and to our customers.

So that is an issue that we're working through, and I think -- I would say that is the one that we're still mixing the cake on the most doing that.

I think another issue any time you go through a transformation and not unexpected, I mean this is the way things go, is that in the early stages, things are a bit messy.

And so making sure that we are keeping things funneled and making sure that we are communicating with the field all the time.

As you can imagine, when you go out and start talking to an organization about this and figuring out how that works, it takes a little bit of time.

And particularly, our field organization, our sales teams who are focused with our customers, making sure that they are prepared, can handle questions from the customer and do a good job on that, the way we expect it.

And I think in that area, obviously, we have to figure out how this works, and I think that's an issue where we've had to work real hard to make sure that we keep our teams informed.

And you don't always do that perfect in the early stages.

So I'd say that's another area that we're working on, but it's there.

I don't want to sound like I'm just repeating, and I don't want you to think I'm cavalier about this.

This is a very difficult challenge we're undertaking.

But we've thought about it, we're planning against it, we're motivated on it.

I think we're doing the right things about it.

Part of why I don't panic about stuff, I've done this before.

I didn't -- in the early stages of any turnaround, you have this.

It's not clear, and it's -- we're not being evasive about what we say and what we don't say.

I just think for a little bit here, we are going to sort out exactly what this looks like.

And you guys probably don't remember this, but a year ago, when I did my first conference call, I said, look, if I can't tell you exactly what the answer is or pretty close what the answer is, I'm not going to tell you.

I'll tell you what I know, and I'm not going to tell you what -- I'm not going to make up stuff just to give you an answer.

And I am very enthusiastic about our strategy.

But actually, the minute details on how that works out, we're still sorting some of that clarity out.

Customer reception of our offerings, how does that work?

How does the consulting organization actually deploy?

I mean, we're there, we're pushing against it, but we're going to have learnings.

And one of the key elements of any successful transformation is that you take that input from the field and make sure you change and modify and tweak your strategy to execute as well as you can and to drive it.

And that's -- we're just in that first messy stage.

Investment exceeds -- or precedes -- not exceeds.

Investment precedes revenue.

And we're just in that -- this is the messiest part you can be in, in a transformation, and that's where we are.

But I'm not -- really not that concerned about it because I really expected this to be a bit messy.

So we're driving against it.

And so that's where we are, and -- but I really do -- I'm not -- I feel good about where we are.

And the thing that drives me the most -- makes me the most confident about it is just that our customers have been so receptive of this.

Our field is receptive.

Our sales teams are excited.

We're starting to see our funnel build.

But we -- this is new to us, and it's new to our customers.

So we've got to work through and make it happen.

But that's a part of change.

It's just a part of change.

And it's -- we're going to get it done.

We're on task.

This is the year -- and we told you in November, it would be hard for us to tell you exactly what it'd look like.

And you know what?

We were right.

This can be one of those years where it's going to be hard to tell you exactly.

Now as the year goes on, we clearly should get more reception and be able to tell it.

But I'm -- I really am very comfortable of where we are.

And I think our teams are behind us, and our customers like what we're saying.

We just -- we've got to make sure we execute, execute and stay focused on what we want to do.

And so I mean, I'm thrilled that you guys are all interested.

I'm thrilled that our organization is interested.

But mostly, I'm thrilled that our customers like what we're saying.

So that's where we are.

I'm very -- I'm pretty calm.

I'm sleeping at night.

And -- but if that's because -- we live with this every day.

I'm -- I spend every day watching and looking at what we're doing, taking what the input is and get what issues do we have to deal.

And I spend an awful lot of time just dealing with this transition.

It's what I focus on every day, to make sure that we don't mistakes that are unnecessary and that we are driving forward to completion and delivering to our people and to our board and, most importantly, to our shareholders what we promised out of this.

And unfortunately, we have no further time for questions today.

I'll turn the call back over for closing remarks.

Well, this is Vic.

What I'm supposed to say, I think I just did.

I don't have a lot to add to that.

I really am excited about where we are.

I'm confident about where we are, and we will keep you as fully informed as we can.

But we're exactly where we thought we would be.

And we got to fine-tune stuff.

We're doing it.

And -- but I really do feel good about where we are.

And this is, I guess, one prediction we made that we absolutely can predict is it's going to be messy this year, but that's to be expected.

And we're -- we have a process in place to manage that and to make sure that the outcome is what we expect it to be and what you all hope it will be.

And we will give you more update next quarter.

And I think next quarter, you can expect that we'll have a little more clarity around issues than we do today.

So -- and third quarter, I'll give you more than that.

So that's my promise to you, and we'll make sure we keep tracking the metrics.

I mean we had some good metrics this quarter, if you look at it.

And I think Steve talked about them, and when you get a chance to think about what he said and all that, we've got good metrics that are driving our Tcore consumption being up.

And so we're feeling good about where we're going.

With that, I'd like to thank you all for joining us, and we will be on next quarter.

Thank you so much.

Goodbye.

This concludes today's conference.

You may now disconnect.