Teradata Corp (TDC) 2017 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Q2 2017 Teradata Earnings Conference Call.

(Operator Instructions) At this time, I would like to turn the call over to Gregg Swearingen.

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

Victor Lund, Teradata's CEO, will begin our call this morning with an update on our progress in transforming Teradata.

Oliver Ratzesberger, EVP and Chief Product Officer, will then provide an update on the progress we've made with our Teradata Everywhere strategy.

Then CFO, Steve Scheppmann, will discuss our second quarter results as well as our expectations for 2017.

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 vary materially.

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

On today's call, we'll also we discussing certain non-GAAP financial information, which exclude such items as stock-based compensation expense and other special items described in our earnings release, including asset impairments, acquisition, reorganization and transformation related costs; and 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 our 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 website.

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.

Now we'll hear from Vic.

Thank you, Greg.

Our discussions to date have laid out our strategy, which is business outcome-led and technology-enabled.

This strategy is extremely relevant today.

Customers face many challenges driving high impact business outcomes from Data and Analytics, and they need help.

Our strategy is focused on our customer success.

We help customers prioritize and deliver their highest impact analytic use cases.

We ensure that our customers deploy the best fit architectures to meet their unique data and analytic priorities.

And we implement, support and manage the most integrated and scalable analytical ecosystem technology to ensure our customers can build lasting analytic capabilities.

Today, I'm going to give a brief update on our progress.

First and foremost, our customers love the capabilities of Teradata software and our teams that support it.

However, a year ago, they didn't like our pricing and deployment rigidity, especially regarding our ability to deploy in the cloud.

In Oliver's comments, he will discuss how we have addressed these concerns.

Additionally, we found our customers are laser-focused on figuring out the type of analytical ecosystem they need.

Analytical ecosystems have become more complex as they have expanded to include, among other things, data warehouses, data lakes and multiple cloud offerings.

Our customers want advice from people they trust to help them understand and navigate this complicated puzzle.

The goal is to deliver business outcomes they need in today's competitive environment in a cost-efficient way.

Given our experience and knowledge, we are uniquely qualified to serve their needs.

Our customers are among the world's 500 largest analytically driven companies.

Many of them require purpose-built analytic solutions that meet the unique needs of their respective businesses, solutions that have the capability to seamlessly interface with and process analytics in an increasingly diverse ecosystem.

This not only speeds up the time to develop solutions that are rich in insight, but also supports consistent data being used across multiple use cases, thereby delivering higher confidence in the outcomes.

We continue to make sure Teradata's software remains in the leadership position when customers think about Data and Analytics.

This continues to be validated by industry analysts.

In fact, so far this year, Teradata has been named a leader in 6 key industry analyst reports.

This recognition spans vision, products, service and how Teradata supports our customer.

But more relevant is how our customers use Teradata.

Our customers tell us no one can compete with Teradata in delivering integrated analytics at scale.

We are the partner that gives our customers maximum flexibility in delivering their unique purpose-built solutions, not ours, but theirs.

Consulting is also an important part of the value we deliver for our customers.

We are focused on consulting that supports our customers, while directly or indirectly driving the consumption of Teradata's software.

Our consulting teams are able to provide advice and deliver both purpose-built analytic business solutions as well as designing, delivering and managing the underlying best fit analytical ecosystem.

Our customers know that we have the experience and capability to make them successful and want us to engage in both areas.

Turning now to go-to-market.

We know a key to our success is the people who engage with our customers.

Like the software and consulting discussed above, we have transformed our go-to-market approach.

Our sales teams have developed account plans focused on delivering high-impact business outcomes, and are approaching our top customers with a business-led approach.

As I said in the last call, when we engage our customers in this way, we are finding the discussions become more about benefits than costs and lead to a sustainable relationship.

We believe the Teradata we are building will be at the nexus in the future, integrated analytics based on integrated data via an agile data foundation and delivered at scale.

Our customers are receptive to the new Teradata strategy.

This is evidenced by our increased funnel and our momentum, which positions us well for the last half of 2017 and a strong start to 2018.

All of this sounds great, but we understand you want metrics that will demonstrate our strategy is delivering results now and will continue to do so in the future.

In his comments, Steve will lay out the metrics that will allow you to do just that.

But before Oliver gives his presentation, I want you to know that we have turned the corner, and we are more confident in our strategy than we have ever been.

Oliver?

Good morning, everyone.

It's an exciting time to be at Teradata.

I'm very pleased to share with you the progress we have made, how are customers reacting to our new strategy and to demonstrate the confidence we have internally at Teradata.

We have created an amazing new company, with a new strategy focused on driving high impact business outcomes for our customers and returning Teradata to meaningful revenue growth.

Our new strategy is focused on providing our customers flexibility and choice, making it easier for them to purchase Teradata's market-leading analytic solutions.

I meet with many of our current and prospective customers, and they love that our solutions are now more portable, and our purchasing options are more flexible than ever before.

As a result, we are seeing increasing momentum and activity that sets us up well for the end of 2017 and into 2018.

The foundational element of our strategy is Teradata Everywhere.

We created Teradata Everywhere to help customers meet their Data and Analytic needs today and in the future.

Teradata Everywhere provides our customers 3 core benefits.

First, we are enabling our customers to implement Teradata across flexible deployment options, including public, private, managed clouds and on-premises deployments.

Our customers can deploy on their hardware or our purpose-built Teradata platforms or public cloud infrastructures.

Second, our solutions can now be purchased in more accommodating ways with our simplified pricing bundles that address the needs of different customer use cases at different price points.

All pricing bundles are delivered through subscription-based pricing and as a service options.

And third, Teradata Everywhere is future-ready.

Customers can take advantage of our portable licensing to change where they run Teradata software as the hybrid cloud needs evolve.

Through a combination of our market-leading technology in Teradata Everywhere and our highly regarded business and technology consulting teams, we are delivering on a broad range of new business use cases.

These use cases are opening new areas for us to sell our technology.

Our consultants help customers identify and build road maps for new analytic opportunities, determine the right architecture and deployment options to fit each customer's unique needs and deliver business-focused, value-creating analytics, all leading to increased consumption of Teradata software.

The business outcomes we enable for our customers are wide-ranging.

And a few of the recent use cases that we are delivering with our customers include: member journey and specialty pharmacy analytics for a healthcare company, raw materials and yield optimization for a semi-compact manufacturer and natural language processing for better speech recognition, document classification to improve process automation at a retail bank.

Customers are now considering Teradata in areas where they previously have not, and this is significantly increasing our opportunities.

Now I want to highlight some of the advances we have made in our technology that are helping us execute Teradata Everywhere and build momentum with customers.

First, we provide the same full-featured Teradata Database software regardless of the deployment options a customer chooses, in public, private or managed clouds as well as on-premises.

And with portable database licenses, customers have the flexibility to expand or modify their hybrid cloud environments by moving licenses between deployment options as their business evolves.

This flexibility and portability is clearly helping our customers move forward on transactions, as we now take the risk out of making purchase decisions.

Customers know that their needs will change over time.

And rather than be paralyzed while trying to determine their future architectures, they can buy today with confidence knowing that the Teradata Database functionality is the same across deployment options, and that the database software licenses are portable.

And with our simplified pricing tiers and subscription-based licenses, it is easy for customers to get started quickly and affordably and pay as they go instead of working through a long capital approval process.

While this is a tremendous benefit for customers, it is also great for Teradata.

We are seeing customers adopt subscription licenses more rapidly than expected, and this is building future recurring product revenue for us.

Turning to our leading Teradata IntelliFlex platform.

We took a technological leap forward and made IntelliFlex 100% based on solid-state drives.

We know that customers continually require substantial gains in their data warehouse compute power to serve the needs of their mission-critical advanced analytics, and we specifically designed IntelliFlex to meet these demands.

The new IntelliFlex all-in memory appliance delivers a massive increase in processing power, in fact, 7x more compute power per cabinet than our previous product.

With IntelliFlex, we are providing our customers with more performance, storage and memory, while reducing costly data center space and saving energy costs.

And it is generating a lot of interest and activity.

One example, a global leader in the semiconductor industry is leveraging IntelliFlex and our consulting services to help them improve the yield and quality of the chips it produces.

A 1% cumulative yield improvement can translate to $100 million of savings, and we executed the proof-of-concept that demonstrated this yield improvement is achievable.

In the second quarter, this customer purchased IntelliFlex and took advantage of our flexible, subscription-based licensing, which made it easier and more affordable for them to purchase more Teradata.

We also launched Teradata IntelliCloud, our managed cloud offering that provides Data and Analytic Software as a Service.

This next-generation cloud service ensures that our customers can leverage the same software, ecosystem applications, tools and training that they have already invested in for their on-premises Teradata systems.

With IntelliCloud, customers can focus on driving business outcomes rather than managing infrastructure.

We are deploying IntelliCloud in our data centers as well as on Amazon's AWS and Microsoft's Azure public cloud infrastructure.

They're gaining considerable traction with our IntelliCloud offering, and cloud activity in our sales funnel has increased significantly in the last few months.

One of our customers, a leading global consumer goods company, is focused on improving analytics to optimize their consumer promotions, improve sales planning, enhance supply contract negotiations and strengthen their executive reporting.

This customer is focused on moving their Data and Analytics to the public cloud, and they purchased our IntelliCloud as a service offering on AWS.

The customer is also relying upon our enterprise data consulting organization for cloud architecture, migration planning and implementation.

We also recently announced our ready-to-run Teradata IntelliBase, a revolutionary multipurpose platform that supports several software technologies on a redeployable hardware at a low price point.

IntelliBase enables the Teradata Database, Aster Analytics and Hadoop to to run in the same cabinet.

A true all-in-one engineered solution.

IntelliBase provides the versatility for a customer to repurpose hardware to meet tomorrow's business requirements.

This provides ultimate flexibility and investment protection for customers despite IntelliBase being engineered as a low-cost alternative.

This makes the new platform extremely efficient and economical and, therefore, extremely attractive to our customers.

An S&P 500 healthcare company purchased IntelliBase in Q2 to complement its enterprise-class Teradata system.

IntelliBase will be its analytical platform to support cost-of-care analytics for its Medicaid and Medicare business by using structured and unstructured data.

This customer also leverages business and analytic consulting provided by our Think Big Analytics organization.

To strengthen our agile build and delivery capabilities, we recently acquired the San Diego startup, StackIQ, a leader in open source software provisioning.

StackIQ will help accelerate adoption of Teradata ecosystem and cloud offerings by simplifying and automating the delivering and deployment of Teradata products.

This intellectual property also supports rapid reprovisioning of our IntelliCloud infrastructure, internal test and benchmarking hardware as well as swift redeployment between technologies to match a customer's changing requirements.

As I close, I want to reinforce why we are so enthusiastic about the progress we have made and the momentum we have built going into the second half of the year.

Customers are recognizing that Teradata is different.

We are easier to do business with, and the customers now have more ways than ever to deploy and purchase Teradata.

As a result, customers are now considering Teradata for a full range of use cases that we may never have been considered for previously.

This is because of our wide range of deployment options and our new simplified pricing tiers at different price points.

We have turned the corner on delivering the flexibility and choice that customers want, and this is showing up in our sales funnel as we now engage in new analytic use cases.

And customers are able to move forward now on purchases because we derisked their buying decisions.

They no longer need to sweat their assets while they decide on their future analytic architecture direction.

They can buy today.

This is enabled by the combination of our multiple deployment options, our portable software licenses, and because customers can buy in smaller pay-as-you-go increments via our subscription-based pricing.

As a result, we are seeing increasing momentum and customer activity.

Our sales funnel is growing and is much higher than it was before our strategy changes.

Subscription licenses are being adopted faster than expected, and we are seeing customers seriously consider and adopt our cloud options.

This all builds recurring product revenue, which positions us well for the future.

As I said at the start, the changes around Teradata are nothing short of amazing, and I'm excited to be part of this transformation.

Thank you.

Thanks, Oliver, and good morning.

Our strategy is working and providing customers greater flexibility on how they deploy and consume Teradata, including our subscription-based options.

However, our reported financial results doesn't quite tell this whole story as the impact of this transition, particularly as it relates to our revenue.

I want to provide you my perspective on our second quarter financial results when adjusted for an increasing mix of subscription-based transactions.

This perspective is based on our analysis as it relates to specific transactions that have transitioned to our subscription-based options.

When I discussed our expectations for the second quarter on our Q1 earnings call, our estimates for reported Q2 revenue were in the range of $510 million to $530 million, which assume that we did approximately $30 million to $40 million of perpetual equivalent transactions converting to our subscription options.

Said another way, our analysis indicated that our Q2 revenue, when combined with the perpetual equivalent transactions, would approximate $540 million to $570 million on a total perpetual equivalent basis.

When looking at our Q2 results, you see $513 million of reported revenue.

What you don't see is the impact of customers that chose our subscription-based options in the second quarter.

During Q2, we had $58 million of subscription-based perpetual equivalent transactions or $18 million higher than the high end of our $30 million to $40 million expected range.

Combining our reported revenue with this $58 million results in a total of $571 million, slightly above the high end of our perpetual equivalent range of $540 million to $570 million.

This clearly demonstrates the increasing demand for Teradata's products.

In fact, we believe that the total perpetual equivalent for product revenue has bottomed out, and we expect an increase in total perpetual equivalent product revenue in the second half of 2017 year-over-year as well as versus the first half.

Now as it relates to EPS.

The expectations we previously provided for the second quarter was a range of $0.25 to $0.30.

Our non-GAAP EPS in Q2 was $0.22.

Just as you would expect, an increase in the amount of activity moving from perpetual to subscription negatively impacts EPS in the reported quarter as well.

Our analysis indicates that our Q2 non-GAAP EPS could have been $0.06 higher if the $18 million worth of transactions above our expected $30 million to $40 million range have been traditionally structured.

When you add this estimated $0.06 impact, plus the $0.02 effective tax rate timing impact that I'll discuss later, we would be at the high end of our EPS expectation range of $0.25 to $0.30 for Q2.

To provide some visibilty into our progress, in Q2, our key performance metrics include revenue from upgrade subscriptions and cloud increased 10% in constant-currency.

Recurring revenue of $257 million saw a 7% increase in constant-currency from Q2 '16.

By the way, our recurring revenue is a very profitable piece of our total revenue.

The gross margin rate on our recurring revenue is higher than our non-GAAP product gross margin, which was 67.5% for the first half of 2017.

Finally, business consulting, which helps customers identify new business use cases and, as a result, should increase the consumption of Teradata, increased more than 20% from Q2 2016 revenue.

For the full year, we expect the following: approximately $225 million to $250 million of gross perpetual equivalent to shift to subscription-based transactions during 2017.

In fact, we had $108 million of gross perpetual equivalent shift in the first half.

Annual recurring revenue, or ARR, of $1.1 billion by the end of the year, with about 1/3 of that being product ARR.

Product ARR to grow approximately 25% for 2017; recurring revenue to grow high single digits in 2017; business consulting revenue to grow approximately 20% in 2017; and key core growth of almost 20% based off of our 2016 year installed base.

Now looking at our regions.

In the Americas, our sales cycles are beginning to shorten.

And we're becoming more predictable with time, with our sales funnel is increasing.

The Americas revenue decreased 17% in constant-currency versus Q2 2016.

However, the majority of the subscription-based transactions signed in Q2 were in the Americas.

Our international region had a good quarter, including international customers starting to utilize our subscription options as well.

Revenue increased 4% in constant-currency and 5% year-to-date.

Turning to margins.

Product gross margin in the second quarter was 67.5%.

On a comparable basis, product gross margin in Q2 2016 was 65.9%.

The improvement in product gross margin was largely due to favorable product mix, in part due to more customers purchasing our IntelliFlex offering rather than our prior 2000 Series appliance.

Services gross margin in the quarter was 44.1%, a decrease from 49.3% in Q2 2016.

Services margin was impacted by the investments we are making in our consulting business which, as we have discussed before, is a driver of our business-led strategy to drive an increased consumption of Teradata's products.

As we said last quarter, these investments will impact services gross margin throughout the course of the year.

Services margin was also impacted by utilization rates as well as the work-in-process issue we described last quarter.

As a result, overall gross margin was 51.7% in Q2 compared to 55.9% in Q2 2016.

Turning to operating expenses.

SG&A expense of $146 million was up 11% from Q2 2016, as we are now starting to compare against prior period when we were reducing cost and now are reinvesting those savings more appropriately to support our new strategy.

Of course, finally, R&D was up meaningfully, as expected, as we continue to invest in cloud development and other areas of R&D.

Compared to Q2 2016, R&D expense of $72 million was $19 million or 36% higher.

Our non-GAAP effective tax rate for the second quarter was 37.8% versus 27.3% in the same period of 2016.

The increase in the effective tax rate period-over-period was largely driven by the higher percentage rate of normal discrete items driven by the lower pretax earnings denominator period-over-period.

However, on an annualized basis, we expect our full year non-GAAP effective tax rate to be approximately 27.5%.

We expect Q3 non-GAAP tax rate to be in low 30s with the Q4 non-GAAP tax rate to be in the mid-teens to result in the expected 27.5% rate for 2017.

Turning to cash flow.

We had another solid quarter in terms of cash flow generation.

Net cash provided by operating activities was $61 million in Q2 2017 compared to the $99 million generated in Q2 2016.

However, cash flow generations in Q2 was better than we expected.

After $14 million of capital expenditures versus $9 million in Q2 2016 and $2 million of additions to capitalized software versus $18 million in Q2 2016, we generated $45 million of free cash flow versus the $72 million of free cash flow generated in Q2 2016.

Although increased investments as well as lower revenue contributed to lower free cash flow year-over-year, free cash flow for both the quarter and year-to-date was better than we expected.

We expect our full year free cash flow to be at least $250 million.

As a reminder, we typically generate the majority of our free cash flow in the first part of the year.

And in this case, we are investing in the future of Teradata.

Free cash flow for the second half could very well be negative after the $275 million of free cash flow generated in the first half.

As a reminder, that $275 million was the high end of our expected free cash flow for the full year.

As Teradata's customers continue 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 impacted by the ratable manner in which revenue is recognized for these new purchasing options.

Furthermore, as we get closer to 2018, adoption of ASC 606, this may begin to impact how transactions are structured in the second half of 2017 in order to minimize lost revenue.

However, given our current view of our sales activity, we are updating our forecast for full year reported revenue to now be down approximately 5% to 7%, which is better than our prior view that 2017 reported revenue could be down 5% to 10% from 2016.

Also keep in mind, we expect $225 million to $250 million of perpetual equivalent to be structured in subscription-based transactions.

Correspondingly, we expect non-GAAP EPS to be in the range of $1.22 to $1.27 for the full year prior to any benefit from the share repurchase activity we planned for the second half.

Again, we think EPS will be more weighted to the fourth quarter much more than is typically the case.

In fact, Q3 overall could look a lot like Q2 or even a little lower, but we expect a very strong fourth quarter as we see our new strategy really start to show signs of success.

Now let me go over some of our other operational expectations for the full year.

We estimate that product gross margin will be in the mid-60s.

Services gross margin is estimated to be in the mid-40s as we continue to invest in our services business to pull through future product revenue.

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

R&D expense is likely to increase 25% to 30% versus 2016 as we invest heavily in cloud and core analytical solutions.

As expected for companies going through this type of business transformation, the first year or 2 are generally challenging from an as-reported basis, but companies build on the recurring revenue model for a stronger and more predictable future years.

2017 is clearly that type of building year for Teradata.

But let me be very clear.

We are very confident that our new strategy is working and will result in a much stronger company.

Therefore, I want to share with you some of the preliminary 2018 targets that we are contemplating based on what we're seeing through the end of Q2 and, based on our current assumptions that we're applying, indicates that our analysis indicates that total perpetual equivalent product revenue is expected to bottom out in 2017, and that we should see more benefits to our strategy in 2018.

This early view is before any of the impacts of ASC 606 and any changes in our underlying transition to subscription assumptions.

Our early assessment for 2018 includes: total perpetual equivalent is expected to increase 2017 over 2016 and 2018 over 2017; product ARR should continue to grow in the mid-20s percents, with almost $100 million of incremental product ARR in 2018; and we continue to expect total revenue growth in 2018 while still transitioning activity to the subscription-based pricing model.

You've heard Vic and Oliver describe how our new strategy transformation and execution have strongly positioned us to drive increasing business value for our customers through analytics.

This is demonstrated by the growth of our sales funnel, as customers are embracing our hybrid cloud deployment and pricing consumption options.

And as a result, we are even more confident in our strategy and plan to acquire up to $300 million of our stock during the second half of 2017.

And with that, operator, we are ready to take questions.

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

Your perpetual equivalent guidance for the back half, suggests that you can have up to 30% higher perpetual equivalent in second half versus first half, which would suggest that you're significantly accelerating the move to subscription revenues.

And Oliver have mentioned, customers are now looking at new analytics use cases, where you would not have been considered before.

Can you share some examples of this?

And do you feel now that, conclusively, customer purchasing is shifting more towards subscription?

And I have a quick follow-up.

Yes.

Wamsi, let me take the first part, then I'll turn to Oliver for the use cases.

But yes, Wamsi, what we're seeing in the second half is clearly what we see in building in the funnel is more activity going towards these deployment consumption options on the subscription basis, particularly in the Americas, and we're actually seeing that activity picking up internationally more so in the second half.

So again, a strong adoption of these consumption models.

And that is -- we're seeing that increase in the sales funnel in the Americas and international, and even to the extent that we're looking at increasing -- potentially increasing our assumptions as we go into '18 with respect to the adoption.

So again, a very strong statement with respect to the adoption of these flexible pricing models.

I'll let Oliver lead to any particular business value use cases that we're seeing.

Yes.

Wamsi, I mentioned one use case, where a very large semiconductor company internationally purchased Teradata IntelliFlex in the second quarter.

And that is really to perform yield optimization, a chip manufacturing plant.

And as I mentioned in my remarks before, those are not the traditional use cases that Teradata was chosen for, right?

But now with -- first of all, with the underlying platform, in this case IntelliFlex, and the solid-state options that we have in there and the high performance that we can deliver at that, plus the new pricing options that we have that simply combine all the relevant features of Teradata into a single pricing bundle, it makes it so much easier for customers to choose Teradata and to implement that.

And we are seeing that throughout our customer base that, in reality, the changes that we have implemented with the strategy are already starting to take hold globally with a lot of companies.

And therefore, new use cases are coming in.

Appreciate the color.

Steve, if I could just follow up really quick.

Thanks to the new supplemental breakdown into the recurring elements here.

Given that you're seeing increased traction across subscription-based offerings, why are we not seeing more of a pickup in the recurring product line in 2017?

Is that just because we only had a few quarters of this model transition?

So 2018 should be substantially higher?

Yes.

Wamsi, what you're seeing is exactly the latter part of that statement.

Like the large Q1 deal, you have now a small portion.

That's a 5-year deal.

So in Q2, you have a portion of that coming in.

What we're seeing, if I'm looking behind the numbers, I see product ARR growing 3x at the end of '17 compared to the end of '16.

So we definitely see that build in the product ARR almost 3x.

You see bookings, which on a combined base is perpetual cloud, and term bookings are increasing close to 15%.

So again, strong bookings coming through, strong product ARR coming through.

That's where we're seeing the activity right now.

And as you're right -- you're correct.

As that keeps building, it keeps rolling in.

What I'm seeing in '18 is -- finishing '17 very strong and there being a very positive impact on that product line revenue in 2018 with respect to that recurring piece rolling into 2018.

So yes, it's the latter part.

We're at the early stages of the ARR building and the ARR releasing into the income statement, into the revenue line item.

And '18 will have a more positive impact.

Our next question comes from Raimo Lenschow from Barclays.

I have 2 quick ones.

The first one is more a follow-up, Steve.

So if I look at that subscription line, when I see balance sequentially, if I'm just going to like -- I know stuff is rolling in slower.

But why is that -- if you're doing so much more, why is that going down sequentially in subscription?

The subscription, the revenue from it is -- continues to -- there's nothing unusual, Raimo, in that line item.

The product -- the recurring product line in Q3, the $69 million to $75 million on that recurring revenue line item, is improving through it as those items roll through.

The perpetual side is falling off on the perpetual side.

But then, again, that's expected as these things convert to subscription.

Am I getting right at your question on that?

Yes.

I mean, we can take it off there.

We can do that later.

And then the -- if I...

There's nothing unusual, Raimo, going through those line items from what we're seeing as the -- as those -- the subscription transactions roll through.

Okay.

And then the -- your comments around the Q3, Q4, do I just kind of simply read into that?

Like if you look at your funnel and how the funnel is evolving, then Q4 is shaping up as a very, very strong year?

It's just that if you look at the deals in the pipeline, they're more local like Q4 deals are in Q3.

And that's why we have kind of the messaging today.

Is that kind of the right way to think about it?

Yes.

There's 2 messages there.

Yes, that latter is one of the messages.

And what we're also seeing, Raimo, with our movement towards the subscription-type transactions, we're not -- how is a good way to say this?

We're not kind of being held hostage at quarter-end to try to get a perpetual transaction done.

And even in Q2, we had 2 to 3 transactions that if they were on a perpetual basis, we would've said, "Okay.

What do we need to go to get them into the quarter?" But now the subscriptions basis says, "Hey, we want to do the right thing for -- to maintain our margins." Those deals, they're around subscription basis.

One was on a perpetual basis rolled over Q2, got close in the first 2 weeks of Q3.

I'm anticipating some of that happen in Q3 to Q4.

But generally, what we find, to your latter point, we find [12 31] is kind of a natural backstop for everybody with their budgets, and the deals get completed in Q4.

We're not going to sacrifice any margin on any transactions just to get it into the quarter.

And so that's why I'm saying Q3, we might see a couple of those things, those subscription deals kind of roll over the first part of Q4, get done in the first part of Q4.

But then I expect that natural progression in Q4 to get done to get the transactions done in Q4.

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

Great.

I mean, as you look at the second half, I mean, what we typically see when there's an acceleration to ratable revenue, there's actually incremental pressure on the model, and it causes total revenue to kind of come down and be more pressured.

And that's not really the case in terms of what you're seeing in second half.

So can you give us quantitative or qualitative mechanics on why this accelerated shift is lifting what you had previously guided to?

And maybe there's some FX benefits in there.

I know the euro has gone up a lot.

Maybe you can speak to FX as well?

Yes.

It's -- Derrick, yes, FX, we saw 1% headwind in the first half, seeing about 1% tailwind in the second half, flat for the year.

But when I'm referring to our total revenue, our entire model isn't shipping the subs.

It's just the product revenue.

We have other elements, the consulting side, the maintenance side that we see continuing to have reasonable growth in that second half.

And as a result, we see that offsetting and bringing down our expectations.

Now remember, when I said earlier on our Analyst Day that companies typically go through this, and they see a 5% to 10% decline in reported revenues next year, those were kind of the fenceposts that we set up there.

And what we're seeing -- and we made some assumptions as to what amount of new Tcore that would go to subscriptions and existing customers that would go to subscriptions.

We're not transitioning our full base of revenue to that.

And then when I see the amounts coming through, we're basically at our original expectations slightly higher, but those were down -- that kept me down to that lower level of that 5% to 7% versus 5% to 10%.

So really no significant change.

I had a broad fencepost, goalpost there to kind of set up '17 because there was a lot of sensitivity to our assumptions.

But now that we see the actual activity kind of tracking towards our assumptions, a little bit better than what we have anticipated, I feel comfortable bringing that range down into a tighter range of 5% to 7% without any significant changes to that model.

So everything that we're seeing, we're at that 5% to 7% range.

I don't want you to lead into that saying, "Okay.

If more is going to go, we could be above that 10% range." No.

We're going to be in within that 5% to 7% range.

And it's really driven by the other part of our business that's not going to the subs model.

Got it.

That's helpful.

And just a quick follow-up.

The maintenance growth at 5%, pretty amazing given the 40% decline in perpetual license revenue.

I mean, how sustainable is this?

Does it start to really decelerate?

Or is it more resilient?

It's pretty resilient because of the service levels that our customers expect from us.

We're still growing their Tcore.

I want to make sure that this points gets out there.

Tcore growth is still 20% off of our [12 31] '16 installed base, okay?

So there's still good growth of Tcore out there year-over-year driving that maintenance and driving the support that our customers expect from us.

So maintenance continues to be resilient.

I expect maintenance always to be in that kind of low single-digit growth rate even with our reported revenue -- product revenue numbers because, again, underneath -- underlying core of it, Tcore is growing 20% over the 12 31 '16 installed base.

Our next question comes from Bhavan Suri from William Blair & Company.

Maybe the first one for Oliver, and then a quick follow-up for Steve.

Oliver, as you look at the deployment options, you've talked about sort of expanding use cases.

But when you look at your customers that's deploying AWS or Azure or pure cloud as opposed to on-premise subscription, on the competitive front, are you seeing any one new?

Are you sort of seeing running into some of your vendors like Snowflake at all?

And how does performance of TDC on AWS compare with Snowflake?

Because we see the Redshift numbers, but I'd love to get your thoughts on Snowflake.

Bhavan, thank you.

Thanks for the question.

Obviously, we are eagerly watching every single competitor that is out there and what they're trying to do.

In reality, what we're seeing is while some of these competitors were to a cloud faster, their performance, and specifically for the use cases that our customers care the most, which is high concurrency, high scale, high complex workloads, that's where we differentiate the most.

And so far, what we are seeing is that for all the cloud-based competitors, they might have a place in small deployments for small companies.

But once the data volumes grow to certain size, once the complexity of the workload takes off, and more importantly, once the concurrency takes off, meaning you have a couple of hundred users or 1,000 users asking complex questions all the time, this is where we are seeing a note-for-note advantage of over 100x with the Teradata software.

And so far, that has been universal in all of these competitors.

And so when we look back, we have been dealing with competitors, obviously, for many years.

And the difference that we see now is while some of the competitors have been earlier to the cloud or focused more on the cloud, they have focused less on the performance than some competitors we have years ago.

And so that is something that -- now that we have full cloud deployment options.

And more importantly, we have that portability that none of the other options have, right?

So if you go to Snowflake or if you go to Redshift or if you go to some of the other options out there, you are locking yourself into one particular cloud platform.

And our customers simply don't know where they want to be tomorrow.

They might be okay with one cloud platform today, but they are not quite sure if that will be the cloud platform of the future.

So these competitors are locked in into a single cloud platform, in single deployment option.

Teradata, with its performance advantage, with its skill advantage, we can deploy on Azure, on AWS, in our cloud, in the data center, on our hardware, on your hardware.

And that makes us, I think, very uniquely positioned compared to some of these competitors.

Plus, when you already have workload on Teradata, when you shift that into whatever choice of cloud that you do, there's 0 rewrite involved with that.

Whereas with all the other products that you have mentioned, it's a total rewrite of the queries and the analytics that you want to do.

And then you're stuck on this one platform out there, and you have no choice to move around between different deployment options.

And so we see that's really coming together as part of our Teradata Everywhere strategy.

And that is really derisking and unlocking business with our customers for us.

Got it.

Got it.

That's helpful.

And then one for Steve.

Steve, you've talked about subscription, but I'd love to sort of get a sense of the split a little bit.

Maybe if you can't, even just a split of the uptake between software only subscriptions, systems subscriptions, meaning I'm buying the whole system from Teradata, still on-premise subscription, public cloud and managed cloud.

So how are we seeing those play out?

And is most of the subscription today really still just on-premise, but paying on a subscription model?

Yes.

Bhavan, most of it's really on-premise, our entire system.

Now we're seeing good growth, again, the rule is small numbers.

But if I'm looking at cloud, I'm seeing strong growth in cloud.

ARR would go 3x on cloud.

But -- so yes, there's good growth.

But the big numbers to that grow is largely entire systems going to subscription.

But that shift is growing, I mean, throughout.

Our next question comes from Philip Winslow from Wells Fargo.

I'm wondering if you can give us a sense for just the pricing environment that you're seeing out there kind of relative to the Tcore growth itself.

And I just have one follow-up for Steve after that.

Yes.

What I would say, Phillip, on the pricing is really look at our gross margins, product gross margins.

That product gross margin continues to hold, and it really would indicate that our pricing strategy is operating very, very effectively in there.

And what I would say overall is to give you comfort that we're not giving that Tcore away, that our objective for '17 is that average revenue, that average price for Tcore to be consistent with '16 even with performance improvements.

So again, solid pricing across all of our offerings from a pricing strategy perspective.

And that product gross margin continues to perform very well.

Got it.

And then, Steve, I know you gave some color as far as the ARR that you expect to add in 2018.

When you think about the mix of perpetual versus perpetual equivalent, how do you see that shifting in 2018?

It seems like you're kind of in the high 30s right now as far as what's shifting to subscription.

How do you see that trending in '18?

It's interesting, Philip.

We're going through that and seeing.

As I mentioned earlier, we're slightly above where we thought we would be performing.

We're above in the Americas, down a little bit internationally.

And that's probably what we've been expecting into '18.

And what we're seeing in the funnel in '17, we actually see the international subscription business picking up in the second half.

So what I'm looking at modeling out in '18 is a little bit more -- slightly more improvement on that conversion in the Americas, with better improvement internationally and a little bit higher, potentially higher conversion rate in '18 versus '17 at this point in time.

Our next question comes from Jesse Hulsing from Goldman Sachs.

Yes.

Steve, can you give us a reminder of what the conversion is to get to your perpetual equivalent?

I'm wondering, what -- how much ACV or ARR have you booked over the last 3 quarters before you converted?

Because I think that would help us understand how the subscription revenue will transition in the second half.

Yes, Jesse.

And our basis, how we calculate perpetual equivalent revenue is on a transaction-by-transaction basis.

We look at what Tcore they will be consuming on a subscription basis and price it out as though they bought it on a perpetual basis.

Those are -- that's the on-premise side.

Now if they're to be conservative on that, Jesse, if they are buying it on a 1-year contract basis, I do not calculate out that they would've bought that on a perpetual basis.

I take the lower of the contract value on a 1-year basis or the equivalent if they would have purchased.

With respect to cloud, we look at the software-only content with respect on that cloud and over their contractual period.

So again, I'm not adding in anything on the hardware side saying assuming if they would've purchased that on the hardware side.

The perpetual equivalent that we're looking at, and as I said in the prepared remarks increasing in the second half of the year from the $108 million in the first half, ARR has grown $50 million over the last 3 quarters on that product ARR.

So there's, again, strong growth in there.

We're looking at product ARR continue to grow 25% in '17 and in that mid-20s for '18.

So again, very solid growth.

But the perpetual equivalent, I want to leave you with that is, again, a truly equivalent one.

But if the contract or rental period is less than what they would have bought it for, we're using at the lower of.

Do you understand that?

I mean, am I clear on that, Jesse?

We're trying to be very conservative not to just bump up a 1-year rental agreement.

Yes, that makes sense.

And to follow up on Raimo's question about subscription revenue.

I guess, if you booked $50 million of ARR in the first 3 quarters, I would've expected that to grow quarter-over-quarter in the second quarter.

And what's the disconnect there?

Yes.

And I do want to -- now that we've asked it twice, I'll explain.

There was an anomaly in one of our perpetual customers that went to subscription in Q2 that impacted that number.

If you look at -- because seasonally, we went down Q1 to Q2 last year, and we went down Q1 to Q2 this year.

But as you said, with that growing of that ARR, you would expect that number in Q2 to come up.

We had an anomaly.

And rightfully so, this was a good anomaly to have.

But it comes down to one customer that took the upgrade rights that were baked into previously.

If you look at that recurring line item, it says, right stuff, great subscription in cloud, okay?

They took their software upgrade rights and went to an ELA software, term software.

And that -- by taking that they moved it out of the line items to the perpetual software and took it out of that subscription right, and that was a sizable amount in Q2.

But what it does, though, what I want to highlight here, is it does illustrate that our customers do have the choice, okay?

We want to do the right thing for the customer even though it might adversely impact a line item, which it did in this quarter.

But it was the right thing to do for the customer.

It's an anomaly.

That's what I was trying to emphasize to Raimo that there's nothing unusual from a recurring perspective in that line item, but there is that anomaly in Q2.

So I'm glad you gave me the opportunity to straighten that one out.

That makes sense.

And I also wanted to ask quickly on your sales and marketing investments, obviously a pretty meaningful ramp quarter-over-quarter in SG&A.

What are you investing -- are you investing in new territories?

Are you investing in overlays for the cloud product?

Where are those investments going?

Yes.

The investments are going in primarily that direct customer-facing point context.

We -- as Vic talked about, we continue to look at the opportunity to drive business value with our customers.

And we continue to make the investments targeted at our largest 500 analytical opportunities in the world and bringing the right resources to bear for those customers to drive that business value.

So the majority of that SG&A increase all is in the go-to-market areas, and particularly, very specifically, direct customer-facing investments.

Our next question comes from Karl Keirstead from Deutsche Bank.

Two for Steve.

Steve, just back to your 2018 revenue guidance, I think you said that you would expect revenue growth in '18.

I just wanted to confirm, that's a little higher than I think most Street analysts are modeling.

Is that a reported revenue number that you think should go up versus '17?

Or is that some kind of equivalent or adjusted basis?

And secondly, are you assuming a positive maintenance growth in '18 to get there?

Yes.

Karl, that is on -- what I'm basing that on is our assumptions that we are looking at right now with respect to the conversion to subscription.

And given those assumptions that we're looking at now and looking at how that product ARR is rolling through, and looking at what we're assuming total Tcore will grow in 2018 over the [12 31] '17 installed base, I'm seeing that -- and I'm calculating into a reported product revenue number.

Then when I look at our other segments of the business with respect to maintenance and consulting, maintenance I'm anticipating will continue to grow low single digits, and consulting continuing to grow, that those would offset the reported product revenue number and result in a slight increase in reported revenue in '18.

Awesome.

And then my second question is just on the share count for '17, Steve, I know it's tough, and I'm essentially asking for a little color on the timing of the buyback, but modeling the full year share count is important to get to our EPS number.

What would you anticipate if you can say what the full year average diluted share count should be sort of post that second-half repurchase?

Yes.

And what I'm seeing is that depending upon the timing of that, of the share repurchases, that could cause -- that could have a favorable impact on EPS maybe of $0.01 to $0.025, $0.01 to $0.03 rounded.

And we -- it's our expectation to be, again, very optimistic in executing that.

And we'll now turn the call back over to Mr. Lund for closing remarks.

Everyone, thank you for your questions and insights.

I think you can sense that we're excited about where we are.

Things are coming together.

We have still a lot of work to do, any transformation that happens.

But I want you to know, from an operational perspective, we are 100% focused on growth here.

I look at that everyday.

The numbers are confusing.

The 606, it's even going to be more confusing next year.

But we are focused on growth, and we are seeing that.

We're looking at our consulting revenue.

We want to make sure the revenue we're doing is focused to get to customer accounts that we want and that we're going after, and that will drive Teradata software growth either direct or indirectly.

A lot of questions about our G&A.

We are building a support organization.

But I want you to know that we are laser-focused on making sure that those investments we're making get stabilized and make us a more efficient organization.

We have a lot of opportunity to improve the way we operate, and we are working on that and monitoring that closely.

And finally, we're building a quality organization that's able to function in the new environment we see.

So we're pleased.

We're excited, but we're also not naïve.

We have a lot of work to do here, but I think we have the plan.

I don't think, I know we have the plan to drive this forward and I'm monitoring it every day.

So again, thank you for taking the time.

We look forward to talking to you all and demonstrating our continued performance in the third quarter.

So thank you very much, and that will conclude the call.

This does conclude today's conference call.

You may now disconnect.