Teradata Corp (TDC) 2017 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Teradata's Q3 2017 Earnings Call.

(Operator Instructions) Gregg Swearingen, Vice President of Investor Relations, you may begin your conference.

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

Victor Lund, Teradata's CEO, will begin our call this morning.

And then Oliver Ratzesberger, Chief Product Officer, will then discuss our Teradata Everywhere strategy.

Then Chief Financial Officer, Steve Scheppmann will discuss our third quarter results and our expectations for the full year.

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 will also be discussing certain non-GAAP financial information, which excludes such items as stock-based compensation expense, and other special items described in our earnings release including asset impairments, acquisition reorganization and transformational 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 potentially constant currency revenue comparisons.

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

A replay this conference call will be available later on our website.

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

And now, I will turn the call over to Vic.

Good morning, and welcome to the Teradata third quarter earnings call.

As our release highlighted, our Q3 results were better than expected and, as you will hear today, we are lined up for a stronger Q4.

After our call last quarter, the #1 question was why the change in attitude?

The answer is really very easy.

We are starting to see real traction with our strategy.

Teradata Everywhere allows our customers to develop an analytic platform while reducing risk.

They can deploy Teradata across a wide variety of technologies and have confidence that we will stay abreast of the ever-changing ecosystem options.

Oliver will cover this in his presentation.

Finally, we are unique in our delivery of our offering to our customers.

Not only do we come with strong technology and consultants that can deliver outstanding analytics, but we stay around to make sure that those analytics solutions deliver real value for our customers and do that at scale.

Despite all of our changes, we still have some who view us as the old Teradata, which we decidedly are not.

Not only are we rolling out Teradata Everywhere, but we are engaging with our customers in new ways.

Our recent announcement with GE is an example.

Through a new strategic partnership with GE Aviation, we will integrate flight analytics and IoT sensor data from GE, with customer and operational data from Teradata to help the airlines manage flight disruptions, increase operational efficiencies and probably, most importantly, to improve customer experiences.

Our unique capability to perform advanced analytics at scale required by the world's largest airlines was the key factor in this partnership.

Our enthusiasm is also driven by operating metric improvements, which Steve will cover in his presentation, which will include pipeline, TCore, ARR and reoccurring revenue growth.

He will also discuss our consulting efforts.

Consulting is one of our leading indicators.

While not up significantly, there is a major shift in how we deploy our consulting teams.

We have stopped doing consulting for consulting's sake and are directing our teams against our top 500 accounts.

This not only drives Teradata product but moves us away from a transactional to a continuing relationship with our customers.

Further, our organization is starting to feel its stride.

We are making great progress.

However, as I mentioned in the past, we had to change a lot in our organization to be able to execute our new strategy.

We are doing that by mixing new talent with the existing Teradata talent that has made us great for many years.

This is working and we still have a great deal of upside left.

In any strategy, execution is the biggest part.

We know our strategy works.

We are getting to the point where we can now laser-focus on our execution.

This will deliver more revenue, better margins and an increasing pipeline.

But to me, the biggest reason for enthusiasm is our people.

They are moving from fearing change to embracing it.

They sense that we are winning and they are pushing all the harder.

It is a beautiful thing to be a part of.

With that, I will turn it over to Oliver.

Good morning, everyone.

We have been hard at work and taking some major steps forward with our innovations for analytics.

Innovations that truly change the game for our customers and I'm pleased to update you on our progress.

Let's start with the analytics challenges that businesses face.

Business is continually changing.

Companies require greater agility to meet dynamically changing analytic workloads and user requirements.

However, this is hard because of siloed solutions that limit deployment options and reduce flexibility and choice.

There are more analytical tools and techniques available to business users than ever.

However, this leads to a proliferation of departmentalized analytics that lead to marginalized decisions and create significant overhead.

Companies are investing in analytics.

But often those investments are focused on managing the technology rather than the business.

And finally, there's a wide range of choices for deploying analytics, but being locked into a specific choice can limit the ability to easily change architecture over time.

So companies face no small set of issues with analytics today.

The good news is that we at Teradata are up to the challenge.

Here are 2 examples of how customers are using Teradata to revolutionize their business and achieve exceptional outcomes.

A global agricultural company is finding new ways to solve problems and fuel innovation through the belief that data analytics are the future of agriculture.

It is using Teradata to help address hunger by dramatically improving the time-to-value across areas such as: products, reputation, customers and safety.

By integrating previously disparate silos of data, users are free to focus on solving real business problems.

Taking advantage of our database portability in Teradata Everywhere, the company recently moved Teradata to the cloud to address needs for elasticity.

One of the world's largest biotech companies is using Teradata to materially shorten the time to bring life-affecting pharmaceuticals to market.

Through Teradata, the company can analyze any of their multiple internal and external data sources and perform real-time integration and analysis of clinical trial data and data about real-world patient experiences.

It will also incorporate IoT sensor data for advanced analytics to help develop future medical innovations.

These are different use cases from different industries.

But there is a key common element.

They are driving innovation and competitive advantage and achieving high impact outcomes with Teradata analytics.

This is precisely why we developed Teradata Everywhere so that companies can meet their analytic needs today and in the future.

The flexibility of Teradata Everywhere helps companies derisk decisions, allowing them to move forward with confidence knowing their investments are protected.

There are 4 key benefits of Teradata Everywhere: first, analyze anything.

We are expanding the capabilities of our database to enable users to work with their preferred analytic tools and languages across data sources with the best capability, elasticity and performance.

Second, deploy anywhere.

We provide flexibility and offer the agility to change as business needs evolve.

Regardless of where a company deploys Teradata, it will run and scale without code changes.

Whether on-premises on Teradata hardware or commodity hardware, in the Teradata Cloud or on public clouds like Amazon and Azure, the Teradata software is the same.

Third, buy any way.

We introduced simplified pricing bundles and a range of price points, subscription-based licenses and our Teradata IntelliCloud as-a-service offering to accommodate all needs.

We make it easier to buy software and leverage as-a-service and pay as you go options.

The sophistication of our software keeps us positioned in the price-performance lead, regardless of deployment choice.

The other guys can't come close to the cost per query from Teradata.

This is the real measure of value of data.

How much work can be done in a given amount of time?

We ran a benchmark of 1 million real-world queries and the cost per query from Teradata was less than $60 versus more than $600,000 for the leading cloud database.

Fourth, move any time.

With Teradata Everywhere, we revolutionized software license portability so companies can move their software where needed, across deployment options.

There is no lock-in as with other vendors.

This is an enterprise software industry first.

In summary, we are making great strides in driving innovation and executing our strategy.

It is exhilarating work helping customers find breakthrough through analytics.

As I hand it to Steve, I want to reinforce what I said last quarter.

This is an exciting time to be at Teradata and I'm even more confident in and enthusiastic about our future.

Steve?

Thanks, Oliver, and good morning, everyone.

We had a good quarter driven by the execution of our strategy.

Highlights from the third quarter include: our reported revenue and EPS in Q3 was better than we expected as the momentum we started to see in Q2 continued and we expect Q4 to be even stronger.

Reported total recurring revenue increased 8% from the third quarter of 2016, while reported recurring product revenue increased 14% from the third quarter of 2016.

Total ARR increased 10% from the third quarter of 2016, while product ARR, which excludes maintenance, increased 23%.

Additionally, I'd like to point out that all of these metrics increased sequentially from Q2.

Total services grew 4% including 6% maintenance revenue growth as customers continue to increase TCore and the size of their Teradata systems.

Consulting services revenue was up 1%.

However, our new focus within consulting services, business consulting, which helps customers identify new business use cases and as a result should drive increased consumption of Teradata, increased more than 20% from Q3 2016.

For the remainder of my comments, I'll be discussing our results on a non-GAAP basis.

Product gross margin in the third quarter was 69.2% versus 71.4% in Q3 2016.

The decline in product gross margin was largely due to deal mix, driven by a higher overall mix of hardware revenue.

Services gross margin in the quarter was 42.7%, a decrease from the 47.7% in Q3 2016.

Services margins continue to be impacted by the strategic investments we are making, including in our consulting business, which we have discussed before, is a driver of our business-led strategy to drive increased consumption of Teradata's products.

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

However, we do expect higher services gross margin in Q4 due to revenue from certain consulting engagements we began earlier in the year being recognized in Q4, whereas the cost of these projects have been recognized throughout the year.

This results in overall gross margin of 51.3% in Q3 compared to 56.7% in Q3 2016.

Turning to operating expenses.

SG&A expense of $149 million was up $15 million or 11% from Q3 2016, primarily related to demand creation headcount as we are now comparing against the prior year period when we had reduced cost, and we are now reinvesting to support our new strategy.

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

R&D expense of $71 million increased $13 million or 22% compared to Q3 2016.

The increase is largely due to initiatives related to managed and public cloud development and our IntelliFlex, IntelliBase platforms.

Our non-GAAP effective tax rate for the third quarter was 26.5% versus 23.5% in the same period in 2016.

The increase in the effective tax rate over the period was largely driven by a higher percentage rate impact of special items in Q3 2017, driven by the lower pretax earnings denominator period-over-period.

I do want to point out that the tax rate in Q3 2017 was lower than we had previously expected and provided a $0.04 worth of EPS benefit in the quarter that we did not anticipate 90 days ago.

On an annualized basis, we continue to expect full year non-GAAP effective tax rate to approximate 28%.

As a result, our tax rate in Q4 will be higher than the mid-teens that we suggested during the Q2 earnings call.

We now expect our Q4 tax rate to be in the high teens, which will result in a Q4 EPS being approximately $0.04 lower than our prior expectations.

Cash at September 30, 2017 was slightly over $1 billion and is substantially held offshore.

On a net basis, we used $8 million for operating activities in Q3 compared to the $45 million generated in Q3 2016.

Operating cash flow was lower due to lower net income and a change in working capital period-over-period.

Additionally, in the third quarter, as part of our ongoing transformation strategy, we initiated an aggressive workforce optimization program to drive an even higher level of performance-oriented culture, which is expected to result in approximately $20 million of severance payments being funded in 2017, with approximately 80% of the $20 million funded by international cash on hand.

After $29 million of capital expenditures versus $15 million in Q3 2016 and $3 million of additions to capitalized software, we used $40 million on a free cash flow basis versus the $12 million of free cash flow generated in Q3 2016.

The increase in capital expenditures is as expected, primarily due to increased cash used to support our transformation strategic initiatives, including our subscription and managed cloud offerings.

Based on the items I just described, we are currently targeting our full year 2017 free cash flow to be in the $205 million to $230 million range.

In addition, our actual free cash flow for the year is highly dependent upon many variables, including volume, timing, mix, structure and billing frequency of new subscription transactions forecasted for the fourth quarter.

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 and free cash flow could be impacted by the manner in which the activity is recognized and the cash is collected for these new purchasing options.

Furthermore, as we get closer to the 2018 adoption of ASC 606, this may affect how transactions are structured in the fourth quarter of 2017 in order to minimize the impact of lost revenue, which is caused by a change in when revenue is recognized between the old and the new standard.

If we have the opportunity, we may structure transactions to minimize the potential negative impact of ASC 606 revenue recognition changes, which may impact reported revenue and other operating metrics in Q4 and/or Q1 2018.

However, we continue to expect strong fourth quarter as our new strategy continues to deliver stronger evidence of success in our financial results, as deals in our increasing sales funnel are completed in Q4.

Given our current view of our sales activity, we are increasing our guidance for the full year 2017 revenue and EPS.

We now expect full year reported revenue to be down approximately 5%, which is better than our prior view that 2017 reported revenue could be down 5% to 7% from 2016.

And we continue to expect $225 million to $250 million of gross perpetual equivalent to be structured as subscription-based transactions for the full year.

This translates into expected fourth quarter revenue of $600 million to $620 million, which is expected to yield a range of $0.47 to $0.52 of non-GAAP EPS.

This results in increased expectations of $1.26 to $1.31 of non-GAAP EPS for the full year.

For the full year, we continue to expect reported total recurring revenue to grow high single digits.

Recurring product revenue from the rights to the software license upgrades, subscription and cloud to increase more than 10%.

Annual recurring revenue, or ARR, of approximately $1.1 billion by December 31, 2017, with about 1/3 of that being product ARR, which excludes maintenance.

Total ARR to grow more than 10%.

Product ARR to grow approximately 25%.

Business consulting revenue to grow approximately 20%.

And we are on track for a high teens growth in TCore.

In addition, we continue to expect product gross margin should be in the mid-60s implying a low 60s in Q4.

Services gross margin is estimated to be in the lower-mid-40s as we continue to invest in our services business, to pull through future product revenue, again, implying mid-40s for Q4.

SG&A should be up high single digits on a percentage basis, and R&D expense should increase approximately 25% versus 2016 as we invest strategically in cloud and core analytical solutions.

As we expected, 2017 has been an optically challenging year from a reported results perspective.

But let me be very clear, we are confident that our new strategy is working and will result in much stronger results going forward.

Although we have not finalized our 2018 plan, I want to share some early thoughts on our 2018 targets.

This early view is clearly before any impacts of ASC 606 and is subject to changes in our assumptions regarding our transition to subscription-based purchasing options, among other things.

Our early assessment for 2018 include the following targets: total reported revenue as well as product revenue should increase over 2017; product ARR, again, which excludes maintenance, should continue to grow in the low-20%; free cash flow improvement over 2017 and non-GAAP EPS growth of more than 10%.

In light of the revenue reporting implications of ASC 606, we are reevaluating our reported metrics and other metrics such as total contract value, TCV, and annual contract value, ACV, to ensure that we provide you with the best financial metrics to monitor and evaluate our performance in 2018 and beyond.

In summary, we can clearly see our strategy is working, and as a result, we expect a strong fourth quarter.

And are confident with respect to how we are positioned, particularly with our sales funnel for 2018, to deliver improved operating results.

And now I want to take this opportunity to share with you one of the most difficult decisions that I've had to make in my life.

Many of you know that I've been addressing some health issues, and I've come to the realization that my mind cannot will my body to overcome my declining health.

I should add that I relentlessly tried to beat my health challenges with the support of my family, friends and the Teradata team and many of you on this call.

For this support, I want to thank you all, it means more than you can imagine.

The debilitating nature of my illness has forced me to realign my priorities and focus all of my attention on my health.

With the support of my family, Vic, and the team, I have decided to go on medical leave under our short-term disability plan.

Throughout my career, I found it professionally rewarding working with quality teams.

This is one of the reasons why this decision is so hard.

The team here at Teradata led by Vic is outstanding and getting stronger every day.

I'm going to be -- miss being in the middle of winning, and this team will win.

It has the vision, the talent, the passion to help our customers exceed their expectations, and our customers win.

My new professional team will now become my doctors.

And as I align my full-time attention to my health, they better be ready because I hate to lose.

Thank you for making these last 10 years my most rewarding in my professional career.

I am grateful to all of you.

Enough about me, I'll turn it back over to Vic.

In closing, the first thing -- I am sure a lot of you have seen the announcements we put out, a couple of things I'd like to say.

Personally, I want to thank Steve for everything that he's done, not only for the company but for me.

As I've taken over this new position, Steve was the voice of reason, the voice of reality and the person who pushed us to make sure that we delivered on all the promises that we made.

Steve is a fighter, and I know he's going to take on his health challenges and will win that battle and have a better life for it.

I'm sure that you join me in wishing Steve the very best.

However, I have the great benefit of having Steve around, I'll still have him to talk to and weigh in on his great experience and advice that he'll continue to give me.

I'm also pleased to introduce Mark Culhane, who will be starting as our new CFO on or about November 10.

I've known Mark for many years; he's strategic, drives results and knows how to scale an organization.

Mark has been a part of many transformational initiatives.

Several of them that are right on point with the transformation that we are undergoing today.

And I'm sure his advice and counsel will be a great benefit to us.

You will also notice that in the announcement the name Eric Tom, Eric is coming in as our Global Chief Revenue Officer.

Like Mark, Eric brings strong executional backgrounds in similar roles.

Mixing him with the great talent we have at Teradata will allow us to drive better execution in our go-to-market.

Eric, coupled with the strong team we have, we'll have a better customer focus and I think we will see accelerating results as a result of that.

With that, I will turn it over to the operator for questions.

(Operator Instructions) Your first question comes from Wamsi Mohan from Bank of America Merrill Lynch.

Vic, you noted in your highlights that the sales funnel is increasing driven by customer adoption of new purchasing and deployment options.

Can you talk about the time it's taking now to close deals, how that might have changed under this new model?

And any more clarity based on the funnel, how customers are choosing to deploy Teradata?

Thanks.

So a couple of things about the question.

We are seeing a bit of a lengthening in the sales process time, driven principally by 2 things.

One is the fact that as we have gone to subscription pricing and all that, it surprisingly is taking our customers some time to work through that.

They have capital budgets that have been approved, they want to go that.

So that has been a process that's taken a little longer than we had anticipated.

But it's getting there.

So it'll shrink back down over time as people have in their budgeting process where they are.

And then analytics, by their nature, business outcomes require the building of a business case.

And with our consulting with our customers, doing that.

So that's taking a little longer.

But we are moving through that process.

The pipeline's getting built up and I think we will continue -- I think we will see an accelerating rate of our deal closes over -- going forward.

And in fact, we're seeing that today.

We are -- in Q2 and in Q3, we have broad-based adoption of where we're going.

We didn't have huge deals so it's broad-based, and so the number and the size of the transactions is going up as well.

So I think we're seeing good traction there.

It's going to take a little bit of time to do this with the consulting-led and build our organization out.

We have a lot of opportunities and we've just got to -- one of our key challenges is to get enough people in line and ready to do this to go on.

And we're doing that, we'll get there.

But I feel really good about what we're seeing in the pipeline, the number, the quality and the interest on our customers.

Our customers, I spend a lot of time with them, they are very, very interested in what we're doing.

And that's one of the reasons I feel so great about where we're going.

Customers really, really like what we're doing.

And Wamsi, I should also add, the quality of that sales pipeline has improved significantly from my perspective.

I look at the pipeline as of 9/30 and I see the growth in the offerings bucket and the closing bucket, the percentage of growth.

So that tells me these opportunities are moving through that sales funnel.

And those are the areas that I'd like to see grow, is that offering and that opportunity to close.

So I just wanted to add you that perspective also.

No, that's helpful.

Steve, I wanted to say it's been a pleasure working with you and good luck.

You were very clear on the last call, by the way, that free cash flow could be negative in the second half.

It seems that free cash flow was weaker partly from this workforce optimization initiative that you called out.

Of that $20 million, can you give us some sense of how much is already completed in 3Q?

And what regions or functions are you targeting in this and when should we see the flow-through of savings kick in?

Yes, thanks, Wamsi, for giving me the opportunity to give more color on that.

The workforce optimization, our whole focus in our strategy was to really drive a higher performance culture.

And we're looking at the style or the manner in which to execute that.

And when we started this process and finalized it in Q3, we said we want to be more aggressive upfront and identified about 100 people and the -- it was across the board, Wamsi, it was really looking at where are our objectives, strategic objectives going forward in the future and how do we best align our resources to achieve those objectives.

And it was across the board throughout Oliver's team, the go-to-market, back office, my teams.

And what we said in Q3, we want to be more aggressive.

It's not a workforce reduction, it's a workforce optimization.

And the best time to align those resources and get them on board to benefit '18 is right now.

So that $20 million that we looked at, about half of it is in the -- to Q3, another half in Q4, and a little bit in '17.

Again, to my previous comment that I made, this is not a workforce reduction, this is a workforce optimization.

So it's not a cost reduction, implied cost reduction effort.

We are going to hire the people, hire the talent and optimize and continue to drive our culture to a higher performing level.

So thank you, and personally, Wamsi, it's been great working with you over those 10 years.

Your next question comes from Raimo Lenschow with Barclays.

Steve, first of all, I enjoy working with you and we will all miss you.

Question from me was, if you look at the Q3 numbers, it looked like, if I look through, your licenses came in a little bit -- your product licenses came in a little bit better than expected.

If I look at the gross margin it looks like there was a little bit more hardware replacement going on.

Can you just -- like in terms of you managing the company, can you talk a little bit about like how much visibility do you get in terms of customers deciding to go on the -- with the new business model versus the old business model.

Do you think that you get more visibility as you go through the process?

Can you talk to that a little bit to help us modeling going forward?

I'll just say, (inaudible), from a customer's perspective, yes, we are seeing, we go through that and they are wanting to see what we've got, they're interested in the process.

I talked a little about risk and Oliver talked about risk from our customers' perspective.

So Teradata Everywhere has opened up discussions we never had before.

The ability to deploy any way they want, to drive it across multiple technologies is really resonating with our customer base.

It's -- when I took the job, I wondered are we -- everything was around have we missed Hadoop, had we missed whatever cloud was going away.

In fact, I think what I've learned from our customers when I'm out with them, they are trying to sort all this out.

There's a lot of confusion in the market about what means what, where do we go, where are we at.

And I think our willingness with a portable license, ability to cross multiple technologies has really allowed us to engage in our customers in a way that they never would have before.

And importantly, from my perspective, it gets our consulting teams in to help them think about stuff in it.

And they're starting to think about Teradata as not a hardware company anymore, but somebody that's going to help them drive long-term business outcomes.

And that's happening across the board.

I was in a big meeting on Monday, I guess, with one of our largest customers and we had a discussion and -- totally engaged.

I mean, they came in not prepared, I think, to have that discussion with us.

And at the end of the day, the meeting went over a couple of hours, totally focused around the outcome and what we can deliver and help them with.

So we're seeing a lot of traction and our strategy plays well with our customers.

And so I feel really strongly that it's doing that and we are seeing it in the pipeline.

I mean the growth in our pipeline is partially driven by execution.

But I think the biggest bulk of the increase in the pipeline has been around the change in our strategy and the receptivity of our customer base.

And Raimo, I just want to add on your revenue comment, that recurring revenue, particularly as it relates to our subscription or rental, was the strongest increasing component in that total -- in that product -- recurring product revenue line item.

So again, continued strength.

The product ARR growing over 20% in the quarter, again, continued strength in that recurring revenue model that we saw coming out of Q2 with the exception of that 1 customer that converted.

And then expect that to continue in Q4.

Your next question comes from Philip Winslow from Wells Fargo.

Steve, sorry to see you leave.

I mean, you're really one of the good guys in the industry and it's been a real pleasure working with you.

Hoping you guys can just touch on the price environment that you're seeing out there right now.

Obviously you've talked about the high teens, TCore growth.

Wondering if you could just give us some color on pricing and kind of how you're thinking about that Q4 and then some of your early commentary on next year's numbers too?

So a couple of things from that perspective.

I think, first of all, we aren't seeing any erosion in our pricing, in the market for our TCore, et cetera.

Part of that is driven around, we have a new operational discipline in the business we didn't have before.

I'm not particularly interested in giving price concessions at quarter-end to drive revenue.

We haven't done that this year.

We're not going to do that.

We don't need to do that.

We are -- we bring value to our customers.

So we have that (inaudible) so that's helped us with our -- where we are.

I think also the other thing that's made that easier is subscription pricing makes it easier to hold your price, because it doesn't make that much difference quarter-to-quarter.

But I -- operationally, we are just -- we have some discipline we haven't had before, we're going to continue to have that.

And so our pricing has remained constant during the year.

We aren't seeing any degradation of that.

Your next question comes from Jesse Hulsing from Goldman Sachs.

And Steve, I echo everyone else's thoughts; it's been a real pleasure working with you over the last 5 or 6 years in (multiple speakers).

It seems like you kind of introduced a new metric this quarter with product ARR growth.

I know you guys talked about it as being strong last quarter.

But this year -- this quarter I think is the first that I can find that you put some growth around it, which is appreciated.

Can you give us a sense of how big of a base that is?

Does this include upgrade rights and kind of the legacy stuff?

Or is this just new Teradata Everywhere subscription revenue?

No, I got you, Jessie, yes.

Let me peel that back.

Yes, we said in the prepared remarks, our total recurring -- total ARR will be about $1.1 billion.

And product ARR represents about 1/3 of that.

Now product ARR is what you described, it's our cloud, it's our subscription, it's our software upgrade rights.

And it's everything in total ARR except the maintenance piece of it, okay?

And so it is the legacies.

And if you look at it's -- the predominant pieces are the rights to the software upgrade, then its' the subscription rental and then it's the cloud, kind of in that priority.

Now the growth -- percentage growth is in that subscription rental and that cloud.

The rights of the software upgrade is primarily the legacy software upgrade rights.

But that is included in that product ARR and then we just exclude the maintenance from that piece.

Got you.

And can you give us a sense of how big the product ARR, excluding upgrade rights, is?

As far as, I guess, an absolute dollar value?

No, I mean these software upgrade rights is the substantially the largest component in there at this point in time.

But that is getting smaller and -- smaller as a percentage of the total as we go quarter-in-quarter, year-over-year.

The growth areas is in the subscription and the rental as Vic described with the customers' adoption of that and the cloud model.

Got you.

And then I have a question for Oliver.

Oliver, if you're still on the call.

I'm curious, it seems like if I look at -- I've seen you guys speak at some conferences and your marketing has really been focused on price per query and price-performance as a ratio that customers should be focused on.

I'm wondering, how is that -- you've always been focused on that, but it seems like you're really pushing that in the cloud versus Amazon and Google and the others.

How is that resonating with customers?

Is that something that people are latching onto?

Jesse, yes.

Thank you for the question.

Yes, absolutely.

This is something that -- especially, when our customers move to the cloud, which normalizes their hardware costs inherently, because they purchased the hardware in the cloud at whatever price point that is published there and with storage prices just being fixed and standard.

They are looking really at how much workload can they do at scale.

And a lot of our customers -- when we talk to our largest customers, they come to us and say, we have so many different environments and, by the way, we have focused on building new technologies.

But the biggest problem with the OCs, like it's one thing to build a prototype of something, it's very different to put these analytical capabilities into production at scale.

And when they run at scale, then the cost per throughput is the real measurement that they ultimately need to do.

And the differences that you see is cloud-on-cloud, our software versus the competitive software that is out there.

And this is something that resonates very well with our customer base right now.

So yes, the answer is makes a big difference, we believe.

Your next question comes from the Bhavan Suri from William Blair.

Steve, I'll echo what everyone said.

But on a personal level, I will really miss you.

It's been a good, I forget now, 7-8 years.

(Multiple speakers) Mark well too, but all the hope for a speedy recovery my friend.

I'll dive in really quickly here.

Just one for Oliver first to start off with.

When you look at the demand and you look at the growth, is there a way of thinking about how much of this is pent-up demand for expanding existing deployments, right.

So for a few years customers are sweating the assets.

And now it feels like we've got guys incrementally buying.

Or are these sort of brand-new net large-scale EDW sort of deployments.

How should we think about that mix and what are you seeing from customers?

Thanks.

It's both.

Yes, it is pent-up demand in some accounts.

But it's also new analytical use cases that they really are starting to deploy at scale.

And the mix of them and the ability for them to derisk the decision of where to deploy, this is something that we're seeing across the board.

The fact that they can go with Teradata in the on-premise world, in our cloud deployments and in the public cloud allows them to make these decisions and deploy these analytical capabilities.

So whether there's pent-up demand or whether there's new capabilities, both are driving that growth in adoption and it's unlocking the growth that we're seeing in the markets.

Got it.

And one quick follow-up, I've been a big proponent of the software-only version, and I understand the optimization of the hardware, obviously, very well.

If you look at the software-only version and the gross margin associated with it, just like to get sort of, how is the uptick of software-only progressing?

We just didn't -- we haven't heard much of that.

And I understand obviously performance and optimization, but how are you guys thinking about, a, customers are saying for that and then investment in the software-only version?

So it is definitely a choice for our customers.

We see it in test development, various forms that is being deployed in certain use cases, it is one of the choices that we offer, right?

We offer software only, we offer it on Teradata hardware, we offer it on the Teradata Cloud and in the public cloud.

And if you think about it, it is the same software that runs across all of these environments.

So whether this is software only in the customer side or whether it's Teradata on AWS or Teradata Cloud, it's the exact same software.

In general, at scale, what we see for the customers that we focus on, the top 500, there will always be a mix for the foreseeable future.

Because at scale, this is where our deployment options and where things like IntelliFlex give us the capability to deploy into existing data centers, where large companies have vested interest, to continue to leverage that but also being enabled however to do things in the cloud or on commodity hardware.

So we see a mix.

And it's something that ultimately when customers look at that and see that the cost performance of what they get with our hardware, it allows them to derisk the deployment of the software.

And so this is why we see a healthy mix, I think, of that.

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

Steve, we'll miss you.

It's been great to work with you and good luck.

So you guys have some interesting developments where the upfront license contracts are expected to have a nice kind of a pop in Q4, yet you're talking about increasing momentum and interest in the subscription pricing.

I know you talked about this kind of dynamic last quarter.

But can you just go through why this is happening?

And then, what we should think about 2018?

Should the upfront license business step back down and see more contract conversions to subscriptions, or would you expect this dynamic to continue?

I guess we start with customer choice, we've said that over and over.

And so that is going to continue to be what drives our strategy.

It's very interesting to go through.

And so why it's difficult to give you an answer to that is we see customers are more and more moving to a subscription pricing.

We are seeing it come that way.

Continued interest in it.

The issue is the hardest thing in us gauging is customer politics inside their own organization, right?

And I know that sounds weird but you've got to -- you either have a capital budget or you've got operating margins.

And how those have set for this year, and how the people that are deploying Teradata have to make those choices has been driven as much around the politics they've got to play inside of their own company as they do what their choice would be.

I think we are seeing people wanting to move subscription, very interested in that.

I think that they have to start working through their process to get approval.

It's easier for them in some cases.

We had 2 of those in the quarter where they wanted to go subscription but they had budget left this year.

And so they did a perpetual deal just because they could get it done this year.

But I do think the overall trend is to subscription.

I think that people more and more like that and I expect that it will continue to grow over time.

We are -- you remember last quarter we talked a little bit about the U.S. is moving faster than international.

We are now, in the international pipeline, starting to see an increased interest in subscription there as well.

But it is still, as a percentage of transactions, smaller than what we're seeing the Americas.

So I know that's a long-winded answer but that's kind of what we see.

But we are -- and there's -- a lot of what's happening is not just around how they can buy.

I think the flexibility that we've shown and we've shown our willingness to help customers do and our focus on analytics is probably, in my mind, probably the number one thing that's driving increased interest.

Not necessarily that they're going to do it right now but they can build something that will help them do that.

So I think showing that we are flexible and with their interest in mind has been as -- equally important in the building of the funnel.

Sure.

No, that's good color.

And Steve, on 606, I mean if you were to establish contracts that were more favorable for you on a rev rec basis, what would that look like?

Yes, Derrick, the key comes down to cancellation clauses or the periods of time in which the short-term duration of those, they're renegotiated, okay?

That's the key driver as to the benefits of spreading that revenue 606 over time.

It's the cancellation clauses and the renewal periods.

Again, as Vic says, we're going to give the right choice, do what's right for the customer.

And when it all comes down to, as we're looking at Q4 and Q1, it comes down to time when the contract starts.

So there -- in order to mitigate that potential lost revenue between 605 and 606, we may look at opportunities that give us the ability to minimize that concept of lost revenue between 605 and 606 effective 1/1/18.

And so long term, we're going to continue to look at -- we understand the benefits of that recurring revenue model, okay?

Again, doesn't affect the recurring free cash flow or the cash flow associated with those.

We understand the benefits, we understand the trigger points.

But again, getting back, we want to make sure we are giving the right choice to the customer that Vic described.

And I echo Vic's points with respect to those customers.

The customers are learning this as we go, even in the U.S. Because, again, as Vic said, a lot of these people are managed on OpEx, and CapEx is kind of outside of their individual business model.

And so they're looking at hey, if I do OpEx, that gets below that -- that's that noncash line on my operating model and I'll focus on CapEx.

But as Vic said, they are learning, they're understanding the benefits of this recurring model, and I expect that education and those benefits continue to evolve in 2018.

Your next question comes from Brad Reback of Stifel.

Steve, best of luck.

Just returning to the 606 question, Steve.

The $600 million to $620 million guide, what type of impact, if any, does that have from potential contracting terms in 4Q with respect to 606?

So if you got more favorable terms, would that provide upside or is that already priced -- baked into that?

No, Brad, we are looking at the deals now and working with the teams.

Right now it's a minimal impact because -- it would have been a more negative impact on the lost revenue, cumulative lost revenue going into 1/1/18.

But the impact in the revenue in the quarter would be nominal if those things got recognized in Q4 and then we just increased the lost revenue item.

So it's -- really comes down to the contracts that would've been ratable under 605, we would've gotten a small piece, in theory, in December.

And that we would just increase that "lost revenue" and the adjustment to retained earnings effective 1/1/18.

So what we're looking at doing is, and if we have the opportunity, is to look at the start dates of these contracts, put it 1/1/18 and then recognize that under 606.

But to also -- I want to reinforce, we're doing a retrospective reproach where we will provide you, next year, those numbers under 605 on a comparable basis for '18.

So you will see the differences between 605 and 606 in primarily Q1 of '18.

Got it.

And then one just real quick follow-up.

Vic, I think last quarter you guys talked about a couple of large transactions that you expected to close before the end of the year.

I'm not sure if there was any mention of those on the call specifically.

Just any update on that would be great.

Yes, so we didn't do any of those in Q3.

But we still -- yes, we have several large transactions that are on track for Q4.

They are -- we haven't lost any deals and so still there and in active negotiations.

So they're still in our pipeline and on track.

Your next question comes from Keith Bachman from Bank of Montréal.

Steve, want to wish you the best in the challenges that lay ahead.

Best of luck there.

I have 2 questions that are related but I'm going to ask them one at a time.

In that, I was hoping to get, number one, a little greater dimensions on new customers -- or new workloads, I should say, versus capacity buys, if you will, from existing customers.

Is there any way to think about that or give us more specifics on dimensions associated with how much is impacting either your revenues and/or the growth of installed base?

Is there any more specifics you could give us on workloads, again, existing customers versus new workloads?

Yes, Keith, and what we're seeing, and this really ties into our consulting-led business-led consulting driving more TCore growth, what we're seeing is a large percentage of the TCore growth is coming in our top 500.

These are the -- these are where the use cases are driving opportunities for growth.

In addition, we continue to see stronger acceptance of our -- as Vic mentioned earlier, stronger acceptance of our consultants on a broader scale, just not hardware focused.

We are getting brought into conversations, as Vic mentioned, even on the conversation earlier this week that these are opening the doors.

It's still very, very early, Keith.

Very early in the process to understand the key drivers.

But with the largest growth of our TCore coming from those top 500, it's a good inference that those are being more business led than purely just technology refreshes, hardware refreshes.

And I might just add, I watch TCore growth because it is growth -- absolute growth.

In other words it's not replacement growth or [anything like that], it actually has to be a larger install we have before it gets in there, whether it be an existing or a new customer.

So we have to be expanding our footprint in existing customers as well as new ones.

And we have both of those going on in the quarter.

But it is -- that is how I'm looking at the business now is, are we are actually growing the use of Teradata over and above where we are today.

And when I first -- I think the first call I had, I had a lot of discussion with some of you all about, everybody's moving off of Teradata, right?

They're going somewhere else.

We're not seeing that at all.

We're actually our -- our customer, installed customer base is now starting to expand their footprint with us.

And so the TCore growth is in fact expansion of Teradata from wherever it comes.

So we -- so it's true growth.

Well let me try the second question that -- which definitely relates.

I've heard a couple times with Teradata, including at your user group event in LA or Anaheim a few weeks ago, that the flexible business model is one of the reasons why you're seeing new renewed interest in Teradata.

But I wanted to break that down.

In cloud we are actually not -- it's a small number, growing fast but it's still a small number.

We're not detecting a lot of interest because the performance degradation on the hardware is pretty meaningful and there's data gravity issues, if you will.

But perhaps, you can correct me if I'm wrong.

I think it comes down to the difference between license and subscription.

And yet, the TCO, I think, is very similar between license and subscription.

So is it really about flexibility, i.e.

business units can make operating budget decisions as opposed to capital decisions?

Or was it more fine-grained than that?

It is absolutely about derisking the decision.

And by the way, the comment that you made that -- about performance impact in the cloud, we are not seeing that, right?

But we have -- or we have migrated significant customers also into the cloud and just seeing a great performance.

And when we show the benchmarks, we compare that to other platforms in the cloud.

So for customers to have that choice and to have the ability to say, "No matter if I start on premises or in the cloud, I can switch and decide at any given point in time," we have that -- and that's what's driving the adoption from the customer base.

Thank you so much.

And thank you for joining us today.

I think that's all the time we got.

Actually we're past it a little bit.

Thank you for your participation and support and interest.

We look forward to reporting a strong fourth quarter on our next call.

Thank you all for joining.

At this time this concludes today's conference call.

You may now disconnect.