Ladies and gentlemen, thank you for standing by, and welcome to Teradata's 4th Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Christopher Lee, Senior Vice President, Investor Relations and Corporate Development.
Thank you. Please go ahead.
Good afternoon, and welcome to Teradata's 20 2Q4 and Full Year 2020 earnings call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today followed by Mark Culhane, Teradata's Chief Financial Officer, who will discuss our financial results. Our discussion today includes forecasts and other information that are considered forward looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could Teradata's most recent Form 10 ks and Form 10 Q filed with the SEC and in the Form 10 ks for the year ended December 31, 2020, that is expected to be filed with the SEC later in February. We undertake no duty or obligation to update our forward looking statements.
On today's call, We will be discussing certain non GAAP financial measures, which exclude such items as stock based compensation and other special items described in our earnings release. We will also discuss other non GAAP items such as free cash flow and constant currency revenue comparisons. A reconciliation of non GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor. Teradata.com. A replay of this conference call will be available later today on our website.
And now, I will turn the call over to Steve.
Good afternoon, everyone, and thanks for joining us today. I'm very pleased to lead off our call by We exceeded expectations in the 4th quarter on recurring revenue, EPS and free cash flow, and we also exceeded incredibly proud of our team's performance and strong execution, particularly given the impacts of the global pandemic. We have effectively completed our transition to a subscription model that generates recurring revenue and are vigorously executing our transformation to a cloud first company. The team drove another quarter of solid year over year and sequential growth in total ARR. This was especially true for public cloud ARR, which exceeded $100,000,000 The growth we are seeing demonstrates that our cloud first positioning is resonating with the market.
More importantly, It shows that customers are increasingly seeing the value advantage in the public cloud, powering effective analytics at scale and delivering meaningful business returns. Public cloud ARR of $106,000,000 At the end of 2020 was a 165% increase from the prior year. Cloud First is overarchingly important to our strategic focus. As such, we are now disclosing our public cloud ARR in our earnings And intend to continue providing this metric going forward. To provide some color on our momentum, I'd like to highlight a handful of our public cloud wins.
1 of the world's largest airlines committed to Teradata on Azure for its next generation analytics in the cloud. We were chosen ahead of Snowflake because of our low cost price performance and our best bet Technology, allowing this customer to meet its advanced analytics goals. This win is a great demonstration of the It's crucial and no one does that better than we do. We signed a long term agreement At a Fortune 100 insurer, as it modernizes its IT infrastructure, this competitive win against several cloud native vendors came after the customer recognized that Teradata provides significantly higher value and quality at significantly lower cost than others. 1 of the largest non profit healthcare systems in the U.
S. Chose Vantage on Azure for its patient experience and the data analytics capabilities enabled by our data platform. We conducted an extensive evaluation of Vantage on Azure versus cloud only competitors. Our customer selected Teradata for Past workload management capabilities, platform ability and an ability to reliably and securely execute 1 of our global consulting partners on this customer's migration to the cloud and its future growth opportunities. A North American based global e commerce marketplace recommitted to Teradata to modernize its analytics environment after it tested the Similar to the realization that it would not achieve the business value it expected from its intended move to Snowflake, Selecting Vantage on AWS offered a seamless transition to the cloud, ensures its mission critical production workload is maintained and allows its people to focus on creating go forward business value.
A Fortune 50 Healthcare company Selected Teradata on AWS to continue to run its business intelligence reporting and analytics for claims, Case management and provider efficiency. This too was a competitive win against multiple cloud native vendors With Teradata's ability to scale and handle very high workload volumes as the main differentiators for this growing customer. And we are helping a leading retailer in APJ transition to the cloud with Vantage on Azure. This customer chose our consumption pricing model to provide the elasticity to quickly scale and address the Changing retail market environment. These are just a few examples that illustrate how well our teams kept Beyond the excellent efforts of our sales organization, who is proving every day the reliability, performance and value of our offerings and capabilities to The company's resolute cloud first focus and commitment came to the forefront throughout 2020 and was manifested across the entire business.
Some of our advances from the last few months include Launching our VANTAGE trial program. This trial program places the power of Teradata directly in the hands of customers To help companies quickly, easily and at no cost experience the capabilities of Vantage in the cloud, this free trial is preloaded With ready to use examples to get customers started, users can also upload their own data to see how Vantage Advanced analytics functions enable faster evaluation and accelerated time to value. And As with every Teradata environment, there is no limit to the number or complexity of queries that may be submitted. Only Vantage enables analytics across multi cloud, on prem and hybrid environments And to offer maximum flexibility and choice for our customers, Vantage is available across the top public cloud vendors, Google Cloud, AWS and Microsoft Azure. We also recently announced that Teradata Vantage is now available in AWS, Azure and Google Cloud Marketplaces.
These Channels offer another means to make it easy for customers to purchase a new Vantage. With full multi cloud support, Our software is consistent across all of these environments, making processes easier, reducing risk and delivering faster time to value and all with the scale, security, availability and performance customers rely on from Teradata. This is a tremendous benefit to our customers as many have multi cloud strategies and roadmaps. With Vantage, companies can leverage all of the data, all of the time and at the Combined with our new flexible pricing options make it easy for customers to benefit from data analytics in the cloud as we unlock the value in the data asset. Additionally, with the latest release of Teradata Query Grid, We are making it easier for customers to connect to data sources regardless of where the data resides.
In the cloud and multiple clouds are on prem. This is important as organizations increasingly transition to the cloud and need to be able to access and combine information from all of the data environments at the same time and at scale. Our R and D team is relentlessly working to ensure that Vantage is the fastest, lowest risk, as we architect our software for the cloud. I am confident in our accelerating cloud roadmap, our rapid cloud migration work and the growth it will deliver. Our development efforts remain centered on driving complete and compelling cloud offerings at scale And the team is bringing forth cloud native integrations at record pace.
Companies must take advantage of all of the data that is available to them to succeed. And we will remain steadfast in providing the enterprise scale and flexibility they need with our cloud data warehouse and the analytic capabilities we enable as a platform. As I referenced last quarter, We undertook a careful review of our operations to align our costs to better support our cloud growth objectives. We will be investing 75% of All R and D spend are over $200,000,000 in fiscal 2021 in our cloud initiatives. We are making these investments while also planning to improve operating margins and increase free cash flow.
Looking ahead, as we begin 2021, we anticipate significant year over year growth in public cloud ARR. Additionally, we expect year over year growth in total revenue, profitability and free cash flow. Going forward, a majority of our revenue will be recovering and we expect total revenue growth For the first time since 2018, as the shift to a subscription model is no longer a headwind for our reported results. Mark will talk more about this in his comments along with financial reporting changes we anticipate making And our future lies in bringing enterprise data warehousing and analytics software to the world's leading organizations. Consulting services and 3rd party software sales don't equate to high quality recurring product revenue.
Therefore, we believe the changes Mark will describe will aid you in seeing our true progress. We have taken clear actions to prepare for growth in 2021. One of the ways we strengthened our execution during 20 and are stepping up our efforts to further focus our marketing and sales teams on driving growth in the cloud. Importantly, We have refined our sales compensation program and are incenting our salespeople to grow cloud while protecting our base. We have also simplified and aligned our marketing message to cloud first and are taking the message to the market to drive awareness and demand for Teradata Vantage on public cloud within our target markets and customers.
Additionally, We received a significant industry endorsement of Teradata's emerging strength as a leading cloud First data platform as Teradata was named a leader in Gartner's cloud database management magic quadrant. The report noted that our move to the cloud and new pricing models make our price performance more apparent and furthermore, The report encourages customers to run a proof of concept to understand how competitive Teradata's price performance is. Teradata garnered the highest scores in 3 out of 4 use cases in Gartner's report on critical capabilities For cloud database management systems for analytical use cases, this evaluation clearly demonstrates Teradata's ability to meet the largest and most demanding customers' data analytics needs from all industries. We are continuing to add strong leadership to executive ranks. I am very pleased that we named Todd Seowen as Chief Revenue Todd brings to Teradata more than 25 years of experience in global sales, marketing, Channel and operations at large multinational technology organizations, including most recently at Apple and previously with Oracle, Rackspace and Microsoft.
The drive for results has a track record of delivering predictable and profitable growth and has successfully led organizations through cloud based transformations. With an intense focus on delivering lasting value for customers, Todd has already hit the ground running and is deeply engaged with our go to market teams. Before I turn the call over to Mark, I would like to highlight the recognition Terra data recently received regarding our ongoing environmental, social and governance or ESG efforts. I am pleased to share that Terra data was named in the Dow Jones North American Sustainability Index For the 11th consecutive year and we have also been included in the Corporate Equality Index for the first time, We believe social responsibility, sustainable business practices and responsible governance are good for our world and right for our business. We will continue to build on our commitment to sustainable corporate citizenship that leads to long term value creation And for all of Teradata's stakeholders, we look forward to share more on our corporate strategy, including ESG at an Analyst Day later this year.
In closing, I would like to reinforce that I am incredibly proud of the progress we've made and our execution against our goals. With the ever increasing volume of data and the dynamically changing business environment, Companies need Teradata's multi cloud technology, which lets them scale simultaneously across all critical dimensions, Whether that be data volume, the number or complexity of queries, response times or managing FLAs of different business needs, This is where Teradata technology excels and our rapidly growing cloud ARR shows that customers are recognizing this value from Teradata. And with that, I will turn the call to Mark for more details on our results.
Thank you, Steve, and good afternoon, everyone. Before I discuss our Q4 operating results, I want to indicate that Unless stated otherwise, my comments today reflect Teradata's results on a non GAAP basis, which excludes items such as stock based compensation expense and other special items identified can be found in the earnings discussion document on our Investor Relations webpage at investor. Teradata.com. I share Steve's view that Teradata had a strong finish to 2020 In a global environment impacted by the pandemic, I am pleased to report that the company delivered another quarter Better than expected recurring revenue, earnings per share and free cash flow, while effectively completing our pivot from a perpetual license model to a subscription license model. We also exceeded our original guidance for the full year We ended the year with $1,587,000,000 in ARR, which was 11% growth year over year and beat guidance of 8% ARR growth given at the beginning of the year.
We delivered $86,000,000 in incremental ARR in the 4th quarter. The $1,587,000,000 of ARR breaks down as follows. Dollars 960,000,000 represents Subscription and cloud ARR. As Steve noted in his introductory remarks, to give investors better insight into our cloud business And momentum, we are disclosing our public cloud ARR for the first time. Public cloud ARR totaled $106,000,000 at the end of 2020, which was a 165% increase from the end of 2019.
Public cloud related ARR is comprised of Teradata Vantage running on the public cloud, AWS, Azure and Google Cloud and does not include private cloud, which continues to be included in subscription ARR. We are not including private cloud as our cloud first strategic focus is on public cloud. The remaining subscription amount of $854,000,000 represents on premises and private cloud subscriptions and grew 30% year over year. The remaining ARR balance of 627,000,000 represents maintenance, software upgrade rights and other ARR, down 14% year over year and reflects our strategic move to subscription and the cloud. Moving to recurring revenue.
In Q4, we generated 383,000,000 recurring revenue, which was above our guidance range of $371,000,000 to 3 73,000,000 and represented 9% growth year over year. Better than expected ARR growth and consistent sales execution throughout the quarter, both positively contributed to the increase in recurring revenue. Moving on to consulting revenue. Consulting revenue declined 27% year over year As expected, as we continue to refocus our consulting business on higher margin engagements that also drive increased software consumption within our customer base. In addition, We experienced impact from the ongoing COVID-nineteen pandemic as some customers canceled or delayed certain projects as they continue to manage their discretionary spending, especially for on-site consulting engagements.
We expect consulting revenues to start to stabilize during 2021 and expect consulting revenues to decline at a significantly lower rate than we have experienced over the last few years. Turning to gross margins, total gross margin came in at 59.3%, up 6 10 basis points year over year. The improvement was driven by the continued favorable revenue mix shift to higher margin recurring revenues and away from lower margin perpetual and consulting revenues, as well as increased Recurring revenue and perpetual revenue gross margins year over year. Cost savings of about $6,000,000 from the actions announced during our Q3 2020 earnings call aided our gross margin in the 4th quarter and will also benefit our gross margin dollars in 2021. Recurring revenue gross margins was 70.5%, up 190 basis points from the Q4 of 2019 and up 10 basis points sequentially.
The year over year increase in recurring revenue gross margins was due to cost improvements, primarily in our subscription and cloud business. As you may recall, we had expected recurring revenue gross margins to decline sequentially in Q4 from Q3. However, The greater than expected recurring revenue dollars and our cost saving actions both drove the better than expected recurring revenue gross margin. Consulting gross margin was 8.4% versus 14.9% in the Q4 of 2019. Consulting margins declined year over year and sequentially as revenue decreases outpaced cost reductions.
As part of our restructuring actions, we have moved to a more variable consulting cost structure starting in 2021 to improve the future profitability of our consulting business and enable more consulting with 3rd party partners. Turning to operating expenses, total operating expenses were up 4% year over year. The primary driver of this increase were additional Total operating expenses decreased slightly year over year. On our Q3 earnings call, we disclosed that the restructuring efforts we announced We're expected to result in expense reductions between $80,000,000 to $90,000,000 on an annualized basis. We expected to invest a portion of these savings into our cloud first and related go to market initiatives and return the remainder to investors through increased earnings.
As an update, the actions taken resulted in approximately $80,000,000 of total cost Of this amount, approximately $12,000,000 benefited operating income in the 4th quarter. We will discuss the impact on 2021 when I get to guidance shortly. Turning to earnings per share, Earnings per share of $0.38 exceeded our guidance range of $0.23 to $0.25 provided last quarter. We cleanly beat expectations as we generated about $0.09 from better than expected revenue growth and about $0.08 of EPS from the cost actions discussed on the Q3 earnings call, partially offset by the primarily lower consulting margins and higher incentive planning expenses as previously mentioned. Turning to free cash flow, We had another solid quarter of free cash flow generation driven by higher operating margin, strong cash collections and other favorable working capital timing differences.
Free cash flow in the 4th quarter was 45,000,000 which contributed to full year free cash flow of $216,000,000 well ahead of the annual free cash flow guidance Approximately $75,000,000 related to the restructuring actions that we discussed during our Q3 earnings call, of which approximately $50,000,000 were expected in the Q4. Our current forecast for total cash usage is now approximately $65,000,000 down $10,000,000 from the prior estimate. Of the $65,000,000 $23,000,000 was paid in the 4th quarter. The remaining $42,000,000 is expected to be paid during 2021. However, even after taking the restructuring cash Turning to guidance.
Let's start by discussing the 2 key assumptions underpinning our 2021 outlook. First, I would like to inform you of a financial reporting change starting in Q1 'twenty one that Steve mentioned in his introductory remarks. To better align our financial reporting with how Steve is managing the business going forward. We will be reclassifying managed services related ARR and revenue out of recurring revenue and into non recurring consulting revenue as these services are principally consulting delivered services. In addition, we will be reclassifying As selling and renewing 3rd party software will not be a focus for us, but rather will be driven directly to the 3rd party software Partner, the reporting change will result in no change to previously reported Total revenue or total gross profit or gross margin percentage.
We are making this change to better reflect and disclose the important revenue and margin metrics that Steve and our company are focused on driving moving forward. See the earnings discussion document on the Investor Relations webpage For more information regarding the revenue and gross margin component impacts of this change, I would like to provide you the reclassified amounts of ARR at December 31, 2020 by category Reflecting these changes, after reclassifying managed services and third party software ARR, Total ARR was $1,425,000,000 at the end of 2020, which still grew over 11% Year over year and it consisted of the following, dollars 917,000,000 of subscription and cloud related ARR, which increased 38% from the end of the prior year with public cloud ARR of $106,000,000 of this total And $508,000,000 of maintenance and software upgrade rights related ARR, which decreased 17% as expected due to our shift to a subscription model. 2nd, We look to continue our growth in the cloud as we accelerate our product roadmap, focus our go to market to grow cloud while protecting our base and drive awareness and demand for our platform amidst the ongoing pandemic. Given our cloud momentum and the purchasing behavior of our high end enterprise customer base, As more of them move to Vantage in the cloud, we expect that we will contract differently with our customer base versus what we have historically done on premises.
We anticipate that some or many of our customers may choose to purchase or use committed volumes of cloud instances directly from the public cloud providers Rather than through us, this could create variability in our total ARR and recurring revenue In subsequent quarters, as only the ARR and recurring revenue associated with our Vantage software will flow through our P and L Rather than that plus the cloud infrastructure. However, we are happy to take that trade off Additionally, as more customers and workloads move to the cloud, it is likely more of our business will be consumption based and will not necessarily be recognized ratably, creating more variability in the recurring revenue we report by quarter. Furthermore, many of our customers will operate Vantage on premises as well as in the cloud And thus, we expect that may change our on premises contracts with customers, which could result in on premises revenue recognized other than ratably, which also may create more variability in the recurring revenue we report by quarter. As a result, we anticipate it becoming more difficult to forecast our recurring revenue, especially on a quarterly basis. Therefore, we will not be providing guidance for recurring revenue by quarter.
With that said, Our 2021 annual guidance, which considers the reclassifications I recently mentioned, is as follows: Public cloud ARR is expected to grow at least 100% year over year. Total ARR is anticipated to grow in the mid to high single digit percentage range year over year. We expect total recurring revenue to grow in the mid to high single digit percentage range year over year. We expect total revenue growth for the first time since 2018. We anticipate total revenue to grow In the low single digit percentage range year over year, non GAAP earnings per share are expected to be in the range of $1.50 to $1.58 which would be about 18% year over year growth at the midpoint And we expect free cash flow of at least 250,000,000 Now I'd like to provide some color on 2021 to help you understand our business, which again considers the reclassification I recently mentioned.
We expect public cloud ARR to become a more meaningful part of total ARR. Within the total revenue guidance we provided, We anticipate mid single digit percentage reduction in consulting revenue year over year and a continued reduction of perpetual and other revenue by at least half in 2021 versus 2020. We expect our total gross margin rate in 2021 to be approximately the same as in 2020, given our significant movement to the cloud. And we also expect recurring revenue gross margins to be in the low 70% range. Perpetual and other gross margin is expected to be in the mid-twenty percent range and consulting gross margin to be in the low teens Percentage range.
We expect to improve operating margins by 100 basis points to 150 basis points as we continue to drive efficiencies in our operating model to drive profitable growth, while increasing our investment in cloud sales and R and D capabilities. As previously discussed, the majority of the $80,000,000 of expected annual run rate cost savings are being reinvested back into R and D and go to market cloud initiatives. However, on a net basis, We anticipate $0.05 to $0.10 of benefit to 2021 EPS. This is on top of the benefit recognized and EPS for the Q4 of 2020. Non GAAP earnings per share includes the cost savings I just mentioned.
The free cash flow guide I mentioned reflects and is reduced by the $42,000,000 of restructuring cash payments previously discussed. We anticipate approximately $27,000,000 of the $42,000,000 being paid during the Q1. We expect our non GAAP effective tax rate to be approximately 23% for the full year and assume 112,000,000 fully diluted shares outstanding. We plan to be opportunistic about share buybacks during 2021. While we are focused on executing against our full year guidance, We wanted to provide you with a few markers to assist you with your modeling of Q1 2021, which again considers the reclassifications I previously mentioned.
Public cloud AR is expected to grow 165% or more From the $44,000,000 in Q1 'twenty public cloud ARR or About $10,000,000 to $15,000,000 increase sequentially from the end of 2020. Total revenue in the Q1 is expected to be higher year over year, but lower sequentially, which is consistent with the historical seasonal pattern. However, we anticipate the decline rate for total revenue from Q4 'twenty to Q1 'twenty one to be less than it was from prior years. While we expect consulting revenues to stabilize during the course And we expect non GAAP EPS in the range of $0.38 to $0.40 with 112,000,000 fully diluted shares outstanding. And with that, operator, we are ready to take questions.
Please standby while we compile the Q and A roster. Your first question comes from Lanzi Mohan from Bank of America.
Yes, thank you and thanks for breaking out the public cloud ARR and congrats on crossing the $100,000,000 mark here. Can you talk about your public cloud ARR guidance of at least 100% growth for the full year? You're clearly now available across Much broader set of platforms. Just wondering in that at least 100%, what's your assumption around the mix of revenue that's Going to be just software bought through the public cloud marketplaces versus the revenue where customers are paying for infrastructure from you as well?
Yes. Hey, Wamsi, thanks. Yes, so clearly, we're seeing lots of momentum in our public cloud interest with Vantage on the cloud. Time will tell how much comes as just software only versus are they going to procure the infrastructure Through us, clearly, we don't think our biggest customers are likely to do that given what we know today. So that's why we're saying at least 100%.
We would hope that we'd be higher than that and we'll have to see how the year plays out As that moves to determine whether is it all coming to us or just the software portion only.
Okay, thanks. And I think, yes.
Hey, Wamsi, it's Steve. Thanks for the question. I'd also say on The customers buying the infrastructure through us, we see that as a key differentiator. Being able to operate Teradata Vantage Inside the customers' environment is something that differentiates us inside the industry. A lot of the cloud business that we have done to date and a significant portion of our $106,000,000 We actually provide the full stack from infrastructure through the application stack.
So, we're offering a full Range of deployment options in the cloud that we think is really differentiating.
No, that's great, Steve. Thanks for that clarification. If I could just ask on the sales comp changes that you mentioned to incentivize more growth in the cloud, any more color you can And what are you seeing at your public cloud customers in terms of pricing choices? Is it going more towards blended pricing or consumption based pricing? Thank you.
Yes. Wamsi, I'll take that as well. It's a great question. So We've redesigned our compensation schema for this year so that our sales teams get Smart account if it's an existing customer and they get a multiplier on it when that growth includes growth in the cloud. So we've designed a compensation scheme that we believe protects both the base and encourages the sales team to execute growth in the cloud.
The other thing I would say is, we are encouraging our sales teams to prospect. We believe that, as you pointed out, our consumption based pricing model enables us to We go after new customers in a very effective way. So, we're not just focusing on our existing base. We're going to actively prospect and our new sales leader, Todd Sione, is looking at deploying a hunter based Sales model to go after new logos. So we're incredibly excited about that.
We see the blended pricing model as being very popular In terms of when our customers look at how they want to operate in the cloud, Because it gives them some benefits commercially if they know that they if they know they're going to execute a certain volume of transactions And they want to be able to spike according to different workloads. So that blended pricing model is really exciting For customers that are just starting with us, that consumption model is really exciting. So I think we'll see both models being pretty successful in uptake from the customer base.
Thanks. Thanks a lot and congrats on the strong execution.
Thanks, Ramsey.
Your next question comes from Tyler Radke from Citi.
Hey, thanks a lot for taking my question. Steve, you talked a lot about several kind of Fortune 100, Fortune 500 Public cloud wins and I'd say in the past this hasn't been something that you've seen a ton In terms of the wins and obviously the strong growth in cloud ARR, I guess from a product or execution perspective, is there anything that you could Identify that you think it's kind of changed your momentum there? And then a follow-up for you or For Mark, is this in these cloud wins, maybe help us understand how much uplift you're seeing
Thank you.
Yes. Thanks, Tyler. I'll take the first part of the question and I'll let Mark talk a little bit about the Expansion that we see when existing customers move to the cloud. I think the excitement around our cloud product has really accelerated As we went through the year, we shifted our research and development investment to be predominantly in the cloud. Just roughly 30% of our investment Prior to our changes in 2020 went to cloud and 70% went to on prem.
We swapped that around. $100,000,000 a significant investment in building up our cloud capabilities. And what we've been able to do is really Build out our integrations across all of the cloud platforms, AWS, Azure and announcement in Google Cloud. Also, our ethos now is to be able to extract value from data no matter where it sits in the ecosystem. So, introducing native object store and being able to use native object stores on the public cloud environments is really attractive to our Customers, and as we look forward into 2021, we're known just now to be great at delivering that Performance and scale on the cloud.
In 2021, we're going to get even better. We're adding 3rd party application ecosystem integration in the cloud. We've got more cloud native integrations with 3rd party applications in the cloud. You can bring your own analytics. We are integrating with cloud native services.
This is a complete modernization of Teradata Vantage and the cloud environment and we think our customers are seeing that and They want to use that technology to get the best business results that they possibly can. So lots of investment there. Mark, do you want to talk a little bit about expansion?
Yes, sure. So to date, it's largely been our existing customers moving some or all Of what they're running with us on premises to the cloud and the growth in AR can vary. It depends. Are they Procuring the infrastructure for us or not, because if they're not, you could see minimum or some less ARR moving. Importantly for us, What we've experienced is that for the growth we experienced across 2020, the customers who are already in the cloud with us, They grew over 50% with us during 2020.
And those that moved something from on premises to the cloud with us, While it may have been neutral or up slightly when they moved or potentially slightly down, we saw that once they moved with us to the cloud, we saw almost approximately 40% Growth and from where they started with us in the cloud, which is obviously very important for us, Which is why I made the comment in our prepared remarks that if we see customers that want to procure the instance of the To date, we haven't seen it, but our bigger customers may go that direction. It may seem like an initial client in ARR, but once we have them there, we see the growth that can occur. And as I mentioned, that's a trade off we gladly make. Obviously, the margin profile of a software only coming to the cloud versus us incurring the infrastructure cost is better as well. And so those would be trade offs we would gladly make because we all We want our customer base to move to the cloud with us, advantage in the cloud.
So We're excited about the trends we've seen across 2020 and the growth we've seen there and we're also very Excited about what we've seen in the pipeline and the momentum building of our existing customer base In the cloud and the perception of us in the marketplace is now starting to rapidly change on that
We ask that you please limit your questions to 1. Your next question comes from Katy Huberty from Morgan Stanley.
Thank you. Good afternoon and congrats on a really strong quarter. I wanted to ask Mark if you can talk a little bit about The margins in your cloud revenue today versus subscription margins overall? And then When do you expect the 2 to converge? And then I have a follow-up.
Sure. Well, clearly, Katie, as we've mentioned, the margins we experience in Cloud are lower than what we've traditionally experienced on prem because we're at 106,000,000 in the cloud today. We're not at scale. So we would expect over time that we view 70% as sort of the benchmark you got to hit and exceed in the public cloud. We're going to see the revenue threshold to get us there is clearly beyond the $106,000,000 Is it $300,000,000 to $500,000,000 time will tell, but we clearly expect those to converge On that front, for sure.
Okay. That's great. And then just also, Mark, just looking at Your earnings guidance, dollars 0.38 in the March quarter and then if I just divide your annual guidance by 4, that would also suggest A similar sort of $0.38 to $0.39 run rate through the year. Should we expect that now that you've transitioned to subscription that EPS is going to be quite stable and we won't see historical seasonality? Or are you ramping investments through 2021 and that's why you're not seeing EPS expansion off the March base?
Yes. As you Properly noted, we've experienced seasonality historically. I think we still experienced some of that here in 2021 as well Despite the completion of perpetual to subscription because now we're in the next phase of that on prem subscription moving to cloud And does that largely go consumption based or not? Because if it goes consumption based, we recognize revenue based on what's consumed, Not a ratable spread of what they've signed up for. And you do that each and every month, which could create Some variability in terms of recurring revenue and what's happening.
And then we'll see what happens with the portion of our customers that Done something with the cloud, but do maintain something with this on prem that may change the way contractually that falls to our revenue, which could create some potential Seasonality as well. So I don't expect it to be sort of stable $0.38 range across the quarters Throughout the sequential part of the year, there is still going to be some seasonality here.
Okay. Thank you.
Your next question comes from Derrick Wood from Cowen.
Yes, great. This is actually Nick Altman on for Derek. Thanks for taking our questions. For my first one, can you guys maybe talk about Customers who have shifted to the consumption based pricing model and maybe touch on how the expansion motions are playing out there?
Hey, Nick. I'll talk about it at a high level and then ask Mark to comment a little bit more. What we've seen from customers who have moved from an on prem motion to subscription in the cloud using consumption It's actually that the overall level of ARR in many of those customers has increased. And that's As they've brought new workloads to the cloud, so Obviously, when you're working in an on prem environment, you have a constrained physical infrastructure footprint. And when we move customers to the cloud, it kind of unleashes their ability to expand their use cases and deployment.
An interesting thing for our response to COVID and when we were helping some of our customers respond to COVID, We gave them some capacity on demand into their infrastructure and they immediately used that capacity on demand. We're seeing a very similar pattern in terms of as our customers move from on prem to the cloud, They can take advantage of those Elastic environments and it's giving us a great opportunity to talk to them about some of the more advanced analytic use cases that they want to deploy and incremental workloads that you can put on Teradata. So it's pretty exciting.
Great. And then can you guys just give us a sense of how the installed base has trended just in terms of willingness to buy or expand mainly as it pertains to the macro environment? How much improvement have you guys Into the macro environment, how much improvement have you guys seen there sort of as the year progressed? And then looking ahead, are you starting to see more projects from distressed verticals come back online or is it a bit too early to tell there?
So we are really, really happy with our Customer examples that we gave in my prepared remarks, which was one of the airlines committing to Teradata in the cloud. Clearly, a distressed industry, but what we're seeing is that Customers who are in an industry which has challenges, if they have the vision to utilize data To get better business results and business outcomes, they can use that data to optimize their operations at a rapid pace to ensure that they can adequately respond to the challenges that are in front of them. So I gave example one example in the airline, another So we're starting to we're seeing even industries that you might consider Just press just now using the power data to really respond to the environmental challenges that they have. Great question though, Derek. Thanks.
Got it. Thank you.
Your next question comes from pre Gotti from Barclays.
Hey, everyone. Congrats on the great quarter. If I look at the map for cloud ARR and total ARR guidance, It's just that almost all the new ARR that you're adding is coming from the cloud. Is the base case assumption that there will be no On premise expansions during this year?
Hey, Preeti, thanks. Yes, no, we will see our on prem business But clearly, we're seeing movement from on prem to the cloud in a major way. So We would expect the cloud that we said is going to grow at least 100%. At the same time, we're still going to have customers that are going to be on prem that haven't done things to the cloud and we expect some of that to Overall, subscription our on prem subscription, we would expect would be lower by the end of This year compared potentially compared in total might be, but right now we're expecting Subscription to grow, but not at the same rate that we have seen it grow in the past because it's moving to the cloud. So The vast majority of the overall subscription growth is But at the end of the day, total ARR is growing, on prem subscription ARR is growing, but the growth is being driven by what's going on in the cloud.
Got it. Ex migrations on premises still growing.
Yes. Good morning.
As far as where the cloud product is right now, can you give us an idea of how much Of the product itself is cloud native versus just the existing Teradata product that's being hosted on the cloud?
Hey, Fria, I'll take that one. So we're really happy with the advances that we've made From our product team, they have completely redesigned certain elements of the product and we continue to Transform the underpinnings of the product. What I will say is that we've really improved our Cloud native integrations, in AWS, we integrate with 17 of their cloud native services. We've got the same level of integration with AWS and Google's 1st party services, that clearly makes us a great partner for the cloud service providers. The thing I want to point out though is Some of our key differentiation and the reason that we are winning in the cloud is Because of the Teradata technology that our customers are used to, their level of performance, their level of scalability As delivered in the cloud successfully across all of the dimensions that our customers want to stress, that an enterprise Data warehouse and analytics capability, whether it be volume of data, concurrent queries, the complexity of those queries, The scalability, all of those capabilities that our customers are used to from the Teradata platform, we deliver in I mentioned a little bit earlier, we turned around our investment To have around $200,000,000 of investment in terms of developing our cloud product, it's just going to get better and better over time.
We've completely We thought our R and D team so that we are moving to much more regular and frequent releases of Cloud based technologies and capabilities. So it's a great transformation story. It is great to see that technology coming online for our customers.
Our last question comes from Zane Chrane from Bernstein Research. Please go ahead.
Hi, thanks for fitting me in. I wanted to ask about the ETL process and migration with customers moving to the newer Cloud and subscription offerings. One of the pieces of feedback we heard from the early adopters of customers a couple of years ago that moved from on premise IDWs to subscription or It's hard to date in the public cloud or managed cloud. Was that the process of migration and rebilling the ETL pipelines was more labor intensive and Clunky than they had expected. So I'm kind of curious what you've done in the last year or 2 to simplify and maybe automate the process Data migration and rebuilding the ECL for data ingress.
And then separately or actually possibly related, Can you talk about what you're doing to capture the growing opportunity in streaming analytics for data in motion, whether it's integrating something like Dataflow on Google or Apache Beam, etcetera? Thank you.
Thanks, Zane. I'll take a Stabbed those. So, yes, I think our integration with Cloud Native Services has really helped some of That migration effort as well as some of the tools and techniques that we've developed to help in migration. As we look to compare moving an existing customer of Teradata to the cloud, We've been able to demonstrate to those customers that given our knowledge of their environments, given the tooling that we have available, We can do it much more effectively and efficiently, really reducing the time to value of Running Teradata in the cloud and getting the business value that they want from their data delivered to them as quickly as possible. One of the wins I referred to actually in our prepared remarks was a customer that was experiencing that challenge in terms of that data migration And they came back and asked Teradata, instead of them moving to a cloud native product, we want to move to Teradata in the cloud.
We see that as a much easier migration and we know that you and your consulting team can help us And we know that you and your consulting team can help us deliver that. So I think we've got a much better value proposition terms of that, the integration with the cloud native services allows us to integrate with those modern ETL capabilities and that also applies to streaming. We're seeing a lot more interest in terms of real time data analytics, especially the 5 gs and IoT use cases. And our streaming capabilities is we have Streaming capabilities in the product just now, but we're also investing to develop more streaming capabilities as we go through 2021.
I see. And you view the streaming opportunity as being something you'll focus on organic development for. It sounds like maybe more so than partnering with open source or third party vendors. That the right way to think about it?
Look, I think what we're thinking about as we think about Teradata Vantage, we're really thinking about it as a platform. And so we are building some capabilities inside the product to help support streaming, But we're also integrating with the cloud service providers, 1st party services around streaming to be able to address that. So I think leveraging those cloud native capabilities is going to be incredibly important and something our customers really want from us. That's how they want I used to focus as a platform on what we just excel at and they can use some of the first Services from the appliance providers to do some of the streaming type activities. So, it's a nice blend of activity.
That's great to hear. Sounds like a solid strategy and congrats on a really nice quarter. It seems like getting the right captain for the ship is getting it back on track. Just congrats.
Thank you, Zane. Thanks very much. So I'd like to close out the call today. I'd like to thank you all for joining us. Thank you for the questions.
I'm incredibly proud of our progress and I'm really confident in the future. Our continued solid results, Particularly in these challenging times are a testimony to the hard work of everybody at Teradata and I just really want to thank and congratulate the team on a great Q4, A great 2020 and looking forward to a great 2021 with them. We remain staunchly focused on our cloud first transformation and ensuring that we execute and deliver the best multi cloud data platform to guide customers in gaining the greatest advantage from the data assets. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.