Good afternoon. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 Teradata Earnings Conference Call. After the speakers' remarks, there will be a question and Thank you. I would now like to turn the call over to Greg Swearingen, VP of Investor Relations.
You may begin your conference.
Good afternoon, and welcome to Teradata's 2019 first quarter earnings call. Oliver Ratzesberger, Teradata's President and Chief Executive Officer will lead our call today. Followed by Mark Culhane, Teradata's CFO, who will then discuss our financial results. Our discussion today includes forecasts and other information that are considered forward looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially.
These risk factors are described in 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 acquisition, reorganization related costs, asset impairments, and capitalized software development costs. We will also discuss other non GAAP items such as free cash flow and 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, which is accessible at investor. Teradata.com.
A replay of this conference call will be available later today on our website. Teradata assumes no obligation to update or revise the information provided during this conference call, whether as a result of new information or future results. And now I'll turn the call over to Oliver.
Good afternoon, everyone. Since my appointment as CEO have spent significant time, with our customers and internal teams in all regions of the globe and these interactions have been truly energizing. In numerous meetings with senior executives at our megadata customers, they understand that addressing the complexities and challenges of today's analytics landscape is critically important. And they are recognizing that Teradata can uniquely bring the power of pervasive data intelligence so that they can integrate This provides an excellent starting point for today's conversation as it is clear we have the right strategy and are executing to win. In Q1, we grew recurring revenue by 13% in constant currency, grew ARR by 12% in constant currency, and exceeded guidance for EPS.
We also remain very pleased with the rapid rate that customers are continuing to adopt our subscription model. Mark will cover these and other financial results in more detail in a few minutes. Today, I will highlight 4 key takeaways for you. First, we have made significant progress in executing our strategy. 2nd, strong demand continues for our Teradata Vantage platform, and we are increasing our competitive position because of this powerful solution.
3rd, we have introduced new asset service offerings for Vantage to help customers apply their focus to getting the answers they need rather than managing our technology is receiving from leading industry analysts. As we get started, it is important to note that we have made significant progress in executing our strategy and realigning our go to market model. Of our sales teams to provide differentiated coverage of our target megadata customers. As a reminder, These megadata companies are the world's most demanding large scale uses of data, requiring massive scale and speed. We're also making progress in aligning our consulting resources to higher value and higher margin engagements, that will drive increased consumption of our software by the megadata customers.
We are seeing strong demand and adoption of Teradata Vantage In the quarter, we added 2 new metadata customers who recognized the Vantage transforms the data they have into the answers they need help them grow and succeed in today's data driven world. We also saw existing customers increasingly turn to Vantage to help and utilize their data to find the answers to their toughest challenges. Let me highlight a few examples. Air France KLM Group is expanding its analytic ecosystem with Vantage performing cross general analytics for improving services and customer experiences as it analyzes the sequence and path of the customer's interactions through different channels. A global medical equipment manufacturer uses Teradata as an analytics hub that supports its entire business.
It is accelerating its business processes and driving new supply chain and services analytics using Vantage Machine Learning and graph functions to streamline manufacturing and reduce equipment downtime. 1 of the world's largest transportation companies has chosen Vantage as their most reliable and robust solution for reducing data silos and harnessing different data at scale. It is leveraging Vantage to deliver improvements in business operations including lowering fuel costs, increasing safety and managing their network. Barclays has invested in a new Vantage platform to support strategic initiatives in advanced analytics, and a modernization of its enterprise decision capabilities. And an S and P 500 oil and gas producer selected Vantage delivered as a service to acquire and integrate real time sensor data from its fleet of rigs, helping to drill well safer faster and on target, and our drilling data as a service solution delivers answers on mobile and desktop devices.
These are just a few examples that illustrate Vantage is changing the game for our customers and they are recognizing its power to deliver answers to all parts of their organization. The unmatched power advantage is also strengthening our competitive position. We are winning against both newer cloud startups and our traditional competitors. In the quarter, we beat Snowflake in a number of opportunities. The amount of negative feedback we are hearing on over promised snowflake capabilities is increasing.
Companies are having to add more technology to try to get Snowflake working, but even then it does not meet performance expectations or deliver enterprise business results. Here are a few examples of our competitive wins. We won against a cloud competitor at Sony Pictures Entertainment. Helping Sony achieve success in maximizing value in sales forecasting, green lighting, competitive information, and customer experience. 1 of the largest European DIY megastore chains is adding Vantage for retail analytic business cases.
The retailer extensively considered competitive offerings, advantages capabilities demonstrated the power of pervasive data intelligence, and won the deal. A major American professional sports league signed up for Vantage as a service running on EWS. Leveraging the significant analytic capabilities of Vantage to better understand lifetime value, drive personalized targeting and messaging to enhance its fan experience. We won despite the company's long standing partnership with a competitor. Manitage is tailor made to help enterprises get the most return from their investments and focus on what truly matters.
Getting answers, not managing their IT infrastructure. With our recently announced asset service offerings, we are now further helping customers simplify their operations and drive an improved experience of adopting and leveraging Vantage to help them expand their analytic use cases, whether on prem, in the cloud, or hybrid environment. Our technology is getting serious recognition from leading industry analysts, demonstrating that our offerings are meeting customer and market needs and then our technology innovation continues. Teradata ranked the highest in every use case in Gartner's report on critical capabilities for data management solutions for analytics. This report is based on feedback from real world users and provides excellent external validation that our strategy is on point.
And Teradata was again named as a leader in Gartner's Magic Quadrant data management solutions for analytics. We were recognized for our ability to simplify analytical ecosystems with Teradata Vantage and our focus on delivering analytics that matter. Lastly, Teradata was acknowledged for our market leading customer data management analytics capabilities in Forrester's WAF for real time interaction management. This recognition demonstrates that we are driving market changing innovation. So as I turn the call to Mark I would like to remind you of 2nd, we are seeing strong demand and adoption for Teradata Vantage and are increasing our competitive position.
3rd, our new asset service offerings for Vantage help customers focus on getting the answers they need rather than managing their infrastructure. And finally, our innovations continue to garner outstanding recognition. The Teradata team remains persistent in our drive to increase our momentum, advance our market leadership, beat the competition and set the bar high for the entire industry. We are moving faster than ever before and the Teradata team is leading the conversation around the power of data to reshape the world. By the way, challenging the status quo and moving at such an accelerated pace is not easy, and I want to reinforce how proud I am of our Teradata people in their commitment to execute our strategy make a difference and win.
This team is energized focused and committed to bringing value to our customers and shareholders and I could not be more proud of our outstanding people. Now, let's turn to Mark.
Thanks, Oliver, and good afternoon, everyone. We continue to see good customer activity in Q1. Building on the strong momentum we generated in Q4. Customers are very interested and engaged. Learning about how Teradata Vantage, our analytics platform helps them integrate and consolidate their analytics workloads onto one platform while we're their overall IT spend.
Our strategies clearly working and our first quarter performance was highlighted by 72% of our bookings being subscription based, which was in line with our annual guidance of 70% or higher. ARR grew over 12% in constant currency or 9% as reported. During the first quarter, we increased ARR by $12,000,000 in constant currency or $11,000,000 as reported. For a total ARR balance of 1,319,000,000 at the end of the 1st quarter. We saw a few sizable subscription transactions in the Americas push into early Q2.
Which would have more than doubled the q 1 reported ARR and would have also contributed to recurring revenue for q 1. We have closed or in the process of closing these transactions. Our backlog at the end of the first quarter was approximately 2,500,000,000 an increase of 43% year over year. Recurring revenue was 331,000,000 and increased year over year 13% in constant currency or 10% as reported. Perpetual software license and hardware revenue was $31,000,000, a year over year decrease of 55 cent.
As I discussed at our Analyst Day last December, we expect to eventually stop selling on a perpetual basis. As we continue our transition, we are seeing less interest from customers purchasing on a perpetual basis than we expected. And therefore, we continue to expect declines year over year in perpetual revenue as a result. The perpetual revenue we do report is almost all hardware related, which obviously carries lower margins than software. And materially affects perpetual revenue gross margin as I will discuss in a moment.
And consulting revenue was a $106,000,000 in Q1, a decrease of 21% year over year. As a reminder, We are shifting our consulting strategy to focus on our target market of megadata companies. And within that target market, to prioritize higher value, higher margin, business related consulting, that drives increased consumption advantage, our software based analytics platform. As I mentioned on our Q4 call, as we make this shift in our consulting business, we expect a meaningful reduction in consulting revenue as well as some short term impact on our consulting margin However, longer term, we expect Before I continue to highlight our first quarter operating results, please note unless otherwise stated, 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 in our Recurring revenue gross margin was 71% versus 73.2% in Q1 2018, and in line with our expectation. Our current quarter total recurring revenue mix carries more subscription based revenue as compared to prior year, which carried more perpetual license related maintenance and software upgrade rights that has a higher margin profile than subscription based revenue since subscription revenue includes both software and hardware.
This lowers the recurring revenue gross margin versus the prior period. We continue to expect recurring revenue gross margins in the low 70% range. Perpetual revenue gross margin was 29%. As compared to 40.6 percent in Q1 2018. The year over year decline was due to perpetual revenue mix being predominantly hardware related as compared to prior year.
Consulting revenue gross margin was negative 2.8% as compared to negative 3% in Q1 2018. As previously mentioned, as we realign our consulting business to our strategy, the near term profitability will be impacted. However, the changes we are making are intended to materially improve the profitability of this business longer Overall, gross margin was 51.5 percent in the first quarter compared to 48.4% in the prior year period. As total revenue mix shifts to more recurring revenue versus non recurring revenue. Turning to operating expenses.
Selling, general, and administrative expense was $129,000,000 in Q1. A decrease of 13000000 or 9% from the first quarter of 2018. The year over year decline in SG And A was driven by lower go to market headcount as we have realigned our sales resources around our megadata and commercial markets to align organizational capabilities with our strategy. Research and development expense was $71,000,000, an increase $68,000,000 in first quarter of 2018 due to continued investments in both our Vantage analytics platform and cloud initiatives. Operating margin was 8.8% versus 6.9% in Q1 2018.
The year over year increase was largely due to gross margin improvement from revenue mix shift and lower operating expenses. Caribbean's non GAAP tax rate was 27.8 percent for the first quarter of 2019. Versus 25.8 percent in Q1 2018, with a higher rate driven by timing of discrete tax items recognized in the quarter. As a result, which was higher than our guidance range higher overall gross margins and lower expenses. Turning to cash flow.
Net cash provided by operating activities was $49,000,000 in Q1 2019. Compared to $184,000,000 in the first quarter of 2018. 2019 reported cash flow from operations as compared to 2018 were predominantly impacted by the following items. Payments related to reorganization and restructuring of our go to market and operations functions, which totaled 29,000,000 in Q1 2019. Meaningfully higher variable compensation payments resulting from Q4 full year 2018 financial performance and meaningfully lower billings due to shift to subscription based transactions, which changes the timing of billings versus historical perpetual license related transactions and renewal of maintenance and upgrade rights.
Historically, the vast majority of perpetual license maintenance and upgrade rights expired on 1231 and were billed in January, which resulted in significant Q1 billings and cash collections and increases to deferred revenue. Now with the move to subscription, billings occur in the quarter the move to subscription occurred. And thus billings happen more throughout the year versus historically in Q1. Cash used for capital expenditures in additions to capitalized software development cost was $16,000,000 in Q1, a decrease from 28,000,000 33,000,000 compared to 156,000,000 in the same period of 2018. As mentioned earlier, Q1 free cash flow included $29,000,000 of cash related to reorganizing and restructuring our go to market and operations functions.
Given the transition to subscription based transactions, We believe quarterly year over year comparisons of cash flow are not as meaningful as annual full year comparisons. Turning to the balance sheet. As of March 31, 2019, cash was 723,000,000. Deferred revenue at the end of Q1 was $669,000,000, an increase of $74,000,000 from the end of 2018. And an increase of 60 The sequential increase was due to the shift to a subscription model and the timing of maintenance billings related to legacy perpetual contracts.
And the year over year increase was mainly due to the shift of our business model to a subscription. Based transaction model. During the first quarter, we bought approximately 1,200,000 shares of Teradata stock for 58,000,000. At the end of Q1 2019, we have approximately 230,000,000 of remaining share repurchase authorization. Which is dependent on many variables including the mix and timing of bookings, currency fluctuations, and other factors.
We now expect regarding currency approximately a 1 to 2 percent point of headwind on our full year over year revenue comparisons with We continue to expect 70% or higher full year bookings mix to be subscription based transactions. We continue to expect annual ARR to grow approximately 11% to 12% in 2019, and full year recurring revenue to increase approximately 10% to 11%. For Q2, we expect $3.36 to $340,000,000 of recurring revenue. For the full year we expect perpetual revenue to decline at the high end of our prior declined guidance range of 150,000,000 to 200,000,000 from the prior year. And we expect consulting revenue to decline at the high end of our prior 15 to 20 percent decline guidance as we realign and focus our consulting resources on higher value, higher margin consulting engagements in our megadata target market.
We continue to expect recurring revenue gross margin in 2019 to be in the low 70% range. Longer term, we expect our recurring revenue gross margin to improve as we increasingly gain efficiencies and leverage our Vantage and cloud related investments. We continue to expect perpetual gross margins to be approximately 35% to 40% for 2019. And we now expect consulting gross margins in high single digits for the full year 2019 as we continue to align the consulting organization to our strategy. In total, we expect overall gross margins to improve about 3 to 4 point from 2018 levels.
And we expect operating margin to improve to improve a couple points over the prior year. We continue to expect our full year non GAAP tax rate to be approximately 20% which is in line with We continue to expect non GAAP EPS to be a dollar 45 to a dollar 55 for the full year. This is based on full year weighted average shares outstanding of approximately 119,000,000 shares. And for the second quarter, non GAAP EPS is expected to be in the $28 to $0.30 range, based on a 22% non GAAP tax rate and 119,000,000 weighted average shares outstanding. Turning to our expectations regarding free cash flow.
We reported annual 2009 free cash flow is expected to be approximately 100 and 40 to 160,000,000. Which includes payments for our reorganization realignment of our go to market and operations functions. As we've had more time to evaluate and estimate the cash associated with our realignment and reorganization efforts. We now expect those Excluding these cash payments, our 2019 free cash flow would be approximately $200,000,000 to 240,000,000 Our projection of free cash flow is subject to many variables, including but not limited to subscription bookings mix, The amount of capital expenditures required to support new subscription transactions as well as the billing frequency of such new subscription transactions.
As I close, I want
to emphasize that we are encouraged with the increased customer interest and excitement in our Vantage analytics platform. We are off to a good start in Q2. And our deal pipeline is robust, which gives us confidence to achieve our guidance for the full year. And I also want to thank Greg Swearingen for his many years of dedicated service to Teradata. Greg will be leaving Teradata for personal family reasons and will be transitioning through the end of the year.
And I'm very pleased to welcome Nabil Elshahi to Teradata who will be taking over for Greg. And with that,
We'll now pause for a brief moment to compile the Q And A roster. Your first question comes from Brad Reback with Stifel. Your line is open.
Great. Thanks very much. Oliver, if you think about the competitive wins this quarter, especially against the cloud vendors and Snowflake, how much do you think of that had to do with the new tech stack versus some of the new, compensation plans that you put out there for the sales force?
I think there's 2 parts to the competitive wins. 1st of all, Vantage as a technology stack is clearly superior compared to what we're seeing from some of these cloud vendors. The second thing is we are seeing customers, as I said before, who have tried out technologies like they have done in the past with Green Plumbing with Net TISA and they're just finding a lot of shortcomings. So this coming together and is allowing us, to, to, to really enable our customers with Vantage to deliver the business results that they need, that they cannot get out of solutions like Snowflake.
Your next question comes from Derrick Wood with Cowen And Company.
Mark, I want to clarify the comments you made on the 2 large deals that slipped. And you mentioned that ARR, I think, would have been double. I suspect you're talking about growth rates. And, I mean, and it sounds like you're incinuating. 1 has closed.
1 is still in the process. Just can you flush out some more detail around those slipped deals?
Sure. Yes, Terry. So Yes. We had a few deals push out of q 1, and they've either closed or in the process of closing. Had those occurred in March like we originally anticipated.
The reported ARR, the 12,000,000 constant currency, 11,000,000 as reported would have been more than double that these were sizable transactions, that like I said, have either already closed during the process of closing.
Okay. And, I mean, you guys made a number structural changes at the beginning of the year. You've got, an accelerated transition around a new head of sales. You've changed the go to market to ARR. More dedicated focus on megadata customers.
Can you just touch on how it's gone so far and kind of now that you're into it a little bit more? What do you expect the dividends to be as you, over the next several quarters?
Yes, Derek, this is Oliver. First of all, we made some some, some, very good progress in the first quarter doing this restructuring. We are now behind, they are done, right? As you said, we are also looking for a new Chief Revenue Officer to really help us take that software subscription business to the next level and are making good progress there. So, we feel the hard work that we have to do at the beginning of the year is done.
And it sets us up within optimized structure worldwide, to drive the amount of subscription software sales and increase in ARR and recurring revenue that we said we will be driving.
Yeah. And that's why, Derek, we said we're very, comfortable with growing AR, 11 to 12% for the year. We feel really good about where we sit.
Your next question comes from Wamsi Mohan with Bank of America. Your line is open.
Yes, thank you. Mark, just to clarify on this prior question around deal push outs. As you're closing those deals here in Q2, why is that not leading to a stronger guide in that recurring revenue growth in the 2nd quarter? And just to clarify, is that also tied to the business environment in EMEA? I mean, it looks like the business declined a lot more in that region versus other regions.
And I will follow-up for Oliver.
Yes. So to your first question, these deals, what, the closer in the process of closing. So we're not gonna get a full quarters of revenue recognition amortization in Q2. Secondly, we've had further FX headwinds now that are impacting 1 to 2 on a full year, but it's 2 to 3 points in Q2, up from where we were before. So that's had, some impact.
These were not related to EMEA. EMEA's revenue year over year is down because of a significant decline in perpetual. That's what's driving that.
Okay. Thanks for that. And then Oliver you mentioned winning against Snowflake in some instances. Can you talk a little bit about the scale of the installation where where you guys have, of, one of these head on and what sort of workloads the customers we're targeting? Thank you.
Yeah, we're seeing Snowflake primarily at the low end of scale, datamark like applications in what we are seeing is that when customers have tried to take workload to that, that they had ended up with multiple instances of Snowflake that they required. In addition to that, pretty much all of them are also telling us they had to supplement it with other technologies and other databases in order to, get the workloads to run In general, we see Snowflake primarily at the very low end of our smaller customers, and even there, we are hearing that the scale and the complexity problems are outweighing, the benefits that they first thought they would get with it. And so that's a big part of that shift in momentum.
Thank you.
Your next question comes from Katy Huberty with Morgan Stanley. Your line is open.
Just from a high level, what should we make of the fact that perpetual is falling off faster than you expected, but you're not seeing a coincident upside in ARR and recurring revenue? And then I have a follow-up.
Yeah. Hi, Katie.
This is Mark. So we, we still feel really good about the full year guide on ARR. So we expect that we're on track. But, yes, perpetual is gonna be at the higher end of that 150 to 200,000,000 decline. Clearly our comp plan is being executed and we're seeing that, in in our international markets where we thought maybe it wouldn't move as fast, but it is.
When just as a follow-up to that question, just in Europe where you said that you saw a big drop off in perpetual are all of those customers planning or in the process of moving to a subscription model that will that will build into your recurring revenue as we go through this year?
Yes.
And then just as a follow-up on free cash flow, Mark, 3 months ago, you knew you were going to do the restructuring and reorg but you're taking down free cash flow today. It sounds like on the back of those costs, just I mean, what changed over the past quarter in terms of the outlook around free cash flow?
Okay. So first of all, I'm not taking down free cash flow. There's not been a change. I said apps, excluding the reorg charges were $2,000,000 to $2,501,000,000, and we didn't have a great range of what the reorg charges were going to be because we were executing through that at the time of the Q4 call in early February, and now we have a better feel for what that is, the $60,000,000 to $80,000,000, which is still in that 200, just call it 2 40. Because we said it could be as much as $90,000,000 in payments.
We don't think that now probably closer to $80,000,000. And so what I said is If you include those, then it's 140 to 160. Excluding those, we're 200 to 240, which is where we said we thought we would be on the q 4 call.
Okay. Thank you.
Your next question comes from Raimo Lenschow with Barclays.
Hey, a question for Oliver. As you talk with guys about Vantage, can you see where they are in terms of taking that as an overall concept in terms of like on premise deployments and cloud deployments. Versus actually already going to the cloud? Where are we on that life cycle? Thank you.
Very well, thank you. And by the way, first of all, thank you to Barclays Fuentes significantly into Vantage here recently. We see Vantage adoption throughout, the hybrid cloud. Clearly, there are existing customers that implement Vantage on premises and are supplementing it with cloud instances, as I've given you also examples today, several new customers are deploying Vantage as a service in the cloud in the various forms of cloud that we offer. So it's a mix.
We have Vantage available both in hybrid and in multi cloud. And we see that mix going forward. Our megadata companies right now are predominantly in the on premises world, but a lot of new business that is coming in is in the cloud. And this is where Vantage really differentiates itself against other clouds. Providers.
Perfect. Well done. Thank you.
We have time for one more caller. And the question comes from Phil Winslow with Wells Fargo. Your line is open.
Hi guys, thanks guys for taking my question. Curious, we used to talk about floor sweeps in terms of refreshing old product. I know obviously things are shifting towards software or land in cloud. But just for the legacy customers, I'd still have those boxes on premise. I mean, any sort of color that you could give on sort of your sort of big floor sweeps, big upgrades they've been seeing, whether it be this quarter or maybe last couple of quarters of what you see in the pipeline, just sort of some more color there.
And maybe kind of how people are buying, if that's still the way they're thinking about it, etcetera? That'd be helpful.
Yes. I think in general, what we're seeing is that the vast majority of, growth that we are seeing in adoption is new workloads. Yes, existing customers sometimes do that as part of floor sweeping existing technology into this. And by the way, the fact that Vantage is fully backward compatible with prior parenthood offerings makes that easy for customers to execute on. But the majority of growth in the ARR that we see, and as we see in the funnel, is really about adoption of new capabilities, advantage, in and it's what's driving our confidence.
I will now turn the call back over to Oliver Ratzesberger for final comments.
Okay, thanks everyone. We remain exceedingly confident in our strategy and our direction. Our customers are validating the need to leverage their data in service of their business and are rapidly adopting Teradata Vantage to provide the answers they need most. And we are winning against competition in the market. Our people are amongst the best in the business and remain enthusiastically focused on and committed to delivering value to customers and shareholders.
We look forward to updating you next quarter.