Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Q3 2018 Earnings Conference Call. After the prepared remarks, Thank you. I would now like to turn the call over to Greg Sparingen.
Please go ahead.
Good afternoon. Thanks for joining us for 2018 third quarter earnings call. Vic Lund, Teradata's President and CEO, will lead our call today. Oliver Ratzesberger, our Chief Operating Officer, will then provide an update on our strategy, product offerings and customer use cases. Then CFO, Mark Colleen, will discuss our financial results and guidance.
Our discussion today includes forecast 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 and terminated in 10 K, 10 Q and other filings with the SEC. On today's call, we will be discussing certain non GAAP financial information would exclude such items as stock based compensation expense and other special items described in our earnings release including acquisition reorganization and transformation 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 and on the investor page of teradata.com. A replay of this conference call will be available later call, whether as a result of new information or future results. And now, I'll turn the call over to Vic.
Good afternoon, everyone, and welcome to our 3rd quarter earnings call. The highlight of the quarter for me was our 82% subscription uptake. This number obviously exceeded the guidance we gave you as well as our plan. When you adjust for this number, our revenue performance exceeded the high end of our guidance. You also saw that our earnings per share exceeded the high end of our guidance range.
Our success is being driven by our strategy, which is focused on our unique customer set. Not the market broadly. Our market segment is the 500 largest analytically driven companies in the world. And they account for over half of the total technology spend globally. They have characteristics which make them unique the world of analytics.
First, they generate a large amount of data that is growing exponentially. 2nd, they have very large investments in their data ecosystem, which consists of thousands of data instances, obviously, driving complexity. 3rd, we view that their ecosystem is gonna remain a hybrid environment for the foreseeable future. And finally, they're very smart, and they require unique answers to the questions they have about their business. Obviously, dealing in this environment requires the ability to perform at scale.
They understand that hope is not a strategy, that there isn't gonna be a bright shiny object that's gonna appear on the horizon. To deliver analytics solutions for them. This journey is filled with hard work. It requires a strategy that considers their existing investment, the risk they encounter. And a difficulty associated with their complex environments.
It requires a partner who understands scale, and has a history of delivering outcomes. Teradata is that partner. They know and trust us. And so our involvement with them has been increasing and delivering our improved performance. By the way, this assessment is not ours only.
There is a body of independent research starting to appear that supports our assessment of our customer base and why they are unique and why they require unique solutions. Greg will be happy to share some of that research with you, if you are interested in it. In closing, I'd like to thank our customers for giving us the opportunity to prove that Cara Data is delivering answers to the unique questions they have. We are grateful that you took the time to listen and understand that we are in fact a unique and new company. I'd also like to thank our teams who through the change have managed to stay focused and delivered strong operating performance quarter over quarter.
With that, I'll turn it over to Oliver
Thanks Vic, and good afternoon, everyone. Since we last spoke, we have made significant advancements in redefining and repositioning our business. I'm excited to talk about First, we set a new course. We find a new strategy and we launched our bold new brand positioning. 2nd, we introduced Teradata Vantage, our powerful new analytics platform.
And third, our commitments to customers remains at the center of everything we do validated by a phenomenal response from our customers as they realize the value in having the answers they need. Just 24 months ago, we began our business transformation journey and set a new course for Teradata to innovate and device new solutions to address the challenges the digital world is creating, a world where the ability to rapidly turn information into actionable insights has become an absolute competitive necessity. We challenged the industry to think differently about analytics resulting in creating a brand new category. Pervasive data intelligence defines the value we deliver to our customers, the ability for companies to deliver answers to their toughest business problems. And at Teradata, we do it at scale, anywhere and anytime.
This means we deliver real time in intelligent answers leveraging 100 percent of our customers' relevant data regardless of scale or volume all the time. We provide the answers across any infrastructure. Our industry leading technology offers choice and flexibility whether deployed as a service, across public clouds on premises or in a hybrid environment. Earlier, we spoke about the challenges today's business leaders are up against. Every day, the team at Teradata is focused on overcoming these challenges by enabling the world's leading enterprises with the largest analytic opportunities to rise above the complexity, cost and inadequacy of today's analytics landscape and deliver answers that matter to their business.
Armed with a bold new strategic direction we determined now was the time to reposition and amplify our brand. In October, we introduced the new Teradata brand and mission to transform how businesses work we also formally named San Diego as our new corporate headquarters. We are confident that our bold and authentic brand firmly positions us to lead the new direction in analytics and we enthusiastically embrace our role as the leading provider of hybrid cloud analytics software. During this reinvention, we remained focused on technology innovation and launched a new Teradata Vantage. Our next generation analytics platform.
Vantage empowers our customers to leverage all of their data, all of the time so that they can analyze anything anywhere and deliver analytics that matter. With this launch, we purposefully moved beyond enterprise data warehousing as Teradata Vantage allows enterprises to uncover actionable answers to their toughest business questions. Vantage stopped this by tightly integrating the best analytic functions and engines to provide a scalable agile platform that enables enterprises to drive business value at the scale they need. Users are able to access and analyze all of their data without having to learn a new tool or language or worry about where the data is located. Vantage also provides has to a wide variety of descriptive, predictive and prescriptive analytics, autonomous decision making, machine learning functions, visualization tools and more and all deployed across public clouds on premises or an optimized or commodity infrastructure or as a service.
This streamlined access is bolstered by Vantage's integration with popular third party tools and analytic languages meeting users where they are and allowing them to work in the environments they already know best. As automation increasingly drives business, artificial intelligence and machine learning have become essential to help enterprises scale to compete in the digital cloud based data driven world. But as that scale increases, so does the sheer volume of data. AI and machine learning to scale and deliver timely actionable answers faster across the organization. This in turn feeds a stronger return on investment for the business.
Together, these functions and capabilities make Vantage the most powerful and flexible tool available for uncovering reliable, rapid, actionable intelligence and bringing pervasive data intelligence to reality for our customers. I mentioned earlier that we are committed to keeping our customers at the center of everything we do. And just 2 weeks ago, we held our Teradata analytics universe customer conference and the response to our new brand and positioning and Teradata Vantage was nothing short of amazing. Speaking of amazing, I'd like to share some recent customer wins and use cases that demonstrate our momentum. We added a large U.
S. Hospital and healthcare services company as a new customer replacing Netisa and other competitors as it realized the benefits of our health care industry expertise and focus on business outcomes. A long standing U. S. Government customer migrated its Teradata environment to the public cloud and leverage new analytics to drive improved performance.
A Fortune 100 manufacturer increased its consumption of the Teradata software to improve the efficiency of its supply chain and increase uptime uptime of its fleet. 1 of the world's largest banks is now using Teradata to drive better customer service by consolidating customer inputs from numerous channels to get to real root causes. Healthcare companies in the world helping the company modernize its analytics environment and thereby increase consumption of Teradata. A multinational financial and credit card company added a new use case to its Teradata Environment to support its new digital identity product for consumers. We significantly increased consumption of Teradata at a global technology company as it migrated to the public cloud.
I've just gone through a partial list, but you can tell that what we are seeing is very positive customer traction across industries and fees. I can confidently declare that we are all in as we challenge the status quo in analytics. Our intuitive team is proving every day that we are transforming how businesses work and people live through the power of data. As I mentioned earlier, this has been a very productive time for us. We've defined our new strategy, launched our bold new brand delivered one of the most significant offers in our history I would like to use this public opportunity to thank Being a part of this transformation is energizing and is extremely rewarding and I look forward to sharing more during our upcoming Analyst Day.
Thank you. And now let's turn the call over to Mark.
Thanks Oliver, and good afternoon, everyone. We achieved another solid quarter. Our third quarter performance was highlighted by our continued accelerated movement to subscription transactions as we saw more transactions completed via subscription in Q3 than expected. Our strategy is clearly working and the shift to subscription is happening even faster than expected just 90 days ago. In Q3, 82 percent of our bookings were subscription based, which year to date puts us at 71%.
The pace of our transition to subscription continues to exceed our internal expectations, and we now expect the subscription based component of our bookings mix were slightly above our previously expected range of 65% to 70%. Given more transactions shifted to subscription than expected, our reported revenue in flat with prior year and a 2% increase in constant currency. On the last day of the quarter switched to subscription based which resulted in our reported revenue being slightly below our guidance. We would have exceeded the where a forecasted subscription based transaction went perpetual resulting in significant upside to our revenue expectation. This quarter, we experienced the opposite with a customer deciding on the last day of the quarter to switch from a perpetual purchase of Teradata to a subscription purchase, as it ultimately benefits us in the long run as it will add future significant ARR and benefit recurring revenue going forward.
Recurring revenue, which includes revenue from subscription based transactions and perpetual license related maintenance and upgrade rights. Was $312,000,000 in Q3, a year over year increase of 7% or 9% in constant currency. As we mentioned on our Q2 earnings call, we incurred significant foreign currency headwinds which resulted in Q2 ARR growth net of FX in low single digits. That impact, coupled with approximately a point and a half of additional FX headwind in Q3 impacting revenue during the quarter and traditional backend loaded subscription based bookings not significantly contributing to recurring revenue during the quarter resulted with Q2 2018. Perpetual software license and hardware revenue, which is revenue from on premise perpetual transactions was $77,000,000, a year over year decrease of 14%.
We continue to expect that perpetual revenue will decline year over year as our bookings mix shifts more towards subscription based transactions. Since most customers are purchasing software on a subscription basis, but some purchased their hardware upfront. The majority of our perpetual revenue is now hardware related. And consulting revenue, which was $137,000,000 in Q3 decreased 5% from Q3 2017. As a reminder, we have shifted our strategy Correspondingly, we are focusing our consulting group on engagements that lead to increased consumption of Teradata's software within the top 500.
As a result, we expect our overall consulting revenue to decline as we reduce However, we expect our consulting margins to improve as we focus more on ARR growth for Q3 prior to negative currency impacts was $35,000,000, $29,000,000 after inclusion of negative currency impact. Which results in total ARR at the end of Q3 of Within total ARR, subscription based ARR increased more than 150% year over year. As our bookings mix continues to shift more to subscription, we see our subscription related ARR growing while ARR related to maintenance and upgrade rights from our prior perpetual business is declining as customers shift to subscription. Our backlog was approximately $1,900,000,000, an increase of 2% from June 30, 2018 13% increase from year end 2017 55% increase from the end of Q3 2017. Before I continue to highlight our Q3 operating results, please note 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 in our earnings release. EPS in the third quarter was $0.36, higher than both our guidance range of $0.30 to $0.32 and higher than $0.29 reported in Q3 2017. The upside in EPS was driven by our continued focus on operational spending, which resulted in higher overall Turning to gross margin. Gross margin of percent in Q3 2017. As expected, the mix of our current recurring revenue includes more subscription based revenue versus perpetual maintenance revenue than the prior year.
We expect our recurring revenue margin to be approximately 70% in the fourth quarter of 2018 low 70s for the year, but to improve over the longer term, as we gain efficiencies and leverage our subscription related investments. Gross margin of our perpetual revenue was 50.6%, as compared to 54.4 percent in Q3 2017. The lower margin as compared to prior year was due to the Given our current forecast and expectations for Q4 perpetual transactions, we expect perpetual revenue margins in Q4 to be mid-40s range and to be in the low-40s range for the full year. And gross margin of our consulting revenue improved to 9.5% compared to 4.9% in Q3 2017. Weeks to continue to improve significantly in Q4 as we continue our focus on making operational improvements, and due to the seasonal profitability trend of this business.
We continue to expect our consulting margins to be approximately 10% for the full year and to continue to improve going forward as we better align our consulting business to the strategy of the company. Overall gross margin was 52.9% in the 3rd quarter versus 51.3% in the third quarter of 2017. We expect gross margins in Q4 to be low 50s range and to be approximately 50% for the full year. Turning to operating expenses. Selling, general and administrative expense was $144,000,000 in Q3.
Decreasing 4000000 dollars or 3% from the third quarter of 2017. We expect SG and A expense to increase in the fourth quarter due to seasonally higher sales commissions as well as our increased marketing activities related to our rebranding of the company and our annual Teradata analytics customer conference. Research and development expense was $78,000,000 versus $70,000,000 in third quarter of 2017. We expect R and D expense in Q4 to be slightly lower than the Q3 level. Operating margin for the quarter was 10.6%.
Versus 9.9% in Q3 2017. We expect operating margin in Q4 to improve slightly from Q3 and to improve tax rate of 17.3 as expected, largely due to the 2017 U. S. Tax reform. Dollars and expect a 4th cash used in operating activities was $33,000,000 in Q3 2018 compared to $8,000,000 used in the third quarter of 2017.
Capital expenditures were $35,000,000 in The increase in CapEx was as expected, primarily driven by capital improvements to our San Diego headquarters, and the increased mix negative $68,000,000, which was roughly what we expected based on our current view of subscription and perpetual transactions in Q4, we continue to expect full year free cash flow in the $175,000,000 to $200,000,000 range. As of September 30, 2018, cash 49,000,000 of Teradata stock or approximately 1,200,000 shares. Through the end of the 3rd quarter, we bought approximately 5,400,000 shares for 206,000,000, leaving us with 338,000,000 of share repurchase authorization remaining at the end of the third expectations which as we have experienced the past 2 quarters can be very fluid. Currently, we continue to expect total revenue in 2018 to be in the 2.13000000000to2.15000000000 range. Despite the business shifting faster to subscription, as well as almost an additional percentage point increase This translates to expected Q4 revenue of $555,000,000 which is predicated on perpetual revenue in and consulting revenue lower than In terms of EPS, This is based expected to be in the $0.41 to $0.45 range based on 120,000,000 weighted average shares outstanding in Q4.
Now, I'd like to provide you with an update on our full After adjustment for 1.5 percent of currency headwind, we expect approximately 10% growth in 2018 due to accelerating activity in Q4. Keep in mind, this currency impact is on a base of over 1,200,000,000 of ARR. We expect recurring and in constant currency. And we expect new booking subscription mix to be at the high end of our previous guidance range of 65% to 70% if not slightly higher. As I close I wanted to mention I spent a significant amount of time talking that customer engagement is up and that and most importantly, customer interest in our newly available Vantage analytics platform is very high.
Which significantly broadens our market opportunity. I was and that they clearly believe it's now easier This is extremely positive for the future of the company and our financial results.
Your first question comes from the line of Gerrick Wood from Cowen and Company. Please go ahead.
Great. Thanks. And congrats. It sounds like you guys beat your Q3 bookings expectation. And I guess my first question is on Q4 and your guide for Q4 is now higher than what the implied Q4 guide was previously.
I'm curious, is this generally due to the strong subscription bookings in Q3 coming fully recognized in Q4? Or is there something else in your Q4 pipelines that are incremental versus what you saw a quarter ago?
Yeah. Thanks, Terry. This is Mark. So yes, it's both. Clearly, we had a strong subscription bookings quarter in Q3 and that starts to flow through Q4.
And secondly, yes, our pipeline of activity in Q4 is more robust than what we were expecting a quarter ago. So it's a combination of both.
Okay. And then a question on Vantage. I mean, the product direction really shows you guys focus more on software and then hardware. And I think that should help with your strategy to focus more on online of business versus IT. So, and as you roll out the focus on the Vantage architecture, Do you see this as being a near term catalyst in targeting new application use cases, new users and maybe a boost on growth?
Or is this, you know, you guys have long sales cycles. Is this something that will take longer to play out? Maybe you could just share some feedback that you've gotten on Vantage. Thanks.
Yeah, Derek, this is Oliver. Yes, so we absolutely see Vantage a driver for adoption by business, in lines of business in, in our various customers. This is really the next generation of our strategy. We started with Teradata Everywhere. We've now elevated our offering with Vantage to a level above of that building on the strength of Teradata Everywhere.
And for those of you that have been at the Teradata Lake Universal User Conference, you've actually heard customers talk about Vantage. We had speakers up on stage that talked about their experience of Vantage and how game changing Vantage is to their ability from ideation to production rollout of advanced models, machine learning, we had one customer out on stage that said, we can now score and roll out against 200,000,000 or 250,000,000 customers and prospects and under 35 minutes from IDEA to production rollout and that's powered by Vantage. So This is clearly resonating with the customer base. And yes, we absolutely see that this will be one of our big accelerators of our strategy going forward.
Great. Thanks for the color.
Your next question comes from the line of Wamsi Mohan from Merrill Lynch. Please go ahead.
Hi. Thank you. This is Param Singh on for Wamsi. Firstly, guys, I wanted to get a sense of, you know, what subscription mix is going hosted versus, say, on public cloud platforms like AWS. And, with the higher amount of subscription, what does that mean for CapEx going into calendar 2019?
So this is Mark. We don't break out that the cloud versus on prem, but the vast majority still continues to be on prem. This is going to be a hybrid environment for a long time. In the top 500 market we serve and the enterprise class workloads that we deal with. As it relates to 2019, we'll provide more commentary on 2019 both at our Analyst Day and ultimately on our Q4 call.
Got it. So just one follow-up call. I guess, on the cash flow, do you think that to be, tempered into the following, given the highest subscription mix Or do you expect it to stabilize here?
No, I can I've continued to say and I've said for the last couple of quarters now that it's possible that 2019 grows over 2018 depending on where we land on subscription mix. That has a big driver to that, in terms of free cash flow, as that free cash flow as the business moves to subscription, that does have free cash flow impact. But we have ways to moderate and finance those kinds of kinds of impacts and we're doing some of that, which you saw in the quarter.
Your next question comes from the line of Raimo Lenschow from Barclays. Please go ahead. Your line is open.
Hey, thanks Can I stay on that subject, Mike? So if I look at the cash flow number this quarter, obviously, it was a little bit lower than people had modeled. Is that kind of directly linked to the better subscription performance. So going forward, if you have a strong subscription quarter, it kind of often comes with a lower cash flow quarter. Is that the right way to think about it for the next couple of quarters while you're still going through this?
So there's a few things here. Yes, higher subscription quarters can have impacts on free cash flow, but again, we will look to finance some of that free cash flow impact. As well. And so to help moderate that. 2, we mentioned on the call in my prepared remarks, we shifted our headquarters San Diego and we clearly spent money on our corporate headquarters And the third thing we announced was as part of that is the relocation of folks out of Dayton to hear and the impacts of of moving out of Dayton, which will have some impact as well.
That's what drove the free cash flow results in Q3. Those were the 3 primary driver. Going forward, it'll be subscription versus perpetual and what does that ultimately look like.
Okay, perfect. And maybe one follow-up for Oliver So, obviously, we have quite a bit of movement in the analytics industry. We saw it called the ArrowWorks merger, etcetera. Can you just talk a little bit of to what you see in terms of you talk with customers, obviously with Vantage, you have a very unique offering, you know, like, in the past, people kind of kind of thought, oh, you can do that is subdued, but just kind of that thinking has changed like how is that understanding of customers evolving in terms of what charity just stands for versus what other guys are doing in the industry?
Yes, I'd be happy to. So the number one theme that we are seeing today with executives in the largest companies, which is, as we keep reminding everyone, that is our go to market segments, right? In the largest companies, we have seen that companies have adopted almost endless technology in the last 10 years many of them have 100, even 1000 of data silos by now. They have almost every any technology that they could get their hands on, in one form or another. And a lot of these executives announcing, we can no longer sustain the complexity in our business model the amount of headcount require to run 100 to 1000 of data silos within these organizations.
Again, this is a very typical scenario for very large scale high end companies that we are focusing on. And And increasingly, they're coming to us and saying, this has run out of control. We need to simplify that. We need to consolidate. We need to get rid of 1 off data silos and this is where we feel and we know that Teradata is uniquely positioned because a lot of the competitors out there in the market, are kind of the problems for some of these technology silos because they only operate at a departmental level.
They can only work at smaller scale. They can only work with lower users. And so This is why our focus has been so important to us. It's really helping these customers simplify that. And with Vantage, that message, that we started with Teradata Everywhere has gotten to a new level of these, with these customers.
And so we talk right now to top executives with customers around the world, quite often, the topic of complexity is front and center with them comes up and they said help us eliminate dozens if not hundreds of data silos. We know Teradata can do it And we know that the TCO is a lot lower than us spending so much money with so many point solutions.
Your next question comes from the line of Phil Winslow from Wells Fargo. Please go ahead. Your line is open.
In terms of the FX impact. Just a couple of follow ups of that. First in the recurring guidance, I think for that for Q4, I wonder if you could kind of delineate what the currency impact there is Q4? And then as you sort of start to look into next year and model as we model forward, just trying to get
a sense of what you kind
of think the currency impact will linger into the next year? Then just one, a quick follow-up to that.
Yeah. So we've said we expect another point of currency headwind coming into Q4. It'll be two points. We expected one point of headwind walking in at quarter. Now it's 2.
So it's up one point from what we thought a year ago. What it will be in 2019, we don't know until we get to the end of the year and start to see. I mean, we can't try to forecast what we think foreign currencies going to do or not going to do. But it's clearly been a headwind for us and everyone else, you know, over the course of the last few quarters.
Got it. And then just a follow-up on the competitive competitive front here. You mentioned Oracle. And obviously in your last question, you just talked about the couple of the core Hadoop players. What has the feedback been?
Obviously, advantage you just talked about that a couple of weeks ago on lease that vision on the marketplace. Just what was the early feedback? And then in terms of the competitive displacements you saw order, what were the drivers behind those?
Yes. So on the feedback, we've got First of all, we got several customers lined up very early this year, as alpha beta customers because the interest was already very high beginning of the year, even before we publicly announced the availability. As we announced that, just to give you a little stats from our analytics user, analytics universe conference that we just had a couple of weeks ago. We had planned for 150 seats of hands on share Vantage experience We were oversubscribed by about 600, people just at the conference just getting willing to get their hands on this. Coming out of the conference, we have a lot of quotes and a lot of statements from customers saying that this is really hitting the mark.
This is really what they're interested in. They want to move from departmental point solutions from technology to, focusing on answers and outcomes. And as such, the brand and the offering that we that we launched with Vantage is resonating very well with the customer base. So early indications are very promising and funnel is very interesting for us.
Yep.
Phil, this is Dick. I'll get that. The other thing I would say about Vantage that is really striking a cord with the customers is the ability to think about analytics on an enterprise scale. And that as opposed to biting off different solutions that you end up just compounding problems. The ability to attack your analytics future from an enterprise scale is playing very, very well with our customers.
In fact, that gets more interest early on with business people want to talk about because it allow them to have a predictable timeframe where they can gauge their investment, their returns and their ability to drive analytics as they're ready for it. And that's a really important difference, the enterprise versus the point solution here. Got it. Thanks guys.
Your next question comes from the line of Zane Trane from Bernstein Research. Please go ahead. Your line is open.
Hi, thanks for fitting me in. Question for Mark on the subscription or the recurring revenue growth it looks like ratable bookings mix is increasing a lot faster than you expected, yet there's not really an increase in your constant currency guidance for recurring revenue growth I'm wondering why recurring revenue isn't expected to grow even faster license than you're expecting or than you previously expected to or is it because of increase in duration for the subscription bookings? Thank you.
So yes, Zane, so yes, recurring revenue growth is totally being driven by subscription and ARR growth. Keep in mind that whatever we book in Q3 is back end loaded in Q3. So at best, it's one quarter's worth of expression and not every subscription deal we do starts the following day, right? There can be a period of time before it starts expressing itself to revenue. And so we're at that point like all subscription businesses where the Q3, Q4 bookings don't really express themselves in the current year recurring revenue growth but it sets you up for what it's going to be the following year and we're no different on that front.
And that's the biggest driver. Perpetual doesn't have anything to do with recurring revenue.
Okay. So no change in terms of your expectations for unit volume or T core growth?
No, not from what it was 90 days ago.
Got it. That's helpful. Okay, great.
Thanks very much and congrats on a nice quarter.
Great. Thank you.
Your next question comes from the line of Brad Reback from Stifel. Please go ahead. Your line is open.
Great. Thanks. Mark, quick question. Deferred revenue was a big use of cash this quarter. Given the commentary on booking strength, would have thought
it would have been a little more or
a little less negative than it was. Is that just a functional linearity in the quarter and that should reverse itself in 4Q to some extent? Thanks.
Yep. 2 things there, Brad. So one is the historical perpetual license related maintenance is huge in Q4. And then that revenue starts to get recognized across the year. And comes out of deferred revenue and gets expressed into the revenue line.
That is a big downward push to deferred revenue. And then it's offset by the deferred revenue you're adding, and yes, we're adding, but that's still of the $1,240,000,000 ARR, the biggest portion of that balance today is still that maintenance related, although the subscription portion as we said in our prepared comments is growing in excess of 150%. So that's really the phenomenon is the seasonality of the maintenance and when that gets built So yes, seasonally, we'll see we believe it'll uptick in Q4 and it really grows in Q1 when we actually bill out all of the big Q4 maintenance renewals.
And then maybe one quick follow-up on the services gross margin. Obviously, there are seasonal benefits that you see in the back is the second half the new starting point or should we think about the overall 2018 result as the starting point? Thanks.
Yes. So great question. So there is seasonality in this business. Historically, Q4 has always been a large consulting margin quarter, just given the way, certain projects that are done on milestones that ultimately tend to get accepted in Q4, which causes the revenue to be recognized and that improves. The margin.
So it's the end of the year where we end up on a full year is kind of the starting point of what we see going forward into 2019. But overall, we will improve our margins in 2019 over 2018. But Q1 has always been low And then it sort of builds from there across Q2, Q3, Q4. Perfect. Thanks very much.
Your next question comes from the line of Tyler Radke from Citi. Please go ahead. Your line is open.
Hi, thank you very much. Question for Oliver. So you mentioned some competitive displacements of Natiza and Oracle in the call. And it's not something I feel like you've historically talked a lot about. I'm just curious if you think that that's been enough tick or you're seeing an acceleration in kind of legacy replatforming and what you think might be driving that, if that's the case?
Yes, great question. Yes, my answer is yes, absolutely. This, simplification of these complex infrastructures at the enterprise level is what is exactly driving replacing other technologies in the existing top 500 customer base. And that is something that we believe will drive our share of wallet within these, within these customers. It's really consolidating these data silos these data centers are often made from 3rd party technologies, even brand new technologies that just came out in the recent years.
First customers had come to us and say that they have now 10 or 12 instances of that. And all of a sudden, they realize a single carrier instance will serve them much better. And these are the conversations that we seeing increasingly in our customer base.
Great. And a follow-up for Mark, I just wanted to understand the ARR target for the full year. I think you said that it's you continue to expect it to be, 10 percent growth, but with 2% in terms of currency. But I'm curious, since that's more of a bookings based metric, which presumably, if you're seeing a higher subscription bookings mix and in the subscription deals, you've talked about uplift. Like, why wouldn't that number, go higher than what we saw in 2Q, just because you are seeing higher subscription bookings mix.
Thank you.
Yeah. So, yes, it's 10% as reported. It's up a couple points from that in constant currency. So we continue to expect that. It will depend on the mix of what Q4 turns You know, we have a pretty broad range on perpetual expectations for Q4 because several of those transactions that are forecasted as perpetual.
There's also conversations with customers about them potentially taking it down on subscription. So clearly, it could be higher. Right? And as you said, it is a bookings metric and you can get healthy on a bookings metric in one day. And so we'll see how it plays out.
I think we're trying to be, cautious and conservative at the 10%, but it certainly could be higher.
Okay. Thank you.
We have time for one more question. Our last question will come from Keith Bachman from BMO Capital Markets. Please go ahead. Your line is open.
Hi, thanks. It's Chung Pack for Keith Bachman. I had a question on your recurring gross margin guide of 70% for Q4. Is that due to the higher mix of subscription revenue relative to maintenance? And how should we think about the recurring gross margins going forward as subscription continues to increase?
So, yes, it's a function of the mix of the type of recurring revenue, which more of it is becoming subscription related versus the traditional perpetual maintenance related. And that has some impacts. I would expect we said approximately 70%. I would expect this to be better than that in Q4. But for full year being low 70s longer term, as we leverage some of the subscription related investments we've made, we expect that that could tick back higher to the mid-70s, best in class in the subscription world to 80% the minimum threshold you need to be is 70.
We're 72 each today on a full year basis and change and we sort of expect this to be in the low 70s. But over time, we think that ticks up as we leverage and get scale across the significant subscription investments we've made.
Great. And I have a follow-up. Americas is down 4% constant currency. Can you help us understand what happened there if the deal shift to subscription had any impact? Thanks.
Yes. So, Americas, clearly, they're moving to subscription way faster than international. So that's clearly been an impact year over year. And then on a reported revenue basis, the one large perpetual transaction I referenced was an Americas transaction. And so that clearly puts, from a total revenue perspective, it being down.
Year over year, but they're moving to subscription much, much faster. So I'm actually pleased that year to date, it's flat with last year given the vast amount of business they've moved to subscription across 2018 versus a year ago.
Great. Thank you very much.
That does conclude our Q And A session. I will now turn the call over to Vic Lund for closing comments.
Perfect. Thank you all so much for joining us here today. We will give you more color around our strategy positioning and our long term expectations on our Analyst Day on December 12th. And we're hopeful, that you can all be there here, we can give you some more detail around where we're going and what 2019 and out beyond that looks like. And as Mark said, if not, we will, we will update our guidance at the end of Q4.
Again, thank you all for taking the time to listen and we look forward to seeing most of you here in Rancho Bernardo.
That concludes today's conference call. You may now disconnect.