Good afternoon. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Q1 2018 Earnings Call. Thank
you.
Greg Swearingen, VP of Investor Relations, you may begin your conference.
Good afternoon, and thanks for joining us for our 2018 first quarter earnings call. Victor Long, Teradata's CEO, will lead our call today. I'll address Brager, our COO, will then discuss our technology advancements, differentiation and customer activity. Then CFO, Mark Colleen, will discuss our financial results and guidance. Our discussion today includes forecasts and other information that are 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 factors ascribed in 3810 K, 10 Q and in accordance with the SEC. On today's call, we 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 and transformation related costs, asset impairments and capitalized software development We may also discuss other non GAAP items such as free cash flow. 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 Investors page of teradata.com. Replay of this conference call will be available later today on that website.
Teradata assumes no obligation to update or revise the information provided during this call whether as a result of new information or future results. And now I'll turn the call over to Vic.
Good afternoon, everyone. I'm very pleased with our strong start to 2018. Our first quarter reported revenue and our non GAAP EPS were better than expected. Not only were our reported revenues up versus Q1 2017, but on the old perpetual basis, our revenues in Q1 of 2018 exceeded those of Q1 2016. A clear indication that consumption is growing.
In addition, more of than we had originally expected and therefore, our Q1 performance was even better than it appears on the surface. Our strategy is clearly working. Customers are moving to our subscription based options faster than we expected This trend is being driven by Caradata Everywhere, our flexible and scalable offering that reduces the risk of our customers' analytic investments. The net result is that our pipeline ARR deferred revenue and backlog are all growing I want to spend a few minutes on what we are doing to drive these positive results. Fundamentally, today's Teradata is a very different organization than it was 2 years ago.
We have added subscription based purchasing options, had developed parity in everywhere, and are deploying new capabilities of our Teradata analytics platform throughout 2018. We are developing cloud offerings that run on AWS and Azure in private cloud and on prem. Formed our go to market strategy and build a field team that is able to engage with customers and address their needs. Not only on the technology front, but also and importantly to help them solve their most pressing business problems. With market led analytics.
Further, we have changed our compensation structure and now incentivize our teams to sell subscription. Also, we have built a sales operation organization to assist in the global deployment
of best practices.
We introduced and instilled new rigor in a formal account planning process. Our sales teams now have modern tools like salesforce.com to help them develop, track and monitor customers. We have changed the skill set at Teradata by combining the people who developed the ware that makes Teradata uniquely positioned to drive analytic performance at scale, with new talent in areas like cloud and AI. We recently brought all of our consulting teams into 1 global organization to drive revenue and support We have also strengthened our leadership team, bringing in an experienced CFO, CRO, CHRO, and in the last quarter, we added CMO who will enhance our brand and help us develop a more disciplined approach in delivering our message to the market. As I mentioned last quarter, We promoted Oliver to the position of COO to sharpen our focus on all the aspects that touch our customers.
The new leadership team is seasoned, driven and committed to successfully structure to enable us to become more efficient as we move forward. And finally, while driving revenue and customer engagement remain key, There are still multiple areas where we can continue to improve the effectiveness of our cost structure and we will exploit all of those opportunities. Looking back, we have accomplished a great deal. Yet as a team, we know we are still in the early stages of this exciting journey. I would like to thank the entire Teradata team for all our efforts to drive these results.
Many folks said we were crazy and take something like this on in a public forum, but the team has validated my belief in them and their commitment to succeed.
Today, I will share why I'm so confident in our future. Based data and analytics that are helping customers drive business outcomes and be on the fastest path to analytics in the cloud. We at Teradata are very excited because of the enthusiasm and support we are seeing from our customers. This was very visible and where I have many engaging conversations with executives. I have 3 key takeaways for you.
1st, Teradata is well positioned to take advantage of digital transformation. 2nd, we are seeing increasing adoption of our hybrid cloud based analytics Through our Teradata Everywhere strategy, we offer customers the best path to the cloud. 3rd, With the power and scale of our advanced analytics, we are seeing companies at new use cases, increased consumption, and grow T course. Today, I'll walk through how we have aligned our business to maintain our market leading position. As the momentum towards digital transformation increases, redefining the way companies build new business models create operational efficiencies and ultimately generate growth, we believe data analytics is the foundation for this digital transformation.
Teradata is well positioned to take advantage of this revolution and we are executing to help the world's leading companies achieve high impact business outcomes from analytics at scale. Companies are recognizing that our production quality advanced analytics along with our flexible licensing and deployment options are the best for their needs. As a reminder, our Teradata Everywhere strategy has 4 key tenants, analyze anything. Deployed anywhere by any way and move anytime. Let's take a look at our advantages.
Customers can analyze anything through our new Teradata analytics platform, which integrates with their preferred engines, tools and languages. They can deploy anywhere With our hybrid cloud offerings, customers can run the same Teradata software on AWS, Azure, Teradata Cloud, and on premises cloud. Through our flexible pricing options at our InteliCloud as a service offering, we enable customers to buy any way. And we help customers move any time. An industry first that allows them to move their software across deployment options whenever they need
of their timeline.
Through our key course and converting to to our buy anyway subscription licenses. During their analysis, they also looked at cloud native vendors and found them to be cost prohibitive and unable to scale to meet their needs. A few other examples of customers leveraging Teradata Everywhere through IntelliCloud include a global CPG company is running terribly on AWS to optimize their consumer promotions, improved sales planning and enhanced supplier contract negotiations. A very large telco chose Teradata's new on premises cloud to provide more elastic expansion capabilities to meet unpredictable workloads, improved service levels, and reduce data center costs. And a leading U.
S. Healthcare organization adopted Teradata to help ensure that its data remain highly reliable and available as the company moves into predictive analytics and machine learning. This last example illustrates how we are driving new advanced analytics capabilities that help companies increase their return on investment in IoT. As part of our Teradata analytics platform, we recently announced for the analytics. This advanced functionality is especially relevant in edge computing applications with constantly changing time and location variables.
We integrate analytics for where and when, primarily geospatial temporal and time series data and combine them with operational and customer data, enabling our customers to operationalize IoT. This new functionality will help lead the IO 2 revolution and is the foundation of digital transformation. It enables new loose use cases like making smart city smarts by analyzing patterns of trains, taxes, and cars Traffic lights, restaurant traffic and general citizen movement to provide insights for improving traffic flow. And another use case like optimizing fleet management by studying sensor data from a vehicle fleet, predicting the probability of a breakdown and proactively address and minimizing the business impact. With the power and scale of our advanced analytics, we are seeing companies increase consumption and T course as they add new use cases, including a major manufacturer is running factory analytics on Teradata.
A leading energy company added supply chain analytics. 1 of our world's leading interactive entertainment companies is enabling GDPR compliance analytics. A global machinery manufacturer is running predictive maintenance. A large U. S.
Healthcare company is improving clinical outcomes and a multinational acrochemical company is improving yield management. It is also important to note that Teradata continues to garner excellent recognition from industry analysis for both our customer dedication and our technology innovations. We started off the year by being acknowledged as the number one for customer satisfaction in the Forbes just 100 rankings. We additionally were named a visionary leader in Gartner's data management solutions for analytics and further attained the highest scores in their critical capabilities for data management solutions for analytics report. As I turn the call over to Mark, know that we remain fully committed to continue leading the market and helping our customers drive differentiated value from their data analytics solutions.
We are operating with fierce urgency to help the world's leading companies get on the fastest path to the cloud for analytics at scale and are excited to earn the ongoing validation from our customers. The entire Teradata team is bullish on our new growth strategy and we are pleased to win. Mark?
Thanks, Oliver, and good afternoon, everyone. We've had a great start to the year and I'm very happy to report better than expected Q1 results. Not only in terms of total revenue and non GAAP EPS, but even more importantly, we had 62% of our new and add on book shipped to subscription, significantly higher than anticipated. Although Q1 is seasonally a smaller quarter, This provides us the confidence that our full year 2018 subscription bookings mix will exceed our earlier projection of 40% to 50%. We now expect full year subscription based bookings to comprise 50% to 60% of our new and add and free cash flow is clearly a positive is our lowest bookings quarter of the year.
As you have seen in our earnings release, we have changed our financial statement disclosure to better align with in the following classifications. Recurring revenue, which includes revenue from subscription based transactions and services as well as perpetual license related software upgrade rights and maintenance. Recurring revenue was $302,000,000 in Q1, which increased 11% from Q1 2017. Perpetual software license and hardware revenue which is revenue from on premise perpetual transactions. In Q1, revenue from perpetual software license and hardware was 69,000,000 This revenue will likely continue And it is also as a result of the adoption of 606.
And finally, consulting revenue. Which was $135,000,000 in Q1 and increased 5% from Q1 2017. At March 31, 2018, our ARR was approximately $1,200,000,000, an increase of 11% from the end of Q1 2017. And our backlog was approximately $1,700,000,000 an increase of approximately Before I highlight our Q1 results, I want to make it clear 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 in our earnings release.
Total Q1 revenue was $506,000,000, above our guidance range of $490,000,000 to $500,000,000. EPS in the first quarter was $0.19. Higher than our guidance range of due to the shift to subscription based transactions and investments related to the company's transformation since Q1 of 2017. Turning to gross margins. Recurring revenue gross margin was 73.2%.
Versus 78% in Q1 2017. As expected, the lower margin year over year was due q11 2018 recurring revenue mix being more subscription based revenue, which carries lower margin net legacy maintenance upgrade rights revenue. We expect our recurring revenue margins to be in the low 70s range for the remaining of 20 18. Perpetual software license and hardware revenue gross margin was 40.6%. As compared to Q1 20 seventeen's 48.9 percent.
As expected, the lower margins are due to the revenue mix being predominantly hardware related, which carries lower margins as compared to software. We expect going forward this revenue will be largely hardware related and therefore margins will fluctuate on a quarterly basis depending on the type of hardware deal hardware deals done and Q2's margin will likely decline from the margins seen in Q1 2018. And consulting revenue gross margin improved 170 basis points to a negative 3% compared to negative 4.7% in Q1 17. Seasonally, the 1st quarter is typically the lowest revenue quarter and a heavy consultant training quarter, resulting in the weakest consulting margins during the year. We haven't invested in our consulting business to drive our business outcome led strategy.
However, this is an area of focus for the company and we expect our consulting margins to exceed comparable 2017 levels improve from Q1 twenty eighteen levels and for the full year be in positive single digits. Overall gross margin was 48.4% in the first quarter versus 51.1% in the first quarter of 2017. We expect Q2 gross margin to slightly decline from Turning to operating expenses. Selling, general and administrative expense was $142,000,000 in Q1. Increasing as expected $15,000,000 or 12 percent from the first quarter of 2017 largely driven by our strategic transformation investments, including Research and development expense was $68,000,000, up $3,000,000 or 5 percent from the first quarter of 2017.
Driven by continued investment in our cloud offerings as well as our new Terra Data analytics platform. Total expenses increased $18,000,000 or 9 percent in Q1 versus the prior year period. As a reminder, during our fourth quarter earnings call, we met that we expected operating expenses to increase by up to $20,000,000 year over year in Q1 2018 due to the strategic investments that we have previously discussed. Operating margin for versus 12% in Q1 2017. We expect operating margin to improve from Q1 2018 levels on a full year basis.
Terrapate is non GAAP tax rate of 25.8 percent for the first quarter was lower than the 35.1 percent rate in Q1 2017. Expected due to the recently enacted U. S. Tax reform. In Q1 twenty eighteen compared to $248,000,000 in the first quarter of 2017.
As expected, prior year strategic transformation investments that began subsequent to Q1 2017. The company's ongoing transition to subscription based purchasing options, which result in the company collecting cash over time versus all upfront and the overall timing of cash collection. Our capital expenditures increased $10,000,000 year over year largely due to customers shifting to subscription based transactions. As a result, free cash flow for the first quarter was 156,000,000 dollars versus the $230,000,000 $39,000,000 of cash as of March 31, 2018. Regarding cash repatriation, during Q1, we brought back $300,000,000 mostly to pay down our revolving credit facility and buyback shares.
And we expect to bring back an additional 500,000,000 across the balance of the year. During the first quarter, we bought 76,000,000 of Teradata stock or approximately 2,100,000 shares. We continue to buy shares during the 1st part of the second quarter. Year to date, we have used $105,000,000 of cash to buy back approximately 2,800,000 shares. We currently have 425,000,000 of share repurchase authorization remaining and will be opportunistic in repurchasing shares during the remainder of 2018.
Total deferred revenue was 6 $4,000,000 at March 31, 2018, which was $105,000,000 higher than on December 31, 2017, due to increasing subscription based transactions and the seasonality of our maintenance billings. I would also like to point out that the adoption of 606 on January 1, 2018 reduced deferred revenue by 19,000,000. In terms of the 606 impact on our Q1 reported results there was no significant revenue impact. Also as expected and included in our guidance assumptions, operating expense was benefited by 5,000,000 as a result of capitalizing Turning to guidance. As I previously mentioned, we are experiencing increased movement to subscription based contracts.
Which we now expect to of 40% to 50%. As a result, our 2018 full year and second quarter reported revenue, margins, operating profit, EPS and free cash flow are impacted by the anticipated increased subscription based bookings. Therefore, we now expect total revenue in 2018 to be approximately $2,150,000,000 to 2 $180,000,000 and total revenue in Q2 to be approximately $520,000,000 to $530,000,000. We expect to continue our strategic investments throughout 2018. And we now expect full year operating expenses to increase by approximately $20,000,000 to $30,000,000 from 2017.
$18,000,000 of which was incurred in Q1. We continue to expect our 2018 full year non GAAP effective tax rate to be approximately than our Q1 rate, but higher than the anticipated full year rate due to the seasonality of pretax earnings and the timing of the tax impact related to discrete items transactions faster than previously expected. We are now estimating our 2018 full year non GAAP EPS to be approximately 1 point shares outstanding of approximately 123,000,000. And Q2 non GAAP EPS is expected to be in the $0.17 to $0.19 range based on $122,000,000 weighted average shares up standing in Q2. In addition, EPS in Q2 will be impacted by lower perpetual revenue margin driven by some large customers purchasing hardware, We now expect our 2018 free cash flow to be approximately $175,000,000 plus or minus $25,000,000.
As we see an increasing mix of our transactions shifting to subscription. This accelerating mix shift to subscription results in more customers paying us over time versus all upfront and thus reducing our previous assumptions of cash collections, which slowers our free cash flow assumptions in the short term. Now, I would like to provide you with an update on our full year expectations for the following key metrics In terms of ARR, we now expect AR to grow a little more than our original 10% estimate to approximately 11% in 2018. Recurring revenue, we continue to expect 12% growth in 2018. Bookings mix We expect approximately 50% to 60% of 20.18 new and add on bookings to be structured as subscription based transactions.
To the extent this mix percentage increases beyond this range, our financial operating results will be negatively impacted. And we continue to expect high teens T core growth in 2018 as we continue to see increased consumption of Teradata from new use cases at existing customers and the addition of new customers. In closing, it's clear our strategy is working as our customers are shifting to our subscription despite the short term impacts to our financial
Your first question comes from Katy Huberty with Morgan Stanley. Your line is open.
Thank you. Good afternoon. Quick question on the quarter, then I have a a big picture question. Why was the international gross margins so weak this quarter?
Hi Katy, this is Mark. The mix of revenue and international, they probably have over 60% of our total consulting overseas than it is in the U. S. And obviously consulting margins are much, much lower than the overall margin profile.
Okay. And then Oliver walked through a number of good examples where you're getting pulled into AI IoT automation use cases. And I wonder if you can just spend a couple of minutes explaining what products that's pulling from Teradata, whether you think you have a full portfolio to address and to gain the largest wallet within those type of projects? Because that seems like it's a big opportunity going forward.
Yes. Thanks Katie. Completely concur. We believe this is a very large opportunity for us going forward. And this is a couple of things coming together from our portfolio.
The first thing is the Teradata Everywhere Foundation. The fact that we can deploy in multiple both deployment forms, the various product offerings that we have. But on top of that, it's really it's really the analytics platform that is bringing together the different engines, the different languages, the different tools. And this is where we hear from C level executives around the world a customer base that they have really they have been struggling with complexity. They have been struggling with silos.
They have been struggling with 1 off technology that it's very hard to operationalize, maintain, keep up and running, and operate. And so the Teradata analytics platform is what is resonating extremely well with the customer base. And I talked a little bit about our recent release about 4 d analytics, which is one step towards that or the next step towards it, which really brings together this location based time based version based view of data that allows customers to prepare the data for the algorithms. AI is only as good as the future extraction, the data pipelines, the data science pipelines that you can build for the infrastructure. And this is where we feel that we have a very strong product offering and customers, again, as I said, just came back from Universe and EMEA, with 24% more customers out there.
Every single one of their executives talked about how these capabilities are game changing for their digital transformations that they're going after.
Thank you very much.
Your next question comes from the line of Wamsi Mohan with Bank of America. Your line is open.
Yes, thank you. Good afternoon. Could you talk a little bit about the linearity this year? You have just under 50% of revenues in the first half, but only 26% of EPS. Sounds like you have some larger hardware transactions in Q2, which which could put some pressure on margins, that might be worse.
But what else changes in the back half of this year for profitability?
Yes. Hi, Wamsi. This is Mark. So you're right. I mean, Q1 has always been our lowest revenue quarter.
Q4 has been our highest revenue quarter. Q4 is our highest revenue consulting quarter. So we see nice margin profile on a Solting in Q4. And if you look at what it's been historically, even across 2017, it was in the low double digits. In Q4 of 2017.
Yes, we have some transactions that are largely hardware related to Q that are putting pressure but from an EPS perspective, the back half particularly Q4 has always been the largest EPS quarter certainly was across 17. And we expect that again in 2018. But yes, we see the back half moving on the EPS side much more dramatically than the first half.
Okay. Thanks, Mark. And your revenue guide for recurring revenue is still at 12%, but you're moving faster to subscription as you alluded to. So can you talk about what is happening at your from a maintenance perspective, which is probably margin profile on the consulting business. Is there anything that is changing for you as a company in a particular or fashion, maybe it's incremental training or whatever it might be that is not allowing you to benchmark appropriately even for the full year at that mid single digit?
Or high single digit margins?
Yes. So on the recurring revenue guide, first, we're only in third 1 quarter and we had a great quarter and a great shift subscription and I'm continuing to expect that to happen, which is why I haven't moved that off to 12% at this point in time. Yes. We are seeing shifts from maintenance and upgrade rights to subscriptions. We're seeing uplifts when that happens.
And so forth. And so obviously as that we take a look at that across the balance of the year, we'll determine whether or not how that impacts overall. Recurring revenue growth. But clearly within recurring revenue, our subscription based revenue is growing in excess of 100% and more than doubling year over year, which is what we expected. And we continue to see that happen.
So that's happening sort of on that front. And what was the second part of that question?
Just on the consulting gross margin profile?
Yes. Well, so if you look across what happened in 2017, they were negative in Q1. They became slightly positive in Q2, a bit more positive in Q3, low double digits in Q4. And I said in my prepared remarks, we expect that same phenomenon to happen. I expect quarter over quarter across the balance of the year.
We will see Our consulting margins exceed 17 levels, both on a quarter basis and a full year basis. The change has been we've now had our consulting organization. It's one organization where in the past it wasn't, it's all managed and organized. We brought that together. That's creating some efficiencies.
And as I said on the call, this is a big area of focus for us going forward because historically, we've seen those margins be much, much higher in the past. And we're going to over the transformation over the next couple of years, get them back to that level. Big area of opportunity for us, we believe.
Your next question comes from the line of Raimo Lenschow with Barclays.
Question for Oliver. Oliver, can you talk a little bit about the competitive environment if you go and sell Teradata now on the new fashion as a subscription model that is kind of more looking at the cloud as well and deployment anywhere. Is that kind of predominantly kind of the old guys? Is it the new guys like a Snowflake? Is it are competing with the ratchets of this world?
Just can you put us help us understand this a little bit better?
Thank you. Yes, Raimo, thanks for the question. Of course, there is competition in our market, right, that we have seen competition over the years. And as you said, it was redshift a few years ago that was predicted to be the big competitor and there's other names like Snowflake that are going around today making a lot of noise Here's something really interesting. Our strategy is really to focus on the largest elderly co op it is up there, the top 500 as we talk about, right?
Interior that everywhere is resonating extremely well with them. Why is that the case? Well, those are customers that operate at the largest end of the scale, right? They have petabytes of information that thousands of users and applications, they expect from their analytics platforms to do it all at the largest scale with the biggest amount of complexity and so forth. The competitors that we see out there, and while they are very, very noisy, They are good at small silos deployments.
Yet they can bring up the data mark for a small department, but they're really strong. To scale beyond that. And that is now becoming visible yet again in our customer base. Those customers that have tested and tried some of these new capabilities are validating that at scale. They are not working.
I told you about a large fintech company that a double down on parity investment in Q1 doubled their TCOS with us went completely to subscription they have tested both Redshift and Snowflake and they told us it became cost prohibitive and impossible to scale to go on to these platforms. And so, yes, yes, we see this, yes, we hear that. This is where we believe we are differentiated the most. And For those customers in the top 500 hybrid cloud is a big deal. They need to be able to say, I moved some workloads into the public cloud.
I use some workloads into a private cloud and they're also moving some workloads into their private data centers. And so you need a solution that runs unchanged in all of these environments That's the other side of some of these competitors. They are either cloud only or one cloud only and that really limits the applicability for most of the use cases that we're seeing in our customer base.
Perfect. A quick follow-up for Mark just can you define how you define ARR mark? Thank you.
ARR is annual recurring revenue. It's a combination of our subscription business and the historical perpetual license maintenance upgrade business.
And do you calculate
it as do you calculate how do you calculate it? Do you take like last quarter and then multiply it by 4? Is it including forward looking numbers?
No, no, it's in forward looking. That's the next 12 months. I think annual revenue run rate. It's not a backwards 12 month. It's a forward 12 months.
Your next question comes from Derrick Wood with Cowen and Company. Your line is open. Great, thanks.
And, Mark, thanks for all those numbers. Color. It's nice to get some more granularity. Real quick on the last quarter, talked about pipeline up 2x. I don't know if you'll be updating that regularly, but any commentary on how it looks today versus 3 months ago and any other color on the pipeline, especially since you've had a lot of new field executives you brought in?
Yes, this is big. Pipelines up again from where it was before it continues to grow. And so we feel good about new opportunities coming. And so we feel just as strong about our pipeline now as we did last quarter.
Okay. And kind of a higher level question. I mean one thing we're hearing, I know you guys have talked about that this the past, but customers have wanted cloud optionality in the database world, but even if they're not really ready move their database infrastructure to the cloud. So, I guess, first, is there a way to measure quantitatively or qualitatively, how having that option for cloud has improved your ability to get budget approval or budget approval cycles And second, is public cloud being a whole lot of adoption at this point? Or can you give a sense for in that subscription line, what the mix looks like between term hosted and public cloud?
Yes. So, what you're talking about is the core of Teradata Everywhere in it first started out last year when we first shared that really with customers where they were very positive about the fact that, oh, I have optionality I have choice, as you say, they might not be ready to move everything into one particular cloud, but they want to know that wherever they go, they can move anytime to any other deployment form. And so it helps executives and companies around the world to derisk their buying decisions. And it has become very obvious and more and more customers are adopting debt and the success stories are coming out, how easy it was for them to shift from on premise to managed cloud in public cloud and to be able to do that in 70 days as we have one example that we shared with you for very large scale deployments without rewriting a single line of code for the applications that were originally written for the on premise world. And that That is a lot of, giving us a lot of momentum with executives in the conversations.
That we're having with them. And it's really helping us together with the new bundled pricing and subscription pricing with the choice of where you can deploy, but also the ability to move at any time without having to relicense that all comes together. And again, if you apply that
to the top 500, if
you apply that to our core customer segments, that is what what is driving the positive customer momentum that we're seeing in the feedback has been absolutely great from the customer base on that.
Your
next question comes from Sted with Deutsche Bank. Your line is open.
Thanks. Question for you, Mark. Mark, it looks like you reclassified a fair amount of consulting revenues into your recurring bucket. So I've got two questions there. First, just from a definition standpoint, what were the consulting services that sort of moved over and that were in your definition more recurring because most people think of consulting as frankly being nonrecurring.
And then secondly, the piece that moved over into the recurring bucket, did it have any different growth or or margin profile than the segment that is currently retained in the consulting bucket? Thanks so much.
Yes. So what got moved over is our main services. Those are all sold on subscription predominantly. So that's all under, subscription contracts that renew. So that's a recurring a recurring item, and that's why it's sitting in the recurring bucket.
The growth profile of that has been largely pretty small. It's been pretty flat. So that's not what's helping drive any recurring revenue growth at all. It's all the subscription. That's driving the recurring revenue growth.
That's pretty flat. It does have some differentiated margin profile and obviously the managed services margins on that given their subscription and largely fixed fee have a higher profile than stand alone consulting margin.
Got it. Okay. That's very helpful. Thank you. And then if I could ask one follow-up, just on the pure subscription revenues.
I know you haven't disclosed it in the past, but if I remember correctly, I think you suggested on the last call that you think these subscription revenue growth could be north of 100% in 2018. So I just wanted to just recheck on that that guidance, do you still feel comfortable with that assuming I had that number correct?
Yes, we do. So We're in excess of 100% more than double in 'eighteen over 'seventeen.
Your next question comes from Jesse Halsing with Goldman Sachs. Your line is open.
Yes, thank you. I on the recurring margins, gross margins, I should say, they tick down year over year. And I'm just wondering where you think those can go as you go this transition and I guess scale up that revenue base. I'm curious, your thoughts on the full year 18, but also I guess over the medium term and long term, where do you think those margins can go?
Yes. So the recurring revenue down year over year is a mix. It's obviously more subscription based revenue versus the perpetual license legacy maintenance upgrade and those have different margin. Profiles. So that's what you're seeing.
And you'll see across 2017 that they declined across 2017 as more than subscription revenue came into the recurring revenue line. One more time, we expect these to grow from the low 70s that we expect across the balance of 20.18 approach closer to 80%, which we think is best in class in the subscription world. When you start to I mean, they're very good candidly in the low 70s compared to a lot of the other SaaS companies out there and so forth. But, yes, we expect to dry them even higher than the from the low 70 going forward.
Got you. And Mark, just so I I am looking at the right numbers and doing the right math. When you say recurring revenue growth of 12%, which is also what you guided to on the fourth quarter call, Is that on last year's reported 605 numbers or on the 606 numbers? I'm not totally sure.
Well, it's on the 2018 numbers are 606. We did not recast the comparable 2017 numbers to go back the 605. So, the 12% on that basis, the 606 adoption was a headwind to our recurring revenue growth across Yes. All our guidance is on a 606 basis.
Okay. Got you. Thank you.
Your next question comes from Phil Winslow with Wells Fargo. Your line is open.
Taking my question. As Vic mentioned earlier, when I do the back envelope math to sort of with your recurring portion versus last year, seem that you see a pretty solid uptick in just product growth as adjusted for that perpetual that ratable mix year over year. I remember Q1 being particularly good quarter last year, you talked about essentially like a tough comp here in Q1 because of a large deal. What are you tell me sort of what drove that year over year strength here in Q1, particularly in the context of that tough comp? Was it big deals again?
Was it just sort of just volume of business across customers, just sort of what's driving that off that tough comp?
So a little bit of everything, but I guess the big thing, we saw versus last year an uptick in international. We were surprised and how quickly international jumped on more this year. We quite honestly affected for that to be a little slower. That's what happened last year and it accelerated significantly in Q1. So that would be the number one factor that caused that percentage to increase the better than last year.
Great. And then just one quick follow-up to that. Just the pricing environment that you're seeing, Q1 and kind of how you're thinking about that in Q2 and beyond relative to sort of what you were seeing last year?
So we're putting discipline. We've talked about discipline in the field and where we are at and we are not giving product away or anything like that. We are holding our price line. We when you go through the deals with the big customers, we have sometimes they're very complicated how you get it all done and get into a subscription base and that can create some issues. But in terms of pure pricing, we're holding strong with where we are, we believe in what we've got.
I told our team they've got to have Swagger, they've got to believe in what they sell and it's worth what we're offering. And so we're upholding where we're at. We aren't feeling any pressure. And in fact, we continue to not try to close deals at quarter end to get a deal done. First of all, it doesn't matter that much under a subscription basis.
But secondly, we
don't need to
do that. So we have a product and it's fairly priced and we think we're treating our customers there and we expect fair return. So, pricing pressure is not anything that I'm overly worried about.
Great. Thanks guys.
We have time for one more question. Your next question comes from the line of Abe Lamba with Mizuho Securities. Your line is open.
Mark, this is the first time we're getting the revenue breakdown the way it is. Can you talk a little bit about what's in the bucket, different relative size of each of them? And how should we think about their respective growth rates? And is it also you have to assume that incremental gross margin on some of those recurring buckets is going to be pretty high in the high 90s?
Well, so, yeah, we've shifted to a recurring revenue presentation, perpetual hardware presentation and consulting. Presentation. So within the recurring revenue bucket, yes, we expect those margins. Over time to improve, based on what comments I made to Jesse's question that we expect those to improve from the low 70s going forward. Clearly, maintenance software upgrade rights have a blended margin profile that's higher.
Clearly, you got software and hardware and those numbers, but in software high 90s and hardware is lower than that. Right? But, but over time, as this shifts and moves, to subscription, we see margin improvement, moving higher. And so that we fully expect to see that a bid across 2018, but clearly more as we get into 2019 2020 as we complete the movement away from perpetual.
Got it. And Oliver, if I can ask one last one, can you talk about the competitive landscape in terms of adoption of Hadoop for ETL workloads? At some point in the past, had quantified a potential range of your workloads that could be at risk of migration away to Purdue. Any color on that in terms of what you're seeing currently the market would be helpful.
Yes, absolutely. And I've been quite outspoken that we have used to do as a tool for the right use cases before. What we're seeing particularly over the last year. And I think the whole industry is seeing that is that, how do abuse cases are actually shifting quite quite a bit, 2 cloud based architectures. And this is, really intersecting very well with what we're doing with Teradata Everywhere and in our focus on cloud deployments.
We're seeing very few Hadoop installations move into the cloud the vast majorities of adoption in the cloud is on cloud native architectures, S3 and DC2 and all the technologies that cloud vendors offer that. And this is what we really have focused over the last couple of years with Teradata Everywhere as we're rolling out. So there's a very nice intersection that we're seeing there. That's coming together. We expect it to be a tool out there.
We expect it to be used in customers around the world, but we certainly don't see a lot of workloads moving off of Teradata to it. Thank you. You're very welcome.
Line.
Thank you everyone for joining us today. I think you've all sensed the enthusiasm that we have about where we are today and our future and where we're going. I'm personally enthused by not only we have it, all the areas that we still have opportunity to improve our operation. I talked about smelting consulting and driving to a better operated company and those are what our infrastructure investments all in all, very, very positive about where we're going good trends, confident for the year. We are going to be hosting an Analyst Day here in San Diego sometime in Q4 and updating on our outlook as we are getting some more clarity around conversion rates and where we are headed as a So we will be able to provide you a little longer view at that time and we will get those dates to you.
Again, thank you very much for joining us today. And we look forward to our call at the end of Q2.
This concludes today's conference call. You may now disconnect.