Gregg Swearingen - Teradata Corp. Victor L. Lund - Teradata Corp. Oliver Ratzesberger - Teradata Corp. Stephen Mark Scheppmann - Teradata Corp..

Wamsi Mohan - Bank of America Merrill Lynch Raimo Lenschow - Barclays Capital, Inc. J. Derrick Wood - Cowen & Co. LLC Bhavan Singh Suri - William Blair & Co. LLC Philip Winslow - Wells Fargo Securities LLC Jesse Hulsing - Goldman Sachs & Co. LLC Karl E. Keirstead - Deutsche Bank Securities, Inc..

Good morning. My name is Carol and I will be your conference operator. At this time, I would like to welcome everyone to the Q2 2017 Teradata Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

At this time, I would like to turn the call over to Gregg Swearingen..

Good morning and thanks for joining us for our second quarter earnings call. Victor Lund, Teradata's CEO will begin our call this morning with an update on our progress in transforming Teradata. Oliver Ratzesberger, EVP and Chief Product Officer will then provide an update on the progress we've made with our Teradata Everywhere strategy.

Then CFO, Steve Scheppmann will discuss our second quarter results as well as our expectations for 2017. Our discussion today includes forecast and other information are considered forward-looking statements.

While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially. These risk factors are described in Teradata's 10-K, 10-Q and other filings with the SEC.

On today's call, we will also be discussing certain non-GAAP financial information, which excludes such items as stock-based compensation expense and other special items described in our earnings release, including asset impairments, acquisition, reorganization and transformation-related costs, and the Marketing Applications business, which was sold in 2016.

We will also discuss other non-GAAP items such as free cash flow and constant currency revenue comparisons. A reconciliation of our non-GAAP results to our reported GAAP results and other information concerning these measures is included in our earnings release and on the Investor page of Teradata's website.

A replay of this conference call will be available later today on our website. Teradata assumes no obligation to update or revise the information included in this conference call whether as a result of new information or future results. Now we'll hear from Vic..

Thank you, Gregg. Our discussions to-date have laid out our strategy, which is business outcome-led and technology enabled. This strategy is extremely relevant today. Customers face many challenges driving high-impact business outcomes from data and analytics, and they need help. Our strategy is focused on our customers' success.

We help customers prioritize and deliver their highest impact analytic use cases.

We ensure that our customers deploy the best fit architectures to meet their unique data and analytic priorities, and we implement, support and manage the most integrated and scalable analytical ecosystem technology to ensure our customers can build lasting analytic capabilities. Today, I'm going to give a brief update on our progress.

First and foremost, our customers love the capabilities of Terdata software and our teams that support it. However, a year ago, they didn't like our pricing and deployment rigidity, especially regarding our ability to deploy in the cloud. In Oliver's comments, he will discuss how we have addressed these concerns.

Additionally, we found our customers are laser-focused on figuring out the type of analytical ecosystem they need. Analytical ecosystems have become more complex as they have expanded to include, among other things, data warehouses, data lakes and multiple cloud offerings.

Our customers want advice from people they trust to help them understand and navigate this complicated puzzle. The goal is to deliver business outcomes they need in today's competitive environment in a cost-efficient way. Given our experience and knowledge, we are uniquely qualified to serve their needs.

Our customers are among the world's 500 largest analytically driven companies. Many of them require purpose-built analytic solutions that meet the unique needs of their respective businesses. solutions that have the capability to seamlessly interface with and process analytics in an increasingly diverse ecosystem.

This not only speeds up the time to develop solutions that are rich in insight, but also supports consistent data being used across multiple use cases, thereby delivering higher confidence in the outcomes. We continue to make sure Teradata software remains in the leadership position when customers think about data and analytics.

This continues to be validated by industry analysts. In fact, so far this year, Teradata has been named a leader in six key industry analyst reports. This recognition spans vision, products, service, and how Teradata supports our customer, but more relevant is how our customers view Teradata.

Our customers tell us no one can compete with Teradata in delivering integrated analytics at scale. We are the partner that gives our customers maximum flexibility in delivering their unique purpose-built solutions; not ours, but theirs. Consulting is also an important part of the value we deliver for our customers.

We are focused on consulting that supports our customers, while directly or indirectly driving consumption of Teradata software. Our consulting teams are able to provide advice and deliver purpose-built analytics business solutions as well as designing, delivering and managing the underlying best-fit analytical ecosystem.

Our customers know that we have the experience and capabilities to make them successful and want us to engage in both areas. Turning now to go-to-market. We know a key to our success is the people who engage with our customers. Like the software and consulting discussed above, we have transformed our go-to-market approach.

Our sales teams have developed account plans focused on delivering high-impact business outcomes and are approaching our top customers with a business-led approach. As I said in the last call, when we engage our customers in this way, we are finding the discussions become more about benefits than cost and lead to a sustainable relationship.

We believe the Teradata we are building will be at the nexus in the future; integrated analytics based on integrated data via an agile data foundation and delivered at scale. Our customers are receptive to the new Teradata strategy.

This is evidenced by our increased funnel and our momentum, which positions us well for the last half of 2017 and a strong start to 2018. All of this sounds great, but we understand you want metrics that will demonstrate our strategy is delivering results now and will continue to do so in the future.

In his comments, Steve will lay out the metrics that will allow you to just that. But before Oliver gives his presentation, I want you to know that we have turned the corner and we are more confident in our strategy than we have ever been.

Oliver?.

Good morning, everyone. It's an exciting time to be at Teradata. I'm very pleased to share with you the progress we have made, how our customers are reacting to our new strategy and to demonstrate the confidence we have internally at Teradata.

We have created an amazing new company with a new strategy focused on driving high impact business outcomes for our customers and returning Teradata to meaningful revenue growth. Our new strategy is focused on providing our customers flexibility and choice, making it easier for them to purchase Teradata's market-leading analytics solutions.

I meet with many of our current and prospective customers, and they love that our solutions are now more affordable and our purchasing options are more flexible than ever before. As a result, we are seeing increasing momentum and activity that sets us up well for the end of 2017 and into 2018.

A foundational element of our strategy is Teradata Everywhere. We created Teradata Everywhere to help customers meet their data and analytic needs today and in the future. Teradata Everywhere provides our customers three core benefits.

First, we are enabling our customers to implement Teradata across flexible deployment options including public, private, managed clouds, and on-premises deployments. Our customers can deploy on their hardware, our purpose-built Teradata platforms or public cloud infrastructures.

Second, our solutions can now be purchased in more accommodating ways with our simplified pricing bundles that address the needs of different customer use cases at different price points. All pricing bundles are delivered through subscription-based pricing and as the service options. And third, Teradata Everywhere is future-ready.

Customers can take advantage of our affordable licensing to change where they run their Teradata software as their hybrid cloud needs evolve. Through a combination off our market-leading technology in Teradata Everywhere and our highly regarded business and technology consulting teams, we are delivering on a broad range of new business use cases.

These use cases are opening new areas for us to sell our technology.

Our consultants help customers identify and build roadmaps for new analytic opportunities, determine the right architecture and deployment options to fit each customer's unique needs, and deliver business-focused value-creating analytics; all leading to increased consumption of Teradata software.

The business outcomes we enable for our customers are wide-ranging and a few of the recent use cases that we are delivering with our customers include; member churning and specialty pharmacy analytics for healthcare company, raw materials and yield optimization for a semiconductor manufacturer and natural language processing for better speech recognition and document classification to improve process automation at a retail bank.

Customers are now considering Teradata in areas where they previously had not and this is significantly increasing our opportunities. Now I want to highlight some of the advances we have made in our technology that are helping us execute Teradata Everywhere and build momentum with customers.

First, we provide the same full-featured Teradata Database software regardless of the deployment options a customer chooses in public, private or managed clouds as well as on-premises.

And with portable database licenses, customers have the flexibility to expand or modify their hybrid cloud environments by moving licenses between deployment options as their business evolves. This flexibility and portability is clearly helping our customers move forward on transactions as we now take the risk of making purchase decisions.

Customers know that their needs will change over time and rather than be paralyzed while trying to determine their future architectures, they can buy today with confidence knowing that the Teradata Database functionality is the same across deployment options and that the database software licenses are portable.

And with our simplified pricing tiers and subscription-based licenses, it is easy for customers to get started quickly and affordably and pay as they go, instead of working through a long capital approval process. While this is a tremendous benefit for customers, it is also great for Teradata.

We are seeing customers adopt subscription licenses more rapidly than expected and this is building future recurring product revenue for us. Turning to our leading Teradata IntelliFlex platform. We took a technological leap forward and made IntelliFlex 100% based on solid state drives.

We know that customers continually require substantial gains in their data warehouse compute power to serve the needs of their mission-critical advanced analytics and we specifically designed IntelliFlex to meet these demands.

The new IntelliFlex, all in memory appliance, delivers a massive increase in processing power; in fact, seven times more compute power per cabinet than our previous product.

With IntelliFlex, we are providing our customers with more performance, storage and memory while reducing costly datacenter space and saving energy costs and it is generating a lot of interest and activity.

One example; a global leader in the semiconductor industry is leveraging IntelliFlex and our consulting services to help them improve the yield and quality of the chips it produces. A 1% cumulative yield improvement can translate to $100 million of savings. And we executed that proof-of-concept, that demonstrate this yield improvement is achievable.

In the second quarter, this customer purchased IntelliFlex and took advantage of our flexible subscription-based licensing, which made it easier and more affordable for them to purchase more Teradata. We also launched Teradata IntelliCloud, our managed cloud offering that provides data and analytics Software-as-a-Service.

This next-generation cloud service ensures that our customers can leverage the same software, ecosystem applications, tools and training that they have already invested in for their on-premises Teradata systems. With IntelliCloud, customers can focus on driving business outcomes rather than matching infrastructure.

We are deploying IntelliCloud in our data centers as well as on Amazon's AWS and Microsoft's Azure public cloud infrastructures. We are gaining considerable traction with our IntelliCloud offering and cloud activity in our sales funnel has increased significantly in the last few months.

One of our customers; a leading global consumer goods company, is focused on improving analytics to optimize their consumer promotions, improve sales planning, enhance supplier contract negotiations, and strengthen their executive reporting.

This customer is focused on moving their data and analytics to the public cloud and they purchased our IntelliCloud-as-a-Service offering on AWS. The customer is also relying upon our enterprise data consulting organization for cloud architecture, migration planning and implementation.

We also recently announced our ready-to-run Teradata IntelliBase; a revolutionary multipurpose platform that supports several software technologies on a re-deployable hardware at a low price point. IntelliBase enables a Teradata Database, Aster Analytics, and Hadoop to run in the same cabinet.

A true all-in-one engineered solution, IntelliBase provides the versatility for a customer to repurpose hardware to meet tomorrow's business requirements. This provides ultimate flexibility and investment protection for customers despite IntelliBase being engineered as a low-cost alternative.

This makes the new platform extremely efficient and economical, and therefore, extremely attractive to our customers. An S&P 500 healthcare company purchased IntelliBase in Q2 to complement its enterprise class Teradata system.

IntelliBase will be its analytical platform to support cost of care analytics for its Medicaid and Medicare business by the structured and unstructured data. This customer also leveraged business and analytic consulting provided by our Think Big Analytics organization.

To strengthen our agile build and delivery capabilities, we recently acquired the San Diego startup, StackIQ. A leader in open-source software provisioning, StackIQ will help accelerate adoption of Teradata ecosystem and cloud offerings by simplifying and automating the delivery and deployment of Teradata products.

This intellectual property also supports rapid re-provisioning of our IntelliCloud infrastructure, internal test and benchmarking hardware as well as swift redeployment between technologies to match a customer's changing requirements.

As I close, I want to reinforce why we are so enthusiastic about the progress we have made and the momentum we have built going into the second half of the year. Customers are recognizing that Teradata is different. We are easier to do business with and customers now have more ways than ever, to deploy and purchase Teradata.

As a result, customers are now considering Teradata for a full range of use cases that we may never have been considered for previously. This is because of our wide range of deployment options and our new, simplified pricing tiers at different price points.

We have turned the corner on delivering the flexibility and choice that the customers want and this is showing up in our sales funnel as we now engage in new analytic use cases. And customers are able to move forward now on purchases because we de-risk their buying decisions.

They no longer need to sweat their assets, while they decide on their future analytic architecture direction. They can buy today. This is enabled by the combination of our multiple deployment options, our portable software licenses and because customers can buy in smaller, pay-as-you-go increments via our subscription-based pricing.

As a result, we are seeing increasing momentum in customer activity. Our sales funnel is growing and is much higher than it was before our strategy changes. Subscription licenses are being adopted faster than expected and we are seeing customers seriously consider and adopt our cloud options.

This all builds recurring product revenue, which positions us well for the future. As I said at the start, the changes around Teradata are nothing short of amazing and I'm excited to be part of this transformation. Thank you..

approximately $225 million to $250 million of gross perpetual equivalent to shift to subscription-based transactions during 2017.

In fact, we had $108 million of gross perpetual equivalent shift in the first half; annual recurring revenue, or ARR, of $1.1 billion by the end of the year, with about a third of that being product ARR; product ARR to grow approximately 25% for 2017; recurring revenue to grow high-single-digits in 2017; business consulting revenue to grow approximately 20% in 2017 and Tcore growth of almost 20% based off of our 2016 year installed base.

Now looking at our regions. In the Americas, our sales cycles are beginning to shorten and we're becoming more predictable with time with our sales funnel is increasing. The Americas' revenue decreased 17% in constant currency versus Q2 2016. However, majority of the subscription-based transactions signed in Q2 were in the Americas.

Our international region had a good quarter, including international customers starting to utilize our subscription options as well. Revenue increased 4% in constant currency and 5% year-to-date. Turning to margins, product gross margin in the second quarter was 67.5%. On a comparable basis, product gross margin in Q2 2016 was 65.9%.

The improvement in product gross margin was largely due to favorable product mix in part due to more customers purchasing our IntelliFlex offering rather than our prior 2000 Series appliance. Services gross margin in the quarter was 44.1%; a decrease from 49.3% in Q2 2016.

Services margin was impacted by the investments we are making in our consulting business, which, as we have discussed before, is a driver of our business-led strategy to drive and increase consumption of Teradata's products. As we said last quarter, these investments will impact services gross margin throughout the course of the year.

Services margin was also impacted by utilization rates as well as the work in process issue we described last quarter. As a result, overall gross margin was 51.7% in Q2 compared to 55.9% in Q2 2016. Turning to operating expenses.

SG&A expense of $146 million was up 11% from Q2 2016 as we are now starting to compare against prior period when we were reducing costs and now are reinvesting those savings more appropriately to support our new strategy. Correspondingly, R&D was up meaningfully, as expected, as we've continued to invest in cloud development and other areas of R&D.

Compared to Q2 2016, R&D expense of $72 million was $19 million or 36% higher. Our non-GAAP effective tax rate for the second quarter was 37.8% versus 27.3% in the same period 2016.

The increase in the effective tax rate period-over-period was largely driven by the higher percentage rate of normal discrete items driven by the lower pre-tax earnings denominator period-over-period. However, on an annualized basis we expect our full year non-GAAP effective tax rate to be approximately 27.5%.

We expect Q3 non-GAAP tax rate to be in the low-30%s, with the Q4 non-GAAP tax rate to be in the mid-teens to result in the expected 27.5% rate for 2017. Turning to cash flow. We had another solid quarter in terms of cash flow generation.

Net cash provided by operating activities was $61 million in Q2 2017 compared to the $99 million generated in Q2 2016. However, cash flow generations in Q2 was better than we expected.

After $14 million of capital expenditures versus $9 million in Q2 2016 and $2 million of additions to capitalized software versus $18 million in Q2 2016, we generated $45 million of free cash flow versus a $72 million of free cash flow generated in Q2 2016.

Although increased investments as well as lower revenue contributed to lower free cash flow year-over-year, free cash flow for both the quarter and year-to-date was better than we expected. We expect our full year free cash flow to be at least $250 million.

As a remainder, we typically generate the majority of our free cash flow in the first part of the year, and in this case, we are investing in the future of Teradata; free cash flow for the second half could very well be negative after the $275 million of free cash flow generated in the first half.

As a reminder, that $275 million was the high end of our expected free cash flow for the full year.

As Teradata's customers continue to shift to the company's new cloud and subscription-based offerings, it is difficult to estimate how much full year 2017 reported revenue could be impacted by the ratable manner in which revenue is recognized for these new purchasing options.

Furthermore, as we get closer to 2018, adoption of ASC 606, this may begin to impact how transactions are structured in the second half of 2017 in order to minimize loss revenue.

However, given our current view of our sales activity, we are updating our forecast for full year reported revenue to now be down approximately 5% to 7%, which is better than our prior view that 2017 reported revenue could be down 5% to 10% from 2016.

Also keep in mind; we expect $225 million to $250 million of perpetual equivalent to be structured in subscription-based transactions. Correspondingly, we expect non-GAAP EPS to be in the range of $1.22 to $1.27 for the full year, prior to any benefit from the share repurchase activity we planned for the second half.

Again, we think EPS will be more weighted to the fourth quarter much more than is typically the case. In fact, Q3 overall could look at lot like Q2 or either a little lower, but we expect a very strong fourth quarter as we see our new strategy really start to show signs of success.

Now let me go over some of our other operational expectations for the full year. We estimate that product gross margin will be in the mid-60%s. Services gross margin is estimated to be in the mid-40%s as we continue to invest in our services business to pull through future product revenue.

We estimate that SG&A will be up high-single-digits on a percentage basis as we hire additional sales and sales support resources and invest in our infrastructure as planned. R&D expense is likely to increase 25% to 30% versus 2016 as we invest heavily in cloud and core analytical solutions.

As expected for companies going through this type of business transformation, the first year or two are generally challenging from an as-reported basis, but companies build on the recurring revenue model for a stronger and more predictable future years.

2017 is clearly that type of building year for Teradata, but let me be very clear, we are very confident that our new strategy is working and will result in a much stronger company.

Therefore, I want to share with you some of the preliminary 2018 targets that we are contemplating based on what we're seeing through the end of Q2 and based on our current assumptions that we are applying indicates that our analysis – our analysis indicates that total perpetual equivalent product revenue is expected to bottom out in 2017 and that we should see more benefits to our strategy in 2018.

This early view is before any of the impacts of ASC 606 and any changes in our underlying transition to subscription assumptions. Our early assessment for 2018 includes; total perpetual equivalent is expected to increase 2017 over 2016 and 2018 over 2017.

Product ARR should continue to grow in the mid-20% with almost $100 million of incremental product ARR in 2018. And we continue to expect total revenue growth in 2018 while still transitioning activity to the subscription-based pricing model.

You've heard Vic and Oliver describe how our new strategy, transformation and execution have strongly positioned us to drive increasing business value for our customers through analytics.

This is demonstrated by the growth of our sales funnel as customers are embracing our hybrid cloud deployment and pricing consumption options, and as a result, we are even more confident in our strategy and plan to acquire up to $300 million of our stock during the second half of 2017. And with that operator, we are ready to take questions..

Thank you. And our first question this morning comes from Wamsi Mohan from Bank of America. Please go ahead..

Yes. Thank you. Good morning. Your perpetual equivalent guidance for the back half, suggests that you can have up to 30% higher perpetual equivalent in second half versus first half which would suggest that you're significantly accelerating the move to subscription revenues.

And Oliver had mentioned customers are now looking at new analytic use cases where you would not have been considered before. Can you share some examples of this and do you feel now that, conclusively, customer purchasing is shifting more towards subscription? And I have a quick follow up..

Yeah. Wamsi, let me take the first part.

Then I'll turn to Oliver on the use cases, but yes, Wamsi what we're seeing in the second half is clearly what we see in building, in the funnel, is more activity going towards these deployment consumption options on the subscription basis particularly in the Americas and we're actually seeing that activity picking up in internationally, more so in the second half.

So again, a strong adoption of these consumption models and we're seeing net increase in the sales funnel in the Americas and the international. And even to the extent that we're looking at potentially increasing our assumptions as we go into 2018 with respect to the adoption.

So again, a very strong statement with respect to the adoption of these flexible pricing models. I'll let Oliver lead to any of particular business value use cases that we're seeing..

Yeah. Wamsi, I mentioned one use case where a very large semiconductor company internationally purchased Teradata IntelliFlex in the second quarter. And that is really to perform yield optimization of chip manufacturing plants.

And as I mentioned in my remarks before, those are not the traditional use cases that Teradata was chosen for, right, but now first of all with the underlying platform in this case, IntelliFlex and the solid state options that we have in there and the high performance that we can deliver at that, plus the new pricing options that we have, that simply combine all the relevant features of Teradata into a single pricing bundle.

It makes it so much easier for customers to choose Teradata and to implement that. And we are seeing that throughout our customer base that really the changes that we have implemented with the strategy already starting to take hold globally with a lot of companies, and therefore, new use cases are coming in..

Thanks a lot. Appreciate the color. And then Steve, if I could just follow-up really quick. Thanks for the new supplemental breakdown into the recurring elements here.

Given that you're seeing increased traction across subscription base offerings, why are we not seeing more of a pickup in the recurring product line in 2017? Is that just because we only had a few quarters of this model transition, so 2018 should be substantially higher?.

Yeah. Wamsi, what you're seeing is exactly the latter part of that statement. Like the large Q1 deal, you have now a small portion. You know that's a five-year deal. So in Q2, you have a portion of that coming in. What we're seeing, if I'm looking behind the numbers, I see product ARR growing 3x at the end of 2017 compared to the end of 2016.

So we definitely see that build in the product ARR, almost 3x. You see bookings, which on a combined basis, perpetual, cloud and term, bookings are increasing close to 15%. So again, strong bookings coming through, strong product ARR coming through. That's where we're seeing the activity right now. And as you're right – you're correct.

As that keeps building, it keeps rolling in. What I'm seeing in 2018 is finishing 2017 very strong and there being a very positive impact on that product line, revenue in 2018 with respect to that recurring piece rolling into 2018. So yeah, it's the latter part.

We're at the early stages of the ARR building and the ARR releasing into the income statement, into the revenue line item and 2018 will have more positive impact..

Thanks, Steve..

Our next question comes from Raimo Lenschow from Barclays. Please go ahead..

Hey, I have two quick ones. So the first one is more a follow-up, Steve. But if I look at that subscription line, it went actually down sequentially.

So I'm just kind of like I know that is rolling in slower, but if you're doing so much more, why is that going down sequentially in subscription?.

The subscription – the revenue from it is – continues to – there's nothing unusual, Raimo, in that line item. The recurring product line in Q3, the $69 million to $75 million on that recurring revenue line item is improving as those items roll through.

The perpetual side is falling off on the perpetual side, but then again that's expected as these things convert to subscription.

Am I getting right at your question on that?.

Yeah. Yeah. I mean, we can take it off. We can do it later, Steve. And then the – if I....

There's nothing unusual, Raimo, going through those line items from what we're seeing as those term or subscription transactions roll through..

Okay. And then your comments around the Q3, Q4, do I just kind of simply read into that, like, if you look at your funnel and how the funnel is evolving, then Q4 is shaping up as a very, very strong year. It's just that if you look at the deals in the pipeline, they more look like Q4 deals than in Q3 and that's why we have kind of the messaging today.

Is that kind of the right way to think about it?.

Yeah. There's two messages there. Yes, that latter is one of the messages. And what we're also seeing, Raimo, with our movement towards the subscription type transactions, we're not – how is a good to say this. We're not kind of being held hostage at quarter end to try to get a perpetual transaction done.

And even in Q2, we had two to three transactions that if they were on a perpetual basis, we would've said okay, what do we need to do to get them into the quarter; but on a subscription basis says, hey, we want to do the right thing to maintain our margins.

Those deals, they were on subscription basis, one was on a perpetual basis, rolled over Q2, got closed in the first two weeks of Q3. I'm anticipating some of that happen in Q3 to Q4, but generally what we find, to your latter point, we find 12/31 as a kind of natural back-stop for everybody with their budgets and the deals get completed in Q4.

We're not going to sacrifice any margin on any transactions just to get it into the quarter.

And so that's why I'm saying Q3, we might see a couple of those things, those subscription deals kind of roll over the first part of Q4, get done in the first part of Q4, but then I expect that natural progression in Q4 to get done – to get the transactions done in Q4..

Perfect. Very clear. Thank you..

Our next question comes from Derrick Wood from Cowen & Company. Please go ahead..

Right. Thanks. A question for Steve, and congrats on the traction with subscription.

I mean, as you look into second half, what we typically see when there's an acceleration to ratable revenue, there's actually incremental pressure on the model and it causes total revenue to kind of come down and be more pressured and that's not really the case in terms of what you're seeing in second half.

So can you give us quantitative or qualitative mechanics on why this accelerated shift is lifting what you had previously guided to? And maybe there's some FX benefits in there. I know the euro has gone up a lot. Maybe you can speak to FX as well..

Yeah. Derrick, yeah, FX we saw 1% headwind in the first half, seeing about 1% tailwind in the second half, flat for the year but when I'm referring to our total revenue, our entire model isn't shifting to subs; it's just the product revenue.

We have other elements – the consulting side, the maintenance side, that we see continuing to have reasonable growth in that second half. And as a result, we see that offsetting and bringing down our expectations.

Now remember, when I said earlier on our Analyst Day that companies typically go through this and they see a 5% to 10% decline in reported revenue in the next year, those were kind of the fence posts that we set up there.

And what we're seeing – and we made some assumptions as to what amount of new Tcore that would go to subscriptions and existing customers that would go to subscriptions. We're not transitioning our full base of revenue to that.

And then when I see the amounts coming through, we're basically at our original expectation, slightly higher, but that kept me down to that lower level of that 5% to 7% versus 5% to 10%. So really, no significant change. I had broad fence posts, goalposts there to kind of set up 2017 because there was a lot of sensitivity to our assumptions.

But now that we see the actual activity kind of tracking towards our assumptions a little bit better than what we had anticipated, I feel comfortable bringing that range down into a tighter range of 5% to 7% without any significant changes to that model. So everything that we're seeing, we're at that 5% to 7% range.

I don't want you to lead into it that's saying, okay, if more is going to go, we could be above that 10% range. No. We're going to be within that 5% to 7% range, and it's really driven by the other part of our business that's not going to the sub's model..

Got it. That's helpful. And just a quick follow-up. The maintenance growth of 5%, pretty amazing given the 40% decline in perpetual license revenue.

I mean, how sustainable is this? Does it start to really decelerate or is it more resilient?.

Yeah. It's pretty resilient because of the service levels that our customers expect from us. We're still growing their – Tcore, I want to make sure that this point gets out there, Tcore growth is still 20% off of our 12/31/2016 installed base.

Okay? So there's still good growth for Tcore out there year-over-year, driving that maintenance and driving the support that our customers expect from us. So maintenance continues to be resilient.

I expect maintenance always to be in that kind of low-single-digit growth rate, even with our reported product revenue numbers, because, again, underneath the underlying core of it, Tcore is growing 20% over the 12/31/2016 installed base..

Okay. Thank you..

Our next question comes from Bhavan Suri from William Blair & Company. Please go ahead..

Hey, guys. Thanks for taking my question. Maybe the first one for Oliver and then a quick follow-up for Steve.

Oliver, as you look at the deployment options, you've talked about sort of expanding use cases, but when you look at your customers as deploying, say an AWS or Azure or pure cloud as opposed to on-premise subscription, on the competitive front, are you seeing anyone new? Are you sort of seeing running into some of the newer vendors like Snowflake at all? And how does performance of TDC on AWS compare with Snowflake? Because we've seen the Redshift numbers, but I'd love to get your thoughts on Snowflake..

Bhavan, thank you. Thanks for the question. Obviously, we are eagerly watching every single competitor that is out there and what they're trying to do.

In reality, what we're seeing is while some of these competitors were to the cloud faster, their performance, and specifically for the use cases that our customers care the most which is high concurrency, high scale, high complex workloads, that's where we differentiate the most.

And so far what we are seeing is that for all the cloud-based competitors, they might have a place in small deployments for small companies, but once the data volumes grow to a certain size, once the complexity of the workload takes off, and more importantly once the concurrency takes off, meaning you have a couple of hundred users or a thousand users asking complex questions all the time, this is where we are seeing a node-for-node advantage of over 100x with the Teradata software.

And so far it has been universal in all these competitors. And so when we look back, we have been dealing with competitors obviously for many years.

And the difference that we see now is while some of the competitors have been earlier to a cloud or focus more on the cloud, they have focused less on the performance than some competitors we have years ago.

And so that is something that now that we have full cloud deployment options, and more importantly we have that portability that none of the other options have, right. So if you go to a Snowflake, or if you go to Redshift, or if you go to some of the other options out there, you are locking yourself in to one particular cloud platform.

And our customers simply don't know where they want to be tomorrow. They might be okay with one cloud platform today, but they're not quite sure if that will be the cloud platform of the future. So, these competitors are locked in into a single cloud platform, in a single deployment option.

Teradata, with its performance advantage, with its scale advantage, we can deploy on Azure, on AWS, in our cloud, in the datacenter, on our hardware, on your hardware. And that makes us, I think, very uniquely positioned compared to some of these competitors.

Plus, when you already have workload on Teradata, when you shift that into whatever choice of cloud that you do, there's zero rewrite involved with that, whereas with all the other products that you have mentioned, it's a total rewrite of the analytics that you want to do, and then you're stuck on this one platform out there and you have no choice to move around between different deployment options.

And so we see that really coming together as part of our Teradata Everywhere strategy, and that is really de-risking and unlocking a business with our customers for us..

All right. That's helpful. And then one for Steve. Steve, you've talked about subscription, but I'd love to sort of get a sense of the split a little bit.

Maybe if you can, even just the split of the uptake between software-only subscriptions, system subscriptions, meaning I'm buying the whole system from Teradata, still on-premise subscription, public cloud, managed cloud.

So how are we seeing those play out? And is most of the subscription today really still just on-premise but paying on a subscription model?.

Yeah, Bhavan. Most of it's really on-premise; our entire system. Now we're seeing....

Got it..

... good growth, again, the real small numbers, but if I'm looking at cloud, I'm seeing strong growth in cloud. ARR would go 3x on cloud. So there's good growth, but the big numbers that grow is largely entire systems going to subscription, but that shift is growing, I mean, throughout..

Got it. Got it. Thanks for taking my questions. I'll get back in queue. Thank you..

Our next question comes from Philip Winslow from Wells Fargo. Please go ahead..

Hey thanks, guys, for taking my question. Thanks for the color on Tcore growth. I'm wondering if you have a sense for the just the pricing environment that you're seeing out there kind of relative to the Tcore growth itself. And I just have one follow-up for Steve after that..

Yeah. What I would say, Philip on the pricing, is really look at our product gross margins. That product gross margin continues to hold and it really would indicate that our pricing strategy is operating very, very effectively in there.

And what I would say overall is to give you comfort that we're not giving that Tcore away, that our objective for 2017 is that average revenue that average price for Tcore to be consistent with 2016, even with performance improvements.

So again, solid pricing across all of our offerings from a pricing strategy perspective and that product gross margin continues to perform very well..

Got it. And then, Steve, I know you gave some color as far as the ARR that you expect to add in 2018. When you think about the mix of perpetual versus, call it, perpetual equivalent, how do you see that shifting in 2018? It seems like you're kind of in the high-30%s right now as far as what's shifting to subscription.

How do you see that turning in 2018?.

It's interesting, Philip. We're going through that and seeing, as I mentioned earlier, we're exactly above where we thought we would be performing. We're above in the Americas, down a little bit internationally. And that's probably what we've been expected.

In the 2018, and what we're seeing in the funnel in 2017, we actually see the international subscription business picking up in the second half.

So what I'm looking at modeling out in 2018 is a little bit more – slightly more improvement on that conversion in the Americas with better improvement internationally and a little bit higher – potentially higher conversion rate in 2018 versus 2017 at this point in time..

Got it. Thanks guys..

Our next question comes from Jesse Hulsing from Goldman Sachs. Please go ahead..

Yeah. Thank you.

Steve, can you give us a reminder of what the conversion is to get to your perpetual equivalent? I'm wondering how much ACV or ARR have you booked over the last three quarters before you convert because I think that would help us understand how the subscription revenue will transition in the second half?.

Yeah, Jesse. Our basis or how we calculate perpetual equivalent revenue is on a transaction-by-transaction basis. We look at what Tcore they will be consuming on a subscription basis and price it out as though they bought it on a perpetual basis. That's the on-premise side.

Now to be conservative on that, Jesse, if they are buying it on a one-year contract basis, I do not calculate out that they would've bought that on a perpetual basis. I take the lower of; the lower of the contract value on a one-year basis or the equivalent, if they would have purchased.

With respect to cloud, we look at the software-only content with respect on that cloud and over their contractual period. So again, I'm not adding in anything on the hardware side saying – assuming if they were to purchase that on the hardware side.

The perpetual equivalent that we're looking at, as I said, in the prepared remarks, increasing in the second half of the year from the $108 million in the first half. ARR has grown $50 million over the last three quarters, on that product ARR..

Yeah. Okay..

And so there's, again, strong growth in there. We're looking that product ARR continue to grow 25% in 2017 and in that mid-20%s for 2018.

So again, very solid growth, but the perpetual equivalent, I want to leave you with that is, again, a truly equivalent one, but if the contractor rental period is less than what they would have bought it for, we're using at the lower of.

Did you understand that? I mean, am I clear on that, Jesse? We're trying to be very conservative, not to just bump up a one-year rental agreement..

Yes. Yes. That makes sense. And to follow-up on Raimo's question about subscription revenue. I guess if you booked $50 million of ARR in the first three quarters, I would've expected that to grow quarter-over-quarter in the second quarter and....

Yes and Jesse....

...

what's the disconnect there?.

Yeah. Now that we've asked it twice, I'll explain. There was an anomaly in one of our perpetual customers that went to subscription in Q2 that impacted that number.

If you look at – because seasonally, seasonally we went down Q1 to Q2 last year and we went down Q1 to Q2 this year, but as you said with that growing of that ARR, you would expect to that number in Q2 to come up.

We have an anomaly, and rightfully so this was a good anomaly to have but it comes down to one customer that took the upgrade rights that we're baked into previously. If you look at that recurring line item, it says rights to upgrade subscription in cloud, okay. They took their software upgrade rights and went to an ELA's term software.

And by taking it there, moved it out of the line items to the perpetual software and took it out of that subscription right. And that was a sizable amount in Q2. But what it does though, what I want to highlight here is it does illustrate that our customers do have the choice. Okay.

We want to do the right thing for the customers even though it might adversely impact the line item which it did in this quarter, but it was the right thing to do for the customer. It's an anomaly. That's why I was trying to emphasize to Raimo that there's nothing unusual from a recurring perspective in that line item, but there is that anomaly in Q2.

So I'm glad you gave me the opportunity to straighten that one out..

That makes sense. And I also wanted to ask quickly on your sales and marketing investments. Obviously, a pretty meaningful ramp quarter-over-quarter in SG&A.

What are you – are you investing in new territories, are you investing in overlays for the cloud products? Where are those investments going?.

Yeah. The investments are going in, primarily that direct customer-facing point context.

As Vic talked about, we continue to look at the opportunity to drive business value with our customers and we continue to make the investments targeted at our largest 500 analytical opportunities in the world and bring the right resources to bear for those customers to drive that business value.

So the majority of that SG&A increase, all, is in the go-to-market areas and particularly – very specifically direct customer-facing investments..

Got it. Thank you..

Our next question comes from Karl Keirstead from Deutsche Bank. Please go ahead..

Yeah. Hi. Two for Steve. Steve, just back to your 2018 revenue guidance, I think you said that you would expect revenue growth in 2018. I just wanted to confirm that's a little higher than I think most Street analysts are modeling.

Is that a reported revenue number that you think should go up versus 2017 or is that some kind of equivalent or adjusted basis? And secondly, are you assuming positive maintenance growth in 2018 to get there?.

Yeah, Karl. What I'm basing that on is our assumptions that we are looking at right now with respect to the conversion to subscription.

And given those assumptions that we're looking at now and looking at how that product AR is rolling through and looking at what we're assuming total Tcore will grow in 2018 over the 12/31/2017 installed base, I'm seeing that – and I'm calculating that into reported product revenue number.

Then when I look at our other segments of the business with respect to maintenance and consulting, maintenance I'm anticipating will continue to grow low-single-digits, and consulting continuing to grow that those would offset the reported product revenue number and result in a slight increase in reported revenue in 2018..

Awesome. Thank you. And then my second question is just on the share count for 2017, Steve, I know it's tough and I'm essentially asking for a little color on the timing of the buyback, but modeling the full year share count is important to get to our EPS number.

What would you anticipate if you can say what the full year average diluted share count should be sort of post that second half repurchase?.

Yeah. And what I'm seeing is that, depending upon the timing of the share repurchases, that could have a favorable impact on EPS maybe of $0.01 to $0.025, $0.01 to $0.03 rather. And it's our expectation to be, again, very optimistic in executing that..

Okay. Thank you, Steve..

We will now turn the call back over to Mr. Lund for closing remarks..

Everyone, thank you for your questions and insights. I think you can sense that we're excited about where we are. Things are coming together. We have still a lot of work to do, any of the transformation, that happens, but I want you to know from an operational perspective, we are 100% focused on growth here. I look at that every day.

The numbers are confusing the 606, it's even going to be more confusing next year but we are focused on growth and we are seeing that. We're looking at our consulting revenue.

We want to make sure the revenue we're doing is focused to get customer accounts that we want and that when going after, and that that will drive Teradata software growth either directly or indirectly. A lot of questions about our G&A.

We are building a support organization, but I want you to know that we are laser-focused on making sure that those investments we're making, get stabilized and make us a more efficient organization. We have a lot of opportunity to improve the way we operate.

And we are working on that, monitoring it closely and finding a better, a quality organization that's able to function in the new environment we see. So we're continuously excited but we're also not naïve. We have a lot of work to do here but I think we have the plan.

I don't think I know we have the plan to drive this forward and I'm monitoring it every day. So again, thank you for taking the time. We look forward to talk to you all demonstrating our continued performance in the third quarter. So thank you very much, and with that, we'll conclude the call..

This does conclude today's conference call. You may now disconnect..