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Good morning. My name is Berjel, I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Corporation Q4 2017 Earnings Release 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 2017 fourth quarter earnings call. Victor Lund, Teradata's CEO, will begin our call this morning. Oliver Ratzesberger, our newly appointed Chief Operating Officer, will then discuss customer activity. Then CFO, Mark Culhane, will discuss our financial results and our expectations for 2018.
Our discussion today includes forecast and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to 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 acquisition, reorganization, transformation related cost, asset impairments, capitalized software development cost, the Marketing Applications business which was sold, and the tax charge related to the Tax Act of 2017.
We may also discuss other non-GAAP items such as free cash flow and constant currency revenue comparisons. A reconciliation of our GAAP results to our non-GAAP results and other information concerning these measures is included in our earnings release and on the Investor page of Teradata's website at teradata.com. A 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 conference call, whether as a result of new information or future results.
And now, I'll turn the call over to Vic.
Good morning, everyone. I am pleased to report that we had a stronger than expected fourth quarter. We exceeded our guidance for revenue, EPS, cash flow and our conversion of customers to subscription pricing. I am very proud of the people of Teradata for pulling together to deliver a strong performance this quarter. Mark will take you through the numbers in his presentation.
Today, I would like to talk about our strategic success in terms of both customer acceptance as well as our team coming together with a single focus to ensure that our strategy wins. On the customer front, we continue to see strong receptivity to our strategy and offerings. Our customers are happy to see Teradata demonstrate flexibility in deployment options, whether on-prem, in the cloud or a combination.
However, the strongest interest has been in Teradata Everywhere. Customers are leveraging our ability to develop an analytic platform driven by great software. When it is coupled with our smart consulting folks, who bring together world-class analytic outcomes that do not require our customers to turn their world upside down, they are recognizing that Teradata Everywhere delivers quicker results and de-risks their future as they build out their analytic environment.
Equally as important to me is that our team has come together behind our strategy, is changing to a business outcome-led approach and understands that change is a never-ending process. We are seeing things move faster, our people are motivated and know as opposed to believe that our strategy wins. For this call, probably the best indication of this is that our funnel continues to grow and is up more than 100% from this time last year.
I should also point out that we continue to build our team by infusing outside talent with the strong talent of Teradata that made us great. As a reminder, last quarter, we added Mark Culhane as our CFO and Eric Tom as our Chief Revenue Officer. And I can let you know that both are already contributing in very positive ways.
Earlier this week, we announced that Oliver was named Chief Operating Officer. As we have our strategy in place and working, we have moved the core of our operations, sales, products, service, marketing, and operational planning under Oliver. Now, we have one team with a strong leader to further accelerate our execution, and drive us forward. This gives Oliver more responsibility and affords me more time to spend with customers to ensure our strategy resonates with them, while providing the high impact outcomes they need.
As we look forward to 2018, we expect to return to revenue growth for the first time in four years, and generate low double-digit non-GAAP EPS growth. We plan to deliver these results while continuing to build our supporting infrastructure for the Teradata of the future as we remain committed to the investments we have discussed over the past two years. To achieve our 2017 plan and to be in a position to increase revenue and our non-GAAP EPS in 2018 while undertaking our transformation and shifting a large percentage of our transactions to subscription shows the strength of the Teradata team.
With that, let's hear from Oliver.
Thanks, Vic, and good morning, everyone. I'm very pleased to join you today and I'm excited to be taking on more responsibility to help Teradata grow. I've spent a good bit of time meeting with customers as we help them leverage their data and analytics to drive business outcomes. And today, I will share their reactions and why they tell me they are investing in our analytics technology and consulting.
First, customers support our Teradata Everywhere strategy. With its unparalleled capability and flexibility, it helps companies de-risk their investment decisions in Teradata and makes Teradata easier to buy through subscription licensing. With Teradata Everywhere, customers can analyze anything, deploy anywhere, buy any way and move any time.
With the unique capabilities of our software, we enable customers to exploit their data and analytics needs of today and tomorrow. With our enterprise scale analytics, companies can derive insights regardless of the analytic complexity, volume of data or number of concurrent users, and they have the power of combining multiple analytic techniques to address a business question, whether from aggregations to time series to machine learning to graph. These robust analytics can drive differentiated business insights.
Second, customers are adding to their Teradata environments as they see the superior results that our analytics platforms provide. For example, a leading healthcare company rolled out a large group rating system on Teradata. This new use case will improve sales channel responsiveness and operational agility via integrated data. A large retailer leveraged our business consultants to help their C-suite, understand the value Teradata can unlock in a time of tight budgets in the challenging retail industry. The outcome of this engagement was the retailer making a commitment to have Teradata at the core of their analytics and operational improvement strategy as they signed a five-year subscription deal.
And third, customers are increasingly adopting our IntelliCloud as-a-service offering, taking advantage of our skilled resources to help optimize and manage their analytical ecosystem. We manage this software and infrastructure for the customers so they can focus on their business outcomes. For example, a major telco is adding our as-a-service offer to their Teradata analytics platform to provide elastic expansion capabilities, improve service levels, reduce datacenter costs, and eliminate asset purchases going forward.
With the strength of our analytics in the cloud, we are confident that this trend will continue. As we look forward to 2018, we will continue to drive innovations to help the world's leading companies drive business value from analytics. You have heard us say that we target the 500 companies globally with the largest analytics opportunities. This is our sweet spot and where our Teradata analytics platform excels.
While we continue to help our existing customers expand and get greater value from their analytical ecosystems, we're also targeting about 20 new top 500 customers over the next year or two, and have already added five of these new top 500 accounts.
As I turn the call over to Mark, I want to be clear about the enthusiasm and dedication of the Teradata team as we execute our strategy. We have outstanding talented people, exceptional technology and are delivering real value to customers. We are super excited about 2018 and beyond. Mark?
Thanks, Oliver, and good morning, everyone. I'm pleased to join you this morning and I'm excited to have joined Teradata. From my short time at the company, I can tell you the strategic changes at Teradata are correct, are working and are in full motion, as evidenced by the better-than-expected results in Q4, not only in terms of total revenue, EPS and free cash flow, but even more importantly, the amount of deal activity that is converting to subscription-based transactions.
Although we made a lot of progress in 2017, we are intent on moving more and more of our business to subscription-based options to create an attractive recurring revenue stream that you can feel more confident in valuing. Although we have shifted our focus to annual recurring revenue or ARR and do not use the perpetual equivalent terminology any longer, we did have a full year target of $225 million to $250 million of transactions that we expected to shift to subscription-based options in 2017. For the full year, we had $255 million worth of equivalent value subscription-based transactions, above the high-end of our expected range.
As a result of customers purchasing licenses on a subscription basis, recurring product revenue increased 16% in the quarter from Q4 2016. For the full year, recurring product revenue increased 12%. Total ARR at December 31, 2017 was $1.1 billion, in line with our forecast and an increase of $126 million or 13% over December 31, 2016. Total recurring revenue was over $1 billion or 49% of total revenue, and increased 7% from 2016. We increased TCore 17% in 2017, in line with our expectations, and about a third of that increase was booked via subscription.
Going forward, we plan to provide you with more industry standard metrics, which I will speak to in a few minutes. Although, we ended the year with more subscription-based activity than expected, we continue to work diligently to change our business approach and model to move faster and shift our business more aggressively to our new subscription and cloud-based offerings, which will lead to longer term benefits for our customers, Teradata and our shareholders.
Before I highlight our Q4 results, I want to make sure everyone is aware that, unless stated otherwise, my comments today reflect Teradata's results on a non-GAAP basis, excluding such items as stock-based compensation expense and other special items identified in our earnings release, including the charge we incurred related to tax reform in Q4.
The GAAP net loss of $74 million in Q4 2017 was due to a repatriation tax charge of $145 million, which was partially offset by a $19 million tax benefit, a majority of which related to re-measurement of net deferred tax liabilities at the new lower corporate tax rate of 21%. We plan to pay the repatriation tax over an eight-year period, beginning in 2018.
Total Q4 revenue was $626 million, above our guidance range and was the same as total revenue in Q4 2016. EPS in the fourth quarter was $0.58, which was higher than our guidance of $0.47 to $0.52. Our full year non-GAAP EPS was $1.35, again higher than our guidance, but lower than 2016 EPS largely due to the shift in revenue to a subscription model as well as our increased investments for the company's transformation to a subscription model.
Turning to gross margins, product gross margin in the fourth quarter was 60.9%, slightly higher than Q4 2016's 60.7%. For the full year, product gross margin of 65.7% was in our targeted mid-60s range and basically in line with 66.1% in 2016. Service gross margin in the quarter was 46% versus 48.6% in Q4 2016. Service gross margin for the full year was 43.9% compared to 48% in 2016. The decrease was due to the investments we made in our consulting business for our business outcome-led strategy that demonstrate incremental business use cases to customers that we believe will lead to increased consumption of Teradata's software.
Overall gross margin was 51.8% in the fourth quarter versus 53.7% in the fourth quarter of 2016. For the full year, gross margin was also 51.5% compared to 55.1% in 2016. The investments in our consulting business and the higher mix of services led to the change.
Turning to operating expenses, selling, general and administrative expense was $162 million in Q4, increasing $21 million or 15% from the fourth quarter of 2016, largely driven by increased sales and sales support head count. For the full year, selling, general and administrative expense was $548 million, increased 9% from $538 million in 2016.
Research and development expense in the quarter was $71 million, up $7 million from the fourth quarter of 2016, driven by strategic initiatives, including further investment in our managed and public cloud offerings, as well as our analytical platform. For the year, R&D increased $51 million to $280 million, consistent with our expectations for strategic R&D initiatives.
Total expenses increased $97 million in 2017 compared to our stated plan of a $100 million year-over-year increase. As a result of all these items, operating margin for the quarter was 14.5%, better than expected and compares to 20.9% in Q4 2016. For the full year, operating margin was 11.4% versus 21% in 2016.
Teradata's non-GAAP tax rate for the fourth quarter was 19.1% as compared to 24% in 2016. The 2017 full-year non-GAAP tax rate of 27.9% was in line with our 28% expectation, but was higher than the 26% for 2016. The increase in the non-GAAP effective tax rate period-over-period was a result of the lower pre-tax earnings period-over-period and the resulting higher percentage rate impact related to normal discrete tax items.
Turning to cash flow, net cash provided by operating activities was $23 million in Q4 2017, compared to $52 million in the fourth quarter of 2016. Full-year net cash provided by operating activities was $324 million compared to $446 million in 2016. Free cash flow for the full year 2017 was $237 million, higher than our guidance, versus $328 million in 2016. 2017 free cash flow was positively impacted by customers accelerating payments to us prior to year end that otherwise would have been collected in 2018 and beyond, which we believe was driven by U.S. tax reform.
As planned, our capital investments to support Teradata's transformation increased meaningfully in 2017. In addition, in their early transformation stages as our customers move to our new subscription-based options, we expect the amount of cash we collect upfront will decline.
Turning to our balance sheet, we had approximately $1.1 billion of cash as of December 31, 2017, which was almost entirely held offshore. During 2017, Teradata used $351 million of cash to repurchase approximately 11.5 million shares. We did not buy back shares in the fourth quarter.
As of December 31, 2017, we had approximately $190 million of share repurchase authorization remaining and our board approved an additional $310 million earlier this week to give us a total of $500 million of authorization.
Regarding cash repatriation, net of taxes and working capital requirements around the world, we expect to repatriate a substantial portion of our cash currently held offshore. In the short term, we plan to use these funds to pay down our credit facility, buyback shares and keep the remainder for general corporate purposes. We will be opportunistic in repurchase activity in 2018.
Total deferred revenue was $499 million as of December 31, 2017, which was $116 million higher than on December 31, 2016, due to increasing subscription-based transaction activity and customers accelerating cash payments into 2017.
Before I move to expectations for 2018, let me discuss a few things that should impact our reported results going forward. We are aggressively moving to subscription, and have now seen more customers shift to our subscription and cloud pricing options, including our IntelliCloud offering. As a result, it's difficult to estimate how much full year 2018 reported revenue will be impacted by the shift to subscription-based transactions, as well as how this will affect our operating profit, EPS and free cash flow in 2018.
In 2018, we expect more of our customers to shift to subscription pricing options, with approximately 40% to 50% of our new bookings mix structured as subscription-based transactions. In terms of ASC 606 impact, we have been successful in structuring transactions that result in ratable revenue recognition over time versus upfront recognition, and we'll continue to do so in 2018.
While we have worked diligently to reduce the impact of ASC 606, we still expect to see approximately 1% of revenue lost upon adoption of ASC 606, thus reducing our reported revenue in 2018. As a result, it is difficult to predict the impact on our full year financial results due to the uncertain mix and types of deals expected to close throughout the year.
All that said, given the assumptions mentioned previously and utilizing January month end currency rates, we expect total revenue in 2018 to be approximately $2.15 billion to $2.2 billion, flat to up 2%. We expect recurring revenue to increase approximately 12% and be slightly more than 50% of total revenue in 2018. Within recurring revenue, which consists of our legacy perpetual maintenance business and our subscription/cloud business, we expect our subscription/cloud revenue to grow in excess of 100% and more than double in 2018.
Since we were successful in structuring more subscription deals to be ratable under the new ASC 606 rules, we will see less total upfront recognized revenue from subscription deals in Q1 than we anticipated 90 days ago. As a result, we expect total revenue in Q1 to be approximately $490 million to $500 million.
We expect to continue our strategic investments in 2018, which will likely increase full year operating expenses by approximately $30 million to $40 million from 2017, with the majority of that year-over-year increase, up to approximately $20 million, occurring in Q1.
While we are still evaluating the effects of the recently enacted Tax Cuts and Job Act (sic) [Tax Cuts and Jobs Act] (00:25:17), we are currently estimating our 2018 full year non-GAAP effective tax rate to be approximately 20%. However, the effective tax rate is heavily dependent on our actual earnings mix and is subject to further refinement as we complete our detailed analysis of the Tax Reform Act and further interpretive guidance from tax authorities.
As in 2017, we expect our effective tax rate to be slightly higher in the first half of 2018 due to the seasonality of pre-tax earnings and the timing of the tax impact related to normal items. So for Q1, we currently estimate our non-GAAP effective tax rate to be approximately 23%.
We are estimating our 2018 full year non-GAAP EPS to be approximately $1.50 to $1.60, and Q1 non-GAAP EPS is expected to be in the $0.13 to $0.16 range. This is based upon full year and Q1 weighted average shares outstanding of approximately 124 million. As Q1 is seasonally our lowest revenue quarter of the year and given our investments in 2017 and related expense level coming out of 2017 into the first quarter, Q1 EPS is expected to be impacted relatively more than compared to remaining quarters during the year.
Due to accelerated customer payments received in late 2017, we now anticipate our 2018 free cash flow to be approximately $200 million, plus or minus $25 million, which is heavily dependent upon many variables, including the mix structure and timing of bookings, required capital investments and billing frequency of new subscription transactions which occur in 2018.
Since the conversion to subscription-based transactions will continue to impact our operating results, beginning in Q1, we plan to provide additional metrics to better show our progress in shifting to a subscription model and measure the underlying health of our business such as ARR, the percentage of new bookings that are structured as subscription-based transactions and TCore growth, metrics that many of you are already very familiar with. In terms of ARR, which comprises term-based contracts whether subscription/cloud, perpetual maintenance or services based, we expect ARR to grow approximately 10% in 2018. But within that, we expect subscription/cloud to grow in excess of 50%.
On a bookings mix basis, we expect approximately 40% to 50% of 2018 new bookings to be structured as subscription-based transactions. And we expect high teens TCore growth in 2018 as we continue to see increased consumption of Teradata from incremental use cases at existing customers and the addition of new customers in the top 500.
We also plan to change our financial presentation in 2018 to better align with how we view and manage the business, including classification of revenue on the P&L as follows: recurring revenue, perpetual hardware and software license revenue and consulting revenue. This new reporting approach will better provide transparency for you to track our progress as we transition to a subscription-based model. In closing, our strategy is correct, it's working and it's resonating with our customers.
And with that, operator, we are ready to take questions.
Your first question comes from Wamsi Mohan from Bank of America. Please go ahead.
Yes. Thank you. Good morning. Vic, you said the funnel continues to grow and up 100% from this time last year. Can you share some color on the key drivers here? Are there large customers expanding wallet share, is it increased refresh, new customers or maybe traction at the hybrid cloud, any color you can share there?
And Mark, can you talk about how you're thinking about long-term revenue growth, mix of recurring rev, I know you've given some color here for 2018, but as we look beyond, longer-term, and also normalized free cash flow levels, clearly 2017 was maybe only half of what your peak free cash flow was, looks like you're guiding to about $200 million here, so any thoughts on sort of what the longer-term more normalized free cash flow profile would look like? Thank you.
Wamsi, it's Vic. So quickly on the funnel, it does continue to grow and I mean this is going to seem like a cop out here, but it's really all those things combined. I think the big thing that's driving our funnel growth is our teams are now engaged, right. They were, I think a couple of years ago, a bit demoralized, not focused with the customers, didn't know how to go to them, so I think the idea that we have a strategy in place, something to talk to the customers about.
As I said in my comments, to our customers, I mean our people now believe as opposed to hope that our strategy works. So, I think their engagement with customers, having things to – that are relevant to our customers to talk to them about has allowed us just to get more engagement. As you all know, we just converted to Salesforce in managing our funnel, and so we put a lot of effort behind making sure that our teams are forward facing and thinking about what's going to happen to them in the next as long as three years in our cycles here.
And so I think it's just a combination of everything, but I think the thing that's driving the increase more than anything is that our teams are back fully engaged with our customer base and they're getting engagement there. And it's across the spectrum on everything, new to refresh to new, but I think the biggest thing driving large increases in our funnel are engagements in analytic platform engagements where we're getting large customers that are interested in exploring using Teradata in new ways.
And then Wamsi, so to your question on recurring revenue growth, free cash flow sort of longer term, I mean obviously it's heavily dependent on the shift to subscription because as you know that impacts those numbers. We clearly are going to continue to see recurring revenue growth and we expect that to continue as we shift to subscription. Free cash flow's harder until we know we've turned in the majority of the businesses happening on a subscription basis, so we start to build back that growth in free cash flow. So longer term, we'll have more views on that, I think, later in the year in terms of what the longer term outlooks for that – that looks like. But clearly, we expect free cash flow growth once we've made the shift to a full subscription model.
Thanks, guys.
Your next question comes from Katy Huberty from Morgan Stanley. Please go ahead.
Thank you. Good morning. Just a couple of quick ones from me. One, what are you seeing in terms of customer behavior post-tax reform? Does it feel like there's more money to spend at your customers, and they could accelerate the prioritization and spending around analytics? And then, just as a quick follow-up, given such strong results in the fourth quarter and you tracking ahead of the subscription transition, why not repurchase shares in the fourth quarter of 2017? Thank you.
Katy, this is Vic. I'll take the last question first, and then Oliver can talk about the other. We didn't repurchase shares in Q4; we're in the middle of a transition to Mark. Mark wanted to study a bit where we were, get his hands around everything. We were busy closing the quarter and we had purchased a substantial number of the shares already.
In retrospect, the stock moved up nicely and we could have repurchased more, we did not. I'm glad I bought my shares when I did, and so that turned out well for me personally, but it's just a matter of timing with the transition from Steve to Mark and working through everything, I think it was one of the things, we talked about it and Mark wanted to get his hands around the business and understand where it was and I think that's a prudent call.
Yeah, and Katy, regarding customer behavior changing, in general, yes, we're seeing customer behavior changing. It's not just specific to the tax law changes; although I'm sure they play into that as well. Overall, what we're seeing that is much more dominant is the fact that customers have arrived over the last couple of years at very complex analytical environments. They have a lot of technologies, a lot of systems, a lot of silos deployed and are starting to realize just how expensive and difficult it is to impact their business with analytical outcomes, and that is driving a lot of activity with Teradata because they see that Teradata Everywhere and the Teradata analytics platform helps them de-risk their decisions and their environments. And so while there's a lot of factors coming together that is shifting customer behavior, yes, we absolutely see a shift and as you said tax law changes are certainly one factor of that, but the larger factor is the strategy just resonating at a time when customers are struggling with their analytical environments.
Thank you for the color.
Your next question comes from Brad Reback from Stifel. Please go ahead.
Great. Just real quick, Mark, going to the balance sheet, other assets and liabilities were a much larger contributor in the quarter than typically, any color there?
You know, Brad, no, not really, I think it's normal Q4 year-end stuff. Clearly, there is things happening on the subscription front, in other assets and that kind of thing as we move some of our assets – some of our subscription transactions are rental based and so we have some of that going on. On the liability front, some of it is tax-related clearly, right, from tax accruals and things like that that we had to book, right. So you know we took a extremely large charge in Q4 of like $120 million – well, $145 million was tax, we took $126 million net charge. So that accrual sitting there, that's largely on the liability side you're seeing on the balance sheet there that – which is the Q4 tax reform impact for sure.
Great. And then maybe real quick follow-up, any details on ASC 606 you can provide, how you're able to structure the transactions in such a way that you can continue to recognize them under subscription accounting?
Well, sure. So our deal structure provides plenty of options for our customers, whether it's as-a-service, on an elasticity basis, rental, those kinds of things all drive towards ratable revenue recognition under ASC 606. So – and our deal structure provides an allowance for that.
Great. Thanks very much.
Thank you.
Your next question comes from Jesse Hulsing from Goldman Sachs. Please go ahead.
Yeah, thanks guys. Mark, a question for you. I think you mentioned that you expect product subscriptions to double in 2018 or more than double. Can you baseline that for us, where did you finish fiscal 2017 with in cloud/product subscription?
Yeah. Yes, Jesse, we do expect it to grow in excess of 100% and more than double. We don't break out the revenue components between subscription, cloud or whatever we – it's within product today, moving forward it's going to be in a recurring revenue and we're going to change, as I mentioned in my prepared comments, to recurring revenue, perpetual revenue, consulting revenue. But we're not – we don't break it out into subscription cloud versus other components and that kind of thing. And then, of course, once we change that on the face of the income statement, then you'll be able to understand what our margins are going to be against that recurring revenue, that perpetual revenue and that consulting revenue.
Got it. A quick follow-up if I may, and maybe this is for Oliver. When you look at the subscription deals that you're doing, how many of those are I guess in the cloud, on Amazon or another infrastructure service provider versus a private cloud or just product subscription that you're converting from licenses? Thank you.
Jesse, thanks for the question. We see a broad mix of everything, we see it in the public cloud, we have signed on production use cases that we run IntelliCloud based on private cloud infrastructure. We see continued growth in the private cloud offering that we have and we're also now starting to see IntelliCloud moving into the on-premises environment of our customers. So, we see a broad adoption of our as-a-service offering, coupled with subscription pricing for both software and hardware that they're offering. So it's really firing on all cylinders for us right now.
And the choice that we give with Teradata Everywhere where customers can pick whether they want to be in the public cloud like on AWS or on Azure, whether they want to be in a private cloud or in their own data center, that is what they value and they're really picking based on what's best for them at this point in time. In fact, the Teradata Everywhere fact that we can move anytime allows them to pick one deployment choice and even know that if they want to change their choice in the future, they can do that at any given point in time without incurring any extra charges for licensing fees. And so, that is really what is resonating very well with our customers.
Thank you. That's helpful.
Your next question comes from Derrick Wood from Cowen & Company. Please go ahead.
Great, thanks and nice job on the quarter. Are there any metrics or anecdotes you can give us around what the uplift in spending looks like when you get customers to shift to term or cloud? I mean, I guess you guys are guiding for high-teens TCore growth. So just trying to get a sense of kind of what the workload growth impact looks like when companies shift to term or cloud.
Thanks, Derrick. This is Mark. Yeah, so we are clearly seeing customers when they convert their – from a perpetual maintenance perspective to our subscription/cloud we are seeing uplift. It varies depending on the customer, it depends on whether they're moving everything entirely there or it's just incremental additional TCore that they're purchasing on that basis, so it depends. But what we're not seeing is people shift at a reduced amount off of that. So we are seeing uplifts and we continue to expect to see that happen as we continue to transition. And obviously that manifests itself in why we're seeing recurring revenue continue to grow.
Great. And then, Mark, I think the average contract length in your perpetual equivalent number is just north of three years. With the move to ASC 606, do you still expect – when you're doing term contracts, are there going to be three-year, or are you doing something to perhaps shorten it?
So, yeah, I think historically we saw across, certainly in my tenure across Q4 approximately three-year terms. I would expect that to continue, but it'll be dependent on movement to the cloud versus potentially being on-prem on a term basis, because we could see some difference there. But by and large, we're anticipating that to be – to stay relatively consistent. We're not seeing anything in our funnel today that suggests that that's moving drastically.
Okay, all right. Thanks, guys.
Your next question comes from Keith Bachman from Bank of Montreal. Please go ahead.
Hi. Thank you very much for taking the question. I also had two, and the first – and they're related. But the first one is, as you think about the revenue growth that you provided for CY 2018, say low single-digit growth, if you normalize that growth for consistent transaction base, what do you think the real economic lift in other words on the revenues would be, is there any way to think about kind of a normalized growth rate for CY 2018 versus what you provided?
And the second question which is a bit similar to Wamsi's, but I'm going to ask in a slightly different way is, if you thought about your billings growth or bookings growth, if you parse it into two different buckets, one would be capacity and one would be new workloads. Is there any way to think about what the capacity versus the new workloads, which frankly could drive more durable growth over time, is there any way to think about that? And that's it for me. Thanks very much.
So, Keith, on your sort of normalized revenue growth, as we've stated, we expect flat to plus 2%, because we're in the midst of a shift to subscription, which will...
Yes sir.
...continue across 2018 and 2019. So obviously longer-term we expect that growth to be larger once we've made the shift. In the middle of that shift, that's difficult. So – but longer-term, we expect obviously greater than zero to 2% revenue growth.
On your question on billings growth and how do we think about that in terms of...
And really just to be clear here, capacity versus new workloads.
...capacity versus new, yeah, we don't – I don't know if I think of it in that way and from forecasting that perspective. So, I don't – that would be something that we don't – I'm not looking at today to be honest on a billings growth perspective. So...
Okay. Let me try it a different way then, as you thought about, you've mentioned you're trying to grow your key accounts and I assume that by definition those are new workloads. Within your existing customers, are you also getting new workloads within your existing customers more so than just capacity expansions?
Yes. So, great question by the way. And let me just take you back here what we just announced at the end of last year at our big user group conference, which is the analytics platform – the integrated analytics platform, which is going live here in second quarter of the year. We have a lot of customers lining up with workloads that want to integrate into that analytics platform, now that we're taking Teradata from what used to be just a data warehouse into a full-fledged analytics platform. There's a lot of use cases that we are seeing that customers are striking with today in their environments because they have had to deploy so many different technology stacks to do that.
So, as you put these things together, we are seeing a very healthy mix of, of course, existing capacity and new workloads coming together here, and the new capabilities that the Teradata analytics platform delivers, whether those time series, whether it's graph, whether it's machine learning, is lining up a whole set new use cases coming towards the Teradata analytics platform. So yes, we are seeing a very healthy mix in that and the new capabilities are resonating very well with our customers.
And then, this is Vic.
Okay.
I might just add one more thing before we move off that and that is that, I would – I look probably not so much down in the weeds there but higher. The larger transactions we're seeing, the higher workloads and principally driven around analytics have been the transactions that have been driving the larger deals we did. And so, I – like Oliver said, it is a bit of everything, but we're definitely seeing momentum around analytics and new workloads.
Our deals don't close in 90 days and are not $300, but that's also what we're seeing, back to the question about the funnel, we're seeing that build in the funnel as well, as customers are engaging and understanding what Teradata Everywhere brings, and how it can not only drive revenue but help them save cost by reducing the number of environments they have. And so, all of those things are coming together. And so, we're seeing receptivity across the board.
All right. Many thanks, gentlemen, very helpful.
Your next question comes from Philip Winslow from Wells Fargo. Please go ahead.
Hey. Thanks guys, and congrats on a strong Q4. You mentioned you saw your shift of $255 million to subscription, which is obviously above the range that you talked about. I'm wondering if you could give us some color on how much of that, that $255 million was Q4?
And then a follow-up question to the accelerated payments comment that you made impacting deferred revenue in Q4, and I'm assuming you also saw that that equal uptick in AR. How should we think, A, how much sort of was that accelerated payment in Q4, and how do we think about that impacting how we model Q1 cash flow and deferred? Thanks.
So Phil, to your first question. You know, roughly half was Q4, of the perpetual equivalent number, approximately, slightly, I don't know, 40% to 50%, et cetera. So on the perpetual equivalent on an ARR basis it's smaller obviously, because perpetual equivalent is a perpetual equivalent not a ARR, ACV metric.
In terms of your question on accelerated payments and so forth, clearly you can see our long-term deferred revenue was up, so that gives you the indication of what that looks like, it was roughly up, almost little less than $70 million. Obviously we also accelerated payments to our vendors as well, given the tax reform and some other things that we took advantage of. So, it's – the net of that is the impact to free cash flow would still put us above our range for 2017. So, it impacted us by $25 million, $30 million, probably net.
Great. Awesome. Thanks, guys.
We have time for one more question. Your question comes from Karl Keirstead from Deutsche Bank. Please go ahead.
Oh, great. Thank you for fitting me in. So maybe I'll sneak into further to Phil's question. In terms of the accelerated payment that helped you in the fourth quarter or certainly we can see that in DR, but your perpetual license revenues in the fourth quarter were at least way above what I was thinking, and so I wanted to ask you whether that delta, that outperformance on the perpetual line is primarily also due to the accelerated payments, in other words, a little bit more one-time in nature.
And then my second question to Mark on free cash flow. Mark, could you just take a moment and describe why free cash flow would be down again in 2018? You mentioned that Teradata may be collecting less cash upfront on subscriptions. Is that the reason and why would that – are invoicing durations shortening this year? Thank you.
Okay. So, to your question on the Q4 outperformance and did that drove what the (00:51:51) cash flows, no. It was largely subscription-based transactions that drove it, the accelerated cash payments, with good volume on that front. Obviously Q4 is seasonally our largest quarter as well during the year. So, all of that impacts that.
From a free cash flow perspective, looking forward, the biggest impact of free cash flow is the shift to subscription versus perpetual, because we're not normally going to see – an annual billing upfront on a multi-year deal or we may get driven to quarterly billings, or whatever. So, it depends on the volume of transactions that shift to subscription, which we said is we expect to be 40% to 50% and then ultimately what that billing frequency is as compared to history where we're largely a perpetual license company where you bill everything upfront. That's the biggest impact of free cash flow.
Okay. That's helpful on both. Thanks a lot.
Perfect, every one, thank you. That's going to conclude our call. I'd like to thank all of you for joining us today. Obviously, we're proud of our fourth quarter and excited about our future. I continue to be more and more excited about what we're seeing as I spend time with customers. Our strategy works and resonates and I think it's unique in the marketplace, the ability to move Teradata Everywhere. Our ability to be flexible and helping our customers achieve what they want, all those things are resonating.
But more importantly, I just think that are people out there doing the right things and I continue to be more and more excited about what we're seeing unfold here at Teradata. We've driven some shareholder value, but we hope to continue to drive more, in fact we are going to drive more as we go forward and very, very positive about the future of Teradata and what it means for our shareholders and our people as well. Again, thank you so much for joining us on our call.
This concludes today's conference call and you may now disconnect.