Teradata Corp (TDC) 2015 Q2 法說會逐字稿

Good morning.

My name is Angel, and I will be your conference operator today.

At this time I would like to welcome everyone to the Teradata second-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you.

Gregg Swearingen, you may begin your conference.

Good morning and thanks for joining us for our 2015 second-quarter earnings call.

Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata results.

Steve Scheppmann, Teradata's CFO, will then provide more details regarding our financial performance.

Our discussion today includes forecasts and other information that are considered forward-looking statements.

While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially.

These risk factors are described in Teradata's 10-K 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.

As well as 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 also be available later today on that site.

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.

I will now turn the call over to Mike.

Thanks, Gregg.

And good morning, everyone.

Teradata finished Q2 with revenue of $623 million, which was lower than what we were expecting.

Revenue decreased 8% as reported from prior year and was down 2% in constant currency.

Product and services margins improved sequentially from Q1 to Q2 and helped to provide a good non-GAAP earnings-per-share yield of $0.53 on the smaller-than-expected revenue.

Services revenue grew 5% on a constant currency basis during the quarter, with maintenance revenue growing 6%.

We were particularly pleased to see Consulting Services revenue increase 4% in constant currency, following a decline in Q1.

And we expect to see similar growth in the second half.

Product revenue declined 9% in constant currency.

Although we closed on major data warehouse opportunities in the US that slipped out of Q1 into Q2, we once again experienced deferrals in the second quarter.

The environment in the US has not changed regarding the continued pressure on large CapEx transactions, along with the longer sales cycles, deferrals and the smaller deal sizes.

This was a key factor in our decision to lower our 2015 guidance.

However, our activity in the US is up significantly from last year.

This is reflected in the Americas third-quarter funnel.

The number of opportunities have increased more than 30% but the dollar amount is roughly flat.

That said, we are expecting the return to constant currency revenue growth in a second half and we continue to believe that mid-single-digits revenue growth is a reasonable target for 2016.

In addition, we have a number of actions in progress to potentially position ourselves better as we exit 2015, which I will talk about later.

Turning to our segment results for Q2, the Data and Analytics division revenue declined 8% as reported and was down 1% in constant currency.

Within those results, we experienced strong growth with two of our key growth initiatives, Big Data and Teradata Cloud.

Big data revenue which includes our [Aster], Hadoop and 1000 Series appliances, along with software tools and related services, continued its strong revenue growth, with an increase of more than 50% in constant currency in the quarter.

Big data revenue more than doubled during the first half.

Aster, our Hadoop appliances, and 1000 Series appliances all had strong growth.

As well as our big data consulting services which includes Think Big.

Teradata Analytics Cloud also grew at a very high rate in the quarter, with revenue increasing by more than 80% in constant currency and annual recurring revenue up close to 70% over prior year.

Teradata Cloud revenue is currently small but we see it as a big opportunity for us longer term and continue to enhance and add to our offerings.

Turning to our Marketing Applications business, Q2 revenue of $48 million was down 3% in constant currency.

Recurring revenue declined 1% in constant currency which was roughly in line with what we expected.

We are beginning to make progress.

Our Digital Marketing Cloud solution, which will be the Cloud platform for all of our Marketing Applications longer term, grew revenue in the mid-teens on a constant currency basis in the second quarter.

And we continue to add new customers across all of our Marketing Applications solutions.

Overall, Teradata is operating from a position of strength in some very high growth markets.

First in our big data initiative, we are leveraging our long-standing core competencies around integrating data to enable customers to gain better insights for their business, and doing it with the broader analytic ecosystem and across the multiple and diverse platforms that reside there.

What we started more than five years ago evolved into our Unified Data Architecture and we continued to add software tools and platforms to make it easier for customers to implement and extract value with our UDA.

Today, we have software and tools such as Aster, Unity, QueryGrid, Brainstorm, Loom, and Viewpoint as well as our appliances.

We recently added a new Hadoop appliance that works with Cloudera or Hortonworks.

We have never seen stronger interest in our UDA and in our world-class services to help customers design, implement and support it, and our consulting expertise to get value from their data.

We are rapidly expanding our Think Big Analytics Consulting business internationally, as demand is accelerating outside of the US.

Second, as mentioned earlier, our Teradata Analytics Cloud initiative is not a large revenue contributor today but it is growing rapidly.

We believe it will continue to grow longer term and we continue to invest to extend and deepen our offerings.

We currently have customers running full-function data warehouses in our Cloud as well as parts of data warehouse workloads, such as subject-specific data marts, test and development, disaster recovery and sandboxes.

These Cloud offerings all leverage our core data warehouse strengths.

Other Cloud offerings include Big Data Analytics and Hadoop which leverage our strength with Aster and various other UDA software tools and consulting capabilities.

We are experiencing good activity with all of our Analytics Cloud solutions in the US and we are expanding in International, where we now have handful of customers in production and is seeing increased interest from customers and partners there.

Third, although we have experienced challenges with our Marketing Applications business, we are making good progress and it continues to be an attractive growth opportunity for Teradata.

Our technology is recognized as among the best for Enterprise On-Premises marketing resource management and campaign management.

Last quarter, Teradata was once again named a leader in the Gartner Magic Quadrant for multichannel campaign management.

And just last week, Forrester named Teradata as one of only two leaders in its first Wave report for real-time interaction management noting our marketer-focused analytics and cross-channel orchestration.

While we have been recognized for category leadership in marketing resource management and campaign management, we realized that has not translated into the results we should be capable of producing.

We continue to take actions to improve our performance.

As mentioned on last quarter's call, our first action was to go to an integrated business model to enhance focus, speed and execution.

At the same time, we have been investing in a major transformation, leveraging our Digital Marketing Cloud platform to become a Cloud-based solution provider for omni-channel marketing and also for all of our applications.

We have successfully added and integrated mobile and social marketing capabilities from our recent acquisitions.

And we are making improvements to our digital data analytics capabilities and user experience.

We are also making investments to add more campaign management capabilities to our Digital Marketing Cloud platform.

Our Digital Marketing Cloud is a key strategic growth initiative for us as more and more marketing applications move to the Cloud; however, we believe there will continue to be a large on-premises market opportunity for marketing applications and we will continue to offer those solutions as well.

We believe these key initiatives, along with further refinements in our go-to-market approach, will position our Marketing Applications business for higher growth.

Last, we are the leader in data warehousing in terms of our technology and the extensive services we provide.

This is evident from what you hear from the industry analysts, our customers and also our win rates.

Many of our outstanding base of customers see us as long-term partners in helping them to gain a better understanding of their business and their customers.

Our customers include many of the world's most successful companies and they are passionate advocates who share their positive experiences with other companies.

The challenge that we have is that customers continue to invest in Teradata Data Warehouses but overall, they are buying in smaller amounts, in particular with major customers here in the US.

From a technology perspective, good enough platforms have proliferated over the past couple of years to address various new data types and analytic workloads with many of these customers.

Some of these customers are now beginning to feel the pain of the complexity and costs associated with these analytic environments and we are starting to see investments coming back to Teradata but in smaller amounts.

In addition, the customer buying behavior for software and technology has changed; companies want to purchase in smaller increments and have flexibility in how they purchase and how they deploy.

To address these challenges, we have been taking actions to make it easier for customers to buy and deploy Teradata and in turn, expand our market opportunity.

I would like to share with you where we are at with our new core data warehouse initiatives.

First, we have been engineering a software-only version of Teradata for over a year now.

This will enable companies with private clouds to run Teradata.

We expect to have our software-only version in beta by Q2 2016 and a production version by Q1 2017.

In addition, our software-only offering will enable companies to run Teradata in public clouds.

We do not expect our software-only version of Teradata to provide the same levels of performance in SLAs that our fully integrated platforms deliver.

But there is a software-only market opportunity that we believe Teradata can excel at.

Second, we are expanding the options for how companies can purchase Teradata.

Previously, we have offered subscription pricing on a custom basis.

We are now in the process of standardizing it so we can deploy it more broadly in the market.

This enables a customer to pay as they would in our Teradata Cloud when it resides in their own data center.

They can also opt for a managed services to run it.

Third, our Teradata Analytics Cloud will benefit our core data warehouse business as well as our Big Data business.

For prospective customers, they can experiment with our data warehouse technology, start small and pay as they go, expand it and then eventually decide whether to stay in our Cloud or move the data warehouse to their data center.

For existing customers, they can move everything to the Cloud, specific workloads to the Cloud, or just do exploratory analytics in the Cloud.

Overall, our goal with these initiatives is to make it easier to do business with our core data warehouse solution by providing options for deployment and purchasing while expanding our market opportunity.

These data warehouse initiatives, along with our marketing applications growth, will also increase the percent of recurring revenue in Teradata over time.

To summarize our key initiatives, number one, we are looking to increase growth in our core data warehouse business by providing more options to make it easier to deploy and purchase Teradata.

Two, we will continue to scale our Big Data business while working to increase margins year on year.

Three, we will continue to scale our Teradata Cloud, which will benefit both our core data warehouse business and our Big Data business and expand our market opportunity.

Four, we will continue to scale our Marketing Applications business while working to increase margins year on year.

And last, we will continue to optimize our cost structure to help fund these growth initiatives.

Currently, our target for operating expenses in 2016 is to increase low single digits over 2015.

We believe that collectively, these actions will improve our overall performance and enhance shareholder value.

In addition, we are actively engaged with third-party consultants to get an outside view of all this through a different lens.

We will provide an update on these key initiatives later in the year when we will be in a better position to provide more details.

As I said before, we are currently headed in the right direction in the second half of 2015 and into 2016.

We have a great opportunity to make it even better.

With that, I'll turn the call over to Steve.

Steve?

Thanks, Mike.

Before I discuss our quarterly results, I would like to address the $340 million non-cash goodwill impairment charge we took in the quarter related to our Marketing Applications business.

We performed a goodwill evaluation during the quarter which requires an assessment of the business unit's estimated fair value.

As result of this valuation, we determined that the carrying value of the recently created Marketing Applications business segment was higher than its fair value, which resulted in a write-down of the goodwill.

We remain committed to the improved performance of our Marketing Applications business segment and we believe its solutions will play an important role in our growth strategy over the long term.

Now I'll turn to the quarterly results.

As usual, except where otherwise noted, I will be addressing margins and expenses on a non-GAAP basis, which excludes stock-based compensation and other special items identified in our earnings release, including the impairment of goodwill I just described.

Product gross margin rebounded from the abnormally low margin in Q1.

In the second quarter, product gross margin was 65.6%, basically in line with the second quarter of 2014, as mix normalized from the adverse mix in Q1.

Adjusting for currency, Q2 product gross margin would have been higher than the prior year.

FAS 86 amortization is still expected to increase approximately $6 million, or $0.03 of EPS for 2015 versus 2014.

Q2 declined approximately $1 million and we expect an increase of approximately $2 million in Q3 and $4 million in Q4.

As a reminder, FAS 86 amortization impacts product gross margin.

Services gross margin in the quarter was 46.3%, down from a strong 48.1% in Q2 2014.

Services margin was impacted by a lower professional services rate as a result of increased work-in-process as well as investments we are making in our Cloud offerings.

Overall, gross margin was 54.3% in the second quarter compared to 56.1% in the second quarter of 2014.

Turning to operating expenses.

SG&A expense of $179 million was up $6 million, or 3% higher than the second quarter of 2014.

The increase was mostly due to investments and demand creation headcount, partially offset by foreign currency movement.

Research and development expense in the quarter was $52 million, up 11% from the second quarter of 2014.

The increase is primarily driven by investments in Unified Data Architecture and Big Data technology as well as Marketing Applications.

In support of our strategic growth initiatives, we expect R&D expense will continue to increase year over year; however, not as much as we previously anticipated, as we are in the process of optimizing our R&D resources and expenditures.

Consequently, we now expect R&D expense for the full year to be up in the mid- to high-teens as our investment in R&D continues to be a very key initiative for Teradata.

As a result of all these items, operating margin for the quarter was 17.2%.

This is down from 23.5% yield in Q2 2014.

The decline in operating margin was due in large part to lower revenue, our services gross margin and the investments we are making for future revenue growth.

Our non-GAAP effective tax rate for the second quarter was when 27.6% versus 28.3% in Q2 2014.

The lower non-GAAP tax was primarily driven by more favorable forecast in foreign earnings mix year over year.

Looking forward for 2015, we expect full-year non-GAAP effective tax rate to be approximately 27%, with the actual tax rate being dependent upon the ultimate earnings mix.

In addition, this presumes that the US R&D tax credit, which expired as of December 31, 2014, will be retroactively reinstated at some point during 2015.

Until such time this occurs, our quarterly non-GAAP effective tax rate will be negatively impacted by approximately 65 basis points.

In terms of earnings per share, we reported GAAP EPS loss of $1.87 in Q2 due to the goodwill impairment charge discussed earlier.

This compared to a positive $0.60 in Q2 2014.

Adjusting for stock-based compensation, and other special items, including the goodwill impairment charge, our non-GAAP EPS was $0.53 compared to $0.72 in Q2 2014.

Turning to cash flow.

Net cash provided by operating activities was $80 million in Q2 2015 versus $138 million in the second quarter of 2014.

In the second quarter, we had $27 million of capital expenditures versus $25 million in the second quarter of 2014 resulting in free cash flow of $53 million versus the $113 million generated in Q2 2014.

The year-over-year decline was primarily due to lower net income as well as the timing of payables.

However, we still expect full-year free cash flow to equal GAAP net income, excluding the $340 million impairment, or up $250 million higher.

Moving onto the balance sheet.

We had $921 million of cash as of June 30, 2015, of which less than 10% was held in the US.

This is up from the $881 million as of March 31, 2015.

During the second quarter, we bought approximately 700,000 shares of Teradata stock for a total cost of approximately $25 million.

During the first half of the year, we bought approximately 7 million shares for a total cost of approximately $300 million.

As of June 30, we had approximately $412 million of share repurchase authorization available.

With respect to accounts receivable, day sales outstanding was 71 days as of June 30, 2015, compared to 73 days as of June 30, 2014.

Total deferred revenue was $461 million as of June 30, 2015, which was down $7 million from June 30, 2014, which was due to foreign currency movement.

Deferred revenue grew approximately 5% in constant currency.

Turning to guidance.

For the full year, as a result of the deferrals and longer sales cycles, full-year 2015 revenue is now expected to be up 0% to 3% in constant currency, down 3% to 6% as reported.

Factoring in the goodwill impairment charge, full-year GAAP EPS now is expected to be a loss in the $0.32 to $0.62 range and adjusting for special items, full-year non-GAAP EPS is now expected to be in the $2.20 to $2.50 range.

To provide some directional color as to our expectations for Q3, we anticipate that reported revenue will be lower than last year's Q3 revenue and as is always the case, the timing of larger transactions can have a meaningful impact on our revenue.

Due to the current forecasted mix of product revenue, we expect product gross margin in Q3 to be similar to the Q3 2014 product gross margin.

We expect services gross margin to be similar to the 2015 year-to-date rate.

We expect operating expenses to approximate Q2 2015.

To summarize, the potential impact of the items I just referenced could lead to Q3 2015 non-GAAP EPS being approximately $0.15 lower than the Q3 2014.

In closing, the initiatives Mike mentioned will continue over the next several quarters and are expected to favorably impact our business results starting in 2016.

We are in the process of evaluating alternative strategies to make it easier for companies to buy Teradata, no matter how they want to purchase Teradata, either on-premise, in a subscription model or in the Cloud.

We have the best analytical database in the business and we are altering our models to be also the most flexible and easiest to buy from as well.

And with that, operator, we are ready to take questions.

(Operator Instructions)

Wamsi Mohan, Bank of America.

Yes, thank you.

Good morning.

Mike, you mentioned many different initiatives that you are looking at over here.

I'm curious how you are thinking about the relative pricing of these offerings, whether it be software-only as a service or in the Cloud and do you foresee challenges in implementing this with your sales force that is typically being used to selling very large deals?

Wamsi, regarding pricing, these are things we already have in flight, so in other words, the Cloud exists today.

We have done subscription models on a custom basis and it already exists today.

So the third piece of this, the software-only piece, although we have not priced it, it is basically offering Teradata without the hardware.

And what you get there is less revenue because you don't get the hardware revenue, you get a higher margin rate and we think most of the opportunity for software-only would be incremental.

So basically, the market will price it with what the hardware component goes for and the software piece will be -- that's part of it that what we saw today in an integrated data warehouse.

But that piece of it, Wamsi, this won't be in production until we get to 2017.

That piece of it is going to evolve over time and we can provide you more details as we get into it

Thanks, Mike.

As you see today, why do you think that the current non-software-only models that you have offered have not -- take a larger piece of the business relative to the traditional way that you sold the core database business?

Thank you.

Wamsi, could you repeat that question?

I'm not sure I got the context right.

I'm just trying to understand, you mentioned that other than the software-only implementation, you have the other two models already in flight.

And I'm just wondering, why do you think those will accelerate over time or why aren't they already showing more traction than what you're seeing right now relative to an on-premise deployment?

Okay, yes, thanks for the clarification, Wamsi.

Regarding the Teradata Cloud, think of it this way.

We have been maturing it and working with it and learning from it over the last three or four years.

And quite frankly, there isn't a lot of demand out there in the marketplace to go take an on-premise, large-scale data warehouse and put it in the Cloud.

We have done it, okay, so it's not a technology thing.

There is other factors around sensitivity, around certain strategic things customers are doing in the data that resides there and everything else, but what we're seeing as this thing has progressed, is we're seeing more demand for certain workloads.

So it might be a specific data mart that is not strategic to run in the Cloud.

It might be test development, it might be disaster recovery, or it might be grabbing capacity to do sandbox types of analytics.

On the subscription model, there we've been maturing it as well.

If you think about it, we've been doing it over time and it's getting the more of a standardized type of offer and then it will go more broadly in the market.

But here again, demand isn't huge, but we do think there's an opportunity to make it easier to do business with Teradata as it relates to the data warehousing.

But I think you get -- you've got to look further down the road and further down the road, it will be more and more data warehousing in the Cloud and with our software-only, we can go address that market opportunity in the public cloud for customers that want to do it that way.

And the subscription model, over time, this could be a much bigger thing as well.

I think if I net it all out, we're just trying to uncover and do every little thing we can that will help our core data warehouse business and its adoption in the market.

Thanks, Mike.

Bhavan Suri, William Blair.

Good morning guys.

David Griffin in for Bhavan.

Thanks for taking our questions.

Just a couple.

First, I was hoping to get a little bit more color on some of the deals that pushed.

Were those mostly 6000 Series deals or was there some 2000 and Big Data components in there as well?

And when do you anticipate those deals to close?

It feels like maybe a few of those are pushed into 2016?

David, the deals that we had slip out of the quarter were 6000s and their larger, if you will, larger CapEx kinds of transactions.

So the ones in Q1 closed in Q2; then we had more in Q2 now deferred out into Q3.

And basically, when we're looking at the amount of opportunities we have in our funnel, we have a very -- we're looking at a very good second half but we're now assuming we're going to have deferrals from Q3 into Q4, Q4 into Q1 and it's kind of the way life is right at the moment.

So we did have a couple significant ones run right out of the quarter and it is what it is.

The Americas had constant currency growth of 1% and we were looking at a much bigger number there in the Americas, in the US, but this is the environment we're in and we've got to deal with it.

Sure.

So it seems like you're taking a little bit more conservative of approach, assuming that some of the deals might push in the back half of the year.

With that said, can you just give us an update on what the top 50 in the Americas is saying and talk a little bit about visibility and what gives you confidence and your ability to achieve the revised guidance range?

Yes, after the -- what we've seen in the first quarter and second quarter, we're taking a more conservative approach.

Your question, first question was around the top 50 in the Americas.

In the first half, it was only down slightly, it is down like 1% and when we look at the second half and once again, we're taking a conservative approach to it, we see a similar full-year result, as we had last year, which was, I think, around 4% or 5% decline in the top 50.

That's kind of how we put that together.

The second part of your question dealt with the second half for the guidance?

Correct.

Okay, the second half of the guidance, the key drivers there is our services revenue, we're looking at 6% constant currency growth in the second half.

This is predictable revenue.

It includes our maintenance revenue and then our consulting services, professional services that operates with the backlog?

So we feel pretty good about getting 5% to 6% there.

The other thing is our International region in the TDA, Teradata Data & Analytics unit.

Our International region had close to 10% constant currency growth in 2014 and in the first half of the year, we knew we were going to run into a buzz saw with some of the prior-year comparables, especially in the second half.

And international had a decline in the second quarter and we felt that.

Now when we look at the second half, International is on a pretty good trajectory for high single digits constant currency growth.

so We've got International coming back in the second half.

We feel good about our services revenue component, which is a little under 60% of total revenue and it leaves what happens here in the Americas and the US and we have risk adjusted what we're seeing there which is a higher amount than what we have in our guidance.

I hope that answers the question.

Very helpful.

Thanks for taking our questions.

Thank you.

(Operator Instructions)

Derrick Wood, Susquehanna Financial.

Thank you.

Mike, you mentioned in the press release that you continue to evaluate new initiatives that could enhance shareholder value.

Given a stock price continues to fall, I think it's down near 2010 levels, can you share some of those initiatives that are on the table right now?

You did mention that you hired third-party consultants; is that to evaluate strategic alternatives, capital allocation?

Can you give a little color there?

What we're referring to is the initiatives I just walked you through, Derrick, in my prepared remarks.

So we're exploring everything and we don't want to leave any rocks unturned; as far as in particular, our core Data Warehouse business one around how do we grow it?

And how do we get it -- adoption broader in the marketplace and everything else?

So our initiatives are around that.

We want to execute and we are executing, getting our cost structure in line with our revenue growth and in the other areas, the Big Data, we're executing well; the Teradata Cloud is moving good.

These are revenue growth opportunities that we're executing on and in Marketing Applications, we -- given our products and what we should be capable of, we are in a very good market we should be getting good growth there.

So as far as engaging third-party consultants, we want to make sure we get an outside view, an external view, and external lens around what are all the things we are doing and can be doing and get an objective assessment, just to make sure we're not missing anything that can drive a better performance for Teradata and in turn, drive shareholder value.

So this is more about growth investments and cost structure as opposed to looking at the capital structure of the Company?

Yes.

We're very much focused on the performance of Teradata.

Okay.

And then, I mean, so you mentioned Europe expecting a stronger second half.

Why is it that Europe has been able to continue to see strong growth while the US has these more structural issues that's hurting growth?

Is it the maturity of the customer base?

What gives you the confidence that Europe can continue to grow?

I think you touched on a couple.

The maturity of customers in International as well as technology adoption broadly in the IT industry trails the US so there is a maturity piece of this and there is a lot of opportunities we have in International, in a lot of these fast-growing marketplaces with fast-growing GDPs and with those markets maturing in terms of their capabilities.

So we do have a very robust opportunity in International.

That said, we have a good opportunity here in the US and we are working it.

Okay.

I will leave it there.

Thanks.

Thanks.

(Operator Instructions)

And please remember to limit yourself to one question.

Ed Maguire, CLSA.

Hi.

Yes, good morning, and thanks for taking my question.

I noticed that with a lot more deals in the pipeline, the other certainly is the maybe the need to adjust some of your sales strategies; how are you thinking about the channel and go to market?

If you do move to an environment where customers are buying less or actually they're buying more deals, more smaller deals, do you re-think the direct approach and potentially expand some of your channel relationships?

You're making a good point, Ed.

When you look at demand in the Americas and the number of opportunities are up 30%, the deals are smaller and the go-to-market and the cost structure has to go fit that.

So that's the way the world is today.

What we are doing -- I didn't mention this in my prepared remarks, but we're looking at how do we make software in the company easy to consume, downloadable and basically, customer can implement it.

And in effect, we're trying to do the same thing with the Cloud where it makes it easier to go do exploratory analytics without a customer doing anything and you don't need a lot of selling expense in the middle of it and consulting.

So to answer your question, we are evolving our go-to-market model across the Company but it will be in sync with the products that we have available.

So there's a product piece of it as well.

Okay, great.

Thank you.

Joe Wittine, Longbow Research.

Hi, thanks.

Mike, like what you just said, US customers are buying in smaller amounts, maybe not surprising, given the weakness in (inaudible) that we've seen throughout hardware.

So the question is should investors still eventually expect larger, quote-unquote, floor sweeps or is this new buying environment, the new normal and most or all customers will be able to get by, by taking smaller bites?

Thanks.

The, well, the way we are operating and the initiatives we have in place and as we look at 2016, is all based on-premise core data warehouse is not going to be growing, obviously like what we saw in 2010, 2011 and 2012.

We are counting on it to get better, but we should not expect at this point in time that we're going to have the core data warehouse on-premise growing 10%, 15% and even more like we did in our good run.

Now that said, we have all kinds of opportunity to make it better, the core Data Warehouse business, but to also do everything else we're talking about.

And we just need to get the -- like in the major customers here in the US and getting the Americas growing around the Data Warehouse business, we can get ourselves to a good number longer term.

And it starts with the second half.

We've got to get after second half; it starts with 2016 and then I think we're positioned where we can get ourselves above the mid-single digits growth collectively as a Company with all of our growth platforms that we will be executing on.

Okay, I will keep it to one.

Thanks.

Keith Bachman, Bank of Montreal.

Hi, guys.

Thank you for taking my question.

Mike, your product -- well, the market for the size of terabytes of growth -- terabytes of storage is still growing.

Analytics, the importance has certainly increased over the last number of years.

Yet if I look at your product revenues, you will have product revenues declining in 2013, 2014 and now 2015 in a fairly meaningful way.

I know you're hopeful you get some bounce back in 2016, and yet if you take the backdrop of the comments that I made, where are the analytic dollars going if they're not flowing to Teradata?

And based on that supposition, what makes you think that it does turnaround?

Keith, first of all, the -- you can see the acceleration of data, analytics and the demand in our Big Data & Analytics business, all right?

So it is doubling; it is growing at a big rate, and it's becoming a meaningful amount of business.

The core on-premise Data Warehouse business, if you take a look at that, we're seeing a deceleration occur in major customers in the US and there, it will hit a baseline eventually and then we will grow from there.

So once we get settled here on the core business, it is not like the on-premise data warehouses are moving to the Clouds or things like that, very little of that.

We will hit a baseline.

We've already had a couple customers in the first half that hit the wall, if you will, and refreshed their EDWs with two floor sweeps in the top 50.

We have a very, very old aging base, in particular in the US.

So there are some underpinnings here that can point towards a bottoming out in the on-premise data warehouse environment where it will return to growth.

We're talking about the US.

International has been growing and the big hit has been in these major customers.

To add a little more information, at the same time, if we can't grow the data warehouses, the customers that put down the clamps on the spending on the EDW, and then eventually have to refresh it, if that data warehouse is not going to grow, we are replacing it with something that costs less money and has less maintenance than what they originally purchased it for.

Okay?

Because you have the impact of Moore's law, but what is going on is we're starting to have some of the workloads that are non-Teradata coming back to Teradata.

I would like to say and give a specific number where this thing is headed, but all I can say is when you collectively look at it and add it all up, I think the core Data Warehouse business is on-premise, in the US is going to hit an inflection point and in the first quarter, it was down -- or first half, I'm sorry, top 50 is down 1%.

Update and your expectation is that looks like you anticipate hitting that inflection point in 2016, you think?

Yes, that's what we are pointing towards.

That's what we are pointing towards.

All right, many thanks.

(multiple speakers)

But we want to -- we want to cover our flying swing and we have a lot of things in flight as well.

Okay.

Good luck, gentlemen.

Thank you for taking my question.

Thank you.

Brent Bracelin, Pacific Crest Securities.

Thank you for the taking the question here.

Two related questions, if I could.

If I back out the Big Data business that doubled in the quarter, good growth there, it does look like though the core Data Warehouse business declined double digits so I guess the question here is, are you seeing internal cannibalization of workloads at customers onto your Big Data platforms?

And if so, why won't this continue?

Then two, as you look at this optimism of returning to growth next year, as I look at the potential tailwinds -- headwinds to growth, you're coming out with Cloud versions, software-only versions, subscription models, these are all new ways that customers can buy Teradata, but potentially will reduce the upfront revenue you collect.

And so what gives you confidence that you can return to growth if you're successful with Cloud, software-only and subscription as well?

Brent, you asked a lot of questions.

Your first one was you did a calculation of what our core Data Warehouse business did in which quarter -- for Q2 or the first half?

For Q2, yes.

Double-digit decline; is that the right math?

The core Data Warehouse double-digit decline; I'm getting no's here in the second quarter, down single digits.

Negative decline, decline of low single-digits.

In the second quarter, we had a very significant data warehouse transaction in the prior year, in International, extremely large and that is the biggest piece of what happened in core data warehouse.

Can you walk me through the rest of the questions?

Yes, the second question would really just be around this return to growth.

What gives you confidence you can return to growth?

And the rationale is, as I think about a Cloud version of Teradata, subscription versions of Teradata, software-only versions of Teradata, if you're successful with these models, there's going to be a negative impact on the amount of revenue you collect upfront versus selling and on-prem Teradata system.

So if you are successful with these new versions, wouldn't that be a continuation of a drag on growth next year?

Well, software-only won't be in production until 2017, but my earlier comments -- we see this as mostly incremental.

We're not going to have the same performance in SLAs in an open software running on anything like you have with our integrated data warehouses, okay?

And it should open doors and be incremental as far as running in public Clouds for companies that want to go in that direction.

So there, not much of a headwind.

It should be a tailwind when we get to 2017.

The Teradata Cloud, it will present some of the headwind on revenue, of course, the way revenue is recognized, but we don't see -- we see workloads, some new workloads and some new customers going to the Teradata Cloud.

We don't see a meaningful impact when we look at 2016 in our goal to get the 5%, or mid-single digits revenue growth.

On the subscription model, once again, that will be a headwind but I think we have to -- the way revenue is recognized, I think we have to look at how it positions us with customers that may want to be in that model.

We don't have a lot of demand from customers saying they would like to get to that model, but we do think it's our advantage if we have customers that want to go to a subscription model because it makes it easier for them to expand their data warehouses.

So even though we don't have a lot of customers and customized subscription model what we see is it is much, much easier to expand.

It doesn't require a large CapEx transaction.

It doesn't require the levels of approval and everything else you get in a license model.

So subscription model, yes, that could provide some headwind.

But in terms of us gaining share of customer spending and everything else in this new environment, we think it's an opportunity, a good guide.

Clearly, a lot of headwind -- clearly, a lot of moving parts here.

Really appreciate the color and taking my question.

Thank you.

Thank you.

That's something -- we want to talk about on the next earnings calls and we'll be giving updates.

There's a lot of moving parts here in how this all comes together into a more crisp model with metrics, if you will.

I think we have time for one more question.

Phil Winslow, Credit Suisse.

Guys, can you hear me?

Yes.

All right.

Great.

Just had two follow-up questions to a couple questions asked earlier.

First, I guess you talked about continued OpEx growth next year but if you start to come to the conclusion, let's say that the core data warehousing business essentially, at least gross profit dollars cannot grow, - how do you think about the cost structure, capital structure, et cetera, of this business?

And then you talked about bringing consultants to evaluate if you're doing the right things across the different divisions, but just looking at the marketing revenue numbers this quarter and the past several quarters, I guess one question, too, is that, yes, I think we all agree that you need analytics to do marketing, automation in marketing and marketing campaign management effectively but do you necessarily have to buy that marketing software from your data platform vendor?

Just any insight on those two would be great.

Okay.

Regarding our OpEx and cost structure, we will always be optimizing it for the revenue and for the margins we're producing.

That's an ongoing for every company you got to match -- got to re-match cost with revenue which we have not done the past year.

So regarding the Marketing business and the Analytics, yes, historically, we've always done a lot of analytics regardless of having a marketing application.

We've done a lot of analytics with marketing organizations around the world.

Our campaign management solution that we've had since 1999 has been very successful and it's -- multichannel campaign management is very, very closely tied with analytics, very, very closely tied, as is digital marketing and the explosion of information coming from new channels like social and so forth.

With our Marketing Applications business, there's some goodness in it.

Number one is we know the market is growing.

There is no confusion there.

It is growing in the right direction.

We have strong assets within our Marketing Applications and we have a very strong team of people and a lot of them have come with acquisitions and they are still here, that founded companies, started companies are in this space.

We see a great opportunity for us.

We haven't delivered on the opportunity.

I'm confident that, well, we're showing signs of going in the right direction this year and you'll see it as we get through the third quarter and then the fourth quarter.

Got it.

Thanks, guys.

Thanks, everyone.

So, basically, I want to emphasize we're working hard on these initiatives to improve the Teradata performance as well as the second half.

We have to deliver on the second half and we've got to work on these initiatives to make Teradata easier to implement, easier to buy with multiple options of where to deploy it and everything else.

So we look forward to giving you an update on our progress next quarter and have a good day.

Thank you, everyone.

This concludes today's conference call.

You may now disconnect.