Teradata Corp (TDC) 2016 Q1 法說會逐字稿

Good Morning, my name is Erica and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q1 2016 Teradata earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Gregg Swearingen.

Good morning.

Thanks for joining us for our 2016 first-quarter earnings call.

Before we get started, I want to make sure everyone has seen the press release we issued this morning, announcing that Teradata's Board of Directors has decided that it's the right time to change the leadership of the Company and Mike Koehler has stepped down as Teradata's CEO.

Stepping in as CEO from Teradata's Board of Directors is Victor Lund.

Before we discuss Teradata's first-quarter results, Victor will offer a few thoughts on the leadership change as well as Teradata's future.

Steve Scheppmann, Teradata's CFO, will then discuss our Q1 financial performance and our transformational initiatives.

Also joining our call today is Oliver Ratzesberger, President of Teradata Labs, who will provide more detail on some of our R&D advances.

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, 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, asset impairments, acquisition and reorganization costs, the results of the Marketing Applications business 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 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.

I'll now turn the call over to Teradata's new CEO, Victor Lund.

Thank you, Gregg.

Good morning, everyone.

Before Steve discusses our first-quarter results, I want to take a few minutes to talk about today's announcement regarding my election as President and Chief Executive Officer of Teradata.

the Board felt that now is the right time for a change in leadership as we transform Teradata for long-term growth and shareholder value creation.

I am honored that the Board has chosen me for this role.

As you may know, I have been a member of Teradata's Board since 2007.

During that time, I have gained an intimate knowledge of Teradata and how we will win in the marketplace.

Throughout the course of my career, I have been involved in many successful organizations.

I plan to bring that experience to bear with me in this new role.

Over the years, I have also developed a deep understanding of leadership, team building, business transformation and the importance of team commitment and success.

Given my age, it's clear that I am not going to be the CEO of Teradata over the long run, but I want to assure you that I have no intention of being a caretaker either.

I plan to focus on the following key areas during my time here.

First, we are going to continue and accelerate our transformation efforts.

We are off to a great start, but I believe that our team is anxious to focus their efforts and to move faster.

This will be my job, to make sure that they get what they need to make this happen.

Second, with our management team, I intend to focus on areas to improve our current operations.

My belief is that we can maintain a proper cost focus, but we need to ensure that that is not coming at the expense of profitable revenue growth.

Further, as important as Teradata's transformation is to our long-term strategy, our current success is driven by who we are today and we have to get that right.

I will also focus on the change in our culture, to instill a sense of urgency and accountability.

We have great people.

We need to unleash their full potential.

Finally, and very importantly, I will lead the effort on behalf of the Board of Directors to ensure a strong leadership team.

I expect to be fully engaged in this as soon as I, along with the Board, can properly assess the skills, personality and experience required to lead the Company forward.

While I don't have an exact timeframe, I hope to give the Board an initial assessment at our next meeting, which will happen in about 90 days.

I am highly energized because I believe the steps that Teradata has taken affirm that the transformation, our technology and the talent that our team has are right to move us forward.

We need to focus the process to ensure timely and positive results, by leveraging Teradata's clear and continued technology leadership and the support of our talented team.

We will evolve and optimize our go-to-market strategy to align the changes in how our customers are purchasing and deploying technology.

We will create a hard charging culture and there is no time to waste.

All actions are intended to provide a better value for our customers, which will naturally lead to increased shareholder value.

Teradata has an obligation to do everything that we can to deliver greater returns to our shareholders and that is both near-term and long-term as well.

We intend to do that just that.

I look forward to speaking to as many of you as possible in the coming weeks and months ahead.

With that, we are here to talk about the first-quarter earnings, so I'm going to turn call back over to Steve for that discussion.

Victor, thank you.

Good morning.

Before I discuss the results of the quarter, I want to briefly summarize our pending sale of the Marketing Applications business.

On April 22, we signed a definitive agreement to sell the business for approximately $90 million subject to customary adjustments.

We expect the transaction to close around June 30.

The agreed-upon price was the result of a very active process involving multiple bidders.

While the price was below what we had earlier anticipated, agreeing to proceed at this price was our best option, given our overall objective to exit the business, so that we can focus solely on the transforming of the core Teradata business with all of our resources and talent.

We expect approximately $55 million to $60 million of net proceeds after adjustments, selling costs and taxes.

To provide more transparency and to enable you to see the Marketing Applications business separately in 2016, since we no longer consider this business core to our ongoing operations, we've added a column showing the Marketing Applications business in our GAAP to non-GAAP reconciliation tables that we provide on our website.

As such, my comments regarding margins, expenses and EPS will reflect our non-GAAP results excluding the Marketing Applications business in 2016, as well as stock-based compensation, third-party transformational costs and other special items, including the impairment of goodwill and other assets.

Now turning to the first-quarter results.

Teradata delivered total revenue in Q1 of $545 million, which was down 6% as reported and down 4% in constant currency.

Excluding the Marketing Applications business, revenue was $511 million, which also was down 6% as reported and down 4% in constant currency.

In total, product revenue was down 20% as reported, down 18% in constant currency, while services revenue was up 3% as reported, up 5% in constant currency.

Within services, consulting revenue was up 4% as reported, up 6% in constant currency.

Maintenance revenue was up 2% as reported and up 4% in constant currency.

Overall growth for consulting was driven by double-digit growth in international, 11%.

During the quarter, we expanded our Think Big consulting unit into China, bringing new data consulting capabilities to the Chinese market.

Overall, Big Data consulting grew double-digits.

We also saw good growth in BI consulting in the Americas in the quarter.

Turning to the regions, the Americas decreased 12% as reported, down 11% in constant currency.

In Q1, as part of our costs rationalization initiatives, the Americas region underwent a substantial realignment of sales people to new accounts, which caused a short-term yet significant disruption to sales.

Although its difficult to quantify, this had a negative impact on America's revenue in Q1; however, we believe that we should have this disruption behind us by midyear.

Within customer accounts, we continue to see companies move away from large CapEx purchases.

At the same time, there is increased interest in term-based pricing alternatives and cloud offerings, which we are addressing in our business transformation initiatives.

Our international region performed better with Q1 increasing 4% as reported and 7% in constant currency.

Within international, EMEA revenue increased 3% as reported and 6% in constant currency, while APJ revenue increased 8% as reported and 11% in constant currency.

Product gross margin in the first quarter improved to 59.6% from 56.4% in the first quarter of 2015.

The improvement in product gross margin was largely due to favorable deal mix and product mix.

Services gross margin in the quarter was 46.1%, an increase from 44.3% in Q1 2015.

Services margin improved due to improved consulting margins, as well as the exclusion of Marketing Applications business in 2016.

As a result, overall gross margin was 51.1% in the quarter in Q1 compared to 49.3% in the first quarter of 2015.

Turning to operating expenses.

SG&A expense of $131 million was $39 million or 23% lower than the first quarter of 2015 as reported, largely due to our cost reduction initiatives and the exclusion of the Marketing Applications business.

Research and development expense in the quarter was $38 million, which was $18 million or 32% lower than the first quarter of 2015, about half the reduction was due to the exclusion of the Marketing Applications business.

For the full year, we anticipate R&D expense to decrease approximately 10% to 15% on an as reported basis, even though we expect R&D expense to be down 25% in the first half as we begin to see R&D expense increase in the second half due to our transformational initiatives.

As a result of the higher product and services gross margin, the lower SG&A and R&D expense and the exit of the Marketing Applications business, operating margin in the first quarter was 18% compared to 10.5% in Q1 2015.

Our non-GAAP effective tax rate for the first quarter was 30.3% versus 27.9% in the same period in 2015.

The higher tax rate was primarily driven by the timing of non-GAAP adjustments, which a higher proportion of call-out items falling in Q1 2016.

On an annual basis, we expect our full-year 2016 non-GAAP effective tax rate to be approximately 27.5%.

On a GAAP basis, we expect our full-year effective tax rate to be approximately 34.5%, which includes the estimated discrete tax impact related to the sale of the Marketing Applications business.

Both effective tax rates are heavily dependent on our actual earnings mix for the full year.

In terms of earnings-per-share, we reported GAAP EPS loss of $0.36 versus $0.15 of EPS in 2015.

The large loss was largely due to the impairment charge.

Adjusting for the impairment charge, stock-based comp and other special items which equated to $108 million of net income or $0.83 per share in the first quarter of 2016, our non-GAAP EPS was $0.47 compared to $0.30 in Q1 2015.

Turning to cash flow, net cash provided by operating activities was $251 million in Q1 2016, which was $29 million or 13% higher than the $222 million generated in the first quarter of 2015.

After $26 million of capital expenditures versus $32 million in the first quarter 2015, we generated $225 million of free cash flow versus the $190 million of free cash flow generated in Q1 of 2015.

The increase in free cash flow in the Q1 2016 versus Q1 2015 was primarily the result of timing of working capital items.

For the full year, we continue to expect free cash flow to be in the range of equal-to to $50 million higher than GAAP net income, which includes the impact of cash flow from all anticipated cash severance payments required to be made in 2016 in connection with our transformation initiatives.

During Q1, we repurchased 2 million shares for approximately $47 million.

As of March 31, 2016, we had $528 million of remaining authorization on our open market share repurchase program.

As of March 31, 2016, we had total debt of $673 million, $80 million on our revolver and $593 million on a term loan.

In addition to the $47 million of cash used for share repurchases in Q1, we also used $100 million of invested cash generation to pay down our revolver.

Now turning to guidance for the full-year.

In Q1, we generally saw revenue in line with Street expectations; however, we saw about 1 point less of currency headwind than we previously expected.

We continue to see some deals deferred in the first quarter due to customer budget issues.

Although, we expect Q1 deferrals to close in Q2, we also see a couple of larger transactions in Q2 that are likely to rollout of the quarter.

As a result of these anticipated rolling deferrals, we feel it's prudent to adjust our full-year revenue guidance range.

We expect full-year revenue, excluding the Marketing Applications business, maybe down 2% to 5% as reported.

We no longer anticipate any currency impact in Q2 or for the full year.

We continue to expect non-GAAP EPS to be in the $2.35 to $2.50 range.

Specifically for Q2, we anticipate that revenue, excluding the Marketing Applications business, will be in the $550 million to the $560 million range.

We estimate that SG&A may be down approximately 22%.

R&D may be down proximally 20% from Q2 2015 as reported.

This could result in non-GAAP EPS, excluding the Marketing Applications business, being approximately $0.60 in Q2.

Now let me briefly talk about our transformation that we are undertaking to evolve with the changing market environment.

While the shifts in the market and in our where customers buy and deploy technology have challenged our overall results, we are making progress in our business transformation.

The need for data analytics remains a top priority.

We are seeing that a majority of the companies want a proven partner to help them, one who offers end-to-end solutions and delivers real business value in a seamless and pragmatic way.

In Q1, we continued to execute against our transformation road map to address this need.

I also want to highlight two top priority areas of progress: our cloud-based analytical ecosystem and our analytics solution initiatives.

With our cloud initiative, we are delivering a hybrid analytical ecosystem, building on our strengths in on-premise analytical technology and consulting.

We are taking these superior capabilities into the cloud.

This addresses customers increasing requirements for computing environment that spans on-premise, managed cloud and public cloud solutions.

Our overall objective with this initiative is to allow seamless integration across environments and to provide the expertise to help customers successfully architect, implement, and manage their hybrid cloud analytical ecosystems.

We believe this broadens our market opportunities.

This cloud initiative is well underway.

We have the vision.

We are hiring strong cloud talent.

We continue to broaden our portfolio of cloud solutions.

Concurrently, we are refining our go-to-market strategy especially for the public cloud.

Turning to our analytics solutions initiative.

Here, we truly distinguish Teradata and become a dramatically different company in the eyes of our customers.

Teradata is well-known for helping our customers derive significant value from their data.

Our analytics solutions initiative will accelerate that value by providing a broader range of business users with prepackaged solutions to leverage data and analytics to address their most pressing challenges.

Through our more consulting-led approach, we are elevating our intellectual property into a more product ties and repeatable solution.

By combining multi-genre analytics with integrated data at scale, our solution will focus on delivering new levels of business insights.

For example, our new communications compliance analytics solution developed in collaboration with a leading financial institution, we combined best practice compliance models and advanced analytics into an end to end solution that automatically detects suspect material in digital communications.

Communications compliance is extremely important for financial services institutions, healthcare providers and government organizations.

Our analytics solutions will broaden our market opportunity by more directly addressing the needs of our business users.

Now, I'll turn the call over to Oliver, who will highlight progress from a R&D perspective.

Good morning, everyone.

Before I get into some of the great progress we have made this year, I would like to talk about how we are approaching our technology innovation.

We work closely with our leading customer's top executives and their teams both on the IT and business sides.

Through these relationships, we understand their business opportunities, the challenges they are facing and the key technologies they are exploring.

By leveraging and expanding our top talent with relevant expertise in these technology areas and employing agile development methodologies, we deliver the right solutions to meet the needs of our customers.

We have been able to and will continue to accelerate these solutions through increased focus in key investment areas as part of our transformation.

Now, I would like to highlight three major milestones in the last quarter: first, cloud; second, IntelliFlex; and third, Big Data services.

First, let's talk about cloud.

We delivered on our commitments to make Teradata available on AWS by the end of Q1.

The initial offering includes the Teradata database and associated tools.

We also released a portfolio of public cloud consulting and managed services.

The response has been very positive, especially when we demonstrated that using equivalent configurations Teradata on AWS has 145 times the throughput for mixed workload compared to the main competing cloud database.

As another example, a product affinity query runs in 12 minutes on Teradata on AWS versus more than 24 hours for the alternative, which is a 123 times improvement.

Customers love that Teradata on AWS is not a slimmed-down version for the cloud.

It is the same powerful Teradata database that is available on all platforms.

This is a core element of our cloud differentiation.

The solutions built on Teradata are fully portable across the entire range of architectural environments: public cloud, managed cloud and on-premises.

Our Teradata on AWS launch is just the tip of the iceberg.

We have accelerated our planned delivery of the MPP scale-out version of Teradata on public cloud, now targeted for year-end.

Turning to our managed cloud offering, we are building upon our success in the Americas.

We recently announced European availability in the second half of the year bringing greater choice to more customers worldwide.

Next, I'd like to talk about our recent announcement of Teradata and IntelliFlex, our next-generation platform for on-premises data warehousing.

In the on-premises environment, just like in the cloud, customers are looking for more flexibility in how they can seamlessly grow their Teradata environments, while maintaining mission-critical availability.

IntelliFlex allows customers to add storage and processing power independently, so they can scale their systems in smaller increments, which makes Teradata easier to purchase in-line with business needs.

Important new features include up to 3 times more memory and the ability to double the size in just one hour with a simple database restart.

Early customer interest for IntelliFlex is strong.

It will be available for shipping in Q3.

Finally, I'd like to talk about our new Big Data consulting announcements.

To expand the way we support our customer's analytical ecosystem environments, we announced new consulting services from Think Big for enterprise data-lake design and deployment.

These new services help customers accelerate time to value and remove risks from their data-lake implementations.

Additionally, many organizations are experimenting to leverage Spark as an engine for product recommendations, predictive analytics, sensor data analysis and graph analytics, amongst others.

To address this, we have introduced new consulting services to help customers incorporate Apache Spark into their Big Data environments.

Let me wrap up by saying, I'm truly excited by the progress we have made.

With our renewed focus sharpened by our transformation and at the accelerated pace, we will rapidly advance Teradata's leadership position and the exceptional business value we bring to our customers.

Now, I'll turn the call back to Steve.

Thanks, Oliver.

In closing, I want to emphasize that everyone at Teradata is focused on transforming Teradata to better align with the evolving market and with the way the customers are buying and deploying data and analytics technology.

We have outstanding technology and world-class sales and services teams.

Our customers are resoundingly supportive of our products and solutions and are enthusiastic about our product road map and future directions.

Our culture is a foundation upon which we will build.

We will be more agile in our development and work, with the leading technologies, significantly improving our internal processes, and even more responsive to our customer needs.

We are making great progress against our transformation.

We are excited by what is yet to come.

The world is changing, Teradata is changing with it.

We are confident about our future.

Now, operator, we are ready take questions.

(Operator Instructions)

Raimo Lenschow, Barclays.

A great start to the year.

Victor, welcome on board in a different role.

First question for you, actually, if you look at the portfolio that Teradata is offering and to see all the new initiatives, how you feel about the need for further change?

Do you think the things that you are working on, that Oliver just lined out, is it enough?

Or do you envision, I don't want you to nail you down on your initiatives already, but do you think there's more that you want to do to change the setup for the Company in the long run?

Then I have one follow-up for Stephen, if that's allowed.

All right.

Thank you.

This is Vic.

I go by Vic, actually, but I put Victor because if I don't, I end up a Richard or Dick or something like that.

(laughter)

That is a very good question.

So the first thing I would say to all of you that I've been here nine hours, and actually a little longer.

I've been on the Board for a long time, so the details exactly what we are going to do, I haven't settled in on.

But I -- there is a lot of effort that's going to be put into the question you asked.

I wouldn't say that at this point time, I think we have a need for a change in strategy, but I do think we have a need for a couple things.

In that, one would be, that we've got to move faster.

As a Board, we are enthusiastic about what our transformational process has brought to bear but one of the things that we've learned in that is that we have a lot of side-load businesses.

So, for instance, we've got Think Big.

Then we've got Teradata Labs.

We need to focus everything we learn from that to make sure we have a laser-focus on what our customers want, how we can deliver it, and make sure the customer knows that there's one Teradata and not five.

So, I think the things that we have to work on are, clearly, we have to be more focused and more -- we have to have a lot more speed on our strategy.

I'm thrilled with people we've got.

I'm thrilled with their enthusiasm.

So I think building momentum for the team, giving them some leadership, telling them we are going to move fast and go forward is going to be my primary objective.

Now, if we find something in that process, we're certainly going to change.

I have an old saying -- I worked for a Colonel in Viet Nam who was a great guy.

He had a saying, if you want it bad that's mostly how you get it.

We have to be thoughtful and careful about how we go about this, but we do not have to be slow.

Those three -- two things don't necessarily go together.

So we will update you as time goes forward.

I will be open and honest with you guys about what we see, but right now, I'm not here because we think we're on a crash course.

I'm here because we want to get focused and we want to get faster.

We have a great team here.

I'm enthusiastic about it.

So I guess, that would be the best way I could answer that.

We are, as a Board -- probably you should know how we got here.

We have been through this process -- as you all know, a Board has two primary responsibilities.

One is to ensure proper leadership of a corporation and a second one is to create shareholder value.

Our Board is totally focused on those things.

We have been about this in the process -- I think we have been a bit of a pusher and a shover in this transformational effort to see we get there.

I think the Border is up to speed and tuned in.

We want to make sure that the process on leadership is thoughtful and careful.

As I said in my opening remarks, I'm going to take 90 days and figure it out, then we'll start working down that process.

It is going to take a bit of time to get that done.

I can't tell you exactly how long, but we will get it done.

We will drive our transformation forward.

I think it's important for you to know that I am not going to be a caretaker.

I'm not a 68 -year-old guy, going to sit here and look at the world go by.

We are going to get after some stuff.

I'm enthusiastic and passionate about where we are.

I have great confidence in the team at Teradata and what we are doing.

So, hopefully that's an answer to your question.

Perfect.

Thank you, Vic.

Good luck.

I'm looking forward to working with you on that.

Thank you.

Just maybe one last question if I can for Steve would be, if you look at the -- you have the changes in the sales organization in the US.

Do I think about that like a normal sales org, so everyone got new territories, et cetera.

So it probably takes like Q2 and then maybe a bit of Q3.

So by the end of the year, we should be settled?

Is that the right way to think about that?

Yes, Raimo.

I'm looking at for -- this is America's conversation when we went through that restructuring, that reorganization -- that yes, in the short term here, Q1 definitely impacted us as we realigned our calendar, our resources, got closer to the customer and that created some short-term disruption.

What I'm seeing here is that we should be through that by midyear and then start coming out of it in the second half of the year.

So, I'm still looking for that -- you can see that in the numbers that I shared for Q2 on the revenue side between $550 million and $560 million.

Still looking at some of that constructive disruption in there, as we look continue to work through, but then coming out stronger in that second half of the year.

Perfect.

Thank you.

Good luck.

Brad Reback, Stifel.

Maybe a quick one for Vic.

Vic, since you been on the Board here for a while, maybe you can help us understand why having the Company remain public during this transition is the best strategy?

Thank you, Brad.

I think, real simple, right?

One of the key obligations of the Board of Directors is to understand the creation of shareholder value.

In this process, we as a Board, are totally committed to seeing that we create value here.

I've thought a lot about this, I knew this question was going to be asked.

We've talked about it as a Board, but we think there is a lot of opportunity here that can be generated near-term and long-term.

Part of the question is always every situation is unique, right?

But to a certain degree to think that you have to be private to do what you need to do, means that one, you either don't understand your issues, you are afraid to take them on, or you don't think you can create value for your shareholders.

I think where we are today, we believe we can do all of those things as a public company.

I guess the best answer is, the Board at the current time feels this is the best way to generate shareholder value.

I'm enthusiastic about that.

I believe we can do that.

So that's the best way I can answer that question.

The Board believes this is the best way to create shareholder value over the appropriate prepared of time for our shareholders.

Obviously I'm not entrenched.

I'm not going to be here.

I'm not trying to hold a job for 15 years.

I'm not looking after self-interest; but I want you to know that I really believe that we can create long-term and near-term shareholder value as we are going today.

Great.

Thanks very much.

Ed Maguire, CLSA.

Congratulations on the new role.

I had a question about what you see as the major forces or the major dynamics in the market and in technology that you see as most urgent for Teradata to address?

How you have thought about the changes ahead of you to respond to those forces?

So, I'll respond just a little bit and then Oliver is going to help me on some of that too.

So I think just as we look at what are the key issues we've got, obviously, you all are up to speed.

It would be a waste of your time for me to talk to you about cloud and software as a service and all of that kind of stuff.

So we clearly have to address that.

Oliver will talk about that in one second, all the things we're doing in those areas.

I think we are doing some great things.

He's making great progress.

So I will let him respond to that.

But second, I think as we think about this and what do we have to do as a Company?

I tried to say that in one of the comments I made.

I think we have a lot of talent.

We have a lot of knowledge of our customers.

So near-term, for me, the number one issue is to make sure that our customer focus, with all of the offerings we have, are more carefully coordinated and directed and that we bring all the strength and talent we have in Teradata to bear on our customers.

So they know everything we have to offer and they think about calling us, instead of us calling them.

I think that is our number one objective to start driving near-term revenue.

That's my number one focus first.

But now, Oliver, if you want to talk about --

Yes.

A great question.

There is obviously a lot of shifts going on in the technology industry, right?

The big underpinning is cloud.

The cloud and the consumption models that cloud enables us to build on.

This is something that it is not new to us.

We've been on it for the last several quarters.

With cloud, we have the ability to bring technology to use cases within minutes, what used to take days and weeks and months can now be done in minutes.

You can stand up entire infrastructures in less than 30 minutes on cloud.

That's really enables businesses to do things very differently.

Having our technology, the Teradata database, the whole UDA ecosystem as we call it, available in the cloud is a great enabler.

The executives around the world, the CXO's that I've talked to.

They all are excited about what that does to their business.

Then there are themes like sensorizing everything.

IoT is obviously a big topic.

More and more data is being generated by devices around the world.

When you combine that with cloud and with scale-out models that cloud enables us, there are very new ways of how industries are being reshaped.

There's new business models on coming out based on data.

I think we are at the center of what is happening there.

Our focus really, on cloud in these technologies, is core to our success going forward.

Thank you.

Katy Huberty, Morgan Stanley.

Vic, welcome to the team, look forward to working with you.

A question on cloud.

Does the Company have the right sales force?

It just seems like the person who has been selling $5 million CapEx orders, may not be the right person to pitch an off-premise cloud offering.

Then I have a follow-up.

Thanks.

Yes.

Katy, as we continue to evaluate our talents and our expertise on the sales force, yes, we're looking at cloud as being another delivery platform on that.

Our salespeople are very well in line with the capabilities.

It's a different approach, but the capabilities are there to really recognize that hybrid solution -- that integrated solution that assesses the on-premise all the way through to the cloud opportunity.

So it's a fully integrated hybrid solution.

Oliver, I will ask you -- I feel very comfortable with the salespeople's talents and capabilities of being able to deliver with that platform.

Katy, this is Vic.

Then I'll let Oliver respond.

I think that's an excellent question.

I really do.

I think it is a key issue we have to address.

I would say that we have great people capable of doing that and a little bit of the question I got to before.

But I'm not convinced.

I am open to be [reconvinced] here that we have done everything we can to focus our sales effort and understand our sales effort going forward.

That is the number one thing I'm going to work on.

So I think we have great people, but I think it requires a laser sharp focus about what you are doing and making sure that your sales force understands it so they can communicate that to your customers.

That is the number one thing I'm going to work on.

So, now I'll let Oliver --

Yes.

Cloud is different.

If you, yourself, go to the Amazon marketplace right now and look up Teradata, all it takes is a credit card, using a price right there.

You don't need a proposal.

You don't need to go through an approval process.

Cloud enables very different consumption models.

That is something that obviously, we as a Company, need to incorporate into our structure, into our sales processes and whatnot.

It's a topic for us, we're driving this with focus and are getting laser sharp on that.

So, yes, absolutely, big topic.

Okay, good to hear.

Steve, deferred revenue grew 3%.

Is that fruits of the transition to as a service in cloud?

Or is that customers paying more to maintain the install base versus upgrading.

Just talk about the dynamics.

Katy, not yet on the transformation.

It's fairly more business as usual.

The maintenance revenue increased low single-digits in Q1.

So it's more business as normal.

Nothing really driven by the transformation or the conversion to a subscription or any type of services model at this point in time, nothing material.

Okay, thank you.

Philip Winslow, Credit Suisse.

You made some comments about deal sizes and particularly some commentary about Q1 and the outlook for Q2.

Just wondering if you can give some more color there?

Obviously you said, big ticket items are still hard to come by, but you referenced a couple decent sized deals.

What are you seeing?

What was that in those Q2 deals that you were referring to?

If you thought they would slip out, is that what you meant?

Just some more color on this deal size and particularly the deals you talked about for Q2?

Yes, Phil, we continue to see pressure on large CapEx transactions particularly in the Americas where -- as you know, we're more dependent upon those than we were on the international side.

So we continue to see, again, this is not unique to Teradata but on a broader scale that customers still want to consume Teradata but they're very open to the other type of offerings that we have, with respect to on a smaller scale purchases or even on the subscription type of models, on the rental type of models, or term type of models.

But saying that, we still see that large capital transactions have a very difficult time getting through an organization.

Now, the ones that we saw in Q1, that deferred or rolled over into Q2, we anticipate that those will close in Q2.

Now, we're also being very sensitive on the larger transactions that we have in Q2 and maybe the possibility of them rolling or deferring into -- outside of Q2.

Again, we are still very sensitive within our business model particularly on our revenue with respect to large transactions.

That phenomenon -- that new normal continues.

But what I am encouraged about is that these larger customers that drive these larger transactions continue to buy and the larger transactions continue to funnel up or bubble up into the funnel.

Got it.

Thanks, guys.

Wamsi Mohan, Bank of America Merrill Lynch.

Vic, congrats on the role.

Look, you've been on the Board for a while.

So in retrospect over the past several years, what would you say were maybe some of the largest strategic mis-steps that happened at Teradata?

What gives you the confidence that the Company is not too late in its portfolio transformation, where other Company's could be gaining scale increasingly, particularly in the cloud?

Thanks.

So I think the roles that a Board has is one of oversight.

As a board, I guess you guys are going to find out, I'm just as open as I can be.

If you want to talk about mis-steps, we just announced the sale of one of them.

We got into that business.

We got into it late.

We didn't focus it.

So in terms of mis-steps, that was clearly one.

I wouldn't call it a misstep, but has the Board -- have we shoved and pushed fast enough to move to the new frontier of data?

Probably not.

But I think we are on course to do that.

We are totally committed.

We are here.

We're going to get it done.

Transformational effort is leading us to where we need to be.

Actually in that -- I'm not going to tell you a bunch about that right now.

But we believe and I absolutely believe to the bottom of my soul with this, that we have the right people and there is a niche for Teradata in the future world of technology.

I think it's something we can fill that no one else can.

We have great relationships.

We are looked as a trusted advisor.

We have added -- it gets back to a little what I've talk about, we've added a lot of talent to this business.

We have just operated them as separate silos.

What need to be is Teradata, where we bring all the smart people together, put our offering together, give our customers what they are telling us they want.

So, I wouldn't call that a misstep; I might call it being a little late.

But I guess that's the best way I can answer your question.

Thanks, Vic.

Good luck in the new role.

Thank you.

Brent Thill, UBS.

I'll add my congratulations to Vic, welcome to the team.

This is Fatima Boolani for Brent Thill.

Vic, a question for you.

You cited focusing cost as a big priority on your agenda this year.

I'm wondering if you can help us understand the largest areas of efficiencies in the Company?

Perhaps, how that reconciles with the investments and then focus to support cloud offerings?

Then a follow-up for Steve, if I may?

I'll give just one quick -- then Steve is going to take the bulk of that, okay?

Because, for me to act like I have been involved with the day to day cost, wouldn't be fair to you.

But I did say in my opening comments -- I think this is a really important thing is that we have made a commitment to the Street about what we are going to do.

We understand that.

We are going to stand behind that.

What I think we need to do is to stand back just a little bit and see, have we properly focused that?

We are going to live with our cost commitment, so it's important.

But more important is making sure that we haven't deprived our organization of what it needs to drive revenue growth.

So we are going to be working on that.

But as to the details, I think Steve can give you some of that.

Yes.

Just echo what Vic said, yes, we are very committed to that $70 million threshold that we put out for 2016.

We committed that total overall operating expense, before incentive compensation and merited that $80 million to $100 million.

So that commitment is still very much alive and being driven through the organization.

With that, if you -- we continue to look at where we need to invest to drive our transformational opportunities.

So as Vic emphasized there, we do not want to shortchange our opportunities for revenue growth in the short-term and the long-term.

So what we have been doing is working throughout the organization with all the business units and identifying the activities, the drivers of our costs and looking at where we add value with those costs throughout the organization.

The costs are not just challenged within the silo.

The costs reduction activities are all brought up to the leadership levels, so we understand the puts and the takes.

We understand what could be at risk if we take these reductions or make these -- take these actions.

So we are constantly balancing to drive the overall comment that Vic is making there, make sure we have the right structure, processes, activities to continue to drive short-term and long-term revenue, particularly being [landed] by a product.

We continue to look at internally how we are going take out additional costs to fund more investments in those transformational road maps.

So again, we are committed to what we said publicly, but we are also driving more internally to fund those strong -- those key initiatives that drive current and future revenue growth.

Steve, just a clarifying question on the guidance.

The full-year guidance moved up from down 8% to down 6%, to down 5% to down 2%.

Are we to understand that delta is entirely ascribed to the easing and normalizing FX environment?

Or is there anything else that we should consider in there?

No, the guidance that we initially gave was down 2% to 4% excluding the Marketing Applications business that we initially gave.

In there, that's excluding the marketing apps.

In there, there was a 200 basis points assumption on FX, when we gave that guidance that first week of February.

What we are now guiding is down minus 2% to down minus 5% in that range, to be sensitive to the rolling deferrals that we saw in Q1.

But now we are anticipating no FX impact for 2016.

So just to clarify, that guidance is minus 2% to minus 5% excluding TMA to be reflective of the rolling deferrals with no assumption of any FX impact for 2016.

That's very helpful.

Thank you for taking the questions.

Thank you.

Karl Keirstead, Deutsche Bank.

I've got two demand-related questions.

One is, Steve, you mentioned that customers want to consume Teradata products in a different fashion.

One way obviously, is more subscription term.

Could you just remind us what portion of your business today is priced that way?

What that might look like in three years time, to get a sense for how that demand change might impact Teradata?

Then my second question is just on these macro pressures, deal delays, et cetera, Teradata is obviously got a large bank, financial services exposure.

Where those Q1 quote, macro budget pressures, more acute in that banking vertical or not really?

Thank you.

All right.

Now, let me answer the latter first.

No, it was not more acute in the financial services vertical.

It was basically across the board in Q1.

So nothing specific into that vertical, Karl.

What we are seeing is on the term models -- it's a very small portion of our business from a product side is, in what I would say, a pure term subscription model at this point.

What I see that growing over the next three years is -- as we go more towards cloud and we go more towards these analytical solutions, these are two good stronger growth areas in our business.

Those would be predominantly from my perspective, predominantly as we even go software as a service or software only, we will be predominantly in that services model.

But we will still have a very strong, solid, on-premise perpetual model.

So, yes, what we are looking at doing is to provide you more clarity, more transparency in that model as we go and bring an Analyst Day to you guys, to really give you clarity or transparency Karl into where we think that model will be in three years.

But we are not looking for a significant revolution from the adoption of the subscription model, where you see some companies have gone out within 2.5 years and converted entirely to subscription.

I do not see that in the Teradata model.

I see it more coming from the new product offerings that we have in cloud and software only and the analytical solutions.

Got it.

Super helpful, Steve, thanks.

Thanks, Karl.

Abhey Lamba, Mizuho Securities.

Vic, you mentioned a few times that you are not here for a long time.

What specific milestones do you want to hit before you look for someone else to take the business over from you?

Well, here's the way the process is going to work.

I'm going to take 90 days and figure out the organization here and then we will have a Board meeting and we will start that process.

Hopefully, at that point in time, it will take however long it takes to get that going.

We're going to look inside and outside, obviously when we do that.

As it relates to my actual milestones, I've got a couple things.

Some are absolutely, we can put numbers on and some we can't.

But just in the few days I've been round here and doing stuff, my number one priority and hope, and I believe that it's going to be true, is I want to energize our base.

Organizations -- one of the things I've learned over my life and when I was younger it took me a while to believe this, but organizations love to be led.

They love to have clarity and they love to have focus.

I think that unleashes more than anyone can imagine.

So the first thing I want to do is to energize this space, make sure they all realize how great this Company is and that they're pushing forward.

They're supportive of where we are going and they have a belief in our future.

So that is the number one thing I'm going to do.

Number two, I want to get our sales effort very focused in the near-term.

I want to make sure that we are organized with the right people in the right place to drive our near-term revenue.

As great as our transformation is and we want to look at that -- as you are seeing everywhere, you can look at IBM, you can look at SAP, you could look at Oracle.

When you undertake changes and you've been around awhile, it takes awhile to transform your revenue base.

So, as important as our transformation is to us, our near-term success and future for our shareholders is based on who we are today.

I've got to make sure that is right.

I will make sure that is right.

So those are the two primary things I'm going to work on there.

Then the third thing is, just to make sure that we really truly assess what is this organization need as a leader going forward?

What amount of tech?

What amount of leadership skills?

What amount of customer interface?

How important are those things going forward?

So as you all know, maybe you don't know, but as a Board member, you get a perspective of an organization primarily from the Chief Executive Officer, right?

That's their view.

We all have our biases.

We have what we have.

But my role here will be coming in and to try and gain a fresh look at that.

Help our Board understand what that looks like, so that we can go forward.

So if I can accomplish those three things in the time and make sure that our transformation gets the funding that it wants, that it needs, and that the people that are leading the transformation know how important they are and that they have license to get on and get it done.

Those are the things I'm going to focus on.

They're all big issues, but I've got a lot of energy.

I'm enthused about this.

I believe in it.

So that's what I'm going to be focusing on.

Next quarter, I will give you an update on all four of those things.

I'll be honest with you about where we're going and how I feel about that.

But those are the things I'm going to be focused on.

The organization is going to be focused on all the things that Steve's been talking to you about.

Those are all important.

We have a lot of good people running this business.

They don't need me to be down day to day mucking around in what they're doing.

But we will move forward.

Actually I think you'll find that Teradata will actually become a tech company.

We'll start acting like one, behaving like one, we will have the speed of a tech Company.

We need to do all those things.

So that's what I'm going to be focusing on.

Thanks, Vic.

That makes a lot of sense.

Oliver, just a quick one for Oliver.

As people are evaluating your cloud offerings are you seeing cannibalization of your other products or is it bringing in new customers?

On a total cost of ownership basis, how do your cloud offerings compare with Hadoop or other big data parallel solutions?

That's it for me.

Great question.

We do not see cannibalization of that, in fact, a lot of executives are very excited about the extra opportunities that clouds performance models give them.

Because a lot of executives around the world are facing new business challenges and need to react very quick and very in agile steps.

Cloud gives them the ability to spin up new sandboxes, new capabilities very, very quickly even though they are not convinced in the long run that they want to use them.

So cloud takes that barrier away and allows Company's to act in much more agile, smaller steps doing that.

So it's very much a complementary thing that we are seeing.

I think it broadens our customer base, it broadens our appeal to companies who want to use our technology.

In fact, we're seeing actually the inverse, right?

We've seen Company's that have accelerated some of their on-premises investments because we now have cloud and software options for them available.

Because again, it makes it much more ubiquitous as an offering within these companies.

In regards to pricing, again -- I challenge you -- we have now Teradata pricing on AWS as public out there on the market places.

It's priced right inline where we feel that the market is with that -- I told you a little bit about the performance differentiation that we have that ultimately blows total cost of ownership totally out of the ballpark, I think, for something like Teradata.

So we will focus on our core strengths.

We will deliver performance capability concurrency even on cloud platforms.

We see it as a great compliment to our on-premises offerings.

Okay.

Before we conclude our call this morning, I would like to thank all of you for your interest in Teradata.

I look forward to meeting with all of you and having you follow our success.

We've got a lot of work to do here.

I think I said that, we have a team that is up to the challenge.

I'm really excited going forward.

On the next call in 90 days, I will be able to be a little more specific with all of you about exactly what we found and what we are doing; and I will do that.

And hopefully that will give you some more comfort and some more knowledge about why we here, are so excited about the future of Teradata.

Thank you all very much for joining us.

This concludes today's conference call.

You may now disconnect.