Welcome to the Q2 2014 Earnings Call. My name is Tiffany, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Gregg Swearingen. You may begin.

Good morning, and thanks for joining us for our 2014 second quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's second quarter results. Steve Scheppmann, Teradata's CFO, will then provide more details regarding our financial performance. Our guidance 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 includes 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. The 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, as a result of new information or future results. I'll now turn the call over to Mike.

Thanks, Gregg, and good morning, everyone. Teradata finished the second quarter with revenue of $676 million, which was up 1% over prior year. Our international region revenue came in higher than we'd expected, while the Americas results were roughly in line with what we had anticipated. New data warehouse customer wins were up significantly over prior year and was the second highest ever recorded for a Q2. For the first half of 2014, Teradata's revenue grew 4% to $1.3 billion, with product revenue up 4% and maintenance up 9% year-to-date. Consulting Services was flat in the first half, but backlog grew as expected, setting us up for a stronger second half. New data warehouse wins for the first half were the second highest ever. Turning to the regions. The Americas Q2 revenue of $374 million was down 8% from prior year and down 7% in constant currency. For the first half, revenue in the Americas was flat. Some notable new customer wins included: a global online travel company, which will be implementing an IDW, along with QueryGrid and our UDA to improve site performance and to get more value from Hadoop; The Cordish Companies, a U.S. entertainment company, which is implementing Teradata and our Integrated Marketing Management solution to automate customer management and campaigns; a top 10 U.S. cable operator that purchased an IDW for sales analytics, customer retention and improved network performance; and a major financial institution in Columbia, which is implementing an IDW to integrate data across their financial functions. Significant expansions and upgrades during the quarter included: a Fortune 500 bank, which expanded its IDW and Aster implementations and extended its UDA by adding a high-performance appliance to detect fraud; a leading package delivery company that upgraded and expanded its Teradata environment to integrate detailed operational data…

Thanks, Mike, and welcome. During my discussion regarding revenue, except where otherwise noted, currency had a minimal impact and the state of percentage change is the same as reported and in constant currency. Product revenue of $300 million was down 1% from the second quarter of 2013, but down less than we expected 90 days ago. For the first half of the year, product revenue is up 4%. Services revenue of $376 million was up 2% from Q2 2013, up 3% in constant currency. For the first half of the year, services revenue was up 4%. Within services revenue for the quarter, consulting services revenue was $203 million, down 2% from Q2 2013, and maintenance services revenue of $173 million was up 8%, up 9% in constant currency. Year-to-date, consulting services was flat year-over-year, and maintenance revenue was up 9%, up 10% in constant currency. Our maintenance revenue growth rate is benefiting from the deferral of floor sweeps, as customers continue to face CapEx pressures and headwinds. Typically, part of the ROI of a product upgrade or a floor sweep is driven by lower maintenance costs, as newer systems take less hardware to perform the same workload, therefore, reducing the maintenance file value or the OpEx cost from a customer's perspective. During my discussion today, again, except where otherwise noted, I'll be addressing margins and expenses on a non-GAAP basis, which excludes stock-based compensation and other special items, including acquisition-related and other special items identified in our earnings release. Product gross margin in the second quarter was 66% compared to 68.3% in the second quarter of 2013. The decrease on product gross margin was driven primarily by the increase in FAS 86 amortization of prior software development cost. FAS 86 amortization is still expected to increase approximately $14 million, or…

[Operator Instructions] Our first question comes from Raimo Lenschow of Barclays.

The first question I had is like, if you -- Mike, can you help us understand, you keep signing -- or the signing rates of new customers for data warehouse keeps going on at very high levels. Remind us how does that translate into revenue. I seem to remember they start slow, but how do these kind of record signings that you see there in terms of new customers translate into future revenue? That would be my first question. And the second question is, you keep having positive news on the marketing side. Steve, can you maybe remind us at what point you want to break that out specifically, so that we get a better visibility there.

Okay. Thanks, Raimo. The new customer wins -- I'll give you a directional comment overall how the revenue flow is, but in any given quarter or year, we can have a different mix of new customer wins where you have an extremely large purchase upfront that paints in that direction. But overall, new customer wins, we typically see in the next 12 months an add-on that's approximately 80% of the original purchase. And then in subsequent years, it moves a little bit lower than that. So there's a pretty good revenue flow that comes over the first 3 or 4 years. The -- and we've been building -- we're on a good track in new customer wins dating back to last year, as well as the first half of this year and the year before as well.

Yes, Raimo, with respect to the presentation of the Integrated Marketing Cloud, that business model -- from internally, how we view that is that the sales activity, the sales operational side reports up through the regions, very consistent with our customer service side. As a result, there is not a separate segment that would drive the reporting of that Integrated Marketing Cloud activities. As long as it's continues to --- as it does currently reside up through the regions, that reporting will then be done through the regions and through our segment reporting that is done with the Americas and international.

Could you give us an indication, Steve? Like how -- roughly, how big it is and what's the growth rate that you see there?

Well, Raimo, I think, with respect to what Mike said earlier in the year that, that business activity was in the range of over $250 million. We're targeting just slightly above that $250 million run rate for 2014 for that total business.

Our next question is from Matt Summerville of KeyBanc.

A couple of questions. First, can you just talk about what sort of gives you pause on your guidance? It sounds like your product close rates are maybe getting a little bit better. Your international business is coming in ahead of your forecast, and your consulting backlog sounds like it's been pretty nicely rebuilt for the second half of the year.

The only pause, Matt, is -- as it relates to what we see in our line of sight for data warehouse opportunities, specifically in Q3. Now it's always subject to change. We've had quarters where we've had stuff move out, and we've had quarters where opportunities have come forward. Such as happened in Q2, and it deflated our Q3 opportunities somewhat. So the -- when we look at the business on a quarter basis and when we do these earnings calls, we're already 4 or 5 weeks into the quarter. We have pretty good visibility on the quarter. And in this particular quarter, we're seeing not as robust of opportunities as we'd like to see. We had a similar situation in the second quarter, and we made comments on the revenue we're expecting -- or kind of looking at in the second quarter and it ended up being higher. So that's basically that. The more positive thing is -- and the progress we're making is when we look at the business overall, and we look in aggregate in the second half and in the fourth quarter, and we do have some things going in the right direction like our consulting services business and our services business overall. And we are seeing a buildup of opportunities that are there in the fourth quarter and beyond. But for right now, we got to navigate through the third quarter, and then we'll go from there. So the fundamentals are good. We're, once again, looking at a light third quarter.

Just one quick follow-up then, Mike. Could you provide a little bit of color by key end market vertical, if you will, in terms of what you're seeing out there in the marketplace?

So I can comment on -- I think you're referring to some of our large industry verticals here in the U.S., Matt?

Correct.

And maybe some of the larger countries internationally. Financial services in the U.S. has been, by far, the fastest-growing and our largest vertical over the past 3 or 4 years, going back to 2010 actually. And actually it had good growth in 2013, low-double digits. The -- but in -- the financial services is going to slow down. The first half was roughly flat, and what we're seeing in the second half, it should be down some. I would characterize this more to -- we've had a huge amount of purchases and infrastructures put in place with the financial institutions, the major ones here in the U.S. getting their data and infrastructures set right. And I think in this case, it's more of a cyclical timeout. Some of the other industries, our retail industry keeps going along at a pretty good pace, so not declining and it's more in a stable environment. Some of the e-commerce industries, the telecommunications, media entertainment and things like that, there, we've experienced some declines in the first half and last year. Manufacturing is growing. It grew last year. It's growing again this year. So that's kind of a snapshot at what we're seeing. In international, once again, we run into some cycles. So in China, we had huge growth up until the second half of last year, and then it turned flattish, and then into the first half of this year flattish. And once again, it's more cyclical, and we see great opportunities in the second half in China as we get out into 2015. We're getting positioned much broader in a lot more industries. So China is a key one for us. Japan, we see stabilized. We actually had growth in constant currency in the first half and towards the end of last year. And that's some high-level commentary. Western Europe's been, really, our strongest over the last 1.5 years, 2.5 years and continues to go at a good rate. I don't know if that covers all the bases, Matt, but that was an attempt to get at it.

Our next question is from Joe Wittine of Longbow Research.

The wins have obviously been good for -- at least the last 2 quarters and maybe even 3 here. You haven't really been giving figures on these sales team additions, so presumably, you kind of dialed that back this year. So maybe, Mike, go on a little bit further detail on how you're expanding the customer base so nicely. Are these legacy opportunities that have kind of been in the funnel for a while? Are they, perhaps, smaller customers that historically you haven't targeted? Or do you have some kind of sales incentives? Or is it just really the suite of new products that you're bringing to market today?

Joe, the -- as far as expanding our territories, what we -- we've given information before. Up until this year, we have added 50% more territories -- sales territories, over the last 5 years. And we added a lot of capacity, and the productivity in those territories were such that there was tremendous opportunities within those territories to drive additional revenue, new customer wins and everything else. So that's why this year, we're taking a little bit of a time out and adding resources into those territories, which are really teams. So not necessarily expanding territories that much, but adding resources to go after those customers in those territories. So there -- our sales cycles with new customers can be long, and I think we're seeing the fruits of what we've been doing, not just this year and last year, but over the past 2 or 3 years longer term, and we still have plenty of capacity in the territories to continue to generate new customer wins for the foreseeable future. So there, I think, we're in good shape. That said, we're continuing to add territories. It's more opportunistically. There's opportunities that make sense. We -- it's there and we have been adding territories selectively, but not at a kind of a volume, not like we've done in the past. Regarding -- no sales incentives. What were the other -- that's all normal.

Product family expansions.

Joe, you'd asked some other -- suggested some other questions related to this?

Yes, but I was just throwing out potential ideas of why you're seeing growth. I think you answered it pretty well. Maybe just as a quick follow-up, the new IDW wins, you said they're up year-over-year. Can you give us an idea of how much they're up first half over first half?

In terms -- if I gave you a rough percentage, it would be 20%. And the other comment I want to make is last year's was a good number, that was up to. So it's not off of a -- not one of those things where it's off of a low number.

Our next question is from Katy Huberty of Morgan Stanley.

As it relates to Americas down 8%, can you split that out between the top 50, and x top 50? I think last quarter you talked about, excluding those top accounts, you were seeing mid-teens growth and expected that again this year. Is that the trend line you're on? And are you seeing any signs of life in those top accounts?

Thanks, Katy. So the growth outside of the top 50 in the Americas is double-digit, just like we expected in everything else. The top 50's going to be a little lumpy quarter-to-quarter. It was actually up in the first quarter and down in the second quarter. And I think if you look at the big picture, it's playing out as expected, and the decline in the top 50 this year will be smaller than it was last year. And we're having some good success and activity in the top 50, and we're getting positioned well there with our UDA and with our big data-related solutions and services that we're taking in there. So we're starting to get positioned good, and we're on the right trajectory where the amount of the decline is getting reduced. So in the second quarter, obviously, we grew outside the top 50 double digits, and the large CapEx purchases and everything else in the top 50 took a decline in the second quarter.

In your prepared remarks, you mentioned a number of floor sweeps, which would suggest that customers are doing some upgrades. Is there any potential that the top 50 could be closer to flat next year? Or you still think that the top 50 would decline in 2015?

It's hard to predict, Katy. I mean, the top 50 could be flat. They could be up. They could be whatever. And to your point, we are seeing floor sweeps, obviously, around the world and we consistently do a level of floor sweeps. And at some point in time, we'll see floor sweeps occurring in the top 50.

And then just last follow-up for Steve, really great free cash flow generation in the first half. I know you said you still expect free cash flow to be pretty close to net income. What's driving the weaker second half free cash flow? That's been a trend over the last couple of years, that the second half is weaker than the first half.

Yes, Katy. As you referenced, our guidance is GAAP net income, plus or minus $25 million to $35 million. Early indications, we could be on the plus side for 2014. It's really the working capital components as we look out in the second half of the year with respect to accounts receivable and that activity. So at this point in time, just be cautious on it. We're still saying it's within our kind of guidance tolerance range, but we could be on the plus side of that for 2014. And we always have a strong Q1, with the maintenance renewals coming through on Q1, which has been consistent with our cash flow over the last years in the past. So nothing unusual, just that range is pretty a consistent range for us, and we feel cautious on it, but a positive side on the plus side.

Our next question is from Bhavan Suri of William Blair. Bhavan Suri - William Blair & Company L.L.C., Research Division: I want to touch on a couple of things, but the first is, when you're seeing this new IDW or EDW deals, the average deal sizes talk has been sort of that $1.7 million. Has that been consistent across the new -- over, say, last 12-month IDW, EDW deals?

It's been fairly consistent, Bhavan. I can't give you an exact number, but we're running very close to it. Bhavan Suri - William Blair & Company L.L.C., Research Division: Great. And then one of the trends you historically seen is, as those customers, which the -- these are new wins, add subject areas or data or grow that -- the volume to store more over time, et cetera, et cetera, they've come back every sort of couple of years on average and sort of double the size of the data warehouse. And so if I look at the new customers added 2 years ago, are you still seeing that sort of pattern too?

Yes, we're still seeing the similar pattern that we've seen in the past, which was in the first 12 months, they tend to add 80% of what was the initial purchase price. And in the initial purchase price, you have a higher PS content than you do in the second purchase, and you get more product revenue, which is a little more of a richer mix of -- gross margin mix of revenue, if you will. Yes, that's all behaving -- those fundamentals, the average deal size, the upgrades, everything else, those are all -- all behaving similar. Bhavan Suri - William Blair & Company L.L.C., Research Division: Okay. And then, I guess, so given that, if you look out to -- you've had great customer adds, great IDW, EDW wins over that last, say, 12, 18 months. If you follow that path and you feel confident about that, I mean, doesn't that bode for sort of acceleration towards the back half of this year and next year? And so if that's the case, I guess, I'm just a little surprised that you're still maintaining the low end of the range given that, that trend should drive some license acceleration just based on customer adds.

To your point, Bhavan, the fundamentals are good and some of our key metrics are good. And we're making a lot of progress, things are going in the right direction and the declines in the top 50, smaller. I think what happens in isolation is, we're looking at a Q3 right now, and we're looking at a Q4 where we are seeing good activity and somewhat of an acceleration there. But once again, it's Q4, and you don't know where it's going to land and so forth. So we think our guidance for the year is a prudent guidance. It's the best view that we have at this time, but underneath of that, I think the fundamentals of the business are improving. Bhavan Suri - William Blair & Company L.L.C., Research Division: Okay, that's helpful. And I guess, when you look at -- now turning a little bit to some of the Hadoop-based appliances and things like that. If I look at just the Hadoop-based appliances and compare the gross margin of that appliance versus, say, the IDW, could you give us some sense of what the gross margin delta is between the 2?

Bhavan, I mean, yes, the 6000 Series is stronger gross margin. Very consistent with what we've said in the past, you have your 6000 Series, then you have the 2000 Series, which is less. It's improved over the years from a margin perspective, but still less than the 6000. Then you have the 1700. You have a 1000 Series, which in particular situations could be significantly less than the 6000, less than the 2000, and then the Hadoop appliances under that. So you have a broad range of it. And in quarters, where we have a significant 1000 Series potential transaction, possibly even in Q3 this year, we'll call some of that out and recognize at the call the impact on the -- 1000 Series transaction on our product gross margins, and that Hadoop appliance, even though it's not as large as those 1000 Series transactions, is lower than that 1000 Series.

Bhavan, let me say it this way. The hardware component of a Hadoop appliance is not going to be large revenue, and it's going to be a very small margins. And what we're doing in the whole UDA area, in the analytical ecosystem, is software value-add, and it plays across any platform. And strategically, having a Hadoop appliances is, when you get out of large companies and into smaller companies -- and sometimes in large companies, they would prefer a pre-configured package, as much turnkey as you can. But the hardware component of that thing will be low margin, it won't be huge revenue volume for us. Bhavan Suri - William Blair & Company L.L.C., Research Division: Yes. I guess, guys, where, I guess, I'm getting at is, with the Revelytix and Hadapt acquisitions, you're going to see the ability, I think, to be able to drill through a Teradata-structured EDW, IDW into raw Hadoop-based data. And I guess, when you look at that, and it hasn't been rolled out, but if you think about that, what does that do to the gross margin profile? Say, it was a new customer buying a new system that had both of those components, how should we think about gross margins for that?

Okay. Bhavan, these are all good questions, but we have to limit the questions from the call participants here. Look, these are all software components, so it's around how much volume of software can we sell and the margins on software or the margin on software. And there'll be related services, which are services type of margins. So the profile of that revenue, in a way, you could look at -- could be higher than our traditional data warehousing products in aggregate with services, okay?

[Operator Instructions] Our next question is from Philip Winslow from Crédit Suisse. Sitikantha Panigrahi - Crédit Suisse AG, Research Division: This is Siti Panigrahi for Phil. On that new customer wins, we were hoping you could comment on the pricing trends that you're seeing for new customer versus existing customers.

The only way I can describe it is there's no change. Sorry for the brief answer, but, I mean, the new customer wins, the pricing, sometimes they're switching costs and this and that where we're trying to help compensate the customer, sometimes there isn't. The dynamics haven't changed between users and new customers.

Our next question is from Ed Maguire of CLSA.

I was wondering if you could comment on the progress of migrating data refining or ETL workloads off the core database to Hadoop systems that you've noted last year.

Ed, consistent with kind of what we said last quarter, we're just not seeing much at all. We had estimated potentially the opportunity could be 4% to 8% of our workload moving with ETL, and we just haven't seen much. And do we expect to see much in the future? At the current course and speed, it's a minimal impact. Now what I'm referring to, though, is our integrated data warehouse as it relates to that. So there may be some ETL being done in a data mart appliance type of thing, but maybe that'll move, but not much of an impact.

Great. And just to comment on maintenances, as you saw that some of your customers are sweating their assets. I mean, do you expect maintenance to grow faster than kind of 3 quarter -- third quarter historical trends if you -- as the expectation of deal closures unfolds as you're currently expecting?

No, Ed. The maintenance in the second half will come down slightly, but that maintenance number is also driven by the quality of new customer wins Mike was referring to, also. So maintenance in the second half coming down slightly, but still, as Mike alluded to earlier, it's still strong in that second half -- positive in the second half.

Our next question is from Brent Thill of UBS.

Just on the Americas business. Have there been any other changes to the go-to market or pricing that may have had some impact? Or from your perspective, is this just purely some of the larger customers, as you put it, in a timeout for right now, but they'll come back at some point?

By far, Brent, it's the major customers and the challenges we've had there. As far as go to market, we continue to build out our mid-market resources, if you will and expand there. But by and large, yes, it's the major customers.

Okay. And just a quick follow-up on the Active Enterprise Warehouse side, are you seeing demand for the hybrid storage solution. It carries a much higher average selling price than the HDD. Just curious what you're seeing there.

Almost all the our new 6000 class sales are hybrid storage, and -- almost all of them. So it's become almost the norm. We do offer without the hybrid storage tab, coexistence with our user base to extend the life of those systems, but yes.

Our next question is from Matt Hedberg of RBC Capital Markets.

Mike, you commented earlier on additional cloud and subscription offerings. I'm curious if you could comment more broadly, and if you'd ever consider rolling out, I guess, more additional flexible subscription pricing, is how many smaller analytic and data management vendors are selling their solutions today.

Okay. Matt, well the -- first of all, on the integrated marketing side, it's all a subscription model, whether it's on-premise or in the cloud and everything else like that. And we are investing more in the cloud, as it relates to data warehousing and everything else, and we're starting to get good activity there. The -- we do, do pricing in some situations with customers in managed services environments, and things like that where we're -- it's more of a subscription model. So we're evolving as the market evolves and the percent of revenue we're getting, that's subscription or recurring, continues to increase. So -- and I think it will pick up going forward as more of our customers go to the cloud and -- our cloud, and that activity picks up. So we're flexible on our pricing.

We will take one more question. Our next question is from Wamsi Mohan of Bank of America.

Mike, can you give us some sense of the percentage of revenues from the top 50 Americas customers? Where you are with that? And you focused on Aster quite a bit on the call, so I was wondering how much stronger Aster performance you saw in the second quarter versus the first quarter. And I have a quick question for Steve.

Percent revenue. Top 50.

Yes, I'm sorry. The percent of revenue from the top 50 is as we discussed on the last call, so we don't see much change there. It was -- I'll repeat some of the numbers, the top 50 spiked up in 2012 to a point where it was 37% of our revenue, then it went to 33% in 2013. And in 2014, what we said is we're headed where it'll be 25% to 28% of our revenue, so not much has changed there. And I do want to comment on it's not -- there's a positive thing going on and that is the rest of our company is growing double- digits, and it's a good thing. As we do that and add new customers, the percent of revenue coming from the top 50 and our dependence on it becomes smaller, smaller, smaller. So that's a good thing. The Aster big data, we've had very strong growth in the first half, so that's the Aster-Hadoop big data-related type of revenue, and it's going to be even accelerating at higher growth rates in the second half of the year, Wamsi. And the other thing I mentioned before is we've had Aster out there long enough, where we're starting to see some meaningful add-ons and expansions of existing Aster customers, which is even adding more to it. You had a question -- one more for Steve, Wamsi?

Yes. Steve, can you just give us some sense of the magnitude of revenue that came in the second quarter that you were prior expecting in the third quarter in those international deals that you referenced?

Wamsi, yes, we didn't quantify it. It's safe to assume that the spread over maybe the previous consensus -- or the consensus range might be a good indicator of it. But it was a couple international deals that we anticipated would close in Q3 that closed in Q2.

Thanks, everyone, again for joining us here today. And I want to repeat that those of you interested coming to our global customer conference in October to please get in touch with Gregg. So thanks for joining us today, and have a good day.

Thank you very much, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.