Teradata Corporation (TDC) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata's 2015 First Quarter Earnings Call. [Operator Instructions] I will now turn the call over to Gregg Swearingen. You may begin your conference.

Good morning, and thanks for joining us for our 2015 First Quarter Earnings Call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's 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'll now turn the call over to Mike.

Thanks, Gregg, and good morning, everyone. Teradata's first quarter results came in lower than what we had expected. Revenue of $582 million was down 7% as reported and 2% in constant currency. Our revenue shortfall was mainly due to opportunities in the Americas that moved to the second quarter. Normally, the puts and takes with opportunities in a given quarter somewhat offset each other, but this was not the case in Q1. In addition, currency movement from our last earnings call had an additional negative impact on our reported revenue and profit. Non-GAAP earnings per share declined to $0.30, primarily due to the 7% decline in revenue as reported, and the lower product margins which were negatively impacted by product revenue mix, currency and lower volume. Steve will be providing more details on this later on the call. In addition to their currency impacts, we continue to experience headwinds from the IT spending environment and the pressure it is causing on large IT CapEx transactions, especially in the U.S. Recent third-party surveys have reported that many of the 2015 IT budgets are flat to down, which confirms what our surveys have been showing from our larger U.S. customers. Although we are disappointed with our start in 2015, we believe we are still on track to finish 2015 within the guidance range as provided at the start of the year, which I'll talk more about later on the call. We continually make changes to help improve the performance of the company. During the quarter, we announced the appointments of Teradata co-presidents, Bob Fair and Hermann Wimmer, and created 2 divisions: our Data and Analytics division, led by Hermann; and our Marketing Applications division, led by Bob. Each division has its own dedicated resources, including R&D, sales, consulting, customer support and marketing. We are looking to get better focus, alignment and execution, and most important, better results with this new model. We now have reporting segments for each of the divisions, which I'll now provide some commentary on. In Q1, our Data and Analytics division reported revenue of $536 million, which was down 7% as reported and down 2% in constant currency. Within the Data and Analytics division, the Americas revenue declined 6% in constant currency due to the opportunities that moved to Q2. International grew 7% in constant currency in the first quarter, led by continued strong growth in Western Europe. Looking at the second quarter, the Americas has an opportunity for good revenue growth versus prior year. Their funnel and large CapEx opportunities have increased compared to prior year, which were partially aided by the slips from Q1. On the other hand, we are expecting international revenue to likely decline in constant currency in Q2, mainly due to the prior year comparable, when international data and analytics revenue grew 16% in constant currency. Reported revenue could decline mid-teens in international, with currency having an 11-point negative impact in Q2 based on April-ending currency rates. We had a good quarter adding new data and analytics customers. Data Warehouse, Aster and Teradata Cloud new customer wins included: a U.S. national health care delivery company, which is implementing a data warehouse, our Hadoop appliances and QueryGrid; Siemens Healthcare, which is installing a data warehouse along with QueryGrid; one of the world's largest telco providers in China is implementing an IDW; LCL, a leading French retail bank, is also implementing an IDW; an Australia government agency, which chose Aster and Hadoop for advanced analytics for its intelligence community; one of the top U.S. construction companies, which is implementing an IDW on-premise, and also along, using our Teradata Cloud for development; Sera Asset Management, a leading Latin American pension management firm, selected our Teradata Cloud for its data warehousing; and a leading U.S. home health care company is replacing a competitor's on-premise data warehouse with our Teradata Cloud data warehouse. We continue to experience good activity with our big data-related solutions. Our Q1 Big Data revenue was above the quarterly run rate of our 2015 target of $150 million in revenue. Our 1000 Extreme Data Appliance, which is included in our Big Data revenue results, can create lumpiness in a given quarter due to the size of some of these transactions. The 1000 Series helped our Big Data revenue results in Q1, but will most likely not help us in Q2. Activity with our Teradata Cloud continues to increase, both with new customers as well as existing customers moving or adding workloads in our cloud, such as for tests and development, discovery and disaster recovery. We continue to enhance and innovate with our core data warehouse platforms. We recently announced our latest 2000 Series data warehouse appliance, giving customers faster in-memory processing and also doubling the power. Customers can analyze twice the amount of data twice as fast while using only 1/2 of the data center floor space. We also announced the Teradata Software-Defined data warehouse, which enables companies to securely create multi-tenancy data warehouse environments within a single database. This allows companies to meet various security and privacy needs of different jurisdictions. For example, multinational companies can keep country data separate for regulatory compliance. We also continue to add capabilities to our UDA, with emphasis on integration and simplification for our customers. We recently enhanced QueryGrid to connect with 2 additional Hadoop distributions. And Gartner again named Teradata a leader in its recent Analytics Magic Quadrant, calling out the strength of our UDA and our continuous technology enhancements. Turning to our Marketing Applications business. Q1 revenue of $46 million was down 10% as reported and 3% in constant currency. The key metrics we are focused on, recurring revenue and annual recurring revenue, each grew low single digits in constant currency. New Marketing Application customer wins in the quarter included: a top-5 oil company, which selected our Marketing Resource Management, or MRM, solution; [indiscernible], a large French health insurance group which is also implementing our MRM solution; a leading gaming company which chose MRM; and a Fortune 100 financial services company that selected our campaign management solution. Although we are not happy with the results of our Marketing Applications business over the past year or so, we have continued to add to our leading solutions. We released our digital marketing center in Q1. This cloud-based solution integrates our digital messaging, campaign management and marketing analytics solutions to enable customers to create more effective campaigns across all channels and to execute them much faster. Digital messaging center is a key to helping us go broader in the market. We continue to gain recognition with industry analysts with our marketing applications. In addition to being named the leader in MRM by Gartner in the previous quarter, Teradata was once again named a leader in the Gartner's Magic Quadrant for Multichannel Campaign Management this quarter, noting our completeness of vision and our ability to execute. We feel we have a hand on the key issues that have been impacting our performance and that we are taking the right actions to address them. One action was to go to an integrated business model that we would have better focus, alignment and execution, and most importantly, better results. We believe this is a big first step in getting our Marketing Applications business back on track, along with the increased investments we are making. These investments will help us to get better position to go broader in the market, both with our cloud offerings and our demand creation, which we did not do a good job of addressing previously. Our goal in 2015 is to have annual recurring revenue growth of mid- to high-single digits in constant currency as we exit the year and to position ourselves for higher recurring revenue growth in 2016. As we said on our last call, we are making additional investments in 2015 in Big Data, Marketing Applications and the Teradata Cloud, all of which are big growth opportunities for Teradata. We believe this is the key for us to get to a mid-single-digits growth rate or higher in 2016. At the same time, we have continually optimized our cost structure and resources over the years, and we will be even more focused on this in 2015 to help fund these growth investments. Turning to guidance. We believe we are still on track to meet the 3% to 5% constant currency revenue growth guidance range provided at the start of the year or flat to minus 2% as reported. As a result of our Q1 earnings per share shortfall, we now estimate we will be at the low end of our non-GAAP earnings per share guidance range of $2.50 to $2.70 for the full year. We expect to make good progress in Q2 and in the second half of the year as well. We currently are seeing higher growth in the second half of the year. Our revenue that has higher visibility or predictability, is forecasted to grow mid-single digits in constant currency. This revenue includes all of our Marketing Applications business and the maintenance, subscription and consulting services from our Data and Analytics business. And this accounts for approximately 2/3 of our total revenue. As a note, our recurring revenue continues to grow and is now in the mid-40s as a percent of our total revenue. The remaining 1/3 of our revenue that has lower visibility or predictability in the second half, is our data warehousing product revenue. Any growth in our data warehouse product revenue in the second half should result in good overall constant currency revenue growth for Teradata in the second half. And with that, I'd now turn the call over to Steve. Steve?

Thanks, Mike. Good morning. During my discussion today, except where otherwise noted, I'll be addressing margins, expenses and EPS outlook on a non-GAAP basis, which excludes stock-based compensation and other special items, including acquisition-related and other special items that may arise from time to time. Reconciliations from GAAP to non-GAAP items are included on the Investor page of teradata.com. Additionally, historical information for each of our new business segments is also available on the Investor page. As you are aware, the strengthening of the U.S. dollar has become a big headwind for many companies, and in Q1, it was even more than the 5 point impact we had suggested during our last earnings call. Correspondingly, approximately 40% of this revenue impact flow through to operating income, which was slightly more than the third we had estimated at that time, due to the amount and rate of the strengthening of the U.S. dollar. The currency movement impacts our product gross margin particularly resulting in an estimated 340 basis point reduction as compared to prior year's Q1. Product gross margin in the first quarter was 56.4% as compared to 68.1% in the first quarter of 2014. In addition to the 340 basis point currency impact, product gross margin was also negatively impacted by product mix. You may recall during the fourth quarter earnings call, as part of our Big Data discussion, we mentioned we had a couple of 1000 Series transactions that slipped out of Q4 and into the first part of 2015. Due to the aggregate deal size and naturally lower margin, this had a meaningful negative impact on overall product gross margin in the quarter of over 500 basis points. We also had some large 6000 Series transactions that moved out of Q1, which reduced our product gross margin in Q1 by approximately 150 basis points. And a reduction in product volume in Q1 resulted in a 120 basis point decline in product gross margin. We are forecasting product gross margin to recover significantly in Q2, but we believe it'll still be about 200 basis points less than Q2 2014. Services gross margin in the quarter was 44.3%, down from 44.8% in Q1 2014. Services margins were negatively impacted by the timing of work-in-process-related consulting projects and the investments we are making in our applications and Teradata Cloud capabilities. We are anticipating similar service gross margin in Q2 compared to Q1 2015. As a result, overall gross margin was 49.3% in the first quarter compared to 54.9% in the first quarter of 2014. Turning to operating expenses. SG&A expense of $170 million was 3% lower than the first quarter 2014, largely due to the benefit of currency, as we held line on G&A expenses. We continue to scrutinize and optimize our expense structure to support our strategic initiatives and to improve our long-term operating efficiencies. In Q1, we incurred incremental costs associated with this strategic investment strategy, as we described on our last earnings call, and we expect this to build for Q2. Research and development expense in the quarter was $56 million, a 24% increase compared to the first quarter of 2014, as we increase and shifted investments to Big Data, Cloud and Marketing Applications activity, which includes R&D expenses associated with the acquisitions we made in 2014. I would also like to note, we do not capitalize R&D activity related to Big Data, Cloud or Marketing Apps projects like we do for the Teradata -- for the core Teradata software projects, which resulted in higher R&D expense hitting the income statement currently. We believe that the Q2 increase in R&D expense will be similar to or larger than the Q1 increase. Total R&D spend for the first quarter, which includes R&D expense plus the addition to capitalized software development cost from the cash flow statement, less the capitalization of internally developed software, was $69 million. This compared to the $64 million in Q1 2014. As a result of lower revenue, the lower product gross profit and higher R&D expenses as well as the currency impact mentioned earlier, operating margin for the quarter was 10.5% compared to 19.9% in Q1 2014. On a GAAP basis, our effective tax rate in Q1 2015 was 26.7%, 130 basis points lower than the 28% in Q1 2014. Our non-GAAP effective tax rate for the first quarter was 27.9% versus 30.4% in the same period 2014. The lower tax rates were primarily driven by more favorable forecasted foreign earnings mix year-over-year. Looking forward, for 2015, we expect our full year GAAP effective tax rate to be approximately 26% and our non-GAAP full year effective tax rate to range -- to be approximately 27.5%, with the actual tax rate being heavily dependent upon our earnings mix. In addition, both rates presume that the U.S. 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, quarterly effective tax rates will be impacted by approximately 80 basis points. In terms of earnings per share. Our Q1 GAAP EPS was $0.15 compared to $0.37 in Q1 2014. Adjusting for stock-based compensation and other special items, which equated to $22 million or $0.15 in the first quarter of 2015, our non-GAAP EPS was $0.30 compared to $0.54 in Q1 2014. Turning to cash flow. Net cash provided by operating activities was $222 million in Q1 2015, which was $120 million lower than the first quarter of 2014. This was expected -- as expected, since we collected a sizable amount of receivables from Q4 2014 transactions in the fourth quarter, which left fewer receivables to collect in 2015. As you may recall, we described this as a favorable timing item for 2014's free cash flow during our last quarter's earnings call. After $32 million of capital expenditures versus $33 million in the first quarter 2014, we generated approximately $190 million of free cash flow versus $310 million of free cash flow generated in Q1 2014. Again, the decrease in free cash flow for the first 3 months in 2015 over '14 was primarily a result of the reduction in income from operations, combined with the net changes in AR, as I previously just mentioned. 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. However, as I mentioned during the Q4 earnings call, the year-over-year free cash flow comparisons in the next quarters are expected to be less favorable and the full year 2015 free cash flow is expected to be more than $200 million lower than the 2014 free cash flow, primarily due to the favorable timing of collections of receivables in the fourth quarter of 2014. Moving on to share repurchases. During Q1, we repurchased 6.3 million shares for approximately $273 million under our open-market share repurchase program. We have used over $2 billion to buy back more than 52 million shares since the program's inception in 2008. As of March 31, we had approximately $131 million of remaining authorization in our open-market share repurchase program. To provide for sufficient flexibility for future share repurchases, our Board of Directors just authorized another $300 million, resulting in a current authorization of $431 million to repurchase our shares. On March 25, we completed a $1 billion refinancing of our credit facilities, whereby we refinanced our existing term loan with a new 5-year $600 million senior unsecured term loan. At the same time, we also replaced a $300 million revolving credit facility with a new 5-year $400 million revolving credit facility. Both facilities expire in March 2020. As of March 31, 2015, our total debt outstanding was $600 million, with no funds drawn under the new revolving credit facility. With respect to accounts receivable, AR decreased $24 million in Q1 2015 versus Q1 2014. Days sales was 79 days as of March 31, 2015, compared to 81 days as of March 31, 2014. The decrease in AR was primarily due to the currency impact as of March 31, 2015. Total deferred revenue was $508 million as of March 31, 2015, which was down $15 million from March 31, 2014. Now turning to guidance for the full year. As Mike indicated, we continue to expect constant currency revenue growth in the 3% to 5% range and flat to down 2% as reported. As a result of our Q1 performance, we now expect non-GAAP EPS to be at the low end of our initial $2.50 to $2.70 guidance range. We also expect GAAP EPS to be at the low end of the guidance range. And I'll provide some added color on our expectations for Q2. We anticipate that reported revenue will be lower than last year's Q2 revenue. And as is always the case, the timing of large transactions have a meaningful impact on our quarterly revenue. We expect product gross margin will improve significantly from Q1, but we anticipate it to be a couple of points below prior year's Q2. We also believe services gross margin will approximate Q1 2015 services gross margin. And we expect R&D expense to be up close to 30% in Q2. The impact of just the projected lower margins and the estimated higher R&D expenses versus prior Q2 is approximately $0.14. Let me assure you, we are not happy or satisfied with our results. However, we understand the challenges we face and the opportunities we have, and we will continue on the path to improve the performance of the company. In addition to our prior acquisitions to position us in faster-growing markets, we have enhanced and advanced our technology in both core data warehousing and big data. We continue to optimize our cost structure, and we are in the process of realigning Teradata into 2 separate but integrated business units, led by 2 co-presidents, to address the specific opportunities and challenges for each business. In closing, we have great technology and a world-class services team, and we are investing to meet the current and future needs of our customers to gain a competitive advantage by leveraging their data assets and as a result, enhance our shareholder value. And with that, operator, we are ready to take questions.

[Operator Instructions] Your first question comes from the line of Raimo Lenschow from Barclays.

Mike, can you talk a little bit about what gives you confidence for that better second half? I mean, as we've been going through with Teradata, like, we have a good few quarters now where it look like it was getting better but it didn't. Can you just give us the data points that you have to have that increased confidence?

Thanks, Raimo. The confidence in the second half basically comes from our more predictable revenue, the revenue we have visibility to. So that's our Marketing Applications, which is basically subscription model, cloud, Software-as-a-Service; and then in the Data and Analytics part of the company, it comes from our maintenance, our subscriptions as well as our professional services. So out of those, professional services has a little bit of variability in it when we look out over a full year at this point in time, but the others are all very predictable. It's recurring types of revenue. So when you look at the second half, we're clearly in the mid-single-digits. And historically, not that, that predicts the future, but historically, we've been well within 1% or 2% of that more predictable revenue at this juncture of the year looking at the second half, and it could be higher, it could be lower by 1 point. So we feel very good about that. And that's 2/3 of our revenue. So that leaves the remaining 1/3 of our revenue in the second half being the pure data warehouse product revenue, which basically we've had trouble with our growth. Last year, it declined 2%. And what we've modeled this year is that our data warehouse product revenue would decline 1% for the year and in the second half would basically be flattish or down 1%. So I think, and what we've modeled in the second half, 2/3 of the revenue, it's very solid. I think the wildcard is our product revenue, data warehouse product revenue, and it could be higher. It could be a little lower, but I don't think it would be much lower than that.

Your next question comes from the line of Wamsi Mohan from Bank of America.

Mike, can you talk a little bit about the trends of the top 50 customers? I think last quarter you noted some stabilization. This quarter, obviously, it was a little weak. You mentioned some pushouts. So without those pushouts, do you think you're still sort of pretty stable at the top 50? And could you just reconcile that with your comments about IT spending flat to down?

Thanks, Wamsi. The -- so if you look at last year, we had an improvement in the top 50. We declined around 5%, and that was an improvement from the decline the year before of 11%. And then when you look at the first quarter, we did have another mid-single-digit decline. But to your point, with the pushouts that we experienced, some of it was in the top 50. We actually would have had a growth in Q1 in the top 50. And when we look at the full year, we do think the top 50 collectively -- it varies within the top 50 with each customer. And when we think collectively, it has stabilized. And what we've modeled in for the years, that'll be flattish this year. And so I -- that's basically where we're at. We're not counting on a big uptick this year. We're just looking at things getting stable, as they've been towards the end of the year.

Your next question comes from the line of Derrick Wood from Susquehanna.

So I had a question on QueryGrid and just be curious to see what your customers are -- how they're adopting it and if you're successful at getting your installed base to adopt it, what you hope to get out of it in terms of either revenue generation or just architectural adoption.

Derrick, it's very early on in its life, so it -- we just recently released it not too long ago. We've added to it, and there's a pretty lengthy roadmap with it, and as I mentioned, we are integrating it with additional Hadoop distributors as well as with other databases. So that all said, the financial results and the impact of QueryGrid on our business results is small at this point. The opportunity that we see with it and the number of customers that are adopting it has validated that this is going to be a very integral part of our whole Unified Data Architecture and our positioning with customers. So we have customers today that have implemented it, but not to the degree where we have enough volume that'll have a meaningful impact on our financial results. I think if you look further out into this year, maybe into the second half, we'll see a little bit of revenue that might mean something along QueryGrid specifically, but then the pull-through of other things that we're doing with the UDA, it'll influence additional revenue. So strategically, it's good for our positioning. The adoption of it, it's hitting the mark with our customers. In terms of revenue impact, small for right now.

Okay. If I could just ask another question on the consulting business, sequentially, it look like more seasonality than we've seen in a long time. Is there any change in demand or any internal changes that you've been making that could have impacted growth? And how are you thinking about consulting growth for the year?

The -- what we're looking at in Q1 really mostly impacts in the marketing applications, Derrick. And there, what's happened is, we're trying to get cost out of our professional services in the Marketing Applications business and basically reducing our prices. So we've moved a lot of -- we're utilizing a lot of offshore now and everything else. And I think what you're looking at in the sequential seasonality and decline in the marketing -- in the consulting services overall is the piece that's coming from the marketing apps. I think, in constant currency, outside of the marketing apps, we were down 1 point or flattish in the first quarter. The other piece, Derrick, with our professional services and the marketing app is we're shifting more to the cloud. We're getting less professional services in the mix, which is what we want to have happen.

Our next question comes from Bhavan Suri from William Blair. Bhavan Suri - William Blair & Company L.L.C., Research Division: Just first on the visibility. You guys have always said you sort of have on the product, the EDW, IDW side, sort of a 6-month visibility, typically. And you've sort of been comfortable with the full year numbers. And so I guess, I'm just trying to reconcile. Are there sort of floor sweeps coming in or sort of your expectations for an upgrade cycle or something that give you some confidence there towards the back half of the year? Because I understand the growth is flattish, up a little bit, down a little bit, possibly, as you said there. But if we see some CapEx pushouts, or security becomes an issue again, I guess, those could be valid concerns. So I'm just trying to understand if you're seeing some trends around upgrade cycle or floor sweeps that give you some confidence outside of that 6-month window that you typically have.

We're -- so we were seeing a little bit more predictability, if you look at 2014, Bhavan. Then in this quarter, we had a little bit of -- we had some pushouts. And really, we shouldn't judge what's going to happen in the future from one quarter, but it does have us a little concerned, in terms of our predictably with some of the larger CapEx transactions that we have. When we look out into the second quarter and the third quarter, we've got a pretty good increase in CapEx, large CapEx transactions in the second quarter. But at this juncture, we're just not counting on a lot of floor sweeps or a big rebound in spending out of the user base, out of our major customers. I'm not saying that we don't see that happening. We're just not counting on it. And the CapEx environment, as you all know, is extremely tight, especially here in the U.S. with the major customers we're working with, and we're just not counting on it. So when you look at our full year guidance, we're just -- we're not counting on a big shift. Bhavan Suri - William Blair & Company L.L.C., Research Division: Okay. And then a quick follow-up from me just on the competitive environment. And again, we can put Hadoop aside for a second. But are you seeing any of the no-SQL guys, like MarkLogic or Mongo or Cassandra, anyone like that sort of starting to play in the large-scale data warehousing space at all?

Not in our space, Bhavan. In the case of some of those you just mentioned, with QueryGrid, we're connected. Mongo's kind of in a -- MongoDB's kind of in a little bit of a different space, and we see it as something that we can add value to by integrating with them and vice versa, but no.

Your next question comes from the line of Ed Maguire from CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division: I actually did want to ask about the dynamics in the -- with your customers around the Hadoop market. And now that you're -- I know that you're fully vested with partnerships. What is the nature of conversations that you're having with customers? How has that changed? And are you seeing any difference in the competitive rhetoric from the main distributions?

Ed, we're not seeing a change from what we've commented on probably the past couple of quarters. I think the rationalization of Hadoop and the analytical ecosystem has somewhat stabilized, generally speaking, as far as the market and customers understanding the capabilities of the various new technologies that are coming into play. I will add, although it's not a big part of our business, our Hadoop business is growing rapidly. And we offer Hadoop appliance with some value-added software. And a lot of these customers are looking for someone to provide an integrated solution and take out a lot of the work and everything else that, quite frankly, is a little bit of upside to our business that I wasn't counting on. The actual Hadoop, the hardware and everything, is not a high-margin thing. But collectively, with our software value-add and the help that we're doing with our customers and positioning it and our Unified Data Architecture, it's been an upside.

Your next question comes from the line of Jesse Hulsing from Cowen.

In my model, even adjusted for currency, product gross margins were probably the lowest they've been since you've been public. Can you just give us a sense of, as your mix shifts away from the 6000 Series into some of these newer Big Data products and to the 1000 Series, what are your expectations for what a long-term stable product gross margin level might be?

Well, Jesse, as we look at going through this year, based on our Q1 results, and as I look out over this -- over 2015, I see a product gross margin and that's actually absorbing about 50 basis points more FAS 86, which will level out this year going forward. We could be possibly 200 basis points lower than last year with this model that we're seeing in 2015. So the color going forward outside of 2015, difficult, but in 2015, about 200 basis points lower with respect to the mixes that we're seeing. It's difficult to predict.

And as a quick follow-up. You mentioned a strong 1000 Series quarter from the deals that slipped, which helped your Big Data business kind of hit a higher-than-expected number on an annualized basis. Exiting out those 1000 Series -- transactions amount of 1000 Series business, how was your -- how are your other Big Data products doing?

Jesse, the -- good question, because we did get the benefit of a spike on the 1000 Series. So the Aster, Hadoop, Big Data-related revenue, pulling out the 1000 Series, was up quite a bit in the first quarter. It was double. Jesse, if I can add one thing to Steve's comments on the product margins, I think if you look long, long term, the amount of revenue that will be growing in other areas of the company with our Marketing Applications business and also with our Teradata Cloud, that'll be data warehouse product revenue that's no longer classified as product revenue. I think what we'll see is the data warehouse product revenue become a smaller part of the company and that'll have an impact on the overall margins, okay. So Steve's comments was on the -- specifically the data warehouse product gross margins, and that's accurate.

Your next question comes from the line of Keith Bachman from BMO.

I wanted to follow up on that comment, if I could, Mike. A -- if I focus on the product gross margin, mix is clearly impacting it. Could you talk about, first, the like-for-like pricing, and are product gross margins outside of mix consistent? And then secondarily, the comment you just made, I'm not sure what the conclusion is. If we look longer term, will the mix continue to have an impact at the areas that are faster-growing? Are you saying just in that cloud and the marketing will help offset some of the, perhaps, product mix that may be negative?

Within the quarter, Keith, we actually had, if you look at the margins on each product and not the overall mix, in the 1000 Series, we had some very large transactions that came with a much lower margin than what I would call normal. So I don't know if you would characterize that as a deal mix. Some of these customers have licenses even when we're floor-sweeping a 1000 Series, and they get credits for the licenses. And yes, so we -- on top of that, we did have a deal mix issue within the 1000.

Right. I'm suggesting outside of the 1000, were there other issues on pricing that might have impacted margins even outside of that 1000 Series?

No, no. Outside of the 1000, the product margins were normal, okay, the standard margins. But we did have a lower-than-normal margin on the 1000 within the quarter, okay. And then the other thing that was hitting us in the quarter was the currency as well.

Yes, you bet. Okay. And then the longer-term comment, if you could just clarify the longer-term implications of what you commented on?

Yes, what I was commenting on is, as you look at the overall mix of the company longer term, the product -- data warehouse product revenue should be a lower percent of the total company's revenue as you look at the growth of some of these other areas, such as our Data Warehouse, Cloud, such as our Marketing Applications, and as you look at our Big Data, there is not the same margin rates as in the 6000. Yes, and the product revenue actually, as the Teradata Data Warehouse product moves more to the Cloud, that won't be categorized as product revenue and it won't be showing up in that bucket. So the mix will shift.

Your next question comes from the line of Karl Keirstead from Deutsche Bank.

I'm just wondering what portion of the delayed 6000 Series deals have closed so far in Q2. Or do you think most of them will close more in May and June? And then just as a quick clarification. When you guided to a decline in total revenues in Q2, I just want to confirm, did you mean that in U.S. dollars, or did you also mean that in constant currency?

We -- we expect the deals to move -- the larger ones have moved out of the first quarter to be back-end loaded in the second quarter. So they'll be coming towards the end of the quarter, which is normal. The other question is...

Yes, Karl, on that revenue color on Q2, it's reported dollars that we expect -- expecting revenue in Q2 on a reported dollars to be down.

Next question comes from the line of Abhey Lamba from Mizuho.

This is Jim Shaughnessy stepping in for Abhey this morning. I am just hoping to get a little more clarity on the top 50 customers and if you guys could provide a little more sensitivity on the different verticals. Specifically, I know in the past you've mentioned the financial vertical on having some challenges, so just a little update on that would be great.

The top 50 I commented on a little bit earlier here, Jim, but what I mentioned is the first quarter, the top 50 was down, but without the opportunities we have that slipped to the second quarter, we would have growth in the first quarter in constant currency. Right? So if I can give a little more color on the verticals that you asked, in the first quarter, outside of financial services, we once again had growth in the top 50. And if you look at the Americas overall in the first quarter, financial services was our biggest decline by far in the first quarter that offset the -- which could have led to growth with the Americas in the first quarter. While looking out at the second quarter, we're expecting a pretty good uptick in financial services and for the rest of the year.

Your next question comes from the line of Alex Kurtz from Sterne. Alex Kurtz - Sterne Agee & Leach Inc., Research Division: So Mike, I just want to follow up on this longer-term product margin outlook. Historically, one of your larger customers really bought into the BYNET framework and the virtual AMPs, and they're really being able to process data at a high speed. And I'm just really struggling to understand, are they transitioning away from that? Or are they not seeing value in that? And what does that mean as far as your competitive advantage in the high end of the market?

Alex, if I can kind of give a summary answer, we don't see any change long term in that and the value of the EDW and the 6000 class and everything else like that with the customers. What I'm saying is, as a mix of overall revenue for Teradata over time, we're going to be -- a lot more revenue is going to be coming from other parts of the business outside of the EDW. And that's basically what our plan is. So whether it's cloud, whether it's the 2000 Series getting into the mid-market, whether it's the 1000 into the big data market, whether it's our marketing apps and our big data Hadoop-related solutions and Aster, that's all -- we see that all growing at a much faster rate. Does that answer... Alex Kurtz - Sterne Agee & Leach Inc., Research Division: Well, just for clarification. Are you seeing the 6000 not being a major platform that customers are investing in over the next couple of years and transitioning to these other services? I'm just trying to understand. The secular idea was that all this data was being housed internally in one of your EDWs and then all these services were sort of spun out of it. And it sounds like the 6000 is becoming sort of a less-critical element in your portfolio to your large customers. And am I framing that incorrectly?

Okay, yes, I'm glad you asked for the clarification. Absolutely not. So the role the 6000 and our integrated data warehouse is playing, absolutely not short term, long term. The role it's playing with our customers, the need and everything else is there long term. What we're saying is, longer term, the other parts of our business will grow at a faster rate than the Enterprise Data Warehouse. So with the Unified Data Architecture and everything else we're doing, there's going to be a lot of business opportunity for us beyond that.

Your next question comes from the line of Aaron Schwartz from Macquarie.

I appreciate the granularity on the segment revenue and visibility there, although I think you gave their percentages relative to total revenue. And just given some of the comments you made about the revenue mix, is there any way you can segment just the product line a little bit more to provide some granularity on what is just EDW product first? What is a little bit more visible either from cloud or some of the subscription elements or the software business?

No -- I mean, Aaron, the other -- those aspects of the business are -- the cloud, and they're still -- what you described, still very small. And from a reporting perspective, you -- the core business, 6000, 2000, 1000s, continue to drive the bulk of our product revenue. To give you a little perspective, our 2000 Series is still just 12% of our product revenue. So it would really not be that meaningful to break it out in -- again, the 1000 Series is, and we talk about it in our Big Data revenue, but the other components are just small at this point in time. Now we always evaluate it as we go forward with respect to disclosure guidelines and relevant information, but at this point, very small.

Okay. And secondly, if I could, on the product gross margins or the gross margins in general. I thought you mentioned, if I heard you correctly, the revenue mix shift over time moving to software, et cetera, should provide a benefit. It does look like, if I read it correctly, the marketing apps gross margins are a bit lower than the overall business at this point. And so what do you have to see there to -- is that just revenue scale that should provide the benefit on the software business longer term? Or what do you have to see there to have that gross margin increase over time?

Aaron, the -- longer term, what we see is the product gross margin would go lower, okay, over time. But what we're saying is, the amount of product revenue as a percent of Teradata total revenue -- I'm talking about data warehouse product revenue, will become a smaller piece of the overall company.

Your next question comes from the line of Shebly Seyrafi from FFN Securities (sic) [FBN Securities].

Yes, I just wanted to know what's the risk to the product gross margin in Q2. I think you guided for it to be down 2 percentage points year-to-year. What are the factors that would drive it? Because that would actually imply an 8 percentage point increase sequentially, which I don't think has ever been done before. What are the factors that would drive that increase? Is it just more improvement in the 1000 gross margin? Is it the 6000 improving? Volume? Just go through the factor that would drive an 8 percentage point increase sequentially in the product gross margin.

Shebly, I think the best answer is what you saw in Q1 is an anomaly. We just had a severe mix of 1000 Series. And you're right, it's the lowest product gross margin we've ever had. It's a mix of: 1000 Series, which is high in the revenue; 6000 Series, low; currency; and it's a long list. So I think it points to the anomaly of Q1. The second quarter, we get pretty good visibility on the opportunities we have in play, and we have a pretty good picture. We may come in lower. We might come in higher. But we think it's a rational number that we put out there for the second quarter. We want to try to help you all after seeing what you just saw in the first quarter, okay.

And Shebly, I'll throw out another one about small. My fourth point on the product gross margin was the volume, product revenue, and with the pickup of the volume, that should cover more of those fixed costs from a percentage basis.

Your last question comes from Brad Reback from Stifel. Brad R. Reback - Stifel, Nicolaus & Company, Incorporated, Research Division: Just a quick question with the decision to sort of separate out the marketing business. It would seem that, that would inherently -- well, first off, can you just go a little deeper into why that's necessary? And number two, it would seem that, that would inherently limit the leverage from that business over time and doesn't seem to be sort of the vision you laid out when you first got more aggressive into that segment.

Brad, what we saw the way we were aligning previously, is we did a good job in the enterprise accounts. That's the center of gravity with Teradata is we do extremely well with large enterprises. And having our Marketing Applications business aligned together with our Teradata Data Warehouse business, we're naturally more towards the large enterprise accounts. And we did good, and we got good leverage, and the opportunities there are big. But what we needed to do was get our Marketing Applications business lined up. Meaning, research and development, consulting services sales and the whole supply chain on going after the broader market. And in order to do that, we had to separate things out and get the R&D organization closer to the customer, closer to the sales organization and go after the broader mid-market and make investments more in our marketing cloud, digital messaging center as a first step, and get on with that type of a motion. To your point, there might be some sacrifice of synergy and leverage with the Teradata Data Warehouse field organization, but we do think it's minimal, because the analytic applications, the campaign management solutions and everything else, drive usage on the Teradata Data Warehouse in those customers. So I want to be clear on that. The Marketing Applications drive volume usage, queries and everything else on the Teradata Data Warehouse side of the business, which is one of the reasons why we invested heavily to get into the marketing space. And that was our last question. So in closing, I want to say we're well positioned with our technology solutions and services, and we have a strong customer base to build upon. We're going to continue to realign and invest in our company to optimize results and shareholder value. And we're going to be balancing the short term with the long term, as always. With that, I'd like to wish all of you a good day. Thank you.

This concludes today's call. You may now disconnect.