Gregg Swearingen – Head-Investor Relations Mike Koehler – President and Chief Executive Officer Steve Scheppmann – Chief Financial Officer and Executive Vice President Oliver Ratzesberger – President of Teradata Labs

Raimo Lenschow – Barclays David Griffin – William Blair Jesse Hulsing – Goldman Sachs Wamsi Mohan – Merrill Lynch Katy Huberty – Morgan Stanley Ed Maguire – CLSA Joe Wittine – Longbow Research Michael Baristajon – Credit Suisse Alex Kurtz – Sterne Agee Keith Bachman – Bank of Montreal Brent Bracelin – Pacific Crest Karl Keirstead – Deutsche Bank

Good morning. My name is Shaun. I will be your conference operator today. At this time, I’d like to welcome everyone to the Q4 2015 Teradata Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Gregg Swearingen, you may begin your conference.

Good morning, and thanks for joining us for our 2015 fourth quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by discussing Teradata's fourth quarter and full year results, as well as provide an update on our transformational initiatives. Steve Scheppmann, Teradata's CFO, will then discuss our Q4 and full year financial performance as well as our 2016 guidance. Also, Oliver Ratzesberger, President of Teradata Labs will be joining the Q&A portion of today's call and can discuss Teradata's market leading technology that will provide the foundation for our business transformation. During today's call, we will not be providing or answer any questions related to details pertaining to our transformational initiatives. We will have – have an Analyst Day, later this summer to provide a more comprehensive view of our transformational plan. More information regarding the date and location will be provided at a later date. 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 and other special items as well. A reconciliation of our non-GAAP results to our reported GAAP results and other information concerning these measures is included in our earnings release and on the Investor page of Teradata's website. A replay of this conference call will also be available later today on that site. Teradata assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results. I will now turn the call over to Mike.

Thanks, Gregg, and good morning, everyone. I just pleased with the fourth quarter came in as expected with year-over-year revenue down 1% in constant currency and non-GAAP EPS of $0.70. We continue to make progress on our key transformation initiatives centered on revenue growth and our cost structure, which I'll cover later. First, I'll provide some color on our results that are specific to our going forward data and analytics business without our Marketing Applications and from a constant currency perspective. For the full year revenue was down 2%, services revenue was up 5% and within services maintenance was up 6% and consulting 4% for the year. Consulting services is on a good growth trajectory, after growing 2% in the first half, revenue grew 6% in the second half. In addition, we grew recurring revenues $74 million, which was up 7% for the year. Recurring revenue as a percent of total revenue increased from 43% in 2014 to 47% in 2015, and accounted for 59% of total revenue excluding one-time professional services. We expect to see both recurring revenue and services growth in 2016. Looking at our results by region, we were pleased to see the Americas grow revenue 3% in the fourth quarter. Our top 50 customers grew in the quarter and declined 3% for the year, which was slightly better than 2014. We have kept the top 50 group of customer’s static over the last three years, so that we could measure their performance. This metric has become less relevant, as we now have 14 different customers that qualify to be in the top 50, which is normal. Going forward, we will report on more relevant metrics such as recurring revenue and other metrics that relate to the transformation of the company. In international, revenue was down 1%…

Thanks, Mike. Teradata is establishing a solid transformational foundation for the future, while also focused on delivering near-term results. Our team has embraced our strategic initiatives, including cost optimization, organization talent initiatives and our go-to-market enhancements. During my discussion today, except or otherwise noted, I'd be addressing margins and expenses on a non-GAAP basis, which excludes stock-based compensation and other special items including the goodwill impairment charges, taken in the second quarters and fourth quarters. Product gross margin in the fourth quarter was 57.5% compared to last year's Q4's product margin of 65.8%. The primarily drivers of the change were deal mix, including sizable floor sweeps, increasing capacity on demand, and a greater mix of larger customers, and currency. For the full year, product gross margin was 59.9% compared to the 65.2% in 2014. The lower margin in 2015 was primarily due to deal mix, including pricing programs that make it easier to buy Teradata and the currency impact. Services gross margin in the quarter was 47.9% down from the 48.9% in Q4 2014. Services gross margin for the full year was 46.4% compared to 47.6% in 2014. The decrease for the period was primarily due to investments to support demand creation in our big data consulting practice. Overall, gross margin was 52.2% in the fourth quarter versus 56.9% in fourth quarter of 2014. For the full year, gross margin was 52% compared to 55.5% in 2014. Turning to operating expense. SG&A expense of $194 million was $4 million lower than the fourth quarter of 2014. For the full year SG&A was $708 million, a 1% decrease from the 2014 level. Research and development expense in the quarter was $47 million, down $1 million from the fourth quarter of 2014. For the year, R&D increased to 11% to $199 million.…

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

Thanks for taking my questions, and congratulations since it looks like you're working really hard here. Just one quick question for Mike. Mike, can you talk a little bit about the feedback you're getting from your customers on the software only version, I mean the core strength of Teradata in the past whereas that you have to kind of anything tuned hardware and software was working really well, why would customers or what's the feedback of customers on getting software only, what's the peak advantage do you see on that one? Thank you. The early feedback Raimo, has been very positive, I mean we've been working with all of our customers very closely as you can imagine over the years and as some of them want to implement their own private clouds and so forth. They were very interested in exploring software only with Teradata, and we've made a lot of progress along those lines and we shared a lot with some customers. In fact, I'll let Oliver to make some comments on the customers he's been talking to.

Yeah, so with us - a several months we have been working with some key customers that have been alpha and beta testing some of our software only solutions on their private cloud, feedback has been very good. They're excited about the progress. They're excited to see the full repertoire of Teradata software coming through their private cloud. And we've also seen that that excitement is not only limited to the software only product, but is even pulling in other products that we have, just because it makes Teradata technology so much relevant for them in their ecosystem.

Perfect. Thank you.

Your next question comes from the line of Bhavan Suri from William Blair. Your line is open.

Hey, guys. David Griffin on for Bhavan Suri. Thanks for taking our questions. Just one on guidance, so on the top line it was a little bit higher than we would have expected given the weakness that you've seen over the past few quarters here. So I'm just wondering if you to talk a little bit about what you're hearing from the customer base, that gives you confidence that you're going to achieve the range that you've provided?

When we look at the guidance audit, we've broken down both through the - throughout the regions, but first of all, I want to be very clear that guidance on the non-GAAP basis excludes TMA and excludes the Marketing Applications business. But in the GAAP guidance we gave for 2016, we're expecting that transaction to close at the end of March, around the end of March and that's $40 million of revenue in it. So overall, the range is down on a GAAP basis, 7% to 8% year-over-year excluding that Marketing Applications business. Now, when you put it on a pro forma basis, and when I made on pro forma, you remove Marketing Applications from 2015 and 2016, your - the guidance reflects at flat to down 2% for the year in constant currency, on a reported basis down 2% to 4%. So at this point in time, we feel it's - our best estimate of the revenue that we see coming in 2016 through the regions.

Yeah, if I can add a little color to it, the one good thing or one a good thing we have gone in the 2016 is we're on a good trajectory with our consulting services. So I mentioned on the prepared remarks, our consulting services grew 2%, this is all in constant currency in the first half and accelerated 6% in the second half. And as we entered the year, close to 60% of our revenues will come from services, maintenance services and consulting services. We're on a pretty good trajectory and a trajectory that's higher than when we went into 2015 on the services piece of the business, not a huge increase, but we're on a trajectory that's higher than when we entered last year. So, that will help us.

Your next question…

Thank you.

Your next question comes from the line of Jesse Hulsing from Goldman Sachs. Your line is open.

Yeah. Thanks, guys. Can you provide a little bit more detail about the first half, in particular the sales force realignment? And I guess a little bit more detail about what you're expecting for Q1 revenue from a seasonality perspective? I mean, do you expect it to be down meaningfully year-over-year, in sub 5% something like that? And regarding your sales force realignment, how many quarters do you think it will take to get that group back up to full productivity?

– : We're just being upfront on that. It's - because we have some very significant cost take out targets, they stepped up for - they stepped up for the challenge. And what I see, we're being cautious that for the first half, they've seen it - you've seen it at other companies have gone through these processes, but it's really getting at optimizing our cost structure and going after those targets, but if I have to step back and look at Q1, it could be - it could be flat in constant currency, when you take out - when you - pro forma for TMA just the pro forma for marketing apps for the Teradata core, it could be flat in constant currency in Q1.

Okay. Got you. And you're referring to earnings, I'm assuming?

I'm referring to flat in revenue.

Oh, flat in revenue. Okay. [Multiple Speaker]

Go ahead.

No. Go ahead Jesse.

The follow-up about your big data business, can you give us a sense of how big that business is from an absolute dollars perspective. You've given us some growth rates, but what is the base entering 2016 for that business? And if you could give us a sense of how big it is excluding the 1000 series as well that will be really helpful?

It's $120 million as we exit the year. The total all-in big data business, excluding the 1000 series, it's around $90 million.

$90 million. Okay.

Yeah. So I mean, if you look at where we were two years, or three years ago and where we're at today, it's been growing in a rapid pace and we've got it to a meaningful amount of revenue. So this is another good thing that we have on a good trajectory as we enter this year.

Thank you.

Your next question comes from the line of Wamsi Mohan from Merrill Lynch. Your line is open.

Hi. Yes. Thank you. Good morning. Mike you mentioned a meaningful and sustainable revenue growth and it sound like it's not predicated on your historical dependence on the top 50 customers, but really a change in product breadth and go-to-market, so can you characterize for us how the mix of revenue is currently between sort of cloud analytical ecosystem and value-added services and how you see that mix evolve over the next few years? And Steve, can you just clarify the free cash flow guidance is just under $300 million for fiscal 2016, so somewhat flattish year-on-year although non-GAAP EPS is up significantly? Thank you.

Okay. Wamsi the - so the mix of revenues is going to shift over time because of the rapid growth we have in our current cloud business as well as our analytic ecosystem as well as aspects of our services business such as managed services and the opportunity we see with repeatable solutions and IP data going to build to go along with that. So, what you'll see is as a percent of revenue, the revenue mix, we believe we have a great opportunity for on-premises data warehouse growth and with the analytic ecosystem over the next several years. But you'll see that has become a smaller percent of our overall revenue mix. Then the other thing is the change we're driving into how we do business today, in the on-premises environment to make it easier for customers to consume and buy and use Teradata and some of it's from a technological perspective, we're going to make it incredibly easy for our customers to upgrade and expand data warehouses in very small increments, where that's an obstacle today and we're also going to make it often various options and how they can buy Teradata, such as, with the subscription models and volume purchase agreement, GLAs and everything else. So, these are the things that we are doing to transform the company, that I think will get us to a diversified revenue stream, that's a lot more predictable and drive increased the recurring revenue.

And Wamsi, on the free cash flow. We finished the year at $281 million and my color on that is that should equal net income and I should say, net income again on a GAAP basis, but before the any potential write-offs on the, any adjustments on the intangibles if any on the marketing upside. And I would, yeah up to $50 million, I would position that at this point in time being a conservative categorize it as a conservative color around that, that's yeah, I would like to, as we go through the year, make sure I'm not having any usual activity in networking capital to take advantage of that net income increased on a GAAP basis. So, conservatively, yeah, I'm still looking at over $300 plus on that free cash flow and again I'd characterize it as conservative. And one thing, just see I wanted to at Goldman want to come back to on that Q1. I should have said at a level of flat to down potentially in constant currency in Q1. So, I just want to stand corrected on that.

Thanks. If I could just…

Yeah. There is three points of currency that I'm looking at that in Q1.

Thank you.

Your next question comes from Katy Huberty from Morgan Stanley. Your line is open.

Yeah. What do you attribute the improvement in product revenue growth in the fourth quarter to and I think you've made the comment that recurring revenue in services would grow in 2016 implying that the product business could be down meaningfully. Why are we seeing the stronger fourth quarter flow through to 2016? Thank you.

Kathy, I think as always, we got to take a look at the business of our three quarters or four quarters as opposed to one discrete quarter. In the fourth quarter, we had the benefit of some force sweeps and then you also saw that show up in the product margin. So, the - I would not characterize the strength we saw or the trajectory we saw in the fourth quarter is necessarily going to carry into the next year or this year. But that said, we want to be thoughtful about the guidance we've just given; we've got a good trajectory going with our services with the recurring revenue and everything else. We've got a number of actions underway to help drive more product revenue which means in the on-premises data warehouses, but it's a little too early for us to say we see it meaningfully better in 2016 or worse.

Okay. Thank you.

Your next question comes from the line of Ed Maguire from CLSA. Your line is open.

Hi. Good morning. I wonder if you could just comment more broadly on the tone of business as it's affected by the macro. I know you've mentioned that Asia was - Asia looked a little bit soft, but I was curious if you're seeing anything a bit more broadly that's impacting is spending intend and behavior in the customer base.

And I think, as it relates to our business, we've been talking about this for so many years about the CapEx environment. I mean that's been the overwriting factor on our business. So, from a Teradata perspective, we're not seeing much change from the macro, that's impacting our business. There might be a little bit of in China, we had some timing on some opportunities there on the macro in China, and we had some opportunities move out of the fourth quarter. I don't know if I can attribute totally to the macro, but there's a little bit there. But - by and large, Ed, I wouldn't change - I wouldn't point to changes in the macro economy that's impacting the business any differently or much differently than what we've experienced over the past couple of years.

And just a quick follow-up, if I may. As you focus on the analytic ecosystem. I know you worked with - with different partners and have resold some third-part technology historically, but what do you see - changing in your - in the strategy, as you -- as you focus on the ecosystem? And are there any partnerships or changes to distribution that are key free to drive this into a - into a new growth phase?

What we've seen that is, we've had an opportunity, we've been investing, we've done acquisitions, we've done a lot in the analytic ecosystem and - and we're finding out things that work, things that drive value, things that are differentiated. And those - those assets and those software solutions that we've - brought to market, such as - our Unity Software, our QueryGrid, and Listener, things that can help customers to connect and manage the analytic ecosystem, but those software - that type of software is driven a lot of value. Consulting services as it relates to Hadoop and architecture, we've seen good success with Think Big. And then of course, with analytics, we've with Aster, we continue to enjoy great success with that.

Great. Thank you. [Multiple Speakers]

A little - a little commentary to this here. We are actually very excited about this whole analytical ecosystem, right. You see us - engineer and partner and really build new software products in this - in this whole ecosystem, whether it's Unity, whether it's Listener, right, bringing capabilities to the market, that make it very easy for our enterprise customers to integrate the new types of data at scale, right. A lot of our customers are challenged to go to become real time analytical competitors. And if the ecosystem, it's the kind of capabilities that we're building that allows us also to deploy that in the various forms of cloud and on-premises rather giving customers a choice where to do that. And so, the ecosystem is really a key focus for us and we're seeing some very good progress and customers are very excited about the products that we are launching.

Great. Thanks.

Your next question comes from the line of Joe Wittine from Longbow Research. Your line is open.

Hi. Good morning. I want to ask a follow-up on the fourth quarter. It's really three straight years that you've seen very solid fourth quarters for the EDW business in the Americas, I think that's interesting. How about the - driving that which is especially even more fourth quarter seasonality that you have previously seen, is there anything Teradata is doing from a sales perspective or is the timing, 100% customer driven, and should we be encouraged it all by that as you kind of see push outs throughout the year, but then customers end up coming back at the end? Thanks.

Joe, the only potential answer might be around as you look at it from the customers perspective, in that there's been such pressure in the U.S. on large CapEx transactions that I think customers put off as long as they can adding in big increments and it might be centered around as customers get to the end of the year, there might be budget to do something. But that speculation my part, there's nothing as it relates to what we're doing or Teradata is doing or the Salesforce saying else that's incenting or causing the fourth quarter's to through, relatively speaking do better than the other quarters for, that's a good question.

Hey. Thanks, Steve. Just a really quick follow-up, yes or no? Will you be reporting, Marketing Apps as a reportable segment in the first quarter or beyond? Thank you.

Yeah. Joe, we're going to be reporting in the - on, we'll show it on a non-GAAP, so it will be excluded and you'll see the impacts of it in Q1 on our non-GAAP schedules - or GAAP to non-GAAP schedules. So, yes it will be - it will be captured separate for these parts that we're selling, not that we're keeping.

Yeah. I met the part you're keeping, I'm sorry.

Oh no, the part that we're keeping will not.

Thanks.

It'll be combined in Teradata.

Your next question…

If you will go - we'll go back to the original segments, a very, very small deal, very small. We'll go back to the original segments of the Americas and international.

Your next question comes from the line of Phillip Winslow from Credit Suisse. Your line is open.

Thanks for taking my question. This is actually Michael Baristajon for Phil. Just wondering, if you guys give us a little bit of color on, how we should expect to see OpEx churn throughout the year? I believe you said $70 million in cost to take out offset with some increase in variable compensation. How should we see that sort of flow into the SG&A and R&D lines, kind of beginning of the year versus end of the year? Thanks.

Yeah. Our - As we look at that, it is transitioning through the year. So, you'll see more of that impact of that $70 million at the later end, later part of the year, on a run rate. But at $70 million is our target to get out to benefit the 2016 operating income by $70 million, again, the cost take out target that would transition into 2017 is that $80 million to $100 million. Now, you have also the incentive comp, as I mentioned in the merit so the net $30 million positive from the cost take out initiatives will come as we progress through the year. For example, we have had some of those initiatives put in place in here in Q1. So, again those will flow through the year. So, it's just really on the timing in latter part of the year for that, that benefit.

Great. Thanks.

Your next question comes from the line of Alex Kurtz from Sterne Agee. Your line is open.

Yeah. Thanks, guys. Steve just going back to some of these larger transactions that have been so important to your second half in particular your Q4 periods with all those transition going on with some of the product revenue changing and changes in the sales force, what are the assumptions on those large transactions, that you would expect to close in Q4 and what's the visibility to them, right now and sort of how they're reflected in the guidance you gave this morning.

Well, the guidance - the guidance we're giving is we're not anticipating in 2016, anything abnormal from a product suite perspective. So, we're keeping that consistent for, what we're as we're looking at that guidance, it reflects what we anticipate from a conservative perspective from cloud and subscription on there, Alex. And if we're seeing more accelerated aggressive actions with respect to cloud and subscription we'll update accordingly. So, really nothing - nothing really unusual, conservative on cloud and subscription. Really, no major changes from the transformation in 2016. If I can characterize 2016, 2016 is where we're focused on our cost optimization our cost structure to better realign our cost. So lay the foundation and to really fund the transformation, that's how I'd characterize 2016.

All right, thanks.

Your next question comes from the line of Keith Bachman from Bank of Montreal. Your line is open.

Hi, thank you very much for taking the question. I wanted to follow up from that last comment. I was just wondering what are the conditions for growth, what are the conditions that you need to be for growth for the product area. So if you exclude maintenance and services and particularly if you address, is there something around mix where you get the analytics business to a certain size and if you could address, are you winning new customers in the traditional data warehouse today and or are you seeing reduced investments by your customers, negative slower fleets if you will on the traditional data warehouse customers. So, if you could address some of those, much appreciated.

Keith, regarding new customer wins so, if you look back over the last two years or three years they've been very strong as we reported on them. And it's not just for data warehousing, it gets in to the analytic ecosystem or big data solutions nothing else, which all drive revenue And I think the common theme on the product revenue that's happened over the last couple years is the customer wins keep going up and they're at a very high rate, but most of the customers tend to buy in smaller increments and starting smaller increments and that's been the most recent trend that impacts product revenue. So, if you look at the average dollar size for new customer wins it's going down, the customers are starting in smaller increments. And then in the user base that all the customers continue to buy Teradata, but in smaller increments and less floor sweeps. So the absent of change which we're trying to drive change and how do we do business as it relates to our core data warehouse and our product revenue, absent a change it would take some of those dynamics to change. And we're not counting on the way customers are buying and what the customers prefer, we're not counting on that to change, we're changing in how we make it easier for customers to consume and buy Teradata and that is what we're counting on to transform ourselves to get the product revenue growing meaningfully.

The next question comes from the line of Brent Bracelin from Pacific Crest. Your line is open.

Thank you. I had a question on kind of gross margins and as we just think about the trend line over the last three years, we've trended lower there now, for three years, didn't see the seasonal lift we typically see in Q4, you explained that a way, but as we think about all the moving parts here factor in your comments around consulting being a higher portion of the mix and starting to grow again, how should we think about kind of the gross margin that's trended lower for three years, do we see that kind of bottoming here and starting to trend higher or are there - is it still unknown if we can start to see a lift in gross margins from a timing perspective in the next year?

Yeah, Brent, let me follow-up with Mike - what Mike said what on and lead into that gross margin product gross margin and services gross margin. As Mike said, we're making it easier through this transformation or through our strategic initiatives to have our customers, particularly our larger customers buy and consume Teradata. Through there you can have DPAs, you can have DLAs, again all these items make it easier for the customers to consume. We saw that impact positive and constructively through in Q4, but it did have an impact on our product gross margin in Q4. With that being said, let me lay - let me just kind of reset. We finished the year at 599. But there is about 200 basis points for FX and FAS 86 impact. So it's really 62% versus 65% for the year in 2015 over 2014. We expect 2016 - with these programs 2016 probably closer to approximate 2015, and going from there. So we're expecting these programs to be in place in 2016 and having overall product gross margin in that range of 2015. So that's giving me a little bit - little bit conservative on that we have another 200 basis points of maybe movement in that product side. On the services side, yeah 2015, we continued to invest particularly in our Think Big, big data and building out the bench strength and building out the team to take advantage of that, and that - those costs as you're building out become expensed through services. So we expect services gross margin to improve slightly - possibly improve slightly in 2016.

Helpful color. Thank you.

Okay. We have time for one more question.

Yeah. Last question comes from the line of Karl Keirstead from Deutsche Bank. Your line is open.

Thanks for squeezing me in. If you don't mind, can we go back to what you described as the pending sales force realignment and add a little bit more color in terms of what you have planned? Are we talking a change in sales territories, are you reducing the size of your direct sales footprint, are you changing your sales comp plans? You mentioned significant realignment, so I just would love a little more color on what you have in store? Thank you.

Well, basically all we're doing is optimizing sales coverage. So, we - the good news is we added a lot of territories over the last three years or four years and we grew the number of territories from somewhere 300 territories to some 600 territories, right. And we have the opportunity to look at now the time is passed and we have been optimizing in the last couple of years. But, we have the opportunity to go deeper and it's not like you're reducing sales coverage. You have the opportunity for customer coverage; you have the opportunity to combine territories and provide coverage to the same customer base and I can argue the more customers with less territories. So, just think of it that way, our sales specialists and our go-to-market and compensation no meaningful change there. We'll continue to evolve our go-to-market where we're in the early stages. But, that's basically the net net as we look at Q1. So…

Got it.

You do get into some changes of account assignments and things like that. And it can have an impact when you do it. So, there is a little bit there in the first quarter. So, thanks..

Got it. Thanks for the color.

So listen, in closing, we remain the undisputed leader for on-premise analytics and we're well on the path to becoming a leading large scale production analytic engine in the cloud, a leading analytic services company and a leader in repeatable analytical solutions across the entire analytic ecosystem. We look forward to sharing more with you in the future and I hope you all have a good day. Thank you very much.

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