Gregg Swearingen - VP, IR Mike Koehler - CEO Steve Scheppmann - CFO.

Wamsi Mohan - Bank of America Merrill Lynch Ed Maguire - CLSA Derrick Wood - Susquehanna Financial Group / SIG Bhavan Suri - William Blair & Company Katy Huberty - Morgan Stanley Raimo Lenschow - Barclays Capital Brent Bracelin - Pacific Crest Securities Brad Reback - Stifel Nicolaus Joe Wittine - Longbow Research.

Good morning. My name is Jessa and I will be your conference operator today. At this time I would like to welcome everyone to the Third Quarter 2015 Teradata Earnings Conference Call. [Operator Instructions]. Mr. Gregg Swearingen, you may begin your conference..

Good morning and thanks for joining us for our 2015 third quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by discussing Teradata's transformational initiatives. Steve Scheppmann, Teradata's CFO, will then discuss our financial performance as well as our updated guidance.

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 looking at certain non-GAAP financial information which excludes such items such as stock-based compensation expense, asset impairments, acquisition and reorganization costs 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 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. This morning I would like to focus my prepared remarks on the actions we're taking and the future of Teradata. Then Steve will go over our third quarter results and full-year guidance.

Although our overall third quarter revenue was not what we expected, there were some positives in the quarter with our services and big data businesses that we will continue to build upon for the future, as well as some SG&A cost efficiencies that we're beginning to realize.

Over the past year or so we've been digging more deeply into our internal operations and into the markets we play in. As we discussed on our last earnings call we have key initiatives underway to improve the performance of our Company, both shorter term and longer term.

While we have not completed the entire process we're already starting to take some significant actions. I would like to share some of our thoughts about those actions as well as what the future for Teradata will entail.

First, after a thorough analysis of Teradata's portfolio and opportunities, we have concluded it's in the best interest of the Company and our shareholders to focus Teradata on our core data and analytics business and to exit our marketing applications business. We believe our marketing applications business can thrive under the right ownership.

Our marketing applications has shown solid improvements in 2015 due to a lot of great work by our team. It has the potential for high levels of revenue growth and good profitability, as reflected in our digital marketing cloud's constant currency revenue growth of 22% in the third quarter and 13% recurring revenue growth year to date.

We have leading solutions, as evidenced by the industry analyst rankings, with our marketing resource management solution being the leader in its segment. Our marketing applications portfolio operates on a very attractive market and we're starting the process to find the right owner.

We have a tremendous opportunity with our core data and analytics business and we will now dedicate all of our energy, resources and investments to it. Our overall goal with Teradata going forward is to transform the business to better align ourselves with the evolving marketplace and customer needs.

Through this transformation, we plan to drive a meaningful revenue growth and improve profitability. We're pursuing four key initiatives to help fuel the transformation. Our first initiative is to expand our core data warehouse market opportunity where we're positioned as the leaders today and represents the majority of our revenue.

As noted on our last earnings call, we've been reengineering our core Teradata database for more than a year now to make it available as software only for both public and private clouds. This extends the market opportunity significantly for our core data warehouse business.

We will release our initial software-only version for global deployment on Amazon's cloud in the first quarter of 2016. This initial version can scale up to approximately 20 terabytes and do workloads such as departmental analytics, analytics sandboxes, smaller-sized integrated data warehouse, as well as test and development and disaster recovery.

As a reminder, we plan to have our full-scale public and private cloud software-only versions available in the first quarter of 2017.

Or software only offerings will provide customers the flexibility with where and how they deploy Teradata and how they pay such as through subscription and the ability to start or expand their existing Teradata environments in smaller increments.

Second, we will continue to rationalize our big data portfolio, focusing investments on solutions that can drive revenue growth and increase our relevance with customers in the dynamic analytic ecosystem, solutions such as Aster, where we recently announced we're making Aster analytics available on Hadoop in the second quarter of 2016 and will extend our market opportunity significantly.

Aster is a market leader for big data analytics and has more than 100 business-ready algorithms and industry applications available which makes it easier for companies to drive value from big data. And our unified data architecture which is strategic to Teradata and our customers.

Our UDA helps customers to connect, capture, manage and analyze all data across the analytic ecosystem, among other things. It also enables new data types and use cases to land in our integrated data warehouses.

Other examples include our Hadoop appliance which is providing customers ease of deployment along with software to help them manage and to connect these environments. And our recently released Teradata Listener for high-volume, high speed data ingestion along with dynamic data integration.

These are all solutions that provide customers a more tightly connect and easier to use analytical ecosystem and, enable them to drive more value from all types and sources of data. As big data and the Internet of Things continues to expand and grow in prominence, we will continue to find new ways to help customers drive value from all of their data.

Our analytics technology and, just as importantly, our services have been key differentiators for Teradata and will continue to be key differentiators going forward. Our third key initiative is focused on our value-added services which we're enhancing and also extending the market opportunity beyond our Teradata user base.

We're seeing a significant opportunity in demand for three of our service offerings -- big data consulting, advanced analytic services and managed services.

Analytic architectures have become increasingly difficult to design, implement and manage and it is becoming increasingly hard for customers to attract the right talent to do this, as well as to do analytics. We have the talent to do both.

We're building good momentum with our Think Big consulting unit and growing our platform-agnostic big data consulting services. Think Big helps companies to design, implement, manage and to drive value from Hadoop and big data. We will continue to increase investments in this business and expand our presence globally.

We're also expanding our advanced analytic services to address complex industry analytics opportunities as well as customer-specific opportunities that use Teradata as well as other technologies. The growing demand for skills to do complex analytics is creating an attractive market dynamic for something that is core at Teradata.

And, last, we're increasing our managed services offerings across both our Teradata environments and the broader analytic ecosystem. We will continue to build out skilled resources to manage and optimize our customers' end-to-end analytics environment for on-premises and cloud deployments.

We recently launched managed services for all major Hadoop distributions from our Think Big consulting team to address the Hadoop portion of the analytic ecosystem and more. These service offerings will enable Teradata to be a more effective partner to customers while expanding our market opportunity for services.

Our fourth key initiative is go to market. We're in the early stages of this initiative but our overall goal is to flex our demand creation, sales and consumption models and to renew our focus on the largest underpenetrated market opportunities. Approximately 3/4 of the largest 5000 companies in the world are not using Teradata today.

And within that we have a sizable opportunity to acquire more new customers in the B2B industries which are going through a digital transformation with the Internet of Things and sensor data being key drivers. As we transform our data and analytics business we're also transforming our cost structure in parallel.

Several cost rationalization work streams are in place with actions being taken across the Company. Those work streams and actions include realigning the corporate structure for one business, optimizing our go-to-market approach and prioritizing R&D investments based on alignment with our strategic initiatives.

We're also evaluating every process and system within the Company to find more efficient and less costly ways to do things. I'll now turn the call over to Steve to provide more detail around our Q3 results, full-year guidance and our cost initiatives.

Steve?.

Thanks, Mike. As a reminder currency movement continues to create a significant headwind on reported year-over-year revenue comparisons, 6 percentage points were total revenue and consequently negatively impacting EPS.

Since currency had such a big impact I will discuss revenue changes in constant currency and you can find the reported information in our earnings release. Teradata reported revenue of $606 million in the third quarter which was lower than what we were expecting. Revenue was down 3%.

Services revenue grew 6% as we had anticipated, but product revenue declined 14% in the quarter. We continue to experience the same headwinds we have been discussing for the past several quarters. Within services revenue consulting services revenue was up 5% and maintenance services revenue was up 7%.

Turning to our segment results for Q3, the data analytics division saw revenue of $557 million which was a decline of 4%. Within data and analytics revenue for the Americas was down 8% while international was up 4%.

International's results were led by overall growth and our Asia-Pacific Japan area, with China and Japan growing around 20%, as well as the UK up 25%. Big data revenue, excluding our 1000 series which are a part of larger deal sizes and therefore tend to create variability when comparing quarters, continued its strong growth in Q3.

And we continue to add new big data customers at a rapid rate. Our big data revenue was up 75% in Q3. Our big data consulting services revenue which includes Think Big, was up 30% on a pro forma basis in the quarter and is expected to be approximately the same rate for the year.

Turning to our marketing application segment, revenue of $49 million was flat which is an improvement over Q1 and Q2 which both were down period over period. Within that our digital marketing cloud had strong growth at 22%.

Recurring revenue and annual recurring revenue which are key metrics for this business, each grew and improved over Q1 and Q2 of this year.

During my discussion today, except where otherwise noted, I will be addressing margin expenses on a non-GAAP basis which excludes stock-based compensation and special items, including impairment, acquisition related, restructuring integration and other special items identified in our earnings release.

Product gross margin in the third quarter was 60.4% compared to 60.9% in Q3 2014. The lower than normal product gross margin was driven by lower product revenue. Services gross margin in the quarter was 46.7% compared to 48.3% in Q3 2014.

The year-over-year decline was primarily due to investments in the big data consulting capabilities and lower margins in the marketing applications consulting services. Year to date, services gross margin was 45.8% compared to 47.1% for the same period 2014. Overall gross margin was 52.1% in the third quarter compared to 53.8% in third quarter 2014.

Year to date overall gross margin was 52% versus 54.9% in 2014. Turning to operating expense, SG&A expense of $165 million was down $4 million from the third quarter of 2014 and down at $14 million sequentially, reflecting the expected early benefit of cost-reduction initiatives that are estimated to show up to a greater extent in 2016.

Research and development expense in the quarter was $44 million, up 10% from the third quarter 2014. Although we're continuing to invest for the future of Teradata we're also rationalizing and realigning the spending.

We now expect our R&D expense for the year to increase between 10% to 15% versus the 25% planned earlier in the year, even though investing in R&D road map continues to be a key strategic initiative for Teradata.

Total R&D spend for the third quarter which includes R&D expense plus the additions to capitalized software development cost from the cash flow statement, less the capitalization of internally developed software, was $63 million as compared to $58 million in Q3 2014. Total expenses in the third quarter were $209 million, the same as Q3 2014.

As a result of all these items, operating margin for the quarter was 17.7%, in line with our expectations but lower than the 22.5% operating margin in Q3 2014. Our non-GAAP effective tax rate for the third quarter was 25.7% in line with the 26% non-GAAP tax rate in Q3 2014.

On a year to date basis our non-GAAP effective tax rate was 26.9% versus 28.1% for the same period in 2014. The reduction of the effective rate year over year is a result of a more favorable earnings mix period over period. We're currently forecasting our full-year non-GAAP effective tax rate to be approximately 27% which assumes that the U.S.

R&D tax credit will be reinstated retroactively for 2015, before December 31, 2015. If the credit is not reinstated by December 31, 2015, it would increase our non-GAAP effective tax rate by approximately 200 basis point in the fourth quarter and 75 basis points for the full-year 2015.

In terms of earnings per share, our Q3 GAAP EPS was $0.55 compared to $0.60 in Q3 2014. Adjusting for stock-based compensation and other special items which offset each other in the third quarter as a gain from an equity investment offset the special items, our non-GAAP EPS was $0.55 compared to $0.71 in Q3 2014.

Turning to cash flow, net cash provided by operating activities was $68 million in Q3 2015 versus $102 million in the third quarter of 2014. The decrease in cash from operations for Q3 2015 over 2014 was primarily a result of the reduction in net income.

Year to date, cash from operating activities was $370 million versus $583 million generated during the same period in 2014.

In the third quarter, we had $35 million of capital expenditure's included capitalized software versus $36 million in the third quarter of 2014, resulting in free cash flow of $33 million versus the $66 million generated in Q3 2014. Free cash flow for the first nine months was $276 million versus $489 million generated during the same period in 2014.

We still expect our 2015 full-year free cash flow to be up to $50 million higher than GAAP net income, excluding the impact from impairment and gains on equity investments. Moving on to the balance sheet, we had $874 million of cash as of September 30, 2015. This is down from $921 million at the end of the second quarter of 2015.

Of the $874 million of cash, approximately 5% was held in the U.S. as we continued to utilize our domestic free cash flow for share repurchases. During the third quarter we bought approximately 8.5 million shares of our stock for approximately $250 million.

As of September 30, we had approximately $667 million of share repurchase authorization remaining under our general share repurchase program. At the end of the third quarter we had $710 million of debt on the balance sheet as we borrowed $110 million on our $400 million revolving credit facility to fund share repurchases.

With respect to accounts receivable, as of September 30, 2015, accounts receivable decreased $36 million compared to the same date in 2014 due to lower volume, but we're only down $3 million in constant currency. Days sales outstanding was 69 days at September 30, 2015 compared to 70 days as of September 30, 2014.

Total deferred revenue was $401 million as of September 30, 2015, up 5% in constant currency from September 30, 2014. Turning to guidance, we're lowering our expectations for the full-year 2015 revenue to be flat to down 2% on a constant currency basis or down 6% to 8% as reported.

Correspondingly, full-year non-GAAP EPS is now expected to be in the range of $2 to $2.20. On a GAAP basis we expect to report a loss in $0.51 to $0.71 range. I do want to point out that our revised full-year guidance does not reflect our intent to exit the marketing applications business.

We will provide the financial details of the marketing applications business as well as the go-forward Teradata financials when we announce our Q4 results.

We're finalizing exactly what portion of the marketing applications business will remain with Teradata since there is some application business, approximately 20% of the marketing applications revenue, that is related to Teradata's data and analytics business which we expect to retain.

In order to give you some context of the future changes in Teradata's financials, excluding marketing applications there is approximately $160 million of annualized revenue associated with the exited business which has a gross margin of approximately 40%.

There is approximately $100 million-plus of associated operating expenses associated with the business.

As Mike highlighted, in addition to our intent to market exit the market applications business, we have commenced developing meaningful cost rationalization and realignment action plans to not only improve our financial performance but also to better align with the evolving market.

All of these actions that will be developed and implemented as a part of this transformational process are currently estimated to have a target benefit to 2016 operating income of approximately $120 million.

Although our plans are still being developed, within this estimating operating income benefit target, total operating expense reduction for 2016 versus 2015 total operating expenses, inclusive of TMA, is currently estimated to be in the range of $180 million to $200 million.

The annualized estimate of cost savings associated with the transformational initiatives that we're developing that excludes marketing applications, is expected to be in the range of $80 million to $100 million. To be clear, these are our best estimates of the benefits from these transformational action items.

In 2016 we will still have some year-over-year cost increases such as variable compensation and salary increases. We're not providing absolute guidance on the amount of operating income for 2016 as specific plans are still being developed.

Regarding 2016 and beyond, we're working on a financial road map which include estimates associated with revenue generation via different consumption models which we see currently as largely incremental in the shorter term. This is currently a work in process.

We will provide more information and context regarding this road map when we provide our Q4 full-year 2015 results. Teradata will provide its expectations for 2016 revenue and EPS in its fourth quarter earnings call. Until that time, previous commentary by the Company regarding 2016 should not be relied upon.

I will turn the call back to Mike for some closing comments..

Thanks, Steve. To recap what we have covered today, our overall goal with Teradata going forward is to transform our core business to fully align with the evolving marketplace and to drive meaningful revenue growth and profitability.

In order to achieve this we're launching four key transformational initiatives, namely, first, to expand our core data warehouse market opportunity, such as with our software-only solutions for public and private clouds; second, focus on big data solutions that can contribute revenue growth and increase our relevance in the analytic ecosystem; third, enhance our value added services and extend the market opportunity; fourth, evolve our go-to-market approach.

In addition, we're also undertaking a major cost transformation to provide a cost structure going forward that enables the investments needed to be leaders in data and analytics.

Our customer franchise consists of some of the largest and most successful companies in the world which positions us to address their growing data needs and to capture more of the broader market opportunity. We have the best technology, domain knowledge and expertise and people in the analytics industry.

These and our customers are our most important assets going forward. And with that, operator, we're ready for Q&A..

[Operator Instructions]. Your first question comes from the line of Wamsi Mohan from Bank of America Merrill Lynch. Please go ahead..

Steve or Mike, can you talk about the cost actions, how we should think about the linearity of how they flow through the model? And your 4Q implied revenues are in line but margins are significantly lower.

Can you help us think through the moving pieces and if there are any specific mix-related issues that might be hitting the fourth quarter? Thanks..

Wamsi, let me start off with Q4 first. What we're seeing is, yes, we're being cautious on that revenue number in Q4 but the margin side is really driven from the product gross margin. We still expect about 200 basis points of FX headwind on that product gross margin. Last year it was 65% in Q4 last year. I'm looking at about 62%.

And the other 100 basis points on that, around 62 of the other 100 basis point is really the product mix side of it. So that's the big driver. On the OpEx expenses I still the OpEx going up seasonally, quarter over quarter sequentially, increasing Q4, but less than Q4 increased last year. So, that's where I see the makeup on Q4.

With respect to the cost saves that you referenced on it, yes, the operating income benefit that we're looking at for 2016 that we're targeting, that $120 million, that's the benefit, that's the target for 2016.

Now, that's inclusive of the benefit that we will be getting from the marketing apps business coming out in 2016, also, on top of the 2016 operating expense saves on the remaining analytics part of the business and corporate.

Now, when I referenced the $80 million to $100 million of cost saves for corporate in the remaining analytics business, that's an annualized target and there's a lesser amount that will be impact in 2016.

We're seeing some of those materializing a little bit in 2015 but the biggest bulk is coming in 2016 and that will be a part of that $80 million to $100 million. Does that help you there? It is basically a step process on those cost takeouts sequentially throughout the year..

Your next question comes from Ed Maguire from CLSA. Please go ahead..

I was wondering if you could discuss the considerations behind why you've decided to divest the marketing applications.

I know there's a portion that's inherent to the data and analytics platform, but what are the considerations going forward in terms of what you're going to divest? And how do you see that really changing the overall operations? I want to get a sense of some of the puts and takes behind the decision. Thanks..

As far as the decision goes, basically, for a long period of time now we've been taking a very deep look at the market opportunities, the dynamics, what our solutions are, what we have to offer.

And basically we came to the conclusion, when you prioritize all of that, we thought it was in the best interest of the Company and the shareholders that we go all in on the Teradata data and analytics. That said, we have a very attractive marketing applications business. We got off to a slow start initially. We've turned it around.

We've made great progress this year and the dynamics in that industry are excellent. As far as the piece that's remaining in Teradata, there is some Teradata specific marketing application that run on Teradata and they are core to Teradata and Teradata's customers.

We will look to continue to enhance that and also to leverage and integrate with the other solutions in our marketing applications portfolio going forward..

Your next question comes from Derrick Wood from Susquehanna. Please go ahead..

I had a question around the AWS announcements. You guys have historically been pretty adamant that Amazon was not an area that customers would ever put mission-critical data into. Obviously things evolved.

Has the attitude changed as you talk to your CIOs? Or is this really designed to go after a different market segment or maybe test dev and not mission-critical? Maybe a little color there would be helpful. Thanks..

Derrick, we see it is a great platform to expand our market opportunity and reach globally with our software-only versions. And, yes, maybe it may not have the SLAs and availability of what we have with our integrated core data warehouse offering.

It's integrated with, designed with hardware and industry-standard hardware and software and everything else like that. But, overall, if you look at this over a long period of time, we would expect the availability and infrastructure to continue to improve.

And we have customers out there today and prospective customers out there today, where something that is good enough fits their needs in terms of SLAs, availability and everything else like that. And then we have other workloads with customers where it needs to be perfect. They cannot operate without a hiccup.

And they're looking for the almost 100% pure availability that we deliver with our integrated data warehouses. I think if you look at this thing going forward its broadening our market opportunity. It's providing more flexibility and options for customers that don't have the same requirement in SLA of what we provide today.

They can put stuff up there in a small increments, they can do it easily.

It can function as a hybrid with our on-premise high-availability offerings with what they're putting up in the Amazon cloud, for things like test and development and DR, analytics sandboxes, departmental analytics, all those types of things we don't need quite the robustness of what we offer today on premise.

So, we see it as a great fit and ability to expand the market opportunities..

Your next question comes from Bhavan Suri from William Blair. Please go ahead..

Just as you think about this whole transformational shift to software or a large part of the business to software, you just introduced Teradata Listener.

Are you thinking of creating a stack here potentially where you may have an ingestion piece and maybe even a reporting virtualization piece that, again, gives you an application stack around analytics -- again, not necessarily marketing but focused on analytics? Are you still just focused very much on the core database and the [indiscernible] data storage database part of the business?.

Bhavan, I would think of it this way -- the software only and what we want to do with public clouds and even to a degree with private clouds, smaller opportunity that the public clouds, that's basically just to extend the core premier Teradata database offering into the market.

It's expanding our market opportunity for our core data warehouse database. When you think about Listener and are we looking to build a stack, I would put that in a different bucket -- what we're trying to do with our unified data architecture to help customers manage their analytic ecosystem and make it easier to do better, get more value out of it.

And you could call it that we're trying to build out a stack in the analytic ecosystem to help our customers do that which is to manage, support, make it easier to do and integrate the analytic ecosystem, but at the same time, technology is evolving so rapidly in the analytic ecosystem I wouldn't say that our objective is to own the stack but to help support and integrate everything that's out there..

And then just one quick follow up, if I may. Any color on how you are retooling the sales force to start switching from on-premise to cloud to faster sales to maybe even selling to mid-market customers, test that.

How are you guys thinking about setting that up, working through the potential changes that's going to bring to the traditional sales force model where you had the sales guy, the pre-sales consultant and then the industry expert?.

We're in the early stages of really working through our go-to-market strategy. But we're not starting from Ground Zero. We've had our Teradata cloud for a number of years now. We've had a mid-market sales force in the U.S. and some other countries for a while. We're not starting from scratch.

That said, we've got to accelerate, whether you want to call it a transformation or getting after the market opportunity for software-only with the public clouds and we've got to get after a lot of things and we've got to do it very cost effectively. We're in the early stages of that.

We'll have more specifics for you as we get to the Q4 earnings call. A couple other things that we did mention, Bhavan, is we're really underpenetrated in many verticals around the world. And there's things we can do to get after that as we look at shorter-term opportunities.

We've got to have a bigger impact shorter term as we strategically shift to the longer term..

Your next question comes from Katy Huberty from Morgan Stanley. Please go ahead..

Mike, last quarter you talked about the business potentially stabilizing next year and maybe even growing. A lot of the new initiatives you're announcing are deflationary in that the total revenue opportunity is less than selling at EDW.

Do still feel like you have the opportunity to potentially stabilize or grow the top line next year or in the next few years? Or will this transition take a bit longer? Thank you..

Katy originally -- not originally, but as recently as the last earnings call, I really felt like we were on a trajectory to grow mid-single digits next year. And that was basically driven by what we were seeing entering into this second half. Unfortunately it did not materialize.

That said, we do get a little bit of a headwind as what is an on-premise license model becomes subscription model as it goes to the cloud and so forth. We do see a lot of that shorter term being more incremental then cannibalization, if you will. That all said, we do have opportunity as we go into 2016.

But to be clear, we will provide that information and details during the fourth quarter earnings call..

Your next question comes from Raimo Lenschow from Barclays. Please go ahead..

First of all, can you talk a little bit about the performance on the big product bucket, so 6000 versus 2000 versus 1000 please?.

Raimo, the 2000 in Q3 was about 20% of our product revenue. Historically we've said we would be in the 10% to 15% range on that 2000. In Q3 it was up to 20%. For the year, based on what we're seeing in the funnel in Q4, we expect that to come closer to that 14% to 16% for the year on that contribution.

The 1000 in Q3 -- that's a very bumpy, larger customers -- was down, was a lower number, smaller number in Q3. That's where were seeing 2015 play out with respect to 2000 and the 6000..

And just to follow up on that one, the client conversation we have is a lot of them are quite comfortable on 2000 which is why you see slightly better numbers. And everyone with constrained CapEx is hesitant on the 6000 a little bit. More a question for Mike, maybe.

If you think out longer term about Teradata, is there an argument that 6000 is still 6000 but that it actually looks in 5, 10 years is much more on the 2000 series, AWS type series? I guess that seems to be the way forward?.

Raimo, I would say if you look at the customer dynamics today what we're seeing is what you're saying which is not a desire to buy in large chunks, spend large CapEx, et cetera. You can see it in our new customer wins where the majority for the past several quarters had been shifting and getting higher to the 2000.

It doesn't necessarily mean these are small customers but the customers want to start in small pieces. I think this is the changing dynamics in the marketplace -- actually, they've been there for a while -- and we're transforming and moving with it.

The cloud, whether it's the Teradata cloud or the public cloud, provides a great opportunity to add in small increments, to actually add in temporary increments, capacity to do sandbox, capacity to do whatever. And this is the dynamic going forward.

When you look at the overall mix of cloud -- whether you want to call it cloud, software-only, Teradata cloud, 2000, 1000 and the 1000 is a great opportunity to grow quite a bit in this new analytic ecosystem. That all said, over time, yes, the 6000 should be a smaller part of our revenue.

Not that it's going to shrink or decline, not that anyone has discontinued 6000 or left Teradata or anything else like that and not that the 6000 can't grow, but as a percent of our total revenue, yes, the 6000 should be lower.

If I can add, if you look at this whole thing, we're going to get to a financial road map for everyone, but if you look at the margin on this, software only brings with it high-margin, obviously and 6000 high margin. And then we've got the 1000, the analytic ecosystem, lower margins. That's growing rapidly and then we have the 2000.

The good news is we've got two prongs that will be growing at a higher margin, obviously software-only and 6000..

And, Raimo I should add that 2000 gross margin, on that 2000, is not that materially off than the 6000. Now, you know the average selling price is different, but from a margin profile perspective, not materially different than that 6000..

May I squeeze in one more? At the beginning of the year we talked about floor sweeps and CapEx is obviously if I look across the board on results.

Is there any comments around floor sweeps at the moment?.

Obviously we've had customers that have sweated the asset long enough we have to do is floor sweeps, Raimo. We haven't benefited as much as we have in the past because simultaneously we need to grow these environments so than when we do the floor sweeps we're putting in more capacity than obviously what they had before.

The CapEx pressures are really causing the customers to button down the hatch. Listen, we've been saying this for too many quarters and everything else like that. Really, the important thing is what we going to do about it.

What we've got to do about it is we're working in an environment and it'll probably continue this way for the foreseeable future, of customers buying in smaller increments and we've got to evolve there. And you can see it in our results.

Even though we had the product declines that you saw in the third quarter, the number of transactions, deals we had in the quarter for data warehouse products was up 23%, that's the new world. We've just got to keep growing and making it easier for customers to buy more of these smaller increments. And we've got the opportunity to do it.

We're under-penetrated in so many verticals. When you look at the Fortune 5000, we have a huge opportunity but we've got to learn to run hard in a new world of smaller deal sizes and smaller increments..

Your next question comes from Brent Bracelin from Pacific Crest Securities. Please go ahead..

A follow-up for Mike and then a question for Steve. Mike, first, you mentioned that trends in the last three months didn't materialize relative to your prior views of seeing this path to stabilization next year and a potential return to growth. I want to drill down on that comment.

What sector changed the most relative to your thinking over the last three months? Was it a competitive change? Was it just the large deals not materializing? Help me understand your thinking on what changed now versus three months ago..

Tactically let me describe it this way. When we look at the second half of the year, 60% of our revenue is services and we have a good handle on services. It's maintenance and professional services, we have managed services. We're looking at 6% growth in the second half and we had 6% constant currency, to be clear, constant currency growth in Q3.

And we were seeing high single-digit revenue growth in international entering into the second half. The one variable that we always have that we've experienced is the large CapEx, the product revenue, in the Americas.

And we took out a significant hedge, we risk adjusted, we did all that Tactically, what happened is we actually had international, as strong as it was in APJ and Western Europe, it came in lower than we were expecting in the third quarter. That really doesn't have -- that can happen any quarter. But it came in lower.

And then the Americas, we just had an unbelievable amount of deferrals. Now, look, this sounds like a broken record and it's been going on for several quarters.

What we've been working on and looking at more strategically is, what are we going to do about this longer term? When you lower the guidance and you slip and miss and you lower the guidance and you slip and miss, it brings to light what are we going to do? So we've done the due diligence, we've done the work.

We know the business, we know the industry, we know what we're capable of. And you reach a point where you've got to get on with it for the longer term. So, we're going to get on with it for the longer term. We've got to evolve some of our solutions. We've got to evolve some of how we go to market. A lot of this is all in flight.

The big thing we've got to do is we've got to get our cost structure right because if you look at the initiatives we went through here and what we're working on, a lot of these really don't have meaningful impact on revenue until 2017.

We'll get some benefit in 2016 but we've got to get after -- which we're doing --our structure and everything else we can do operationally to show up with a meaningful 2016 and that is what we're doing..

Steve, just for you, a real quick one, how much of the $120 million benefit to that operating income in 2016 that you mentioned will fall to the bottom line?.

Brent, our target is for that to all be a benefit to 2016 operating income, of that $120 million target, because that's composed of, as I said before, the 2016 impact of the cost saves and the impact of TMA coming out -- Teradata marketing apps coming out. So, that is our target for the 2016 benefit.

Now you know we'll have, as I mentioned in the prepared remarks, some normal offsetting cost increases in 2016 that I highlighted, variable compensation and merit increases. But from our actions, that $120 million is our target for benefiting 2016 operating income..

Brent, the only thing I want to add is the third quarter wasn't like a knee-jerk reaction. This is the environment we have been working with and thinking about for a real long time. basically, we're working with a cost structure for a growth company which we had high growth 2010, 2012 and et cetera.

We started coming back in baby steps in constant currency growth in 2013 and 2014. So, this is something that is a long-term thought out thing..

Your next question comes from Philip Winslow from Credit Suisse..

This is [indiscernible] for Phil Winslow. I was just hoping you could give a split of the marketing revenue this last quarter between license and maintenance and maybe what that was over the last year. Thanks..

It's also subscription model predominantly. You had some professional services in there but it's all recurring revenue and professional services. Really, no perpetual licenses in that number for most of 2015..

Your next question comes from Brad Reback from Stifel. Please go ahead..

Steve, just real quick back on the cost cuts, I'm a little confused which is kind it easy to make happen as you exit 2016 or January 1, 2017, should we expect the $180 million to $200 million as the run rate savings at that point going forward, with TMA gone and the internal cost cuts?.

No. That $180 million to $200 million is our target for reduction of our total OpEx expenses in 2016 because TMA, Teradata marketing apps, has a $100 million-plus of operating expenses and our anticipated targeted savings on TDA and corporate side or the one business.

We should have, depending upon the stepping of those cost saves in 2016, we should have reduction of the 2016 run rate going into 2017. So, all of that $80 million to $100 million that I refer to as being the remaining reduction target, there will be some benefit flowing into 2017..

Okay.

And just as it relates to core Teradata, should we thing about 800 employees, roughly, being cut?.

We're going through that assessment right now, Brad, seeing how much of the business we want to keep in TDA. I will have more color on that in February..

And, finally, will the restructuring and the costs of the restructuring impact your ability to buy back stock?.

No. We will still be opportunistic, as we have in the past, on it. And it should not materially impact us..

Your next question comes from the line of Joe Wittine from Longbow Research. Please go ahead..

What can you tell us as it relates to the software-only? What can you tell us on the bottom-line profitability there relative to the 6000 appliances? I'm sure you've done the math with the management consultant, so what kind of guidepost can you give us? Thanks..

Joe, this is something that, as we work through it, we have it as it relates to our own Teradata cloud and everything else like that. But this will be part of our financial road map that we continue to work on. We can talk more about when we get to the fourth quarter earnings call..

Joe, I agree with that. We'll give more color on that in February when we talk about the 2016 guidance..

Okay, understood. Maybe instead, then, you talked about the three quarters of, I think, the global 5000 where you don't have exposure. Maybe you could just give us some flavor on what your first target is, however you want to talk about it by geography, by market vertical. Where is, for lack of a better word, low hanging fruit? Appreciate it..

The global 5000 target, it's really more focused on the B2B. It's just a really a broadening of our market opportunity. We've been saying more vocally or my publicly the global 3000. I would say the 5000 has broadened to more B2B opportunities in manufacturing, oil and gas and the Internet of Things.

I really don't have anything specific with respect to those targets as we look. And we will continue to give more information as we evolve into those areas..

Joe, it's Mike. If I can add some specifics here. When we look at B2B and in particular some of the verticals, the sub segments within manufacturing, the machine data or sensor data is becoming a big opportunity for us.

And we're doing a lot of work with manufacturers today and some for several years, around the analytics around those machine data to do early failure detections, warning repairs, make things safer and all this other stuff. And it's really beginning to explode.

A lot of the manufacturers, specifically with machine data or other segments like the oil and gas industry, are working with all this sensor data and it presents a huge opportunity for us.

With that, before we end the call I just want to let everyone know we're extremely focused, first and foremost, on all of our customers, including obviously those in our Teradata data and analytics business. And we're riveted on our customers in the marketing applications business.

And I want to enforce what a great job all of our employees in the marketing applications business has done, turning around and progressing that business to where we're today, where we have a meaningful part of that business growing 22% in the second quarter. So, I would like to thank all of our people for that.

We look forward to providing an update on all of our initiatives at the next earnings call. Please bear with us, we're working through a lot of things, we've been working on a lot of things for quite a while.

And we will hopefully be able to be in a position to disclose more specifics around what we're doing and further clarify the date we've given about all the potential benefits we see in 2016 around operating income, expense, costs and also our initiatives to expand our market opportunities. Thanks and have a good day..

This concludes today's conference call..