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% for the full year.

Fourth quarter revenue declined 8% with declines in Western Europe, Australia and China, which was mostly due to lumpiness. All three were roughly flat for the full year. Turning to our big data results, revenue increased more than 50% in 2015, and maintenance revenue more than doubled. Excluding the 1000 series, revenue grew more than 60%.

Big data new customer wins increased sequentially each quarter, resulting in a significant increase in new customer wins compared to 2014. We continue to see increasing demand for our big data consulting, as company struggled to manage the analytic ecosystem and extract value from their data.

For the full year, our big data consulting services revenue, which includes the Q3 2014 acquisition of Think Big was up 80%. Turning to our Teradata Managed cloud, revenue is still small but growing rapidly and it is very strategic to us. We more than doubled the number of customers in 2015 and revenue was closed to double.

Our cloud offers customers flexibility and how they buy and how they deploy Teradata. Today, most of our cloud customers are running workload such as discovery, custom development, faster recovery and production. Our trial delivers the same performance and functionality as our on-premises data warehouses, which is extremely important to our customers.

We have had new customer start off small with our Teradata cloud than based on Teradata's outstanding performance purchase Teradata to use on-premises and replace competitors in the process.

Regarding the sale of our Marketing Applications business, we have strong interest from a number of buyers and are now in the due diligence process and expect to complete the sale in the next few months. In the fourth quarter, our Marketing Applications revenue of $50 million, was up 4% over prior year.

Our digital marketing cloud had good recurring revenue growth of 13%. Now, I'd like to provide an update on our transformation and the future of our company, which I'm personally excited about. Last quarter, I described four key transformational initiatives.

Expand our data warehouse market opportunity 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 and transform our cost structure. Over the last quarter, we've made a lot of progress and have further refined our plans and evolved our initiatives, which I'm going to share with you now. We've developed comprehensive transformation blueprint to place the company on a trajectory of meaningful revenue growth.

This blueprint addresses the challenges of the analytic ecosystem, cloud software only and open source. It also addresses customers' changing behaviors, how they buy, how they consume, and how they deploy analytics. Teradata is universally known as the leader in the high-performance data analytics and consulting services.

Many of our customers are leaders in their industries, and we're recognized as their partner of choice for driving business value from the data. Our business transformation is building on this position of strength and will advance our leadership and extend our market opportunity.

The broad-reaching transformation will now drive change in 40 revenue generating areas and will create a more diversified, stable and predictable revenue stream. These four areas are on-premises data warehouse, cloud, analytic ecosystem and value-added services and solutions.

We expect the mix of revenues to increase significantly for cloud analytic ecosystem and value-added services over time, as these are fast growing markets. This also help increase our mix of recurring revenue. First, we continue to see the on-premises data warehouse market, as a solid opportunity for revenue growth.

By growing wallet share with existing customers and by penetrating more than 75% of the Global 5000, they don't use Teradata. We will make it easier for customers to buy Teradata by offering multiple consumption and pricing options to make it easier to budget and purchase in a more predictable manner.

We will also provide the ability to seamlessly expand our data warehouses and to buy from smaller increments. In addition, our software-only version of Teradata will open doors with both new customers and existing customers. Second, cloud will extend our market opportunity and become a significant contributor to recurring revenue.

As I discussed earlier, we are having great success with our Teradata managed cloud, which delivers the same performance and functionality as we do on-premises.

Teradata software only pubic cloud environments will provide flexible pay-as-you-go options that will allow customers to quickly and easily standup with Teradata environment for a wide range of uses, including discovery, experimentation, test and development, backup and archive and production workflows.

We continue to shift engineering resources to our cloud team and add outside talent with cloud experience. We plan to make Teradata available on multiple public clouds, which gives our customers choice and will also be a key differentiator for us.

We're on track to deliver our initial software only version of Teradata on AWS later this quarter and our fully scalable MPP version in early 2017. We're building new services for cloud migration, as well as for design and implementation. Third, the analytic ecosystem will continue to be a major driver of revenue growth.

Our big data portfolio which plays in the analytic ecosystem had revenue growth of approximately 60% last year. We expect to see strong demand to continue for our solutions and services.

We want to be the best to providing software, services and solutions that help customers to connect, manage and extract value from the various platforms and data across the analytic ecosystem. We will continue to add to our software offerings that focus on this, such as with Unity, QueryGrid and Listener that help connect and manage the ecosystem.

And with Aster that helps to extract value from the data. Fourth, our value-added services and solutions represent a critical strategic vector driving revenues by themselves, but more importantly serve as a key enabler and differentiator for all of our revenue generating initiatives.

In this area, we have a strong foundation for building repeatable solutions with our logical data models, business improvement opportunities and use cases. We had good success with this today such as with use cases that will penetrate the manufacturing industry with predictive parts failures, preventive maintenance and more of niche solutions.

These types of use cases save customers tens of millions of dollars annually and we're investing to create more of that. Many of these repeatable solutions will contain IP such as with our Teradata analytics for SAP solution, some will be in turnkey applications such as with our customer interaction management application.

The point is we need to invest systematically capturing use cases and IP from engagements around the world and invest in packaging them for ease of delivery and implementation. Turning to go-to-market, which is a central and critical element of our transformation.

This is about from one initiative into four, which are aligned and integrated with our four revenue generating initiatives. We have the most work to do with our public cloud go-to-market and are in the early stages of developing our plan. We will continue to provide more details at a later date.

We have already begun taking steps to optimize our go-to-market for on-premises data warehouse and analytic ecosystem, and we are exploring new ways to generate demand. Finally, we are making good progress with our cost transformation. This is critical to enable us to increase investments in our four key revenue generating areas, and into R&D.

I'm excited by the steps we've already taken. The entire leadership team is committed to the success of our business transformation. Given the magnitude of transformational change across the company, we've created a transformation team, which is led by John Dinning, one of my direct reports.

Additionally, we are committed to add more outside talent to our team to address these key initiatives. As we execute our transformation, new metrics will be added to help you track our success. We will be providing more details regarding Teradata's transformation and longer term financial outlook at our Analyst Day later this summer.

I'll now turn the call over to Steve, who will provide more detail on our Q4 and full year results, and our 2016 guidance.

Steve?.

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. The increase was related to our growth initiatives, although the increase was not as much as we've planned when we began the year.

As a result of all these items, operating margins for the quarter was 18.6% versus the 24.6% in Q4 2014. For the full year, operating margin was 16% versus 22.7% in 2014. Teradata's non-GAAP tax rate was 28.8%, as compared to 25.1% in 2014.

The year-over-year increase was largely driven by fourth quarter catch-up due to the proportion of actual foreign pre-tax earnings in 2015 being lower than what we've previously forecasted. For the full year 2015, non-GAAP tax rate was 27.5%, as compared to the 27.2% for 2014.

Looking forward for 2016, we expect the GAAP effective tax rate to be approximately 26%, excluding the taxes impact from the pending sale of our Marketing Applications business. The non-GAAP effective tax rate is expected to be approximately 27.5%, and will not be impacted by the Marketing Applications disposition.

However, both tax rates are heavily depended upon our actual earnings mix. Turning to our cash flow, net cash provided by operating activities was $31 million in Q4 2015 compared to $97 million in the fourth quarter of 2014.

In addition to the impact of lower net income, the lower cash flow performance was primarily due to normally high level of collections of accounts receivable in the fourth quarter of 2014, which improved the 2014 full year cash flow by approximately $100 million. But, then correspondingly reduce the full year 2015 cash flow by the same amount.

Free cash flow for the full year of 2015 was $281 million versus the $551 million in 2014, again the year-over-year change was negatively impacted by lower net income and the early collection of approximately $100 million receivables in Q4 2014.

Going forward due to the expected differences between free cash flow and net income, such as stock based compensation and other acquired intangible and amortization, we expect full year free cash flow to be up approximately $50 million higher or be up to $50 million higher than GAAP net income.

Our balance sheet, we had $839 million of cash as of December 31, 2015. More than 95% is held offshore. In Q4, we repurchased approximately 3.5 million shares of stock for approximately $99 million. In 2015, we've repurchased approximately 90 million shares for $647 million.

To fund a portion of these share repurchases, we drew down $180 million in our $400 million credit facility as of December 31. As of December 31, 2015 we had approximately $573 million of share repurchases - repurchase authorization remaining.

Additionally, we've used $50 million to repurchase approximately 2.2 million shares in 2016 as of February 3, 2016, we've approximately $523 million of share repurchase authorization remaining.

As previously mentioned a majority of the Marketing Applications business will be sold as a result we've made balance sheet adjustments to the assets held for sale and the liabilities held for sale to reflect the most current fair value. Future adjustments to these estimates maybe necessary as the sale of businesses not completed.

The following balance sheet commentary includes the Marketing Applications business that we expect to exit. Accounts receivable was consistent between December 31, 2015 and 2014, and up 5% in constant currency. Day sales outstanding was 89 days as of December 31, 2015, compared to 83 days as of December 31, 2014.

Total deferred revenue was $439 million as of December 31 2015 which was up $25 million from December 31, 2014 or up 10% in constant currency. As I transitioned into guidance, I want to highlight a few items.

As Mike said, we are making good progress in the exit of our Marketing Applications business and currently plan to complete the sale of that business around the end of the first quarter. For 2016, we'll provide you with a non-GAAP view of our results that excludes the Marketing Applications business.

To give you an idea of the size and operating income impact of the Marketing Applications business we expect to exit in 2016, excluding the portion we will retain in 2015 we have approximately $115 million of revenue and an operating loss of approximately $45 million, which translates to a loss per share of approximately $0.23 in 2015.

In terms of revenue guidance for 2016, based on the exchange rates at the end of January, and including approximately $40 million of revenue from the Marketing Applications business in the first quarter 2016, but no revenue contribution from the Marketing Applications business remaining for the remaining three quarters of the year, our GAAP revenue is expected to be in the approximate range of $2.315 billion to $2.360 billion, down 7% to 8% year-over-year or down 5% to 7% in constant currency.

Excluding the anticipated marketing - excluding the anticipated Marketing Applications revenue from Q1 2016, we expect non-GAAP revenue to be down 8% to 10%, down 6% to 8% in constant currency. This translates into a full year revenue in the approximate range of $2.275 billion to $2.320 billion.

For the comparison purposes, when the Marketing Applications business is excluded for both 2015 and 2016, revenue is expected to be down 2% to 4% reported or flat or down 2% in constant currency.

In terms of EPS, including the expected Q1 results of Marketing Applications business, but excluding any potential tax impact from the sales of Marketing Applications business, we expect full year 2016 GAAP EPS in the range of $1.68 to $1.83 range.

Excluding the Q1 results from the Marketing Applications business, non-GAAP EPS is expected to be in the $2.35 to $2.50 range. Other specific items impacting our 2016 guidance include. We are on track for the cost reduction of approximately $70 million in 2016.

As a reminder, last quarter we estimated we will be able to lower our costs, exclusive of exiting the Marketing Applications business by approximately $80 million to $100 million over the 2016 to 2017 timeframe, with approximately $70 million of the reduction in costs realized in 2016 and the remainder in 2017.

We expect product gross margin expectation to be consistent with 2015 and services gross margin forecast expected to improve slightly.

Consistent with what we said during the third quarter earnings call the cost savings in 2016 will be somewhat offset by increased variable compensation costs in 2016 due to Teradata not achieving our incentive compensation targets in 2015.

But we'd assume we'll achieve the targets in 2016, thereby creating a year-over-year increase in incentive compensation of approximately $30 million. We also referenced an approximately $10 million increase in overall salary expense or performance increases spread across the total employee base, which is also included in our guidance.

Netting these items, we expect the net benefit of approximately $30 million in 2016 operating income specifically due to the cost rationalization work we have underway. Weighted average shares outstanding for the full year is expected to approximate $132 million with the similar number of shares expected for Q1.

And finally, specifically as it relates to Q1, 2016, we expect to start Q1 very slowly from a non-GAAP revenue perspective, due to our international region facing an approximate 5 points currency headwind and also comparing against a 7% constant currency growth in Q1, 2015, and we also expect the significant - that the significant realignment of our U.S.

sales force related to our strategic go-to-market initiatives may create some disruption of productivity - our productivity in the first part of 2016. In closing, Teradata is strategically focused on transitioning back to meaningful growth and we've made significant progress since our last earnings call.

More specifically, we are in the process of exiting the marketing applications business. We expect to achieve our cost reduction initiatives, however, there is transition elements of our cost reduction initiatives that span 2016 and 2017.

We have begun the process of strengthening our talent to better align our organization with our strategic initiatives. We have realigned our sales model in the Americas to increase our sales productivity and lower our overall sales cost.

And last, we have dedicated team of internal functional leaders led by a well respected group direct report to Mike, our CEO in place to drive our transformation. Our transformation is far from complete, but I'm excited about the progress we have made.

The team is energized and leveraging our technological and consulting strengths to reignite our growth engine.

We have a lot of work streams and classes and look forward to providing you more detailed information relating to our initiatives later this summer 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? A 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. A 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} And with that operator, we are ready to take questions..

[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?.

Mike Koehler:.

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..