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Edited Transcript of TDC earnings conference call or presentation 7-Feb-19 10:00pm GMT

Q4 2018 Teradata Corp Earnings Call

DAYTON Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Teradata Corp earnings conference call or presentation Thursday, February 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregg Swearingen

Teradata Corporation - VP of IR

* Mark A. Culhane

Teradata Corporation - Executive VP & CFO

* Oliver Ratzesberger

Teradata Corporation - President, CEO & Director

* Victor Lynn Lund

Teradata Corporation - Executive Chairman

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Conference Call Participants

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* Brad Robert Reback

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* James Derrick Wood

Cowen and Company, LLC, Research Division - MD & Senior Software Analyst

* Karl Emil Keirstead

Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst

* Kathryn Lynn Huberty

Morgan Stanley, Research Division - MD and Research Analyst

* Philip Alan Winslow

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

* Tyler Maverick Radke

Citigroup Inc, Research Division - Senior Associate

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

* Zane Brandon Chrane

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Q4 2018 Earnings Conference Call. (Operator Instructions). Mr. Gregg Swearingen, VP of Investor Relations, you may begin your conference.

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Gregg Swearingen, Teradata Corporation - VP of IR [2]

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Good afternoon, and welcome to Teradata's 2018 Fourth Quarter and Year-End Earnings Call. Vic Lund, Teradata's new Chairman, will begin our call today, followed by Oliver Ratzesberger, our new President and Chief Executive Officer. Then Mark Culhane, CFO, will discuss our financial results and provide our guidance for 2019.

Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, there are subject to a number of risk and uncertainties that could cause actual results to differ 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 be discussing certain non-GAAP financial information, which excludes such items as stock-based compensation expense, and other special items described in our earnings release, including acquisition, reorganization, transformation-related cost, asset impairments and capitalized software development costs. We will also discuss other non-GAAP items, such as free cash flow and constant currency revenue comparisons.

A reconciliation of our GAAP results to our non-GAAP results and other information concerning these measures is included in our earnings release and on the investor page of teradata.com. A replay of this conference call will be available later today on our website. Teradata assumes no obligation to update or revise the information provided during this conference call, whether as a result of new information or future results.

And now I will turn the call over to Vic.

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Victor Lynn Lund, Teradata Corporation - Executive Chairman [3]

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Thank you, Gregg. I would like to add my welcome. Almost 3 years ago, I was given the honor of becoming President and CEO of Teradata. In my initial calls, I laid out my goals. First, in conjunction with the Teradata team, to develop a customer-centric strategy that would drive our profitable growth into the future. Second, develop a team capable of driving that strategy, which would include the next CEO of Teradata. The announcement of Oliver as CEO and our strong fourth quarter results are an endorsement that these objectives have been met. It is now time for a new leader to drive our ongoing success. Oliver is the right person at the right time. He has an understanding of what makes us special, a seasoned view of our customers' needs, the confidence of our board and our team, and the pragmatic intelligence seasoned by experience to continue to drive our business forward. While there is still much to be accomplished, my confidence in our strategy and our team has never been stronger. Oliver?

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [4]

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Good afternoon, everyone. I would like to start by thanking Vic as he transitions to his new role as Executive Chairman of our board. His leadership and guidance have been invaluable not only to the company but for me personally as well. I'm extremely proud of what Vic and I have accomplished together, including the winning strategy that defines the Teradata of today. This is an exciting time in our history, the world of data and analytics has never been as strategically important, and Teradata is uniquely positioned to deliver value to the world's leading companies. I'm pleased to share that our strategy, our execution and our relentless dedication to customer success has resulted, once again, in excellent performance in Q4 and 2018 overall.

We exceeded guidance on all important measures: ARR growth, recurring revenue growth, total revenue, EPS and free cash flow. We are seeing accelerating growth rates across all these measures, and this is visible in our financial results.

Our customers continue to transition to subscription faster than we had anticipated. In fact, 79% of our bookings in 2018 were subscription-based, peaking at 87% for Q4. These results are evidence of our solid foundation of future recurring revenue. Mark will cover these financials in more detail.

Now I'd like to highlight some of our 2018 achievements. We refined our strategy, shifted to a subscription-based model and significantly enhanced our offerings. We introduced our game-changing analytics platform Teradata Vantage to broad acclaim and record adoption.

We optimized and aligned our go-to-market approach around our targeted customer set. Having the entire organization tightly aligned to our strategy is helping us be more effective with our largest analytic opportunities, and is helping us gain efficiencies that will drive greater profitability.

We repositioned and revitalized our brands to better reflect our strategy, our offerings and the customers we serve. And we transitioned and moved our headquarters to San Diego, successfully consolidating our corporate functions into fewer locations while delivering these positive results.

Next, let me address our strategy that we shared with you at our recent Analyst Day. There, we described how we are applying our differentiated capabilities to address the needs of the world's most demanding large-scale users of data that require massive scale and speed. We call these megadata companies.

Teradata is uniquely positioned to enable these complex and sophisticated companies to deliver pervasive data intelligence in order to leverage all of the data, all of the time, across any infrastructure to deliver analytics that matter and at the scale they require.

We also defined our 5 strategic imperatives that are enabling us to win. First, we are relentlessly focused on driving consumption of Teradata. This in turn drives ARR and recurring revenue growth. Our second strategic imperative is to radically simplify. This is about improving the customer experience and making it much easier to consume our software regardless of the deployment or purchase option they desire.

We believe that this will not only drive ARR growth, but also drive margin expansion. The third imperative is to pivot to as-a-service, making it easy for customers to purchase, provision, upgrade and leverage our software to accelerate time to value.

Our next imperative is the continued transformation of our go-to-market and our brand, repositioning Teradata with our customers. We are challenging the status quo and raising expectations for what data analytics can mean to the success of our customers. And finally, we will deliver operational excellence. Improving the efficiency and execution across the organization.

Now let's move to our flagship analytic platform, Teradata Vantage. In Q4, we took another bold step with the launch of Vantage, the industry's first and most powerful platform for complex enterprise scale analytics. Vantage is achieving record adoption with our customers and winning against the competition. I will share some examples that demonstrate how our customers are leveraging Teradata to conquer the challenges they face in this increasingly digital world.

We launched Vantage to a market that immediately showed an unprecedented level of interest. In fact, Vantage was so well received that it holds the record for the fastest customer adoption of any release in Teradata's history. Vantage is the only platform that allows customers to work with the tools and languages they prefer in order to quickly build and use the analytics they need. Vantage tightly integrates the best analytic engines and functions and is fully extensible to meet the needs of our megadata companies. These include descriptive, predictive and prescriptive analytics, machine learning and autonomous decision making. And all deployed across public clouds, on premises, on optimized or commodity infrastructure or as a service. Our customers are realizing the benefit of Vantage. So allow me to share a few examples.

A global technology powerhouse is undertaking a comprehensive evolution of its analytic enterprise and is creating a modernized and interconnected hybrid ecosystem with Vantage as its foundation. A major telecommunications provider in Switzerland is developing its analytic environment of the future on Teradata, driving increased consumption of our software. This increased investment was based on the recognition of the expertise of our people to help them drive improved analytics and the capabilities of Teradata Vantage.

A global aviation manufacturer added new Vantage capabilities to enable multiple analytical use cases, integrating ERP, IoT and central data assets. This has created the foundation for growth of its services business, improved manufacturing quality and supply chain optimization. Our solution also provides executive leadership with access to answers based on data to make strategic decisions across all aircraft programs.

A large U.S. consumer packaged goods company deployed a hybrid ecosystem based on Teradata to connect its on-premises and Azure cloud instances. This new architecture allows users to efficiently and effectively access the right data through a unified user experience.

A major global telco partnered with us to keep its subscribers in potentially life-saving contact during the recent wildfires in California, using geospatial boundaries built in Teradata Vantage. Subscribers in the affected area were identified then provided with unlimited data and high-speed access to cell towers in the region.

These customers reflect just a handful of the great examples of our mission to transform how businesses work and people live through the power of data. And all examples are among the more than 100 customers who are adopting Vantage and are driving ARR growth since its launch in Q4.

Teradata wins because we focus on the enterprise scalable features that our megadata customers demand. Vantage unlocks all limitations from handling thousands of users, integrating data from across functions and driving millions of decisions across the business. The scale and complexity of our customers' workloads far exceeds human capability. Building on the hallmarks of Teradata's world-class optimizer and best-in-class workload manager, we are further enhancing our advanced capabilities with embedded algorithms and machine automation. Together they simplify and derisk investment decisions, supporting our customers to accelerate time to value, reducing operational complexities and associated costs.

Looking ahead to 2019, we have a winning strategy. Our focus is clear. We have fantastic opportunities and are well positioned to continue our successful path. I am extremely confident about the future of this great company, and I'm excited to lead it.

As President and CEO, I'm committed to focus on the work we have started, evolve it and continue to grow the company and create long-term value for our customers and shareholders.

And above all, we have outstanding people. We will continue to develop our culture and values, encourage innovation and enabling our associates to do the best work of their lives.

As I turn the call to Mark, a sincere thank you to the Teradata team as they show every day what it means to rise above and challenge the industry while keeping our customers at the center of all we do. This team is executing our winning strategy, and I'm very proud of the work they do every day.

Now Mark will discuss our financial results.

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [5]

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Thanks, Oliver, and good afternoon, everyone. We delivered a strong quarter in Q4 and close to our year, which sets us up well for good momentum as we enter 2019. Our fourth quarter performance was highlighted, not only by our better-than-expected total revenue and EPS, but even more importantly by our strong ARR and recurring revenue growth, as well as better-than-expected free cash flow generation.

Our strategy is clearly working. And it's now being reflected in our financial results. In Q4, 87% of our bookings were subscription-based, which resulted in 79% for the full year. This exceeded our most recent guidance range of 65% to 70%, and significantly beat our original guidance of 40% to 50% when we began 2018. Even with more transactions shifting to subscription than expected, which is good for the future of Teradata but reduces the amount of revenue recognized in the current period, total revenue in Q4 was $588 million, meaningfully above our guidance range of $555 million to $575 million. This was driven by recurring revenue growth ahead of our expectations from strong customer subscription demand for Teradata's software.

Full year total revenue was $2.164 billion, higher than our $2.13 billion to $2.15 billion guidance range, as well as higher than 2017 full year revenue of $2.156 billion.

Recurring revenue, which includes revenue from subscription-based transactions as well as maintenance and software upgrade rates relating to perpetual licenses was $328 million in Q4, a year-over increase of 10%, 13% increase in constant currency and well ahead of our expectations for the quarter because of better-than-expected bookings linearity contributing to recurring revenue recognition within the quarter.

Full year recurring revenue was $1.254 billion, a 10% increase from 2017 on both a reported and constant currency basis, both of which exceeded our guidance.

Perpetual software license and hardware revenue, which is revenue from on-premise perpetual transactions was $97 million, a year-over-year decrease of 39%.

As I discussed at our Analyst Day in December, we expect to eventually stop selling on a perpetual basis, and therefore, we expect perpetual revenue to continue to decline year-over-year. As we go through our transition, most customers are purchasing software on a subscription basis, but some customers continue to purchase their hardware upfront. Therefore, our perpetual revenue is now predominantly hardware-related. All year perpetual revenue declined 21% to $340 million. And consulting revenue, which was $163 million in Q4 decreased 4% from Q4 2017, but was flat in constant currency.

Full year consulting revenue was $570 million, down 2% from 2017 as reported and in constant currency. As a reminder, we are shifting our strategy relating to our consulting business to focus on megadata companies, and within that target market, to prioritize higher value, higher margin business-related consulting, which is intended to increase consumption of Teradata Vantage, our software-based analytics platform.

As a result, we expect our overall consulting revenue to decline as we realign and refocus our consulting resources. As we make this shift, we expect a meaningful reduction in consulting revenue as well as some short-term impact on our consulting margins. However, because of this shift, we expect improved consulting margins longer term.

ARR grew $68 million, $72 million in constant currency in the fourth quarter. At the end of 2018, ARR was $1.308 billion, a 10% increase, 12% in constant currency from the prior year.

At our Analyst Day in December, I said that we expected subscription-based ARR to be more than $400 million, and up over 100% year-over-year at the end of 2018. I am happy to report that as of the end of 2018, subscription-based ARR was $493 million and up more than 130% year-over-year. The remainder of our ARR is comprised of $716 million of perpetual license maintenance and software upgrade rights and $99 million of subscription-based managed services. We intend to only provide this ARR breakdown on an annual basis, given the large transaction nature of our business, as we believe quarterly comparisons are not meaningful.

As our business continues to shift more to subscription-based transactions, we see our subscription related ARR growing at an attractive rate, while ARR related to maintenance and software upgrade rights from our legacy perpetual business likely declining from the shift to subscription.

For 2018, on a net basis, we generated approximately $125 million in incremental ARR, which was almost $150 million in constant currency.

Our backlog at the end of the year was approximately $2.5 billion, an increase of 34% from the end of the third quarter and 51% from year-end 2017.

Before I continue to highlight our Q4 operating results, please note, unless stated otherwise, my comments today reflect Teradata's results on a non-GAAP basis, which excludes items such as stock-based compensation expense and other special items identified in our earnings release.

In terms of gross margin, recurring revenue gross margin was 71.6% versus 74.9% in Q4 2017 and in line with our expectations. As expected, our current recurring revenue mix includes more subscription-based revenue, versus legacy perpetual maintenance and software upgrade rights revenue as compared to the prior year. As a result, this revenue mix shift drove the year-over-year recurring revenue gross margin decline. Full year recurring revenue gross margin was 72.8%, better than expected but lower versus the prior year due to the shift to the subscription-based transactions.

Perpetual revenue gross margin was 44.3%, which compared to 49.4% in Q4 2017. A year-over-year decline was due to perpetual revenue being primarily hardware-related versus the prior year period as many customers began purchasing their software via subscription. Full year perpetual gross margin was 41.2%, which was lower than the prior year but as expected due to the shift to the subscription-based transactions.

And gross margin of our consulting revenue improved to 17.2% compared to 13.6% in Q4 '17. While consulting margin in the fourth quarter improved over 2017, it fell short of our expectations. Full year consulting margin was 7.4% versus 4.6% in 2017. We expect consulting margins to continue to improve going forward as we continue to align our consulting resources to our strategy.

Overall gross margin was 52% in the fourth quarter, which was roughly flat compared to the prior year period. Full year gross margin was 50.6%, down 1 percentage point, largely due to the timing of revenue recognition and the corresponding revenue mix changes from the shift to subscription-based transactions.

Turning to operating expenses. Selling, general and administrative expense was $160 million in Q4, decreasing $2 million or 1% from the fourth quarter of 2017. Full year SG&A was $595 million, up 2%.

Research & Development expense was $72 million versus $70 million in the fourth quarter of 2017. Full year R&D expense was $290 million, up 5% as we continued to invest in Teradata Vantage, our software-based analytics platform.

Operating margin was 12.6% versus 14.9% in Q4 2017. Full year operating margin was 9.7%, down from 11.7%. The year-over-year decline was largely due to the impact of shifting to the subscription model. Teradata's non-GAAP tax rate of 17.1% for the fourth quarter was lower than the 19.1% rate in Q4 2017 but in line with our expectations. Full year non-GAAP tax rate was 19.6%, in line with our expectations at the beginning of 2018 of about 20%.

As a result, EPS in the fourth quarter was $0.49, which was higher than our guidance range of $0.41 to $0.45. The upside in EPS was driven by the higher than expected recurring revenue. Full year EPS was $1.29, again, higher than our guidance range of $1.22 to $1.26.

Turning to cash flow. Net cash provided by operating activities was $107 million in Q4 2018 compared to $23 million in the fourth quarter of 2017. Full year net cash provided by operating activities was $364 million for 2018 as compared to $324 million in 2017.

Cash used for capital expenditures in addition to capitalized software development cost was $63 million in Q4, an increase from $21 million in Q4 2017. The increase in CapEx was as expected and driven by capital improvements to our San Diego headquarters, and the increased mix of transactions moving to subscription. Full year cash used for capital expenditures and additions to capitalized software development cost was $160 million compared to $87 million in the prior year. As a result, free cash flow for the fourth quarter was $44 million. And full year free cash flow was $204 million, which exceeded our guidance range of $175 million to $200 million.

As of December 31, 2018, cash was $715 million. During the fourth quarter, we bought approximately 2.6 million shares of Teradata stock for $94 million. For the full year, we bought 7.9 million shares for $300 million. At the end of 2018, we had $253 million of remaining share repurchase authorization.

During 2018, we completed the repatriation of $800 million of foreign earnings that we planned at the beginning of the year. Deferred revenue at year-end increased $109 million from the end of the third quarter and increased $96 million from the end of 2017. Both increases were due to the strong growth in our subscription-based transactions.

Turning to guidance, which is dependent on many variables, including the mix and timing of bookings and currency fluctuations among other factors. Regarding currency, we expect a 1 percentage point headwind on our full year, year-over-year revenue comparisons with a 3- to 4-point headwind for the first quarter. We expect our full bookings -- full year bookings mix related to subscription-based transactions to be approximately 70% or higher. In terms of ARR, we expect ARR to grow approximately 11% to 12% in 2019.

We expect recurring revenue to increase approximately 11% in 2019. And in the first quarter, we expect recurring revenue between $332 million and $335 million. We expect perpetual revenue to continue to decline approximately $150 million to $200 million in 2019 over the prior year.

And additionally, we expect consulting revenue to decline in 2019 approximately 15% to 20% as we realign and focus our consulting resources on high-value, higher margin consulting engagements in our megadata target market.

Recurring revenue gross margin in 2019 is expected to be in the low 70s. But longer term, we expect our recurring revenue gross margin to improve as we continue to gain efficiencies and leverage our cloud and subscription-related investments. We expect perpetual gross margins to be approximately 35% to 40% for 2019. We expect consulting gross margins in the low teens for 2019. Thus in total, we expect overall gross margin to improve 3 to 4 points from 2018 levels. And we expect operating margin to improve a couple of points over the prior year.

Our non-GAAP tax rate is anticipated to be 20% again, in 2019. As a result, non-GAAP EPS is expected to be $1.45 to $1.55 for the year. This is based on full year weighted average shares outstanding of approximately 119 million. And for the first quarter, non-GAAP EPS is expected to be in the $0.18 to $0.20 range, based on 25% non-GAAP tax rate, the same as Q1 2018, and 119 million weighted average shares outstanding.

We expect 2019 free cash flow after adjusting for cash impacts related to reorganizing, restructuring our operations and our go-to-market functions as we align to our strategy, to be in the range of $200 million to $250 million.

Our projection of free cash flow is subject to many variables, including but not limited to, subscriptions bookings mix, the amount of capital expenditures required to support new subscription transactions, as well as the billing frequency of such new subscription transactions and the ultimate cash payments related to reorganizing our operations.

As I close, I want to thank Vic for his vision and leadership in driving the development and execution of our strategy over the last few years. I have really valued his advice and counsel during my time here at Teradata. And I look forward to continue working with Oliver to successfully execute our strategy going forward. Clearly the future for Teradata is very bright.

And with that, operator, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brad Reback from Stifel.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [2]

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Mark, real quick, on the guidance for subscription being at about 70% for 2019. Obviously, you did something well north of that in '18, and you're guiding perpetual down meaningfully. Can you give us some of the puts and takes going into that guide?

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [3]

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Yes, so are you talking about bookings mix? Or margin?

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [4]

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Bookings mix.

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [5]

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Yes, bookings, I mean we said 70% or higher. So we could certainly see it higher. But right now, we're looking at that 70%-plus range. So the puts and takes there are, we clearly see perpetual revenue continuing to decline, the magnitude of which could be $150 million to $200 million. And then obviously, depending on where that falls, impacts where the bookings mix ultimately [bes], and it can move it as we saw across '18 on different quarters, et cetera. So -- but we're extremely pleased with what we're seeing in the transformation to move to the subscription model. And obviously, it's a different set of our existing customers that we're focused on this year that are coming back to acquire more stuff from us that's more part of the '18 cohort, if you will.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [6]

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Got it. And then Oliver, maybe a quick follow up. I believe at the beginning of this calendar year, you changed the sales force comp plan. Maybe some high-level highlights on how that's been received?

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [7]

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Yes, Brad, thanks for the question. Indeed, and I think we said that at the Analyst Day already, we changed this year to focus for the entire company not just go-to-market, to ARR as the primary metric. And we did the same with the go-to-market realignment that we drove, specifically focused to ARR. The reception in the field and with our go-to-market orientation has actually been very positive. And we believe that, that increased focus on ARR will drive increased consumption, increased ARR results for 2019.

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Operator [8]

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Our next question comes from Katy Huberty from Morgan Stanley.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [9]

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Obviously, a strong end to the year. And the feedback in the market is that there is quite a healthy budget flush in the fourth quarter. But there's obviously questions around how 2019 is starting as it relates to the pipeline building in what may be a slower growth year. So just curious, any high-level comments as it relates to what your, I think, you mentioned backlog. But what your deal pipeline looks like for this year? And if there's been any change in the rate of the business as you move into January and early February? Then I have a follow-up.

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [10]

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Katy, this is Oliver. No change in the business. If anything, we are seeing a very good and healthy funnel. We are seeing that the business -- the adoption of Vantage is driving actually increased activity in our customer base. And for 2019, that makes us very positive for our continued execution on the strategy, especially with the help of Vantage being the enterprise platform.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [11]

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Okay, that's great to hear. Maybe question for Mark. The first quarter EPS is a little bit lower than we were expecting, even though the recurring revenue is in line. Just -- is there anything as it relates to mix of hardware or cost that flow through in the first quarter that we should be thinking about?

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [12]

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No, I mean, it's always traditionally been our lowest quarter from an EPS perspective of the 4. At the high end of the range, we'd be, over last year, we're going through some of our go-to-market realignments that we've executed on and rolled out in the month of January. So that had somewhat of an impact. But we feel, on a full year basis, we feel really good about where we're headed from an EPS perspective. So I don't think there's a specific callout to where Q1 is.

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Operator [13]

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Our next question comes from Derrick Wood from Cowen and Company.

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James Derrick Wood, Cowen and Company, LLC, Research Division - MD & Senior Software Analyst [14]

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First question for Oliver. Clearly, you're acting more aggressively on the Teradata consulting area, based on your guidance. Can you give us a sense as to how much is actually nonstrategic areas? And how much is an effort to push Teradata-related engagements to SI Partners? And maybe for the latter, give us some color as to what kind of new engagements you're getting from SI?

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [15]

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So Derrick, the -- we don't break out the professional services business in terms of what parts we do for what type. In general, what you see us do is really focusing and aligning not just go-to-market but consulting directly to the strategy that we laid out at the Analyst Day. And yes, the focus is on Teradata Vantage. And we have more focus on Teradata Vantage than ever before. And that is what's driving the adoption. This is what our megadata customers are asking for and what is helping us be successful in that line of business. At this point in time, we are not ready to talk about SI Partners or what we are doing with them. But overall, this is a direct alignment of the consulting business to the strategy. And it's what we believe will drive the most adoption of Vantage and increase in ARR for 2019.

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James Derrick Wood, Cowen and Company, LLC, Research Division - MD & Senior Software Analyst [16]

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Okay, and then Mark, I was impressed by the strength in short-term deferred revenue this quarter. It was a big acceleration. Could you help us bridge the 18% growth in short-term deferred revenue and the 10% growth in recurring revenue? Should we expect deferred rev growth to come down and converge more to recurring? Or why would that be growing faster?

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [17]

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Derrick, this is Mark. So obviously, we had a very robust Q4 ARR growth quarter. That's obviously showing up in short-term deferred revenue. That -- we guided from a recurring revenue growth perspective in -- for '19 of 11%. So part of it is the seasonality here, you'll see deferred revenue typically peaks at the end of March, the end of Q1 and then due to all of the historical perpetual license maintenance and upgrade right renewals, which are Q4 related but get billed in January and go onto the deferred revenue balance, and then work off as revenue gets recognized, which is why you see, across the year, deferred revenue potentially declining across the balance of the year. And then you tend to see it pop back up in Q4 again because candidly that's our biggest bookings quarter of the 4 during the year. And that's been a phenomenon for this business for a long time. So that's really what's happening there on that front.

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Operator [18]

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Our next question comes from Wamsi Mohan from Bank of America Merrill Lynch.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [19]

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I was wondering if you can talk a little bit about the trends, U.S. versus International. In your segment reporting, it looks like you saw the opposite of what most of the others saw, with America sort of weaker and International stronger. Is that just an acceleration towards subscription that happened more in the Americas? Or any other color you can share that would be helpful. And then I have a follow-up.

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [20]

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Yes, this is exactly it. The accelerations into subscription bookings in Americas has been leading all year long, and has peaked at approximately 7% increase in Q4 for the U.S. International has been a little bit trailing behind in terms of subscription bookings mix, but it's catching up. And that bookings mix is what is driving the Q4 result here. So Americas actually had a very, very strong quarter because of that extremely high bookings mix that makes the in-quarter revenues look smaller than what they actually are based on the subscription business.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [21]

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And Mark, on the free cash flow guide of $200 million to $250 million, you mentioned that that's a sort of net of some of the headwinds you're baking in for the reorg and realignment costs that you noted. Can you give us some sense of the magnitude of those costs so we can sort of get a fuller understanding of the strength of the free cash flow trajectory here?

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [22]

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Yes, Wamsi, we're still working through what that is between sort of natural attrition and other actions. So that's why we've sort of culled that out. But even on an apples-to-apples basis, we think it's going to grow over the prior year from where we were on the $204 million, even if I tentative potentially include some of that depending on where that lands. And so we'll have more of a sense of that as it gets rolled out here across Q1. But it could be a meaningful number in -- less, obviously, than a $100 million, but it's more than $10 million.

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Operator [23]

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Our next question comes from Zane Chrane from Bernstein Research.

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Zane Brandon Chrane, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [24]

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I was wondering if you could give us a sense for what we should expect for 2019 in terms of the assets acquired by capital lease. I believe it was $52 million in 2018. Just wondering what your expectations are for 2019 for that type of asset acquisition?

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [25]

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Sure. So I think it -- we expect it to be definitely higher, the magnitude is really hard to quantify how much does a customer want to continue to buy and own the hardware upfront versus subscribe to the entire solution. But we clearly expect it to be above the $52 million-ish that we have on the balance sheet today.

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Zane Brandon Chrane, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [26]

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Okay, shall we think of that as like a 2x increase, 20%? Any -- your ballpark range, again?

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [27]

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I think, if I had to guess, it's $75 million. $75 million, $100 million, potentially.

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Zane Brandon Chrane, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [28]

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Got you, that's very helpful. Just quick follow up. You guys talked a lot at your Analyst Day about the strength of your renewals and how that does not seem to present a material risk to the business. Is there something -- could you guys maybe give us quarterly renewal rates or just kind of make that a standard KPI, so we can see what the renewal rate on contracts each quarter is? Or maybe give us an update on what it was for Q4?

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [29]

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Yes, we haven't done -- we haven't looked at it that way. That's something that we'll take under consideration moving forward. But that's not a metric that we've talked about. We don't have customer loss. And so given our focus on existing customers, then it becomes a question of they grew ARR, so do we count that as -- they renewed at 100%, or do we say, hey, everything else they're doing with us to expand their workloads, et cetera, do I bake that in and call that really as part of the renewal or not? Particularly when they convert all their historical licenses to subscription. And that's why we haven't really done that because it's not a true subscription renewal where they don't own the underlying asset like you see when you are a 100% subscription business. And so that's -- but that's something we're contemplating looking at across the year.

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Operator [30]

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Our next question comes from Karl Keirstead from Deutsche Bank.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [31]

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I've got 2, both for Mark. Mark, on Q1 '19, you obviously didn't give us a total revenue guide. You only gave us recurring revs. Would you expect for the perpetual and consulting revenue streams that the pace of decline in Q1 might be somewhat comparable to what you guided to for the full year? Or above or below?

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [32]

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I expect it to be down year-over-year, the magnitude of which is very difficult to predict because these transactions are very fluid and go right up to the end of the line as to whether it goes perpetual or goes subscription, which we saw across a few quarters here in '18. But I would expect, on an absolute dollar basis, perpetual to be down year-over-year.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [33]

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Okay. And then maybe a second, to follow up. Mark, you mentioned that there was better than expected linearity in 4Q. I'm just wondering if you could elaborate, why was that? And in terms of the P&L impact, I presume that, that helped you on the revenue line. It probably helped you a little bit on the cash flow side. And does that create any headwinds that we should keep in mind for Q1?

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [34]

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So yes. Earlier bookings linearity drove the sequential growth and recurring revenue Q4 over Q3 we were up $16 million, ahead of our expectations from where we landed in Q3. It did not impact cash flows at all because most of those deals, the cash will collected in Q1 and versus in Q4. So it was -- it did not help cash flow generation in Q4. But we got meaningful contribution into recurring revenue recognition inside Q4 given the timing of those deals as the sales force started to realize that the comp plans were going to be shifting in '19 towards ARR growth. Term start dates are important and so forth, and I think we just got phenomenal follow-through by our sales teams in Q4 on that front, which drove the upside in recurring revenue higher than we expected.

In addition, as you may recall, our Q3 call, we had a very significant transaction we thought was going perpetual that ultimately ended up going subscription and closed in early Q4 that helped also drive that. I mean, we anticipated that but we got a lot more of the subscription deals done in Q4 because we put up $68 million of net of currency impacts and ARR growth in Q4 with a lot of that growth contributing to the recurring revenue in Q1.

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Operator [35]

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Our next question comes from Phil Winslow, Wells Fargo.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [36]

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Just had a -- wanted some color on sort of the deployment options that the customers are taking. Wondered if you could give us a sense of the subscription business, sort of which functions you're kind of going to cloud? Or maybe still -- just thinking about the appliance model versus also maybe just the -- just going subscription but for the software. Just maybe a sort of a sense of sort of what you saw this last year, and maybe kind of compare that to how you're kind of thinking of how that mix trends?

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [37]

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Yes, Phil, this is Oliver. Great question. This goes straight back to our strategy into the megadata customers that we focus on. We see a very strong demand for hybrid deployments from our megadata customer base, they're asking for the ability to deploy across a variety of options that they heavily are still invested in on-premises deployments, whether that is optimized hardware, or whether that is on commodity hardware. And a majority of our subscription bookings that you see are on premises. Many of them are linked to cloud and hybrid deployments, as I gave examples even in my remarks earlier, where companies run their large production instances on premises, but expand with virtual apps and experimentation into the various cloud options that we offer.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [38]

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Fair. Got it. And also just I've got a technology and competitive question here as well. I mean, one of the things you talked about at Analysts Day, was the support for the languages integration with SQL or Python et cetera, sort of, call it, data store, persistent storage. And then sort of your engine's on top of that and support for multiple languages. When you think about some of the single-point product competitors, we've seen some of them, like Snowflake and Databricks partner up, obviously, one more of a Spark, Python guy, the other one more SQL-oriented. How do you think about sort of your positioning with Vantage, your language support and NewSQL, et cetera? There's different engines versus let's say the point competitors that are mostly cloud, but are partnering to try to get there.

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [39]

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Yes. So this -- I think this goes back to one of the most differentiating characteristics of Vantage for megadata companies. There's a lot of point solutions. In fact, we have a lot of megadata companies that have -- that tell us they have hundreds, if not thousands of point solutions deployed with different languages, with different versions of languages, different dialects, and it's making it very, very difficult for these companies to maintain, grow and optimize this environment. With Vantage, we give these companies the option to integrate the various different engines. And you mentioned Spark, and you mentioned languages like Python and R and others integrated into a single instance that megadata companies can scale around, and virtualize their workloads within that choice of deployment, therefore providing a single-user experience for their applications and for their thousands of users, which in turn lets them simplify their ecosystem, simplify and reduce their cost structures that ultimately they have inherited over the last decade or so from literally thousands of point solution deployments that they have. So Vantage is really finding a lot of positive momentum with our megadata customer base for that reason. That integration, that simplification, one advanced SQL dialect, one dialect of Python, one dialect of R, and the engine's directly integrated on top of storage options like you mentioned, S3 and others is really what's driving the interest in our customer base.

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Operator [40]

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Our next question comes from Raimo Lenschow from Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [41]

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Oliver, good luck in the new quest as a CEO. The question I had, if you think about Teradata and Vantage now, you talked about the very large customers. How do I have to think about the old 2,000 series guys, especially in Europe, where you were kind of expanding more that way? What's their feedback from -- what's the feedback from those guys about Teradata's and the new direction?

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [42]

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So Vantage -- so we have multiple deployment choices, obviously, for Vantage. Vantage finds very good reception from the entire customer base. Clearly, as we said, our focus is on megadata companies. And yes, we have 2,000 series appliances years ago deployed across a variety of customer bases. And what we have done in our platform, and you probably remember, at the beginning of the Teradata Everywhere strategy, I pointed out that we had something like 12 different hardware platforms. We are down to basically 1 hardware platform. When we meet on premises, which is a software-defined IntelliCloud platform, this is where we make the shift from separating compute and storage. And it has allowed us in a software-defined environment to configure the platforms through software to the various use cases it needs thereby eliminating the various different hardware platforms that we built in years prior to that. Because remember, these were hard-wired platforms. You pick the 2000, it was forever a 2000. Within IntelliFlex with its software-defined nature, we can dial-up compute, we can dial-up storage. And now with Vantage, we're expanding the use into other storage formats like S3 object stores that no longer need to get imported into the platforms. But peered directly in place by Vantage and that is what makes that story very powerful.

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Operator [43]

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Our next question comes from Tyler Radke from Citi.

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Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Associate [44]

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Oliver, congratulations on the new role. Oliver, I was hoping that you could share with us exactly how you're measuring the strong adoption you've seen of Vantage. And could you also remind us how exactly that product is purchased or consumed? Is it customers upgrading to the latest version of Teradata? And just kind of walk us through that go-to-market motion?

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [45]

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Yes. Thank you, Tyler. Yes, so we made -- one of the big design goals for Vantage as we brought that technology together over the last several years, was to make the migration for existing customers as seamless and as simple as possible. So any existing customer on prior versions of Teradata can migrate straight into Vantage without any necessary changes to their data structures, data sets, applications, queries, all of that is fully backwards compatible, making for a very easy migration path. Vantage is consumed predominantly, almost exclusively as subscription, which is driving up, obviously, our ARR and subscription mix. I talked in the remarks, we have over 100 customers that are in the process of rolling out Vantage in production. That's in a very short period of time, that's the fastest adoption of anything that Teradata built in terms of software in our history, that make us obviously very optimistic for the future of Vantage. Customer feedback and reception is very good. And so yes, ease of deployment, a big part. And on the other side, the fact that when they migrate to Vantage, it's reducing the complexity of their ecosystems, because many of these analytical capabilities has to be handcrafted, as we heard before, point solutions, point versions of different languages and frameworks, this now comes integrated for our customers. And that takes a lot of complexity away from lines of business as well as IT departments that otherwise have to develop this in-house.

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Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Associate [46]

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Great. And a follow up for Mark. We saw, obviously, the services, consulting services guidance for 2019. Just curious how you're thinking about realigning the consulting group? What you're factoring in, in terms of headcount reductions? And how you are thinking about minimizing the disruption that something like that could cause?

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Mark A. Culhane, Teradata Corporation - Executive VP & CFO [47]

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Yes. So yes, Tyler, so we're focusing it and realigning it around our megadata customers to drive more consumption of our Vantage analytics software platform. So we're reorganizing the various sets of skills and practices that we have around this, a consequence of which is, yes, we've said we expect less revenue because we're not doing consulting for consulting's sake, we're doing consulting clearly with a focus around megadata customers and driving consumption. So the consequence of that is, yes, there's going to be lower cost, which are going to improve the overall margin profile, operating profile for the company. In terms of a headcount reduction versus what just happens through natural attrition, it'll be a combination of both of that. But we feel good about where that's at, it's in process, which is why Q1 has traditionally been our lowest quarter from an operating margin perspective. And then it builds throughout the year, which is the same as if you look across what happened in '17 and '18, that's the phenomenon and the nature of our business. It's just that we're driving it squarely to align to the strategy.

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Operator [48]

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And thank you very much, we're now out of time. I will turn the call back to Oliver Ratzesberger for final remarks.

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Oliver Ratzesberger, Teradata Corporation - President, CEO & Director [49]

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Yes, thank you very much, everyone. To summarize, I want to say, we are very pleased with our excellent performance in Q4, in 2018. First and foremost, I'd like to reiterate a big thank you to our great Teradata people, our success would not have been possible without their dedication to our customers. As we said, we are -- we believe we are very well positioned and very optimistic for 2019. Our strategy is definitely working, our execution is well underway and we are committed to continued customer success and driving long-term value for our shareholders. With that, we look forward to updating you again in May. Thank you very much, and have a great day.

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Operator [50]

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