Teradata Corporation., Q4 2008 Earnings Call Transcript

Feb.12.09 | About: Teradata Corporation (TDC)

Teradata Corporation (NYSE:TDC)

Q4 2008 Earnings Call

February 12, 2009, 8:30 am ET

Executives

Gregg Swearingen - VP, IR

Mike Koehler - President and CEO

Steve Scheppmann - CFO

Analysts

John DiFucci - JP Morgan

Matt Summerville - KeyBanc

Nabil Elsheshai - Pacific Crest Securities

Greg Holter - Great Lakes Review

Operator

Good morning ladies and gentlemen and welcome to the Teradata Q4 2008 Earnings Release Conference Call. At this time all participants are in a listen only mode, later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Gregg Swearingen, Mr. Swearingen, you may begin.

Gregg Swearingen

Good morning and thanks for joining us for our 2008 fourth quarter earnings conference call. Mike Koehler, Teradata's CEO, will lead our discussions, highlighting Teradata's fourth quarter results. After Mike's remarks, Steve Scheppmann, Teradata's Chief Financial Officer, will provide more details relating to our fourth quarter and full year 2008 performance.

Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially. These risk factors are described in Teradata's 10-K and other filings with the SEC.

On today's call, we will also be discussing certain non-GAAP financial information, such as free cash flow and results excluding the impact of certain non-recurring items. A reconciliation of our reported GAAP EPS to our non-GAAP EPS as well as forecasted non-GAAP results and other information concerning these measures, are included in our earnings release and on the investor page of Teradata's website at www.teradata.com.

A replay of this conference call will also be available later today on teradata.com. 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.

Now I will turn the call over to Mike.

Mike Koehler

Thanks, Gregg and good morning everyone. Teradata finished the year on a strong note with revenues up 6% in the fourth quarter and up 9% in constant currency. Overall, we had a successful and very productive year in 2008.

We extended our technology lead, launched a new innovative family of purpose built data warehouse platforms and added sales territories to broaden our market reach. Operating margins were up slightly in the quarter and earnings per share grew 15% on a non-GAAP basis in the quarter and also for the full year.

Looking at the results by region, the Americas grew 13% in the fourth quarter following a slow start in 2008.

As anticipated, opportunities that have been deferred or delayed earlier in the year began closing in Q3 and to a much larger degree in Q4.

The Americas had significant increases in new account wins which included International Hotel Group or IHG the parent company of InterContinental Holiday Inn and Crowne Plaza hotel brands; Navistar International, a leading manufacture of medium and heavy duty trucks; Rogers Communications, the second largest provider of internet cable and home phone services in Canada; a U.S. Fortune 500 BioTech company; and Lan Cargo, one of Latin America's leading air freight carriers.

In the Americas, we also saw broad customer upgrade activity including Del and three of the largest technology manufactures in the world; a number of the top ten banks and financial services companies; three of the leading telecos including AT&T; insurers from the Fortune 500, including Guardian Life Insurance and Aekyung Group; the centers for Medicare and Medicaid services; and [Pan Azucar], the second largest retailer in Brazil. Overall, just excellent quarter for the Americas.

EMEA also saw growth in the quarter with revenues up 2% in constant currency. Some significant new account wins we can name included, GKV-Spitzenverband a major new German insurance organization created to oversee the country's health plans. This strategic new account was a joint win with our partner SAS. They choose Teradata and SAS as their analytical platform to collect, analyze, and benchmark complex data sets from 70 million German citizens.

In that O2, the United Kingdom's largest mobile operator. This win with SAS and other partners will support the marketing, revenue assurance, and finance organizations.

We also saw notable upgrades at Deutsche Post World Net or DHL, HSBC, Unit Credit Bank, Austria which is consolidating data from six countries in Central and Eastern Europe into a centralized enterprise data warehouse for risk management, accounting and the controllers function.

And Swisscom which is extending their Teradata system into a full enterprise data warehouse, and it is also leveraging our SAS partnership to achieve their first fully integrated view of their wireline and wireless businesses encompassing customers, products and revenues.

In APJ, revenue was also up low single digits in Q4 and for the full year. Notable new customers included; KDDI, Japan's second largest teleco; three China Telecom provinces; Daiei, one of Japan's largest retailers, and Shinwa Bank.

Overall new account wins across the regions were strong during the second half of the year and most new account wins represent our head-to-head win against competition as well as the replacement of competitor systems. As we have added new and large customers over the past couple of years and grown the customers that are in our installed base, we have not been expanding our market coverage in parallel. As a result, less resources were available to focus on new account opportunities and we now have approximately 90% of our revenues coming from our installed base versus 85% in previous years.

With the investment in new territories and the expanded platform family we are now looking to increase our new account wins and revenues.

Now I would like to provide some color on the full year performance of our four largest industries.

Financial services was our highest growth industry in 2008 with all three regions reporting double-digit growth. While 2009 will be challenging for financial services institutions and the number of companies is declining with consolidation, we believe that data architecture integration and governance will continue to remain a priority due to the need for granularity and visibility of customers and products, risk management and cost take-out opportunities as well. This is where Teradata can help.

Manufacturing also had double-digit growth for the full year. The number and quality of new accounts was encouraging confirming our value propositions for the various manufacturing segments we're targeting.

Teradata is well positioned to help manufacturers address cost reduction opportunities such as in consumer goods using customer point of sale data in order to improve supply chains; early detection of warranty and quality issues which have proven to be significant cost reduction opportunities for both auto and hi-tech manufacturers. And companies with the Oracle and SAP ERP systems are using Teradata and enterprise data warehousing to consolidate and integrate analytical data.

The communications industry which was our fastest growing industry in 2007 was up slightly for the full year. The quantity and quality of new account wins was good especially internationally.

In addition, we have already secured 3 1550 Extreme Data Warehouse Appliance wins in the comp industry to-date which is our new purpose built platform that allows companies to analyze massive amounts of data sets in a cost effective data warehouse environment.

The 1550 is currently being utilized to analyze high volumes of call detail records and network data in telcos as well as web clickstream data in the e-businesses.

New wins in the quarter included Real Networks and one of India's largest telcos. And finally our retail industry had a difficult 2008 with double digit declines for the year with the entire decline coming in the U.S.

The U.S. is by far our largest retail market and we still generated significant revenues in 2008 and we continue to have good new account wins that will help position us for the longer term. There are two key areas we are focused on with retailers.

First is to better understand the rapidly changing customer preferences and spending and improve promotions and customer specific offers. And second is to quickly understand and predict changes in product sales to improve supply chains and optimize inventory levels.

And to do all this in near real time with data that is minutes or hours old through active data warehousing, information based on data that is days or weeks old is not good enough in retail anymore. We ended 2008 with the following revenue splits by industry which is based on approximate product and professional services revenues. Financial service, which for us includes banks, capital markets, credit cards and insurance companies, was 29%.

The communications industry which includes telecommunications, e-business, media and entertainment companies was 28%. Retail was 16%, manufacturing 11%, travel and transportation 6%, government 5%, Healthcare 4%, and other 1%.

The investments we have been making in financial services and manufacturing have helped to increase the size of those industries.

In addition, our investments in Eastern Europe and Asia are adding meaningful revenue to both our banking and telecom segment results as well.

We also extended our technology lead in 2008, as evidenced by the leading analysts. Our Active Enterprise Data Warehouse solution was the major contributor to our number one position in the newest Gartner Server Evaluation Model for data warehousing. And it is the major contributor to our position in the Gartner data warehouse Magic Quadrant as well. And just last week, Teradata was named number one in the new Forrester WAVE for enterprise data warehouse platforms.

Teradata was also named as one of the elite dozen global companies that matter most to intelligent enterprises. In the intelligent enterprise 2009 Editor's Choice Awards.

Finally in 2008, we saw good success with our purpose built platform family with both new and existing customers. For example, 2550 new account wins in Q4 included United Rentals, Navistar, InterContinental Hotel Group, and a major internet information provider.

The 2550, 1550, and 551 appliances have allowed us to position Teradata at multiple price points and functionality, and to more easily penetrate and win new accounts in the Global 3000 and beyond, and to capture new opportunities in existing accounts.

Turning to 2009, we won't be providing guidance at this time due to the uncertain economic environment and lack of visibility. Although we have over 30% of our revenue that is recurring coming from maintenance and subscription, the majority of our revenues come from products sales and professional services which operate with limited backlogs.

Overall activity levels are good, but vary across the regions. Currently our EMEA pipeline is strong, but is facing significant currency headwinds at current exchange rages.

Our APJ pipeline is strong in Asia-Pacific, but we are seeing softness in Japan, our second largest country in Teradata. And in the Americas, although overall activity is good, the amount of mature opportunities in the US pipeline is down following the strong Q4.

We are broadening our market opportunity with the addition of over 40 new sales territories in 2008 and with our platform family as well which will help position us for growth longer term.

The challenge for us in 2009 will be to accelerate the productivity of these investments, mature the opportunities in our pipeline faster, and focus on the fastest ROI and cost take-out opportunities for our customers to drive as much revenue as possible for Teradata.

We have lots of work to do in 2009, but keep in mind 90% of our revenue comes from our installed base and although this can lead to deferrals and lumpiness in our revenue shorter term, the growth of data and the demand for better enterprise intelligence in our installed base does not stop.

Looking at our expense structure entering 2009, our cost initiatives have positioned us for a flat-to-down SG&A versus 2008, while absorbing the new territory cost added from 2008 and also being added in 2009.

R&D expense will increase over 2008, but will be below 2007 levels. We will continue to monitor and scrutinize our overall selling expense in 2009 as well as tightly managing our professional services cost structure and keeping it in line with revenue.

We have been fairly efficient with our G&A and marketing costs with only 11% of our Teradata headcount residing in these organizations. But we do have some smaller opportunities we are working on there as well.

Before I turn it over to Steve Scheppmann, I would like to summarize by saying that 2009 will be a challenging year. However we are encouraged by our Q4 performance, our continued leadership position in data warehousing and the increased opportunities with our platform family, expanded sales territories and our partners.

In addition, we have a strong balance sheet with plenty of cash, no debt and good free cash flow generation. And our team is energized to meet the challenge in 2009 and focus on meeting the needs of our customers.

Now, I will turn it over to Steve who will provide more specifics on our fourth quarter and 2008 performance as well as 2009. Steve?

Steve Scheppmann

Thanks Mike and good morning everyone. Customers gravitate towards working with financially stable and well positioned partners and our Q4 2008 results clearly reflect that movement. Teradata's Q4 2008 revenue of $493 million was up 6% from the fourth quarter of 2007 or 9% in constant currency.

Our Q4 revenue increase was driven by strong performance in the Americas region where revenues were up 13%.

From a revenue segmentation perspective, product revenue increased 4% to $250 million in the fourth quarter from the same period in 2007. For the full year, product revenue declined 4% to $849 million.

Services revenue increased 8% to $243 million in the fourth quarter of 2008. For the full year services revenue increased 12% to $913 million. The increase in services revenue for the full year was driven by a 17% increase in the maintenance and services.

Our annuity revenue stream consisting of maintenance and subscription revenue and just as a reminder, subscription revenue is recorded as component of our product revenue, accounts for more than 30% of our total revenue.

This is a strong foundation for the consistency in our recurring revenue model. Professional installation related services, which is the other component of our services business increased 5% in the quarter and 8% for the year.

We saw our services revenue increase in all three regions in the quarter and the year. Before I get into this discussion of our margins and how they compared to 2007, I want to remind everyone of the non-recurring items we had in 2007 and 2008, so that we can reconcile to and then speak to the non-GAAP numbers.

In the fourth quarter of 2007, we had a $2 million spin-off related cost and a $6 million beneficial tax adjustment related to the spin-off. For the full year 2007, we had $17 million of spin-off related cost as well as $11 million of net tax adjustment expense.

In 2008, we took a $3 million charge to write down our basis in a prior equity investment and had a $3 million tax adjustment expense related to our 2007 tax return.

Excluding these items, our non-GAAP EPS in Q4 2008 was $0.45 versus $0.40 excluding the items in the fourth quarter of 2007.

For the full year, excluding these items, non-GAAP EPS was $1.42 in 2008 versus $1.24 in 2007, a 15% increase. To see the effect of excluding these non-operating items from our reported GAAP results, please see the reconciliation of GAAP to non-GAAP measures we have posted on our website.

Gross margin in the fourth quarter of 2008 was 54.6% compared to 56% in the fourth quarter of 2007.

Gross margin in Q4 '07 was very strong. As we pointed out a year ago, due to a favorable mix of product revenue and services gross margin. As a reference point, gross margin in the fourth quarter of 2006 was 53.2% versus 54.6% in Q4 of 2008.

In the fourth quarter of 2008, our revenue contained one, a number of floor sweeps which takes place when a customer replaces an older Teradata system and the result is the higher mix of hardware revenues as the customers receive the newer version of the software at no significant additional cost assuming they purchase our database software via our subscription model or option.

Secondly, we also had an unfavorable mix of third party products in our Q4 results, which may include storage and or other applications which we resell as a component of our overall solution.

And third, currency headwind which created pressure on our margins in Q4 '08 by approximately 50 basis points.

For the full year, gross margin 2008 was roughly the same as that generated in 2007, at 53.9%. The strength of our maintenance and services and the currency benefit we saw earlier in the year offset the Q4 items I just mentioned.

Product gross margin declined 4.3 points to 63.6% in the fourth quarter, due to the items that I just previously mentioned. For the full year, product gross margin declined 30 basis points to 64.4% compared to 64.7% in 2007.

On the other hand, services gross margin improved 190 basis points to 45.3% in Q4, and improved 190 basis points to 44% for the full year. The improvement was largely due to the increase in our maintenance services.

Moving to a geographical view, where we have a very diversified business model. 56% of our 2008 revenue came from the Americas, 26% from EMEA and roughly 18% from APJ.

Americas revenue of $285 million was up 13% for the quarter despite a slow start in 2008 with a revenue decline in the first half of the year. Revenue was up 2% for the year.

In addition to a solid funnel or deal activity, we saw the majority of deferrals that we referenced in previous quarters closed by year-end. For the quarter, gross margin in Americas region was down approximately 3 points to 57.2%.

Again due to the unfavorable revenue mix that I previously discussed that impacted the Americas. For the year gross margin in Americas was down 0.9% again due to the unfavorable revenue mix.

In EMEA, revenue declined 7% to $114 million in the fourth quarter, but was up 2% in constant currency. For that full year, revenue increased 6% or 3% in constant currency. Gross margin in the EMEA region was 51.8%, 180 basis points improvement from the 50% generated in the fourth quarter of 2007.

The increase in gross margin was due to a favorable deal mix and higher maintenance revenue offsetting the currency impact. Gross margin for the full year in EMEA was up almost 360 basis points due to the higher product gross margin, due to a favorable deal mix and the currency benefit.

In our Asia-Pacific, Japan region we reported 3% revenue growth in the quarter with 2 points of currency benefit. For the full-year, our APJ region revenue grew 7% but down 2% in constant currency.

Gross margin in APJ was 50%, down from the 52.7% in Q4 2007, and this decline was due to lower proportion of product revenue as well as lower service margin. For the year, gross margin in APJ was 48.3%, down from 50% in 2007 again due to the lower proportion of product revenue.

Now turning to our expense structure; SG&A increased to $137 million from the $131 million reported in Q4 2007. Excluding the $2 million of non-recurring spin-off cost in Q4 2007, SG&A increased $8 million from the last year's fourth quarter. However included in the fourth quarter of 2008, SG&A reflected $5 million of increased sales expenses from our new territory initiative. For the full year, SG&A was $508 million, an increase of $38 million from the $470 million reported in 2007. Included in the 2007 number was $17 million of one time spin-off related costs. Excluding these costs, SG&A in 2008 was $55 million higher than in 2007.

Keep in mind however that included in our SG&A for 2008 was $19 million of the incremental recurring cost associated with Teradata operating as an independent publicly traded company; $10 million of investment for new 2008 sales territories, and net backs impact of approximately $7 million.

In total, incremental new company costs in 2008 were $29 million, $1 million lower than expected. In total in 2007 and 2008, new costs were $37 million versus the $38 million we had previously projected.

Specific to the $29 million of incremental new company cost absorbed in 2008, $10 million of the incremental stand-alone cost were recorded in cost of products and services while $19 million was included in our operating expenses.

In Q4, R&D expenses on the income statement decreased $4 million to $30 million. And this was largely the result of variable compensation. For the full year, R&D was $18 million lower than in 2007, for the most part due to the timing of the capitalization of software development cost related to our recently announced Teradata 13. And this is per the requirements under FAS 86 and also another component was a variable compensation component for the year.

We expect to see an increase in R&D expenses in 2009 with the majority of increase in Q1 2009 as it relates to the FAS 86 capitalization timing difference. For 2009 for the full year, R&D expense is expected to be higher than the $108 million in 2008, but lower than the $126 million in 2007. In the quarter, Teradata's operating margin was 20.7% versus 20.6% reported in Q4 2007 or 21% excluding the spin-off cost in Q4 2007. For the full year, operating margin was 18.9% versus the 18.8% as reported in 2007; again excluding the $17 million non-recurring spin-off cost, operating margin was 19.8% in 2007.

The slight operating margin decline was primarily due to the $29 million of incremental recurring public company cost and the $10 million higher sales cost from the increased sales territory initiative. This was offset somewhat by the lower R&D expense.

Given the unprecedented scale of the global economic turmoil and uncertainty is more important than ever that we have a well defined executable strategy given the wide range of possible scenarios that this market may create. The disruption in our current and potential customer status quo environment is bound to happen and this has historically played into Teradata's hand. Our game plan calls for us to continue to shift and add resources where we see the best opportunities to insure that we are positioned to capture future growth through new sales territories and focused R&D efforts. In addition, we expect to continue our cost discipline throughout our operating model; from cost of revenue through our operating expenses, including salary related costs, restricted hiring, travel and various non-customer facing programs.

Below the operating income line, Teradata had $1 million of other income in the quarter which was down $2 million in Q4 '07 due to lower interest income in part to lower interest rates. For the year, other income was $5 million in 2008 versus $2 million in 2007 due to higher interest income and a higher cash balance, but in a lower interest rate environment.

For Q4, 2008, our effective tax rate was approximately 23.3% which includes the impact of the retroactive restatement of the US Research Tax Credit. The tax rate in the fourth quarter of 2007 was 19.4%. For the full year 2008, our effective tax rate was 26% or 25.2% when you exclude the previously disclosed discrete items recorded in the third quarter related to 2007. For the full-year 2007, our tax rate was 37.9% or 33.3% excluding the previously disclosed items that impacted the 2007 tax rate. Based on the analysis to-date, we expect our annual effective tax rate for 2009 to approximate 26% to 27%. The forecasted effective tax rate is heavily dependant on our geographical mix of taxable earnings.

Quarterly, the company refines the estimates used to build the annual effective tax rate. Stock-based compensation included in our 2008 results was approximately $21 million versus $17 million in 2007. We expect 2009 stock-based compensation expense to be similar to the 2008 amount.

During the fourth quarter, we repurchased 2.9 million shares of our stock for approximately $39 million. Repurchases for the full year 2008 totaled 8.5 million shares for approximately $176 million. As such, we have $82 million remaining on our board authorization for share repurchases. Again we expect that our rate of buyback will continue to fluctuate each quarter taking account among other things, our stock price, alternative uses of cash and other cash management strategies.

Turning to the cash flow statement. In the fourth quarter we generated cash from operating activities of $118 million, up 20% from the $98 million in the fourth quarter of 2007. After using $13 million for capital expenditures, we generated $105 million of free cash flow which favorably compares to the $67 million of free cash flow in Q4 2007.

For the full year 2008, we generated cash from operating activities of $440 million, up $53 million from 2007. The Teradata model was driven by our operating strength and our continued focus on managing our working capital. After using $71 million for capital expenditures during the year we generated $369 million of free cash flow which was 26% increase from the $292 million of free cash flow in 2007. Teradata defines free cash flow as cash flow from operating activities plus capital expenditures for property and equipment and additions to capitalize software.

To summarize, one of the strengths of the business model is cash flow generation and we grew cash flow from operations 14%, and free cash flow 26%, and revenue growth of 4%.

Turning to the balance sheet. As of December 31, 2008 we had $442 million of cash and short-term investments, a $64 million increase from the end of September, even after using the $39 million for share repurchases in the fourth quarter.

Our cash continues to be invested very conservatively generally in overnight government securities. For the year, we increased our cash and short-term investments by $172 million from the end of 2007 despite repurchasing $176 million worth of Teradata shares.

DSO the days sales outstanding was 93 days as of December 31, 2008 compared to 109 days as of December 31, 2007. Differed revenue as of December 31, 2008 grew slightly from the same level, from the same date in 2007. In an effort to provide further transparency around currency movement and the potential impact on our revenue, we have provided additional detail on our website regarding how currencies moved in 2008 and how this movement is expected to impact our year-over-year revenue comparisons in 2009.

Assuming the spot rates on February 9, we expect currency to create a 4 point headwind for us in 2009 and a 6 point headwind in Q1 of 2009. With respect to currency impact on our gross and operating margins that continues to be tough to precisely calculate due to the difficulty of specifically determining how much of the currency impact was captured in the pricing of a particular transaction or how it was addressed in our sourcing product and services activities.

However to help you understand the impact of currency translation has on our operating margins, roughly 40% of the currency movement flows through to operating margins or income. If we can adjust our pricing models to the currency movements in the short-term, we might be able to get back, get closer to the 30% flow-through which is more representative of our existing operating model.

Looking forward from my perspective, it is not prudent to expect that the macro economic environment will improve in 2009. As a result, visibility into 2009 and beyond is very limited. Until we can gain better visibility on how our customers are reacting to the economic environment, we will not provide specific revenue or EPS guidance for 2009. Hopefully as we move into the year, visibility will improve.

To provide further perspective on how our year-over-year earnings is likely to trend in 2009 versus 2008, again beyond the effect of the economy and the likely impacts on our revenues, we want to reiterate that the currency based on the current spot rates is creating a headwind for us on both the top line and on margins as I discussed earlier. R&D expense hitting the P&L is expected to be higher as we continue to invest in our core R&D. Again the 2009 expense is expected to be more than our 2008 levels but less in our 2007 levels.

Again, the Q1 2009 year-over-year change is expected to be the most significant increase as primarily driven by the timing of our capitalization of FAS 86.

Incremental selling expenses as a function of our strategic decision increased the investment of our sales territories, again as expected, increased by approximately $13 million in 2009. For the full year impact from the class of 2008 and the layering in of the expense from the class of 2009, but again our total SG&A is expected to be flat or down after absorbing these costs.

I am encouraged that although we are feeling the headwind of the strengthening of the US dollar and the impact of the global economic slowdown, the unfortunate pain that a slowing economy creates is not all bad for Teradata. It can and does open opportunities for us as a status quo of IT infrastructures in place at many companies is now perceived to be not good enough. And companies become more open and more motivated about investing in enterprise analytics.

We are clearly not immune from the effects of the weak global economy but our solutions allow our diverse portfolio of stable and strong customers to not only reduce their IT spend, but also gain a much better, deeper transparency and view into their business at the same time.

In addition, we are entering the year in a very strong financial position. Our balanced geographical business model provides the basis of resiliency with respect to our overall financial model during this period. As previously stated, our maintenance and subscription business provides a healthy foundation which creates stability in our model and our cash flow.

In conclusion, we feel that Teradata is well positioned for the current but difficult economic environment. We like our technology leadership, our competitive advantage, our strong financial position and most importantly the passion that our team has to win by staying laser focused on our fundamental business strategies.

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

Question-and-Answer-Session

Operator

Thank you (Operator Instructions) Our first question comes from John DiFucci from JP Morgan. Please go ahead.

John DiFucci - JP Morgan

Thank you. Mike, I was wondering if you could comment a little more on your comments about the Americas, it looks like things will go well this quarter, but you said the mature pipeline was down going forward. I was wondering if you could provide any more commentary around that, either something quantitative or even qualitative around those comments?

Mike Koehler

John, what I was referring to, is in 2008 we had deferrals and delays that we were experiencing from the first quarter to second quarter to the third quarter. And as a result, the amount of mature opportunities in the pipeline, in other words, opportunities that we are looking to close, we closed out a significant number of them in the fourth quarter. So, the overall activity in the Americas is good as we entered the first quarter, but the amount of opportunities that are mature or in the closing stages was reduced by the high number of opportunities that we closed in the fourth quarter.

John DiFucci - JP Morgan

Okay, so it sounds like in the fourth quarter, it sounded like you had a lot of opportunities that were mature more -- but was it more than normal and at this point, recognize there is a lot of uncertainty out there for everyone, how does it look today versus what would be called I guess normal in past other than last quarter?

Mike Koehler

Historically, the seasonality of our business, you can see it in the past results, the first quarter historically overall for Teradata, seasonality of the first quarter, it's a lower quarter, okay. That said, the visibility or lack of that we have got at this time, we are not giving guidance for the year. The opportunity that we have and what we are focused on doing is accelerating the maturity of the opportunities that are in the pipeline. So the overall activities there, it's the acceleration of the opportunities that we have in the activity and to mature them as soon as possible.

John DiFucci - JP Morgan

Okay, thanks and a quick question for Steve, on deferred revenue, you had a nice up tick in this quarter after declining in the last two quarters. And I was just wondering if you could comment on that at all, is there anything we should be reading into that?

Steve Scheppmann

No John, again that's coming into the timing of some of our annual maintenance renewals. And if you go back, look at the third to fourth quarter last year, we had an up tick in there approximately $10 million and this up tick was somewhat similar and nothing unusual in that increase.

John DiFucci - JP Morgan

Okay thanks guys.

Operator

Our next question comes from Matt Summerville from KeyBanc. Please go ahead.

Matt Summerville - KeyBanc

Couple of question, first I want to talk about the sales additions planned for '09. How many territories are you contemplating adding if your business were to deteriorate beyond your comfort zone, I would suppose. How much flexibility is there to cut that number meaningfully. And on the same topic, how does the payback now on territory creation differ than several years ago when you did not have as broad of a product offering that you have today?

Mike Koehler

We added over 40 sales territories in 2008. Our plan is to exit 2009 with 60 additional sales territories. The pace at which we are adding the sales territories, we will slow down to a degree but the opportunity for us when you look at this thing overall is to broaden our market reach and balancing the long-term objectives of the company to get after sustained long-term revenue growth.

Now in the existing territories, we are continually optimizing that and continually looking at the resource alignment with the productivity yields and the overall headcount we have in the existing territories. There is also opportunities we have attritioned historically and how we backfill and to what degree and how rapidly we do that.

So where simultaneously we want to broaden the number of territories we have, but at the same time we want to optimize the current expense that is in the existing sales territories. And that's an opportunity that we have ongoing, not just now but ongoing that we have got it turn the heat up on.

As far as the yield goes, if you look at the territories we have added, some commentary, 10 of them are in new countries or emerging markets for us like in Eastern Europe and parts of Asia. And those types of territories we get a pretty quick yield from and we did yield revenue in 2008 and we will continue to yield revenue in 2009.

Some of the other new territories that we are adding in three of our largest countries is to go after mid-market opportunities. And in mid-market opportunities, we are focused on shorter sales cycles and greater focus with our product platform family the expanded family with the appliances and so forth. And we have come out with packages and bundles beyond the appliance itself that includes professional services, applications and it's a solution for a particular customer in a particular industry segment.

And we have also added to that with lead generation and telemarketing and everything else going into the mid-market. So, as I look at the return on the sales territories, there are some pretty good opportunities in things we are doing in particular in the emerging markets and in the mid-markets, where we are going after shorter sales cycles and going after quicker ROIs or quicker revenue.

And then in the more traditional territories which encompass some of the large major Fortune 1000 companies, Fortune 3000, we are driving to look at the highest fastest ROI opportunities specifically to an industry segment, to our customer set. And at the most significant costs take out opportunities, once again to increase the productivity cycle in these territory additions.

Matt Summerville - KeyBanc

In terms of the broadened product line, how much of your revenue now would you say is being derived from the products, the new products you launched in 2008, and then just another question in terms of the pace of deals thus far in the year, has the closure rate you have experienced up till now materially different than the closure rate you have experienced on a year-to-date basis looking back several years?

Mike Koehler

Regarding the revenues, Matt, on the new product platform family appliances. It's not huge, it's not significant. To give you a little bit of color, we have sold over 20 systems, specifically the 2550 and the 1550. The 1550 which is the Extreme Data Warehouse appliance was only announced in October. And we have had a number of wins as I mentioned in our prepared remarks.

And we are encouraged by that because it has such, it solves such a large data problem at such a low price point and the activity we are seeing there is high, and the close rates are fairly quick when you look at the sales cycles, we have for that. But overall, I'm pretty encouraged by the number of systems we have sold.

The second question you had regarding our close rates. I would say when you look at new account opportunities, we actually had a pretty good increase in new account wins in the second half of the year. I do not see much of a change in the sales cycles in new accounts.

We did have a number of mature opportunities with new accounts that we are growing in the pipeline. They closed out in the third and fourth quarters, but overall the sales cycles not much difference with new customers. The bigger challenge for us is so much revenue comes in our user base, it's up to 90% now, and that's the challenge. So, the deferrals and any deferrals, delays and so forth that we experienced in the user base, that's extending the sales cycles and that has bigger impact on the business.

Matt Summerville - KeyBanc

Okay just two more questions. You provided Mike, in your prepared remarks in general high level color on what you are seeing across the three geographical regions. I was wondering if you could go one layer deeper and talk about kind of what you highlighted in the context of the major verticals that you serve. And then the other question I have is more around pricing, if you are seeing any additional price competitiveness in the market just given what's happening in the macro environment?

Mike Koehler

Well we look at it by verticals as far as the activity we are seeing today that I gave commentary on geographically. Let me go to the markets where we are seeing some softness, so in Japan clearly softness in manufacturing with the large auto manufacturers and tech manufacturers, softness in retail in Japan. And when you turn to the US there as we reported on the industry segments for 2008, softness in the retail. Globally our activity in the financial services sector has been good. I would say globally when you take a look at it in that view; by industry manufacturing we are seeing some softness. Retail some softness, and yet to a much lesser degree, financial activity okay and telecommunications.

Matt Summerville - KeyBanc

And than my question on pricing?

Mike Koehler

On pricing, there has been more pricing pressure overall for sure, any company, every company in the world is looking to reduce OpEx, CapEx everything else. But I would say the previous pricing pressure is more related to new account opportunities when you get some competitors in there that it can be driven by that kind of behavior more or so then the overall environment with the customers. I would say the bigger impact on pricing as it relates to our business is less in the margin rates, the product gross margin rates. But it's more in the volume. The less dollars being spent, that pressure making opportunities smaller or delaying opportunities in hitting the volume -- it is the bigger pressure that shows up on our business results than the actual margin rates.

Matt Summerville - KeyBanc

Thanks, Mike.

Operator

Our next question comes from Nabil Elsheshai from Pacific Crest. Please go ahead.

Nabil Elsheshai - Pacific Crest Securities

Hi, guys. Can you hear me?

Mike Koehler

Sure, we can.

Steve Scheppmann

Sure.

Nabil Elsheshai - Pacific Crest Securities

I am on a unusual phone so. First real quick, how many sales teams did you guys end the year with? I think I missed that.

Mike Koehler

We added over 40, Nabil.

Nabil Elsheshai - Pacific Crest Securities

Okay. And then, on the business in Q4, I guess the upside, did you get a sense, not really budget flush, but people were kind of stocking up on capacity and if you are scrolling away additional capabilities in anticipation of lower budgets in '09 and did that potentially drive some of the strength in Q4?

Mike Koehler

Nabil it's Mike; regarding the territories, the starting point as we entered 2008, it was 385. And we are up now, up over 425.

Nabil Elsheshai - Pacific Crest Securities

Great, thank you?

Mike Koehler

Yeah on the territories, regarding, as you pointed budget flush in Q4. I believe we saw some of that, there was some of that that contributed to the results. Like I said before, the amount of deferrals and delays throughout 2008, eventually they come to fruition and the budget flushing of people with some uncertainty over budgets in 2009, spending in 2008, there was some of that they contributed to it.

Nabil Elsheshai - Pacific Crest Securities

And then if you look at the 2550 and the 1550, are those deals that you talked about, I know there is not a ton of them yet, but are you finding those opportunities primarily in your installed base at this point or are they new customer opportunities, getting your foot in the door?

Mike Koehler

They are in both Nabil. I will say though the number of new account engagements and competitive engagements outside the user base picked up, since we have released the family. Some of those engagements result in the sale of an enterprise data warehouse or the 5550, but since we have re-positioned ourselves in the market with the platform family that addresses a multitude of different customers, the number of new engagements we have has increased. And simultaneously in our user base there clearly has been opportunities that we are able to go address that normally sound that we would not have addressed previously.

Nabil Elsheshai - Pacific Crest Securities

Okay and then a follow-up on the competitive front, have you guys run into the new Oracle machine, and if so, any commentary about it?

Mike Koehler

Not yet, I'm aware of one or two customers that are looking at it or working with it.

Nabil Elsheshai - Pacific Crest Securities

Okay and last question on the partnership front. I think you mentioned a large deal tied to SAS. From a revenue driver perspective, I think you had set the expectation that that would take a while. Can you give us any commentary on how the pipeline is building with regards to that partnership, and do you see that becoming a significant driver in '09?

Mike Koehler

Overall activity with SAS has been increasing. The amount of wins we had to-date partnering and going to customers with a joint solution has increased significantly, and it's resulted in wins that we have had together. It's a little bit subjective to quantify or qualify exactly how much of that was due precisely to SAS or not being partnered with SAS. But overall it just has resulted in a lot of joint wins together and has broadened our activity. We continue to work together, co-development, getting more of SAS's offerings running in database. We have a road map for executing to and as the number of analytical applications and other things run native on Teradata, the amount of revenue and the partnership will just be that much better.

Nabil Elsheshai - Pacific Crest Securities

Thank you very much.

Operator

Thank you. Our next question comes from Greg Holter from Great Lakes Review, please go ahead.

Greg Holter - Great Lakes Review

Yes, good morning and thank you for taking my questions. I was wondering if you could comment on your sales growth goals, operating margin goals, earnings goals that you had set forth whether or not you have made any changes to those or are sticking with what do you think you can do over the long-term?

Mike Koehler

Well we are not providing obviously guidance for 2009. If I think I have, your question right, it's have we changed our longer term goals?

Greg Holter - Great Lakes Review

Right.

Mike Koehler

Thanks, for the clarification and the answer is, no we have not changed our longer term goals. We are taking actions to increase the longer-term goals. The question of course that everyone has is when will we get through the current down cycle and putting that aside, that longer term our goals remain the same and we are taking actions to increase the longer term goals.

Greg Holter - Great Lakes Review

Okay, and relative to the stimulus and healthcare coming out of the Obama administration, is there anything in there that would be a benefit to folks like you or specifically Teradata and the Enterprise Data Warehouse?

Mike Koehler

Overall, I would characterize it as minimal or not significant.

Greg Holter - Great Lakes Review

Okay. And do you have the employee count as of the end of the year?

Steve Scheppmann

That is roughly 6400 people, I believe.

Greg Holter - Great Lakes Review

Okay. And you may not be complete with this given that your K is not out yet but how under funded is your pension liability and what do you expect the expense to be for 2009?

Steve Scheppmann

The under funded pension liability as you have indicated will be disclosed in the K. The expense for 2009 will be closely approximate to the 2008 expense numbers.

Greg Holter - Great Lakes Review

And what was that if you could remind us?

Steve Scheppmann

I believe around $9 million, $8 million to $9 million.

Greg Holter - Great Lakes Review

Okay. Would you a anticipate increase in the under funding given the market?

Steve Scheppmann

It all depends on the actuarial methods and the valuations, but I do not anticipate anything that would materially distort our numbers going forward.

Greg Holter - Great Lakes Review

Okay. And one last one relative to competition, HPs and the [piece] of the world, how would you characterize the environment and has anyone become more or less of a threat or competitive to your own offering?

Mike Koehler

No material change.

Greg Holter - Great Lakes Review

Okay.

Mike Koehler

Okay, listen I want to thank everyone for joining our call. That's all the time that we have this morning. In closing, I would like to thank all of you for joining us. And to summarize, we are saying 2009 is going to be a challenging year. I can assure you our team is energized to go after the challenge and we are very encouraged by our Q4 performance. The clear leadership position we have in the data warehouse industry and the opportunities that we have underway to broaden our position in the market in 2009 and for the longer term.

So once again thank you everybody.

Operator

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.

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