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Teradata (NYSE:TDC)

Q4 2010 Earnings Call

February 10, 2011 8:30 am ET

Executives

Stephen Scheppmann - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Darryl McDonald - Chief Marketing Officer and Executive Vice President of Applications & Business Development

Michael Koehler - Chief Executive Officer, President, Director and Member of Executive Committee

Gregg Swearingen - Vice President of Investor Relations

Analysts

Gregory Halter - Great Lake Review

Wamsi Mohan - BofA Merrill Lynch

Brad Reback - Oppenheimer & Co. Inc.

Bhavan Suri - William Blair & Company L.L.C.

James Wood - Susquehanna Financial Group, LLLP

Edward Maguire - Credit Agricole Securities (NYSE:USA) Inc.

Matt Summerville - KeyBanc Capital Markets Inc.

Amelia Harris - Merriman Curhan Ford & Co.

Kathryn Huberty - Morgan Stanley

Nabil Elsheshai - Pacific Crest Securities, Inc.

Operator

Welcome to the Q4 2010 Teradata Earnings Call. My name is Sandra, and I will be your operator for today's call. [Operator Instructions] 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 2010 fourth quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's 2010 Q4 and full year results. Steve Scheppmann, Teradata's Chief Financial Officer, will then provide more details regarding our financial performance, as well as our 2011 guidance. Darryl McDonald, Teradata's Executive Vice President of Applications, Business Development and CMO, is also in the room to answer questions.

Our discussion today includes forecast and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risk 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 earnings per share excluding stock-based compensation, transaction-related items, as well as free cash flow and constant currency revenue comparisons. A reconciliation of our non-GAAP results to our reported GAAP results, and other information concerning these measures, is included in our earnings release and on the Investor page of Teradata's website found at teradata.com. A replay of this conference call will also be available later today on our website. Teradata assumes no obligation to update or revise the information included in this conference call whether as a result of new information or future results. I'll now turn the call over to Mike.

Michael Koehler

Good morning, everyone, and thanks for joining us today. Teradata finished 2010 with record revenue, operating income and earnings per share for both the fourth quarter and for the full year. We were particularly pleased with our 20% constant currency product revenue growth for the year, as well as our overall constant currency revenue growth of 12%.

During the year, we continued to invest in our four key growth initiatives to go broader and deeper into the market: R&D to accelerate innovation in our technology and to broaden and strengthen our data warehouse offerings; consulting services to help customers get the most value from their Teradata investment and expand our market and customer presence; partnerships to increase the number of solutions available on Teradata and increase our market coverage; and sales territories to expand our market coverage.

We met our objective of ending 2010 with 475 territories and target finishing 2011 with at least 505. These investments had a meaningful impact on our results in 2010. Teradata had its highest revenue growth in the last 10 years, the highest number of new customer wins since 2002 and the highest number of new customer wins ever in a quarter in the fourth quarter.

In addition, we made key acquisitions with xkoto, Kickfire and Aprimo to strengthen our technology and expand our solutions and market opportunity. We are well positioned as we enter 2011. Looking at the region results, the Americas had a stronger-than-expected fourth quarter with revenue up 14%. For the full year, revenue grew 19% and was up 18% in constant currency. Overall, the Americas had an outstanding year and took market share as evidenced by product revenue growth of over 30% for the year and a record number of new customer wins in the fourth quarter and for the full year.

New customer wins included: Univision, the largest Spanish-language television network in the U.S, selected Teradata to support and improve its advertising sales operations. Univision will combine historical sales data with day-to-day transactions and provide intraday reporting via new executive passports in order to quickly capitalize on revenue opportunities. Also, one of the top U.S. financial services companies chose Teradata to integrate channels to provide a better customer experience and ultimately increase revenues; Service Management Group, a leading multinational customer experience analytics firm, is converting to Teradata's data warehouse appliance from Netezza's Twin Fin. SMG is now able to provide a higher level of service to its clients by leveraging Teradata's mixed workload, complex analytics and volume capabilities that we offer with our appliances versus the competition; and one of the largest coffee retailers in the world, which is using Teradata in partnership with SaaS, to quickly create new and innovative data sets to better operate their business.

Other new customer wins included Western Refining, a win in the oil and gas industry; Live Nation Entertainment, the online ticket seller and leading promoter of concerts; a Fortune 100 company in the healthcare industry; and Arcos Dorados, the largest restaurant operator in Latin America.

The Americas also had strong activity with existing customers such as: Electronic Arts, which is expanding its EDW as EA grows its online consumer business; Vonage, which is expanding its EDW to include marketing and customer care analytics; a Fortune 100 pharmaceutical benefits company that has a Teradata EDW is now deploying a Teradata appliance to support analytics for 10 years of Medicare history; and at Navy Federal Credit Union, where Teradata is supporting realtime inbound marketing and adding geospatial analytic capabilities. Other expansions in the quarter included CVS, GE Healthcare, Office Depot, PepsiCo, Ace Hardware and Xcel Energy.

Turning to EMEA. Revenue grew 12% in the fourth quarter and was up 19% in constant currency. For the full year, revenue increased 3% and was up 6% in constant currency. EMEA had the highest number of new customer wins in a year since 2006. Their wins in the quarter included: Everything Everywhere, the largest mobile operator in the U.K., which was created by the merger of T-Mobile and Orange, and will now use Teradata's Active Enterprise Data Warehouse to correlate data from network probes to accurately measure the customer experiences; in Russia, we added two of the largest telecommunications companies. One of them is leveraging Teradata for social network analysis, obtaining insights from the web to help acquire new customers, keep current customers and win back customers that previously defected. This is a great example of our newer business use case with Teradata; a very large utility company in the U.K. will now use Teradata to analyze web data from its customers and trigger relevant and targeted communications to increase sales; and one of the top financial services institutions in the U.K., which is implementing a Teradata Active Enterprise Data Warehouse and SaaS in-database analytics to improve risk management.

EMEA also had good activity with existing customers including Polkomtel, the largest mobile operator in Poland, which expanded its EDW to accommodate multiple applications including realtime marketing campaigns, revenue assurance and online fraud detection; one of the world's largest communications manufacturer who is an EDW user is now using Teradata's Extreme Data Appliance to deploy a big data application that analyzes customer interactions with websites and phone applications. Other expansions in EMEA included: Lloyds Banking Group, TNT Express and Poste Italiane.

Turning to APJ. Revenue was down 2% in the fourth quarter and 9% in constant currency. For the full year, revenue grew 10% as reported and was up 2% in constant currency. We experienced softness in Japan in 2010, while the rest of APJ grew revenue at strong double digits in constant currency. APJ had a solid quarter and full year with new customer wins. Fourth quarter wins included: Sony Business Solutions, which is deploying an appliance to support sales and marketing as it evolves towards an Enterprise Data Warehouse; and at Takashimaya, one of Japan's largest department stores, which will consolidate its data marts onto a Teradata EDW to reduce costs and better utilize information across the enterprise to increase sales, enhance customer satisfaction and improve its supply chain.

Expansions in APJ included: Maybank, one of the largest banks in Malaysia, which is expanding its EDW to support new capabilities associated with our marketing application; BBS, a leading bank in Singapore and Hong Kong, is expanding its in-database processing capabilities with SaaS on their active Enterprise Data Warehouse; Smart Communications, the largest mobile phone operator in the Philippines, is adding a disaster recovery system to its Teradata environment. Here, the data warehouses reached mission-critical status in less than one year, demonstrating the power and benefits of realtime analytical insights. Other expansions included: Yahoo Japan; the Shanghai Pudong Development Bank in China; Vodafone Australia; JCB, the largest credit card company in Japan; and DCM Holdings, the largest home center retailer in Japan.

Looking at 2010 results from an industry perspective, Teradata posted double-digit revenue growth across all industry sectors with the exception of healthcare, which was coming off a record 2009 when revenue doubled. The solution revenue contribution by industry for 2010 was as follows: financial services, which includes banks, capital markets, credit card and insurance companies, accounted for 28%; communications, which includes telecommunications, cable, e-business and media and entertainment companies, finished at 24%; retail contributed 16%; manufacturing accounted for 13%; government was 7%; travel and transportation, 6%; and healthcare 6%. Other industries made up less than 1%. As a reminder, the solution revenue estimates by industry do not include our maintenance revenue.

In terms of industry growth for 2010: financial services grew 17% for the year with all three regions growing double digits; communications was up 20%, with the Americas and APJ both growing slightly under 50%; retail grew 10% and was up more than 30% in the Americas; manufacturing had the strongest growth of all the industries, up 42% in 2010 and led by EMEA, which more than doubled, and then the Americas, which was up 40%; government grew 10% with APJ and the Americas growing double digits; travel and transportation was up 14%, with strong growth in EMEA and in the Americas; and finally, healthcare revenue declined 18% in 2010. As I mentioned earlier, healthcare was going against the prior year in 2009 when revenues had doubled.

There are many specific drivers of analytics growth in each of these industry segments we serve today, but there is a common challenge faced by all corporations with managing the exploding volumes and complexities of traditional data, along with the exponential growth of the mostly untapped and mostly unstructured big data. New types of data from sources such as mobile devices to sensors to web flick streams represent opportunities for new insights and business intelligence for corporations. We've been working hard to take advantage of all these opportunities that we're seeing today and also for tomorrow. Teradata Labs, our data warehouse R&D engine, launched Teradata 13.10, the most comprehensive database for analytics with powerful geospatial, temporal and compression capabilities to meet new market challenges. These releases have been well-received by all of our customers. Our Purpose-Built Platform family strategy has had great success as evidenced by product revenues that were up a record 21% for the year. Our clients' revenue nearly doubled in 2010, while our EDW revenue growth was approximately 17%, which was our highest annual growth rate for EDW during the past 10 years.

Teradata continues to be recognized as a leader by industry analysts and took the top spot in Gartner's 2011 Data Warehouse DBMS Magic Quadrant. Gartner recognized Teradata as the leader in both vision and execution for our broad product line, our strong workload capabilities and our integration with SaaS. And at the recent National Retail Federation Show, Teradata's geospatial capabilities was selected as a top new technology. We're riveted on driving innovation to maintain and extend our lead in the data warehouse for the years to come.

Our partnerships continue to strengthen. Earlier, I mentioned a number of wins with SaaS in the quarter, and now we're implementing our first SAP BW on Teradata and progressing towards general availability. And in 2010, we also added new partnerships with big data players such as Cloudera and Karmasphere to help transform unstructured data into advanced analytics for new insights.

Recently, we completed the acquisition of Aprimo, a leader in cloud-based integrated marketing management software. Teradata works closely with marketing organizations and the majority of the customers we serve today and is core to our business. Marketing sits at the intersection of customers, products, services and business development in a lot of corporations. Marketing makes thousands of strategic and operational decisions that has significant impact on profitable growth for their companies. Although Teradata helps many customers with strategic and operational decision-making, many corporations' marketing processes and systems are inefficient or nonexistent, which makes it hard to take full advantage of the analytical capabilities that Teradata can provide. Aprimo's integrated marketing management software addresses this and enables marketing executives to control budgets, eliminate internal silos, increase productivity and execute best-in-class marketing and drive measurable ROI. This acquisition enabled us to make our core Teradata data warehouse and analytical marketing solutions stronger while expanding our addressable market with the number one integrated marketing management and software-as-a-service provider.

This year, Gartner recognized Aprimo, again, as the undisputed leader in marketing resource management. In this report, Gartner cites Aprimo's broad and deep solution, experience, client maturity and continued market traction as key success drivers. I am pleased that Aprimo's CEO, Bill Godfrey, has joined Teradata's leadership team reporting to Darryl McDonald. In Bill's new role as President of Aprimo, we have aligned Teradata's applications with Aprimo, and product roadmaps are being synchronized and joint marketing and selling has begun. Teradata is now the leader in both data warehousing and integrated marketing management, two strong positions to build upon for the years to come.

Turning to guidance for 2011. We expect revenue to grow 12% to 14% from 2010 and non-GAAP EPS to be $2.10 a share to $2.20 a share. Our revenue guidance includes Aprimo, which will contribute 3% to cap revenue growth and also currency benefit of approximately 2%.

In summary, we are very pleased with our performance in 2010 and the foundation we are building for longer-term growth. Now I will turn it over to Steve, who will provide more details on our fourth quarter and full year performance and our 2011 expectations. Steve?

Stephen Scheppmann

Thanks, Mike, and thanks for joining us this morning. We just completed a great year highlighted by 13% revenue growth, expansion of our gross and operating margins and non-GAAP earnings per share up almost 20%.

Moving from the headlines to the financial detail. Revenue of $548 million was up 10% from the fourth quarter of 2009, also up 10% in constant currency. Product revenue of $267 million, was up 12% from the fourth quarter of 2009, or 11% in constant currency. Services revenue, up $281 million, was up 9% with no impact from currency. Within our services revenue, consulting services was up 11% and maintenance services was up 7% in the quarter. For the full year, total revenue was up 13% to $1.936 billion. In constant currency, total revenue was up 12% from 2009, our best performance since 2000. Product revenue for the year was $933 million, up 21% from 2009, up 20% in constant currency. Services revenue of $1 billion was up 7%, up 6% in constant currency. Consulting services was up 8%, or 6% in constant currency, and maintenance revenue was up 6%, or 5% in constant currency. Gross margin in the fourth quarter of 2010 was 55.7% compared to 56% in the fourth quarter of 2009. The decline in gross margin from the strong prior period resulted from the Americas and APJ regions seeing less than a favorable deal mix as compared to the prior year period. Gross margin for the year was 56.2%, up 130 basis points from the 54.9% in 2009. The increase in gross margin for the full year was driven primarily by improvements in product gross margin. Product gross margin in the fourth quarter was 65.9%, good in terms of historical levels, but not quite as high as the 67.8% product gross margin achieved in the strong fourth quarter of 2009. Product gross margin for the year was 67.2%, an increase of 200 basis points from the 65.2% reported in 2009.

We are pleased with our overall product gross margin performance in 2010, in particular driven by our ability to leverage the fixed cost structure or component of our product costs. Services gross margin in the quarter improved 80 basis points to 45.9% versus 45.1% in Q4 2009. Margin improvement in our Maintenance business was significant enough to offset the margin headwind on our overall services gross margin created by adding new consulting resources. As we described in prior quarters, in 2010, we began to hire additional consulting resources to properly position us for the increasing demand for these services. Although adding consulting resources negatively impacts services margin in the shorter term, our consulting team did a great job in Q4 of managing costs and effectively utilizing resources, which minimized the margin pressure from the increased headcount. For the year, the solid operational performance by our consulting team was almost significant enough to offset the margin headwind on overall services gross margin created from adding the incremental consulting resources. Services gross margin for the full year was 46% versus 46.4% reported for 2009.

Moving to a geographical view of gross margin, in the Americas region, gross margin was 60.1%, down from 60.7% in the fourth quarter of 2009. The gross margin decline from the strong prior period resulted from a less favorable deal mix. For the full year, Americas' gross margin was 60.2% versus 58.1% in 2009. The year-over-year increase was largely driven by improved product margin.

Gross margin for the EMEA region in the fourth quarter was 52.1%, about the same as the 51.9% reported in the fourth quarter of 2009. For the full year, EMEA's gross margin was 52.5%, down from the 53.5% in 2009, due to a less favorable mix of product revenue versus services revenue, as well as somewhat lower services margin which was partially offset by the higher product margin. Gross margin in APJ for the fourth quarter was 43.2% versus 45.6% in Q4 2009. The decline was due to lower consulting and product margins, offset in part by higher maintenance margin as compared to the prior year period. For the full year, APJ gross margin increased to 47% from 46.3% in 2009, due primarily to a more favorable mix of product revenue versus services revenue.

Turning to our operating expense structure. SG&A expense in Q4 2010 increased $11 million from the prior period last year. For the year, SG&A was $526 million compared to $483 million in 2009. For both the quarter and the full year, the increases were primarily driven by higher selling expense from increased commission expense related to the higher revenue, increased number of sales territories and increased variable incentive compensation across the company in 2010 versus 2009.

As we discussed in previous quarters, we expected a continued increase in our selling expense in 2010 as we added more sales territories consistent with our three-year sales territory expansion strategy. Incentive-based compensation was also higher in 2010 due to the improved revenue results. We also had a moderate salary increase in 2010, which we did not have in 2009. R&D in the quarter was $39 million versus $34 million in the fourth quarter of 2009. As we have discussed for the last few quarters, we are increasing our investments in R&D, in particular, through enhancements to our database, tuck-in technology acquisitions and our expanded product family.

For the full year, R&D was $147 million, slightly less than the $150 million we had estimated. This compares to $117 million in 2009. In addition to our planned increase in R&D investment, FAS 86, or additions to capitalized software, was $10 million lower in 2010 than in the prior period, which resulted in a corresponding increase in R&D expense in 2010. It should be highlighted that we invest more in R&D activity than what is reported on the R&D operating expense line item on our income statement. Total R&D spend for 2010 before capitalization of internally developed software, which, as a reminder, is included in the line item Additions to Capitalized Software on the statement of cash flows, was approximately $191 million in 2010 compared to $171 million in 2009 or a 12% increase. The amortization of the capitalized software costs are reflected on the income statement through product cost of revenue. As a result of these items, Teradata's operating margin in the fourth quarter was 21.4%, the same as we reported in Q4 2009. The contribution from higher revenue offset the increased investment in sales territories and R&D. For the full year, operating margin was 21.4% versus 19.8% in 2009. We're very proud of these results, especially in light of the fact that we drove a significant increase in operating margin over the prior year while absorbing the previously described sales and R&D investments in 2010.

Our effective tax rate in Q4 2010 was 27%, up from the 21% effective tax rate applied to the fourth quarter of 2009. For the full year, our tax rate was 27% versus 24% in 2009. The higher tax rate in the fourth quarter and the full year was caused by a higher proportion of our pretax income generated in the United States in 2010 as compared to 2009. Obviously, the U.S. has one of the highest tax rates in the world. Summing it all up, GAAP EPS in Q4 2010 was $0.50 versus $0.48 in Q4 2009. For the full year, GAAP EPS was $1.77 versus $1.46 in 2009. Non-cash stock-based compensation expense is included in our GAAP EPS. During the quarter, stock-based compensation expense was approximately $8 million, or approximately $0.03 per share. For the full year, stock-based compensation was $26 million, or approximately $0.09 per share, compared to the $0.08 per share in 2009. We expect stock-based compensation expense to be approximately $31 million, or roughly $0.11 per share in 2011. This increase reflects the normal increase in the stock-based compensation expense, as well as the increase related to adding the new Aprimo team. Excluding stock-based compensation expense, our non-GAAP EPS was $0.53 in Q4 2010 compared to $0.50 in Q4 2009. And for the full year, non-GAAP EPS was $1.86 versus $1.56 in 2009. We provide this non-GAAP information because we use this information internally to manage the business and compare our results to our peers. And I believe all the sell-side analysts that followed Teradata now calculate and use the non-GAAP EPS figures to forecast our results, compare our results to our peers and use this measure, along with others, as a basis for stock price modeling. As a reminder, we have a table in the footnotes of our earnings release, as well as detailed schedules on our website that reconciles the differences between our GAAP and non-GAAP results, as well as our 2011 EPS guidance. In 2011, we will also exclude EPS impact from the Aprimo acquisition-related items, which I will discuss in a few minutes.

Turning to cash flow. Net cash provided by operating activities was $148 million in Q4 2010, up from the $91 million generated in the fourth quarter of 2009. The largest contributor to our increased cash from operating activities was a change in accounts receivable. I'd like to point this out because this is yet another example of how it is common for the impact of AR, or accounts receivable, to move up and down for Teradata from quarter-to-quarter due to the lumpiness and timing of transactions, particularly quarterly for Teradata. After $21 million of capital expenditures, which includes additions to capitalized software, development cost and expenditures for property and equipment, versus $27 million in the fourth quarter of 2009, we generated $127 million of free cash flow, almost doubling the $64 million of free cash flow generated in Q4 of 2009.

During 2010, Teradata generated $413 million of cash from operating activities compared to $455 million in 2009. Capital expenditures in 2010 were $83 million compared to $88 million in the prior year, yielding $330 million of free cash flow for the year versus $367 million in 2009. Our free cash flow should approximate our net income plus or minus $25 million to $35 million each year. However, as I mentioned before, this relationship can change quarter-to-quarter. But on an annual basis, this relationship should hold. As a reminder, Teradata defines free cash flow as cash flow from operating activities, less capital expenditure for property and equipment and additions to capitalized software.

Turning to the balance sheet. We had $883 million of cash as of December 31, 2010, a $142 million increase from the end of the third quarter. For the year, our cash balance increased $222 million from the end of 2009. During the year, we used approximately $88 million to repurchase approximately 3 million shares versus using $174 million to repurchase approximately 7 million shares in 2009. As I said before, we expect that the rate of our buyback will continue to fluctuate each quarter, taking into account, among other things, our working capital needs, our stock price, alternative uses of cash, U.S. cash balances and economic and market conditions. That said, we do anticipate buying back stock in 2011. We have approximately $160 million of our board authorization remaining for open market repurchases. As you know, we closed the Aprimo transaction a few weeks ago, and we used the entirety of our pre-existing $300 million credit facility as well as approximately $225 million, or $200 million net of Aprimo cash, of our U.S. cash to fund the purchase price. Adjusting the 2010 year end cash balances, this would equate to us having now approximately $175 million of U.S. cash remaining. After funding the Aprimo acquisition, approximately 26% of our cash balance is available in the U.S. with the remainder being held offshore. We continue to consider and evaluate alternative capital structures as we move forward. With respect to our accounts receivable, days sales outstanding was 76 days as of December 31, 2010, compared to 83 days as of December 31, 2009; and 93 days as of December 31, 2008, which speaks to the improvement we've made in working capital and the quality of our customers and the relationship we enjoy with them. To provide further transparency around currency movement and the potential impact on our future revenue, we provide a schedule on our website detailing how currencies moved in 2010 and how this movement is expected to impact our year-over-year revenue comparisons in 2011. Assuming the currency exchange rates at the end of January, and assuming currency rates do not change throughout 2011, we expect currency to provide a two-point benefit for us in 2011, as well as a two-point benefit in Q1. Mike provided our revenue and EPS guidance early in the call, but I want to give a little more color on the specific items. We had another solid quarter in Q4, and we are looking to add a healthy pipeline. So we expect to get off to a good start in the first half of 2011. We expect 12% to 14% revenue growth in 2011, with our growth in the first half of the year probably tracking at the higher end of that range. Reflected in the company's 2011 revenue guidance is the loss of approximately one percentage point of revenue growth due to the required U.S. GAAP purchase accounting adjustments, reducing Aprimo's deferred revenue recorded on their balance sheet, which will negatively impact the revenue we can recognize from the Aprimo business in 2011. In other words, if we were not required by U.S. GAAP to adjust Aprimo's deferred revenue downward as we consolidate Aprimo's result into Teradata, our overall revenue growth assumption would have been 13% to 15%.

Turning to EPS. Specifically, we anticipate higher selling expense due to increased compensation, presales and training costs associated with the new territories we had in 2010 and those we expect to have in 2011. In addition, slightly lower services gross margin, as we continue to add to our consulting resources, and finally, higher R&D investments. We are also looking forward to integrating the Aprimo's business into Teradata and increasing our addressable market reach in their marketing applications space. Incorporating all these factors into our GAAP EPS guidance, we expect GAAP EPS of $1.80 to $1.90. However, this includes approximately $31 million, or $0.11 a share, of stock-based compensation. In addition, approximately $25 million or $0.09 a share, of estimated purchase accounting adjustments related to the Aprimo acquisition. In addition, approximately $17 million, or $0.06 per share, except amortization of acquisition-related intangibles. And finally, one-time transaction and integration cost of approximately $8 million, or $0.04 a share. Finally, these items may be refined throughout the year. Excluding these non-operational items, we expect non-GAAP EPS of approximately $2.10 to $2.20 per share in 2011. In closing, Teradata continues to be a leader in the market due to: our technology leadership position, which was recently recognized by Gartner for both Teradata and Aprimo; our strong customer base and relationships, servicing and enabling the Global 3000; our expanded product family, now including a very successful Appliance business, as well as new applications for integrated marketing management from the acquisition of Aprimo; our geographically diverse business model and our strong recurring revenue model from existing high-quality customer base, as they routinely increase the size, the scope of their enterprise data warehouses as well as the annuity revenue stream that comes from our Maintenance business. The Aprimo business model, by the way, works very much like the Teradata revenue model, with the large amount of the Aprimo's revenue recurring and with strong visibility. We have a strong capital position and have created a very attractive free cash model and are committed to managing our business to drive long-term operational earnings growth. We are very pleased with our 2010 results and are excited about 2011. And with that, operator, we are ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Wamsi Mohan from Bank of America Merrill Lynch.

Wamsi Mohan - BofA Merrill Lynch

Mike, I think you mentioned right at the beginning of your prepared remarks that you expect about 505 territories versus the 475 you exited 2010 with. So given your higher revenue and faster revenue growth, why are you continuing to expand the sales territories at the same rate as you have over the past three years and not be more aggressive in building out your footprint?

Michael Koehler

We currently plan, Wamsi, for the 505 territories, depending how things unfold in the year. We possibly could end up with more territories. As it stands today, we're more than happy with the investments that we've been making in the territories and the yields, and we're always looking across broader portfolio of opportunities in which to invest and ultimately optimize and maximize the revenue. So as it stands, today, we're looking at 30, and it could go higher as the year unfolds.

Wamsi Mohan - BofA Merrill Lynch

And could you just tell us how much you realized in 2010 from a revenue perspective from the new territories relative the roughly $100 million that you had originally expected? And how much do you think you'll realize in 2011?

Michael Koehler

It was slightly under the $70 million, which was the most recent update we had given the last couple of calls. And we're looking for the same incremental revenue increase in 2011, which was $50 million off of the original $100 million. So we're looking for a $120 million type of number off of the new territories, which is $50 million over the $70 million in 2010.

Operator

The next question is from Katy Huberty from Morgan Stanley.

Kathryn Huberty - Morgan Stanley

Steve, in light of the considerable downtick in DSOs, both sequentially and year-on-year, can you talk about linearity in the quarter and the momentum of business at the end of December and during January in particular?

Stephen Scheppmann

Yes, Katy, what we see on the DSO -- I'm still comfortable on the range, 75 to 85, which I've kind of targeted as a DSO. And it is lumpy depending upon when some of the deals come into the quarters. If the deal comes in early in the quarter, like in the fourth quarter and October, generally speaking, they'll be paid before the quarter end. So you have some of that going through, but that's nothing unusual than what we'll see in other quarters. So I'm very comfortable still in that 75 to 85 DSO range, and playing out pretty consistent to how it's evolved over the last three years on a cyclical basis throughout the year.

Kathryn Huberty - Morgan Stanley

And there's nothing in relation to a stronger beginning of fourth quarter versus end of fourth quarter that gives you any pause?

Stephen Scheppmann

No. I mean, I've seen the same movie in other quarters too, where we've had our revenue coming in early the quarter versus the end of the quarter and vice versa. So again, that's why I'm comfortable in that 75 to 85 range.

Kathryn Huberty - Morgan Stanley

And then just a quick follow-up for Mike, have you seen any increased competitive pressure from the Oracle Exadata product? Are you finding still that they're attracting a different use case and customer set?

Michael Koehler

Not at this point in time, Katy. No.

Operator

The next question is from Nabil Elsheshai from Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities, Inc.

I guess I was wondering if you could provide a little more color on the revenue growth in terms of mix, particularly organically. What do you guys think when you back out the currency and the acquisition? It looks like you're at the 7% to 9% range in terms of revenue growth that you guys just talked about historically. So A, when you look at the year, what do you think could potentially drive that higher, whether it's appliances or partnerships? And if we can get an update with SAP? And then what's embedded in that growth rate on products versus the services and maintenance?

Michael Koehler

You got the numbers right, Nabil. So it's 7% to 9% in the core business. And, also, you did point out a lot of different things that could provide potential upside to the revenue guidance. So the one good thing we've done is we've laid out a lot of different underpinnings organically in non-Aprimo, in which there's opportunity to grow the revenue at a faster rate. The guidance of the 7% to 9%, as Steve mentioned in his prepared remarks, is we look at the first half, we're looking to be at the higher end of the guidance. If you take a look at the services revenues and that component, once again, it will be a higher growth rate than 2010. But once again, it's harder to move the dial meaningfully on it. So this is a very similar scenario to what we were talking about a year ago at this time, which gets back to, we don't have -- I hate to use the word visibility because it gets translated into the economy, but we just don't have good detailed knowledge of what is going to be in the funnel for product revenue once we get out to the second half. And that's basically the net-net.

Nabil Elsheshai - Pacific Crest Securities, Inc.

And SAP? Maybe, Darryl, you could give an update on where we are on that for a while?

Darryl McDonald

Yes, we are on schedule with the SAP ramp up of release 7.3. We've got our first customer that we're implementing BW on Teradata underway right now, and we've got four other customers who were teed up to participate in that early ramp-up in GCA.

Nabil Elsheshai - Pacific Crest Securities, Inc.

Any change out of Netezza now that they're part of IBM on the competitive front?

Michael Koehler

Not really. We're not seeing any change at all from the Netezza front from our perspective.

Operator

The next question is from Bhavan Suri from William Blair & Company.

Bhavan Suri - William Blair & Company L.L.C.

Just as I look at product growth, that kind of slowed down sequentially or decelerated. Any sort of color on how we understand that? Were they sort of hardware floor sweeps? How should we think about that?

Stephen Scheppmann

No, Bhav. I mean, nothing unusual. Coming into 2010, we knew we were going to have a very strong performance in the Americas, particularly on the product side. So that was anticipated. And the performance we saw in the second half of 2010 continued along pretty consistent to where we thought it was going to be. And so there was really nothing unusual. I mean, at the end of the time, it was actually better than anticipated, particularly in the second half of the year Q3 and Q4. So nothing unusual in there, other than we knew we were coming out of the blocks with a strong first half on the product side of the Americas.

Bhavan Suri - William Blair & Company L.L.C.

And then could you just provide a little color on the appliances? Sort of how many customers do you have that have got appliances? And sort of how many did you have in the quarter? And what percentage of revenue did that account for, I didn't catch that?

Michael Koehler

The last earnings call, we updated -- we had roughly 150 customers. And at the end of the fourth quarter, we're a little under 190 customers. The revenue from the appliances actually in the fourth quarter went slightly above the 5% to 10% range we've been talking about. And for the year, it finished slightly under 10% of product revenues.

Bhavan Suri - William Blair & Company L.L.C.

As you look at that business, is that mostly selling into the existing EDW environments? Where they sort of hanging the appliances off the core EDW? Or is that more new mid-market accounts that you hadn't reached before? Mike or Steve, where is that?

Michael Koehler

A little less than half the new customer wins are done with appliances. So we do have a number of appliances going into the new customer wins. And it's had an impact on our ability to have record kind of new customer wins in 2010. So it's just been a great addition. Of course, it gets selected more often or not when we get into the mid-market or down towards the bottom of the Global 3000. And it's proven to be a nice fit. I really think the great thing is that our EDW revenues grew 17% in 2010 while our appliance product revenue was close to doubling. This is exactly what we wanted to have happened. The other point of it is in the customer base, where the appliances are going in, the 1600 class machine, our big data, Extreme Data Appliance, this is sheer incremental business in our customer base. So there is no confusion, no overlap, no cannibalization whatsoever as it relates to the EDW revenue flow in our current customers, and that these 1600 implementations have been huge. Lots of petabytes. Lots of petabytes and something that would not be practical to be putting in an EDW, which is handling thousands of users and different kinds of workloads and queries. So this thing's really unfolded very, very well.

Bhavan Suri - William Blair & Company L.L.C.

And I guess, one quick one on the product side, Mike, do you think you'll add like Hadoop functionality to that big data appliance? Or do you think you'll sort of just stay with partners like Cloudera for that?

Michael Koehler

We'll be doing both. I'll let Darryl give a little more color.

Darryl McDonald

Yes, it's our intent to -- as you know, at PARTNERS, we announced our new relationship with Cloudera to be able to integrate with MapReduce, but we're looking at which of the MapReduce functionality -- we've got customers today that are integrating Teradata with that environment. And we're continuing to look at it in our Labs, our ability to integrate MapReduce capabilities into our products as well as our advanced development.

Operator

The next question is from Matt Summerville from Keybanc.

Matt Summerville - KeyBanc Capital Markets Inc.

Two questions on the APJ region. Can you guys talk a little bit more about the gross margin performance there in the fourth quarter? As I look back over the last several years, that's basically the lowest gross profit margin I've seen, at least in the history that I have. So can you talk a little bit more about the dynamics there in terms of profitability? And then are you getting the sense that your business in Japan, which I think is about half of APJ, is to the point that it's kind of bumping along a bottom where it's no longer kind of detracting from the region's organic growth?

Michael Koehler

Two things here. So on the margins, the one thing that's impacting the APJ overall gross margins is the mix of professional services that's been increasing over the past couple of years. And Steve, I'll let you add if there's any more detail relevant beneath that. The other question, Matt, around Japan, the Japan environment has been soft for a number of years. And we've been doing okay. However, in 2010, once again, we did not get the growth we were looking for and in fact, had a decline. That said, the companies that we do talk there, other companies in our industry and everything, looks like Japan, overall, is pretty soft. We have been sizing ourselves properly to fit better into the revenue that we are producing there. We're realigning investments and APJ to get after some of the markets that are a little more attractive from a growth perspective, economic perspective. But at the end of the day, we're very, very, very committed to Japan. And we see just tremendous opportunity for Teradata, given the scale of the corporations and their enterprises there. As far as a market opportunity for Enterprise Data Warehouse, Japan is clearly second to the U.S. And we're very committed there, and we'll keep after it. It was a pretty -- the good news in having a down year is the following year. So we're optimistic that we've at least seen bottom or can get back on the growth trajectory there.

Stephen Scheppmann

And Matt, Mike's right. I mean, Japan's got the highest mix in any of the countries of the FBS to the total revenue. And so that is their primary driver.

Operator

The next question is from Alex Kurtz from Merriman Capital.

Amelia Harris - Merriman Curhan Ford & Co.

This is Amelia in for Alex today. Just a question about the increase in adoption in flash drives. Have you seen an increase on your end? And what is your adoption rate of flash drives?

Stephen Scheppmann

What we have -- it's a technology that we're very well aware of, and we leverage all the different technologies across our stack today. And as you know, we optimize the right technology for this analytical space. And today, we've invested quite a bit in looking at memory, solid state drives or flash and then the traditional drive. So today, we have it in our product, and we think it has potential in the future for rightsizing the right analytics for that type of technology as the price performance comes down.

Amelia Harris - Merriman Curhan Ford & Co.

And just as a follow-up, what are your thoughts on flash-based EDW drives -- EDW arrays like Violin Memory at the high-end of the market?

Michael Koehler

Again, we don't think that all or nothing around the technology is appropriate. We think the right balance of that technology in the stack is what's going to be optimal from a price performance for our customers.

Operator

The next question is from Brad Reback from Oppenheimer.

Brad Reback - Oppenheimer & Co. Inc.

Back on the 4Q linearity. At the end of the quarter, did you see any unnatural deal slippage?

Michael Koehler

I would characterize it as normal. In any quarter, there is puts and takes. The Americas came in higher than we expected in the fourth quarter. There were some new opportunities that came into play. In this case, some of them are large, and it can contribute quite a bit. But overall, Brad, no.

Operator

The next question is from Greg Halter from Great Lakes Review.

Gregory Halter - Great Lake Review

Deferred revenues, wondered if you could discuss the percentages from maintenance and subscriptions in the quarter?

Stephen Scheppmann

Greg, thanks for bringing that up. Usually I mention that in my prepared remarks, so thank you. Yes, my metric is to be about 70% of that balance in the deferred revenue on the balance sheet to be maintenance and subs. They were about 72% as of 12/31. So very consistent to where I expected to finish.

Operator

The next question is from Derrick Wood from Susquehanna International.

James Wood - Susquehanna Financial Group, LLLP

Professional services was pretty strong in the quarter. Clearly, you're hiring utilization is going up. Can you talk about what's driving that demand? And is there any kind of leading indicator for kind of product sales pipelines with respect to that number?

Stephen Scheppmann

No, I wouldn't say. That's kind of lively internal debate. I'll probably have half the leadership team 50-50 as the leading indicator or lagging indicator. I would not -- what I've seen over the years, I would not say it goes either way, but just something that we all experience throughout the quarters. So nothing unusual within the activity that would be an indicator of product revenue or lagging indicator of product revenue. So nothing that I've seen specifically.

Michael Koehler

If I can add, within the Consulting Services business itself, we continue to add capabilities to what we can provide in the marketplace. And we continue to grow and expand our managed services offers to our customers. We've added VI consulting types of capabilities with Clairview acquisition a couple of years back that we continue to grow. So there's multiple things within the Consulting Services business that we continue to add to. And then with the uptick in the business, we've been ramping and adding resources. And basically, there's a lot of demand for Teradata consulting services, all the different types that we have. So we are operating with a higher backlog. We've expanded our offshore capabilities to onshore. And we're growing onshore resources, offshore resources. And the backlog's up, and we saw an uptick in the fourth quarter, which was very conservative.

Stephen Scheppmann

And Derrick, one thing I wanted to do on the professional services, coming to a comment on the prepared remarks, that when we look at the services margins due to these investments, we do anticipate that it possibly could be lower for the year on the services margins and lower in the first half. So just kind of emphasizing that from the prepared remarks.

James Wood - Susquehanna Financial Group, LLLP

What about on the product side?

Stephen Scheppmann

On the product side of the margin?

James Wood - Susquehanna Financial Group, LLLP

Yes.

Stephen Scheppmann

I don't see anything unusual in there. I mean, appliance side, we're still seeing the appliances to be about 10%. They are slightly less than the margin side, but we stay in the 10%. We should be -- it's pretty consistent with the prior year, fluctuating quarter-by-quarter. And then one thing I did want to bring out that I didn't bring on my prepared remarks was the R&D expenses for the year, expect to be approximately $155 million with Aprimo in there for 2011.

Operator

And the last question is from Ed Maguire from CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc.

Just a quick question on how Aprimo's revenues layer into the products consulting and maintenance? And also if you could just talk about what you expect the impact of Aprimo will be on the maintenance line? Typically, maintenance declines over the quarters during the year, and would just appreciate any color on that.

Stephen Scheppmann

Yes, Ed, we're just getting right in. We just closed the acquisition in late January. I'm just getting right into modeling for the 2011 plan. And the biggest thing that I'm dealing with now is going through the impact of the deferred revenue adjustment on that revenue throughout the year. So I need to continue to work through to see how that's going to impact quarter-by-quarter. So I'd like to defer on that until I get that model worked out as to exactly how much deferred revenue I'll be writing off and how that will impact the quarters. Because that includes the maintenance side of it and some of the professional services side that was capitalized or deferred on the balance sheet. And I just have to see how that wings off under GAAP.

Michael Koehler

Thank you very much, everyone, for joining us today, and thank you for the questions. I hope you all have a great day, and we're looking forward to a strong 2011. Thank you.

Operator

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

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