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Teradata, (NYSE:TDC)

Q2 2011 Earnings Call, Aug 04, 2011

August 04, 2011 8:30 am ET

Executives

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

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

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

Gregg Swearingen - Vice President of Investor Relations

Analysts

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Wamsi Mohan - BofA Merrill Lynch, Research Division

Greg Halter - Great Lakes Review

Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division

Katy Huberty - Morgan Stanley, Research Division

Rahul Bhangare

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

Brad Reback - Oppenheimer & Co. Inc., Research Division

Operator

Welcome to the Q2 2011 Teradata Earnings Call. My name is Sandra, and I'll be your operator for today's call. [Operator Instructions] 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 2011 second quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's 2011 Q2 results. Steve Scheppmann, Teradata's Chief Financial Officer, will then provide more details regarding our financial performance, as well as our increased guidance for 2011. Darryl McDonald, Teradata's Executive VP of Applications, Business Development and CMO is also in the room as well.

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, which excludes stock-based compensation expense and other special items, as well as other non-GAAP items, such as free cash flow and constant currency revenue comparisons. A reconciliation of our non-GAAP results to our reported GAAP results and other information concerning these measures is included in our earnings release and on the Investor page of Teradata's website 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 F. Koehler

Thanks, Gregg, and good morning, everyone. Teradata delivered strong growth in the second quarter with revenue up 24% over prior year and for the first half, revenue was up 21% and up 17% in constant currency. These results represent the highest growth quarter and first half Teradata has produced over the past 10 years.

Growth for the quarter and first half was led by strong performances in the financial services and retail industries. The increased investments we have been making during the past 3 years in R&D, market coverage, consulting and partners has been key to driving overall revenue growth and product revenue growth which has averaged more than 20% over the past 6 quarters. These investments have also paved the way to the highest number of new data warehouse customer wins ever recorded the past 10 years for our first half.

We are also experiencing good growth and activity with Aprimo. Bookings are up over 30% versus prior year since joining Teradata at the end of January. Overall, Teradata had an excellent quarter in terms of revenue growth and non-GAAP operating income of $143 million, which was up 28% over Q2 2010 and non-GAAP EPS of $0.60, which was up 30%. My thanks go out to all Teradata associates who make it all happen.

The business drivers and market opportunity continue to favor Teradata. As corporations continue to operate in these times of economic uncertainty, 2 things are clear: Business is hypercompetitive, and corporations are dealing with more data and more new data types than ever before to gain critical insights into their business. This was evident in the first half, when we added 10 customers to our Petabyte Club, doubling the number of customers we have with petabyte-size data warehouses to 20.

All of this big and complex data presents an opportunity and a threat to corporations. The ones who are able to manage the data and extract new insights and precision from it will have an advantage over their competitors. The corporations that don't manage this data explosion and extract value from it, will be stuck with the increased cost from the data and will be at a competitive disadvantage.

More and more corporations are turning to Teradata's unique technology and consulting capabilities to take advantage of this opportunity. I'll be sharing some examples as we go through the region highlights for the quarter.

The Americas continued the strong growth we started seeing in the beginning of 2010. Revenue was up 21% over a very strong Q2 in 2010 and up 21% for the first half of 2011. The Americas had another good quarter with new customer wins including CBS Interactive, one of the premier global online content providers, which will use Teradata, integrate customer data with advertising data from Hadoop for new insights.

MercadoLibre, the largest online auction house in Latin America will use Teradata to integrate web data and to provide access to external users so that they can make better buying decisions. SUBWAY, which is implementing Teradata to increase profitability and improve customer satisfaction from analytics. And Razorfish, one of the world's largest interactive agencies, will use Aster Data to provide highly differentiated digital marketing services by mining multi-structured behavioral data from their websites.

Core cell business with Aprimo and Aster Data in the quarter included one of the world's largest professional social networking companies, which is an Aster Data customer, and is now adding a Teradata data warehouse to analyze social networking behaviors to increase revenue. The Sports Authority, which is a Teradata customer, is now deploying Aprimo's integrated marketing management solution.

A major entertainment studio, which also is a Teradata customer and uses Aprimo to manage complex media buying activities, has now added Aster Data as well. As the company expands into digital channels, it will use Aster for big data analytics on clickstream and social media data to better understand consumer preferences and build cross-promotion opportunities.

Upgrades and expansions in the Americas were also strong. Caterpillar added a 6000 Series active data warehouse to support its finance transformation and SAP recording, as well as leveraging new data sources including telematic sensors, which transmit machine data for proactive maintenance.

Netflix has added a Teradata appliance to its Teradata data warehouse environment. Macy's is adding our Aprimo demand chain management application for improved forecasting and inventory management. And at eBay, we had a major expansion of their 1000 series Extreme big data appliance, which now stands at 37 petabytes.

Turning to EMEA, we had a very strong quarter with revenue up 34% and up 20% in constant currency. For the first half, EMEA is up 26% as recorded and up 18% in constant currency. New customer wins included SuperGros Denmark's largest wholesaler, which is implementing our 2000 Data Warehouse Appliance for SAP and for advanced point-of-sale analytics.

The Cooperative Financial Services Group, which is the world's largest consumer co-op headquartered in the U.K. installed a 2000 Data Warehouse Appliance to support credit risk and accounting as they evolve to an integrated data warehouse vision.

Significant expansions and upgrades included Lloyds, which expanded their Enterprise Data Warehouse to support the bank strategy of focusing on optimal customer engagement, regulatory needs, cost leadership and best practice risk management.

Bouygues Telecom in France, which is expanding their Teradata environment, to support the large increase of smartphone usage and mobile data traffic and is adding analytics around the convergence of fixed line, mobile, Internet and TV. And TeliaSonera, one of the largest mobile operators in the Nordics is consolidating multiple data warehouses with the Teradata active data warehouse to provide a 360-degree view of their customers for strategic, tactical and operational decision-making.

Last, Asia Pacific and Japan grew revenues 20% over prior year in the second quarter and 8% in constant currency. For the first half, revenue was up 13% as recorded and up 3% in constant currency. Overall, we are seeing some good progress in APJ.

New customer wins included Nissen Holdings, one of Japan's largest mail order companies and is using SAS in database analytics with Teradata to improve performance; Semiconductor Manufacturing International, one of the largest and most advanced integrated circuit manufacturers in China; Korea Telecom, the largest telco provider in Korea, is implementing both a Teradata EDW and an Appliance; and Okasan Securities, which is our first win in the Japan securities industry.

Upgrades and expansions in APJ included one of the largest telcos in Australia which is installing our new 6000 active data warehouse to form the foundation of its private cloud environment with virtual enterprise reporting. Taisho Pharmaceutical in Japan installed a 6000 active data Warehouse for marketing, analysis, sales support and finance. Commonwealth Bank of Australia, which has evolved their EDW environment to an active data warehouse, is leveraging mixed workload capabilities for operational decision-makings. And Mitsubishi UFJ NICOS, a leading credit card company in Japan, is enhancing its campaign management, credit analysis and regulatory compliance solutions.

Now, I'd like to give a brief update on Aprimo and Aster Data. As I mentioned earlier, Aprimo is off to a good start in 2011, and the integration is progressing very well. We are experiencing strong demand from customers and partners who work with Teradata in the international markets where Aprimo had less presence previously. We're also seeing strong demand in the U.S. We clearly have an opportunity to accelerate growth with Aprimo, and we are investing in additional customer-facing resources to do that.

We continue to add to the Aprimo Integrated Marketing Management suite of applications. In Q2, we announced the integration of the former Teradata multichannel campaign management application into the Aprimo marketing suite. We also added mobile marketing capabilities, making it easy to integrate SMS text campaigns into the marketing mix. We see more opportunities to accelerate Aprimo's Integrated Marketing Management leadership position. And we are increasing investments in R&D as well.

Turning to Aster Data, the addition of Aster has put us in a strong technological position relative to the market and the competition. Aster's unique patented SQL-MapReduce technology makes it simpler for mainstream commercial corporations to perform multi-structured big data analytics. This is a key differentiator for Teradata.

In addition, we have established the new Aster online community for analytic developers and data scientists, to create and share powerful MapReduce analytics. The market opportunity for Aster is clearly there, as evidenced by the increased activity we are seeing. And overall, we are very pleased with the progress of both Aprimo and Aster to date.

Regarding our core data warehouse investments, we have been making in R&D, territories, consulting and partnerships -- let me comment first, Teradata Labs, our data warehouse R&D division, released the 6000 Series active data warehouse in Q2, which is proving to be a game changer. We shipped a significant number of these powerful hybrid storage data warehouses in the quarter, and it is evident that customer demand is there. The ability to mix high-performance solid-state storage with traditional storage, along with our ability to automatically place data based on its usage, provides an extremely cost-effective and a higher performance data warehouse as opposed to data warehouses that use only one type of storage.

Our new territories are on target to produce $50 million more revenue in 2011 than they did in 2010. And we are increasing the number of territories we are adding in 2011, from 30 to 60.

Consulting Services revenues grew 34% in Q2 and 29% for the first half of 2011. We continue to add consultants as demand continues to increase for our data warehouse, DI and applications consulting expertise.

And finally, we continue to make good progress with our partnerships. In Q2, the Teradata Foundation for SAP BW became generally available, and we're implementing at key customers right now.

Turning to guidance, we are increasing our revenue growth guidance for 2011, from a range of 14% to 16% to a range of 18% to 20%. And we're increasing EPS from a range of $2.13 to $2.23 to a range of $2.20 to $2.28.

As mentioned earlier, we are increasing investments in sales territories and in Aprimo. And although these investments will negatively impact operating income the second half of 2011 as well as 2012, they will help position us for further revenue and operating income growth in 2013 and beyond.

In summary, Teradata has been executing well since spinoff, on our strategies to grow our business and increase our data warehouse leadership position. We now have an opportunity to further accelerate our growth and leadership positions in data warehousing as well as big data and integrated marketing, and we're going for it.

Steve will now provide more details on the business results and our guidance. Steve?

Stephen M. Scheppmann

Good morning. Thanks, Mike. Driven by the demand for business analytics, our second quarter reinforced our leadership position, producing revenue growth of 24%, 18% in constant currency, and yielding strong growth in non-GAAP earnings per share of 30%. Revenue for the first half of the year was up 21% or 17% in constant currency.

Product revenue of $269 million improved 21% from the second quarter of 2010, and increased 16% in constant currency. For the first half of the year, product revenue was up 19%, 16% in constant currency.

Services revenue of $312 million grew 26%, 19% in constant currency and was up 22% for the first half or 17% in constant currency.

Within our services revenue, Consulting Services increased 34% in the quarter and 29% for the first half, while maintenance services improved 17% in the quarter and 15% in the first half.

Before I go deeper into our operational highlights, let me discuss the special items we incurred in the second quarter of 2011.

Included in Teradata's Q2 U.S. GAAP results was approximately $28 million or $0.13 of gains from 2 equity investments. First, related to our equity investment and client technologies, and second, related to the impunity gain on the initial equity investment we made in Aster Data in 2010. These gains offset the following items that are approximate $10 million or $0.05 per share of transaction, integration, reorganization costs; $6 million or approximately $0.02 per share of acquisition-related purchase accounting adjustments; $9 million or $0.03 per share of amortization of acquisition-related intangible assets; and $8 million or approximately $0.03 per share of stock-based compensation expense.

Teradata's 2010 second quarter results included $6 million or approximately $0.02 per share of stock-based compensation expense and no other special items. Given that these special items impact several line items throughout our income statement, the following discussion, unless highlighted differently, will focus on the relevant income statement line items on a non-GAAP basis, excluding the impact of the before mentioned special items.

For further transparency, we have a GAAP to non-GAAP reconciliation schedule on our website. We also include tables in the footnotes of our earnings release, reconciling EPS, gross margin and operating income from a GAAP basis to a non-GAAP basis.

Moving to our operating results. Gross margin in the second quarter of 2011 was 55.9%, compared to 57% in the second quarter of 2010. The decline in overall gross margin was due to lower services margins, in which the primary driver was the higher mix of lower margin Consulting Services revenue versus higher margin maintenance services revenue.

Product margin rates were up slightly on a non-GAAP basis with the prior year. In the second quarter, we had a large lower margin 1000 series Extreme big data appliance. However, it was offset by the favorable mix of other product transactions.

The 1000 series Extreme big data appliance is an incremental opportunity for Teradata. But the margins are not quite as favorable as those generated by our core EDW and our data warehouse businesses. The reason for the lower gross margin on the 1000 series is directly related to the high ratio of storage-to-CPU and database licenses compared to the 2000 series data warehouse and our EDW.

Product gross margin in the second quarter was 68.5%, an increase from an extremely strong 68.2% generated in the second quarter of 2010. Favorable overall deal mix and the benefit from currency more than offset the lower product gross margin on the large 1000 series transaction and of higher amortization of previously capitalized software development costs.

The 68.5% product gross margin this quarter compares to the 67.2% for the full year 2010. This, however, does not mean our gross margin profile will remain at this level, as a benefit from currency will reverse at some time, and we expect higher amortization of software development costs, a non-cash charge recorded as product cost over the next couple of years.

Services gross margin in the quarter was 44.9% versus a very strong 47% in 2010 Q2. The margin decline reflects the strong 34% growth generated in our Consulting Services business. Margins for our very important but labor-intensive Consulting Services businesses are not as high as margins for our maintenance business and therefore, reduce the overall services margin when we see a larger increase in our strategic consulting revenues.

Moving into a geographical view of gross margin, and this will be on a GAAP basis. In the Americas region, gross margin was 57.2% versus 60.9% in the second quarter of 2010. The decrease in gross margin from the strong prior-year period resulted from a significant increase in Consulting Services revenue, which generates lower gross margin than the product revenue and lower product gross margin due to a deal mix and increased amortization of capitalized software development costs and the special items identified for amortization of acquired technology.

Gross margin for the EMEA region in the second quarter was 52.4%, a slight decrease from the 52.8% in the second quarter of 2010, due primarily to the greater proportion of consulting revenue. Gross margin in APJ for the second quarter was 47.4% versus 49.4% in Q2 2010, as lower services margins were offset in part by a greater proportion of product revenue as compared to the second quarter of 2010.

Turning to our operating expense structure, and this is back a non-GAAP basis. SG&A expense in Q2 2011 was $149 million compared to $121 million in Q2 last year. The increase was primarily driven by the addition of SG&A from Aprimo and Aster Data, higher selling expense from the increased number of sales territories, higher variable expense associated with a higher revenue and foreign currency impact.

As we discussed in previous quarters, we expect the continued increase in our selling expense in 2011, as we continue to add more sales territories to reach more new customers. And as Mike said earlier, due to the strong business analytics demand we are seeing, and the related opportunities we have, we now plan to double the number of sales territories added in 2011. We now expect to add 60 sales territories versus the 30 we had planned for earlier in the year.

To reiterate, a new sales territory takes several years to get to the same productivity levels as do existing territories, driven by the nature of the relationships that existing territories drive, 90% of the revenue from our current customers, whereas the new territories have substantially all their revenue coming from new customers. Therefore, as we increase our investments for sales territories, this will add incremental operating expenses in the second half of 2011 and into 2012. Although this will impact our ability to increase, maintain operating margins in the second half of 2011 and into 2012, this increased investment should enhance our revenue and operating income growth potential for 2013 and beyond, as Mike said earlier.

R&D in the quarter was $37 million, about the same as the $35 million recorded in the second quarter of 2010. The net increase included the addition of Aprimo's and Aster Data's R&D expenses. I would like to remind everyone that we invest more in our R&D activity each quarter than what is reported on the R&D expense line item on our income statement. To quantify our total R&D spend, you need to add our R&D expense and the amount we capitalize, which can vary significantly year-over-year or sequentially, under FAS 86, which is included in the line item additions of capitalized software in the statement of cash flows

In Q2, the total R&D investment or spend was approximately $56 million compared to approximately $47 million in Q2 2010 or a 19% increase, strongly tied to our strategic objective of maintaining and growing our technology leadership position.

In addition, as you may recall, we've been amortizing capitalized software costs over time back through the income statement, which hits our product cost of revenue and impacts our product gross margin.

For the full year 2011, we expect approximately $165 million to $170 million of R&D expenses including Aprimo and Aster Data.

Teradata's operating margin in the second quarter was 24.3% versus 23.8% in Q2 2010, and non-GAAP operating income increased 28% year-over-year. Our non-GAAP effective tax rate in Q2 2011 was 27%, down from the 30% in the second quarter of 2010, driven primarily by a higher overall mix of foreign versus domestic earnings.

We expect our non-GAAP tax rate for the full year to be approximately 27% to 28%. Our non-GAAP rate is a little higher than our GAAP rate of 26% to 27% due to a more heavily weighted U.S. earnings mix for our non-GAAP after considering the impact of the special items.

Summing it all up, for the quarter, excluding special items, non-GAAP EPS was $0.60 in Q2 2011, compared to $0.46 in Q2 2010, a 30% increase.

Turning to the cash flow. Net cash provided by operating activities was at $179 million in Q2, 2011, up from the $62 million generated in the second quarter of 2010. The increase in cash from operating activities was primarily due to the decrease in the receivables DSO, sequentially and year-over-year, driven by the timing of the collection of the receivables. As you will recall, our cash from operations was lower than normal in Q1. Again it was due to the normal fluctuations and the timing of collections of receivables, and now you can see the positive side of that in our Q2 collections.

Just a reminder, we are now including Aprimo and Aster Data in our cash flow statement, which increases the working capital line items beyond Teradata's historical trend levels. With respect to accounts receivable DSO, it was 71 days as of June 30, 2011, compared to 75 days as of June 30, 2010. After $33 million of capital expenditures, which includes the additions of capitalized software development costs and expenditures for property and equipment versus $23 million in the second quarter of 2010, we generated $146 million of free cash flow compared to $39 million of free cash flow generated in Q2 of 2010.

As a reminder, Teradata defines free cash flow as cash flow from operating activities less capital expenditures for property and equipment and additions to capitalized software.

Turning to the balance sheet. As of June 30, 2011, we had $682 million dollars of cash, a $96 million decrease from the end of the first quarter. Cash generated into the quarter was used along with net proceeds from our new $300 million term loan to fund the Aster Data acquisition which closed on April 5. And in addition to fund our share repurchase activity in the quarter, and also to repay the $300 million outstanding under the revolving credit facility. As a result, quarter end net borrowings were primarily unchanged from March 31, 2011.

We repurchased approximately 720,000 shares in Q2 for approximately $38 million. We have approximately $155 million of board authorization remaining for open market share repurchases. Of our $682 million cash balance, we have approximately $550 million offshore, with the remaining $130 million of cash being held in the U.S.

To provide further transparency around currency movement and the potential impact on our 2011 revenue, we provide a schedule on our website, detailing how currencies move since the respective periods in 2010 to indicate how this movement is expected to impact our year-over-year revenue comparisons in 2011.

Assuming the currency exchange rates as of the end of July, and assuming currency exchange rates do not change throughout the remainder of 2011, we expect currency to provide an approximately 4-point benefit for us in 2011, with an approximate 4-point benefit in Q3 based on -- again based on the exchange rates as of the end of July.

Turning to full-year guidance. After another solid quarter in Q2 and a healthy pipeline for the second half of the year, we are increasing our revenue guidance from 14% to 16%, to 18% to 20% for the full year. This includes 4 points of benefit from currency and about 3 points of growth from Aprimo and minimal revenue from Aster Data.

Regarding our full year 2011 EPS guidance, the following factors, among others, includes our guidance range: Higher operating expenses due to increased performance space variable expenses, presales and other related costs associated with the new territories we added in 2010 and the increased space of investments in new sales territories, and in Aprimo that we now plan in 2011.

Secondly, we expect overall gross margin to remain generally consistent with the first 6 months. And finally, we continue to expect higher R&D investment versus 2010. We expect significantly lower capitalization, reduction of R&D expenses under FAS 86 in the second half of 2011 as compared to the first half of 2011, resulting in significantly increasing our R&D expense for the second half when compared to the first half, which had been factored in to our previous R&D expense guidance of $165 million to $170 million.

Incorporating these factors in our guidance, we expect our GAAP EPS guidance range to be approximately $1.91 to $1.99. However, this is based on and includes the following facts and assumptions. First, $28 million or $0.13 per share of gains from equity investments recognized in Q2. Secondly, approximately $34 million or $0.12 per share of stock-based compensation. Third, approximately $18 million or $0.07 per share of estimated purchase accounting adjustments related to the Aprimo and Aster Data transactions. Fourth, approximately $28 million or $0.10 a share of amortization of acquisition-related intangibles. Fifth, transaction, integration, reorganization-related cost of approximately $26 million or $0.13 per share. And finally, our weighted average shares outstanding estimate of 172 million shares.

Based on these assumptions and exclusions, we expect non-GAAP EPS guidance to be approximately $2.20 to $2.28 per share for the full year 2011. We had a strong first half of 2011, and are driving to finish strong in 2011, while investing more aggressively for the future that leverages our strategic strengths and opportunities.

We're also looking forward to completing the integration of the Aprimo and the Aster Data businesses into Teradata and increasing our addressable market reach into these 2 new exciting market opportunities.

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.

Wamsi Mohan - BofA Merrill Lynch, Research Division

Mike, can you talk about how many of the 60 targeted territories you have already added through the end of the second quarter? I'm trying to understand how much more is left in the second half of the year?

Michael F. Koehler

Wamsi, the 60 territories will be for the full year for 2011. Previously, what we have said, we had planned to add 30 territories this year. And based on the results and what's going on, we see an opportunity, expand that from 30 to 60 for the full year 2011.

Wamsi Mohan - BofA Merrill Lynch, Research Division

Can you give us some sense of where you are in the process of adding those 60 territories, and where geographically you might be seeing the most number of additions?

Michael F. Koehler

As we exited the first half, we had 30 territories already established, new territories added. So we're in the process right now ramping the next 30. On a geographical basis, we've added -- it's fairly even distributed. There's some industry segments that we're going after, so there's an industry segment view to this. We've added a little bit -- or are adding a little bit to our mid-market team here in the U.S. We've had some decent success there, not a lot of revenue, but a number of nice wins. But by and large, it's pretty broad-based. The growth emerging, kinds of markets, we're adding more there. So -- but it's pretty well distributed.

Stephen M. Scheppmann

And Wamsi, may I add that those incremental 30, that second 30 will probably be more back-end weighted into 2011, as we work through what Mike just described.

Wamsi Mohan - BofA Merrill Lynch, Research Division

Okay. And as a quick follow-up, your revenue growth in EMEA on a constant currency basis has been the strongest since we've seen in a very long time. Can you comment on which verticals you're seeing the most amount of strength and opportunity there? Because it seems that it's very different from where a lot of the other software companies, especially those that have more exposure to financials, I was just sort of wondering.

Michael F. Koehler

We've been ramping pretty steadily in EMEA if you look back over the past 6 or 7 quarters in constant currency. There's been a gradual ramp and EMEA had a fairly good first quarter as well as the second quarter. Where we're experiencing the growth, is in our traditional industries, EMEA has always been a very strong in our traditional industries such as telco and retail, financial services has been big. We've done a lot of new account acquisitions in the past 2 years in Fortune 500-types of financial services institutions, a couple of retailers, telcos. A lot of the growth has been coming from more of the emerging markets in EMEA, as well as we've now penetrated in a meaningful way in some of the other segments, we are less penetrated in, like the manufacturing -- from the manufacturing industry sectors such as auto and so forth. And we're starting to make some headway into the utilities market as well. So it's a combination of investing more in the high-growth markets, executing on some great new customer wins and the global Fortune 500, further development of our traditional industries, and getting -- going into some new industries there. Plenty of opportunity in EMEA, and we've laid some great underpinnings there. And I think what you're seeing is the results of work that's been going on there, a good 3-year or 4-year showing up right now.

Operator

The next question is from Katy Huberty from Morgan Stanley.

Katy Huberty - Morgan Stanley, Research Division

In light of the trade-off you're talking about today in regards to choosing growth investments versus driving the operating leverage goals you've laid out in the past, why isn't the 7% to 9% long-term revenue growth off the table and actually much higher when we think about the next 3 to 5 years?

Michael F. Koehler

Katy, as we look out longer-term, we're looking at a minimum of 10% of revenue growth over the longer term. And over the longer term, we're looking at earnings per share growth of 1.5x at revenue growth. I think shorter term, we have an opportunity like we're seeing right now for higher revenue growth, and maybe not as robust of an EPS growth relative to the revenue growth that we're making. But longer term, we have our sights set on a consistent 10% --plus type of revenue growth and yielding 1.5x on that 10% revenue growth.

Katy Huberty - Morgan Stanley, Research Division

[indiscernible] shorter term revenue growth will be higher, operating leverage lower, do you mean both the second half of this year as well as 2012?

Stephen M. Scheppmann

Yes, second half of this year as well as 2012 will be, as I mentioned, Katy on my prepared remarks, lowered. In probably the low 20%. We achieved our operating margin target that we talked about that mid-22% to 23%. And by doing so, really looking at the opportunities to reinvest back into the business to generate that revenue growth in the future years that Mike talked about. And so there’ll still be a pressure. But we'll still maintain in that low 20% range.

Katy Huberty - Morgan Stanley, Research Division

And a lot of the revenue this quarter came in the consulting business at least versus our model. Can you just talk about the relationship to products' revenues, do consulting engagements lead or lag products' revenues?

Michael F. Koehler

Well, I'd add, we have very strong product revenue growth as well, Katy. But this relationship of Consulting Services and product revenue growth, we've looked at it 27 different ways. And you can draw 37 different correlations. There is definitely one correlation and that's between the number of new account wins that we acquire, achieve. The size of those new account wins, the quality of them and our professional services business. So in a new account win, there is way higher Consulting Services content in the mix versus hardware in a new customer win, a first installation, versus the ongoing upgrades and expansions that occur moving forward. The other piece of this is we continue to really build out a great Managed Services business, more and more customers are turning to us for our expertise, and by the way, a very good, blended -- low-blended cost to operate the data warehouses and different aspects of it, and that continues to grow. We also have a very nice growing business intelligence consulting practice. This started with the acquisition at Claraview. It's probably been 3 years now, a little bit over 3 years. That continues to ramp. And that has also been a key driver. So this Consulting Services business, although the margin rate is not like the other aspects of our business, it contributes meaningful margin dollars, continues to grow. We see very good opportunities going forward, but most importantly, it's very strategic to our ability to compete and win against competitors, it's very important on our ability to grow our data warehouses and it's a big differentiator for the company.

Operator

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

Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division

It's interesting when you guys cited your customer wins, in the Americas in particular, I wouldn't say you fell -- fall into the Global 3000 that you traditionally target for by and large. Are you seeing a different segment of opportunities in your customer base or different revenue drivers as you expand your footprint?

Michael F. Koehler

We try to mention the new customer wins, we don't like that in the prepared remarks due to many masked names, and so forth. So we do try to limit it to ones where we have permission to use their names. In this quarter's prepared remarks, we tried to highlight some more that were related to big data, related to synergy wins with Aster Data and Aprimo and trying to give a little more color there. Our momentum in the U.S. in particular, with the continuing to acquire Global Fortune 500 customers and Global 3000 customers is, it's been fantastic, quite frankly, the last year and a half or so.

Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division

Great. And then, yes, you mentioned the 6000 Series and the uptick of the mixed storage environments. What are you seeing there in terms of that potentially driving a product cycle or additional uptick within your installed base?

Michael F. Koehler

Great question. The thing that's unique about the 6000 versus all the other EDW class releases we've done is we don't have coexistence, and it's centered around the complexities of the virtualized storage and everything that we’ve built into the platform. So the way I would categorize it is we might see a little bit of an acceleration of floor sweeps, where our customers completely refresh everything as opposed to continuing to add 5000 Series to their EDW in a coexistence environment. Because we'll continue to offer the 5000 Series, so our EDW customers can continue to add capacity and workload through coexistence. So there will be some acceleration of it. I think if you look at it over a 3-year kind of cycle, I don't see a big impact, only potentially a smaller one, where some companies will choose to accelerate a floor sweep that maybe they would've looked to do 2 years from now or a year from now and doing it sooner. Overall, I don't think it's going to have a meaningful impact.

Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division

Okay, great. And then, last for me. I have to ask the obligatory competitive question. Any change in the environment from your friends at Oracle? Or obviously big question from EMC? How much are you competing with some of those newer guys?

Michael F. Koehler

Other than some advertisements we're seeing, not a lot. Seriously, I have to say I've never seen our competitive position this strong. And it's across the entire platform family. Our win rates really started kicking in and hitting new highs about 1.5 years. Some of that's probably due to us having a broader platform family. But it is interesting, since Exadata was released, it’s been close to 3 years, our win rate has actually increased. We compete more with Oracle, but at the end of the day, we really can't find many data warehouse -- Oracle data warehouse implementations in our accounts. And the only thing I can figure is maybe, they are winning a lot more with Exadata and the OLT Peace [ph] fix.

Operator

The next question is from Rahul Bhangare from William Blair & Company.

Rahul Bhangare

It's good to see that you guys are doubling the number of sales territories. Are you guys making any more investments in your channel?

Michael F. Koehler

We've been increasing in part, our investments and partnerships, Bhavan, going back the last 2 or 3 years. Part of those investments include partners who also are systems integrators and also resellers and so forth. And we partner with the major global SIs, as well as some of the larger local SIs in the various countries around world. At the end of the day we have more of a cell-width model. To engage a customer, typically our expertise is needed in the design, the consulting around the business value, the ROI, the data architecture, and so forth and so on. So we had great partners, but I wouldn't call it a channel in the traditional sense, where you send the product over to somebody and it goes and gets sold. There's just a lot more to this than going and implementing a bank somewhere.

Rahul Bhangare

Okay. And what would you say the growth rate was, I guess relative to the core business for appliances or smaller scale data margins?

Michael F. Koehler

The 2000 series was right in that 10% to 11% range that we've been seeing the past several quarters. The actual growth rate is very, very high. When I say the 10%, I'm saying as a percent of revenue, Bhavan, not to be confused with growth rate. And we've had very good strong growth as well in the EDW class products. But I separate out the 2000 because we had a very, very large 1000 sale in the quarter that can spike things up by itself. The 1000s will be very lumpy. When we had one, they're big. We're not selling them in volume like the 2000 Data Warehouse Appliance.

Operator

The next question is from Matt Summerville from KeyBanc.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

A couple of questions, now that you guys have been involved with Aster through the equity stake for a couple of months, and you've owned it now for several months as well out right. Have you guys been able to do any work to attempt to quantify the market opportunity or the market size or unstructured or big data?

Michael F. Koehler

Matt, I'll make a comment and then I'll ask Darryl McDonald to add additional color. At this juncture, I don't think the market opportunity is clear other than it's large, it's extremely large. But it's probably a very big range, and how big it could be other than it's going to be -- it is big.

Darryl D. McDonald

Yes, I think there's a lot of work going on with analysts to try to quantify and define the big data space. I think everyone is now educated that it means more than just volume. It definitely means the different data types and different multi-structured data types being driven by social networks, Web and Web 2.0 applications environments, as well as machine data generated, sensor data generated. So everyone's trying to put some numbers around that, but we don't have anything to base sort of a market potential of growth on, but we are currently working and trying to give input where we can to try to quantify some of that for some of the analysts that do that for a living.

Michael F. Koehler

Matt, there's several dimensions yet to be figured out. So if you look at the structured data that we've been working with over the years, we do know our customers retain and use a lot of historical data. And as we've been working with other types of data like text data over the years, what we found is huge data volumes, but the amount of data that's retained, that historical data that's used for queries and things like that, joined with newer data, transactional data, isn't that much. So that’s just an example, one variables when you get into new data types.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

The other question I have is just a follow-up on unstructured and big data. A lot of your competitors out there, a lot of other technology companies are talking about having a big data strategy, talking about big data. I guess how would you compare, if you go down the list of your typical competitive set, how would you compare the viability of their initial go-to-market approach with the technology you now have with Aster?

Darryl D. McDonald

Yes, this is Darryl, Matt. I think we're in a very unique position with Aster Data. Because if you look at kind of the big buckets that this big data gets put into, they're sort of transactional data that's landing on traditional databases. And then there's a lot of the multi-structured that's landing on, Hadoop clusters, and I think in the middle of the opportunity where everyone is saying they're starting to move into around combining those 2, and the reason we acquired Aster Data, was its unique patented capability that combining SQL's transactional data with unstructured MapReduce data, and being able to go after that with a common set of tools and people. So a lot of people are talking about their big data strategy, most of them are referring to volume in their transactional database, the others are really trying to then connect to Hadoop or MapReduce environments, and I think we're in a unique position compared to all of them to have the ability to run those 2 together on one platform. Where the others are really bridging the 2 environments, very similar to the way Teradata did with the Hadoop environments that we announced a year ago on our partnership with Cloudera. So I think we're in a very unique position on how we approach and can handle it is unmatched by some of the other people that are saying they can do it in the market.

Michael F. Koehler

The only thing I'd add is we're in the very early stages of this, as far as how different companies are approaching it, and what the opportunities are and so forth. As Darryl said, we have a unique set of IP that can really differentiate us and provide a specific solution. But in all of this, there's a lot of variables, and I think that works to our advantage. This thing will evolve over time and these variables are an opportunity for us because we're really focused on this stuff and it's all we do for a living.

Operator

The next question is from Ed Maguire from CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

It's encouraging to see your confidence in building out sales teams, and I know you have very long sales cycles, but I was wondering if you could comment on the trends and deals in sales cycles and deal sizes. As you've ramped up over the last couple of years and you're looking to build out capacity, I would appreciate any color you can provide, particularly given the backdrop in Europe, whether you are seeing sales cycles accelerate or if there's any -- if there are any macro concerns that are impacting your deal cycles?

Michael F. Koehler

Ed, yes, what we've seen is back in the '08, '09 time frame I've alluded to lengthening of the sales cycle, 18 to 24 months. We've seen it probably come down more the traditional 18 months for the new account, new sales territories production. But again, that production to get to full kind of what I would call full quota carrying or full average is still lengthy 4-year-plus process. But with respect to deal size, the traditional EDW transactions for new first-time customers are staying pretty consistent. We talked about net $1.5 million to $1.7 million range. Where the change is on when it comes on the appliance side, the 2000 series size, and you get a lower average ASP in that. But again, that still uses a very effective sales tool in this process and in some instances may have accelerated that sales process from the normal 18 months. So those are the 2 things I'm seeing, Ed.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

Great. And could you just comment on the deal sizes on relative basis based on the low-end, particularly on the appliance side, how much competitive engagement you see that may impact the size of the deals you do there?

Michael F. Koehler

Ed, I would say the deal size on the appliances, we talked about previously that $500,000 to $700,000 range. The margin is slightly lower than the EDW from an overall margin perspective. But I really haven't seen anything from a competitive side influencing that.

Operator

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

Greg Halter - Great Lakes Review

I wonder if you could comment on your deferred revenues, which I think are up 20% year over year, but how much of that dollar amount may have come from Aprimo and Aster?

Stephen M. Scheppmann

There were some coming from Aprimo and Esther, but purchase accounting, artificially has impacted that at this stage. But I can say behind the numbers is the decline from March to June is very consistent with the same decline that we saw 4% to 6% from March last year. The key point, the measure that I look at is the maintenance and subs is still very healthy 70% plus of that deferred revenue balance. So even with Aster was minimal, with the Aprimo coming in, it's very consistent to the model that we look at Teradata, and at this point in time. But as they continue to add more to the SAS model, that will change going into the future somewhat. But nothing unusual behind that deferred revenue number on the balance sheet.

Greg Halter - Great Lakes Review

Okay. And relative to your capital spending and capitalized software on a combined basis, I don't know if you've given a number of your expectations for the full year?

Stephen M. Scheppmann

Yes, Gregg, what I'm looking at there is for the combined, between $105 million and $125 million that breaks down approximately $45 million to $55 million of the CapEx and approximately $60 million to $70 million on the capitalized software.

Greg Halter - Great Lakes Review

All right. And then you mentioned a number on the R&D, I think it was $165 million to $170 million. Given that dollar number, does that also include the amount capitalized? Or is that just the straight number that would be on the income statement?

Stephen M. Scheppmann

Net, well, both of those are true. That's a straight number on the income statement and it does reflect the capitalization reducing that. So that is a net number after the capitalization. The gross spend is actually higher.

Operator

The last question is from Brad Reback from Oppenheimer.

Brad Reback - Oppenheimer & Co. Inc., Research Division

Mike, if you look at the current market opportunities as you see it, I think you have -- after these 60 sales teams you'll have somewhere approaching 550 total sales territories. What do you think the -- if you had full penetration or full coverage right now, how many sales territories would you need to address the current opportunity?

Michael F. Koehler

I think if we just look, Brad, at the Global 3000 and we were, as we penetrate and we acquire large customers and they absorb a full-time account executive or "accounting salesperson” I think it could be north of 1,000.

Brad Reback - Oppenheimer & Co. Inc., Research Division

And on the global -- last quarter, you talked about the [indiscernible] doing some state work there. Of the additional 30, are you going to add some in the sub-3000? Or are they all focused to the Global 3000?

Michael F. Koehler

There will be some added in the -- outside the Global 3000 in the U.S. So we have a team in the U.S. focused outside the Global 3000. That's not to say by the way, we do sell to customers outside the Global 3000 around the world. Because there are some companies that have unique, complex types of analytical requirements like a lot of these e-business companies and web companies and everything else. So but the answer to the question is, we'll be adding some, a couple here in the U.S.

Brad Reback - Oppenheimer & Co. Inc., Research Division

And finally, on the Managed Services side of the business, you had alluded to that in your prepared comments I believe, what is the opportunity your customer demand for this idea of databases. How are you positioned there? And do you need meaningful incremental investments?

Michael F. Koehler

We're well-positioned. Whether you want to call it data warehouses as a service, software as a service or hosting or however you want to categorize it, we're very well-positioned because we do it today on-site with customers. We do have a couple of customers that we host, and it could be an opportunity. We basically -- we look to what the customers are asking for, and where the market is going for, and that could be an opportunity down the road, Brad.

Okay, in closing, first of all, thank you, everyone for joining us here this morning. I'd like to encourage all of you to attend the Annual Partners Users Group Conference held in San Diego this year from October 2 through the 6. It would be great if you could make it, we'd love to have you there. So once again, thanks for joining us today and have a great day.

Operator

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

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