Teradata Corporation Q1 2008 Earnings Call Transcript

May.19.08 | About: Teradata Corporation (TDC)

Teradata Corporation (NYSE:TDC)

Q1 2008 Earnings Call

May 8, 2008 10:00 am ET

Executives

Greg Swearingen – Vice President, Investor Relations

Michael Koehler - President, Chief Executive Officer & Director

Stephen M. Scheppmann - Chief Financial Officer & Executive Vice President

Darryl McDonald - Chief Marketing Officer

Analysts

Matt Summerville – Keybanc Capital Markets

Katy Huberty – Morgan Stanley

Nabil Elsheshai – Pacific Crest Securities

Greg Halter – Great Lakes Review

Operator

Welcome to Teradata’s first quarter earnings release conference call. At this time all participants are in a listen only mode. (Operator Instructions) Today’s conference is being recorded. If anyone has any objections you may disconnect at this time. I would now like to introduce Mr. Greg Swearingen.

Greg Swearingen

Good morning and thanks for joining us for our first quarter earnings conference call. Mike Koehler, Teradata’s CEO will lead our discussion providing highlights of Teradata’s first quarter results and commenting on our expectations for the full year. After Mike’s remarks, Steve Scheppmann, Teradata’s Chief Financial Officer will provide more details relating to our Q1 results. Then Darryl McDonald, Chief Marketing Officer and head of Business Development will describe Teradata’s newly expanded product line.

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 in other filings with the SEC.

In today's call, we will also be discussing certain non-GAAP financial information such as free cash flow and results excluding the impact of pension and other non-operational items. Reconciliations of non-GAAP financial results to our reported results and forecasted GAAP results and other information concerning these measures are included in our earnings release and on the investor page of Teradata’s website, www.Teradata.com. A replay of this conference call will be available later today on Teradata’s website. For those listening to the replay of this call please keep in mind that the information discussed is as of May 8, 2008, and 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 would now like to turn the call over to Mike.

Michael Koehler

Good morning everyone. I’d like to start off talking about our Q1 results and giving some color on what we’re seeing in the market and then cover our full year guidance. In addition we will be discussing the strategic initiatives we have under way to generate higher revenue growth and profitability for Teradata longer term.

With regards to Q1 first our services business was strong across all the regions and grew 20%. We had a 1.3 point rate improvement in services margins overall and had a margin rate improvement in every region. Services gross margin dollars grew by 24% in the quarter from $72 million to $89 million and we expect to see good results from our services businesses for the full year in 2008. Second we are making progress on our cost structure. In the quarter total expenses were up $15 million including new company expenses of $8 million. Of the remainder approximately $4 million was from currency. However offsetting the strong results in our services business was a 14% decline in product revenues primarily driven by the US.

Like other companies have reported we are experiencing strong activity and demand internationally but softness in the US. I want to be clear that we are not losing deals and our win rates remain the same but customers are paying closer scrutiny and taking processes for large cap ex transactions and in some cases even delaying the addition of needed capacity in new applications to their data warehouses. This has led to us seeing an overall lengthening of sales cycles in the US. Our product gross margin decline of one point was entirely due to the lower product volume.

Total gross margin declined 1.7 points due to the decrease in product revenue and the increase in services revenue versus Q1 of 2007. During the first quarter we had numerous new account wins and upgrade with key customers. Some of the new account wins that we’re commencing today in various industries include Caterpillar, Banco de Credito and [VUIs] Telecom, one of France’s top wireless operators. Upgrades of key accounts that are mentionable included AT&T Mobility, The Gap, Vodafone, DHL, Yahoo Japan and China Mobile.

Relative to industry performance in Q1 international had growth across all industries with the manufacturing and communications industries having the best performance. Specific to the US the manufacturing industry had the highest growth while the communications industry had the largest decline. The rest of the industry showed minor increases and decreases. Within the financial services industry the banking segment was down while the insurance segment had strong growth.

As we look at where we are headed for the 2008 full year our activity remains high across all the regions especially in international and our services business overall is strong. But given what we saw in Q1 and as we look at our pipeline going forward we now expect our international business to grow faster than what we had anticipated entering the year and our US business to grow less than what we expected. Net/net our full year guidance of 5% to 8% revenue growth remains the same and we will now be at the higher end of our EPS guidance of $1.35 to $1.45 due to the benefit of a lower effective tax rate of 25%. However we will not see the full benefit of the lower tax rate as we now expect a higher mix of international business and lower product revenues than expected in the US.

The fundamentals of our business remain strong and the future has great opportunity for Teradata. Data will continue to grow exponentially in the years to come both in terms of volume and complexity. Teradata is in a leadership position to help more companies manage the continual data explosion and gain competitive advantage from it as it does today. We have four key initiatives under way to broaden our position in the market and to take advantage of this opportunity. First, we recently announced our expanded family of compatible data warehouse platforms that we take to market all leveraging our world class data base. Second we are increasing our market coverage by adding more sales territories starting this year. We will be discussing both these initiatives later on the call this morning. In addition we are continuing to expand our consulting services business which has grown double digits each of the past three years and helps extend our market reach. And fourth we will continue to invest in partners to increase the number of solutions available in Teradata and to also provide more market coverage.

To summarize with these four initiatives we are broadening our portfolio and expanding our market coverage. And last we continue to work on lowering our overall cost structure which can help offset some of these investments. With the new company costs that have been added we have specific opportunities to lower our costs in 2009 and 2010 and the lower G&A has a percent of revenue over the next several years.

With that I’d like to now turn the call over to Steve.

Stephen M. Scheppmann

Thanks for joining us this morning. We are very confident in our business model and the value of a Teradata solution in all market conditions. Customer interest continues to be strong particularly in the international markets that we have invested in.

Now I’d like to discuss summary views of our revenue and gross margin. Q1 revenue was $375 million increasing 2% on a year-over-year comparison which included a 4 percentage point benefit from currency translation. Our Q1 margin was 51.7% compared to 53.4% in the first quarter of 07. Gross margin was lower in the first quarter primarily the result of lower product revenues in the Americas region.

Looking at our results geographically Americas’ revenue of $210 million was down 2% solely attributable to the US market. As Mike referenced this was largely due to the result of macro economic pressures experienced in the US causing customers to delay their purchasing decisions. Although sales cycles are lengthening in the US our sales funnel activity in the US as well as globally continues to be strong as companies are looking for ways to better manage and leverage their businesses and information in this challenging environment. Gross margin in the Americas region was 54.3% compared to 59.5% in the first quarter of 2007. Gross margin in the Americas was lower due to the quality of deal mix including higher percentage of professional services revenue which carries a lower gross margin. In EMEA revenue increased 14% to $103 million which included 11 points of benefit from currency. Performance was driven across multiple industries including manufacturing and communications as well as regionally. Gross margin the EMEA region was 50.5% a 610 basis point improvement from the 44.4% gross margin generated in the first quarter of 2007. The improved gross margin was primarily due to the benefit of currency translation, favorable volume growth and improved productivity in professional services.

In our Asia Pacific / Japan region revenue was flat year-over-year at $62 million which included nine points of benefit from currency. I want to point out however that our Q1 results in APJ do not represent the operational activity we are seeing in the region. As anticipated when we began the year the timing of some transactions clearly affected our year-over-year revenue comparison in this region. These were not delays but rather consistent with the timing we had expected. Gross margin in APJ was 45.2% the same as generated in Q1 2007. Behind these numbers we experienced improvements in both product and services gross margin but the increased mix of services offset the margin improvements on a weighted average basis.

From a revenue type segmentation perspective product revenue declined 14% from a year-over-year quarterly comparison primarily due to the shortfalls experienced in the Americas more specifically entirely in the United States. Gross margin declined 1% to 63.6% due to the shortfall of product revenue with respect to covering of our cost of revenues fixed cost structure. Services revenue which provides a solid base of cash flow accounted for over 50% of our revenue in Q1 2008 and increased 20%. Gross margin improved from 41.1% due to the strengthening of our PS margins.

Now I will turn to our expense structure. Total operating expense increased $15 million or 12% largely driven by $8 million of incremental costs associated with Teradata operating as an independent public company and these costs were recorded as operating expense as well as the impact of currency translation. R&D expenses on the income statement decreased $2 million. This decrease was a direct result of the company capitalizing $4 million more of capitalized software in Q1 2008. The company is committed to investing in its core technologies and its 2008 total R&D spend will increase $11 million over 2007. To operationalize this expense increase six points of the increase came from new company costs. Three points were due to currency impact. The remaining three points came from our core operational expense growth. Total incremental new company costs for Q1 were $11 million with $8 million recorded as operating expenses that I previously discussed and $3 million recorded as cost of revenue.

With an over $600 million operating expense base comes opportunity to become more cost efficient and drive productivity across our businesses. We have identified specific opportunities through 2010 to reduce our infrastructure costs and improve the efficiency of these costs while leveraging the improvements into growth areas and margin expansion. Operating income of $53 million in the first quarter was down from $70 million in the first quarter of 2007. As previously mentioned operating income was down primarily as the result of lower product revenue in the Americas region as well as the new company costs. Included in our results was $5 million of stock-based compensation expense, $2 million more than Q1 2007. Below the operating income line Teradata had interest income of $3 million in the quarter. We did not have any interest income in Q1 2007 as Teradata operated as a part of NCR.

For Q1 our projected annual effective tax rate is approximately 25% versus the previously guided 30%. Part of the reason for the lower effective tax rate is the company’s decision to permanently reinvest a majority of the company’s foreign earnings overseas. Accordingly no US income taxes have been provided on those earnings. The effective tax rate is also largely driven by the forecasted pre-tax earnings mix by taxing jurisdiction due to the broad range of statutory income taxes where the company conducts its business. Based on our current full year projections we anticipate our full year effective tax rate to be approximately 25%.

EPS in Q1 2008 was $0.23 compared to $0.24 in Q1 2007. During the first quarter we repurchased 1.6 million shares of stock for approximately $38 million and in addition we have $212 remaining on our Board authorization for share repurchases. Going forward we expect to be opportunistic regarding these share repurchases.

Turning to the cash flow statement, the strengths of our business model include a strong and stable cash flow and a strong balance sheet. In the first quarter we generated cash from operating activities of $143 million compared to $102 million in Q1 2007. This increase is attributable to our solid operating results and our lower receivables. After using $20 million for capital expenditures we generated $123 million of free cash flow which compares to $83 million of free cash flow in Q1 of 2007. 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 our balance sheet, as of March 31, 2008 we had $339 million of cash an increase of $69 million from December 31, 2007. Although we had no outstanding debt we have a $300 million credit facility which is available for general purposes. We have a disciplined approach to aligning our investments to growth opportunities and we will continue to aggressively invest in higher growth market opportunities.

Regarding our full year 2008 guidance in spite of getting off to a slow start in Q1 we still anticipate full year revenue growth to be 5% to 8%. However more of our growth is now expected to come from outside the United States. Our international pipeline and funnel activity look good for the remainder of the year. Factoring in a higher mix of revenue from outside the US and lower than expected product revenues in the Americas and the projected annual effective tax rate of 25% we expect our earnings per share guidance will be at the higher end of our $1.35 to $1.45 guidance range.

With that I will turn it over to Darryl to provide further detail on our new product announcement.

Darryl McDonald

Good morning. I’m pleased to provide you with an overview of our new and expanded family of powerful analytical platforms which will leverage our recently released world class Teradata 12.0 Database into other market opportunities. The family extends the range of solutions we deliver to our customers so they can compete more effectively and win. For Teradata the family does two important things, first it gives us a lower entry level platform for companies who are just starting down the path to building an enterprise data warehouse. Second the family expands our opportunities or wallet share within our existing accounts. Essentially Teradata is committed to helping customers use data for strategic advantage and we continue to see an increasing data explosion and the need to incorporate real time intelligence and analytics into all aspects of companies’ operations to gain an edge.

This affects the way businesses currently use data and the way they need to use data going forward and each company’s criteria differs. As the market leader in the data warehouse base Teradata is well positioned to help customers optimize how they leverage data for strategic advantage. Teradata has consultative experience and knowledge of enterprise data management best practices and we can help them determine the most value of data at the different levels within an enterprise and then determine the optimal platform required to support those business needs. Our new family of platforms addresses customers’ requirements ranging from departmental to entry level to active enterprise data warehouses. We meet their business needs today as we put them on a path to a full enterprise data warehouse. What’s more we deliver fully integrated total solutions including data integration, software and consulting not just a box.

Briefly the new family includes the Teradata 550 symmetrical multiprocessing or SMP for departmental data warehousing, he Teradata 2500 for entry level enterprise data warehousing and the Teradata 5550 for active enterprise data warehousing. We make it easy for our customers to use these new platforms, all come pre-loaded and ready to run with the proven power of Teradata 12.0 Database engine. Many customers are up and running in a matter of hours. All of their analytical and business intelligence applications, ETL and data models all are 100% portable all across all three platforms as are all of our business intelligence, data integration and industry applications partners solutions.

Let me go into some details about the new family members and I want to point out that we are the only vendor with a platform family that can be configured to meet total business and technical requirements not just the single dimension of data size. First we’ve updated our low end SMP the Teradata 550 for departmental data warehousing. The 550 has a list price of $67,000 per terabyte and can scale up to six terabytes. It’s a cost effective platform that packs in all of the power of Teradata and it has a built in migration path.

Next there is the new Teradata 2500 our entry level enterprise data warehouse which has a list price of $125,000 per terabyte. The powerful 2500 is purpose built for reporting, ad hoc analysis and deep drive analytics and it can scale up to 146 terabytes. The 2500 delivers a more complete superior solution over the appliance vendors on the market today handling more complex queries, more concurrent users and offering better workload management at the best overall price performance.

For more robust or complex enterprise data warehousing needs the third member of our family is the Teradata 5550 it provides an active enterprise data warehouse. This is the architecture Teradata advocates, a centralized enterprise data warehousing architecture offers the best integration of data at the lowest cost resulting in the best return on investment and most strategic value for our customers. This platform reflects the newest release of our core EDW technology. The 5500 has a list price of $200,000 per terabyte depending on the performance and availability needs of the customer. The Teradata 5550 is built for more demanding mission critical and active enterprise environments including things like continuous and batch loads, operational queries, reporting and complex analytics for thousands of users. The new system in combination with the Teradata 12.0 Database provides up to twice the performance of our previous generation and can scale up to four petabytes.

Let me give you an example of where the product family fits in. In financial services many companies take a departmental line of business view on applications such as credit risks for the mortgage or credit card business. This is where the 550 fits in. As you add more lines of business or risk types like market and operational risk and try to meet compliance mandates like Basel II you would migrate to a 2500 entry level enterprise data warehouse. Once you have an enterprise risk platform and want to add customer and marketing information to gain better visibility into the value of customers you would then migrate to a 5550 enterprise data warehouse. The combination of these data types delivers a 360 degree view of the customer, their profitability and risk profile so organizations can make better decisions and get a higher return and profit from each of their customers.

So whether customers take a direct or an indirect path to an enterprise data warehouse with Teradata we can protect their investment along the way. The entire family of platforms is now available and since we launched this new family two weeks ago the market reaction among analysts and customers has been positive. Teradata has a long history of continuing to innovate and have all of our solutions and this new family is just one more example. With the new independent Teradata you can expect to see even more innovation which will allow us to address a broader set of data warehouse specific environments and solutions.

And now I’ll return the call back over to Mike for further remarks.

Michael Koehler

Now I’m going to touch on our plans to add more sales territories. Over the last few years we have generated high quality revenue from investing in more direct market coverage. From 2004 to 2007 we added 77 territories approximately 20 territories per year and in 2007 those 77 territories contributed approximately $126 million of revenue. Put another way since 2003 our compound annual growth rate was 9%. Of that two points were driven by our new sales territories by revenue from the core territories grew 7%. We’ve seen a positive return on our prior investment of the $126 million of revenue generated in 2007 from the new sales territories added since 2004 approximately $38 million or 30% drop to operating income. So starting this year we plan to add a minimum of 30 new territories per year through 2010. Our goal is to have these new sales territories at $100 million of revenue in 2010 and $150 of incremental revenue in 2011.

We define a sales territory as having an account executive, one half of a full time industry consultant and one half of a full time technology consultant. We do have plans for any significant revenue from this initiative in 2008 but the cost of adding these territories has been factored into our guidance. We expect this initiative to be slightly accretive in 2009 as we see revenues from the class of 2008 start to contribute in the second half of the year. In 2010 our goal is to drop 20% to 25% of the $100+ million incremental revenue to operating income and by 2011 30% on the $150+ million of revenue. Based on our past experience we believe we can invest at a higher rate to expand market coverage and drive more incremental revenue and profit and the broader product family should also allow our sales territories to become productive faster.

We see these as good investments for the future of Teradata. We’ve sharpened our strategy, we have a strong sales funnel and a strong balance sheet and combined with attractive cash flow generation we’re well positioned to continue growing our business and increasing shareholder value.

With that Operator we’re ready to take a few questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Matt Summerville – Keybanc.

Matt Summerville – Keybanc Capital Markets

Mike, can you give us some sort of idea with respect to how much you’ll actually be investing into this, if you want to call it, sales initiative? What that unabsorbed fixed cost is going to look like in 08 and 09?

Michael Koehler

In 2008, Matt, it will be somewhere between $5 million and $6 million and we factored into the 08 guidance. When you look out to 2009 it’s basically the cost that comes on the 30 territories we added in 2008 which is approximately 60 people and we get that cost for the full year and then it depends on the timing of the 30 territories that we add in 2009.

Matt Summerville – Keybanc Capital Markets

Couple questions on the quarter, if you look at the mix or your service business is up 20%. If I break that into two parts, the professional services piece and the customer support [audio difficulties 00:09:44]

Operator

One moment, please. We’ll move on to the next question from Katy Huberty – Morgan Stanley.

Katy Huberty – Morgan Stanley

Can you help us understand where the confidence comes from in raising the international growth rate for this year in light of what you’ve already seen in the US in terms of the slow down and the potential for currency to become less of a tailwind as we go through the year? What are you seeing in the pipeline and the funnel that gives you that confidence?

Michael Koehler

Katy, what we’re seeing is extremely strong activity in all the international geographies including Asia Pacific / Japan which was flattish and actually down net of currency benefit. So when we take a look at the activity we have at this moment and the activity longer term and the funnel metrics, we’re clearly going to be up from what we originally expected entering the year.

Operator

The next question comes from Matt Summerville – Keybanc.

Matt Summerville – Keybanc Capital Markets

I was starting to ask this before I think I got cut off, if I look at the mix of service revenue during the quarter, services sales were up about 20%. Can you talk about what the underlying growth was on professional services versus support services and then to the extent that all this PS work you’re doing is a leading indicator of what’s to come in terms of product sales?

Michael Koehler

Both the services businesses, the professional services and the customer services businesses were right around 20%, Matt. The professional services businesses grew at 19%. The support services was a little bit over 20%. The second part of your question, Matt?

Matt Summerville – Keybanc Capital Markets

If I look at the magnitude of growth on the PS side, to what extent does it foreshadow what we could anticipate looking out a couple of quarters on the product side? I guess how much of the growth there is up from legwork you’re doing with new customers?

Michael Koehler

I don’t think you can read into it materially one way or another, Matt. Typically professional services activities is an indicator of increased activities particularly in the user base. If anything I would err on the side that it’s a good indicator of product revenue in the future.

Matt Summerville – Keybanc Capital Markets

Can you talk about within the US how much you think the sales cycle is lengthening by and are you seeing this more around new customers or more with respect to upgrades and expansions? And then is this relegated to a few sectors or is it more broad based?

Michael Koehler

85% of our revenues comes from the user base so really this is more relegated in terms of impact to the user base as opposed to new customers, although there is a lengthening of cycles as well in the new customers. But I’d like to add that there is actually two dimensions we experienced in the first quarter. The one is the lengthening of the sales cycles and the economic conditions but typical to Teradata we had some lumpiness and timing issues also in the first quarter. To give you an example the communications industries product revenue decline almost accounted for the entire drop in product revenues in the Americas as well as at the corporate level and it’s a situation where the comm industry had an extremely strong prior year Q1 and basically the timing of the larger customers within the comm industry in the US is that the deals were not anticipated happening in the first quarter. On the other hand, on the lumpiness side, manufacturing industry had extremely strong growth in the US in the first quarter but it was going against an easier prior year comparable in Q1.

You couple that with the lengthening of sales cycles in the other industries and this is what presented our headwind. Normally we look at the revenue growth coming from the other industries in the US to offset the lumpiness that you might see in a particular industry and we just did not get that in the first quarter. The other industries were relatively flattish and we needed them to grow to offset the lumpiness in the comm industry. I think it’s also helpful if I comment on the size of some of these industries. We haven’t done that in the past but for example, the comm industry is our largest industry in Teradata in terms of revenue. We track it not including the annuity but just the solution, the product revenue in the professional services. The comm industry accounts for 28% of Teradata’s revenues whereas the manufacturing industry accounts for 9%. So the lumpiness of comm being down and manufacturing being up, you can see the magnitude of the difference in these industries.

What I’d like to do is go ahead and share with you how much of the revenue comes from the various industries in Teradata based on 2007 revenue and if I go from largest to smallest, telecommunication, media and entertainment industry is 28%; financial services is 24%; retail is 19% of our revenues last year; manufacturing 9%; government 7%; travel and transportation 6%; and healthcare 5%. I want to give a little context some of these industry movements when we talked about some of the results. And then even within the industry segments we see lumpiness as well. Within the financial services industry in the US, it was actually up a little bit. The insurance segment within the financial services industry had extremely strong growth in the first quarter whereas the banking segment had a decline.

I hope some of these additional data points help and what we’re going to do is we’ll provide this information on the make up of our revenues by industry on an annual basis to help give a better perspective on the business.

Matt Summerville – Keybanc Capital Markets

With respect to the US, in the fourth quarter you indicated that you thought maybe somewhere in the neighborhood of three to five deals got effectively pushed, if you will. Are you seeing a similar number here in Q1 and were any of these transactions of meaningful size?

Michael Koehler

We didn’t see significantly more, Matt, maybe a little bit more. It’s just the overall timing and the sales cycle has just been pushed out. It’s a longer decision making process, it’s a longer approval process, there’s tighter scrutiny, there’s crisper ROIs, business cases, TCOs as there should be and in the mix of all that, it’s just an overall lengthening in the sales cycle.

Matt Summerville – Keybanc Capital Markets

With respect to the newer family of products that Teradata is bringing to market and you layer that in with these new sales initiatives, how do you feel about the long term revenue growth targets you originally set out at 7% to 9%? And then what’s the timing of when we start to see traction with this new family of products?

Michael Koehler

Matt, we’ve made these investments to further the business and get out ahead of the longer term 7% to 9% target that we put in place. Both of these investments we laid out the numbers on the expanded sales territories and we feel very good and comfortable about it. In our original targets we had a minimal number of territories expansions in the mix and this clearly gives us incremental to what we had originally established in the 7% to 9% longer term targets. The expanded family, and on the expanded territories what I said was we’ll start to see the revenue coming from this in the latter part of 2009 and then 2010 $100 million, 2011 $150 million. On the expanded family we don’t anticipate a material positive impact as it relates to 2008. We have it in the guidance. When we look at 2009 and 2010 to a degree that has been put into our overall targets that we set. We’ve been working on this expanded family for a great length of time as you can imagine. That said I do think it will present an opportunity for more growth and these two things, the expanded family and increasing the sales territories clearly give us the opportunity to accelerate growth as we get out into the latter part of 2009, 2010, 2011. At the same time I also want to re-emphasize the investments in partnerships and what we’ve been doing with partners is very critical to the growth of Teradata. The 2004 to 2007 compounded growth net of the territory expansions was only 7% and we have to take more offers, more solutions into the user base and the partners and solutions that come along with it is key to our success as well as getting expanded territory coverage out of the partners.

Matt Summerville – Keybanc Capital Markets

One of the things you talked about as far as your four initiatives, I believe, it may have been aside from that, are the things you’re doing to focus on cost reduction. Can you quantify what kind of cost reduction goals you’re setting for the company over the next few years and what the major buckets of that cost efficiency are being derived from?

Stephen M. Scheppmann

Our focus in 2008 as Mike said, we’ve incorporated that additional cost for the territory expansion into our 2008 guidance with the opportunity to fund that within that range and we’re looking at our G&A cost centers. Those are traditional G&A, financial accounting, legal, HR, IT, somewhat real estate to incorporate that in. Going into 2009, 2010 we’re looking at to continue to improve with specific opportunities specific targets in those G&A areas to drive down our G&A costs as a percentage of revenue as we continue to be able to invest in the more customer facing customer demand costs, being selling, presale, marketing, etc. Our targets are specific to the G&A, specific to the new company costs, to take out costs and also improve the efficiency of those costs as a percentage of revenue in 2009, 2010.

Matt Summerville – Keybanc Capital Markets

And these investments you’re making, just to be clear on these new sales territories, is that something that you have not previously not contemplated? Is this added cost? Is this something that may be wasn’t in your previous guidance or was it? I’m just trying to be clear.

Stephen M. Scheppmann

In 2008, it was not, 2009, 2010, not in that long range guidance of 7% to 9% revenue growth. Driving that 7% to 9% so it’s incremental costs. In 2008 we are looking at covering that small incremental that Mike indicated within our existing infrastructure. But in 2009, 2010, it would be additive incremental.

Operator

Our next question comes from Nabil Elsheshai – Pacific Crest Securities.

Nabil Elsheshai – Pacific Crest Securities

Couple questions, one on the macro side can you give me any color on what your expectations are for product versus service growth when you talk about maintaining the 5% to 8% guidance? Are you expecting products to accelerate later in the year or are you expecting to see the 20% type of growth in services that you saw in Q1?

Michael Koehler

We expect to have product improving in that second half of the year but again still the services growth at a stronger rate than the product growth.

Nabil Elsheshai – Pacific Crest Securities

Are you assuming some sort of re-acceleration in the US or are you expecting to see the same type of project delays that you saw in Q1 continue through the rest of the year?

Michael Koehler

What we’re seeing here is a little bit of a bubble. So we see in the second half of the year the US picking up especially as we get into the fourth quarter where we have an easier prior year comparable and then basically just looking at the activity to follow on the projects that are under way. We expect the US to pick up in the second half. Overall not to where we had planned for going into the year, but picking up.

Nabil Elsheshai – Pacific Crest Securities

I know you gave the growth rates but I can’t calculate that fast, what were the numbers for service and support for the quarter, the breakdown between consulting and support maintenance?

Stephen M. Scheppmann

For the quarter, it was on the services side approximately 20% and the PS side approximately 21%.

Nabil Elsheshai – Pacific Crest Securities

In terms of the actual numbers.

Stephen M. Scheppmann

The actual numbers were $103 million on the support services and $107 million on the professional services.

Nabil Elsheshai – Pacific Crest Securities

On the product side of things, help me understand, and when you roll out these two new products it’s a little bit of a strategic shift from you guys where you’d always focused on and your message had been around an enterprise data warehouse. How does that not undermine that message and how do the new products cannibalize some of your historical sales?

Darryl McDonald

The way we work with customers is they typically have a set of requirements and/or an architecture that they’re trying to accomplish with their business intelligence or analytical needs, so what we’re trying to address here is in working with customers around their enterprise data warehouse strategies there are instances as I gave in the example of where they may have different goal states they want to reach with these different platforms so we’re really at working at the platforms it allows us to customize the configuration and the solution to meet their architectural desires as well as their business goals for those applications. But what’s unique about the way we’ll approach it is if you think about it, Teradata will be able to leverage the database, the world’s leading database for analytics across all three platforms and have this comfort of migration because today there is a lot of investments being made in these departments, in these entry level data warehouses that aren’t really expandable or upgradeable to an enterprise data warehouse and so we’re really looking at this as a way to try to have a different configurable solution at a much more affordable price point but with a total expandability and upgradeability to the enterprise data warehouse. From our perspective we’re really trying to address the business requirements and the architectural requirements that customers are looking for but giving them this expandability to the enterprise data warehouse and it should result in Teradata getting more wallet share not only from our users but more business from new prospects as well.

Nabil Elsheshai – Pacific Crest Securities

Did you change the price for the 5550, is that $200,000 per terabyte the same or has that changed?

Darryl McDonald

This is a new release. This new platform is the new quadcore from Intel that we’ve released and so we’ve doubled the performance of this platform from the other. So this is in line with the pricing per terabyte of our last generation. There is a few dollars difference but this is in line with the last release that this is released on top of.

Nabil Elsheshai – Pacific Crest Securities

On the territories, do you define territories is that by geographic region, is that by vertical or both and then where do you see most of the growth in that investment coming, whether it’s US, international or by vertical?

Michael Koehler

Let me explain the territory metric. It’s driven by account exec or quota carrying salesperson. The metric we want to report on is territories as opposed to pure sales people headcount and the reason why is there is attrition spikes that occur in any given month or quarter in the core set of territories that are in place and those naturally get backfilled and everything. So the metric we want to focus on is the number of territories we have being expanded beyond the core set of territories that we’re starting with and the number of territories we’re starting with when we ended 2007 was 385 and we’re going to add a minimum 30 and go up to 415. In terms of geographies and where we’re headed, there’s natural territory expansion that we do in the emerging markets and there’s territory expansion pretty evenly distributed across the geographies. In terms of industry segments, though, the fastest growing industries and opportunities we have are in manufacturing, government as well as healthcare and those are verticals that we have plenty of real estate to go after and then within the financial services industry as well outside of the banking and insurance industries where we have pretty good positions.

Operator

Our next question comes from Greg Halter – Great Lakes Review.

Greg Halter – Great Lakes Review

Looking at your cash flow statement I believe there is a line item there of the other investing activities and business acquisitions net of $22 million. Can you describe what’s in there?

Stephen M. Scheppmann

As we’ve said in the past we’ll continue to make other type of investments, tuck in acquisitions or industry deep analytics or for expanding our demand creation and we’ll continue to make those and those are considered in our core growth targets that we’ve established and that would be consistent with what you have seen in the past from us in that area on the cash flow statement.

Greg Halter – Great Lakes Review

So it’s fair to day it was a small tuck in acquisition?

Stephen M. Scheppmann

That’s fair to say.

Greg Halter – Great Lakes Review

Just to clarify, Steve, I believe you said that, or maybe it was Mike, the R&D would be up $11 million for the year? Did I hear that correctly?

Stephen M. Scheppmann

Yes, Greg. That’s approximately $11 million increase on the R&D spend. Now the expense that will come through on the income statement will be net of what we capitalize and we’re anticipating to be capitalizing more in 20078 with respect to our investments in our core technologies and expecting $&D from an income statement or from an expense perspective to only increase by a couple million dollars. But our total R&D spend, our gross spend, will be up approximately $11 million for 2008 over 2007.

Greg Halter – Great Lakes Review

And I believe you had talked about a capital spending as well as capitalized software of about $80 million for the year 08. Is that still in the forecast that you have?

Stephen M. Scheppmann

Greg, that’s still our target, to be around $75 million to $85 million.

Greg Halter – Great Lakes Review

On the foreign exchange side, does that have any impact either on operating income or the bottom line or did it have any in the quarter?

Stephen M. Scheppmann

Yes, Greg, that will have impact, that will impact our revenue, that will also impact the expenses that we refer to. Typically speaking though, given our margins, that would have a more positive impact on our operating income between periods. That’s correct.

Greg Halter – Great Lakes Review

Can you clarify what that may have been on the bottom line, either in net income or EPS for the first quarter?

Stephen M. Scheppmann

It’s minimal or nominal but there is positive impact on the bottom line.

Greg Halter – Great Lakes Review

Any impact on the balance sheet given where your cash is?

Stephen M. Scheppmann

Our cash is generally split 50/50, roughly 50/50 internationally and domestically so that there will be some translation adjustments on the cash side. But we’re looking at based on our decision to permanently reinvest that internationally, continue that investment overseas.

Greg Halter – Great Lakes Review

Do you have any auction rate securities or any of that other.

Stephen M. Scheppmann

We don’t have any ARSs and we don’t have muni exposures on our investments. Our investment policy is pretty conservative so no one here has exposure.

Greg Halter – Great Lakes Review

I know you made the announcement several months ago about the partnership with SAS, I was wondering if you could give an update on what is happening in regard to that initiative?

Darryl McDonald

We’re making progress with our roadmap that we put together between the two companies on integrating our solutions. You may have seen we announced in Q1 at the SAS Global Forum two of those first deliverables, the first one was what we call SAS In a Box which basically allows a SAS note to be attached to a Teradata enterprise that allows us to give greater speed and access to SAS applications in Teradata and the second was SAS acceleration on Teradata which is the first step of putting a lot of the SAS computational functions within the database of Teradata which again provides increased performance and that’s in and around some work we’re doing in the financial space around anti-money laundry.

Greg Halter – Great Lakes Review

Any comment on how many of the common customers have chosen to accept or use those products?

Darryl McDonald

We publicized three or four customers that were early adopters of the integration. We probably have another 50 to 75 that we’re in current discussions with around integration of the solutions. In total we have over 250 joint customers that we’re looking at how can we optimize those as well as new prospects we’re targeting.

Greg Halter – Great Lakes Review

I just wonder if you could comment on what you’re seeing relative to the competitive environment, some of the obviously established guys on data mart side or the up and comers that are out there?

Michael Koehler

The only comment I would make there is, and we said this before, it does cause a lengthening in the sales cycle as companies evaluate new technologies and new solutions that come into play. No impact on the win rate or anything like that but rightfully so, companies will stop and take a look. If I categorized it we’re probably 50% of the way through larger customers taking a look, evaluating and everything and then eventually the impact of that will go away.

We’re out of time right now, so with that I would like to end the call. The only parting comments I want to make is short term as you can imagine we’re 100% focused on optimizing costs and optimizing revenue as we work through the lengthening of sales cycles here in the US and so forth. The other message here is regardless of that, we’re also simultaneously 100% focused on and getting after the longer term growth of Teradata and we don’t aspire to growing 7% to 9% longer term and regardless of where we’re at right now, we want to make the investments and make sure we’ve got the growth in the years to come.

With that, I’d like to end the call. Thanks everybody.

Operator

This concludes today’s presentation. Thank you for your participation.

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