Teradata Corporation Q3 2009 Earnings Call Transcript

| About: Teradata Corporation (TDC)
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Teradata Corporation (NYSE:TDC) Q3 2009 Earnings Call November 5, 2009 8:30 AM ET

Executives

Greg Swearingen – Investor Relations

Michael Koehler – President, Chief Executive Officer

Stephen Scheppmann – Chief Financial Officer

Darryl McDonald – Chief Marketing Officer

Analysts

Kathryn Huberty – Morgan Stanley

Mark Kelleher – Brigantine Advisors

Matt Summerville – Keybanc Capital Markets

Nabil Elsheshai – Pacific Crest Securities

Brian Denyeau – Oppenheimer & Company

Derrick Wood – Wedbush Securities

Greg Halter – Great Lakes Review

Operator

Welcome to the Teradata third quarter 2009 earnings conference call. (Operator Instructions) I will now turn the call over to Mr. Greg Swearingen.

Greg Swearingen

Good morning and thanks for joining us for our 2009 third quarter earnings conference call. Mike Koehler, Teradata’s CEO will lead our discussion highlighting Teradata’s third quarter results. After Mike’s remarks, Steve Scheppmann, Teradata’s Chief Financial Officer will provide more detail relating to our Q3 performance as well as our 2009 full year guidance. Darrell McDonald who is responsible for Strategy and Business Development is also in the room to answer questions.

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 as well as in the note to investor section of the company’s earnings release.

On today’s call we will also be discussing certain non-GAAP financial information such as earnings per share, free cash flow and other items as well as revenue comparisons in constant currency. 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 www.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 will now turn the call over to Mike.

Michael Koehler

Good morning everyone. Teradata has delivered another good quarter while continuing to extend our technology leadership and executing on our longer term growth initiatives. For the third quarter of 2009, Teradata delivered earnings per share of $0.36 versus $0.33 in prior year and $0.38 versus $0.36 on a non-GAAP basis. Revenue in the quarter was $425 million, down 3% from Q3 of 2008 and down 2% from prior year in constant currency.

Our professional services business continued to show good growth in the third quarter, up 5% in constant currency to $124 million in revenue and gross margins were up versus Q3 of 2008.

Year to date, earnings per share are up 2% on a non-GAAP basis on revenues that are down 4% as reported and flat in constant currency with 2008.

Overall, revenue growth has been spotty this year. We have seen signs of stability in the U.S., softness in key countries in APJ due to the economy and strong revenue growth across most of Europe and Middle East Africa.

The Teradata team has been executing very well delivering a good operating income yield on the revenue book to date but our goal remains to drive higher revenue growth and in particular more product revenue as we look to the future.

Turning to the regions, the America’s generated $247 million in revenue, down 2% from Q3 f 2008. Year to date the America’s revenue is down 3% as reported, and down 1% in constant currency.

New account wins that we can name included Comcast, the largest cable operator in the United States. Comcast is implementing a Teradata active enterprise data warehouse to improve analytics across their business as they consolidate numerous data marks. This will help Comcast eliminate manual processes, reduce costs, improve insight and increase agility throughout their company, Vonage, a leading provider of Broadband voice over IP who will be using Teradata to help manage network quality, and Habitat for Humanity who will integrate its operational, financial and donor information to provide better cross functional intelligence across the entire organization.

We also good activity across the America’s user base as customers continued to expand their Teradata environment. Upgrades and expansions in the communications industry which includes the telecommunications media, entertainment and e-business segments included ETB, the second largest telephone company in Columbia, Telephonic Argentina, the largest provider of telephone service in Argentina, Electronic Arts which is adding Teradata relationship manager, our customer analytics and marketing application to help them better target and enhance communications with customers, Netflix, Overstock.com and EBay.

In addition to their Teradata enterprise data warehouse, EBay is adding an initial two pedabyte appliance to capture and analyze web traffic to improve their customer’s experience and their advertising performance.

In the financial services industry, user base activity included World Bank of Canada, Discover Card, two of the largest banks in the U.S. and one in Brazil, one of the world’s largest investment banks which expanded its Teradata enterprise data warehouse to enable finance to have a better view of all financial data and to provide daily profit and loss information needed by traders, and, one of the top financial services companies who selected Teradata for its customer facing web application.

This new application will enable customers to review statement data online and to look at their spending patterns by category over time. The system will also deliver statement and transaction data to the company’s call centers, ensuring that workers on the front lines will have the most current and accurate information.

In manufacturing, we saw good growth in the quarter from the high tech and consumer packaged goods sectors. Manufacturers expanded their Teradata systems to improve supply chain visibility, improve category management and reduce costs by consolidating data marks. Other significant upgrades in the quarter came from the U.S. Defense Logistics Agency and Medco.

EMIA delivered a strong performance in Q3 with revenues of $109 million, up 3% over Q3 of 2008 and up 9% in constant currency. Year to date, EMIA has also grown revenues 9% in constant currency and is executing well across most of the major countries and industries we serve there.

EMIA added a number of new accounts in the quarter including AVIVA, a top five global leader in insurance, Etisalat in the UAE, a large and rapidly growing telecommunications company and Commercial International Bank of Egypt.

EMIA also had strong upgrade and expansion activity such as media market and Saturn, the largest European consumer electronics retailer who is enhancing and expanding their data warehouse to provide intra-day reporting.

One of the world’s largest manufacturers of mobile phones which will use Teradata to better integrate and understand their web data in order to more effectively target offerings to consumers who are browsing their websites.

And at one of the world’s largest freight management companies, which is using Teradata to obtain more consistent and comprehensive information about shipments, revenue and billing.

We also saw expansions from Vota Phone, Pakistan Mobile, HSBC, Standard Bank, South Africa’s largest bank and Lloyd’s Banking Group.

Turning to APJ, we had a difficult quarter with revenues declining 14% to $69 million versus Q3 in 2008. Year to date, revenues are down 11% and 10% in constant currency. We are feeling the economic impacts in two of our largest markets, Japan and Australia as customers delayed larger data warehouse expansions but continue for the most part to approve smaller purchases.

During the quarter we saw eight major banks in China, Japan and Korea expand their Teradata systems as well as WestPac in Australia. Six Telco’s in China, Japan, Australia and India and Quantus Airlines who is expanding their Teradata enterprise data warehouse which supports many areas within the area including passenger, group loyalty and corporate finance.

And five retailers in Japan which included [Recoten], which manages Japan’s largest online retail marketplace, which is now using their enterprise data warehouse to help target and optimize online advertising, and at Napco Corporation, a major home improvement retailer in Japan who expanded their Teradata system as well.

Driving innovation for our customers is an important factor for our continued success and we recently made a number of significant announcements at the 24th Annual Teradata Partners Users Group Conference, the world’s largest event focused on data warehousing and enterprise analytics.

It was great to see the enthusiasm from our customers there. Close to 100 of them presented at various sessions, sharing their best practices, new insights and game changing innovation. At the event we announced and demonstrated our newest offerings from Teradata Labs. We launched the world’s first solid state data warehouse platform for hyper-analytics.

The 4600 extreme performance appliance uses solid state drives for data warehouse workloads with performance which is up to 150 times faster than conventional hard drives, but at a higher price. It is ideally suited for applications with 100% hot data where you need to aggregate millions of rows in a second and require extremely fast data loads, operation queries or complex analytics.

Utilizations for the 4600 include real time analysis and optimization of online advertising, high volume manufacturing logistics, traffic optimization for transportation companies, or in analyzing all of Telco’s network traffic to keep its network secure. The 4600 will be available for purchase in the first quarter of 2010.

Teradata will continue to expand its platform family as unique business and analytical requirements continue to evolve in the data warehouse market. We now have seven platforms, the 5555 enterprise data warehouse, 2555 entry level data warehouse, 1550 extreme data appliance, the 4600 extreme performance appliance, our 551 data mark, our software only data mark, and now Cloud.

We announced our first public and private Cloud computing offers at the Partners Conference. Teradata is now available on Amazon’s EC2 Public Cloud. This prepackaged developer version will provide prospects and partners easy access to explore Teradata’s capabilities at minimal cost.

In addition, we announced Teradata availability on VMware. Although these new offerings will not materially add revenue, they expand the number of companies who can access and use Teradata more easily. These announcements reflect our continued focus on driving innovation from our Teradata Labs the research and development arm of Teradata.

Turning to our full year guidance for 2009, we continue to expect full year revenue to be down 1% to 3% in constant currency. We are encouraged by our increased activity levels and sales funnels, especially in the America’s. However, we’re going against a prior year Q4 where we grew 9% in constant currency.

We are increasing our full year EPS guidance from a range of $1.22 to $1.28 to a range of $1.32 to $1.36 on a GAAP basis or a range of $1.34 to $1.38 on a non-GAAP basis driven primarily by our Q3 performance and our continued success in containing costs in 2009.

In closing, the Teradata team continues to operate with passion and dedication to the success of our customers. We continue to improve key customer satisfaction metrics such as product reliability, responsiveness and being easy to do business with.

We strive for customers to view Teradata as a long term business partner who can positively impact the results of their business and our goal is to be the best IT provider for each of the customers we serve.

Now I’ll turn the call over to Steve who will provide more details on Q3 and our full year outlook.

Stephen Scheppmann

From an overall perspective in the third quarter saw Teradata continuing to execute and deliver sound operating results while generating solid free cash flow, all in a tough economic backdrop.

Turning to our revenue performance, Teradata’s Q3 2009 revenue of $425 million was down 2% in constant currency from the third quarter of 2008, down 3% as shown in U.S. dollars. Product revenue of $191 million was down 9% from the third quarter of 2008 in constant currency and down 10% in U.S. dollars. Product revenue continues to be the area that is being hit the hardest by the economy and the pull back in IT CapEx spending.

Services revenue however, continues to be more resilient. In the quarter, services revenue was up 4% to $234 million from last year’s third quarter. In constant currency, services revenue increased 5% from the third quarter of 2008.

Breaking service revenue down a bit further, maintenance revenue which includes maintenance of our software and hardware solutions was $110 million, up 2% from the third quarter of 2008. On a constant currency basis, maintenance revenue increased 4%.

Professional services which is the other component of our services business, was up 5%. On an aggregate basis, currency did not have a meaningful impact on the professional services revenues.

Gross margin in the third quarter of 2009 as 53.4% compared to 54% in the third quarter of 2008. Continued improvement in our services gross margin offset a decline in our product gross margin.

Product gross margin of 62.3% decline 200 basis points from 64.3% in Q3 of 2008. As expected, an increase in the amortization of previously capitalized software development costs impacted product gross margin by a couple of percentage points. As we discussed last quarter, we will see accelerated or increased amortization of capitalized software development costs now that Teradata 13, our newest generation of data base software is generally or commercially available. This will continue to impact product gross margin through the first half of 2010.

As a reminder, when the amortized previously capitalized software development costs, the amortization is recorded in cost of product on the income statement. Much like we saw in Q3, we expect roughly $5 million more of amortization to be recorded in the fourth quarter of 2009 versus the same period in 2008, again having the effect of lowering our product gross margin.

Services gross margin on the other hand, improved 200 basis points. As was the case during the last few quarters, we drove meaningful improvements in professional services gross margin in Q3 as we continued to improve utilization of our internal professional services resources, lowered our year over year outside contract service costs, lowered travel expense and continue to leverage our offshore capabilities.

Within our PS business, we saw an interesting dynamic in the quarter related to our outside contractor spend. For the last several quarters, we have lowered our outside contractor spend as a percentage of revenue. In Q3, we saw outside contractor spend rise slightly. This is the first sequential increase in several quarters and increased outside contractor spend over multiple quarters, may signal that it’s time to hire internal PS resources.

We will not hire people until we are sure we can sustain the workload, but when this happens, it will lower the higher services gross margin we have been driving the last few quarters because it takes a period of time to train the new people. Our services margins would still likely be running at attractive levels, but lower than the services margins we have seen or reported over the last few quarters.

One of the key items we will manage is balancing the move to hire internal PS resources against outside contractor spend while maintaining our attractive PS gross margins, but we’ve done a good job on this front over the last several quarters.

During the last year or so we went from building for growth mode to a profit protection mode. We will need to manage the shift back to building for growth when the time is right. We look forward to managing that process with a focus of growing the top line while holding on to as much of the profit improvement as possible.

Moving to a geographical view of gross margin; in the America’s region, gross margin was 55.9%, down a point from 56.9% in the third quarter of 2008 largely due to lower volume, a higher mix of services revenue and the increased amortization of previously capitalized software development costs.

Gross margin in the EMIA region improved 130 basis points to 53.2% from 51.9% in the third quarter of 2008 driven primarily by higher product revenue and improvement in professional services margin which more than offset the increased amortization of capitalized software development costs.

Gross margin in APJ was 44.9%, a 260 point decline from the 47.5% in Q3 2008. The impact of lower revenue volume and the resulting under absorption of fixed local overhead costs and increased amortization of software development costs resulted in a lower gross margin for APJ region.

Turning to our expense structure, we lowered our SG&A expense in Q3 2009 by $10 million to $113 million. Reduction in overhead and other discretionary expense such as travel and entertainment, variable compensation and outside services and a little help from currency more than offset the incremental investments in new sales territories.

As we see sales territory expense increase primarily as a result of our strategic territory expansion initiative, our ability to report meaningful reductions in year over year SG&A will be more challenging in Q4 2009. And in fact, it will likely increase.

That said, we are firmly on the path to report full year SG&A below the 2008 levels while absorbing the expense of our strategic initiatives.

R&D in the quarter was $26 million versus $28 million in the third quarter of 2008. However, as we discussed on our last quarterly conference call, we still expect R&D expenses to increase in the latter part of 2009 due to the timing of software development expenses.

As a result of all these items just discussed, Teradata’s operating margin in the third quarter was 20.7% versus 19.6% reported in Q3, 2008.

Below the operating income line, other income and expense includes a one time write down of a prior equity investment. Excluding this $5 million item, other income would have been $1 million, down slightly from Q3 ’08. When excluding a similar write down of a different equity investment, other income was $2 million in Q3 ’08. Both of these investments were made prior to Teradata’s spin off from NCR.

The lower interest rate environment continues to negatively impact interest income despite Teradata having $326 million more in cash and cash equivalents than at the end of the third quarter of 2008.

For Q3 2009 our effective tax rate was approximately 25%, down from the 29.4% used in the third quarter 2008. However, the tax rate in the third quarter of 2008 included a $3 million Federal Income Tax accrual adjustment for approximately 3% related to the filing of the 2007 Federal Income Tax return. Excluding this item, the tax rate in Q3 2008 would have been approximately 26%.

For the full year 2009 we continue to expect our annual effective tax rate to approximate 26%. Our tax rate continues to reflect our intention to permanently reinvest foreign earnings outside the United States. We can however; repatriate the cash if needed, but that would generate additional income tax expense and a corresponding current payable.

Turning to cash flow generation, one of the strengths of our business model, cash from operating activities was $96 million in Q3 2009, about the same as the $94 million generated in the third quarter of 2008. After using $21 million for capital expenditures versus $15 million in the third quarter of 2008, we generated $75 million of free cash flow, again about the same as the $79 million free cash flow generated in Q3 2008.

During the first nine months of 2009 Teradata generated $364 million of cash from operating activities compared to $322 million dollars in the prior period. Capital expenditures in the first nine months of 2009 was $61 million compared to $58 million in the same period in 2008.

Year to date, 2009 Teradata has generated $303 million of free cash flow versus $264 million during the first three quarters of 2008. 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, we had $704 million of cash as of September 30, 2009, a $66 million increase from the end of the second quarter and a $326 million from the end of Q3 2008. Approximately 45% of our cash is available in the United States.

We continued our share repurchase activity during the quarter. Since our last earnings call, we repurchased approximately 1.1 million shares for approximately $29 million. Since the initial share repurchase authorizations were approved at the beginning of 2008, we have repurchased 12.3 million shares of stock for approximately $255 million. We have approximately $318 million of Board authorization remaining for open market share repurchases

As we’ve said before, we expect the rate of our buy back will continue to fluctuate each quarter, taking into account among other things, our working capital needs, our stock price, alternative uses of cash and economic and market conditions.

With respect to our accounts receivable, DSO was 70 days as of September 30, 2009 compared to 93 days as of December 31, 2008 and 80 days as of September 30, 2008. This DSO performance speaks to the quality of our customers and our relationships with them.

Deferred revenue at the end of the quarter was $265 million compared to $237 million at the end of Q3, 2008, a 12% increase.

To provide further transparency around currency movement and the potential impact on our revenue, we’ve provided additional detail on our website regarding how currencies moved in 2008 and how this movement is expected over the year revenue comparisons for the full year and fourth quarter of 2009.

Assuming the spot rates at the end of October, we expect currency to create a four point tailwind in Q4, resulting in what is expected to be a two point headwind for us for the full year 2009.

Mike provided some revenue EPS guidance early in the call, but I want to give you a little more color on some specific items. Although we had a solid quarter in Q3, predictability continues to be a challenge not only for 2010 but also for the fourth quarter of 2009.

Teradata is increasing its expectations for full year GAAP earnings per share to be in the range of $1.32 to $1.36 from its previous earnings guidance of $1.22 to $.128 per share. On a non-GAAP basis, excluding the impairment charge related to the prior equity investment mentioned earlier which was $0.02 per share; Teradata expects 2009 earnings per share to be in the range of $1.34 to $13.8.

Selling expense is expected to increase in the fourth quarter as we continue to add more sales territories, so we’re not likely to see the same type of year over year G&A reductions as we’ve seen in the last few quarters. As a reference point, SG&A normally increases seasonally from Q3 to Q4, a $14 million increase in 2008.

The seasonal 2009 Q4 to Q3 should be greater than 2008 increase due to additional sales territories that we have added. This higher selling expense will continue into 2010 as we feel the full effect of the class of 2009 and the layering in of the class of 2010.

Beyond the normal seasonal increases in R&D expense that we typically see in the fourth quarter, we will also see approximately $5 million to $7 million of incremental R&D expense in the fourth quarter of 2009 versus Q4 2008 as well as the higher amortization of capitalized software development costs in Q4 ’09 versus Q4 ’08 of approximately $5 million which will flow through the product cost of revenue.

In closing, Teradata continues to be well positioned in our market due to our technology leadership position, our strong customer base and relationships, new expanded product family, our geographically diverse business model, our strong recurring revenue model from existing customer base as they routinely increase the size and scope of their enterprise data warehouses, as well as the annuity revenue stream that comes from our maintenance business, our strong capital position, $704 million in cash and no debt, and a very attractive free cash flow model.

As Mike said earlier, everyone at Teradata is passionate around our commitment and our focus of helping our customers analytically navigate through these uncertain economic times and positioning our customers to emerge even stronger in their respective markets.

Again, thank you for joining us this morning and we look forward to see many of you over the next coming weeks. And with that, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kathryn Huberty – Morgan Stanley.

Kathryn Huberty – Morgan Stanley

We didn’t see R&D come up sequentially or year on year as expected. Why is that and what are the projects that drive it higher in the fourth quarter and then as a follow on, given the strength you’re seeing in U.S. and EMIA should we expect that more broadly you loosen up the purse strings a little bit going forward given the growth opportunities?

Stephen Scheppmann

What we were expected to see in Q3, we had some projects, some R&D projects that we had the opportunity to push off into Q4, and this really related to materials for new projects that we weren’t at that technologically feasibility stage, and so we pushed those purchased out into Q4. They total about $6 million that we will continue for new product development, new initiatives, new opportunities in the R&D area that we will see in Q4.

So that’s the big bulk that moved from Q3 to Q4, and we effectively manage those purchases out of Q3 into Q4 and we will expense them in Q4.

As we see the market, if the market continues to evolve or stabilize, we continue to have a pipeline of new opportunities that we look at in Teradata Labs, and we’ll continue to evaluate those from a prudent basis as to what investments we can make given the current market conditions.

So yes, the Teradata Labs has a good backlog, a good pipeline of opportunities and projects and we’ll continue to evaluate those in a prudent manner in which we did in 2009.

Kathryn Huberty – Morgan Stanley

As we think about the fourth quarter, I understand you haven’t changed the full year revenue view, but given the deals you were able to sign in the third quarter and the pipeline, is the risk to the upside on revenues going into the end of the year?

Stephen Scheppmann

No, I don’t see any risk on the upside. There’s been as Mike mentioned some stability in the U.S. and the America’s market. We see that stability continuing. I think the profile; the risk profiles are pretty consistent in Q4, Q3.

Kathryn Huberty – Morgan Stanley

I know it’s early to have a full view on 2010, but you’ve made investments in sales teams and partners like SAP. You’re continuing to broaden the product line. Comps are getting easier. Currency becomes a tailwind next year. So why would it be reasonable to assume that you get back into that 7% to 9% long term revenue growth range as we get into 2010?

Michael Koehler

Regarding 2010, we’ll get into the specifics about the year on the next quarter’s call. But it’s safe to assume that we will have increases in expenses coming from the things that you just mentioned there. So when you look at selling expense from new territories as well as R&D, as we head into 2010 we are going to be carrying a bigger run rate on expenses.

Operator

Your next question comes from Mark Kelleher – Brigantine Advisors.

Mark Kelleher – Brigantine Advisors

Maybe we can touch on the competitive environment. A couple of your competitors introduced new products last quarter. What are you seeing from those and maybe connect that into gross margin. If we take out the software amortization, is there a way you can give us a feel for how the cash gross margin did in the quarter?

Stephen Scheppmann

On the gross margin side, the impact of the initial amortization was about 200 basis points, 2%, and if you back that out product gross margin would be relatively consistent with the prior quarters. As I look over the last four quarter, very consistent. That’s a good indicator from a pricing perspective.

From a competitive perspective, we’ve been able to maintain those product gross margins as you back out that additional amortization.

Mark Kelleher – Brigantine Advisors

Are you seeing any competitive push outs of sales cycles, anything disrupting from your competitors with their new products in the quarter?

Michael Koehler

Nothing unusual that we hadn’t indicated in the past so I don’t think there’s anything unusual in the pricing pressure in the elongation of the sales cycles that we hadn’t seen in the past.

Operator

Your next question comes from Matt Summerville – Keybanc Capital Markets.

Matt Summerville – Keybanc Capital Markets

Can you talk a little bit about the disconnect you’re seeing in APJ relative to the other regions, a little more detail on what you’re seeing in some of those countries. And you indicated that customers are not necessarily not buying but they’re buying in a lot smaller chunks. So order of magnitude, not necessarily in dollars, but percentage terms, how is your average deal size in APJ trended, and when do you see that business excluding seasonality bottoming and you coming out of that?

Michael Koehler

A couple of points on APJ, regarding the third quarter we did have a little bit more deal slippages that usual, so that showed up in the third quarter result where APJ was down 14%. When you look on a full year basis, the year to date growth is down 10% in constant currency.

So the challenge we have in APJ is that a lot of our revenue is concentrated in three countries; Japan, China and Australia, and as I mentioned in the prepared remarks, we’re feeling the effects of the economy in Japan and in Australia to a higher degree than we had anticipated entering the year.

We had very good activity going in Japan as well as Australia. We continue to have good activity, but we’re feeling the impacts and the larger expansions if you will, are getting delayed and we’re getting a lot of the smaller types of transactions done.

I can’t give you a magnitude or specifics on the average deal sizes, what that nets out to in Japan and Australia other than that it’s added up to a revenue decline. The challenge we have there is we need to expand broader in the region, and we’re making good inroads in the other markets like Southeast Asia, India and Korea, but we have a lot more work to do.

So if you look at APJ, the portfolio is very heavily weighted towards Japan, China and Australia and when you look at EMIA on the other hand, we’ve done a very good job building out EMIA over the recent years.

We have revenues well distributed across several countries across the region in both mature markets and emerging or growth markets. We’re getting good growth from Telco’s and banks in the emerging markets and in the more mature markets, we’re getting good growth from some of the under penetrated industries like in manufacturing, health care and some of the other verticals.

Also, we’re getting good growth from recent Fortune 1000 account wins that we’ve had there in Europe over the past couple of years. So overall, in Europe we’re executing extremely well, not just this year but over the past couple of years.

Matt Summerville – Keybanc Capital Markets

I think in your prepared remarks you mentioned overall, when you were talking about your ’09 revenue guidance that you’re seeing increased activity levels, and the funnels seem healthier. Can you provide a little bit more detail around those comments you made?

Michael Koehler

The sales activity is up overall. The sales funnel is up overall over prior year. We’re having good activity in the America’s. The one caveat is we’re going against prior year Q4 where we grew 9% in constant currency. In the America’s in particular, in the fourth quarter last year we grew 12% in constant currency.

So that’s the one caveat going against the increased activity, but by and large I’m pleased with where the activity level is in the fourth quarter.

Matt Summerville – Keybanc Capital Markets

With regards to discretionary spend, what do you think the decline is 2009 versus 2008 and how much of that outside, again just focusing on discretionary so outside of the sales adds and the expense there, how much of that do you think creeps back in 2010?

Stephen Scheppmann

We did extensive drill downs and challenging our teams to effectively manage those discretionary spends in 2009, even to the extent we cancelled sales kick off meetings, other type of non customer facing activities and award activities. Those things will be coming back in into 2010 with respect to merit, we gave merit 2009 that is being anticipated coming back in 2010.

We have training, T&E, sales kick off meetings, so there’s going to be a sequential increase in those expenses, but again, we had very good results in 2009 with the team coming through and managing those expenses and the team is challenging itself to say, what is the new normal run rate going into 2010 to effectively control that increase.

So yes, we want to be sensitive that we will have an increase in 2010, but we want to make sure we effectively manage that and from an SG&A perspective and an R&D perspective, we’ll see the increases, but we want to effectively manage those increases with respect to our performance in 2009.

Matt Summerville – Keybanc Capital Markets

Given that you’re looking for some of that to come back next year, and given Mike’s comments on the sales funnel, is it sufficient to say that you feel better about the organic growth environment next year than you did entering 2009 or what you feel will occur in 2009?

Michael Koehler

Given where the world was at a year ago at this time and the uncertainty, it’s safe to say we feel a little bit better than we did a year ago.

Operator

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

Nabil Elsheshai – Pacific Crest Securities

I was wondering if you could talk a little bit about the verticals in particular the top three financial services, retail and Telecom, how they performed in the quarter.

Michael Koehler

On a quarter basis, I’ve said before, there’s very big swings quarter to quarter. I’ll give you a little bit of a flavor of where we stand on a year to date basis.

The financial services, Telco, manufacturing are all generally down single digits. Retail is up a little bit on a year to date basis, and some of the smaller segments that I mentioned in the last call like government and health care continue to be up quite a bit. I hope that gives you a flavor.

Nabil Elsheshai – Pacific Crest Securities

In the America’s you’ve talked about better pipelines. Have you seen any change in close rates or sales cycles at this point? We’ve heard that from some other companies about improvement there.

Michael Koehler

Overall the close rates, sales cycles you talk about on a macro level, they’ve been running generally the same. I do think there’s a little bit more predictability in outcomes when we look at the business quarter to quarter than we had earlier in the year and of course going back last year.

On an overall, by and large the competitive environment, the customer’s buying decisions and processes and everything else has stabilized and we’re working with a lot more predictability than we have been in the past.

Nabil Elsheshai – Pacific Crest Securities

Can you provide any color on new customers in the quarter? Did you give that and I missed it?

Michael Koehler

We don’t give specific new customer counts. In the prepared remarks we mentioned customers where we have permission to use their names. By and large our new account wins have been I would characterize as roughly steady across Q1, Q2, Q3 and we do have activity and funnel building around new customer opportunities.

Nabil Elsheshai – Pacific Crest Securities

On the services hiring, it sounded like in your remarks it would be at least a couple more quarters before you started to ramp the services hiring. Was I hearing that correctly?

Stephen Scheppmann

We just saw the sequential increase this quarter, and so that’s something that we’re going to keep our eye on and we want to make sure that we have the right leverage with our outside contractor spend and our internal spend to effectively maximize our profit opportunities on those projects.

So we’ll keep evaluating it and keep watching that trend. There’s a particular level of outside contractor spend that you want to build that variability into your model, and we’re going to watch that and if it starts ticking up, we’re going to take the appropriate actions to make sure that we preserve that profit margin in Teradata and it could be next quarter, it could be a couple quarters out. But it’s a variability that we’re going to stay closely in tune to.

Operator

Your next question comes from Brian Denyeau – Oppenheimer & Company.

Brian Denyeau – Oppenheimer & Company

Could we talk about services for a second, very strong performance in this quarter and this year. If I look back at your historical, the two years that you had product revenue decline, you had a very strong services growth in the following year. They really lagged your growth in product revenue. Should that dynamic play itself out next year and if not, why not?

Michael Koehler

The correlation between the growing consulting services business and our product isn’t clearly there. It isn’t clearly related to one another. You can make a case that it’s a fore runner of increased product revenue. You can also make the case that it’s a lot of work being done in existing accounts in a down environment to utilize the assets, meaning the Teradata data warehouses that are there to the optimal capability.

You can also make the case that customers in the user base are looking for more help around creating more analytics and doing more with the assets they have in addition to cleansing data, freeing up capacity and things of that nature.

So I would not draw a correlation between the consulting services, professional services being an early indicator of future product revenue, but I clearly would also not make the correlation that it’s an indication of product revenue in the other direction also.

Brian Denyeau – Oppenheimer & Company

In last quarter you had talked about R&D being up $10 million in the second half of this year versus last year. If you adjust for that, you talk about R&D being up in the fourth quarter this year. Is that still going to be the push out from the third quarter and the fourth quarter or should we think about what you talked about last quarter being relatively operative still?

Michael Koehler

What I see is, we typically have a sequential increase, Q4 over Q3 and that roughly runs $2 million to $3 million. The other piece I see is really tied to these material purchases that we’ll expense, and that will be $5 million to $7 million. So that’s what I see superseding my comment from last quarter that we’ll be up sequentially normal $2 million to $3 million plus $5 million to $7 million for these material purchases for Q4.

Operator

Your next question comes from Derrick Wood – Wedbush Securities.

Derrick Wood – Wedbush Securities

Just a clarification, the 200 basis point impact on amortization of product cost of sales, was that on a sequential basis?

Stephen Scheppmann

That’s on a sequential basis and also year over year basis. We just announced commercially available, generally available on Teradata 13 at the end of the June, the end of the second quarter, so that amortization then kicks in the following quarter, so before that it was running relatively consistent year over year, and that $5 million kicking in in Q3, will kick in in Q4 and continue in the first half of 2010 until I get out of a comparative basis.

Derrick Wood – Wedbush Securities

On the SG&A side, it did drop quite a bit sequentially. I’m just curious, did you push out any hiring plans? Could you just update us on what future plans are?

Stephen Scheppmann

No, we didn’t push anything out. We continue on our new sales territory expansion. This was really the product of our continued management of the discretionary expenses primarily in the T&E area and some variable compensation expenses. As I look into the bridge into Q4 ’09 from Q3, we typically as I mentioned have a sequential increase Q3 to Q4 and I get a full quarter impact of the new sales territories.

In 2008, because we just announced initiative was in May of 2008. I’ve had a back load of 2008 class. We still committed, we added about 40 in 2008. We still committed to add the 20, so we kept that momentum. So Q4 really picks up the incremental class of ’08 plus the ’09 class in the full quarterly impact in Q4 ’09.

So that’s really driving the sequential increase that I see over and above the normal that we would typically see on a seasonal basis.

Derrick Wood – Wedbush Securities

So you’re still on track for 28 new territories in ’09?

Stephen Scheppmann

Correct. We’re still on track to come out of the year with a minimum of 60 new territories in ’09.

Derrick Wood – Wedbush Securities

You mentioned you have seven product sets now, very different than a year ago. Does this change your sales cycle as you may have to talk with the customer and figure out what product is right for them or have you not seen any impact? And could you give us an update on how demand has been for your newer products.

Michael Koehler

The new products that we launch to into discrete utilizations such as our 1550 which handles data sets that have extremely large volumes that you don’t integrate and share across the enterprise such as the order I mentioned that we got at EBay. That’s around the web quick stream data analytics and everything else and the sales motion is very clear in that regard.

At the same time, with the extreme performance 4600 solid state appliance we announced, that once again gets after an incremental different new requirement around functions or applications that require that type of extreme performance. It costs more but we’re able to address a different discrete data warehouse opportunity.

The 2000 class machine appliance which is our entry level data warehouse and our 5000 class machine, the enterprise data warehouse, there is a little bit of potential sorting out where a customer may be looking at one and going with another, and so forth.

But as far as a burden to the sales force or anything else, the sales force is thrilled to have all these different options and solutions and in particular when our competitors don’t possess a lot of these capabilities at the enterprise data warehouse level as well as in these extreme data sets and extreme performance sets.

Darryl McDonald

The only other thing I would add is that we really in listening to our customers, they have a need for different features and different price points to address those business needs that they have and so I think really the platform family allows us to address a broader set of business needs and technological needs as well as price performance for our customers.

I think in the long term, we’re going to be able to address more of the broader analytical capabilities but also look to gain more wallet share from our customers as we proceed. So I think as Mike discussed, the platform family is easy to understand and is easy to position in our customers and is being very well received.

Derrick Wood – Wedbush Securities

DSO’s have been trended down pretty nicely. Do you have a target DSO range?

Stephen Scheppmann

My target is 75 to 85, what I work with internally. Again we continue to have good performance on our quality customer base. It’s a strength with our relationship with these customers, but if I target, I’m somewhere in the 75 to 85 in my modeling.

Operator

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

Greg Halter – Great Lakes Review

Given the great cash flow and the build in cash, I wondered if you could speak to where it is currently country wise as well as what it’s invested in and what your thoughts are relative to the uses of cash and your capital structure going forward.

Michael Koehler

Overall, the $704 million we have about 45% in the U.S. The other 55% is internationally, and we’re concentrated in U.S. Treasuries domestically and also off shores. So we have predominantly U.S. Treasuries outside of the cash required for some of the countries for their capital structures. So still on a very preservation of capital, manage the risk on a return side.

With respect to our capital structure and uses of cash, no real changes from what I’ve said in the past. We prudently invest, evaluate the best way to manage it from a capital perspective and a return to our shareholders. We’re still actively in the market with our stock repurchases under the authorization that the Board gives us.

We consistently talk to the Board on some other opportunities with respect to leveraging our capital structure. We continue to evaluate opportunities to enhance our technology leadership position from a make or buy scenario. So all of those that we talked about is still very consistent and very good topics internally with respect to leveraging our capital structure.

Thanks everyone. In closing I want to thank you all for joining us here today. 2009 has been a bit of a challenge but overall we’re generally pleased with our performance and also with the progress we’re making with our growth initiatives.

Have a good day and we’ll talk to you next quarter.

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