Teradata Corp (TDC) 2007 Q3 法說會逐字稿

Welcome to the Teradata Third Quarter 2007 Earnings Release Conference Call.

All participants are currently in a listen only mode.

(OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to turn the call over to your host, Gregg Swearingen.

Sir, you may begin.

Good morning, and thanks for joining us for our first quarterly earnings Conference Call.

Mike Koehler, Teradata's CEO, will lead our discussion of Teradata's third quarter results.

After Mike's results, Steve Scheppmann, Teradata's CFO, will discuss Teradata's financial results.

Bob Fair, Executive Vice President of Global Field Operations, will then provide an overview of our new partnership with the SAS Institute.

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 Form 10 filing with the SEC.

On today's call, we'll also be discussing certain non-GAAP information such as free cash flow.

We will discuss briefly NPOI and other results excluding the impact of certain non-recurring 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 also available on the investor page of Teradata's website.

A replay of this conference call will also be available later today which can be accessed at www.Teradata.Com.

For those listening to the replay of this call, please keep in mind that the information discussed is as of October 30, 2007 and Teradata assumes no obligation to update or revise 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.

Thanks, Greg, and good morning, everyone.

Thanks for joining us for our first quarterly Conference Call.

It's an exciting time at Teradata.

We completed our spinoff from NCR, delivered strong revenue growth in the third quarter, and look forward to our future as an independent company.

I'm pleased to report Teradata had third quarter revenue growth of 17%, while at the same time dealing with all the various activities surrounding our spinoff from NCR.

Teradata's third quarter operating profit was $66 million versus $68 million in Q3 2006.

Included in the third quarter results was $15 million of one-time costs related to the spinoff from NCR.

Excluding the non-recurring spinoff costs, operating income was $81 million or 18.5% in Q3 versus 18.1% in Q3 2006.

Steve Scheppmann will discuss our operating results in greater detail later on in the call.

Third quarter revenues of $439 million were aided by 3 points of currency translation, and also by the acceleration of some deals that we'd anticipated closing in the fourth quarter.

The revenue growth was broad based with double digit growth in each of our three region operating segments.

The Americas grew 13% to $245 million, which included 1 point of benefit from currency.

In EMEA, revenue grew a strong 32% to $116 million, which included 8 points of benefit from currency.

And in Asia Pacific Japan, revenue grew 10% to $78 million, which included 3 points of benefit from currency.

We also had some good new customer wins across the regions.

In Asia Pacific Japan, we had key wins including several financial services companies.

A couple of examples in China were [Chi Lu] Securities and Bank of Shanghai.

Chi Lu Securities is one of the top securities companies in China and the first Chinese security company to use Teradata.

Bank of Shanghai is a top 10 commercial bank in China.

They selected Teradata after a strict evaluation process with intense competition.

The Bank of Shanghai Enterprise Data Warehouse will provide the bank with analysis across departments and systems and allow the bank to effectively manage risk and optimize customer relationships.

The Enterprise Data Warehouse will also help the bank deploy major applications such as anti-money laundering and compliance with new banking regulations.

In the Americas, wins included a top five U.S.

computer manufacturer, a top five U.S.

life insurance company, and Netflix, the world's largest online movie rental service.

Europe had some key wins in the communications and insurance industries and a top 10 manufacturer.

Also, some new customer wins from Q2 that we can name now included ICBC, the largest bank in China; and Mizuho Bank, Japan's second largest bank.

From a global industry perspective, travel and transportation, retail and financial services were all particularly strong in the quarter, and on a year-to-date basis, we have had strong growth in the manufacturing industry in Europe and in the U.S.

The investments made in demand creation in the manufacturing subverticals -- in particular high-tech, auto, and CPG -- continue to generate high activity.

As I mentioned earlier, it has been a busy time for Teradata but it has also been a very productive time for our new company.

We recently announced a new strategic partnership with SAS, which Bob Fair will talk about later on the call, and Gardner released their Magic Quadrant for data warehousing and Teradata was positioned as the leader again this year.

Gardner discussed in the release how data warehouses have evolved to being active and mission critical.

In this, they also recognize Teradata's architecture as being well positioned to support the new modern workload, as proven by Teradata's active data warehouse and dual active data warehouse.

We call this Active Enterprise Intelligence.

We saw this opportunity coming five years ago and started investing in our technology to become the leader today, as acknowledged by Gardner.

Before I turn the call over to Steve, I want to reiterate how pleased I was with Teradata's performance this quarter, and for the year-to-date, given the spinoff activities that we worked in parallel all year long.

Steve?

Well, thanks, Mike, and good morning.

Teradata, I'll discuss some of the financial results in the third quarter here, leading with our revenue.

Teradata's total revenue of $439 million grew 17% on a year on year basis, including a 3 percentage point benefit from currency translation.

As you see, the reported GAAP net income of $9 million or $0.05 per share was recorded on the Press Release; however, as Mike mentioned we did have non-recurring items in the quarter, and I'll go through the list of them here.

Approximately $15 million of non-recurring costs or $0.07 per share related to the spinoff of Teradata from NCR.

These were primarily costs associated with replicating our IT software infrastructure and other professional services relating to the spin, all one-time non-recurring costs.

Second item, approximately $10 million after-tax or $0.06 per share related to a tax rate change in Germany during the third quarter.

And the third item, a $20 million charge relating to an uncertain tax position which had which $0.11 per share impact on our Q3 GAAP EPS, and I will reference this item in my discussion of our effective tax rate.

The after-tax result was $44 million of charges being recorded on our P&L or approximately $0.24 per share.

The one-time spinoff costs we recorded in our general administrative expenses above the operating income line while the tax items were recorded through our income tax provision or income tax expense.

Excluding these special items, non-GAAP EPS was $0.29 per share for the quarter, which compared to $0.24 in Q3 of 06 or 21% increase on a 17% revenue increase.

To analyze Teradata's operational performance without the effect of the spin related non-recurring items, please see the supplemental financial schedule on the investor page of our website that reconciles our GAAP to non-GAAP results.

For the remainder of my comments during today's call, I will exclude the impact of these special items on our adjusted operating income and our adjusted EPS.

Our Q3 gross margin was 52.2% compared to the 53.1% in the third quarter of '06.

Gross margin was down primarily due to the deal mix in the Americas.

The Americas region had a 55.9% gross margin; however, this was lower than the 58.3% gross margin in the Americas in the prior period due to the mix of deals.

Gross margin in EMEA region was 52.6%, a 6 percentage point improvement from the 46.6 gross margin generated in EMEA in the Q3 third quarter of '06.

The improved gross margin was primarily due to hardware/software volume and improved services margins.

And gross margin in APJ was 48.7%, a decrease from the 49.3% gross margin achieved in the prior period.

When we say deal mix, this means the revenue mix of our hardware/software, professional services and third party content.

We will not speak to the general puts and takes each quarter at the regional level because there's a lot of variability with these components, unless a material mix driver emerges that requires specific mention.

And then when we refer to unfavorable deal mix, we're talking about a higher number of lower margin deals in a quarter than expected.

A lower margin deal can result from high PS professional services, and/or third party content or when a customer completely replaces their Teradata data warehouse.

When a customer replaces their warehouse, it results in higher hardware content because trading credits are granted for previously acquired database licenses.

Adjusted operating income of $81 million in the third quarter of '07 increased 19% from the $68 million reported in the third quarter of 2006.

Adjusted operating margin was 18.5% of revenue in the quarter versus 18.1% in the third quarter of 2006.

We had several items that offset the adjusted operating income margin improvement that would have otherwise been created from the higher revenue growth.

These include $9 million more in demand creation costs versus the third quarter of 2006, $8 million more in Research and Development expense or 30% increase versus the third quarter of 2006 -- and a little subnote on that R&D, in addition to increasing our R&D spending on the new CRM application, for example, we also had a negative impact of timing variances between software capitalization and amortization in the quarter.

Finally, we also had $1 million of ongoing incremental costs for Newco in the third quarter of 2007 as we prepared Teradata to operate as an independent publicly traded new company.

These incremental costs will increase in the fourth quarter resulting in approximately $8 million of these ongoing incremental costs in total and for 2007.

The remainder of the $25 million to $30 million of the previously anticipated annual incremental ongoing cost is expected to be incurred in 2008.

Despite the $17 million more in demand creation ongoing and our incremental Newco costs, we still experienced expense ratio improvement of 120 basis points in the third quarter as a percentage -- as total expenses of a percentage of revenue -- and 90 basis points improvement on that same ratio compared to year-to-date 2007.

For those of you who have tracked NPOI, or non-pension operating income, to measure Teradata's operating performance, NPOI in the quarter was $85 million or 19.2%.

This compared to $75 million or 19.8% into the third quarter of 2006.

However, Teradata will not be reporting NPOI going forward, since pension expense should not be that significant or fluctuate for Teradata.

However, since Teradata reported non-pension operating income or NPOI for the last several years, we have created a schedule that reconciles the NPOI Teradata reported in prior periods to what would have been adjusted operating income.

This schedule is available on the investor page of teradata.com and includes the following reconciling items, pension expense, some general computing business in Japan that will reside with NCR post-spin, changes in severance expense and other miscellaneous items that were previously allocated to Teradata from NCR, and some other general miscellaneous items in total.

Teradata did not have any other income or other expense in the third quarter of 2007.

Now for a discussion of our tax rate.

Our tax rate in the quarter was -- effective tax rate in the quarter was 86%, which included the impact of spin related items.

In our Form 10 filing of Teradata Corporation, it was disclosed that Teradata was notified by the IRS that the IRS would likely issue an adverse ruling on Teradata's ability to continue to amortize and consequently deduct for tax purposes certain research and development costs that had been capitalized by NCR and transferred to Teradata in connection with the spinoff.

However, based on discussions with the IRS and additional information, all transpiring and arising subsequent to the final Form 10 filing, Teradata determined that it is more likely than not that it will be able to realize a substantial majority of the deferred tax asset in the future relating to the capitalized research and development costs.

The uncertainty related to this future realization of this deferred tax asset has been significantly reduced.

As a result, Teradata recorded a charged income tax expense of $20 million in the third quarter of '07 related to the remaining uncertainty as it relates to this tax position.

In addition, we recognized a one-time $10 million charge related to tax rate change in Germany.

This item relates to a deferred tax asset that was generated by a local country German NOL in Germany that was established as of the spinoff date, and through carve out balance sheet rules, was revalued due to the tax rate change.

Excluding the impacts of these items, the tax rate applied to our third quarter results was an effective rate -- adjusted effective rate of 35%, slightly lower than the 37% rate included in our non-GAAP guidance for the full year.

A balance sheet and cash flow statement will be in our Form 10-Q filing with the SEC as of and for the period ended September 30, 2007.

Now, I would like to take time to update our full year 2007 guidance.

Due to the strong revenue growth for the first three months, approximately 12%, we anticipate our full year revenue growth will be at the high end of our prior 7 to 9% revenue guidance range.

Assuming we deliver on the high end of that revenue guidance range, that would mean we would deliver 9% growth in the second half to match the 9% growth we delivered in the first half.

But obviously the growth rate will be lower in Q4 2007 as we face a tough revenue comparison from the 15% growth quarter we achieved in Q4 of 2006.

And as Mike mentioned earlier, we closed some transactions in Q3 that had previously been in our outlook for Q4.

Even though we expect the higher end of the revenue guidance range, we expect to be at the lower end of our previous guidance range of 20 to 21% for adjusted operating margin, primarily due to the adverse deal mix experienced in the third quarter.

We expect a better deal mix in Q4, and as a result estimate our full year gross margin will be roughly flat versus our gross margin in 2006.

Assuming a 37% tax rate and 181 million shares outstanding, we expect the full year 2007 GAAP EPS to be in the range of $0.88 to $0.93.

This includes $0.28 of charges associated with the uncertain tax position, the German tax item, and the non-recurring spinoff cost that I previously discussed, and Teradata's portion of a tax adjustment included in NCR's Q2 results.

Excluding these items, we continue to expect adjusted EPS to be in the range of $1.16 to $1.21 per share in 2007.

This compares to $1.10 per share -- per diluted share in 2006.

We continue to develop and refine our tax strategies for Teradata and will provide an update to you on Teradata's expected effective tax rate for 2008 on our 2007 earnings call.

With that, I would like to turn the call over to Bob Fair, Teradata's Executive Vice President of Field Operations, to provide an overview of our new working relationship with SAS.

Bob?

Thanks, Steve.

At Teradata's PARTNERS annual user conference on October 8, on the stage with Mike Koehler, Dr.

Jim Goodnight, the CEO of SAS, announced SAS's in-database initiative and a comprehensive and strategic partnership with Teradata.

With this partnership, the entire SAS solution set will be optimized on Teradata, allowing customers to leverage the core strength of each, SAS for BI and analytic solutions, and Teradata for EDW technology and consulting.

The SAS solution set includes data integration, analytics and business intelligence applications within a comprehensive enterprise intelligence platform.

Specific solutions such as risk management, anti-money laundering and merchandise planning are offered across a broad spectrum of industries including financial services, telecommunications, retail, and manufacturing.

SAS has over 10,000 employees, 12,000 customers around the world, and more importantly, is very well penetrated in the largest companies in the world.

For example, SAS has 96 of the Top 100 companies on the 2007 Fortune Global 500 list.

While we have done some integration for customers in the past, this partnership is a result of customer demand for better integration between our two companies.

To reduce costs, today's processes require a significant movement of data resulting in redundant labor and infrastructure cost in things like software licenses, servers, disk, labor, network; to dramatically improve performance by eliminating the data movement from the EDW or data marts to the SAS servers and improving the actual times to run analytics; and lastly, to improve customer choice for available solutions on Teradata.

We have defined a joint R&D road map starting with immediate improvements between Teradata and SAS Solutions followed by product deliverables in mid '08, at the end of '08, and in 2009.

The partnership entails joint investments in research and development including moving SAS functions to perform in the Teradata database, in marketing, in field co-selling including a joint center of excellence to provide highly skilled and dedicated field resources, and a joint customer advisory board to guide priorities for the R&D teams.

By integrating key steps of the analytical or data mining development process between Teradata and SAS, businesses can build predictive models in a fraction of the time.

For example, one financial services provider built an exposure model for Hurricane Katrina in 90 minutes.

It previously would have taken two weeks.

In addition, Teradata and SAS's predictive modeling markup language or PMML integration automates in-database scoring, allowing models to run more than 20 times faster.

For example, a predictive model that ran for 175 hours on a server can run in-database in 25 minutes.

This partnership is good for our customers who have been asking for better integration between SAS and Teradata.

They get better performance, improved cost and improved time to value.

This is good for SAS, as they now have a truly scalable EDW foundation to deliver their solutions on and can leverage Teradata's presence to promote their portfolio.

This is good for Teradata, as we can now fulfill the data warehouse requirement for SAS solutions.

Teradata EDWs will grow due to increasing the number of users accessing Teradata, adding complex queries, adding new data, and increasing the work load.

The early activity is broad-based globally, with the majority being in finance and insurance markets followed by retail, communications, manufacturing, and travel and transportation accounts.

Customers are very excited about this partnership.

We have a lot of activity and we expect to see the results ramp up in late 2008.

Mike, back to you.

Thanks, Bob.

The SAS partnership was one of the highlights at the Teradata PARTNERS User Conference three weeks ago where we had record attendance.

We had 3,700 people, up from 18% from a year ago, and a year ago was up quite a bit from the year before that.

So we had a very successful conference there three weeks ago and the SAS partnership was extremely well received by all of the customers and other constituents there at the conference.

In summary, I'm pleased with our Q3 results which as Steve mentioned position us to achieve the high end of the 7 to 9% revenue guidance range we gave in January for the full year, and we are on target to achieve our $1.16 to $1.21 non-GAAP EPS guidance.

Before we open up the call to questions, I want to emphasize that we are entering into an exciting time for Teradata, specifically, we will have a strong balance sheet.

We should generate strong cash flow.

We'll have the opportunity to make capital and investment decisions that are based solely in the best interest of Teradata, our customers and our shareholders.

We're excited about the future and our ability to grow the business and increase shareholder value.

So with that, Operator?

We are ready to take a few questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Matt Summerville of KeyBanc.

Your line is open.

A couple questions.

First just on the SAS partnership, I think Bob you mentioned there are 12,000 customers.

How many of those are currently EDW users and out of the 96 of 100 top Fortune companies, how many of those guys are EDW users?

And then I guess how does the global 3,000 fit into that overall fold?

Okay, Matt, let's see if I can get them in order here.

How many of the 12,000 are EDW users?

I think if you take a look at the general market mix on this stuff, we continue to believe that the minority of companies in the world are implementing EDW.

That's that Teradata has got the majority of those.

So I think the mix would be similar as it relates to kind of their installed base, that the minority would be true EDW users.

As it relates to, see what was the second piece of it?

I guess what I'm trying to get a feel for and maybe this is a better way of asking it, how much does this partnership increase your addressable market and should this relationship be additive to your revenue growth target long term of 7 to 9%?

Yes, I think, Matt, it's Michael Koehler.

If I could add a little color here, you take a look at the global 3,000 and the verticals that we concentrate on, a lot of them are SAS users and there's a lot of SAS in the Teradata user base that's being used.

The analytics are done outside of the Enterprise Data Warehouse.

SAS has a broad portfolio of applications.

And so what we're talking about -- how that intersects with Teradata and the opportunity for us is you'll find a majority of the larger Teradata Enterprise Data Warehouse accounts have SAS and we have the opportunity to move those analytics and those workloads into the Teradata Enterprise Data Warehouse.

So what we'll see is an opportunity to increase work load, data, and basically capacity into our Enterprise Data Warehouses and grow them.

And I would say the intersection is -- without having crisp, specific data you look at the financial services industry in the U.S.

and the accounts we have there, a lot of SAS.

You look at some of the other industry segments, similar as well.

So this is a great opportunity for us, once we get there and get the SAS applications ported and integrated.

Is there any redundancy or overlap in terms of functionality between SAS and Teradata along the lines of what you just said?

Matt, this is Bob again.

The SAS has got a pretty broad portfolio, and as you take a look at that, there's two areas of probably overlap, and I would say it's the minority of the portfolio.

One is SAS is a very mature enterprise miner product.

We have a Teradata warehouse miner product.

So that's some data mining algorithms and we're working together to see how these can be leveraged.

And then the second significant piece is RTRM app or the CRM relationship manager app does compete with SAS's marketing automation application.

And we've agreed in that area we'll go compete.

And that said, they will make improvements to make their application work better with Teradata's.

So the key thing for us is to get the Teradata foundation to support the majority of the SAS users' data processes, and we have two very minor areas of overlap.

And we've been very proactive with our organizations and customers on that piece.

Yeah, the net-net is this is a vast majority of when you look at what SAS is doing and what we're doing, it is net incremental for Teradata, Matt.

Got you.

When I look at, I'm going to bounce around here a little bit -- when I look at the improvement you saw in gross margins in EMEA, how much of that was operational versus currency?

If FX falls through to the gross margin line in any way?

And I think one of the things you mentioned was improved performance in service margins, is that sustainable and if so, why?

Yes, I'll make a couple of comments, Matt and I'll turn it over to Steve.

First of all, it's hard to look at these regional results on a quarterly basis.

There's some pretty good puts and takes when we start taking a look at the gross margin.

So if you look at that Third Quarter, EMEA gross margins were up, Americas were down, there's things like deal mixes and everything else.

There was some benefit from currency in the EMEA results, obviously, but also the other thing is just a pure volume.

The volume was additive to the gross margins in the reported results.

So we had a combination of deal mix as well as volume aided by a little bit of currency.

And just in terms of demand creation and R&D spend I guess -- in the fourth quarter is it expected that the R&D spend will decline sequentially?

And then the incremental spend on demand creation was $9 million in the third quarter.

Is that what we should be thinking about for Q4.

And then on an annual basis what's kind of the right number for net incremental demand creation spend?

Well, as we said on the Q2 call, the demand creation investment and expenses there were going to get normalized in the fourth quarter.

So sequentially, demand creation expense increased the rate of increase in investment in demand creation headcount will come down in the fourth quarter compared sequentially and as well as to prior year.

Yes, Matt, what you see on there, you'll see more significant increase of expenses in Q3, and we expect the total expenses to come down more in line with the historical growth that was experienced in the first six months in Q4.

Okay.

In terms of just looking at the financial vertical here in the U.S, Mike, have you seen any I guess -- what are you hearing from your customers given what in some instances are challenging credit related situations with respect to their EDW plans looking out over the next 12 to 18 months?

Have you seen any impact?

Matt, I have not seen anything to date.

Okay.

I'll get back in queue.

Thanks.

(OPERATOR INSTRUCTIONS) Jeff Embersits of Shareholder Management, your line is open.

Hi, good morning.

I was wondering if you could address your market segmentation.

You've spoken a lot about the Global 3000.

Is there a strategy in place to try to expand that market by having some product differentiation with lower entry costs, or how are you looking at some of the competitive environment where you have (inaudible) and are some other people trying to come up from the low end?

We remain very focused on the Global 3000 and it basically has the highest ROI for us in terms of return on our investment when you look at going and creating demand for enterprise data warehousing.

The total spend is estimated on data warehousing in the Global 3000 at $19 billion and we're only at $1.6 billion growing from there today.

And when we look at the market opportunity, it's just huge for us just within the Global 3000.

So we plan to stay riveted and focused on growing the business, capturing as much data warehousing spend as we can in that segment.

If there was a opportunity -- and we look at it all the time to economically and profitably with similar returns that we get in the Global 3000 look to extending ourselves down lower in the market, we would.

We do have several customers, this all said, that aren't in the Global 3000.

Teradata benefits a company that is a Global 10000 similar to how it benefits a Company that's a Global 3000.

But at the end of the day, we want to stay focused with our investments and our resources going after the larger companies in the world.

Well, my guess would be Netflix is not in the Global 3000, at least not yet.

What's sort of the entry cost for say Netflix or someone of comparable size to get in the game with EDW?

Well, when we say Global 3000, you're bringing up a good point.

There's companies that operate with tremendous complexities and high volumes of transactions that lend themselves extremely well to Teradata.

So when we talk about the Global 3000 we're talking about a revenue type of threshold.

But that really is not the only dimension in what we should be going after.

So you look at e-business, for example, it's just huge data volumes and e-business companies of all size lend themselves well to Teradata.

So the Global 3000 I would use that -- when I say that, that's a general dimension of where we focus our resources but certainly, there's opportunities like with the e-business and other companies that have high data volumes and complex analytics that lend itself well to us.

So when you talk about a $19 billion EDW market, is that purely your addressable market or does that include some business intelligence and other items that aren't in your revenue stream right now?

The $19 billion market includes hardware, software, support services, and professional services for just data warehousing.

Okay, and if you look at the revenue right now, what's sort of the mix between new customers and follow-up sales services to existing?

Our revenues, approximately 85% comes from our user base and 15% from new customers.

Okay, and then getting back to the question regarding your relationship with SAS, you mentioned that one of the benefits is that some of the capacity or if computing needs get transferred on to Teradata EDW, how does that actually get monetized?

When the load comes to Teradata, whether, this is Bob by the way, when the load comes to Teradata, whether that's users, more data, or applications and workload, Teradata has to expand the footprint.

So we'll sell bigger systems, more nodes, and that's how we make our money on this.

Yes, think of it this way.

The growth of Teradata and our business really comes from consolidating data marts that exist in an enterprise and moving the data and the workload to a central enterprise data repository, hence Enterprise Data Warehouse.

What you have with SAS -- there's companies out there that literally have hundreds of terabytes of data and workload being done out there in a data mart-like environment on other platforms.

So what we're doing is capturing that work load, that data and that capacity.

It sits out there in data mart-like environments and adding that to our Enterprise Data Warehouse.

Okay.

This is just a tremendous opportunity for us.

Right, and then on the competitive front there's always a lot of noise regarding I guess in particular IBM and Oracle.

Could you comment on some of the competitive wins or how you are standing up as differentiated product and service?

Well, almost all of our new account wins are replacing something in the mix.

There's a lot of Oracle and IBM out there.

We've competed with Oracle and IBM over the last -- they've been our primary competitor over the past six or seven years, if you look backwards.

And in early 2000, there were a lot of other companies in there.

There was Sybase, there was White Cross, there was Red Brick, Informix, there was Tandem, a lot of other companies around there and then we saw consolidation.

So the net new on the competitive front really isn't so much Oracle and IBM.

It's some of the upstarts that you see out there, the Green Plums, Netezzas, and DATAllegros and then there's HP Neoview.

But this is a common course of business and this is something that's always there.

Right, and one last question and I'll turn it over.

In terms of the HP Neoview in particular, how often are you seeing them out there, what's the win rate like, and with Wal-Mart much more than Press Release?

Well, we've had several incidences where we've competed and the record has been made public where they've won.

But it's a very attractive market.

We would expect companies trying to come into this market.

Not just now, but for the years to come.

Great.

Thank you.

Yes, Mike, if I could add one thing on the Neoview, I would say Neoview is in the minority of our deals -- to Mike's point, we have competed a few times.

We've got a very high win rate, and it's just not fully mature out there in the market yet.

Thank you.

John Emerich with Iron Works Capital, your line is open.

Thank you, a couple unrelated questions, if I could ask them separately.

Could you repeat your comment about the tax rate for this year and is that the right rate to use going forward as well as into '08 just generally?

Our guidance on the '07 tax rate was on an effective -- adjusted effective tax rate of 37%.

And in the '08, we had indicated that we are continuing to develop our tax strategies and we will give guidance with respect to that '08 effective tax rate when we release our 2007 numbers.

And so --

But somewhere in the Form 10 I think -

Excuse me, I forgot to mention one part.

Our long term objective that we indicated was to drive the effective tax rate of 30% for our long term objective.

Got you.

And I will provide better guidance on that in the -- when we release our 2007 actual results.

Okay, and do you have any kind of cash flow from operations and CapEx estimates for this year or year-to-date if that's what you want to share?

I would say it would be consistent with what we had shared on the road show when we were $75 million to $80 million for our CapEx, and our operating income guidance was at $20 million to $21 million and we're indicating we're at the lower end of the operating income guidance.

And typically speaking, our free cash flow, basically defined as cash flow from operations less capital expenditures, closely approximated net income.

Okay, so is depreciation and amortization also approximating CapEx then?

Yeah, our depreciation/amortization I believe was in the $55 million range and our CapEx that we had indicated early was $75 million to $80 million range.

Okay, you answered my --

And long term we would continue to be in that range.

Okay, and can you ballpark how many, the sales dollars that you had originally slotted for Q4 that came into Q3?

I think the guidance we would be providing on that is we continue to be at the higher end of the range of the 7 to 9.

We've always guided or indicated we do have lumpiness in our quarters.

This is a good example of those transactions flipping from one quarter to another quarter, and so it's very difficult to pin down the quarter's actual growth by not looking at the year in total.

Fair enough.

Last question.

Overall, what's the sector exposure in total financial services and retail and if it's different worldwide versus the U.S.

And you want to differentiate feel free but I'm just wondering what your exposure is to those two segments.

We don't disclose revenues on an industry segment or sector basis, but I'll say this, that our business is very broad based across the various industry verticals, as well as geographically.

You can see that as well.

And yes, I think that's about all I could summarize.

I don't think there's any material impact regarding financial or retail or any of these.

Great.

Thank you very much.

Our last question comes from Matt Summerville, you may ask your question.

First on the deal mix in the fourth quarter why is it going to get better?

And then second, I guess put that in the context of what looks to be pretty substantial margin improvement on a sequential basis from Q3 to Q4, what gives you the confidence you're going to do somewhere in the neighborhood of 22 to 23% based on your guidance?

The deal mix, I mean, -- Matt, this is Steve -- as we indicated, we did have -- as we [defined] the deal mix, some lower margin deals coming through from the tech refreshes for the floor sweeps in which we had a higher content of hardware versus the software side, and with the licenses carrying over as a trade off for that increase in the license for the software.

But we expect that mix to become more in line in Q4 and have -- all growth in the products will be better on the revenue mix for Q4.

Getting back more to a normal -- and that's why we feel comfortable that our overall gross margin will improve in Q4 compared to Q4 '06 and as a result lead to gross margin consistent with the '06 on an annual basis for '07.

With respect to operating margin, we have -- as you know, Matt, a very leverageable strong business model, and when that gross margin comes back, a lot of that does fall to the operating margin line.

And so you can look at that basis point improvement on the gross margin and substantial majority of that will drop down to the bottom line in Q4 to allow us to achieve that operating margin guidance for the year.

And a couple things, Matt, I could add.

What I mentioned before is we'll have less incremental demand creation expense in the fourth quarter, and what we discussed before was a lower PS mix, or revenue mix is normalizing in the fourth quarter.

And then the other big benefit we'll have is just the sheer volume in the fourth quarter, when you look at it sequentially.

Okay, and as far as how we should think about the public company costs of $25 million to $30 million, Steve, is there any seasonality to that at all or are we kind of looking at $7 million a quarter?

Not much seasonality in that, Matt.

I think what you'll find is the run rate in Q4 will be basically the run rate going into '08.

Okay, and then Mike, maybe can you just spend a few minutes just talking about other trends as far as average deal size, what you're seeing for the overall sales cycle within Teradata?

As far as trends go, Matt, I mean you take a look at it by different industry segments.

In the financial services industry, whether it's banking or insurance or whatever, the adoption of Enterprise Data Warehouse due to some regulatory factors around Basel II and solvency, a move to better enterprise risk management, there it's a positive trend that you can call out.

In other industry segments, we've got this partnership with Agilent that in the telecommunications industry squarely puts us in the network operations side of the telcos where we hadn't played to a large degree before.

E-business continues to be a very good market for us as well, so when you take a look at this as far as trends, nothing at a macro level.

Some minor things when you look at sales cycles in the U.S.

When you're doing new competitors, new entrants, a little bit of benchmarking going on, a little more due diligence on customers' parts, whether it's new customers we're trying to acquire or some of our user base.

So not a material impact but a little bit of a slowing down in the sales cycle.

And then the other thing, it's all goodness is positive trends in Europe when you look at it as a geography and finally getting some momentum around driving the adoption of Enterprise Data Warehousing into the market, very good.

Okay, great.

Thanks a lot.

That's all I have.

[Van Tran] of Delaware Investments, your line is open.

Hi, this is Jeff Van Harte actually with Delaware.

I wanted to follow-up on a previous question with regard to what SAS ultimately would contribute to your revenue growth.

Could you give us maybe a little more color on as you move into late 2008 and into 2009, is your 7 to 9% guidance -- does that already take into account what SAS could do or at some point do you think they could add 1 or 2 points to that or does this give you more confidence that they could make the high end of the range?

There's obviously been a lot of interest around that and trying to figure out what actually might happen as we move into 2009?

The answer is it is baked into the 7 to 9% longer term targets.

We've been working on the SAS partnership for awhile.

It's not a new thing.

Is there upside from any partnerships and things like this?

Sure, time will tell, but we don't expect to see anything significant in terms of impacts to the business until looking out to the latter part of 2008 and into 2009.

But we have a lot of other key partnerships as well, and they're always in different phases, maturing at different rates, and there's good opportunity there.

But the answer to your question is yes, it's baked into the 7 to 9% longer term targets.

Maybe just one other question kind of related to that is do you -- now that you're a public company, is there kind of a pipeline of companies that you would like to acquire that are out there and it makes it a little easier for you as a public company now?

Well, there's always a pipeline we've been looking at prior to spin, post-spin, and everything else.

The only thing, so the answer to the question is yes, there's always a pipeline we're looking at.

And the thing that's changed is we have the opportunity to make that decision based on the benefits specifically to Teradata and to our shareholders.

Are they big deals or a lot of smaller companies?

Typically, what we've done over the years is smaller tuck-in type acquisitions, so those we'll certainly continue to do.

Great, thanks.

At this time we're showing no further questions.

Okay, listen, I want to thank everyone for joining us on the call this morning and we look forward to building relationships with you in the coming months, so thank you once again for joining us.

That concludes today's conference call.

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