Teradata Corp (TDC) 2008 Q1 法說會逐字稿

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.

Gregg Swearingen.

Sir, you may begin.

Good morning.

Thanks for joining us for our first quarter earnings conference call.

Mike Koehler, Teradata's CEO, will lead our discussion, providing highlights of Teradata first quarter results and commenting on our expectations for the first 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 Marking 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 material.

These risk factors are described in Teradata's 10-K and in other filings with the SEC.

On today's call we will be discussing certain non-GAAP financial information such as free cash flow and results excluding the impact of certain non-recurring items.

Reconciliations of non-GAAP results to our quarter results and forecasted GAAP results and other information concerning these measures are included in our earnings release and on the investor relations page of Teradata's website, teradata.com.

A replay of this conference call will also 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 8th, 2008, and Teradata assumes no obligation to update the information or revise the information in this conference call whether as a result of new information and future results.

I will now turn the call over to Mike.

Thanks, Greg.

Good morning, everyone.

I would like to start off talking about our Q1 results and giving some color on what we are seeing in the market and then cover our four-year guidance.

In addition, we will be discussing the strategic initiatives we have underway to generate higher revenue growth and profitability for Teradata longer term.

With 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 service 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 U.S.

Like other companies have reported, we are experiencing strong activity and demand internationally but softness in the U.S.

I want to be clear that we are not losing deals and our win rates remain the same, but customers are placing closer scrutiny and taking processes for large CapEx transactions and, in some cases, even delaying the addition of needed capacity and new applications to their data warehouses.

This has led to us seeing an overall lengthening of sales cycles in the U.S.

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.

ring the first quarter we had numerous new account wins and upgrades with key customers.

Some of the new account wins that we can mention today in various industries include Caterpillar, Banco de Credito and [Leash] Telecom one of France's top wireless operators.

Upgrades of key accounts that are mentionable included AT&T Mobility, 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 U.S., 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 of 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 U.S.

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 U.S.

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 to manage the continual data explosion and gain competitive advantage from it, as it does today.

We have four key initiatives underway to broaden our position to 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 database.

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 have 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 to lower G&A as a percent of revenue over the next several years.

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

Steve?

Yes.

Thanks for joining us this morning.

We are very confident in our business model and the value of the 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 some reviews of our revenue and gross margin.

Q1 revenue was $375 million, increasing 2% on a year-over-year comparison, which include a 4 percentage point benefit from currency translation.

Our Q1 margin was 51.7% compared to 53.4% in the first quarter of 2007.

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 U.S.

market.

As Mike referenced, this was largely due to the result of macroeconomic pressures experienced in the U.S.

causing customers to delay their purchasing decisions.

Although sales cycles are lengthening in the U.S., our sales funnel activity in the U.S.

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 communications, as well as regionally.

Gross margin in 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 9 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 the 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 costs 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, 6 points of the increase came from new company costs, 3 points were due to currency impact, the remaining 3 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 $6 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 expansions.

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 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 didn't operate 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 U.S.

income taxes have been provided on those earnings.

The effective tax rate is also largely driven by the forecasted pretax earnings mix by taxing jurisdiction, due to the broad range of statutory income taxes where the Company conducts its business.

Based on our current four-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 million 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 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 have 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 U.S.

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.

And with that, I will turn it over to Daryl to provide further detail on our new product announcement.

Thank you and 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's 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 company's 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 space, 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 valuable of data at the different levels within an enterprise and then determine the 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, the 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 preloaded and ready to run, with a 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 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 department data warehousing.

The 550 has a list price of $67,000 per terabyte and can scale up to 6 terabytes.

It is 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 dive 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, 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 on 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 4 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 risk 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 (inaudible) 2, 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 indirect path to a 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 evolve 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.

Thanks, Daryl.

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, while 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% dropped 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 add $100 million of revenue in 2010 and $150 million 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 not plan 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 plus incremental revenue to operating income, and by 2011 30% on the $150 plus million in 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 have sharpened our strategy.

We have a strong sales funnel and a strong balance sheet.

And combined with attractive cash flow generation, we are well positioned to continue growing our business and increasing shareholder value.

And with that, operator, we are ready to take a few questions.

Thank you.

We are now ready to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) One moment, please, for the first question.

Our first question comes from Matt Summerville of KeyBanc.

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 fix cost is going to look like in '08 and '09.

In 2008, Matt, it will be somewhere between $5 million and $6 million and we factored that into the '08 guidance.

When you look out to 2009, it's basically the costs 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.

Okay.

A couple of questions just on the quarter.

If you look at the mix -- or your service business was up 20%.

If I break that into two parts, a professional service piece and customer support -- (technical difficulty)

One moment, please.

We will move on to the next question from Katy Huberty of Morgan Stanley.

Good morning, guys.

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 U.S.

in terms of a slow down and 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?

Katy, what we are seeing as very extremely strong activity in all of the international geographies including Asia Pacific Japan, which was flattish and 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 are clearly going to be up from what we originally expected entering the year.

Thanks.

The next question comes from Matt Summerville, KeyBanc.

Yes.

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 are doing is a leading indicator of what's to come in terms of product sales.

Both the services businesses, 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?

Yes.

With respect to -- I guess if I look at the magnitude of growth on the PS side, to what extent does it sort of foreshadow what maybe we could anticipate looking out a couple of quarters on the product side?

I guess how much of the growth there is up front legwork you are doing with new customers?

I don't think you can read into it materially one way or another, Matt.

Typically good 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.

Okay.

Can you talk about within the U.S.

how much you think that 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?

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 U.S.

is that the deals were not anticipated on happening in the first quarter.

On the other hand, on the lumpiness side, manufacturing industry had an extremely strong growth in the U.S.

in the first quarter but it was going against an easier prior-year comparable in Q1.

So you couple that with the lengthening of sales cycles in the other industries and this is what presented our head wind.

Normally we look at revenue growth coming from the other industries in the U.S.

to offset the lumpiness that you might see in a particular industry and we just did not get that in the first quarter.

And the other industries were relatively flattish and we needed them to grow to offset the lumpiness in the comm industry.

I think it is 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 and 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 industries 28%, financial services is 24%.

Retail was 19% of our revenues last year, manufacturing 9%, government 7%, travel and transportation 6% and health care 5%.

So I want to give a little context to some of these industry movements when we talk about some of the results.

And then even within the industry segments, we see lumpiness as well.

Within the financial services industry in the U.S.

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.

So I hope some of these additional data points help and what we are going to do is we will provide this information on the makeup of our revenues by industry on an annual basis to help give a better perspective on the business.

That's very helpful data.

Thanks, Mike.

With respect to the U.S., I guess, in the fourth quarter you indicated you saw 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?

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 is tighter scrutiny.

There is crisper ROIs, business cases, TCOs, as there should be.

In the mix of all that, it is just an overall lengthening in the sales cycle.

Okay.

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 and 9%?

And then I guess what's the timing of when we start to see traction with this new family of products?

This is something that, Matt -- I mean, we have made these investments to further the business and get out ahead of the longer term 7 and 9% target that we put in place, and 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 territory expansions in the mix and this clearly gives us incremental to what we had originally established in the 7 and 9% longer term targets.

The expanded family -- and on the expanded or on the expanded territories what I said was, we will see the impact of this.

We will 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 have 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 are -- these two things, the expanded family and increasing the sales territories clearly give us the opportunity to accelerate growth as we get out into latter part of 2009, 2010, 2011.

At the same time, I also want to reemphasize the investments in partnerships and what we have 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%.

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.

All right.

I'm going to ask one more then I will get back in queue.

As far as 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 are doing to focus on cost reduction.

Can you quantify what you anticipate -- or what kind of cost reduction goals you are setting for the company over the next few years and what the major buckets of that cost efficiency are being derived from?

Yes, Matt.

This is Steve.

Our goal, our focus in 2008, as Mike said, we have incorporated that additional costs for the territory expansion into our 2008 guidance with the opportunity to fund that within that range.

And we are looking at our G&A cost centers, those are the traditional G&A, finance and accounting, legal, HR, IT, somewhat real estate to incorporate that in.

Going into 2009, 2010, we are 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 base and customer demand cost, being selling, presale, marketing, et cetera.

So 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.

These investments you're making, just to be clear, on these new sales territories, is that something that you had not previously contemplated?

Is this added cost, I guess -- well, is this something that maybe wasn't in your previous guidance or was it?

I'm just trying to be clear here.

In 2008 it was not.

2009, 2010, not in that long range guidance of 7 to 9% revenue growth.

Okay.

Driving that 7 to 9%.

So it is incremental costs.

In 2008, we are looking at covering that small incremental costs that might indicate it within our existing infrastructure.

But in 2009, 2010 it would be added incrementally.

Great.

Thanks a lot, guys.

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

Hi, guys.

A couple of questions.

One, on the macro side, can you give me on 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?

Are you expecting to see the 20% type of growth in services that you saw in Q1?

Yes, on the -- we expect to have products improving in that second half of the year.

But again, still the services growth at a stronger rate than the product growth.

Then are you assuming some sort of kind of reacceleration in the U.S.?

Or are you expecting to see the same type of product -- project delays that you saw in Q1 continue through the rest of the year?

Well, what we are seeing here is a little bit of a bubble.

So we see in the second half of the year the U.S.

picking up and especially as we get into the fourth quarter where we have an easier prior year of comparable then basically just looking at the activity to funnel the projects that are underway we expect the U.S.

to pick up in the second half.

Overall, not to where we had planned for going into the year, but picking up.

Okay.

And what -- I know you gave the growth rates, but just because I can't calculate that fast.

What were the numbers for service and support for the quarter, The breakdown between consulting and support maintenance?

For the quarter?

Yes.

Let's see.

It was on the services side approximately 20% and on the PS side approximately 21%.

In terms of the actual numbers.

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

Great.

Then on the product side of things, I mean, help me understand when you roll out these two new products, I mean it is a little bit of a strategic shift from you guys where you would always focused on and your message had been around the enterprise data warehouse.

How does this not undermine that message and how do the new products not cannibalize some of your historical sales?

This is Darryl McDonald.

The way we work with customers is, they typically have a set of requirements and/or an architecture they are trying to accomplish with their business intelligence or analytical needs.

So what we are trying to address here is, in working with customers around their enterprise warehouse strategies, there are instances as I gave in the example, of where they may have different goal states they want to reach for these different platforms, so we are really looking at the platform that allows us to customize the configuration and the solution to meet their architectural desires as well as business goals for those applications.

But what's unique about the way we 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 are a lot of investments being made in these departments and these entry-level data warehouses that aren't expandable or upgradable to an enterprise data warehouse.

And so we are really liking 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.

So from our perspective we are really trying to address the business requirements and the architectural requirements customers are looking for, but giving them this expandability to this data warehouse and it should result in Teradata getting more wallet share not only from users but new business from new prospects as well.

Okay.

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

This is a new release.

This new platform is the new quad core from Intel that we have released and so we have 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 this is released on top of.

Okay.

And then last question and I'll get back on queue.

On the territories, could you just -- is that -- 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 is U.S., international or by vertical?

Let me explain the territory metric.

It's driven by account exec or quota carrying salesperson, okay.

The metric we want to report on is territories as opposed to pure salespeople head count.

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, okay, being expanded beyond the core set of territories that we are starting with.

And the number of territories we are starting with when we ended 2007 was 385.

And we are going to add at minimum 30 and go up to 415.

In terms of geographies and where we are headed, there is natural territory expansion that we do is in the emerging markets and there is territory expansion pretty evenly distributed across the geographies.

Okay.

I will get back in the queue.

Thank you.

In terms of industry segments, though, the fastest growing industries and opportunities we have are in manufacturing, government as well as health care.

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.

Okay.

Thanks.

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

Good morning.

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?

Yes.

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

So it's fair to say it is a small tuck-in acquisition?

That's fair to say.

Okay.

And just to clarify, Steve, I believe you said -- or maybe it was Mike -- the R&D would be up $11 million for the year?

Yes, Greg, that was me, Steve.

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.

Okay.

And we are anticipating to be capitalizing more in 2008 with respect to our investments and our core technologies and expecting R&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.

Okay.

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 the forecast that you have?

Greg, that's still our target.

To be around $75 million to 85 million.

Okay.

And 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?

Yes, Greg, that will have impact.

That will impact our revenue.

That will also impact the expenses that we referred to.

Typically speaking, though, given our margins, that would have a more positive impact on our operating income between periods.

That's correct.

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

We have not -- it's minimal or nominal, but there is positive impact on the bottom line.

Okay.

And any impact on the balance sheet given where your cash is?

Our cash is generally split 50/50.

Roughly 50/50 internationally, domestically.

So there will be some translation adjustments on the cash side.

But we are looking at, based on our decision to permanently reinvest that internationally, to continue that investment overseas.

And do you have any option rate securities or any of that other --

We don't have any ARS's and we don't have any muni exposures on our investments.

Our investment policy is pretty conservative.

So no ARS exposure.

All right.

And I know you've made the announcement several months ago about the partnership with SAS.

I'm just wondering if you can give us an update on what is happening in regard to that initiative?

Sure.

This is Darryl.

We are making progress with our road map 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 the first deliverables.

The first one was what we call SAS in a box, which basically allows a SAS node to be attached to a Teradata enterprise that allows us to give greater speed and access to SAS applications in Teradata.

And the second one, 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 are doing in the financial space around anti money laundering.

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

Yes, we have publicized three or four customers that were early adopters of the integration.

We probably have another 50 to 75 that we are in current discussions with around integration of the solutions.

In total, we have over 250 joint customers that we are looking at how can we optimize those as well as new prospects we are targeting.

Great.

One last one.

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

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.

So, if I categorized it, we are 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 are 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 are 100% focused on optimizing costs and optimizing revenue, as we work through the lengthening of sales cycle here in the U.S.

and so forth.

The other message here is regardless of that, we are also simultaneously 100% focused on and getting after the longer term growth of Teradata.

And we don't aspire to growing 7 and 9% longer term and, regardless of where we are 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.

This concludes today's presentation.

Thank you for your participation.