Teradata Corp (TDC) 2008 Q3 法說會逐字稿

Welcome to the Teradata Q3 2008 earnings release conference call.

All participants will be in a listen-only mode until the question-and-answer session.

(OPERATOR INSTRUCTIONS)

Today's conference is being recorded.

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

Now, I will turn the meeting over to Gregg Swearingen of Investor Relations.

Sir, you may begin.

Thank you and good morning.

Thanks for joining us for our 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 details relating to our Q3 performance.

Our discussion today includes forecasts and other information that are considered forward-looking statements.

While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially.

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

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

A reconciliation of our $0.33 of reported GAAP EPS to our non-GAAP EPS of $0.36 which reflects an impairment charge related to an historical equity investment as well as increased tax expense related to assumptions used in our 2007 tax filing, as well as forecasted non-GAAP results and other information concerning these measures, are 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 Teradata.com.

For those listening to the replay of this call, please keep in mind that the information discussed is as of November 4th, 2008 and Teradata assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results.

I will now turn the call over to Mike.

Thanks, Gregg, and good morning, everyone.

Teradata delivered a good third quarter in terms of earnings and operating margins, with non-GAAP earnings per share of $0.36, up 24% over prior year, and operating margins improving to 19.6%, up over 100 basis points from Q3 of 2007.

Excluding $6 million of incremental new company costs, operating margins would have been up 250 basis points.

I was pleased with our continued improvements in our product and services gross margins in the quarter.

Year-to-date our product gross margins are now up 130 basis points on lower product revenue volume, and services gross margins are up 200 basis points versus prior year.

Overall, revenues were flat in the quarter, which was roughly in line with what we had expected, given the strong prior year Q3 comparable where revenues grew 17%.

I was encouraged with the Americas region, which grew revenue by 3% over a strong 13% growth quarter in Q3 in 2007.

Overall activity was up, with growth coming from upgrades of existing accounts and new account wins.

Significant upgrades included eBay, who is gaining valuable insights from analyzing its significant volumes of rich online data.

eBay is now Teradata's largest data warehouse environment in the world, at over 5 petabytes.

With an innovative analytics as a service approach for rapid prototyping, eBay provides an easy and cost-effective means for its internal teams to quickly experiment with ideas and learn fast, improving eBay's time to market while saving on the cost of data marts.

We also saw an upgrade at Cabela's, who is leveraging our SAS partnership to speed delivery and increase the value of advanced analytic projects.

And we had upgrades from Harvard Pilgrim Healthcare, who is using Teradata Warehouse to analyze data and develop trends on demand; Goodyear, who is adding analytics for procurement; and CVS, who implemented Teradata's Relationship Manager application to improve their direct marketing campaign efficiencies.

Among the new account wins in the Americas was one of the top US television broadcasting companies, one of the largest mining companies in the world, and Supermercados LIDER, the largest supermarket retailer in Chile.

Revenue in the EMEA region was down 9% in the quarter, but was going against a very strong 32% growth prior year comparable, and sequentially going against a 33% growth in Q2 2008.

EMEA generated some great new customer wins including HSBC, one of the largest financial institutions in the world, which I mentioned on our last call; HEMA, a Dutch retailer, which will use Teradata's Demand Chain management application to help build collaborative relationships with suppliers and increased demand forecasting accuracy; and Carrefour, the second largest retailer in the world.

Now, four of the top five retailers in the world use Teradata.

EMEA also experienced good upgrades in the quarter, including DHL Parcel in Germany; the Cooperative Group in the UK; Komercni Banka in the Czech Republic; and Vodafone Libertel in the Netherlands.

Our Asia-Pacific/Japan region grew revenue 3% and with good upgrade activity from a number of banks including the Bank of Fukuoka in Japan, National Australia Bank and Siam Commercial Bank in Thailand.

APJ also saw upgrades from retailers including [Shinseki] in Japan, The Warehouse in New Zealand, and several upgrades from communications companies including SmarTone-Vodafone in Hong Kong.

New account wins included Aekyung, a Korean retailer who purchased our new 2550 Data Warehouse Appliance to help improve their marketing and customer services.

On an industry basis, we saw growth in the manufacturing industry in Q3, winning both new accounts and significant upgrades, including a large computer manufacturer who was consolidating departmental data marts into their Teradata Enterprise Data Warehouse in order to improve their marketing campaigns and promotions.

Consolidating data marts into a centralized EDW helps companies improve visibility across their entire enterprise, and extract the most value from all of their information assets.

This also helps to reduce costs for our customers by retiring or redeployment data marts in the process.

A new emerging use for Teradata we are seeing is analyzing sensor data such as engineering test data.

A major high-tech manufacturer in the US is working on capturing and analyzing very large sets of sensor data to improve [UL] analysis from every location.

Engineers use this information to significantly improve semiconductor yield and chip quality.

The communications industry posted good growth in the third quarter, and has shown good growth on a year-to-date basis as well.

We had a significant upgrade with a large US carrier to improve their network operations through active data warehousing, and overall we experienced good upgrade activity from communications companies around the globe.

Nine of the top 10 telecommunications companies in the world now use Teradata.

The financial services industry, and in particular banking, continues to see excellent growth across all the regions.

Financial services was our highest growth industry in the third quarter, and also on a year-to-date basis.

We closed some top tier new accounts in the quarter.

In addition to HSBC, we closed a top retail financial services company in Japan, and the UniCredit Group in Italy.

We also saw significant expansions from banks around the world, where we now have nine of the top 10 banks using Teradata.

The call to action in the financial services industry is to further integrate data from across the enterprise, get costs out and get full transparency of information down to the customer and product level, and more effectively manage enterprise risk.

In addition, the mergers and regulatory demands that the financial services industry are experiencing is what Teradata knows and does best, and has experience from working with the telecommunications, airline and retail industries over the years.

Our focus on innovation at Teradata was evidenced in our announcements at the Teradata Partners User Conference held three weeks ago.

At this year's event we announced the addition of another new member of our purpose built platform family, the Teradata Extreme Data Appliance, the 1550.

The 1550 addresses new market segments where massive volumes of data reside, that couldn't be accessed previously in an affordable data warehouse analytics environment.

For example, petabytes of data exist in telcos with customer call detail records; retailers with years of market basket data; e-businesses as well as traditional companies with web log data; and set-top box data with satellite and cable companies, to mention a few of the market opportunities.

The 1550 scales up to 50 petabytes of user data at a US list price of approximately $16,000 per terabyte, and it is basically a purpose-built data mart to address the needs of departments within an organization that need to analyze massive data sets.

This complements our recently released Data Warehouse Appliance, the 2550, which is positioned for entry-level data warehousing and analytical sandboxes, our 551 data mart solution and our active enterprise data warehouse, the 5550.

The Teradata platform family offers customers options to take full advantage of all the power of Teradata anywhere in their enterprise.

We now have a purpose-built platform to fit any analytics need, big or small, simple or the most complex.

We also introduced the Teradata Petabyte Club at Partners, announcing that there are now five Teradata customers led by eBay with data warehousing environments exceeding one petabyte.

Given the changes in currency and the economic environment since we last gave guidance, we are lowering our revenue growth guidance of 5% to 8%, to 1% to 4%; and our prior non-GAAP EPS range of $1.35 to $1.45, to $1.30 to $1.40.

The lower guidance is primarily due to the changes in currencies as of October 31st, which has approximately a 3% negative impact on revenue.

The remaining 1% is due to the impact of the economic uncertainty.

Overall, while the current economic environment is uncertain, we remain confident in the value we bring to customers.

In tough times or good times, it's imperative for companies to make the right decisions on where to cut back and where to shift investments to drive growth and improve efficiencies.

Better decision-making while taking costs out is at the heart of what Teradata does with its customers.

We remain confident in Teradata's business and long-term prospects.

The amount of data will continue to explode, and new data bites will continue to evolve, even during economic downturns.

We'll continue to expand our technology lead in Enterprise Data Warehousing and also with our purpose-built Data Warehouse Platform family.

And we're committed to add sales territories, a minimum of 30 per year in 2008, 2009 and 2010.

With our platform family and added sales territories, we are working to further extend our market reach to position ourselves for higher growth in the years to come.

Steve Scheppmann will now provide more details about the quarter and our full-year outlook.

Steve?

Thanks, Mike.

Thanks for joining us today.

These are extraordinary times of macroeconomic and financial uncertainty.

Our business model and our value proposition are clearly positioned to drive long-term growth of our revenue mission, which includes expanded sales territories, coverage, expanded product family, our strategic relationships, and long-term profitability through our disciplined approach to improved productivity.

Q3 2008 revenue of $439 million was the same as the revenue we reported in our strong third quarter of 2007.

The year-over-year comparison included 1 percentage point of benefit from currency translation.

Q3 revenue was driven by improved performance in the Americas region, where revenues were up 3%; and by our services business, which grew 9% in the quarter.

Offsetting these strengths was lower product revenue, which declined 8% year-over-year.

We experienced broad gross margin expansion throughout our business model.

Gross margin improved in Q3 2008 to 54%, compared to 52.2% in the third quarter of 2007; a 180 basis point improvement.

The drivers included a favorable deal mix, the continued strength of our maintenance services, and currency.

From a revenue segmentation perspective, product revenue declined 8% from a strong third quarter in 2007, in which product revenue grew 19% as we saw transactions accelerate into Q3 from the fourth quarter of 2007.

Product gross margin improved 310 basis points to 64.3%.

However, we are comparing against an easier prior year comp in terms of deal mix, and aided by currency in the current quarter.

Services revenue, which once again provided more than 50% of our revenue, increased 9% to $226 million in the third quarter of 2008.

This increase was driven by a 15% increase in maintenance services, our annuity revenue stream, which is the strong foundation for the consistency in our recurring revenue and cash flow model.

Professional and installation-related services, which is the other component of our services business, increased 4%.

We saw services revenues increase in all three regions in the quarter.

Services gross margin also improved in all three regions, resulting in a 44.2% services gross margin in Q3 of 2008 versus 42% in Q3 2007.

The 220 basis point improvement was largely due to the increase in our maintenance services.

Moving to a geographical view, where we have a very balanced business model with 55% of our revenue coming from the Americas and 45% from EMEA and APJ combined on a year-to-date basis.

As a result, the Americas revenue of $253 million was up 3% year-over-year but down 2% on a year-to-date basis.

We attributed the latter largely to macroeconomic pressures we began to see in the first quarter, causing customers to delay their capital decisions.

As we have referenced during the last two conference calls, we have been operating in this environment for most of the year.

Gross margin in the Americas region improved 260 basis points 56.9%, compared to 54.3% in the third quarter of 2007.

Gross margin in the Americas improved, due to a favorable deal mix and growth in maintenance and product revenues.

In EMEA, revenue declined 9% to $106 million from the prior year period.

The year-over-year comparison included 2 points of currency benefit.

As Mike said earlier, the 32% revenue growth in the year ago created a tough comp.

Gross margin in the EMEA region was 51.9%, a 100 basis point improvement from the 50.9% generated in the third quarter of 2007.

Gross margin improved due to favorable deal mix and currency.

In our Asia-Pacific/Japan region, we reported 3% revenue growth with 3 points of currency benefit.

In our third quarter of 2007, our APJ regional revenue grew 10%.

Gross margin in APJ was 47.5%, up 10 basis points from the 47.4% in Q3 2007.

Within the numbers, we generated good improvement in services gross margin but saw a decline in product gross margin due to the mix of transactions.

Currency also contributed to margin improvement.

Now I'll turn to our expense structure.

SG&A decreased $5 million from the $128 million reported in Q3 2007.

However, included in last year's third quarter results was $15 million of one-time spinoff costs.

Excluding the non-recurring spinoff costs, SG&A increased $11 million from last year's third quarter.

As expected, we had recurring incremental costs associated with Teradata now operating as an independent, publicly-traded company.

In the third quarter we saw $6 million of total incremental costs versus the same period in 2006.

I want to point out, however, that we are still on track to see approximately $30 million of incremental costs from 2007, which means we will have approximately $3 million to $4 million of remaining incremental costs recognized in the fourth quarter.

Specific to the $6 million of incremental costs absorbed in Q3, $3 million of the incremental public company costs were recorded in cost of products and services, while $3 million was included in our operating expenses.

Additionally, we had an increase in sales and marketing expense as we began to see the incremental cost of the new sales territory-related initiatives begin to hit our expense structure.

R&D expenses on the income statement decreased $7 million year-over-year.

The decrease was a direct result of the timing of the capitalization of software R&D related to our recently announced Teradata 13.

We continue to expect that our 2008 gross engineering spend will increase at a rate faster than our revenue growth.

In 2009, we will see increased R&D-related expense, operating and cost (inaudible), as the timing of software capitalization under FAS 86, which is captured in operating expenses, and the resulting amortization, which is recorded in cost of revenue, comes through our operating results versus the capitalization on our balance sheet.

We will continue to execute on our operating expense investment strategy, while directing our OpEx investments to the areas where we have the visibility and the potential higher returns.

That includes sales territory expansion and R&D.

Teradata's operating margin was 19.6%, including the $6 million of incremental new company costs.

Operating income of $86 million in the third quarter improved from $66 million in the third quarter of 2007.

Again, the third quarter of 2007 included $15 million of one-time spinoff costs.

Adjusting for this, our operating income would have been $81 million in Q3 2007.

On a comparable basis, operating income improved $5 million despite the $6 million of incremental recurring public company costs, and the higher sales and marketing costs resulting from the increased sales expansion initiatives.

Below the operating income line, Teradata had interest income of $3 million in the quarter, which was principally offset by a $3 million impairment charge relating to the write-down of the value of a prior equity investment.

We acquired an equity investment in the company, the company is being sold, and we needed to adjust our investment basis.

For Q3, our effective tax rate was approximately 29%.

This included a $3 million or 3% tax adjustment relating to the company's 2007 tax return, which was filed in September 2008.

Excluding this adjustment, this discrete item, the Q3 tax rate was 26%.

The tax rate for the third quarter of 2007 included a 21% adjustment related to a tax rate change in Germany, and the tax effect of the spinoff-related items.

Excluding these adjustments, the tax rate in Q3 of 2007 was 35%.

The effective tax rate recognized each quarter is based on the annual estimated effective tax rate calculated on full-year forecasted results, which are applied on a quarterly basis, one way the company refines the estimates used to build the effective tax rate.

Based on the analysis to date, which is heavily dependent on our geographical mix of earnings, the company continues to estimate that the forecasted annual effective tax rate for 2008 will be approximately 26% to 27%.

GAAP EPS in Q3 2008 was $0.33, compared to a $0.16 in Q3 2007.

Included in the third quarter of 2008 results was a $3 million equity investment impairment write-down and a $3 million tax adjustment.

These items lowered the third quarter EPS by $0.03, resulting in non-GAAP EPS of $0.36.

In the third quarter 2007, Teradata recorded $15 million of one-time spinoff costs and a $10 million tax adjustment related to the tax rate change in Germany.

That lowered EPS by $0.13.

So on a non-GAAP basis, EPS excluding the one-time items was $0.36 in Q3 2008 versus $0.29 in Q3 2007.

During the third quarter, we repurchased 2.7 million shares of stock for approximately $65 million.

Repurchases for the first nine months of the year totaled 5.6 million shares for approximately $137 million.

We have approximately $120 million remaining on our Board authorization for share repurchases.

The rate of our buyback will continue to fluctuate each quarter, taking into account both our stock price and alternative uses of cash.

We will continue to manage our cash and cash flow prudently.

Turning to the cash flow statement, we have a business model that is aligned with driving strong incremental profit and cash.

We continue to be very disciplined in our revenue growth strategies and the related investments.

In the third quarter, we generated cash from operating activities of $94 million, same as the third quarter of 2007.

After using $15 million for capital expenditures, we generated $79 million of free cash flow, which favorably compares to the $71 million of free cash flow in Q3 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 the balance sheet.

As of September 30th, 2008, we had $378 million of cash and short-term investments, an increase of $11 million from the end of June, after using $65 million for share repurchases in the third quarter.

Our cash is invested very conservatively, generally in overnight government securities.

We have no significant derivative positions that would expose us to counterparty risk.

Looking forward, generally speaking in the past Teradata had not had material movements in currency rates during a quarter.

However, since the last time we updated our 2008 guidance on August 7th, 2008, we based this guidance on the exchange rates as of June 30th, 2008.

We've experienced unprecedented shifts and strengthening of the US dollar against most currencies subsequent to that time.

Currency has shifted from the tailwind we had been disclosing to a significant headwind in a short period of time.

The impact on our 2008 revenue guidance from the June 30th, 2008 exchange rates to the October 31, 2008 exchange rates, which our 2008 guidance update is based on, is approximately $43 million; with an approximately $8 million impact experienced in Q3, and the remaining $35 million impact expected to be experienced in Q4 2008.

Due to the impact of the dramatic currency change, and to a lesser degree to the challenging economic environment,we are lowering our 2008 fiscal year revenue guidance to 1% to 4% growth.

Correspondingly, we are also adjusting our full year 2008 EPS guidance to a $1.30 to $1.40 range from the previous range of $1.35 to $1.45.

(Inaudible) perspective on our change in our revenue guidance, I am encouraged that although we are feeling the headwind of the currency and the global economic slowdown, the unfortunate pain in a slowing economy is not all bad for Teradata.

It can and does open opportunities for us, as the status quo of IT infrastructures in place at many companies is now perceived to be not good enough, and companies become more open and serious about investing in enterprise analytics.

We are clearly not immune from the effects of a global weak economy, but our solutions allow our diverse portfolio of stable, strong customers to not only reduce their IT spend, but also gain much greater and deeper transparency into their business at the same time.

Our balanced geographical business model provides a basis of the resiliency with respect to our overall financial model during this period.

In conclusion, we feel that Teradata is well positioned for the current but difficult environment.

We like our technology leadership, our competitive advantage, our strong financial position, and most importantly the passion that our team has to win.

With that, Operator, we are ready to take some questions.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Matt Summerville with KeyBanc.

You may ask your question, sir.

Steve, just back to the FX comment you made a minute or two ago.

I want to make sure I'm clear.

Are you essentially factoring in 7 to 8 points of top line headwind into the fourth quarter just on FX?

No, Matt.

What we looked at is the impact of - our last guidance was based on the June 30th FX rates, and let's call it $1.55 on the Euro for example, and looking at the October 31st, the rates on Friday at, say, about one -- call it $1.28, just round numbers, and you look at that impact, and when I calculate that impact it's $43 million in total with approximately $8 million to $9 million in Q3 that we experienced, and then the $34 million to $35 million anticipated in Q4.

That's how basically I [boxed] back to those numbers.

I got you.

I thought on the last call, Steve, you mentioned that we should see R&D being expensed in the P&L start to ramp up in the second half of the year.

Obviously, you're still saying that for Q4, but I guess help me understand more from a timing standpoint why that didn't start to happen in Q3?

The old accounting ledger FAS 86 with respect to capitalization of costs with respect to internally-developed software for resale, we had had made some accounting estimates with respect to Teradata 13 that we had to adjust in Q3 that resulted in more capitalization of that R&D investment under FAS 86 than from an accounting perspective that flowed through Q3.

In Q4, I expect our R&D expense to closely approximate the Q4 '07 number, about $35 million.

Okay.

With respect to the Americas business, obviously this is the first quarter in several that you saw year-over-year growth.

Do you thing this is more reflective of a bottoming out in that geography as far as demand, or is this more reflective of the lumpiness in the business?

Matt, this is Mike Koehler.

I'll answer that one.

The US has been tough all year, as we've said in the prior two quarter calls.

But what's going on is the opportunities to keep building with the delays, and the other thing that's going on is starting in the fourth quarter we're going to be going against much easier prior year comparables going forward in the US.

So there's a little bit of lumpiness, but then there's also, if you will, a bubble that's been building as opportunities get delayed and the total amount of the opportunities just continues to build.

So we're cautiously optimistic that with the Americas going forward, with the prior year comparables being easier and the build-up in the delays, that we'll get a little tailwind with the Americas.

Is there any sort of close rate I guess you can quote over the last 12 months, the number of deals that have been pushed, how many of those have since been signed, so we can get sort of a feel for how big that bubble might be that you described?

I don't know if I can give you an exact metric, piece of data on that, Matt, but we do -- we do track them.

The number of deals that are cancelled as opposed to delayed are minimal, and they continue to flow through and we continue to work them as they're delayed.

Okay.

If I look at just the fourth quarter and your full year revenue guidance plus 1% to 4%, that implies fourth quarter revenue is in a range of something like minus 3% to plus 7% or $450 million to $500 million, round numbers.

That range is obviously extremely wide and I'm wondering, is that more reflective of current volatility you're seeing in your business or more reflective of contingency, just given the broader macro environment?

It's more contingent on the -- I would say the economic uncertainty, Matt.

Okay.

One more question, and I'll get back in queue.

With respect to the 2550, how has your head-to-head win rate there versus some of the other data appliance vendors compare to the win rate you talk about with your higher NBDW?

And I guess do we have a rough customer count on that 2550 at this point?

Overall, we're pretty encouraged with the 2550.

We've had several wins in the quarter, including five new customer decisions, five new customer wins in the third quarter, and we have pretty good activity building.

With the 2550, we are seeing more head-to-head competition where we're competing against the appliance vendors, and we've had a very high win rate in the third quarter with the 2550 as well as the entire product family going head-to-head with the appliance vendors.

The number we talk about on our win rate with enterprise data warehouse decisions, which is typically a different set of competitors and a whole different landscape, we've talked about that being in the 80%, 90% range.

We're not seeing that to that degree in this space at that time, but what we saw in the third quarter is certainly going up closer to that rate.

Great.

Thanks a lot, Mike.

Thank you.

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

You may ask your question.

Yes, hello, good morning.

Regarding some of the other new products that you've had discussed over the last quarter or two, just wondered if you could give a little update on a -- a little further update on how things are going there as well?

Gregg, this is Mike Koehler.

The update or the answer or the conversation I was just having with Matt was regarding the 2550 appliance.

The other new product that we introduced a couple weeks ago at our Partners Conference was the 1550, and it's just getting under way.

We're very encouraged with the market opportunity for the 1550.

It gets into a net new incremental market opportunity because it's attacking an area where there's massive data volumes and data sets that previously couldn't be mined or accessed in a data warehouse, traditional data warehouse environment.

So with the 1550, it's very promising as to what the opportunity here is because we have something that is very affordable and makes sense to get after those large volume sets in a data mart environment, and we've got some initial activities under way with a number of customers.

But it's very early in the process to report on that.

Okay.

That's helpful.

And I know you mentioned regarding the sales territory build-out of I think the 30/30/30 for the next three years.

What kind of progress have you made so far?

And I know it's still early there.

Well, no, as far as 2008 goes, we're very much on track to get to the minimum of 30 territories.

Okay.

Okay.

Great.

And the SAS relationship, I know you mentioned you've had some products come out of that expanded relationship.

Just wondered if you could update us on that initiative as well?

We continue to make progress.

We continue to optimize more and more of the SAS analytical applications in the Teradata environment.

I mentioned Cabela's as well as other companies that are benefiting from getting better speed and efficiencies and performance running with the Teradata environment.

So this is something that we did not plan on moving overnight, and it will take a period of time until we get a bunch of - more of the applications ported and optimized with Teradata.

We did release two applications, new applications at our Partners Conference, SAS applications that were credit risk and anti-money laundering, that's now available on Teradata.

So we're making good progress and pretty much as we expected.

Okay.

Great.

And Steve, you talked about the impact of the - foreign currency on the top line.

What kind of impact would that be expected to have on the net income or earnings per share, I guess, either one?

Gregg, let me just kind of give you a little perspective on that.

That's -- the impact on EPS, that continues to be a tough one to calculate, really due to the difficulty of specifically determining how much of the currency impact was captured in the pricing of a particular transaction, or how it was addressed in our sourcing activities from a products and services perspective.

But you can look at the total and look at our standard margins and, again, due to the pricing of the transaction, which we may be able to recover some of that, that will vary from the standard margin, gross margin perspective, and then you look at it from the operating expenses, how much can we protect on the sourcing side on the OpEx side, and so there will be an impact on EPS.

It just depends how much we can manage through the currency movements in our pricing decisions and our sourcing decisions.

Okay.

It's a difficult one to quantify.

I can imagine, especially with the volatility.

Exactly.

Do you have a quarter-end diluted share count figure?

The quarter-end diluted share count figure I believe is 179 - for the year, 181 even, and 179.4 for Q3.

Okay.

Because of the repurchases in Q3, we'll get the full weighted average share outstanding for Q4.

RIght, that's what I'm trying to get at.

Is it lower than the 179.4 you show as the average for the quarter?

It will be lower for Q4, but it just depends on the weighting for the full year.

Okay.

Okay.

And lastly, capital spending for this year, what are your plans and any early thoughts for '09, at least directionally?

What we have said in the past, you know, we're typically $75 million to $85 million for CapEx spend.

That includes capitalized software plus property and equipment, and that - we've been running that pretty consistently over the years, other than little [spend]-related capital investments.

So at this point in time, based on that, that would probably be a reasonable benchmark, based on the historical experience.

Okay.

Great.

Thank you very much.

Thanks, Gregg.

Thank you.

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

You may ask your question.

Hey, guys.

If I could follow up on the 2550 wins, like the five that you mentioned in the quarter, how many of those are with existing Teradata customers versus new, and then if you look at opportunities out, you know, do you see more of those deals coming from existing customers or from new customers?

Nabil, it's Mike Koehler.

In the quarter, five of the wins were new customer wins.

In addition, we had sales into our user base as well.

I thought you had said that you did five new customer wins for the 2550.

Did I hear that wrong earlier?

What I had meant to say, and thanks for asking for the clarification, Nabil, those are new account customer wins.

So yes, we had five new account wins in addition to user base wins with the 2550.

Okay.

Have you guys given your total count of customers using the 2550, and do you have customers that are in production on it at this point?

We do have customers in production and we have not given quantities, Nabil, for the number of 2550s.

I think on the call last quarter I had mentioned I think it was five customers by name that we were permitted to use their names, and then on this call what I mentioned is one customer that purchased the 2550.

We had several others that we didn't disclose by name, and five new account wins with the 2550.

So we're seeing a nice opportunity with the 2550, both in our user base as well as new account acquisition.

Now, the other dynamic that's occurred also is some of these new account wins that we're competing with with the 2550, some of those did change to 5550s when we were competing with the appliance vendors.

So in the quarter, we had several head-to-head wins against the appliance vendors with both the 2550 as well as the 5550.

Okay, great.

And then I apologize if I missed this but could I get the split between -- of the services revenue between consulting and maintenance?

The split between the service revenue on consulting and maintenance Nabil, let's see, I'll give that to you exactly here.

In Q3 it was 118 on the professional Services and 108 on the maintenance.

Great.

And then just a follow-up on the macro questions earlier.

Obviously kind of right at the end of the quarter and so far in Q4, at least the markets and news has been much worse.

Did you guys see a significant incremental slowdown as you got into the end of the quarter and so far into Q4, or from a - buying behavior and project delays has it been similar to what you were seeing throughout the year?

At the end of the quarter, it varied a little bit by geography and by industry.

In EMEA, Europe, Middle East and Africa, we didn't notice any change or behavior change.

Everything was pretty much normal going right through the end of Q3.

In Asia-Pacific/Japan, some of the global manufacturers, auto and high-tech manufacturers, we did see some delays and further scrutiny and change of behavior, as the deals were closing there at the end of the third quarter.

And then in the US, we saw a little bit more.

But once again, the US has been tough all year and we've had delays fall out at the end of each quarter in Q1 and Q2.

We had a little bit more fall out in Q3 versus Q2 but not anything abnormally high or different.

Okay.

Great.

Thank you very much.

Thank you.

Our next question comes from James Lynn with Greenlight Capital.

You may ask your question, sir.

Hi.

Given the math that you guys did on the revenue headwind, the $43 million, how should we think about the headwind heading - for 2009?

Well, James, this is Steve Scheppmann.

We don't forecast or admit to be able to predict currency rates, and basically what we do is we go off the spot rates, and our 2008 guidance in August was based on 6.6.

We updated through 10/31 for '08.

And if you do the math, if you say from -- you know, there's roughly a 20% currency headwind or strengthening of the US dollar from June 30th, there's 12% strengthening in there from the $1.45 to $1.28 range.

So you can look at -- do the math and say there may be $100 million out there in '09.

But again, that's predicting those currencies, and I'm not in a position to predict them, but I'm just looking at the spot rates and applying to the international markets, and you can do the same math and you could get a number that may approximate $100 million.

For 2009?

For 2009, right.

I'm just saying based on the '08 revenue, and looking at the movement of the spot rates, that's what you could calculate.

So then going back to this issue of the flow through, you know, the -- when we look at the $43 million that you guys were talking about, the change in the EPS guidance would imply about $0.05 was moved, was the fall-through, which sort of if you work off the chain, $9 million after tax, $12 million to $13 million pretax implies -- seems to imply a fall-through of about 30%.

Is that fair?

Is that math reasonable?

It varies.

You know, as I've said before, our business model generates incrementally, getting in that 30% range after the territory expansions are completed.

So, I mean, it varies.

It's a reasonable range.

Okay.

And it would also be reasonable to apply to this roughly the $100 million that we were talking about?

Again, it varies, and varies geographically.

It could be a larger range.

It just depends upon where this falls out.

How much from a pricing perspective we can manage, how much from a sourcing perspective we can manage, and from a products and services perspective.

So there's a lot of variables that are going into it.

That's why it's very difficult on the EPS side.

It's a little bit early to tell, and we'll obviously have a much better handle on this at the next call for '09.

Okay.

At this time, do you expect to get back some of this in pricing power?

Because you know there's a headwind, right?

I mean, it is our objective to always try to mitigate any potential risk, and so expectations versus our objective, it is our objective to try to mitigate those.

Thanks.

(OPERATOR INSTRUCTIONS)

Our next question comes from Matt Summerville with KeyBanc.

You may ask your question.

Just two follow-up questions.

Can you talk about how sustainable the growth is you're seeing in the maintenance business, given that we've had several quarters now of down year-over-year product sales?

Matt, as you've seen the growth in maintenance has slowed down a bit from the first part to the latter part of the year, through Q3 from a quarter-over-quarter perspective.

You know, with the movement I would expect that to level out and become more normalized going forward.

But again, that's still an area that we continue to emphasize with respect to the annuity side of our business.

But you've seen the trend, and that should level out.

When you say normalized, what do you consider the normalized rate to be?

Somewhere in the range of 5% to 10%?

Typically, that will track our product revenue growth, you know, and our -- really track our product revenue growth going forward.

And I'm being a little guarded here, Matt, because under GAAP with VSOE, maintenance revenues are protected with respect to - from an accounting side, so that's going to have a little bit of a benefit on the maintenance side.

So that's why I'm being a little cautious on the -- where that normal amount may be.

Matt, it's Mike Koehler.

The one thing we're really riveted on is picking up the number of new account wins, and with the broadening of our platform family, the increase of the sales territories, we're just very riveted on new account acquisition.

And, you know, with the economic environment we're faced, it's just also critical that we rapidly increase the number of new accounts and with that comes an incremental maintenance revenue.

That will drive the maintenance revenue.

Then just the last question.

Mike, you spent a couple minutes talking about communications, financial services verticals.

The other big one for you guys historically has been retail.

Can you give similar kind of color?

I know you mentioned a big new win there, but just more broadly what you're seeing there?

On a year-to-date basis, retail is down in the United States.

Outside the US, retail is up a little bit.

So we've been feeling the clampdown, as I've been saying, in the US now for three or four quarters and a piece of that was -- a good piece of it was in the retail industry.

We've also had some lumpiness in the government sector, which has been a drag on revenue growth this year.

So given that you've had nine to 12 months of fairly lackluster spending domestically among retailers, have the conversations you're having with these customers begun to change yet, i.e.

show signs that they might be coming back to you guys to spend?

I would say it's more similar at this point, Matt.

It's more of the same old, same old.

So - you know, we work with all our customers to help them maximize the assets that they have, actually to help them get the most they have out of their existing investments, even though it runs counter to an upgrade and everything else like that.

But at the end of the day, you know, we have to work with our customers and help them out in this time, and it pays dividends down the road.

Thanks a lot.

Okay.

We have time for one more question.

And then we'll wrap things up.

Thank you.

Our last question comes from Greg Halter with Great Lakes Review.

You may ask your question.

Hello.

Thank you for letting me back on.

Given this drop at least in the price of assets, I wondered what your feeling is towards merger and acquisition candidates, and I know you generally talk about small tuck-in type opportunities, but just if you could provide some input there, that would be helpful?

Hey, Gregg.

This is Steve.

We'll continue to be prudent with our cash investments, and we're always open for opportunities to enhance our competitive advantage.

So if that's strategically from a products perspective or strategically from a market perspective, we'll be always interested and active accordingly from a prudent perspective.

Okay.

And you mentioned your cash is overnight securities.

Is that mostly here, invested in the US, or is it not?

So as you recall in our effective tax rate, we made a determination to permanently reinvest because of our cash flow dynamics, you know, our international cash.

And at 9/30 approximately one-third is domestic and two-third is international.

Okay.

That's very helpful.

And it's all -- it's generally speaking in overnight government securities and again, not subject to any of the derivative exposure from third-party exposure.

All right, and one last one.

Mike, you had mentioned the retail and government.

Any commentary you could provide on the transportation, and I guess the newer growth area, the healthcare area, would be helpful as well?

Gregg, those two industry segments are very small relative to the overall revenues for Teradata, so I wouldn't take too much on it.

But since you asked the question, travel and transportation is up year-to-date and healthcare is - I'm getting the answer here - down a little bit.

Once again, it has more value if we give some color on an annual basis, which we will do, especially in some of these smaller segments.

You know, the bigger ones is meaningful and we get three quarters in a year, such as financial services, telecommunications and retail and manufacturing.

Right.

Makes sense.

Good luck, guys, I see the dollar has fallen the most against the Euro since '99 currently here, so good luck in these currency volatility times.

Well, thanks, Gregg, and thanks everyone for joining the call.

You know, we're looking at a tough economic environment here, but I want you to know we are committed to advancing the Teradata business, both short-term and longer-term, so thanks again.

This does conclude today's conference.

You may disconnect at this time.

Thank you for your participation.