Teradata Corp (TDC) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Teradata second quarter 2009 earnings call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

Please note that this conference is being recorded.

I will now turn the call over to Gregg Swearingen.

Mr.

Swearingen, you may begin.

Good morning, and thanks for joining us for our 2009 second quarter earnings conference call.

Mike Koehler, Teradata's CEO, will lead our discussion, highlighting Teradata's second quarter results.

After Mike's comments, Steve Scheppmann, Teradata's Chief Financial Officer, will provide more details relating to our Q2 performance, as well as our full year guidance.

Darryl McDonald, Teradata's Chief Marketing Officer, who is responsible for strategy and business development, is also in the room to answer questions.

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

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

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

On today's call, we will also be discussing certain non-GAAP financial information, such as free cash flow and revenue comparisons in constant currency.

A reconciliation of our non-GAAP results to our reported GAAP results and other information concerning these measures is included in our earnings release and on the investor page of Teradata's website found at www.Teradata.com.

A replay of this conference call will also be available later today on our website.

Teradata assumes no obligation to update or revise the information included in this call, whether as a result of new information or future results.

I'll now turn the call over to Mike.

Thanks, Gregg, and good morning, everyone.

Teradata finished the second quarter with $421 million in revenue, down 2% in constant currency from Q2 of 2008, and earnings per share of $0.36 versus $0.38 prior year.

Gross margins improved 60 basis points driven by a strong professional services performance in the quarter, and expenses were down $8 million, while absorbing increased investments in R&D, market coverage, and partnerships.

Given the economic environment we are operating in, overall, I was pleased with the performance of our team for the quarter and for the first half of 2009.

On a region basis, the Americas revenue was down 1% in constant currency in the quarter.

We had some very significant new customer wins, including The Home Depot, which is implementing an active enterprise data warehouse.

One of the world's largest pharmaceutical firms, who is consolidating and eliminating costly data marts into an enterprise data warehouse to get better information around their business.

Amazon.com, the State of Ohio, which joins a growing group of states relying upon Teradata to help recover unpaid and owed tax revenues.

One of the world's leading milk and dairy products producers and distributors, which will use Teradata to help improve their supply chain by moving to a more active reporting environment.

And Kia Networks, one of Latin America's major hosting service providers.

We also saw a good user base activity in the Americas, as customers continue to expand their Teradata environment to get better insight to run their businesses and to save costs.

Customer expansions in the healthcare industry included CVS Caremark Pharmacy services division of CVS, one of the largest health insurers, one of the largest pharmacy services companies, and one of America's leading health plan providers, which is executing on its vision for national electronic health records with Teradata.

Other upgrades or expansions in the Americas included Nextel in Mexico, as well as seven other leading telecommunications providers.

Five of the world's top manufacturers, three in the consumer package goods segment, one in auto, and one in the high tech segment.

In retail, Saks Fifth Avenue selected Teradata to help improve their current forecast accuracy at the store level.

Macy's and also one of the largest food retailers where marketing power users will use the Teradata system for advanced market basket analytics.

Also in the quarter we added a major SmartPhone and computer company as the latest member of our Petabyte Club.

Our roster of Teradata customers with over a petabyte of data continues to grow.

Turning over to EMEA, EMEA had our strongest performance in the quarter with revenue up 6% in constant currency, and EMEA was going against a very strong prior year Q2 where revenues grew 33%.

New customer wins included Skandinavisk Data Center, who supports the information technology needs of more than 140 banks in Scandinavia.

This new EDW is one in partnership with SAS.

And Jaguar/Land Rover, the well known auto manufacturer in the UK.

Expansions and upgrades of notes were Lloyds Banking Group and four other large financial services companies.

Shop Direct Home Shopping Limited, the UK's largest online and home shopping retailer, which is consolidating data marts into an active enterprise data warehouse.

Check Post, and Lufthansa, which is also a managed services customer.

EMEA also noted good expansion activity in the communications sector, including Telefonica Spain, Telecom Egypt, Telenor Pakistan, Vodafone and others.

A number of global customers have further established their commitment to our technology platform.

Barclays Bank, for example, has signed a new global agreement with us and made investments in Teradata in the UK and now in South Africa.

Asia-Pacific-Japan had a difficult quarter with revenue declines of 17% in constant currency.

Similar to EMEA, APJ was facing a very strong comparison with Q2 of 2008.

APJ saw new customer wins across multiple industries, a major Japanese equipment manufacturer who selected Teradata, recognizing the importance of an integrated enterprise data warehouse architecture.

They plan to merge sales and production data in its first phase.

One of Japan's top 10 community banks and a large insurance company in India.

Expansions and upgrades in APJ included Center Link, the largest civilian agency in the Australian government.

Center Link is now using Teradata to provide report statuses on services delivery and other situations during national disasters.

Industry Bank of China, the Cooney Coca-Cola bottling company in Japan, Daiya, Japan's third largest retailer and a number of financial and communications companies.

Not only do new customer wins represent the replacement of competitor systems, a lot of these expansions with customers also represent the replacement of competitor systems as well.

As data warehouses and data marts get eliminated when consolidating and integrating them into Teradata, enterprise data warehouses.

Turning to our professional services business, we had an exceptionally strong quarter across all regions.

Revenue was up in every region in constant currency and gross margins were up significantly.

Improved resource utilization, optimizing the mix of onshore and offshore consultants and managed services revenue growth have all been key drivers of the second quarter and the first half results.

We continue to see good success with our platform family in the quarter, with both new customers and existing customers.

Several customers have now implemented all four of our platforms, the 5550, which is the high end enterprise data warehouse, the 2550 appliance, 1550 extreme appliance, and the 550.

And our overall appliance activity continues to grow.

However, keep in mind the vast majority of our revenues and our opportunity in the market will continue to come from enterprise data warehouses, both for services and product.

Millions of data marts and data warehouses exist today and most of them are Oracle and maybe 1000 true enterprise data warehouses are out there today and they are mostly Teradata.

Integrating multiple subject areas and data into a centralized and active enterprise data warehouse provides best in class information to make decisions, and is the lowest cost architecture for the majority of the data and subject areas that exist out there today in the world's enterprises.

What our platform family has done is to allow us to address new opportunities like extreme data single-subject areas, such as click stream data or call detail record data, that are more efficiently served in a dependent data mart environment with our 1550 than in an EDW environment, or such as with entry level data warehousing opportunities with our 2550.

Enterprise data warehousing will continue to be our primary focus and not our competitors' focus.

It requires high concurrency of users, complex queries and analytics, ad-hoc queries, active loads and realtime access, to name a few of the unique requirements that Teradata does.

Our opportunity is to increase our market coverage and help our customers understand the business value that our platform family can deliver beyond what they are currently doing today.

We continue to extend our technology lead and during the second quarter we announced our most advance database release yet, Teradata 13.

Teradata 13 extends our tradition of innovation and data warehousing with over 90 new features, 60 patent applications, and up to a 30% overall performance improvement from our database software alone.

One of the new innovative features in Teradata 13 is the ability to include and analyze geospatial data inside the database.

This will now allow companies to incorporate more precise location data than previously available, and thereby enhance business insight.

Faster geospatial reporting with Teradata 13 enabled one of our insurance customers to run geospatial BI reports that previously took two days in less than 5 minutes with Teradata 13.

With the explosion of location data, GPS information and cell phones, planes, trains and automobile devices, the possibilities, the data volumes, and the new insights are endless.

Another data warehouse first is Teradata virtual storage.

Teradata virtual storage software provides automatic placement of data on disk based on data temperature or usage.

This patent-pending technology will provide immediate throughput improvements for Teradata users, and is the foundation for supporting mixed drive types, such as one Terabyte FAT drives or the new solid state drives.

Our approach to temperature aware virtual storage enables maximum data warehouse performance while lowering overall storage costs for our customers, and it all happens automatically.

In summary, we had a good Q2 and a good first half for 2009, given the economic environment.

For the first half, revenues were up 1% in constant currency and earnings per share were flat with prior year, and we're able to absorb the increased investments for our future in R&D, market coverage, and partners.

We will continue to execute to our plan, tightly managing expenses, while investing prudently to extend our technology lead, and our market reach, and ultimately drive higher revenue and shareholder growth over the longer term.

Looking forward, the economic environment continues to be a challenge with predictability.

However, we are now providing guidance, given that the first half of the year is behind us and we are now well into the third quarter.

For the full year, we expect revenues to be down 1% to 3% in constant currency, and earnings per share to be in the $1.22 to $1.28 range.

This assumes 3 points of currency headwind.

Some of the key factors when looking at the second half sequentially from the first half of 2009 are the strong prior year Q4 revenue comparison and the expense and cost increases in the second half over the first half in 2009.

Steve Scheppmann will be discussing this a little bit later on the call in more detail.

In summary, I am pleased with the performance of the entire Teradata team for the first half of 2009.

There is no doubt that 2009 is a challenging year, but all of us at Teradata remain confident about our business and confident about our future.

Now I'll turn the call over to Steve, who will provide more details on our Q2 performance and our full year outlook.

Steve?

Thanks, Mike, and good morning, everyone.

Teradata's business model focused on driving the strategic value of analytics throughout an enterprise, continued to deliver very efficient margin returns and free cash flow in a continuing challenging economic environment.

Teradata's Q2 2009 revenue of $421 million was down 2% in constant currency from the second quarter of 2008, down 7% as shown in US dollars.

Mike walked us through the revenue performance by region in the US dollars and in constant currency.

I'll move directly into our revenue from a product segmentation perspective.

Product revenue of $185 million was down 16% from the second quarter of 2008, in constant currency, product revenue was down 12%.

As we have seen from other IT companies, product revenue is generally where the brunt of the CapEx headwind is felt.

But services continue to be more resilient.

Services revenue in the quarter was up 1% to $236 million from last year's second quarter.

In constant currency, services revenue increased 6% from the second quarter of 2008.

Maintenance revenue, which includes maintenance of our software and hardware solutions was $109 million or up 1% from the second quarter of 2008.

Currency headwind had a negative impact on our year-over-year maintenance revenue comparison.

On a constant currency basis, maintenance revenue increased 6%.

Professional and insulation-related services, which is the other component of our services business, was up 1% in US dollars and increased 7% in constant currency.

Once again, we drove gross margin improvement, despite the challenging business environment and the negative impact of currency headwind.

Gross margin in the second quarter of 2009 was 55.3% compared to 54.7% in the second quarter of 2008.

This was due to in large part to the strong performance in our professional services business, which more than offset the negative impact from currency translation.

Product gross margin of 64.3%, although down from the 66.1% in Q2, was still solid.

For the six months ended June 30, 2009, product gross margin was 64.9% versus 65% last year, so basically flat year-over-year, where 2008 included one of our highest quarters product gross margin performance.

The drivers for the year-over-year change is primarily due to volume and currency.

Services gross margin improved 430 basis points to a record 48.3% and a record dollars of services gross profit margin generated.

As was the case in Q1, we drove meaningful improvement in services margin in Q2 as we gained better utilization of our internal professional services, resources, lowered our third party service costs, lowered our travel, and continued leveraging our offshore capabilities.

Behind the total services gross margin, we generated margin improvement in both maintenance and professional services.

Moving to a geographical view of gross margin, in the Americas region, gross margin improved to 58.1% for the quarter, due in large part to improved professional services margin.

Gross margin in the EMEA region improved 110 basis points to 54.2% from 53.1% in the second quarter of 2008, driven primarily by significant improvement in professional services margins.

Gross margin in APJ was 48.6%, a 90-basis point decline from 49.5% in Q2 2008, as higher professional services margins were offset by lower product revenue volume compared to the strong Q2 revenue performance in 2008.

Turning to our expense structure, we lowered our SG&A expense in Q2 2009 by $10 million to $122 million.

Beyond the currency benefit on SG&A, lower G&A expense more than offset the incremental investment in sales territories.

As we see sales territory expense increase the further we move into 2009, we continue to expect our ability to report meaningful reductions in year-over-year SG&A to be more challenging.

But we are still firmly on the path to report SG&A at or below our 2008 levels while absorbing the expense of our strategic initiatives, including sales territory expansion, and investments in our partnerships.

As we have discussed during our last quarterly conference call, we expect R&D expenses to increase in 2009.

In Q2 2009, R&D was $27 million versus $25 million in Q2 2008.

For the full year, we still expect R&D expenses to be closer to the 2007 R&D levels than the 2008 levels, which means R&D may be running at approximately $10 million higher in the second half of the year than it did in the first half.

As we have previously communicated, the timing of this R&D expense is related to the requirements capitalizing certain software development expenses under FAS 86.

In addition, when we amortize previously capitalized software development costs, the amortization is recorded in cost of product on the income statement and as a result, approximately $10 million more of amortization will be recorded in the second half of 2009 and will have the effect of reducing our product gross margin versus the first half due to GCA of Teradata 13.

So to summarize, we will have approximately $10 million more in R&D expense and we'll have about $10 million more costs via amortization hitting the product gross margin the second half of 2009.

Even though those will hit our operating margin a bit in the second half of the year and into 2010, we have anticipated this in our prior earnings comments for 2009.

As a result of all of these items just discussed, Teradata's operating margin in the second quarter was 20%, about the same as the 20.2% reported in Q2 2008.

Below the operating income line, other income declined $2 million from the second quarter of 2008, as interest income was not sufficient to offset fees associated with the company's operational financing-type activities.

The lower interest rate environment negatively impacted interest income, despite Teradata having $271 million more in cash and short-term investments than it had at the end of the second quarter of 2008.

For Q2 2009, our effective tax rate was approximately 26.2%, roughly the same as the 26.6% used in the second quarter of 2008.

For the full year, we continue to expect our annual effective tax rate for 2009 to approximate 26% to 27%.

Our tax rate continues to reflect our intention to permanently reinvest foreign earnings outside the United States.

However, we can repatriate this cash if needed, but that would generate additional income tax expense and a corresponding payable.

During the second quarter, we repurchased 1.4 million shares of stock for approximately $30 million.

Year to date, we have used approximately $50 million to repurchase 2.7 million shares.

Since the initial share repurchase authorizations were approved the at the beginning of 2008, we have purchased 11.2 million shares of stock, or approximately 6% of our weighted average shares outstanding for approximately $226 million.

Including the three -- the additional 300 million share repurchase authorization from our board last quarter, we have approximately 340 million remaining on our board open market authorization for share repurchases.

As we have said before, we expect that a rate of our buyback will continue to fluctuate each quarter taking in account, among other things, our working capital needs, our stock price, alternative uses of cash, and the economic market and market conditions.

Turning to cash flow generations, one of the strengths of our business model, we generated cash from operating activities of $103 million in Q2 2009, up 21% from $85 million the second quarter of 2008.

After using $20 million for capital expenditures versus$ 23 million in the second quarter of 2008, we generated $83 million of free cash flow, an increase of 34% from the$ 62 million of free cash flow in Q2 2008.

During the first six months of 2009, Teradata generated $286 million of cash from operating activities compared to $228 million in the prior year comparable period.

Capital expenditures in the first half of 2009 were $40 million compared to $43 million in the same period of 2008.

Year to date, 2009 Teradata generated $228 million of free cash flow versus $185 million in the same period in 2008.

Teradata defines free cash flow as cash flow from operating activities, less capital expenditures for property and equipment and additions to capitalized software.

Turning to the balance sheet, as of June 30, 2009, we had $638 million of cash, a $67 million increase from the end of the first quarter and a $271 million increase from the end of Q2 2008.

Approximately 50% of this cash is available in the US.

With respect to our accounts receivable, DSO was 73 days as of June 30, 2009 compared to 93 days as of December 31, 2008 and compared to 94 days as of June 30, 2008.

Deferred revenue at the end of the quarter was $302 million compared to $283 million at the end of Q2 2008, an increase of 7%.

As we did last quarter in an effort to provide further transparency around currency movement and the potential impact on our revenue, we have provided additional detail on our website regarding how currencies moved in 2008 and how this movement is expected to impact our year-over-year revenue comparisons in 2009.

Assuming the spot rates at the end of July, we expect currency to create a 2-point headwind in Q3 and a 2 points of tailwind in Q4, resulting in what is expected to be 3-point headwind for us for the full year of 2009.

Mike provided some revenue and EPS guidance earlier in the call, but I want to give a little more color on some of the specific items and the calendarization between the first half results and what we expect in the second half.

Although we had good results in Q2, predictability continues to be a challenge, not only for the full year, but also for the third quarter.

I'll reiterate.

Currency based on the current spot rates is expected to continue to create headwind for us in Q3 on both the top line and on margins discussed earlier, while creating a lesser positive impact on operating expenses.

R&D expense hitting the P&L is expected to be higher in 2008 as we continue to invest in our core R&D.

In 2009, R&D expense is expected to revert back to a normalized level, more comparative to the 2007 level of $126 million .

Expense management, as well as some help from currency, successfully offset the incremental selling expense related to the strategic decision we have made to increase the investment in our sales territories.

With our performance in the first half of 2009, we are on track for our objective of SG&A to be flat or down from 2008, even after absorbing approximately $17 million of incremental sales territory costs.

Beyond the normal increase in expense that we see in a typical year, second half versus first half , we will also see approximately $10 million of incremental R&D expense in the second half of 2009 and approximately $10 million of higher amortization of capitalized software development costs in the second half.

Furthermore, we expect sales territory expense to increase in the second half versus the first half of 2009.

So as a result of the higher R&D and sales territory expenses in the second half, along with the addition of -- additional software amortization hitting gross margin, it is likely that our EPS in the second half of the year will be similar to up from our EPS we reported in the first half of the year, assuming a revenue performance of minus 1 to minus 3 in constant currency for the year.

In closing, Teradata continues to be well positioned in this market, driven by its technology leadership position, its strong customer base and relationship, the global 3000, strong recurring revenue model from our existing customer base, and our annuity business, our strong capital position, $638 million in cash, no debt, and strong free cash flow model, our new expanded product family, and our geographical diverse business model.

Teradata continues to be a good cash flow model.

Since June 30, 2008, cash increased $271 million, despite using $154 million for share repurchases during the last 12 months.

Again, thank you for joining us this morning, and we look forward to seeing many of you over the next coming weeks.

And with that,

(Operator Instructions).

Our first question comes from Katie Huberty with Morgan Stanley.

Please go ahead.

Thanks, good morning.

And nice quarter.

To get to the midpoint of your EPS guidance for the year, we need to assume that gross margins come down from the levels in June.

Are there any other headwinds other than the amortization of the Teradata 13 R&D expense that you talked about that hits COGS in the second half of the year?

Katie, this is Steve.

The primary headwind is that capitalized R&D that we're going to start amortizing in the second half, and that will be adversely impacting our product gross margin in the second half.

We had strong yields on the professional services side with the leveraging that Mike spoke to of all of those components.

We'll continue to work with that leverage, but again, we -- it was a record PS margin, or record services margin quarter, so we've got to continue our focus on generating that margin in the services sector because we did have a record second quarter in that area.

So those would be the two things I would point out.

And as it relates to the higher professional services revenue this quarter, does that indicate anything about early stage new customer projects, or is that just a matter of the team doing a better job selling consulting services?

Katie, it's Mike Koehler.

The majority of the revenue is related to billable activities in and around the user base.

I wouldn't say it's a huge positive, but it is somewhat positive as it relates to the opportunities going forward.

Any time you're generating more consulting activity in and around your customer base and with new prospective customers, it's more beneficial, or more positive than it is anything else.

And then just lastly, do you know how many deals you did with SAP in the quarter and how that compared to a year ago?

Hi, this is Darryl.

On the SAP front, we're continuing to partner with SAP today prior to the release of the ported solution.

So we've got activity with SAP that we're actually driving integration through partnerships and deals, so we're not tracking the specific deals and reporting them until we get the full port.

But we are having good traction.

We've had a lot of uptick in interest from the current SAP customers that are looking to either consolidate or roll out new versions of SAP, and now looking at Teradata as a platform as a part of that architecture.

So things are going well with the partnership.

We're really waiting for the port to be completed to see an uptick in the business opportunity in the first half of next year.

Our next question comes from Anthony Kure from KeyBanc.

Please go ahead.

Good morning, guys.

Couple of quick questions.

Can you just comment on the strong service gross margins as it pertains to Europe?

I think the comment was they were substantially up there, and how that factors into your full year guidance and expectations for the second half of the year?

This is Mike Koehler, Anthony.

A lot of the EMEA business margins was delivered by -- driven by deal mix, as well as our yield on the product margins.

So the services business, though, was up substantially with the margins.

And you get into things like resource utilization, optimization of resources leveraging the offshore resources.

This is in our professional services business, as well as just pure execution in EMEA.

The other piece in EMEA that's been growing is managed services, and they have done well with that, and that's also added to the margin rates.

So looking forward at this, you asked about the second half and the EMEA margins.

We would expect similar margins except for the piece that's professional services.

The professional services is a little bit less predictable, and it would remain a little bit more of a question as we look out at the second half of the year.

And nothing negative, but it is a little bit less predictable and -- but generally speaking we feel pretty good about the margins there in the second half.

And, Anthony, this is Steve.

We've had professional services improvement in all three regions in Q2.

So it was strong across all three regions, including EMEA.

Okay.

Next question is just around the capitalization amortization expense, obviously hitting you in the second half of the year.

When do those -- can you provide any color on sort of timing moving to 2010?

I know these things are kind of cyclical when you come out with new databases.

How does that roll off, or is there any sort of logic to look forward to in 2010 and how that might impact the year next year?

Anthony, our historical practice on amortization, under FAS 86, you really -- the criteria tells you you have to track the revenue from these releases.

We typically have a major release every, call it 18 months for this conversation.

And historically to track that, we've generally amortized -- we're on an accelerated method, which would equate to amortizing more of that in the front half, and typically we amortize it over a three-year period.

And so more of that would be amortized in the front half in theory to match the revenue generated from it.

So you would expect to see it up in the second half.

You would expect to see it up in 2010.

If you use a three-year basis, that would be the halfway mark through 2010, so there would be more amortization coming through in the first half on our traditional historical model on an accelerated method.That's why I referred to in 2009 and into 2010 that amortization would be up.

And if you look at our 10K schedules where we track capitalized software, you'll see the additions going through it on a quarterly basis on the cash flow, and you can build that and then that period basically has to amortize off through a reduction of our product gross margin or an increase in our product costs.

Okay, thanks.

And then just last question, if you might be able to comment on any changes or positive or negatives on the competitive landscape in respect to --I know Natezza that just came out, this new product, but what your customers are saying about that and maybe the Exadata competitors, now that Oracle's been talking a little bit more aggressively about that.

Hi, this is Darryl.

Let me make a couple of comments.

I can imagine it must be confusing to yourself and a lot of people around, all of the hype that's in the marketplace around 10 times faster, 100 times faster, 50% cheaper.

I like the ones that are actually 50% cheaper than themselves.

That's pretty funny.

But from a Teradata perspective, we're very confident in our technology.

If you look at what we've done over the last couple of years, we've improved that technology leadership with the announcement of the platform family.

More importantly, with the new generation of Teradata 13 and the capabilities you heard Mike talk about.

We're really focused on handling the enterprise data warehouse and the active enterprise intelligence space from a Teradata perspective, and we're still the leader in being able to handle complex queries, concurrency with lots of users, workload management, which is critical in that environment, active elements.

Customers need real-time loading, real-time access in this competitive environment today.

All of these things, along with systems management capabilities, are things that we're the best at, we're investing in, and we're still the market leader in.

So all of the new announcements are really not attacking or going after our leadership position in that area.

They are really going after the data marts and coming up with cheaper, faster solutions in that area.

Our platform family allows us to compete in that area, so we are getting a chance to do that.

I would say we're seeing similar traction with Oracle Exadata across the board that we saw since they announced the product.

We primarily are seeing it in their user base, as you can imagine, talking to their users about upgrading Oracle platforms to the new Oracle Exadata.

When we get a chance to compete, we have a very high win rate.

Our opportunity is to get out there and make sure we're getting in front of those and getting Teradata on the table instead of just assuming upgrading to Exadata is the right path, so we're very confident in being able to compete there.

On the Natezza front, we're continuing to compete with Natezza at the data mart and appliance level.

We think our platform family can handle that.

We still think the ability to upgrade to the EDW is our value proposition.

So we're very confident in our ability to win and compete there, too.

So we'll keep evaluating the competition and the claims out there, but we're very comfortable that we're in the leadership position and our new platform and products are strong, and we're also very confident in some of the new things we're doing around the 1550 and the new data spaces and the new extreme data applications that people are looking to do around compliance, around near line storage capabilities, around call detail records.

Those things we think are innovative that we're going to continue to lead on there as well.

We'll continue to track the competition.

We respect them all, but currently we don't see anything that's announced that we think is a threat to our overall strategy to being the leader in enterprise data warehousing.

Okay, thank you very much.

Our next question comes from Brian Denyeau with Oppenheimer and Company.

Please go ahead.

Great, thanks, guys.

Just a quick question on the sales force buildup.

I believe you said in your prepared remarks, Steve, that you expect $17 million of incremental expense this year.

If I go back last quarter, I believe you had said it's $13 million.

Does that imply that you guys are hiring ahead of schedule in terms of hiring reps this year?

No, Brian.

We're still on target.

We had committed to 60 territories by the end of 2009.

As you know, we added the 40 in 2008 and we're still on target and the hiring is still as we expected in 2009 and the incremental cost of $17 million for 2009 is on top of the costs we had in 2008 of $10 million, so everything is what we had expected.

Okay, and then on the professional services side, not to beat a dead horse here, but last quarter you said one trend -- one quarter didn't a trend make in terms of higher utilization and resource rationalization.

Now that you've got two quarters in, do you think you've reached a level where assuming you continue to block and tackle like you have, that you can keep that type of professional services margin?

This is Mike, Brian.

The one -- well, first of all, the question is are PS margins, are they sustainable?

And at the current levels?

And I would say clearly the trend and what we're executing to is at a level that will be better than the PS margins we saw in 2008 as we go forward, okay?

The one variable is this year we aren't hiring, we're not really growing much.

And when looking forward, when we are hiring and we are growing, which is what we want to do, that has a drain on utilization, training, ramping, and things like that.

And that's the one negative headwind I see, which is actually a good thing.

It's -- back when we were growing our PS business and our overall revenues and hiring and staffing, that will be an impact on utilization.

That will be a drag on the margins.

The blocking, tackling, and the efficient utilization of resources, that should stay with us.

I can argue we have opportunity to improve the margins with further offshore utilization and with our managed services business.

But the only headwind I see going forward will be when we're growing again.

Okay, great.

Then lastly, just on the retail business, domestically, sounds like you have some nice wins this quarter.

How's that trending and how are you feeling about that in the second half of the year?

The -- yes, the retail business, and in particular in the US, it was actually up in the -- for the first half of the year, and we're feeling pretty good about the retail segment, the retail industry for Teradata overall.

And primarily driven in the US.

We got hit pretty hard last year in the retail industry in the US.

It looks like as we stand now it's bottomed out, and things are stabilized from here and hopefully we have an opportunity to continue to grow the retail business here as we get into the second half.

Great.

Thank you, guys.

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

Please go ahead.

Hey, guys.

That is Nabil.

Let's see, a few questions.

Actually, can you give me the currency, I mean the guidance on revenue again?

I missed that.

I just wanted to make sure I got that right.

Guidance on revenue, Nabil, is minus 1 to minus 3 in constant currency.

That assumes that a 3% currency headwind for the year, and that we expect a 2% headwind in Q3 and a 2% tailwind in Q4 to basically relatively flat for the second half in constant currency.

That's -- those are the assumptions we've made.

Okay, and then any color you can give me on what the product assumptions are as part of that?

Are you expecting growth in the second half, or any color there?

Nabil, it's Mike Koehler.

We expect product growth to grow sequentially from the first half to the second half, if that's your question.

Okay.

Whatever's built into the revenue guidance, I just wanted to get some color on that.

Let's see, on, on the other verticals, any color you can provide on telecom and financial services and how they performed in the quarter?

Well, we typically like to go over these results, Nabil, on a year basis.

They can be a little bit lumpy on a quarterly basis and even on a six-month basis.

But you ask the question, and I'll answer it, but I just want to give you the caveat, I wouldn't jump to any conclusions.

Financial services is actually down from the first half.

Com is down in the first half.

Retail globally overall for the first half is really around flattish.

It's up in the US, and manufacturing was significantly down.

The manufacturing industry in the first half.

Some of the smaller segments where we're getting a lot of traction were up significantly in the first half.

Once again, I wouldn't call it a trend, but it's a good result.

Our healthcare industry was up a ton for the first six months of the year.

Small numbers, but up a ton.

You heard in my prepared remarks a number of these wins were mass, but big wins, particularly in the US in the healthcare segment.

And our government business was up quite a bit in the first half.

So that can kind of give you a feel and kind of a picture for where we sit on the first six months.

And Nabil, coming back to your question on product revenue in the second half first half, again, Mike indicated sequentially up.

We have a tough Q4 comp coming from last year on top of it, too, on the product revenue side.

So I would say based on our performance through the first six months, product revenue down 11%.

It should be down from second half 2008 to second half 2009 also.

Okay.

And then what was the portion -- you guys usually give this, portion of revenue from installed base?

It still remains, still running.

There's been no significant change to that.

About 90% range of revenue coming from that existing customer base.

Okay, and then just to follow up on the competitive question, specifically on Oracle, when you guys do compete with them, what have you seen them doing on the pricing front and how aggressive have they been there?

Well we've seen some very bipolar sort of reactions on the pricing side with them.

Interestingly enough, when we do get involved, we have seen some instances where it looks like they are trying to buy the account or buy a reference, especially as we compete with them.

So we've seen some pretty drastic reductions in their price to try to get, I think, footprints and a reference list.

So that will level out hopefully or from a customer perspective, but again, kind of crazy pricing is probably the biggest thing we've seen.

And again, I think our opportunity is making sure we can get the market aware that if they consider Exadata, that Teradata really is an alternative to that solution and growth if they have aspirations to try to not only improve performance, but look at how they can improve data integration in business value, then Teradata is definitely an alternative that will be equal in price, but better in performance.

Okay, and just kind of compared to, say, 12 months ago, do you compete more or less or the same with IBM?

I would say it's about the same.

Okay.

And last question, I probably should have started with this one, but just from a macro perspective, if I missed this, I apologize, but have you seen close rates improve or any sort of sign that things are loosening up maybe for the second half?

Nabil, you're asking have we seen any signs of close rates -- if you could repeat it, improving?

I was trying to get a sense from a macro and spending perspective, have you seen close rates improve maybe near the end of the quarter, or signs that maybe--

Oh, okay.

-- spending is loosening up for the second half?

Nabil, thanks for the clarification.

The sales cycles, the close rates and everything else, I would characterize that we've been in a -- well, in some parts of the world like the US, we've been in this delayed long sales cycle for well over a year, a year and a half.

And more recently in APJ it seems to be hitting us a little bit later than when it hit us in the US a year and a half ago.

So by and large, I characterize it as the sales cycles are longer.

The close rates are the same.

But in a way, it's stable.

I wouldn't call it good, but it's stable.

Okay.

Better than declining, I guess.

Yes, yes.

All right.

I'll pass the mic.

Thank you very much.

Sure.

Our next question comes from Alex Kurtz with Merriman Curhan Ford.

Please go ahead.

Yes, thanks for taking the question.

Great quarter.

So can you give us a little more color on what the linearity was in Q2, just sort of how deals paced out during the quarter?

Alex, Steve.

There is really as Mike said, there's probably -- we've been in this cycle now for 18-plus months.

And what I would call this now, we probably are in the new normal, at least for this economic environment, and so we really didn't see anything unusual on the second quarter.

It played out very consistent with the prior quarter's items in the pipeline came through, some deferred, some got picked up from the prior quarter.

So there wasn't really anything unusual or new with respect to the process in Q2 compared to the prior quarters.

Okay.

And just a little bit more color on the last question about customer budgets going into the back half of the year.

No commentary back from your install base saying budgets are starting to get loosened up and they feel they can get a little bit more aggressive with projects heading into 2010.

It seems like from your last comment things seemed pretty much stable with what you saw last quarter, just a little bit more color there?

Alex, as far as the actual customer budgets go, I really can't speak to that or comment on that.

The thing I would say is it's encouraging, projects that involve Teradata seem to get a little bit of a higher priority than other things the IT organizations are looking at.

I can't give you a forward-looking view on whether we anticipate it, or we're seeing it pick up or decline.

It's going into the second half here, it's pretty static.

Okay.

Just a couple more questions here, then I'll pass it.

The Oracle Exadata solution, can you just give us a sense of where -- what kind of environment and how that you're engaging Exadata and sort of what their sales strategy has been engaging you guys.

Well, I would -- this is Darryl.

I would say their strategy is not to engage us, but Oracle has a large install base, so they have a lot of market share that they can go and try to upgrade.

And I think that's where they are targeting.

I would say they are primarily focusing on their environments where they have customers that are pushing the limits.

As you can imagine, most of the upgrading, most -- a lot of the upgrading in migrations of data marts that we do are migrating Oracle data marts into an enterprise data warehouse.

And we can continue to do that on a daily basis with a lot of our users.

So as you think about our install base growth, we're constantly moving applications and existing Oracle data marts into the enterprise data warehouse and giving them that integrated view of the data, as well as a lower cost of ownership.

So I would say on the whole, I think they are primarily targeting where they have performance issues with their current platform and then their offering does offer performance of Oracle in that area.

But I think when customers get the chance to evaluate the cost to do that and look at Teradata, whatever, it's becoming a nice alternative for them to consider.

Again, there hasn't been a lot of head to heads or engagements still with Oracle.

I would say it's been constant since they announced it, but it hasn't picked up tremendously so far from an enterprise data warehousing standpoint.

Sounds like they are not necessarily going after your install base at this point.

They are just sort of upgrading their existing solutions.

So you're not really running into them too much.

Are you running into them in new opportunities at this point for net new customers out in the market?

In some of those, yes.

So in some of the new ones, they are considering it giving all the marketing that Oracle's been doing around it.

But I would say, I would say on the whole--

Yes, I would say if I can add, our user base does look at it and we have engaged with them, with some of our customers.

But by and large and overall, we've done very well.

Okay.

And just two quick questions on just the follow-up here.

The 2550, you mentioned number of systems sold last quarter.

Could you provide that again this quarter and also, the last question would be just sort of looking into your pipeline for your support and services organization heading into Q3, how does that pipeline look right now?

Do you see a lot of upside potential there?

Thank you.

Alex, it's Mike Koehler.

Yes, we're not going to get into disclosing details and numbers and everything else on units sold and all of that across the product platform family each quarter.

The comment I'll make is our activity's up and we're pleased with the results.

However, one thing I want to point out when you look at Teradata overall and how significant and large our enterprise data warehouse solution architecture is, the appliances by and large, the average selling prices, a third of what we get with the, when we're in an enterprise data warehouse environment.

So overall we're fine and it seems sales activity on the rise.

The second question was?

Pipeline for the support organization, sort of you have a lot of big opportunities in the quarter, in the current quarter.

So what's your view of that right now?

Okay.

Pipeline on services, okay, I assume we're talking specifically about our consulting services because the annuity--

Right.

Maintenances and annuity and everything else.

The pipeline is solid.

So as we enter the second half of the year, it's solid.

And quite frankly in this environment, as we entered the year and everything else, I'm pleasantly surprised, not just in the margin rate improvement, but our ability to grow the professional services businesses environment.

And entering the second half of the year, the pipeline's good.

Thank you.

Our next question comes from Doug Reid from Thomas Weisel Partners.

Please go ahead.

Thank you.

Nice quarter, guys.

Wanted to just quickly circle back to this, this growth opportunity in the data -- the appliance and data market opportunity rather.

You're not providing the numbers for the 2550 or the 1550 any longer, but I'm just wondering if it's fair to assume that because of the crazy pricing, as you've cited from Oracle, that you're stepping away from a greater number of opportunities that you might have anticipated a few months ago, would that be fair?

The answer is no.

I would say if anything, with our platform family -- and I think to clarify what Mike was saying, we wanted to give you an update last quarter on the platform family announcement.

What we'll do is periodically give you updates and some specific numbers on a yearly basis.

But not being a big portion of our business, we don't want to focus all of our time on those every call or whatever.

Regarding the deals and the traction, we're very comfortable in the platform family, the 2500 competing with the Oracle Exadata and Natezza.

So that is the platform that we go to market with and compete with them and we're seeing, like I said earlier, the activity is up and I think as you can imagine, creating interest in that space gives us an opportunity to also insert that platform and compete for that business.

The other thing I would mention, there's a lot more engagements and activity generally going on around the world as a result of all this new entrants and new competitors and new products and everything else.

A lot of this results in 5550s.

In other words, we get engaged in these data marts, smaller data warehouses and everything else, and we have the platform family and we go there.

But a lot of times what you wouldn't see in the numbers we're talking about appliance, is we're selling our enterprise data warehouse class product, the 5550, as the result of an engagement in a data mart appliance, small data warehouse engagement, which is a good thing.

So it's actually helping us in the EDW space as well.

That's helpful.

Thanks.

Operator, we have time for one quick question from one more caller.

Thank you.

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

Please go ahead.

Great.

Just made it under the wire.

Wondered if you could comment, given the fact that the cash is building very nicely here, on either M&A opportunities, share repurchase, although the stock's at 26, so it's had a nice increase there, or the initiation of a dividend.

This is Steve.

That is constantly in our strategic discussions, all the three elements that you've mentioned, and we'll continue to be active in the third quarter with respect to our strategic opportunities for our cash.

And I feel comfortable with that statement.

Okay.

And was there any sort of either deal pull-forward or push-back into the current quarter, the third quarter?

It was the normal deferrals.

So we're in a longer sales cycle, and the deferrals pull forwards and so forth, it's all been running the same quarter to quarter, very similar.

Okay, and one last one.

I think you touched on the SAP, but on the SAS side, and I think you said you went along with SAS in EMEA.

Any other commentary on how that relationship has been developing since you announced it over a year ago?

Yes.

Things are going extremely well with SAS.

Our in-database initiative with them, as well as our application buildout with them went well.

We've released, as I've talked on the previous calls, three solutions already with SAS, driving the in-database initiative.

We're also looking to make some announcements here at our partners event coming up on some new solutions that we're releasing with SAS as well.

Things are going well.

The activity's going well.

We've got some great customer wins that we'll continue to highlight along the way.

And as we mentioned, in the Teradata 13 database release, we built specifically in there capabilities, Mike referenced it a bit with the geospatial, but this is an example of what we're doing with SAS to allow SAS's data mining and models and analytical models to run in the database, which is going to drive just tremendous performance value and cost efficiency for our joint customers.

So with that release and our new solutions we're going out, we're continuing to see great results and opportunity with SAS in the marketplace.

Okay, great.

Thank you.

And good luck down the road.

Thank you.

Thanks, Greg.

Okay.

Before we close the call, one more thing.

I would like to invite all of you to attend this year's Teradata partners conference being held October 18 to 22 in Washington, DC.

This is the largest data warehouse conference in the world, and it is sponsored and run by Teradata customers and it's a great opportunity to get -- hear from them and meet them and so forth.

If you're interested, for more details, please contact Gregg Swearingen.

Once again, thanks for joining the call this morning.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.