Teradata Corp (TDC) 2009 Q3 法說會逐字稿

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

(Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Mr.

Gregg Swearingen.

You may begin.

Good morning.

Thank you for joining us for our 2009 third quarter earnings conference call.

Mike Koehler, Teradata's CEO will lead the discussion highlighting Teradata's third quarter results.

After Mike's remarks, Steve Scheppmann, Teradata's Chief Financial Officer will provide detail relating to our Q3 performance as well as our 2009 full year guidance.

Darryl McDonald who is responsible for strategy and business development is also in the room to answer questions.

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

While the 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 10k, and other filings with the SEC as well as in the note to investors section of the Company's earnings release.

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

Reconciliation of our non-GAAP results to our reported GAAP result and other information concerning these measures is included in our earnings release and on the investor page of Teradata web site at wwwteradata.com.

Replay of this conference call will also be available later today on our web site.

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 another good quarter while continuing to extend our technology leadership, and executing on our longer term growth initiatives.

For the third quarter of 2009, Teradata delivered earnings per share of $0.36 versus $0.33 prior year.

And $0.38 versus $0.36 on a non-GAAP basis.

Revenue in the quarter was $425 million, down 3% from Q3 of 2008.

And down 2% from prior year in constant currency.

Our professional services business continued to show good growth in the third quarter up 5% in constant currency to $124 million in revenue.

And gross margins were up versus Q3 of 2008.

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

Overall revenue growth has been spotty this year.

We have seen signs of stability in the US, softness in key countries in APJ due to the economy and strong revenue growth across most of Europe and Middle East Africa.

Teradata team has been executing very well delivering a good operating income yield on the revenue book to date.

But our goal remains to drive higher revenue growth and in particular more product revenues as we look to the future.

Turning to the regions, the America's generated $247 million in revenue.

Down 2% from Q3 of 2008.

Year to date the Americas revenue is down 3% as reported, and down 1% in constant currency.

New account wins that we can name included Comcast, the largest cable operator in the United States.

Comcast is implementing a Teradata active enterprise data warehouse, can prove analytics across their business as they consolidate numerous data marks.

This will help Comcast eliminate manual processes, reduce costs, improve insight, and increase agility throughout their company.

Vonage leading provider of broad band voiceover IP will be using Teradata to help manage network quality.

Habitat for Humanity will integrate its operations, financial and donor information to provide better cross functional intelligence across the entire organization.

We also saw good activity across the Americas user base as customers continued to expand their Teradata environment.

Upgrades and expansions in the communications industry which includes the telecommunications media entertainment and e-business segments included ETB the second largest telephone company in Columbia, Telephonic Argentina, the largest provider of telephone service in Argentina, Electronic Arts, which is adding Teradata relationship manager, our customer analytics and marketing application, to help them better target and enhance communications with customers.

Netflix, overstock.com, and eBay.

In addition to their Teradata enterprise data warehouse eBay is adding initial two peta bite appliance to capture and analyse web traffic to improve their customers experience and their advertising performance.

In the financial services industry, user base activity included World Bank of Canada, Discover card, two of the largest banks in the US and one in Brazil, one of the world's largest investment banks which is expanded its Teradata warehouse to enable finance to have a better view of all financial data and to provide daily profit and loss information needed by traders.

And one of the top financial services companies who selected Teradata for its customer facing web application.

This new application will enable customers to review statement data on line and look at their spending patterns by category over time.

The system will also deliver statement and transaction data to the companies call centers ensuring that workers on the front lines will have the most current and accurate information.

In manufacturing we saw good growth in the quarter from the high-tech and consumer packaged good sectors.

Manufacturers expanded their Teradata systems to improve supply chain visibility, improve category management, and reduce costs by consolidating data marks.

Other significant upgrades in the quarter came from the US defense logistics agency, and Medco.

EMEA delivered a strong performance in Q3 with revenues of $109 million up 3% over Q3 2008 and up 9% in constant currency.

Year to date EMEA has also grown revenues 9% in constant currency and executing well across most of the major countries and industries we serve there.

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

EMEA also had strong upgrade and expansion activities such as Media Market and Saturn the largest European consumer electronics retailer who is enhancing and expanding their data warehouse to provide intraday reporting.

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

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

We also saw expansions from Vodafone, Pakistan Moble, HSBC, Standard Bank, South Africa's largest bank, and Lloyd's Banking Group.

Turning to APJ, we had a difficult quarter with revenues declining 14% to $69 million versus Q3 in 2008.

Year to date revenues are down 11% and 10% in constant currency .

We are feeling the economic impacts in two of our largest markets Japan and Australia as customers delay larger data warehouse expansions but continue for the most part to approve smaller purchases.

During the quarter we saw eight major banks in China, Japan and Korea expand Teradata systems as well as Westpac in Australia.

Six Telcos in China, Japan, Australia and India, and Qantas Airlines who is expanding their Teradata enterprise data warehouse, which supports many areas within the Company including passenger, group loyalty, and corporate finance.

And five retailers in Japan which included Rakuten, which manages Japan's largest on line retail marketplace.

Which is now using their enterprise data warehouse to help target and optimize on line advertising.

And NAFCO Corporation, major home improvement retailer in Japan, have expanded the Teradata system as well.

Driving innovation for our customers is an important factor for our continued success.

And we recently made a number of significant announcements at the 24th annual Teradata partner's users group conference.

The world's largest event focused on data warehousing and enterprise analytics.

It was great to see the enthusiasm from our customers there, close to 100 presented at various sessions sharing best practices, new insights and game changing innovation.

At the event we announced and demonstrated our newest offerings from Teradata labs.

We launched the world's first solid state data warehouse platform for hyper analytics.

The 4600 extreme performance appliance uses solid state drives for data warehouse workloads and with performance which is up to 150 times faster than conventional hard drives.

But at a higher price.

It is ideally suited for applications with 100% hot data where you need to aggregate millions of rows in a second, and require extremely fast data loads operational queries or complex analytics.

Utilizations for the 4600 include real time analysis and optimization of on line advertising, high volume manufacturing logistics, traffic optimization for transportation companies, or analyzing all the telco network traffic to keep its network secure.

The 4600 will be available for purchase in the first quarter of 2010.

Teradata will continue to expand its platform family as unique business and analytical requirements continue to evolve in the data warehouse market.

We now have seven platforms, the 5555 enterprise data warehouse, 2555 entry level data warehouse, 1550 extreme data appliance, the 4600 extreme performance appliance, our 551 data mart, our software only data mart and now cloud.

We announced our first public and private cloud computing offers at the partners conference.

Teradata is now available on Amazon's EC2 public cloud.

This prepackaged developer version will provide prospects and partners easy access to explore Teradata's capabilities at minimal cost.

In addition, we announced Teradata availability on VM ware.

Although these new offerings will not materially add revenue, they expand the number of companies who can access and use Teradata more easily.

These announcements reflect our continued focus on driving innovation from our Teradata labs, the research and development arm of Teradata .

Turning to our full year guidance for 2009, we continue to expect full year revenue to be down 1% to 3%, in constant currency.

We are encouraged by our increased activity levels and sales funnels especially in the Americas.

However, we are going against prior year Q4 where we grew 9% in constant currency.

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

In closing, the Teradata team continues to operate with passion and dedication to the success of our customers.

We continue to improve key customer satisfaction metrics such as product reliability, responsiveness and being easy to do business with.

We strive for customers to view Teradata as a long-term business partner who can positively impact the results of their business.

And our goal is to be the best IT provider for each of the customers we serve.

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

Thanks, Mike.

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

Turning to our revenue performance.

Teradata Q3 2009 revenue, of $425 million, was down 2% in constant currency from the third quarter of 2008.

Down 3% as shown in US dollars.

Product revenue, $191 million was down 9% from the third quarter, of 2008, in constant currency, and down 10% in US dollars.

Product revenue continues to be the area that is being hit the hardest by the economy, and the pull back in I T CapEx spending.

Services revenue however, continued to be more resilient.

In the quarter, services revenue was up 4% to $234 million.

from last year's third quarter In constant currency, services revenue increased 5% from the third quarter of 2008.

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

On a constant currency basis maintenance revenue increased 4%.

Professional services which is the other component of our services business was up 5%.

On a aggregate basis, currency did not have a meaningful impact on the professional services revenues.

Gross margin in the third quarter of 2009 was 53.4%, compared to 54% in the third quarter of 2008.

Continued improvement in our services gross margin offset a decline in our product gross margin.

Product gross margin of 62.3% declined 200 basis points from 64.3% in Q3 2008.

As expected, increase in the amortization of previously capitalized software development cost impacted product gross margin by a couple of percentage points.

As we discussed last quarter, we will see accelerated or increased amortization of capitalized software development cost now that Teradata 13, our newest generation of data base software is generally or commercially available.

This will continue to impact product gross margin through the first half of 2010.

As a remainder, when you amortization previously capitalized software development cost the amortization is recorded in cost of product on the income statement.

Much like we saw in third quarter, we expect roughly $5 million more of amortization to be recorded in the fourth quarter of 2009, versus the same period in 2008.

Again, having affect of lowering our product gross margin.

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

Within our PS business we saw interesting dynamic in the quarter related to our outside contractors spend.

For the last several quarters we have lowered our outside contractor spend as a percentage of revenue.

In Q3 we saw outside contractors spend rise slightly.

This is a first sequential increase in several quarters.

An increase in outside contractors spend over multiple quarters may signal that it's time to hire internal PS resources.

We will not hire people until we are sure we can sustain the workload, but, when this happens it will lower the higher services gross margin we have been driving the last few quarters because it takes a period of time to train new people.

Services margins would still likely be running at an attractive level.

But lower than the services margins we have seen or reported over the last few quarters.

One of the key atoms we'll manage is balancing the move to higher internal PS resources against increased outside contractor spend while maintaining our attractive PS gross margins.

We've done a good job in this front over the last several quarters, during the last year or so we went from building for growth mode to a profit protection mode.

We will need to manage the shift back to building for growth when the time is right.

We look forward to managing that process with a focus of growing the top line while holding on to as much of the profit improvement as possible.

Moving to geographical view of gross margin.

In the Americas region, gross margin was 55.9%, down a point from 56.9% in the third quarter 2008.

Largely due to lower volume, a higher mix of services revenue and increased amortization of previously capitalized software development cost.

Gross margin in the EMEA region improved 130 basis points to 53.2%.

From 51.9% in the third quarter of 2008.

Driven primarily by higher product revenue and improvement in professional services margin, which more than offset the increased amortization of capitalized software development cost.

Gross margin in APJ was 44.9%, 260 point decline from the 47.5% in third quarter 2008.

The impact of lower revenue volume and the resulting under absorption of fixed to local overhead cost and the increased amortization of software development cost resulted in lower gross margin for APJ region.

Turning to our expense structure.

We lowered our SG&A expense in Q3, 2009 by $10 million, to $113 million.

Reduction in overhead and other discretionary expense such as travel and entertainment, variable compensation, and outside services, and a little help from currency, more than offset the incremental investments in new sales territories.

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

That said, we are firmly on the path to our report full year SG&A below the 2008 levels.

While absorbing the expense of our strategic initiatives.

R&D in the quarter was $26 million, versus $28 million in the third quarter of 2008.

However, it was as we discussed in our last quarterly conference call, we still expect R&D expenses to increase in the latter part of 2009 due to the timing of software development expenses.

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

Below operating income line other income and expense includes one time write down of a prior equity investment excluding this $5 million item, other income would have been $1 million down slightly from third quarter '08.

When excluding a similar write down of a different equity investment, other income was $2 million in third quarter '08.

Both of these investments were made prior to Teradata spinoff from NCR The lower interest rate environment continues to negatively impact interest income.

Despite Teradata having $326 million more in cash, and cash equivalence, than at the end of the third quarter of 2008.

For third quarter 2009, our affective tax rate was approximately 25%, down from the 29.4% used in the third quarter of 2008.

However, the tax rate in the third quarter of 2008 included a $3 million federal income tax accrual adjustment or approximately 3% related to the filing of the 2007 federal income tax return.

Excluding this item, the tax rate in third quarter 2008 would have been approximately 26%.

For the full year 2009 we continue to expect our annual affective tax rate to proximate 26%.

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

We can, however, repatriate the cash if needed that would generate additional income tax expense and corresponding current payable.

Turning to cash flow generation, one of the strengths of our business model, cash from operating activities was $96 million in third quarter 2009.

About the same as $94 million generated in the third quarter of 2008.

After using $21 million for capital expenditures, versus $15 million in the third quarter 2008, we generated $75 million of free cash flow again about the same $79 million free cash flow generating third quarter 2008.

During the first nine months of 2009, Teradata generated $364 million of cash from operating activities compared to $322 million in the prior period.

Capital expenditures in the first nine months, were $61 million, compared to $58 million in the same period in 2008.

Year to date, 2009 Teradata generated $303 million of free cash flow, versus $264 million during the first three quarters of 2008.

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

Turning to the balance sheet.

We had $704 million of cash as of September 30, 2009 , a $66 million increase from the end of Q2, and $326 million increase from the end of Q3 2008.

Approximately 45% of our cash is available in United States.

We continued our share repurchase activity during the quarter, since our last earnings call, we repurchased approximately 1.1 million shares for approximately $29 million.

Since the initial share repurchase authorizations were approved at the beginning of 2008, we have purchased 12.3 million shares of stock for approximately $255 million.

We have approximately $318 million of board authorization remaining for open market share repurchases.

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

With respect to our accounts receivable, DSO was 70 days as of September 30th, 2009.

Compared to 93 days as of December 31, 2008, and 80 days as of September 30th, 2008.

This DSO performance speaks to the quality of our customers and our relationships with them.

Deferred revenue at the end of the quarter was $265 million, compared to $237 million, at the end of third quarter 2008.

a 12% increase.

To provide further transparency around currency movement and the potential impact on our revenue we provided additional detail on our web site.

Regarding how currencies moved in 2008, and how that movement expected over the year revenue comparisons for the full year and the fourth quarter of 2009.

Assuming the spot rates at the end of October, we expect currency to create a four point tail wind in Q4.

Resulting in what is expected to be a two-point head wind for us for the full year 2009.

Mike provided revenue in EPS guidance earlier in the call, but I want to give you more color on specific items.

Although we had a solid quarter in Q3 predictability continues to be a challenge not only for 2010, but also for the Q4 of 2009.

Teradata is increasing its expectations for full year GAAP earnings per share to be in the range of $1.32 to $1.36 from previous earnings guidance of $1.22 to $1.28 per share On a non-GAAP basis excluding the impairment charge related to prior equity investment mentioned earlier, $0.02 per share, Teradata expects 2009 earnings per share to be in the range of $1.34, to $1.38.

Selling expense, is expected to increase in Q4 as we continue to add more sales territories.

We are not likely to see the same type of year-over-year SG&A reductions as we seen in the last few quarters.

As a reference point SG&A normally increases seasonally from Q3 to Q4 a $14 million increase in 2008.

The seasonal 2009 Q4 to Q3 should be greater than 2008 increase due to additional sales territories that we have added.

This higher selling expense will continue into 2010, as we feel the full affect of the class of 2009 and the layering in of the class of 2010.

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

In closing, Teradata continues to be well positioned in our market.

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

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

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

With that operate we are ready to take

(Operator Instructions) Katie Huberty from Morgan Stanley.

Good morning, nice quarter, guys.

First, Steve we didn't see R&D come up sequentially or year on year as expected why is that and what are the projects that drive it higher in the fourth quarter and then as a follow on given the strength you are seeing in US and EMEA, should we expect that just more broadly you loosen up the purse strings going forward given the growth opportunities.

Katie, what we were expecting to see in Q3 we had projects, some R&D projects that we had the opportunity to push off into Q4.

And this really related to materials for projects that we weren't at the technological feasibility stage and so we pushed these purchases out into Q4.

They totaled $6 million that we will continue for new product development, new initiatives new opportunities in the R&D area that we will see in Q4.

So that's the big bulk that moved from Q3 to Q4 and we affectively managed those purchases out of Q3 into Q4 and we will expense them in Q4.

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

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

Then as we think about the Q4, I understand you haven't changed the full year revenue view but given the deals you were able to sign in Q3 and the pipeline, is the risk to the upside on revenues going into the end of the year?

No.

I don't see any risk on the up side.

There has been as Mike mentioned some stability in the US for the Americas market.

We see that stability continuing.

I think the profile-- the risk profile is consistent in Q4 and Q3.

Okay.

Lastly, I know it's early to have a full view on 2010, but you made investments in sales teams and partners like SAP, you're continuing to broaden the product line, comps get easier, currency becomes a tail wind next year, why would it be reasonable to assume that you get back in to that 7 to 9% long-term revenue growth range as we get into 2010.

Katie it's Mike Koehler.

Regarding 2010, we will get in to the specifics about the year on the next quarter's call.

But it's safe to assume that we will have increases in expenses coming from the things that you just mentioned there.

When you look at selling expense from new territories, as well as R&D, as we head in to 2010, we are going to be carrying a bigger run rate on expenses.

Got it.

So bigger revenue opportunities but also expenses coordinated with that?

Okay.

Thanks, guys.

Thanks Katie.

Next question comes from Mark Kelleher from Brigantine Advisors.

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

Thanks.

Mark, the on the gross margin side, the impact of the additional amortization was about 200 basis points, 2%.

And if you back that out product gross margin would be relatively consistent with the prior quarters as I look at over the last four quarters, very consistent.

So that's a good indicator into from a pricing perspective, from a competitive perspective we have been able to maintain those product gross margins after you back out back out the additional amortization.

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

Nothing unusual that we hasn't indicated in the past.

I don't think there is anything unusual in the pricing pressure or the elongation of the sales cycle that we hasn't seen in the past.

Okay, thanks.

Next question comes from Matt Summerville from KeyBanc.

Please go ahead.

Good morning, couple of questions, first can you talk about the disconnect you are seeing in APJ relative to the other regions a little more detail on what you're seeing in some of those countries, Mike you indicated the customers aren't necessarily not (inaudible) but they are buying in a lot smaller chunks, so order of magnitude not necessarily in dollars but percentage terms how is your average deal size in APJ trended, and then I guess when do you see that business excluding seasonality kind of bottoming and you coming out of that?

Okay.

Couple of points on apj, Matt, regarding the Q3 we did have a little bit more deal slippages than usual.

So that showed up in the third result where APJ was down 14%.

But when you look on a full year basis, the year to date growth is down 10% in constant currency.

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

We had very good activity going in Japan as well as Australia.

We continue to have good activity, but we are feeling the impacts and the larger expansions if you will, are getting delayed and to your point we are getting a lot of the smaller types of transactions done, I can't give you a magnitude or specifics on the average deal sizes what that nets out to in Japan and Australia, other than that it's added up to a revenue decline.

The challenge we have there is we need to expand broader in the region.

We are making the good inroads in the other markets like southeast Asia, India and Korea but we have a lot more work to do.

If you look at APJ the portfolio is very heavily weighted towards Japan, China and Australia's when you look at EMEA on the other hand, we done a very good job building out EMEA other the recent years.

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

And also in addition we are getting good growth from recent Fortune 1000 account wins that we had there in Europe over the past couple of years.

So, overall in Europe we are executing extremely well, not just this year but over the past couple of years.

I think in your prepared remarks, Mike, you mentioned overall (inaudible) when you were talking about your '09 revenue guidance that you are seeing increased activity levels and the funnel seems healthier.

Can you talk can you provide a little bit more detail around those comments you made.

Sales activity is up overall.

The sales funnel is up overall.

Over prior year.

We are having good activity in the Americas.

The one caveat is we are going against prior year Q4 where we grew 9% in constant currency.

In the Americas in particular in Q4 last year we grew 12% in constant currency.

So that's the one caveat going against increased activity.

But by in large I'm pleased with where the activity level is in the fourth quarter

Steve, with regards to discretionary spend, what do you think the decline is 2009 versus 2008, how much of that outside again just focusing on discretionary so outside of the sales ads and the expense there , how much do you think creeps up or creeps back in 2010, I should

Matt, we did extensive drill downs in challenging our teams to manage effectively manage those discretionary spends in 2009, I mean even to the extent we canceled sales kickoff meetings, other type of noncustomer facing activities and award activities.

Those things will be coming back in into 2010 with respect to merit we froze merit 2009, that is anticipated coming back in 2010, we have training T&E sales kickoff meetings , there is going to be a sequential improvement-- I won't say improvement-- sequential increase in those expenses but again, we had very good results in 2009 with the team coming through and managing those expenses and we are challenging the team is challenging itself to say what is the new normal run rate going in to 2010 to affectively control that increase.

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

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

Well, given where is world was at a year ago at this time in the uncertainty, its safe to say we feel better than we did a year ago, Matt.

Thanks.

Next question comes from Nabil Elsheshai from Pacific Crest Securities.

Please go ahead.

Hey, guys, thanks for taking my call.

First I was wondering if you could talk about the verticals in particular the top three financial services retail and telecom how they performed in the quarter.

Quarter basis, I said before there is very big swings quarter to quarter.

I will give you a little bit of a flavor of where we stand on a year to date basis.

The financial services, telco, manufacturing, are all generally down single digits.

Retail is up a little bit.

On a year to date basis.

And some of the smaller segments that I mentioned in the last call like government and health care continue to be up quite a bit.

So I hope that gives you a flavor.

In the Americas you talked about better pipelines have you seen any change in close rates or sales cycles at this point we heard that from some other companies about improvement there.

Overall the close rates sales cycles, you talked about on a macrolevel, they've been running generally the same.

I do think there is a little bit more predictability in outcomes when we look at the business quarter to quarter than we had earlier in the year and of course going back last year.

Overall by in large the competitive environment, the customers buying decisions and processes, and everything else has stabilized and we are working with a lot more predictability than we have been in the past.

Okay.

Can you provide any color on new customers in the quarter or did you guys give that, I missed it.

We don't give specific new customer counts in the prepared remarks we mentioned customers where we have permission to use their names.

By in large our new account wins have been I would characterize as roughly steady across Q1, Q2, Q3.

Okay.

We do have activity in funnel building around new customer opportunities.

Okay.

Then lastly on the services hiring it sounded like Steve in your remarks that it would be couple of more quarters before you started to ramp the services hiring was I hearing that correctly.

We just saw the sequential increase, this quarter.

So that's something that we are going to keep our eye on and we want to make sure we have the right leverage with our outside contractor spend and our internal spend to effectively maximize our profit opportunities on those projects.

We will keep evaluating it and watching that trend, there is a particular level of outside contractor spend that you want to build that variability in to your model.

We are going to watch that if it starts ticking up we are going to take the appropriate actions to make sure that we preserve that profit margin in Teradata and it could be next quarter it could be a couple of quarters out but it's a variability that we are going to stay closely in tune to.

Okay.

Thank you very much.

Next question comes from Brian Denyeau from Oppenheimer and company, please go ahead.

Thanks guys.

So we could talk about services for a second, strong performance in this quarter and this year.

If I look back at your historicals the two year that you had product revenue decline, you had a very strong services growth in the following year they really lagged your growth in product revenue.

Should that dynamic play itself out next year, if not, why not?

Brian it's Mike Koehler.

The correlation between the growing consulting services business and our product revenue isn't clearly there.

It isn't clearly related to one another.

You can make a case that its a forerunner of increased product revenue, you can also make the case that it's a lot of work being done in existing accounts in a down environment to utilize the assets, meaning the Teradata data warehouses that are there to the optimal capability.

You can also make the case that customers and user base are looking for more help around creating more analytics and doing more with the assets they have.

In addition to cleansing data, freeing up capacity and things of that nature.

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

Great, fair enough.

The last quarter you talked about R&D being up $10 million in the second half of this year versus last year.

If you adjust for that you talk about R&D up in the Q4 this year, is that solely the pushout from the third quarter into the fourth quarter or should we think about what you talked about last quarter being relatively operative still.

What we see is we typically has a increase Q4 over Q3 and that roughly runs to two to $3 million.

The other piece I see is really tied to the material purchases that will expense and that will be $5 million to $7 million.

That's what I see superseding my comment from last quarter, we will be up sequentially normal $2 million to $3 million plus the $5 million to $7 million for these material purchases for Q4.

Thanks very much.

Thanks Brian.

The next question comes from the Derrick Wood from Wedbush securities.

Thank you.

Steve just a clarification, 200 basis point impact on amortization of product cost of sales was that on sequential basis?.

That was on sequential basis and also a year-over-year basis.

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

And on the SG&A side, it dropped quite a bit sequentially.

Just curious.

Did you pushout any hiring plans or can you just update us on what future plans are.

We didn't push anything out.

We continued on new sales territory expansion.

This is really the product of our continued management of discretionary expenses primarily in T&E area and some variable compensation expenses.

So as I look at the bridge into Q4 09, from Q3, we typically, as I mention, have a sequential increase Q3 to Q4 and I get a full quarter impact of the new sales territories in 2008 because we just announced initiative was in May 2008.

I've had a back end load of the 2008 class we still committed we added 40 in 2008, we still committed add the 20, so we kept the momentum and so Q4 really picks up the incremental class of '08 plus the '09 class in the full quarterly impact in Q4 '09 and so that's really driving the sequential increase that I see over and above the normal one that we would typically see on a seasonal basis.

You are on track for 20 new territories in '09.

Correct we are still on track to come out of the year with a minimum 60 new territories in '09.

You guys-- you mentioned you have seven product sets now very different than maybe a year ago, does this change your sales cycle as you may have to kind of talk with the customer and figure out what product is right for them or have you not seen any impact.

And then if you could give us an update on how demand has been for your newer products that would be great.

This is Mike Koehler.

The new products that we launched go into discreet utilizations such as our 1550, which handles data sets that have extremely large volumes that you don't integrate and share across the enterprise, such as the order I mentioned that we got at eBay.

That's around the web click stream data analytics and everything else.

And the sales motion is very clear in that regard.

At the same time?

With the extreme performance 4600 solid state appliance we announced that once again gets after the incremental different new requirement around functions or applications that require that type of extreme performance.

It costs more but we are able to address a different discreet data warehouse opportunity.

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

As far as a burden to the sales force or anything else, the sales force is thrilled to have all these different options and solutions.

In particular when the competitors don't possess a lot of these capabilities .

At the enterprise data warehouse level as well as in these extreme data sets and extreme performance

The only other thing I would add, this is Darryl by the way, we really in listening to our customers they had need for different features and different price points to address those business needs that they have.

So I think really the platform family allows us to address a broader set of business needs and technological needs as well as price performance for our customers.

And so, I think, in the long-term we are going to be able to address more of the broader analytical capabilities but also look to gain more wallet share from our customers as we proceed.

As Mike discussed the platform family is easy to understand and easy to position in our customers and is being very well received.

Great thanks, if I could squeeze one more, Steve, DSO trended down nicely, just curious do you guys have a target DSO range.

Yes, Derrick.

What I try to keep it, my target is 75 to 85.

What I work with internally.

We continue to have good performance on our quality customer base.

It's strengthened with our relationship with these customers but if I target I'm somewhere 75 to 85 in my modeling.

All right, thank you.

Operator we have time for one more caller please.

The final question will come from [Greg Halter] from the Great Lakes Review.

Please go ahead.

Good morning, just under the wire.

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

Okay, Gregg.

Overall the $704 million, we have about 45% in the US, the other 55% is internationally.

We are concentrated in US treasuries domestically and also offshores.

So predominantly in US treasuries outside of the cash that I require and some of the countries for the capital structures.

Still in a very preservation of capital, management of risk on the return side.

With respect to our capital structure and uses of cash no real changes from what I said before in the past.

We prudently invest,-- we evaluate the best way to manage it from a capital perspective and return to our shareholders, we are still actively in the market with our stock repurchases under the authorization that the board gives us.

We consistently talk to the board on some other opportunities with respect to leveraging our capital structure.

We continue the evaluate opportunities to enhance our technology leadership position, from a make or buy scenario.

So all of those that we talk about in the past as still consistent, still very current topics internally with respect to affectively leveraging our capital structure.

Thank you.

Thanks everyone in closing I want to thank you all for joining us here today.

2009 has been a bit of a challenge but overall we are generally pleased with our performance.

And also with the progress we are making with our growth initiatives.

Have a good day, we will see you all next quarter.

Thank you for participating in the Teradata third quarter 2009 earnings conference call.

This concludes your conference for today you may all disconnect at this time.