Teradata Corp (TDC) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Teradata fourth 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 Mr.

Gregg Swearingen.

Sir, you may begin.

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

Mike Koehler, Teradata's CEO, will lead our discussion, highlighting Teradata's fourth quarter and full year results.

After Mike's remarks, Steve Scheppmann, Teradata's Chief Financial Officer, will provide more details relating to our 2009 financial performance, as well as our 2010 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 considering these measures is included in our earnings release and on the investor page of Teradata's website at Teradata.com.

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

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 finished the year with a record fourth quarter in 2009, reporting revenues of $496 million, up 1% from a strong fourth quarter in 2008 when revenues grew 9% in constant currency.

Revenue for the full year was $1.17 billion, down 3% from 2008 and down 1% in constant currency.

The Teradata team had strong execution in 2009, with meaningful gross margin improvements, particularly in our services business, and excellent expense management which allowed us to deliver increased operating income and increased earnings per share on lower revenue.

More importantly, our results for 2009 included investments for our future, increased investments in R&D, our partners and additional sales territories.

We extended our technology lead with innovative new releases in our database software, purpose built platform family, Teradata virtual storage and in key analytical applications.

As a result, we have positioned ourselves stronger as we enter 2010.

Looking at our business from a regional perspective, the Americas region had a strong Q4, generating $300 million of revenue, up 5% from the fourth quarter of 2008 and on top of a prior year Q4 when revenues were up 14% in constant currency.

Revenue for the full year was roughly flat with 2008 at $981 million.

Overall, solid performance for 2009.

In Q4 the Americas brought in a number of significant new accounts, including Southern Cal Edison, one of the largest utility companies in the US.

We are placing additional focus on utility companies as they transform power generation and distribution through the implementation of smart grids and smart metering technology.

Novastar, one of the largest wireless companies in Chile, is installing a data warehouse and Teradata Relationship Manager to consolidate customer information and create personalized offers.

United Supermarkets, a regional grocer in Texas, which is leveraging our Teradata accelerate program, which allows new customers to get started quickly and easily as they deploy an integrated data warehouse.

A leading Fortune 500 health insurer, who serves more than 70 million consumers, and Caterpillar Logistics, a subsidiary of Caterpillar, which is one of the top five supply chain and logistic businesses in the US, which will use Teradata to support service parts management, demand forecasting and inventory planning, and supporting very high data volumes with roughly 5 terabytes of new data per day.

The Americas region also saw broad based upgrade activity in the quarter, including Dell, which is both a customer and supplier, upgraded its data warehouse and is adding active applications to support its strategy of delivering global BI, including executive dashboards.

DirecTV, which uses Teradata to load and analyze set top information to provide better content and support to their subscriber base.

One of the top three beverage manufacturers in the US, which is integrating Teradata with its SAP supply chain management and demand planning applications.

One of the top five motion picture studios in the world is expanding their Teradata warehouse in support of their DVD and Blu-ray inventory application.

One of the largest toy retailers added to their Teradata system to support organic growth and additional workload from consolidating data marts.

The Teradata solution also enabled the retailer to analyze sales every 15 minutes, which was extremely valuable in the days leading up to the holiday shopping season.

And also, Lowe's, Sirius and The Gap were among other expansions in the quarter.

In EMEA revenue of $106 million in the fourth quarter was down 7% from the fourth quarter of 2008.

For the full year revenue was $430 million, down 5% from 2008.

Adjusting for currency, full year revenue in the EMEA region was up 2% from the prior year, which was a good performance for 2009.

New wins from EMEA included [Zeroc] Bank, the largest bank in Turkey, who chose Teradata to help it become more competitive by leveraging strategic and operational information, one of the top property and casualty insurance companies in the Czech Republic, and one of the largest banking institutions in Russia with over 20,000 branches and over 250 million customers.

EMEA also saw good upgrade activity from many different leading companies, including ABN AMRO Bank in the Netherlands, which is adding customer data from their merger with Fortis Bank, supporting new government reporting requirements, integrating BSL 2 data and adding new risk information.

DGT, the Spanish Department of Traffic, which is continuing to grow their system and consolidating multiple data marts into their Teradata data warehouse platform.

DGT uses Teradata to identify the root cause of traffic accidents and has seen a 20% reduction in the number of accidents and also decline in traffic fatalities to levels last seen in 1967.

One of the top three global leaders in international express mail is now using Teradata to help with revenue assurance and collect unbilled revenue.

HSBC Holdings, one of the largest banks in Europe, one of the world's leading auto manufacturers is upgrading their system to detect vehicle faults and quality issues earlier and more comprehensively.

Telefónica, Spain's largest telco, BBVA, the second largest bank in Spain, Bupa Health Insurance, the largest private healthcare insurer in the UK, Belgacom International Carrier Services, and one of the top mobile operators in Poland is deploying an active application to identify fraud within minutes.

Asia-Pacific Japan recorded $90 million of revenue in the fourth quarter, down 4% from the fourth quarter of 2008.

For the full year revenue was $298 million, down 9% from 2008 and down 10% in constant currency.

2009 proved to be a challenging year for us in APJ.

Key contributors to the decline included -- lumpiness for timing of major banking upgrades in Australia; softness in retail in Japan; and delays in telco expansions in China and Japan.

APJ new customer wins in Q4 included A & Z Bank, the largest bank in Australia, which selected Teradata help them align and consolidate fragmented reporting environments onto a common scalable platform.

This will also enable them to get a complete view of their customers for new marketing strategies.

Smart Communications in the Philippines chose Teradata to consolidate separate data stores into a single system for lower total cost of ownership and ease of maintenance.

Neptune Orion lines in Singapore and Chiba Bank, the second largest regional bank in Japan.

Upgrades included Overseas Chinese Banking Corporation, one of the top three financial institutions in east Asia, AFLAC, a top 10 insurance provider in Japan, and one of the world's largest LCD manufacturers, which will expand their Teradata warehouse to include cross-factory effect analysis and to enhance yield rates as well as reducing overall inventory.

I was very pleased with the performance of our services business across all the regions in 2009.

Overall, our services business grew revenues 3% as reported and 4% in constant currency.

The consulting services team improved margins significantly, while providing outstanding service and value to our customers.

Effective utilization of resources, leveraging offshore resources, and overall expense management were the key drivers of the margin improvements.

Not only was 2009 one of our best years operationally, it was one of our best years ever in terms of innovation.

Teradata 13 was our most powerful data base release in our history.

We announced the world's first solid state drive data warehouse appliance, Teradata virtual storage, which automatically places data on different types of storage devices based on its usage.

This results in lower storage costs and increased performance for our customers.

Market leading tools, such as Teradata Viewpoint for performance management.

And in addition, we launched the Teradata Enterprise Analytics Cloud, our first public and private cloud computing offer.

And last, we strengthened our applications, including Teradata Relationship Manager and Teradata Integrated Web Intelligence.

I was very pleased that last week Teradata received recognition once again as being the clear leader in the Gartner data warehouse magic quadrant.

Teradata has been in the leader's quadrant since 1998 and just this week Gartner published its newest server evaluation model and, again, Teradata's ranked number one data warehouse DBMS server.

I encourage you all to read these reports.

Last, I'd like to share some information on the approximate revenue contribution by industry for 2009, which excludes maintenance.

Financial services, which includes banks, capital markets, credit card and insurance companies, remained our largest industry, contributing 28% of our total revenues, about the same as in 2008 when it was 29%.

Communications, which includes telecommunications, cable, e-business, media and entertainment companies, finished at 23%, down from 28% in 2008.

The decline was driven primarily from the timing of major expansions with some Fortune 500 customers here in the Americas and to a much lesser degree in APJ.

Retail increased to 17% from 16% in 2008 and grew double digits in the Americas.

Manufacturing contributed 10% compared to 11% in 2008.

Healthcare grew to 8% of our business, up from 4%, with very strong growth in the Americas.

Government increased 2 points to 7%, with very strong growth in APJ and in the Americas.

Travel and transportation was 6%, flat compared to prior year, and with good growth in APJ.

Other industries made up 1% of our revenue in 2009.

The investments we have been making in healthcare and government, in particular in the US, have resulted in good growth for those industries.

I am pleased with Teradata's overall position in the market and the performance of the Teradata team in 2009 and look forward to a good year going forward.

Going into 2010, uncertainty and complexity in the business environment will continue to drive investments in BI and analytics.

New regulations in government policy in health and energy will also help drive demand and new data types, such as sensor data and manufacturing, and click stream and social media data from the web, will all drive greater demand for BI and analytics.

However, more and more executives recognize the need to obtain a holistic view of the enterprise with transparency and granularity of information.

Having consistent and detailed information that can be shared across organizations that is updated and accessed real-time for decisions is key for companies to compete in the marketplace.

And this is best provided with an integrated enterprise data warehouse architecture.

The world's leading companies have proven you have to breakout of the status quo model and build an agile, integrated data architecture to achieve greater insight and speed in decision making and to reduce cost.

This is what Teradata does.

Our competitors, on the other hand, advocate status quo and steer away from this Best-in-Class data architecture, as they can't handle the high complexity workload management and scalability of an integrated EDW, with multiple applications and thousands of users running concurrent ad hoc and complex queries, in addition the standard reporting.

We expect the market will continue to move to an EDW architecture as companies realize the value that data has being integrated and shared and Teradata is the clear leader in doing it.

Looking at 2010, we expect revenue to increase 7% to 9% from 2009, including 1 to 2 percentage points of benefit from currency, which we expect to yield earnings per share of $1.54 to $1.64.

Based on the strong activity we are currently seeing, in particular in the Americas, we expect to be at the higher end of the revenue guidance for the first half of the year.

However, given the limited visibility we have for the second half of the year, we have modeled in a more conservative revenue number for the second half.

Steve will now share more details regarding our fourth quarter and full year performance, as well as our 2010 expectations.

Steve?

Thanks, Mike, and good morning, everyone.

Teradata delivered another solid performance in the fourth quarter of 2009, highlighted by record-setting performances across some of our key business categories, including total revenue, consulting revenue, Americas revenue, and services gross margin dollars.

Revenue of $496 million was up 1% from the strong fourth quarter we reported in 2008, down 3% in constant currency.

We grew 9% in constant currency in the fourth quarter of 2008.

Product revenue of $239 million was down 4% from the fourth quarter of 2008, as the economy still weighed on IT CapEx spending.

In constant currency, product revenue was down 7%.

Services revenue, however, of $257 million was up 6%, with consulting services being up 4% and maintenance services being up 7%.

In constant currency, services revenue was up 1%.

For the full year, total reported revenue was down 3% to $1.71 billion.

In constant currency, total revenue was only down 1% from 2008.

Product revenue for the year of $772 million was down 9% from 2008 and down 7% in constant currency.

Services revenue of $937 million was up 3% or up 4% in constant currency.

Reported revenue for consulting services was up 2% and maintenance revenue was up 3%.

While in constant currency, consulting services was up 4%, while maintenance services was up 5% for the year.

Gross margin in the fourth quarter of 2009 was 56% compared to 54.6% in the fourth quarter of 2008.

We had a meaningful increases in our gross product gross margin, while holding our line on services gross margin.

Gross margin for the year was 54.9%, up 1 point from 53.9% in 2008.

Product gross margin of 67.8% increased 420 basis points from 63.6% in Q4 2008.

The increase in product gross margin was primarily driven by improvements in the Americas region and, to a lesser extent, in the EMEA region, which saw a more favorable deal mix as compared to the fourth quarter of 2008, which countered the increased amortization of previously capitalized software development costs that we have described in earlier earnings calls.

Although we drove very attractive gross margin in Q4, we continue to expect higher amortization of software development costs to create pressure on product gross margin in the foreseeable future.

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

Much like we saw in Q3 and Q4 of 2009, we roughly expect another $11 million of higher amortization to recorded in 2010 compared to 2009.

Again, creating the possibility of a headwind for product gross margin.

The proxy for future amortization is the amount of software development cost being capitalized and we capitalized $59 million in 2009 compared to $52 million in 2008.

Product gross margin for the year was 65.2%, an increase of 80 basis points from the 64.4% achieved in 2008.

Again, we are pleased with our performance in 2009, especially since we were facing the headwind of increased software amortization.

Services gross margin in the quarter was about the same as reported last year, at 45.1% versus 45.3% in Q4 2008.

As was the case throughout 2009, we drove solid yields in margins in our services business.

Consulting services gross margin benefited from higher utilization of internal resources, lower outside contractor service costs, and a greater leverage of our offshore capabilities.

We began to hire additional consulting resources in Q4 to keep up with the demand for these services.

As these new resources are trained and become more fully productive, we anticipate that this will somewhat soften our services gross margins from the high levels we achieved in 2009.

We are likely to add these new resources on a gradual basis, not intending to drive significant increase in these costs or to hit margins in any one period.

Services gross margin for the full year was up 240 basis points to 46.4%, due to our active management of our cost structure in this business.

Moving to a geographical view of our gross margin.

In the Americas region, gross margin was 60.7%, a meaningful improvement from the 57.2% in the fourth quarter of 2008, largely due to the impact of a favorable deal mix on product gross margin and improvements in our consulting services business compared to Q4 2008.

Americas' gross margin was 58.1% for the full year versus 56.6% in 2008, again, largely driven by an improvement in our consulting services business and to a lesser extent the improved product deal mix, which more than offset the increased amortization of software development costs and the impact of higher level of services revenue.

Gross margin in the EMEA region of 51.9% was roughly the same as the 51.8% reported in the fourth quarter of 2008.

EMEA gross margin was 53.5% for the full year, an increase from the 51.9% in 2008, due to the improvements in our consulting services business that we described earlier.

Gross margin in APJ was 45.6%, a decline from 50% in Q4 2008.

The decline was driven by lower services margin and the impact of lower product volume.

APJ gross margin was 46.3% for the full year versus 48.3% in 2008.

Again, the decline was largely due to the impact of lower product revenue volume.

Turning to our expense structure.

SG&A expenses in Q4 2009 increased $1 million from a year ago.

The slight increase was driven by selling expense from the increased number of sales territories, which was offset by continued focus on holding down overhead and other discretionary expense, such as travel, entertainment, compensation and outside services.

For the year, SG&A of $483 million was $25 million below the 2008 levels, a 5% reduction, while absorbing the expense of our strategic initiatives, such as our investments in incremental sales territories and strategic partnerships.

However, as we discussed last quarter, we expect a continued increase in our selling expenses in 2010, as we add more sales territories consistent with our sales territory expansion strategy.

We will also have a moderate compensation increase in 2010, which we did not have in 2009 while we froze salaries, and we will see an increase in training and education expenses.

Overall in 2010, we expect SG&A expenses to increase at a rate less than our overall revenue growth rate.

R&D in the quarter was $34 million versus $30 million in the fourth quarter of 2008.

In large part, this was due to the timing of specific R&D expenses which hit in Q4 versus Q3, as we described last quarter.

For the full year, research and development was $117 million versus $108 million in 2008.

For 2010 we expect research and development expenses to increase slightly greater than 10% year-over-year.

As a result of these items discussed, Teradata's operating margin in the fourth quarter was 21.4% versus 20.7% reported in Q4 2008.

For the full year, we just missed 20%, coming in at 19.8% versus 18.9% in 2008.

For 2010 we expect operating margins to be in the 19% to 20% range.

Below the operating income line, as has been the case all year, interest income was not sufficient to offset the cost of our cash and foreign currency management programs.

For the year, we had $4 million of other expense versus $5 million of other income in 2008, again, due to the lower interest rate environment and the write-down of an equity investment.

Our effective tax rate in Q4 2009 was 21%, down from the 23% tax rate used in Q4 2008.

Our effective tax rate was lower in Q4 2009 due to recognizing the annualized effects of previously estimated permanent differences.

For the full year, our tax rate was 24% versus the 26% in 2008, again, influenced primarily by the annualized activity in the fourth quarter.

For 2010, we expect our annual effective tax rate to be approximately 24% to 25.5%.

Summing it all up, GAAP EPS in Q4 2009 was $0.48 versus $0.45 in Q4 2008.

For the full year, GAAP EPS was $1.46 versus $1.39 in 2008.

Excluding impairment charges in Q3 of each year and a tax adjustment in Q3 of 2008, our non-GAAP EPS comparison was $1.48 in 2009 versus $1.42 in 2008.

We are pleased that we were able to increase our earnings per share in 2009, despite the economic challenges and our continued investment in sales resources during the year.

Many of you have asked how much stock-based compensation expense is included in our operating income and EPS results?

During the quarter, stock-based compensation expense was approximately $6 million or $0.02 per share.

For the full year 2009, stock-based compensation expense was approximately $23 million or $0.08 per share.

We expect approximately the same amount of stock-based compensation expense in 2010 as we had in 2009, or approximately $0.08 per share.

Turning to cash flow generation.

Cash from operating activities was $91 million in Q4 2009, down from the $118 million generated in the fourth quarter of 2008.

The largest contributor to the 2008 results was changes in assets and liabilities.

That change was smaller in 2009.

After $27 million of capital expenditures, including increased capitalization of software development costs and property, plant and equipment, versus $13 million in the fourth quarter of 2008, we generated $64 million of free cash flow, down from the $105 million of free cash flow in Q4 2008.

During 2009, Teradata generated $455 million of cash from operating activities compared to $440 million in 2008.

Capital expenditures in 2009 were $88 million compared to $71 million in the prior year, yielding $367 million of free cash flow for the year versus $369 million 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.

We had $661 million of cash as of December 31, 2009, a $43 million decrease from the end of the third quarter, as share repurchases more than offset our free cash flow generation.

During the fourth quarter we repurchased 3.4 million shares for approximately $103 million.

For the year, our cash and short-term investment balance increased $219 million from the end of 2008, despite using $175 million to repurchase approximately 7 million shares in 2009, investing roughly the same amount in our shares in 2009 as we did in 2008.

Since our Board's initial share repurchase authorization at the beginning of 2008, we have repurchased 15.5 million shares of our stock, or approximately 9% of the outstanding for approximately $350 million.

We have approximately $234 million of Board authorization remaining for open market share repurchases.

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

Approximately 30% of our cash is available in the US.

With respect to our accounts receivable, DSO, day sales outstanding, was 83 days as of December 31, 2009, compared to 93 days as of December 31, 2008, which speaks to the quality of our customers and our relationships we have with them.

To provide further transparency around currency movement and the potential impact of revenue, we provided on our website additional detail regarding how currencies moved in 2009 and how this movement is expected to impact our year-over-year revenue comparisons in 2010, assuming the currency exchange rates as of the end of January.

We expect currency to create 1 to 2 point tailwind for us in 2010 and a 5 to 6 point benefit in Q1 2010.

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

Although we had another solid quarter in Q4 and we are looking at a healthy pipeline for the first half of 2010, it is not clear what the second half of 2010 will look like.

As a result, our guidance for 2010 is 7% to 9% revenue growth, with our growth in the first half of the year probably tracking at the higher end of that range.

As we discussed with you last quarter, we expect some of our cost and expenses lines to grow faster in 2010.

As a result, we expect our EPS improvement for the year to be less than our long-term target of growing EPS at twice our revenue growth.

Specifically, as we have discussed before, we anticipate -- headwind on our services gross margin, as we add to our consulting teams; higher selling expenses due to more sales territories; normal increases in G&A, such as base compensation increases and a return of expenses that were eliminated or reduced in 2009, including training and education; and research and development increasing slightly greater than 10% over the 2009 levels of $117 million.

That said, we are very happy with how we are positioned and eager to operate in what we hope -- hopefully going to be a better economic environment than what we've seen over the last two years.

In closing, Teradata continues the lead in data warehousing and enterprise analytics market.

And this is due to our technology leadership position, our strong customer base and relationships serving and enabling the global 3,000, our expanded product family, our geographically diverse business model, our strong recurring revenue model from our existing high quality customer base, as they routinely increase the size and the scope of their enterprise data warehouses, as well as the annuity revenue stream that comes from our maintenance business, and finally, our strong capital position, $661 million in cash, no debt, and a very attractive free cash flow model.

And with that, Operator, we are ready to take questions.

(Operator Instructions) And our first question comes from Wamsi Mohan from Bank of America.

Thank you.

Your results in the Americas were very strong, up 21% sequentially.

Mike, you mentioned some increased purchases from large customers like Dell.

Are you seeing signs that customers in the installed base are now sort of coming back to purchase more capacity after sort of a really mediocre first three quarters of 2009?

And did you see any specific large deals that drove the strength that might have pulled forward any demand in the fourth quarter?

Wamsi, the -- yes, it's Mike Koehler.

I would say the fourth quarter behaved somewhat normal.

So we didn't see any significant changes in budget flushing or acceleration in the quarter, and, in fact, we continue to see very good activity, in particular in the Americas, as we entered into the first quarter this year.

Thanks, Mike.

And if we look at the growth of 7% to 9% for 2010, can you gives us some color on expectations by region?

At this juncture, Wamsi, it's a little bit early to comment on.

We do see, based on the activity we have visibility to in the first half, that we should be at the higher end of the revenue guidance.

And as we entered into the year, the Americas' activity was stronger than the international regions.

So the visibility that we have for the first half, the Americas from what we can see should be stronger than both EMEA and Asia-Pacific Japan.

Thanks, Mike.

And last one from me, maybe for Steve.

Can you update us on where you are on your sales territories buildout and your expectations for 2010 and what you expect your revenue contribution in 2010 from the sales hires over the past several quarters?

Thanks a lot.

Hi, Wamsi, it's Steve.

We're continuing on our buildout of the new sales territories.

Where we exited 2008 with 40, 2009 we're exiting the year with slightly greater than 60 and still on target for a minimum of 90 new sales territories at the end of 2010.

We did have targets with respect to revenue generated by the new sales territories.

We had positive revenue generation in 2009.

Was it at our -- where we would have expected, given the economic conditions?

No, below that number, lower.

And in 2010, we continue to see -- expect to have positive contribution from the revenue side incrementally.

Is it going to be at the levels that we previously discussed?

No, with the challenges in 2009, with the economic challenges, we expect that to come in slightly below that.

But we're still optimistic on those new territories in 2010.

Wamsi, this is Mike Koehler.

Generally speaking, we're pretty pleased with the performance of the new territories and the yields that we received in 2009.

As Steve mentioned, it's slightly below where our expectations were in '09 and based on what we're seeing as we sit here today, it may be slightly below what we had said on 2010, but it's still very early in the year and we've been really pleased with the return on the territories.

Thanks a lot, Mike.

Our next question comes from Kathy Huberty from Morgan Stanley.

Thanks, good morning.

Just back on the strength in the Americas region, do you have a view yet as to whether your market share gains or your win rates accelerated in the region or is your view that it was really just a broad economic improvement that drove the results?

Katie, it's Mike Koehler.

There really hasn't been any material change in win rates when we look at 2008 and 2009.

We're just seeing in the user base, as well as in new accounts, generally a pickup in demand.

We've had significant, if you will, delays and deferrals that have been going on since in the 2008 and 2009, and we are seeing an uptick coming from that, as upgrades, expansions, continue to materialize, like what we saw in the fourth quarter in the Americas and the type of activity we're seeing right now as we've entered into 2010.

Got it.

And then just as a follow-on to the last question about regional growth in 2010, there are obviously some concerns about a few countries in Europe right now, both as it relates to how it could influence demand this year and also a weaker Euro influencing revenue growth.

Do you think it's fair to say that your assumptions for that region in 2010 are pretty conservative, such that if these concerns last for a few quarters that that's already in your guidance?

I wouldn't call what we planned for EMEA in 2010 to be conservative or impacted a lot by some of the specific countries you're alluding to and some of the struggles there.

Overall, as we stand today, we feel pretty good about the business, but the second part of your question as it relates to currency, that's -- and the Euro, that's a real variable to the business.

And our guidance is based on seeing a 1% to 2% type of tailwind from currency and obviously if the thing moves down or moves up by any significant amount, that's a, yes, that's a risk.

Okay.

That makes sense.

And then just lastly, have the new sales territory additions, has there been a skew by geography or has that been pretty well spread across the three different regions?

It's been fairly well spread, just the size of the enterprises here in the Americas and the revenue contribution of the Americas would skew it proportionately.

But we're pretty pleased with the distribution of the revenues we're receiving from the new territories and as we look at 2010 as well.

Okay.

Great.

Congrats on the quarter.

Thank you.

Our next question comes from Mark Kelleher from Brigantine Advisors.

Great.

Thanks.

Wanted to focus on those gross margins and very nice gross margins there.

You mentioned that it was a favorable deal mix.

Could you perhaps describe what's in a favorable deal?

Mark, yes, a favorable deal mix would be really the -- if we have a large floor sweep or tech refresh where we had in Q4 2008, we had some -- where you have more hardware versus software.

In Q4 2009, we didn't have those large refreshes or floor sweeps that we had in Q4 '08.

And our third party revenue, if we had more third party content, that would generally drive down the margins.

So we had a very good mix by region across the board from a product deal perspective.

Those are the really big drivers of that margin.

Okay.

And could you touch on how your Analytics Cloud has been doing and how that might affect gross margins if it gets rolling?

Hi, this is Darryl McDonald.

It's actually progressing nicely.

As you know, we introduced it in fourth quarter last year.

It's not really contributing any significant revenue today, but we have built up an environment at Amazon that's allowed lots of people to actually start testing Teradata as new prospects and customers.

So we've had quite a bit of interest and some downloads, both of our Teradata Express Addition, which is a free download for people to try, as well as trials on the Amazon Cloud.

Where we're really seeing more activity around cloud capability is in the private cloud environment with our user base.

So many of them are starting to experiment with how to build an agile enterprise cloud environment with their current installed base and there we're starting to see some increased activity.

But it's going well, but not a major contributor from a revenue standpoint at this time.

Okay.

Great.

Thanks.

Congratulations.

Good quarter.

Thanks, Mark.

Our next question comes from Alex Kurtz from Merriman & Co.

Thanks for taking the question.

So back on the product margin uptick this quarter.

Can you just sort of give us some color on the competitive environment and maybe were you able to -- was there less competitive pressure in the quarter that also helped the margin?

Alex, it's Mike Koehler.

The competitive pressures and so forth haven't changed materially at all.

So I wouldn't characterize that as having an impact on the product margin.

And it's basically driven by the types of things that Steve was discussing earlier.

So if we look into 2010, if you think there's going to be more product refreshes within your installed base, I mean, should we be more optimistic about being able to sustain a higher product gross margin going forward?

No, Alex, I would say it's -- from an overall perspective, I mentioned we had that $11 million of software amortization coming through on the product margin.

We had a good deal mix in Q4.

I would -- if you look at our product gross margin over a six quarter period, that generally gives you a good flavor.

Again, you've heard the lumpiness story quarter by quarter.

That generally gives you a good flavor and then you can bake in that additional $11 million of software amortization coming through there, should give you a good picture.

Okay.

And last question.

I think most companies would not have a lot of visibility into the second half of 2010 at this point.

So are you guys just being conservative with your commentary around 7% to 9% because -- and your commentary that the first half's going to be better or is there something within your installed base and as you look out your pipeline, it does concern you about the back half?

Alex, it's Mike Koehler.

The second half, it's strictly due to lack of visibility.

And we've put some conservative -- conservatism into the second half outlook, just based on the visibility, no drivers, no -- nothing at the macro level.

It's just we have a pretty good handle on the activity we're seeing in the first half, which we're very encouraged by, and we've chosen to model in a more conservative view of the second half with the unknowns that are there.

Okay.

Thank you.

Our next question comes from Matt Summerville from KeyBanc.

Mike, a couple questions relating to some of the things that have already been asked.

I actually -- one of the questions was about budget flush.

I actually thought I heard you say that you saw deferrals in a couple areas, specifically with telcos in the Americas and I believe some specific set of customers in APJ.

So can you provide a little more color on that?

Yes, just to clarify.

What we're saying, Matt, is I didn't see any higher degrees of budget flush than we typically see in a quarter, in the fourth quarter and some of the delays, like with some of the Fortune 500 companies here in the Americas, it's just more due to timing.

It's not due, I wouldn't call it an economic thing or anything else.

I would call it the normal lumpiness that we've always seen over the years and the pluses and the minuses we see.

You get a fairly significant Fortune 500 type of customer who upgraded due to major expansion like in 2008 and they don't do an expansion in 2009.

It can have a significant impact on the results for an industry or for a region.

So in the Americas we had some pluses in the lumpiness in other industries and what I mentioned was when looking at the Com industry results for the year, we had a decline and that was an example of the negatives of lumpiness in 2009.

The flip side of it is it becomes an opportunity for us in 2010.

In APJ the delays are much smaller dollars, but still has a similar kind of impact when you look at the APJ results.

So some of those areas I alluded to earlier, like delays in telco in China and Japan and banking in Australia, those become opportunities in 2010.

But it's, at the end of the day, it's just the -- it's the lumpiness that we have in Teradata when you look at large transactions with some large customers and how it impacts results by industry or by region and from year to year.

Mike, how would you describe, I guess, how the average duration in your sales cycle has trended over, say, the last 12 to 18 months, I guess.

Where was the peak, if there in fact was one, and have you seen that sales cycle start to shorten?

And then maybe just a follow-on to that, maybe you can talk a little bit more about specifically kind of what some of your more meaningful customers are reflecting or saying about their capital budgets for 2010.

As far as sales cycles go, there's really -- you really have to look at it a couple different ways.

One of them's new account acquisition and there our average sales cycle is longer.

When you run into a rough economic type of environment, the sales cycles in new accounts actually are impacted to a lesser degree.

The bigger impact in sales cycles occurs in the user base with companies trying to defer spending and large CapEx expenditures and so forth and that elongates the sales cycle in the user base and typically with bigger dollars.

If you look at where we're at today, I would say the sales cycle in the Americas, when you look at the user base, as was evident in the fourth quarter and the activity we're seeing now, to a degree has shortened.

I wouldn't call it significant, but it's shortened.

So we're seeing a little bit of an acceleration in upgrades in the user base.

Internationally, I would say it's still running pretty much the same, the sales cycles and the user base as well as new accounts.

The second question -- oh, that was it.

Thanks, Matt.

Mike, I actually just have kind of one more question for either you or maybe Steve.

There's been a lot of focus on the expense inflation we're going to see in 2010.

As we think about the kind of where you're at with your current R&D cycle, how should we think about that longer term.

If you have kind of in 2011 the full run rate benefit from all these sales territories you've been adding, if you're on kind of a down side from an expense standpoint in your R&D cycle, shouldn't we see pretty huge operating leverage once you get beyond 2010 for your business?

No, Matt, it's really too early to tell and really too early to get into that.

We're continuing one of our strategic initiatives as it continue to invest and grow the research and development as it relates to our products.

And this is one of the things of coming out of the spin with NCR that we're very committed to do and you see that commitment growing in 2010 slightly greater than 10% over the '09 levels.

And we're still committed to that.

But on the flip side, Matt, we continue to look at, making sure we're getting the efficiencies and driving the returns out of those investments.

So that's why I'm saying it's too early to tell.

If we're getting those returns and it's reflecting through product revenue and gross margin improvement, we'll continue to make that investment.

So at this point in time, I guess the tag line to say it's really too early to discuss it in 2011 and the leverage that we would get.

Thank you.

Our next question comes from Nabil Elsheshai from Pacific Crest, please go ahead.

Hi, guys.

Thanks for taking my question.

If I could follow up on the telecom in particular, there's been some reports including, I think, at one of your bigger customers about them over investing in network and I'm wondering if that is having an impact on what you're seeing and maybe some of the reasons for the delay in some of the deals on the IT side and if so, it would seem like that would be more of a several quarter type of impact instead of something that would reverse in one quarter.

Is that incorrect?

Nabil, good point.

In China we saw an increased focus and expenditures in network infrastructure and 3G that got prioritized and that did contribute to some of the telco expansions for Teradata's not occurring and being delayed in 2009.

We don't see a long-term delay.

Our activity there is picking up and it won't be a long delay.

It did impact us, though, in 2009, to your point.

And is that the same in the Americas as well?

I mean, obviously, AT&T made a lot of noise on their earnings call about investing in the wireless network.

The Americas, no.

Okay.

Could I get an update on SAP?

Is the integration on track for, I believe, release this quarter?

And then how is the sales and roll-out going?

Have you guys worked out all of the go-to-market details.

Hi, Nabil, this is Darryl.

Yes, we have worked out all of the go-to-market details.

I would say the partnership is progressing well.

We've got activity that's continuing around the business intelligence and analytics work that we're doing in both SAP and Teradata accounts.

So that's still on a good track and we're seeing positive activities.

We've also had some joint solutions that we released in the fourth quarter that we shared with partners around their new SAP business, Object Explore.

Teradata's going to certify that, have a platform that supports that.

We think it's going to be a nice solution for leveraging the enterprise data warehouse in both Teradata and SAP accounts.

On the port front, we are continuing the port activities.

We were originally planning on having it ported in the first half, unfortunately due to some issues that we both have come across, it's going to be pushed out to the second half of 2010.

We're still making progress.

We're still having good success in the market, but we are going to have a slight delay in the port and it will move to completing in the second half of 2010.

Great.

Thank you.

And then, Steve, I was wondering if I could maybe get some commentary on free cash flow and if you could provide any color on both capitalized software expense and CapEx in 2010.

Yes, Nabil, total, I would say, still in that range of 80 to 90 total PP&E and capitalized software.

Pretty consistent with the prior years, maybe up $5 million or so on that.

With respect to free cash flow, we had very good performance again this year on our receivables performance, down to 83 days DSO from 93 days.

So my proxy, my benchmark has always been net income plus or minus $25 million.

In the last two years, because of the management of the working capital, we've been greater than that, $367 million, $369 million in the last two years.

So I would expect us to be more down to my, kind of my benchmark of net income plus or minus $25 million, with capitalized software and PP&E in that $80 million to $90 million range.

Okay.

And then just so I'm clear, you had mentioned R&D is going to grow a little faster than revenue.

What about cash spend on R&D, if you can account for capitalized expenditures?

Is that a similar growth rate?

That will increase.

As I mentioned, we went from $52 million in '08 to $59 million in 2009.

That will continue to increase, in line with that percentage expense increase, probably.

Okay.

Great.

And then I missed it.

What was the percent of revenue from retail and from manufacturing?

In 2009 retail was 17%.

Or no.

Yes, 17%.

And manufacturing was 10%.

Okay.

Great.

And then last question.

I think you guys have made a little bit of an effort on new customer acquisition and maybe some mid-market efforts.

Is there an update there and what kind of traction are you seeing?

We don't disclose number of new account wins.

I will say the number of new account wins was very good, very strong in the fourth quarter, second half of the year, and a lot of new account wins with the appliances across the board in the US, as well as a lot of new account wins in international.

Overall, we're on a pretty good rhythm on new accounts.

The funnel's up and the activity's up.

Great.

Thank you guys for taking my questions.

Thanks, Nabil.

(Operator Instructions) Our next question comes from Derrick Wood from Wedbush Securities.

Thanks.

Just a question on the balance sheet.

So deferred revenue usually sees some sequential growth in Q4 if you look at historically.

Looks like it was actually down quarter-over-quarter this quarter.

Could you give us some color as to what the reason was for this?

Yes, Derrick..

Behind the deferred revenue number on the balance sheet, there's really three components.

There's our deferrals for maintenance, our deferrals for subscriptions and our deferrals for what I call product deferrals from under GAAP from revenue, software revenue recognition rules.

Our maintenance and subs behind that number grew, as you would expect, 2009 over 2008.

Where we show the decline was very specific product or transactions that are basically unique to the deal and where under GAAP I would have to defer revenue based on the structure of the transaction.

Those transactions vary quarter by quarter and year-over-year.

And typically, sometimes you get at the end of the year some structures that as when you review them and go through them require deferral of product -- of revenue.

And those vary, again, year by year.

That's where the difference resulted.

Nothing unusual in the maintenance and the subscriptions that get capitalized on the balance sheet as of quarter-end or year-end.

So nothing unusual behind it other than the onetime transactional items.

So extrapolating that would you say that the deferred license revenue component dropped quarter-over-quarter from Q3 to Q4?

That would be one of -- that would be the driver, yes, the unique transactional product revenue that was referred.

Okay.

That's it from me.

Thanks.

We have time for one more question.

We have Greg Halter from Great Lakes Review.

Good morning, guys.

Just a couple quick ones for you relative to the cash on the balance sheet, obviously, at a very good position here.

Wondered if you could discuss your capital structure thoughts of corporate repurchase versus any possible M&A type activities.

Yes, Greg, in 2009 we're about one-half of our free cash flow, 2008, one-half of our free cash flow.

We continue to be very aggressive and opportunistic in the market with respect to our stock.

We'll continue to do such.

We always look at M&A activities or opportunities, particularly from a technology perspective, and also from a top-line revenue perspective.

So there's been no changes in our assessing our capital structure with respect to taking advantage of those opportunities in 2009 and as I look forward in 2010.

So it's pretty consistent and, again, emphasis on the technology and emphasis on the top-line revenue growth.

And one last one for you.

Do you have the number of employees as of the end of the year?

It was 6600, I believe.

Great.

Thank you.

Okay.

I'd like to thank everyone for joining the call.

We're looking forward to 2010 and we look forward to talking to you all again next quarter.

Thank you.

Thank you, ladies and gentlemen.

This concludes your conference.

Thank you for participating.

You may now disconnect.