Teradata Corp (TDC) 2010 Q1 法說會逐字稿

Welcome to the Teradata Q1 2010 earnings call.

My name is Sandra, and I will be your operator for today's 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.

Mr.

Swearingen, you may begin.

Good morning.

Thanks for joining us for our 2010 first quarter earnings conference call.

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

After which Steve Scheppmann, Teradata's Chief Financial Officer, will provide more details relating to our financial performance as well as our 2010 guidance.

Darryl McDonald, Teradata's Executive VP for Business Development and Marketing 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 earnings per share, free cash flow and revenue comparisons in constant currency.

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

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

Teradata assumes no obligation to update or revise the information included in this 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 started the year strong with record first quarter revenue of $429 million, operating income of $86 million, and EPS of $0.39.

Operating margin improved to 20% in Q1 from 16.3% in Q1 of 2009.

Revenue was up 17% as reported and up 12% in constant currency over Q1 2009, which was not an easy prior year comparable.

Revenues grew 5% in constant currency in Q1 of 2009.

Product revenue grew 27%, which was our highest growth quarter during the past nine years and all three regions grew revenues and each reported strong double-digit product revenue growth.

Overall, it was a great start to 2010.

The Americas had an outstanding Q1, generating $252 million in revenue, which was up 23% from the first quarter of 2009.

New customer wins we can name included Kohl's Department Stores and Mobistar, a mobile phone provider in Peru.

Expansions and upgrades in the quarter included Macy's, CVS Caremark, Cabela's, Overstock.com, and Electronic Arts in the US and Rogers Communications and Hudson's Bay Company in Canada.

With the return to a more stable economic climate in the US, we saw strong activity across most industry segments.

In particular, in manufacturing, financial services, retail, and healthcare.

Turning to EMEA, revenue of $106 million in the first quarter was up 9% from the first quarter of 2009.

Adjusting for currency, revenue in EMEA was up 3%, over a prior year comparable that had strong growth in constant currency of 12%.

New customer wins we can name included Cajasol, a financial services institution who merged with another bank in Spain, and is integrating data from the two banks into a Teradata EDW, and EOS Group, a financial services company in Germany.

EDW expansions and upgrades included Barclays, BBVA, Daimler, Volvo cars, TNT Express, Telefonica Spain, which is converging their wireline and wireless businesses into an integrated EDW.

Bouygues Telecom, one of the largest wireless providers in France, which is adding web and social network data for analytics as well as customer segmentation and regulatory compliance.

Pannon, a leading mobile operator in Hungary, expanded their Teradata relationship manager CRM application to provide multi-step, multi-channel, and multi-offer campaigns for better customer life cycle marketing, and Shop Direct, the UK's largest internet retailer, which is deploying Teradata integrated web intelligence to load near realtime web browsing data into its EDW, that can now understand customer intent as well as purchase history to better drive marketing campaigns and grow revenues.

Asia Pacific Japan reported $71 million of revenue in the first quarter, up 9% from the first quarter of 2009, and down 1% in constant currency.

APJ had a record first quarter for new account wins including NTT Solmare, which is the number one content provider for mobile phones in Japan, and will use Teradata in an active environment, examining weblogs to analyze customer navigation and deliver more effective web-based marketing.

One of Australia's largest retail companies which selected Teradata and SAS over strong competition from an incumbent, based upon the value they saw from the integrated and advanced analytics environment that we provide.

Star Track Express, an Australian logistics services company is implementing a Teradata active data warehouse as the foundation for their active information management strategy.

Their vision includes integrating data from multiple operational systems with geospatial capabilities in order to optimized loading and routing for their fleets and a top three mobile operator in Indonesia, which is implementing an active enterprise data warehouse.

Upgrades and expansions from the APJ region included NTT Communications, Japan's largest internet service provider, which is expanding its Teradata system for customer care to improve customer service and satisfaction.

KDDI Corporation, the second largest communications company in Japan, is adding to its Teradata EDW to provide better leverage of information across all of their business units, and we saw expansions from numerous other leading communications companies in the region, including China, India, Australia, New Zealand, Indonesia and Malaysia.

Additional data and applications are being added to better understand and improve the customer experience, and geospatial data for marketing and network analytics.

We're pretty excited about the execution of our platform family strategy.

As we've discussed, our objective was to, one, add more customers, two, grow our existing customers by gaining wallet share in their analytical environments and three, address competitive offerings in the data mart space.

Our appliances helped us to increase new account wins in the first quarter, and our Extreme Data Appliance has opened new opportunities for our existing customers that need archival analytical solutions at a lower cost.

Overall, our competitive win rate has never been stronger.

With the release of our solid state drive Extreme Performance Appliance, we now have platforms to address any analytical need at competitive price points.

Best of all, they all leveraged the industry leading database, Teradata.

In Q1 our R&D team delivered several new models across the Teradata platform family.

We announced general availability of the 5600, Teradata's Active Enterprise Data Warehouse, which included a 65% increase in performance.

The 1600 Teradata Extreme Data Appliance, which delivered a four times improvement in performance and a reduced data center footprint of 50%, and the 2580 Teradata Data Warehouse Appliance which delivers up to two times the performance.

We're also very pleased to be recognized by those in the industry.

In Q1 Teradata was named as one of Information Week's top 10 most strategic IT vendors.

During the survey, they heard many of our customers attribute much of their success to the competitive intelligence they get through their partnership with Teradata, and partnership is the word these companies use most often.

Teradata was also named to the Intelligent Enterprise's list of the dozen companies that will matter the most in 2010.

We were recently named to the Top 100 most ethical companies in the world by the Ethosphere Institute.

These awards follow Teradata being recognized by Gartner for leadership in data warehousing and data warehousing servers.

Going forward, more companies will be looking to drive value by adding more subject areas and applications to their data warehouses, more users, more queries, and enabling realtime decision-making, while taking costs out via the consolidation of their data marts.

This requires data warehouse technology that has the ability to manage complex mixed workloads, multiple applications, thousands of users and concurrent queries in an active, realtime environment that can execute both strategic and operational decisions.

This is what Teradata provides that our competitors don't.

In closing, we are very pleased with our strong start in Q1 and are increasing our revenue guidance to 8% to 10% revenue growth in 2010.

We now expect to generate EPS of $1.60 to $1.70, based on the strength of Q1 and the higher revenue guidance.

I will now turn the call over to Steve Scheppmann, who will discuss our Q1 results and 2010 guidance in more detail.

Steve.

Thanks, Mike.

Good morning.

As anticipated, we got off to a great start in 2010.

Revenue of $429 million was up 17% from the first quarter of 2009 and as Mike said, up 12% in constant currency which was against a 5% constant currency growth performance in Q1 2009, so we are comparing against a fairly solid quarter last year.

Product revenue of $200 million was up 27% from the first quarter of 2009 as the demand for and the value of infrastructure enhancing enterprise data warehousing fueled a strong start to the year for Teradata.

Services revenue of $229 million was up 9% or 4% in constant currency, with consulting services increasing 10% and maintenance services improving by 8% as reported.

Gross margin in the first quarter of 2010 was 55% compared to 54.5% in the first quarter of 2009.

Higher services gross margin and a greater percentage of product revenue more than offset the lower product gross margins in the quarter.

Product gross margin of 64% decreased from 65.6% in Q1 2009.

At the end of the day, the decrease was primarily attributable to deal mix, for the most part in the EMEA region.

However, with that said, we experience a significant increase in product revenue in a period, other factors come into play including more efficient leveraging of the product fixed cost structure, which has a favorable impact on product margin and the fact that subscriptions, making up a smaller percentage of our total revenue, you will recall subscriptions are included in our product revenue, and this represents an unfavorable impact on our product margin.

Services margin of 47.2% was a full point higher than a year ago due to more efficient utilization of our consulting resources in the quarter, compared to a lower quarter in 2009.

We expect that Q2 will be a tougher comparable with the strong prior year.

As we have said in the past, as we add targeted capacity to meet the anticipated demand for consulting expertise, we expect services gross margins will soften from the higher levels achieved in 2009, especially as we proceed into the next few quarters.

Moving to a geographical view of gross margin, in the Americas region, gross margin was 57.9%, an improvement from 57.1% in the first quarter of 2009, largely due to higher consulting services margins.

Gross margin in the EMEA region was 53.8%, down from the 54.6% reported in the first quarter of 2009, due to lower product margins.

Gross margin in APJ of 46.5% was roughly the same as last year, 46.2% in Q1 2009.

Turning to our expense structure, SG&A expense in Q1 2010 increased $8 million from the same period last year.

This was largely driven by increased selling expense in the areas of head count, training, incentive compensation, and currency.

Research and development, R&D, in the quarter was $32 million versus $30 million in the first quarter of 2009.

For the full year 2010, we are increasing our R&D investments and estimate that R&D may experience a percentage increase in the low teens year-over-year.

As a result of all of these items discussed, Teradata's operating margin in the seasonally lower first quarter was 20% versus 16.3% reported in Q1 2009.

For the full year 2010, we continue to expect operating margins to be in the 19% to 20% range.

Below the operating income line, our effective tax rate in Q1 2010 was 22%, down from the 25% tax rate used in the first quarter of 2009.

Our effective tax rate was lower in Q1 2010 due to a previously disclosed $5 million tax benefit associated with the recognition of certain foreign net operating loss carryforwards resulting from an audit settlement in the first quarter.

Due to more of our estimatable pretax earnings coming from the US than previously expected we now expect our full year effective tax rate for 2010 to be approximately 25.5% to 26.5%.

As a result, EPS in Q1 in 2010 was $0.39 versus $0.26 in Q1 2009.

Noncash stock-based compensation expense is included in our operating income and EPS results.

During the quarter, stock-based compensation expense was approximately $5 million or $0.02 of earnings per share.

For the full year, we expect approximately the same amount of stock-based compensation expense in 2010 as we had in 2009, roughly $23 million or approximately $0.08 to $0.09 of earnings per share for the full year.

Turning to cash flow, cash from operating activities was $138 million in Q1 2010 versus the $165 million generated in the first quarter of 2009.

After $21 million of capital expenditures versus $20 million of capital expenditures in the first quarter of 2009, we generated $117 million of free cash flow, down from the $145 million of free cash flow in Q1 2009, or a decrease of $28 million.

During the last few years, we, along with many other companies, were able to decrease our working capital as we reduced the amounts of our accounts receivable, which benefited our free cash flow.

As you are aware, lowering receivables is generally a one time cash flow benefit.

From an absolute dollar perspective, our receivables were $64 million lower as of 12-31-09 compared to 12-31-08 due to improved efficiency throughout 2009.

As a result, this had the effect of creating a free cash flow head wind for 2010 when you compare it to the opportunity we had entering 2009.

From an accounts receivable efficiency perspective, DSO improved to 69 days as of March 31, 2010, compared to 75 days as of March 31, 2009.

Now that we see growth again, our free cash flow generation should return to more normalized levels in line with the plus or minus $25 million of net income metric we have talked about since the spin-off.

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

Turning to the balance sheet, as of March 31, 2010, we had $712 million of cash, a $51 million increase from the end of 2009, despite our share repurchase activity in Q1.

During the first quarter we repurchased approximately 2.4 million shares for approximately $70 million.

As I've said before, we expect 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 economic and market conditions.

Approximately one third of our cash is available in the US.

With respect to our deferred revenue, deferred revenue as of March 31, 2010, increased $70 million from 12-31-09, compared to a $66 million increase as of 3-31-09 versus 12-31-08.

Deferred maintenance and deferred subscriptions had solid increases between periods, and together they represent over 70% of the deferred revenue balance as of March 31, 2010.

To provide further transparency around currency movement and the potential impact on revenue, we provide on our website additional detail regarding how currencies moved in Q1 2010, and how this movement is expected to impact our year-over-year revenue comparisons for the remainder of 2010, assuming that currency exchange rates as of the end of April.

In Q1, our year-over-year revenue comparison included a 5 percentage point benefit from the currency translation.

Based on the spot rates as of the end of April, for Q2, we expect approximately 1 percentage point of benefit from the currency.

For the year, we now expect less than 1 percentage point of benefit from currency and we expect to see 1 to 2 points of currency head wind in the second half of the year.

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

We are increasing our revenue guidance for the year to 8% to 10% which includes less than 1 percentage point of estimated benefit from currency.

Our previous revenue guidance of 7% to 9% included a 1% to 2% of estimated benefit from currency.

Therefore, in effect, we're increasing our revenue guidance range by approximately 2%.

Although we continue to see a healthy pipeline for the first half of 2010, it is difficult to accurately forecast what the second half product revenue will look like.

As is typical in the case of our business model, we do not have a high degree of predictability two to three quarters out.

We do not see anything that is likely to negatively impact us in the second half of the year but we simply do not have a high degree of product revenue visibility at this time.

We do have visibility into our services revenue which represents slightly greater than 50% of our total revenue, and this currently shows growth in the mid-single digits range in constant currency.

Included in the total services revenue is our maintenance revenue, which is a true annuity revenue stream.

As a result, more predictable over the remainder of the year, and this maintenance revenue accounts for approximately one half of our services revenue or approximately 25% of our total revenue.

As we discussed with you last quarter, we expect some of our costs and expense lines to grow faster than normal in 2010 due to reductions in 2009 and our increased investment in sales coverage and R&D.

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 rate.

Specifically, as we have discussed before, we anticipate the following, tough year-over-year comps in our services gross margin as we add to our consulting teams, second, higher selling expenses due to more sales territories and higher commission as revenue increases, third, normal increases in G&A such as base compensation increases, and a partial return of some expenses that were eliminated or reduced in 2009, including training and education.

Finally, due to increased investments, we expect low teens increase in R&D over the 2009 level of $117 million.

That said, for the full year, we are increasing our EPS guidance from the $1.54 to $1.64 range to the $1.60 to the $1.70 range.

Keep in mind, this includes the increase of our effective tax rate resulting from our expectation that more of our pretax earnings mix will come from the US, which reduced our EPS by approximately $0.03 per share, if you assume the midpoints of our effective tax rate guidance ranges.

This impact has been incorporated into our new guidance for 2010.

In closing, there is a strong correlation between the effective use of business analytics and profitability.

Effective use of business analytics begins with the right architecture and leveraging of the enterprise's information infrastructure.

I believe you will see more companies focused on centralizing, integrating their information infrastructure as they look to improve their responsiveness and the effectiveness of their BI infrastructure.

Teradata Solutions, products and services, are well-positioned from strategic to active, enterprise intelligence to drive and manage this change.

We're excited about our start in 2010, and with that, operator, we are ready to take questions.

(Operator Instructions).

Your first question is from Wamsi Mohan from Bank of America.

Please go ahead.

Thank you.

You had a really solid quarter.

You increased your top line growth at constant currency 5% to 8%, to now 8 to 10%, but I am trying to put that in context with the over achievement you did in the first quarter.

You had pretty strong deferred revenue.

You have easy comparison the second quarter.

It seems to me you're being very conservative in your assumption in the back half of the year closer to perhaps mid-single digit top line growth.

You mentioned lack of visibility on the product side.

Are you being incrementally more conservative now in the back half?

Is there anything on a competitive front that you're seeing which is different, or is it just purely lack of visibility?

Thank you, Wamsi.

This is Mike Koehler.

There is a couple of dimensions when you look at the full year revenue guidance.

One of them is the services business, and if you look at the growth rate in constant currency, it is mid-single digits.

It is hard to move the dial on things like maintenance revenue, which is a little bit less than 25% of our revenues.

However, as we continue to grow product revenues, that will benefit the maintenance longer term, but when you look at the year, you can't move the dial that much on the maintenance revenue, and on the consulting services piece, it is a little harder to move the dial at all.

So when you take a look at the 8% to 10% revenue guidance, we're actually pretty bullish on our product revenue growth for the rest of the year, to back into the 8% to 10% range.

Okay.

And to follow up on that, I mean, from a gross margin perspective, services gross margins were quite a bit higher than what we expected.

You had indicated an intent to reinvest in talent on the professional services side.

You're pointing to that again as a head wind in the next few quarters.

Is this just a timing issue?

Have you not been able to hire the folks you wanted to hire yet or how should we be thinking about that?

It is really the ramping, so we have begun to hire, and it will be ramped smooth throughout the year.

Okay.

Thank you.

Thank you.

Thank you.

The next question is from Matt Summerville from KeyBanc.

Please go ahead.

A couple questions.

I think over the last couple of weeks there has been some folks that were concerned regarding the rate of new customer wins possibly slowing in the quarter, price competitiveness creeping up.

Mike or Steve, I was wondering if you could give a little more color around those items there?

The new account wins were up in the first quarter over prior year, and APJ had a record first quarter in terms of new account wins.

In terms of competition or win rates, we've reached our highest level in win rates in 2008 and 2009 and they were up at the end of 2009.

2009 was up a little bit over 2008, the fourth quarter of 2009 they were up and the first quarter of 2010 our win rates are up.

So overall when you take a look at new account wins, competitions, win rates, right now things have never been better.

Matt, this is Steve.

What I would also comment on, you brought up product gross margin.

I would also comment in the product gross margin as we've said before in the past, if you look over a longer period of time and see the ups and downs in the product margin, that's the real indicator of any pricing that we -- the pricing dynamics we see in the marketplace, and the product gross margin is 64%.

We were at a low 61.2% in Q3 2007 to a high of 67.9%, and so that 64% is right in the sweet spot, so that would indicate very consistent dynamics from a competitive front from pricing.

Can you also comment on just what you're seeing more trend wise in terms of the length of the overall sales cycle now versus maybe a year ago, how average deal size has trended and then, Steve, you made -- in your prepared remarks you mentioned what organic ex-currency sales growth was on the service side.

Can you give us that same number on the product side during the quarter?

On the sales cycles I would say in the Americas we're just about back to normal.

We're having some delays in the communications industry but overall the sales cycles in the US in particular are overall back to normal.

We're seeing some delays, a little bit of lumpiness in APJ with regards to sales cycles, and deferrals, and in EMEA, EMEA has been operating relatively stable over the past couple of years and right through the downturn, and as we look at it today.

EMEA, our challenge there is more around currency and more around some of the prior year comparables we'll be going against when you look at it in constant currency and while in Q1, Q2, and Q3.

Matt, your question on the constant currency and product, we were 27% in as reported and 22% in constant currency growth on the product revenue.

Thanks a lot, guys.

Thank you.

The next question is from Katy Huberty from Morgan Stanley.

Please go ahead.

Good morning, and very nice quarter.

Just as a follow-up to Wamsi's initial question, some of the large storage companies talked about revenue upside in March as a result of pent up demand that wasn't able to close in December and so January and February started out very strong.

Is that something that you saw this quarter and do you think that that creates sort of a sequential head wind going into June?

Q4, close of Q4 and close of Q1, if you net it all out, it behaved pretty normal, so there are some puts.

There are some takes.

In some parts of the world, and some customers in the US, we had some delays, they went out.

In other cases we had some takes, and it was similar in Q4 and Q1, so, Katy, what I would say here is the quarter ends and spillovers if you will or the bringing in of revenue it's all netting out about the same for the past at least the past two quarters.

Okay.

So you don't see a sequential head wind going into June by any means?

No.

Okay.

And then on the deferred revenue line, Steve, you gave some metrics around maintenance and subscriptions.

How did the product deferred revenue trend from December to the March quarter?

The transactional component of that was very consistent, nothing unusual, Katy, from the structure of the deals.

Okay.

And then lastly, as a follow-up to the competitive discussion.

Are you actually seeing Oracle's marketing efforts increase the number of deals that you're getting pulled into?

Is there maybe a positive impact from the noise they're creating in the market?

We're not seeing much of a difference at all in terms of the number of times we're competing with Oracle or we don't see an effect of being pulled into deals because of Oracle.

There hasn't been much change over the past three or four quarters.

This is Darryl.

The only other thing I would add is as you can imagine with Oracle having the largest installed base, it is the one that we're typically running into as we're competing globally, so as we look at replacing Oracle data marts and data warehouses with Teradata, typically, it is Oracle, the version they have today, or Oracle Exadata gets introduced, but I would say it hasn't increased or decreased.

It is very similar.

So as we go head to head with them, depending on the Company's direction, they'll introduce try to save it with the current -- the old product or try to save it with a new product.

And we're very comfortable competing with both.

We've had some great success in head to heads with Oracle Exadata recently, and we think we'll continue to succeed against them.

Oracle's biggest presence is really in LLTP and on the analytics side it is more in a data mart kind of environment, so the -- we just haven't seen much of a change.

Okay.

Great.

Thank you.

Thanks, Katy.

The next question is from Nabil Elsheshai from Pacific Crest Securities.

Please go ahead.

I'm going to drop my last name.

Thanks for taking that and my question.

Just to start first on partnerships, I was wondering if we could get an update on channels and, obviously, SAP top of mind and any contribution or progress you're making with SAS as well?

Sure.

Let me start with SAS.

We're making good progress with our in-database initiative but we also announced at SAS Global Forum in Q1 a couple of new products that we've also packaged up.

We announced the availability of SAS Marketing Automation on Teradata at the event, and then we also announced SAS's warranty application where we actually merged both Teradata and SAS's IP into an advanced warranty application from SAS on Teradata as well, so some real good product announcements as well as some progress on the next release of our in-database initiative and all of those were announced and well received by the customers both Teradata and SAS Global Forum.

So we're making good progress there and we've got some other additional products planned for the remainder of the year.

On the SAP front, we're on track with our port of BW on Teradata.

Our first availability is going to be in Q4 of 2010, so we're making good progress on the port.

We also will be participating in Sapphire here in May in both Orlando and EMEA.

We'll be announcing some new products that we have developed together.

We have had a couple in the manufacturing area around trade promotions effectiveness and out of stocks that we'll be presenting and demonstrating at both conferences and we'll also be demonstrating SAP's BusinessObjects Explorer product on Teradata at both conferences as well, so again good progress with some integration of applications and then also on the big initiatives that we'll be continuing across our relationship.

Great.

Thank you.

Given that close rates, especially in the US, are starting to get back to normal, what are you seeing, Mike, in terms of the productivity of the new sales reps?

I think on Q4 you had said they weren't quite where you had expected.

Are you starting to see that get back to where you had expected given the close rates?

Just a clarification.

It is the sales cycles that are getting back to normal.

The close rates, yes.

Thank you for clarifying.

Yes.

As far as the new territories go, 2009 the revenues were a little bit lighter than where we wanted.

The first quarter we have a revenue yield that's decent, and when we look at the full year, our current projections are we're a little bit light of where we want to be, not by a lot, a little bit light, and of course we have the opportunity to get to where we want to be, and this is when I say a little bit light, this is from our original we talked about $100 million in revenue from the new territories in 2010, and as we look at it right now, we're a little bit light.

Okay.

And then lastly on Europe, you had called out tougher growth rates, I mean, comps, but even adjusting for that the growth rate isn't what you're seeing right now in North America.

Is there an economic lag that you're seeing and you think that will kind of catch up with North America or is there some other dynamic going on there?

When you look at EMEA and you look at it in constant currency and kind of the environment they were in, last year's Q1 they were up 12% in constant currency, and Q2 in terms of just revenue as reported was their second largest quarter ever including Q4's, and in Q3 they grew 9% in constant currency, so those are some pretty -- those are tougher prior year comparables than we have with APJ and in the Americas, and although the currency isn't a huge head wind at this point, there is a currency head wind, and they're just going against tougher prior year comparables.

The fourth quarter will be an opportunity where we'll have a lighter prior year comparable to go against.

So I think if you look at the performance of our EMEA business in 2008 and 2009, relative to other IT companies in EMEA, I would say it has been a very, very strong performance, it continues to perform well, but they're not going to have the same opportunity that the other regions have in terms of the prior year comparables.

Thank you, guys, for taking my question.

Thank you, Nabil.

The next question is from Mark Kelleher from Brigantine Advisors.

Please go ahead.

Thanks for taking the questions.

I was just wondering if we could follow up on the new sales territories.

That's a pretty impressive year-over-year growth.

How much of that is being driven by these new sales territories completing their sales cycles and coming online and maybe you can give us some indication of what you're looking for for new sales territories this year and maybe how many total you have right now?

In terms of the number of territories, we're on track to add the 90 territories this year, so the execution of that is going -- add 90 territories not this year.

Getting to the 90 territories that we said we were going to put in place over the three-year period that ends in 2010, so the execution of the territories is on track.

The other question, Mark, was in terms of the revenue.

Of the revenue growth of the kind of the surge you saw in the first quarter.

Is that general economic recovery?

Is it good products or is it new sales teams that are finally delivering?

In the first quarter was the strength of the Americas in the first quarter.

I mean, that's what really drove it and within the Americas you would have a portion of those territories we put in place so if you kind of do the math, it wouldn't have a meaningful impact of growth there.

And how about on a product side?

Was there particular products that were driving it, new data mart products all the way up to the high-end?

What was the story there?

The majority of our revenue growth and product revenue is our 5000 series, the EDW if you will.

That said, our appliances were up a lot in terms of units and sales in the first quarter, but it doesn't move the dial much when you look at the overall growth for the Company, because the appliances are doing a kind of 5% to 10% of revenue short-term, long-term type of thing.

So this was clearly driven by EDW, the product revenue growth in the first quarter, but that said, we had a very good uptick in our appliances in the quarter.

Mark, as Mike said, there really wasn't any deviation from our short-term, long-term mix of appliance versus EDW.

That stayed pretty consistent.

So I don't want -- that was pretty consistent between those two products.

This is Darryl.

The only other thing I would add is we're seeing a good opportunity to position our appliance in our large accounts that have enterprise data warehouses, so we're seeing them leveraging them for disaster recovery in their environments, so we have a customer, Kaiser, who has a large EDW with us and they actually purchased one of our appliances as a disaster recovery, and we're also see good take with our 1500 on our Extreme Data Appliance for a lot of new analytics and also nearline opportunities for keeping additional historical data for either compliance, regulatory, or new analytics.

So again in our installed base with our EDW we're seeing a good fit for surrounding it for these other types of capabilities with the platform family.

Great.

Thanks.

Thank you.

The next question -- I am sorry.

Go ahead.

I have to add one more thing.

It is also been helpful in us increasing new account wins, the appliance family, basically so companies can start with a smaller footprint platform and then expand out to EDW over time.

Thank you.

The next question is from Alex Kurtz from Merriman and Company.

Please go ahead.

Thanks for taking the questions.

Just back to the second half visibility concern that you guys keep raising.

I know --- I think you talked about this last quarter.

You just put up a really solid number in Americas; you're talking about sales cycles showing some improvements.

Given your longstanding relationship with your customer base, why would second half visibility be not improved from last quarter?

Alex, it is more around our business model.

We have over 50% of our revenue that we have visibility to, and by the way, these comments are whether there is a good economy, a bad economy; it has nothing to do with the macro economy.

Basically our business model is on the product revenue, customers make a decision, and they want to implement it as soon as possible on the product, and so we operate with not much of a backlog, so what happens is your ability to predict what's going to happen in the fourth quarter on product revenue is not as good as it is right now in Q2, and there is that -- that's the lack of visibility.

Maybe visibility is the wrong term.

It is the way our business model behaves.

We have trends.

We have funnels.

We have all of that we looked at, but at the end of the day, you don't know the answer until you get there.

But aren't a lot of the deals you're working on long-term projects that your customers are planning to implement so doesn't your salesforce have that visibility or what you're saying is the product stuff is almost like a turns business; it happens within a quarter?

The purchase decision happens in a quarter.

We're always engaged with our customers working on the next upgrade, the next addition, the next application.

We have very, very close working relationships with our customers, and we work together, but our customers don't do upgrades in any particular month or quarter and sometimes they won't do it in a year.

It depends on what the particular addition they're doing to their EDW.

The variability comes in as to when do they get lined up to actually pull the trigger and make the decision, and then the revenue comes quickly.

The other thing is quite frankly we have very large transactions in our business, very large.

In a given quarter, you have a couple of $10 million or $15 million types of opportunities or opportunities even much higher that don't happen, and it will change the percent of growth for not just for a quarter, but for an entire year.

We have seen some years where, and this is four or five years ago when things were good where you have a set of customers that deferred out of the year and the impact on our top line revenue growth was huge.

So it is the dynamics of the business model of operating without a backlog and the volatility we have with some large deals with large customers.

That makes sense.

Steve, just a couple of quick questions and I will jump off here.

Can you just give us sort of what you think product sort of the puts and takes on product margins over the next couple of quarters are?

Is it volume related?

Is there region related, sort of what we can expect from that line?

And can you just repeat again what you think the effective tax rate will be all in on a blended basis?

Thanks.

Thanks, Alex.

On the product margins, don't see anything out there unusual other than FX that we talked about on the head wind in EMEA so everything is pretty consistent.

It really depends upon what we had in Q1, the mix, and when we refer to mix, it is floor sweeps, it is larger transactions that will impact that we have seen in our past.

Now, that could impact it, Alex, it impacted EMEA in Q1 here.

So it really gets down to the mix and the timing of the mix that Mike talked about on these larger deals coming through.

With respect to the effective tax rate, updating the guidance to 25.5% to 26.5% on the effective tax rate.

That's really driven by the strength of the Americas.

We have FX influence our head winds because of the dollar strengthening on the EMEA side.

What you have seen now is the strength of the Americas stepping up.

Well, it is a double-edged sword.

In EMEA I have a lower effective tax rate on taxable earnings in EMEA.

In the US I had a higher tax rate, and you see the strength of the Americas coming through from that increase of that effective tax rate, so that's why we're coming up to the 25.5% to 26.5%, all driven by the pretax earnings mix.

Thanks, guys.

Thank you.

The next question is from Derrick Wood from Wedbush Securities.

Please go ahead.

Thanks for taking my questions.

So you saw a nice rebound in year-over-year growth in reported revenue.

I am curious why you're not seeing the same increase on the year-over-year growth in deferred revenue?

In deferred revenue, Derrick, in the two main components of maintenance and subscriptions, we saw solid strong growth in those two components.

And that's why I identified or highlighted those two.

There was solid and strong growth in those two components.

The third component of transactional side, again, very consistent with the year end, nothing unusual in there, and that represents roughly quarter to 30%, and that's really transactional driven.

Your transactions will either go through as a deferred revenue item or in the backlog item.

Mike said the backlog -- I won't say backlog but the deal mix at the end of Q4 and the end of Q1 were pretty consistent, so that the transactional activity in the deferred revenue really doesn't tie to the health of the business.

The health of the business is tied into maintenance and subscription side and those both had strong improvements.

Okay.

Thanks for the color.

Europe, so if you look at it on a sequential basis, it was flat which it is usually down double-digits in Q1.

Were there some one-time large deals that supported this, or are you seeing something more sustainable or a change in seasonality from this region?

No.

There has been really no large changes or no large deals coming through so everything is pretty consistent in the EMEA region other than we had on the one -- we mentioned on the product margin side, but again that was one large mix related transaction, but nothing unusual.

In terms of you give us annual guidance, can you give us a sense for how you see seasonality progressing throughout the year?

No, I mean typically historically we have seen our seasonality was Q4 strongest, Q2 and Q3 can vary between particular years, and Q1 being our seasonally lower, and we're not seeing anything that would distort the historical trends.

It is lumpy, as we have always said, in that Q3 and Q2 can be lumpy on the timing.

With respect to your 19% to 20% operating margin guidance, you just did 20% in Q1, so I guess that assumes you're going see some declines in parts of it in quarters looking forward.

Can we just assume this is due to increased hiring on the sales front as well as increased hiring on services, and then I guess R&D starting to accelerate in terms of investments there?

Yes, you hit the three, Derrick.

Okay.

Lastly, share count for 2010.

Can you share what your assumptions are under EPS?

What we generally have done is you saw we did $70 million in Q1.

In the prior two years we really did basically half of our free cash flow, half of our free cash flow is generally a reasonable metric to follow.

We said cash flow this year would be back to the guidance that we're given post bin net income plus or minus $25 million.

So we'll continue to be opportunistic and evaluate as I said in the prepared remarks, evaluate those factors, and so there isn't anything that I see right now that would take me away from our historical patterns.

So just to be clear, half of your free cash flow typically will go to a buyback in the quarter?

We have done half of the free cash flow in the last two years.

Okay.

All right.

Thank you.

Operator, we have time for one more caller, please.

Thank you.

The last question will be from Brad Reback from Oppenheimer & Company.

Please go ahead.

Hi, guys, how are you?

Good, Brad, how are you doing?

Good.

Mike, I think you had talked about some of the new sales teams, the yields being lighter than expected in the guidance sort of carrying that through for the remainder of this year.

Could you maybe walk through for a minute or two what's going on there, what you guys have discovered, why they're lighter and maybe what you're doing to help fix that?

We think it is just economic related when you look across the board.

So as the economy picks up over the course of this year, those yields should start to improve?

Yes, to get us to what we're talking about which currently looks like it will be a little bit light, not significantly light.

Okay.

And then finally on the question on the guidance you had talked to it before for the back half of the year.

Just to be clear, in a normal year, putting aside last year and maybe the end of 2008, would it be fair to say that you typically at this time in the quarter -- this time in the year don't have very much visibility into the back half?

That's correct, on the product revenue.

Great.

Thank you very much.

Thank you.

With that I would like to thank everyone for joining us here this morning, and hope you enjoy the rest of the day.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.