Teradata Corp (TDC) 2010 Q3 法說會逐字稿

Welcome to Teradata's third quarter 2010 earnings conference call.

My name is Christine and I will be your operator for today's conference.

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

Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Gregg Swearingen,Vice President, Investor Relations.

Mr.

Swearingen, you may begin.

Good morning, and thanks for joining us for our 2010 third quarter earnings call.

Mike Koehler, Teradata's CEO, will begin our discussion, summarizing Teradata's third quarter results.

Steve Scheppmann, Teradata's Chief Financial Officer, will then provide more details related to our financial performance, as well as our increased 2010 guidance.

Darryl McDonald, Teradata's Executive Vice President of 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, excluding stock-based compensation expense, 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, 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.

Good morning, everyone.

Teradata has delivered another strong quarter in Q3 with revenue growth of 15% and operating income growth of 20% versus prior year.

Product revenue was up 27% in the quarter and for the year is up 25%.

This is the highest total revenue growth and product revenue growth we have achieved during the past 10 years.

Data volumes continue to grow exponentially, with new data types coming from new data sources.

As companies look to bring these new data elements together with traditional data, this makes for an attractive market opportunity for Teradata and our integrated active data warehouses.

This has also created demand for our appliances to address big data and other evolving opportunities in large, single subject data marts.

We continue to innovate on many fronts, to capitalize on the evolving landscape from big data to advanced analytics to enterprise marketing management to mobile intelligence.

These innovations are translating into growth in our customer base.

And growth in the number of customers that Teradata serves.

New customer wins year-to-date are at our highest levels in six years.

Turning to the regions, the Americas had strong growth again in Q3, with revenue of $292 million, which was up 18% over 2009.

New account wins included a world leading manufacturer of aircraft engines which will integrate and analyze large volumes of text analytics.

This will enable them to quickly detect and react to changes that impact its forecasting and manufacturing schedules which will in turn reduce inventory and service costs.

Other new account wins included a major high-tech manufacturer ,and Proctor & Gamble, and a leading department store retailer, as well as a top two bank in Mexico and one in Chile.

Customer upgrades and expansions included WellPoint, which has added our solid-state drive appliance to deliver critical care alerts to hospital staff and physicians within seconds.

Our Extreme Performance Data Warehouse, the 4600 Appliance, is enabling new time sensitive, mission critical breakthrough applications that were not possible before.

Additional upgrades and expansions in the quarter included Nationwide Insurance, Caterpillar Logistics, and Enterprise Holdings, which includes Alamo, National and Enterprise rental cars.

And one of the world's largest retailers and one of the world's largest manufacturers of phones and computers.

Overall the Americas is having an outstanding 2010 to date in terms of total revenue growth, product revenue growth and new customer wins.

In EMEA, Q3 revenue of $109 million was equal to prior year, but it was up 7% in constant currency.

New account wins included Unilever, a leading consumer packaged goods company.

We are working with CPG manufacturers around the world to integrate, explore and analyze their consumer and retail point of sale information to better understand preferences and build brand loyalty.

EMEA, also, had four government account wins, with two in Turkey, and one each in Italy and Belarus.

The government sector, as you all know, is an under-penetrated vertical for Teradata and is a big opportunity for us.

Upgrades and expansions in the quarter included Lufthansa, which is adding operational or active decision making, and is also redesigning their customer loyalty program and integrating it with partner airlines.

And we had expansions at Lloyds, DHL, Telenor Pakistan, the Italian Tax Authority, Coop Norden, Mobile Mill in Egypt and at Chronopost International in France.

For the first three quarters of 2010 EMEA's revenue was flat with 2009 as reported and up 2% in constant currency.

However, keep in mind, EMEA was going against a good prior year comparable, when revenue grew 9% in constant currency through Q3 2009.

EMEA's overall activity has been solid in 2010 and we expect good growth in Q4.

Asia Pacific / Japan had an excellent quarter, generating $88 million of revenue in Q3, which was a 28% increase over the third quarter of 2009.

In constant currency, APJ grew 19%.

China is having a strong 2010 and we continue to see good growth in financial services there, our largest industry.

In Q3, we added Ping An Bank as a new customer, and they will be consolidating 26 data marts into one centralized EBW.

Ping An Bank joins a growing number of financial service institutions relying on Teradata to provide a single view of the customer, reduce credit risk and drive top and bottom line results.

During the third quarter we also recognized significant expansions at several of China's top five banks, including ICBC, China Construction Bank and the Bank of Communications.

Across APJ, active EBW implementations are fulfilling mission critical needs as well.

A good example is the Australian Border Control, which is processing data from a wide range of sources, including near realtime data.

The agency will utilize Teradata's event triggering technique to rapidly identify, analyze and respond to situations to ensure the safety of Australia's borders.

APJ also saw good growth from a number of other customers across the region in Q3, including the Australian Tax Authority, in Japan, Rakuten,Japan's largest online retailer, JCB, Mitsui Foods and Sony Marketing.

And in the Philippines, Globe Telecom.

Overall, APJ has grown revenue 15% this year, as reported, and 7% in constant currency.

Growth has been especially strong in the countries outside of Japan.

Our annual partners conference was held in San Diego last week with over 3,000 attendees and 169 customers presenting at various sessions there.

One of the common themes from customers in Teradata was how to innovate with the wave of new big data.

In particular, how to leverage the big data being driven from web logs, smartphones, social media, sensors, et cetera, together with what they already know such as customers, products and supply chains.

Organizations that move quickly and figure out how to leverage this new information will have a clear competitive advantage in the marketplace, and Teradata is helping them to do that.

I would like to highlight a few of our announcements from the conference.

We introduced Teradata Database 1310 which further extends our lead with temporal and compression capabilities, among other things.

Teradata's temporal software automatically time stamps data to allow customers to track and properly account for changes that evolve in their business over time.

For example, manufacturers can obtain more meaningful sales performance reports that account for territory realignments or customer mergers and acquisitions that have occurred over the years.

And retailers can get sales comparisons that reflect products changing the different categories.

The Teradata Database 1310 has enhanced compression technologies that enable customers to store more data.

Customers are receiving up to 20 times compression for select data types and up to four times for overall compression.

We also released the next generation of our platform family of partners which significantly boasts performance across all models and reduces energy consumption as well.

For example, our 5650 Active Enterprise Data Warehouse delivers a 43% performance boost over the previous generation.

And does this in the same sized footprint ,which reduces energy and floor space requirements.

In addition, we announced enhancements to our customer relationship management application, which we call TRM.

New features include mobile intelligence capabilities, customized reporting and visualization tools.

Now, marketers and executives can visualize their data and access reports and dashboards across all medium channels from a variety of platforms including mobile devices and iPads.

In summary, we see more opportunities than ever before to help customers drive value through data warehousing.

And we remain confident in our ability to execute with customers and in the market, with our best in class technology solutions and the world's best data warehousing consulting practice.

Given our performance in Q3, we are increasing our guidance for 2010 revenue growth to be approximately 12%, and we are increasing our non-GAAP EPS guidance to the $1.80 to $1.83 range.

Now I will turn the call over to Steve for more details.

Steve?

Thanks, Mike.

Good morning, and thanks for joining us.

This quarter, we improved our revenue growth rates, expanded our gross and operating margins and increased our EPS.

Now, moving to our revenue details.

Revenue of $489 million was up 15% from the third quarter 2009 and, also, up 15% in constant currency.

Revenue for the first nine months of the year was up 14%, 13% in constant currency.

Product revenue, up $243 million, was up 27% from the third quarter of 2009 and up 25% for the first nine months.

Services revenue of $246 million was up 5%, and 6% year-to-date.

Within services, during Q3 consulting services revenue was up 6%, and maintenance service revenue was up 5%.

Turning to our gross margin.

Gross margin in the third quarter improved to 57.1% compared to 53.4% in the third quarter of 2009.

Higher product gross margin and a more favorable mix of product revenue versus services revenue more than offset a lower services gross margin in the quarter.

Product gross margin of 70.4% increased from 62.3% in Q3, 2009.

The increase was primarily driven by a positive deal mix, particularly in the America's region.

Services gross margin in Q3 of 43.9% was lower than the strong services gross margin of 46.2% achieved in Q3, 2009.

Our consulting services business is expanding their head count in response to a growing business opportunities.

As we've discussed in prior quarters, this new headcount can have a negative impact on margin, particularly while the new consultants are being trained and are not yet fully productive or chargeable.

Our data warehousing consulting capability is unmatched and a very important part of our business model.

Not only does it enable us to grow services revenue, but it may open the door to future product revenue opportunities.

Moving to a geographical view of gross margin.

In the America's region, gross margin was 61.6%, an improvement from 55.9% in the third quarter of 2009.

Driven primarily by higher product margins as well as a higher proportion of product revenue as compared to services revenue.

Gross margin in the EMEA region of 51.4% was down from the 53.2% reported in the third quarter of 2009, driven by lower services margins which were offset somewhat by the improved product margins.

Gross margin in the APJ region was 48.9% up from the 44.9% in Q3, 2009.

The increase was primarily driven by higher product margin as well as a greater proportion of product revenue as compared to the services revenue.

Turning to our expense structure, SG&A expense in Q3 2010 increased $20 million from a year ago.

The increase was largely driven by increased selling expenses associated with our strategic initiatives of expanding our sales territories, as well as higher variable incentive compensation across the Company.

As we discussed last quarter, we expected this level of increase in SG&A expenses as the third quarter of 2009 was abnormally low, due to timing and we curtailed expenses due to the economic downturn and the associated uncertainty.

R&D in the quarter was $40 million versus $26 million in the third quarter of 2009.

As anticipated, we continue to invest in our market leading technology.

For the full year 2010, we expect R&D to be approximately $150 million.

FAS86 unfavorably impacted R&D expense $5 million in Q3 as compared to Q3 2009.

And will have an anticipated unfavorable impact of approximately $11 million for 2010 as compared to 2009.

As a result of all these items discussed, Teradata's operating margin in the third quarter increased to 21.7% versus 20.7% reported in Q3 2009.

Increased investments, in sales territories and R &D, will create more of a head wind on operating margin and EPS in Q4.

That said, however, for the full year 2010 we now expect operating margin to be approximately 21%, higher than the 19% to 20% original guidance range we provided earlier this year.

Below the operating income line, the effective income tax rate in the third quarter 2010 was 29%, which compared to a 25% effective tax rate in the prior period, driven by an overall proportional increase in US pretax earnings.

For the full year, Teradata expects a higher proportion of its pretax income will be generated in the United States in 2010 as compared to 2009.

As a result, we are anticipating the full-year effective tax rate to be approximately 27%.

However, if the US Federal R&D tax credit is not retroactively reinstated by Congress before year end, our full year effective tax rate for 2010 will increase to approximately 28%.

GAAP EPS in Q3 2010 was $0.44 versus $0.36 in Q3 2009.

Non-cash stock-based compensation expense is included in our EPS results.

During the quarter, stock-based compensation expense was approximately $7 million or approximately $0.02 per share.

Non-GAAP EPS for the third quarter, excluding the stock-based compensation expense, was $0.46 in the third quarter of 2010.

This compares to $0.40 in the third quarter of 2009, excluding stock-based compensation expense as well as an impairment charge that we took in the third quarter of 2009.

For the full year, we expect approximately the same amount of stock-based compensation expense in 2010 as we had in 2009, roughly $24 million or approximately $0.09 per share for the full year.

As a reminder, we have a table in the footnotes of our earnings release, as well as detailed schedules on our website, that reconciles the differences between our GAAP and non-GAAP results and outlook.

Focusing on cash flow, cash from operating activities was $65 million in Q3 2010 versus the $96 million generated in third quarter of 2009.

When comparing to the prior year period, the decrease in cash provided by operating activities was principally driven by the anticipated increase in our receivables balance, as well as the higher inventory levels which are uses of working capital.

After $18 million of capital expenditures versus $21 million of CapEx in the third quarter of 2009, we generated $47 million of free cash flow, down from $75 million of free cash flow in Q3 of 2009.

In Q3 2010, the timing of the meaningful revenue growth added to our receivables balance and increased our working capital needs, as one would expect.

In 2008 and 2009, free cash flow benefited from working down our receivable balance and improving our DSO.

Our free cash flow is now expected to run in line with, the plus or minus, $25 million of net income, annual guidance metric we've 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 additions to capitalized software.

With respect to our balance sheet, as of September 30, 2010 we had $741 million of cash, a $17 million increase from the end of the second quarter 2010.

During the third quarter, we used $29 million for tuck in technology investments and used approximately $17 million to repurchase 559,000 shares of our stock.

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

At the end of Q3 2010, approximately 67% of our cash was held outside the United States, and in effect, not available for share repurchases.

Unless we repatriate the cash back to the US and pay the corresponding taxes at a significant tax cost.

With respect to our receivables, our day sales outstanding were at 80 days as of September 30, 2010, compared to 70 days as of September 30, 2009.

Again, we target approximately 75 to 85 as the DSO targets.

To provide further transparency around our currency movement, we provided on our website additional detail regarding how currencies moved in Q3 2010.

And how this movement is expected to impact our year-over-year revenue comparisons for the remainder of 2010, assuming the currency exchange rates as of the end of October.

As I mentioned earlier, our Q3 total company year-over-year revenue comparison was not impacted by currency translation.

But our EMEA region did see seven points of currency head wind in the year-over-year revenue comparison in the quarter.

While APJ benefited from nine percentage points of currency tail wind.

Currency has moved in a favorable direction since our last earnings call.

As a result, we now expect zero to 1% of currency benefit both in the fourth quarter and for the full year revenue comparison.

As Mike said earlier in the call, we are increasing our full year 2010 and EPS guidance ranges.

We increased the expectation for revenue growth from the higher end of the 8% to 10% guidance range to approximately 12%.

And GAAP EPS, from the $1.60 to $1.70 range to the $1.71 to the $1.74 range.

Excluding stock-based compensation expense, non-GAAP EPS is now expected to be in the $1.80 to $1.83 range.

As we discussed in the past, and as we saw in Q3, some of our costs and expense lines continue to grow faster than normal due to the increased investments in sales coverage and R&D.

Along with more a normalized spending in 2010.

As a result, we expect our EPS growth to be less than our long-term target of growing EPS at twice our revenue growth, probably more in the 1.5 times range.

Specifically, as we discussed last quarter and saw in Q3, we anticipate head wind in Q4 from the following factors.

R&D for the full year increasing to approximately $150 million.

$11 million due to FAS86, compared to the 2009 level of $117 million.

Annualized higher selling expense due to more sales territories, and increased training costs associated with new territories and head count.

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.

Lower services gross margin, as we add to our consulting teams.

And, finally, potentially higher incentive compensation across the Company, as the Company is performing better relative to key incentive plan metrics as compared to 2009.

That said, we are very pleased with our year-to-date performance and we feel very good about our technology and competitive leadership positions.

Which is clearly reflected in our operating results.

And consequently, we have increased our guidance for both revenue growth and EPS for 2010.

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

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from Wamsi Mohan from Bank of America.

Please go ahead.

Yes, thank you.

Steve, your implied revenue guidance for 4Q of $526 million compares well to consensus at $521 million, but given the upside this quarter, the seasonality of guidance is somewhat below your normal double digit.

Did you see any deals in 3Q that you were expecting to close in 4Q which is causing this dynamic, or is this continued caution in view of an uncertain demand environment?

Wamsi, you know, we say Teradata is lumpy, quarter by quarter.

The timing of the transactions, we saw some go from Q4 to Q3 that we were anticipating, but it's still within the full year of 2010.

So you have some of those dynamics occurring between Q3 and Q4, that you will see in any given year, that will affect that quote seasonality.

Can you quantify, Steve, how much revenue?

There was nothing unusual.

Nothing surprised us, but again, when we look at those on a timing wise over a six-month period, you know, there was nothing that is really out of the unusual.

But some of that, in fact, did occur.

Okay.

Mike, it looks like you guys spent some capital on acquisitions.

I was wondering if you could share some color on these, and if these are geared to the overall EDW platform, just sort of technology tuck-ins, or more specifically geared towards appliances?

The acquisitions were technology tuck-ins that basically enhanced our IP across the data warehouse platforms.

Okay.

Thank you.

And just my last question, can you remind us what percent of revenue came from appliances in the quarter and if you were able to convert any current only appliance customers into EDW customers?

For the quarter, we were at the lower end of the 5% to 10% product revenue for appliances.

On a year-to-date basis, we are somewhere in the middle of it.

In terms of appliances that have upgraded to EDWs in new account opportunities, we do have some activity but none to date.

Okay, great.

Thanks a lot.

The next question comes from Bhavan Suri from William Blair and Company.

Please go ahead.

Good morning, gentlemen.

Thanks for taking my question.

If you could provide a quick update on the sales teams and new territories that have been added and how they are executing, versus that incremental $100 million that we might have expected.

You brought that number down a bit last quarter.

How are those coming along and where do you think full year gets us to?

For the full year we are tracking to 475 territories, which will put us up a minimum of 90 territories that we targeted for the three-year period that's ending this December.

In terms of revenue, what we are looking at right now for the full year is somewhere around $70 million.

So, we are coming up short on the $100 million target we had.

We are very pleased with the activity that we have going and we will continue to add territories going forward.

So, I guess, Mike, given that it's a little short, the $70 million, but you've had really good Q1, Q2, Q3, is there something with the new sales teams that is a little slower?

Are they a little slow to ramp, is there something specific there, or what is taking them longer to ramp, given the up performance has not driven by the newer sales teams?

Bhavan, this is Steve.

I would say, given what they worked through in the second half of 2008 and 2009, that sales cycle for the new accounts, because these are focused on new accounts, has really stretched to about two years.

Before we were in that kind of 18 month cycle.

So, that is the only difference that we have seen.

What Mike referred to on the quality, we are very pleased with the quality of the new accounts that are in those pipelines and the quality of the performance.

It's just that the revenues dip down.

When I talked in partners last year, I thought we were about six months behind.

That would dip to about 50.

I said we were back up to about 75, 80.

With clarity into the last quarter, we are running about $70 million.

So, an improvement to where I thought we were about a year ago, but the quality of the accounts is very positive.

It's just really the lengthening of the sales cycle for the targeted new customers.

Got it.

If I could squeeze one more quick question in.

You had a record number of new customer wins this year.

Any color on how many are of those are for appliances versus the EDW?

Less than 50% are with the appliances.

Then the other dimension of our increase in new account wins is the new territories.

So, back to the new territory question, the $70 million in revenue is showing up short, but the quality of new account wins and the contribution to new accounts has been extremely positive.

Great, thanks, guys.

The next question comes from Katy Huberty from Morgan Stanley.

Please go ahead.

Thanks.

Good morning, guys.

Nice quarter.

Steve, question for you, if somebody was looking at the balance sheet in a vacuum, seeing the DSOs and inventories increase and then the lack of deferred revenue growth year-on-year, they might assume that you are actually trying to send a message with the guidance about decelerating growth, which I don't think is the case.

Can you just comment on those two items?

Did you see anything as it relates to timing or linearity in the third quarter that suggests we won't see a budget flush in the fourth quarter?

And then on the deferred revenue relative to the fourth quarter of last year where the lower deferred revenue is actually a positive because you kept more deals in the pipeline.

Let me address those for you, Katie.

On the DSO side, it's really the timing of the transactions as they come through in the quarter.

So, if they are coming through later, they will run up the -- hit the receivable balance and I won't have the collections during the quarter if they are earlier in the quarter.

So, as I said on the call -- on the prepared remarks, I am comfortable on a DSO range of 75 to 85.

We are right at 80.

We were 70 last year.

So, there is nothing that I saw unusual on the DSO with respect to any leading indicator.

So, nothing in there that would change my, you know, opinion on the quality of the activity going forward.

On the inventory side, it's just normal fluctuation on when we do our prebuilds versus when we are completing the shipments.

There is nothing unusual in that activity.

I saw a build up in the Americas on the finished goods inventory side which, when I work through the deals, is perfectly anticipated.

The inventory build up, other than timing, proposed no -- created no concern to me.

On the deferred revenue side, I am still -- I follow this metric of over 70% of our delivered revenue balance in maintenance and subscriptions.

That continues to hold true.

I am 74% as of September 30.

So, that other percentage that fluctuates significantly, or significantly between quarters, is the transactional side.

So that side still continues to be fluctuating more.

At long as I'm over that 70% of my total delivered revenue, I fell very comfortable on it.

And the decrease from Q3 to Q4 -- Q2 to Q3 last year and Q2 to Q3 this year -- was reasonably in line, didn't concern me.

A little bit more this year, maybe like $7 million more.

That didn't bother me because my percentages are still holding with the total deferred revenue.

I hope that answers those questions, Katie.

That's great.

Thank you.

As a follow-up, what is driving the broad based increase in product margins, because you're seeing that across regions?

Far and beyond its driven by deal mix.

We had a very favorable deal mix in the third quarter.

I will say, there is a slight benefit of having the appliance family, in that we are able to sell products that fit the opportunity as opposed to, in previous years, we would be selling the EDW or the 5,000 Class into a lot of these opportunities.

So, there is a very -- it's a very minor benefit, but it is a benefit.

But the one thing I'd like to add is, previously we have been saying the appliance product margins are similar to the EDW.

Even though, keep in mind, long term we see appliances 5% to 10% of our overall product revenue mix, but we are starting to see slightly lower margins on the appliances versus the EDW, okay.

If you take a look at our appliances, they have -- overall, they have less software content than EDW, which makes them a little bit less positive in product margin, gross margin.

The 1,000 Class, that's that big data, extreme data appliance, that has huge storage content.

You look at the mix of that product, the configuration, there is a lot more storage and storage is a little lower margin.

And then, of course, the 4,000 Class machine which uses the solid-state drives, that comes with a lower margin.

And we are doing very well with the 1,000 Class series.

Lots of big implementations.

We had one customer at our partners conference last week that was talking about a 10 petabyte implementation.

It's a very effective solution for this big data analytics that's going on in the marketplace.

Great.

Thanks.

I'll cede the floor.

Thanks, Katie.

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

Please go ahead.

Thanks for taking the questions.

Last quarter you gave a little bit of commentary about the expected growth rates in the second half, by region.

I was wondering if you could give us an update across the three regions, how you are thinking about that playing out in Q4?

Sure.

What we were saying about the second half and as it goes into the fourth quarter is our services revenue is still growing mid-single digits.

That is kind of an overall weighting factor, when we looked at the second half of the year and as we go into the fourth quarter.

Where we stand today, and I have to qualify this, when you look at this at a region basis, you can get some pretty good swings going in one direction or another in a given quarter, and it's -- But where we stand today, APJ will be somewhat flat in the fourth quarter.

Now, that said, APJ is having a very, very strong year outside of Japan.

We have been experiencing softness in Japan, as well as other companies in Japan doing business there.

And Japan is our largest country in APJ.

So, in the fourth quarter and as we have seen for the year, we will see very strong growth in APJ, outside of Japan.

So, APJ will be flattish as we stand today.

EMEA will be up double digits,we believe at this juncture, and the Americas, which has really been driving the growth all year long with incredible product revenue growth, we are looking at Americas to be mid-single digits.

A minor thing about the Americas in the fourth quarter ,but it is a factor, last year they grew 5% in the fourth quarter whereas previous quarters in 2009 they were going against declines, not big declines but declines.

And the sheer strength that the Americas had in product revenue in the first quarter, second quarter, third quarter, it's just not going to continue in the fourth quarter at the rate it has.

It's not a red flag.

It's just timing.

When you step back and look at the year, Americas will have a fantastic year.

When you step back and look at our product revenue growth and what we are doing for the year, it's a tremendous year.

But we see the Americas, as we stand today, in the mid-single digits range.

That is kind of the makeup of -- as you look at the implied revenue growth in the fourth quarter, it's a mix of APJ flattish, EMEA kicking in.

They've had good activity all year and it's kicking in the fourth quarter.

They will be up double digits.

And the Americas is in the mid-single digit range, as we stand today.

Mike, those are all year-over-year Q4 to Q4 comments, right?

Yes, I'm sorry.

Yes.

Great.

Steve, can you talk about your thoughts of the R&D growth rates heading into next year?

I know there was some accounting head winds this year.

What the overall trend may look like versus the growth rate at the top line.

Alex, what you will find this year with the acquisitions that we talked about coming on full stream in the mid-part of this year, and with the FAS86 impact that I described in my prepared remarks of $5 million in Q3, and $11 million for full year 2010 over 2009.

2010 was a little bit abnormal, out of the ordinary with respect to that increase, year-over-year.

I expect 2011 to be more in line with the spend rate of 2010, but it will come down to the timing of the technological feasibility on our next major release.

You know, we announced 13.1 at the partner's conference.

Typically, we will have a point release right after a major release, then we have another major release coming.

So, it really boils down to the next one will be a major release.

And it comes down to when we can qualify for technological feasibility that will drive, you know, that capitalization and the corresponding increase on the balance sheet and the amortization coming through as product cost.

If the timing of that holds true to what we are anticipating, I would think R&D for 2011 would be more in line with 2010.

As far as year-over-year growth rates?

The -- you know, the growth rates you saw in 2010 is abnormal.

I would talk more in absolute dollars.

Okay.

Great.

And just last question, help us understand the service and support margin.

What is more of a normalized rate, obviously it came down from Q2 to Q3, just help us think about that, going into Q4 into next year.

2009, as we said was extremely -- performed extremely well.

The 2010 levels are probably more in line with what we would have expected.

We will continue to make those investments, as we talked about, in the consulting services area.

And as you saw, the services margin overall was roughly 44% to 47% during the year, and last year services margin ticked up to around the 48%.

So I would say more in line.

Look at us in the pre-2009 levels and it should be very similar to what you would be seeing in 2011, probably more in that 45%, 46% range.

All right.

Thanks, guys.

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

Please go ahead.

Thanks for taking my question.

Just a follow-up on the consulting side, you guys have talked about hiring this year to meet increasing demand.

That hasn't yet resulted in acceleration ingrowth on the consulting services dramatically.

So, when would you expect those investments to start to drive real consulting revenue growth?

Hello, Nabil.

There is probably historically, on average, about a six to nine month lag on when they start becoming chargeable.

I would say probably a little bit longer on where they would become fully chargeable.

I would expect that to occur probably somewhat in the second half of 2011, with respect to the investments being made in 2010.

So, I would still say there would be good, you know, reasonable pressure on the services revenue in total and the consulting services side through 2011, and it probably is in that mid-single -- call it that higher single digits, 7% to 8% range, for 2011.

If history holds true with respect to when they come online being fully chargeable.

As I said, probably the second half of 2011.

That's going to keep that percentage down.

Okay.

You mentioned earlier, I think Mike mentioned, that you will continue to add sales teams.

I imagine you are going through budgeting for next year, right now.

Have you made any decisions on the rate, will you continue to add at the same rate the last two years or will you reduce the rate of new sales territory adds?

Do you know that at this point?

We will be increasing territories.

We will settle on and discuss more specifics on the next quarter call.

Not to interpret that one way or another, in terms of less than or more than or whatever, but we are seeing the kind of results that we want to see on the new territories.

We are light on the $100 million target, but we are not light on the activity.

So in terms of the quality and what we're getting, we like it.

Okay.

I was wondering if you could kind of comment on the competitive environment.

Some of your competitors make some pretty aggressive claims about win rates versus you guys, particularly versus Exedata, I was wondering if you -- since it has been out for a little while now, how that has impacted the competitive dynamic, either in terms of pricing or your win rates?

Hello, Nabil.

This is Darryl McDonald.

As it relates to competition, the playing field has been about the same as it was in the past few quarters.

We still run into Oracle and again, primarily with Oracle having a very large market share in the OLTP space, that's who we do see the most.

As we consolidate data marts in Enterprises, either in existing customers or new customers, it's primarily Oracle.

We are continuing to take market share from that perspective.

As it relates to Exedata, we haven't seen the competition increase regarding Exedata at all.

We do run into them, we do compete with them.

We compete very effectively with our 2,000 Appliance against Exedata, and we're able to compete and effectively win there.

It appears, if you look at a lot of the media and press activity, it appears that I think a lot of the attention that Oracle is getting recently with the Exedata is more in the OLTP space, against some of the OLT competitors, like IBM and others.

Okay.

Great.

Nabil, if I can add, when you look at our new customer wins, the vast majority of the time we are replacing somebody.

When you look at our EDWs expanding and adding new applications, we are replacing data warehouses and data marts inside of an account.

The number of wins we have against competitors is huge.

It's a very, very large number.

Our growth doesn't come from just our data warehouse installed at a customer just grows itself and stays within a subject area and organically there is more revenue.

Our growth comes from replacing stuff.

And it's across the board, new customers and our existing customers and everything else.

Our product revenue growth this year, you take a look at the levels of our product revenue growth, we are replacing more stuff than we've ever replaced in the past 10 years.

Okay.

Great.

Last question, on the partnership side, so, at the conference it looked like they were targeting a November data for the SAP partnership.

When you look at that timing and then when it would go GA, is your expectation that any impact financially could be delayed to 2012, or maybe late 2011.

And then on the SAS partnership that has been out a while, the feedback was pretty positive.

I was wondering, is there any way that to talk about how that impacts your revenue opportunity and maybe incremental opportunities that could generate, if any?

Yes, I'll be glad to talk about both of those.

You are correct regarding the SAP BW port to Teradata.

We are following the SAP ramp up schedule for BW 7.14 and we are targeted to go into ramp up in the November-December time frame.

We have customers that have been identified for that.

That would put us into their cycle that would have us in Q1 doing the betas, and then going GCA at the end of Q2.

So, to your point, we wouldn't look to be then taking it to market in a broad way until the second half of 2011.

We do work together following SAP's schedule on that, and their certification process and ramp up process.

We are trying to move with that schedule and with the market to stay aligned there.

We still do have lots of interest and lots of opportunity from customers wanting to integrate both their BW analytics and their non-SAP analytics into a common platform.

We think Teradata will be the best at that.

As it relates to SAS, we are seeing good momentum with SAS.

We continue to build on our strategy there.

We had a three-prong approach around the things we were reporting and going to market with, and we are seeing good traction in our industry apps.

We have good examples of where incrementally we are able to pull SAS analytics onto Teradata and/or SAS applications onto Teradata.

And we had several of our great customers showcased at partners talking about that.

So, hopefully you will get a chance to see some of those.

We've had anti-money laundering applications that we had from SAS that we've been able to put on Teradata.

And, of course, what that does is A, it allows us to leverage the EDW that is in place, the data that's in place and add new business value to their enterprise.

We are continuing to port and release industry applications.

The latest, of course, was the manufacturing warranty and analytics that we think with will have a good up side in helping customers determine their early warranty problems.

And then also, we just recently ported their customer application, customer marketing application to Teradata and had good success in that in Q3.

Okay.

Great.

Thanks for taking my questions.

The next question comes from Matt Summerville from KeyBanc.

Please go ahead.

Morning.

Two questions.

First, as we think about -- I know you don't want to get specific necessarily, Mike, about your sales add plans for the next year or two, but as we think about that dynamic, thinking about some of the other spending dynamics, R&D, et cetera, that you've highlighted today.

Steve, one of the comments you made is that, right now you are thinking about, you know, earnings growth at a one and a half X, or 1.5 times sales growth rate.

When do you think you start to get back to that 2 kind of range?

Does that happen in 2011, or should we think about that more for 2012, at this point?

Matt, what I've been saying is that 2012 is kind of the first year-over-year full year comparison, if we don't do anything accelerated, or increased, with respect to sales territories or R &D out of the normal.

So, if we continue on the path of investing strategically in sales territories, that could push it out longer.

But if we go back down to a more normalized historical, then that would be 2012 would be the first one.

So it really comes down to that core investments on the strategic sales territory expansion or R&D.

The one thing that I want to make sure I have a clear understanding, you talk about -- I think people are focusing on this $100 million you expected to get out of the class of folks and territories you've brought in over the last couple of years.

You talk about kind of a $70 million number, but that being a higher quality $70 million number.

I guess maybe one way to think about, if you look out five years, how much difference or what do you think the net worth is of the $70 million in revenue that you are getting versus what you originally targeted?

I'm trying to understand how you're looking at the quality aspect of that revenue.

I would assume the future value is more substantial.

Matt, if you take a look five years out and even forget the subjective.

We are saying the quality is good of the revenue that we are doing and so forth.

If you look at the current number of sales territories we have today and the revenue for the Company, it's a number of like $4 million per territory.

So, this is just high level mathematics.

So us adding 90 more territories, it's not unreasonable out over five years.

We are getting the same yield that we're getting across the Company today.

That is a very meaningful number.

That's why we want to continue to add sales territories.

We do want to get a good yield on the revenue, short term, and we are talking comments about 2011 here.

At the same time, we want to build the pipelines for revenue growth for the years beyond as well.

So, it's a balance.

The other thing I wanted to ask, Mike, over last week you obviously had a lot of time to spend with some of your more substantial customers.

What are they saying about 2011 and their ability to spend?

What are they saying about their enterprise data warehouse or enterprise analytics budgets looking like next year versus this year?

Any sort of early read there?

Matt, my conversations with customers, as well as feedback from others from Teradata that were there engaged with customers and so forth, not -- there is very rarely ever talk about budgets or plans or things like that.

Most of the customers don't have their budgets finalized, anyway, that are on a calendar basis.

So much of the conversation talk is more around opportunities, projects, new things we can do to get more value, that they can get, drive more value for their companies.

That's where the focus of -- it's educational and getting into specifics how they can better their own organizations.

Thanks, guys.

Operator, we are running out of time here.

So, can we limit the next callers to one question, please?

Yes.

Thank you.

As a reminder,please limit yourself to one question when asking a question.

The next question comes from Ed McGuire from CLSA.

Please go ahead.

Yes.

Good morning.

I was wondering if you could characterize what some of the dynamics are in the Asian market.

You are seeing similar growth there to the US.

But if you could compare and contrast what some of the drivers are behind that to the growth you are seeing in the US market?

APJ is, first of all, a much smaller number in terms of revenue volume versus the Americas and the US.

And the largest part of the revenue in APJ is in Japan.

You get outside Japan and then you are working with even a smaller number.

So, we had very good success with new territories, there you can put a meaningful increase in revenue.

I'm talking about the non-Japan portion, because it is smaller number.

And we are also having very, very strong success in China, which is our second largest market over there in APJ.

And in China, we are very strong in financial services, the [Delcos] and we are making good inroads in other industry segments there, with manufacturing, government and travel and transportation.

So I hope that's helpful.

So it's still more kind of green field versus consolidations?

I'm not -- Ed, can you elaborate on consolidations --

I said new implementations rather than consolidating existing data mart implementations.

In our users there, when we're adding to the data warehouses in financial institutions in Japan or wherever, communications customers, we are replacing competitive data marts and data warehouses.

Okay.

No, that's great.

Thanks very much.

Sure.

How about one more question?

Thank you,.

The last question comes from Brad Reback from Oppenheimer.

Please go ahead.

Hello, guys.

How are you?

Hello, Brad.

Just a real quick one.

I think last quarter you had talked about 125 customers were live on the Appliance product.

Could you update us at all on that number?

It's over 150.

Great.

Thanks a lot.

Thanks, Brad.

Listen, I want to thank everyone for joining the call today.

We are extremely, extremely pleased with our progress and the year we will have in 2010.

So, thanks for joining the call.

And hope you all have a good day.

Thank you.

Thank you for participating in Teradata's third quarter 2010 earnings conference call.

This concludes the call for today.

You may all disconnect at this time.