Teradata Corp (TDC) 2012 Q3 法說會逐字稿

Welcome to the third-quarter 2012 Teradata earnings conference call.

My name is Christine and I'll 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 today's conference is being recorded.

I will now turn the call over to Gregg Swearingen.

Sir, you may begin.

Good morning and thanks for joining us for our 2012 third-quarter earnings call.

Mike Koehler, Teradata's CEO will begin today by summarizing Teradata's Q3 results.

Steve Scheppmann, Teradata's CFO will then provide more details regarding our financial performance as well as our guidance for 2012.

Darryl McDonald, Teradata's EVP of Applications, Business Development, and CMO is also in the room.

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, which excludes stock based compensation expense, and other special items, as well as other non-GAAP items such as free cash flow and constant currency revenue comparisons.

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 which can be found at www.Teradata.com.

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

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

I will now turn the call over to Mike.

Good morning everyone.

For those of you impacted by the storm, I hope that you are all doing okay.

Overall, I was pleased with Teradata's execution in Q3 given the macroenvironment.

Revenue of $647 million was generally in line with what we'd expected, growing 7% as reported and 10% in constant currency.

From a region perspective, EMEA and APJ came in higher than we had anticipated and the Americas lower.

We had strong yield on revenue in Q3, with non-GAAP operating income of $166 million, which was up 16% over prior year, and non-GAAP EPS of $0.69, which was up 17%.

Longer term, we believe we are well positioned for a sustained double-digit revenue growth.

We have market-leading technology and solutions to build upon in three large and growing markets; data warehousing, big data analytics, and integrated marketing management.

These are market opportunities that will continue to be top priorities for corporations, as they look to gain competitive advantage from big data and the big data channels, such as social networks, the web, mobile, and sensor.

Shorter term, we are feeling the impacts of the macroenvironment, but to varying degrees in each of the three regions.

In EMEA, we continue to generate double-digit, organic, constant currency revenue growth overall, but our results would be better if not for the macro headwinds.

In APJ, we are now closing deals in China that were delayed from the first half.

Japan is growing again, and overall APJ is on track for decent growth for the year.

But in the Americas, we are now seeing slower growth.

Three factors that are contributing to this.

First, we are seeing a little belt tightening and uncertainty on spending with some of our customers.

Second, 95% of our revenue comes from our user base on average each year.

The Americas' strong product revenue growth the past 2.5 years has added a lot of capacity to many of our customers, which gives them some flexibility as to when to add capacity, especially in times of uncertainty.

Third, the prior-year comparables, such as the 28% revenue growth we had in Q3 last year.

Although we experienced some minor lumpiness, overall, we believe these are the three key headwinds we saw in Q3, and also for what we are seeing in Q4 in the Americas.

The Americas' third-quarter revenue of $384 million was up 2% and up 3% in constant currency over prior year.

Year to date, revenue is up 15% as reported, and also in constant currency.

The win rates remain strong, as evidenced with the Americas' Q3 data warehouse new customer wins.

It was the second-highest for any quarter dating back to the year 2000.

New customers joining Teradata included Fruit of the Loom, which we use our data warehouse to provide a consolidated view of the supply chain and financial metrics across all of their brands.

Aviva, one of the fastest-growing life insurance companies in the US, which is adding Teradata for predictive analytics.

24/7 Media, which will use Teradata to power its digital forecasting solution.

The Men's Warehouse, which will consolidate its data marks into an integrated data warehouse for improved analytics.

And Monroe Energy, a new oil refining company, that will use Teradata as its foundation for integrated data and analytics.

Upgrades and expansions included Safeway, Symantec, CBS, and a US government law enforcement agency.

In addition, SAS and Teradata teamed to establish an innovation lab with the Centers for Medicare and Medicaid services.

This lab will be used for predictive modeling to understand Medicare program trends and variations, and to test new risk approaches.

Turning to Europe, Middle East, and Africa, revenue of $156 million for the quarter was up 17% from the third quarter of 2011, and up 28% in constant currency.

Year to date, revenue is up 14% as reported, and up 23% in constant currency.

New account wins included one of the largest electronics companies in the world, which will use Teradata to complement their ERP solution to get more granular analytics across the company on consumers, products, finance, HR, and suppliers.

Samsung UK which selected Aprimo to manage its direct-to-consumer marketing campaigns.

Upgrades and expansions from existing customers included DHL, Maersk, Pakistan Telecom Mobile, the Swiss government, and TELUS Amera.

Asia-Pacific and Japan delivered good revenue growth in Q3, with revenue of $107 million, which was up 14% over prior year, and up 16% in constant currency.

New customer wins included PC Mall, the largest computer electronics retailer in China, and is now our first Aprimo customer in China.

SP AusNet, the leading Australia utility, which will use Teradata for smart network management, integrating data from over 600,000 smart meters and network monitors, to help adjust demand and give customers greater ability to manage their own power consumption.

HTC, the smartphone manufacturer, and China Eastern Airlines, which was implement an Enterprise Data Warehouse starting with customer relationship analytics.

Upgrades and expansions in the quarter included Commonwealth Bank of Australia, Standard Chartered Bank of Korea, Bank of Shanghai, Oversea-Chinese Banking Corporation, Westpac Bank in Australia, [Nakit Shimato] in Japan, and Yahoo!

Japan.

Teradata's focus today and going forward is centered on driving value from big data for our customers.

We are doing this in two areas.

One, by providing analytics for all data, big data, traditional data, any type of data.

Two, by providing our customers the ability to leverage all channels to drive value, including central networks, the web, and mobile.

The key is to have all data and all channels working in concert, past, present, and future.

This is critical if corporations or government agencies are going to realize the full potential of the new big data.

In the case of marketing, we are focused on providing an end-to-end solution for our customers and the solution that is available in the cloud, on premise, or both.

Our integrated marketing management solution encompasses marketing operations, analytics for all data, multichannel campaign management, and the execution and delivery of marketing offers for all channels.

We see marketing organizations as the key driver of analytics today, and that they will play an even bigger role in many corporations for the years to come.

They are in the best position to enable corporations to gain competitive advantage from the new big data insights and the new big data channels.

Last week, at our Annual Global Customer Conference, we had over 3,900 attendees, with over 300 sessions and over 200 customer presentations, all focused on analytics and driving business value.

There is no other event like this in the world.

Key Teradata announcements included three centered on big data analytics.

First, we launched our unified data architecture and integrated environment that brings together multiple data technologies.

This foundation leverages the best of breed and complimentary capabilities of Teradata, Aster, and Hadoop.

Second, we demonstrated our Aster big analytics appliance, which is an industry first, bringing together Asters SQL MapReduce capabilities, the Hortonworks Data Platform for Hadoop, and our Aster's analytics portfolio, which now has more than 50 prepackaged analytics built from use cases.

The Aster big analytics appliance is an integrated Hadoop Aster environment supported by Teradata.

It speeds the adoption of big data analytics and at a lower cost by allowing existing employees to use the same SQL BI tools and skill sets that they already use today for traditional data analytics.

This is in contrast to hiring expensive and scarce engineering resources to do analytics on the multi-structured data coming from social media, the web, mobile, call centers, and more, in order to gain insights into customers from these new channels.

Third, we announced significant advancements to our database technology, including new workload management functionality, and new tools to simplify and automate database management, and to expand self-service capabilities for our customers.

It is key that we continue to advance our Active Enterprise Data Warehouse capabilities to help our customers manage the ongoing data explosion.

Data warehouse demand and scale are only going to get more and more challenging as evidenced by Teradata now having 34 customers with petabyte data warehouses.

We also made several integrated marketing management announcements at the conference.

Two that were big data related were, our digital messaging center.

This solution comes from e-Circle and is a comprehensive cloud-based solution for the next generation of digital marketing.

It is a centralized hub where all cross channel digital messaging activity can be managed.

Second, we announced our new social network segmentation, along with tighter inbound and outbound active marketing integration for our multichannel campaign management solution.

Regarding our growth initiatives, we are tracking to reach the higher end of the 35 to 45 range for sales territory additions that we targeted for 2012, and we continue to invest in tools and service offers to help customers extract more value from their data.

Also, to make us more efficient.

However, our hiring has slowed from recent levels, given our lower consulting services growth of 10% as reported, and 13% in constant currency in the quarter.

Turning to guidance, we now expect revenue growth for the full year to be at the lower end of our previous guidance ranges, and we expect earnings per share to be in the middle to the higher end of our previous guidance ranges.

Before I turn the call over to Steve, I want to summarize that I am confident that our competitive position has never been stronger.

Our team continues to execute well and we are well positioned in three growing and strategic markets for the long term.

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

Steve?

Thanks, Mike and good morning everyone.

Teradata generated third-quarter revenue of $647 million, which was up 7% from the third quarter of 2011, up 10% in constant currency.

We view this as a good result, given the uncertainties surrounding the global economic environment.

Revenue for the first nine months of the year was up 14%, 17% in constant currency.

Product revenue of $306 million was up 7% from the third quarter of 2011, up 9% in constant currency.

For the first nine months of the year, product revenue was up 18%, up 21% in constant currency.

In terms of linearity, product revenue in the quarter was more backend loaded in Q3, 2012.

Services revenue of $341 million was up 8%, or up 12% in constant currency from the third quarter of 2011.

Year-to-date services revenue was up 10%, up 13% in constant currency.

Within services revenue for the quarter, consulting services revenue was up 10%, up 13% in constant currency, and maintenance services revenue was up 6%, up 9% in constant currency.

Year to date, consulting services revenue was up 11%, up 14% in constant currency, and maintenance services revenue was up 10%, 12% in constant currency.

During my discussion today, except where otherwise noted, I will be addressing margins and expenses on a non-GAAP basis, excluding stock compensation and special items.

A reconciliation from GAAP to non-GAAP measures identifying these items, is available in our earnings release and also on the investor page of our website.

We had solid operating execution and performance with gross and operating margin improvements, driven by disciplined operating fundamentals.

Gross margin in the third quarter of 2012 improved 150 basis points to 56.9%.

Product gross margin in the third quarter was very strong, 70.3%, up 340 basis points from the 66.9% in the third quarter of 2011.

The second consecutive quarter of the team generating very strong product gross margin.

The improvement was primarily driven by favorable revenue mix in Q3 2012, compared to the product revenue mix in Q3 2011.

As a percentage of total product revenue, our 2000 series appliance revenue in Q3 2012 was generally in the midpoint of the 10% to 15% expected range we've discussed previously.

Services gross margin in the quarter was a solid 45%, slightly higher than the 44.9% in Q3 2011.

Turning to our operating expense structure, SG&A expense of $163 million increased $9 million or 6% from Q3 2011, with the majority of the increase being in the selling expense.

R&D, research and development in the quarter was $40 million, versus $39 million in the third quarter 2011.

Year to date, R&D expense was $123 million, up 13% versus the prior period.

As we mentioned before, we invest more in our R&D activity than what is reported on the R&D operating expense line on our income statement.

Total R&D spend for the third quarter, which includes R&D expense plus the additions to capitalized software development cost from the cash flow statement, less capitalization of internally developed software, was approximately $60 million, or approximately 20% of our product revenue.

This compared to approximately $55 million in Q3 2011.

As a reminder, these capitalized costs, when amortized, are then added back to the income statement as product cost of revenue, which reduces product gross margin.

Year to date, total R&D spend was $178 million, or approximately 19% of our product revenue, versus $161 million last year.

As a result of all these items, operating margin for the quarter was 25.6%, a 200 basis point increase over the 23.6% generated Q3 2011.

The contribution from higher revenue, and favorable revenue mix offset the increased operating investments.

Year to date, operating margin improvement was even better, increasing 240 basis points or 26% for the first nine months of 2012, versus 23.6% for the same period last year.

On a GAAP basis, our effective tax rate in Q3 2012 was 27.3%, versus 28.1% in Q3 2011.

Our non-GAAP effective tax rate for the third quarter was 28.3%, compared to 28.9% for the same period 2011.

Our year-to-date 2012 effective tax rate did not reflect a tax benefit related to the Federal R&D tax credit due to its current expiration.

We continue to expect our full-year GAAP effective tax rate to be approximately 27% and expect our non-GAAP effective tax rate to approximately 28% or 1 percentage point higher than the associated GAAP effective tax rate.

As a majority of the non-GAAP pretax items including stock based compensation expense as well as the special items, are weighted more to the US.

The effective tax rate guidance for the full year 2012, assumes that the Federal R&D tax credit, which expired as of December 31, 2011, will be retroactively reinstated for the full year in Q4 of 2012.

If the credit is not reinstated by the end of the year, our tax expense will be negatively impacted by approximately $4 million in the fourth quarter of 2012.

In terms of earnings per share, our Q3 GAAP EPS was $0.60 versus $0.51 in Q3 2011.

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

During the quarter, stock based compensation expense was approximately $0.04 per share.

We expect stock based compensation expense to be approximately $0.16 per share for the full year 2012.

Excluding the impact of stock based compensation, and other special items, which equated to $0.09 in Q3, our non-GAAP EPS was $0.69 in Q3 2012, compared to $0.59 in Q3 2011, for a year-over-year increase of 17%.

Turning to cash flow.

Net cash provided by operating activities was $107 million in Q3 2012, versus $102 million in the third quarter of 2011.

After $40 million of capital expenditures, which include additions to capitalized software development costs and expenditures for property and equipment, versus $27 million at the third quarter 2011, we generated $67 million of free cash flow, versus $75 million free cash flow generated Q3 of 2011.

The decline in free cash flow was primarily due to increased investments in property and equipment and capitalized software development expenses in Q3 2012, versus the same period last year.

On a year-to-date basis, free cash flow was $342 million, increasing $42 million year to year.

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

Turning to the balance sheet.

At the end of the third quarter, we had $909 million of cash an $88 million increase from June 30, 2012.

Approximately 50% of our cash balance is available in the US, with the remainder being held offshore.

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

With respect to accounts receivable, day sales outstanding or DSO was 74 days at September 30, 2012, relatively consistent with June 30, 2012 and September 30, 2011.

Accounts receivable increased 19% compared to revenue increase of 7%.

The primary driver of the increase in accounts receivable was the timing of the product revenue transactions during Q3 2012, which were more backend loaded when compared to Q3 2011.

With respect to deferred revenue, with the recent fluctuations in our deferred revenue, particularly as it relates to product transactions, which as I said in the past, can be inconsistent or lumpy quarter over quarter, we will be presenting the short-term and the long-term deferred revenue balances on our balance sheet.

My discussion that follows will address total deferred revenue.

Total deferred revenue of $382 million, as of September 30, 2012 was down $52 million from the June 30, 2012, and up $7 million from September 30, 2011.

Deferred maintenance and subscription revenue continues to increase at a rate consistent with our expectations.

As I said in the past, deferred revenue associated with maintenance and subscriptions generally account for greater than 70% of the deferred revenue balance.

That said, over the past to 16 quarter ends, deferred product transaction revenue has ranged from $70 million to $100 million.

As of September 30, 2012, deferred revenue related to product transactions was in this historical range.

The movement in product transaction deferred revenue is a direct reflection of the nature of our business model and our revenue recognition practices, and does not reflect changes in backlog or expectations for future periods.

With respect to currency movement.

To provide further transparency around currency movement and the potential impact on our future revenue, we provide a schedule on our website detailing how currency's impacted the third quarter 2012.

And how this movement is expected to impact our year-over-year revenue comparisons for the remainder of 2012.

Assuming the currency exchange rates as of the end of October and assuming the currency rates do not change throughout the remainder of 2012, we expect a 2-point headwind from currency for the full year.

We expect a 1-point headwind on our Q4 revenue comparison.

Turning to guidance for the full year 2012 as it relates to revenue.

As a result of the impact of the macroeconomic environment is having on overall business activity around the world, and more specifically on CapEx expenditures, we now expect our growth in our reported revenue for the year to be at the low end of our prior guidance of 12% to 14%.

On a constant currency basis, we now expect 2012 revenue at the low end of our prior guidance range of 14% to 16%.

As it relates to EPS, we expect EPS to be in the middle to the high end of our previous guidance range of $2.34 to $2.44.

This GAAP EPS is expected to include approximately the following-- $0.16 a share of stock based compensation expense; $0.01 a share of estimated purchase accounting adjustments related to our previous acquisitions; $0.14 a share of amortization of acquired intangible assets; and $0.07 a share of transaction and integration costs.

Excluding these nonoperational items, or special items, we expect our non-GAAP EPS to be in the middle to the high end of our prior guidance range of $2.72 to $2.82 per share for the full year.

In closing, we are pleased with our year-to-date results.

We continue to deliver solid performance.

Importantly, we realized growth across all of our three geographical operating reporting regions, despite continued uncertainty in the worldwide economy.

We have done this by consistently investing in our solutions, services, and our go-to-market strategy.

We will continue to be disciplined in managing our operations and capital.

Teradata's unique combination of technology, strength, and differentiation, consulting services excellence, and our global capability, should enable us to deliver long-term, sustainable increases in revenue, earnings, and cash flow.

Many of you attended our customers user group conference last week, and experienced first hand the strong and positive relationships that exist between Teradata, our customers, and our partners.

Many of you have commented that our customers repeatedly said that Teradata has true technology leadership in terms of integrating data from complex analytics, both structured- and multi-structured data, scalability, concurrency, mixed workloads, and workload management, as well as overall customer support.

However, in the short term, the global uncertainty may make it a little more difficult for IT cap investments to be approved.

With that, Operator, we are ready to take questions.

(Operator Instructions)

Wamsi Mohan, BOA Merrill Lynch.

Mike, you told us last quarter you were expecting to be at the low end of the revenue guide in the back half of 9% to 13%, which is where you came in.

But you also alluded to three reasons today for some of the weakness in the Americas.

Sounds like two of those both belt tightening and tougher comps are transitory.

I was curious about your comment on the historical strong product growth that's giving the user base some more flexibility in delaying purchases.

So where do you think we are with capacity utilization?

Are we talking about a quarter or two of potential excess capacity?

Or is this something that could pressure growth in 2013?

Thanks.

Well, I think we need to take a look at the strong product revenue growth we've had the past 2.5 years in conjunction with the belt tightening that we are seeing.

So what happens is, is as IT budgets and our customers in the user base get a little bit tighter with how they are spending money right now, the added capacity that we have put out there over the past 2.5 years gives the customers more flexibility than they had, say, a year ago or two years ago.

So they are able to optimize and figure out how to use the capacity that they do have, because there's more of it for different functions.

So there might be some uses that are more strategic than other uses.

There might be different priorities they can give to different users and different types of applications and so forth.

It just gives them a little more flexibility to hold off and to add capacity at a later date.

In terms of your question regarding so how long might we see this, it's difficult to tell at this juncture.

Once again, it's related to the belt tightening.

So if we don't have belt tightening, like we've run into right now, the impact of the added capacity we've put out there is minimized.

If we continue to have belt tightening, then this will linger on for a while.

I think we will be in a better position to answer that second part of the question when we get to the next earnings call early next year.

Thanks, Mike.

Katy Huberty, Morgan Stanley.

Just a follow-up on the first question.

Is the delay in spending that you are seeing entirely capacity additions in the installed base?

Or are you also seeing new customers delaying new analytics projects.

Then if you could comment on I think you mentioned that some of the China deals have closed.

Are you seeing the new China and Europe pipelines converting at the same rates that you expected, or has that also slowed down?

Thank you.

First, let me make sure I do a clarification.

Everything that I just said in answer to Wamsi's question is related, Katy, specifically to the Americas.

So if we stay on the Americas as it relates to your question, regarding outside the user base, and the impacts of some of the belt tightening that we are seeing, in the Americas, we did have our second-best new account win quarter of any quarter that we've had in the last 12 years.

So we've been able to actually accelerate and step up our new customer wins in the Americas in 2011, and also in 2012, and actually increased it over the first half of this year, Q1 and Q2 and Q3.

So that piece is going pretty well.

There is an impact as it relates to new customer wins, that yes, the decisions get extended a little bit longer.

But we've had a pipeline of new customers in play that we are always working from and will continue to materialize.

Also when there's some belt tightening, the size of the deals may be smaller than they would be when we're having -- for the new customer wins, that is -- they might be smaller than when we are in a more but robust-type economic environment.

Katy, I'm sorry, as it relates to EMEA and APJ --

Are the China and Europe deals that you talked about last quarter converting at the same pace that you expected?

Okay.

Thank you.

On China, what we said in Q1 and Q2 is we ran into some pretty big delays on some pretty big opportunities, that we expected them to close in the latter part of the second half.

China has come back strong.

Some of these large opportunities closed in Q3.

There's more coming in Q4.

The amount of growth in China was huge in the third quarter.

We are anticipating similar in Q4.

Regarding EMEA, we are seeing very little change in terms of length of sales cycles and all that.

We are just out running the impacts of the macro.

In Europe -- in Europe, Middle East and Africa, our results actually could be stronger because we are getting hit by the macro in some of the countries in Western Europe where we've had revenue declines this year.

So basically EMEA is running -- continues to run strong.

We expect another really strong quarter from EMEA in Q4.

APJ is on track to have a good year for growth.

Bhavan Suri, William Blair and Company.

Just a question on the Americas deals and the challenging environment.

Going into the quarter, you'd suggested that because of the summer break in Europe, you could see some of that lead to the sequential decline in Q3 from Q2.

But it appears that is obviously the Americas.

What are the certain verticals that you saw the weakness in?

Did you see it delay decision making?

Or did deals just get pushed out and they're still in the pipeline?

In regards to the Americas, it did come in less than what we expected.

So maybe like $10 million or $20 million less than what we are were looking at in the Americas.

EMEA and APJ actually came in higher.

But this is somewhat normal in most quarters.

We will have some regions come in higher, some regions lower.

We can have some large transactions that get hung up.

In the case of the Americas, we did have one large opportunity, a little over $10 million that moved out of the quarter and moved into 2013.

As it looks by vertical, looking at one quarter, it's hard to establish a trend from it.

We did have very strong results in manufacturing, but I can't tie that to anything to do with the macro or anything else like that.

There were other industries where we had declines in the Americas in the third quarter.

Telecommunications industry was down, financial services was up a little.

So in the quarter, I can't pin anything on it by vertical.

Okay.

And then just one follow-up to Wamsi's and Katy's question.

When you look at the existing base and you said they've got the opportunity to delay some of the purchases, can you give us a sense on average, what is the utilization at existing customers of their existing Teradata environment?

How much headroom do they have, if you were to think about capacity from a flexibility perspective?

So in our user base, we have a meaningful integrated enterprise data warehouse, the way that system works is you are consolidating thousands of users and thousands of applications and you are executing thousands of queries.

It's a wonderful thing, because the computing assets get utilized anywhere from 90% to 100% across our user base.

So our Enterprise Data Warehouses provide private cloud-like benefits to our customers, because most corporations around the world, the computing assets are utilized 20% to 25% of the time.

Now as it relates to this additional capacity that's been added and the flexibility, the customers will still find ways to use whatever capacity it is and optimize it to 90% or 100%.

But they can scale back and lower the priorities on some types of work that they are doing and some types of workloads, and just use what they have, there's more of it more efficiently.

I appreciate that's not exactly a clear answer, but if a customer has capacity there, they are going to use it one way or another.

But some of that capacity is being used at times is more for luxury than mission critical.

Great.

That's helpful.

Thanks, Mike.

(Operator Instructions)

Raimo Lenschow, Barclays.

The question I have was around how you managed the P&L around the uncertainties that you have at the moment.

Obviously, you had gross margin benefit this quarter but you also fall low as compared to what I had modeled.

Given the uncertainty that we have going forward, how do you think about managing the P&L and hence managing your earnings?

Thank you.

Raimo, what we look at is really the focus on the execution, the operational execution.

I mean, Q3 you see that in the OpEx expenses.

But we are continuing to invest in this new sales territories.

As Mike said, we continue to be at the higher end of the 35% to 45% new sales territories.

We have lowered hiring on the PS side, PO as Mike said in the prepared remarks, were reflective of that 10% growth.

So again that emphasis or focus on execution is still there and being closely looked at and monitored.

Jesse Hulsing, Pacific Crest Securities.

You mentioned a number of new wins in the quarter and a great quarter from a new add perspective in the Americas.

What's driving the increased customer addition velocity in what otherwise was a pretty tough environment?

As a follow-up, what proportion of those customers are adopting the Hybrid 6690 Data Warehouse?

Thanks.

Well, we've been expanding our market coverage in the US and around the world for a number of years now.

We have gone deeper with more solutions, more partners, and everything else.

We've also expanded into the midmarket in the Americas.

I think we have very good momentum, as well as awareness in the United States.

If any of you that were at our customer conference last week, you know it's pretty evident.

We have a number of people that work in one company that's a Teradata user and goes to another company.

It just goes on and on and on.

As relates to how many are adopting the 6690, versus the 2000 appliance, was that the question?

Or 6690 versus the 6000?

Using the 6000 series in general, right?

Yes.

The hybrid versus the homogenous, was the question.

So for the SSD capability?

For the hybrid -- for the new customers.

Generally speaking, we are getting new customers that are going with EDW class, yes, with the 6690.

Thanks.

Matt Summerville, KeyBanc.

Just a couple quick things.

Mike, I want to clarify something.

Did you mention earlier, I think it was maybe to Katy's questions, that your Western European business has been down all year?

If so, how much of the EMEA region now is Western Europe, if all the growth is being driven by say, Eastern Europe and the Middle East?

Thanks, Matt.

I want to make sure I clarify this.

We have a couple countries in Western Europe that have declines in revenue year to date.

So in particular, we have countries like Spain, which had huge growth in 2011, they are down in 2012.

France is down a little bit.

But generally speaking, Western Europe, collectively has grown this year.

I apologize for misunderstanding.

It's okay.

I want to make sure we get it clear on the call.

Because, overall in Western Europe, we are having very good growth.

But it could be better, except for we are getting hit a little bit with the macro in some of these countries.

Then Mike or Steve, could you comment on what your preliminary thoughts are as far as territory additions in 2013?

Thank you.

As it stands right now, we won't be adding territories in 2013.

To what degree, it's less about the macro.

It's more about -- we have added a lot of additional solutions and capabilities and innovations inside of Teradata, that we are trying to deploy around the world.

So we may have to get some of the selling expense and investments into subject matter experts on all of these additional things, such as our integrated marketing management, digital marketing, as well as Aster big data analytics is moving all over the world right now.

So we may need to shift some of that investment into sales specialists from territories.

But generally speaking, the number of territories -- we have tremendous opportunity to add more territories, and we will continue to do it.

Greg Dunham, Goldman Sachs.

Quickly on the product gross margins side.

That was a very standout performance this quarter.

How should we think about that going forward in terms of the mix of product revenues?

Would you expect that to change?

Or is this a trend that should continue?

Thank you.

Greg, this is Steve.

It will fluctuate, again, quarter by quarter.

We've had good execution Q2, Q3.

I'm not saying it's a trend upwards, there will be variability in that product revenue.

In 2012, we had a couple things that I talked about earlier in the year.

Headwinds from the drive pricing in Taiwan and also FAS 86 amortization.

Those things in 2012 have come in a little better than I would've expected, again, with our discipline and execution on the price -- on the cost purchasing side.

As disk drives came in and held the price pretty steady compared to some of the upside risk we were looking at.

Then FAS 86 amortization came in less than I was looking at in 2012, primarily due to timing of the releases.

So I will have the FAS 86 amortization headwind in 2013 that we'll address.

But again, that product gross margin will still stay somewhat fluctuating.

Brent Thill, UBS.

EMEA has been the standout.

I'm just curious if you feel EMEA is exhibiting the same capacity as is you are seeing, I guess, in the US Mike, I guess you alluded to the capacity was added and you are seeing a slowdown there.

Is there any risk you are seeing in anything the customers are doing in EMEA that they may choose to follow the same pathway that the US did?

Or is it just a completely different dynamic that you are seeing on the European side?

The different dynamic between EMEA and the Americas, and in particular the US, is the amount of growth and the amount of product revenue growth over the past 2.5 years.

The Americas has been averaging 20% plus revenue growth on average each quarter for the past 10 quarters.

The product revenue has been higher than that.

So the magnitude of product going into the customer user base in the Americas has been higher than in EMEA.

So EMEA has also been dealing with a, how should I say this, a steady state of uncertainty and we continued to produce well right through that.

So in the case of the Americas, we've run into this little bit of belt tightening, which is different than what we've seen previously.

Then we have the added dimension of the added capacity that we've put in there.

The other thing that happens is, with this belt tightening, and with the added capacity, the average deal size is smaller in the Americas.

The amount of large deals is quite a bit lower in Q3 in the Americas and Q4.

In other words, the second half versus what we saw in the first half of this year and versus the number of large deals that we saw in the second half of 2011.

So in the Americas, we've seen a reduction to a degree in the number of large opportunities and more smaller opportunities.

We are not seeing that in EMEA.

That's another different dimension.

Ed Maguire, CLSA.

You discussed in that live investment in marketing and certain domain-specific solutions.

Could you comment on where you are seeing opportunities tracking ahead of your expectations and what may be tracking below your expectations?

I was struck by the commentary around Smart Grid and was interested if there were any other newer areas that seem to be tracking really well.

Thank you.

This is Darryl.

On the marketing front we are really going to market with three key pillars that we are going after; marketing operations, campaign management, and our digital messaging area.

What we are starting to see, is a lot of attention around how do they get the marketing spend under control with marketing operations and a lot more investment in trying to understand the payback on the digital marketing front of companies.

So those are definitely the two big areas we are growing in.

Edward Parker, Lazard.

Mike, just following up on the macro issues you're seeing in the Americas, could you maybe remind us how your business has reacted historically to slowing economic growth?

Especially since most of the projects you are involved in, relatively higher priority, higher ROI type of projects.

Given growing interest in analytics is a secular trend, do you think your business may be more resilient than through previous cycles?

Thanks.

I think, if you look back historically when we had a downturn in 2001, '02, and '03, Teradata's performance relative to the IT industry was pretty good.

However, pretty good is a relative term.

If we had a revenue decline in 2003 and we were up a little bit in 2002.

If you look at the downturn in 2008 and 2009, once again, relatively speaking, we did pretty good relative to the rest of the IT industry.

However, we did decline in 2009, 3% as reported, 1% in constant currency.

So we are not totally -- we are not totally immune from a big downturn.

You heard it before.

Customers tend to prioritize, or they have demonstrated, they'll prioritize analytics, analytics, analytics, in good times and bad.

I think that holds true for us as well.

Keith Bachman, Bank of Montreal.

I'd like to ask about the competitive landscape.

Are you getting less share of wallet?

To flesh that out a little more, at this year's customer event, your customer event, rather, more customers that we talked to suggested Hadoop and running workloads on commodity hardware.

I realize that Aster participates in that as well.

But running Hadoop on commodity hardware.

Hadoop World also occurred that same week and we talked to customers and vendors there.

Again, Hadoop seems to be getting a little more traction than we had anticipated.

When we look at your slide deck at present versus the past few years, the EDW was the center of the universe.

Now it seems that the EDW is an important note in the business analytics network.

But the broader question, as you think about the macro slowdown, is there some share of wallet issue here, specifically for Hadoop, but perhaps even touching on Oracle's latest offering.

Thank you.

Let me -- yes, in terms of wallet share, we've increased our wallet share significantly in our customer base.

So if you take a look at what we've done over the past three or four years, with our workload-specific platform family, is -- is we've taken on more of the customers' enterprise with data warehouse platforms that are optimized for specific workloads and captured more wallet share than we have previously.

I think that's reflected in the strong revenue growth we've had over the past two years.

So the types of workload-specific platforms that we've come to market with have not cannibalized our Enterprise Data Warehouse.

Our product revenue growth for the Enterprise Data Warehouse has the 6000 class machine, has been very, very high this year as it was last year.

Right?

So Teradata went from advocating an architecture where everything should be integrated into an Enterprise Data Warehouse in a corporation, to one where we advocate integrating all the data that's relevant to the business, and think of it as an integrated, Active Data Warehouse for all the business to work from and have a single view of the customer and a single version of truth and everything else.

With the emergence of Hadoop, we see this as a best-in-class environment and at a low-cost, as you mentioned, with the commodity hardware and open-source type software, to ingest the huge amounts of data that are coming from the new big data sources.

Also to transform and store that data.

So this is a net new opportunity and a net new technology for our customers to adopt.

We advocate that they do adopt it.

But then the question gets to, how do you add value or get value out of all this massive multi-structured, nonrelational types of data.

That's where Aster comes into play.

Doing it with SQL types of BI tools and the skill sets that most workers have in the mainstream market.

Because to do the analytics with Hadoop takes very expensive and scarce engineering resources.

Derrick Wood, Susquehanna.

You guys had a pretty tough comp in the Americas.

I'm just curious given this new environment, what you generally think the Americas business should be, what the general growth rates are going forward?

Then hoping you can give a little color on what the expectations are in terms of seasonal growth on the product revenue side going into Q4?

Thanks.

As it relates to Q4 in the Americas, we are seeing a similar type of result that we saw in Q3, Derrick.

Regarding the prior-year comparables, it is a bit of a challenge, but it's not the big challenge.

The reality is, when the Americas grew 28% last year in Q3, it compounds it a little bit.

When we get -- when we get further out into 2013, what's going to happen is the prior-year comparables become a good thing for the Americas as we get to Q3 and Q4.

So in terms of product cycles as it relates to the Americas, mathematically, the back half of 2013 become a great opportunity for us.

Shorter term, as we get into the first half of 2013, the prior-year comparables are bit more of a challenge and we will just know a lot more when we get to our next earnings call.

And once again, everything I just said is specific to the Americas.

It's a completely different story we've got going on in EMEA as well as APJ.

Aaron Schwartz, Jefferies and Company.

Just a quick question on the new customer growth.

Given the different dynamics with your broader product portfolio, and maybe some more season products there, is there any different view on the lifetime and the revenue ramp of those new customers coming on, different than several years ago?

Secondly, I don't know if you can qualitatively talk or directionally talk, I guess, about the deferred product revenue?

Was it up or down or flat from Q2 levels?

Thanks.

On the new customers and the amount of revenue that we get from them, it's really not so much a product type of thing.

So whether they are starting with a 2000 class data warehouse or they are starting with the 6000 class.

The ones that are going down in EDW path will integrate the data, use our logical data model and get similar kinds of business benefit.

It's really more around the size of the customer and where they take it from there.

We've already had five or six customers that had the 2000 class EDW has become larger and now they've migrated to the 6000.

So generally speaking, the value that we get from EDW -- from new customers is similar.

Aaron, with respect to the deferred revenue, on the product side which includes consulting services and the products associated with that, as I said, we are in that historical range of $70 million to $100 million at quarter end.

Although, on the lower end of that range in Q3 or up to 9/30.

So again, maintenance and subs underneath that growing what we expected.

On the product side, which includes related or professional services, consulting services, with that, we are on the lower end of that range.

But still nothing unusual in that balance.

In closing, I'd like to say that we are extremely confident in our position at Teradata for the longer term.

Shorter term, we've run into a bit of a challenge here in the Americas.

I'm very confident that longer term, we will be growing and performing as well as we have in the past.

So I'd like to thank you all for joining us here this morning.

I hope you all have a good day.

Thanks.

Thank you for participating in the third-quarter 2012 Teradata earnings conference call.

This concludes the conference for today.

You may all disconnect at this time.