John DiFucci - JP Morgan Matt Summerville - KeyBanc Nabil Elsheshai - Pacific Crest Securities Greg Holter - Great Lakes Review

Good morning ladies and gentlemen and welcome to the Teradata Q4 2008 Earnings Release Conference Call. At this time all participants are in a listen only mode, later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Gregg Swearingen, Mr. Swearingen, you may begin.

Good morning and thanks for joining us for our 2008 fourth quarter earnings conference call. Mike Koehler, Teradata's CEO, will lead our discussions, highlighting Teradata's fourth quarter results. After Mike's remarks, Steve Scheppmann, Teradata's Chief Financial Officer, will provide more details relating to our fourth quarter and full year 2008 performance. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially. These risk factors are described in Teradata's 10-K and other filings with the SEC. On today's call, we will also be discussing certain non-GAAP financial information, such as free cash flow and results excluding the impact of certain non-recurring items. A reconciliation of our reported GAAP EPS to our non-GAAP EPS as well as forecasted non-GAAP results and other information concerning these measures, are included in our earnings release and on the investor page of Teradata's website at www.teradata.com. A replay of this conference call will also be available later today on teradata.com. 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. Now I will turn the call over to Mike.

Thanks, Gregg and good morning everyone. Teradata finished the year on a strong note with revenues up 6% in the fourth quarter and up 9% in constant currency. Overall, we had a successful and very productive year in 2008. We extended our technology lead, launched a new innovative family of purpose built data warehouse platforms and added sales territories to broaden our market reach. Operating margins were up slightly in the quarter and earnings per share grew 15% on a non-GAAP basis in the quarter and also for the full year. Looking at the results by region, the Americas grew 13% in the fourth quarter following a slow start in 2008. As anticipated, opportunities that have been deferred or delayed earlier in the year began closing in Q3 and to a much larger degree in Q4. The Americas had significant increases in new account wins which included International Hotel Group or IHG the parent company of InterContinental Holiday Inn and Crowne Plaza hotel brands; Navistar International, a leading manufacture of medium and heavy duty trucks; Rogers Communications, the second largest provider of internet cable and home phone services in Canada; a U.S. Fortune 500 BioTech company; and Lan Cargo, one of Latin America's leading air freight carriers. In the Americas, we also saw broad customer upgrade activity including Del and three of the largest technology manufactures in the world; a number of the top ten banks and financial services companies; three of the leading telecos including AT&T; insurers from the Fortune 500, including Guardian Life Insurance and Aekyung Group; the centers for Medicare and Medicaid services; and [Pan Azucar], the second largest retailer in Brazil. Overall, just excellent quarter for the Americas. EMEA also saw growth in the quarter with revenues up 2% in constant currency. Some significant new account…

Thanks Mike and good morning everyone. Customers gravitate towards working with financially stable and well positioned partners and our Q4 2008 results clearly reflect that movement. Teradata's Q4 2008 revenue of $493 million was up 6% from the fourth quarter of 2007 or 9% in constant currency. Our Q4 revenue increase was driven by strong performance in the Americas region where revenues were up 13%. From a revenue segmentation perspective, product revenue increased 4% to $250 million in the fourth quarter from the same period in 2007. For the full year, product revenue declined 4% to $849 million. Services revenue increased 8% to $243 million in the fourth quarter of 2008. For the full year services revenue increased 12% to $913 million. The increase in services revenue for the full year was driven by a 17% increase in the maintenance and services. Our annuity revenue stream consisting of maintenance and subscription revenue and just as a reminder, subscription revenue is recorded as component of our product revenue, accounts for more than 30% of our total revenue. This is a strong foundation for the consistency in our recurring revenue model. Professional installation related services, which is the other component of our services business increased 5% in the quarter and 8% for the year. We saw our services revenue increase in all three regions in the quarter and the year. Before I get into this discussion of our margins and how they compared to 2007, I want to remind everyone of the non-recurring items we had in 2007 and 2008, so that we can reconcile to and then speak to the non-GAAP numbers. In the fourth quarter of 2007, we had a $2 million spin-off related cost and a $6 million beneficial tax adjustment related to the spin-off. For the full year…

Thank you (Operator Instructions) Our first question comes from John DiFucci from JP Morgan. Please go ahead.

Thank you. Mike, I was wondering if you could comment a little more on your comments about the Americas, it looks like things will go well this quarter, but you said the mature pipeline was down going forward. I was wondering if you could provide any more commentary around that, either something quantitative or even qualitative around those comments?

John, what I was referring to, is in 2008 we had deferrals and delays that we were experiencing from the first quarter to second quarter to the third quarter. And as a result, the amount of mature opportunities in the pipeline, in other words, opportunities that we are looking to close, we closed out a significant number of them in the fourth quarter. So, the overall activity in the Americas is good as we entered the first quarter, but the amount of opportunities that are mature or in the closing stages was reduced by the high number of opportunities that we closed in the fourth quarter.

Okay, so it sounds like in the fourth quarter, it sounded like you had a lot of opportunities that were mature more -- but was it more than normal and at this point, recognize there is a lot of uncertainty out there for everyone, how does it look today versus what would be called I guess normal in past other than last quarter?

Historically, the seasonality of our business, you can see it in the past results, the first quarter historically overall for Teradata, seasonality of the first quarter, it's a lower quarter, okay. That said, the visibility or lack of that we have got at this time, we are not giving guidance for the year. The opportunity that we have and what we are focused on doing is accelerating the maturity of the opportunities that are in the pipeline. So the overall activities there, it's the acceleration of the opportunities that we have in the activity and to mature them as soon as possible.

Okay, thanks and a quick question for Steve, on deferred revenue, you had a nice up tick in this quarter after declining in the last two quarters. And I was just wondering if you could comment on that at all, is there anything we should be reading into that?

No John, again that's coming into the timing of some of our annual maintenance renewals. And if you go back, look at the third to fourth quarter last year, we had an up tick in there approximately $10 million and this up tick was somewhat similar and nothing unusual in that increase.

Okay thanks guys.

Our next question comes from Matt Summerville from KeyBanc. Please go ahead.

Couple of question, first I want to talk about the sales additions planned for '09. How many territories are you contemplating adding if your business were to deteriorate beyond your comfort zone, I would suppose. How much flexibility is there to cut that number meaningfully. And on the same topic, how does the payback now on territory creation differ than several years ago when you did not have as broad of a product offering that you have today?

We added over 40 sales territories in 2008. Our plan is to exit 2009 with 60 additional sales territories. The pace at which we are adding the sales territories, we will slow down to a degree but the opportunity for us when you look at this thing overall is to broaden our market reach and balancing the long-term objectives of the company to get after sustained long-term revenue growth. Now in the existing territories, we are continually optimizing that and continually looking at the resource alignment with the productivity yields and the overall headcount we have in the existing territories. There is also opportunities we have attritioned historically and how we backfill and to what degree and how rapidly we do that. So where simultaneously we want to broaden the number of territories we have, but at the same time we want to optimize the current expense that is in the existing sales territories. And that's an opportunity that we have ongoing, not just now but ongoing that we have got it turn the heat up on. As far as the yield goes, if you look at the territories we have added, some commentary, 10 of them are in new countries or emerging markets for us like in Eastern Europe and parts of Asia. And those types of territories we get a pretty quick yield from and we did yield revenue in 2008 and we will continue to yield revenue in 2009. Some of the other new territories that we are adding in three of our largest countries is to go after mid-market opportunities. And in mid-market opportunities, we are focused on shorter sales cycles and greater focus with our product platform family the expanded family with the appliances and so forth. And we have come out with packages and bundles beyond the appliance itself that includes professional services, applications and it's a solution for a particular customer in a particular industry segment. And we have also added to that with lead generation and telemarketing and everything else going into the mid-market. So, as I look at the return on the sales territories, there are some pretty good opportunities in things we are doing in particular in the emerging markets and in the mid-markets, where we are going after shorter sales cycles and going after quicker ROIs or quicker revenue. And then in the more traditional territories which encompass some of the large major Fortune 1000 companies, Fortune 3000, we are driving to look at the highest fastest ROI opportunities specifically to an industry segment, to our customer set. And at the most significant costs take out opportunities, once again to increase the productivity cycle in these territory additions.

In terms of the broadened product line, how much of your revenue now would you say is being derived from the products, the new products you launched in 2008, and then just another question in terms of the pace of deals thus far in the year, has the closure rate you have experienced up till now materially different than the closure rate you have experienced on a year-to-date basis looking back several years?

Regarding the revenues, Matt, on the new product platform family appliances. It's not huge, it's not significant. To give you a little bit of color, we have sold over 20 systems, specifically the 2550 and the 1550. The 1550 which is the Extreme Data Warehouse appliance was only announced in October. And we have had a number of wins as I mentioned in our prepared remarks. And we are encouraged by that because it has such, it solves such a large data problem at such a low price point and the activity we are seeing there is high, and the close rates are fairly quick when you look at the sales cycles, we have for that. But overall, I'm pretty encouraged by the number of systems we have sold. The second question you had regarding our close rates. I would say when you look at new account opportunities, we actually had a pretty good increase in new account wins in the second half of the year. I do not see much of a change in the sales cycles in new accounts. We did have a number of mature opportunities with new accounts that we are growing in the pipeline. They closed out in the third and fourth quarters, but overall the sales cycles not much difference with new customers. The bigger challenge for us is so much revenue comes in our user base, it's up to 90% now, and that's the challenge. So, the deferrals and any deferrals, delays and so forth that we experienced in the user base, that's extending the sales cycles and that has bigger impact on the business.

Okay just two more questions. You provided Mike, in your prepared remarks in general high level color on what you are seeing across the three geographical regions. I was wondering if you could go one layer deeper and talk about kind of what you highlighted in the context of the major verticals that you serve. And then the other question I have is more around pricing, if you are seeing any additional price competitiveness in the market just given what's happening in the macro environment?

Well we look at it by verticals as far as the activity we are seeing today that I gave commentary on geographically. Let me go to the markets where we are seeing some softness, so in Japan clearly softness in manufacturing with the large auto manufacturers and tech manufacturers, softness in retail in Japan. And when you turn to the US there as we reported on the industry segments for 2008, softness in the retail. Globally our activity in the financial services sector has been good. I would say globally when you take a look at it in that view; by industry manufacturing we are seeing some softness. Retail some softness, and yet to a much lesser degree, financial activity okay and telecommunications.

And than my question on pricing?

On pricing, there has been more pricing pressure overall for sure, any company, every company in the world is looking to reduce OpEx, CapEx everything else. But I would say the previous pricing pressure is more related to new account opportunities when you get some competitors in there that it can be driven by that kind of behavior more or so then the overall environment with the customers. I would say the bigger impact on pricing as it relates to our business is less in the margin rates, the product gross margin rates. But it's more in the volume. The less dollars being spent, that pressure making opportunities smaller or delaying opportunities in hitting the volume -- it is the bigger pressure that shows up on our business results than the actual margin rates.

Thanks, Mike.

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

Hi, guys. Can you hear me?

Sure, we can.

Sure.

I am on a unusual phone so. First real quick, how many sales teams did you guys end the year with? I think I missed that.

We added over 40, Nabil.

Okay. And then, on the business in Q4, I guess the upside, did you get a sense, not really budget flush, but people were kind of stocking up on capacity and if you are scrolling away additional capabilities in anticipation of lower budgets in '09 and did that potentially drive some of the strength in Q4?

Nabil it's Mike; regarding the territories, the starting point as we entered 2008, it was 385. And we are up now, up over 425.

Great, thank you?

Yeah on the territories, regarding, as you pointed budget flush in Q4. I believe we saw some of that, there was some of that that contributed to the results. Like I said before, the amount of deferrals and delays throughout 2008, eventually they come to fruition and the budget flushing of people with some uncertainty over budgets in 2009, spending in 2008, there was some of that they contributed to it.

And then if you look at the 2550 and the 1550, are those deals that you talked about, I know there is not a ton of them yet, but are you finding those opportunities primarily in your installed base at this point or are they new customer opportunities, getting your foot in the door?

They are in both Nabil. I will say though the number of new account engagements and competitive engagements outside the user base picked up, since we have released the family. Some of those engagements result in the sale of an enterprise data warehouse or the 5550, but since we have re-positioned ourselves in the market with the platform family that addresses a multitude of different customers, the number of new engagements we have has increased. And simultaneously in our user base there clearly has been opportunities that we are able to go address that normally sound that we would not have addressed previously.

Okay and then a follow-up on the competitive front, have you guys run into the new Oracle machine, and if so, any commentary about it?

Not yet, I'm aware of one or two customers that are looking at it or working with it.

Okay and last question on the partnership front. I think you mentioned a large deal tied to SAS. From a revenue driver perspective, I think you had set the expectation that that would take a while. Can you give us any commentary on how the pipeline is building with regards to that partnership, and do you see that becoming a significant driver in '09?

Overall activity with SAS has been increasing. The amount of wins we had to-date partnering and going to customers with a joint solution has increased significantly, and it's resulted in wins that we have had together. It's a little bit subjective to quantify or qualify exactly how much of that was due precisely to SAS or not being partnered with SAS. But overall it just has resulted in a lot of joint wins together and has broadened our activity. We continue to work together, co-development, getting more of SAS's offerings running in database. We have a road map for executing to and as the number of analytical applications and other things run native on Teradata, the amount of revenue and the partnership will just be that much better.

Thank you very much.

Thank you. Our next question comes from Greg Holter from Great Lakes Review, please go ahead.

Yes, good morning and thank you for taking my questions. I was wondering if you could comment on your sales growth goals, operating margin goals, earnings goals that you had set forth whether or not you have made any changes to those or are sticking with what do you think you can do over the long-term?

Well we are not providing obviously guidance for 2009. If I think I have, your question right, it's have we changed our longer term goals?

Right.

Thanks, for the clarification and the answer is, no we have not changed our longer term goals. We are taking actions to increase the longer-term goals. The question of course that everyone has is when will we get through the current down cycle and putting that aside, that longer term our goals remain the same and we are taking actions to increase the longer term goals.

Okay, and relative to the stimulus and healthcare coming out of the Obama administration, is there anything in there that would be a benefit to folks like you or specifically Teradata and the Enterprise Data Warehouse?

Overall, I would characterize it as minimal or not significant.

Okay. And do you have the employee count as of the end of the year?

That is roughly 6400 people, I believe.

Okay. And you may not be complete with this given that your K is not out yet but how under funded is your pension liability and what do you expect the expense to be for 2009?

The under funded pension liability as you have indicated will be disclosed in the K. The expense for 2009 will be closely approximate to the 2008 expense numbers.

And what was that if you could remind us?

I believe around $9 million, $8 million to $9 million.

Okay. Would you a anticipate increase in the under funding given the market?

It all depends on the actuarial methods and the valuations, but I do not anticipate anything that would materially distort our numbers going forward.

Okay. And one last one relative to competition, HPs and the [piece] of the world, how would you characterize the environment and has anyone become more or less of a threat or competitive to your own offering?

No material change.

Okay.

Okay, listen I want to thank everyone for joining our call. That's all the time that we have this morning. In closing, I would like to thank all of you for joining us. And to summarize, we are saying 2009 is going to be a challenging year. I can assure you our team is energized to go after the challenge and we are very encouraged by our Q4 performance. The clear leadership position we have in the data warehouse industry and the opportunities that we have underway to broaden our position in the market in 2009 and for the longer term. So once again thank you everybody.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.