Welcome to the Q4 2010 Teradata Earnings Call. My name is Sandra, and I will be your operator for today's call. [Operator Instructions] 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 2010 fourth quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's 2010 Q4 and full year results. Steve Scheppmann, Teradata's Chief Financial Officer, will then provide more details regarding our financial performance, as well as our 2011 guidance. Darryl McDonald, Teradata's Executive Vice President of Applications, Business Development and CMO, is also in the room to answer questions. Our discussion today includes forecast and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risk 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, transaction-related items, as well 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 found at teradata.com. A replay of this conference call will also be available later today on our website. Teradata assumes no obligation to update or revise the information included in this conference call whether as a result of new information or future results. I'll now turn the call over to Mike.

Good morning, everyone, and thanks for joining us today. Teradata finished 2010 with record revenue, operating income and earnings per share for both the fourth quarter and for the full year. We were particularly pleased with our 20% constant currency product revenue growth for the year, as well as our overall constant currency revenue growth of 12%. During the year, we continued to invest in our four key growth initiatives to go broader and deeper into the market: R&D to accelerate innovation in our technology and to broaden and strengthen our data warehouse offerings; consulting services to help customers get the most value from their Teradata investment and expand our market and customer presence; partnerships to increase the number of solutions available on Teradata and increase our market coverage; and sales territories to expand our market coverage. We met our objective of ending 2010 with 475 territories and target finishing 2011 with at least 505. These investments had a meaningful impact on our results in 2010. Teradata had its highest revenue growth in the last 10 years, the highest number of new customer wins since 2002 and the highest number of new customer wins ever in a quarter in the fourth quarter. In addition, we made key acquisitions with xkoto, Kickfire and Aprimo to strengthen our technology and expand our solutions and market opportunity. We are well positioned as we enter 2011. Looking at the region results, the Americas had a stronger-than-expected fourth quarter with revenue up 14%. For the full year, revenue grew 19% and was up 18% in constant currency. Overall, the Americas had an outstanding year and took market share as evidenced by product revenue growth of over 30% for the year and a record number of new customer wins in the fourth quarter and for the…

Thanks, Mike, and thanks for joining us this morning. We just completed a great year highlighted by 13% revenue growth, expansion of our gross and operating margins and non-GAAP earnings per share up almost 20%. Moving from the headlines to the financial detail. Revenue of $548 million was up 10% from the fourth quarter of 2009, also up 10% in constant currency. Product revenue of $267 million, was up 12% from the fourth quarter of 2009, or 11% in constant currency. Services revenue, up $281 million, was up 9% with no impact from currency. Within our services revenue, consulting services was up 11% and maintenance services was up 7% in the quarter. For the full year, total revenue was up 13% to $1.936 billion. In constant currency, total revenue was up 12% from 2009, our best performance since 2000. Product revenue for the year was $933 million, up 21% from 2009, up 20% in constant currency. Services revenue of $1 billion was up 7%, up 6% in constant currency. Consulting services was up 8%, or 6% in constant currency, and maintenance revenue was up 6%, or 5% in constant currency. Gross margin in the fourth quarter of 2010 was 55.7% compared to 56% in the fourth quarter of 2009. The decline in gross margin from the strong prior period resulted from the Americas and APJ regions seeing less than a favorable deal mix as compared to the prior year period. Gross margin for the year was 56.2%, up 130 basis points from the 54.9% in 2009. The increase in gross margin for the full year was driven primarily by improvements in product gross margin. Product gross margin in the fourth quarter was 65.9%, good in terms of historical levels, but not quite as high as the 67.8% product gross margin…

[Operator Instructions] The first question is from Wamsi Mohan from Bank of America Merrill Lynch.

Mike, I think you mentioned right at the beginning of your prepared remarks that you expect about 505 territories versus the 475 you exited 2010 with. So given your higher revenue and faster revenue growth, why are you continuing to expand the sales territories at the same rate as you have over the past three years and not be more aggressive in building out your footprint?

We currently plan, Wamsi, for the 505 territories, depending how things unfold in the year. We possibly could end up with more territories. As it stands today, we're more than happy with the investments that we've been making in the territories and the yields, and we're always looking across broader portfolio of opportunities in which to invest and ultimately optimize and maximize the revenue. So as it stands, today, we're looking at 30, and it could go higher as the year unfolds.

And could you just tell us how much you realized in 2010 from a revenue perspective from the new territories relative the roughly $100 million that you had originally expected? And how much do you think you'll realize in 2011?

It was slightly under the $70 million, which was the most recent update we had given the last couple of calls. And we're looking for the same incremental revenue increase in 2011, which was $50 million off of the original $100 million. So we're looking for a $120 million type of number off of the new territories, which is $50 million over the $70 million in 2010.

The next question is from Katy Huberty from Morgan Stanley.

Steve, in light of the considerable downtick in DSOs, both sequentially and year-on-year, can you talk about linearity in the quarter and the momentum of business at the end of December and during January in particular?

Yes, Katy, what we see on the DSO -- I'm still comfortable on the range, 75 to 85, which I've kind of targeted as a DSO. And it is lumpy depending upon when some of the deals come into the quarters. If the deal comes in early in the quarter, like in the fourth quarter and October, generally speaking, they'll be paid before the quarter end. So you have some of that going through, but that's nothing unusual than what we'll see in other quarters. So I'm very comfortable still in that 75 to 85 DSO range, and playing out pretty consistent to how it's evolved over the last three years on a cyclical basis throughout the year.

And there's nothing in relation to a stronger beginning of fourth quarter versus end of fourth quarter that gives you any pause?

No. I mean, I've seen the same movie in other quarters too, where we've had our revenue coming in early the quarter versus the end of the quarter and vice versa. So again, that's why I'm comfortable in that 75 to 85 range.

And then just a quick follow-up for Mike, have you seen any increased competitive pressure from the Oracle Exadata product? Are you finding still that they're attracting a different use case and customer set?

Not at this point in time, Katy. No.

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

I guess I was wondering if you could provide a little more color on the revenue growth in terms of mix, particularly organically. What do you guys think when you back out the currency and the acquisition? It looks like you're at the 7% to 9% range in terms of revenue growth that you guys just talked about historically. So A, when you look at the year, what do you think could potentially drive that higher, whether it's appliances or partnerships? And if we can get an update with SAP? And then what's embedded in that growth rate on products versus the services and maintenance?

You got the numbers right, Nabil. So it's 7% to 9% in the core business. And, also, you did point out a lot of different things that could provide potential upside to the revenue guidance. So the one good thing we've done is we've laid out a lot of different underpinnings organically in non-Aprimo, in which there's opportunity to grow the revenue at a faster rate. The guidance of the 7% to 9%, as Steve mentioned in his prepared remarks, is we look at the first half, we're looking to be at the higher end of the guidance. If you take a look at the services revenues and that component, once again, it will be a higher growth rate than 2010. But once again, it's harder to move the dial meaningfully on it. So this is a very similar scenario to what we were talking about a year ago at this time, which gets back to, we don't have -- I hate to use the word visibility because it gets translated into the economy, but we just don't have good detailed knowledge of what is going to be in the funnel for product revenue once we get out to the second half. And that's basically the net-net.

And SAP? Maybe, Darryl, you could give an update on where we are on that for a while?

Yes, we are on schedule with the SAP ramp up of release 7.3. We've got our first customer that we're implementing BW on Teradata underway right now, and we've got four other customers who were teed up to participate in that early ramp-up in GCA.

Any change out of Netezza now that they're part of IBM on the competitive front?

Not really. We're not seeing any change at all from the Netezza front from our perspective.

The next question is from Bhavan Suri from William Blair & Company. Bhavan Suri - William Blair & Company L.L.C.: Just as I look at product growth, that kind of slowed down sequentially or decelerated. Any sort of color on how we understand that? Were they sort of hardware floor sweeps? How should we think about that?

No, Bhav. I mean, nothing unusual. Coming into 2010, we knew we were going to have a very strong performance in the Americas, particularly on the product side. So that was anticipated. And the performance we saw in the second half of 2010 continued along pretty consistent to where we thought it was going to be. And so there was really nothing unusual. I mean, at the end of the time, it was actually better than anticipated, particularly in the second half of the year Q3 and Q4. So nothing unusual in there, other than we knew we were coming out of the blocks with a strong first half on the product side of the Americas. Bhavan Suri - William Blair & Company L.L.C.: And then could you just provide a little color on the appliances? Sort of how many customers do you have that have got appliances? And sort of how many did you have in the quarter? And what percentage of revenue did that account for, I didn't catch that?

The last earnings call, we updated -- we had roughly 150 customers. And at the end of the fourth quarter, we're a little under 190 customers. The revenue from the appliances actually in the fourth quarter went slightly above the 5% to 10% range we've been talking about. And for the year, it finished slightly under 10% of product revenues. Bhavan Suri - William Blair & Company L.L.C.: As you look at that business, is that mostly selling into the existing EDW environments? Where they sort of hanging the appliances off the core EDW? Or is that more new mid-market accounts that you hadn't reached before? Mike or Steve, where is that?

A little less than half the new customer wins are done with appliances. So we do have a number of appliances going into the new customer wins. And it's had an impact on our ability to have record kind of new customer wins in 2010. So it's just been a great addition. Of course, it gets selected more often or not when we get into the mid-market or down towards the bottom of the Global 3000. And it's proven to be a nice fit. I really think the great thing is that our EDW revenues grew 17% in 2010 while our appliance product revenue was close to doubling. This is exactly what we wanted to have happened. The other point of it is in the customer base, where the appliances are going in, the 1600 class machine, our big data, Extreme Data Appliance, this is sheer incremental business in our customer base. So there is no confusion, no overlap, no cannibalization whatsoever as it relates to the EDW revenue flow in our current customers, and that these 1600 implementations have been huge. Lots of petabytes. Lots of petabytes and something that would not be practical to be putting in an EDW, which is handling thousands of users and different kinds of workloads and queries. So this thing's really unfolded very, very well. Bhavan Suri - William Blair & Company L.L.C.: And I guess, one quick one on the product side, Mike, do you think you'll add like Hadoop functionality to that big data appliance? Or do you think you'll sort of just stay with partners like Cloudera for that?

We'll be doing both. I'll let Darryl give a little more color.

Yes, it's our intent to -- as you know, at PARTNERS, we announced our new relationship with Cloudera to be able to integrate with MapReduce, but we're looking at which of the MapReduce functionality -- we've got customers today that are integrating Teradata with that environment. And we're continuing to look at it in our Labs, our ability to integrate MapReduce capabilities into our products as well as our advanced development.

The next question is from Matt Summerville from Keybanc.

Two questions on the APJ region. Can you guys talk a little bit more about the gross margin performance there in the fourth quarter? As I look back over the last several years, that's basically the lowest gross profit margin I've seen, at least in the history that I have. So can you talk a little bit more about the dynamics there in terms of profitability? And then are you getting the sense that your business in Japan, which I think is about half of APJ, is to the point that it's kind of bumping along a bottom where it's no longer kind of detracting from the region's organic growth?

Two things here. So on the margins, the one thing that's impacting the APJ overall gross margins is the mix of professional services that's been increasing over the past couple of years. And Steve, I'll let you add if there's any more detail relevant beneath that. The other question, Matt, around Japan, the Japan environment has been soft for a number of years. And we've been doing okay. However, in 2010, once again, we did not get the growth we were looking for and in fact, had a decline. That said, the companies that we do talk there, other companies in our industry and everything, looks like Japan, overall, is pretty soft. We have been sizing ourselves properly to fit better into the revenue that we are producing there. We're realigning investments and APJ to get after some of the markets that are a little more attractive from a growth perspective, economic perspective. But at the end of the day, we're very, very, very committed to Japan. And we see just tremendous opportunity for Teradata, given the scale of the corporations and their enterprises there. As far as a market opportunity for Enterprise Data Warehouse, Japan is clearly second to the U.S. And we're very committed there, and we'll keep after it. It was a pretty -- the good news in having a down year is the following year. So we're optimistic that we've at least seen bottom or can get back on the growth trajectory there.

And Matt, Mike's right. I mean, Japan's got the highest mix in any of the countries of the FBS to the total revenue. And so that is their primary driver.

The next question is from Alex Kurtz from Merriman Capital. Amelia Harris - Merriman Curhan Ford & Co.: This is Amelia in for Alex today. Just a question about the increase in adoption in flash drives. Have you seen an increase on your end? And what is your adoption rate of flash drives?

What we have -- it's a technology that we're very well aware of, and we leverage all the different technologies across our stack today. And as you know, we optimize the right technology for this analytical space. And today, we've invested quite a bit in looking at memory, solid state drives or flash and then the traditional drive. So today, we have it in our product, and we think it has potential in the future for rightsizing the right analytics for that type of technology as the price performance comes down. Amelia Harris - Merriman Curhan Ford & Co.: And just as a follow-up, what are your thoughts on flash-based EDW drives -- EDW arrays like Violin Memory at the high-end of the market?

Again, we don't think that all or nothing around the technology is appropriate. We think the right balance of that technology in the stack is what's going to be optimal from a price performance for our customers.

The next question is from Brad Reback from Oppenheimer. Brad Reback - Oppenheimer & Co. Inc.: Back on the 4Q linearity. At the end of the quarter, did you see any unnatural deal slippage?

I would characterize it as normal. In any quarter, there is puts and takes. The Americas came in higher than we expected in the fourth quarter. There were some new opportunities that came into play. In this case, some of them are large, and it can contribute quite a bit. But overall, Brad, no.

The next question is from Greg Halter from Great Lakes Review.

Deferred revenues, wondered if you could discuss the percentages from maintenance and subscriptions in the quarter?

Greg, thanks for bringing that up. Usually I mention that in my prepared remarks, so thank you. Yes, my metric is to be about 70% of that balance in the deferred revenue on the balance sheet to be maintenance and subs. They were about 72% as of 12/31. So very consistent to where I expected to finish.

The next question is from Derrick Wood from Susquehanna International.

Professional services was pretty strong in the quarter. Clearly, you're hiring utilization is going up. Can you talk about what's driving that demand? And is there any kind of leading indicator for kind of product sales pipelines with respect to that number?

No, I wouldn't say. That's kind of lively internal debate. I'll probably have half the leadership team 50-50 as the leading indicator or lagging indicator. I would not -- what I've seen over the years, I would not say it goes either way, but just something that we all experience throughout the quarters. So nothing unusual within the activity that would be an indicator of product revenue or lagging indicator of product revenue. So nothing that I've seen specifically.

If I can add, within the Consulting Services business itself, we continue to add capabilities to what we can provide in the marketplace. And we continue to grow and expand our managed services offers to our customers. We've added VI consulting types of capabilities with Clairview acquisition a couple of years back that we continue to grow. So there's multiple things within the Consulting Services business that we continue to add to. And then with the uptick in the business, we've been ramping and adding resources. And basically, there's a lot of demand for Teradata consulting services, all the different types that we have. So we are operating with a higher backlog. We've expanded our offshore capabilities to onshore. And we're growing onshore resources, offshore resources. And the backlog's up, and we saw an uptick in the fourth quarter, which was very conservative.

And Derrick, one thing I wanted to do on the professional services, coming to a comment on the prepared remarks, that when we look at the services margins due to these investments, we do anticipate that it possibly could be lower for the year on the services margins and lower in the first half. So just kind of emphasizing that from the prepared remarks.

What about on the product side?

On the product side of the margin?

Yes.

I don't see anything unusual in there. I mean, appliance side, we're still seeing the appliances to be about 10%. They are slightly less than the margin side, but we stay in the 10%. We should be -- it's pretty consistent with the prior year, fluctuating quarter-by-quarter. And then one thing I did want to bring out that I didn't bring on my prepared remarks was the R&D expenses for the year, expect to be approximately $155 million with Aprimo in there for 2011.

And the last question is from Ed Maguire from CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc.: Just a quick question on how Aprimo's revenues layer into the products consulting and maintenance? And also if you could just talk about what you expect the impact of Aprimo will be on the maintenance line? Typically, maintenance declines over the quarters during the year, and would just appreciate any color on that.

Yes, Ed, we're just getting right in. We just closed the acquisition in late January. I'm just getting right into modeling for the 2011 plan. And the biggest thing that I'm dealing with now is going through the impact of the deferred revenue adjustment on that revenue throughout the year. So I need to continue to work through to see how that's going to impact quarter-by-quarter. So I'd like to defer on that until I get that model worked out as to exactly how much deferred revenue I'll be writing off and how that will impact the quarters. Because that includes the maintenance side of it and some of the professional services side that was capitalized or deferred on the balance sheet. And I just have to see how that wings off under GAAP.

Thank you very much, everyone, for joining us today, and thank you for the questions. I hope you all have a great day, and we're looking forward to a strong 2011. Thank you.

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