Welcome to the Q2 2011 Teradata Earnings Call. My name is Sandra, and I'll be your operator for today's call. [Operator Instructions] 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 2011 second quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's 2011 Q2 results. Steve Scheppmann, Teradata's Chief Financial Officer, will then provide more details regarding our financial performance, as well as our increased guidance for 2011. Darryl McDonald, Teradata's Executive VP of Applications, Business Development and CMO is also in the room as well. 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 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.

Thanks, Gregg, and good morning, everyone. Teradata delivered strong growth in the second quarter with revenue up 24% over prior year and for the first half, revenue was up 21% and up 17% in constant currency. These results represent the highest growth quarter and first half Teradata has produced over the past 10 years. Growth for the quarter and first half was led by strong performances in the financial services and retail industries. The increased investments we have been making during the past 3 years in R&D, market coverage, consulting and partners has been key to driving overall revenue growth and product revenue growth which has averaged more than 20% over the past 6 quarters. These investments have also paved the way to the highest number of new data warehouse customer wins ever recorded the past 10 years for our first half. We are also experiencing good growth and activity with Aprimo. Bookings are up over 30% versus prior year since joining Teradata at the end of January. Overall, Teradata had an excellent quarter in terms of revenue growth and non-GAAP operating income of $143 million, which was up 28% over Q2 2010 and non-GAAP EPS of $0.60, which was up 30%. My thanks go out to all Teradata associates who make it all happen. The business drivers and market opportunity continue to favor Teradata. As corporations continue to operate in these times of economic uncertainty, 2 things are clear: Business is hypercompetitive, and corporations are dealing with more data and more new data types than ever before to gain critical insights into their business. This was evident in the first half, when we added 10 customers to our Petabyte Club, doubling the number of customers we have with petabyte-size data warehouses to 20. All of this big and complex…

Good morning. Thanks, Mike. Driven by the demand for business analytics, our second quarter reinforced our leadership position, producing revenue growth of 24%, 18% in constant currency, and yielding strong growth in non-GAAP earnings per share of 30%. Revenue for the first half of the year was up 21% or 17% in constant currency. Product revenue of $269 million improved 21% from the second quarter of 2010, and increased 16% in constant currency. For the first half of the year, product revenue was up 19%, 16% in constant currency. Services revenue of $312 million grew 26%, 19% in constant currency and was up 22% for the first half or 17% in constant currency. Within our services revenue, Consulting Services increased 34% in the quarter and 29% for the first half, while maintenance services improved 17% in the quarter and 15% in the first half. Before I go deeper into our operational highlights, let me discuss the special items we incurred in the second quarter of 2011. Included in Teradata's Q2 U.S. GAAP results was approximately $28 million or $0.13 of gains from 2 equity investments. First, related to our equity investment and client technologies, and second, related to the impunity gain on the initial equity investment we made in Aster Data in 2010. These gains offset the following items that are approximate $10 million or $0.05 per share of transaction, integration, reorganization costs; $6 million or approximately $0.02 per share of acquisition-related purchase accounting adjustments; $9 million or $0.03 per share of amortization of acquisition-related intangible assets; and $8 million or approximately $0.03 per share of stock-based compensation expense. Teradata's 2010 second quarter results included $6 million or approximately $0.02 per share of stock-based compensation expense and no other special items. Given that these special items impact several line items…

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

Mike, can you talk about how many of the 60 targeted territories you have already added through the end of the second quarter? I'm trying to understand how much more is left in the second half of the year?

Wamsi, the 60 territories will be for the full year for 2011. Previously, what we have said, we had planned to add 30 territories this year. And based on the results and what's going on, we see an opportunity, expand that from 30 to 60 for the full year 2011.

Can you give us some sense of where you are in the process of adding those 60 territories, and where geographically you might be seeing the most number of additions?

As we exited the first half, we had 30 territories already established, new territories added. So we're in the process right now ramping the next 30. On a geographical basis, we've added -- it's fairly even distributed. There's some industry segments that we're going after, so there's an industry segment view to this. We've added a little bit -- or are adding a little bit to our mid-market team here in the U.S. We've had some decent success there, not a lot of revenue, but a number of nice wins. But by and large, it's pretty broad-based. The growth emerging, kinds of markets, we're adding more there. So -- but it's pretty well distributed.

And Wamsi, may I add that those incremental 30, that second 30 will probably be more back-end weighted into 2011, as we work through what Mike just described.

Okay. And as a quick follow-up, your revenue growth in EMEA on a constant currency basis has been the strongest since we've seen in a very long time. Can you comment on which verticals you're seeing the most amount of strength and opportunity there? Because it seems that it's very different from where a lot of the other software companies, especially those that have more exposure to financials, I was just sort of wondering.

We've been ramping pretty steadily in EMEA if you look back over the past 6 or 7 quarters in constant currency. There's been a gradual ramp and EMEA had a fairly good first quarter as well as the second quarter. Where we're experiencing the growth, is in our traditional industries, EMEA has always been a very strong in our traditional industries such as telco and retail, financial services has been big. We've done a lot of new account acquisitions in the past 2 years in Fortune 500-types of financial services institutions, a couple of retailers, telcos. A lot of the growth has been coming from more of the emerging markets in EMEA, as well as we've now penetrated in a meaningful way in some of the other segments, we are less penetrated in, like the manufacturing -- from the manufacturing industry sectors such as auto and so forth. And we're starting to make some headway into the utilities market as well. So it's a combination of investing more in the high-growth markets, executing on some great new customer wins and the global Fortune 500, further development of our traditional industries, and getting -- going into some new industries there. Plenty of opportunity in EMEA, and we've laid some great underpinnings there. And I think what you're seeing is the results of work that's been going on there, a good 3-year or 4-year showing up right now.

The next question is from Katy Huberty from Morgan Stanley.

In light of the trade-off you're talking about today in regards to choosing growth investments versus driving the operating leverage goals you've laid out in the past, why isn't the 7% to 9% long-term revenue growth off the table and actually much higher when we think about the next 3 to 5 years?

Katy, as we look out longer-term, we're looking at a minimum of 10% of revenue growth over the longer term. And over the longer term, we're looking at earnings per share growth of 1.5x at revenue growth. I think shorter term, we have an opportunity like we're seeing right now for higher revenue growth, and maybe not as robust of an EPS growth relative to the revenue growth that we're making. But longer term, we have our sights set on a consistent 10% --plus type of revenue growth and yielding 1.5x on that 10% revenue growth.

[indiscernible] shorter term revenue growth will be higher, operating leverage lower, do you mean both the second half of this year as well as 2012?

Yes, second half of this year as well as 2012 will be, as I mentioned, Katy on my prepared remarks, lowered. In probably the low 20%. We achieved our operating margin target that we talked about that mid-22% to 23%. And by doing so, really looking at the opportunities to reinvest back into the business to generate that revenue growth in the future years that Mike talked about. And so there’ll still be a pressure. But we'll still maintain in that low 20% range.

And a lot of the revenue this quarter came in the consulting business at least versus our model. Can you just talk about the relationship to products' revenues, do consulting engagements lead or lag products' revenues?

Well, I'd add, we have very strong product revenue growth as well, Katy. But this relationship of Consulting Services and product revenue growth, we've looked at it 27 different ways. And you can draw 37 different correlations. There is definitely one correlation and that's between the number of new account wins that we acquire, achieve. The size of those new account wins, the quality of them and our professional services business. So in a new account win, there is way higher Consulting Services content in the mix versus hardware in a new customer win, a first installation, versus the ongoing upgrades and expansions that occur moving forward. The other piece of this is we continue to really build out a great Managed Services business, more and more customers are turning to us for our expertise, and by the way, a very good, blended -- low-blended cost to operate the data warehouses and different aspects of it, and that continues to grow. We also have a very nice growing business intelligence consulting practice. This started with the acquisition at Claraview. It's probably been 3 years now, a little bit over 3 years. That continues to ramp. And that has also been a key driver. So this Consulting Services business, although the margin rate is not like the other aspects of our business, it contributes meaningful margin dollars, continues to grow. We see very good opportunities going forward, but most importantly, it's very strategic to our ability to compete and win against competitors, it's very important on our ability to grow our data warehouses and it's a big differentiator for the company.

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

It's interesting when you guys cited your customer wins, in the Americas in particular, I wouldn't say you fell -- fall into the Global 3000 that you traditionally target for by and large. Are you seeing a different segment of opportunities in your customer base or different revenue drivers as you expand your footprint?

We try to mention the new customer wins, we don't like that in the prepared remarks due to many masked names, and so forth. So we do try to limit it to ones where we have permission to use their names. In this quarter's prepared remarks, we tried to highlight some more that were related to big data, related to synergy wins with Aster Data and Aprimo and trying to give a little more color there. Our momentum in the U.S. in particular, with the continuing to acquire Global Fortune 500 customers and Global 3000 customers is, it's been fantastic, quite frankly, the last year and a half or so.

Great. And then, yes, you mentioned the 6000 Series and the uptick of the mixed storage environments. What are you seeing there in terms of that potentially driving a product cycle or additional uptick within your installed base?

Great question. The thing that's unique about the 6000 versus all the other EDW class releases we've done is we don't have coexistence, and it's centered around the complexities of the virtualized storage and everything that we’ve built into the platform. So the way I would categorize it is we might see a little bit of an acceleration of floor sweeps, where our customers completely refresh everything as opposed to continuing to add 5000 Series to their EDW in a coexistence environment. Because we'll continue to offer the 5000 Series, so our EDW customers can continue to add capacity and workload through coexistence. So there will be some acceleration of it. I think if you look at it over a 3-year kind of cycle, I don't see a big impact, only potentially a smaller one, where some companies will choose to accelerate a floor sweep that maybe they would've looked to do 2 years from now or a year from now and doing it sooner. Overall, I don't think it's going to have a meaningful impact.

Okay, great. And then, last for me. I have to ask the obligatory competitive question. Any change in the environment from your friends at Oracle? Or obviously big question from EMC? How much are you competing with some of those newer guys?

Other than some advertisements we're seeing, not a lot. Seriously, I have to say I've never seen our competitive position this strong. And it's across the entire platform family. Our win rates really started kicking in and hitting new highs about 1.5 years. Some of that's probably due to us having a broader platform family. But it is interesting, since Exadata was released, it’s been close to 3 years, our win rate has actually increased. We compete more with Oracle, but at the end of the day, we really can't find many data warehouse -- Oracle data warehouse implementations in our accounts. And the only thing I can figure is maybe, they are winning a lot more with Exadata and the OLT Peace [ph] fix.

The next question is from Rahul Bhangare from William Blair & Company.

It's good to see that you guys are doubling the number of sales territories. Are you guys making any more investments in your channel?

We've been increasing in part, our investments and partnerships, Bhavan, going back the last 2 or 3 years. Part of those investments include partners who also are systems integrators and also resellers and so forth. And we partner with the major global SIs, as well as some of the larger local SIs in the various countries around world. At the end of the day we have more of a cell-width model. To engage a customer, typically our expertise is needed in the design, the consulting around the business value, the ROI, the data architecture, and so forth and so on. So we had great partners, but I wouldn't call it a channel in the traditional sense, where you send the product over to somebody and it goes and gets sold. There's just a lot more to this than going and implementing a bank somewhere.

Okay. And what would you say the growth rate was, I guess relative to the core business for appliances or smaller scale data margins?

The 2000 series was right in that 10% to 11% range that we've been seeing the past several quarters. The actual growth rate is very, very high. When I say the 10%, I'm saying as a percent of revenue, Bhavan, not to be confused with growth rate. And we've had very good strong growth as well in the EDW class products. But I separate out the 2000 because we had a very, very large 1000 sale in the quarter that can spike things up by itself. The 1000s will be very lumpy. When we had one, they're big. We're not selling them in volume like the 2000 Data Warehouse Appliance.

The next question is from Matt Summerville from KeyBanc.

A couple of questions, now that you guys have been involved with Aster through the equity stake for a couple of months, and you've owned it now for several months as well out right. Have you guys been able to do any work to attempt to quantify the market opportunity or the market size or unstructured or big data?

Matt, I'll make a comment and then I'll ask Darryl McDonald to add additional color. At this juncture, I don't think the market opportunity is clear other than it's large, it's extremely large. But it's probably a very big range, and how big it could be other than it's going to be -- it is big.

Yes, I think there's a lot of work going on with analysts to try to quantify and define the big data space. I think everyone is now educated that it means more than just volume. It definitely means the different data types and different multi-structured data types being driven by social networks, Web and Web 2.0 applications environments, as well as machine data generated, sensor data generated. So everyone's trying to put some numbers around that, but we don't have anything to base sort of a market potential of growth on, but we are currently working and trying to give input where we can to try to quantify some of that for some of the analysts that do that for a living.

Matt, there's several dimensions yet to be figured out. So if you look at the structured data that we've been working with over the years, we do know our customers retain and use a lot of historical data. And as we've been working with other types of data like text data over the years, what we found is huge data volumes, but the amount of data that's retained, that historical data that's used for queries and things like that, joined with newer data, transactional data, isn't that much. So that’s just an example, one variables when you get into new data types.

The other question I have is just a follow-up on unstructured and big data. A lot of your competitors out there, a lot of other technology companies are talking about having a big data strategy, talking about big data. I guess how would you compare, if you go down the list of your typical competitive set, how would you compare the viability of their initial go-to-market approach with the technology you now have with Aster?

Yes, this is Darryl, Matt. I think we're in a very unique position with Aster Data. Because if you look at kind of the big buckets that this big data gets put into, they're sort of transactional data that's landing on traditional databases. And then there's a lot of the multi-structured that's landing on, Hadoop clusters, and I think in the middle of the opportunity where everyone is saying they're starting to move into around combining those 2, and the reason we acquired Aster Data, was its unique patented capability that combining SQL's transactional data with unstructured MapReduce data, and being able to go after that with a common set of tools and people. So a lot of people are talking about their big data strategy, most of them are referring to volume in their transactional database, the others are really trying to then connect to Hadoop or MapReduce environments, and I think we're in a unique position compared to all of them to have the ability to run those 2 together on one platform. Where the others are really bridging the 2 environments, very similar to the way Teradata did with the Hadoop environments that we announced a year ago on our partnership with Cloudera. So I think we're in a very unique position on how we approach and can handle it is unmatched by some of the other people that are saying they can do it in the market.

The only thing I'd add is we're in the very early stages of this, as far as how different companies are approaching it, and what the opportunities are and so forth. As Darryl said, we have a unique set of IP that can really differentiate us and provide a specific solution. But in all of this, there's a lot of variables, and I think that works to our advantage. This thing will evolve over time and these variables are an opportunity for us because we're really focused on this stuff and it's all we do for a living.

The next question is from Ed Maguire from CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division It's encouraging to see your confidence in building out sales teams, and I know you have very long sales cycles, but I was wondering if you could comment on the trends and deals in sales cycles and deal sizes. As you've ramped up over the last couple of years and you're looking to build out capacity, I would appreciate any color you can provide, particularly given the backdrop in Europe, whether you are seeing sales cycles accelerate or if there's any -- if there are any macro concerns that are impacting your deal cycles?

Ed, yes, what we've seen is back in the '08, '09 time frame I've alluded to lengthening of the sales cycle, 18 to 24 months. We've seen it probably come down more the traditional 18 months for the new account, new sales territories production. But again, that production to get to full kind of what I would call full quota carrying or full average is still lengthy 4-year-plus process. But with respect to deal size, the traditional EDW transactions for new first-time customers are staying pretty consistent. We talked about net $1.5 million to $1.7 million range. Where the change is on when it comes on the appliance side, the 2000 series size, and you get a lower average ASP in that. But again, that still uses a very effective sales tool in this process and in some instances may have accelerated that sales process from the normal 18 months. So those are the 2 things I'm seeing, Ed. Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division Great. And could you just comment on the deal sizes on relative basis based on the low-end, particularly on the appliance side, how much competitive engagement you see that may impact the size of the deals you do there?

Ed, I would say the deal size on the appliances, we talked about previously that $500,000 to $700,000 range. The margin is slightly lower than the EDW from an overall margin perspective. But I really haven't seen anything from a competitive side influencing that.

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

I wonder if you could comment on your deferred revenues, which I think are up 20% year over year, but how much of that dollar amount may have come from Aprimo and Aster?

There were some coming from Aprimo and Esther, but purchase accounting, artificially has impacted that at this stage. But I can say behind the numbers is the decline from March to June is very consistent with the same decline that we saw 4% to 6% from March last year. The key point, the measure that I look at is the maintenance and subs is still very healthy 70% plus of that deferred revenue balance. So even with Aster was minimal, with the Aprimo coming in, it's very consistent to the model that we look at Teradata, and at this point in time. But as they continue to add more to the SAS model, that will change going into the future somewhat. But nothing unusual behind that deferred revenue number on the balance sheet.

Okay. And relative to your capital spending and capitalized software on a combined basis, I don't know if you've given a number of your expectations for the full year?

Yes, Gregg, what I'm looking at there is for the combined, between $105 million and $125 million that breaks down approximately $45 million to $55 million of the CapEx and approximately $60 million to $70 million on the capitalized software.

All right. And then you mentioned a number on the R&D, I think it was $165 million to $170 million. Given that dollar number, does that also include the amount capitalized? Or is that just the straight number that would be on the income statement?

Net, well, both of those are true. That's a straight number on the income statement and it does reflect the capitalization reducing that. So that is a net number after the capitalization. The gross spend is actually higher.

The last question is from Brad Reback from Oppenheimer.

Mike, if you look at the current market opportunities as you see it, I think you have -- after these 60 sales teams you'll have somewhere approaching 550 total sales territories. What do you think the -- if you had full penetration or full coverage right now, how many sales territories would you need to address the current opportunity?

I think if we just look, Brad, at the Global 3000 and we were, as we penetrate and we acquire large customers and they absorb a full-time account executive or "accounting salesperson” I think it could be north of 1,000.

And on the global -- last quarter, you talked about the [indiscernible] doing some state work there. Of the additional 30, are you going to add some in the sub-3000? Or are they all focused to the Global 3000?

There will be some added in the -- outside the Global 3000 in the U.S. So we have a team in the U.S. focused outside the Global 3000. That's not to say by the way, we do sell to customers outside the Global 3000 around the world. Because there are some companies that have unique, complex types of analytical requirements like a lot of these e-business companies and web companies and everything else. So but the answer to the question is, we'll be adding some, a couple here in the U.S.

And finally, on the Managed Services side of the business, you had alluded to that in your prepared comments I believe, what is the opportunity your customer demand for this idea of databases. How are you positioned there? And do you need meaningful incremental investments?

We're well-positioned. Whether you want to call it data warehouses as a service, software as a service or hosting or however you want to categorize it, we're very well-positioned because we do it today on-site with customers. We do have a couple of customers that we host, and it could be an opportunity. We basically -- we look to what the customers are asking for, and where the market is going for, and that could be an opportunity down the road, Brad. Okay, in closing, first of all, thank you, everyone for joining us here this morning. I'd like to encourage all of you to attend the Annual Partners Users Group Conference held in San Diego this year from October 2 through the 6. It would be great if you could make it, we'd love to have you there. So once again, thanks for joining us today and have a great day.

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