Michael F. Koehler - Chief Executive Officer, President, Director and Member of Executive Committee Stephen M. Scheppmann - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Darryl D. McDonald - Chief Marketing officer and Executive Vice President of Applications & Business Development Gregg Swearingen - Vice President of Investor Relations

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division Brent Thill - UBS Investment Bank, Research Division James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division Wamsi Mohan - BofA Merrill Lynch, Research Division Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division Katy Huberty - Morgan Stanley, Research Division Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division Gregory W. Halter - LJR Great Lakes Review Amelia Harris - Sterne Agee & Leach Inc., Research Division Arvind Rajamohan - Oppenheimer & Co. Inc., Research Division

Welcome to the Q3 2011 Teradata Earnings Call. My name is Sandra, and I will 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 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 increased guidance for 2011. 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 that 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 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. Teradata delivered excellent growth in the third quarter with revenue of $602 million, which was up 23% over prior year and up 19% in constant currency. Non-GAAP operating income of $143 million grew 27%, and non-GAAP EPS of $0.59 grew 28%. We continued the strong product revenue growth we've been experiencing the past 6 quarters with product revenue up 18% in Q3 over prior year. And our overall services revenue continues to grow at record levels with 28% growth in the quarter. Within our Services revenue, Consulting Services was up 34% in the quarter and up 31% year-to-date. Excluding acquisition and currency benefit, our core Data Warehouse Consulting Services was growing approximately 22% in Q3 and 18% year-to-date. New customer wins continue at record levels, and the quality of new customer wins has never been better. In the quarter, we added 5 Fortune 500 customers. Turning to the regions, the Americas continue to lead the way with revenue growth of 28% over prior year and up 24% year-to-date. Key new customer wins included a top 5 global oil and gas company, which has a vision to create an integrated operation of the future and will use Teradata to integrate multiple operations from across the company. The oil and gas industry is an underpenetrated vertical for Teradata that represents great growth potential. And we are pleased to have the opportunity to work with this leader. Other new customer wins included Belk, Symantec and one of Canada's largest banks, as well as a top 5 U.S. insurance company. Upgrades and expansions in the Americas included Bradesco, Enterprise Holdings, Royal Bank Financial Group and Safeway. EMEA also continued its strong growth in Q3 with revenue up 22% in the quarter and up 14% in constant currency. Year-to-date, revenue is up…

Thanks, Mike, and thanks for joining us this morning. We delivered another strong quarter fueled by Teradata's technological advantages and our leadership positions. The resiliency of our revenue stream is driven by the strong relationships we develop and grow with our customers, which leads to approximately 95% of our revenue being generated by our existing installed base of analytically focused customers. The attractiveness of our operating and financial models was also highlighted as free cash flow increased 60% in Q3. The strong demand for analytics and business intelligence was once again demonstrated by our revenue growth of 23%, 19% in constant currency, yielding strong growth in non-GAAP earnings per share of 28%. Year-to-date, revenue was up 22%, 18% in constant currency. Product revenue of $287 million improved 18% from the third quarter of 2010, up 16% in constant currency. Year-to-date, product revenue was up 19% and also up 16% in constant currency. Services revenue of $315 million grew 28% or 23% in constant currency and was up 24% year-to-date, 19% in constant currency. Within our Services revenue, Consulting Services revenue increased 34% in the quarter and 31% year-to-date, while Maintenance revenue improved 21% in the quarter and 17% year-to-date. Before I go deeper into our operational highlights, let me discuss the special items included in our GAAP results for the third quarter of 2011. The special items approximated the following: $6 million or $0.03 per share of amortization of acquisition-related intangible assets; $4 million or $0.01 per share of transaction, integration and reorganization costs; $3 million or $0.01 per share of acquisition-related purchase accounting adjustments; and $8 million or $0.03 per share of stock-based compensation expense. Teradata's 2010 third quarter results included $7 million or $0.02 per share of stock-based compensation expense and no other special items., Given that these…

[Operator Instructions] The first question is from Katy Huberty from Morgan Stanley.

Steve, given the success of Consulting, should we now expect that gross margins stick around the 55% range going forward rather than returning to the 57% range you were at a year ago? Or are there offsets over time from the product and software mix that can lift margins longer-term?

Katy, I'd say, longer-term, the former is probably the trend. We're having good professional services growth at the margin dynamics of the Professional Services, the Consulting Services side. We're always out there, working on improving the product margin attributes. But I would say the mix that we have, that we see out here being in that -- last year, we were about 56.4%, this year, 55.8% overall, in that ranges. It should be in the -- the mid-55s or around should be probably a good benchmark to build going forward.

Okay. And then I've gotten a few questions on the deferred revenue line that decreased sequentially again this quarter. So can you just spend a minute explaining the volatility? I think most of us understand that if you're selling more systems then maintenance deferred revenue should be stable or growing. So I assume the volatility is on the product deferred side of the business. And could you just talk about what causes product deferred revenue? And does a lower number necessarily mean that your pipeline is worse going forward?

No. Katy, what really is on that deferred revenue, I look at 2 pieces. And the bigger one that you're seeing there is the seasonality that we always experience as we go through the year with respect to deferred maintenance and subscriptions. But I always look at that total balance at any point in time is a greater -- 70% plus of my total deferred revenue being maintenance and subscriptions at any point in time. That is correct. We're always staying above that number. In addition, I look at deferred revenue, again, at the point of time with respect to what I'm forecasting out over the next 12 months with respect to maintenance or subscription revenue. As you know, our subscription revenue's up and our product revenue. And Q1, because of the nature of our billing cycles, we have more of that billed in the Q1 time frame from that deferred revenue. We have buildup as of March 31. And I’m at my highest percentage of deferred revenue versus my next 12 months anticipated revenue, and then throughout the year because of the seasonality of it, of how it amortizes off, Q3 and Q4, I'm at my lowest percentages. So I'm not seeing anything unusual. Those percentages have held consistent with the prior years, and I'm not seeing anything unusual with those percentages as I look at '08, '09, 2010 and 2011. So there's nothing behind that number that would give me any type of concern at this point in time.

Okay. And then Mike, you've obviously had a fantastic year so far in 2011 with your investments paying. We look into next year with the additional sales people you hired in '09, in 2010, the acquisitions you've made, the traction you're getting with new and existing customers. Is there any reason to believe that constant currency revenue growth won't remain well into the teens next year?

Well, thanks. First of all, thanks, Katy on the year. Obviously, we'll be able to give more insight on the next earnings call, next year. Like we said on the last call, we feel we're fairly well positioned long-term to grow double-digits, above double-digits, and that's where we're at today.

The next question is from Wamsi Mohan from Bank of America Merrill Lynch.

Steve, can you help bridge the gross margin decline quarter-over-quarter separately for Products and for Services, particularly if you could give some color on how much more amortization of capitalized software there was on a quarter-on-quarter basis? And then how your consulting headcount is ramping so we can better understand the Services gross margins as well?

Yes. Wamsi, on the Product side, we had extremely strong Q3 last year. It was a strong quarter on the Product side due to the mix. And I believe it's almost one of the record quarters, all-time high. And so this year’s product margin is more in line with what we’re anticipating based on the mix. And year-to-date, we're right on top of the number year-to-date. So again, it comes down to that lumpiness factor quarter-by-quarter with respect to product margins. So I'm seeing that -- nothing usual. I mean, we've actually been able to cover increased amortizations, FAS 86, through our Product margin this year. The amortization from last year, for the year, would be roughly almost $10 million more of amortization for the year, and sequentially, the amortization was pretty consistent, Q2 to Q3. But over last year, we had probably about $2 million increase of amortization, $2 million, $2.5 million increase of amortization from Q2 -- or Q3 2010 to Q3 2011, so. But again, the big thing I would focus on the product margin, look at the product margin year-to-date. It's level with it, and sequentially, we're right in line on the product margin. So there's nothing really unusual on the product margin side. On the Professional or on the Services margin side, there was actually an improvement in the quarter on the Services side, and I see that continuing relatively in line for the year because of the mix of the Consulting Services. You'll see it down on a year-over-year comparison purely because of the growth in the Consulting Services side. But the margin's still holding relatively good, actually improving for both of the components. It's really just a mix of the revenue driving it. So again, I feel good about our margin performance, Q3 and year-to-date.

Okay. And as a follow-up, can you comment on what, if anything, you're seeing from a demand perspective, particularly as it relates to Europe and financial services? Sounds like you highlighted some success at Credit Agricole, but if you could share some broader color, that would be helpful.

Wamsi, this is Mike. On a year-to-date basis and where we stand today, things have been pretty good in financial services broadly. That industry segment, our revenue was up 28% for the first 3 quarters year-to-date. And we haven't seen much changes in buying behavior or anything else like that, so in the U.S. and in Europe. I think if you look at it going forward, everything that's out there that's been made public is several financial institutions in Europe and U.S. clearly have cost-reduction initiatives underway, and that could -- it could impact IT budgets eventually. So that is out there. But on the flip side of it, we're seeing very good demand and initiatives with the financial institutions around integrated risk management, around home lending, getting more transparency in the organizations and regulatory types of reforms that are benefiting us. And as a result, a lot of these financial institutions, in a way, it's creating demand and initiatives focused on data architecture, which kind of goes into the wheelhouse of what we're doing. So it's a little bit of a double-edged sword.

And last one for me, any expectation for the hard drive situation and from the Thailand flooding to negatively impact you guys?

As of this date, we're working very closely with our suppliers, and we expect to have enough supply for the fourth quarter.

Okay, great. How about the first quarter of next year?

We don't have visibility at this time, Wamsi. As of this date, what we know and what we expect is we have good supply for the fourth quarter.

Operator, can we ask people to limit their questions to one so we can get through everybody?

Yes. [Operator Instructions] The next question is from Brent Thill from UBS.

Just a quick follow-up on Europe. You mentioned a number of, a record number of new customer wins. Can you just give us a sense of what the dynamics you're seeing there on the new side and how you look at your pipeline going forward there?

The new customer wins have been pretty broad-based, so geographically, balanced between Western Europe and Eastern Europe and some of the growth markets there. By industry segment, we continue to -- we had a number of wins in telcos as well as financial services, and we're starting to get into some other industry segments as well.

The next question is from Ed Maguire from CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division: Looking at the strength in Consulting, would appreciate it if you could provide just a bit of color in terms of how you look at the ramp here, whether this is a really leading indicator for product sales, if it's coincident or really trailing based on a lot of the big projects that you have underway?

Ed, it's Mike Koehler. We've tried to -- well, we've been looking at this quite a long time and trying to draw correlations between the consulting and the product revenue is somewhat inconclusive. If you just look at sheer data, and we're talking about billable revenue activities that's showing up in the Consulting revenue, the growth in our Core Data Warehouse Consulting business in constant currency is a little bit higher than our product revenue. And then if you take a look at last year, our Product revenue growth was more than the Consulting Services revenue growth. If you get into environments in a down market like in 2008 and 2009, the customers tend -- this is the user base, where 95% of our revenues come from on a yearly basis, the customers tend to invest more in our Consulting than making capital purchases to expand the data warehouse capacity. So they're looking at our consulting services to figure out how to get more out of the assets that are there in place in down economies. There's a lot of dimensions to this. Our Managed Services business continues to grow at a pace beyond the Product revenue and Consulting Services overall. We have a BI consulting business that continues to grow at a higher rate also, and in a way, this is in addition to and somewhat separate of the product revenue. So we've been asked this question several times. I would say, overall, when Product revenue is growing at the rate it has been in the past couple of years, the Consulting revenue would tend to be more of a lagging indicator because there's just that much more activity with expansions, additions, new customers going on that will pull with it Consulting revenue. But I would also argue on the flip side, when we're seeing a lower growth rate in the Product revenue, we have a very robust Consulting Services portfolio that by itself can continue to grow in a more stagnant market, where there is less expenditures on CapEx. I wish I could give you all a clear answer, but this is what it is.

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

So I was wondering if you could talk a little bit about the about-face by SAP on BW and if that's a sign, a, they're trying to shove HANA into that the installed base and, b, if you're seeing HANA and/or Greenplum more competitively.

Sure, Nabil. This is Darryl. You're right on target. I mean if you look at SAP's strategic direction, HANA is what they want to lead with. So that was the primary reason that they decided not to continue to pursue BW on Teradata. With that said, we are continuing our partnership around providing business objects, business intelligence and data integration and their analytics on Teradata. We're also going to continue to support and integrate through the integration options, integrating SAP data with Teradata data for integrated data warehouses or enterprise data warehouses. So we've been doing that for years, we've had great success, we'll continue to do that. One of the big drivers of putting BW on Teradata was to integrate it with non-SAP data. We'll continue to do that without that happening. And from a competitive standpoint, we really don't compete with HANA per se in our space. HANA really accelerates performance of their current business warehouse reports and really only a small selection of those. As it relates to other competition, it really is pretty much the same as it has been, primarily with Oracle and IBM. And yes, there is some additional noise on the line with Greenplum and EMC. But again only in the discussions and all. From a competitive standpoint, we remain very confident we can compete on all 3 of those fronts.

The next question is from Matt Summerville from KeyBanc.

Mike, I know you have a lot of conversations with customers. You indicated that you feel good about their ability to spend through the end of 2011. But as you're at events like Partners and other things like that, talking to folks, more importantly, what are they saying about 2012? What are they saying that their CIOs or CFOs are telling them about their spend priorities next year? And I guess what sort of confidence does that give you in Teradata's growth trajectory?

Matt, we have over 1,300 customers now, and basically, it's a little bit -- the answer is we're not hearing much yet about next year. So a lot of companies have not set budgets or have not directionally communicated thoughts in this area. So that's basically about it, where we stand today.

And then just one follow-up. Have you thought about doing 60 sales adds this year? What are you thinking about sales adds for 2012? And then you've talked before about how we should think about incremental productivity out of those sales adds, I think moving from $70 million last year to $120 million this year. What should that $120 million ramp to next year?

It's a little too early, Matt, to comment on how many sales territories we're going to add next year or what we expect from the new territories, as far as the yield. I think, well, I know we'll be in a much better position to communicate this, if you will, on the next earnings call.

The next question is from Derrick Wood from Susquehanna International.

On the guidance for revenue, 19% to 21% for the year. Based on this, it looks like you're guiding to about flat to up 5% sequential growth in Q4, which compares to 12% sequential growth last year. So I was just wondering if you could give us some color as to why seasonality would be a bit lower this year, and maybe talk about how you look at it in Product versus Services revenue.

I think, first, if you look at it just in the quarter itself, at the high-end of the revenue guidance for the year, what's implied in there is we would be growing -- we'll have 2 points of currency benefit and what's implied in there, we'd grow 20%, as reported, and 18% in constant currency, which is consistent for the whole year.

Yes. And Derrick, what I would add is when we gave the guidance in August, we were assuming 4 points of currency benefit. And when we gave the updated guidance here, it's based on 3 points of currency benefit for 2011. So in effect, that if we would've been on the same basis, we would've raised it from 18% to 20% to 20% to 22%. But because the currency benefit came down to 3, we kept it at 19% to 21%. So there's implied is another percentage of growth that was currency-driven in the August guidance that we're now moving back. So again, it really gets back to the numbers Mike just laid out. Basically, if you took the high end of the region, it implies that growth, and if I would have kept the currency benefit the same, I would have had another $23 million of growth on top of that number, so it would put us north of 650. So again, I feel comfortable on the implied Q4 growth rate.

Okay. And just a follow-up on that. I mean last time, I think you updated us on Aprimo contributing about 4% growth. But this year, you said it's tracking a little bit above plan. Does that mean kind of something around 5%?

Well, Derrick, what we said was 3 percentage growth on a GAAP basis for Aprimo, and it's tracking right in that range.

The next question is from Arvind Rajamohan from Oppenheimer. Arvind Rajamohan - Oppenheimer & Co. Inc., Research Division: Can you guys talk about what appliances contributed to your Product revenue and if that trend is kind of sticking to where you expected it?

It's consistently been running in the 10% to 15% as a percent of product revenue. And in the quarter, it was a little bit towards the higher end. But overall, it's tracking right in the 10% to 15%.

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

I was just wondering if you could discuss your own acquisition outlook. Are there any particular areas that the company is in need of filling holes?

Well, there's always opportunities. And basically, we've been focused on a couple of areas, and it's a build versus partner versus buy. So we're always looking at unique IPs or relates to our data warehouse stack and our other solutions as well, integrated marketing manager, marketing management and we also look in areas in Consulting Services as well. So that's about all I can comment on at this time.

The next question is from Alex Kurtz from Sterne Agee. Amelia Harris - Sterne Agee & Leach Inc., Research Division: This is Amelia Harris in for Alex today. Can you quantify or provide more color on how the new sales territories have trended over the last 2 quarters? And with that, was there an uptick in new customers from these territories added in June, in the June quarter, versus September quarter last year?

Yes. This is Steve. From an overall perspective, the new territories, as Mike commented on earlier, is tracking right in line with where we would thought from -- growing from $70 million in 2010 to $120 million in the aggregate in 2011. So the performance throughout the year is just in line with what we've been expected on a year-over-year basis. With respect to new customers, nothing unusual. I mean they're all -- the majority of the territories are targeted on new customers, and so again, with the performance on the revenue, we're seeing a similar performance on the new customers, but again nothing unusual sequentially and definitely a growth over 2010.

Mr. Swearingen, at this time, there are no further questions. I will turn the call back over to you for closing remarks.

Okay. I'd like to thank you all for joining us here this morning, and we look forward to speaking with you next quarter. Have a great day.

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