Teradata Corporation (TDC) Q3 2011 Earnings Report, Transcript and Summary

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 25% as reported and up 17% in constant currency. For the third quarter, EMEA registered the largest number of new customer wins since 2002. New customer wins included Credit Agricole, the sixth largest bank in the world, which selected Teradata to enhance its relationship with customers and marketing capabilities, and one of the largest tax agencies, which installed Teradata to improve tax collection, detect and prevent fraud and provide better service for taxpayers. The public sector is another underpenetrated vertical we have been targeting that represents a significant growth opportunity for Teradata. In addition to tax compliance, we have Teradata being used in various countries for defense logistics, security, census, health services, transportation planning and postal services. Customers across all industries in EMEA continued to invest in the quarter with expansions that included BNP Paribas, TeliaSonera, Nordia, A.P. Moller-Maersk, British Airways and Leroy Merlin. Asia-Pacific Japan grew revenue 7% in Q3 and was down 2% in constant currency. Year-to-date revenue is up 10% as reported and up 1% in constant currency. APJ had good growth in their sales pipeline during Q3 and, in particular, in Japan. And as a result, APJ is positioned to have strong revenue growth in Q4 and has already completed a couple of large transactions. New customer wins were up from prior year and included a company in another underpenetrated industry we have been targeting, utilities. Chang Hung Electric Company, one of China's largest electric conglomerates, is deploying Teradata to integrate data from over 200 subsidiaries to establish a single integrated view from multiple operational systems. Other new customer wins included a top retailer in Australia, and a significant win from Q2 we can now mention was Korea Telecom. Major customer expansions included Takashimaya and NTT Communications in Japan and Commonwealth Bank and Westpac Bank in Australia. Our growth initiatives and increased investments are helping to grow our Core Data Warehouse business, which net of currency benefit and acquisitions, is growing a healthy 15% this year. First, the number of sales territories will increase approximately 60 in 2011 and have increased close to 40% since 2007. The new territories are tracking to generate $120 million in revenue this year, an increase of $50 million from 2010. Second, the number of partnerships continues to increase. We have added 18 independent software vendors so far this year on top of the 30 we added in 2010. At the same time, we continue to deepen our partnerships with existing partners such as SAS. Regarding SAP, we will focus our partnership on business intelligence, applications and data integration going forward. Although SAP is discontinuing support for BW on Teradata, we will continue to market our integrated data warehouse to customers like we have done successfully in the past, enabling them to integrate SAP and non-SAP data for better enterprise analytics. Third, our investments in Consulting Services are resulting in record revenue growth rates, expanded market reach and is a key differentiator for Teradata. And fourth, our increased investments in R&D have allowed us to extend our lead in data warehousing. Last month, at our PARTNERS Global Customer conference, we released one of our broadest set of innovations ever delivered by Teradata Labs. I want to highlight 3 of these announcements. One, our hybrid row/column store database software, which leapfrogs our competitors’ columnar implementations. Two, the 2690 Data Warehouse Appliance, which doubles the performance and triples the capacity per cabinet compared to its predecessor, the 2650. By the way, the 2650 is our Data Warehouse Appliance that competes very successfully against Exadata and Netezza today. And last, Unity was announced at our partners conference, which is query management and systems synchronization software that makes managing multiple Teradata systems as simple as managing a single system. It is another key differentiator for Teradata and is also the foundation for the broader Teradata analytical ecosystem. Unity is based on the intellectual property that came with our acquisition of xkoto a year and a half ago. Overall, our Core Data Warehouse business has never been stronger in terms of technology, consulting and solutions capabilities. On top of this, Aster Data and Aprimo represent 2 additional growth opportunities for Teradata. The integration of both companies has gone extremely well and is just about complete. Our Aster funnel and sales activities continue to grow. We recently launched our Aster SQL-MapReduce appliance, which has been in demand from customers and should help simplify and shorten our sales cycles. The Aster clients will also increase our average selling price and support services opportunity. However, we will continue to make Aster available on non-Teradata platforms as well. In addition, we are investing in tools to help take unstructured data analytics to the mainstream market with Aster. We are building out libraries of algorithms and use cases such as digital marketing optimization, social network and relationship analysis and the combining of social media data with customer historical data for improved marketing campaign management. Aprimo is also performing well. Revenue growth is slightly above plan year-to-date, and we just had a solid quarter with new customer wins in Q3. New customer wins included Campbell's Soup, and new wins from Teradata's existing customers included a top 10 global bank in Europe, a top 10 global bank in the U.S., a leading bank in Brazil and a top media entertainment company here in the U.S. And just last week, Gartner recognized Aprimo as the visionary leader in their newly defined integrated marketing management, Magic Quadrant. In summary, we have plenty of opportunity going forward, and we continue to advance our positions in data warehousing, big data analytics and integrated marketing management. Turning to our full year guidance. To date, we have seen minimal changes in customer buying behavior and budgets. So given our overachievement in Q3, we are increasing our revenue growth guidance from a range of 18% to 20% to a range of 19% to 21% and EPS from a range of $2.20 to $2.28 to a range of $2.25 to $2.30. Now, I'll turn it over to Steve, who will provide more details on the business results and our guidance. Steve?

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 special items impact several line items throughout our income statement, the following discussion, unless highlighted differently, will focus on the relevant income statement line items on a non-GAAP basis, which excludes the impact of the before-mentioned special items. For further transparencies, we have a GAAP to non-GAAP reconciliation schedules on our website. We also include tables in the footnotes of our earnings release that reconcile EPS, gross margin and operating income from a GAAP to a non-GAAP basis. Moving to our operating results. Gross margin in the third quarter of 2011 was 55.4% compared to 57.3% in the third quarter of 2010. The decline in overall gross margin was due to the significant increase in Consulting Services revenue, which created a higher mix of lower margin Services revenue versus higher-margin product revenue. Product gross margin was also lower than the record-high product gross margin generated in the third quarter of 2010, which also contributed to the decline. Product gross margin in the third quarter was 66.9%, a decrease from the exceptionally strong 70.4% generated in the third quarter of 2010. Year-to-date product gross margin was 67.7%, the same as generated during the first 9 months of 2010. Since some of you may not be as familiar as others on this topic, I'd like to summarize the accounting for the cost of internally developed software for resale, commonly referred to as FAS 86. The objective of FAS 86 is to match the expensing of the software development costs with the associated revenue generated from the developed software. FAS 86 requires companies to capitalize relevant software development costs after technology or software reaches technological feasibility. In other words, once you know that you have a viable software offering that is expected to generate material revenue, then you start to capitalize the development cost of that software offering on the balance sheet so that may be later amortized or expensed back to cost of product on the income statement as the software is sold. In theory, during the development stage, more of the R&D spend is capitalized, which in effect lowers the R&D expense on the income statement. Then when the product is sold, the software development costs are amortized or expensed, which increases cost of product and lowers the product gross margin. Due to past database management software releases and the anticipated release of Teradata 14, we expect approximately $1.5 million to $3 million more of amortization of previously capitalized software development expense per quarter than we had over the last 4 quarters. Services gross margin in the quarter was 44.9% versus 44.3% in Q3 of 2010. The 60-basis-point increase reflects strong revenue growth and margin rate improvement in both our Consulting and Maintenance businesses. Moving to a geographical view of gross margin, and this will be on a GAAP basis. In the Americas region, gross margin was 59.5% versus 61.6% in the third quarter of 2010. The decreasing gross margin from the strong prior-year period resulted from lower product gross margin due to deal mix and increased amortization of capitalized software development cost and acquired technology. Gross margin for the EMEA region in the third quarter was 46.6%, down from the 51.4% in the third quarter of 2010. Due to the greater proportion of consulting revenue, lower product gross margin due to deal mix, increased amortization and capitalized software development cost and acquired technology. Gross margin in the APJ region for the third quarter was 45.7% versus 48.9% in Q3 2010. The decrease was primarily due to the strong growth in Consulting revenues which generated lower gross margins. Turning to our operating expense structure on a non-GAAP basis. SG&A expense in Q3 2011 was $154 million compared to $128 million in Q3 last year. The increase was primarily driven by the addition of SG&A from Aprimo and Aster Data, higher selling expense from increased number of sales territories, higher variable expense associated with the higher revenue and a foreign currency impact. As we discussed in previous quarters, we expect a continued increase in our selling expense in 2011 as we continue to add more sales territories to reach more new customers. As Mike said last quarter, due to the strong market for business analytics, we now plan to double the number of sales territories we added in 2011. We now expect to add 60 sales territories in 2011 versus the 30 we had planned for at the beginning of the year. To reiterate, a new territory, which includes an account exec along with supporting technical and business consultants, take several years to get to the same level of productivity as existing territories, driven by the nature of integrated enterprise data warehouse architecture. New sales territories are primarily targeted at new customers. Therefore, as we increase our investment for sales territories, this will add incremental operating expense in the second half of 2011 and into 2012 without any meaningful corresponding revenues from the additional new territories in 2011 or 2012. Although this could impact our ability to increase or maintain operating margins in the fourth quarter of 2011 and into 2012, the increased investment should enhance our revenue and operating income growth potential for 2013 and beyond. On a non-GAAP basis, R&D in the quarter was $39 million, the same as recorded in the third quarter of 2010. As I mentioned earlier, we invest more in our R&D activity each quarter than what is reported on the R&D expense line item on our income statement. To quantify our total R&D spend, you need to add our R&D expense in the amount we capitalized, which can vary significantly year-over-year or sequentially under FAS 86, which is included in the line item, "Additions to Capitalized Software" on the statement of cash flows. For the full year 2011, on a non-GAAP basis, we expect approximately $160 million to $160 million of R&D expense, including Aprimo and Aster Data R&D. This compares to $144 million we had in 2010. Teradata's operating margin in the third quarter was 23.6% versus 23.1% in Q3 2010. Operating income of $143 million was a 27% increase from the third quarter of last year. Our non-GAAP effective tax rate in Q3 2011 was 29%, down from the 30% in the third quarter of 2010, driven primarily by the tax benefit associated with the U.S. Federal R&D tax credit, which was not retroactively reinstated for 2010 tax year until Q4 of 2010. We expect our non-GAAP tax rate for the full year to be approximately 28%. Our non-GAAP rate is slightly higher than our expected GAAP rate of approximately 27% due to a more heavily weighted U.S. earnings mix of non-GAAP earnings after considering the impact of the special items in the U.S. related to our recent acquisitions. Summing it all up. For the quarter, excluding special items, non-GAAP EPS was $0.59 in Q3 2011 compared to $0.46 in Q3 2010, a 28% increase. Turning to cash flow. Net cash provided by operating activities was $102 million in Q3 2011, up from the $65 million generated in the third quarter of 2010. With respect to our accounts receivable, DSO was 72 days as of September 30, 2011, compared to 80 days as of September 30, 2010. After $27 million of capital expenditures, which includes additions to capitalized software development cost and expenditures for property and equipment versus $18 million in third quarter 2010, we generated $75 million of free cash flow compared to the $47 million free cash flow generated in Q3 of 2010. As a reminder, Teradata defines free cash flow as cash flow from operating activities less capital expenditure of property and equipment and additions to capitalized software. Turning to the balance sheet. As of September 30, 2011, we had $691 million of cash. Cash generated during the quarter more than offset the $57 million of cash we used in the third quarter to repurchase approximately 1.1 million of our shares. Through the third quarter, we invested $95 million to repurchase 1.9 million of Teradata shares. This is more than we invested in the full year for 2010. As of the end of September, we had approximately $101 million of board authorizations remaining for our open-market share repurchases. Of our $691 million of cash, we have approximately $600 million held offshore. To provide further transparency around currency movement and the potential impact on our 2011 revenue, we provide a schedule on our website detailing how currencies have moved since respective periods in 2010 to indicate how this movement is expected to impact our year-over-year revenue comparisons in 2011. Assuming the currency exchange rates as of the end of October and assuming currency exchange rates do not change through the remainder of 2011, we expect currency to provide approximately 3 points of benefit for us in 2011 with approximately 2 points of benefit in Q4 2011. Turning to full year guidance. After another solid quarter in Q3, we are increasing our revenue guidance from 18% to 20% for the full year to 19% the 21%. This includes 3 points of benefit for currency and approximately 3 points of revenue from Aprimo and minimal revenue from Aster Data. Regarding our full year 2011 EPS guidance, the following factors, among others, influence our guidance range: higher operating expenses due to increased performance-based variable expenses; presales and other related costs of sales associated with new sales territories we had in 2010; and the increased pace of investment in new sales territories we now plan to add in 2011. We expect overall gross margin to be slightly less than last year due primarily to the higher mix of services revenue. And we continue to expect higher R&D investments versus 2010. We expect significantly lower capitalization or reduction of R&D expense under FAS 86 in the fourth quarter of 2011 as compared to the first 9 months of 2011, resulting in significantly increasing R&D expense for the Q4, which has been factored into our previous R&D expense guidance of $160 million to $165 million. I'd also like to note that an increase in R&D expense as a result of FAS 86 may continue into 2012. Incorporating these factors into our EPS guidance, we expect GAAP EPS of $1.98 to $2.03. However, this is based on and includes the following approximation for special items and assumptions: $28 million or $0.13 per share of gains from equity investments recognized in Q2; $34 million or $0.12 a share of stock-based compensation expense; $18 million or $0.07 per share of estimated purchase accounting adjustments related to the Aprimo and Aster Data acquisitions; $25 million or $0.09 a share of amortization of acquisition-related intangible assets; $26 million or $0.12 a share of transaction, integration and reorganization-related costs; and a weighted average share outstanding estimate of 172 million shares. Based on these assumptions and exclusions, we expect our non-GAAP EPS guidance to be $2.25 to $2.30 per share for the full year 2011. That said, the demand for analytics has never been stronger across organizations because information-driven decisions lead to stronger financial performance. Companies are excelling operationally and creating competitive differentiation of market segmentation through Analytics. In order to achieve an effective analytical platform, supporting real-time day-to-day operations, our customers understand that the underlying requirement for delivering the full functionality of this analytical platform, and that is a cohesive integrated enterprise data architecture or standard. This is the Teradata advantage. We've had a strong first 3 quarters of 2011 and are driving to finish strong in 2011 while investing more aggressively for our future that leverage our strategic strengths and opportunities. And with that, operator, we are ready to take questions.

[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.