Teradata Corporation (TDC) Q2 2012 Earnings Report, Transcript and Summary

Welcome to the Q2 2012 Teradata Earnings Call. My name is Kim, and I will be the operator for today's call. [Operator Instructions] Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Gregg Swearingen. Mr. Swearingen, you may begin.

Good morning, and thanks for joining us for our 2012 second quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's Q2 results. Steve Scheppmann, Teradata's CFO, will then provide more details regarding our financial performance as well as our increased guidance for 2012. Darryl McDonald, Teradata's EVP of Applications, Business Development and CMO, is also in the room. Our discussion today includes forecast and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of 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 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 had another strong quarter in Q2, with revenue growth of 14% as reported and 18% in constant currency. And for the first half, revenue was up 20% in constant currency while going against last year's record first half revenue growth of 17% in constant currency. Non-GAAP operating income grew 31% in the quarter to $188 million, and non-GAAP EPS of $0.77 was up 28% over prior year. Non-GAAP operating margin of 28.2% was 390 basis points higher than the previous best quarter of 24.3%, which was achieved in Q2 of 2011. The record operating margin was driven by solid execution across the company and a significantly favorable revenue mix. In the quarter, higher-margin product revenue grew faster than services revenue. And within the product revenue, higher-margin EDWs grew faster than the appliances. And within the services revenue, higher-margin maintenance grew faster than Consulting. It is rare when all 3 revenue mixes line up favorably like this in a quarter. Overall, we were pleased with our better-than-expected second quarter results and where we stand at the end of the first half. Turning to the regions, the Americas reported revenue growth of 17% and was up 18% in constant currency. For the first half, the Americas was up 22% as reported and in constant currency. Q2 marked the 10th consecutive quarter of double-digit growth, with 7 of those quarters growing more than 20%. The Americas had a large number of new customer wins in the quarter, including Groupon, which will be implementing a data warehouse to manage large-scale Web log data and differentiate offers by location and subscriber; Mutual of Omaha, which purchased a data warehouse to integrate data from across finance, marketing, insurance and retirement services to provide better information to their users; the State of Indiana Family and Social Services Administration will be using our Enterprise Data Warehouse to better manage care for their citizens; and Machinima, the #1 entertainment channel on YouTube, purchased both a data warehouse and Aster to analyze online viewer behavior and optimize placement of advertising. Aprimo new customer wins in the Americas included a leading university, which will use Aprimo to better track and optimize marketing spend and to improve its marketing workflow. Constellation Energy, which is a Teradata customer and purchased Aprimo for campaign management; and at Amsterdam Printing, a leading promotional products company, which purchased Aprimo to gain better insight into its customers and prospects. Expansions and upgrades included Sears Holding, which will -- upgraded and expanded their analytics environment to the hybrid storage 6690 EDW; and the Royal Bank of Canada, which also deployed our hybrid storage 6690. Other upgrades and expansions in the quarter included Boeing, TIAA-CREF, Winn-Dixie and PRODABEL in Brazil. Europe, Middle East and Africa had an exceptional second quarter, with revenue up 16% as reported and up 27% in constant currency. This was better than we expected given the macroeconomic environment and the strong prior year comparable when revenue grew 34% in Q2 of 2011. For the first half, EMEA revenue was up 13% as reported and up 20% in constant currency. Although we are experiencing some lengthening of sales cycles and delays in purchases, it is currently being offset by increased pipelines across most of the region and strong revenue growth in newer markets such as Russia, where we have been steadily adding territories the past 4 years. New customer wins included Mobily, Saudi Arabia's leading mobile operator, where we are replacing a competitor's data warehouse; Tapiola, one of Finland's largest insurers, where our Teradata Solvency II solution will be able to address the new regulatory risk requirements. TruBid Group in Italy was another new customer win and will be using our data warehouse to analyze geospatial and temporal data in order to better serve its customers. And at Türk Telekom, which will be implementing an Enterprise Data Warehouse, along with our communications industry logical data model to consolidate and illuminate competitor data marks. Significant expansions and upgrades included Swift Com, BBVA in Spain, Nordea Group and a top bank in Russia. And finally, Asia Pacific and Japan grew revenue 2% in the second quarter and 4% in constant currency. For the first half, revenue was up 10% both as reported and in constant currency. Similar to Q1, we experienced extended sales cycles and delays in China during the second quarter, which was offset by growth across the rest of APJ. However, we are looking for China to provide good growth in the latter part of the second half as opportunities that have been delayed begin to close. APJ added a number of new customers in Q2, including several from the financial services industry in Indonesia, Malaysia, Singapore and China and at Tokyo Star Bank in Japan. Initiatives around risk, compliance and marketing as well as cost reduction were the key drivers of these wins. New wins in the government sector included the Department of Agriculture, Fisheries and Forestry in Australia. Upgrades and expansions included the Overseas-Chinese Banking Corporation, DiGi Telecom in Malaysia and Star Track Express in Australia. Regarding our growth initiatives, we are on track to reach the higher end of the 35 to 45 territories we targeted to add in 2012. I'd like to add that we are pleased with our return on investment from the territories added during 2008 to 2011. Consulting Services revenues grew 13% in constant currency in Q2 and 14% in constant currency for the first half of 2012. We continue to add consultants both onshore and offshore to get to a lower blended cost for our customers, which in turn helps to increase demand as well as improve margins. In addition, we continue to invest in new service offers and add to existing ones. However, our Consulting Services growth rate is slowing, and we are likely to see low-double digit constant currency growth during the second half and mid-single digit as reported. And last, our increased investments in R&D continue to bring innovation and industry first to the market. We recently released our unified big data architecture and software to help companies bridge the worlds of classic business intelligence and new big data analytics. Hadoop plays a key role in this unified data architecture for analytics. Consistent with Teradata's view of workload-specific platforms to optimize analytical ecosystems, we see Hadoop as a workload-specific platform for storing, ingesting and transforming the new and the high-volume big data and with Aster allowing for the rapid discovery of the gold nuggets that reside in the Hadoop detailed data. Aster enables knowledge workers to utilize mainstream analytic BI tools that they are already familiar with. This, in turn, makes it easier for companies to deploy analytics on Hadoop and reduce the dependency on expensive and scarce big data engineers for big data analytics. And of course, our core Teradata Active Data Warehouse is the platform that provides unsurpassed integration of all data from all data sources and the real-time delivery of analytics to the front lines. We are clearly gaining momentum in the market with Aster. And although still a small number, we had our largest revenue quarter in Q2, and Aster's pipeline and proof of concepts have grown significantly. Marketing, as well as analytics, will continue to be a top priority for most companies over the next several years and is in an area we will continue to increase our investments. In June, we strengthened our integrated marketing management solution with the completion of our acquisition of eCircle, which is the leading digital marketing company in Europe. We are in the process of taking this solution globally. And most recently, Teradata Aprimo was named to the Leaders Quadrant of the Magic Quadrant for Multi-Channel Campaign Management Report by Gartner. The combination of Aprimo, eCircle, Aster and Teradata will provide an end-to-end marketing solution once integrated that will encompass social, mobile, the Web as well as all traditional channels while providing next-generation digital marketing capabilities with seamless analytics across all marketing data. Longer term, the positions we have established in data warehousing, big data and integrated marketing management should allow us to continue to grow revenue double digits plus. Turning to guidance. Teradata and analytics overall tend to receive a high priority from companies during uncertain economic environments. However, we are not immune from the various negative impacts of these environments that we are now seeing, and this is reflected in our revenue guidance. We are increasing our constant currency revenue growth guidance by 1 point, from 13% to 15% to 14% to 16% for the full year. But the guidance implies a slowing of constant currency revenue growth in the second half to 9% to 13% versus the 20% growth we saw in the first half. As it relates to EPS, due to the overachievement we had in Q2, we are increasing our full year non-GAAP EPS guidance $0.12 to $2.72 to $2.82 per share. I will now turn it over to Steve, who will provide more details on our financial results as well as our updated full year guidance. Steve?

Thanks for joining us this morning. Our Q2 2012 results continue to reflect the strong qualities of our business model, driving revenue that increased 18% in constant currency and record non-GAAP product and overall gross margins and record operating margin. This drove non-GAAP EPS of $0.77, which is a 28% increase from the prior year period. Second quarter revenue of $665 million was up 14% from the second quarter of 2011. Revenue for the first half of the year was up 18%, 20% in constant currency. As you're probably aware, currency moved against us during the course of the quarter a full percentage point, which resulted in approximately $9 million less revenue in our reported results than would have been the case using the April 30, 2012, exchange rates when we updated our 2012 guidance on May 3, 2012. In other words, our Q2 revenue would have been approximately $9 million higher than the $665 million reported. Product revenue of $321 million was up 19% from the second quarter of 2011, up 23% in constant currency. For the first half of the year, product revenue was up 25%, 27% in constant currency. Services revenue, up $344 million, was up 10% or up 13% in constant currency from the second quarter of 2011. Year-to-date, services revenue was up 11% or up 14% in constant currency. Within services revenue for the quarter, Consulting Services revenue was up 9%, up 13% in constant currency. And maintenance services revenue was up 12%, up 14% in constant currency. Year-to-date, both Consulting Services and maintenance services revenue were up 11%, with Consulting Services up 14% in constant currency, while maintenance services was up 13% in constant currency. During my discussion today, I will be addressing margins and expenses on a non-GAAP basis, excluding special items. A reconciliation from GAAP to non-GAAP measures identifying the special items is available in our earnings release and on the Investor page of our website. Gross margin in the second quarter of 2012 improved 260 basis points to 58.5%, a record gross margin for the company. The increase in gross margin was driven by a greater proportion of product revenue versus services revenue as well as improved product and services gross margins. Product gross margin in the second quarter was a record 70.4%, up 190 basis points from 68.5% in the second quarter of 2011. The improvement was primarily driven by less 1000 series appliance product revenue in Q 2012 compared to the product revenue mix in Q 2011. As a percentage of total product revenue, our 2000 series appliance revenue in Q2 was 12.5%, at the midpoint of the 10% to 15% expected range we have previously discussed. Services gross margin in the quarter was 47.4% versus 44.9% in Q2 2011. The increase was primarily due to increased maintenance services margins in EMEA and the Americas as well as the improved Consulting Services margins in APJ. Turning to our expense structure. SG&A expense of $162 million increased $13 million or 9% from Q2 2011. The increase in SG&A for the quarter, which was reduced by approximately $4 million from the currency movement benefit, was primarily driven by the increased number of sales territories as well as higher commissions due to the strong revenue growth generated in the quarter. Despite the investment in sales territories and higher sales commissions in the quarter and year-to-date, SG&A continues to decrease as a percentage of revenue, approximately a full percentage point lower in both the quarter and the first half year-over-year comparisons. R&D in the quarter was $40 million versus $37 million in the second quarter of 2011. However, for the full year, we continue to expect that non-GAAP R&D expense should grow approximately 10% over 2011, factoring in the full year impact of the R&D expense from the acquisitions. As we've mentioned before, we invest more in our R&D activity than what is reported on the R&D operating expense line in our income statement. Total non-GAAP R&D expense for the second quarter, which includes R&D expense plus the additions to capitalized software development cost from the cash flow statement, less capitalization of internally developed software, was approximately $59 million compared to approximately $55 million in Q2 2011. Year-to-date, total R&D expense was $118 million versus the $106 million last year. As a result of all the items in the second quarter, Teradata achieved its highest operating margin ever. Operating margin in Q2 was 28.2%, a significant increase over the 24.3% generated in Q2 2011 which, coincidentally, Teradata achieved the highest operating margin since going public. The contribution from higher revenue and favorable revenue mix offset the increased operating investments. Our GAAP effective tax rate in Q2 2012 was 30% versus 25% in Q2 2011. Our non-GAAP effective tax rate for the second quarter was 30% compared to 27% for the same period in 2011. The non-GAAP effective tax rate for the second quarter increased as we currently are forecasting a higher proportional amount of earnings being taxed in the U.S. which, as you know, has a higher statutory tax rate. Additionally, the Q2 2012 rate reflected no benefit related to the federal R&D tax credit due to its current expiration. We are raising our expectation for full year GAAP tax rate 1 percentage point to approximately 28% and expect our non-GAAP tax rate to be approximately 1 percentage point higher than the associated GAAP effective tax rate as the majority of the non-GAAP pretax items, including stock-based compensation expense as well as the special items, are weighted more to the U.S. The effective tax rate guidance for the full year 2012 assumes that the federal R&D tax credit, which expired as of December 31, 2011, will be retroactively restated for the full year in Q4 of 2012. In terms of earnings per share, our Q2 GAAP EPS was $0.65 versus $0.60 in Q2 2011. Noncash stock-based compensation expenses included our GAAP EPS. During the quarter, stock-based compensation expense was approximately $0.04 per share. We expect stock-based compensation expense to be approximately $0.16 per share for the full year 2012. This reflects the normal increase in stock-based compensation expense as well as the increase in stock-based compensation expense related to our acquisitions. During the quarter, we also had some special items, which totaled approximately $0.08 per share. Excluding the impact of the stock-based compensation and other special items, which equated to $0.12 in Q2, our non-GAAP EPS was $0.77 in Q2 2012 compared to $0.60 in Q2 2011 for a year-over-year increase of 28%. In Q 2011, GAAP and non-GAAP EPS were the same at $0.60 as approximately $0.13 of gains from equity investments offset the stock-based compensation and the other special items. Turning to cash flow. Net cash provided by operating activities was $152 million in Q2 2012 versus $179 million in the second quarter of 2011. After $39 million of capital expenditures, which includes additions to capitalized software development costs and expenditures for property and equipment, versus $33 million in the second quarter of 2011, we generated $113 million of free cash flow versus the $146 million of free cash flow generated in Q2 2011. The decrease in free cash flow was primarily driven by the timing of receivables or collections between Q1 and Q2 of both years. We had stronger collections in Q1 2012 versus the same period last year. On a year-to-date basis, which normalizes the timing of the receivables and the related collections between Q1 and Q2, free cash flow was up $50 million from the $225 million generated in the first half of 2011. As a reminder, Teradata defines free cash flow as cash flow from operating activities less capital expenditure for property and equipment and additions to capitalized software. Turning to the balance sheet. At the end of the second quarter, we had $821 million of cash, a $157 million decrease from March 31, 2012, as cash used for share repurchases, acquisitions and other investing activities outweighed the cash provided by operating activities in the quarter. Approximately 40% of our cash balance is available in the U.S., with the remainder being held offshore. With respect to accounts receivable, days sales outstanding was 72 days as of June 30, 2012, down from the 74 days at the end of Q1 and in line with the 71 days at the end of June in 2011. With respect to deferred revenue. Deferred revenue was down $44 million from March 31, 2012 compared to June 30, 2012, down $39 million in constant currency. Historically, with the exception of last year, deferred revenue declined approximately $19 million between March 31 to June 30 each year due to a high percentage of maintenance contracts that are renewed in Q1 each year. However, in 2011, deferred revenue only declined $8 million from March 31, 2011 to June 30, 2011 as we had approximately $10 million of partial year maintenance agreement additions for existing customers roll over from Q1 2011 to Q2 2011. So if you normalize this in 2011, the prior year decline was right on track, down approximately $18 million. Overall, current deferred revenue as of June 30, 2012, increased $18 million from June 30, 2011, or $30 million in constant currency. And more specifically, deferred revenue for maintenance and subscriptions was up approximately 13% in constant currency for the same period. Maintenance and subscriptions continue to account for greater than 70% of our deferred revenue balance, with the remainder attributable to the product transactions. Deferred revenue related to product transactions can be inconsistent quarter-over-quarter as was reflected in the March 31, 2012, deferred revenue balance. Product transaction deferred revenue was down $20 million from March 31, 2012 to June 30, 2012. However, to add some color around the amount of the product transaction deferral as of June 30, 2012, the amount is consistent with 6 out of the last 8 quarters. This movement is a direct reflection of our business model and revenue recognition policies and practices but does not reflect changes in backlog or expectations for future periods. To provide further transparency around currency movement and the potential impact on future revenue, we provide a schedule on our website detailing how currencies impacted the second quarter of 2012 and how this movement is expected to impact our year-over-year revenue comparisons throughout the remainder of 2012. And as stated earlier, we now see an additional point of headwind from currency on our full year revenue growth as well as 1 point of additional currency headwind in Q3 and in Q4. Assuming the currency exchange rates as of the end of July and assuming currency exchange rates do not change throughout the remainder of 2012, we acknowledge that currency to create about 2 points of headwind for us for the full year and 3 points of headwind in Q3 and 1 point of headwind in Q4. The effect of the change in the exchange rates from April month end, used to base our 2012 revenue guidance on May 3, to the July month-end rates, used to base our 2012 revenue guidance today, was a reduction of revenue of approximately $20 million for the second half of 2012, spread generally ratable over Q3 and Q4. Turning to guidance for 2012. As it relates to revenue, we are increasing our expectation for constant currency revenue growth from 13% to 15% to 14% to 16%. However, due to the additional point of headwind created by currency movement during Q2, our reported revenue growth rate guidance remains the same at 12% to 14% growth. As it relates to EPS, we continue to expect that total gross margin as a percentage of revenue in Q3 2012 is estimated to be reasonably consistent with our 2011 full year's gross margin percentage; in addition, higher R&D expense, up approximately 10% from Q2 2011, including the R&D from acquisitions; in addition, G&A expense to increase in the low-single digits on a percentage basis, again including the ongoing G&A from acquisitions; and finally, higher selling expense from new territories added in 2011 and those territories anticipated to be added in 2012, as well as higher commission expense in presale and consulting expense as the business continues to grow nicely. Incorporating all these factors as well as our strong Q2 results into our EPS guidance, we are increasing our expectations for GAAP EPS to $2.34 to $2.44. The GAAP EPS is expected to include approximately the following: $0.16 a share of stock-based compensation expense, $0.01 a share of estimated purchase accounting adjustments related to our previous acquisitions, $0.13 a share of amortization of acquired intangible assets and $0.08 a share of transaction and integration cost. Excluding these nonoperational items or special items, we are increasing our expectations for our non-GAAP EPS $0.12 to approximately $2.72 to $2.82 per share in 2012. As you are aware, Teradata generates approximately 95% of our revenue from our existing customer base, which supports the strong long-term consistency of our business model. However, due to the size of our transactions, this can drive short-term variability as we just experienced in Q2, which was driven primarily by the favorable revenue mix. As Mike indicated, Q2 2012 performance was very strong, led by an outstanding revenue mix that produced record operating metrics. In the past, we have experienced product gross margin and services gross margin declines up to 270 basis points from Q2 to Q3, driven by product and revenue mix and operating expense increases up to 100 basis points as a percentage of revenue, both of which are examples of short-term variability of our business model from quarter-to-quarter and which would result in estimated yields lower than what we experienced in Q2 of 2012. However, the estimated lower Q3 yields is taken in consideration with our increased guidance. In closing, we are very pleased with our strong results in Q2 especially in light of the negative headwinds regarding the macroeconomic environment. Although we had a very good Q2, we want to be cautious when forecasting the remainder of the year. As we know, no one is immune from macroeconomic forces, although historically, we have fared well on a relative basis even in difficult economic environments. We are extremely pleased with our technology and competitive positioning and remain confident in our ability to execute and drive our business model to leverage our opportunities during the remainder of 2012 and beyond. And with that, operator, we are ready to take questions.

[Operator Instructions] And at this time we have a question from Katy Huberty from Morgan Stanley.

Despite the macro situation right now, you made a few positive comments, particularly about the size of the pipeline in Europe and expected better deal closings in China in the back half. So my question is, where does the 7- to 11-point deceleration in revenue growth come from in the back half if you feel relatively good about those 2 regions?

The -- first of all, Katy, I would look at EMEA. We're having some pretty good results, especially when you look at it in constant currency. The currency headwinds for EMEA in Q3 are about 10 points. And basically, what we're seeing with EMEA as you look at the second half of the year, more impact from currency offset by the strong pipeline as well as we're getting some really strong results out of some of the newer markets, such as Russia, the Middle East and some others. So the net-net, because of the currency, if you look at EMEA organically without the favorable impact of eCircle, it's going to be challenged, as reported, as we look at the second half, but they should grow double digits in constant currency in the second half organically. In the case of APJ, they're pretty back-end loaded. As you mentioned, with China, we expect the deals that have been pushed out and delayed in the first half of the year to start closing, hopefully, some in the third quarter, but most of it's back-end loaded. And when we look at APJ overall, the third quarter, we see it more on the light side with more upside in the fourth quarter. And then overall, when we look at the Americas, the rate of growth they've had over the past several years, we're beginning to see a little bit of a slowdown in the rate of growth simply because of the magnitude of some of the prior year comparables that we're running against there. The activity in everything else in the Americas is very good, and we have pretty good visibility on the third quarter. And in the third quarter, we think we're more towards the lower end of the 9% to 13% we're talking about, the growth in constant currency in the second half. So on the third quarter, as it stands today, we see us more towards the low end of that. And the real upside or the real wildcard comes in the fourth quarter with product revenue. We've got a pretty good handle, as you can imagine, on maintenance and consulting, which operates with a pretty good backlog. The real wildcard will come down to product revenue in the fourth quarter. So -- and back to your original question. You look at first half, second half, we're feeling impacts of the macro. There's definitely some impacts, and it's not just EMEA. You can see it in our consulting business. Some of the customers are doing more in house. Some of the customers are working with smaller chunks of consulting as opposed to broader-based projects. And so we're feeling some of those impacts broadly.

And just as a quick follow-up, similar to some of the comments out of your software peers, did you see weakness in the back half of the quarter and particularly, the month of June? Or was the modest macro weakness throughout the quarter?

No, we didn't, Katy. So we had a very normal behavior in the quarter, and we had a fairly good close at the end of the quarter in Q2.

Our next question comes from Wamsi Mohan from Bank of America Merrill Lynch.

Mike, you alluded to, in your prepared remarks, deceleration in consulting revenue, and as you were answering the last question, you noted a few factors here. But typically, when you see the macroeconomic environment deteriorate, historically, you've actually seen your consulting revenues go up. So I'm wondering what has changed over there, if anything. And have you actually slowed the pace of hiring consultants in anticipation of that?

First of all, Wamsi, we've got to separate out some of the inorganic benefit we've had in our consulting results over the past several quarters from some of the acquisitions. So the magnitude of deceleration in Consulting Services revenue growth isn't quite as large as it appears. So I believe the number, in constant currency without acquisitions, for Consulting Services in 2011, I think it netted down to about 18% growth, okay? And now in the first half of this year, we're looking at a number that's like 13% or 14%. So I just want to get everyone grounded on the amount of deceleration that we're seeing. The -- as far as the consulting and its behavior and slowing down, there's several dimensions to it. So first of all, you can always have some lumpiness. So in the first half of the year, the lumpiness going against us was mostly in the Americas. It was more related to completion of some larger contracts. We had some in the federal government that came to conclusion. Of course, you need to replace them with more contacts. But as you go forward, the size of the contracts in this environment, and we're seeing it more broadly, is companies tend to go with smaller chunks and so forth. You mentioned, historically, our Consulting Services has performed well in a down economy, and right now, I think what we're dealing with is more of an uncertain economy. But the Consulting Services growth rates are good as it relates to our product revenue growth in a down economy. The Consulting Services growth rates are lower if you look at what we grew in 2008 and '09, so I wouldn't take anything there with that.

[Operator Instructions] And at this time we have a question from Jesse Hulsing from Pacific Crest Securities.

On the Aster Data side, proof-of-concept activity seems to be picking up. Are you starting to become more aggressive with how you position Aster data with your broader Teradata sales force? And can you talk about the dynamics of who's buying Aster? And are they buying it alongside your traditional EDW products?

Okay. Well, first of all, we've been aggressively marketing Aster Data since the acquisition. So I think what we're seeing is things have matured. And as things have matured, meaning acquiring more customers, more use cases, template-type applications, if you will, it's easier to deploy, get in front of customers, do proof of concepts. And as the product and use cases mature, you can more aggressively get it out in front of customers. In addition, we've held several big data conferences. We did a roadshow. We're not finished with it yet. There's still one left in New York we're doing in October. And the attendance there and the interest has been very, very good. So like I said, the pipeline is up significantly. The proof of concepts is up very, very significantly. And although it's small numbers, we had a good amount of revenue, our highest Aster revenue in the second quarter.

Yes. The other thing that you talk -- who's buying the Aster. It really is across the board, so we're having strong interest in financial, retail, e-business and government. And as you can imagine, a lot of them are looking at this platform as an alternative to a lot of their Hadoop projects. So many of them have started to do projects and found that they needed a tool and platform that could help them access the data using some of the standard tools, and Aster, using SQL-MapReduce, is the perfect tool to allow them to apply some of their existing tools against the big data projects that we have going on. So again, we're seeing it in finance, marketing and the e-business side at many of those industries.

Our next question comes from Raimo Lenschow from Barclays.

A quick question from me. I'm thinking more about Europe again. Obviously, we have the concerns on the macro. But then if I look at the revenue contribution you're getting from Europe, it seems that you are still not really at a mature stage. Can you maybe talk about how you see your revenue mix, from a geographic perspective, evolve over time? And maybe kind of help us to get more comfortable on the European development in that respect.

In general, we see the market adoption of technology and analytics and data warehousing, generally, around the world, trailing the U.S. And I do believe one of the reasons we're doing fairly well in Europe -- doing fairly well is a relative term. But we are at that point in Europe where the market adoption of Enterprise Analytics and Enterprise Data Warehousing, as Teradata views it, is gaining a lot of traction. So we've gained a lot of traction in the telecommunications industry, financial services industry. The retail industry is doing very well in Europe, and we're gaining traction in newer industry segments, such as manufacturing, so forth. So in Europe right now, we're at a point where relative -- if we forget the macroeconomic conditions, relative to the Americas, the revenue contribution from EMEA is going to continue to increase. That is the trajectory we're on. And we are -- as a percent of our total revenues, EMEA is at a lower percent of contribution than a lot of the U.S.-based technology companies are that are global. So we do expect that to go up over time.

Our next question comes from Matt Summerville from KeyBanc.

This is actually Joe on for Matt. Given the strong start to the year, do you get the sense that there was any pull-forward perhaps maybe with customers looking to spend their budgets before the macro gets worse? And then kind of along with that, I just want to make sure we have the seasonality right. Historically -- and you've talked about this a little bit. But historically, the third quarter looks similar to the second quarter with the fourth quarter being the high watermark for the year. And I mean is that seasonal pattern expected to hold at least on the revenue side?

It's interesting you brought this up. Historically, if you looked at Teradata, revenue declined sequentially between Q2 and Q3, and there's a number of factors in the third quarter that deals with holidays in certain parts of the world and things like that. But if you do go back and you look at 2000 to 2006 and into 2007, some of these years, we declined sequentially. When we started growing at a more rapid rate like we've done recently, we've been more on a sequential growth almost across all quarters except for, of course, Q4 to Q1. So it's -- yes, there's a little bit of -- we've increased sequentially the last 2 years, but we're not planning on seeing that type of growth going from Q2 to Q3. The other part of the question was on pull-forward and really, really flushing of budgets or us pulling forward or whatever, once again, Q2 behaved very normally. And as we entered the third quarter, we're entering in a similar condition that we entered Q2.

Our next question comes from Edward Parker from Lazard Capital Markets.

So you mentioned that you continue to be pleased with the ROI on the sales territories that you've been adding here the last several years, and I think you also mentioned that you're on track to be at the higher end of your 2012 plans. But I wanted to ask, have you given any thought about 2013 hiring plans? And do you see enough opportunity out there to keep your foot on the accelerator in terms of hiring?

As it stands today and what we know today, we would be looking at similar number sales territories in 2013. We're pleased with the ROI. If anything changes between now and then, positively or negatively, maybe we'll tweak it up or down. But you can count on us continuing to expand the sales territories.

To take in 30 to 50 is a good number to think about?

Yes.

I'm sorry, 30 to 35?

Yes. Yes, 30 to 45.

Our next question comes from Derrick Wood from Susquehanna International.

And it sounds like you're qualifying these good results with some cautious macro commentary, as you often do, but you are raising constant currency guidance in this kind of tougher market. Clearly, in aggregate, you guys are navigating the macro quite well. So just curious what you're hearing from customers in terms of why you're staying so high in priority. And would also be curious to just kind of get a sense of the magnitude of some of the new growth drivers, maybe 6690 upgrades or synergies with Aprimo or Aster, to what degree that's helping lift your outlook for the year.

Okay, Derrick. The -- so 95% of our revenue comes from the customer base, and a lot of that revenue is segmented into a subset of our total customer base. And we do have pretty good communication with what's gone on with our customers. I think if you look in our customer base and especially ones with Enterprise Data Warehouses, it's a continual journey. So they're always building out. We're always working with them for return on investments and defining what the metrics are and everything. So as we complete each addition and build out of an Enterprise Data Warehouse, we can show meaningful ROI to the companies. So I think between having out there in the market place that analytics is a big thing and big data is a big thing and all this stuff, with that kind of air cover and then us actually working hand-in-hand with customers and actually delivering ROIs that the C levels can see it and understand it inside corporation, bodes well for our user base. The other macro thing that works in our favor is most companies out there right now have cost reduction initiatives that are somewhere near the top on the list. If it isn't cost reductions, it's trying to constrain cost. And we have a clear methodology documented how we can help take out cost in the process of providing better analytics. So these things tend to work in our favor. That all said, I'm very confident we can always be in the top part of the budget prioritization in corporations, right? But when the budget actually gets cut, it's difficult to have the customer, in many cases, spend more money with you than they did the year before as the budgets are getting cut, and you saw that in 2008 and 2009. So that bodes well for us. The 6690 does present an opportunity for us to accelerate a little bit more floor sweeps as more companies have older non-hybrid storage types of EDWs then they can hit the tipping point and switch over to the 6690. Aprimo and Aster clearly are good revenue growth opportunities for us this year and next year. Especially when we look at the software as a service subscription model with Aprimo, that bodes itself well for consistent revenue growth. Did I catch everything?

I think you did. Yes.

Our next question comes from Aaron Schwartz from Jefferies. Aaron Schwartz - Jefferies & Company, Inc., Research Division: I just had a question on that gross margin. You were pretty upfront with the dynamics here in the quarter. But as you see maybe a little more macro pressure, some of the things you talked to, can you just walk through how you would expect the product mix shift to look going forward? Are there any historic trends you can point to? Or is there sort of any more constraint or trade downplay within the product mix?

Yes. So there's actually a couple of components here. Aaron, first of all, if you're talking specifically about the product mix, it's a little less predictable as far as appliances versus EDW. Obviously, if a customer is upgrading or enhancing and adding to their EDW, we know the product mix, but there are some cases of specific use data warehouses within an EDW customer that may or may not go with an appliance, new customers that we win. Half the time we're winning with an EDW, half with an appliance. Don't take that as a precise answer on the percentage of which, but it's hard to predict the mix of these things in the quarter. So the dynamics of the gross margin is we kind of had the trifecta here in the second quarter, where we had the product revenue growing faster than the services revenue. As you look out to the second half of the year, they're kind of lining up closer or similar in terms of rate of growth, the -- yes, so that's the dynamics.

And Aaron, yes, what I would add to that, what Mike was alluding to, as we look at the configuration in Q3, Q2, as Mike said, was a perfect game with that trifecta, with everything lining up but with respect to margin -- gross margin performance. And I would expect Q3's configuration estimated to be more in line with our historical averages, not declining but maybe more in line with Q2 -- or Q1, I should say, and then we have total year 2011 with respect to margin performance. So not really declining but not really being at that high rate that you saw in Q2. Aaron Schwartz - Jefferies & Company, Inc., Research Division: Okay. That's helpful. And just a quick clarification question. But did you say that the non-GAAP tax rate is expected to be about 29% for the year?

29% for the year, yes.

And at this time, I hear no response. I'll now turn the conference back to our speakers for closing remarks.

Okay. Once again, thank you all for joining us here this morning. In closing, I'd like to invite each of you, if you can, I know it's a busy time of the year, to our PARTNERS Users Group Conference in Washington, D.C. It's October 21 to 25, and that's our global customer conference. And if you're interested in attending, please contact Gregg to register. So once again, thanks, everyone, and have a good day.

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