Teradata Corporation (TDC) Q3 2012 Earnings Report, Transcript and Summary

Gregg Swearingen - Former Vice President of Investor Relations 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

Wamsi Mohan - BofA Merrill Lynch, Research Division Kathryn L. Huberty - Morgan Stanley, Research Division Bhavan Suri - William Blair & Company L.L.C., Research Division Raimo Lenschow - Barclays Capital, Research Division Jesse Hulsing - Pacific Crest Securities, Inc., Research Division Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division Gregory Dunham - Goldman Sachs Group Inc., Research Division Brent Thill - UBS Investment Bank, Research Division Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division Edward Parker - Lazard Capital Markets LLC, Research Division Keith F. Bachman - BMO Capital Markets U.S. James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division Aaron Schwartz - Jefferies & Company, Inc., Research Division

Welcome to the Third Quarter 2012 Teradata Earnings Conference Call. My name is Christine, and I'll be your operator for today's conference. [Operator Instructions] Please note today's conference is being recorded. I will now turn the call over to Gregg Swearingen. Sir, you may begin.

Good morning, and thanks for joining us for our 2012 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 guidance for 2012. 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 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 the call today, whether as a result of new information or future results. I'll now turn the call over to Mike.

Good morning, everyone. And for those of you impacted by the storm, I hope that you're all doing okay. Overall, I was pleased with Teradata's execution in Q3 given the macro environment. Revenue of $647 million was generally in line with what we had expected, growing 7% as reported and 10% in constant currency. From a region perspective, EMEA and APJ came in higher than we had anticipated and the Americas lower. We had strong yield on revenue in Q3 with non-GAAP operating income of $166 million, which was up 16% over prior year, and non-GAAP EPS of $0.69, which was up 17%. Longer-term, we believe we are well positioned for a sustained double-digit revenue growth. We have market-leading technology and solutions to build upon in 3 large and growing markets: data warehousing, big data analytics and Integrated Marketing Management. These are market opportunities that will continue to be top priorities for corporations as they look to gain competitive advantage from big data and the big data channels such as social networks, the web, mobile and sensor. Shorter-term, we are feeling the impacts of the macro environment but to varying degrees in each of the 3 regions. In EMEA, we continue to generate double-digit organic constant currency revenue growth overall, but our results would be better if not for the macro headwinds. In APJ, we are now closing deals in China that were delayed from the first half. Japan is growing again, and overall, APJ is on track for decent growth for the year. But in the Americas, we are now seeing slower growth and 3 factors that are contributing to this. First, we are seeing a little belt tightening and uncertainty on spending with some of our customers. Second, 95% of our revenue comes from our user base on average each year. The Americas' strong product revenue growth the past 2.5 years has added a lot of capacity to many of our customers, which gives them some flexibility as to when to add capacity, especially in times of uncertainty. And third, the prior year comparables, such as the 28% revenue growth we had in Q3 last year. Although we experienced some minor lumpiness, overall, we believe these are the 3 key headwinds we saw in Q3 and also for what we are seeing in Q4 in the Americas. The Americas' third quarter revenue of $384 million was up 2% and up 3% in constant currency over prior year. Year-to-date, revenue was up 15% as reported and also in constant currency. The win rates remained strong as evidenced with the Americas Q3 data warehouse new customer wins, which was the second highest for any quarter dating back to the year 2000. New customers joining Teradata included Fruit of the Loom, which will use our data warehouse to provide a consolidated view of the supply chain and financial metrics across all of their brands; Aviva, one of the fastest-growing life insurance companies in the U.S., which is adding Teradata for predictive analytics; 24/7 Media, which will use Teradata to power its digital forecasting solution; The Men's Wearhouse which will consolidate its data markets into an integrated data warehouse for improved analytics; and Monroe Energy, a new oil refining company that will use Teradata as its foundation for integrated data and analytics. Upgrades and expansions included Safeway, Symantec, CVS and a U.S. Government law enforcement agency. In addition, SaaS and Teradata teamed to establish an innovation lab with the Centers for Medicare & Medicaid Services. This lab will be used for predictive modeling to understand Medicare program trends and variations and to test new risk approaches. Turning to Europe, Middle East and Africa, revenue of $156 million for the quarter was up 17% from the third quarter of 2011 and up 28% in constant currency. Year-to-date, revenue was up 14% as reported and up 23% in constant currency. New account wins included one of the largest electronics companies in the world, which will use Teradata to complement their ERP solution to get more granular analytics across the company on consumers, products, finance, HR and suppliers; and Samsung U.K., which selected Aprimo to manage its direct-to-consumer marketing campaigns. Upgrades and expansions from existing customers included DHL, Maersk, Pakistan Telecom Mobile, the Swiss government and TeliaSonera. Asia Pacific and Japan delivered good revenue growth in Q3 with revenue of $107 million, which was up 14% over prior year and up 16% in constant currency. New customer wins included PC Mall, the largest computer electronics retailer in China and is now our first Aprimo customer in China; SP AusNet, the leading Australian utility, which will use Teradata for smart network management, integrating data from over 600,000 smart meters and network monitors to help adjust demand and give customers greater ability to manage their own power consumption; HTC, the smartphone manufacturer; and China Eastern Airlines, which will implement an enterprise data warehouse starting with Customer Relationship analytics. Upgrades and expansions in the quarter included Commonwealth Bank of Australia, Standard Chartered Bank of Korea, Bank of Shanghai, Oversea-Chinese Banking Corporation, Westpac Bank in Australia, Nakashimato [ph] in Japan and Yahoo! JAPAN. Teradata's focus today and going forward is centered on driving value from big data for our customers. We are doing this in 2 areas: one, by providing analytics for all data: big data, traditional data, any type of data; and two, by providing our customers the ability to leverage all channels to drive value, including social networks, the web and mobile. The key is to have all data and all channels working in concert, past, present and future. This is critical if corporations or government agencies are going to realize the full potential of the new big data. And in the case of marketing, we are focused on providing an end-to-end solution for our customers and a solution that is available in the cloud, on premise or both. Our Integrated Marketing Management solution encompasses marketing operations, analytics for all data, multichannel campaign management and the execution and delivery of marketing offers for all channels. We see marketing organizations as the key driver of analytics today and that they will play an even bigger role in many corporations for the years to come. They are in the best position to enable corporations to gain competitive advantage from the new big data insights and the new big data channels. Last week, at our Annual Global Customer Conference, we had over 3,900 attendees with over 300 sessions and over 200 customer presentations, all focused on analytics and driving business value. There is no other event like this in the world. Key Teradata announcements included 3 centered on big data analytics. First, we launched our Unified Data Architecture, an integrated environment that brings together multiple data technologies. This foundation leverages the best of breed and complementary capabilities of Teradata, Aster and Hadoop. Second, we demonstrated our Aster Big Analytics Appliance, which is an industry first, bringing together Aster's SQL-MapReduce capabilities, the Hortonworks Data Platform for Hadoop and our Aster's Analytics Portfolio, which now has more than 50 prepackaged analytics built from use cases. The Aster Big Analytics Appliance is an integrated Hadoop-Aster environment supported by Teradata. It speeds the adoption of big data analytics and at a lower cost by allowing existing employees to use the same SQL BI tools and skill sets that they already use today for traditional data analytics. This is in contrast to hiring expensive and scarce engineering resources to do analytics on the multi-structured data coming from social media, the web, mobile, call centers and more in order to gain insights into customers from these new channels. Third, we announced significant advancements to our database technology, including new workload management functionality and new tools to simplify and automate database management and to expand self-service capabilities for our customers. It is key that we continue to advance our active enterprise data warehouse capabilities to help our customers manage the ongoing data explosion. Data warehouse demands and scale are only going to get more and more challenging as evidenced by Teradata now having 34 customers with petabyte data warehouses. We also made several Integrated Marketing Management announcements at the conference. Two that were being big data related were: our Digital Messaging Center. This solution comes from eCircle and is a comprehensive cloud-based solution for the next generation of digital marketing. It is a centralized hub where all cross-channel digital messaging activity can be managed. And second, we announced our new social network segmentation along with tighter inbound and outbound active marketing integration for our multichannel campaign management solution. Regarding our growth initiatives, we are attracting to reach the higher end of the 35 to 45 range for sales territory additions that we targeted for 2012. And we continue to invest in tools and service offers to help customers extract more value from their data and also to make us more efficient. However, our hiring has slowed from recent levels given our lower Consulting Services growth of 10% as reported and 13% in constant currency in the quarter. Turning to guidance. We now expect revenue growth for the full year to be at the lower end of our previous guidance ranges. And we expect earnings per share to be in the middle to higher end of our previous guidance ranges. Before I turn the call over to Steve, I want to summarize that I am confident that our competitive position has never been stronger. Our team continues to execute well, and we are well positioned in 3 growing and strategic markets for the long-term. Now I'll turn the call over to Steve for additional details. Steve?

Thanks, Mike, and good morning, everyone. Teradata generated a third quarter revenue of $647 million, which was up 7% from the third quarter of 2011, up 10% in constant currency. We view this as a good result given the uncertainties surrounding the global economic environment. Revenue for the first 9 months of the year was up 14%, 17% in constant currency. Product revenue of $306 million was up 7% from the third quarter of 2011, up 9% in constant currency. For the first 9 months of the year, product revenue was up 18%, up 21% in constant currency. In terms of linearity, product revenue in the quarter was more back-end loaded in Q3 2012. Services revenue of $341 million was up 8% or up 12% in constant currency from the third quarter 2011. Year-to-date, services revenue was up 10%, up 13% in constant currency. Within services revenue for the quarter, Consulting Services revenue was up 10%, up 13% in constant currency. And Maintenance Services revenue was up 6%, up 9% in constant currency. Year-to-date, Consulting Services revenue was up 11%, up 14% in constant currency, and Maintenance Services revenue was up 10%, 12% in constant currency. During my discussion today, except where otherwise noted, I'll be addressing margins and expenses on a non-GAAP basis, excluding stock compensation and special items. A reconciliation from GAAP to non-GAAP measures identifying these items is available in our earnings release and also on the Investor page of our website. We had solid operating execution and performance with gross and operating margin improvements, driven by disciplined operating fundamentals. Gross margin in the third quarter of 2012 improved 150 basis point to 56.9%. Product gross margin in the third quarter was very strong, 70.3%, up 340 basis points from the 66.9% in the third quarter of 2011, the second consecutive quarter of the team generating very strong product gross margin. The improvement was primarily driven by favorable revenue mix in Q3 2012, compared to the product revenue mix in Q3 2011. As a percentage of total product revenue, our 2000 series appliance revenue in Q3 2012 was generally at the midpoint of the 10% to 15% expected range we have discussed previously. Services gross margin in the quarter was a solid 45%, slightly higher than the 44.9% in Q3 2011. Turning to our operating expense structure. SG&A expense of $163 million increased $9 million or 6% from Q3 2011, with the majority of the increase being in the selling expense. R&D, Research and Development, in the quarter was $40 million versus $39 million in the third quarter of 2011. Year-to-date, R&D expense was $123 million, up 13% versus the prior period. As we mentioned before, we invest more in our R&D activity than what is reported on the R&D operating expense line on our income statement. Total R&D spend for the third 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 $60 million or approximately 20% of our product revenue. This compared to approximately $55 million in Q3 2011. As a reminder, these capitalized costs, when amortized, are then added back to the income statement as product costs over revenue, which reduces product gross margin. Year-to-date, total R&D spend was $178 million or approximately 19% of our product revenue versus $161 million last year. As a result of all these items, operating margin for the quarter was 25.6%, a 200 basis point increase over the 23.6% generated in Q3 2011. The contribution from higher revenue and favorable revenue mix offset the increased operating investments. Year-to-date, operating margin improvement was even better, increasing 240 basis points or 26% for the first 9 months of 2012 versus 23.6% for the same period last year. On a GAAP basis, our effective tax rate in Q3 2012 was 27.3% versus 28.1% in Q3 2011. Our non-GAAP effective tax rate for the third quarter was 28.3%, compared to 28.9% for the same period in 2011. Our year-to-date 2012 effective tax rate did not reflect the tax benefit related to the Federal R&D tax credit due to its current expiration. We continue to expect our full year GAAP effective tax rate to be approximately 27% and expect our non-GAAP effective tax rate to be approximately 28%, or 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 reinstated for the full year in Q4 of 2012. If the credit is not reinstated by the end of the year, our tax expense will be negatively impacted by approximately $4 million in the fourth quarter of 2012. In terms of earnings per share, our Q3 GAAP EPS was $0.60 versus $0.51 in Q3 2011. Noncash stock-based compensation expense is included in 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. Excluding the impact of stock-based compensation and other special items, which equated to $0.09 in Q3, our non-GAAP EPS was $0.69 in Q3 2012, compared to $0.59 in Q3 2011 for a year-over-year increase of 17%. Turning to cash flow. Net cash provided by operating activities was $107 million in Q3 2012 versus $102 million in the third quarter of 2011. After $40 million of capital expenditures, which include additions to capitalized software development costs and expenditures for property and equipment versus $27 million in the third quarter of 2011, we generated $67 million of free cash flow versus $75 million of free cash flow generated in Q3 of 2011. The decline in free cash flow was primarily due to increased investments in property and equipment and capitalized software development expenses in Q3 2012 versus the same period last year. On a year-to-date basis, free cash flow was $342 million, increasing $42 million year-on-year. As a reminder, Teradata defines free cash flow as cash flow from operating activities less cash expenditure for property and equipment and additions to capitalized software. Turning to the balance sheet. At the end of the third quarter, we had $909 million of cash, an $88 million increase from June 30, 2012. Approximately 50% of our cash balance is available in the U.S. with the remainder being held offshore. And as I said before, expect that the rate of our share repurchases will continue to fluctuate each quarter taking into account among other things, our working capital needs, our stock price, alternative uses of cash, our U.S. cash balances and economic and market conditions. With respect to accounts receivable. Day sales outstanding or DSO was 74 days at September 30, 2012, relatively consistent with June 30, 2012, and September 30, 2011. Accounts Receivable increased 19% compared to revenue increase of 7%. The primary driver of the increase in accounts receivable was the timing of the product revenue transactions during Q3 2012, which were more back-end loaded when compared to Q3 2011. With respect to deferred revenue. With the recent fluctuations in our deferred revenue, particularly as it relates to product transactions, which as I said in the past, can be inconsistent or lumpy quarter-over-quarter, we will be presenting the short-term and the long-term deferred revenue balances on our balance sheet. My discussion that follows will address total deferred revenue. Total deferred revenue of $382 million as of September 30, 2012, was down $52 million from the June 30, 2012, and up $7 million from September 30, 2011. Deferred maintenance and subscription revenue continues to increase at a rate consistent with our expectations. As I said in the past, deferred revenue associated with maintenance and subscriptions generally account for greater than 3% [ph] of the deferred revenue balance. That said, over the past 16 quarter ends, deferred product transaction revenue has ranged from $70 million to $100 million. As of September 30, 2012, deferred revenue related to product transactions was in this historical range. The movement in product transaction deferred revenue is a direct reflection of the nature of our business model and our revenue recognition practices and does not reflect changes in backlog or expectations for the future periods. With respect to currency movement. To provide further transparency around currency movement and the potential impact on our future revenue, we provide a schedule on our website detailing how currencies impacted the third quarter of 2012 and how this movement is expected to impact our year-over-year revenue comparisons for the remainder of 2012. Assuming the currency exchange rates as of the end of October and assuming the currency exchange rates do not change throughout the remainder of 2012, we expect a 2-point headwind from currency for the full year. We expect a 1-point headwind on our Q4 revenue comparison. Turning to guidance for the full year 2012 as it relates to revenue. As a result of the impact that the macroeconomic environment is having on overall business activity around the world and more specifically on CapEx expenditures, we now expect our growth in our reported revenue for the year to be at the low end of our prior guidance of 12% to 14%. On a constant currency basis, we now expect 2012 revenue at the low end of our prior guidance range of 14% to 16%. As it relates to EPS. We expect EPS to be in the middle to the high end of our previous guidance range of $2.34 to $2.44. This 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, $0.14 a share of amortization of acquired intangible assets and $0.07 a share of transaction and integration costs. Excluding these nonoperational items, or special items, we expect our non-GAAP EPS to be in the middle to the high end of our prior guidance range of $2.72 to $2.82 per share for the full year. In closing, we are pleased with our year-to-date results, and we continue to deliver solid performance. Importantly, we’ve realized growth across all our 3 geographical operating reporting regions, despite continued uncertainty in the worldwide economy. We have done this by consistently investing in our solutions, services and our go-to-market strategy. And we will continue to be disciplined in managing our operations and capital. Teradata's unique combination of technology strength and differentiation, Consulting Services excellence and our global capability should enable us to deliver long-term sustainable increases in revenue, earnings and cash flow. Many of you attended our customers User Group Conference last week and experienced firsthand the strong and positive relationships that exist between Teradata, our customers and our partners. And many of you have commented that our customers repeatedly said that Teradata has true technology leadership in terms of integrating data for complex analytics, both structured and multi-structured data, scalability, concurrency, mixed workloads and workload management, as well as overall customer support. However, in the short-term, the global uncertainty may make it a little more difficult for IT cap investments to be approved. And with that, operator, we are ready to take questions.

[Operator Instructions] The first question comes from Wamsi Mohan from BoA Merrill Lynch.

Mike, you had told us last quarter you were expecting to be at the low end of the revenue guide in the back half of 9 to 13, which is where you came in. But you also alluded to 3 reasons today for some of the weakness in the Americas. Sounds like 2 of those, both belt tightening and tougher comps, are transitory, but I was curious about your comment on the historical strong product growth that's giving the user base some more flexibility in delaying purchases. So where do you think we are with capacity utilization? Are we talking about 1 quarter or 2 of potential excess capacity? Or is this something that could pressure growth in 2013?

Well, I think the -- I think you need to take a look at the strong product revenue growth we've had the past 2.5 years in conjunction with the belt tightening that we're seeing. So what happens is, as IT budgets and our customers and the user base get a little bit tighter with how they're spending money right now, the added capacity that we put out there over the past 2.5 years gives the customers more flexibility than they had, say, 1 year ago or 2 years ago. So they're able to optimize and figure out how to use the capacity that they do have because there's more of it for different functions. So there might be some uses that are more strategic than other uses, there might be different priorities they can give to different users and different types of applications and so forth. And it just gives them a little more flexibility to hold off and to add capacity at a later date. In terms of your question regarding, so how long might we see this, it's difficult to tell at this juncture. It's -- once again, it's related to the belt tightening. So if we don't have belt tightening like we've run into right now, the impact of the added capacity we’ve put out there is minimized. If we continue that belt tightening, then this will linger on for a while. I think we'll be in a better position to answer that second part of the question when we get to the next earnings call early next year.

The next question comes from Katy Huberty from Morgan Stanley.

Just a follow-up on the first question. Is the delay in spending that you're seeing entirely capacity additions in the installed base? Or are you also seeing new customers delay new analytics projects? And then if you can comment on -- I think, you mentioned that some of the China deals have closed. Are you seeing the new China and Europe pipelines converting at the same rates that you expected? Or has that also slowed down?

First, let me make sure I do a clarification. Everything that I just said in answer to Wamsi's question is related, Katy, specifically to the Americas, all right? So if we stay on the Americas as it relates to your question, regarding outside user base and the impacts of some of the belt tightening that we're seeing, in the Americas, we did have our second best new account win quarter -- of any quarter that we've had in the last 12 years. So we've been able to actually accelerate and step up our new customer wins in the Americas in 2011 and also in 2012 and actually increased it over the first half of this year, Q1 and Q2 and Q3. So that piece is going pretty well. There is an impact as it relates to the new customer wins that, yes, the decisions get extended a little bit longer, so we've had a pipeline of new customers in play that we're always working from and will continue to materialize. And also under some belt tightening, the size of the deals may be smaller than they would be when we're having -- for the new customer wins, that is, they might be smaller than when we're in a more robust type of economic environment. Katy, I'm sorry, as it relates to EMEA and APJ?

Are the China and Europe deals that you talked about last quarter converting at the same pace that you expected?

Okay. Thank you. On China, yes, what we said in Q1 and Q2 is we ran into some pretty big delays on some pretty big opportunities and that we expected them to close in the latter part of the second half. And China has come back strong. Some of these large opportunities closed in Q3. There's more coming in Q4, and the amount of growth in China was huge in the third quarter, and we're anticipating similar in Q4. Regarding EMEA, we're seeing very little change, and we -- in terms of length of sales cycles and all that, we're just outrunning the impacts of the macro. And in Europe, Middle East and Africa, our results actually could be stronger because we are getting hit by the macro in some of the countries in Western Europe where we've had revenue declines this year. So basically, EMEA is running -- continues to run strong. We expect another really strong quarter from EMEA in Q4, and APJ is on track to have a good year for growth.

The next question comes from Bhavan Suri from William Blair & Company. Bhavan Suri - William Blair & Company L.L.C., Research Division: Just a question on the Americas deals and sort of the challenging environment. Going into the quarter, you suggested that because of the summer break in Europe, you could see some of that lead to the sequential decline in Q3 from Q2. But it appears it's obviously Americas, but were there certain verticals that you saw the weakness in? And did you sort of see delayed decision-making? Or did deals just sort of get pushed out, and they're still sort of in the pipeline?

In regards to the Americas, it did come in less than what we expected. So maybe like $10 million or $20 million less than what we were looking at in the Americas, and EMEA and APJ actually came in higher. But this is somewhat normal in most quarters. We'll have some regions come in higher, some regions lower, and we have some -- we can have some large transactions that get hung up, and in the case of the Americas, we did have 1 large opportunity, a little over $10 million that moved out of the quarter and moved into 2013. As it looks by vertical, looking at one quarter, it's hard to establish a trend from it. We did have very strong results in manufacturing, but I can't tie that to anything to do with the macro or anything else like that. We were under -- were other industries where we had declines in the Americas in the third quarter. Telecommunications industry was down, financial services was up a little, and so in the quarter, I can't pin anything on it by vertical. Bhavan Suri - William Blair & Company L.L.C., Research Division: Okay. And then just one follow-up to Wamsi and Katy's question. When you look at the existing base and you said they've got the opportunity to sort of delay some of the purchases, can you give us a sense of sort of on average, what is the utilization at existing customers off their existing Teradata environment? Sort of how much headroom do they have if you were to think about capacity from a flexibility perspective?

So in our user base, if you have a meaningful integrated enterprise data warehouse, the way that system works is you're consolidating thousands of users and thousands of applications, and you're executing thousands of queries. And it's a wonderful thing because the computing assets get utilized anywhere from 90% to 100% across our user base. So our enterprise data warehouses provide private cloud-like benefits to our customers because most corporations around the world, the computing assets are utilized 20% to 25% of the time. Now as it relates to this additional capacity that's been added and the flexibility, the customers will still find ways to use whatever capacity it is and optimize it to 90% or 100%, but they can scale back and lower priorities on some types of work that they're doing and some types of the workloads and just use what they have, there's more of it, more efficiently. I appreciate that's not exactly a clear answer, but if a customer has capacity there, they're going to use it one way or another. But some of that capacity that's being used at times is more for luxury than mission-critical.

[Operator Instructions] The next question comes from Raimo Lenschow from Barclays.

The question I had was around how you manage the P&L around the uncertainties that you have at the moment. Obviously, you had a gross margin benefit this quarter, but you also kind of saw a lower OpEx compared to what I had modeled. Given the uncertainty that we have going forward, how do you think about managing the P&L and, hence, managing your earnings?

Yes, Raimo, what we look at is really the focus on the execution, the operational execution. I mean, Q3 you see that in the OpEx expenses, but we're continuing to invest in this new sales territories. As Mike said, we continue to be at the higher end of that 35 to 45 new sales territories. And we have lower hiring on the PS side, as Mike said in the prepared remarks, reflected above that 10% growth. So again, that emphasis or focus on execution is still there and being closely looked at and monitored.

The next question comes from Jesse Hulsing from Pacific Crest Securities.

You mentioned a number of new wins in the quarter, and a great quarter from a new adds perspective in the Americas. What's driving the increased customer addition velocity in what otherwise was a pretty tough environment? And as a follow-up, what proportion of those customers are adopting the hybrid 6690 data warehouse?

Well, we've been expanding our market coverage in the U.S., well, and around the world for a number of years now, and we've gone deeper with more solutions, more partners and everything else. We've also expanded into the mid-market in the Americas, and I think we have very good momentum as well as awareness in the United States. If any of you that were at our Customer Conference last week, it's pretty evident. And we have a number of people that work in one company that's a Teradata user and goes to another company, and it just goes on and on and on. As it relates to how many are adopting the 6690 versus the 2000 appliance, was that the question? Or 6690 versus the 6000?

I think -- Jesse, you just meant the ED -- the 6000 series in general, right?

Yes, the hybrid versus the homogenous was the question.

So for the SSD capabilities?

For the hybrid -- for the new customers. Yes, generally speaking, we're getting new customers that are going with the EDW class, yes, with the 6690.

The next question comes from Matt Summerville from KeyBanc.

Just a couple of quick things. Mike, I wanted to clarify something. Did you mention earlier, I think it was to maybe one of Katy's questions, that your Western European business has been down all year? And if so, how much of the EMEA region now is Western Europe if all the growth is being driven by, say, Eastern Europe and the Middle East?

Thanks, Matt, because I want to make sure I clarify this. We have a couple of countries in Western Europe that have declines in revenue year-to-date. So in particular, we have countries like Spain, which had huge growth in 2011. They're down in 2012, and France is down a little bit. But generally speaking, Western Europe collectively has grown this year. So...

Okay, I apologize for misunderstanding that part.

No, it's okay, and I wanted to make sure we get it clear on the call. Because overall, Western Europe we are having very good growth, but it could be better, except for we are getting hit a little bit with the macro in some of these countries.

And then Mike or Steve, could you comment on what your preliminary thoughts are as far as territory additions in 2013?

As it stands right now, we will be adding territories in 2013. And to what degree? It's less about the macro. It's more about -- we've added a lot of additional solutions and capabilities and innovations inside of Teradata that we're trying to deploy around the world. So we may have to get some of the selling expense and investments into subject matter experts on all of these additional things, such as our Integrated Marketing Management, digital marketing, as well as Aster big data analytics is moving all over the world right now. So we may need to shift some of that investment into sales specialists from territories. But generally speaking, the number of territories, we have tremendous opportunity to add more territories, and we'll continue to do it.

The next question comes from Greg Dunham from Goldman Sachs.

Quickly on the product gross margin side, that was a very kind of standout performance this quarter. How should we think about that going forward in terms of the mix of product revenues? Would you expect that to change? Or is this a trend that should continue?

Yes, Greg. Yes, this is Steve. It will fluctuate again. Quarter by quarter, we've had good execution Q2, Q3. And I'm not saying it's a trend upwards. There'll be variability in that product revenue. In 2012, we had a couple of things that I talked about earlier in the year. Headwinds from the dry pricing in Taiwan and also FAS 86 amortization. Those things in 2012 had come in a little better than what I've expected, again with our disciplined execution on the price on the cost -- or the purchasing side. Those disk drives came in and held the price pretty steady compared to some of the upside risk we were looking at. And then FAS 86 amortization came in less than I was looking at in 2012, primarily due to the timing of the releases. And so I'll have the FAS 86 amortization headwind in 2013 that we’ll address, but again, that product gross margin will still stay somewhat fluctuating.

The next question comes from Brent Thill from UBS.

EMEA has been the standout, and I'm just curious if you feel EMEA is exhibiting the same capacity adds as you're seeing, I guess, in the U.S. And Mike, I guess you alluded to the capacity was added, and you're seeing a slowdown there. Is there any risk you're seeing in anything that customers are doing that they may choose to follow the same pathway that the U.S. did? Or is it just a completely different dynamic that you're seeing on the European side?

The different dynamic between EMEA and the Americas, and in particular the U.S., is the amount of growth and the amount of product revenue growth over the past 2.5 years. The Americas has been averaging 20%-plus revenue growth on average each quarter for the past 10 quarters, and the product revenue has been higher than that. So the magnitude of product going into the customer user base in the Americas has been higher than in EMEA. So EMEA has also been dealing with a -- how should I say this? A steady state of uncertainty, and we continue to produce well right through that. So in the case of the Americas, we've run into this little bit of belt tightening, which is different than what we've seen previously, and then we have the added dimension of the added capacity that we've put in there. And the other thing that happens is with this belt tightening and with the added capacity, the average deal size is smaller in the Americas and the amount of large deals is quite a bit lower in Q3 in the Americas and Q4, so in other words, the second half versus what we saw in the first half of this year and versus the number of large deals that we saw in the second half of 2011. So in the Americas, we've seen a reduction to a degree in the number of large opportunities and more smaller opportunities, and we're not seeing that in EMEA. So that's another different dimension.

The next question comes from Ed Maguire from CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division: You had discussed live investment in marketing and certain domain-specific solutions. Could you comment on where you are seeing opportunities tracking ahead of your expectations and what may be tracking below your expectations? I was struck by the commentary around Smart Grid and was interested if there were any other newer areas that seem to be tracking really well.

Yes, this is Darryl. On the marketing front, we're really going to market with 3 key pillars that we're going after: marketing operations, campaign management and our digital messaging marketing area. And what we're starting to see is a lot of attention around how do they get the marketing spend under control with marketing operations and a lot more investment to try to understand the payback on the digital marketing front of companies. So those are definitely the 2 big areas we're growing in.

The next question comes from Edward Parker from Lazard.

Mike, just following up on macro issues you're seeing in the Americas. Can you maybe remind us how your business has reacted historically to slowing economic growth, especially since most of the projects you are involved in are relatively high priority, high ROI types of projects? And given growing interest in analytics is a secular trend, do you think your business may be more resilient than through previous cycles?

I think if you look back historically when we had a downturn in 2001, ‘02 and ‘03, Teradata's performance relative to the IT industry was pretty good. However, pretty good is a relative term, and we had a revenue decline in 2003, and we were up a little bit in 2002. And then if you look at the downturn in 2008 and 2009, once again, relatively speaking, we did pretty good relative to the rest of the IT industry. However, we did decline in 2009, 3% as reported, 1% in constant currency. So we're not totally immune from a big downturn. And you've heard it before. Customers tend to prioritize, whether they’ve demonstrated, they’ll prioritize analytics, analytics, analytics in good times and in bad. And I think that holds true for us as well.

The next question comes from Keith Bachman from Bank of Montréal.

I'd like to ask about the competitive landscape, and are you getting less share of wallet? And to flush that out a little more, at this year's customer event, your customer event, rather, more customers that we talked to suggested Hadoop and running workloads on commodity hardware. I realize that Aster participates in that as well, but running Hadoop on commodity hardware. Hadoop World also occurred that same week, and we talked to customers and vendors there, and again, Hadoop seems to be getting a little more traction than we had anticipated. And when we look at your slide deck at present, versus the past few years, the EDW was the center of the universe, and now it seems that the EDW is an important node in the business analytics network. But the broader question, as you think about the macro slowdown, is there some share of wallet issue here, specifically for Hadoop, but perhaps even touching on Oracle's latest offering?

Let me -- yes, the -- in terms of wallet share, we've increased our wallet share significantly in customer base. So if you take a look at what we've done over the past 3 or 4 years with our workload-specific platform family is we've taken on more of the customers' enterprise with data warehouse platforms that are optimized for specific workloads and captured more wallet share than we have previously. And I think that's reflected in the strong revenue growth we've had over the past 2 years. So the types of workload-specific platforms that we've come to market with have not cannibalized our enterprise data warehouse, and our product revenue growth for the enterprise data warehouse has -- the 6000 class machine has been very, very high this year as it was last year, all right? So Teradata went from advocating an architecture where everything should be integrated into an enterprise data warehouse in a corporation to one where we advocate integrating all the data that's relevant to the business and think of it as an integrated, active data warehouse for all the business to work from and to have a single view of the customer and a single version of the truth and everything else. With the emergence of Hadoop, we see this as a best-in-class environment and at a low cost, as you mention with the commodity hardware and open-source type software, to ingest the huge amounts of data that are coming from the new big data sources and also to transform and store that data. So this is a net new opportunity and a net new technology for our customers to adopt, and we advocate that they do adopt it. But then the question gets to, how do you add value or get value out of all this massive multi-structured non-relational types of data? And that's where Aster comes into play and doing it with SQL types of BI tools and the skill sets that most workers have in the mainstream market, because to do the analytics with Hadoop takes very expensive and scarce engineering resources.

The next question comes from Derrick Wood from Susquehanna.

You guys had a pretty tough comp in the Americas. I'm just curious, given this new environment, what you generally think the Americas business should be, what the general growth rates are going forward. And then hoping that you can give a little color on what the expectations are in terms of seasonal growth on the product revenue side going into Q4.

As it relates to Q4 in the Americas, we're seeing a similar type of result that we saw in Q3, Derrick. Regarding the prior year comparables, it is a bit of a challenge, but it's not a big challenge. But the reality is when the Americas grew 28% last year in Q3, it compounds it a little bit. And when we get further out into 2013, what's going to happen is the prior year comparables become a good thing for the Americas as we get to Q3 and Q4. So in terms of product cycles as it relates to the Americas, mathematically, the back half of 2013 become a great opportunity for us. Shorter-term, as we get into the first half of 2013, the prior year comparables are a bit more of a challenge, and we'll just know a lot more when we get to our next earnings call. And once again, everything I just said is specific to the Americas. It's a completely different story we got going on right now in EMEA, as well as APJ.

There's time for one final question. Today's final question comes from Aaron Schwartz from Jefferies & Company. Aaron Schwartz - Jefferies & Company, Inc., Research Division: Just a quick question on the new customer growth. Given sort of the different dynamics with your broader product portfolio and maybe some more seasoned products there, is there any sort of different view on sort of the lifetime sort of revenue ramp of those new customers coming on, different than several years ago? And then secondly, I don't know if you can qualitatively talk or directionally talk, I guess, about the deferred product revenue. Was it sort of up or down or flat from Q2 levels?

On the new customers and the amount of revenue that we get from them, it's really not so much a product type of thing. So whether they're starting with the 2000 class data warehouse or they're starting with the 6000 class, the ones that are going down and EDW passed will integrate the data user logical data model and get similar kinds of business benefit. It's really more around the size of the customer and where they take it from there. And we've already had 5 or 6 customers that the 2000 class EDW has become larger, and now, they've migrated to the 6000. So generally speaking, the value that we get from the new customers is similar.

And Aaron, with respect to the deferred revenue. On the product side, which includes Consulting Services and the products associated with that, as I said, we're in that historical range of $70 million to $100 million at quarter end, although on the lower end of that range in Q3 or as of 9/30. So again, maintenance and subs underneath that growing what we expected. On product side, which includes related or professional services, Consulting Services with that around the lower end of that range, but still nothing unusual in that balance.

In closing, I'd like to say that we're extremely confident in our position at Teradata for the longer-term. Shorter-term, we've run into a bit of a challenge here in the Americas. I'm very confident that longer-term, we will be growing and performing as well as we have in the past. So I'd like to thank you all for joining us here this morning, and I hope you all have a good day. Thanks.

Thank you for participating in the Third Quarter 2012 Teradata Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.