Welcome to the Q2 2013 Teradata Earnings Call. My name is Paulette, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Gregg Swearingen. Mr. Swearingen, you may begin.

Good morning, and thanks for joining us for our 2013 second quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's second quarter results. Steve Scheppmann, Teradata's CFO, will then provide more details regarding our financial performance, as well as our guidance for 2013. 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 in other filings with the SEC. On today's call, we will also be discussing certain non-GAAP financial information, which excludes such items as 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 made good progress on several fronts during the second quarter. Revenue of $670 million was up 2% in constant currency and was our third-highest quarter ever, and non-GAAP EPS of $0.76 was our third-largest non-GAAP EPS quarter ever. We also achieved record gross margin rates for services in the quarter, and our non-GAAP operating margin rate was the second highest ever for a quarter. Most encouraging was that the U.S. bounced back in Q2 with 7% revenue growth over prior year after experiencing an 8% decline in Q1. As anticipated, the number of large deals in the U.S. increased in Q2 from Q1, and we have a healthy funnel entering Q3. For the first half of 2013, Teradata's revenue was down 2% as reported and down 1% in constant currency. As discussed at the start of the year, we had expected revenue growth in the first half to be challenging. This was primarily driven by 2 headwinds we were seeing at that time: first, a reduction of large deal opportunities in the Americas, which had been impacting us since Q3 last year; and second, the challenge of the first half prior year comparison. Teradata grew revenue 20% in constant currency during the first half of 2012. In addition, our International region revenue growth for the first half came in lower than we had expected at the start of the year. Overall, although we are not satisfied with our results for Q2 and for the first half, we saw a good improvement from Q1 to Q2, and we are now in a position for further progress in our results during the second half of 2013. Turning to the regions. The Americas reported 2% revenue growth for the quarter. As I mentioned before, the U.S.…

Thanks, Mike, and thank you for joining us. Second quarter revenue of $670 million was up 1% from a strong second quarter of 2012 and up 2% in constant currency. When we made our first quarter earnings announcement 90 days ago, we said we did not expect any currency headwind in Q2. But currencies in Japan, Australia and Brazil all moved against the U.S. dollar, resulting in a 1 point unexpected headwind. As we have discussed earlier in the year, marketing conditions created a hesitation in companies making large capital expenditures, which caused revenue growth for the first half of the year to be challenged. The year-over-year comparison for the first half was down 2%, down 1% in constant currency. However, even though this hesitancy to commit capital continues to some degree, it is becoming clearer that the constraints around large CapEx deals appear to be easing, which should help in the second half of 2013. Our Americas revenue grew 2% in the second quarter of 2013 from the strong Q2 of 2012, when the Americas increased their revenue 17%. For the first half, Americas revenue was down 3%, both as reported and in constant currency. In the second quarter, our International region saw a 1% decline in reported revenue versus Q2 2012. But on a constant currency basis, revenue increased 1%. For the first half, International revenue was up 1%, up 3% in constant currency. Product revenue of $303 million declined 6% from the second quarter of 2012, down 5% in constant currency. For the first half of the year, product revenue was down 12%, both reported and in constant currency. Services revenue of $367 million was up 7% from the second quarter of 2012, up 8% in constant currency. For the first half of the year, services revenue…

[Operator Instructions] Our first question comes from Ed Maguire from CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division: Could you discuss what you've seen come unstuck, as it were? You described over the last couple of quarters more of a just-in-time approach to your customers' purchasing. And are you seeing some deals come unstuck? And also in terms of the pipeline going forward, are you seeing any change in size and scope over the last couple of quarters?

Ed, this is Mike Koehler. Yes, the area we were struggling with was in the Americas, primarily in the U.S., when we first started seeing softness in Q3 last year. And basically, with the belt tightening with our customers, the size of the large deals and the number of the large deals shrunk, okay? And basically, as we entered Q1, the number of these large deals and the size of them were down. And as we headed into Q2, for the first time, it started picking back up again. So in the U.S., we rebounded. We had 7% growth. The number of large deals and the size of large deals sequentially increased from Q1, although they were still beneath what they were in Q2 a year ago. And then as we exited Q2 and came into Q3, the funnel is very healthy in the U.S. in terms of the number and the size of the large deals. So as far as from a Teradata perspective, when we look at our customer base and everything else, we went into a timeout. I wouldn't categorize it that we're out of this yet. I think where we sit right now is we're in a trend of steady improvement in terms of the belt tightening with customers in the U.S. and spending more money on larger transactions. So it's been a steady progression, and we're cautiously optimistic as we get here into the third quarter and the fourth quarter, what we're seeing in the pipeline as it relates to the U.S. But it was really -- just to clarify, it was really centered around the U.S. The behavior in the rest of the world on these large types of transactions has remained fairly consistent over the past 4 quarters or even 8 quarters.

Our next question comes from Raimo Lenschow from Barclays.

Can you just talk a little bit about the Aster use cases that you see out there? And is there already a trend too? Are we seeing that this is becoming kind of more mass market for you? Or are we still kind of more in the period where people are trying to find out what to do with it?

Raimo, we are in the early phases because it's relative to, for the most part, customers standing up some Hadoop environments, although some of these prepackaged analytic modules are also relevant and used with structured data in Teradata environments. So the library of these has grown to where we have well over 70 of these, and it basically provides customers functionality to get at things like -- we call one end path and you can identify, look at a bunch of the consumer paths as it relates to an event like buying a product or abandoning a shopping basket or closing their account. So you can look across a broad spectrum of paths that their customers are taking to determine what type of offer or what type of event related to them taking an action, whether closing an account or buying something. So it's enabling that type of functionality. And there's these type of prepackaged modules to look at graphs and do graph analytics, spatials, statistical, pattern matching and on and on and on. So these are very specific functionality enablers as it relates to working with big data, unstructured data that helps you get to new ways to look at churn, fraud, people on the web and so forth.

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

Mike, there's been a lot of talk on how certain workloads, particularly ETL workloads that run on Teradata, are being moved to Hadoop. Have you seen this phenomenon at your customers? And what percentage of Teradata workloads do you think could get transferred to Hadoop?

Thanks for the question, Wamsi. We know there are some noise out there on this now. First of all, as far as analytical workloads go, the answer is a clear no. So Hadoop really isn't designed to do what Teradata does in a Data Warehouse environment. And I can add, for that matter, the other relational databases that are out there, they're not really designed well to do what Teradata does. They're more optimized. The way they were originally architected and designed in their DNA was around OLTP as opposed to the complex analytics that Teradata was built for. So some customers have looked at moving ETL workloads to Hadoop. But they came to the conclusion that it's not really worth the cost or the effort. So that relates to our installed base, right? But going forward, with our Unified Data Architecture, we are actually recommending that some of the new ETL workloads be done in Hadoop versus Teradata. They can be done there more cost effectively, and it's a better answer for the customer. But I want to point out, this also results in more data and new data, and then what comes with that is more analytical workloads coming back into Teradata. So I would look at this thing -- well, the way we look at it is that net-net, it's going to benefit us overall down the road.

Our next question comes from Katy Huberty from Morgan Stanley.

As you know, the Street is looking for and above seasonal September quarter. So can you talk about what lends confidence to that theme? How much was the deal pipeline up in the second quarter? Do you think you have a shot of closing any of those large deals in the third quarter? And just generally, what did the month of July look like to either justify or not that above-seasonal trend?

I think overall, Katy, I think the key metric is the overall funnel is up going into Q3 versus Q2. The number of large opportunities and the size of the opportunities continues to trend up. At this juncture, or at this time in the quarter, we only have 1 month behind us, July, it's a little too early to predict what the end result is going to be. It's just that when you look at the opportunity and what we have in the funnel, we think we're going to continue to progress as we have in Q2 and into Q3. We always have and we always need big deals, and it comes down to timing on some of these as you get to, as you know -- as you all know, as it comes to end of the quarter. But when you look at this thing in aggregate and the trend that we're on, forgetting about what closes in Q3 versus spills into Q4, we're on a very good trajectory as it stands now to reach the low end of the full year guidance range on revenue. With that, it implies roughly a 10% kind of constant currency revenue growth that's coming on top of a 10% constant currency growth the year before.

Our next question comes from Greg Dunham from Goldman Sachs.

I guess just following up on that point, I mean, when you think about that 10% kind of constant currency revenue growth, should that be fairly consistent between Q3 and Q4? I know it's hard to predict, but just helping us get a sense of if the growth in Q4 should be dramatically different than Q3 on a year-over-year basis that will be helpful. And then secondly, on the pipeline, you highlighted a bunch of new customer wins and also expansions. When you look at your pipeline ahead, how much of the growth in the pipeline is really just driven by more existing customers looking to expand and do bigger deals?

Okay, Greg. Regarding Q3 and Q4, once again, it's difficult to predict the timing of what's going to happen as you get towards the end of the quarter in Q3. I think a practical way to look at this is we're probably a little more back-end loaded in Q4 than in Q3, okay? But that's not to be confused with predicting that the rate of growth in Q3 is going to be higher or less than Q4. It's more around when you look at the overall opportunities, the aggregate amount we're looking at getting 10% constant currency growth in the second half, and the most likely scenario is there will be more in Q4 than in Q3. Regarding the pipeline, I believe your question was around is most of the growth coming from the user base, and the answer is yes, because 95% of our revenue on average comes from our user base. So when we run into situations where the user base and the customers are tightening belts, that's where we run into a timeout or a slowdown in some of the revenue growth. And the growth that we're seeing coming back to us is mostly -- it's predominantly the user base. That said, new customer wins are incredibly important to us because it expands, obviously, the number of customers in our user base that we'll be counting on for growth. There will be more in the user base that we'll be counting for growth 4 quarters from now and 2 years from now.

Our next question comes from Phil Winslow from Crédit Suisse. Philip Winslow - Crédit Suisse AG, Research Division: Over the past few quarters, you've been talking about a hot, new [ph] cycle amongst your customers in terms of just the utilization levels in their EDWs. What are you seeing right now? Are you seeing a sort of peaking in that cycle that you guys have talked about in the past? You obviously mentioned new capacity buys. But kind of going forward, how do you kind of compare what your expectation is for us coming out of sort of this hot, new [ph] cycle versus past ones before it goes back to the same sort of level of capacity as to, for lack of a better word, cooldown or EDWs?

Phil, I want to make sure I got your question right. Is it centered around at what rate the customers will come back when they've been in a... Philip Winslow - Crédit Suisse AG, Research Division: Yes, it's a little bit of both, yes. How do they think they come back and have we hit sort of the peak of the current cycle?

Okay, okay, yes. Phil, so what we said is typically, when we get into a belt tightening, customers can fine-tune their Data Warehouses and free up capacity, if you will, so that they can take on additional workloads. So in other words, they're not buying additional compute power from us or capacity. It's not so much about disk and storage, but it's compute power. They're not expanding and buying that extra capacity from us. So instead, they're reducing and cutting back some of the performance levels within the Data Warehouse to free up capacity, address new demand, right? So what we said in the past is that typically can last about, on average, 4 quarters. Each customer environment is different, but in the past, we've seen it come back typically around after 4 quarters. So this started hitting us -- and once again, it's specific to the U.S. This isn't the rest of Teradata around the world. It started hitting us in the third quarter last year, and that's why earlier this year on calls, we were pretty optimistic about the second half because it will have been 12 months in the U.S. since customers started sweating the assets, if you will. Now the second part of your question is kind of at what rate does it come back. That's probably a little bit tied to what kind of economic environment we're in. If you flipped into a robust economic environment, our customers in the user base have a lot of different opportunities to add more value to the Data Warehouse that we're working with them on and everything else. And it slipped into a -- it's more dependent on the economic environment. In this environment that we're in right now, that I'd say is a little more murky, I would expect this to come back at a more gradual rate than if we were in a robust economic climate.

Our next question comes from Shebly Seyrafi from FBN Securities.

So your U.S. growth was impressive, turning around to 7% here. But you're non-Americas -- I'm sorry, your overall Americas growth was up 2%. So I guess my question is can you talk about the non-U.S. part of the Americas, how that's going, what percentage of Americas is non-U.S. and what's your outlook for that region in the back half?

The U.S. makes up 90% of the Americas revenue, Shebly. Basically, you get into the smaller areas like Canada and Caribbean and Latin America. We run into some lumpiness on deal timings. So in Canada, for example, in Q2 a year ago, we had some very large transactions, if you will, that bumped the revenue way up, higher than usual. This past quarter, we had a down quarter. So it was below average, if you will. And so you have a little bit of that. Caribbean and Latin America in the second quarter was kind of flattish. There's parts of it that were up and parts that were down. And it doesn't take much to knock off the difference that we're talking about between the U.S. growth rate of 7% and the Americas growth rate of 2%. It's roughly 5% on what the revenue was in the quarter for the Americas.

Our next question comes from Jesse Hulsing from Pacific Crest.

Strong consulting margins, which would indicate that utilization is running pretty hot. What are your plans for consulting hiring as we enter the second half? And should we expect margins within the consulting line to contract due to that increased hiring, if it happens?

Jesse, it's Steve. Yes, what we've done in the consulting side is really, as we saw the slowdown, cut back on the hiring and cut back on the outside contractor expenses coming through. We continue to watch that and watch our pipeline very closely as we come in through 2013. And from a consulting margin perspective, the second half of 2012 -- from an overall services perspective, I should add, second half of 2012, the gross margin ran right around 45%, yes. And I'm looking at really being pretty consistent with that second half of 2013. Again, we're staying on top of the hiring and the outside contracting spend within that.

Our next question comes from Aaron Schwartz from Jefferies.

I'd think over the years, you have spoken to very consistent average deal price, if you will, for new customers as they come on the platform. Can you just talk about what you're seeing on the UDA side as those deals come into your pipeline and closes, is there a material difference in those sort of initial deal prices? And then secondly on that topic, the Hadoop functionality, I believe you allow for either your own solution or a third party. What's the preference of your customers in adapting that Hadoop piece?

Aaron, on the question regarding UDA and average new customer wins and everything else like that, okay, first of all, the Unified Data Architecture, a lot of it is consulting and consulting services related and so forth. However -- and that will resulted in -- it can result in a purchase of something from Teradata if they are not already a Teradata customer. What we have seen is we've had new customer wins, where because of the UDA, it has resulted in the purchase of a Teradata Data Warehouse, Aster and/or a Hadoop appliance from Teradata and/or, in some cases, a Digital Messaging Center. So the UDA is providing a little bit of an uplift as it relates to some of the new customer wins. I wouldn't call it material, but short term, when we record a new customer win, the dollar amount, but longer term, get in position with the customer with a UDA and then all the things we can bring to it in and around it, because we have software such as our Unity software around data movement and data synchronization and we've got Teradata viewpoint and some other software assets. Longer term, that makes that customer more robust and larger in terms of revenue for Teradata.

Our next question comes from Alex Kurtz from Sterne Agee. Alex Kurtz - Sterne Agee & Leach Inc., Research Division: Mike, if you could just talk about the specific verticals that you've -- in the U.S., that you think are important to hitting the second half ramp that would be helpful.

Alex, we're going to try and hit them all.

Fair enough. If you look at the funnel, is there a specific concentration? Let me ask it that way.

Yes, yes. This -- I mean, we've got a pretty good balance. If we were coming out as exposure in our outlook around certain verticals, around the world, we're pretty diversified. Here in the U.S., financial services has been a good industry for us, and it continues to perform well there. And we do have a lot in our funnel in the financial services industry in the U.S. I wouldn't say it's way or overbalanced versus some of the other verticals. Government has always been a smaller vertical for us relative to other industries. But we actually -- we had extremely good growth with government in the second quarter, and we're seeing some good opportunities that have come here in the second half. So, Alex, I think that's about as much color I can give on it other than I think we're fairly well distributed and balanced here as we look at the second half.

And we have time for one more question. Our last question comes from Matt Summerville from KeyBanc.

It's Joe Radigan on for Matt. Inventory was up significantly year-over-year while product revenue was down. What should we read into that? Was there an order that got pushed in the quarter as it related to customers taking advantage of elastic capacity on demand offering that you have? Just some are colored there, please.

Yes, just on inventory. Inventories fluctuate quarter by quarter depending upon what we have in that finished goods and proof of concepts out in the field. We generally try to stay 50 to 60 days in inventory. And yes, at the June 30, we're 60 days. So within our historical pattern of 50 to 60 days from the planning perspective, but nothing unusual that would indicate that there was a large deal slippage that we anticipated. We had normal activity at the end of the quarter from deals moving in and out. There might have been a little bit more in the EMEA region, but nothing significant that would draw any attention to activity going into Q3 because there's activities at the end of Q3 that could be very similar to the activity we saw at the end of Q2.

Thanks, everyone. I just want to repeat, we're very encouraged by what we saw here in the second quarter. Not to be confused with that we're satisfied about it. But we're encouraged and we're looking forward to the second half. We've got a lot of work to do, but it's on to the second half. Thank you, all, for joining us here this morning.

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