Teradata Corporation (TDC) Q3 2014 Earnings Report, Transcript and Summary

Welcome to the Q3 2014 earnings call. My name is Vivian, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Gregg Swearingen. Mr. Swearingen, you may begin.

Good morning, and thanks for joining us for our 2014 third quarter earnings call. Mike Koehler, Teradata's CEO, will begin today by summarizing Teradata's third quarter results. Steve Scheppmann, Teradata's CFO, will then provide more details regarding our financial performance. 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 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. 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 finished the third quarter with revenue of $667 million, which was flat compared to prior year and up 1% in constant currency. Non-GAAP earnings per share of $0.71 was up 1%. Year-to-date, Teradata's revenue has grown 2% as reported and 3% in constant currency, and non-GAAP EPS has increased 4%. We had another strong quarter in terms of adding new customers. The number of new customers added in Q3 was our second highest in a dozen years. Year-to-date, the number of new customers added was also our second highest in a dozen years. This continues to validate the market opportunity for data warehousing, along with the investments we have been making for the broader analytic ecosystem. Turning to the regions. The Americas finished Q3 with revenue of $405 million, which was down 1%. Year-to-date, revenue in the Americas was down 1% as reported and flat in constant currency. Data warehouse new customer wins in the quarter included a leading U.S. semiconductor manufacturer, which will be using our data warehouse for end-to-end traceability across yield, quality, reliability and warranty management. And we added another company to our growing roster of gaming companies, which will be using Teradata to gain deeper customer insights for marketing. Expansions included Dell, DIRECTV, LexisNexis, Southwest Airlines and one of the largest health insurance companies in the U.S. The Americas continued to increase its Big Data analytics activity and wins in Q3. Wins included, 2 Fortune 100 companies that added an Aster-Hadoop appliance and a 1000 Series appliance to their UDA environment for exploration and archiving; Dell, which added more Aster-Hadoop to its UDA for sensor data and predictive analytics; and Sure America [ph] a leading insurance provider in Latin America, has added Aster to their UDA to analyze driving behaviors and correlate them with accidents for improved risk modeling. Cloud activity is also increasing in the Americas with wins in the quarter that included one of the largest pharmaceutical companies that is adding our Teradata Cloud and our Integrated Marketing Cloud as part of our campaign management solution. Netflix expanded its data warehouse cloud environment to support analytics on content, operations and finance. DISH is now using our Teradata Cloud for data warehouse development and as a test environment. And a Fortune 500 cable company new data warehouse win, which is replacing a competitor's on-premise data warehouse with our Teradata Cloud, and adding our marketing churn application. Turning to our international region. Q3 revenue of $262 million was up 2% as reported and up 2% in constant currency. Year-to-date, international revenue has grown 7%, both as reported and in constant currency. APJ had a good Q3, with 8% as reported, and up 9% in constant currency. EMEA had a 1% revenue decline as reported and in constant currency from prior year. This was roughly in line with what we were anticipating given the deals that closed in Q2 that we had originally expected to close in Q3. Year-to-date, EMEA revenue has grown 10% as reported and 9% in constant currency. APJ is up 1% as reported and 5% in constant currency. Some notable new customer wins and expansions in the quarter included Admiral Group, one of the U.K.'s largest auto insurance providers, which selected Teradata to enhance business analytics and customer insights. China Mobile Pakistan, which is implementing Teradata data warehouse to gain a 360-degree view of their customers. Magnit, a leading food retailer in Russia. And T Systems, the IT service provider of Deutsche Telekom, expanded their data warehouse environments as well. International also had several Big Data analytic wins in the quarter, including China Unicom, the third largest telco in China, which selected Aster for data exploration and analytics. Vodafone New Zealand added Aster and Hadoop appliances to its Teradata environment to analyze geolocation and behavioral data to improve their customers' experience across their channels. A global Fortune 500 chemical company that added Aster and Hadoop appliances to its UDA. Ural Federal University, one of the largest scientific and educational institutions in Russia, selected Aster for data exploration and analytics. And one of China's largest banks added Aster in Q3. Looking at our Big Data analytics initiatives overall, in both regions, we continue to see good growth in Big Data analytics, which includes our Aster, Hadoop and 1000 Series appliances, along with our UDA software, tools and related services. In Q3, we saw a record number of Aster new customer wins and good activity with our 1000 Series. We are currently tracking towards $100 million of Big Data revenue for the year. We continue to add solutions to our analytics cloud and most recently announced our Teradata Cloud for Hadoop. We now have available in our Teradata Cloud, data warehousing, Aster discovery analytics, Hadoop data management, test and development, and disaster recovery. Our cloud data warehouse delivers the same functionality and SLAs as we do for our customers today on-premise. The Teradata Cloud and Integrated Marketing Cloud provide options for our customers and it helps to expand Teradata's markets and opportunities for the mid-market as well as for larger companies. Most of the demand to date and our focus has been centered in the United States, but we expect it to pick up in international over time. Our Unified Data Architecture or UDA is becoming mainstream. Firms like Gartner, Hortonworks and now Cloudera are advocating that multiple analytic platforms need to work together, and also the importance of the role that the integrated data warehouse plays. We continue to grow our strategic partnerships to enable tighter integration and more transparent access to open-source technologies across the UDA. We've also been adding to our UDA portfolio with acquisitions such as Revelytix and Hadapt and, in August, with the acquisition of Think Big Analytics. Think Big brings Hadoop consulting capability that is critical for companies to create value from Big Data platforms. And we're investing to scale this capability in the U.S. as well as globally. These 3 acquisitions underscore our commitment to being a leader in helping customers to get the most value from all of their data. In addition, we continue to add new capabilities and solutions to our own development and our own innovations. Some of the recent announcements we've made included expanding QueryGrid to connect with Oracle databases, along with Aster, Teradata, Hadoop and MongoDB. We announced connection analytics, which is a new class of analytics that discover relationships and influences between people, products and processes and at a massive scale. Teradata Loom is now available, which makes it easier for business analysts and data scientists to find, understand, track and use data in Hadoop. We are also expanding our consulting offers to help customers deal with the complexity of the analytical ecosystem. We add in an offer that helps customers evaluate the numerous analytic platforms so that they can choose the right platform for the right job to meet performance requirements and also optimize costs. Overall, we have made significant investments and strong progress building out our UDA portfolio and services through our own innovations, our partnerships and our acquisitions. With regard to our applications, we continue to make investments to strengthen our leadership positions. We recently announced enhancements to our integrated marketing platform to deepen our cross channel and digital marketing capabilities. We have also expanded our partner ecosystem with companies such as ADAM, Celebrus, LiveRamp and Urban Airship. Earlier this year, we acquired Ozone Online agency to enhance our customers' marketing strategy and provide creative campaign services to improve engagements with their customers. And just last week, Gartner named us a leader in its Magic Quadrant for Integrated Marketing Management, noting our broad set of marketing capabilities and continued market execution. Overall, we're well-positioned with our integrated marketing solutions. Historically, more of our focus and resources have been applied to our on-premise or hosted integrated marketing solution and with our enterprise accounts. We are now adding investments in R&D and demand creation to focus on driving more revenue with our integrated marketing cloud solution. This will allow us to take better advantage of the demand we are seeing in the mid-market, as well as for some of our enterprise accounts. Currently, we are expecting to be slightly below our 2014 total applications revenue target of $250 million and expecting to exit the year with mid-single-digit recurring revenue growth. Longer term, we believe our investments and our focus on our integrated marketing cloud solution will help position us for increased revenue growth rates. Turning to guidance. We continue to expect to be at the low end of our revenue guidance range on a constant-currency basis, which is now 2% to 6% revenue growth as reported. And we continue to be, expect to be, at the low end of our non-GAAP EPS guidance range of $2.85 to $3. With that, I'll now turn the call over to Steve to provide more details on our financial results. Steve?

Thanks, Mike, and welcome. Currency movement during the quarter created about a 1% headwind on our Q3's overall revenue growth, and consequently negatively impacted EPS. Product revenue of $294 million was down 4% from the third quarter of 2013, down 3% in constant currency. Year-to-date, product revenue was up 1%, both as reported and in constant currency. Services revenue of $373 million was up 4% from Q3 2013, up 4% in constant currency. Year-to-date, services revenue was up 4%, both as reported and in constant currency. Within services revenue for the quarter, consulting services revenue was $200 million, flat compared to Q3 2013, up 1% in constant currency. And maintenance services revenue of $173 million was up 8%, both as reported and in constant currency. Year-to-date, consulting services revenue was also basically flat year-over-year, while maintenance revenue was up 8%, up 9% in constant currency. During my discussion today, except where otherwise noted, I'll be addressing margins and expenses on a non-GAAP basis, which excludes stock-based compensation and special items, including acquisition-related and special items identified in our earnings release. Product gross margin in the third quarter was 60.9%. The lower-than-normal product gross margin was influenced by floor sweeps and increased 1000 Series revenue, which have lower gross margin profiles. In addition, Q3 2014's product gross margin compared to the prior year was impacted by increased FAS 86 amortization of $3 million and less favorable product mix from a gross margin perspective. Year-to-date, product gross margin was 64.9% compared to 65.2% for the year-to-date 2013. The 30 basis point decrease resulted from 160 basis point headwind created from increased amortization of capitalized software development costs, offset by more favorable net COD activity. From a gross margin [Audio Gap] amortization of capitalized software, FAS 86, is expected to increase approximately $14 million for 2014 versus 2013, with anticipated increase of approximately $5 million in 2015. We anticipate that Q4 2014's product gross margin will approximate a mid-60s percentage, due primarily to a more normalized deal mix. Services gross margin in the quarter was 48.3%, flat compared to Q3 2013. Year-to-date, services gross margin was 47.1% compared to 47.7% year-to-date in 2013. Overall, gross margin was 53.8% in the third quarter compared to 55.0% in the third quarter of '13, driven primarily by product gross margin. Year-to-date, overall gross margin was 54.9% versus 55.5% in 2013. Turning to operating expenses. SG&A expense of $169 million was down $1 million from the third quarter of 2013. We continue to invest in direct selling and marketing activities, offset by reductions in noncustomer-facing expenses. Research and development expense in the quarter was $40 million, up 5% from the third quarter of 2013, influenced both by our recent technology acquisitions and our internal road map. We expect our R&D expense for the year to increase approximately 10% as investing in our R&D activities continue to be a key initiative for Teradata. Total R&D spend for the third quarter, which includes R&D expense plus additions to capitalize software development costs from the cash flow statement, less capitalization of internally developed software, was $58 million. This compared to $59 million in Q3 of '13. Total expenses were $649 million for the 9 months ended September 30, 2014, an increase of 3% over the same period of last year. Our 2014 plan had anticipated an approximate $30 million increase in variable compensation expense. Based on our results year-to-date, we are relatively flat with 2013 as it relates to this variable compensation program. As a result for all these items, operating margin for the quarter was 22.5% versus 23.7% in Q3 2013. Our non-GAAP effective tax rate for the third quarter was 26%, slightly lower than the 26.6% non-GAAP effective tax rate in Q3 2013. On a year-to-date basis, our non-GAAP effective tax rate was 28.1% versus 27.6% for the same period in 2013. The lower tax rate in Q3 was primarily driven by the discrete impact resulting from an IRS audit settlement in Q3 2014. However, this favorable impact was offset by the expiration of the U.S. federal research and development tax credit on December 31, 2013, which as a result, is not reflected in our marginal tax rate through September 30, 2014. We are currently forecasting our full year non-GAAP effective tax rate to be approximately 27.5%, which assumes that the U.S. R&D tax credit will be reinstated retroactively for 2014, before December 31, 2014. If the tax credit is not restated by December 31, 2014, it would increase our non-GAAP effective tax rate by 170 basis points in the fourth quarter and 40 basis points in the full year 2014. In terms of earnings per share. Our Q3 GAAP EPS was $0.60 compared to $0.59 in Q3 2013. Adjusting for stock-based compensation and other special items, which equated to $17 million after tax or $0.11 in the third quarter of 2014, our non-GAAP EPS was $0.71 compared to $0.70 in Q3 2013. Turning to cash flow. Net cash provided by operating activities was $102 million in Q3 2014 versus $64 million in Q3 2013. Year-to-date, cash from operating activities was $583 million, a 30% increase from the $447 million generating -- generated during the same period in 2013. In the third quarter, we had $36 million of capital expenditures, including capitalized software, versus $35 million in the third quarter of 2013. Resulting in free cash flow of $66 million versus $29 million generated in Q3 2013. Free cash flow for the first 9 months was $489 million, a 41% increase from the $347 million generated during the same period in 2013. We now expect our 2014 full year free cash flow to approximate $50 million higher than GAAP net income, above our normal plus or minus $25 million to $35 million of GAAP net income range. However, due to the strong free cash flow performance through September 30, and specifically, our strong cash collections in Q3, we are forecasting negative free cash flow in Q4. Moving on to the balance sheet. We had $848 million of cash as of September 30, 2014. This is down from the $934 million at the end of the second quarter. Of the $848 million of cash, approximately 12% was held within the U.S. as we continue to utilize our domestic free cash flow for share repurchases. During the third quarter, we bought approximately 2.4 million shares of our stock for $102 million. Through the 9 months ended September 30, we bought approximately 6.9 million shares for a total cost of approximately $293 million. As of September 30, we have approximately $353 million of share repurchase authorization remaining under our general share repurchase program. With respect to accounts receivable. As of September 30, 2014, accounts receivable decreased $24 million compared to September 30, 2013, primarily due to the timing of the cash collections. Day sales outstanding was 70 days as of September 30, 2014, compared to 75 days as of September 30, 2013. Total deferred revenue was $402 million as of September 30, 2014, which was up $2 million from September 30, 2013. Turning to guidance. For the full year and on a constant-currency basis, we do not see a change from our prior view of revenue growth being at the low end of our previous guidance range of 3% to 7%. However, based on the October 31 exchange rates, we now expect reported revenue growth to be approximately 1 point lower, or approximately 2% revenue growth for the full year resulting in 2014 reported revenue of approximately $2.75 billion. Said another way, assuming the exchange rates as of October 31, the foreign currency movement will reduce our 2014 revenue by approximately $25 million and will be a headwind of approximately 1.5 points in 2015. We are maintaining our prior expectation that non-GAAP EPS will come in at the lower end of our prior guidance range of $2.85 to $3. But currency movement also has impact on EPS. Historically, only 20% to 25% of the currency movement impact on revenue flows through to operating income. In closing, it is clear that the market is moving to an IT architecture of multiple best-of-breed solutions, working together in an analytical ecosystem, as we advocate in the Unified Data Architecture. Our technology and expertise enable this architecture. Our IDW and Big Data platforms are an integral components of this architecture and are recognized by industry analysts as leaders. Our QueryGrid software drives query execution across the analytical ecosystem and we continue to enhance our strong consulting capabilities. Teradata has an outstanding and compelling value proposition, focused on delivering breakthrough analytics from all data. And with that, operator, we are ready to take questions.

[Operator Instructions] And our first question comes from Wamsi Mohan from Merrill Lynch.

Can you address product gross margins in a little bit more detail, Steve? How much of the margin contraction should we think, if any, was related to any pricing and how much related to mix of products? I think Mike mentioned at least 1 1000 Series deals in his commentary and if there were any other factors like floor sweeps or anything else that were atypical in the quarter driving that product margin to that level?

Wamsi, thanks. From a pricing perspective in the quarter, nothing unusual, okay? And I'll walk through a little more detail. You've hit most of them on there, but I'll give you a little more color on those. In that -- there's probably a little bit over 4% in total when we looked at a normalized quarter and that 4 plus percent is really made up of product mix, the 1000 Series that Mike referred to. You're right, floor sweeps were up, particularly internationally. International was up a good amount in Q3 and is up year-to-date. The Americas is down less than that. So the international increase from the floor sweeps was driving part of that margin compression on there. The other one is deal mix. Just normal deal mix within the quarter that we expect to normalize in Q4, and I'll finish on Q4. And then the FAS 86 amortization. If you look at those 4 pieces, that's 4-plus percent and reconciling back to a quarter -- normal quarter of 65% to 66%. Now if you look at -- when we looking at Q4, we finished 2013 roughly around 66%, product gross margin. I see Q4 based on the more normalized deal mix coming in right around that area. Now I'll qualify, if we have a large 1000 Series transaction could reduce it, but that's a positive thing in total. But those are the 4 key points and, hopefully, that summarizes it for you.

Thanks, Steve. And just if I could follow-up, you mentioned international floor sweeps, is this sort of -- do you look at it as a trend that floor sweeps are actually picking up and there is -- the installed base there is reaching some sort of critical mass that you're going to see this continued? Or would you say this was more isolated in the quarter?

No, I don't see it being a trend. I wouldn't say that, that indicates anything going forward. It's just a normal evolution of their customer base.

Wamsi, if I can add a little bit more. International had a spike up in Q3, okay? So the floor sweeps have been up Q1, Q2. They'll be up for the year, but the spike in Q3 is what really hit us. We still have a pretty big floor sweep in the Americas, but it was in the federal government.

And our next question comes from Raimo Lenschow from Barclays Capital.

Can we talk a little bit about the Big Data initiative you're seeing. So you started working with Hortonworks on the Unified Data Architecture now Cloudera seems to be coming around to the notion. How do the customer engagements are working? Are you introducing the other guys or are they introducing? And where do you see customer spending in terms of kind of moving ahead with that, or is it still exploratory territory?

Raimo, basically, the Unified Data Architecture, in that vision, in that solution, comes from Teradata. It's similar to what Gartner's been advocating with the logical data warehouse. And basically, what you're seeing is we're getting the mainstream adoption in the U.S. and actually outside the U.S. of this Unified Data Architecture or an analytical ecosystem and the role the various platforms need to play or should play, including Hadoop, including lots of other point-specific analytic platforms, as well as Teradata's offers and the Integrated Data Warehouse, of course, is a very key piece of that and going forward. So customers have options as far as who they implement Hadoop with, and Cloudera and Hortonworks are 2 of the larger distributors of Hadoop. And basically, what we're doing is we want to integrate and certify and make it easier for customers to work with all of the distribution companies that are out there, and at the end of the day, the customers really decide. We just want to make -- we want to make it easy and we want to make our customers successful with the implementation of the Unified Data Architecture and with the Hadoop implementation itself.

And where -- if you see like what's going on there in the field, like are we kind of in the early innings here still? I mean, and where are they in terms of the understanding and the project that you see?

If you could clarify, Raimo, the early innings of what specifically with the customers or in the field you were saying?

Yes. I was trying to gauge, like are you actually working on real projects there? Or is it, at the moment, more proof of concept, et cetera, that are kind of happening?

Okay, thank you for the clarification. So it's progressed. I mean, outside of the Silicon Valley companies that were into it early. The rest of the market was in an exploratory phase and so forth. And some of those customers have now moved into a production phase. So it continues to move along. We're engaged with a lot of these customers. And in particular, if you look at all the Aster wins we have, in effect, that's putting Hadoop to work in a productive environment -- production environment. So we've had customers doing discovery and exploratory analytics on all of the various types of data in Hadoop with Aster now for 2 or 3 years. So those customers are far along. And yes, it continues to move Hadoop into the mainstream and its role it plays in the analytical ecosystem.

And our next question comes from Phil Winslow from Crédit Suisse. Philip Winslow - Crédit Suisse AG, Research Division: And just building on the gross margin question, not on the product side but on gross margin for the services, you guys had a pretty sort of healthy mid-single digit margin on services last year. The margins has gone down a little bit this year. I mean, how should we think about that via long term? Any changes in sort of just the services mix that you're seeing that's driving that? Or just how should we think about kind of that in particular, and then sort of those 2 combined longer-term, product and services?

Well Phil, the maintenance side has grown more in 2014. We're up approximately 8% year-to-date and consulting services, lesser extent on that flat -- Q3 flat year-to-date. The maintenance is going to carry that higher mix of that margin. I don't see maintenance continuing that growth rate. And so as a result, I would expect that weighted side would affect it but not affecting the standalone margins itself. But if I look at going into Q4, I would expect to see that coming in slightly less than year-to-date or Q3 with the services margins, with maintenance growth rates possibly coming -- slowing down a little bit. But nothing, if you look at the maintenance rates independently, it's just a mix issue. Philip Winslow - Crédit Suisse AG, Research Division: Got it. And then just one quick follow-up. You talked a lot in your prepared remarks about focus on international. Maybe just provide us an update there, kind of how you feel about your go-to-market infrastructure, for lack of a better word, internationally and sort of how you're thinking about that, not just this quarter but over the next few quarters?

Regarding international, Phil, you're asking about how we're thinking about it going forward? Philip Winslow - Crédit Suisse AG, Research Division: Yes.

Okay. So international has had a pretty good year so far. And like I said, they were up -- for the first 3 quarters, up 10%. So the go-to-market, we continue to expand territories there. And in addition, we continue to add resources into the growth areas such as the Big Data analytics as well as the integrated marketing, and we continue to build out those resources there. So in particular, in the big emerging markets where we've had some pretty strong growth and great market opportunities in places like China as well as Russia and some of the other big ones.

And our next question comes from Brent Thill from UBS.

Mike, you mentioned this is the second highest quarter on new customer count, yet the product and total revenue seems to continue to lag. What do you think the delta is there and how do you expect that to play catch-up over time?

The thing about the new customer wins is, in a given year, it may only contribute 5% of the revenue, and 95% of the revenue comes from the user base. The key with the new customer wins is that it then goes into the user base revenue the second year, the third year and the fourth year. And new customers are growing the amount of money they're investing with us at a much higher rate than customers who have been around 3 or 4 or 5 years. So what we're seeing is the last couple of years, we've had very strong new account wins and it has been contributing to our revenue growth this year and it will continue next year and the year after. So I think you can see it specifically in the international results. So if you look at international on the way they've grown, in 2013, they were up something like 4% in constant currency, and this year, they're headed for higher single digits kind of growth. You can see it in the international results. Where we're not seeing it is in the Americas, where it's somewhat masked by the declines we've been talking about with our large customers. And that said, the large customer declines, the top 50, this year will be less than what it was in 2013. And you look out to 2015, we expect it to be less again. But the new customers are very, very important when we look at future growth, longer term, and we've got a pretty darn good base of 2 customers we put out there. So I think that's basically it. You can see it in our international results and it's getting masked to a degree in our Americas results.

Okay. Just as a quick follow-up on financial services. You said last quarter that it's key to see that come back in the Americas. I assume, just in the comment you made, that you're not seeing that fall through in the Americas for financial?

Yes. That's correct. And listen, if we took a look at the year and where we think we're headed in the various industries, in the Americas, the way it shapes up is, as it stands now, all of our industries will grow this year except for financial services. So financial services, which had a huge run-up in 2010, '11 and '12, and even into '13, it's now our biggest vertical. And if you get a meaningful decline, like high-single digits or 10%, it's pretty meaningful. But as it stands today, we think all of our industries will grow in the Americas this year, outside of financial services. And financial services, I don't interpret it as anything that's impacting it other than it's a little bit cyclical when you have a huge ramp up in investments in the data warehouse platforms that we're providing and the amount of money that's being invested the subsequent year and the year after that.

And our next question comes from Ed Maguire from CLSA.

Could you discuss the -- just general business conditions, what are sales cycles like? And I mean, I know there's -- you're certainly experiencing the weakness among the top 50, but how would you characterize the broader deal environment for your products?

I would say, Ed, that we're now in a more stable and a little bit more predictable environment. When we look at what we're expecting for revenue in a quarter or whatever, and upon more about in the U.S., where the environment was a little tricky going back 1 year or 2. I would say everything's a little bit more stable, predictable. And I would call it a good environment. Not a great environment, but a good environment. That said, we're just not seeing a big uptick in large CapEx spending in the U.S. and we haven't seen it in a couple of years. Now -- and we can't hope that it changes short term. Eventually, we think it'll change. So in the meantime, what we've got to do is get after all these other opportunities, like we're doing in the market, and we're seeing short sales cycle as -- and great demand as it relates to all of our Big Data analytics types of offers and services. We're seeing an uptick in our cloud, although small, the Teradata data warehouse cloud offers, we're seeing some demand. Small numbers, but it'll help. And once again, we're after our integrated marketing revenue, and we have a good opportunity to grow that. So in the U.S., I think we've got a lot of levers that we're working on to accelerate revenue growth where there is good sales cycles, there is good demand, and we'll continue to go after that. And then we'll see what happens with the larger -- large CapEx spending as time goes by here.

[Operator Instructions] We'll now take a question from Keith Bachman from Bank of Montréal.

I think you mentioned that you had about $250 million in applications revenue. I was hoping you could clarify, a, what's in that category of application revenues? And how quickly is the aggregate, not just the recurring part, but how quickly is that growing? And specifically, if you could address the integrating marketing packages of Aprimo and eCircle, how are those growing within the overall context of the application space?

The majority of our applications revenue is Integrated Marketing Management, okay? So that is the majority. So we have some other applications in the area of demand chain management and some others in the financial services areas and everything else like that. But by and large, it's the Integrated Marketing Management. And when you take a look at the Integrated Marketing Management, well, a couple of headwinds in our growth is our legacy applications outside integrated marketing, and then also in the consulting area. So when you take a look at the integrated marketing, basically, what's happened is we have leading, innovative -- highly innovation solutions that are installed in production with some of the largest customers, companies here in the U.S. These are solutions that -- or implementations that integrate our campaign management, along with our digital messaging, along with our marketing resource management applications. These are hybrid solutions. Some of it's in the cloud, some of it's on-premise. And these are leading implementations of integrated marketing, and I think that's reflected in the recognition we get by the analysts like Gartner and so forth. And these large enterprise customers, where we've been doing a lot of activity, these are higher ASPs, there's more PS [ph], there's also more customization. But there are also longer sales cycles and implementation cycles. So the piece we need to focus on and get after is our integrated marketing cloud solution, which is well-suited for the mid-market, as well as some enterprise customers who just want to put a piece of the integrated marketing suite up. And these cycles are shorter, the implementations are shorter, and so forth. So what we're doing is, we're putting our focus and we're increasing our investments in the sales and marketing. And also the research and development, as it relates to our integrated cloud offer. And as we do that, we will be selling a lot more digital messaging, along with campaign management to the mid-market and so forth and so on. So Keith, or -- yes, I don't know if that...

It does. And that's actually a lot of great color. I guess, if I try to distill that down, all that terrific color, just philosophically, if you think about FY '15, is the application space flat, up or down on a growth rate basis? It sounds like as you're trying to transition to cloud, my interpretation is, it may still face some growth challenges as we look at 2015.

I think we have a great opportunity to increase our growth rate, full stop. And the reason why is, if you take a look at what happened, the epicenter of Teradata is in large enterprise accounts. And quite frankly, we do a great job with these large customers, and these marketing implementations are wonderful. We got them on-premise, we have them hybrid, we're doing leading things. But at the same time, these are long engagements, these are the good engagements, high average selling price, but the opportunity that we need to go focus on is the peer cloud Software as a Service and the bigger market opportunity, which comes with mid-market accounts, small business it comes with some enterprise customers, they're looking to just put a piece, not a huge implementation. And so we have the opportunity, and that's why we are investing in it, to increase our growth rate next year in 2015. Now can we turn -- can we move the needle overnight? Probably not, but we'll get there because it's a growing market.

Our next question comes from Derrick Wood from Susquehanna.

We've seen a lot of companies struggle with close rates on large deals in Q3. You guys did a nice execution job in Q3. But I'm just curious what you're seeing in the close rate environment for large CapEx deals and your guidance implies a big jump in Q4. So I just wanted to get some color as to what gives you the confidence that we'll see growth rebound in Q4?

Okay, well, thank you, Derrick, for the comment on Q3. What gives us the confidence is, earlier, I said, what we're seeing in the U.S., we're seeing a greater consistency. So I think predictability and consistency in the opportunities we have for large CapEx deals. The challenge is, we don't have enough of them [ph]. So that is the challenge. International is a different environment than the U.S. We do have some lumpiness between quarters, like EMEA had deals close that we looked at for Q3, that went into Q2. We also had some in Q1 that went into Q2, in the wrong direction. But anyway, I think it's more -- I feel like we're in a more predictable environment right now, Derrick.

And I guess as a follow-up to that. If you look at a year ago, there was a lot of disruption around Hadoop. And maybe that's going away and that's helping in the U.S. I mean, how would you compare the level of disruption Hadoop a year ago where you were talking about workloads moving out versus what the state of the market is today?

I'm glad you asked that question, Derrick, because it's -- I could almost call it night and day between a year ago and where we're at today. So the market has really settled down here in the U.S. and most of the developed markets around the hype, or whatever you want to call it, and confusion around what are the capabilities of Hadoop and how should it best be used. I think our Unified Data Architecture, along with Gartner's and others that are advocating a similar type of environment, has helped companies have a rational view of everything. And now we have the 2 largest Hadoop distribution companies all in the same boat. So I feel like we have an aligned marketplace, if you will. Not totally and not perfect, but a much more aligned marketplace than we had a year ago.

And our last question comes from Brad Reback from Stifel. Brad R. Reback - Stifel, Nicolaus & Company, Incorporated, Research Division: Just a quick one for Steve. Can you give us a sense from the couple of acquisitions you've done here that are more services-based, what type of contribution we should expect from them in 4Q?

On the contribution, Brad, we're gearing up on those. We're continuing to make investments so the contribution would be deemed to be small, minimal in Q4. It's prime -- we're really enhancing the infrastructure to drive the value of that Big Data consulting. So I would say like it's minimal contribution on a small revenue contribution.

Yes, if I can just add a little bit, Brad. So you look at some of the ones we've done historically, like with Claraview, we've got a BI consulting capability that was great and had built critical mass and has grown big since we've done that. With Ozone, we were able to provide an additional media services types of consulting and strategy and how companies run a campaign that we can build from that and move globally. And this helps differentiate us and sell other offers. And we think big. We're just getting a great consulting capability that knows how to help companies get value out of Big Data and all these different platforms that are out there that we can build from. So when you look at it on a -- financially or numerically, it may not be a huge big deal, but strategically, these things have really, really helped us and worked our well. Okay. With that, I'd like to thank all of you for joining us here this morning, and I hope you have a good day, and look forward to talking to you next year. Thank you.

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