Teradata Corporation
Q3 2008 Earnings Call Transcript

Published: 4 Nov 2008

[Operator:]

Welcome to the Teradata Q3 2008 earnings release conference call. (Operator instructions) Now, I will turn the meeting over to Gregg Swearingen of Investor Relations. Sir, you may begin.

[Gregg Swearingen:]

Thank you and good morning and thank you for joining us for our third quarter earnings conference call. Mike Koehler, Teradata’s CEO will lead our discussion highlighting Teradata’s third quarter results. After Mike’s remarks, Steve Scheppmann, Teradata’s Chief Financial Officer, will provide more details relating to our Q3 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, such as free cash flow and results excluding the impact of certain non-recurring items. A reconciliation of our $0.33 of GAAP EPS to our non-GAAP EPS of $0.36 which reflects an impairment charge related a history equity investment, as well as increased tax expense related to assumptions used in our 2007 tax filings, as well as forecasted non-GAAP results and other information concerning these measures, are included in our earnings release and on the investor page of Teradata’s website at www.teradata.com. A replay of this conference call will also be available later today on teradata.com. For those listening to the replay of the call, please keep in mind that the information discussed is as of November 4, 2008 and 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.

[Michael Koehler:]

Thanks, Greg and good morning, everyone. Teradata delivered a good third quarter in terms of earnings and operating margins with non-GAAP earnings per share of $0.36, up 24% over prior year and operating margins improving to 19.6%, up over 100 basis points from Q3 of 2007. Excluding $6 million of incremental new company costs, operating margins would have been up 250 basis points. I was pleased with our continuing improvements in our product and services gross margins in the quarter. Year to date, our product based margins are now up 130 basis points on lower product revenue volume and services gross margins are up 200 basis points versus prior year. Overall, revenues were flat in the quarter, which was roughly in line with what we had expected. Given the strong prior year Q3 comparable, our revenues grew 17%. I was encouraged with the Americas region, which grew revenue by 3% over strong 13% growth quarter in Q3 2007. Overall activity was up with growth coming from both upgrades at existing accounts and new account lands. Significant upgrades included eBay, who is gaining valuable insights from analyzing its significant volumes of rich online data. eBay is now Teradata's largest data warehouse environment in the world at over 5 terabytes. With innovative analytics as a service approach for rapid prototyping, eBay provides an easy and cost effective means for its internal teams to quickly experiment with ideas and learn fast, including eBay's time to market while saving on the cost of datamarts. We also saw an upgrade at Cabelas, who is leveraging our SAS partnership to speed delivery and increase the value of advanced analytics projects. And we had upgrades from Harvard Pilgrim Healthcare who is using Teradata warehouse to analyze data and develop trends on demand. Goodyear who is adding analytics for procurement and CVS is implementing Teradata's relationship manager application to improve their direct marketing campaign efficiencies. Among the new account wins in the Americas was one of the top U.S. television broadcasting companies, one of the largest mining companies in the world and Super Mercados Lider, the largest supermarket retailer in Chile. Revenue in the EMEA region was down 9% in the quarter but we're going against a very strong 32% growth prior year comparable and sequentially going against a 33% growth in Q2 2008. EMEA generated some great new customer lands including HSBC, one of the largest financial institutions in the world which I mentioned on our last call. HEMA, a Dutch retailer, will use Teradata's demand chain management application to help build collaborative relationships with suppliers and increase demand forecasting accuracy. And (inaudible 00

[Stephen Scheppmann:]

Thanks, Mike and thanks for joining us today. These are extraordinary times with macroeconomic and financial uncertainty. Our business model and our value proposition are clearly positioned to enjoy long term growth as our revenue mission is, which includes expanded sales territories, coverage, expanded product families, and our strategic relationships, and long-term profitability and our disciplined approach to improve productivity. Q3 of 2008 revenue, up $439 million, was the same as the revenue we reported in our (inaudible 00

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Matt Summerville with KeyBanc. You may ask your question, sir.

[Matt Summerville:]

Steve, just back to the FX comment you made a minute or two ago, I want to make sure I’m clear, are you essentially factoring in 7 to 8 points of top line headwind into the fourth quarter just on FX?

[Stephen Scheppmann:]

No, Matt. What we’ve looked at is the impact of – our last guidance was based on the June 30th FX rates and let’s call it $1.55 on the Euro for example, and looking at the October 31st, the rates on Friday, and say about $1.28, just for round numbers, and you look at that impact and when I calculate that impact it’s $43 million in total with approximately $8 to $9 million in Q3 that we experienced, and then the $34 to $35 million we just paid in Q4. That’s how basically I’ve boxed back to that numbers.

[Matt Summerville:]

Okay, I got you. I thought on the last call, Steve, you mentioned that we should see R&D being expensed in the P&L start to ramp up in the second half of the year, obviously you’re still saying that for Q4, but I guess help me to understand more from a timing standpoint why that didn’t start to happen in Q3?

[Stephen Scheppmann:]

Yes, the old accounting ledger SFAS 86 with respect to capitalization of cost with respect to developed – internally developed software for resale. We have made some accounting estimates with respect to Teradata 13 that we had to adjust in Q3 that resulted into more capitalization of that argued investment under SFAS 86 then from an accounting perspective that flowed through Q3. In Q4, I expect our R&D expense to closely approximate the Q4 ’07 number about $35 million.

[Matt Summerville:]

Okay. With respect to the America’s business, obviously there’s a first quarter and several that you saw year-over-year growth, do you think this is more reflective of a bottoming out in that geography as far as demand or is this more reflective of the lumpiness in the business?

[Michael Koehler:]

Matt, this is Mike Koehler, I’ll answer that one. The U.S. has been tough all year. As we said in the prior two quarters’ calls. But what’s going on is the opportunities to keep building with the delays and the other thing that’s going on is starting in the fourth quarter. We’re going to be going against a much easier prior year comparables going forward in the US. So, there’s a little bit of lumpiness but then there’s also, if you will, a bubble that’s been building as opportunities get delayed and the total amount of the opportunities just continues to build. So, we’re cautiously optimistic that with the Americas going forward with the prior year comparables being easier and the build up in the delays, that we’ll get a little tailwind with the Americas.

[Matt Summerville:]

Is there any sort of close rate, I guess, that you can quote over the last twelve months, the number of deals that have been pushed, how many of those have since been signed so we can get sort of a feel for how big that bubble might be that you described.

[Michael Koehler:]

I don’t know if I can give you an exact metric, a piece of data on that, Matt, but we do track them. The number of deals that are canceled as opposed to delayed are minimal and they continue to flow through and we continue to work them as they're delayed.

[Matt Summerville:]

Okay, if I look at just the fourth quarter in your full-year revenue guidance plus 1 to plus 4, that implies fourth quarter revenue is in the range of something like minus 3 to plus 7 or $450 to $500 million round numbers. That range is obviously extremely wide and I’m wondering is that more reflective of current volatility you’re seeing in your business or more reflective of contingency just given the broader macro environment?

[Michael Koehler:]

It’s more contingent on the – I would say the economic uncertainty, Matt.

[Matt Summerville:]

Okay. One more question and I’ll get back in queue. With respect to the 2550, how is your head-to-head win rate there versus some of the other data appliance vendors compared to the win rate you talked about with your higher NDDW, and do we have a rough customer count on that 2550 at this point?

[Michael Koehler:]

Overall, we’re pretty encouraged with the 2550. We’ve had several wins in the quarter including five new customer decisions – five new customer wins in the third quarter, and we have pretty good activity building. With the 2550, we are seeing more head-to-head competition where we’re competing against the appliance vendors and we’ve had a very high win rate in the third quarter with the 2550 as well as the entire product family going head-to-head with the appliance vendors. The number we talked about on our win rate would refer enterprise data warehouse decisions which are typically a different set of competitors and a whole different landscape. We've talked about that being in the 80% to 90% range. We’re not seeing that to that degree in this space at that time, but what we saw in the third quarter is certainly going up closer to that rate.

[Matt Summerville:]

Great. Thanks a lot, Mike.

[Operator:]

Thank you. Our next question comes from Greg Holter with Great Lakes Review. You may ask your question.

[Greg Holter:]

Yes. Hello. Good morning. Regarding some of the other new products that you’ve had discussed over the last quarter or two, just wondering if you could give a little update on – a little further update on how things are going there as well.

[Michael Koehler:]

Greg, this is Mike Koehler. The update or the answer or the conversation I was just having with Matt was regarding the 2550 appliance. The other new product that we introduced a couple of weeks ago at our partner’s conference was the 1550 and it’s just getting underway. We’re very encouraged with the market opportunity for the 1550. It gets into a net new incremental market opportunity because it’s attacking an area where there is massive data volumes and data sets that previously couldn’t be mined or accessed in a data warehouse – traditional data warehouse environment. So with the 1550, it’s very promising as to what the opportunity here is because we have something that is very affordable and makes sense to get after those large volume sets in a data market environment and we’ve got some initial activities underway with a number of customers but it’s very early in the process to report on that.

[Greg Holter:]

Okay. That’s helpful. And I know you mentioned regarding the sales territory build out of the, I think, the 303030 for the next three years. What kind of progress have you made so far and I know it’s still early there?

[Michael Koehler:]

Well, no. As far as 2008 goes, we’re very much on track to get to the minimum of 30 territories.

[Greg Holter:]

Okay. Great. And the SAS relationship, I know you mentioned you’ve had some products come out over that expanding relationship, just wondering if you could update us on that initiative as well.

[Michael Koehler:]

We continue to make progress. We continue to optimize more and more of the SAS analytical applications in the Teradata environment. I had mentioned Cabelas as well as other companies that are benefiting from getting better speed and efficiencies and performance running with the Teradata environment. So this is something that we did not plan on moving overnight and it will take a period of time until we get a bunch of more of the applications, put in an optimized with Teradata. We did release two applications – new applications at our partner's conference, SAS Applications, that were credit risk and anti-money laundering that's now available in Teradata. So we're making good progress and pretty much as we expected.

[Greg Holter:]

Okay. Great. And Steve, you talked about the impact of the foreign currency on the top line, what kind of impact would that be expected to have on the net income or earnings per share, I guess, either one?

[Stephen Scheppmann:]

Greg, let me just kind of give you a little perspective in their. The impact on EPS, that continues to be a tough one to calculate. Really due to the difficulty of specifically determining how much of the currency impact was captured and the pricing of a particular transaction or how it was addressed in our sourcing activities from a products and services perspective? But you can look at the total and look at our standard margins and again, due to the pricing of the transaction which we may be able to recover some of that that'll vary from the standard margin – gross margin perspective, and then you look at it from the operating expenses, how much can we protect the sourcing side and the FX side. And so there will be an impact on EPS. It just depends how much we can manage through the currency movements in our pricing decisions and our sourcing decisions.

[Greg Holter:]

Okay.

[Stephen Scheppmann:]

It's a difficult one to quantify.

[Greg Holter:]

Yes. I can't imagine especially with the volatility.

[Stephen Scheppmann:]

Exactly.

[Greg Holter:]

Do you have a quarter end diluted share count figure?

[Stephen Scheppmann:]

The quarter end diluted share count figure, I believe, is 179 for the year and 181, even at 179.4 for Q3.

[Greg Holter:]

Okay.

[Stephen Scheppmann:]

Well, Greg, because of the repurchases in Q3 we'll get the full weighted average share outstanding for Q4.

[Greg Holter:]

Right. That's what I'm trying to get at. Is it lower than the 179.4 you showed as the average for the quarter?

[Stephen Scheppmann:]

Well, the loan for Q4 but – it just depends on the waiting for the full year.

[Greg Holter:]

Okay. And lastly, capital spending for this year. What are your plans and any early thoughts for '09, at least directionally?

[Stephen Scheppmann:]

What we have said in the past, we're typically $75-85 million for CapEx spending. That includes capitalized software plus property equipment and that we've been running that pretty consistent over the years other than little spin related capital investments. So at this point in time, based on that it would probably be a reasonable benchmark based on the historical experience.

[Greg Holter:]

Okay. Great. Thank you very much.

[Stephen Scheppmann:]

Thanks Greg.

[Operator:]

Thank you. Our next question comes from Nabil Elsheshai with Pacific Crest Securities. You may ask your question.

[Nabil Elsheshai:]

Hey guys. I have a follow-up on the 2550 win like the size that you mentioned in the quarter, how many of those are with existing Teradata customers versus new? And then if you look at opportunities out, do you see more of those deals coming from existing customers or from new customers?

[Michael Koehler:]

Nabil, it's Mike Koehler. In the quarter, five of the wins were new customer wins. In addition, we had sales into our user base as well.

[Nabil Elsheshai:]

I thought you said that you did five new customer wins for the 2550. Did I hear that wrong earlier?

[Michael Koehler:]

What I had meant to say, and thanks for asking for the clarification, Nabil, those are new account customer wins. So we have five new account wins in addition to user-base wins with the 2550.

[Nabil Elsheshai:]

Okay. Have you guys given your total count of customers using the 2550 and do you have customers that are in production at this point?

[Michael Koehler:]

We do have customers in production and we have not given quantities, Nabil, for the number of 2550s. On the call last quarter, I had mentioned, I think it was five customers by name that we were committed to use their names and then on this call, what I mentioned as one customer that purchased the 2550, we had several others that we didn't disclose by name and five new account wins with the 2550. So we're seeing a nice opportunity with the 2550 both in our user base as well as new account acquisition. Now the other dynamic that's occurred also is some of these new account wins that we're competing with the 2550. Some of those did change to 5550s when we were competing with the appliance vendors. So in the quarter, we had several head-to-head wins against the appliance vendors with both the 2550 as well as the 5550.

[Nabil Elsheshai:]

Okay. Great. And then, I apologize if I must. Can I get the slip of the services revenue between consulting and maintenance?

[Michael Koehler:]

The slip between the service revenue, I'm consulting maintenance, Nabil – let's see. I'll go back to you exactly here.

[Stephen Scheppmann:]

Really, it was 118 on the professional services and 108 on the maintenance.

[Nabil Elsheshai:]

Great. And then just to follow up on the macro questions earlier. Obviously, kind of right at the end of the quarter and so far in Q4, at least the markets and news has been much has been worse, did you guys see a significant incremental slow down as you got at the end of quarter and so far in the Q4 or from a biding behavior and project delays, has it been similar to what you were seeing throughout the year?

[Michael Koehler:]

At the end of the quarter, it buried a little bit by geography and by industry. In Europe, Middle East, Africa, we didn't notice any change or behavior change, everything was pretty much normal going right through the end of Q3. In Asia Pacific Japan, some of the global manufacturers, auto and high-tech manufacturers, we did see some delays and further scrutiny and change of behavior as the deals were closing there at the end of the third quarter. And then in the US, we saw a little bit more, but once again, the U.S. has been tough all year and we've had delays fallout at the end of each quarter and Q1 and Q2. We had a little bit more fallout in Q3 versus Q2 but not anything abnormally high or different.

[Nabil Elsheshai:]

Okay. Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from James Lin with Greenlight Capital. You may ask your question, sir.

[James Lin:]

Hi. Given the math that you guys did on the revenue headwind, the $43 million, how should we think about the headwind heading for 2009?

[Stephen Scheppmann:]

Hi, James. This is Stephen Scheppmann. We've announced – forecast or to be able to predict currency rates and basically what we do is we go off the spot rates in our 2008 guidance in August with a basis of 6.6. We updated through 1031 for '08 and if you do the math, if you say from – there is roughly 20% currency headwind of strengthening of the U.S. dollar from June 30th, there is a 12% strengthening in there from the 145 and 128 range. So you can look at it and do the math and say there maybe $100 million out there in '09. But again, that's predicting those currencies and I'm not in the position to predict them but I'm just looking at the spot rates and applying it to the international markets and you could the same math and you could get a number of that may approximate $100 million.

[James Lin:]

For 2009?

[Stephen Scheppmann:]

For 2009, right. Well, I'm just saying based on the '08 revenue and look at the movement of the spot rates, that's what you can calculate.

[James Lin:]

Right. So then going back to this issue of the flow through, when we look at the $43 million that you guys are talking about, the change in the EPS guidance would imply about $0.05 with the fall through which sort of you work up the chain, $9 million after tax, $12 to $13 million pretax implies – seems to imply a fall through of about 30%. Is that fair? Is that math reasonable? $0.05 with the fall through which sort of you work up the chain, $9 million after tax, $12 to $13 million pretax implies – seems to imply a fall through of about 30%. Is that fair? Is that math reasonable?

[Stephen Scheppmann:]

It varies. As I've said before our business model generates incrementally getting that 30% range after the territory expansions were completed. So it varies. It’s a reasonable range.

[James Lin:]

Okay. And it would also be reasonable to apply to this roughly the $100 million that we are talking about?

[Stephen Scheppmann:]

Again, it varies geographically. And it could mean a larger range. This would depend upon where this stalls out. How much from a pricing perspective we can manage? How much from a sourcing perspective we can manage from the product and services perspective? So it’s a lot of variable that are going into that. That's why it’s very difficult on the EPS side.

[Michael Koehler:]

And it’s a little bit early to tell and we will obviously have a much better hand on this at the next call for all knowing.

[James Lin:]

And at this time do you expect to get back some of those in pricing power? 'Cause you know there’s a headwind, right?

[Stephen Scheppmann:]

It is our objective to always try to mitigate any potential risk and so expectations versus our objective, it’s our objective to try and mitigate those.

[James Lin:]

Thanks.

[Michael Koehler:]

Thanks James.

[Operator:]

(Operations Instructions) Our next question comes from Matt Summerville of KeyBanc, you may ask your question.

[Matt Summerville:]

Just two follow-up questions. Can you talk about how sustainable the growth as you’re seeing in the maintenance business given that we’ve had several quarters now of down year-over-year product sales?

[Stephen Scheppmann:]

Well, Matt, yes. You've seen that the growth in maintenance has slow down a bit from the first part to the latter part of the year through Q3 from a quarter-over-quarter perspective. With the movement, I would expect that to level out and become or normalize going forward. But again, that’s still an area that we continue to emphasize with respect to the annuity side of our business, but you’ve seen the trend and that should level out.

[Matt Summerville:]

When you say normalize, what do you consider the normalized rate to be? Somewhere in the range of 5% to 10%?

[Stephen Scheppmann:]

Typically, that will attract our product revenue growth. Really attract our product revenue growth going forward. And not being little guarded here, Matt, because under GAAP with VSOE, maintenance revenues are protected with respect to from an accounting side. So that’s going to have a little bit of a benefit on the maintenance side. So that’s why I'm being a little cautious on the – where that normal amount may be.

[Michael Koehler:]

Yes, Matt, it’s Mike Koehler. The one thing we’re really riveted on is picking up the number of new account wins and with the broadening of our platform family, the increase of the sales territories, we’re just very riveted on new account acquisition, and with the economic environment we’re faced, it’s just also critical that we rapidly increase the number of new accounts and with that comes an incremental maintenance rev up.

[Stephen Scheppmann:]

And that'll drive the maintenance revenue.

[Matt Summerville:]

And then just a last question. Mike, you spent a couple of minutes talking about communications, financial services, and verticals. The other big one for you guys historically has been retail. Can you give similar kind of color? I know you mentioned a big new win there, but just more broadly what you’re seeing there.

[Michael Koehler:]

On a year-to-date basis, retail is down in the United States. Outside the US, retail is up a little bit. So we’ve been feeling the clamp down as I have been saying in the U.S. now for three or four quarters and a piece of that was – a good piece of it was in the retail industry. We've also had some lumpiness in the government sector which has been a drag-on revenue growth this year.

[Matt Summerville:]

So given that you've had nine to twelve months of fairly lackluster spending domestically among retailers, have the conversations you're having with these customers begun to change it. Are you showing signs that they might be coming back to you guys to spend?

[Michael Koehler:]

I would say it's more similar at this point, Matt. It's more of the same old same old. So we work with all our customers to help them maximize the assets that they have. Actually they help them get the most that they have out of their existing investments even though it runs counter to an upgrade and everything else like that. But at the end of the day, we have to work with our customers and help them out in this time and it pays dividends down the road.

[Matt Summerville:]

Thanks a lot.

[Michael Koehler:]

Okay. We have time for one more question and then we'll wrap things up.

[Operator:]

Thank you. Our last question comes from Greg Holter with Great Lakes Review. You may ask your question.

[Greg Holter:]

Hello. Thank you for letting me back. Given this drop at least in the price of assets, I wonder what your feeling is towards merger and acquisition candidate and I know you've generally talked about small tuck-in type opportunities, but just if you could provide some input there that would be helpful.

[Stephen Scheppmann:]

Hey, Greg. This is Steve. Now, we'll continue to be prudent with their cash investments and we're always open for opportunities to enhance our competitive advantage. So if that's strategically from a products perspective or strategically from a market perspective, we'll be always interested and active accordingly from a prudent perspective.

[Greg Holter:]

And you mentioned your cash is overnight securities, is that mostly here invested in the U.S. or is it not?

[Stephen Scheppmann:]

As you recall in our respective tax rate, we've made the determination to permanently reinvest because of our cash flow dynamics, our international cash. And at 930, approximately one-thirds domestic and two-thirds international.

[Greg Holter:]

Okay. That's very helpful.

[Stephen Scheppmann:]

And it's all – generally speaking, in overnight government securities and again not subject to any of the derivative exposure from third party exposure.

[Greg Holter:]

Alright. And one last one. Mike, you had mentioned the retail in government, any commentary you could provide on the transportation and the newer growth area of healthcare? It would be helpful as well.

[Michael Koehler:]

Greg, those two industry segments are very small relative to the overall revenues for Teradata. I wouldn't take too much of that but since you asked the question, travel and transportation is up year-to-date and healthcare is – I'm getting the answer here – down a little bit. But once again, it has more value if we give some color on an annual basis which we will do especially in some of the smaller segments. The bigger ones is meaningful when we get three quarters in the year such as financial services, telecommunications, and retail and manufacturing.

[Greg Holter:]

Right. Makes sense. Good luck guys. Let's see the dollar fall the most against the Euro since '99 currently here. So, good luck and (inaudible 01

[Michael Koehler:]

Well, thanks Greg and thanks everyone for joining the call. We're looking at a tough economic environment here but I want you to know we are committed to advancing the Teradata business both short-term and longer-term. So, thanks again.

[Operator:]

This does conclude today's conference. You may disconnect at this time. Thank you for your participation.