Business Context and Reporting Period
Teradata Corporation provides data warehousing, big data analytics, integrated marketing management, consulting, and maintenance services. This Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Effective January 1, 2013, Teradata combined EMEA and Asia Pacific/Japan into a single International operating segment; prior-period segment data was reclassified.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Total revenue | $670 million | $665 million | $1,257 million | $1,278 million |
| Product revenue | $303 million | $321 million | $552 million | $629 million |
| Service revenue | $367 million | $344 million | $705 million | $649 million |
| Gross margin | 56.6% | 57.4% | 54.4% | 56.3% |
| Operating income | $147 million | $160 million | $223 million | $287 million |
| Operating margin | 21.9% | 24.1% | 17.7% | 22.5% |
| Net income | $108 million | $112 million | $167 million | $203 million |
| Diluted EPS | $0.65 | $0.65 | $1.00 | $1.18 |
Q2 service revenue increased 7%, including 7% growth in consulting and 6% growth in maintenance, while product revenue declined 6%. Service revenue represented 54.8% of quarterly revenue versus 51.7% in the prior-year quarter. Product gross margin fell to 66.7% from 69.2%, while service gross margin improved to 48.2% from 46.5%.
For the first six months, product revenue declined 12%, primarily because of fewer large customer orders, while service revenue increased 9%. Product gross margin declined to 64.9% from 67.9%, partly due to a less favorable mix and increased lower-margin appliance revenue. Service gross margin improved to 46.2% from 45.1%.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Six-month operating cash flow was $383 million, up from $344 million.
- Free cash flow, as defined by Teradata, was $318 million versus $275 million. This excludes acquisitions and financing activities.
- Cash and cash equivalents were $826 million at June 30, 2013, compared with $729 million at December 31, 2012. Approximately $600 million was held outside the United States.
- Accounts receivable declined to $514 million from $668 million at year-end, while inventories increased to $70 million from $47 million.
- Long-term debt on the balance sheet was $263 million. The term loan principal outstanding was $281 million, with an interest rate of 1.25%; $8 million was repaid during the first six months.
- The company had no borrowings under its $300 million unsecured revolving credit facility and remained in compliance with its covenants.
- Management stated that cash, operating cash flow, and available credit capacity should be sufficient for at least the next twelve months.
- Teradata repurchased 3.2 million shares for $184 million during the first six months, including 1.6 million shares in the second quarter. General repurchase authorization remaining at June 30 was approximately $209 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 1%, but six-month revenue decreased 2%.
- Revenue mix shifted materially toward services as product revenue declined.
- Quarterly operating income decreased 8%; six-month operating income decreased 22%.
- Operating expenses increased to $232 million in Q2 from $222 million and to $461 million for the first six months from $433 million, driven primarily by additional sales headcount and higher engineering expenses.
- Americas six-month revenue declined 3% and gross margin declined to 57.2% from 60.3%. International six-month revenue increased 1% and gross margin was broadly stable at 50.1%.
- The effective tax rate declined to 26.5% from 30.0% in Q2 and to 24.8% from 29.0% for the first six months. The six-month rate included a one-time $4 million benefit related to the retroactive reinstatement of the 2012 Federal R&D Tax Credit.
- Foreign currency translation adversely affected reported revenue by approximately 1 percentage point in Q2 and the first six months.
Guidance, Outlook, Risks, and Unusual Items
Management continued to expect overall revenue growth for full-year 2013, with customer purchase activity and larger capital investments expected to improve in the second half. Management also estimated a full-year global effective tax rate slightly above 25% and expected approximately 1 to 2 percentage points of adverse revenue and operating-income impact from currency translation based on August 1, 2013 exchange rates.
Management cited cautious customer budgets and delayed large capital purchases, particularly in the United States, as the principal near-term demand concern. Large order size, timing, and contractual terms may cause significant quarter-to-quarter variability. Other risks include foreign exchange volatility, potential future pricing pressure, competitive conditions, long sales cycles for new sales territories, and the company’s dependence on generating sufficient operating cash flow.
- A federal False Claims Act litigation matter was settled in January 2013 for the previously accrued $3 million, and the action was dismissed.
- Customer lease-value guarantees had a maximum future payment obligation and associated liability of $3 million at June 30.
- Warranty reserves were $7 million at June 30.
- The company had not provided U.S. federal tax for approximately $963 million of foreign earnings considered permanently reinvested outside the United States.
- No material changes were reported to previously disclosed market-risk factors or risk factors, and management reported effective disclosure controls as of June 30, 2013.
Investor Verification Points
- Verify whether the expected second-half recovery in large customer purchases occurred and whether full-year revenue growth was achieved.
- Track product revenue, appliance mix, product gross margin, and the sustainability of service-margin gains.
- Assess whether higher sales and R&D spending produced corresponding revenue growth and operating leverage.
- Review cash held overseas, permanent reinvestment assertions, and potential tax costs of repatriation.
- Monitor term-loan amortization, interest-rate exposure, covenant compliance, and remaining revolving-credit capacity.
- Reconcile share repurchases with diluted share count, free cash flow, and remaining authorization.
- Review the impact of foreign exchange movements and any changes in customer budgets, competitive pricing, or large-order timing.