Teradata Corporation 2010 Form 10-K Summary
Business context and reporting period
Teradata provides enterprise data warehousing and analytics solutions combining software, hardware, consulting, installation, maintenance, and support services. The filing covers the fiscal year ended December 31, 2010. Fourth-quarter 2010 information is included in unaudited quarterly data but this is an annual Form 10-K, not a standalone Q4 filing.
- Reportable regions: Americas, EMEA, and Asia Pacific/Japan.
- 2010 revenue mix: 48.2% product revenue and 51.8% service revenue.
- Approximately 45% of revenue was generated outside the United States; no customer represented 10% or more of total revenue.
- Teradata had approximately 7,400 employees at year-end.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $1.936 billion | $1.709 billion | 13% increase |
| Product revenue | $933 million | $772 million | 21% increase |
| Service revenue | $1.003 billion | $937 million | 7% increase |
| Gross profit | $1.088 billion | $938 million | 16% increase |
| Gross margin | 56.2% | 54.9% | 130 basis-point increase |
| Operating income | $415 million | $338 million | 23% increase |
| Operating margin | 21.4% | 19.8% | 160 basis-point increase |
| Net income | $301 million | $254 million | 18% increase |
| Diluted EPS | $1.77 | $1.46 | 21% increase |
| Operating cash flow | $413 million | $455 million | 9% decrease |
| Free cash flow | $330 million | $367 million | 10% decrease |
2010 fourth-quarter revenue was $548 million, compared with $496 million in the fourth quarter of 2009. Fourth-quarter operating income was $117 million and net income was $85 million, compared with $106 million and $84 million, respectively, in the prior-year quarter.
- SG&A expense increased to $526 million from $483 million, primarily due to higher sales headcount, territory expansion, commissions, and incentive compensation.
- R&D expense increased to $147 million from $117 million due to higher headcount, salaries, and lower capitalization of software development costs.
- Product gross margin improved to 67.2% from 65.2%; service gross margin declined slightly to 46.0% from 46.4%.
- The effective tax rate increased to 27.3% from 24.0%, principally because a greater proportion of earnings was generated in the United States.
Liquidity, debt, and capital resources
- Cash and cash equivalents were $883 million at December 31, 2010, up from $661 million at year-end 2009.
- Teradata had no debt outstanding at year-end and had no borrowings under its $300 million unsecured revolving credit facility; it was in compliance with all covenants.
- The company repurchased approximately 2.9 million shares for $88 million during 2010. A further $161 million remained available under the general repurchase authorization at year-end.
- Capital expenditures were $34 million and additions to capitalized software were $49 million.
- Cash held outside the United States totaled $506 million. The company had not provided U.S. federal tax on approximately $591 million of foreign earnings considered permanently reinvested abroad.
- Contractual lease and purchase obligations totaled $73 million at year-end, including $23 million due in 2011.
Material changes versus the prior comparable period
- Revenue growth accelerated sharply from the 3% revenue decline reported in 2009, led by a 30% increase in Americas product revenue.
- Americas revenue increased 19% to $1.166 billion; EMEA revenue increased 3% to $442 million; APJ revenue increased 10% to $328 million.
- Product revenue returned above 2008 levels, while service revenue continued to grow steadily.
- Gross and operating margins expanded despite increased selling and R&D investment.
- Operating cash flow and free cash flow declined because receivables and inventories increased with higher revenue.
- Share repurchases decreased from approximately $174 million in 2009 to $88 million in 2010.
Guidance, outlook, commentary, risks, and unusual items
- Management described its long-term outlook as positive, citing increasing data volumes, more data types, complex analytics, and demand for near-real-time enterprise intelligence.
- For 2011, management estimated an effective tax rate of approximately 27% to 28% and expected roughly a two-percentage-point benefit to reported revenue from currency translation based on January 31, 2011 exchange rates.
- Teradata completed the $525 million all-cash acquisition of Aprimo on January 21, 2011. The purchase was funded with $225 million of U.S. cash and a full draw of the $300 million credit facility. Approximately $13 million of acquisition-related transaction and integration costs were expected in 2011.
- Key risks include intense competition from IBM, Oracle, and emerging providers; long and unpredictable sales cycles; seasonality, with typically lower first-quarter and higher fourth-quarter revenue; pricing and maintenance-renewal pressure; foreign currency volatility; reliance on Flextronics and other suppliers; product and security failures; international compliance risks; and acquisition integration risk.
- The company disclosed a Department of Justice investigation and related False Claims Act litigation concerning federal contracts and pricing disclosures originating before the NCR separation. Teradata had accrued approximately $3 million for its current best estimate of probable liability, but the ultimate exposure was not determinable.
- International pension and postemployment obligations were underfunded by approximately $52 million and $40 million, respectively, at year-end.
- PricewaterhouseCoopers issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- Whether post-acquisition leverage, interest expense, and liquidity changed materially after the $300 million credit-facility draw for Aprimo.
- Aprimo’s actual contribution to revenue, profitability, cash flow, goodwill, and intangible assets after integration.
- Whether product-led growth and improved product margins are sustainable, or reflect unusually favorable deal mix and currency effects.
- Trends in receivables, inventories, deferred revenue, and conversion of earnings into operating and free cash flow.
- The resolution, financial exposure, and potential reputational impact of the Department of Justice and False Claims Act matters.
- Foreign earnings repatriation implications, including potential U.S. and withholding taxes on the approximately $591 million of permanently reinvested foreign earnings.
- Maintenance-renewal rates, pricing pressure, competitive losses, and the productivity of expanded sales territories.