Teradata Corporation — Q3 2014 Form 10-Q Summary
Business context and reporting period
Teradata provides analytic data platforms, software, hardware, consulting, maintenance, and integrated marketing cloud applications. The filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. Operations are reported through the Americas and International segments.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $667 million | $666 million | $1,971 million | $1,923 million |
| Product revenue | $294 million | $306 million | $867 million | $858 million |
| Service revenue | $373 million | $360 million | $1,104 million | $1,065 million |
| Gross margin | 52.5% | 53.8% | 53.5% | 54.2% |
| Operating income | $123 million | $132 million | $345 million | $355 million |
| Operating margin | 18.4% | 19.8% | 17.5% | 18.5% |
| Net income | $94 million | $98 million | $249 million | $265 million |
| Diluted EPS | $0.60 | $0.59 | $1.57 | $1.59 |
For the nine months, operating cash flow was $583 million versus $447 million in 2013. Free cash flow, defined by the company as operating cash flow less property and equipment expenditures and additions to capitalized software, was $489 million versus $347 million. Investing cash outflow was $143 million, including $37 million of property and equipment expenditures, $57 million of capitalized software additions, and $49 million for acquisitions and other investing activities. Financing cash outflow was $279 million, including $282 million of share repurchases.
At September 30, 2014, cash and cash equivalents were $848 million, including $743 million held by foreign subsidiaries. Total debt was $255 million of term-loan principal; the company had no borrowings under its $300 million unsecured revolving credit facility. Current and long-term debt recorded on the balance sheet totaled $255 million. The term loan carried a 1.1875% interest rate and remaining principal was due in April 2016. The company reported compliance with all debt covenants and stated that liquidity was sufficient for at least the next twelve months.
Material changes versus the prior comparable period
- Q3 revenue was essentially flat: services revenue increased 4%, offsetting a 4% decline in product revenue. For the nine months, revenue increased 2%, driven by 4% growth in services revenue and 1% growth in product revenue.
- Q3 gross margin declined 130 basis points to 52.5%, primarily because of increased amortization of capitalized software development costs, unfavorable product and deal mix, and lower consulting-services productivity.
- Q3 operating income fell $9 million and net income fell $4 million. Nine-month operating income declined $10 million and net income declined $16 million.
- Research and development expense increased $3 million in Q3 and $12 million for the nine months, reflecting technology acquisitions, internal development, and a voluntary early-retirement program. Nine-month SG&A increased $10 million, primarily from additional sales resources.
- International nine-month revenue increased 7%, while Americas revenue decreased 1%, primarily because of product revenue declines among the largest Americas customers. International gross margin declined to 47.4% from 49.6%.
- The diluted weighted-average share count declined to 157.1 million in Q3 and 159.1 million for the nine months, from 166.4 million and 167.1 million, respectively, reflecting repurchases. The company repurchased 6.9 million shares for $282 million during the nine months.
- Other expense included a $9 million impairment of an equity investment during the nine months. Foreign currency translation reduced other comprehensive income by $28 million in Q3 and for the nine months.
Guidance, outlook, risks, and unusual items
- Management expects research and development expense to increase sequentially during the remainder of 2014.
- Amortization of previously capitalized software development costs was expected to increase product costs by approximately $14 million in 2014 compared with 2013, with an additional approximately $5 million increase anticipated in 2015.
- Based on late-October exchange rates, currency translation was expected to adversely affect 2014 full-year revenue growth by 1% and 2015 full-year revenue growth by 1% to 2%.
- Management identified pressure on large capital expenditures by major Americas customers as the principal challenge to revenue growth. Risks include economic conditions, competitive and pricing pressure, alternative technologies, customer shifts toward lower-cost analytics platforms, foreign exchange movements, and dependence on large customers.
- The estimated 2014 effective tax rate was approximately 25.8%, subject to assumptions regarding the possible reinstatement of the U.S. Federal Research and Development Tax Credit. Q3 and nine-month 2014 tax rates benefited from an IRS audit settlement for the 2011 tax year, while the expired R&D credit reduced the comparative benefit.
- The company had a $353 million authorization remaining for share repurchases at September 30, 2014. Approximately $1.1 billion of foreign earnings were considered permanently reinvested, with no U.S. federal tax liability provided.
- The filing reports no material changes to previously disclosed risk factors, market risks, contractual commitments, or internal controls. A $4 million maximum future obligation existed under equipment lease-value guarantees, and the warranty reserve was $6 million at September 30, 2014.
- New revenue-recognition guidance effective after December 15, 2016 and new share-based-payment guidance effective after December 15, 2015 were under evaluation; the company had not determined their impact.
Important facts for investors to verify
- Whether the decline in product revenue among major Americas customers persists and whether service growth can offset it.
- The effect of rising capitalized-software amortization and unfavorable deal mix on product gross margin.
- Progress toward the company’s strategic growth areas, including big data analytics, cloud offerings, and integrated marketing applications.
- The April 2016 term-loan maturity, available revolving capacity, and cash held overseas relative to future capital needs and repurchases.
- The sustainability of the unusually strong improvement in operating cash flow and free cash flow, including working-capital effects.
- The impact of foreign exchange changes, the IRS audit settlement, and any eventual resolution of the U.S. R&D tax-credit issue on reported results.