Teradata Corporation 2011 Q3 Form 10-Q Summary
Business context and reporting period
Teradata provides data warehousing, big data analytics, consulting, maintenance, and marketing and business applications. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
During 2011, Teradata completed the acquisitions of Aprimo, a marketing software provider, for $525 million, and Aster Data Systems, an advanced analytics company, for $259 million. The acquisitions expanded the company’s applications and big-data offerings and materially increased goodwill, acquired intangible assets, amortization, and debt.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $602 million | $489 million | $1.689 billion | $1.388 billion |
| Product revenue | $287 million | $243 million | $791 million | $666 million |
| Service revenue | $315 million | $246 million | $898 million | $722 million |
| Gross margin | 54.5% | 57.1% | 54.4% | 56.4% |
| Operating income | $122 million | $106 million | $323 million | $298 million |
| Operating margin | 20.3% | 21.7% | 19.1% | 21.5% |
| Net income | $87 million | $75 million | $255 million | $216 million |
| Diluted EPS | $0.51 | $0.44 | $1.48 | $1.27 |
- Revenue increased 23% in Q3 and 22% for the first nine months. Service revenue grew faster than product revenue, led by consulting and maintenance services.
- Q3 product gross margin declined to 65.5% from 70.4%; service gross margin increased modestly to 44.4% from 43.9%. Nine-month product and service margins both declined.
- Q3 operating expenses were $206 million, or 34.2% of revenue, compared with $173 million, or 35.4%, in the prior-year quarter. Higher selling costs, added sales and engineering headcount, acquisition costs, and infrastructure contributed to the increase.
- Other income for the nine months was $25 million, including an $11 million gain on the remeasurement of Teradata’s prior Aster Data investment and a $17 million gain on the sale of the Pliant Technology investment.
- The effective tax rate was 28% in Q3 and 27% for the first nine months. Management estimated a full-year 2011 effective tax rate of approximately 27%.
Cash flow, liquidity, debt, and balance sheet
| Metric | September 30, 2011 | December 31, 2010 |
|---|---|---|
| Cash and cash equivalents | $691 million | $883 million |
| Total assets | $2.486 billion | $1.883 billion |
| Long-term debt | $293 million | None reported |
| Total liabilities | $1.085 billion | $694 million |
| Stockholders’ equity | $1.401 billion | $1.189 billion |
- Cash provided by operating activities was $387 million for the first nine months, up from $265 million. Free cash flow, as defined by Teradata, was $300 million versus $203 million.
- Investing cash outflow was $809 million, including $722 million for acquisitions, compared with $123 million in the prior-year period.
- Financing cash flow was $234 million, reflecting $600 million of borrowings, $300 million of repayments, and $95 million of share repurchases.
- The company had $300 million outstanding under a five-year term loan at a 1.25% interest rate and no borrowings under its $300 million revolving credit facility. The company was in compliance with all debt covenants.
- Approximately $595 million of cash was held outside the United States. Teradata had not provided U.S. federal tax for approximately $698 million of foreign earnings considered permanently reinvested abroad.
Material changes versus the prior comparable period
- Revenue growth was broad-based, with Q3 increases of 28% in the Americas, 22% in EMEA, and 7% in APJ. For the first nine months, revenue increased 24% in the Americas, 25% in EMEA, and 10% in APJ.
- Service revenue increased 28% in Q3 and 24% for the first nine months, while product revenue increased 18% and 19%, respectively.
- Gross margin declined by 260 basis points in Q3 and 200 basis points for the first nine months, primarily because of product mix, a larger consulting contribution, acquired-intangible amortization, software amortization, and acquisition-related purchase accounting adjustments.
- Operating income increased 15% in Q3 and 8% for the first nine months, less than the rate of revenue growth because of increased operating expenses and acquisition-related items.
- Adoption of revised revenue-recognition guidance increased Q3 revenue by 4% and nine-month revenue by 1%. The guidance accelerated recognition for certain partially delivered products; remaining deliveries were scheduled for Q4 2011.
- Goodwill increased from $136 million to $736 million and acquired intangible assets increased from $12 million to $171 million, primarily because of the Aprimo and Aster Data acquisitions.
- Teradata repurchased 1.9 million shares for $95 million during the first nine months and had approximately $101 million remaining under its general repurchase authorization at September 30, 2011.
Guidance, outlook, risks, and unusual items
- Management stated that demand should benefit from increasing data volumes, data complexity, and demand for near-real-time analytics. The long-term outlook remained positive, but the filing did not provide a specific revenue or EPS forecast.
- Management expected approximately three percentage points of reported 2011 revenue benefit from currency translation based on October 31, 2011 exchange rates.
- Sales territories and consulting resources were being expanded; management noted that new data-warehouse sales territories may require 18 to 24 months to generate meaningful revenue.
- Risks include uncertain macroeconomic recovery, variable timing and size of large customer orders, foreign-exchange exposure, competitive and pricing pressure, lower customer maintenance-service levels, execution risks from acquisitions, and potential margin pressure from consulting expansion.
- The U.S. Department of Justice was investigating arrangements and pricing disclosures related to certain federal contracts originating before Teradata’s separation from NCR. Teradata reported approximately $3 million accrued for the current best estimate of probable liability and stated that a material excess loss was not reasonably possible, although no assurance was provided.
- Acquisition-related purchase accounting, transaction, integration, and reorganization costs, together with acquired-intangible amortization, reduced Q3 net income by approximately $9 million after tax.
- The company had a $2 million maximum future obligation under equipment lease-value guarantees, a $6 million warranty reserve at September 30, 2011, and no material change in previously disclosed risk factors or market-risk exposures.
Important facts for investors to verify
- Whether revenue growth and consulting expansion can be sustained without further deterioration in product and service margins.
- The contribution and profitability of Aprimo and Aster Data, including the effect of acquisition-related amortization and purchase accounting.
- Cash deployment, foreign cash repatriation constraints, and the company’s ability to fund acquisitions, repurchases, and investment while carrying $300 million of term debt.
- The timing and financial resolution of the Department of Justice and related federal-contract matters.
- The effect of revised revenue-recognition rules on future quarterly comparisons and revenue timing.
- Progress in converting newly added sales territories and consulting capacity into sustainable revenue and operating income.