Business Context and Reporting Period
Company: Teradata Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2010
Business Overview: Teradata provides data warehousing hardware and software solutions, along with consulting and maintenance services. The company operates in three geographic segments: Americas, EMEA (Europe, Middle East, and Africa), and APJ (Asia Pacific and Japan).
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenue | $429 million | $367 million |
| Product Revenue | $200 million | $157 million |
| Service Revenue | $229 million | $210 million |
| Gross Margin | 55.0% | 54.5% |
| Operating Income | $86 million | $60 million |
| Net Income | $67 million | $45 million |
| Diluted EPS | $0.39 | $0.26 |
| Cash and Equivalents (End of Period) | $712 million | $506 million |
| Operating Cash Flow | $138 million | $165 million |
| Free Cash Flow (Non-GAAP) | $117 million | $145 million |
| Debt | $0 | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 17% year-over-year, driven primarily by a 27% increase in product revenue. Foreign currency fluctuations provided a 5% benefit to the reported growth.
- Profitability: Operating income rose 43% to $86 million, and net income increased 49% to $67 million. Gross margin improved to 55.0%, aided by better consulting service margins and a higher mix of product revenue, despite a slight decline in product gross margin (64.0% vs. 65.6%).
- Operating Expenses: Total operating expenses increased $10 million to $150 million. Selling, general, and administrative (SG&A) expenses rose due to higher sales commissions and foreign exchange impacts. R&D expenses increased due to higher engineering headcount.
- Cash Flow: Operating cash flow decreased $27 million to $138 million, primarily due to lower receivable collections and greater reductions in current payables compared to the prior year.
- Share Repurchases: The company repurchased 2.4 million shares of common stock for approximately $71 million during the quarter.
Guidance, Outlook, and Risks
- Outlook: Management expects less than a 1% benefit from currency translation on reported revenue for the full year 2010. The full-year effective tax rate is estimated at 25.5% - 26.5%, subject to the reinstatement of the U.S. Federal R&D Tax Credit.
- Strategic Initiatives: Focus remains on increasing market coverage, extending core technology, differentiating through services, and investing in partnerships.
- Risks and Contingencies:
- Legal Proceedings: The U.S. Department of Justice is investigating the propriety of arrangements related to federal contracts and pricing disclosures. The company has accrued $2 million for probable liability but notes outcomes are uncertain.
- Economic Conditions: While signs of economic recovery exist, the speed and scope remain unclear, potentially impacting IT budgets and sales cycles.
- Accounting Changes: The company is evaluating the impact of new FASB guidance on multiple-deliverable revenue arrangements and software elements, expected to be adopted prospectively in 2011.
Investor Verification Checklist
- Verify the sustainability of the 27% product revenue growth and whether it is driven by large, one-time orders or recurring demand.
- Monitor the status of the DOJ investigation regarding federal contracts and potential liability beyond the current $2 million accrual.
- Assess the impact of the new FASB revenue recognition standards (effective 2011) on future revenue reporting.
- Review the company's ability to maintain gross margins given the noted decline in product margins in EMEA and APJ regions.
- Confirm the utilization of the remaining $165 million share repurchase authorization and its impact on future earnings per share.