Teradata Corporation 2014 Form 10-K Summary
Business context and reporting period
Teradata provides analytic data platforms, big data analytics, marketing applications, cloud services, consulting, and maintenance support. The filing covers the fiscal year ended December 31, 2014; fourth-quarter figures are included in the annual filing. Revenue was generated primarily in the Americas and International regions, with approximately 47% of total revenue originating outside the United States.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $2.732 billion | $2.692 billion | Up 1% |
| Product revenue | $1.227 billion | $1.230 billion | Flat |
| Service revenue | $1.505 billion | $1.462 billion | Up 3% |
| Gross margin | 54.1% | 54.7% | Down 60 bps |
| Operating income | $503 million | $532 million | Down 5% |
| Operating margin | 18.4% | 19.8% | Down 140 bps |
| Net income | $367 million | $377 million | Down 3% |
| Diluted EPS | $2.33 | $2.27 | Up 3% |
| Cash flow from operations | $680 million | $510 million | Up $170 million |
| Free cash flow | $551 million | $372 million | Up $179 million |
| Cash and cash equivalents | $834 million | $695 million | Up $139 million |
| Total debt | $468 million | $274 million | Up $194 million |
Service revenue included $688 million of maintenance revenue, up from $644 million, while consulting revenue was $817 million, essentially unchanged. The effective tax rate was 25.7%, compared with 25.8% in 2013. Fourth-quarter 2014 revenue was $761 million, gross margin was $425 million, operating income was $158 million, and net income was $118 million.
Material changes versus the prior comparable period
- Revenue growth remained limited by constrained customer IT budgets, extended sales cycles, fewer large orders, and foreign-currency effects. Reported revenue growth included a 2% adverse currency impact.
- Gross margin declined primarily because of increased amortization of previously capitalized software, product mix, and deal mix. Product gross margin fell to 63.9% from 64.8%, while service gross margin remained 46.2%.
- Operating expenses increased to $976 million from $941 million. R&D expense rose by $22 million due partly to a voluntary early-retirement program, additional acquisition-related headcount, and investments in future product releases.
- Americas revenue declined 1% to $1.619 billion, while International revenue increased 5% to $1.113 billion. International gross margin declined to 48.2% from 49.7%.
- Cash generation improved substantially because of favorable working-capital changes, especially lower receivables. The company repurchased approximately 13.0 million shares for $551 million, compared with 7.8 million shares for $382 million in 2013.
- Teradata completed six immaterial acquisitions and other equity investments totaling $69 million and recorded a $9 million impairment-related loss on an equity investment.
Liquidity, debt, and capital allocation
At December 31, 2014, Teradata had $834 million of cash and cash equivalents, including $785 million held outside the United States. The company had $220 million outstanding under its $300 million unsecured revolving credit facility, leaving $80 million available, and $248 million outstanding under its term loan. The reported blended interest rates were 1.14% on the revolving facility and 1.1875% on the term loan. The company was in compliance with its debt covenants.
Management stated that existing cash, operating cash flow, and available credit capacity should be sufficient for working capital, R&D, capital expenditures, pension contributions, and other financing needs for at least the next twelve months. Management expected to refinance and increase the term loan in the first quarter of 2015 to fund additional share repurchases and replenish revolver capacity.
Guidance, outlook, commentary, and risks
- Management expected a continued need for analytics driven by data growth, more complex analytical environments, predictive and other advanced analytics, and cloud adoption.
- Management identified pressure on large customer capital expenditures as the primary challenge to future revenue growth. Customers were directing more spending toward lower-average-selling-price analytical ecosystem products and, in some cases, moving workloads to other platforms.
- For 2015, management estimated an effective tax rate of approximately 26%, assuming reinstatement of the U.S. R&D tax credit. Without reinstatement, the rate was expected to be approximately 80 basis points higher.
- Based on exchange rates at January 30, 2015, management expected approximately five percentage points of adverse currency translation impact on 2015 reported revenue growth, with a corresponding operating-income effect.
- Beginning in 2015, Teradata planned to report two new segments: data and analytics, and marketing applications.
- Material risks include intense competition from IBM, Oracle, Adobe, Salesforce.com, SAS, open-source technologies, and emerging cloud providers; long and unpredictable sales cycles; customer budget constraints; pricing and product-mix pressure; foreign-currency volatility; acquisition integration; reliance on Flextronics and other suppliers; cybersecurity and data-protection incidents; intellectual-property claims; tax audits and regulatory compliance.
- The company’s applications reporting units were at greater risk of goodwill impairment if future revenue and margin projections were not achieved, although no goodwill impairment was recorded in 2014.
- Unfunded pension and postemployment obligations totaled approximately $102 million at year-end, and the company expected 2015 contributions of approximately $8 million to pension plans and $5 million for postemployment obligations.
Important facts for investors to verify
- Assess whether Teradata can return to sustainable revenue growth after several years of approximately 1% annual growth and reduced large-platform orders.
- Monitor product gross margin, software amortization, revenue mix, and the effect of smaller appliance and cloud transactions on profitability.
- Verify the refinancing and subsequent capital structure following the planned 2015 term-loan increase and continued share repurchases.
- Evaluate the sustainability of cash flow after $551 million of 2014 repurchases and the company’s reliance on cash held by foreign subsidiaries.
- Track the applications business, including the Americas applications reporting unit’s impairment sensitivity and the transition to the new segment structure.
- Confirm the effect of foreign-currency movements, the R&D tax-credit outcome, and customer spending trends on 2015 results.
- Review commitments and contingencies, including $36 million of unrecognized tax benefits, $18 million of non-current uncertain tax positions, lease and purchase obligations, product warranties, and indemnification exposures.