Teradata Corporation Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The filing was dated August 8, 2014. Amounts are in millions except per-share data.
Business Context
Teradata provides analytic data platforms, software, hardware, consulting, maintenance, big-data analytics, and integrated marketing cloud applications. Operations are managed through the Americas and International segments.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Total revenue | $676 | $670 | $1,304 | $1,257 |
| Product revenue | $300 | $303 | $573 | $552 |
| Service revenue | $376 | $367 | $731 | $705 |
| Gross margin | $371; 54.9% | $379; 56.6% | $704; 54.0% | $684; 54.4% |
| Operating income | $133; 19.7% | $147; 21.9% | $222; 17.0% | $223; 17.7% |
| Net income | $96 | $108 | $155 | $167 |
| Diluted EPS | $0.60 | $0.65 | $0.97 | $1.00 |
| Operating cash flow | Not separately provided | Not separately provided | $481 | $383 |
| Free cash flow | Not separately provided | Not separately provided | $423 | $318 |
At June 30, 2014, cash and cash equivalents were $934, total assets were $3,136, total liabilities were $1,274, and stockholders’ equity was $1,862. Long-term debt was $225 on the balance sheet; the outstanding term-loan principal was $263, with remaining principal due in April 2016. The company had no borrowings under its $300 revolving credit facility and remained in compliance with its debt covenants.
Deferred revenue totaled $468, up from $415 at December 31, 2013. Cash held outside the United States was $777, and approximately $1.1 billion of foreign earnings was considered permanently reinvested abroad without a provided U.S. federal tax liability.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased 1%, but product revenue declined 1% while service revenue increased 2%. For the first six months, total revenue increased 4%, with product and service revenue each increasing 4%.
- Second-quarter gross margin declined 170 basis points to 54.9%, reflecting lower product and service margins. Product margin was affected largely by increased amortization of capitalized software; service margin reflected consulting engagement timing and mix.
- Second-quarter operating income fell 10% to $133, and net income declined 11% to $96. Higher selling expense, additional sales resources, increased research and development spending, and lower gross margin contributed to the decline.
- Americas second-quarter revenue declined 8% to $374, primarily due to lower product revenue from large customers. International revenue increased 14% to $302, driven by new customers and several larger deals closing earlier than anticipated.
- For the first half, operating cash flow increased $98 to $481, primarily due to more favorable working-capital changes. Free cash flow increased $105 to $423.
- The company repurchased 4.5 million shares for $184 during the first half, compared with 3.2 million shares for $184 in the prior-year period. Remaining repurchase authorization was $452 at June 30, 2014.
- Other expense included a $9 million impairment of an equity investment, contributing to $8 million of other expense for the first half versus $1 million in the prior-year period.
- The effective tax rate increased to 27.3% in the second quarter and 27.6% for the first half, primarily because the U.S. Federal R&D Tax Credit had expired.
Outlook, Commentary, Risks, and Unusual Items
- Management expects continued demand for analytic platforms as data volumes, analytical workloads, and use of predictive, network, and other advanced analytics expand.
- Management identified pressure on large capital expenditures by major Americas customers as the principal near-term challenge. These customers have reduced purchases since 2012 because of budget constraints, prior investments, and shifting spending toward lower-priced analytical ecosystem technologies.
- Competitive pressure, alternative technologies, pricing pressure, general economic conditions, foreign exchange, and customer migration of workloads to specialized platforms could adversely affect results.
- Research and development expense is expected to increase sequentially in each remaining quarter of 2014. Based on late-July currency rates, management did not expect currency translation to have a meaningful impact on full-year 2014 results.
- Management estimated a 2014 effective tax rate of approximately 26%, assuming retroactive reinstatement of the U.S. R&D Tax Credit. Without reinstatement, the rate was expected to be approximately 50 basis points higher.
- Management believes cash, operating cash flow, and the available credit facility will fund working capital, research and development, capital expenditures, pension contributions, and other requirements for at least the next twelve months.
- The filing reports no material changes to previously disclosed market risks or risk factors. Ordinary-course litigation, investigations, claims, intellectual-property matters, tax matters, and regulatory matters remain possible. A lease-value guarantee had a maximum future obligation of $4 million at June 30, 2014.
- Teradata was evaluating new revenue-recognition guidance and share-based-payment guidance; the filing does not provide a quantified expected impact.
Investor Verification Points
- Verify whether weakness among large Americas customers persists and whether International growth reflects sustainable demand rather than timing of large deals.
- Assess whether product and service gross-margin pressure, including software amortization and consulting mix, continues.
- Monitor the impact of increased sales and research and development spending on future revenue growth and operating leverage.
- Confirm the eventual treatment of the expired U.S. R&D Tax Credit and the resulting full-year effective tax rate.
- Reconcile cash held overseas, permanently reinvested foreign earnings, and potential tax costs of repatriation.
- Track term-loan repayments, the April 2016 maturity, credit-facility availability, and compliance with debt covenants.
- Review the $9 million investment impairment, deferred-revenue growth, share repurchases, and remaining $452 million authorization for cash-allocation implications.