Business Context and Reporting Period
Teradata Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2011. Teradata provides data warehousing, data analytics, marketing, and business application solutions through the Americas, EMEA, and Asia Pacific/Japan regions.
On January 21, 2011, Teradata acquired Aprimo, Inc., an integrated marketing software provider, for approximately $525 million in cash. Aprimo was integrated into Teradata’s operations and contributed approximately $9 million of reported revenue from the acquisition date through March 31, 2011.
Key Financial Metrics
| In millions, except per-share data | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $506 | $429 | 18% |
| Product revenue | $235 | $200 | 18% |
| Service revenue | $271 | $229 | 18% |
| Gross margin | $275; 54.3% | $236; 55.0% | Margin down 70 bps |
| Operating income | $91; 18.0% | $86; 20.0% | 6%; margin down 200 bps |
| Net income | $65 | $67 | Down 3% |
| Diluted EPS | $0.38 | $0.39 | Down $0.01 |
| Cash flow from operations | $106 | $138 | Down $32 |
| Free cash flow | $79 | $117 | Down $38 |
Product gross margin increased to 66.4% from 64.0%, while service gross margin declined to 43.9% from 47.2%. Selling, general and administrative expense increased to $150 million from $118 million, and research and development expense increased to $34 million from $32 million.
Cash and cash equivalents were $778 million at March 31, 2011, compared with $883 million at December 31, 2010. Accounts receivable increased to $467 million from $402 million, while deferred revenue increased to $400 million from $263 million.
Long-term debt was $300 million at quarter-end, consisting of borrowings under the revolving credit facility. The facility had no remaining availability at March 31, 2011, and the company was in compliance with its covenants. The borrowing carried an interest rate of 0.57% based on 30-day LIBOR plus 32 basis points.
Material Changes Versus the Prior Comparable Period
- Revenue increased 18%, including an approximately 2% benefit from foreign currency movements. Americas revenue increased 22%, EMEA revenue increased 18%, and APJ revenue increased 4%.
- Consulting revenue increased 24% and maintenance revenue increased 13%. APJ product revenue declined 14%, partially offset by a 16% increase in APJ service revenue.
- Gross margin declined because lower service margins, particularly in consulting, more than offset improved product margins. Teradata attributed the service-margin pressure primarily to newly added consulting headcount that was not yet fully productive.
- Operating income increased only $5 million despite revenue growth, reflecting higher sales headcount, commissions, receivable provisions, Aprimo-related costs, and infrastructure expenses.
- Net income declined despite higher operating income because of higher operating expenses and an effective tax rate of 28% versus 22% in the prior-year quarter. The 2010 rate benefited from a $5 million foreign net operating loss carryforward tax benefit.
- Operating cash flow and free cash flow declined, primarily because of later-quarter invoicing and higher receivables. Teradata reported $249 million of receivable collections during April 2011, compared with $148 million in April 2010.
- Investing cash outflows increased to $526 million from $21 million, primarily because of the $499 million net cash outflow associated with the Aprimo acquisition, in addition to $8 million of property and equipment spending and $19 million of capitalized software additions.
- Goodwill increased from $136 million to $516 million and acquired intangible assets increased from $12 million to $131 million, primarily due to Aprimo.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated a full-year 2011 global effective tax rate of approximately 27% to 28%.
- Based on exchange rates as of April 29, 2011, management expected approximately four percentage points of foreign-currency translation benefit to reported 2011 revenue, with a corresponding impact on operating income.
- Management expressed a positive long-term outlook based on increasing data volumes, data complexity, and demand for near-real-time analytics, but noted that economic recovery, IT spending, sales-cycle length, order timing, pricing pressure, and customer reductions in maintenance service levels remain uncertainties.
- Teradata intends to continue investing in core technology, applications, partnerships, sales territories, and consulting resources. New sales territories typically require more than two years to become fully productive.
- Q1 2011 operating income included approximately $7 million of acquisition-related transaction, integration, and reorganization expenses, $6 million of acquisition-related purchase accounting adjustments, and $3 million of amortization of acquired intangibles. Management estimated the combined after-tax impact of these items at approximately $11 million.
- On April 5, 2011, Teradata completed its approximately $260 million acquisition of Aster Data Systems, a provider of advanced analytics and unstructured-data technology. The acquisition was financed partly with a new $300 million five-year unsecured term loan. The purchase price allocation remained preliminary, and management did not expect a material effect on 2011 results excluding acquisition and integration costs.
- On April 21, 2011, Teradata repaid $280 million of its revolving credit facility borrowings. The filing states that management expected available cash, operating cash flow, and credit resources to fund requirements for at least the next twelve months.
- Teradata accrued approximately $3 million for probable liability related to a Department of Justice investigation and related False Claims Act matters involving certain federal contracts. The company stated that it did not believe a material loss beyond the accrued amount was reasonably possible, while acknowledging that no assurance could be given.
- Cash held outside the United States totaled $474 million at March 31, 2011. Teradata had not provided U.S. federal tax for approximately $627 million of foreign earnings considered permanently reinvested abroad.
- The company adopted amended multiple-deliverable revenue recognition guidance prospectively for new or materially modified arrangements beginning January 1, 2011. Management reported no material effect on current results or financial condition.
Most Important Facts to Verify
- Whether the Aprimo and Aster Data acquisitions generate expected revenue synergies and whether preliminary purchase-price allocations materially increase goodwill, intangible amortization, or future charges.
- The company’s post-April 2011 debt balance, borrowing costs, covenant compliance, and remaining liquidity after the Aster Data acquisition and repayment of $280 million under the revolving facility.
- Whether consulting headcount becomes productive enough to restore service margins, particularly in APJ and the Americas.
- Whether receivable collections and deferred-revenue growth support a recovery in operating cash flow and free cash flow.
- Whether the Department of Justice and related False Claims Act matters result in payments materially exceeding the $3 million accrual.
- The effect of foreign exchange movements, foreign cash repatriation taxes, and the stated 27% to 28% full-year effective tax-rate expectation.