Business Context and Reporting Period
Teradata Corporation filed an unaudited Form 10-Q covering the three months ended March 31, 2015. Effective January 1, 2015, the company reorganized into two operating segments: Data and Analytics and Marketing Applications. Results are compared with the three months ended March 31, 2014.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $582 million | $628 million | Down 7% |
| Product revenue | $241 million | $273 million | Down 12% |
| Service revenue | $341 million | $355 million | Down 4% |
| Gross margin | $277 million; 47.6% | $333 million; 53.0% | Down $56 million; margin down 5.4 points |
| Operating income | $30 million | $89 million | Down $59 million |
| Net income | $22 million | $59 million | Down $37 million |
| Diluted EPS | $0.15 | $0.37 | Down $0.22 |
| Operating cash flow | $222 million | $343 million | Down $121 million |
| Free cash flow | $190 million | $310 million | Down $120 million |
Product gross margin declined to 54.8% from 66.3%, primarily because of a higher mix of hardware relative to software, several large transactions, foreign currency effects, lower integrated data warehousing mix, and reduced product volume. Service gross margin was 42.5%, compared with 42.8%.
Operating expenses were $247 million, or 42.4% of revenue, versus $244 million, or 38.9%, in the prior-year quarter. SG&A declined $4 million, while R&D increased 13% to $63 million because of investments in big data analytics, cloud capabilities, marketing applications, acquisitions, and lower software capitalization.
The effective tax rate was 26.7%, compared with 28.0%. Management estimated a full-year 2015 effective tax rate of approximately 25% to 26%, assuming reinstatement of the U.S. R&D tax credit; without reinstatement, the rate could be approximately 80 basis points higher.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $881 million at March 31, 2015, compared with $834 million at December 31, 2014. Approximately $826 million was held outside the United States.
- Total debt was approximately $600 million, consisting primarily of a new senior unsecured term loan. The company had no borrowings under its new $400 million revolving credit facility, leaving the full capacity available.
- The new $600 million term loan was issued on March 25, 2015, at an interest rate of 1.4375%. Quarterly principal repayments begin March 31, 2016, with remaining principal due in March 2020.
- Management stated that cash, operating cash flow, and the revolving facility should be sufficient for at least the next twelve months. The company was in compliance with all debt covenants.
- Teradata repurchased 6.3 million shares for $269 million during the quarter at an average price of $43.34 per share. On May 4, 2015, the board authorized an additional $300 million for repurchases, bringing general program authorization to approximately $431 million.
Material Changes Versus the Prior Comparable Period
- Revenue fell $46 million, with product revenue down 12% and service revenue down 4%. Management attributed the decline primarily to deal timing, foreign currency, and customer investment patterns.
- Gross margin decreased from 53.0% to 47.6%, principally due to lower product margins.
- Operating income and net income declined substantially because of lower revenue and gross margin, increased R&D investment, and the absence of the prior-year comparison benefit from a $8 million investment impairment included in other expense in Q1 2014.
- Data and Analytics revenue declined 7% to $536 million, while Marketing Applications revenue declined 10% to $46 million. Segment gross margins declined to 50.2% and 39.1%, respectively.
- Operating cash flow and free cash flow declined primarily because of lower net income and the timing of receivable collections.
- Goodwill declined from $948 million to $924 million due to foreign currency translation and a purchase accounting adjustment. No goodwill impairment was recorded, although the Marketing Applications reporting units were identified as being at greater impairment risk if results differ materially from projections.
- Comprehensive income changed to a loss of $13 million from income of $58 million, largely because of a $31 million foreign currency translation loss and a $6 million after-tax unrealized securities loss.
Guidance, Outlook, Risks, and Unusual Items
Management expects continued demand for analytic data platforms, cloud offerings, big data analytics, and marketing applications, but identified significant challenges from customer IT budget constraints, lower-cost alternatives, smaller deal sizes, competitive pressure, and delayed large capital expenditures. Deal timing moved some transactions out of the first quarter.
Based on currency rates as of April 30, 2015, management expected approximately five percentage points of adverse foreign-currency impact on full-year 2015 reported revenue growth, with a corresponding effect on profitability.
Management continued to invest in consulting, cloud capabilities, marketing applications, product development, partnerships, and sales resources. Marketing Applications is exposed to strong competition and ongoing investment-related margin pressure.
- Approximately $1 billion of foreign earnings was considered permanently reinvested outside the United States, and no U.S. federal tax liability had been provided on those earnings.
- The company had a $5 million maximum future obligation under equipment lease value guarantees at March 31, 2015.
- Warranty reserve liability was $6 million at quarter-end.
- Foreign exchange forward contracts had a $94 million gross notional amount and a $2 million net notional amount; fair values and quarterly gains or losses were not material.
- The company stated that there were no material changes to previously disclosed market risks or risk factors.
Important Facts for Investors to Verify
- Whether product revenue and product gross margin recover as delayed deals close and the hardware/software mix changes.
- The effect of foreign currency movements on reported revenue, profitability, and cash balances.
- Progress and returns from increased R&D and cloud and Marketing Applications investments.
- Compliance with the term loan covenants and the impact of floating-rate debt and scheduled repayments beginning in 2016.
- The pace and funding of the expanded share repurchase authorization.
- Whether Marketing Applications results support the carrying value of its $579 million of goodwill.
- Whether the U.S. R&D tax credit is reinstated and how the outcome affects the full-year effective tax rate.