Teradata Corporation Form 10-Q Summary
Business Context and Reporting Period
Teradata provides analytic data platforms, big data analytics, integrated data warehousing, and integrated marketing cloud applications. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013. Teradata reports two operating regions: Americas and International.
Financial Results and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $628 million | $587 million | Up 7% |
| Product revenue | $273 million | $249 million | Up 10% |
| Service revenue | $355 million | $338 million | Up 5% |
| Gross profit | $333 million | $305 million | Up 9% |
| Gross margin | 53.0% | 52.0% | Up 1.0 point |
| Operating income | $89 million | $76 million | Up 17% |
| Operating margin | 14.2% | 12.9% | Up 1.3 points |
| Net income | $59 million | $59 million | Flat |
| Diluted EPS | $0.37 | $0.35 | Up $0.02 |
| Operating cash flow | $343 million | $243 million | Up $100 million |
| Free cash flow | $310 million | $216 million | Up $94 million |
Product gross margin increased to 66.3% from 62.7%, while service gross margin declined to 42.8% from 44.1%. SG&A increased to $188 million from $179 million, and research and development expense increased to $56 million from $50 million. Other expense was $7 million, primarily reflecting an $8 million impairment of an equity investment.
At March 31, 2014, cash and cash equivalents were $922 million, compared with $695 million at December 31, 2013. Accounts receivable declined to $607 million from $717 million, while total deferred revenue increased to $523 million from $415 million. Total liabilities were $1.329 billion and stockholders’ equity was $1.849 billion.
Long-term debt was $240 million on the balance sheet. The company had $270 million of principal outstanding under its senior unsecured term loan, which carried a 1.1875% interest rate and is scheduled to mature in April 2016. The $300 million revolving credit facility had no borrowings outstanding, leaving the full capacity available. Teradata stated that it was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by a 10% increase in product revenue and a 5% increase in services revenue. Foreign currency movements reduced reported revenue growth by approximately 1%.
- Gross margin improved because of higher product margins and favorable product mix, but service margins weakened because of lower consulting rates, higher variable compensation, and costs related to a voluntary early-retirement program.
- Operating income increased despite higher SG&A and R&D spending. R&D included approximately $5 million of voluntary early-retirement program expense.
- Net income was unchanged because higher operating income was offset by higher other expense and income taxes. The effective tax rate increased to 28.0% from 21.3%, primarily because the U.S. Federal R&D Tax Credit had expired.
- Americas revenue increased 8% and gross margin rose to 58.1% from 54.9%. International revenue increased 5%, while International gross margin fell to 45.1% from 47.4% because of weaker service margins.
- Operating cash flow benefited from favorable working-capital changes, including receivables, payables, and deferred revenue. Management cautioned that first-quarter operating cash flow is typically seasonally strong.
- The company repurchased approximately 2.0 million shares for $86 million, compared with 1.6 million shares for $93 million in the prior-year quarter. On May 5, 2014, the board authorized an additional $300 million for the general share-repurchase program.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated a 2014 full-year effective tax rate of approximately 26.5%, assuming the expired U.S. R&D Tax Credit would be retroactively reinstated. Without reinstatement, the rate was expected to be approximately 50 basis points higher.
- Management expected R&D expense to increase sequentially during each remaining quarter of 2014.
- Management expected currency translation, based on late-April exchange rates, not to have a meaningful impact on full-year 2014 results.
- Management identified the largest future revenue-growth challenge as lower spending by historically large Americas customers. Factors cited included IT budget constraints, recent investments in Teradata environments, migration of some workloads to lower-cost analytical ecosystem platforms, and customer focus on alternative analytics investments.
- Additional risks include economic conditions, competitive and pricing pressure, alternative technologies, foreign-exchange exposure, execution of strategic investments, and reliance on continued operating cash generation.
- Approximately $1 billion of foreign earnings were considered permanently reinvested outside the United States, and no U.S. federal tax liability had been provided on those earnings.
- The company had a $4 million maximum future obligation under guarantees of minimum leased-equipment values. Warranty reserves were $7 million at March 31, 2014.
- The company adopted new guidance on presentation of unrecognized tax benefits on January 1, 2014; management reported no material impact.
Important Facts for Investors to Verify
- Confirm whether the U.S. R&D Tax Credit was ultimately reinstated and how that affected the full-year effective tax rate.
- Monitor revenue trends among Teradata’s largest Americas customers and the effect of lower-cost analytical platforms and workload migration.
- Assess whether higher product margins can offset declining service margins and planned increases in R&D spending.
- Review the term-loan repayment schedule, floating-rate exposure, covenant compliance, and April 2016 maturity.
- Evaluate the sustainability of first-quarter cash generation, including the impact of annual support renewals and seasonal receivables collection.
- Track the expanded share-repurchase authorization and its effects on cash balances, share count, and capital allocation.
- Consider potential tax costs associated with repatriating foreign cash and permanently reinvested foreign earnings.