Teradata Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Teradata provides data warehousing, big data analytics, integrated marketing management, and related consulting and maintenance services. This quarterly report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Effective January 1, 2013, management combined EMEA and Asia Pacific/Japan into a single International operating segment; prior-period segment data was reclassified.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $587 million | $613 million | Down 4% |
| Product revenue | $249 million | $308 million | Down 19% |
| Service revenue | $338 million | $305 million | Up 11% |
| Gross margin | 52.0% | 55.1% | Down 3.1 percentage points |
| Operating income | $76 million | $127 million | Down 40% |
| Operating margin | 12.9% | 20.7% | Down 7.8 percentage points |
| Net income | $59 million | $91 million | Down 35% |
| Diluted EPS | $0.35 | $0.53 | Down 34% |
| Operating cash flow | $243 million | $192 million | Up $51 million |
| Free cash flow | $216 million | $162 million | Up $54 million |
Product gross margin declined to 62.7% from 66.6%, primarily because of unfavorable Americas product mix and a greater proportion of lower-margin appliance revenue. Service gross margin improved modestly to 44.1% from 43.6%. SG&A increased to $179 million from $165 million, primarily due to additional sales headcount, while R&D increased to $50 million from $46 million. The effective tax rate was 21.3%, compared with 27.8%, including a $4 million discrete benefit related to the reinstated 2012 Federal R&D Tax Credit.
Liquidity, balance sheet, and debt
- Cash and cash equivalents were $853 million at March 31, 2013, compared with $729 million at December 31, 2012.
- Accounts receivable declined to $510 million from $668 million, while inventories increased to $65 million from $47 million. Current liabilities were $783 million, including $457 million of current deferred revenue.
- Long-term debt was reported at $271 million. The term-loan principal outstanding was $285 million, bearing interest at 1.25%; Teradata repaid $4 million during the quarter.
- The company had no borrowings under its $300 million unsecured revolving credit facility and reported $300 million of available capacity and compliance with covenants.
- Cash flow from operations benefited substantially from collections of receivables and an $84 million increase in deferred revenue. Capital expenditures and capitalized software additions totaled $27 million.
- Teradata repurchased approximately 1.6 million shares for $93 million at an average price of $58.43. Approximately $289 million remained under the general repurchase authorization at quarter-end.
- Approximately $605 million of cash was held outside the United States. The company had not provided U.S. federal tax on approximately $930 million of foreign earnings considered permanently reinvested abroad.
Material changes versus the prior comparable period
- Revenue weakness was concentrated in products and the Americas: Americas revenue declined 9%, while International revenue increased 3%.
- The shift toward services increased the services share of revenue to 57.6% from 49.8%, but reduced consolidated gross margin because services carry lower margins than products.
- Americas gross margin fell to 54.9% from 59.8%; International gross margin improved slightly to 47.4% from 47.1%.
- Operating expenses increased 9% while revenue declined, materially reducing operating and net margins.
- Operating cash flow and free cash flow improved despite lower earnings, primarily because of working-capital movements.
- Goodwill declined by $11 million to $921 million due to foreign-currency translation; no goodwill additions were reported.
Guidance, outlook, risks, and unusual items
- Management continued to expect full-year 2013 revenue growth, based on anticipated improvement in customer confidence and increased large capital-investment purchases later in the year.
- Management estimated a full-year 2013 effective tax rate of approximately 25%.
- Foreign-currency translation was expected to adversely affect reported 2013 revenue and operating income by approximately one percentage point based on exchange rates available on May 2, 2013.
- Customers remained cautious about large capital purchases, particularly in the United States. The timing, size, and terms of large orders could materially affect quarterly results.
- Management cited potential future pricing pressure, competitive risks, economic conditions, long sales cycles for new sales territories, and dependence on continued operating cash generation.
- A federal False Claims Act litigation matter was settled in January 2013 for the previously accrued $3 million, and the action was dismissed. Management stated that other ordinary-course claims were not expected to have a material effect.
- The company reported a $3 million maximum future obligation under equipment lease-value guarantees and a $7 million warranty reserve at March 31, 2013.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting or risk factors from the 2012 Form 10-K.
Important facts for investors to verify
- Whether the expected recovery in large Americas product orders materializes in subsequent quarters.
- Whether sales-force investments and higher SG&A generate sufficient incremental revenue and margin improvement.
- The sustainability of strong operating cash flow, given its reliance on receivable collections and deferred revenue changes.
- Product mix, appliance pricing, and their effect on product and consolidated gross margins.
- Foreign-currency effects, the location of cash balances, and potential taxes associated with repatriating foreign earnings.
- Term-loan repayment requirements, interest-rate exposure, and continued compliance with credit-facility covenants.
- The remaining share-repurchase authorization and its effect on share count, liquidity, and capital allocation.