Teradata Corporation: Fiscal 2012 Form 10-K Summary
Business context and reporting period
Teradata provides integrated data warehousing, big data analytics, business applications, consulting, and support services. The filing covers the fiscal year ended December 31, 2012, including unaudited fourth-quarter results. Reportable segments were the Americas, EMEA, and APJ; effective January 1, 2013, EMEA and APJ were combined into a new International region.
Teradata completed the acquisition of eCircle in 2012, expanding its digital marketing applications. The company had approximately 10,200 employees and generated 45% of revenue outside the United States.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $2.665 billion | $2.362 billion | 13% increase |
| Product revenue | $1.297 billion | $1.122 billion | 16% increase |
| Service revenue | $1.368 billion | $1.240 billion | 10% increase |
| Gross margin | 55.9% | 54.7% | Up 120 basis points |
| Operating income | $580 million | $456 million | 27% increase |
| Operating margin | 21.8% | 19.3% | Up 250 basis points |
| Net income | $419 million | $353 million | 19% increase |
| Diluted EPS | $2.44 | $2.05 | 19% increase |
| Cash flow from operations | $575 million | $513 million | 12% increase |
| Free cash flow | $427 million | $403 million | 6% increase |
Product gross margin increased to 67.9% from 66.0%, while service gross margin was broadly stable at 44.6%. SG&A expense increased to $728 million and research and development expense increased to $183 million, primarily reflecting sales expansion, eCircle-related costs, and higher engineering headcount.
Fourth-quarter revenue was $740 million, compared with $673 million in the prior-year quarter. Fourth-quarter operating income was $150 million versus $133 million, and net income was $112 million versus $98 million. Diluted fourth-quarter EPS was $0.66 versus $0.57.
Liquidity, capital resources, and debt
- Cash and cash equivalents were $729 million at December 31, 2012, down from $772 million at year-end 2011.
- Cash declined after approximately $277 million of share repurchases and $274 million spent on acquisitions and other investment activities.
- Total term-loan principal outstanding was $289 million, including $15 million due in 2013 and $195 million due in 2016. The loan carried a 1.25% interest rate at year-end.
- The company had no borrowings under its unsecured $300 million revolving credit facility, which expires in 2017, and was in compliance with its covenants.
- Management stated that cash, operating cash flow, and available credit capacity should fund working capital, capital expenditures, research and development, pension contributions, and other requirements for at least the next twelve months.
- Teradata repurchased 4.5 million shares for approximately $277 million during 2012 and had $376 million of remaining general repurchase authorization at year-end.
Material changes versus the prior comparable period
- Revenue growth was led by a 17% increase in Americas product revenue, a 16% increase in EMEA revenue, and an 8% increase in APJ revenue.
- Foreign currency movements reduced 2012 revenue by approximately 2%; the EMEA increase included a 7% negative currency impact.
- Gross margin improved primarily because of better product margins, a higher product-revenue mix, and lower acquisition-related costs.
- Operating income benefited from revenue growth and margin expansion, partially offset by higher SG&A and R&D expenses.
- Net other expense was $2 million in 2012 compared with $25 million of net other income in 2011, when Teradata recorded gains on equity investments.
- Acquisition-related purchase accounting, transaction, integration, reorganization, and acquired-intangible amortization costs had an estimated after-tax impact of approximately $41 million in 2012 versus $24 million in 2011, net of the prior-year investment gain.
- Goodwill increased from $742 million to $932 million, primarily because of eCircle. The annual goodwill impairment test resulted in no impairment charge.
Guidance, outlook, risks, and unusual items
Management described the long-term outlook as positive but reported increased customer caution and weaker confidence during the second half of 2012, particularly for large U.S. capital purchases. Teradata expected macroeconomic challenges to continue into 2013. Management estimated a 2013 effective tax rate of approximately 26%, including an estimated $4 million benefit from the retroactive reinstatement of the U.S. research and development tax credit.
Management did not expect currency translation to have a significant effect on 2013 reported revenue or operating income based on exchange rates available as of February 7, 2013. The company continued investing in product development, sales territories, big data analytics, and integrated marketing management.
- Results may fluctuate materially because of long sales cycles, large customer transactions, fourth-quarter seasonality, transaction timing, revenue mix, and relatively fixed short-term operating expenses.
- Competition from IBM, Oracle, open-source technologies, Hadoop-related platforms, and emerging analytics providers may pressure pricing, demand, and margins.
- Maintenance and subscription renewals may be pressured if customers select lower service levels or do not renew term-license and SaaS arrangements.
- Teradata relies on Flextronics for hardware assembly and on certain single-source suppliers, including Intel and NetApp, creating supply-chain and shipment risks.
- International operations expose the company to foreign-currency, economic, political, regulatory, export-control, tax, and compliance risks.
- The company disclosed at least one attempted nation-state-sponsored cyberattack but stated that it did not believe the attack was successful or materially affected operations.
- In January 2013, Teradata settled previously disclosed civil False Claims Act litigation for the $3 million accrued at December 31, 2012.
- The company had approximately $881 million of foreign earnings considered permanently reinvested outside the United States, for which U.S. federal tax had not been provided.
- Independent auditors concluded that the financial statements were fairly presented under GAAP and that internal control over financial reporting was effective as of December 31, 2012.
Important facts for investors to verify
- Whether large-deal timing and U.S. macroeconomic weakness affected 2013 revenue and bookings after the filing date.
- Progress integrating eCircle and the performance of the applications, big data analytics, and digital marketing businesses.
- Renewal rates, pricing, and margin trends for maintenance, subscriptions, term licenses, and SaaS offerings.
- Cash conversion and working-capital trends, particularly the significant increase in accounts receivable during 2012.
- Debt repayment requirements, floating-rate exposure, and compliance with the term-loan and revolving-credit covenants.
- Use of the remaining $376 million share-repurchase authorization and its effect on liquidity and share count.
- Potential tax consequences of repatriating foreign earnings and the resolution of approximately $31 million of uncertain tax positions.
- Exposure to supplier concentration, cybersecurity incidents, intellectual-property claims, legal contingencies, and foreign-currency movements.