Teradata Corporation Form 10-Q Summary
Business Context and Reporting Period
Teradata provides data warehousing, data analytics, marketing and business application solutions, including products, consulting and maintenance services. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
During the first half of 2011, Teradata acquired Aprimo, a marketing software provider, for $525 million, and Aster Data Systems, an advanced analytics provider, for $259 million. The acquisitions expanded Teradata’s application and big-data analytics offerings.
Financial Performance and Key Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Total revenue | $581 million | $470 million | $1,087 million | $899 million |
| Product revenue | $269 million | $223 million | $504 million | $423 million |
| Service revenue | $312 million | $247 million | $583 million | $476 million |
| Gross margin | 54.4% | 57.0% | 54.4% | 56.1% |
| Operating income | $110 million | $106 million | $201 million | $192 million |
| Operating margin | 18.9% | 22.6% | 18.5% | 21.4% |
| Net income | $103 million | $74 million | $168 million | $141 million |
| Diluted EPS | $0.60 | $0.44 | $0.98 | $0.83 |
| Cash flow from operations | Not provided | Not provided | $285 million | $200 million |
| Free cash flow | Not provided | Not provided | $225 million | $156 million |
Q2 revenue increased 24%, while six-month revenue increased 21%. Product revenue grew 21% in Q2 and 19% for the six-month period. Service revenue grew 26% in Q2 and 22% for the six-month period, led by consulting growth.
Gross margin was pressured by lower product margins, a higher mix of consulting services, acquired-intangible amortization and purchase-accounting reductions to acquired deferred revenue. Q2 operating income included approximately $10 million of acquisition-related transaction, integration and reorganization expenses, $6 million of purchase-accounting adjustments and $9 million of acquired-intangible amortization.
Q2 net income included approximately $17 million after tax of acquisition-related purchase-accounting adjustments, transaction, integration and reorganization expenses, and acquired-intangible amortization. These costs were more than offset by an approximately $22 million after-tax gain on equity investments.
Liquidity, Cash Flow and Capitalization
- Cash and cash equivalents were $682 million at June 30, 2011, compared with $883 million at December 31, 2010.
- Operating cash flow was $285 million for the first six months, up from $200 million, primarily because of increased deferred revenue and a smaller decline in current payables and accrued expenses.
- Free cash flow, defined by the company as operating cash flow less property and equipment expenditures and capitalized software additions, was $225 million versus $156 million.
- Capital expenditures were $22 million and additions to capitalized software were $38 million during the first six months.
- Teradata had $300 million of term-loan principal outstanding at June 30, 2011, bearing interest at 1.56%. The term loan matures in April 2016, with scheduled principal repayments beginning June 30, 2012.
- The $300 million revolving credit facility was fully repaid during Q2, leaving $300 million of borrowing capacity available. Teradata was in compliance with all debt covenants.
- Deferred revenue increased to $392 million from $263 million at year-end 2010.
- Approximately $551 million of cash was held outside the United States. The company had not provided U.S. federal tax for approximately $665 million of foreign earnings considered permanently reinvested offshore.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, with double-digit growth in all three regions. Q2 revenue increased 21% in the Americas, 34% in EMEA and 20% in APJ.
- Q2 gross margin declined 260 basis points, and six-month gross margin declined 170 basis points. Service gross margin fell to 44.9% in Q2 from 47.0%, primarily due to the increased consulting mix and lower consulting productivity during headcount expansion.
- SG&A increased to $165 million in Q2 from $126 million and to $315 million for the first six months from $244 million, reflecting additional sales headcount, commissions, acquisition costs, infrastructure and amortization.
- Other income increased to $27 million in Q2 and $26 million for the first six months, principally from an $11 million gain on the remeasurement of Teradata’s prior Aster Data investment and a $17 million gain on the sale of its Pliant Technology investment.
- Goodwill increased from $136 million at year-end 2010 to $714 million, and acquired intangible assets increased from $12 million to $205 million, primarily because of the Aprimo and Aster Data acquisitions.
- Teradata repurchased approximately 0.7 million shares during the first six months at an average price of $54.28 per share. Approximately $155 million remained available under the general repurchase authorization at June 30, 2011.
Guidance, Outlook, Risks and Unusual Items
- Management estimated a 2011 full-year effective tax rate of approximately 26% to 27%.
- Based on exchange rates as of July 29, 2011, management expected approximately four percentage points of benefit from currency translation to reported 2011 revenue, with a corresponding operating-income impact.
- Management expected demand to benefit from increasing data volumes, more complex analytics and greater use of near-real-time analysis. It continued investing in core technology, applications, partnerships, sales territories and consulting resources.
- New sales territories typically require 18 to 24 months to become fully productive, creating near-term margin and execution risk.
- Risks include macroeconomic weakness, extended sales cycles, large-order timing, competitive or pricing pressure, lower customer maintenance service levels, foreign-currency fluctuations and the ability to integrate Aprimo and Aster Data.
- The Department of Justice was investigating matters involving certain federal contracts and related pricing disclosures arising before Teradata’s separation from NCR. Teradata was in settlement discussions and had accrued approximately $3 million for its current estimate of probable liability.
- The company reported a maximum future obligation of $2 million under equipment lease-value guarantees and maintained a $6 million warranty reserve at June 30, 2011.
- Teradata adopted amended multiple-deliverable revenue-recognition guidance prospectively beginning in 2011; management stated that adoption had no material effect on results or financial condition.
Most Important Facts for Investors to Verify
- Whether revenue growth and consulting expansion can be sustained without further erosion in gross and operating margins.
- The final purchase-price allocations, integration costs and operating contribution of Aprimo and Aster Data, which were still based partly on preliminary estimates.
- The effect of acquired-intangible amortization, deferred-revenue purchase-accounting adjustments and other acquisition-related charges on reported earnings.
- Debt repayment requirements beginning in June 2012, floating-rate exposure and compliance with the revolving facility and term-loan covenants.
- The resolution and ultimate cost of the Department of Justice and False Claims Act-related matters.
- The extent to which reported growth depends on favorable foreign-currency translation and the tax implications of offshore cash and permanently reinvested foreign earnings.