Business Context and Reporting Period
Company: Teradata Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2009
Business Overview: Teradata provides data warehousing hardware, software, and services. The company operates in three geographic segments: Americas, EMEA (Europe, Middle East, Africa), and APJ (Asia Pacific and Japan).
Key Financial Metrics
| Metric (in millions) | Q2 2009 | Q2 2008 | 6M 2009 | 6M 2008 |
|---|---|---|---|---|
| Total Revenue | $421 | $455 | $788 | $830 |
| Net Income | $62 | $69 | $107 | $111 |
| Operating Income | $84 | $92 | $144 | $145 |
| Gross Margin % | 55.3% | 54.7% | 54.9% | 53.4% |
| Operating Cash Flow (6M) | $268 (2009) vs $228 (2008) | |||
| Free Cash Flow (6M) | $228 (2009) vs $185 (2008) | |||
| Cash & Equivalents | $638 (as of June 30, 2009) | |||
| Debt | $0 (No short- or long-term debt outstanding) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 7% in Q2 2009 and 5% for the six-month period compared to 2008. Product revenue fell 16% in Q2 and 11% for the six months, while service revenue remained relatively flat (up 1% in Q2).
- Currency Impact: Foreign currency fluctuations had a significant adverse impact, accounting for a 5% negative effect on Q2 revenue and a 6% negative effect on the six-month revenue.
- Margin Expansion: Despite revenue declines, gross margin improved to 55.3% in Q2 2009 from 54.7% in Q2 2008. This was driven by better utilization rates in professional services, lower third-party costs, and reduced travel expenses.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased by $10 million in Q2 2009 compared to the prior year, partially offset by a $2 million increase in Research and Development (R&D) expenses.
- Regional Performance: Revenue declined across all regions. APJ saw the steepest drop at 19% in Q2, followed by EMEA at 8% and Americas at 3%.
Guidance, Outlook, and Risks
- Outlook: Management expects SG&A expenses for 2009 to be at or below 2008 levels. R&D expenses are expected to be higher than 2008 levels ($108M), approaching the $126M level seen in 2007.
- Currency Forecast: Management anticipates approximately 3 percentage points of negative impact from currency translation on reported 2009 revenue.
- Strategic Initiatives: The company is expanding sales territories (targeting 60 new territories cumulatively by end of 2009) and investing in new product platforms, including the Teradata 13 database software released in June 2009.
- Risks and Contingencies:
- Legal Proceedings: The U.S. Department of Justice is investigating the propriety of arrangements regarding federal contracts and pricing disclosures. The company has accrued approximately $2 million for probable liability but cannot determine the full extent of potential exposure.
- Economic Conditions: The global economic downturn and credit crisis are lengthening sales cycles for enterprise data warehousing solutions.
- Liquidity: The company has no debt and a $300 million credit facility available. Management believes current resources are sufficient for the next 12 months.
Investor Verification Checklist
- Revenue Mix: Verify the sustainability of the shift toward service revenue as product revenue continues to decline.
- Currency Sensitivity: Assess the impact of foreign exchange rates on future earnings, given the significant adverse impact reported in 2009.
- Legal Exposure: Monitor the status of the DOJ investigation regarding federal contracts and the adequacy of the $2 million accrual.
- Share Repurchases: Note the company's active buyback program; $340 million of authorization remained as of June 30, 2009.
- Capital Allocation: Review the increase in R&D spending and its correlation with future product launches and revenue growth.