TDC

Business Context and Reporting Period

Company: Teradata Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Teradata is a global leader in enterprise data warehousing (EDW), providing integrated software, hardware, and consulting services. The company operates in three geographic segments: Americas, EMEA, and APJ. In 2008, Teradata launched a new "Teradata Platform Family" of appliances to address various market segments. The company separated from NCR Corporation in September 2007.

Key Financial Metrics

Note: Free cash flow is defined by management as net cash provided by operating activities less capital expenditures for property, equipment, and capitalized software.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 4% to $1.762 billion. This growth was driven by a 12% increase in service revenue (specifically a 17% rise in maintenance revenue), which offset a 4% decline in product revenue attributed to lengthening sales cycles and the global economic downturn.
• Profitability: Net income rose 25% to $250 million. This increase was significantly aided by a lower effective tax rate (26.0% in 2008 vs. 37.9% in 2007) and higher operating income.
• Segment Performance:
  • Americas: Revenue up 2% to $984 million.
  • EMEA: Revenue up 6% to $451 million, driven by maintenance growth.
  • APJ: Revenue up 4% to $327 million.
• Share Repurchases: The company repurchased approximately 8.5 million shares of common stock in 2008 at an average price of $20.67 per share, utilizing $176 million in cash.

Guidance, Outlook, and Risks

Outlook and Commentary:

• Management anticipates a negative impact of approximately 4 percentage points on reported revenue and operating income due to foreign currency translation based on rates as of February 9, 2009.
• The company expects the global economic downturn to continue challenging the IT industry, potentially lengthening sales cycles for large capital expenditures.
• Management plans to scrutinize selling expenses and manage professional services costs to align with revenue trends in 2009.
• The estimated full-year effective tax rate for 2009 is projected to be between 26% and 27%.

Risks and Contingencies:

• Economic Conditions: The global financial crisis and credit tightening may delay customer purchases and impact the ability of customers to fulfill obligations.
• Legal Proceedings: The U.S. Department of Justice is investigating the propriety of the company's arrangements regarding certain federal contracts under the False Claims Act. The company has recorded a $2 million reserve for this matter but notes outcomes are unpredictable.
• Competition: Intense competition from IBM, Oracle, and Netezza, particularly regarding pricing pressure and the entry of new competitors in the low-end data warehousing market.
• Internal Controls: The company remediated a material weakness in internal controls regarding revenue recognition for reseller transactions identified in 2007.

Investor Verification Checklist

• Revenue Mix Shift: Verify the sustainability of service revenue growth (maintenance) given the decline in product revenue and the potential for lower-margin service mix to impact future gross margins.
• Tax Rate Normalization: Assess the impact of the 2008 tax rate (26.0%) versus the 2007 rate (37.9%) on future earnings per share, noting the 2007 rate included discrete charges.
• Legal Exposure: Monitor the status of the Department of Justice investigation regarding federal contracts and the adequacy of the $2 million reserve.
• Currency Impact: Evaluate the sensitivity of future results to foreign currency fluctuations, specifically the projected 4% negative impact on revenue.
• Capital Allocation: Review the remaining $82 million authorization under the general share repurchase program and the company's commitment to maintaining liquidity amidst economic uncertainty.