Business Context and Reporting Period
Company: Teradata Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Teradata is a global leader in enterprise data warehousing, providing integrated hardware, software, and consulting services. The company operates in three reportable segments: Americas, EMEA, and APJ.
Key Event: The company separated from NCR Corporation on September 30, 2007, becoming an independent, publicly traded entity. This separation involved the distribution of 100% of Teradata's common stock to NCR shareholders.
Key Financial Metrics
| Metric | 2007 | 2006 (Revised) |
|---|---|---|
| Total Revenue | $1,702 million | $1,547 million |
| Net Income | $200 million | $192 million |
| Operating Income | $320 million | $302 million |
| Diluted EPS | $1.10 | $1.06 |
| Gross Margin | 53.8% | 53.6% |
| Operating Margin | 18.8% | 19.5% |
| Free Cash Flow | $287 million | $151 million |
| Cash and Equivalents (Year End) | $270 million | $0 (Pre-separation) |
| Debt | $0 | $0 |
Note: 2006 figures have been revised to correct a revenue recognition error (see Material Changes).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 10% to $1.702 billion, driven by strong growth in EMEA (18%) and APJ (18%) regions. Product revenue grew 10% and service revenue grew 11%.
- Profitability: Operating income increased $18 million to $320 million. Net income increased $8 million to $200 million. Gross margin improved slightly to 53.8%.
- Separation Costs: 2007 results included $17 million in separation-related expenses and $8 million in recurring incremental costs associated with operating as an independent company.
- Financial Statement Revision: The company identified a material weakness in internal controls regarding revenue recognition for reseller transactions. This resulted in a revision of 2006 financial statements, reducing 2006 revenue by $13 million and net income by $6 million. The corrected amounts were recognized in Q1 2007.
- Liquidity: Upon separation, Teradata received $196 million in cash from NCR. The company entered into a $300 million unsecured revolving credit facility in October 2007, with no borrowings outstanding as of year-end.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2008 Revenue Guidance: Management expects full-year 2008 revenue growth of approximately 5% to 8%.
- Tax Rate: The expected effective tax rate for 2008 is approximately 30%.
- Strategy: Focus remains on advancing enterprise data warehousing, investing in "active" data warehousing, expanding consulting services, and optimizing market coverage.
- Stock Repurchase: In February 2008, the Board authorized a $250 million share repurchase program over two years. Approximately 1.6 million shares were repurchased for $38 million shortly after authorization.
Risks and Contingencies
- Internal Controls: A material weakness was identified in revenue recognition controls for reseller transactions. Remediation plans include additional training and new policies.
- Legal Proceedings: The company is subject to a U.S. Department of Justice investigation regarding federal contracts and pricing disclosures. A reserve of approximately $1 million has been recorded.
- Separation Risks: Risks include the loss of economies of scale previously enjoyed with NCR, increased costs for standalone operations, and potential tax liabilities if the separation does not qualify as tax-free.
- Market Risks: Exposure to foreign currency fluctuations (hedged with forward contracts) and intense competition from IBM and Oracle.
Investor Verification Checklist
- Revenue Recognition Controls: Verify the implementation and effectiveness of new controls regarding reseller transactions to prevent future restatements.
- Separation Cost Run-Rate: Assess the sustainability of operating margins as one-time separation costs normalize and standalone operating costs fully materialize.
- Legal Investigation Status: Monitor the outcome of the DOJ investigation regarding federal contracts to determine if the $1 million reserve is sufficient.
- Stock Repurchase Execution: Track the execution of the $250 million buyback program and its impact on earnings per share.
- Geographic Mix: Evaluate the sustainability of the high growth rates in EMEA and APJ regions, which drove the 2007 performance.