Teradata Corporation 10-Q Summary
Business context and reporting period
Teradata provides data warehousing, big data analytics, integrated marketing management, consulting, and maintenance services. This Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Beginning in 2013, management reported two operating segments: Americas and International.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $666 million | $647 million | $1,923 million | $1,925 million |
| Product revenue | $306 million | $306 million | $858 million | $935 million |
| Service revenue | $360 million | $341 million | $1,065 million | $990 million |
| Gross margin | 53.8% | 55.8% | 54.2% | 56.2% |
| Operating income | $132 million | $143 million | $355 million | $430 million |
| Operating margin | 19.8% | 22.1% | 18.5% | 22.3% |
| Net income | $98 million | $104 million | $265 million | $307 million |
| Diluted EPS | $0.59 | $0.60 | $1.59 | $1.78 |
- Q3 service revenue increased 6%, including 3% growth in consulting and 9% growth in maintenance. Nine-month service revenue increased 8%, while product revenue declined 8%.
- Q3 product gross margin fell to 61.4% from 69.0%; service gross margin improved to 47.2% from 44.0%. The company cited product mix, hardware migrations, capacity-on-demand installations, and $5 million of additional capitalized-software amortization as product-margin pressures.
- Operating expenses were $226 million in Q3 and $687 million for the nine months, up from $218 million and $651 million, respectively, primarily due to expanded sales territories and headcount.
- Net cash provided by operating activities was $447 million for the nine months, compared with $451 million in 2012. Defined free cash flow was $347 million, compared with $342 million.
- Cash and cash equivalents were $862 million at September 30, 2013, versus $729 million at December 31, 2012. Accounts receivable declined to $546 million from $668 million, while inventories increased to $67 million from $47 million.
- Reported long-term debt was $255 million. The term-loan principal outstanding was $278 million at a 1.1875% floating interest rate. The company had no borrowings under its $300 million revolving credit facility, leaving the full facility available.
- Teradata repurchased $187 million of common stock during the first nine months, purchasing 3.3 million shares at an average price of $56.02. Weighted-average diluted shares declined to 167.1 million from 172.1 million.
Material changes versus the prior comparable period
- Q3 revenue increased 3%, but nine-month revenue was essentially flat. The mix shifted materially toward services and away from products.
- Q3 operating income declined 8% and nine-month operating income declined approximately 17%; operating margin decreased 230 basis points in Q3 and 380 basis points for the nine months.
- Q3 net income declined approximately 6%, while nine-month net income declined approximately 14%. Lower income was partly offset by lower effective tax rates.
- The Q3 Americas revenue increased 7%, while International revenue declined 2%. For the nine months, both Americas and International revenue declined approximately $1 million.
- The effective tax rate was 25.8% in Q3 versus 27.3% in the prior-year quarter, and 25.1% for the nine months versus 28.4%. The nine-month 2013 rate included a one-time $4 million benefit related to the reinstated 2012 Federal R&D Tax Credit.
- Goodwill increased to $945 million from $932 million, primarily from immaterial acquisitions and currency translation. The company stated that there were no significant changes in critical accounting policies or estimates.
Guidance, outlook, commentary, risks, and unusual items
- Management forecast a full-year 2013 global effective tax rate of approximately 25.5%; no specific revenue or earnings guidance is provided in the filing text.
- Management expected approximately one percentage point of adverse currency translation impact on 2013 revenue and a similar effect on operating income, with approximately one percentage point of adverse currency impact anticipated for 2014.
- Management cited delayed, deferred, or modified customer purchases, extended sales cycles, macroeconomic weakness, competitive pressure, and potential pricing pressure as principal risks. These conditions were particularly visible outside the United States and in China, Japan, and parts of the Middle East and Africa.
- Management expects demand for analytics, data warehousing, and marketing applications to benefit from increasing data volumes and complexity, while continuing to invest in sales capacity, research and development, partnerships, services, and targeted acquisitions.
- Liquidity was described as sufficient for at least the next twelve months, supported by cash, operating cash flow, and the undrawn revolving facility. Approximately $617 million of cash was held outside the United States, and approximately $985 million of foreign earnings was considered permanently reinvested, for which U.S. federal tax had not been provided.
- The company settled a previously disclosed False Claims Act litigation matter in January 2013 for the $3 million already accrued; the court dismissed the action. Management did not identify any material reasonably possible losses from other proceedings.
- Guarantees and contingencies included a maximum future payment obligation of $3 million related to certain equipment lease guarantees. Warranty reserves were $7 million at September 30, 2013.
- On October 14, 2013, the board authorized an additional $300 million for share repurchases, increasing total remaining authorization under the general program to approximately $509 million.
Important facts for investors to verify
- Whether product revenue and product gross margins recover after the unfavorable mix, capacity-on-demand installations, and hardware migration effects described in Q3.
- Whether expanded sales capacity converts into sustained revenue growth without further margin pressure from higher operating expenses.
- The durability of service-revenue growth and improved consulting utilization.
- The impact of foreign exchange, customer purchasing delays, competitive pricing, and regional weakness on 2014 results.
- The relationship between $862 million of cash, $278 million of term-loan principal, the undrawn $300 million credit facility, and cash held offshore.
- The pace and valuation impact of the additional $300 million share-repurchase authorization.
- The effect of the one-time $4 million tax benefit and the Federal R&D Tax Credit on comparability of reported tax rates.