Teradata Corporation 2013 Form 10-K Summary
Business context and reporting period
Teradata provides analytic data platforms, marketing and analytic applications, cloud offerings, consulting, implementation, maintenance, and support services. Its solutions combine software, hardware, and services for data warehousing, big data analytics, data discovery, and data-driven marketing.
This filing reports the fiscal year ended December 31, 2013. The filing also includes unaudited quarterly information for the fourth quarter ended December 31, 2013. Teradata operated through two geographic segments: Americas and International.
- Total revenue was generated 61% in the Americas and 39% internationally.
- Approximately 44% of total revenue was generated outside the United States.
- No single customer represented 10% or more of annual revenue; the top ten customers represented approximately 16%.
Key financial metrics
| In millions, except per-share data | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $2,692 | $2,665 | 1% |
| Product revenue | $1,230 | $1,297 | (5%) |
| Service revenue | $1,462 | $1,368 | 7% |
| Gross margin | 54.7% | 55.9% | Down 120 basis points |
| Operating income | $532 | $580 | (8%) |
| Operating margin | 19.8% | 21.8% | Down 200 basis points |
| Net income | $377 | $419 | (10%) |
| Diluted EPS | $2.27 | $2.44 | (7%) |
| Cash flow from operations | $510 | $575 | (11%) |
| Free cash flow | $372 | $427 | (13%) |
Product gross margin declined to 64.8% from 67.9%, while service gross margin improved to 46.2% from 44.6%. The overall margin decline reflected the greater proportion of lower-margin services and lower product volume and mix. SG&A increased to $757 million from $728 million, primarily because of expanded sales territories and related headcount. R&D expense was $184 million, compared with $183 million.
Other expense was $24 million versus $2 million in 2012, primarily because of a $22 million net loss on equity investments. The effective tax rate was 25.8%, compared with 27.5% in 2012.
Fourth-quarter information
| In millions, except per-share data | Q4 2013 | Q4 2012 |
|---|---|---|
| Revenue | $769 | $740 |
| Gross margin | $431 | $410 |
| Operating income | $177 | $150 |
| Net income | $112 | $112 |
| Diluted EPS | $0.68 | $0.66 |
Fourth-quarter results reflected the company’s normal seasonality, with revenue generally higher in the fourth quarter and concentrated in the final month of the quarter.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $695 million at December 31, 2013, down $34 million from year-end 2012.
- Cash provided by operating activities was $510 million. Capital expenditures were $60 million and additions to capitalized software were $78 million, producing reported free cash flow of $372 million.
- Total debt was $274 million, consisting primarily of an unsecured term loan with $248 million classified as long-term debt and $26 million as current debt. The loan carried an interest rate of 1.1875% at year-end and matures primarily in 2016.
- The company had no borrowings under its $300 million unsecured revolving credit facility, which expires in 2017, and was in compliance with its debt covenants.
- Teradata repurchased approximately 7.8 million shares for $382 million in 2013 at an average price of $48.53 per share. Approximately $323 million remained available under the general repurchase authorization at year-end.
- The company paid no cash dividends and did not anticipate initiating dividends in the immediate future.
- Approximately $615 million of cash was held outside the United States. Teradata had not provided U.S. federal tax for approximately $1 billion of foreign earnings considered permanently reinvested abroad.
Material changes versus the prior comparable period
- Revenue growth slowed to 1% from 13% growth in 2012. Product revenue declined 5%, while service revenue increased 7%; maintenance revenue increased 9% and consulting revenue increased 5%.
- Management attributed weaker product revenue to macroeconomic conditions, extended sales cycles, and fewer large customer orders.
- Gross margin declined because of the shift toward services and less favorable product mix, although service margins improved.
- Operating income and net income declined despite modest revenue growth because of lower gross margins, higher operating expenses, and the investment loss.
- Operating cash flow and free cash flow declined, while share repurchases increased from $277 million in 2012 to $382 million in 2013.
- The company’s goodwill increased to $946 million from $932 million, primarily from immaterial acquisitions. The annual goodwill impairment test produced no impairment charge.
Guidance, outlook, commentary, risks, and unusual items
Management expected continued long-term demand for analytics as data volumes, data types, and analytical workloads expand. However, it expected customer budget pressure and delayed, deferred, or modified large capital investments to continue in 2014. Management estimated that currency translation would reduce reported 2014 revenue growth by approximately one percentage point and have a corresponding adverse impact on operating income.
Management estimated a 2014 effective tax rate of approximately 26.5%, assuming retroactive reinstatement of the U.S. R&D tax credit. Without reinstatement, the effective tax rate was expected to be approximately 60 basis points higher.
- Primary competitive risks include IBM, Oracle, emerging analytic technologies, open-source alternatives, pricing pressure, and changing cloud versus on-premise delivery models.
- Results are exposed to long and unpredictable sales cycles, large-order timing, seasonality, customer IT budgets, and changes in product and service mix.
- International operations create exposure to foreign currency, economic and political conditions, regulatory compliance, export controls, and longer payment cycles.
- Teradata relies on Flextronics for hardware assembly and certain single-source suppliers; supply disruptions could delay shipments or reduce profitability.
- Cybersecurity incidents, system failures, product defects, intellectual-property claims, acquisitions, tax audits, and other legal or regulatory matters could adversely affect results.
- The company disclosed at least one attempted nation-state-sponsored cyberattack but stated that it believed the attempt was unsuccessful and had not materially affected operations.
- Unusual 2013 items included approximately $35 million of after-tax acquisition-related costs, amortization, and reorganization expenses, and a $14 million after-tax net loss on equity investments.
- At year-end, the company had $34 million of uncertain tax positions, $371 million of debt, lease, and purchase obligations, and underfunded pension and postemployment obligations.
Important facts for investors to verify
- Whether product revenue and large customer orders recover after the 2013 decline and whether the services mix continues to pressure consolidated margins.
- Progress toward management’s 2014 outlook, including the approximately one-percentage-point currency headwind and estimated 26.5% tax rate.
- Debt repayment requirements, particularly the $195 million principal maturity scheduled for 2016, and continued availability of the revolving credit facility.
- The sustainability of cash generation after share repurchases, capitalized software investment, acquisitions, and pension contributions.
- The effect of competitive pricing, open-source technologies, cloud adoption, and customer purchasing delays on Teradata’s market position.
- Potential cash tax costs associated with repatriating foreign earnings, resolution of uncertain tax positions, and the expiration or reinstatement of R&D tax credits.
- Reliance on Flextronics and other suppliers, cybersecurity controls, legal contingencies, and the performance of acquired marketing and analytics businesses.