Teradata Corporation Form 10-Q Summary
Business Context and Reporting Period
Teradata Corporation, a provider of data warehousing, big data analytics, and integrated marketing management solutions, reported results for the quarter and six months ended June 30, 2012. The filing was signed August 3, 2012. Operations are managed through the Americas, EMEA, and APJ regions.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Total revenue | $665 million | $581 million | $1.278 billion | $1.087 billion |
| Product revenue | $321 million | $269 million | $629 million | $504 million |
| Service revenue | $344 million | $312 million | $649 million | $583 million |
| Gross margin | 57.4% | 54.4% | 56.3% | 54.4% |
| Operating income | $160 million | $110 million | $287 million | $201 million |
| Net income | $112 million | $103 million | $203 million | $168 million |
| Diluted EPS | $0.65 | $0.60 | $1.18 | $0.98 |
- Q2 revenue increased 14%; product revenue rose 19% and service revenue rose 10%. For the first six months, revenue increased 18%, with product revenue up 25% and service revenue up 11%.
- Q2 operating margin increased to 24.1% from 18.9%; six-month operating margin increased to 22.5% from 18.5%.
- Q2 effective tax rate was 30%, compared with 25% in the prior year; the six-month rate was 29%, compared with 26%. Management estimated a full-year 2012 effective tax rate of approximately 28%.
- Net cash provided by operating activities was $344 million for the first six months, compared with $285 million in 2011. Free cash flow, defined by the company as operating cash flow less property and equipment expenditures and capitalized software additions, was $275 million versus $225 million.
- Capital expenditures were $31 million and additions to capitalized software were $38 million. Investing cash outflow was $307 million, including $238 million for acquisitions and other investing activities.
- Cash and cash equivalents were $821 million at June 30, 2012, versus $772 million at December 31, 2011. Current assets were $1.440 billion and current liabilities were $719 million.
- Long-term debt was $282 million. The company had $296 million of principal outstanding under its term loan at a 1.25% interest rate and no borrowings under its new $300 million unsecured revolving credit facility.
- Deferred revenue increased to $410 million from $339 million at year-end 2011. Goodwill increased to $925 million from $742 million, primarily due to the eCircle acquisition.
Material Changes Versus the Prior Comparable Period
- Revenue growth and improved product and service margins drove operating income growth of 45% in Q2 and 43% for the first six months.
- Gross margin benefited from a greater proportion of product revenue, improved product mix, and lower acquisition-related costs. Q2 product gross margin increased to 69.2% from 65.4%; service gross margin increased to 46.5% from 44.9%.
- SG&A increased because of additional sales headcount and higher sales commissions. R&D expense also increased because of higher engineering headcount.
- Prior-year results included approximately $28 million of gains on equity investments, including gains associated with Aster Data and Pliant Technology. These gains were absent in 2012, causing other income to decline from $27 million in Q2 2011 to zero and from $26 million to a $1 million expense for the six-month period.
- Cash flow from operations increased by $59 million, while acquisition spending declined to $238 million from $719 million in the first half of 2011, when Aprimo and Aster Data were acquired.
- Teradata acquired eCircle Beteiligungs GmbH during the second quarter of 2012. The filing describes the acquisition and other second-quarter acquisitions as immaterial to the reported results, although goodwill increased by $185 million during the first half.
- Teradata repurchased approximately 0.5 million shares in the first half at an average price of $67.37 per share and had $300 million remaining under its general repurchase authorization at June 30.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management maintained a positive long-term outlook based on increasing data volumes, analytics demand, and opportunities in integrated marketing management and digital marketing.
- Management expected approximately two percentage points of adverse currency translation impact on 2012 reported revenue and a corresponding impact on operating income, based on currency rates as of July 31, 2012.
- Management identified macroeconomic slowdown, particularly in Europe, potential reductions in information technology spending, the timing of large customer orders, pricing pressure, and lower maintenance service levels as risks to revenue and margins.
- New sales territories may require more than two years to become fully productive, creating a potential near-term expense and execution burden.
- The Department of Justice was investigating arrangements and disclosures related to certain federal contracts, including matters arising before Teradata separated from NCR. Teradata was in settlement discussions and had accrued approximately $3 million for its best estimate of probable liability.
- The company reported a $2 million maximum future obligation under equipment lease-value guarantees and a $7 million warranty reserve at June 30, 2012.
- Approximately $820 million of foreign earnings were considered permanently reinvested outside the United States; no U.S. federal tax liability had been provided on those earnings.
- Foreign exchange forward contracts had $85 million of gross notional value, or $23 million on a net basis, at June 30. Related fair values and gains or losses were not material.
- Management stated that cash resources, operating cash flow, and the revolving credit facility should be sufficient for at least the next twelve months. The filing also notes that interim results are not necessarily indicative of full-year results.
Facts Investors Should Verify
- Whether revenue growth and the 2012 margin improvement were sustained after adjusting for currency effects, product mix, acquisition-related costs, and prior-year investment gains.
- The terms, covenant requirements, repayment schedule, and floating-rate exposure of the $296 million term loan and the $300 million revolving facility.
- The final purchase accounting, operating contribution, and potential impairment exposure associated with eCircle and the company’s increased goodwill and acquired intangible assets.
- The resolution and ultimate financial exposure related to the Department of Justice investigation and federal-contract litigation.
- The actual full-year tax rate, including the assumed reinstatement of the U.S. federal R&D tax credit.
- The impact of European economic conditions, foreign currency movements, customer order timing, pricing, and maintenance contract levels on future revenue and margins.