Teradata Corporation 2012 Q1 Form 10-Q Summary
Business Context and Reporting Period
Teradata Corporation provides data warehousing, big data analytics, integrated marketing management, consulting, and maintenance services. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011. The company operates through the Americas, EMEA, and Asia Pacific and Japan (APJ) regions.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $613 million | $506 million | Up 21% |
| Product revenue | $308 million | $235 million | Up 31% |
| Service revenue | $305 million | $271 million | Up 13% |
| Gross margin | 55.1% | 54.3% | Up 0.8 percentage points |
| Operating income | $127 million | $91 million | Up 40% |
| Operating margin | 20.7% | 18.0% | Up 2.7 percentage points |
| Net income | $91 million | $65 million | Up 40% |
| Diluted EPS | $0.53 | $0.38 | Up $0.15 |
| Cash flow from operations | $192 million | $106 million | Up $86 million |
| Free cash flow | $162 million | $79 million | Up $83 million |
Product revenue represented 50.2% of total revenue, compared with 46.4% in the prior-year quarter. Product gross margin was 66.6%, versus 66.4%, while service gross margin was 43.6%, versus 43.9%. SG&A expense increased to $165 million from $150 million, and research and development expense increased to $46 million from $34 million.
At March 31, 2012, cash and cash equivalents were $978 million, compared with $772 million at December 31, 2011. Total current assets were $1.614 billion and total current liabilities were $745 million. Accounts receivable were $499 million, inventories were $54 million, and deferred revenue was $454 million.
Total debt consisted primarily of a $300 million senior unsecured term loan, reported at $286 million as long-term debt after applicable accounting adjustments. The term loan carried a 1.25% interest rate and had quarterly principal payments beginning June 30, 2012, with remaining principal due in April 2016. The $300 million revolving credit facility had no borrowings outstanding and was scheduled to expire in September 2012.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by a 31% increase in product revenue, particularly in the Americas and APJ regions. Service revenue increased 13%, including 14% growth in consulting and 11% growth in maintenance.
- Americas revenue increased 26% and APJ revenue increased 20%; EMEA revenue increased 9%. EMEA gross margin declined to 48.5% from 56.0%, primarily because of a higher consulting mix, adverse deal mix, and transaction timing.
- Gross margin improved primarily because of the greater product mix and approximately $4 million less in acquisition-related costs. Acquisition-related costs included acquired-intangible amortization and purchase accounting adjustments.
- Operating expenses increased $27 million, reflecting added sales and engineering headcount, acquisition-related infrastructure, and higher sales commissions. The expense increase was more than offset by revenue growth and improved gross margin.
- Operating cash flow benefited from higher net income and a smaller increase in receivables than in the prior-year quarter. The prior-year investing period included approximately $499 million of acquisition spending, while Q1 2012 had no acquisition cash outflow.
- Cash increased by $206 million during Q1 2012, compared with a $105 million decrease in Q1 2011. The company made no common-stock repurchases during the quarter and had $300 million remaining under its general repurchase authorization.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management estimated a full-year 2012 global effective tax rate of approximately 27%; the Q1 effective tax rate was 28%, with no material discrete tax items.
- Management expected approximately one percentage point of adverse reported-revenue and operating-income impact from currency translation based on exchange rates as of April 26, 2012.
- Management stated that current cash resources, operating cash flow, and the revolving credit facility should be sufficient for at least the next twelve months to fund working capital, research and development, capital expenditures, pension contributions, and other requirements.
- The company was negotiating a replacement revolving credit facility expected to be in place by September 2012. Failure to renew the facility or comply with debt covenants could increase liquidity risk.
- Management’s long-term outlook remained positive, supported by demand for data warehousing, big data analytics, near-real-time analytics, integrated marketing management, and digital marketing. Newly added sales territories may take more than two years to become fully productive.
- Risks include macroeconomic weakness, the timing and size of large customer orders, future pricing pressure, lower maintenance service levels, foreign-currency volatility, competitive pressures, and dependence on sustained operating cash flow.
- The company was involved in a Department of Justice investigation and related qui tam litigation concerning certain federal-contract arrangements and pricing disclosures. Teradata had accrued approximately $3 million for its current best estimate of probable liability and stated that it did not believe a material excess loss was reasonably possible, although no assurance was provided.
- As of March 31, 2012, approximately $782 million of foreign earnings were considered permanently reinvested outside the United States; no U.S. federal tax liability had been provided on those earnings.
- The company had a $3 million maximum future obligation related to guaranteed residual values on leased equipment. The warranty reserve was $7 million at March 31, 2012, compared with $5 million at March 31, 2011.
- The company adopted new comprehensive-income presentation and disclosure guidance effective January 1, 2012. Management reported no significant changes in critical accounting policies or estimates and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Verify the sustainability of the 21% revenue growth and whether the higher product mix can be maintained without weakening service margins.
- Monitor EMEA gross-margin recovery and the effect of consulting mix, deal mix, and transaction timing.
- Confirm renewal or replacement of the revolving credit facility before its September 2012 expiration and track term-loan amortization beginning June 30, 2012.
- Assess the quality and sustainability of the $192 million operating cash flow and $162 million free cash flow, including the contribution from deferred revenue.
- Follow developments in the Department of Justice investigation and related federal-contract litigation, including whether the approximately $3 million accrual remains adequate.
- Evaluate foreign-currency exposure, the tax implications of permanently reinvested foreign earnings, and the company’s approximately $677 million of cash held outside the United States.
- Review the effect of 2011 Aprimo and Aster Data acquisitions on growth, expenses, amortization, integration costs, and future operating margins.