Business Context and Reporting Period
Teradata Corporation filed its Form 10-K for the fiscal year ended December 31, 2011. The company provides analytic data solutions, including data warehousing software and hardware, big-data analytics, business applications, consulting, implementation, and support services. Operations are reported across the Americas, EMEA, and APJ regions. The filing also provides unaudited fourth-quarter information.
During 2011, Teradata completed the acquisitions of Aprimo, an integrated marketing software provider, and Aster Data Systems, a big-data analytics company. These acquisitions expanded the company’s application and multi-structured-data offerings.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $2.362 billion | $1.936 billion | Up 22% |
| Product revenue | $1.122 billion | $933 million | Up 20% |
| Service revenue | $1.240 billion | $1.003 billion | Up 24% |
| Gross margin | 54.7% | 56.2% | Down 150 basis points |
| Operating income | $456 million | $415 million | Up 10% |
| Operating margin | 19.3% | 21.4% | Down 210 basis points |
| Net income | $353 million | $301 million | Up 17% |
| Diluted EPS | $2.05 | $1.77 | Up 16% |
| Cash flow from operations | $513 million | $413 million | Up $100 million |
| Free cash flow | $403 million | $330 million | Up $73 million |
Service revenue represented 52.5% of total revenue, including $695 million of consulting revenue and $545 million of maintenance revenue. The company generated approximately 61% of revenue in the Americas, 23% in EMEA, and 16% in APJ. Revenue outside the United States represented 44% of total revenue.
Fourth-quarter 2011 revenue was $673 million, compared with $548 million in the prior-year quarter. Fourth-quarter operating income was $133 million and net income was $98 million, compared with $117 million and $85 million, respectively, in fourth-quarter 2010.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $772 million at December 31, 2011, down from $883 million at year-end 2010.
- Teradata used approximately $744 million for the Aprimo and Aster Data acquisitions and $127 million for share repurchases during 2011.
- Long-term debt was $290 million on the balance sheet, representing a $300 million unsecured five-year term loan, net of current maturities. The loan carried a 1.31% interest rate at year-end and matures primarily in 2016.
- The company had no borrowings outstanding under its $300 million revolving credit facility, leaving the full facility available. The facility was scheduled to expire on September 30, 2012, and management expected to renew or replace it.
- Management stated that cash resources, operating cash flow, and available credit were sufficient for expected needs for at least the next twelve months.
- Teradata repurchased approximately 2.5 million shares at an average price of $50.78 during 2011. No cash dividends were paid or anticipated in the immediate future.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, with double-digit increases in all three regions. Americas revenue increased 23%, EMEA 24%, and APJ 15%.
- Consulting revenue increased 30% and maintenance revenue increased 17%, contributing to the higher service mix.
- Gross margin declined primarily because of the increased consulting mix, acquisition-related purchase accounting adjustments, acquired-intangible amortization, and lower consulting utilization while new personnel were being trained.
- SG&A increased by $137 million, driven by expanded sales headcount, higher commissions, acquisition-related costs, integration expenses, and incremental infrastructure.
- R&D expense increased by $27 million, reflecting higher engineering headcount and acquisition-related costs, partially offset by increased capitalization of software development costs.
- Other income improved materially because of a $17 million gain on the sale of an investment in Pliant Technology and an $11 million gain from revaluing Teradata’s existing Aster Data investment.
- Goodwill increased from $136 million to $742 million, and acquired intangible assets increased from $12 million to $163 million, primarily because of the two acquisitions. No goodwill or acquired-intangible impairment was recorded.
Guidance, Outlook, Risks, and Unusual Items
Management maintained a positive long-term outlook, citing continued growth in data volumes, multi-structured data, near-real-time analytics, and enterprise intelligence. The company expected approximately a one-percentage-point adverse currency translation impact on reported 2012 revenue and operating income based on January 31, 2012 exchange rates. Management estimated a 2012 effective tax rate of approximately 27%, assuming reinstatement of the U.S. research and development tax credit.
Key risks include intense competition from IBM, Oracle, and emerging providers; pricing and technology pressure; large and unpredictable transaction timing; seasonal fourth-quarter concentration; lower-margin consulting growth; customer maintenance-renewal risk; foreign currency volatility; global economic weakness; acquisition integration; dependence on Flextronics and certain single-source suppliers; intellectual-property and cybersecurity risks; and the ability to retain skilled personnel.
Thailand flooding in 2011 affected suppliers of disk-drive components and could have increased costs or disrupted shipments. The company also disclosed a Department of Justice investigation and related False Claims Act litigation concerning certain federal-contract arrangements and pricing disclosures predating the separation from NCR. Teradata accrued approximately $3 million for its current best estimate of probable liability and stated that the ultimate outcome remained uncertain.
Approximately $728 million of foreign earnings were considered permanently reinvested outside the United States, with no associated U.S. federal tax liability provided. The company also reported $28 million of unrecognized tax benefits and $49 million of pension underfunding plus $33 million of postemployment underfunding.
Most Important Facts for Investors to Verify
- Whether the post-acquisition revenue and profit contribution from Aprimo and Aster Data develops as expected, given that the acquisitions contributed $72 million of 2011 revenue and a $13 million net loss from their acquisition dates.
- Whether consulting growth and acquisition-related amortization continue to pressure gross and operating margins.
- The renewal rate, pricing, and profitability of maintenance, subscription, hosting, and SaaS arrangements.
- The company’s ability to refinance or replace the revolving credit facility before its September 2012 expiration and to repay the term loan beginning in 2012.
- The effect of foreign currency movements, international economic conditions, and the concentration of cash held outside the United States.
- The resolution and potential financial exposure from the Department of Justice and False Claims Act matters.
- Supply-chain continuity for Flextronics, disk drives, and other components affected by single-source or geographically concentrated suppliers.
- Whether revenue growth converts into sustainable free cash flow after acquisition spending, capitalized software investment, debt service, pensions, and share repurchases.