TDC

Teradata Corporation 10-Q Summary: Quarter Ended September 30, 2009

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Teradata Corporation for the period ended September 30, 2009. Teradata is a provider of data warehousing hardware and software solutions, operating in three geographic segments: Americas, EMEA, and APJ. The company spun off from NCR Corporation in September 2007. As of November 2, 2009, approximately 171.2 million shares of common stock were outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 3% in Q3 and 4% YTD compared to the prior year. Product revenue declined 10% in Q3 and 11% YTD, primarily due to the economic downturn and reduced IT capital spending. Service revenue increased 4% in Q3 and slightly YTD.
• Margin Pressure: Gross margin decreased to 53.4% in Q3 from 54.0% in Q3 2008. Product margins were pressured by higher amortization of capitalized software costs (related to the Teradata 13 release) and lower volume. Service margins improved due to lower travel and contractor costs.
• Expense Reduction: Operating expenses decreased $12 million in Q3, driven by a $10 million reduction in SG&A and a $2 million reduction in R&D. SG&A reductions included lower travel, variable compensation, and outside services.
• Regional Performance: Americas revenue fell 2% in Q3; EMEA rose 3%; APJ fell 14%. Currency fluctuations had a net adverse impact of 1% on Q3 revenue and 4% on YTD revenue.
• Cash Position: Cash and cash equivalents increased significantly to $704 million from $402 million at year-end 2008, driven by strong operating cash flow ($364 million YTD) and reduced investing outflows.

Guidance, Outlook, and Risks

• Outlook: Management expects SG&A expenses for full-year 2009 to be below 2008 levels, though Q4 SG&A is expected to be higher than the prior year due to sales territory expansion. R&D expenses are expected to be higher in 2009 than 2008. Management anticipates a negative currency impact of approximately 2 percentage points on 2009 revenue.
• Strategic Initiatives: The company is expanding sales territories (targeting 60 new territories cumulatively by end of 2009) and investing in strategic partnerships (e.g., SAP). New purpose-built data warehouse appliances are expected to shorten sales cycles.
• Risks and Contingencies:
  • Legal Proceedings: The DOJ is investigating the propriety of arrangements regarding federal contracts and pricing disclosures (False Claims Act). Teradata has accrued $2 million for probable liability but cannot determine the full extent of potential exposure.
  • Economic Environment: Continued global economic slowdown is resulting in longer sales cycles and lower product revenues, particularly in the U.S.
  • Impairment: A $5 million impairment charge on a cost-method equity investment was recognized in Q3 2009.
• Share Repurchases: The company repurchased 3.5 million shares YTD 2009. As of September 30, 2009, $325 million remained authorized under the general share repurchase program.

Investor Verification Checklist

• Verify the sustainability of service revenue growth amidst declining product sales.
• Monitor the impact of the DOJ investigation on potential future liabilities beyond the current $2 million accrual.
• Assess the timeline for new sales territories to become productive and offset expansion costs.
• Review the amortization schedule for capitalized software costs to understand future margin pressure.
• Confirm the company's ability to maintain liquidity and fund operations without debt, given the current cash position of $704 million.