Teradata Corporation 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, for Teradata Corporation, a provider of data warehousing solutions. The company operates as a standalone entity following its separation from NCR Corporation in September 2007. The filing includes unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2008, compared to the same periods in 2007. Note that 2007 comparative figures have been revised to correct a prior period revenue recognition error.
Key Financial Metrics
| Metric (in millions) | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Total Revenue | $439 | $439 | $1,269 | $1,236 |
| Net Income | $60 | $29 | $171 | $121 |
| Diluted EPS | $0.33 | $0.16 | $0.94 | $0.67 |
| Operating Income | $86 | $66 | $231 | $224 |
| Gross Margin % | 54.0% | 52.2% | 53.6% | 53.0% |
| Cash from Operations (9mo) | $322 | |||
| Free Cash Flow (9mo) | $264 | |||
| Cash & Equivalents (Sep 30, 2008) | $328 | |||
| Debt | None outstanding |
Material Changes vs. Prior Period
- Revenue Stability: Q3 2008 revenue remained flat at $439 million compared to Q3 2007. This was driven by a decline in product revenue (down 8% Q3, 7% YTD) offset by growth in service revenue (up 9% Q3, 13% YTD), particularly in maintenance services.
- Profitability Expansion: Net income doubled in Q3 2008 ($60M vs. $29M) and increased 41% YTD. This was driven by improved gross margins (favorable deal mix and currency benefits) and a significantly lower effective tax rate (29.4% in Q3 2008 vs. 56.1% in Q3 2007).
- Expense Management: Operating expenses decreased in Q3 2008 compared to Q3 2007, largely because Q3 2007 included $15 million in one-time separation costs from NCR. However, YTD operating expenses increased due to $26 million in incremental costs associated with operating as an independent public company.
- Share Repurchases: The company repurchased 5.6 million shares of common stock during the first nine months of 2008 for approximately $137 million.
Guidance, Outlook, and Risks
- Revised Guidance: Management lowered its full-year 2008 revenue growth expectation to approximately 1% to 4%, citing the impact of foreign currency movements and a challenging macroeconomic environment (financial/credit crisis) leading to longer sales cycles and tighter capital spending reviews.
- Tax Outlook: The estimated full-year 2008 effective tax rate is projected to be between 26% and 27%.
- Legal Proceedings: The U.S. Department of Justice is investigating the propriety of certain federal contracts and pricing disclosures. The company has accrued approximately $2 million for potential liability but cannot determine if further liability is probable regarding pricing disclosure adequacy.
- Internal Controls: The company disclosed a material weakness in internal controls over financial reporting related to revenue recognition for reseller transactions. Management is implementing a remediation plan, but controls were deemed ineffective as of September 30, 2008.
Investor Verification Checklist
- Revenue Recognition Controls: Verify the progress of the remediation plan for the material weakness regarding reseller revenue recognition.
- Legal Exposure: Monitor the status of the DOJ investigation regarding federal contracts and potential liability beyond the current $2 million accrual.
- Macroeconomic Impact: Assess the sustainability of the revised 1-4% revenue growth guidance given the ongoing credit crisis and lengthening sales cycles.
- Service Mix Shift: Confirm the trend of declining product revenue versus growing maintenance service revenue and its long-term impact on margin stability.
- Currency Sensitivity: Evaluate the impact of foreign currency fluctuations, which provided a 1% benefit in Q3 but remain a volatile factor for future results.