Teradata Corporation: 2010 Q3 Form 10-Q Summary
Business Context and Reporting Period
Teradata provides enterprise data warehousing, analytics, software, hardware, consulting, and maintenance services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenue | $489 million | $425 million | $1,388 million | $1,213 million |
| Product revenue | $243 million | $191 million | $666 million | $533 million |
| Service revenue | $246 million | $234 million | $722 million | $680 million |
| Gross margin | 57.1% | 53.4% | 56.4% | 54.4% |
| Operating income | $106 million | $88 million | $298 million | $232 million |
| Net income | $75 million | $63 million | $216 million | $170 million |
| Diluted EPS | $0.44 | $0.36 | $1.27 | $0.98 |
| Operating cash flow | Not separately provided | Not separately provided | $265 million | $364 million |
| Free cash flow | Not separately provided | Not separately provided | $203 million | $303 million |
- Q3 product revenue increased 27%; service revenue increased 5%. Product gross margin rose to 70.4% from 62.3%, while service gross margin declined to 43.9% from 46.2%.
- Q3 operating margin was 21.7%, compared with 20.7% in the prior-year quarter. Nine-month operating margin was 21.5%, compared with 19.1%.
- Cash and cash equivalents were $741 million at September 30, 2010, compared with $661 million at December 31, 2009. Accounts receivable increased to $411 million from $387 million, and inventories increased to $65 million from $47 million.
- Teradata had no short- or long-term debt outstanding and had access to a $300 million credit facility. Management stated that available liquidity and expected operating cash flow should meet requirements for at least the next twelve months.
- Net cash used in investing activities was $123 million, including $25 million of property and equipment spending, $37 million of capitalized software additions, and $61 million of other investing activities and acquisitions.
- Net cash used in financing activities was $64 million, including $88 million of share repurchases. The company repurchased 2.9 million shares during the first nine months at an average price of $29.57 per share.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 15%, and nine-month revenue increased 14%. Growth was concentrated in product revenue, particularly in the Americas and APJ regions.
- Q3 gross margin expanded by 3.7 percentage points, primarily because of improved product margins and favorable product deal mix in the Americas. Nine-month gross margin increased by 2.0 percentage points.
- Q3 SG&A increased to $133 million from $113 million, primarily due to additional sales headcount, higher variable compensation, and the return of certain costs reduced during 2009.
- Q3 R&D increased to $40 million from $26 million, driven by higher engineering headcount and lower capitalization of software development costs.
- Operating cash flow declined by $99 million year over year to $265 million, principally because of lower receivables collections and a higher receivables balance associated with increased revenue.
- Americas Q3 revenue increased 18% and gross margin improved to 61.6%. EMEA revenue was unchanged and gross margin declined to 51.4%. APJ revenue increased 28% and gross margin improved to 48.9%.
- The effective tax rate increased to 29% from 25% in Q3 and to 28% from 25% for the first nine months. The nine-month 2010 rate included a $5 million tax benefit from recognition of foreign net operating loss carryforwards following an audit settlement.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management reported a positive long-term outlook based on increasing data volumes, more complex analytics requirements, and growing demand for near-real-time analysis.
- Management estimated approximately one percentage point of 2010 reported revenue benefit from currency translation based on exchange rates as of October 27, 2010.
- The company estimated a 2010 full-year effective tax rate of approximately 27%. If the U.S. Federal Research and Development Tax Credit was not retroactively reinstated, the rate was expected to increase to approximately 28%.
- Risks include uncertain economic recovery, constrained IT budgets, lengthened sales cycles, volatility in large customer orders, potential pricing pressure, lower maintenance service levels, foreign currency movements, and the time required for new sales territories to become productive.
- Teradata remained subject to government investigations and related False Claims Act litigation concerning certain federal contracts and pricing disclosures predating its separation from NCR. The company had accrued approximately $2 million for its current best estimate of probable liability but stated that the ultimate outcome was uncertain and could exceed recorded amounts.
- The company had a $4 million maximum future obligation related to guarantees of minimum residual values on certain leased equipment. The warranty reserve was $6 million at September 30, 2010.
- The company expected to adopt new accounting guidance for multiple-deliverable revenue arrangements and revenue arrangements containing software elements prospectively beginning January 1, 2011. The impact was still being evaluated.
- Foreign exchange forward contracts had a total notional amount of $70 million, or $29 million on a net basis. Related gains and losses were immaterial.
- Management reported effective disclosure controls as of September 30, 2010 and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether product-led revenue growth and the improved product deal mix are sustainable, particularly in the Americas and APJ.
- Whether service gross-margin pressure, especially in EMEA and APJ, persists as consulting headcount expands.
- Conversion of earnings to cash, including receivables collections, working-capital investment, and the decline in operating cash flow.
- The effect of the 2011 revenue-accounting guidance on timing and allocation of revenue.
- The final tax rate for 2010 and the status of the federal R&D tax credit.
- Developments and potential financial exposure from the government investigation and related litigation.
- The pace and return on investments in sales expansion, R&D, acquisitions, and new product platforms.