TERADATA CORP quarterly report, Q2 FY2010

Business Context and Reporting Period

Teradata Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company provides enterprise data warehousing, analytics, hardware and software products, consulting, and maintenance services. Operations are managed through the Americas, EMEA, and Asia Pacific/Japan regions.

Financial Performance and Position

Metric	Three Months Ended June 30	Six Months Ended June 30
Total revenue	$470 million, versus $421 million in 2009	$899 million, versus $788 million in 2009
Product revenue	$223 million, up 21%	$423 million, up 24%
Service revenue	$247 million, up 5%	$476 million, up 7%
Gross margin	57.0%, versus 55.3%	56.1%, versus 54.9%
Operating income	$106 million, versus $84 million	$192 million, versus $144 million
Operating margin	22.6%, versus 20.0%	21.4%, versus 18.3%
Net income	$74 million, versus $62 million	$141 million, versus $107 million
Diluted EPS	$0.44, versus $0.36	$0.83, versus $0.61

Second-quarter product gross margin increased to 68.2% from 64.3%; service gross margin declined to 47.0% from 48.3%.
Six-month product gross margin increased to 66.2% from 64.9%; service gross margin was 47.1% versus 47.3%.
Second-quarter SG&A was $126 million and R&D was $36 million. R&D increased primarily because of higher engineering headcount, development materials, and lower software-cost capitalization.
At June 30, 2010, cash and cash equivalents were $724 million, compared with $661 million at December 31, 2009. Total assets were $1.662 billion and total liabilities were $656 million.
The company had no short- or long-term debt outstanding and reported compliance with its credit-facility covenants. It had a $300 million credit facility.
Six-month operating cash flow was $200 million, down from $268 million. Free cash flow, a non-GAAP measure defined by Teradata, was $156 million versus $228 million.
Capital expenditures were $17 million and capitalized software additions were $27 million in the first six months.
The company repurchased $71 million of common stock, or approximately 2.4 million shares, during the first six months. General repurchase authorization remaining at June 30 was approximately $165 million.

Material Changes Versus Prior Comparable Period

Revenue growth was led by products and the Americas. Second-quarter revenue increased 23% in the Americas, declined 8% in EMEA, and increased 9% in APJ.
For the first six months, Americas revenue increased 23%, EMEA revenue was essentially unchanged, and APJ revenue increased 9%.
The product mix increased to 47.4% of second-quarter revenue from 43.9%, and to 47.1% for the first half from 43.4%.
Operating income and margins improved despite higher operating expenses, primarily because of revenue growth and stronger product margins.
Operating cash flow declined because of lower receivable collections and larger reductions in current payables and accrued expenses, partly offset by higher net income and increased deferred revenue.
Shares outstanding declined: basic weighted-average shares were 167.0 million in the quarter and 167.4 million for the six months, compared with 172.3 million and 172.8 million, respectively, in 2009.

Guidance, Outlook, Risks, and Unusual Items

Management’s long-term outlook remained positive, citing increasing data volumes, more complex analytics requirements, and demand for near-real-time analysis.
Management expected less than one percentage point of 2010 revenue benefit from currency translation, based on exchange rates as of July 31, 2010.
The company estimated a 2010 full-year effective tax rate of approximately 27% to 28%. The six-month tax rate included a $5 million benefit from recognition of foreign net operating loss carryforwards following an audit settlement.
Management cited economic uncertainty, IT-budget constraints, lengthy sales cycles, the timing and size of large orders, potential pricing pressure, and customer migration to lower maintenance service levels as risks.
New sales territories generally require more than two years to become productive, creating execution and investment risk.
The Department of Justice continued investigating matters relating to federal contracts and pricing disclosures connected to the company’s pre-separation relationship with NCR. Teradata had accrued approximately $2 million for its current best estimate of probable liability, but stated that the ultimate exposure could exceed recorded amounts and could materially affect results, financial condition, or cash flows.
The company had a $4 million maximum future obligation related to guaranteed lease residual values. Warranty reserve liability was $5 million at June 30, 2010.
Teradata expected to adopt new accounting guidance for multiple-deliverable arrangements and arrangements containing software elements prospectively for applicable transactions beginning January 1, 2011; the impact was still being evaluated.
Management stated that cash resources, operating cash flow, and the credit facility should be sufficient for working capital and other requirements for at least the next twelve months.
Disclosure controls were assessed as effective as of June 30, 2010, and no material changes to internal control over financial reporting were reported.

Most Important Facts for Investors to Verify

Whether strong product-led growth, particularly in the Americas, continues while EMEA remains comparatively weak.
Whether higher product margins offset pressure in consulting and maintenance services.
Whether operating cash flow and free cash flow recover after the first-half decline.
The status and potential financial exposure of the Department of Justice and related False Claims Act matters.
The effect of the 2011 revenue-accounting changes on reported revenue and timing of recognition.
The sustainability of share repurchases and the remaining approximately $165 million general authorization.
Actual full-year tax rate, foreign-exchange effects, and the company’s ability to maintain liquidity without debt.