Business Context and Reporting Period
Company: Teradata Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Teradata is a global leader in enterprise data warehousing (EDW), providing integrated software, hardware, and consulting services. The company operates in three geographic segments: Americas (57% of revenue), EMEA (25%), and APJ (18%). As of December 31, 2009, the company employed approximately 6,600 people globally.
Key Financial Metrics
| Metric (in millions) | 2009 | 2008 |
|---|---|---|
| Total Revenue | $1,709 | $1,762 |
| Product Revenue | $772 | $849 |
| Service Revenue | $937 | $913 |
| Gross Margin | $938 (54.9%) | $949 (53.9%) |
| Operating Income | $338 | $333 |
| Net Income | $254 | $250 |
| Diluted EPS | $1.46 | $1.39 |
| Cash and Cash Equivalents | $661 | $402 |
| Free Cash Flow | $367 | $369 |
| Debt | $0 | $0 |
Note: Free cash flow is a non-GAAP measure defined by the company as net cash provided by operating activities less capital expenditures for property and equipment and additions to capitalized software.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 3% to $1.709 billion, driven by a 9% decline in product revenue due to reduced capital spending in a difficult global economic environment. This was partially offset by a 3% increase in service revenue.
- Margin Expansion: Gross margin improved to 54.9% from 53.9%. Product gross margin rose to 65.2% due to favorable deal mix, while service gross margin increased to 46.4% driven by improved consulting utilization and lower contractor costs.
- Operating Expenses: Total operating expenses decreased to $600 million from $616 million. Selling, General, and Administrative (SG&A) expenses dropped $25 million due to currency benefits and lower discretionary costs. Research and Development (R&D) expenses increased $9 million due to higher compensation and materials spending.
- Tax Rate: The effective tax rate decreased to 24% in 2009 from 26% in 2008, contributing to higher net income despite lower pre-tax income.
- Share Repurchases: The company repurchased approximately 7.0 million shares for $174 million in 2009. As of year-end, $234 million remained authorized for future repurchases.
Guidance, Outlook, and Risks
Outlook and Commentary: Management expects a 1-2 percentage point benefit from currency translation on reported revenue in 2010. The company anticipates a full-year effective tax rate for 2010 of approximately 24% to 25.5%. While signs of economic recovery exist, the speed and scope remain unclear, and sales cycles remain lengthened.
Key Risks and Contingencies:
- Economic Uncertainty: Continued global economic downturns could delay customer purchases and impact IT budgets.
- Competition: Intense competition from IBM, Oracle, and Netezza, particularly in the data warehouse appliance market, poses pricing and market share risks.
- Legal Proceedings: The company is subject to a U.S. Department of Justice investigation regarding federal contracts and pricing disclosures. An accrual of approximately $2 million has been recorded, though the ultimate liability is uncertain.
- Supply Chain: Hardware components are assembled exclusively by Flextronics Corporation; a disruption there could impact shipments.
- Revenue Recognition: The company relies on the residual method for revenue allocation in multi-element arrangements, which requires significant judgment regarding fair value.
Investor Verification Checklist
- Product Revenue Trend: Verify the sustainability of the 9% decline in product revenue and the impact of the global economic recovery on capital spending.
- Service Mix Shift: Assess the long-term margin implications of the increasing reliance on service revenue (54.8% of total) versus product revenue (45.2%).
- Legal Exposure: Monitor the status of the DOJ investigation regarding federal contracts to determine if the $2 million accrual is sufficient.
- Capital Allocation: Review the remaining $234 million share repurchase authorization and the company's commitment to returning capital to shareholders versus reinvestment.
- Foreign Currency Impact: Evaluate the sensitivity of future earnings to foreign currency fluctuations, given that 49% of revenue is generated outside the U.S.