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TDC > SEC Filings for TDC > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for TERADATA CORP /DE/

Form 10-Q for TERADATA CORP /DE/


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")

You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the MD&A are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q and in the 2011 Annual Report on Form 10-K.

Third Quarter Financial Overview

As more fully discussed in later sections of this MD&A, the following were significant financial items for the third quarter of 2012:

Total revenue was $647 million for the third quarter of 2012, up 7% from the third quarter of 2011, led by growth in the Europe, Middle East and Africa ("EMEA") and the Asia Pacific and Japan ("APJ") regions.

Gross margin increased to 55.8% in the third quarter of 2012 from 54.5% in the third quarter of 2011, driven by improvements in product margin rates, particularly in the EMEA region.


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Operating income was $143 million in the third quarter of 2012, compared to $122 million in the third quarter of 2011, driven by both revenue growth and higher margin rates. This increase was offset in part by higher Selling, General and Administrative ("SG&A") expenses which were primarily due to the impact of our strategic initiative to add sales headcount.

Net income of $104 million in the third quarter of 2012 increased 20% from $87 million in the third quarter of 2011, with increased revenue and improved margins offset in part by higher SG&A expenses, as compared to the prior year.

Strategic Overview

Teradata is a leader in helping companies manage, integrate, and analyze growing data volumes and complexity, and transform it into actionable business insight for competitive advantage. Teradata's strategy focuses on three large and growing markets-data warehousing, big data analytics, and integrated marketing management and digital marketing applications. Additionally, we have four key initiatives underway to broaden our position in the market and take advantage of these market opportunities. These initiatives are to:

Invest to extend Teradata's core database technology and software application offerings, and expand our family of compatible data warehouse platforms to address multiple market segments and solution offerings through internal development and targeted strategic acquisitions,

Differentiate Teradata technology and drive platform and solutions demand by delivering consulting services that enable customers to achieve business value through the use of best-in-class analytics,

Invest in partnerships to increase the number of solutions available on Teradata platforms, maximize customer value and increase our market coverage, and

Continue to seek opportunities to increase our market coverage through additional sales territories (hiring incremental sales account executives as well as technology and industry consultants).

Future Trends

We believe that demand for our solutions will continue to increase due to the continued increase in data volumes and types, the scale and complexity of business requirements, and the growing use of new data elements and more near real-time analytics. The adoption by customers of more near real-time analysis for enterprise intelligence is driving more applications, usage and capacity. We believe there is additional opportunity for Teradata in integrated marketing management ("IMM") and digital marketing. Marketing organizations have been a leader in leveraging analytics over the years. A significant number of our data warehouses are being used by marketing organizations, and many of them are using our Teradata/Aprimo multi-channel campaign management application.

Furthermore, we believe that marketing will lead the way in most corporations to drive innovation from new analytics with big data. Marketing can use and apply the new insights created from social and mobile data, to impact a corporation's revenue and earnings, and leverage the new channels created with social and mobile media to interact with and market to customers.

As a portion of the Company's operations are conducted outside the United States, and in currencies other than the U.S. dollar, the Company is exposed to fluctuations in foreign currency exchange rates. In 2012, Teradata currently expects approximately 2 percentage points of adverse impact from currency translation on its reported revenue and a corresponding currency impact on operating income, based on currency rates as of October 29, 2012.

There have been signs of macroeconomic slowdown and uncertainty in the first nine months of 2012, which has led to increased scrutiny on operating budgets and large capital expenditures. The size, timing and contracted terms of large customer orders for our products and services can impact, both positively and negatively, our operating results,


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especially in times of economic uncertainty. While Teradata experienced strong results in the first nine months of 2012, a potential economic downturn in one or more of the Company's geographic operating segments, particularly with respect to information technology spending by our current or prospective customers, could have a significant impact on our future results.

While macroeconomic concerns exist, our long-term outlook remains positive. We did not experience significant changes in the first nine months of 2012 due to competitive and/or pricing trends for our data warehouse or appliance solutions, although there is always a risk that pricing pressure for our solutions could occur in the future. Additionally, as companies look to reduce ongoing operating expenses, customers may choose to go to lower maintenance service level agreements which could lead to revenue and margin pressure on our maintenance services business. We continue to be committed to new product development and achieving a responsive yield from our research and development spending and resources, which are intended to drive future demand. We also continue to evaluate opportunities to increase our market coverage and are committed to continuing to increase our number of sales territories, among other things, to drive future revenue growth. New sales account territories typically take more than two years to become fully productive, given the length of an average sales cycle with a new data warehouse prospect.

Results of Operations for the Three Months Ended September 30, 2012

Compared to the Three Months Ended September 30, 2011



                                                            % of                     % of
 In millions                                    2012       Revenue       2011       Revenue
 Product revenue                                $ 306          47.3 %    $ 287          47.7 %
 Service revenue                                  341          52.7 %      315          52.3 %

 Total revenue                                    647           100 %      602           100 %

 Gross margin
 Product gross margin                             211          69.0 %      188          65.5 %
 Service gross margin                             150          44.0 %      140          44.4 %

 Total gross margin                               361          55.8 %      328          54.5 %

 Operating expenses
 Selling, general and administrative expenses     174          26.9 %      163          27.1 %
 Research and development expenses                 44           6.8 %       43           7.1 %

 Total operating expenses                         218          33.7 %      206          34.2 %

 Operating income                               $ 143          22.1 %    $ 122          20.3 %

Revenue

Teradata revenue increased 7% in the third quarter of 2012 compared to the third quarter of 2011. The revenue increase is net of a 3% adverse impact from foreign currency fluctuations. Product revenue increased 7% in the third quarter of 2012 from the prior-year period, led by growth in the EMEA and APJ regions. Service revenue in the third quarter of 2012 increased 8% from the prior-year period, with an underlying 10% increase in consulting services revenue, and 6% increase in maintenance services revenue, as compared to the prior-year period.

Gross Margin

Gross margin for the third quarter of 2012 was 55.8% compared to 54.5% in the third quarter of 2011. Product gross margin increased to 69.0% in the third quarter of 2012, compared to 65.5% in the prior-year period. The increase in product margin was largely a result of an improved product revenue mix, particularly in the EMEA region, when compared to the prior period. Product gross margin in the third quarter of 2012 also included $4 million of costs from amortization of acquired intangible assets, as compared to $6 million of combined purchase accounting adjustments and amortization of acquired intangible assets in the third quarter of 2011. Service gross margin decreased to 44.0% in the third quarter of 2012 compared to 44.4% in the prior-year period. The decrease in services margins was driven by lower consulting margins versus the prior-year period, offset in part by increased maintenance margins.


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Operating Expenses

Total operating expenses, characterized as SG&A and Research and Development ("R&D") expenses, were $218 million in the third quarter of 2012 compared to $206 million in the third quarter of 2011. The $11 million increase in SG&A expenses was driven by higher selling expense, due primarily to our strategic initiative to add sales headcount. The $1 million increase in R&D expenses was driven by higher engineering headcount expenses, which was offset in part by $3 million more in capitalization of software development expenses.

Certain R&D expenses for internally developed software are capitalized and later amortized over the useful life of the underlying commercial software products. The capitalization of costs reduces R&D expense in the current period, and the subsequent amortization of those costs is charged against product cost of revenue over future periods, which reduces product gross margin.

Revenue and Gross Margin by Operating Segment

As described in Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited), Teradata manages its business in three geographic regions, which are also the Company's operating segments: (1) the North America and Latin America ("Americas") region; (2) the EMEA region; and (3) the APJ region. Teradata believes this format is useful to investors because it allows analysis and comparability of operating trends by operating segment. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess our financial performance. The discussion of our segment results describes the changes in results as compared to the prior-year period.

The following table presents revenue and operating performance by segment for the three months ended September 30:

                                               % of                     % of
              In millions          2012       Revenue       2011       Revenue
              Revenue
              Americas             $ 384            59 %    $ 375            62 %
              EMEA                   156            24 %      133            22 %
              APJ                    107            17 %       94            16 %

              Total revenue          647           100 %      602           100 %

              Gross margin
              Americas               229          59.6 %      223          59.5 %
              EMEA                    81          51.9 %       62          46.6 %
              APJ                     51          47.7 %       43          45.7 %

              Total gross margin   $ 361          55.8 %    $ 328          54.5 %

Americas: Revenue increased 2% in the third quarter of 2012 from the third quarter of 2011, led by a 10% increase in services revenue. The revenue increase is net of a 1% adverse impact from foreign currency fluctuations. Gross margins were roughly unchanged at 59.6% for the third quarter of 2012, from 59.5% in the third quarter of 2011, with improved product margins roughly offset by somewhat lower services margins, and the impact of a higher proportion of services revenue (as compared to product revenue).

EMEA: Revenue increased 17% in the third quarter of 2012 from the third quarter of 2011, led by a 25% increase in product revenue. The revenue increase is net of a 11% adverse impact from foreign currency fluctuations. Gross margins increased to 51.9% for the third quarter of 2012, from 46.6% in the third quarter of 2011, as margin rate improvements in product revenue and the impact of a greater proportion of product revenue (as compared to services revenue) offset a decline in services margin rates, compared to the prior-year period.


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APJ: Revenue increased 14% in the third quarter of 2012 from the third quarter of 2011, led by a 51% increase in product revenue. The revenue increase is net of a 2% adverse impact from foreign currency fluctuations. Gross margin increased to 47.7% in the third quarter of 2012, from 45.7% in the third quarter of 2011. The benefit from a greater proportion of product revenue, as well as improved product margin rates offset a decline in service margin rates as compared to the third quarter of 2011.

Provision for Income Taxes

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company's intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix between the United States and other foreign taxing jurisdictions where the Company conducts its business. The Company estimates its full-year forecasted global effective tax rate for the year ended December 31, 2012 to be approximately 27%. This estimate is based on the forecasted overseas profits being taxed at an overall effective tax rate of approximately 10%, as compared to the statutory tax rate of 35% in the United States. In addition, this estimate assumes that the U.S. Federal R&D tax credit, which expired as of December 31, 2011, is retroactively reinstated for the full year 2012 in the fourth quarter of 2012.

The effective tax rate in the third quarter of 2012 was 27%, compared to 28% in the third quarter of 2011. There were no material discrete tax items reflected in the effective tax rate for the three months ended September 30, 2012 and September 30, 2011.

Results of Operations for the Nine Months Ended September 30, 2012

Compared to the Nine Months Ended September 30, 2011



                                                                 % of                           % of
In millions                                       2012          Revenue          2011          Revenue
Product revenue                                  $   935            48.6 %      $   791            46.8 %
Service revenue                                      990            51.4 %          898            53.2 %

Total revenue                                      1,925             100 %        1,689             100 %

Gross margin
Product gross margin                                 638            68.2 %          520            65.7 %
Service gross margin                                 443            44.7 %          399            44.4 %

Total gross margin                                 1,081            56.2 %          919            54.4 %

Operating expenses
Selling, general and administrative expenses         518            26.9 %          478            28.3 %
Research and development expenses                    133             6.9 %          118             7.0 %

Total operating expenses                             651            33.8 %          596            35.3 %

Operating income                                 $   430            22.3 %      $   323            19.1 %

Revenue

Teradata revenue increased 14% in the first nine months of 2012 compared to the first nine months of 2011. The revenue increase is net of a 3% adverse impact from foreign currency fluctuations. Product revenue increased 18% in the first three quarters of 2012 from the prior-year period, led by growth in the Americas and APJ regions. Service revenue in the first three quarters of 2012 increased 10% from the prior-year period, with an underlying 11% increase in consulting revenue, and 10% increase in maintenance revenue, as compared to the prior-year period.


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Gross Margin

Gross margin for the nine months ended September 30, 2012 was 56.2% compared to 54.4% for the nine months ended September 30, 2011. Product gross margin increased to 68.2% in the first three quarters of 2012, compared to 65.7% in the prior-year period. The increase in product margin was driven by improved product revenue mix, primarily in the Americas region, as compared to the prior period. Product gross margin in the first nine months of 2012 also included $12 million of amortization costs from acquired intangible assets, as compared to $24 million of combined purchase accounting adjustments and amortization of acquired intangible assets in the first nine months of 2011. The decrease in acquisition-related costs was offset in part by $5 million of additional amortization of capitalized internal software development costs in the first three quarters of 2012. Service gross margin increased to 44.7% in the first three quarters of 2012 compared to 44.4% in the prior-year period. The increase in services margins was driven by improved maintenance services margins in all three regions, offset somewhat by lower consulting services margins.

Operating Expenses

Total operating expenses, characterized as SG&A and R&D expenses, were $651 million in the first three quarters of 2012 compared to $596 million in the first three quarters of 2011. The $40 million increase in SG&A expenses was largely driven by higher selling expense, due primarily to our strategic initiative to add sales headcount (including sales headcount from acquisitions closed in 2012 and 2011), as well as increased revenue-driven costs for sales commissions. These increases were offset in part by $4 million less in acquisition-related transaction, integration and reorganization expenses, as well as amortization expenses from acquired intangible assets. The $15 million increase in R&D expenses was driven by higher engineering headcount expenses, including incremental engineering headcount from the Aprimo and Aster Data acquisitions completed in 2011.

Revenue and Gross Margin by Operating Segment

As described in Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited), Teradata manages its business in three geographic regions, which are also the Company's operating segments: (1) the Americas region; (2) the EMEA region; and (3) the APJ region. Teradata believes this format is useful to investors because it allows analysis and comparability of operating trends by operating segment. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess our financial performance. The discussion of our segment results describes the changes in results as compared to the prior-year period.

The following table presents revenue and operating performance by segment for the nine months ended September 30:

                                               % of                       % of
            In millions           2012        Revenue        2011        Revenue
            Revenue
            Americas             $ 1,170            61 %    $ 1,021            60 %
            EMEA                     460            24 %        403            24 %
            APJ                      295            15 %        265            16 %

            Total revenue          1,925           100 %      1,689           100 %

            Gross margin
            Americas                 703          60.1 %        592          58.0 %
            EMEA                     240          52.2 %        208          51.6 %
            APJ                      138          46.8 %        119          44.9 %

            Total gross margin   $ 1,081          56.2 %    $   919          54.4 %

Americas: Revenue increased 15% in the first nine months of 2012 from the first nine months of 2011, led by a 20% increase in product revenue. The revenue increase was not significantly impacted by foreign currency fluctuations. Gross margins increased to 60.1% for the first three quarters of 2012, from 58.0% in the first three quarters of 2011, driven primarily by improved product revenue mix, as well as the impact of a higher proportion of product revenue, as compared to services revenue, compared to the prior-year period.


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EMEA: Revenue increased 14% in the first nine months of 2012 from the first nine months of 2011, led by a 23% increase in consulting revenue. The revenue increase is net of a 9% adverse impact from foreign currency fluctuations. Gross margins increased to 52.2% for the first three quarters of 2012, from 51.6% in the first three quarters of 2011, driven primarily by improved product revenue mix, offset in part by lower services margins.

APJ: Revenue increased 11% in the first nine months of 2012 from the first nine months of 2011, led by a 21% increase in product revenue. The revenue increase is net of a 1% adverse impact from foreign currency fluctuations. Gross margin increased to 46.8% in the first three quarters of 2012, from 44.9% in the first three quarters of 2011. The gross margin increase was driven primarily by improved service margins, as well as a greater proportion of product revenue (compared to service revenue), compared to the prior-year period.

Other Income (Expense)

The Company recognized $1 million of other expense in the first nine months of 2012, versus $25 million of other income in the nine months ended September 30, 2011. The other income in the prior-year period was driven by $28 million in gains on equity investments. As part of the required accounting for the acquisition of Aster Data, Teradata's then-existing 11.2% equity investment in Aster Data at the time of the acquisition was valued at $36 million, triggering the recognition of an $11 million gain. Additionally, in May 2011, the Company completed the sale of an equity investment in Pliant Technology, Inc. The Company received proceeds of $30 million and recognized a net gain of $17 million on the transaction.

Provision for Income Taxes

The effective tax rate for the nine months ended September 30, 2012 was 28%, compared to 27% in the first three quarters of 2011. There were no material discrete tax items reflected in the effective tax rate for the nine months ended September 30, 2012. The effective tax rate for the nine months ended September 30, 2011 included a $4 million discrete tax benefit recorded in the second quarter related to the book gain recorded on the Company's previous equity investment in Aster Data, which was reflected as a one-time permanent non-taxable item. The increase in the Company's overall effective tax rate primarily results from the discrete benefit recognized in 2011.

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities increased by $64 million in the first nine months of 2012. In comparison to the prior-year period, the increase in cash provided by operating activities in the nine months ended September 30, 2012 was principally due to an increase in net income in the first three quarters of 2012 (adjusted for non-cash items such as depreciation and amortization, share-based compensation expense and deferred income taxes), as well as a decrease in inventories and an increase in payables and accrued expenses, in the first three quarters of 2012 due to the timing of orders and deliveries. This impact was offset in part by a smaller increase in deferred revenue in the first nine months of 2012, compared to the first nine months of 2011, due to the timing of product revenue deferrals.

Teradata's management uses a non-GAAP measure called "free cash flow," which we define as net cash provided by operating activities less capital expenditures for property and equipment, and additions to capitalized software, as one measure of assessing the financial performance of the Company. Free cash flow does not have a uniform definition under GAAP; therefore, Teradata's definition of this measure may differ from the definition used by other companies. The components that are used to calculate free cash flow are GAAP measures taken directly from the Condensed Consolidated Statements of Cash Flows (Unaudited). We believe that free cash flow information is useful for investors because it relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after certain capital expenditures, for among other things, investments in the Company's existing businesses, strategic acquisitions and repurchase of Teradata common stock. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.


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The table below shows net cash provided by operating activities and capital expenditures for the following periods:

                                                       Nine Months Ended
                                                         September 30,
         In millions                                   2012           2011
         Net cash provided by operating activities   $    451         $ 387
         Less:
         Expenditures for property and equipment          (49 )         (31 )
         Additions to capitalized software                (60 )         (56 )
. . .
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