News Column

TERADATA CORP /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")

May 12, 2014

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 2013 Annual Report on Form 10-K.

First Quarter Financial Overview

As more fully discussed in later sections of this MD&A, the following were significant financial items for the first quarter of 2014:

• Total revenue was $628 million for the first quarter of 2014, up 7% from the first quarter of 2013, with a 10% increase in product revenue and a 5% increase in services revenue. • Gross margin increased to 53.0% in the first quarter of 2014 from 52.0% in the first quarter of 2013, driven by higher product margins as well as favorable revenue mix. • Operating income was $89 million in the first quarter of 2014, compared to $76 million in the first quarter of 2013, driven by higher product revenue and product margin, partially offset by an increase in Selling, General and Administrative ("SG&A") expenses that resulted primarily from our ongoing strategic initiative to add sales resources and higher variable based compensation expense and an increase in Research and Development ("R&D") expenses primarily related to a voluntary early-retirement program in the first quarter of 2014. • Net income in the first quarter of 2014 was $59 million, unchanged from the first quarter of 2013. 13



--------------------------------------------------------------------------------

Table of Contents

Strategic Overview

Teradata helps companies achieve competitive advantage and win in their markets by empowering them to become "data-driven businesses" capable of exploiting data for insight and value through its analytic data solutions.

Teradata's strategy focuses on three large and growing markets: integrated data warehousing ("IDW"), big data analytics, and integrated marketing cloud applications. We continue to focus on the following key initiatives to broaden our position in these markets and take advantage of growth opportunities.

• Invest to expand our leading Unified Data Architecture, IDW software and platform family, big data discovery platforms, Hadoop®-based data management platforms, and integrated marketing cloud applications to address multiple market segments through internal development and targeted strategic acquisitions; • Deliver our solutions via the cloud (as a service) or on premise with offerings that support marketing applications as a service,



data warehousing as a service, as well as discovery analytics as a service and data management as a service;

• 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 strengthen our sales resources, by opportunistically hiring incremental sales support resources as well as technology and industry consultants.



Future Trends

We believe that demand for our analytic data platforms will continue to increase due to the continued growth of data volumes and types of data, the scale and complexity of business requirements, and the growing use of new data elements and more analytics over time. The adoption by customers of a broader set of analytics including predictive analytics, path analysis, network analysis/graph, and many others is driving more applications, usage and capacity. This increased breadth of analytics also drives the need for an overall architecture to manage an increasingly complex analytics environment. As a result, we expect that Teradata's leadership in analytic data platforms and Unified Data Architecture positions us for future growth. In addition, we believe that our competitive position in integrated marketing cloud applications, including our marketing operations, campaign management and digital messaging offerings, will contribute to our growth and be increasingly synergistic with the Company's big data analytics business as companies gain competitive advantage through data-driven marketing with their customers.

This growth, however, is not expected to be without its challenges from general economic conditions, competitive pressures, alternative technologies, and other risks and uncertainties. Since mid-2012, Teradata has seen a change in customers' buying patterns, particularly in the Americas region, with respect to large capital investments and related services. Currently, we believe that the largest challenge for future revenue growth derives from the Company's largest customers by historical revenue in the Americas region. Revenue for these customers has been trending lower since 2012, while we continue to experience growth outside of these large customers. We believe that a number of factors are contributing to a slowdown in growth within this group of larger customers, including: information technology budget constraints; the relatively recent investments made by several of these customers to build out their Teradata IDW environments; a current focus of investments on their analytical ecosystems which have lower average selling prices than IDW environments; and to a lesser degree the transfer of some IDW workloads to specialized platforms in the analytical ecosystem.

Overall, we believe that IDW will remain a critical part of companies' analytical ecosystems and Teradata's technology is highly differentiated with our ability to handle the concurrency and service level agreements of hundreds to thousands of mission-critical users and applications. Further, we believe the Company has the opportunity for continued revenue growth from both the expansion of our existing customers' analytical ecosystems (through growth in IDW, Teradata big data analytics and integrated marketing cloud applications) as well as the addition of new customers.

Although we did not experience significant changes for the quarter ended March 31, 2014, due to competitive and/or pricing trends for our analytic data platforms, there is risk that pricing and competitive pressures on our solutions could occur in the future as major customers evaluate and rationalize their analytics infrastructure, particularly to the extent that cost becomes a top priority in companies and lower-cost alternatives are more seriously and frequently considered. However, such alternatives generally do not enable companies to perform mission-critical, complex business analytic workloads or provide a Unified Data Architecture to address mission-critical analytics, discovery analytics, and data management such as those enabled by Teradata's offerings. As described above, we continue to believe that analytics will remain a high priority for companies and will drive growth for Teradata's leading solutions. Moreover, we will continue to be committed to new product development and achieving a positive yield from our research and development spending and resources, which are intended to drive future demand. To that end, we expect research and development expense to increase sequentially each quarter during the remainder of 2014.

14



--------------------------------------------------------------------------------

Table of Contents

As a portion of the Company's operations and revenue occur outside the United States, and in currencies other than the U.S. dollar, the Company is exposed to fluctuations in foreign currency exchange rates. However, based on currency rates at the end of April 2014, Teradata currency translation is not expected to have a meaningful impact on 2014 full year results.

Results of Operations for the Three Months Ended March 31, 2014

Compared to the Three Months Ended March 31, 2013

% of % of In millions 2014 Revenue 2013 Revenue Product revenue $ 273 43.5 % $ 249 42.4 % Service revenue 355 56.5 % 338 57.6 % Total revenue 628 100 % 587 100 % Gross margin Product gross margin 181 66.3 % 156 62.7 % Service gross margin 152 42.8 % 149 44.1 % Total gross margin 333 53.0 % 305 52.0 % Operating expenses



Selling, general and administrative expenses 188 29.9 % 179 30.5 %

Research and development expenses 56 8.9 % 50 8.5 % Total operating expenses 244 38.9 % 229 39.0 % Operating income $ 89 14.2 % $ 76 12.9 % Revenue



Teradata revenue increased 7% in the first quarter of 2014 compared to the first quarter of 2013. The revenue increase included a 1% adverse impact from foreign currency fluctuations. Product revenue increased 10% in the first quarter of 2014 from the prior-year period. Service revenue in the first quarter of 2014 increased 5% from the prior-year period, with an underlying 2% increase in consulting services revenue, and 9% increase in maintenance services revenue, as compared to the prior-year period.

15



--------------------------------------------------------------------------------

Table of Contents

Gross Margin

Gross margin for the first quarter of 2014 was 53.0% compared to 52.0% in the first quarter of 2013. Product gross margin increased to 66.3% in the first quarter of 2014, compared to 62.7% in the prior-year period. The increase in product margin was largely a result of favorable product mix, when compared to the prior period. Service gross margin decreased to 42.8% in the first quarter of 2014 compared to 44.1% in the prior-year period. The decrease in services margins was driven primarily by a consulting services rate decline, increased variable incentive based compensation expense and expenses related to a voluntary early retirement program in the first quarter of 2014. The decrease was partially offset by an improved revenue mix in higher margin maintenance revenue.

Operating Expenses

Total operating expenses, including SG&A and R&D expenses, was $244 million in the first quarter of 2014 compared to $229 million in 2013. SG&A increased by $9 million, and was primarily driven by higher selling expense, resulting from our strategic initiative to add sales resources and related headcount and higher variable incentive based compensation expense. R&D expenses increased $6 million and included $5 million in expenses related to a voluntary early-retirement program in the first quarter of 2014.

Other Expense, net

The Company recognized $7 million of other expense in the first quarter of 2014, compared to $1 million in the first quarter of 2013. The other expense in the first quarter of 2014 arose primarily from an $8 million impairment in the carrying value of an equity investment.

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 under its current structure. The Company estimates its full-year effective tax rate for 2014 to be approximately 26.5%, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction for 2014. The estimate also assumes that the U.S. Federal Research and Development Tax Credit ("US R&D Tax Credit"), which expired on December 31, 2013, will be retroactively reinstated sometime during 2014. If the credit is not reinstated during 2014, we estimate our effective tax rate will be negatively impacted by approximately 50 basis points. The forecasted tax rate is based on the overseas profits being taxed at an overall effective tax rate of approximately 12%, as compared to the federal statutory tax rate of 35% in the United States.

The effective tax rate in the first quarter of 2014 was 28.0%, compared to 21.3% in the first quarter of 2013. The increase is primarily driven by the expiration of the US R&D Tax Credit on December 31, 2013. As a result, there is no tax benefit associated with the US R&D Tax Credit reflected in the effective tax rate for the three months ended March 31, 2014. The effective tax rate for the three months ended March 31, 2013 included the marginal rate benefit of the US Research and Development Tax Credit for 2013, as well as a one-time discrete $4 million tax benefit associated with the US R&D Tax Credit for 2012, which was retroactively reinstated with the enactment of the American Taxpayer Relief Act of 2012 in January of 2013.

Revenue and Gross Margin by Operating Segment

Teradata manages its business in two geographic regions, which are also the Company's operating segments: the Americas and International regions. 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.

16



--------------------------------------------------------------------------------

Table of Contents

The following table presents revenue and operating performance by segment for the three months ended March 31:

% of % of In millions 2014 Revenue 2013 Revenue Segment revenue Americas 384 61 % 355 60 % International 244 39 % 232 40 % Total revenue 628 100 % 587 100 % Segment gross margin Americas 223 58.1 % 195 54.9 % International 110 45.1 % 110 47.4 % Total gross margin $ 333 53.0 % $ 305 52.0 %



Americas: Revenue increased 8% in the first quarter of 2014 from the first quarter of 2013, led by an 11% increase in product revenue. The revenue increase includes 1% adverse impact from foreign currency fluctuations. Gross margins were 58.1% for the first quarter of 2014, up from 54.9% in the first quarter of 2013, driven primarily by higher product margins due to favorable product mix.

International: Revenue increased 5% in the first quarter of 2014 from the first quarter of 2013, with an underlying 6% increase in product revenue and a 4% increase in services revenue. The revenue increase is net of a 1% adverse impact from foreign currency fluctuations. Gross margins decreased to 45.1% for the first quarter of 2014, from 47.4% in the first quarter of 2013, as improved product margins were largely offset by significantly lower services margins compared to the prior-year period.

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities increased by $100 million to $343 million in the first quarter of 2014. The increase in cash provided by operating activities was primarily due to a positive change in working capital, largely driven by a small increase in current payables and accrued expenses during the current quarter compared to a large decrease in the first quarter of 2013. Cash provided by operating activities is typically high in the first quarter when compared to later quarters in the fiscal year due to the high receivable balances at December 31 and the increase in deferred revenue resulting from the timing of annual renewals of our postcontract customer support agreements.

Teradata's management uses a non-GAAP measure called "free cash flow," which is not a measure defined under accounting principles generally accepted in the United States of America ("GAAP"). We define free cash flow 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, and this 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 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.

17



--------------------------------------------------------------------------------

Table of Contents

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

Three Months Ended March 31, In millions 2014 2013 Net cash provided by operating activities $ 343$ 243 Less: Expenditures for property and equipment (12 ) (10 ) Additions to capitalized software (21 ) (17 ) Free cash flow $ 310$ 216



Financing activities and certain other investing activities are not included in our calculation of free cash flow. In the first quarter of 2014, these other investing activities primarily consisted of $4 million of immaterial business acquisitions and investment activities that were closed during the period. There were no other investing activities in the first quarter of 2013.

Teradata's financing activities for the quarters ended March 31, 2014 and 2013 primarily consisted of cash outflows for share repurchases. The Company purchased 2.0 million shares of its common stock at an average price per share of $42.42 in the first quarter of 2014 and 1.6 million shares at an average price per share of $58.43 in the first quarter of 2013. Share repurchases were made under two share repurchase programs authorized by our Board of Directors. The first program (the "dilution offset program"), which at March 31, 2014 had $3 million of authorization remaining, allows the Company to repurchase Teradata common stock to the extent of cash received from the exercise of stock options and the Teradata Employee Stock Purchase Plan ("ESPP") to offset dilution from shares issued pursuant to these plans. As of March 31, 2014, under the Company's second share repurchase program (the "general share repurchase program"), the Company had $246 million of authorization remaining to repurchase outstanding shares of Teradata common stock. On May 5, 2014, the Company's Board of Directors authorized an additional $300 million to be utilized to repurchase Teradata Corporation common stock under the Company's general share repurchase program, which resulted in a total of approximately $546 million authorized for share repurchases under this program as of that date. Share repurchases made by the Company are reported on a trade date basis. Our share repurchase activity depends on factors such as our working capital needs, our cash requirements for capital investments, our stock price, and economic and market conditions.

Proceeds from the ESPP and the exercise of stock options were $7 million in the first quarter of 2014 and $7 million in the first quarter of 2013. These proceeds are included in Other financing activities, net in the Condensed Consolidated Statements of Cash Flows (Unaudited). Additionally, during the first quarters of 2014 and 2013 the Company repaid $4 million against the principal balance of its outstanding term loan, which is discussed further below.

Our total in cash and cash equivalents held outside the United States in various foreign subsidiaries was $731 million as of March 31, 2014 and $615 million as of December 31, 2013. The remaining balance held in the United States was $191million as of March 31, 2014 and $80 million as of December 31, 2013. Under current tax laws and regulations, if cash and cash equivalents and short-term investments held outside the United States are distributed to the United States in the form of dividends or otherwise, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and possible foreign withholding taxes. As of March 31, 2014, we have not provided for the U.S. federal tax liability on approximately $1 billion of foreign earnings that are considered permanently reinvested outside of the United States.

Management believes current cash, Company cash flows from operations and its $300 million Credit Facility will be sufficient to satisfy future working capital, research and development activities, capital expenditures, pension contributions, and other financing requirements for at least the next twelve months. The Company principally holds its cash and cash equivalents in bank deposits and highly-rated money market funds.

The Company's ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in the Company's 2013 Annual

18



--------------------------------------------------------------------------------

Table of Contents

Report on Form 10-K (the "2013 Annual Report"), and elsewhere in this Quarterly Report. If the Company is unable to generate sufficient cash flows from operations, or otherwise to comply with the terms of the credit facility and term loan agreement, the Company may be required to seek additional financing alternatives.

Long-term debt. Our five-year revolving credit agreement (the "Credit Facility"), has a borrowing capacity of up to $300 million. The Credit Facility ends on June 15, 2017, at which point any remaining outstanding borrowings would be due for repayment unless extended by agreement of the parties for up to two additional one-year periods. The interest rate charged on borrowings pursuant to the Credit Facility can vary depending on the interest rate option the Company chooses to utilize and the Company's leverage ratio at the time of the borrowing. In the near term, Teradata would anticipate choosing a floating rate based on the London Interbank Offered Rate ("LIBOR"). The Credit Facility is unsecured and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities. As of March 31, 2014, the Company had no outstanding borrowings on the Credit Facility, and was in compliance with all covenants.

Teradata's senior unsecured $300 million five-year term loan is payable in quarterly installments, which commenced on June 30, 2012, with all remaining principal due in April 2016. The outstanding principal amount of the term loan agreement bears interest at a floating rate based upon a negotiated base rate or a Eurodollar rate plus in each case a margin based on the leverage ratio of the Company. As of March 31, 2014, the term loan principal outstanding was $270 million, and carried an interest rate of 1.1875%. The Company was in compliance with all covenants as of March 31, 2014.

Contractual and Other Commercial Commitments. There has been no significant change in our contractual and other commercial commitments as described in the 2013 Annual Report. Our guarantees and product warranties are discussed in Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited).

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting policies are those that require assumptions to be made about matters that are highly uncertain. Different estimates could have a material impact on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Our management periodically reviews these estimates and assumptions to ensure that our financial statements are presented fairly and are materially correct.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require significant management judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. The significant accounting policies and estimates that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are discussed in the 2013 Annual Report. Teradata's senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the three months ended March 31, 2014. Also, there were no significant changes in our estimates associated with those policies.

New Accounting Pronouncements

See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for new accounting pronouncements.

19



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters