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Teradata Reports 2013 Fourth Quarter and Full-Year Results

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- Fourth quarter revenue of $769 million up 4 percent, up 5 percent in constant currency(1)
- Full year revenue of $2.692 billion up 1 percent, up 2 percent in constant currency(1)
- Gross margin and operating margin improvement versus prior year quarter
- Fourth quarter non-GAAP operating income increased 16 percent year over year(2)
- GAAP EPS of $0.68 in the quarter, $2.27 for the full-year period
- Non-GAAP EPS of $0.88 in the quarter, $2.76 for the full-year period(2)

Teradata Corp. (NYSE: TDC), the leading analytic data platforms, applications and services company, today reported revenue of $769 million for the quarter ended December 31, 2013, an increase of 4 percent from $740 million in the fourth quarter of 2012. Fourth quarter revenue increased 5 percent year-over-year when compared in constant currency.(1) For the full-year 2013, revenue was $2.692 billion, a 1 percent increase from $2.665 billion in 2012. In constant currency, revenue increased 2 percent for the full-year comparison.(1)

Gross margin was 56.0 percent, versus 55.4 percent in the fourth quarter of 2012, as reported under U.S. Generally Accepted Accounting Principles (GAAP). On a non-GAAP basis, excluding stock-based compensation expense and special items described in footnote #2, gross margin was 57.3 percent, versus 56.4 percent in the prior year period.(2) The increase in non-GAAP gross margin for the quarter resulted from favorable product revenue mix and higher service gross margin, driven in part from maintenance services revenue growth. Gross margin for the full-year 2013 was 54.7 percent, versus 55.9 percent in 2012. On a non-GAAP basis, excluding special items described in footnote #2, 2013 full-year non-GAAP gross margin was 56.0 percent, versus 56.9 percent for the full-year 2012.(2)

Teradata reported fourth quarter net income of $112 million, or $0.68 per diluted share, which compared to net income of $112 million, or $0.66 per diluted share, in the fourth quarter of 2012. Stock-based compensation expense and other special items, including a $14 million after-tax net loss on equity investments during the quarter, reduced Teradata's 2013 fourth quarter net income by $32 million, or $0.20 of earnings per diluted share, as reported under GAAP.(2) Excluding stock-based compensation expense and special items, non-GAAP net income in the fourth quarter of 2013 was $144 million, or $0.88 per diluted share, versus $135 million, or $0.79 per diluted share, in the fourth quarter of 2012.(2)

Full-year net income reported under GAAP was $377 million, or $2.27 per diluted share, which compared to net income of $419 million, or $2.44 per diluted share in 2012. Stock-based compensation expense and other special items, including a $14 million after-tax net loss on equity investments during the year, reduced Teradata's 2013 net income by $82 million, or $0.49 of earnings per diluted share.(2) Excluding stock-based compensation expense and special items, full-year non-GAAP net income was $459 million, or $2.76 per diluted share in 2013, compared to $489 million, or $2.85 per diluted share in 2012.

"Teradata made progress on several fronts in the fourth quarter, including product revenue growth, product gross margin, record non-GAAP operating margin and an increased number of new customer additions and Fortune 500 wins," said Mike Koehler, president and chief executive officer, Teradata Corporation. "The adoption of our Unified Data Architecture which leverages Teradata, Hadoop and Aster, along with our integrated marketing management suite, continues to accelerate as we enter 2014."

Operating Income

Fourth quarter GAAP operating income of $177 million compared to $150 million reported in the fourth quarter of 2012. On a non-GAAP basis, operating income was $205 million versus $177 million in the fourth quarter of 2012.(2) The increase was primarily due to favorable revenue mix and lower variable incentive-based compensation expense, offset somewhat by higher selling expense largely driven by the addition of sales resources during the last 12 months.

Full-year operating income was $532 million in 2013, versus $580 million in 2012. On a non-GAAP basis, full-year operating income was $641 million, versus $678 million in 2012.(2) The year-over-year decrease was due to lower gross margin and higher selling expense, which was partially offset by lower variable incentive-based compensation expense.

Income Taxes

Teradata's GAAP tax rate was 27.3% in the fourth quarter 2013 versus 24.8% in 2012. The increase was largely driven by a higher mix of U.S. pre-tax earnings in 2013 than was previously forecasted.

The fourth quarter 2013 non-GAAP tax rate was 29.4% as compared to 23.3% in 2012, driven by a higher mix of U.S. pre-tax non-GAAP earnings in 2013 versus 2012, and the recognition timing of the tax benefit for the 2013 U.S. R&D tax credit. In 2013 the R&D tax credit was recognized ratably over the full-year period, whereas the benefit of the 2012 tax credit was recognized entirely in the fourth quarter of 2012 for non-GAAP purposes due to the credit being retroactively reinstated in January of 2013.

The full-year 2013 GAAP tax rate was 25.8% versus 27.5% for 2012, mainly due to the tax benefit of both the 2012 and 2013 U.S. R&D tax credit being recognized in 2013 when the tax credit was retroactively reinstated.

The full-year 2013 non-GAAP tax rate was 28.2% as compared to 27.7% for 2012, driven by a higher mix of U.S. non-GAAP pre-tax earnings in 2013.

Cash Flow

During the fourth quarter of 2013, Teradata generated $63 million of cash from operating activities, compared to $124 million in the prior-year period. Teradata generated $25 million of free cash flow (cash from operating activities less capital expenditures and additions to capitalized software)(3) in the fourth quarter of 2013, versus $85 million in the same period in 2012. The timing of payments and a higher accounts receivable balance year-over-year were the primary drivers that led to the lower free cash flow in the fourth quarter of 2013.

For the full year, Teradata generated $510 million of cash from operating activities, compared to $575 million in 2012. Teradata generated $372 million of free cash flow(3) in 2013, versus $427 million in 2012. Lower net income and the timing of payments were the primary drivers that led to the lower free cash flow versus 2012.

Balance Sheet

Teradata ended the quarter with $695 million in cash, a $167 million decrease from September 30, 2013. During the quarter, Teradata purchased 4.5 million shares of its stock for $195 million. During 2013, Teradata used approximately $382 million of cash to repurchase 7.8 million shares.

As of December 31, 2013, Teradata had total debt of approximately $274 million outstanding under a term loan. Additionally, Teradata has $300 million available through a pre-arranged credit facility, but no funds were drawn from the credit facility as of December 31, 2013.

2014 Outlook

Teradata expects full-year 2014 revenue to grow approximately 3-7 percent in 2014, an increase of 4-8 percent when measured in constant currency.(1)

Teradata expects earnings per share for the full-year 2014 to be in the $2.39-$2.54 range on a GAAP basis and $2.85-$3.00 on a non-GAAP basis, which excludes stock-based compensation expense and other special items.(2) A conference call is scheduled today at 8:30 a.m. (ET) to discuss the company's fourth quarter and full-year 2013 results. Access to the conference call, as well as a replay of the call, is available on Teradata's web site at www.teradata.com/investor.

Supplemental financial information regarding Teradata's operating results is also available on the Investor Relations page of Teradata's web site.

(1.) The impact of currency is determined by calculating the prior-period results using the current-year monthly average currency rates. See the foreign currency fluctuation schedule on the Investor Relations page of the company's web site at www.teradata.com/investor, which is used to determine revenue on a constant currency ("CC") basis.

(2.) Teradata reports its results in accordance with GAAP. However, as described below, the company believes that certain non-GAAP measures (such as non-GAAP gross margin, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per diluted share, or EPS, which exclude certain items as well as free cash flow) are useful for investors. Our non-GAAP measures are not meant to be considered in isolation or as substitutes for, or superior to, results determined in accordance with GAAP, and should be read only in conjunction with our condensed consolidated financial statements prepared in accordance with GAAP.

Special items included in Teradata's 2013 fourth quarter GAAP net income included the following items, net of tax: $7 million of stock-based compensation expense; $6 million of amortization of acquisition-related intangible assets; $5 million of acquisition transaction, integration and reorganization related expenses; and $14 million for costs related to a net loss on equity investments.

Special items for Teradata's full-year GAAP net income as reported in this release also included a $4 million income tax benefit related to the 2012 U.S. R&D tax credit, which was retroactively enacted in the first quarter of 2013. The 2012 R&D tax credit benefit was included in Teradata's non-GAAP results in the fourth quarter of 2012, since the benefit related the 2012 tax reporting period. However, Teradata did not include the tax benefit in its GAAP results in the fourth quarter of 2012 due to the American Taxpayer Relief Act of 2012 not being enacted until the first quarter of 2013. As a result, the $4 million income tax benefit is included in Teradata's year-to-date 2013 GAAP net income, but excluded from the company's year-to-date non-GAAP net income.

The following tables reconcile Teradata's actual and projected results and EPS under GAAP to the company's actual and projected non-GAAP results and EPS for the periods presented, which exclude certain items. Our management regularly uses supplemental non-GAAP financial measures, such as gross margin, operating income, net income and EPS, excluding certain items internally, to understand, manage and evaluate our business and support operating decisions. The company believes such non-GAAP financial measures (1) provide useful information to investors regarding the underlying business trends and performance of the company's ongoing operations, (2) are useful for period-over-period comparisons of such operations and results, that may be more easily compared to peer companies and allow investors a view of the company's operating results excluding special items, (3) provide useful information to management and investors regarding present and future business trends, and (4) provide consistency and comparability with past reports and projections of future results.