The Daily Magic Formula Stock for 10/19/2008 is Teradata Corp. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is >100 %.
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Overview. Teradata Corporation (â€śwe,â€ť â€śus,â€ť â€śTeradata,â€ť or the â€śCompanyâ€ť) is a global leader in enterprise data warehousing, including enterprise analytic technologies and services. Our data warehousing solutions are comprised of software, hardware, and related business consulting and support services. Recognized as market leading by both industry analysts and customers, our solutions integrate an organizationâ€™s enterprise-wide dataâ€”about customers, financials, operations, and moreâ€”into a single enterprise-wide data warehouse. Our enterprise analytical technologies then transform that data into actionable â€śenterprise intelligence.â€ť This intelligence offers our customers a single view of their business, and the ability to leverage their organizationâ€™s data as a strategic corporate asset to gain competitive and operational advantage. They can access more timely and accurate information, obtain better insight about all aspects of their business, and make decisions with greater speed and precision to drive profitable growth. Teradata is designed to enable our customers to maximize business value while minimizing their total costs.
We currently serve more than 850 customers around the worldâ€”ranging from small implementations to some of the worldâ€™s largest data warehouses. Teradata operates from three main locations in the United States: Atlanta, Georgia; Miamisburg, Ohio; and Rancho Bernardo, California. In addition, we have sales and services offices located in approximately 40 countries. For the full year ended December 31, 2007, we had net income of $200 million and total revenues of $1.702 billion, of which approximately 57% was derived in the North America and Latin America region (the â€śAmericasâ€ť), 25% in the Europe, Middle East and Africa region (â€śEMEAâ€ť), and 18% in the Asia Pacific and Japan region (â€śAPJâ€ť). For financial information about these geographic areas that are also our reportable segments, see â€śNote 13â€” Segment, Other Supplemental Information and Concentrationsâ€ť in Notes to Consolidated Financial Statements elsewhere in this Annual Report.
History and Development. Teradata was formed in 1979 as a Delaware corporation. Teradata established a relational database management system on a proprietary platform in 1984. In 1990, Teradata partnered with NCR Corporation (â€śNCRâ€ť) to jointly develop next-generation database systems. In 1991, AT&T Corp. (â€śAT&Tâ€ť) acquired NCR and, later that year, NCR purchased Teradata. In 1995, Teradata was merged into NCRâ€™s operations and ceased to exist as a separate legal entity.
In 1996, AT&T spun off NCR (including Teradata) to form an independent, publicly-traded company, NCR Corporation. In 1999, NCR consolidated its data warehousing operations and product offerings into a separate operating division. Since 1999, we have increased our investments and focus to extend the scope of our enterprise data warehousing solutions, including improvements to our leading database software, increasing our enterprise analytic software applications, and providing sophisticated support and professional consulting services.
The Separation. On August 27, 2007, the Board of Directors of NCR approved the separation of NCR into two independent, publicly-traded companies through the distribution of 100% of its Teradata data warehousing business to shareholders of NCR (the â€śSeparationâ€ť).
To effect the Separation, Teradata was formed as a separate Delaware corporation on March 27, 2007, as a wholly-owned subsidiary of NCR. Immediately prior to the Separation, the assets and liabilities of the Teradata data warehousing business of NCR were transferred to Teradata in return for 180.7 million shares of the Companyâ€™s common shares. NCR accomplished the Separation through a distribution of one share of Teradata common stock for each share of NCR common stock on September 30, 2007. 100% of the Teradata shares were distributed to NCR shareholders of record as of September 14, 2007.
Our Relationship with NCR. NCR and Teradata entered into an Interim Services and Systems Replication Agreement, pursuant to which we provide certain transitional services by and through our subsidiaries to NCR and its subsidiaries, and vice versa. The services include the provision of administrative and other services identified by the parties. The Interim Services and Systems Replication Agreement provides for a term of up to 18 months for such services, which may be extended for an additional six months by mutual agreement of the parties. The pricing is based on actual costs incurred by the party rendering the services plus a reasonable fixed percentage.
As discussed in the Companyâ€™s Registration Statement on Form 10, filed on May 10, 2007, as amended on August 21, 2007 (the â€śForm 10â€ť), NCR and the Company have also entered into certain other agreements including the Separation and Distribution Agreement, Tax Sharing Agreement, Employee Benefits Agreement and several commercial agreements. The commercial agreements include a network support agreement, service and distributor arrangements, intellectual property agreements, and various real estate arrangements.
Data Warehousing Market and Drivers. Our revenues are primarily generated in the multi-billion dollar data warehousing market. This market includes data warehouse database software; applications software; supporting hardware (servers, storage and interconnects); as well as professional, installation and support services (such as maintenance agreements). We expect that the need for data warehousing will continue to grow as organizations increasingly rely on enterprise analytics to compete on a global basis. This need is further driven by the convergence of the following key market dynamics we have observed:
high levels of data growth are being driven by globalization, increased merger and acquisition activities, alignment of information technology (â€śITâ€ť) and business functions, and increased government regulation, such as the Sarbanes-Oxley Act of 2002 and Basel II;
mission-critical applications used in business operations are increasingly requiring systems to be available at all times;
improved data warehousing affordability due to price/performance gains on server and disk hardware is enabling new types of usage, and the maintenance and analysis of more historical and near real-time data; and
the adoption by customers of more real time, or â€śactive,â€ť environments for enterprise intelligence is driving more applications, usage and capacity.
Our Data Warehousing Solutions
Data Warehousing. Data warehousing is the process of capturing, integrating, storing, managing, and analyzing data to answer business questions and make decisions. An enterprise data warehouse (â€śEDWâ€ť) is generally a central, application-neutral, often large repository of an organizationâ€™s current and historical data for information sharing and analysis. Customers use our data warehousing hardware and software technologies and related services to:
acquire, aggregate, store and integrate data from multiple sources, including data processing and enterprise resource planning systems;
manage and analyze these data through the Teradata database software and tools, data mining, master data management and other enterprise analytical applications, such as customer management, demand and supply chain management, enterprise risk management, and financial management; and
integrate analytics-based decisions into operational processes.
Our solutions enable customers to (1) obtain a single, integrated view of their data (including customers, products, channels, financials, suppliers, partners, services, etc.), and (2) transform these data into useful, insightful and actionable enterprise intelligence. By offering a single integrated instance of a companyâ€™s analytical data, our solutions are designed to help that customer eliminate IT infrastructure costs associated with separately run and managed departmental databases, or data marts.
Our solutions are robust, scalable, and reliable data warehousing systems that are capable of managing vast amounts of detailed data. Our enterprise data warehouses provide linear scalability, allowing customersâ€™ systems to grow in multiple dimensions to accommodate more information, more near real-time data, more subject areas, more users, and more complex, meaningful, and sophisticated queries. As the customer requirements grow, our enterprise data warehouse easily expands by adding incremental units of our hardware and software solutions (these units are also referred to as â€śnodesâ€ť). The customer can increase the size and scope of their EDW by adding more nodes. As more nodes are added, the performance increases on a one-to-one ratio. In other words, we provide linear scalability as the size and scope of the EDW is increased. Teradata also provides â€śco-existenceâ€ť capability that allows users to add current generation nodes with several prior generations of nodes, thereby protecting and extending our customersâ€™ investment.
We believe these capabilities and benefits typically make a Teradata enterprise data warehouse a key, strategic IT and business platform for our customers, driving significant return on investment for the customer and long-standing relationships for Teradata.
Active Enterprise Intelligence. Teradata extends the use of traditional data warehousing by integrating advanced analytics into enterprise business processes through a solution known as Active Enterprise Intelligence, which reduces the time between obtaining information and acting on it. Specifically, this advanced solution integrates detailed historical information with near real-time data, and then deploys timely, accurate intelligence to decision-makers at all levels of the enterprise. We believe that our Active Enterprise Intelligence solution enables consistent execution of corporate strategy by allowing the strategic decisions devised by senior management to become operationalized and flow to front line employees, such as call center operators, gate agents, bank tellers and cashiers, as well as to customers, partners, and suppliers.
Our Products. We are a single-source provider of enterprise data warehousing solutions with a fully integrated business that includes dedicated professionals and technologies. Our products are optimized and integrated specifically for data warehousing, including the database and application software, hardware platform, and related consulting and support services. Our key software and hardware products include:
Teradata Database Software â€”Our flagship Teradata database software is regarded by customers and industry analysts as a superior choice for analyzing large amounts of data and processing increasing volumes and complexity of queries without compromising performance. Our software combined with our massively parallel processing (â€śMPPâ€ť) architecture provides the foundation for our unique ability to support and manage a wide range of mixed workloads and data warehousing functions. These functions range from generating reports to ad hoc queries to data mining and simultaneous data loading, all from a single data warehouse that integrates data from across the enterprise to drive better, faster decision-making. Our Teradata database software delivers near real-time intelligence for our customers with capabilities and features such as support of short-term operational and long-term strategic workloads (mixed workloads), the ability to handle thousands of concurrent queries, robust and simplified system management, high system availability, event monitoring, and easy integration into the enterprise. We also offer subscriptions that provides our customers with when-and-if-available upgrades and enhancements to our database software.
Teradata Servers â€”For the hardware component of our solutions, Teradata integrates and optimizes open systems industry standard hardware components with our value-added, fault-tolerant BYNET MPP interconnect. We utilize industry standard Intel Â® XEON 32/64-bit servers, along with industry-standard storage offerings, to provide seamless, transparent scalability. As a result, our solutions perform in multiple operating environments, including UNIX Â® , LINUX and Microsoft Windows Â® . Our research and development efforts have sought to optimize our server family platform as a high performance, scalable, and easily supportable MPP server, specifically designed for enterprise data warehousing, and to optimize the performance of the Teradata software. Parallel processing vastly increases the speed with which results are delivered and/or correspondingly increases the amount of data that can be queried or the numbers and complexities of queries that can be run at the same time. Further, Teradata servers are designed to protect our customersâ€™ technology investments so that new servers can co-exist with multiple generations of our hardware platform.
Teradata Logical Data Models â€”Our enterprise industry logical data models (â€śLDMsâ€ť) are designed to be easy-to-follow blueprints for designing an enterprise data warehouse that reflects business priorities tailored to the specific needs of a particular industry. Developed through years of experience serving our customers, our industry-specific LDMs clearly organize and structure information, defining which individual data elements are required and how they relate to one another to provide a data model for the entire enterprise. Our LDMs are licensed to our customers as a key component of our data warehousing solutions. We also offer
subscriptions that provide our customers with when-and-if-available upgrades and enhancements to our LDMs.
Teradata Analytic Applications and Tools â€”We offer a full suite of data access and management tools and applications that leverage enterprise intelligence to solve business problems. These tools and applications include: data mining, master data management, customer management, enterprise risk management, finance and performance management, demand and supply chain management, and profitability analytics.
Our service offerings include:
Teradata Professional Consulting Services â€”With a leading global EDW professional services organization, Teradata consultants combine a patented methodology with extensive industry expertise and hands-on experience to help our customers quickly recognize business value and minimize risk. We employ skilled consultants who provide data warehousing business impact modeling, design, architecture, implementation, and optimization consulting services, as well as enterprise analytics consulting, data management services, and managed services. Our Global Consulting Centers around the world are staffed with professionals trained in our patented solutions methodology, and supplement local area consulting teams by accessing and utilizing the accumulated wealth of our global knowledge base and providing offshore consulting resources as needed.
Teradata Customer Support Services â€”Our customer services organization provides an experienced, single point of contact and delivery for the deployment, support and ongoing management of Teradata data warehouses around the world. In addition to installation, our customer support service offers both proactive and reactive services, including maintenance, monitoring, back up, and recovery services to allow customers to maximize availability and better leverage the value of their investments in data warehousing. This support is increasingly important for our customersâ€™ mission-critical data warehouse environmentsâ€”those that operate continuously 24 hours per day, 7 days per week.
Training Services â€”To enhance the value of their investment, we also provide our customers with training for their employees and contractors who are responsible for the operation and/or use of their Teradata data warehouses and analytical applications.
Our Strategy. As part of our multi-year goal of advancing our enterprise data warehousing solution as the preferred data warehousing architecture used by companies to build their enterprise analytics infrastructure, we are focused on three core strategies:
Increasing our technology capabilities by investing in active data warehousing and advanced development. We continually seek to enhance our technology offerings in order to remain a leader in the enterprise data warehousing/analytics market. As businesses integrate technological support for strategic and operational decision making, we plan to continue to invest in capabilities to offer active enterprise intelligence solutions to our customers. We are also open to further expanding our market reach and intellectual property portfolio through appropriate acquisitions and strategic alliances. We will endeavor to exploit future advances in hardware technology with a view to obtaining a speed and cost advantage.
Expanding our solutions and offers by investing in consulting and support services, applications and partners. We offer data warehouse consulting services to provide our customers with tailored solutions. We are seeking to grow our team of professional consultants to help our customers identify, design and implement additional high value opportunities to leverage and grow their data and extend their data warehouses to active enterprise environments. We will continue to optimize and expand our portfolio of Teradata analytical applications to enable customers to drive additional value from their data warehousing investments. We also seek to partner with leading technology and system integrator companies to deliver a complete solution that includes packaged applications, unique integration technologies, tools and utilities, training and services.
Optimizing our market coverage through our sales and marketing resources. Recognizing that business issues, decisions and data types vary by industry, our approach to the market is tailored to discrete industries. Accordingly, we seek to employ and retain individuals with specific industry knowledge, for industry consulting, professional services and account management personnel.
Customers. We focus our sales efforts on the global 3,000 leading companies across a broad set of industries, including banking/financial services, entertainment (including gaming and media), government, insurance and healthcare, manufacturing, retail, telecommunications, transportation, and travel. We currently have more than 850 customers, although the extent to which any given customer contributes to our revenues generally varies significantly from year to year and quarter to quarter. These industries provide a good fit for our EDW analytic solutions, as they tend to have large and increasing sources of data, complex data management requirements or large and varied groups of users.
With more than 25 years of experience, Teradata is a leader in implementing enterprise data warehouses. Our customers represent some of the best-known Global 3000 companies. Teradata solutions power: nine of the top ten global telecommunication firms, 70% of the top global airlines, 60% of the top transportation/logistics firms, five of the top ten global retailers, and 50% of the top global commercial and savings banks. (Rankings are based on the July 2007 Fortune Global Rankings and Teradata customers as of 2007.) Although Teradata is a well-established vendor with strong penetration in each of these industries, our market and growth potential remains strong. In addition to new accounts, expanded EDW investment within existing accounts is being driven by growth in the number of users, amounts of data, and types and complexity of analytics being directed to the customersâ€™ Teradata EDW environment.
Enterprise data warehouses are typically built one project at a time. For example, an initial enterprise data warehouse may start with a single subject area, which forms the foundation of data that is available to be leveraged for the next project, and so on. Therefore, a customer with a large order in one quarter is likely to generate additional revenue for Teradata in subsequent quarters. However, due to the breadth of our customer base, no single customer of Teradata (overall or within any of our reportable segments) accounted for 10% or more of our total revenue in any of the last three fiscal years. For the year ended December 31, 2007, our top ten customers on a revenue basis collectively accounted for approximately 16% of our total revenues. Moreover, Teradataâ€™s total revenue and revenue for each reportable segment can vary considerably from quarter to quarter given the different growth patterns of our existing customersâ€™ data warehouse systems and the variable timing of new customer orders. Due to the size and complexity of these transactions (purchases), the sales cycle is often fairly long (twelve months or more). Each of our large sales orders typically requires substantial lead time, and our results in any particular quarter have generally been dependent on our ability to generate a relatively small number of large orders for that quarter.
Partners, Marketing and Distribution Channels
Strategic Partnerships. We seek to leverage our sales and marketing reach through our strategy of partnering with leading global and regional systems integrators, independent software vendors, and consultants which we believe complement our enterprise data warehousing solutions.
Alliance Partners â€”Strategic partnerships are a key factor in our ability to leverage the value of our data warehousing solutions and expand the scope of our offerings to the marketplace. Our partner program is focused on working collaboratively with independent software vendors in several areas critical to enterprise data warehousing, including tools, data and application integration solutions, data mining and business intelligence, and specific horizontal and industry solutions. Our goal is to provide customer choices with partner offerings that are optimized with our solutions, and fit within the customerâ€™s enterprise IT environment. Our strategic alliance partners include many leaders in the data warehousing and analytics market.
Systems Integrators â€”We also work with a range of consultants and systems integrators that engage in the design, implementation and integration of our solutions. Our consulting and systems integrator partners provide broad industry expertise in the design of business solutions based on our data warehousing technologies. In general, these partners are trusted advisors who assist in vision and strategy development with our customers while objectively assessing and meeting their needs. By working with premier system integrators and consulting firms, we combine our expertise in data warehousing with top-notch consultants to
provide true end-to-end solutions. Our key global systems integrators include Accenture LLP (â€śAccentureâ€ť), BearingPoint, Capgemini and Deloitte.
Sales and Marketing. We sell and market our data warehousing solutions in our reportable segments, the Americas, EMEA, and APJ, primarily through a direct sales force. We believe our quota-carrying sales force increases our visibility and penetration in the marketplace and fosters long-term customer relationships and additional product sales. We have approximately 80% of our employees in customer-facing and/or revenue driving roles (including sales, professional and customer service, and product engineering).
We support our sales force with marketing and training programs which are designed to grow awareness and highlight our differentiation, as well as provide a robust set of tools for use by our direct sales force. In support of growing awareness of the need for enterprise data warehousing and Teradata solutions specifically, we employ a broad range of marketing tactics including programs to inform and educate the media, industry analysts, academics and other third-party influencers, targeted direct marketing, a website, webinars, and trade shows and conferences. We annually host or participate in worldwide and regional user conferences that take place in approximately 25 locations around the globe.
We also believe that promoting customer success and return on investment is an important element for our success. As a result, and because we have an enthusiastic customer base, we have developed an active program to support and leverage customer references.
Resellers and Distributors. Although the majority of our sales are direct, to extend our sales coverage, we market and sell our products through third-party channels, including resellers and distributors. We have a number of licensed resellers, including Accenture, Bearing Point and EDS, and have license and distribution agreements with independent distributors in many countries worldwide, including NCR. The distribution agreements generally provide for the right to offer our products within a territory. Our distributors generally maintain sales and services personnel dedicated to our products. Accordingly, we have dedicated sales, marketing, and technical alliance resources designed to optimize our reseller and distributor relationships.
Sources of Materials. Our hardware components are manufactured exclusively by Flextronics Corporation (formerly Solectron). Our server line is designed to leverage the best-in-class components from industry leaders such as Intel Corporation for microprocessors. In addition, our computer data storage devices (such as disk arrays) are industry-standard technologies provided by LSI Corporation and EMC Corporation, but are selected and configured by us to work optimally with our hardware platform and software. Flextronics also procures a wide variety of components used in the manufacturing process on our behalf. Although many of these components are available from multiple sources, the Company utilizes preferred supplier relationships to better ensure more consistent quality, cost and delivery. Typically, these preferred suppliers maintain alternative processes and/or facilities to ensure continuity of supply. Given the Companyâ€™s strategy to outsource its manufacturing activities to Flextronics and to source certain components from single suppliers, a disruption in production at Flextronics or at a supplier could impact the timing of customer shipments.
Competition. The overall data warehousing market is very competitive, and we face competition for nearly every sales opportunity we pursue. In addition to our primary competitors, IBM and Oracle, we expect additional competition from both well-established and emerging companies who have recently become active at the entry-levels of the data warehousing market and who may increase their level of competitive activities in the future. Since the overall market is large and growing, we expect to see new and emerging competitors with other alternative approaches, especially in the low-end of the data warehousing market. We compete successfully in the marketplace and intend to continue to do so based on our superior approach, integrated solution with high performing and scalable technology, deep and broad services capabilities, and our successful track record. For more information, see the section entitled â€śRisk Factorsâ€”Risks Relating to Our Businessâ€ť included in Item 1A of this Annual Report.
MANAGEMENT DISCUSSION FROM LATEST 10K
Teradata provides enterprise data warehousing solutions for customers worldwide that combine hardware, software (including the Teradata database software and tools, data mining and analytical applications), and related consulting and support services. These solutions can also include third-party products and services from other leading technology and service partners.
Our solutions enable customers to integrate detailed enterprise-wide data such as customer, financial and operational data into a single data warehouse and provide the analytical capabilities to transform that data into useful information. As a result, customers have a consistent, accurate view of their data and businesses, which gives them more accurate, insightful and timely information when and where they need it so they can make better and faster decisions. This approach provides customers with better insight, faster access to new analytics and less redundancy within their information technology infrastructure so they can maximize business value while minimizing their total cost of ownership.
Our data warehousing technologies provide a high level of performance, scalability, availability and manageability for strategic and operational analytic requirements. Our professional service consultants combine a proven methodology, deep industry expertise and years of hands-on experience to help clients quickly capture business value while minimizing risk. Our customer services professionals provide a single source of support services to allow customers to maximize use and fully leverage the value of their investments in data warehousing.
Through active enterprise intelligence, Teradata is extending the use of traditional data warehousing by integrating advanced analytics into enterprise business processes, allowing companies to combine the analysis of current and historical data so operations personnel can make decisions at the point of contact or service and take action as events occur.
Teradata offers data warehousing solutions to many major industries, including banking/financial services, entertainment (including gaming and media), government, insurance and healthcare, manufacturing, retail, telecommunications, transportation and travel. Teradata delivers its solutions primarily through direct sales channels, as well as through alliances with system integrators, other independent software vendors, value-added resellers and distributors. We deliver our solutions to customers on a global basis, and organize our operations in the following three regions which are also our reportable segments: North America and Latin America (â€śAmericasâ€ť), Europe, the Middle East and Africa (â€śEMEAâ€ť), and Asia Pacific and Japan (â€śAPJâ€ť).
REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS
During the fourth quarter of 2007, the Company identified an error related to a sales transaction that was originally recognized in the fourth quarter of 2006. Upon subsequent review, management determined that the transaction, which was made through a reseller, did not meet the conditions for revenue recognition until the first quarter of 2007, when the products were delivered and accepted by the end-user customer. The impact of this error was an overstatement of revenue and net income in the three- and twelve-month periods ended December 31, 2006, and an understatement of revenue and net income in the three-month period ended March 31, 2007. We assessed the materiality of this error on the three- and twelve-month periods ended December 31, 2006, in accordance with the SECâ€™s Staff Accounting Bulletin No. 99 (â€śSAB 99â€ť), and concluded that the error was not material to either period. However, we did conclude that the error was material to the three months ended March 31, 2007, as it understated the first quarter results. Accordingly, in accordance with the SECâ€™s Staff Accounting Bulletin No. 108 (â€śSAB 108â€ť), the full-year 2006 financial statements presented herein have been revised to correct for the immaterial error and to allow for the correct recording of this transaction in the 2007 consolidated financial statements. The correction resulted in a $13 million reduction in product revenue, a $3 million reduction in cost of products and a $4 million reduction to income tax expense, resulting in a $6 million reduction to net income ($0.04 per diluted share) in the full-year 2006 financial statements. These revenue and expense amounts have subsequently been reflected in the 2007 results. Associated adjustments were also made to decrease accounts receivable by $13 million, increase inventory by $3 million and increase deferred income taxes by $4 million within the December 31, 2006, consolidated balance sheet. The revision had no net impact on Teradataâ€™s net cash provided by operating activities for the twelve months ended December 31, 2006.
2007 FINANCIAL OVERVIEW
As more fully discussed in later sections of this MD&A, the following were significant themes and events for 2007:
Revenue increased 10% in 2007 from 2006, driven by strong growth in the EMEA and APJ regions.
Gross margin as a percentage of revenue increased to 53.8% in 2007 from 53.6% in 2006.
Operating income was $320 million in 2007, up from $302 million in 2006. Operating income in 2007 included separation-related expenses of $17 million.
Net income of $200 million in 2007 increased from $192 million in 2006. Net income per common share (diluted) of $1.10 in 2007 compared to $1.06 in 2006. Included in the 2007 results were $0.08 of Separation-related costs and $0.06 of unfavorable tax adjustments.
Our strategy is to grow profitability as the global leader of enterprise data warehousing technology and services. We are executing our multi-year strategy to advance enterprise data warehousing as the preferred data warehousing architecture that companies utilize to build their enterprise analytics infrastructure. To do this, we are focused on three core strategies:
Increasing our technology capabilities by investing in near real-time (or â€śactiveâ€ť) data warehousing and advanced development;
Expanding our solutions and offers by investing in consulting and support services, applications and partners; and
Optimizing our market coverage through effective use of our sales, marketing and services resources.
Further discussion of our business strategy is included in the section entitled â€śBusinessâ€ť included in Item 1 of this Annual Report on Form 10-K and incorporated herein by reference.
We believe that demand for our solutions will continue to increase due to the continued increase in data volumes, the scale and complexity of business requirements, and the growing use of new data elements and more near real-time analytics over time. The adoption by customers of more near real-time analysis for enterprise intelligence is driving more applications, usage and capacity. We expect 2008 full-year revenue growth of approximately 5% to 8%. This outlook for 2008 includes some conservatism due to the potential impact of certain macroeconomic factors on capital spending, particularly in the United States. Also, while the EMEA and APJ segments experienced very strong revenue growth of 18% in 2007, we do not anticipate this same level of revenue growth for these regions in 2008. The size, timing and contracted terms of large customer orders for our products and services can impact, both positively and negatively, our quarterly operating results. While we have seen fluctuations in the information technology environment in the past, our outlook remains positive. We expect that competitive and technological pricing trends will continue at the levels experienced in 2007 and 2006. In 2008, we continue to be committed to new product development and achieving maximum yield from our research and development spending and resources, which are intended to drive revenue growth, and we continue to evaluate opportunities to increase our market coverage. We expect our full-year effective tax rate for 2008 to be approximately 30%.
THE SEPARATION OF TERADATA FROM NCR CORPORATION
The Separation became effective on September 30, 2007, through a distribution of 100% of the common stock of Teradata Corporation to the holders of record of NCRâ€™s common stock. The Separation was completed pursuant to the Separation and Distribution Agreement by which NCR contributed to the Teradata Corporation all of the assets and liabilities associated with the Teradata data warehousing business. We have received a private letter ruling from the Internal Revenue Service indicating that the Separation was tax free to the stockholders, NCR and Teradata for U.S. federal income tax purposes. NCR distributed all of the shares of Teradata Corporation common stock as a dividend on NCR stock as of the record date for the Separation.
RESULTS FROM OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
Teradata revenue increased 10% in 2007 from 2006. The revenue increase included a benefit of 2% from foreign currency fluctuations. The growth was driven by the need for more centralized data warehouse systems and is indicative of customers valuing the analytical capabilities of our solutions and the return on investment they can provide. Product revenue increased 10% in 2007 from 2006, primarily due to capacity expansions and technology upgrades by existing customers, as well as sales to new customers. Service revenue increased 11% in 2007 from 2006, driven by strong growth in both professional services and annuity support services. Product revenue, as a percentage of total revenue, declined in 2007 due to the increase in service revenue in 2007. Operating income was up $18 million in 2007 compared to 2006. The operating income benefited from the higher volume, offset somewhat by higher operating expenses, which included separation-related costs and recurring incremental independent-company costs, as well as higher selling and marketing expenses and increased investment in research and development.
Our revenue increased 5% in 2006 from 2005. Revenue increased due to strong demand for a consolidated, enterprise-wide data warehousing architecture. Foreign currency fluctuations had less than 1% of negative impact on the year-over-year revenue comparison. Product revenue increased 3% in 2006 from 2005, led by growth in the EMEA region. Service revenue increased 9% in 2006 from 2005, primarily due to increases in professional services and annuity support services in the Americas region. Operating income increased $18 million in 2006 from 2005 due primarily to higher volume, offset somewhat by increases in selling and marketing expenses.
Gross margin as a percentage of revenue for 2007 was higher at 53.8% in 2007 compared to 53.6% in 2006. Product gross margin increased to 64.7% in 2007, compared to 64.2% in 2006. Service gross margin improved to 42.1% in 2007 compared to 42.0% in 2006. The increase in product gross margins was driven primarily by the EMEA and APJ regions. The improvement in total gross margin overcame the adverse mix effect of having a higher growth rate of the lower-margin service revenue (as compared to product revenue) in 2007. Gross margin as a percentage of revenue for 2006 decreased to 53.6% from 54.2% in 2005. Product gross margin increased to 64.2% for 2006 compared to 63.6% in 2005, primarily due to improved product revenue mix. Service gross margin decreased to 42.0% for 2006 from 43.3% in 2005 as Teradata added professional services resources.
Total operating expenses, characterized as â€śselling, general and administrative expensesâ€ť and â€śresearch and development expenses,â€ť were $596 million in 2007 compared to $527 million in 2006. As a percentage of revenue, total operating expenses increased to 35.0% in 2007 from 34.1% in 2006. The increase in selling, general and administrative expenses of $60 million included $17 million in separation-related expenses and $8 million of recurring incremental costs subsequent to the Separation as Teradata began operating as an independent publicly-traded company. The remainder of the increase was primarily due to increased selling and marketing expense (consisting of compensation expense as well as marketing, partnering, and pre-sale activities), foreign currency impact and stock-based compensation. Research and development expenses were $9 million higher in 2007 compared to 2006, reflecting increased investment in product development.
Our 2006 operating expenses were $527 million in 2006 compared to $511 million in 2005. As a percentage of revenue, total operating expenses improved to 34.1% in 2006 from 34.8% in 2005. The increase in selling, general and administrative expenses of $19 million was primarily due to a $29 million increase in selling and marketing expenses and a $5 million increase in stock-based compensation as a result of adopting Statement of Financial Accounting Standards No. 123 (revised 2004) (â€śSFAS 123Râ€ť), Share-Based Payment . The increase was partially offset by decreases of $14 million in expenses from NCR for corporate-related functions. The decrease in costs allocated from NCR coincided with its multi-year re-engineering efforts to drive operational improvements through simplification, standardization, globalization and consistency across the organization, which reduced overall costs at the NCR level. Research and development expenditures were lower, primarily due to the timing of the capitalization of software development. For more information on the impact of the timing of software capitalization, see the subhead entitled â€śCritical Accounting Policiesâ€”Capitalized Softwareâ€ť included below in this MD&A section.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Second Quarter Financial Overview
As more fully discussed in later sections of this MD&A, the following were significant themes and events for the second quarter of 2008:
Total revenue increased 6% in the second quarter of 2008 over the second quarter of 2007. Total revenue included a 5% benefit from foreign currency fluctuations. The lack of more significant growth from the prior-year quarter was primarily the result of decreased product revenues in the United States.
Gross margin as a percentage of revenue increased to 54.7% in the second quarter of 2008 from 53.5% in the second quarter of 2007. Gross margin improved in both product and services, driven by the benefit of currency translation, favorable deal mix and improved contribution from maintenance services.
Operating income was $92 million in the second quarter of 2008, up from $88 million in the second quarter of 2007. Higher overall revenue volume, the benefit of currency translation and a favorable deal mix more than offset weak product revenue in the Americas region and the incremental costs of Teradata now operating as an independent, publicly-traded company.
Net income of $69 million in the second quarter of 2008 increased from $49 million in the second quarter of 2007. Second quarter 2008 net income was aided in large part by a lower effective tax rate.
Teradata is in a leadership position to help companies manage the continual increases in data volume and complexity and gain a competitive advantage. We have four key initiatives underway to broaden our position in the market and take advantage of this opportunity. These initiatives include:
Expanding our family of compatible data warehouse platforms that we take to market,
Further increasing our market coverage by adding more sales territories (through hires of additional sales executives and technology and industry consultants), beginning in 2008,
Extending our market reach through an expansion of our consulting services business, and
Continuing to invest in partners to increase the number of solutions available on Teradata, as well as to provide more market coverage.
We believe that demand for our solutions will continue to increase due to the continued increase in data volumes, the scale and complexity of business requirements, and the growing use of new data elements and more near real-time analytics over time. The adoption by customers of more near real-time analysis for enterprise intelligence is driving more applications, usage and capacity. We continue to expect 2008 full-year revenue growth of approximately 5% to 8%, though more of our growth is now expected to come from outside the United States. This outlook for 2008 reflects the potential impact of certain macroeconomic factors on capital spending, particularly in the United States where we have seen a lengthening of the sales cycle as a result of closer scrutiny and tighter review processes for larger capital expenditures. The size, timing and contracted terms of large customer orders for our products and services can impact, both positively and negatively, our quarterly operating results. While we have seen fluctuations in the information technology environment in the past, our outlook remains positive. We expect that competitive and technological pricing trends will continue at the levels experienced in 2007. We continue to be committed to new product development and achieving maximum yield from our research and development spending and resources, which are intended to drive revenue growth, as evidenced by our recent release of our new expanded family of compatible data warehouse platforms. We also continue to evaluate opportunities to increase our market coverage and are committed to adding a significant number of new sales territories (through hires of additional sales executives and technology and industry consultants), among other things, to drive revenue growth. We currently estimate our full year effective tax rate for 2008 to be within the range of 26 to 27%.
Results of Operations for the Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
Total revenue increased 6% in the second quarter of 2008 from the second quarter of 2007. The revenue increase included a benefit of 5% from foreign currency fluctuations. Product revenue in the second quarter of 2008 was unchanged from the prior-year period, with strong growth in the Europe, Middle East and Africa (â€śEMEAâ€ť) region offset by lower volume in the North and Latin America (â€śAmericasâ€ť) and Asia Pacific and Japan (â€śAPJâ€ť) regions. Service revenue increased 11% in the second quarter of 2008 from the prior-year period, driven primarily by growth in maintenance services in all regions. Operating income increased $4 million in the second quarter of 2008 compared to the prior-year period, with volume and margin improvements offset in part by higher operating expenses. In addition to the currency translation impact on revenue, operating income in 2008 was affected by incremental costs of $9 million (consisting of $3 million of cost of goods sold and $6 million of operating expenses) associated with Teradata operating as an independent, publicly-traded company, as well as the negative impact of currency translation on the Companyâ€™s expenses outside of the United States.
Gross margin as a percentage of revenue for the second quarter of 2008 was 54.7% compared to 53.5% in the second quarter of 2007. Product gross margin increased to 66.1% in the second quarter of 2008, compared to 65.0% in the prior-year period. Service gross margin improved to 44.0% in the second quarter of 2008 compared to 41.4% in the prior-year period. The increase in product gross margins was driven primarily by the EMEA region, which benefited from currency translation, higher product volume and a favorable deal mix in the period. The services gross margin rate benefited by strong maintenance services volume and improved maintenance margin rate across all operating segments.
Total operating expenses, characterized as â€śselling, general and administrative expensesâ€ť and â€śresearch and development expenses,â€ť were $157 million in the second quarter of 2008 compared to $142 million in the second quarter of 2007. As a percentage of revenue, total operating expenses increased to 34.5% in the second quarter of 2008 from 33.0% in the second quarter of 2007. The $20 million increase in selling, general and administrative expenses included incremental costs of $6 million associated with Teradata operating as an independent, publicly-traded company, as well as negative impact from foreign currency fluctuations. Research and development (â€śR&Dâ€ť) expenses were lower by $5 million in the second quarter of 2008 compared to the second quarter of 2007. Our overall R&D spend for the second quarter of 2008 compared to the second quarter of 2007 was relatively constant, the decrease in R&D expense was driven primarily by higher capitalization of external-use software development cost during 2008.
Effects of Pension and Postemployment Benefit Plans
As discussed in Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited), in conjunction with the Separation, certain of NCRâ€™s pension and postemployment benefit obligations and plan assets relating to the Teradata data warehousing business were assumed by/transferred to the Company.
Revenue and Gross Margin by Operating Segment
Teradata manages its business in three geographic regions, which are also the Companyâ€™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. 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. These changes do not represent changes in long-term trends. Teradata does not use certain corporate-level selling, general and administrative, or research and development expenses to measure the performance of the regional operating segments. Our segment results are reconciled to total Company results reported under accounting principles generally accepted in the United States of America (â€śGAAPâ€ť) in Note 12 of Notes to Condensed Consolidated Financial Statements (Unaudited).
Americas: Revenue decreased 6% in the second quarter of 2008 from the prior-year period, with reductions in product revenue somewhat offset by increased service revenue. The revenue decline in the Americas region was
impacted by customer deferrals of new product purchases given the economic environment in the United States. Revenue included less than 1% of benefit from foreign currency fluctuations. Gross margin as a percentage of revenue increased to 57.6% for the second quarter of 2008, from 56.2% in the prior-year period, driven primarily by higher product margins due to deal mix, as well as increased contribution from maintenance services.
EMEA: Revenue increased 33% in the second quarter of 2008 from the prior-year period, with double-digit growth in both product and service revenue. The revenue comparison included 11% of benefit from foreign currency fluctuations. Gross margin as a percentage of revenue increased to 53.1% in the second quarter of 2008, from 46.9% in the prior-year period, primarily driven by higher product margins due to the benefit of currency translation, as well as the greater mix of product revenue to service revenue in the period.
APJ: Revenue increased 10% in the second quarter of 2008 from the prior-year period, with growth in service revenue offset by reductions in product revenue. The revenue comparison included 11% of benefit from foreign currency fluctuations. Gross margin as a percentage of revenue was 49.5% in the second quarter of 2008, compared to 53.0% in the prior-year period. The lower margins were influenced by the geographic mix of product sales within the region compared to the prior-year period, as well as the higher proportion of service revenue compared to the second quarter of 2007.
Provision for Income Taxes
The effective tax rate in the second quarter of 2008 was 26.6% as compared to 44.3% in the second quarter of 2007. For the three months ended June 30, 2007, while the Company was operated as part of NCR, Teradataâ€™s provision for income taxes in certain tax jurisdictions reflected only a portion of the tax benefits related to certain foreign operationsâ€™ tax net operating losses due to the uncertainty of the ultimate realization of future benefits from those losses under NCRâ€™s tax structure. The provision for income taxes for the three and six months ended June 30, 2008 is based on the forecasted annual pre-tax earnings mix by jurisdiction of Teradata and its subsidiaries under the Companyâ€™s current structure.
The effective tax rate for the three months ended June 30, 2007 includes a $7 million net adjustment to increase tax expense to correct prior period errors in the calculation of the income tax provision related to intercompany profit elimination. As the impact of this error was not material to any prior periods or to the full-year 2007 financial statements, it was recorded in the second quarter of 2007. The effective tax rate for the three month period ended June 30, 2008 includes a 1% increase over the first quarter 2008 effective tax rate due to a change in the estimated 2008 annual pre-tax income by jurisdiction.
The Company has asserted its intention to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rate in the periods presented for 2008 largely results from the mix of income earned and the allocation of certain expenses in various tax jurisdictions that apply a broad range of statutory income tax rates. See Note 6 of Notes to Condensed Consolidated Financial Statements (Unaudited) for additional information on the income tax provision.
Good morning and thanks for joining us for our second quarter earnings conference call. Mike Koehler, Teradataâ€™s CEO will lead our discussion highlighting Teradataâ€™s second quarter results.
After Mikeâ€™s remarks, Steve Scheppmann, Teradataâ€™s Chief Financial Officer, will provide more details relating to our Q2 performance. Darryl McDonald, who heads Teradata marketing and strategy, is also in the room and will participate in our Q&A session.
Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially. These risk factors are described in Teradataâ€™s 10-K and other filings with the SEC.
On todayâ€™s call we will also be discussing certain non-GAAP financial information, such as free cash flow and results excluding the impact of certain non-recurring items. Reconciliations of non-GAAP financial results to our operating results and forecasted GAAP results, and other information concerning these measures, are included in our earnings release and on the investor page of Teradataâ€™s website, teradata.com.
A replay of this conference call will also be available later today on teradata.com. And for those listening to the replay of the call, please keep in mind that the information discussed is as of August 7, 2008 and Teradata assumes no obligation to update or revise the information included in this conference call whether as a result of new information or future results.
Iâ€™ll now turn the call over to Mike.
Thanks, Gregg and good morning everyone. Teradata delivered a solid second quarter led by our international and services business. I was particularly pleased with our operational performance in the quarter with product gross margins improving 110 basis points over Q2 2007 and services margins up 260 basis points.
Overall, our operating margins at 20.2% included $9 million of incremental new company costs worth 2 points of operating margin, which if excluded, would have resulted in the second highest operating margin of all quarters in Teradata history.
Revenue growth of 6% was driven by a very strong performance in our EMEA region, where revenues were up 33% or 22% in constant currency and by our services business which grew 11% in the quarter.
However, continued softness in the U.S. resulted in our overall revenue growth being slightly lower than what we had expected. In the financial services industry, we had excellent revenue growth in every region in Q2 and we continue have good activity and are adding new customers.
In early July, after the close of Q2, we announced HSBC as a new customer, one of the largest and most influential financial services institutions in the world.
During the past four quarters we have now added as new customers the number one or number two largest banks in five of the top 15 GDP countries in the world. On a global basis, 9 of the 10 largest banks are now using Teradata. We are building a broad-based foundation from which to grow from with the addition of leading customers such as these.
Financial services institutions are investing to strengthen their business intelligence infrastructure to operate with better precision and with less risk and lower costs.
We also generated good growth in the retail industry in Q2, particularly in EMEA where we had major upgrades including Metro and Otto in Germany, and upgrades at retailers here in the U.S. such as Best Buy, Big Lots and Myers.
Retailers continue to look to Teradata to help drive more efficient operations across their enterprises, such as optimizing their supply chains and also to address new initiatives such as customer privacy. The travel and transportation industry also expands good growth.
Facing challenges from oil price increases, companies in these sectors have become highly motivated to reduce costs and improve business models. Our solutions and business impact models help these organizations find ways to leverage their data to help meet these goals.
In the second quarter we were pleased to see that BNSF Railway was awarded a 21st Century Achievement Award by Computerworld towards innovative fuel saving program utilizing Teradata.
In the utility industry, we had a new account win with Xcel Energy, a company with over five million customers in the west and Midwestern U.S. Their new Teradata solution will allow Xcel to identify ways to maximize revenue recovery, reduce costs and improve customer satisfaction, and allows Xcel to manage the massive amounts of real time data being generated from their meters, billing and collection systems.
Overall where markets are good, such as in EMEA and most of APJ we continue to see good growth. Conversely, in markets such as the U.S. where we continue to see softness, our revenue growth is challenged.
Our win rates in the U.S. continue to remain the same and activity is high. But the scrutiny placed on new large CapEx and OpEx expenditures continues to lengthen our sales cycles.
In these softer markets, weâ€™re placing greater emphasis on helping companies reduce costs through data warehousing. Over the years Teradata has developed market leading business impact models to help companies model cost reductions from data mart consolidations as well as data center consolidation initiatives.
Consolidating data centers enables strong costs savings with reduced operating and support costs, while providing the benefit of a fully integrated data warehouse for better decision making in these tight economies.
In addition, weâ€™ve launched industry-specific entry level data warehouse bundles to accelerate implementation in ROIs for customers. These solutions include industry-specific software tools and consulting along with the Teradata platform.
In summary, our full year revenue and EPS guidance remains unchanged, but with the U.S. lower than what we had anticipated entering the year and with EMEA higher.
Turning to the longer term picture for Teradata, our fundamentals and business model remain strong. Revenue is our number one priority, and along with that, growing market share.
The recently released Gartner Dataquest report, which estimated 2007 market shares for relational database software companies, showed that Teradata grew share and achieved higher revenue growth in 2007 than the overall market.
We continue to execute on our four key growth initiatives to position ourselves for higher growth in 2009 and beyond. We are well on our way to adding a minimum of 30 territories in 2008 to expand our market coverage.
We continue to drive activity and investments with partners. Weâ€™re continuing to invest and grow our consulting services business and we are expanding our platform family.
Weâ€™ve had a good initial market acceptance and several wins since the launch of our data mart and entry level data warehouse platforms last April. Customer names we can mention include Western Digital, Delta Community Credit Union, Timberland, MDC and the government of Egypt.
Our growth initiatives combined with our strong balance sheet and cash flow generation position us well to continue growing our business and increasing shareholder value.
Before I turn the call over to Steve, Iâ€™d like to remind everyone of the annual Teradata PARTNERS User Group Conference coming up October 12 through the 16 in Las Vegas. I hope to see some of you there.
This event is the place to meet and hear from the worldâ€™s leading data warehouse practitioners and learn from them about their experiences and best practices. This year we have over 85 customer presentations as well as presentations from the thought leaders in Teradata.
We expect have over 3,000 attendees again this year. I hope you can join us and if you are interested, please contact Gregg.
Now Iâ€™ll turn the call over to Steve, whoâ€™ll provide more details about the quarter and for the year.
Thanks Mike, and thanks for joining us today. Turning to this family of products in our business model, recurring revenue dynamics and our investments in our growth markets continue to attract customer interest and our pipeline is very active.
Our customers continue to focus on the solution that enhances their competitive advantage in the most cost effective manner and supports an accelerated payback. This is the Teradata solution.
The following discussion will provide a detailed view of our financial reporting, beginning with our revenue and gross margins. Q2 2008 revenue of $455 million increased 6% on a year-over-year comparison which included a five percentage point benefit from currency translation.
We experienced broad-based gross margin expansion throughout our business model. Gross margin improved nicely in Q2 2008; 54.7% compared to 53.5% in the second quarter of 2007, a 120 basis point improvement. The drivers include currency, stronger deal mix, and the continued strength of our maintenance services business.
Detailing our performance geographically, Americasâ€™ revenue of $236 million was down 6%, largely due to the continued lengthening of the sales cycles in the U.S. as macroeconomic pressures are causing customers to continually weigh their capital decisions.
Revenues in the Americas was up significantly in financial services, in travel and transportation, but down significantly in manufacturing, and to a lesser extent, retail.
Gross margin in the Americas regions improved 270 basis points to 58.9% compared to 56.2% in the second quarter of 2007. Gross margin in the Americas improved due to deal mix and the strength of our maintenance services.
In EMEA, revenue growth accelerated at an increase of 33% to $128 million, which included 11 points of currency benefit. We saw revenue growth in several different industries, especially in financial, retail, travel and transportation.
By country, we saw a good growth in Germany and in France, among others. Gross margin in EMEA region was 53.9%, a 700 basis point improvement from the 46.9% generated in the second quarter of 2007. Gross margin improved due to currency, product volume growth and favorable deal mix.
In our Asia-Pacific/Japan region, we reported 10% revenue growth. However, there are a couple of things I would like to point out about APJâ€™s revenue growth. First of all, the reported growth rate benefit from the 11 points of currency.
On the other hand, it was a very tough year-over-year comparison in the second quarter of 2007, our APJ region grew 24%. So the results were decent when considering the tough year-over-year comparison.
Revenue in APJ was up in the financial services and manufacturing industries, but down in communications and retail.
Gross margin in APJ was 50.5%, down from the 53% in Q2 2007. Within the numbers we generated good improvement in the services gross margins, but saw a decline in product gross margins due to the mix of transactions by country.
From the revenue segmentation perspective, product revenue is basically unchanged as the strong growth in the product revenue in EMEA covered the product revenue decline in other regions, largely in the Americas, but also to a lesser extent in APJ.
Product gross margin improved 110 basis points to 66.1%. Meaningful improvement in both Americas and in EMEA, while down in APJ due to geographical mix of transactions within the region.
Services revenue, which once again provided more than 50% of our revenue, increased 11% to $234 million in the second quarter of 2008.
This increase was driven by maintenance services, 20% increase our annuity driver and as a strong foundation for the consistency of our recurring revenue and cash flow model. In all three regions we generated good services revenue growth during the quarter.
Services gross margin also improved meaningfully in all three regions, resulting in a 44% gross margin to Q2 2008 versus 41.4% in Q2 2007. The 260 basis point improvement was due to an increase in our maintenance services volume.
Now Iâ€™ll turn to our expense structure. SG&A increased by $20 million or 18%, largely driven by incremental costs associated with Teradata operating as an independent public company.
The $9 million of incremental costs in total with $6 million recorded in operating expenses. The impact of FX of $5 million contributed to the increase.
R&D expenses on the income statement decreased $5 million. This decrease was a direct result of the timing of the capitalization of software R&D.
Let me be clear however, we are not reducing our investment or spend in engineering. Our gross spend will increase $11 million over 2007. In 2009, you will see more of the expenses we see less capitalization and more expensing of software R&D.
Operating income of $92 million of the second quarter improved from $88 million from the second quarter of 2007.
Higher volume, a favorable deal mix and the good performance in our maintenance services business more than offset the $9 million of incremental costs associated with Teradata operating as an independent publicly traded company.
Included in our results was $5 million of stock-based compensation expense, $1 million more than in Q2 2007.
Below the operating income line, Teradata had other income $2 million in the quarter which compared favorably to Q2 2007 when Teradata operated as a part of NCR and did not have interest income.
For Q2 2008, our effective tax rate was approximately 27% versus the previously guided 25% for the year. Approximately 1% of this increase in Q2 represents a true-up of the Q1 for a revision to our annual forecasted effective tax rate of 26% on a year-to-date basis.
The effective tax rate recognized each quarter is based on the annual estimated effective tax rate calculated on a full year forecasted results and applied on a quarterly basis.
Quarterly, the company refines the estimates used to build the effective tax rate. Based on the analysis to-date, the company has currently estimated that the forecasted annual effective tax rate for 2008 will approximate 26 to 27%.
The companyâ€™s first U.S. tax return on a standalone basis for the post-spin period ending December 31, 2007 is not due until September 2008. Resulting adjustments, if any, from the prior year tax return are required to be reflected as a discrete item or a discrete rate item in Q3 2008.
Accordingly, the potential impact of the adjustments, either positive or negative, has not been included in the above estimate of the annual effective tax rate for 2008.
GAAP EPS in Q2 2008 was $0.38 compared to $0.27 in Q2 2007. In the second quarter of 2007, Teradata recorded a tax adjustment that lowered EPS by $0.04. Excluding the tax adjustment, non-GAAP EPS in the second quarter of 2007 would have been $0.31.
During the second quarter we repurchased 1.4 million shares of stock for approximately $34 million. During the first half of the year, we bought 2.9 million shares for approximately $72 million.
We have $182 million remaining on our board authorization for share repurchases. Going forward, we expect to be opportunistic regarding these share repurchases.
Turning to the cash flow statement, in the second quarter, we generated cash from operating activities of $85 million, compared to $93 million in Q2 2007.
Cash from operating activities was lower in the quarterly year-over-year comparison due to additions to working capital largely due to a higher receivables balance. This was caused by the timing of transactions in the quarter; the FX impact and a higher mix of international revenue where collections typically take longer.
After using $25 million for capital expenditures, we generated $60 million of free cash flow, which compares to $66 million of free cash flow in Q2, 2007.
Teradata defines free cash flow as cash flow from operating activities, less capital expenditures for property and equipment and additions to capitalized software.
Turning to the balance sheet, as of June 30, 2008 we had $367 million of cash and short term investments, an increase of $28 million for the end of March, even after using $34 million for share repurchases in the quarter.
Looking forward, we anticipate that in Q3, 2008 our quarterly year-over-year comparison will be tough. This is largely due to the favorable timing of transactions in Q3 2007 when we reported a strong 17% growth in revenues. In Q4, 2008 we should see the benefit of a smaller comparable based on Q4, 2007.
With that being said, our current view of our full year guidance based on our 27% effective tax rate in the current exchange rate environment, we continue to anticipate full year revenue growth to be in the 5 to 8% range, consistent with our view at the end of last quarter, more of the growth is expected to come from outside the United States.
In terms of our earnings per share, we continue to expect EPS at the higher end of our prior $1.35 to $1.45 guidance range.
With that operator, we are ready to take some questions. Thank you.