Teradata Corporation — Form 10-Q Summary
Business Context and Reporting Period
Teradata filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Effective January 1, 2015, the company reorganized into two operating segments: Data and Analytics and Marketing Applications. Management subsequently committed in November 2015 to exit the majority of the Marketing Applications business and focus on Data and Analytics.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $606 million | $667 million | $1.811 billion | $1.971 billion |
| Product revenue | $240 million | $294 million | $737 million | $867 million |
| Service revenue | $366 million | $373 million | $1.074 billion | $1.104 billion |
| Gross margin | 50.7% | 52.5% | 50.3% | 53.5% |
| Operating income (loss) | $77 million | $123 million | $(155) million | $345 million |
| Net income (loss) | $78 million | $94 million | $(165) million | $249 million |
| Diluted EPS | $0.55 | $0.60 | $(1.16) | $1.57 |
- Q3 revenue declined 9%; product revenue declined 18% and service revenue declined 2%. Foreign currency reduced reported Q3 revenue by approximately 6%.
- Nine-month revenue declined 8%, with product revenue down 15% and service revenue down 3%.
- The nine-month operating loss and net loss primarily reflect a non-cash $340 million goodwill impairment charge related to Marketing Applications.
- Q3 other income included a $35 million gain on the sale of an equity investment; nine-month other income included $50 million of investment gains.
- Nine-month cash flow from operations was $370 million, compared with $583 million in the prior-year period. Free cash flow was $276 million versus $489 million.
- Capital expenditures were $43 million and capitalized software additions were $51 million during the first nine months.
- Cash and cash equivalents were $874 million at September 30, 2015, compared with $834 million at December 31, 2014. Approximately $833 million was held outside the United States.
- Total debt was approximately $710 million, consisting primarily of a $600 million term loan and $110 million drawn under the revolving credit facility, partially offset by current debt classifications. The company had $290 million of remaining revolving capacity and was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Gross margin fell 180 basis points in Q3 and 320 basis points for the first nine months, reflecting lower product volume, adverse currency effects, hardware mix, lower product revenue, and investments in consulting, cloud, big data, and Marketing Applications capabilities.
- Q3 operating income decreased $46 million, while nine-month operating income declined by $500 million due largely to the goodwill impairment.
- Data and Analytics revenue declined 9% in Q3 and 8% for the first nine months. Marketing Applications revenue declined 8% in Q3 and 9% for the first nine months.
- Research and development expense increased 11% in Q3 and 14% for the first nine months, driven by investments in big data analytics, cloud, Marketing Applications, and acquired activities.
- The company repurchased 15.5 million shares for $541 million during the first nine months, compared with 6.9 million shares for $282 million in the prior-year period. Approximately $667 million remained authorized under the general repurchase program at September 30.
- Teradata issued a new $600 million term loan and replaced its prior revolving facility with a new $400 million facility in March 2015.
Guidance, Outlook, Risks, and Unusual Items
- Management expected approximately $120 million of 2016 operating-income benefit from cost reductions, business realignment, and the Marketing Applications exit, excluding one-time costs. Cost savings from transformation initiatives excluding Marketing Applications were expected to be $80 million to $100 million annually.
- Management expected approximately six percentage points of adverse currency impact on full-year 2015 reported revenue growth based on exchange rates at October 30, 2015.
- The filing stated that the estimated full-year 2015 effective tax rate was approximately negative 7,000%, distorted by the goodwill impairment and related tax effects. The filing also noted that non-reinstatement of the U.S. R&D tax credit could increase tax expense by approximately $3 million.
- Management cited customer IT budget constraints, distributed budget ownership, lower-cost competing technologies, changing analytics-platform strategies, and possible migration of workloads as risks to revenue growth and margins.
- The Marketing Applications goodwill impairment used significant Level 3 valuation assumptions, including forecast cash flows, growth rates, discount rates, and market multiples. Management warned that additional impairment charges could occur, particularly in connection with the decision to exit the business.
- Management stated that current cash, operating cash flow, and available credit were expected to fund working capital, investment, pension, and other requirements for at least the next twelve months, subject to operating and financing risks.
- The company reported no material changes in previously disclosed market risks, no defaults on senior securities, and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the planned Marketing Applications exit results in additional impairment, restructuring, separation, divestiture, or other one-time costs.
- Whether the projected $120 million of 2016 operating-income benefit and $80 million to $100 million of annual cost savings are achieved.
- Trends in Data and Analytics bookings, product mix, services utilization, gross margin, and customer capital spending.
- Cash generation after share repurchases, debt service, capitalized software investment, and any transformation-related payments.
- Foreign-currency effects and the concentration of cash and permanently reinvested earnings outside the United States.
- Compliance with debt covenants, floating-rate exposure, and the term loan repayment schedule beginning in 2016.
- Management’s valuation assumptions for remaining Marketing Applications goodwill and the potential for further impairment.