Business Context and Reporting Period
Teradata Corporation’s Form 10-Q covers the three months ended March 31, 2016, filed May 6, 2016. The company manages three operating segments: Americas Data and Analytics, International Data and Analytics, and Marketing Applications. Teradata is executing a business transformation focused on its core data and analytics business, including cost reductions, cloud offerings, analytical ecosystems, and value-added services.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $545 million | $582 million | Down 6% |
| Product revenue | $194 million | $241 million | Down 20% |
| Service revenue | $351 million | $341 million | Up 3% |
| Gross margin | 49.4% | 47.6% | Up 180 basis points |
| Operating income (loss) | $(42) million | $30 million | Declined $72 million |
| Net income (loss) | $(46) million | $22 million | Declined $68 million |
| Diluted EPS | $(0.36) | $0.15 | Declined $0.51 |
| Cash flow from operations | $251 million | $222 million | Up $29 million |
| Free cash flow | $225 million | $190 million | Up $35 million |
Gross profit was $269 million, compared with $277 million in the prior-year quarter. Product gross margin increased to 59.8% from 54.8%, while service gross margin increased to 43.6% from 42.5%.
At March 31, 2016, cash and cash equivalents were $917 million, compared with $839 million at December 31, 2015. Current assets were $1.677 billion and current liabilities were $968 million. Balance-sheet debt included $30 million of current long-term debt, $80 million of short-term borrowings, and $560 million of long-term debt.
The company had $80 million outstanding under its $400 million revolving credit facility, leaving $320 million available. The $600 million term loan had $593 million of principal outstanding. Teradata was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because product revenue fell 20%, reflecting fewer large capital expenditure transactions. Foreign currency movements adversely affected reported revenue by approximately 2%.
- Service revenue increased 3%, including 4% growth in consulting revenue and 2% growth in maintenance revenue.
- Americas Data and Analytics revenue declined 12% to $295 million, while International Data and Analytics revenue increased 4% to $216 million. Marketing Applications revenue declined 11% to $34 million.
- Operating results included an $80 million impairment charge for goodwill, acquired intangible assets, and other assets. The charge included $57 million of goodwill impairment, $19 million of acquired intangible asset impairment, and a $4 million impairment related to the corporate aircraft.
- SG&A expense decreased $10 million and R&D expense decreased $6 million, primarily because of cost reduction initiatives.
- Operating cash flow increased despite the net loss, supported by working-capital changes, including a $140 million increase from deferred revenue.
- Share repurchases totaled approximately 2.0 million shares for $47 million, compared with 6.3 million shares for $269 million in Q1 2015. Approximately $528 million remained available under the general repurchase authorization.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects the transformation to shift revenue over time toward cloud, analytical ecosystem offerings, subscriptions, and value-added analytic services. The company launched an initial software-only public-cloud offering in the first quarter and expects a fully scalable public-cloud version in early 2017.
Management estimated a 2016 full-year effective tax rate of approximately 34.5%, including expected tax effects associated with the planned Marketing Applications disposition. Based on currency rates as of April 30, 2016, management expected no additional foreign-currency translation impact on the full-year reported revenue growth rate.
Teradata expects demand for analytics to benefit from data growth and increasing ecosystem complexity, but identified risks from weaker large capital expenditures, smaller deal sizes, changing customer purchasing behavior, competitive and pricing pressure, alternative technologies, economic conditions, foreign exchange, and the transition toward recurring subscription models.
The Marketing Applications business was classified as held for sale. On April 22, 2016, Teradata agreed to sell it to an affiliate of Marlin Equity Partners for $90 million in cash, subject to customary adjustments. The transaction was expected to close around the end of the second quarter of 2016. The business generated $34 million of Q1 revenue and an operating loss of $96 million, including the $76 million impairment of goodwill and acquired intangibles.
After quarter-end, on May 5, 2016, Michael F. Koehler stepped down as president and chief executive officer and director. Victor L. Lund became CEO. Teradata expects to recognize an approximately $3 million pre-tax departure charge in the second quarter.
Management stated that current cash, operating cash flows, and available credit capacity should satisfy working-capital, investment, pension, and other financing needs for at least the next twelve months. Approximately $891 million of cash was held outside the United States, and the company had not provided U.S. federal tax for approximately $1.2 billion of foreign earnings considered permanently reinvested overseas.
Warranty, indemnification, legal, regulatory, tax, intellectual-property, and other ordinary-course contingencies remained outstanding. The maximum future obligation under equipment lease-value guarantees was $3 million, and the warranty reserve was $6 million at March 31, 2016. No material changes to previously disclosed risk factors or market-risk exposures were reported.
Important Facts for Investors to Verify
- Verify completion terms, closing date, proceeds, and any final adjustments related to the $90 million Marketing Applications sale.
- Assess whether the revenue decline from large capital expenditure transactions persists and whether cloud, subscription, and services growth offsets product weakness.
- Monitor additional impairment risk for assets held for sale and the remaining goodwill and intangible assets.
- Reconcile reported debt carrying values with the $593 million term-loan principal and $80 million revolving-credit balance, including scheduled maturities and floating-rate exposure.
- Evaluate the sustainability of strong operating cash flow and free cash flow, particularly the contribution from deferred revenue and working-capital movements.
- Track execution of the CEO transition, the expected second-quarter departure charge, and the broader cost-reduction and business-transformation program.