Teradata Corporation — Form 10-Q Summary
Business context and reporting period
Teradata provides data and analytics solutions, including on-premises, cloud, subscription, consulting and managed services offerings. The filing covers the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Following the July 1, 2016 sale of its marketing applications business, the company operates through Americas and International Data and Analytics segments.
Financial performance and liquidity
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $513 million | $599 million | $1,004 million | $1,144 million |
| Gross profit | $242 million | $310 million | $466 million | $579 million |
| Gross margin | 47.2% | 51.8% | 46.4% | 50.6% |
| Operating income (loss) | $(1) million | $87 million | $(2) million | $45 million |
| Net income (loss) | $(4) million | $64 million | $(6) million | $18 million |
| Diluted EPS | $(0.03) | $0.49 | $(0.05) | $0.14 |
- Second-quarter product and cloud revenue was $166 million, down 32%; service revenue was $347 million, down 3%. Six-month product and cloud revenue was $332 million, down 26%, while service revenue was $672 million, down 3%.
- Recurring revenue increased to $257 million, or 50% of quarterly revenue, from $243 million, or 41%, in the prior-year quarter. Management reported 7% constant-currency growth.
- Operating expenses were $243 million in the second quarter, up from $223 million, primarily because certain software development costs were no longer capitalized and strategic cloud and go-to-market investments increased.
- Cash provided by operating activities was $309 million for the first six months, versus $349 million in 2016. Free cash flow, as defined by the company, was $275 million versus $296 million.
- Cash and cash equivalents were $1.085 billion at June 30, 2017, compared with $974 million at December 31, 2016. Approximately $1.036 billion was held outside the United States.
- Debt consisted of approximately $553 million of carrying value on the balance sheet, including $45 million current and $508 million long term. Term-loan principal was $555 million at a 2.625% interest rate; the $400 million revolving credit facility had no borrowings, and the company was in compliance with its covenants.
Material changes versus the prior comparable period
- Quarterly revenue declined 14% and six-month revenue declined 12%, reflecting the marketing applications divestiture and customer migration from upfront perpetual licenses toward cloud, subscription, rental and usage-based models that recognize revenue over time.
- Quarterly gross margin fell 460 basis points, and six-month gross margin fell 420 basis points. Product margin was affected by amortization of previously capitalized software costs, while services margin reflected consulting investments, lower utilization and costs incurred before related revenue recognition.
- The company reported losses in both the quarter and first six months, compared with profits in the prior-year periods.
- Research and development expense increased to $78 million in the quarter and $148 million for the six months, compared with $51 million and $108 million, respectively. No R&D costs were capitalized in 2017 versus $17 million in the quarter and $33 million in the first half of 2016.
- Prior-year six-month results included an $80 million impairment charge, including $57 million of goodwill, $19 million of acquired intangible assets and a $4 million corporate-plane impairment. No comparable impairment was recorded in 2017.
- Share repurchases were $151 million in the first six months, compared with $51 million in 2016. The company repurchased 5.1 million shares during the period.
Guidance, outlook, risks and unusual items
- Management expects short-term revenue pressure as customers shift from perpetual licenses to recurring models, while expecting longer-term growth as cloud, subscription and services adoption increases.
- For 2017, management expected recurring revenue growth in the high-single digits, Business Consulting revenue growth of approximately 20%, perpetual-equivalent contract value of approximately $225 million to $250 million, year-end ARR of approximately $1.1 billion, product ARR growth of approximately 25% and TCore growth of almost 20% from the 2016 year-end installed base.
- Management estimated a 2017 effective tax rate of approximately 5%. The reported quarterly and six-month 2017 tax rates were negative because tax expense was recorded on pretax losses.
- The company expects to repurchase up to an additional $300 million of stock in the second half of 2017. From July 1 through August 3, it repurchased approximately 1.3 million shares for $41 million; approximately $341 million of authorization remained at August 3.
- Teradata voluntarily disclosed questionable travel, gift and other expenditures at a Turkish subsidiary to the SEC and DOJ and is cooperating with their review. Management does not currently expect a material adverse effect, but fines, penalties, disgorgement or other remedies remain possible.
- The company plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. The filing states that the effect remains under evaluation and may affect revenue timing, retained earnings, contract-acquisition-cost accounting, systems and controls.
- Key operating risks include competition and alternative technologies, uncertain customer adoption of recurring purchasing models, foreign-exchange exposure, customer credit risk, reliance on Flextronics and certain single-source suppliers, and the possibility of insufficient operating cash flow or covenant issues.
Important facts for investors to verify
- Whether recurring revenue, ARR and product ARR growth are offsetting the decline in perpetual-license and hardware revenue.
- The pace and profitability of cloud, subscription, consulting and managed-service adoption, including the effect on revenue recognition and gross margins.
- Whether R&D and go-to-market investments produce the projected TCore, contract-value and revenue growth.
- The ultimate resolution and financial impact of the SEC and DOJ investigation relating to the Turkish subsidiary.
- The company’s ability to fund planned share repurchases while maintaining liquidity, debt-service capacity and compliance with credit-facility covenants.
- The quantified impact of the January 2018 revenue-recognition adoption and the company’s approximately $1.3 billion of foreign earnings treated as permanently reinvested.