Teradata Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2020, compared with the three months ended March 31, 2019. The filing was dated May 11, 2020. Teradata provides hybrid-cloud analytics software, hardware, consulting, and support services, with increasing emphasis on subscription-based offerings and its Vantage platform.
Financial Results and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $434 million | $468 million | Down 7% |
| Recurring revenue | $345 million | $331 million | Up 4% |
| Perpetual software licenses and hardware | $14 million | $31 million | Down 55% |
| Consulting services | $75 million | $106 million | Down 29% |
| Gross profit | $225 million | $224 million | Essentially flat |
| Gross margin | 51.8% | 47.9% | Up 3.9 percentage points |
| Operating loss | $6 million | $5 million | Loss increased $1 million |
| Net income (loss) | $168 million | $(10) million | Improved primarily from tax benefit |
| Diluted earnings (loss) per share | $1.51 | $(0.09) | Improved |
| Cash flow from operations | $10 million | $49 million | Down $39 million |
| Free cash flow | $(2) million | $33 million | Down $35 million |
- Operating expenses were $231 million, up 1% year over year. SG&A increased to $158 million, while R&D declined to $73 million.
- Recurring revenue represented 80% of total revenue, compared with 70% in the prior-year quarter. The higher recurring mix supported gross-margin expansion, although subscription transactions generally carry lower margins than legacy maintenance revenue.
- Annual recurring revenue was $1.402 billion, up 6% year over year, including a 2% negative foreign-currency impact. Backlog was $2.661 billion, up 7%.
- Cash and cash equivalents were $394 million at March 31, 2020, down from $494 million at December 31, 2019. Total cash, cash equivalents, and restricted cash were $396 million.
- Total debt was approximately $473 million, consisting primarily of $475 million of term-loan principal offset by debt issuance and current-classification effects. The company had no borrowings under its $400 million revolving credit facility, leaving the full facility available.
- Teradata was in compliance with its debt covenants at March 31, 2020. Management stated that available cash, operating cash flow, and the revolving facility should be sufficient for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Total revenue declined $34 million, driven by the transition from upfront perpetual software and hardware sales to subscription offerings and by lower consulting revenue.
- Recurring revenue increased $14 million, while perpetual software licenses and hardware revenue decreased $17 million and consulting revenue decreased $31 million.
- Gross profit was broadly unchanged despite lower revenue, and gross margin improved because of the increased recurring-revenue mix.
- Operating results remained slightly loss-making, with the operating loss increasing from $5 million to $6 million.
- Net income increased by $178 million, but the improvement was not operational: a $182 million income-tax benefit was recorded on a $14 million pretax loss.
- Operating cash flow decreased substantially, primarily because of the timing of receivable collections and the late-quarter effects of COVID-19.
- The company repurchased approximately 3.6 million shares for $73 million, compared with approximately 1.2 million shares for $56 million in the prior-year quarter. Repurchases were suspended as a precautionary measure, and management did not anticipate further repurchases for the remainder of 2020.
Guidance, Outlook, Risks, and Unusual Items
- Management expected recurring revenue and annual recurring revenue to grow in 2020, but expected total revenue to decline because of lower perpetual revenue and consulting revenue. The magnitude of the decline was difficult to predict because of COVID-19.
- Management expected perpetual revenue to continue declining as customers adopt subscription offerings. Consulting revenue was also expected to decline longer term as Teradata focuses on higher-margin Vantage-related work and expands its partner ecosystem.
- Based on exchange rates as of April 30, 2020, foreign-currency translation was expected to reduce 2020 revenue growth by one to two percentage points.
- COVID-19 negatively affected late-quarter sales closures, receivable collections, consulting projects, employee work arrangements, and potentially supply-chain activity. The company shifted most employees to work from home and activated contingency plans.
- The company recorded approximately $157 million of discrete tax benefit from transferring certain intellectual property to an Irish subsidiary, partially offset by $6 million of tax expense related to equity-compensation vesting. The reported effective tax rate was 1,300%, and management estimated a full-year 2020 effective tax rate of approximately 4,800%; these rates are not representative of underlying operating profitability.
- In April 2020, the company identified a withholding-tax regulation that could apply to certain prior intra-group transactions. Teradata was evaluating the matter and could establish a reserve in the second quarter, although it did not expect a material impact.
- Teradata is pursuing litigation against SAP alleging trade-secret misappropriation and anticompetitive conduct. SAP has asserted patent-infringement counterclaims; the likelihood and amount of any loss could not be reasonably estimated.
- The company identified customer credit and collection risk, foreign-currency volatility, COVID-19-related demand disruption, consulting-project delays or cancellations, and manufacturing and supplier concentration risk. Hardware assembly is performed exclusively by Flex Ltd.
Investor Verification Points
- Verify whether recurring-revenue and ARR growth offset continued declines in perpetual hardware and consulting revenue.
- Separate the $168 million reported net income from underlying operating performance by excluding the unusual tax benefit.
- Monitor operating cash flow, receivable collections, and free cash flow as subscription adoption and COVID-19 disruptions affect cash timing.
- Confirm liquidity and covenant compliance, including the availability of the $400 million revolving credit facility and the scheduled term-loan maturities in 2023.
- Assess the duration and financial effects of COVID-19 on customer demand, consulting activity, collections, supply chain, and foreign exchange.
- Review subsequent filings for any withholding-tax reserve and developments in the SAP litigation.