Business Context and Reporting Period
Teradata Corporation filed this unaudited Form 10-Q for the three and nine months ended September 30, 2021. Teradata provides the Vantage connected multi-cloud data platform, supported by subscription software, recurring services, consulting, and related hardware offerings. The company continues shifting toward subscription and public-cloud revenue while reducing lower-margin and non-core consulting activities.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Total revenue | $460 million | $454 million | Up 1% |
| Recurring revenue | $352 million | $329 million | Up 7% |
| Gross profit | $275 million | $254 million | Up 8% |
| Gross margin | 59.8% | 55.9% | Up 390 basis points |
| Operating income | $30 million | $1 million | Improved |
| Net income | $17 million | $(1) million | Returned to profit |
| Diluted EPS | $0.15 | $(0.01) | Improved |
| Metric | Nine months 2021 | Nine months 2020 | Change |
|---|---|---|---|
| Total revenue | $1.442 billion | $1.345 billion | Up 7% |
| Recurring revenue | $1.100 billion | $963 million | Up 14% |
| Gross profit | $892 million | $735 million | Up 21% |
| Gross margin | 61.9% | 54.6% | Up 730 basis points |
| Operating income | $181 million | $3 million | Improved materially |
| Net income | $114 million | $124 million | Down 8% |
| Diluted EPS | $1.01 | $1.12 | Down 10% |
Q3 revenue mix was 76.5% recurring, 3.9% perpetual software licenses, hardware and other, and 19.6% consulting. Subscription software licenses increased to $64 million from $52 million, while perpetual software licenses, hardware and other declined to $18 million from $25 million and consulting declined to $90 million from $100 million.
At September 30, 2021, annual recurring revenue was $1.437 billion, up 7% year over year, and public-cloud ARR was $148 million, up 83%. The cloud net expansion rate remained above 130%. Reported remaining performance obligations were $2.524 billion, including $1.550 billion expected in year one; approximately $1.423 billion was subject to customer-only cancellation-for-convenience provisions.
Nine-month cash flow from operations was $368 million, compared with $211 million in the prior year. Non-GAAP free cash flow was $347 million, compared with $171 million. Investing cash use was $21 million, including $19 million of property and equipment expenditures and $2 million of capitalized software additions. Financing cash use was $252 million, including $176 million of share repurchases, $32 million of long-term debt repayments, and $68 million of finance-lease payments.
Cash and cash equivalents were $613 million at September 30, 2021, compared with $529 million at December 31, 2020. Total cash, cash equivalents and restricted cash was $617 million. Reported current and long-term debt totaled $424 million, while the term-loan principal outstanding was $425 million. The company had no borrowings under its $400 million revolving credit facility and was in compliance with its debt covenants. Management stated that available cash, operating cash flow, and revolver capacity should meet requirements for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Recurring and cloud-related revenue growth increased the revenue mix toward higher-margin subscription offerings.
- Gross margin improved primarily from subscription and cloud efficiencies, a higher recurring-revenue mix, and lower employee costs following 2020 workforce actions.
- Operating expenses declined 3% in Q3 and 3% for the nine-month period, although Q3 SG&A increased due to variable incentives, cloud sales compensation, and go-to-market investments.
- Research and development expense declined, partly offset by increased investment in cloud initiatives.
- Q3 2021 benefited from a $4 million net discrete tax benefit and had a 10.5% effective tax rate. The prior-year quarter included a $9 million tax benefit and a 90.0% effective tax rate. The nine-month 2020 results included a $151 million tax benefit, substantially related to an intra-entity intellectual-property transfer, making year-over-year net-income comparisons less representative.
- The company repurchased approximately 4.5 million shares for $176 million during the first nine months of 2021, compared with 3.7 million shares for $75 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year 2021 ARR growth in the mid- to high-single digits, public-cloud ARR growth of approximately 90% or approximately $200 million, recurring-revenue growth in the high-single-digit to low-double-digit range, and total-revenue growth in the low-single-digit to mid-single-digit range.
- Management estimated a full-year 2021 effective tax rate of approximately 27% and expected foreign-currency translation to add approximately one to one-and-a-half percentage points to full-year revenue growth.
- The company expected approximately $54 million to $58 million of total costs related to workforce reduction and real-estate rationalization actions, with remaining costs expected in the fourth quarter of 2021. It incurred $13 million during the first nine months of 2021 and estimated total cash expenditures of approximately $59 million to $63 million.
- COVID-19 continued to create uncertainty involving workforce operations, customer spending, consulting activity, supply chains, and potential variants. The company also identified supply-chain concentration because hardware components are assembled exclusively by Flex Ltd. and certain components may have single-source exposure.
- Teradata is involved in litigation with SAP involving alleged trade-secret misappropriation, anticompetitive conduct, and patent claims and counterclaims in the United States and Germany. The filing states that the likelihood and reasonably estimable range of any loss on SAP’s patent counterclaims and German lawsuit could not be determined.
- On November 1, 2021, after the quarter end, the board authorized an additional $1 billion for share repurchases, bringing total authorization under the general program to $1.3 billion through December 31, 2025.
Investor Verification Priorities
- Verify whether ARR, public-cloud ARR, and cloud net expansion continue to support the stated 2021 growth outlook.
- Assess the sustainability of gross-margin gains as the business shifts toward cloud and subscription offerings.
- Reconcile reported debt, term-loan amortization, interest-rate hedging, and the June 2023 maturity profile against cash generation and repurchase activity.
- Monitor conversion of the $2.524 billion backlog into revenue, particularly the portion subject to customer cancellation rights.
- Evaluate the effect of the unusual 2020 tax benefit and 2021 discrete tax items when comparing earnings and effective tax rates.
- Track remaining restructuring costs, consulting revenue declines, COVID-19 effects, supply-chain concentration, and the unresolved SAP litigation.