Teradata Corporation: FY2018 Form 10-K Summary
Business context and reporting period
Teradata provides hybrid-cloud analytics software, hardware, consulting, managed services, and support through its Teradata Vantage platform. The filing covers the fiscal year ended December 31, 2018, including fourth-quarter results. Revenue was generated 52% in the Americas and 48% internationally; 53% of total revenue was from outside the United States.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $2.164 billion | $2.156 billion | Up $8 million |
| Recurring revenue | $1.254 billion | $1.145 billion | Up 10% |
| Perpetual software and hardware revenue | $340 million | $429 million | Down 21% |
| Consulting revenue | $570 million | $582 million | Down 2% |
| Gross profit / margin | $1.026 billion / 47.4% | $1.024 billion / 47.5% | Margin broadly flat |
| Operating income / margin | $43 million / 2.0% | $68 million / 3.2% | Income down $25 million |
| Net income / diluted EPS | $30 million / $0.25 | $(67) million / $(0.53) | Returned to profitability |
| Cash flow from operations | $364 million | $324 million | Up $40 million |
| Free cash flow | $204 million | $237 million | Down $33 million |
Fourth-quarter 2018 revenue was $588 million, gross profit was $289 million, operating income was $23 million, and net income was $15 million, or $0.13 diluted EPS. FY2018 gross margin was pressured by the increasing mix of lower-margin subscription revenue, partly offset by improved consulting margins.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $715 million at December 31, 2018, down from $1.089 billion, principally reflecting approximately $300 million of share repurchases, debt repayments, and other uses.
- Total debt and capital leases were $547 million. The company had $500 million outstanding under a new senior unsecured term loan and $47 million of capital lease obligations.
- The $400 million revolving credit facility had no borrowings outstanding, leaving $400 million of capacity. Teradata was in compliance with all debt covenants.
- The term loan is hedged with a $500 million interest-rate swap; the reported all-in fixed rate was 4.36% at year-end.
- Teradata repurchased 7.9 million shares for approximately $300 million during 2018. Approximately $253 million remained authorized under the general repurchase program at year-end.
- Management stated that cash, operating cash flow, and available revolver capacity should meet working-capital, investment, and other financing needs for at least the next twelve months.
Material changes versus the prior comparable period
- The business continued its transition from perpetual licenses and hardware toward subscription, cloud, and managed-services offerings. Subscription bookings represented 79% of 2018 bookings.
- Annual recurring revenue increased 10% to $1.308 billion, although foreign currency reduced ARR growth by approximately two percentage points.
- Backlog or remaining unsatisfied obligations increased to approximately $2.5 billion from $1.6 billion; approximately $1.2 billion was expected to be recognized as revenue in 2019. A substantial portion included customer cancellation-for-convenience provisions.
- Operating expenses increased 3% to $983 million, reflecting investments in sales, cloud offerings, Teradata Vantage, research and development, and the headquarters transition to San Diego.
- Research and development expense increased 4% to $317 million. No external-use software development costs were capitalized in 2018 or 2017.
- Teradata adopted ASC 606 using the modified retrospective method. The adoption increased 2018 revenue by $15 million and net income by $33 million, or $0.27 per share, versus the previous guidance, with no impact on operating cash flow.
- The company incurred $23 million of business-transformation and headquarters-transition costs in 2018, of which $11 million was paid and $12 million remained accrued at year-end.
Outlook, commentary, risks, and unusual items
Management expected recurring revenue and annual recurring revenue to continue growing as customers adopt subscription offerings. Perpetual revenue was expected to continue declining in 2019, primarily because remaining perpetual activity was increasingly hardware-related. Consulting revenue was also expected to decline as Teradata focused on higher-value consulting for target “megadata” customers. Based on January 31, 2019 currency rates, management expected approximately a one-percentage-point negative currency impact on 2019 revenue growth.
- The transition to subscription revenue improves recurring-revenue visibility but reduces upfront revenue and cash collection in the near term and may pressure margins.
- Key risks include execution of the business transformation, competition from IBM, Oracle, SAP, Amazon, Microsoft, cloud providers, and open-source technologies, long sales cycles, customer renewal rates, and pricing pressure.
- Cloud and managed-services growth increases exposure to cybersecurity, data privacy, service reliability, regulatory, and third-party-provider risks.
- Teradata relies exclusively on Flex for hardware assembly and uses certain single-source suppliers, creating supply-chain and delivery risks.
- The company reported a lawsuit against SAP alleging trade-secret misappropriation, copyright infringement, and anticompetitive conduct. Teradata seeks injunctive relief and damages; the filing does not provide a clear estimate of potential recovery or exposure.
- The company owed approximately $105 million of remaining Tax Act transition-tax payments, payable through 2025, and had $34 million of uncertain tax positions.
- The filing states that no goodwill impairment was required in 2018, no material litigation was known beyond disclosed matters, and management and the independent auditor concluded that internal controls over financial reporting were effective.
Most important facts for an investor to verify
- Whether recurring revenue and ARR growth can offset continued declines in perpetual software, hardware, and consulting revenue.
- Subscription bookings conversion, customer renewals, churn, and the timing of revenue and cash conversion from the $2.5 billion backlog.
- Progress toward restoring operating leverage after increased sales, R&D, cloud, and transformation spending.
- Liquidity after share repurchases, scheduled term-loan amortization, capital leases, transition-tax payments, and remaining headquarters-transition costs.
- Execution of the 2019 shift to three reporting segments: Americas, EMEA, and Asia Pacific.
- Developments in the SAP litigation, cybersecurity and privacy exposure, supplier concentration, foreign exchange, and competitive pressure.