Teradata Corporation — FY 2016 Form 10-K Summary
Business context and reporting period
Teradata provides analytic data platforms, software, hardware, consulting, support, and hybrid-cloud solutions. The filing covers the fiscal year ended December 31, 2016. The company completed the sale of its marketing applications business on July 1, 2016 and is now focused on data and analytics.
Data and analytics represented approximately 97% of 2016 revenue, while the divested marketing applications business represented approximately 3%. Teradata operated in 45 countries and had approximately 10,093 employees at year-end.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $2.322 billion | $2.530 billion | Down 8% |
| Product revenue | $889 million | $1.057 billion | Down 16% |
| Service revenue | $1.433 billion | $1.473 billion | Down 3% |
| Gross margin | 51.2% | 50.4% | Up 0.8 percentage points |
| Operating income | $232 million | $(195) million | Improved by $427 million |
| Net income | $125 million | $(214) million | Improved by $339 million |
| Diluted EPS | $0.95 | $(1.53) | Returned to profitability |
| Operating cash flow | $446 million | $401 million | Up $45 million |
| Free cash flow | $328 million | $281 million | Up $47 million |
| Cash and equivalents | $974 million | $839 million | Up $135 million |
| Debt, including current portion | $570 million | $780 million | Down $210 million |
| Stockholders’ equity | $971 million | $849 million | Up $122 million |
2016 revenue included approximately 1 percentage point of adverse foreign-currency impact. The company generated $1.188 billion of GAAP gross profit. SG&A was $664 million, R&D was $212 million, and impairment of goodwill, acquired intangibles, and other assets was $80 million.
Fourth-quarter 2016 revenue was $626 million, operating income was $98 million, and net income was $58 million, or $0.44 diluted EPS.
Material changes versus prior comparable period
- Revenue declined primarily because customers increasingly selected subscription licenses, rentals, cloud deployments, and other arrangements in which revenue is recognized over time rather than upfront.
- Product revenue fell 16%, while service revenue declined 3%. Consulting revenue decreased 6% and maintenance revenue increased 1%.
- Gross margin improved because of more favorable deal and product mix and the exit from the lower-margin marketing applications business.
- Operating results benefited from substantially lower impairment charges and reduced operating expenses. The company recorded $80 million of 2016 impairment charges versus $478 million in 2015.
- 2016 impairment charges included $57 million of goodwill and $19 million of acquired-intangible impairment related to the marketing applications business, plus a $4 million impairment related to the sale of the corporate plane.
- The marketing applications business generated $69 million of revenue and an operating loss of $112 million through June 30, 2016. Teradata received approximately $92 million in cash from the sale, subject to post-closing adjustments, and recorded approximately $22 million of related tax expense.
- Share repurchases fell materially to approximately $82 million in 2016 from $657 million in 2015. Approximately 3.4 million shares were repurchased at an average price of $24.25, leaving $512 million of general repurchase authorization at year-end.
Liquidity, debt, and cash flow
Teradata had $974 million of cash and cash equivalents at December 31, 2016, including $957 million held outside the United States. The company had $570 million of outstanding term-loan principal, bearing a floating interest rate of 2.1875%, with $30 million due in 2017 and $413 million due in 2020. Its $400 million unsecured revolving credit facility had no borrowings outstanding. The company was in compliance with all debt covenants.
Management stated that cash, operating cash flow, and available revolver capacity should be sufficient for working capital, capital expenditures, R&D, pension contributions, severance, and other requirements for at least the next twelve months. Contractual debt, interest, lease, and purchase obligations totaled approximately $690 million.
Outlook, management commentary, and risks
Management is executing a business transformation focused on hybrid cloud, software-only offerings, subscription licensing, managed cloud, usage-based models, business analytics, and ecosystem architecture consulting. The transition is intended to increase recurring revenue and make Teradata easier to buy and expand, but management expects revenue could decline in the short term as customers move from upfront perpetual licenses to over-time purchasing models.
The company did not provide a full numerical revenue or earnings forecast in the filing. Based on exchange rates as of January 31, 2017, management expected approximately one percentage point of negative foreign-currency translation impact on projected full-year revenue growth.
- Execution risk associated with the transformation plan, cost management, new sales structure, and cloud and subscription offerings.
- Intense competition from IBM, Oracle, cloud vendors, open-source technologies, and emerging analytics providers, with continuing pricing and price-performance pressure.
- Long and volatile sales cycles, seasonal purchasing patterns, large-order timing, and possible revenue-recognition delays.
- Customer migration toward lower-cost, less capital-intensive, cloud, rental, subscription, and usage-based alternatives.
- Foreign-currency, Brexit, global economic, international operating, and geopolitical risks; approximately 46% of 2016 revenue was generated outside the United States.
- Dependence on Flextronics and certain single-source suppliers for hardware assembly and components.
- Variable-rate debt, debt covenant compliance, and potential constraints on future financial flexibility.
- Cybersecurity, data privacy, intellectual-property, tax, regulatory, legal, pension, and postemployment-benefit exposures.
- Approximately $1.3 billion of foreign earnings were considered permanently reinvested outside the United States and had not been provided for U.S. federal tax.
The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective as of December 31, 2016. The filing reported no unresolved SEC staff comments and no material changes to internal control during the final quarter.
Important facts for investors to verify
- Whether recurring revenue, annual recurring revenue, TCORE consumption, and business consulting growth offset the near-term effect of deferred revenue recognition.
- Progress in returning the core data and analytics business to sustainable revenue growth after the 8% 2016 decline.
- Cash conversion, foreign-cash repatriation constraints, and the repayment schedule for the $570 million term loan.
- The sustainability of the improved 51.2% gross margin as product, service, cloud, and consulting mix changes.
- Potential additional impairment, restructuring, severance, tax, litigation, indemnification, and postemployment costs.
- Customer support and subscription renewal rates, competitive pricing pressure, and reliance on Flextronics and other key suppliers.