Teradata Corporation — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
Teradata provides the Vantage connected multi-cloud data platform, including public cloud, private cloud, on-premises and related consulting and support services. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Total revenue | $462 million | $430 million | $938 million | $926 million |
| Recurring revenue | $371 million | $345 million | $760 million | $731 million |
| Gross profit | $276 million | $258 million | $578 million | $559 million |
| Gross margin | 59.7% | 60.0% | 61.6% | 60.4% |
| Operating income | $33 million | $14 million | $112 million | $82 million |
| Net income | $17 million | $(4) million | $57 million | $32 million |
| Diluted EPS | $0.17 | $(0.04) | $0.55 | $0.30 |
| Cash flow from operations | Not separately provided | Not separately provided | $158 million | $256 million |
| Free cash flow | Not separately provided | Not separately provided | $151 million | $252 million |
At June 30, 2023, total ARR was $1.523 billion, up 10% year over year, including a 1% favorable currency impact. Public Cloud ARR was $414 million, up 77%, and the cloud net expansion rate was 121%, compared with 117% in Q2 2022.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $504 million, compared with $569 million at December 31, 2022. Including restricted cash, total cash was $506 million.
- The company had $500 million of term-loan principal outstanding and no borrowings under its $400 million revolving facility, leaving $400 million of revolving capacity available.
- Teradata was in compliance with its debt covenants at June 30, 2023. Approximately 90% of the term loan’s floating-rate exposure was hedged with an interest-rate swap.
- Six-month financing cash outflows included $154 million of share repurchases and $41 million of finance-lease payments.
- Approximately 3.9 million shares were repurchased during the first six months at an average price of $40.65. Remaining open-market repurchase authorization was approximately $689 million at June 30, 2023.
- Management stated that cash, operating cash flow and available revolver capacity should fund working capital, capital expenditures, research and development, pension contributions and other requirements for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 7%, while recurring revenue increased 8%; foreign currency movements reduced reported total revenue by approximately 3%.
- Operating income improved to $33 million from $14 million, and net income improved to $17 million from a $4 million loss.
- Gross margin declined modestly to 59.7% from 60.0%, primarily due to currency effects and a higher mix of cloud revenue, partly offset by improved cloud and on-premises recurring margins.
- Operating expenses were essentially flat: SG&A increased to $167 million from $163 million, while R&D declined to $76 million from $81 million.
- For the six-month period, operating cash flow declined by $98 million, primarily because the prior-year period benefited from a $50 million CARES Act tax refund and the 2023 period included approximately $35 million of incremental cash taxes.
- Six-month recurring revenue increased 4%, while perpetual software, hardware and other revenue declined 24% and consulting revenue declined 6%, reflecting the transition toward subscription offerings, currency effects, the Russia exit and consulting realignment.
- Regional Q2 revenue increased 8% in the Americas and 15% in EMEA, but declined 3% in APJ, partly due to the wind-down of direct operations in China.
Guidance, Outlook, Commentary and Risks
- Management reaffirmed 2023 guidance for Public Cloud ARR growth of 53% to 57%, total ARR growth of 6% to 8%, recurring revenue growth of 4% to 7% and total revenue growth of 1% to 4%.
- Based on July 31, 2023 currency rates, management estimated a 1.25% to 1.75% negative currency-translation impact on full-year reported revenue.
- Management attributed cloud growth to existing customers adding workloads, migrations to VantageCloud and expansion into hybrid environments. Consulting revenue was described as stabilizing following a focus on higher-margin engagements and partner-led activity.
- The estimated 2023 effective tax rate was approximately 34%. The Q2 2022 effective tax rate of 972% was distorted by a discrete valuation allowance related primarily to the discontinuation of Russia operations; the Q2 2023 rate was 29.2%.
- Teradata disclosed ongoing SAP litigation and related patent counterclaims. Several claims were dismissed or settled, but remaining claims in the TD-SAP 1 matter remain stayed pending appeal. The likelihood and potential amount of any loss could not be reasonably determined.
- Manufacturing is outsourced to Flex, and certain components are sourced from single suppliers, creating potential supply-chain and customer-shipment risks. The company also faces foreign-exchange, customer-credit, competitive, execution and cloud-migration risks.
- On July 25, 2023, Teradata acquired Stemma Technologies, an AI-enhanced data catalog provider. The acquisition was immaterial to the financial statements.
Important Facts for Investors to Verify
- Whether Public Cloud ARR growth and the 121% cloud net expansion rate continue to support the reaffirmed 2023 outlook.
- The conversion of ARR into recognized recurring revenue and cash flow, particularly as maintenance and software-upgrade ARR declined to $233 million from $323 million.
- Whether cloud mix, foreign currency movements and pricing improve or pressure recurring gross margins.
- The sustainability of operating cash flow after the absence of the prior-year tax refund and after incremental cash taxes.
- Term-loan amortization beginning June 30, 2024, future interest expense and compliance with leverage-related covenants.
- The remaining SAP litigation, including the potential outcome and any financial exposure that cannot currently be estimated.
- Execution of the China wind-down, consulting reorganization and Stemma integration, as well as reliance on Flex and other preferred suppliers.