Teradata Corporation — Q2 2022 Form 10-Q Summary
Business context and reporting period
Teradata provides the Vantage connected multi-cloud data platform, supported by consulting and customer services. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
- At June 30, 2022, Teradata had approximately 102.8 million common shares outstanding.
- Management is prioritizing cloud expansion, existing-customer growth, new customers, and operational efficiency.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $430 million | $491 million | $926 million | $982 million |
| Recurring revenue | $345 million | $376 million | $731 million | $748 million |
| Gross profit | $258 million | $310 million | $559 million | $617 million |
| Gross margin | 60.0% | 63.1% | 60.4% | 62.8% |
| Operating income | $14 million | $70 million | $82 million | $151 million |
| Net income | $(4) million | $44 million | $32 million | $97 million |
| Diluted EPS | $(0.04) | $0.39 | $0.30 | $0.86 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $256 million | $335 million |
| Free cash flow | Not provided for the quarter | Not provided for the quarter | $252 million | $324 million |
- Q2 operating expenses were $244 million, up from $240 million, reflecting investments in cloud and go-to-market operations and research and development.
- Q2 recurring revenue represented 80.2% of total revenue, compared with 76.5% in the prior-year quarter.
- At June 30, cash and cash equivalents were $545 million, or $548 million including restricted cash.
- Accounts receivable were $266 million and total deferred revenue was $541 million.
- Long-term debt was $497 million, with no borrowings under the $400 million revolving facility. The company reported compliance with all debt covenants.
- The blended all-in interest rate at June 30, 2022 was 3.98%.
Material changes versus the prior comparable period
- Q2 revenue declined 12%, including an approximately 4% adverse foreign-currency effect. Recurring revenue declined 8%; perpetual software, hardware and other revenue declined 53%; consulting revenue declined 21%.
- Six-month revenue declined 6%, while recurring revenue declined 2%. Consulting revenue declined 17% and perpetual software, hardware and other revenue declined 15%.
- Gross margin fell 310 basis points in Q2, primarily because of foreign exchange, upfront revenue arrangements, the Russia exit, and unfavorable deal mix.
- Q2 operating income declined from $70 million to $14 million, and the company reported a $4 million net loss versus $44 million of net income.
- The Q2 effective tax rate was 972.0%, driven by $4 million of discrete tax expense, primarily a valuation allowance related to tax assets associated with discontinuing operations in Russia.
- ARR was $1.390 billion at quarter-end, down 3% year over year, including a 4% adverse currency effect. Public Cloud ARR increased 68% to $234 million from $139 million, including a 7% adverse currency effect.
- Cloud net expansion rate was approximately 120%.
- Operating cash flow declined to $256 million from $335 million for the six-month period. Financing cash outflows included $317 million of share repurchases, partly offset by $87 million of net long-term borrowing proceeds.
- Teradata repurchased approximately 7.2 million shares for approximately $317 million during the first six months, including 5.6 million shares under a $250 million accelerated share repurchase agreement. Remaining open-market repurchase authority was $904 million at June 30, 2022.
Guidance, outlook, risks and unusual items
- Management reaffirmed its revised 2022 guidance but widened the total ARR outlook to a low-to-mid-single-digit percentage year-over-year decline on a reported basis. The outlook includes an anticipated $55 million ARR reduction from exiting Russia.
- Based on July 29, 2022 currency rates, management estimated a 3.75% to 4.25% negative foreign-currency translation impact on full-year 2022 reported revenue.
- Management estimated a full-year 2022 effective tax rate of approximately 40%. The estimate includes approximately $9 million of potential GILTI tax expense related to the requirement to capitalize and amortize U.S. research and development costs. Legislative changes could materially reduce this amount.
- Teradata ceased operations in Russia in the first quarter following sanctions related to Russia’s invasion of Ukraine. Management estimated the impact at approximately $16 million of Q2 revenue and $27 million of six-month revenue, with additional effects on margins and tax assets.
- Macroeconomic conditions, foreign exchange movements, deal timing, cloud migration execution, competitive pressures, and the transition from on-premises offerings to subscriptions may affect results.
- The company relies on Flex Ltd. for hardware assembly and certain preferred or single-source suppliers; disruptions could affect shipments and operating results.
- Teradata’s remaining SAP litigation is stayed pending appeal. The filing states that the likelihood and potential range of loss from remaining patent counterclaims cannot currently be determined.
- On June 28, 2022, the company refinanced its prior term loan with a new $500 million unsecured term loan and entered into a new $400 million unsecured revolving facility, both maturing in 2027 subject to stated terms.
- Teradata entered into a $450 million SOFR interest-rate swap and a $150 million cross-currency net-investment hedge during June 2022.
Most important facts for investors to verify
- Whether Public Cloud ARR growth and the approximately 120% cloud net expansion rate translate into sustained total ARR growth after currency and Russia-related effects.
- Whether recurring revenue and gross margins recover as upfront deal timing normalizes and cloud scale improves.
- The company’s ability to generate sufficient operating cash flow while funding share repurchases, cloud investment, debt service, and other obligations.
- Exposure to floating interest rates, foreign exchange movements, and the terms of the new credit facility.
- The ultimate tax impact of R&D capitalization, GILTI, valuation allowances, and any legislative changes.
- Developments in the remaining SAP litigation and any related indemnification or intellectual-property exposure.
- Execution of the planned expansion of cloud analytics capabilities announced for August 2022 and its effect on customer adoption and revenue mix.