Teradata Corporation 2019 Form 10-K Summary
Business context and reporting period
Teradata is a hybrid-cloud analytics software provider offering the Vantage analytics platform, subscriptions, software, hardware, consulting, and support services. The filing covers the fiscal year ended December 31, 2019; quarterly data identifies the fourth quarter as the period ended December 31, 2019.
Teradata continued its transformation from perpetual software and hardware sales toward subscription-based, recurring revenue and cloud deployments. Revenue was generated across the Americas, EMEA, and APAC regions, with approximately 50% of total revenue from outside the United States.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1,899 million | $2,164 million | Down 12% |
| Recurring revenue | $1,362 million | $1,254 million | Up 9% |
| Perpetual software and hardware revenue | $106 million | $340 million | Down 69% |
| Consulting services revenue | $431 million | $570 million | Down 24% |
| Gross profit | $955 million | $1,026 million | Down 7% |
| Gross margin | 50.3% | 47.4% | Up 2.9 points |
| Operating income | $10 million | $43 million | Down $33 million |
| Net income (loss) | $(20) million | $30 million | Declined $50 million |
| Diluted EPS | $(0.18) | $0.25 | Declined $0.43 |
| Cash flow from operations | $148 million | $364 million | Down $216 million |
| Free cash flow | $89 million | $204 million | Down $115 million |
Fourth-quarter 2019 revenue was $494 million, gross profit was $248 million, operating loss was $5 million, and net loss was $19 million, compared with fourth-quarter 2018 revenue of $588 million and net income of $15 million.
At December 31, 2019, cash and cash equivalents were $494 million, down from $715 million. Total assets were $2.057 billion and stockholders’ equity was $262 million. Debt and finance leases totaled approximately $612 million, including a $482 million term-loan principal balance and $130 million of finance-lease obligations.
Teradata had no borrowings under its $400 million revolving credit facility and reported compliance with its debt covenants. The company repurchased approximately 8.5 million shares for $300 million during 2019 and had approximately $503 million remaining under its general repurchase authorization.
Material changes versus the prior comparable period
- Recurring revenue increased to 71.7% of total revenue from 57.9%, while perpetual software and hardware revenue fell sharply as customers adopted subscriptions.
- Annual recurring revenue increased 9% to $1.427 billion, including $700 million of subscription and cloud-related ARR, up 42%.
- Subscription transactions represented 88% of 2019 bookings.
- Backlog increased 7% to $2.732 billion, of which approximately $1.377 billion was expected to be recognized as revenue during 2020. However, approximately $1.923 billion of backlog included customer cancellation-for-convenience provisions.
- Gross margin improved because of the higher recurring-revenue mix, although recurring-revenue margin declined due to the greater use of lower-margin subscription offerings with hardware.
- Operating expenses declined 3.9% to $945 million. SG&A declined primarily from sales-organization restructuring and lower incentive compensation, while R&D increased because of investments in Vantage and cloud offerings.
- Operating cash flow and free cash flow declined substantially because the faster subscription transition reduced upfront billings and collections, while restructuring-related cash payments and variable compensation payments increased.
- Headcount declined to 8,535 from 10,152, reflecting transformation and cost-management actions.
Guidance, outlook, commentary, risks, and unusual items
Management expected at least 8% ARR growth and recurring-revenue growth in 2020. Total revenue was expected to be flat to down slightly, reflecting recurring-revenue growth offset by further declines in perpetual revenue and consulting revenue. Management expected little to no perpetual software and hardware revenue in 2020, higher overall gross margin, and subscription margins broadly in line with 2019.
Management identified the subscription and cloud transition, execution of the business transformation, customer renewals, competitive pressure, long sales cycles, foreign currency movements, international operations, cybersecurity and data privacy, key suppliers, and retention of senior personnel as significant risks. Teradata was also searching for a permanent chief executive officer; Victor Lund served as interim CEO beginning in November 2019.
- The company incurred approximately $14 million of 2019 restructuring and headquarters-transition costs and recorded $6 million of accelerated amortization related to its former headquarters lease. Most remaining transformation actions were expected to be completed by the first half of 2020.
- A January 1, 2020 intra-entity transfer of intellectual property to an Irish subsidiary was expected to create an approximately $152 million discrete deferred tax benefit in 2020. Management forecast a 2020 effective tax rate of approximately negative 600%, making the rate unusually sensitive to this item and the company’s earnings mix.
- Remaining contractual obligations totaled approximately $982 million, including $482 million of term-loan principal, $137 million of finance-lease principal and interest, $65 million of operating-lease obligations, $92 million of transition tax, and $159 million of purchase obligations.
- Teradata is pursuing litigation against SAP involving alleged trade-secret misappropriation, copyright infringement, and anticompetitive conduct. SAP asserted patent counterclaims in July 2019; the likelihood and range of any loss could not be reasonably estimated.
- Hardware assembly is concentrated with Flex, and certain components are sourced from single suppliers, creating potential supply-chain and delivery risks.
- The company reported effective internal control over financial reporting, and its independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether recurring-revenue and ARR growth offsets the continuing decline in perpetual revenue and consulting revenue.
- Subscription renewal rates, cancellation activity, contract duration, and the portion of backlog that is cancellable.
- Progress toward positive operating income and recovery of operating cash flow and free cash flow.
- Liquidity after share repurchases, required debt amortization, lease payments, transition-tax payments, and remaining restructuring costs.
- The permanent CEO appointment and execution of the cloud and business-transformation strategy.
- The actual 2020 tax benefit from the intellectual-property transfer and its effect on cash taxes versus reported earnings.
- Developments in the SAP litigation, cybersecurity and privacy exposure, foreign-currency effects, and supplier concentration.