Teradata Corporation — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Teradata provides hybrid-cloud analytics software, hardware, consulting, and related support services, with a strategic focus on Teradata Vantage and subscription-based offerings for large, data-intensive customers. The filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Effective January 1, 2019, Teradata reported three geographic operating segments: Americas, EMEA, and APAC.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $468 million | $506 million | Down 8% |
| Recurring revenue | $331 million | $302 million | Up 10% |
| Perpetual software licenses and hardware | $31 million | $69 million | Down 55% |
| Consulting services | $106 million | $135 million | Down 21% |
| Gross profit | $224 million | $223 million | Nearly flat |
| Gross margin | 47.9% | 44.1% | Up 3.8 percentage points |
| Operating loss | $5 million | $4 million | Worsened by $1 million |
| Net loss | $10 million | $7 million | Worsened by $3 million |
| Diluted loss per share | $0.09 | $0.06 | Worsened by $0.03 |
| Operating cash flow | $49 million | $184 million | Down $135 million |
| Free cash flow | $33 million | $156 million | Down $123 million |
Recurring revenue represented 70.7% of total revenue, compared with 59.7% in the prior-year quarter. Gross profit was supported by the higher recurring-revenue mix, although subscription-based transactions generally carry lower margins than legacy maintenance and upgrade-rights revenue. Operating expenses were $229 million, or 48.9% of revenue, compared with $227 million, or 44.9%, in the prior-year period. Interest expense increased to $9 million from $5 million, partly offset by interest income of $6 million versus $3 million.
At March 31, 2019, cash and cash equivalents were $723 million, compared with $715 million at December 31, 2018. Total current assets were $1.302 billion and total current liabilities were $914 million. Accounts receivable declined to $445 million from $588 million, while current deferred revenue increased to $569 million from $490 million. Total deferred revenue was $669 million.
Total debt consisted primarily of a $500 million senior unsecured term loan, with $25 million classified as current debt and $472 million as long-term debt on the balance sheet. The company had no borrowings under its $400 million revolving credit facility and reported compliance with all debt covenants. An interest-rate swap resulted in an all-in fixed rate of 4.36% on the term loan at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue declined $38 million, primarily because customers continued shifting from upfront perpetual licenses and hardware toward subscription arrangements and because consulting activity declined.
- Recurring revenue increased $29 million, while perpetual software licenses and hardware revenue decreased $38 million and consulting revenue decreased $29 million.
- Foreign currency translation negatively affected total revenue by approximately 4% and recurring revenue by approximately 3%.
- Gross margin improved despite lower revenue, reflecting the increased recurring-revenue mix.
- Operating cash flow and free cash flow declined substantially, due to restructuring payments, higher payments related to 2018 variable compensation, lower billings associated with subscription transactions, and the timing of vendor payments.
- Teradata repurchased approximately 1.2 million shares for $56 million, compared with approximately 2.1 million shares for $60 million in Q1 2018. Approximately $230 million remained under the general repurchase authorization at quarter-end.
- Research and development expense increased to $78 million from $75 million as Teradata invested in Vantage and cloud offerings.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects recurring revenue and annual recurring revenue to continue growing as customers adopt subscription-based offerings, while perpetual revenue is expected to continue declining in 2019.
- Annual recurring revenue was $1.319 billion at quarter-end, up 9% year over year, including a 3% negative currency impact. Subscription bookings represented 72% of Q1 bookings; management expects at least 70% for full-year 2019.
- Management expects foreign currency translation to reduce full-year 2019 projected revenue growth by approximately 1 to 2 percentage points based on exchange rates at April 30, 2019.
- Consulting revenue is expected to continue declining as resources are redirected toward higher-value engagements intended to increase Vantage consumption.
- Management estimates a 2019 full-year effective tax rate of approximately 18%; the Q1 effective tax rate was zero because of the quarterly pretax loss and recurring discrete tax items.
- Teradata expects approximately $35 million to $40 million of total costs related to its headquarters transition and broader business transformation, with actions expected to be completed in 2019. Q1 included $5 million of restructuring accruals and $6 million of accelerated amortization related to the former headquarters lease.
- Teradata adopted the new lease standard on January 1, 2019, recording approximately $68 million of additional net lease assets and $66 million of lease liabilities. Prior periods were not recast.
- Remaining unsatisfied customer obligations totaled $2.476 billion, of which $1.160 billion was expected to be recognized within one year. Approximately $1.636 billion included customer cancellation-for-convenience provisions.
- Risks include execution of the subscription and cloud transition, declining perpetual and consulting revenue, foreign exchange exposure, customer concentration and credit risk, dependence on Flex and certain component suppliers, variable-rate debt exposure, and restructuring execution.
- Teradata is pursuing litigation against SAP alleging trade-secret misappropriation, copyright infringement, and anticompetitive conduct. Management stated that it was not aware of other litigation expected to materially affect the company.
Important Facts for Investors to Verify
- Whether recurring revenue and ARR growth continue to offset the near-term revenue and cash-flow effects of the subscription transition.
- Whether gross-margin improvement persists as subscription revenue becomes a larger portion of the business.
- The pace and cash cost of the headquarters transition, business transformation, and consulting realignment.
- Operating cash-flow conversion, deferred-revenue trends, billings, and working-capital movements in subsequent quarters.
- Term-loan amortization beginning June 30, 2019, refinancing capacity, and compliance with debt covenants.
- Progress in Americas, EMEA, and APAC, particularly the significant EMEA revenue decline.
- The outcome and potential financial impact of the SAP litigation and the company’s reliance on Flex and other suppliers.