Teradata Corporation Form 10-Q Summary
Business context and reporting period
Teradata provides data analytics software, cloud and subscription offerings, hardware, and consulting services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company is transitioning from perpetual software and hardware sales toward subscription-based and cloud offerings, including the Teradata Vantage analytics platform.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $526 million | $526 million | $1,576 million | $1,530 million |
| Recurring revenue | $312 million | $292 million | $926 million | $846 million |
| Gross profit | $264 million | $250 million | $737 million | $717 million |
| Gross margin | 50.2% | 47.5% | 46.8% | 46.9% |
| Income from operations | $14 million | $9 million | $20 million | $8 million |
| Net income | $18 million | $13 million | $15 million | $7 million |
| Diluted EPS | $0.15 | $0.10 | $0.12 | $0.05 |
| Operating cash flow | Not separately provided | Not separately provided | $257 million | $301 million |
| Free cash flow | Not separately provided | Not separately provided | $160 million | $235 million |
- Q3 recurring revenue increased 7%, while perpetual software licenses and hardware declined 14% and consulting services declined 5%. Nine-month recurring revenue increased 9%, while perpetual software and hardware declined 10%.
- Q3 gross margin expanded 270 basis points, primarily from recurring-revenue growth and improved consulting-services margins. Nine-month gross margin was broadly flat because subscription revenue generally carries lower margins than legacy maintenance and software-upgrade revenue.
- Operating expenses increased 4% in Q3 and 1% for the nine-month period. Nine-month research and development expense increased to $236 million from $228 million, reflecting investment in cloud, managed services, and Teradata Vantage.
- Cash flow from operations declined $44 million year over year, and free cash flow declined $75 million, partly because subscription customers pay over time and because of higher capital expenditures and transformation investment.
- At September 30, 2018, cash and cash equivalents were $768 million versus $1,089 million at December 31, 2017. Total current assets were $1,284 million and total current liabilities were $725 million.
- Debt included $500 million of term-loan principal and approximately $22 million of capital-lease obligations. The company had no revolving-credit borrowings and retained $400 million of available revolving capacity. The term loan was hedged, resulting in an all-in fixed rate of 4.36% at September 30, 2018.
Material changes versus prior comparable periods
- Q3 revenue was flat, but the revenue mix shifted materially toward recurring revenue, which represented 59.3% of revenue versus 55.5% in the prior-year quarter.
- International Q3 revenue increased 6%, while Americas revenue decreased 5%. Foreign currency movements reduced Q3 total revenue by approximately 2%.
- Nine-month revenue increased 3% to $1.576 billion, including a 1% favorable foreign-currency impact.
- The company repurchased $206 million of common stock during the first nine months, purchasing approximately 5.4 million shares. The general repurchase authorization remaining at September 30 was approximately $338 million.
- Cash declined primarily because of $464 million of financing cash outflows, including share repurchases, debt repayments, and repayment of $240 million of credit-facility borrowings.
- The company adopted ASC Topic 606 using the modified retrospective method on January 1, 2018. Adoption reduced opening accumulated deficit by $26 million on a net basis and increased reported Q3 net income by approximately $3 million and nine-month net income by approximately $12 million versus the previous revenue-recognition guidance.
Guidance, outlook, commentary, risks, and unusual items
- Management expected 2018 subscription bookings mix to be at the high end of, or slightly above, its estimated 65% to 70% range. Q3 subscription bookings mix was 82%.
- Annual recurring revenue was approximately $1.2 billion at Q3-end, up 6% year over year. Management stated that customer migration to subscriptions may negatively affect near-term reported revenue timing while increasing recurring revenue over time.
- Management estimated a full-year 2018 effective tax rate of approximately negative 17%. The Q3 tax benefit included a $7 million adjustment to provisional amounts under the 2017 Tax Cuts and Jobs Act. The tax accounting remained provisional, with completion expected in the fourth quarter of 2018.
- The company expected no currency-translation impact on its full-year projected revenue growth rate based on October 31, 2018 exchange rates.
- A headquarters and operations-consolidation plan is expected to cost approximately $35 million to $45 million, primarily in cash, during 2018 and 2019. The company incurred $13 million through the first nine months of 2018, of which $8 million remained accrued at September 30.
- Teradata sued SAP in June 2018, alleging trade-secret misappropriation and anticompetitive conduct. The company seeks injunctive relief and damages. Management stated that it was not aware of other litigation expected to materially affect the business.
- Key operating risks include customer adoption and renewal of subscription contracts, revenue timing, foreign-currency volatility, competitive pressure, reliance on Flex and certain single-source suppliers, credit exposure to large customers, execution of the business transformation, and compliance with debt covenants.
- The company expected to adopt the new lease standard prospectively on January 1, 2019. It could not yet reasonably estimate the potentially material increase in reported assets and liabilities, although it did not expect a material income-statement or cash-flow effect.
Important facts for investors to verify
- Whether recurring-revenue and ARR growth continues to offset declining perpetual-license and hardware revenue without excessive margin pressure.
- The sustainability and cash-flow impact of subscription billing, including collection timing and customer renewal rates.
- Progress and final costs of the headquarters consolidation and broader transformation plan.
- Final accounting for the Tax Cuts and Jobs Act and the resulting effective tax rate.
- Term-loan amortization, interest-rate exposure, covenant compliance, and the availability of revolving-credit capacity.
- The potential financial and operational consequences of the SAP litigation and supplier concentration.
- The effect of ASC 606 adoption and the prospective lease-standard adoption on comparability, assets, liabilities, and earnings.