Teradata Corporation 2018 Q1 Form 10-Q Summary
Business context and reporting period
Teradata provides analytic data solutions and services, including software, hardware, cloud and subscription offerings, consulting, implementation and support. The filing covers the three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017. Teradata continued transitioning from perpetual software and hardware sales toward subscription-based and recurring revenue models.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $506 million | $491 million | Up 3% |
| Recurring revenue | $302 million | $273 million | Up 11% |
| Perpetual software licenses and hardware | $69 million | $90 million | Down 23% |
| Consulting services | $135 million | $128 million | Up 5% |
| Gross profit | $223 million | $225 million | Down $2 million |
| Gross margin | 44.1% | 45.8% | Down 1.7 percentage points |
| Loss from operations | $4 million | Break-even | Declined |
| Net loss | $7 million | $2 million | Loss increased |
| Diluted loss per share | $0.06 | $0.02 | Loss increased |
| Operating cash flow | $184 million | $248 million | Down $64 million |
| Free cash flow | $156 million | $230 million | Down $74 million |
Operating expenses were $227 million, compared with $225 million in the prior-year quarter. SG&A declined to $152 million from $155 million, while research and development increased to $75 million from $70 million as Teradata invested in managed cloud, public cloud and its Analytics Platform.
At March 31, 2018, cash and cash equivalents were $939 million, compared with $1.089 billion at December 31, 2017. Total assets were $2.355 billion and total liabilities were $1.711 billion. Current liabilities included $532 million of deferred revenue, up from $414 million at year-end, while total deferred revenue increased to $604 million from $499 million.
Debt included $68 million of current debt and $456 million of long-term debt on the balance sheet. Separately, the term loan principal outstanding was $525 million, bearing interest at 3.688%, with remaining principal due in March 2020. The $400 million revolving credit facility had no outstanding borrowings at quarter-end, and Teradata reported compliance with all covenants.
Material changes versus the prior comparable period
- Recurring revenue increased 11% and represented 59.7% of total revenue, compared with 55.6% in Q1 2017.
- Perpetual software licenses and hardware revenue fell 23% as customers shifted toward subscription transactions, which generally recognize revenue over time rather than upfront.
- Gross margin declined primarily because of a higher mix of hardware and subscription revenue. Consulting services continued to generate a negative gross margin, although the margin improved modestly year over year.
- International revenue increased 8% to $242 million, including a 9% favorable currency impact. Americas revenue decreased 1% to $264 million.
- Operating results included no reorganization or business-transformation costs in Q1 2018, compared with $18 million in Q1 2017, including an $8 million inventory-related charge.
- Operating cash flow declined because subscription customers pay over time, strategic investment spending remained elevated and collection timing was less favorable.
- Teradata repurchased approximately 2.1 million shares for $60 million at an average price of $37.09 per share. General repurchase authorization remaining at March 31, 2018 was approximately $446 million.
Accounting, outlook, risks and unusual items
- Teradata adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method. Adoption reduced accumulated deficit by $26 million, increased reported first-quarter net income by approximately $4 million relative to prior guidance, and increased reported assets by $22 million. Prior-year results were not restated for Topic 606.
- Total remaining performance obligations were $1.737 billion at March 31, 2018, including $1.045 billion expected in the next year. Approximately $843 million included customer cancellation-for-convenience provisions, and management cautioned that remaining obligations may not be a meaningful indicator of future results.
- Annual recurring revenue was approximately $1.2 billion, up 11% year over year. Subscription transactions represented approximately 62% of Q1 bookings; management expected a full-year bookings mix of 50% to 60% subscription-based transactions.
- Management continued to expect high-teens TCore growth in 2018. Based on exchange rates as of April 27, 2018, currency translation was expected to contribute approximately two percentage points to full-year projected revenue growth.
- Management estimated a full-year 2018 effective tax rate of approximately 20%. The Tax Cuts and Jobs Act generated a provisional $145 million transition-tax liability in 2017, payable over eight years; the company stated that the final amount remained subject to additional analysis and guidance.
- Teradata planned to repatriate an additional $500 million of offshore cash by year-end 2018 and expected to use repatriated funds for share repurchases and general corporate purposes.
- Management stated that cash, operating cash flow and available credit were expected to meet working capital, investment, pension and other financing needs for at least the next twelve months.
- Key risks include the pace and timing of customer migration to subscriptions, competitive pressure, foreign-currency fluctuations, dependence on Flex and certain suppliers for hardware manufacturing, customer credit risk, execution of cloud and transformation initiatives, and the ability to generate sufficient operating cash flow.
- The filing reported no material pending or threatened litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2018.
Important facts for investors to verify
- Whether recurring revenue and ARR growth can offset declining perpetual software and hardware revenue.
- Whether subscription adoption improves long-term revenue visibility without causing sustained near-term pressure on revenue, gross margin and cash collections.
- The conversion of the $1.737 billion remaining performance obligation into recognized revenue, particularly the portion subject to customer cancellation rights.
- Debt repayment requirements and refinancing or liquidity needs ahead of the March 2020 term-loan and credit-facility maturities.
- The final accounting impact of the Tax Cuts and Jobs Act and the timing and use of planned offshore cash repatriation.
- Progress toward high-teens TCore growth, the projected 50% to 60% full-year subscription bookings mix and the approximately 20% full-year effective tax rate.