Teradata Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the three months ended March 31, 2017. Teradata is focusing on data and analytics, hybrid cloud, subscription-based licensing, managed and public cloud offerings, and consultative services. Following the July 1, 2016 sale of its marketing applications business, the company reports Americas and International Data and Analytics segments.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $491 million | $545 million |
| Product and cloud revenue | $166 million | $208 million |
| Service revenue | $325 million | $337 million |
| Gross profit | $224 million | $269 million |
| Gross margin | 45.6% | 49.4% |
| Loss from operations | $1 million | $42 million |
| Net loss | $2 million | $46 million |
| Diluted loss per share | $0.02 | $0.36 |
| Operating cash flow | $248 million | $250 million |
| Free cash flow | $230 million | $224 million |
Recurring revenue was $252 million, or 51% of total revenue, compared with $238 million, or 44%, in the prior-year quarter. Annual recurring revenue was approximately $1 billion, up 4%. Management reported more than 30% year-over-year growth in TCore consumption and 10% growth in Business Consulting revenue.
Cash and cash equivalents were $1.164 billion at March 31, 2017, compared with $974 million at December 31, 2016. Total debt on the balance sheet was $561 million, consisting of $38 million of current debt and $523 million of long-term debt. The term loan had $563 million of principal outstanding at a 2.375% interest rate. The company had no revolving credit facility borrowings and $400 million of available capacity.
Material Changes Versus the Prior Comparable Period
- Revenue declined 10%, primarily reflecting the marketing applications divestiture and customer migration toward cloud, subscription, rental, and usage-based purchasing models.
- Product and cloud revenue fell 20%, while service revenue declined 4%.
- Recurring revenue increased 6% and represented a larger share of total revenue.
- Gross margin decreased to 45.6% from 49.4%, reflecting lower product and services margins, product mix, software amortization, consulting project costs, and investments in analytical consulting.
- Operating and net losses improved substantially because Q1 2016 included an $80 million impairment charge. Q1 2017 had no impairment charge.
- Research and development expense increased to $70 million from $57 million, partly because the company stopped capitalizing certain software development costs and increased cloud-related investment.
- Reorganization and business transformation costs declined to $18 million from $97 million. Q1 2017 included an $8 million inventory charge and related costs associated with discontinuing prior hardware platforms.
- Cash flow from operations was broadly stable, while free cash flow increased to $230 million from $224 million.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated a full-year 2017 effective tax rate of approximately 15%; the quarter had no discrete tax items.
- Based on April 28, 2017 currency rates, management expected approximately a one-percentage-point negative currency translation impact on full-year projected revenue growth.
- Management expects revenue to shift over time toward subscription licenses, cloud, analytical ecosystem offerings, and consulting. This transition may reduce short-term revenue because more revenue is recognized over multiple periods rather than upfront.
- The company closed approximately $50 million of subscription-based license transactions during the quarter that might otherwise have been recognized as perpetual-license revenue in the current period.
- Management stated that cash, operating cash flow, and available credit capacity should be sufficient for working capital, research and development, capital expenditures, pension contributions, and other financing needs for at least the next twelve months.
- Key risks include customer adoption of new purchasing models, competitive and pricing pressure, alternative technologies, economic conditions, foreign currency movements, customer credit concentration, and reliance on Flextronics and certain preferred suppliers.
- The company had approximately $1.044 billion of cash held outside the United States and had not provided U.S. federal tax on approximately $1.3 billion of foreign earnings considered permanently reinvested abroad.
- The company repurchased 1.4 million shares for $43 million during the quarter and had approximately $485 million remaining under its general repurchase authorization.
- The company plans to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method. The potential impact remains under evaluation, particularly for subscription arrangements, contract acquisition costs, and contingent revenue.
Investor Verification Points
- Verify whether recurring revenue, ARR, and TCore consumption growth offset continuing declines in traditional product and perpetual-license revenue.
- Assess the effect of subscription and cloud transitions on reported revenue timing, margins, cash flow, and future revenue comparability.
- Monitor gross-margin recovery as consulting investments and new cloud offerings scale.
- Review term-loan amortization, floating-rate exposure, covenant compliance, and the March 2020 debt maturity.
- Evaluate the sustainability of operating cash flow and share repurchases given the company’s transformation investments.
- Track the eventual impact of the new revenue recognition standard and the company’s significant foreign cash and permanently reinvested earnings.