Teradata Corporation — FY2017 Form 10-K Summary
Business context and reporting period
Teradata provides analytic data solutions and services, including software, hardware, cloud offerings, consulting, and maintenance support. The filing covers the fiscal year ended December 31, 2017, with quarterly information included for the fourth quarter. The company operated through Americas Data and Analytics and International Data and Analytics segments after selling its marketing applications business in July 2016.
- FY2017 revenue was generated approximately 55% in the Americas and 45% internationally.
- The company is transitioning from upfront perpetual licenses toward subscription, rental, cloud, and usage-based models under its Teradata Everywhere strategy.
- Backlog was approximately $1.6 billion at December 31, 2017, including approximately $1.1 billion expected to be recognized as revenue in 2018.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $2,156 million | $2,322 million | Down 7% |
| Gross profit | $1,022 million | $1,188 million | Down 14% |
| Gross margin | 47.4% | 51.2% | Down 3.8 points |
| Operating income | $64 million | $232 million | Down 72% |
| Net income/(loss) | $(67) million | $125 million | Declined $192 million |
| Diluted EPS | $(0.53) | $0.95 | Declined $1.48 |
| Cash flow from operations | $324 million | $446 million | Down $122 million |
| Free cash flow | $237 million | $328 million | Down $91 million |
| Cash and cash equivalents | $1,089 million | $974 million | Up $115 million |
| Total debt | $780 million | $570 million | Up $210 million |
- Product and cloud revenue was $747 million, down 19%; service revenue was $1.409 billion, up 1%.
- Recurring revenue increased 7% to $1.047 billion, or 49% of total revenue, from $978 million, or 42%, in 2016.
- Annual recurring revenue was approximately $1.1 billion at year-end, up $126 million, or 13%.
- R&D expense increased 44% to $306 million, partly because the company stopped capitalizing external-use software development costs and increased investment in cloud initiatives.
- SG&A declined 2% to $652 million.
Liquidity, debt, and capital allocation
- Cash provided by operations was $324 million; capital expenditures were $78 million and additions to capitalized software were $9 million.
- The company repurchased approximately 11.5 million shares for $351 million at an average price of $30.59 per share.
- Debt consisted principally of a $540 million term loan and $240 million drawn under a $400 million revolving credit facility. The company had $160 million of additional revolver capacity available.
- The term loan carried a 3.375% interest rate and the revolver carried a 5.0% interest rate at year-end. Both facilities mature or become due in 2020, subject to their contractual terms.
- Management stated that cash, operating cash flow, and available revolver capacity were sufficient for at least the next twelve months. Approximately $1.044 billion of cash was held outside the United States.
Material changes versus the prior comparable period
- Revenue declined primarily because of the 2016 divestiture of the marketing applications business and the shift from upfront perpetual transactions to revenue recognized over the life of subscription, rental, and cloud contracts.
- Gross margin contracted because of consulting investments, a higher services mix, lower services margins, and higher capitalized software amortization.
- Operating income fell substantially as revenue declined and the company reinvested in its transformation, cloud offerings, consulting capabilities, sales effectiveness, and infrastructure.
- Net results were affected by a $126 million tax charge related to the 2017 Tax Cuts and Jobs Act. The charge included a provisional $145 million transition tax on accumulated foreign earnings, partially offset by a $19 million tax benefit from deferred-tax remeasurement.
- Unlike 2016, the company recorded no goodwill or acquired-intangible impairment in 2017. FY2016 included $80 million of impairment and FY2015 included $478 million.
- International revenue increased 5% to $961 million, while Americas revenue decreased 10% to $1.195 billion.
- Fourth-quarter 2017 revenue was $626 million and operating income was $59 million. The quarter included the $126 million tax impact, resulting in a net loss of $74 million, or $(0.61) per diluted share.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific numerical FY2018 revenue or earnings forecast in the provided filing text. Management expects the transition to subscription-based offerings to reduce near-term reported revenue and cash collections because revenue is recognized over time, while increasing recurring revenue and potentially improving long-term predictability.
- Key execution risk is whether the business transformation, cloud strategy, consulting investments, and new sales model produce the expected growth and cost benefits.
- Revenue remains difficult to forecast because of long sales cycles, large individual transactions, seasonal buying patterns, and customer budgeting cycles. Fourth-quarter revenue is typically higher than first-quarter revenue.
- Competitive risks include cloud providers, open-source technologies, traditional enterprise technology companies, pricing pressure, and rapidly changing analytics architectures.
- Subscription and cloud offerings increase exposure to renewal, customer adoption, data security, privacy, service reliability, and third-party hosting risks.
- The company relies on Flex Ltd. for hardware assembly and uses certain single-source suppliers, creating potential supply-chain disruption risk.
- Foreign currency, international regulatory and anti-corruption compliance, cybersecurity, intellectual property, tax audits, litigation, and changing data-protection laws remain material risks.
- The company disclosed a prior investigation into questionable expenditures at a Turkish subsidiary. The SEC closed its investigation without recommending enforcement action on January 16, 2018, and the Department of Justice closed its investigation without enforcement action on February 20, 2018.
- Teradata adopted ASC 606 revenue guidance on January 1, 2018 using the modified retrospective method and expected approximately $20 million of revenue-related retained-earnings adjustments and approximately $15 million of deferred compensation costs. The company stated that the assessment was not yet final.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether recurring revenue and annual recurring revenue growth offset the near-term revenue drag from subscription and cloud adoption.
- The pace of Americas recovery, particularly given the 10% FY2017 revenue decline in that segment.
- Progress in restoring gross margins while maintaining consulting and cloud investment.
- Debt repayment capacity, revolver utilization, floating-rate exposure, and the timing of 2020 maturities.
- The final accounting effects of ASC 606 and any subsequent revisions to the provisional Tax Act amounts.
- Whether the $1.6 billion backlog converts to revenue as expected, recognizing management’s warning that backlog may not predict results because many orders are sold and fulfilled within the same reporting period.
- Future share repurchases, including the additional $310 million authorization approved in February 2018, and their effect on liquidity and leverage.