Business Context and Reporting Period
Teradata Corporation provides the Vantage connected multi-cloud data platform, supported by consulting and support services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Management highlighted the August 2022 introduction of Teradata VantageCloud Lake and continued priorities of expanding cloud offerings, growing existing and new customer relationships, and improving operational efficiency.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $417 million | $460 million | $1,343 million | $1,442 million |
| Recurring revenue | $331 million | $352 million | $1,062 million | $1,100 million |
| Gross profit | $259 million | $275 million | $818 million | $892 million |
| Gross margin | 62.1% | 59.8% | 60.9% | 61.9% |
| Operating income | $25 million | $30 million | $107 million | $181 million |
| Net income | $8 million | $17 million | $40 million | $114 million |
| Diluted EPS | $0.08 | $0.15 | $0.38 | $1.01 |
| Operating cash flow | Not separately provided | Not separately provided | $290 million | $368 million |
| Free cash flow | Not separately provided | Not separately provided | $283 million | $347 million |
Q3 revenue mix was 79.3% recurring, 3.4% perpetual software licenses, hardware and other, and 17.3% consulting services. Consulting gross margin improved to 22.2% from 12.2%, while recurring gross margin declined to 72.2% from 73.0%.
At September 30, 2022, cash and cash equivalents were $506 million, compared with $592 million at December 31, 2021. Total debt was $500 million, consisting of the new term loan; no borrowings were outstanding under the $400 million revolving facility. Management stated that current cash, operating cash flow, and available revolving capacity should be sufficient for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 9%, including an estimated 5% adverse foreign-exchange impact. Nine-month revenue declined 7%, including a 4% currency impact.
- Recurring revenue declined 6% in Q3 and 3% for the first nine months. Perpetual software licenses, hardware and other revenue declined 22% in Q3 and 17% year to date; consulting revenue declined 20% and 18%, respectively.
- Q3 gross margin increased 230 basis points, primarily from revenue mix and improved consulting margins. Nine-month gross margin decreased 100 basis points.
- Operating income declined 17% in Q3 and 41% for the first nine months. Net income declined 53% in Q3 and 65% year to date.
- Operating cash flow decreased $78 million year over year to $290 million, primarily due to lower net income and working-capital timing.
- Foreign currency losses included in other expense increased by $6 million in Q3 and $19 million for the first nine months.
- Teradata ceased operations in Russia in the first quarter of 2022. Management attributed approximately $16 million of Q3 revenue loss and approximately $45 million of nine-month revenue loss to the closure.
- Public Cloud ARR increased 89% to $279 million at September 30, 2022, while total ARR declined 4% to $1.374 billion. Cloud net expansion rate declined to 117% from 141%.
- Teradata repurchased approximately 8.2 million shares for $346 million during the first nine months, reducing reported shares outstanding to approximately 102.2 million from 107.2 million at year-end 2021.
Guidance, Outlook, Risks and Unusual Items
Teradata reaffirmed its 2022 outlook: Public Cloud ARR growth of approximately 80% year over year; total ARR and total recurring revenue declines in the low-to-mid-single-digit percentage range; and total revenue decline in the mid-to-high-single-digit percentage range. Based on October 31, 2022 exchange rates, management estimated a 4.25% to 4.75% adverse currency impact on full-year reported revenue.
Management estimated a 2022 effective tax rate of approximately 41%. The rate includes the impact of U.S. tax rules requiring capitalization and amortization of research and development expenses, including an estimated $7 million of GILTI tax expense. Proposed legislation could reduce the tax impact if enacted retroactively.
The new $500 million term loan matures in 2027, with quarterly amortization beginning in 2024. Teradata entered into a $450 million SOFR interest-rate swap covering approximately 90% of the term loan and a $150 million cross-currency swap. The company was in compliance with its debt covenants at September 30, 2022.
Risks include foreign-exchange volatility, continued revenue transition from perpetual and on-premises offerings to cloud subscriptions, customer concentration and cancellations, reliance on Flex for hardware assembly and certain single-source suppliers, execution of the Russia exit, and the ability to sustain operating cash flow. Teradata disclosed ongoing SAP litigation and stated that the likelihood and potential loss from remaining patent counterclaims could not currently be determined. Management reported no material changes to previously disclosed risk factors and no material changes affecting disclosure controls.
Investor Verification Checklist
- Verify the sustainability of Public Cloud ARR growth and whether it offsets declines in total ARR, maintenance ARR, and on-premises subscription ARR.
- Assess the effects of foreign exchange, the Russia exit, and subscription-transition timing on reported revenue and margins.
- Reconcile operating cash flow and free cash flow, including the $50 million CARES Act tax refund and working-capital movements.
- Review the new term-loan terms, SOFR hedge effectiveness, covenant headroom, and future refinancing or amortization requirements.
- Monitor the approximately 41% projected effective tax rate and potential changes to R&D capitalization and GILTI rules.
- Review the status and potential exposure of the remaining SAP litigation and any customer, supplier, or indemnification contingencies.