Teradata Corporation 10-Q Summary
Business Context and Reporting Period
Teradata provides the Vantage connected multi-cloud data platform for enterprise analytics, supported by consulting and customer services. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $491 million | $457 million | $982 million | $891 million |
| Recurring revenue | $376 million | $323 million | $748 million | $634 million |
| Gross profit | $310 million | $256 million | $617 million | $481 million |
| Gross margin | 63.1% | 56.0% | 62.8% | 54.0% |
| Operating income | $70 million | $8 million | $151 million | $2 million |
| Net income (loss) | $44 million | $(43) million | $97 million | $125 million |
| Diluted EPS | $0.39 | $(0.40) | $0.86 | $1.13 |
| Operating cash flow | Not separately provided | Not separately provided | $335 million | $140 million |
| Free cash flow | Not separately provided | Not separately provided | $324 million | $113 million |
Q2 operating margin was approximately 14.3%, compared with 1.8% in the prior-year quarter. Six-month operating margin was approximately 15.4%, compared with approximately 0.2% in 2020. Q2 net margin was approximately 9.0%, compared with negative 9.4% in 2020; the six-month net margin was approximately 9.9%, compared with 14.0% in 2020.
- Subscription software license revenue increased to $81 million in Q2 from $55 million; services and other revenue increased to $295 million from $268 million.
- Perpetual software licenses, hardware and other revenue declined 32% in Q2 to $17 million, while consulting services declined 10% to $98 million.
- Annual recurring revenue was $1.426 billion at quarter-end, up 9% year over year. Public cloud ARR was $139 million, up 157%.
- Backlog or remaining performance obligations were $2.611 billion, up 1% year over year. Approximately $1.5 billion was subject to customer cancellation-for-convenience provisions.
- Cash and cash equivalents were $684 million at June 30, 2021, versus $529 million at December 31, 2020. Total assets were $2.245 billion and stockholders’ equity was $471 million.
- Long-term debt and current maturities totaled $436 million on the balance sheet. The term loan principal was $437 million, and the $400 million revolving credit facility had no borrowings and was fully available.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by recurring, subscription, and public cloud activity, while customers continued transitioning away from perpetual licenses and hardware.
- Gross margin expanded primarily because of the higher recurring-revenue mix, subscription and cloud efficiencies, and improved consulting resource utilization.
- Operating expenses declined 3% in Q2 and 3% for the first six months, largely due to 2020 workforce reductions, lower travel and marketing spending, and cost discipline.
- Operating cash flow increased $195 million year over year, reflecting higher earnings, stronger collections, and favorable working-capital movements.
- The company repurchased approximately 3.4 million shares for $121 million during the first six months. Approximately $321 million remained under the general repurchase authorization at June 30, 2021.
- Prior-period revenue and cost classifications were revised to reflect the company’s current business strategy; total revenue, total cost of revenue, and gross profit were unchanged.
Guidance, Outlook, Risks, and Unusual Items
- Management expected full-year 2021 ARR growth in the mid- to high-single-digit range, recurring-revenue growth in the high-single-digit to low-double-digit range, and total-revenue growth in the low-single-digit to mid-single-digit range.
- Public cloud ARR was expected to increase at least 90% year over year in Q3 2021 and at least 100% for full-year 2021.
- Management estimated a full-year 2021 effective tax rate of approximately 30%. Results in 2020 were materially distorted by discrete tax items, including a $152 million benefit related principally to an intra-entity intellectual-property transfer.
- The company incurred $13 million of workforce-reduction and real-estate-rationalization costs in the first six months of 2021. Remaining costs were expected in the second half of 2021, with total charges estimated at approximately $55 million to $59 million and cash expenditures at approximately $59 million to $66 million.
- COVID-19 and potential variants continued to create uncertainty affecting employees, customer demand, consulting projects, suppliers, and return-to-office plans.
- Teradata is involved in litigation with SAP involving alleged trade-secret and patent matters. The company stated that the likelihood and reasonably estimable loss range for SAP’s patent counterclaims and German lawsuit could not currently be determined.
- Hardware manufacturing is outsourced to Flex, and reliance on Flex and certain single-source suppliers creates supply-chain and shipment risks.
- Management stated that existing cash, operating cash flow, and available credit were expected to satisfy requirements for at least the next twelve months. The company was in compliance with its credit and term-loan covenants.
Important Facts for Investors to Verify
- Whether ARR and public cloud ARR growth continues at the rates underlying management’s 2021 outlook.
- Whether recurring-revenue mix and cloud efficiencies sustain the substantial gross-margin improvement.
- The timing and final cost of workforce, facilities, and transformation actions.
- The effect of customer cancellation rights on the $2.611 billion backlog and future revenue conversion.
- Refinancing or repayment requirements when the term loan and revolving facility mature in 2023.
- Potential financial or operational effects from the SAP litigation, COVID-19 developments, and supplier concentration.
- The sustainability of unusually strong first-half operating cash flow and free cash flow relative to reported net income.