Teradata Corporation — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Teradata provides the Vantage multi-cloud data platform for enterprise analytics, supported by consulting, services, and partner networks. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Results are reported across the Americas, EMEA, and APJ regions.
Financial Results and Key Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $491 million | $434 million | Up 13% |
| Recurring revenue | $372 million | $311 million | Up 20% |
| Gross profit | $307 million | $225 million | Up 36% |
| Gross margin | 62.5% | 51.8% | Up 10.7 percentage points |
| Operating income (loss) | $81 million | $(6) million | Improved by $87 million |
| Net income | $53 million | $168 million | Down 68% |
| Diluted EPS | $0.47 | $1.51 | Down $1.04 |
| Cash flow from operations | $110 million | $10 million | Up $100 million |
| Free cash flow | $105 million | $(2) million | Improved by $107 million |
Recurring revenue represented 75.7% of total revenue versus 71.7% in the prior-year quarter. Subscription software licenses increased to $93 million from $48 million, while services and other recurring revenue increased to $279 million from $263 million. Perpetual software licenses, hardware and other revenue was $23 million in both periods, and consulting services revenue declined to $96 million from $100 million.
Operating expenses decreased 2% to $226 million. SG&A declined to $149 million from $158 million, while R&D increased to $77 million from $73 million as the company invested in cloud initiatives and incurred higher variable incentive compensation.
ARR was $1.404 billion at quarter-end, up 12% year over year, including a 3% favorable currency impact. Public cloud ARR was $124 million, up 176%, including a 6% favorable currency impact. Remaining performance obligations were $2.702 billion, up 2% from the prior-year quarter; approximately $1.674 billion was subject to customer-only cancellation-for-convenience provisions.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $538 million at March 31, 2021, compared with $529 million at December 31, 2020. Cash, cash equivalents, and restricted cash totaled $542 million.
- The company had $400 million of available capacity and no borrowings under its revolving credit facility, which expires in June 2023. Teradata was in compliance with the facility’s covenants.
- Term-loan principal outstanding was $450 million. The interest-rate swap resulted in an all-in fixed rate of 4.36% at March 31, 2021.
- Total current and long-term debt was $449 million, excluding finance and operating lease liabilities.
- Teradata repurchased approximately 2.6 million shares for $83 million during the quarter at an average price of $32.94 per share. Approximately $352 million remained authorized under the general repurchase program at quarter-end.
- Management stated that cash on hand, operating cash flow, and available revolver capacity should be sufficient for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by recurring revenue, subscription adoption, public cloud expansion, and several significant on-premises customer transactions. Approximately $24 million of recurring revenue was recognized in Q1 from arrangements that otherwise would have been recognized ratably during 2021.
- Gross margin expanded principally because of the higher recurring-revenue mix, improved subscription and cloud operating efficiency, better consulting utilization, and deal mix.
- Operating performance improved from a $6 million loss to $81 million of income, despite continued investment in cloud transformation.
- Net income declined sharply because Q1 2020 included a $182 million tax benefit, largely from a $157 million benefit related to an intra-entity intellectual-property transfer. The Q1 2021 effective tax rate was 26.4%, compared with 1,300.0% in Q1 2020.
- Operating cash flow increased substantially due primarily to improved working-capital management and higher deferred revenue.
- The company revised the presentation of certain revenue and cost categories, including reclassifications of managed-services and third-party revenue. The changes did not affect total revenue, total cost of revenue, or gross profit.
Guidance, Outlook, Risks, and Unusual Items
- For full-year 2021, management expected ARR growth in the mid- to high-single-digit range, public cloud ARR growth of at least 100%, and total revenue growth at a low-single-digit percentage rate. Currency translation was expected to provide approximately a two-percentage-point benefit to full-year revenue based on April 30, 2021 exchange rates.
- Management estimated a full-year 2021 effective tax rate of approximately 30%.
- The company incurred $8 million of workforce-reduction and real-estate-rationalization costs in Q1 2021 and expected total costs of approximately $52 million to $60 million, with estimated cash expenditures of approximately $60 million to $70 million.
- COVID-19 continued to create uncertainty regarding customer spending, consulting projects, workforce arrangements, supply chains, and operating costs.
- Teradata and SAP are engaged in ongoing trade-secret and patent litigation in the United States, including SAP counterclaims, and a related German patent lawsuit. The filing states that the likelihood and potential loss range for SAP’s counterclaims and German lawsuit cannot currently be determined.
- Hardware components are assembled exclusively by Flex, and reliance on Flex and certain single-source suppliers creates potential supply-chain and shipment risks.
- Proposed U.S. tax-law changes, including a higher corporate tax rate, increased taxation of international operations, and a global minimum tax, could affect future tax rates, cash taxes, and deferred tax assets.
- The company used foreign-exchange forwards and a term-loan interest-rate swap to manage currency and interest-rate exposure. No material changes to previously disclosed market risks were reported.
Important Facts for Investors to Verify
- Whether ARR and public cloud ARR growth translate into durable recurring-revenue and cash-flow growth after the benefit of significant customer transactions in Q1.
- The sustainability of the 62.5% gross margin and the pace of improvement in consulting-services margins.
- The timing and magnitude of the remaining workforce and real-estate restructuring costs and related cash expenditures.
- The company’s ability to refinance or repay the $450 million term loan when it matures in 2023.
- The effect of foreign-exchange movements, customer cancellation rights, COVID-19 developments, and supply-chain concentration on backlog conversion and revenue.
- Potential outcomes and financial exposure from the SAP litigation.
- Future tax-rate effects from proposed U.S. and international tax changes, particularly given the unusually large tax benefit in Q1 2020.