Business Context and Reporting Period
Teradata Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The company was executing a business transformation focused on data and analytics, cloud, hybrid-cloud offerings, consultative services, and cost management. Teradata completed the sale of its marketing applications business on July 1, 2016, and thereafter operated through Americas and International data-and-analytics segments.
Financial Highlights
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $552 million | $606 million | $1.696 billion | $1.811 billion |
| Product revenue | $208 million | $240 million | $630 million | $737 million |
| Service revenue | $344 million | $366 million | $1.066 billion | $1.074 billion |
| Gross profit | $294 million | $307 million | $873 million | $911 million |
| Gross margin | 53.3% | 50.7% | 51.5% | 50.3% |
| Operating income (loss) | $89 million | $77 million | $134 million | $(155) million |
| Net income (loss) | $49 million | $78 million | $67 million | $(165) million |
| Diluted EPS | $0.37 | $0.55 | $0.51 | $(1.16) |
- Operating expenses were $205 million in Q3, down from $230 million, primarily reflecting cost reductions and the marketing applications divestiture. Nine-month operating expenses were $739 million, including $80 million of impairment charges.
- Cash provided by operating activities was $395 million for the nine months, compared with $370 million in the prior-year period. Management-defined free cash flow was $309 million versus $276 million.
- Cash and cash equivalents were $988 million at September 30, 2016, compared with $839 million at December 31, 2015. Approximately $961 million was held outside the United States.
- Term-loan principal outstanding was $578 million at a floating interest rate of 1.9375%. The company had no borrowings under its $400 million revolving credit facility and reported compliance with debt covenants.
- Total current assets were $1.517 billion versus current liabilities of $688 million. Total liabilities were $1.382 billion and stockholders’ equity was $932 million.
Material Changes Versus Prior Comparable Period
- Q3 revenue declined 9% year over year, including a 13% decline in product revenue and a 6% decline in service revenue. Nine-month revenue declined 6%; foreign-currency movements had an approximately 1% adverse impact.
- Americas data-and-analytics revenue decreased 9% in both the quarter and nine-month period. International revenue increased 6% in Q3 and 4% for the nine months.
- Gross margin improved to 53.3% in Q3 from 50.7% and to 51.5% for the nine months from 50.3%, primarily due to product mix and the exit from the lower-margin marketing applications business.
- Q3 operating income increased despite lower revenue because of reduced selling, general and administrative and research and development expenses.
- Q3 net income declined because the prior-year period included a $35 million gain on the sale of an equity investment. The nine-month comparison improved substantially because 2015 included a $340 million goodwill impairment charge.
- Teradata sold the marketing applications business for approximately $92 million in cash, subject to post-closing adjustments. The transaction generated approximately $22 million of third-quarter tax expense and approximately $5 million of transaction costs and post-closing obligations.
- The company repurchased $69 million of common stock during the nine months, compared with $541 million in the prior-year period. Approximately $525 million remained available under the general repurchase authorization at September 30, 2016.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management estimated a 2016 full-year effective tax rate of approximately 38%, incorporating discrete tax effects from the marketing applications sale and 2016 impairment charges.
- Based on October 31, 2016 currency rates, management expected less than one percentage point of negative currency-translation impact on projected full-year revenue growth.
- Management expected cash, operating cash flow, and available revolving-credit capacity to fund working capital, research and development, capital expenditures, pension contributions, and other requirements for at least the next twelve months.
- Customers were delaying or reducing traditional on-premises purchases while evaluating cloud, subscription, rental, usage-based, and “as-a-service” alternatives. Management expected this transition to pressure near-term revenue and spread recognition over multiple periods.
- The transformation plan included expanding public and managed cloud offerings, flexible purchasing models, analytical ecosystem products, and a more consultative go-to-market approach. Management anticipated a gradual shift toward cloud, ecosystem, and consulting revenue and increased recurring revenue.
- Unusual items included $80 million of nine-month impairment charges, comprising $57 million of goodwill and $19 million of acquired intangible assets related to the divested business, plus a $4 million impairment related to the sale of the corporate plane.
- Key risks included competitive and pricing pressure, slower customer capital spending, adoption of lower-cost or alternative technologies, execution risk in the transformation, foreign-currency exposure, Brexit-related economic and currency volatility, potential future impairment charges, and restrictions or additional taxes on repatriating foreign earnings.
- The company had approximately $1.3 billion of foreign earnings considered permanently reinvested outside the United States for which it had not provided U.S. federal tax.
- Management stated that no material changes had occurred in previously disclosed contractual commitments, market-risk factors, or internal control over financial reporting. Disclosure controls were considered effective as of September 30, 2016.
Investor Verification Checklist
- Verify the final working-capital and other post-closing adjustments, transaction costs, and final tax consequences of the marketing applications divestiture.
- Monitor whether cloud, subscription, and as-a-service offerings offset continued weakness in traditional on-premises product revenue.
- Assess the sustainability of the improved gross margin and lower operating-cost structure after divestiture-related benefits and transformation actions.
- Reconcile reported net income and cash flow for impairment charges, divestiture proceeds, working-capital movements, share repurchases, and other nonrecurring items.
- Track term-loan amortization, floating-rate exposure, covenant compliance, and the timing of the $412 million term-loan maturity scheduled for 2020.
- Evaluate foreign-currency effects, Brexit-related customer spending risk, and the tax implications of cash held and earnings generated outside the United States.