Teradata Corporation — Form 10-Q Summary
Business Context and Reporting Period
Teradata filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company operates through two divisions: Data and Analytics and Marketing Applications. Results were affected by weaker product demand, foreign-currency headwinds, investments in cloud and marketing applications, and a significant goodwill impairment.
Key Financial Metrics
| In millions, except per-share data | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $623 | $676 | $1,205 | $1,304 |
| Product revenue | $256 | $300 | $497 | $573 |
| Service revenue | $367 | $376 | $708 | $731 |
| Gross margin | $327; 52.5% | $371; 54.9% | $604; 50.1% | $704; 54.0% |
| Operating income (loss) | $(262) | $133 | $(232) | $222 |
| Net income (loss) | $(265) | $96 | $(243) | $155 |
| Diluted EPS | $(1.87) | $0.60 | $(1.69) | $0.97 |
| Operating cash flow | Not separately provided | Not separately provided | $302 | $481 |
| Free cash flow | Not separately provided | Not separately provided | $243 | $423 |
- Q2 revenue declined 8%, with product revenue down 15% and service revenue down 2%. Foreign currency reduced reported revenue by approximately 6%.
- Six-month revenue declined 8%; product revenue decreased 13% and service revenue decreased 3%.
- The company recorded a $340 million non-cash goodwill impairment charge related to Marketing Applications. Goodwill declined from $948 million at December 31, 2014 to $590 million at June 30, 2015.
- The impairment included a $78 million discrete tax impact, and the six-month effective tax rate was negative 11.0%, compared with 27.6% in the prior-year period.
- Cash and cash equivalents were $921 million at June 30, 2015, compared with $834 million at year-end 2014. Deferred revenue increased to $461 million from $388 million.
- Total debt was approximately $600 million, consisting primarily of a new senior unsecured term loan. The company had no borrowings under its $400 million revolving credit facility and was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Data and Analytics revenue decreased 8% in Q2 and 7% for the first six months, driven by lower large capital expenditures, weaker international results, and currency effects.
- Marketing Applications revenue decreased 9% in Q2 and 10% for the first six months. Segment gross margin declined to 41.7% in Q2 from 45.3%, primarily due to cloud investments and lower professional-services margins.
- Gross margin fell to 52.5% in Q2 from 54.9% and to 50.1% for the first six months from 54.0%. Product margins were pressured by lower volume, foreign currency, deal mix, and fixed costs; service margins were affected by utilization, work-in-process timing, and strategic investments.
- SG&A was broadly stable for the first six months, while R&D increased 15% to $122 million as Teradata invested in big-data analytics, cloud capabilities, and marketing applications.
- Operating cash flow declined $179 million year over year, and free cash flow declined $180 million. The filing attributes the operating cash-flow decline primarily to lower earnings and the timing of receivable collections.
- Teradata repurchased $308 million of common stock during the first six months and had approximately $412 million of authorization remaining under its general repurchase program at June 30, 2015.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected approximately six percentage points of adverse currency impact on full-year 2015 reported revenue growth, based on exchange rates at July 31, 2015.
- Management estimated a full-year 2015 effective tax rate of approximately 230%, reflecting the goodwill-related tax item and the company’s projected geographic earnings mix. The estimate assumed retroactive reinstatement of the U.S. R&D tax credit; without reinstatement, tax expense was expected to increase by approximately $3 million.
- Management stated that current cash, operating cash flow, and available credit were expected to support working capital, research and development, capital expenditures, pension contributions, and other financing needs for at least the next twelve months.
- Key business challenges include customer constraints on large capital expenditures, lower-cost alternative technologies, competitive and pricing pressure, smaller deal sizes, foreign-currency volatility, and execution risk in the cloud and Marketing Applications businesses.
- The goodwill impairment was based on preliminary Level 3 valuation assumptions and may be adjusted in the third quarter. Management disclosed that additional impairment charges could occur if forecasts, market conditions, or business strategy change adversely.
- The filing reported no material changes to previously disclosed risk factors, market-risk exposures, contractual commitments, or internal controls. The company stated that its disclosure controls were effective as of June 30, 2015.
Investor Verification Items
- Verify the final amount of the Marketing Applications goodwill impairment and whether any third-quarter adjustment or additional impairment was recorded.
- Assess whether revenue declines, lower product gross margins, and weaker large-capital-expenditure demand persisted beyond Q2 2015.
- Reconcile reported results with the non-GAAP free-cash-flow measure and monitor whether operating cash flow improves from the $302 million first-half level.
- Review the $600 million term-loan amortization schedule, floating-rate exposure, covenant compliance, and refinancing requirements through the March 2020 maturity.
- Evaluate the sustainability of share repurchases in light of lower earnings, reduced free cash flow, and increased debt.
- Monitor foreign-currency effects, the projected 2015 tax rate, and the tax consequences of approximately $1 billion of foreign earnings treated as permanently reinvested.