Teradata Corporation — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Teradata provides the Vantage connected multi-cloud data platform, including public cloud, private cloud, on-premises and related consulting and support services. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $476 million | $496 million | Down 4% |
| Recurring revenue | $389 million | $386 million | Up 1% |
| Gross profit | $302 million | $301 million | Up 1% |
| Gross margin | 63.4% | 60.7% | Up 270 bps |
| Operating income | $79 million | $68 million | Up 16% |
| Net income | $40 million | $36 million | Up 11% |
| Diluted EPS | $0.39 | $0.33 | Up $0.06 |
| Cash flow from operations | $109 million | $151 million | Down $42 million |
| Free cash flow | $105 million | $150 million | Down $45 million |
Perpetual software licenses, hardware and other revenue declined 50% to $13 million, while consulting services revenue declined 12% to $74 million. Recurring revenue represented 81.7% of total revenue, compared with 77.9% in the prior-year quarter. Foreign currency movements reduced reported total revenue by approximately 4% and recurring revenue by approximately 3%.
Operating expenses declined 4% to $223 million, reflecting lower research and development costs and the absence of certain Russia-related costs incurred in 2022. Other expense, net increased to $21 million from $13 million, primarily because foreign currency losses increased by $12 million. The effective tax rate was 31.0%, compared with 34.5%; management estimated a full-year 2023 effective tax rate of approximately 36%.
ARR was $1.506 billion at March 31, 2023, up 6% year over year, including a 1% adverse currency impact. Public Cloud ARR was $388 million, up 86%, including a 3% adverse currency impact. Cloud net expansion rate was 119%, compared with 128% in the prior-year period.
Cash and cash equivalents were $551 million at March 31, 2023, compared with $569 million at December 31, 2022. Total cash, cash equivalents and restricted cash were $555 million. The company had $500 million of term-loan principal outstanding and no revolver borrowings. The $400 million revolving facility remained available, and the company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined despite modest recurring-revenue growth, primarily because of currency effects, the continuing shift away from perpetual licenses and hardware, lower consulting revenue, and the absence of a partial-period contribution from Russia.
- Gross margin improved because recurring revenue represented a larger proportion of sales, recurring-revenue margins improved, and Russia-related costs recorded in Q1 2022 did not recur.
- Operating income and net income increased despite lower revenue.
- Operating cash flow decreased principally because Q1 2022 included a $50 million tax refund related to a CARES Act carryback claim.
- The company repurchased approximately 2.3 million shares for $84 million during the quarter at an average price of $37.69. Approximately $758 million remained available under the open-market repurchase authorization at March 31, 2023.
- EMEA revenue declined 9% and APJ revenue declined 13%, while Americas revenue increased 1%; reported regional results were materially affected by foreign exchange.
Guidance, Outlook, Commentary and Risks
Management reaffirmed its full-year 2023 outlook: Public Cloud ARR growth of 53% to 57%, total ARR growth of 6% to 8%, recurring-revenue growth of 4% to 7%, and total-revenue growth of 1% to 4%. Based on exchange rates as of April 30, 2023, management estimated a 1.25% to 1.75% adverse currency impact on full-year reported revenue.
Management is focused on migrating customers to the cloud, expanding VantageCloud and related offerings, adding and expanding customers, and improving operating efficiency. The company expects current cash, operating cash flow and available revolver capacity to fund working capital, research and development, capital expenditures, pension contributions and other requirements for at least the next twelve months.
- Foreign exchange exposure remains significant; the company uses forward contracts, a cross-currency swap and an interest-rate swap for hedging.
- The company’s hardware components are assembled exclusively by Flex, and disruptions at Flex or single-source suppliers could affect shipments and operating results.
- Large customer transactions create potential concentration and counterparty risk.
- Teradata and SAP remain involved in litigation and related patent counterclaims. The company stated that the likelihood and reasonably estimable range of loss for SAP’s remaining counterclaims could not currently be determined.
- The company used approximately $15 million for restructuring and reorganization activities during the quarter.
- Management reported no material changes to previously disclosed risk factors, market-risk disclosures or internal control over financial reporting; disclosure controls were effective as of March 31, 2023.
Key Facts Investors Should Verify
- Whether rapid Public Cloud ARR growth converts into sustained recurring-revenue and total-revenue growth within management’s 2023 guidance ranges.
- The durability of the 63.4% gross margin amid currency pressure, consulting realignment and changing revenue mix.
- Cash-flow trends after the nonrecurring Q1 2022 tax refund and the effect of continued share repurchases on liquidity and leverage.
- Progress in reducing legacy maintenance, perpetual-license and hardware revenue while expanding cloud workloads.
- The outcome and potential financial exposure of the remaining SAP litigation and counterclaims.
- Compliance with the term-loan covenants and the company’s ability to manage variable-rate debt and foreign-currency exposures.