Business Context and Reporting Period
Teradata Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. Teradata provides hybrid-cloud data and analytics software, hardware, consulting, and support services through its Vantage platform. The company is transitioning customers from perpetual licenses and hardware purchases toward subscription-based offerings.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total revenue | $457 million | $478 million | $891 million | $946 million |
| Recurring revenue | $358 million | $338 million | $703 million | $669 million |
| Gross profit | $256 million | $236 million | $481 million | $460 million |
| Gross margin | 56.0% | 49.4% | 54.0% | 48.6% |
| Operating income | $8 million | $10 million | $2 million | $5 million |
| Net income (loss) | $(43) million | $(1) million | $125 million | $(11) million |
| Diluted EPS | $(0.40) | $(0.01) | $1.13 | $(0.09) |
| Operating cash flow | Not separately provided | Not separately provided | $140 million | $104 million |
| Free cash flow | Not separately provided | Not separately provided | $113 million | $75 million |
Q2 revenue declined 4%, while recurring revenue increased 6%. Perpetual software licenses and hardware revenue fell 41%, and consulting services revenue fell 26%. Operating expenses increased 10% to $248 million, primarily due to higher equity compensation and investments in go-to-market and customer success functions.
At June 30, 2020, cash and cash equivalents were $494 million, compared with $494 million at December 31, 2019. Total debt on the balance sheet was $467 million, including $31 million current and $436 million long-term. The company had no borrowings under its $400 million revolving credit facility, was in compliance with its debt covenants, and reported $400 million of available revolver capacity. The term loan principal was $469 million, with an all-in fixed interest rate of 4.36% after hedging.
Current liabilities were $893 million against current assets of $948 million. Deferred revenue increased to $559 million from $533 million at year-end 2019. Remaining unsatisfied obligations were $2.595 billion, including $1.382 billion expected to be recognized within one year; approximately $1.783 billion was subject to customer-only cancellation-for-convenience provisions.
Material Changes Versus the Prior Comparable Period
- Revenue mix continued shifting toward recurring and subscription revenue: recurring revenue represented 78.4% of Q2 revenue versus 70.7% in the prior-year quarter.
- Gross margin increased 660 basis points in Q2 and 540 basis points for the six-month period, primarily because of the higher recurring-revenue mix.
- Despite higher gross profit, operating income declined because operating expenses increased, particularly stock-based compensation and sales-related investments.
- Q2 net loss widened to $43 million from $1 million, primarily due to higher operating expenses and a $39 million discrete tax expense.
- Six-month net income of $125 million was substantially affected by a $142 million income-tax benefit, principally associated with an intra-entity transfer of intellectual property to an Irish subsidiary.
- Operating cash flow increased $36 million year over year, and free cash flow increased $38 million, reflecting improved working-capital management.
- The company repurchased approximately 3.7 million shares for $75 million during the first six months but suspended repurchases in Q2 because of COVID-19 uncertainty. Remaining general repurchase authorization was $432 million at June 30, 2020.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected annual recurring revenue and recurring revenue to grow in 2020, but total revenue to decline because of lower perpetual revenue and consulting revenue.
- Management expected perpetual software and hardware revenue to continue declining as customers adopt subscriptions. Consulting revenue was expected to remain pressured by COVID-19, project delays, cancellations, and the company’s strategic reduction of non-core consulting work.
- Management expected full-year operating expenses to be flat year over year and research and development expense to be flat to slightly higher, reflecting continued cloud investment.
- Management expected consulting gross margins to be in the low double digits for 2020 and anticipated that consulting performance would normalize in the second half, although the filing provides no specific revenue or earnings forecast.
- The company estimated a 2020 effective tax rate of approximately 1,000%, which is highly distorted by discrete tax items and forecasted foreign earnings. This rate is not representative of normalized operating profitability.
- COVID-19 adversely affected transaction closures, collections, consulting activity, customer spending, employee work arrangements, foreign exchange rates, and potentially the supply chain. Management stated that liquidity was sufficient for at least the next 12 months but acknowledged substantial uncertainty.
- Teradata’s principal manufacturing exposure is through Flex Ltd. and certain single-source suppliers, creating potential shipment and production risks.
- Teradata is pursuing litigation against SAP involving alleged trade-secret misappropriation and anticompetitive conduct. SAP has asserted patent-infringement counterclaims; the likelihood and potential loss range were not reasonably estimable.
- The company reported no legal proceeding that management believed would materially adversely affect its business, financial condition, results of operations, or cash flows. A guaranteed residual value obligation for leased equipment was $1 million.
Most Important Facts for Investors to Verify
- Whether recurring-revenue and ARR growth can offset continued declines in perpetual revenue and consulting services.
- Whether subscription and cloud mix changes improve long-term cash generation despite near-term revenue-recognition and margin effects.
- The sustainability of operating expenses, particularly equity compensation and go-to-market investment, relative to revenue growth.
- The extent to which COVID-19 affects consulting projects, customer collections, deal closures, supply-chain continuity, and foreign exchange.
- The underlying tax rate and cash-tax implications after excluding the one-time intellectual-property transfer benefit and other discrete items.
- Debt repayment requirements through the June 2023 term-loan maturity and continued compliance with debt covenants.
- The status and potential financial exposure of the SAP litigation and patent counterclaims.