Teradata Corporation 10-Q Summary: Second Quarter 2016
Business Context and Reporting Period
Teradata reported results for the three and six months ended June 30, 2016. The company was transforming its business toward data and analytics, reducing costs, expanding cloud and software offerings, and exiting its Marketing Applications business. On July 1, 2016, after the reporting period, Teradata completed the sale of that business to Marlin Equity for approximately $92 million in cash, subject to final adjustments.
Financial Results and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Total revenue | $599 million | $623 million | $1,144 million | $1,205 million |
| Product revenue | $228 million | $256 million | $422 million | $497 million |
| Service revenue | $371 million | $367 million | $722 million | $708 million |
| Gross margin | 51.8% | 52.5% | 50.6% | 50.1% |
| Operating income (loss) | $87 million | $(262) million | $45 million | $(232) million |
| Net income (loss) | $64 million | $(265) million | $18 million | $(243) million |
| Diluted EPS | $0.49 | $(1.87) | $0.14 | $(1.69) |
- Q2 revenue declined 4%; product revenue fell 11%, while service revenue increased 1%. For the first six months, revenue declined 5%, product revenue fell 15%, and service revenue increased 2%.
- Q2 gross profit was $310 million, with product gross margin of 61.0% and service gross margin of 46.1%. Service margin improved, but product margin declined because of deal and product mix.
- Operating results improved substantially because Q2 2015 included a $340 million goodwill impairment charge. The first half of 2016 included $80 million of impairment and other asset write-downs, including $76 million related to the Marketing Applications business.
- SG&A declined to $172 million in Q2 from $190 million, and research and development expense declined to $51 million from $59 million, primarily due to cost-reduction initiatives.
- Operating cash flow for the first six months was $350 million, compared with $302 million in the prior-year period. Free cash flow, as defined by management, was $297 million versus $243 million.
- Cash and cash equivalents were $909 million at June 30, 2016, compared with $839 million at December 31, 2015. Cash held outside the United States was $894 million.
- Term-loan principal outstanding was $585 million at a floating interest rate of 1.875%. The company had no borrowings under its $400 million revolving credit facility and remained in compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue pressure was concentrated in products and large capital-expenditure transactions, particularly in the United States, as customers evaluated cloud, subscription, rental, usage-based, and other less capital-intensive alternatives.
- Services became a larger portion of revenue, representing 61.9% of Q2 revenue versus 58.9% in Q2 2015; maintenance revenue increased while consulting revenue declined modestly.
- Americas Data and Analytics revenue declined 7% in Q2 and 9% for the first half. International Data and Analytics revenue increased 1% in Q2 and 2% for the first half, including adverse foreign-currency effects.
- Marketing Applications revenue declined 8% in Q2 and 9% for the first half. The business was classified as held for sale and was sold shortly after quarter-end.
- The company repurchased 2.6 million shares for $51 million during the first six months, compared with 7.0 million shares for $308 million in the prior-year period. General repurchase authorization remaining at June 30 was approximately $528 million.
- Long-term debt increased materially versus the beginning of 2015 following term-loan financing, but the company repaid $180 million of revolving-credit borrowings and $15 million of term-loan principal during the first six months of 2016.
Outlook, Commentary, Risks, and Unusual Items
- Management expects analytics demand to benefit from data growth, cloud adoption, hybrid-cloud deployments, and increasingly complex analytical environments. The company plans to emphasize business solutions, analytical architecture expertise, technology solutions, and recurring revenue models.
- Management estimated a 2016 full-year effective tax rate of approximately 36%, including an estimated $18 million discrete tax expense in the third quarter related to the Marketing Applications sale. The filing does not provide clear full-year revenue or earnings guidance.
- Based on currency rates as of July 29, 2016, management expected less than one percentage point of negative currency-translation impact on full-year projected revenue growth.
- Key risks include declining large on-premises capital purchases, competitive and pricing pressure, lower-cost or alternative technologies, changes from perpetual licenses to subscriptions, execution of the business transformation, and foreign-currency volatility.
- The June 2016 Brexit referendum could increase currency volatility, global economic uncertainty, and customer budget pressure.
- The Marketing Applications sale generated approximately $92 million of cash proceeds, but the final amount remained subject to working-capital, transaction-cost, and other adjustments. Teradata expected to provide transition services to the buyer for up to 15 months.
- The company had $1.2 billion of foreign earnings considered permanently reinvested outside the United States for which it had not provided U.S. federal tax liability.
- New revenue-recognition, lease, and stock-compensation standards were not yet adopted; management was evaluating their effects. Disclosure controls were assessed as effective, and no material changes to internal control were reported.
Important Facts for Investors to Verify
- Confirm the final proceeds, tax expense, gain or loss, and working-capital adjustments from the Marketing Applications divestiture.
- Assess whether product-revenue declines and delayed large capital purchases persist as customers shift toward cloud, subscription, and usage-based models.
- Monitor recurring service revenue, consulting demand, product and service gross margins, and performance of the post-divestiture Americas and International segments.
- Review cash generation and the company’s ability to fund transformation investments, repurchases, debt repayment, and other obligations while maintaining liquidity.
- Track the $585 million term loan, floating-rate exposure, covenant compliance, and the availability of the $400 million revolving facility.
- Evaluate the effect of currency movements, Brexit-related uncertainty, competitive alternatives, and potential future impairment charges.