Teradata Corporation 2015 Form 10-K Summary
Business context and reporting period
Teradata provides analytic data platforms, software, hardware, consulting, cloud, maintenance, and marketing applications. The filing covers the fiscal year ended December 31, 2015; fourth-quarter results are included in the annual financial statements. Teradata operated in 44 countries and had approximately 11,300 employees at year-end.
Effective January 1, 2015, Teradata reported two operating segments: Data and Analytics and Marketing Applications. In the fourth quarter, management committed to exit most of the Marketing Applications business and focus on core Data and Analytics offerings.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $2,530 million | $2,732 million | Down 7% |
| Product revenue | $1,057 million | $1,227 million | Down 14% |
| Service revenue | $1,473 million | $1,505 million | Down 2% |
| Gross margin | 50.4% | 54.1% | Down 3.7 points |
| Operating income/(loss) | $(195) million | $503 million | Decline of $698 million |
| Net income/(loss) | $(214) million | $367 million | Decline of $581 million |
| Diluted EPS | $(1.53) | $2.33 | Decline of $3.86 |
| Operating cash flow | $401 million | $680 million | Down $279 million |
| Free cash flow | $281 million | $551 million | Down $270 million |
Revenue was negatively affected by approximately five percentage points of foreign-currency translation. Management attributed the decline primarily to constrained customer IT budgets, extended sales cycles, fewer large customer orders, and lower capital spending.
- Data and Analytics revenue was $2,337 million, down 7%; segment gross margin was $1,237 million, or 52.9%.
- Marketing Applications revenue was $193 million, down 8%; segment gross margin was $79 million, or 40.9%.
- Product gross margin declined to 58.4% from 63.9%, reflecting unfavorable deal and product mix, foreign exchange, lower integrated-data-warehousing volume, and pricing programs.
- Service gross margin declined to 44.7% from 46.2%, partly due to investments in big-data consulting, cloud capabilities, and the Marketing Applications business.
- SG&A expense was $765 million, down slightly, while R&D expense increased 11% to $228 million.
- Goodwill and acquired-intangible impairment charges totaled $478 million, principally related to Marketing Applications.
- Other income included a $57 million gain on the sale of equity investments.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $839 million at December 31, 2015, compared with $834 million at year-end 2014.
- Total debt, including the current portion, was $780 million, compared with $468 million in 2014.
- Debt consisted primarily of a $600 million senior unsecured term loan and $180 million drawn under a $400 million revolving credit facility. The revolver had $220 million of remaining availability.
- The term loan and revolver carried floating interest rates of 1.8125% and 1.623%, respectively, at year-end. The company reported compliance with debt covenants.
- Approximately $657 million was used for share repurchases in 2015, covering approximately 19 million shares at an average price of $34.15. Approximately $573 million remained authorized at year-end.
- Management stated that cash, operating cash flow, and available revolver capacity should meet working-capital, investment, pension, severance, and other financing needs for at least the next twelve months.
- Approximately $819 million of cash was held outside the United States. The company had not provided U.S. federal tax on approximately $1.2 billion of foreign earnings considered permanently reinvested abroad.
Material changes versus the prior comparable period
- Revenue fell 7%, with product revenue declining substantially more than service revenue.
- Gross margin contracted 3.7 percentage points, and the company moved from operating and net profitability to significant losses.
- Operating results included $478 million of goodwill and acquired-intangible impairment charges, including a $340 million second-quarter Marketing Applications goodwill charge and $138 million of fourth-quarter charges.
- Marketing Applications assets of $214 million and liabilities of $58 million were classified as held for sale at year-end. The anticipated sale was not presented as discontinued operations.
- Debt increased following the issuance of the $600 million term loan and the use of borrowings to refinance existing debt and fund repurchases.
- Operating cash flow and free cash flow declined materially despite continued share repurchases.
- Stockholders’ equity decreased to $849 million from $1,707 million, reflecting the net loss, repurchases, and other comprehensive losses.
- Beginning in 2016, Teradata planned to report Americas Data and Analytics, International Data and Analytics, and Marketing Applications as separate segments until the planned divestiture is completed.
Guidance, outlook, management commentary, and risks
Management expects long-term demand for analytics to benefit from data growth, big data, cloud adoption, Internet of Things applications, and increasingly complex analytical environments. However, management identified near-term pressure from smaller deal sizes, lower capital expenditures, evolving customer buying behavior, and potential movement from upfront perpetual licenses toward recurring subscription models.
- Teradata expected its software-only offering on a public cloud during the first part of 2016 and a fully scalable public-cloud version in 2017.
- Management expected approximately two percentage points of adverse currency impact on 2016 reported revenue growth, based on January 30, 2016 exchange rates.
- The estimated 2016 effective tax rate was approximately 26%, excluding the tax impact of the pending Marketing Applications disposal.
- The transformation plan focuses on on-premises data warehouses, cloud, analytical ecosystems, and value-added services, alongside cost rationalization and go-to-market changes.
- The planned Marketing Applications divestiture remained subject to acceptable transaction terms and applicable board approval.
Principal risks include execution of the transformation and divestiture, additional impairment charges, intense competition from IBM, Oracle, cloud vendors, open-source technologies, and emerging analytics providers, foreign-currency volatility, long and unpredictable sales cycles, customer concentration in large transactions, renewal risk for support and subscription arrangements, floating-rate debt, reliance on Flextronics and other suppliers, cybersecurity and data-privacy risks, tax and legal contingencies, and the ability to retain key personnel.
The filing reports effective disclosure controls and internal control over financial reporting as of December 31, 2015. The independent auditor issued an unqualified opinion.
Most important facts for investors to verify
- Progress, sale terms, timing, and retained liabilities associated with the Marketing Applications divestiture.
- Whether the transformation plan produces sustainable revenue growth and offsets the shift toward smaller transactions and recurring pricing models.
- Future impairment risk for the remaining goodwill and acquired intangible assets.
- Ability to generate sufficient operating cash flow while servicing approximately $780 million of debt and funding scheduled term-loan repayments.
- Effect of currency movements, customer IT-budget constraints, competitive pricing, and cloud or open-source adoption on revenue and margins.
- Continuation and financial rationale of share repurchases relative to leverage, liquidity, and investment requirements.
- Potential tax costs if foreign earnings are repatriated and the tax consequences of the planned business disposal.