Teradata Corporation — Form 10-Q Summary
Business Context and Reporting Period
Teradata provides analytic data software, hardware, cloud and subscription offerings, consulting, implementation and support services. The filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. The company is transitioning from perpetual software and capital purchases toward subscription-based and cloud-enabled transactions.
Financial Results and Key Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Total revenue | $544 million | $513 million | $1,050 million | $1,004 million |
| Recurring revenue | $312 million | $281 million | $614 million | $554 million |
| Perpetual software licenses and hardware | $97 million | $91 million | $166 million | $181 million |
| Consulting services | $135 million | $141 million | $270 million | $269 million |
| Gross profit | $250 million | $242 million | $473 million | $467 million |
| Gross margin | 46.0% | 47.2% | 45.0% | 46.5% |
| Operating income (loss) | $10 million | $(1) million | $6 million | $(1) million |
| Net income (loss) | $4 million | $(4) million | $(3) million | $(6) million |
| Diluted EPS | $0.03 | $(0.03) | $(0.02) | $(0.05) |
Q2 recurring revenue increased 11%, perpetual software licenses and hardware increased 7%, and consulting services declined 4%. Management attributed the lower gross margin primarily to increased hardware mix and the higher proportion of lower-margin subscription revenue. Operating expenses declined 1% year over year to $240 million.
For the six months, net cash provided by operating activities was $290 million versus $309 million in 2017. Capital expenditures were $58 million and capitalized software additions were $4 million, producing reported free cash flow of $228 million versus $275 million in the prior-year period.
At June 30, 2018, cash and cash equivalents were $882 million, total assets were $2.203 billion, and total liabilities were $1.631 billion. Total debt consisted principally of a $500 million term loan, with $6 million classified as current debt. The company had no revolving-credit borrowings and $400 million of available revolver capacity.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6% in Q2 and 5% for the first six months, aided by favorable foreign-currency translation.
- Recurring revenue represented 57.4% of Q2 revenue versus 54.8% in the prior-year quarter; management reported annual recurring revenue of approximately $1.2 billion, up 7% year over year.
- Six-month perpetual software licenses and hardware revenue declined 8%, consistent with customers shifting toward subscriptions.
- Gross margin declined 120 basis points in Q2 and 150 basis points for the six-month period.
- The company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method. Reported Q2 revenue was $19 million higher and six-month revenue was $20 million higher than under the prior guidance; reported net income was higher by $4 million and $8 million, respectively.
- On June 11, 2018, the company replaced its existing credit facility with a new $400 million facility and refinanced its prior term loan with a new $500 million five-year term loan.
- Share repurchases totaled $157 million during the first six months, reducing shares outstanding from 121.9 million at December 31, 2017 to 119.0 million at June 30, 2018.
Guidance, Outlook, Risks and Unusual Items
- Management expects subscription transactions to comprise 65% to 70% of full-year bookings and expects 2018 TCore growth in the mid-to-high teens.
- Management estimated a full-year 2018 effective tax rate of approximately 20% and expected currency translation to benefit full-year projected revenue growth by approximately one percentage point, based on July 31, 2018 exchange rates.
- Management expects $35 million to $45 million of costs related to consolidating operations and transitioning the headquarters from Dayton, Ohio to San Diego, California. The majority of cash expenditures are expected in 2019, with completion anticipated by 2019.
- The company expects to repatriate an additional $275 million of offshore cash by year-end 2018 and intends to use part of the funds for share repurchases.
- Key risks include the uncertain pace of subscription and cloud adoption, potential margin pressure from subscription and hardware mix, foreign-currency volatility, customer renewals and cancellations, dependence on Flex for hardware assembly, and the company’s ability to generate sufficient operating cash flow.
- Teradata filed a lawsuit against SAP alleging trade-secret misappropriation and anticompetitive conduct. The company seeks injunctive relief and monetary damages; the filing does not quantify a potential recovery or loss.
- The company was evaluating the potential tax impact of the July 2018 Altera appellate decision and proposed regulations concerning the Tax Cuts and Jobs Act.
- At June 30, 2018, the company reported compliance with the covenants under both the revolving credit facility and term loan.
Most Important Facts for Investors to Verify
- Whether recurring revenue and annual recurring revenue continue to grow as subscription adoption increases.
- Whether subscription and hardware mix changes produce further gross-margin compression.
- Actual cash conversion and free cash flow as customers pay over longer subscription terms.
- Progress and total cost of the headquarters relocation and broader business-transformation program.
- Term-loan amortization, interest expense and remaining revolver capacity through the June 2023 maturities.
- Final accounting and tax effects of ASC Topic 606, the Tax Cuts and Jobs Act and the Altera decision.
- Developments in the SAP litigation and any resulting financial or operational consequences.