Teradata Corporation — Q3 2023 Form 10-Q Summary
Business context and reporting period
Teradata provides cloud analytics and data platforms, including VantageCloud and ClearScape Analytics, for enterprise data management, artificial intelligence and machine learning. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Management highlighted continued migration toward recurring and public-cloud offerings. During the quarter, Teradata expanded VantageCloud Lake availability to Microsoft Azure, acquired Stemma Technologies, introduced Teradata ask.ai in private preview and added ModelOps capabilities to ClearScape Analytics.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $438 million | $417 million | $1,376 million | $1,343 million |
| Recurring revenue | $360 million | $331 million | $1,120 million | $1,062 million |
| Gross profit | $259 million | $259 million | $837 million | $818 million |
| Gross margin | 59.1% | 62.1% | 60.8% | 60.9% |
| Operating income | $27 million | $25 million | $139 million | $107 million |
| Net income | $12 million | $8 million | $69 million | $40 million |
| Diluted EPS | $0.12 | $0.08 | $0.67 | $0.38 |
| Cash flow from operations | Not separately provided | Not separately provided | $199 million | $290 million |
| Free cash flow | Not separately provided | Not separately provided | $187 million | $283 million |
Q3 recurring revenue increased 9%, while perpetual software licenses, hardware and other revenue declined 50% and consulting revenue declined 1%. Nine-month recurring revenue increased 5%, while perpetual software, hardware and other revenue declined 31% and consulting revenue declined 4%.
Q3 operating expenses were $232 million, broadly flat year over year. SG&A was $156 million and R&D was $76 million. The Q3 effective tax rate was 7.7%, benefiting from $4 million of discrete tax benefits; the nine-month rate was 27.4%, compared with 38.5% in the prior-year period.
ARR, cloud performance and regional trends
| Metric at September 30 | 2023 | 2022 | Change |
|---|---|---|---|
| Total ARR | $1.524 billion | $1.374 billion | 11% |
| Public Cloud ARR | $454 million | $279 million | 63% |
| Subscription ARR | $872 million | $802 million | 9% |
| Maintenance and software upgrade rights ARR | $198 million | $293 million | 下降? |
| Cloud net expansion rate | 123% | 117% | Up 6 percentage points |
The filing states that maintenance and software upgrade rights ARR declined by $95 million, or approximately 32%; the table does not present a percentage change.
Q3 revenue increased 9% in the Americas and 8% in EMEA, while APJ revenue declined 13%, primarily reflecting the wind-down of direct operations in China. Foreign currency movements reduced total Q3 revenue by approximately 1% and had a larger adverse impact on certain regional results.
Liquidity, cash flow and debt
- Cash and cash equivalents were $348 million at September 30, 2023, compared with $569 million at December 31, 2022. Total cash, cash equivalents and restricted cash was $349 million.
- Nine-month operating cash flow was $199 million, down from $290 million, primarily due to the absence of a $50 million CARES Act tax refund received in 2022 and approximately $35 million of incremental cash taxes in 2023.
- Free cash flow was $187 million, compared with $283 million in the prior-year period.
- Teradata repurchased approximately 6.9 million shares for $301 million during the first nine months, at an average price of $43.80 per share. Approximately $560 million remained available under the open-market repurchase authorization at September 30, 2023.
- Total term-loan principal was $500 million. The company had no borrowings under its $400 million revolving facility, leaving the full facility available.
- The term loan matures in June 2027, with quarterly principal payments beginning June 30, 2024. An interest-rate swap hedged approximately $450 million, or about 90%, of the term loan's floating-rate exposure.
- Management stated that current cash, operating cash flow and available revolver capacity should be sufficient for at least the next twelve months. The company was in compliance with its debt covenants at September 30, 2023.
Material changes versus the prior comparable period
- Revenue growth shifted further toward recurring and public-cloud offerings, while perpetual license and hardware revenue continued to decline.
- Gross margin fell three percentage points in Q3, primarily due to lower consulting margins and a greater public-cloud revenue mix, although public-cloud margin rates improved year over year.
- Operating income increased despite essentially flat operating expenses, reflecting higher recurring revenue and cost discipline in R&D.
- Net income and diluted EPS increased, aided in part by a lower quarterly tax rate and a smaller diluted share count.
- Operating cash flow and free cash flow declined substantially because of tax timing and the prior-year CARES Act refund.
- Debt principal remained $500 million, while cash declined because of share repurchases, finance-lease payments, investing activity and foreign-exchange effects.
Guidance, outlook, risks and unusual items
Teradata reaffirmed its full-year 2023 outlook:
- Public Cloud ARR growth of 53% to 57%.
- Total ARR growth of 6% to 8%.
- Total recurring revenue growth of 4% to 7%.
- Total revenue growth of 1% to 4%.
Based on currency rates as of October 31, 2023, management estimated a 2.0% to 2.5% negative foreign-currency translation impact on full-year reported revenue. The company estimated a full-year effective tax rate of approximately 40%.
In October 2023, Teradata began using Argentina Blue Chip Swap transactions to remit cash from its Argentine operations. Management expects a $13 million pretax investment loss in the fourth quarter, including an estimated $8 million net tax impact.
Remaining performance obligations were $2.394 billion at September 30, 2023, with $1.409 billion expected in the next year. Approximately $1.140 billion was subject to customer-only general cancellation-for-convenience terms, while approximately $503 million of next-year revenue was under non-cancelable contracts.
The company disclosed ongoing SAP litigation. Several claims were dismissed or settled, while remaining claims and counterclaims in the TD-SAP 1 matter are stayed pending appeal. The filing states that the likelihood and amount of any loss from SAP's remaining patent counterclaims cannot currently be determined.
Other risks include foreign-currency volatility, customer concentration and defaults, dependence on Flex and certain component suppliers, execution of the cloud transition, consulting project delays, debt covenant compliance and the ability to generate sufficient operating cash flow. Management reported no material changes to previously disclosed risk factors or internal controls.
Important facts for investors to verify
- Whether Public Cloud ARR growth and the 123% cloud net expansion rate translate into sustained revenue and margin expansion.
- The effect of increasing cloud mix on recurring gross margins and the continuing decline in legacy maintenance and perpetual-license ARR.
- Fourth-quarter results, including the $13 million Argentina Blue Chip Swap loss and related tax effects.
- Cash generation after substantial share repurchases, upcoming term-loan amortization beginning in 2024 and finance-lease payments.
- The outcome and timing of the remaining SAP litigation and appeal.
- Progress against the reaffirmed full-year revenue, recurring revenue and ARR guidance, including foreign-currency effects.