TERADATA CORPORATION You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the MD&A are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q and in the 2019 Annual Report on Form 10-K. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. OverviewTeradata Corporation ("we," "us," "Teradata," or the "Company") is a leading hybrid cloud analytics software provider focused on helping companies leverage all of their data across an enterprise to uncover real-time intelligence, at scale. In doing so, we enable them to find answers to their toughest challenges. Our solutions enable customers to integrate and simplify their analytics ecosystem, access and manage data, and use analytics to extract answers and derive business value from data. Our solutions are composed of software, hardware, and related business consulting and support services to deliver analytics across a company's entire analytic ecosystem. Teradata's strategy is based on our mission of transforming how businesses work and people live through the power of data. Our target market is made up of companies that we believe are the world's most demanding, large-scale users of data. These companies face significant challenges including siloed data and conflicting and duplicative solutions that typically result in considerable expense to maintain and difficulty to manage the complexity. Our strategy is to provide a differentiated set of offerings to our target market through a portfolio of integrated data and analytic solutions. Teradata Vantage™ is an extremely scalable, secure, highly concurrent and resilient analytics platform that addresses the challenges faced by our targeted customer set. By offering customers full integration of their datasets, tools, analytics languages, functions, and engines in one analytical platform, Vantage reduces customers' complexity, risk, and costs. Our Vantage platform embraces leading commercial and open source analytics technologies and is available in the cloud and on-premises. All subscription-based Teradata software licenses enable portability of the software license between cloud and on-premises deployment options; this flexibility is designed to reduce risk associated with customers' buying decisions. Customer buying behavior has shifted from predominantly capital-intensive purchases to these subscription-based purchasing options. In the near term, the movement to subscription-based transactions is negatively impacting the timing of our reported revenue and our cash flows because revenue and cash related to subscription-based transactions are recognized and received over time versus upfront as was the case with the capital purchase model. The transition to a subscription-based model is expected to increase our recurring revenue, create more predictable operating results and improve cash flow generation over time. Near-term impacts, however, can fluctuate based on the pace of customer adoption, which can be difficult to predict. In the longer term, we expect our reported operating results and cash flow to normalize and increase as customers increasingly transition to these subscription-based offerings. We are continuing to focus on our key priorities, including expansion of our cloud-based offerings, enhancements to our market-leading Vantage platform, consulting, partner solutions and operational excellence. To allow for greater transparency regarding the progress we are making toward achieving our strategic objectives, we utilize the following financial and performance metrics: • Annual Recurring Revenue ("ARR") - annual contract value for all active and contractually binding term-based contracts at the end of a period. It includes maintenance, software upgrade rights, subscription-based transactions and managed services. 19
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• Backlog - the price of firm orders for which work has not been performed
or goods have not been delivered and the Company is contractually required
to perform.
COVID-19
During the three months ended
• Customers - proactively connecting with our customers to support their
needs and meet our service level commitments,
• Supply Chain - proactively working to monitor existing inventory, supplier
availability and securing inventory for future quarters,
• Global community - making our technology available to customers, partners
and communities, particularly in healthcare and government, where
collectively we can positively impact efforts in combating COVID-19, and
• Future Planning - to best position the Company to emerge as strong as
possible when this crisis ends.
As of the date of this Quarterly Report on Form 10-Q, we have fully activated
our contingency plans. Teradata's
COVID-19 Pandemic. There are many uncertainties regarding the current COVID-19 pandemic, including the anticipated duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. The COVID-19 pandemic may have far-reaching impacts on many aspects of our business operations, directly and indirectly, including with respect to its impacts on customer behaviors, supply chain,
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inventory, accounts receivable, the Company's employees, and the market
generally, and the scope and nature of these impacts continue to evolve. The
Company will continue to assess the evolving impact of the COVID-19 pandemic and
intends to adjust our business accordingly. For more information, see "Risk
Factors" under Part II, Item 1A of this Quarterly Report on Form 10-Q.
As more fully discussed in later sections of this MD&A, the following were
significant financial items for the first quarter of 2020:
• Total revenue was
compared to the first quarter of 2019, with an underlying 4% increase in recurring revenue. The Company's business has shifted to subscription-based transactions driving increased recurring revenue, which was offset by a 55% decrease in perpetual software licenses and hardware revenue as transactions move to subscription and a 29% decrease in consulting services revenue in alignment with our strategy. Foreign currency fluctuations had a 1% negative impact on total revenue for the quarter compared to the prior year.
• Gross margin increased to 51.8% in the first quarter of 2020 from 47.9% in the
first quarter of 2019, primarily due to a higher recurring revenue mix as
compared to the prior period.
• Operating expenses for the first quarter of 2020 increased by 1% compared to
the first quarter of 2019, primarily due to an increase in amortization of
capitalized sales compensation.
• Operating loss was
million in the first quarter 2019.
• Net income in the first quarter of 2020 was
loss of$10 million in the first quarter of 2019. The increase in net income was due to a discrete tax benefit of$157 million related to an intra-entity asset transfer of certain of the Company's intellectual property ("IP") to one of its Irish subsidiaries. 21
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Results of Operations for the Three Months Ended
% of % of
In millions 2020 Revenue 2019 Revenue
Recurring $ 345 80 % $ 331 70 %
Perpetual software licenses and hardware 14 3 % 31 7 % Consulting services
75 17 % 106 23 %
Total revenue $ 434 100 % $ 468 100 %
Total revenue decreased $34 million , or 7%, in first quarter of 2020 and
included a 1% negative impact from foreign currency fluctuations. Recurring
revenue grew 4%, which included a 2% negative impact from foreign currency
fluctuations. This increase in recurring revenue was driven by our movement to
subscription-based transactions from perpetual software licenses and hardware
transactions, which is consistent with our strategy; however, this increase was
partially offset by the negative impact on our ability to close transactions
late in the quarter due to COVID-19. Under subscription models, we recognize
revenue over time as opposed to the upfront recognition under the perpetual
model. For 2020, we expect ARR growth and recurring revenue growth. Taking into
consideration the growth in recurring revenue offset by reduced perpetual
software licenses and hardware revenue and reduced consulting services revenue,
we expect that total revenues will decrease in 2020, although the amount of
decline is difficult to predict due to the uncertain global environment caused
by COVID-19.
Revenues from perpetual software licenses and hardware decreased 55%. We expect
perpetual revenues to continue to decline as customers switch to our
subscription-based offerings. However, some customers continue to purchase on a
perpetual basis, and COVID-19 impacts might result in some additional customers
preferring this option. Perpetual revenue is primarily hardware-related, as
software is generally being sold on subscription. We expect that perpetual
revenue will continue to decline in 2020 and will continue to be predominantly
hardware-related.
Consulting services revenue decreased 29%, including a 1% negative impact from
foreign currency fluctuations, as we are realigning and focusing our consulting
resources on higher-margin engagements that drive increased software consumption
within our targeted customer base. Consulting revenue was also impacted by the
transition to work from home and shelter-in-place orders that went in effect
late in the quarter in response to COVID-19. In the first quarter, we made
progress towards our strategy of refocusing our consulting organization on
Vantage-oriented offerings and de-emphasizing non-core consulting engagements.
We expect consulting revenue to decline longer term as we build a deepening
partner ecosystem and our product simplification efforts reduce our reliance on
Teradata's consulting organization while creating greater total value for our
customers. We also expect consulting revenue to continue to be impacted by
COVID-19, as we anticipate delays and/or cancellation of new projects.
As a portion of the Company's operations and revenue occur outside the United
States , and in currencies other than the U.S. dollar, the Company is exposed to
fluctuations in foreign currency exchange rates. Based on currency rates as of
April 30, 2020 , Teradata is expecting one-to-two percentage points of negative
impact from currency translation on our 2020 full-year projected revenue growth
rate.
Included below are financial and performance growth metrics for 2020:
• At the end of the first quarter of 2020, ARR was $1.402 billion , a 6%
increase from the first quarter of 2019, including a 2% negative impact
from foreign currency, as compared to the first quarter of 2019.
• Total backlog was
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Gross Profit
% of % of
In millions 2020 Revenue 2019 Revenue
Recurring $ 225 65.2 % $ 225 68.0 %Perpetual software licenses and hardware 5 35.7 % 6 19.4 % Consulting services
(5 ) (6.7 )% (7 ) (6.6 )%
Total gross profit $ 225 51.8 % $ 224 47.9 %
The decrease in recurring revenue gross profit as a percentage of revenue was
driven by a higher mix of subscription-based revenue as compared to the
prior-year period. Subscription-based transactions are typically lower margin as
compared to the recurring revenue from legacy software maintenance and software
upgrade rights, due to the higher mix of hardware included in subscription-based
transactions.
The increase in perpetual software licenses and hardware gross profit as a
percentage of revenue was driven by deal mix compared to the same period a year
ago.
Consulting services gross profit as a percentage of revenue decreased slightly
as compared to the prior-year period, despite the larger than expected decrease
in consulting revenue due to COVID-19. The Company continues to refocus our
consulting organization on Vantage-oriented offerings and reduce our footprint
in non-core consulting engagements. As a result of these actions, we expect
profitable consulting growth longer term.
Operating Expenses
% of % of
In millions 2020 Revenue 2019 Revenue
Selling, general and administrative expenses
73 16.9 % 78 16.6 %
Total operating expenses $ 231 53.2 % $ 229 48.9 %
The selling, general and administrative ("SG&A") expense increase was primarily
driven by an increase in amortization of capitalized sales compensation as well
as additional investments in our go-to-market and customer success teams. For
the year, we expect SG&A expenses to increase low to mid-single digits on a
percentage basis as we continue to invest in our go-to-market and customer
success teams.
Research and development ("R&D") expenses decreased due to a re-prioritization
of our R&D organization on strategic initiatives and reduced spending on
de-prioritized initiatives. For the full year, we expect R&D expense to be flat
to slightly up as we reallocate spending to focus on accelerating our cloud
initiatives.
Other Expense, net
In millions 2020 2019
Interest income $ 2 $ 6
Interest expense (7 ) (9 )
Other (3 ) (2 )
Other expense, net $ (8 ) $ (5 )
Other expense, net in the first quarter of 2020 and 2019 is comprised primarily
of interest expense on long-term debt and finance leases, partially offset by
interest income earned on our cash and cash equivalents. Other expense, net
increased compared to the prior year primarily due to lower interest income on
lower cash and cash equivalents.
Provision for Income Taxes
Income tax provisions for interim periods are based on estimated annual income
tax rates, adjusted to reflect the effects of any significant infrequent or
unusual items which are required to be discretely recognized within the current
interim period.
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As a result of the 2017 Tax Act, the Company changed its indefinite reversal
assertion related to its foreign subsidiary undistributed earnings and no longer
considers a majority of its foreign earnings permanently reinvested outside of
the
2020 2019
Effective tax rate 1,300.0 % - %
For the three months ended March 31, 2020 , a net $152 million of discrete tax
benefit was recorded. The Company recorded approximately $157 million of
discrete tax benefit related to an intra-entity asset transfer of certain of its
IP to one of its Irish subsidiaries, which occurred on January 1, 2020 . The tax
benefit for this intra-entity asset transfer was recorded as a deferred tax
asset and represents the book and tax basis difference on the transferred assets
measured based on the applicable Irish statutory tax rate. The tax deductions
for amortization of the IP asset will be recognized in the future, and any
amortization not deducted for tax purposes will be carried forward indefinitely
under Irish tax laws. The Company expects to be able to realize the deferred tax
assets resulting from these intra-entity asset transfers. This tax benefit was
offset by discrete tax expense of $6 million related to equity compensation
vesting.
Due to the impact of discrete items, income tax benefit was $182 million on a
pre-tax net loss of $14 million in the first quarter of 2020.
For the three months ended March 31, 2019 , no special discrete tax items were
recorded.
Revenue and Gross Profit by Operating Segment
Teradata manages its business under three geographic regions, which are also the
Company's operating segments: (1) Americas region (North America and Latin
America ); (2) EMEA region (Europe , Middle East , and Africa ) and (3) APAC region
(Asia Pacific and Japan ). For purposes of discussing results by segment,
management excludes the impact of certain items, consistent with the manner by
which management evaluates the performance of each segment. This format is
useful to investors because it allows analysis and comparability of operating
trends. It also includes the same information that is used by Teradata
management to make decisions regarding the segments and to assess financial
performance. The chief operating decision maker, who is our Interim President
and Chief Executive Officer, evaluates the performance of the segments based on
revenue and multiple profit measures, including segment gross profit. For
management reporting purposes, assets are not allocated to the segments. Our
segment results are reconciled to total company results reported under GAAP in
Note 12 of Notes to Condensed Consolidated Financial Statements (Unaudited).
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The following table presents segment revenue and segment gross profit for the
Company for the three months ended
% of % of
In millions 2020 Revenue 2019 Revenue
Segment revenue
Americas $ 244 56.2 % $ 269 57.5 %
EMEA 118 27.2 % 113 24.1 %
APAC 72 16.6 % 86 18.4 %
Total segment revenue $ 434 100 % $ 468 100 %
Segment gross profit
Americas $ 144 59.0 % $ 157 58.4 %
EMEA 61 51.7 % 50 44.2 %
APAC 30 41.7 % 34 39.5 %
Total segment gross profit
Americas revenue decreased 9%, which included a decrease in perpetual software licenses and hardware revenue of 79% and a 30% decrease in consulting revenue. Segment gross profit as a percentage of revenues was higher primarily due to an overall higher mix of recurring revenue. EMEA EMEA revenue increased 4%, which included a 2% unfavorable impact from foreign currency fluctuations. An increase of 15% in recurring revenue, as well as an increase of 29% in perpetual software licenses and hardware revenue was partially offset by a decrease in consulting revenue of 24%. Segment gross profit as a percentage of revenues was higher primarily due to a higher mix of recurring revenue. APAC APAC revenue decreased 16%, which included a 3% unfavorable impact from foreign currency fluctuations. An increase in recurring revenue of 4% was offset by a decrease of 80% in perpetual software licenses and hardware revenue and a decrease in consulting revenue of 33%. Segment gross profit as a percentage of revenues was higher primarily due to a higher mix of recurring revenue. 25
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Financial Condition, Liquidity and Capital Resources
Cash provided by operating activities decreased by
Three Months Ended March 31, 2020
In millions 2020 2019
Net cash provided by operating activities $ 10 $ 49
Less:
Expenditures for property and equipment (10 ) (15 ) Additions to capitalized software (2 ) (1 ) Free cash flow $ (2 ) $ 33
Financing activities and certain other investing activities are not included in
our calculation of free cash flow. There were no other investing activities for
the three months ended
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Proceeds from the ESPP and the exercise of stock options, net of tax, were immaterial for the three months endedMarch 31, 2020 and$33 million for the three months endedMarch 31, 2019 . These proceeds are included in other financing activities, net in the Condensed Consolidated Statements of Cash Flows (Unaudited). Our total cash and cash equivalents held outsidethe United States in various foreign subsidiaries was$321 million as ofMarch 31, 2020 and$344 million as ofDecember 31, 2019 . The remaining balance held inthe United States was$73 million as ofMarch 31, 2020 and$150 million as ofDecember 31, 2019 . Prior to the enactment of the 2017 Tax Act, the Company either reinvested or intended to reinvest its earnings outside ofthe United States . As a result of the 2017 Tax Act, the Company has changed its indefinite reinvestment assertion related to foreign earnings that have been taxed inthe United States and now considers a majority of these earnings no longer indefinitely reinvested. EffectiveJanuary 1, 2018 ,the United States moved to a territorial system of international taxation, and as such will generally not subject future foreign earnings toUnited States taxation upon repatriation in future years. Management believes current cash, cash generated from operations and the$400 million available under the Credit Facility will be sufficient to satisfy future working capital, research and development activities, capital expenditures, pension contributions, and other financing requirements for at least the next twelve months. The Company principally holds its cash and cash equivalents in bank deposits and highly-rated money market funds. The Company's ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in the Company's 2019 Annual Report on Form 10-K (the "2019 Annual Report"), and elsewhere in this Quarterly Report on Form 10-Q. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of its credit facility and term loan agreement, the Company may be required to seek additional financing alternatives. Long-term Debt. There has been no significant change in our long-term debt as described in the 2019 Annual Report. Our long-term debt is discussed in Note 10 of Notes to Condensed Consolidated Financial Statements (Unaudited). Contractual and Other Commercial Commitments. There has been no significant change in our contractual and other commercial commitments as described in the 2019 Annual Report. Our guarantees and product warranties are discussed in Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited). Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting policies are those that require assumptions to be made about matters that are highly uncertain. Different estimates could have a material impact on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Our management periodically reviews these estimates and assumptions to ensure that our financial statements are presented fairly and are materially correct. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as ofMarch 31, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While there was not a material impact to our consolidated financial statements as of and for the quarter endedMarch 31, 2020 , resulting from our assessments, our future assessment of our current expectations at that time of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require significant management judgment in its application. There are also areas in which management's judgment 27
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in selecting among available alternatives would not produce a materially different result. The significant accounting policies and estimates that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are discussed in the 2019 Annual Report. Teradata's senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the three months endedMarch 31, 2020 . New Accounting Pronouncements See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for new accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have not been any material changes to the market risk factors previously disclosed in Part II, Item 7A of the 2019 Annual Report. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Teradata maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")) that are designed to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to management, including, as appropriate, the Interim Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on their evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, as ofMarch 31, 2020 , our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified inSEC rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter endedMarch 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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