ENGINEERING

Teradata Corp. reported fourth-quarter and full-year 2019 financial results driven by an ongoing transition to a recurring revenue model. Subscription-based transactions comprised 89 percent of the company’s bookings mix in the quarter. Recurring revenue increased 7 percent, both reported and in constant currency, from the fourth quarter of 2018. ARR increased 9 percent, both reported and in constant currency, from the prior-year period. As the company shifts to a recurring revenue model and focuses its consulting resources on strategic engagements that drive increased software consumption within its targeted customer base, perpetual revenue and consulting revenue declined versus the prior-year period, as expected. Fourth-quarter total revenue was $494 million, down 16% compared to the 2018 fourth-quarter total revenue of $588 million. Currency translation had a one percentage point negative impact on the fourth-quarter total revenue comparison.

For the full year, total revenue was $1.899 billion, down 12% compared to $2.164 billion reported in the prior year. Subscription-based transactions comprised 88 percent of the Company’s bookings mix for the full year. Recurring revenue of $1.362 billion increased 9%, 11% in constant currency from the prior year. ARR at the end of 2019 was $1.427 billion, a 9 percent increase, both reported and in constant currency, from the end of 2018.

“Teradata continues to make solid progress on its business transformation. We closed out our 2019 transition year on a positive note, as we doubled our cloud customers, grew both recurring revenue and ARR, and effectively completed our transition to a subscription business,” said Vic Lund, Interim CEO, Teradata. “Teradata has strong differentiation in delivering the answers our customers need, at the scale they require, and we are resolutely focused on helping customers drive competitive advantage in this world of ever-growing data.” {module INSIDE STORY}

Teradata reported a net loss of $23 million under U.S. Generally Accepted Accounting Principles (GAAP) in the fourth quarter, or $0.21 per share, which compared to net income of $15 million, or $0.13 per diluted share, in the fourth quarter of 2018. Non-GAAP 2019 fourth-quarter net income, which excludes stock-based compensation expense and other special items, was $25 million, or $0.22 per diluted share, as compared to $58 million, or $0.49 per diluted share, in the fourth quarter of 2018.

For the full year, net loss reported under GAAP was $24 million, or $0.21 per share, which compared to net income of $30 million, or $0.25 per diluted share, in 2018. Non-GAAP 2019 full-year net income, which excludes stock-based compensation expense and other special items, was $121 million, or $1.05 per diluted share, as compared to $156 million, or $1.29 per diluted share, in 2018.

Gross Margin

2019 fourth-quarter gross margin reported under GAAP was 50.2 percent versus 49.1 percent for the fourth quarter of 2018. On a non-GAAP basis, excluding stock-based compensation expense and other special items, 2019 fourth-quarter gross margin was 53.2 percent versus 52.0 percent in the same period of the prior year.

2019 full-year gross margin reported under GAAP was 50.3 percent versus 47.4 percent in 2018. On a non-GAAP basis, excluding stock-based compensation expense and other special items, 2019 full-year gross margin was 53.3 percent versus 50.6 percent in 2018. The gross margin rate was higher year-over-year primarily due to a higher mix of recurring revenue.

Operating Loss / Income

2019 fourth-quarter operating loss reported under GAAP was $9 million compared to operating income of $23 million in the fourth quarter of 2018. On a non-GAAP basis, excluding stock-based compensation expense and other special items, 2019 fourth-quarter operating income was $48 million versus $74 million in the fourth quarter of 2018.

2019 full-year operating income reported under GAAP was $6 million compared to $43 million in 2018. On a non-GAAP basis, excluding stock-based compensation expense and other special items, 2019 full-year operating income was $183 million versus $210 million in 2018. The decline in operating income was primarily driven by the higher subscription-based bookings mix which resulted in a significant decline in perpetual revenue, as well as a decline in consulting revenue, as expected and consistent with our strategy.

Income Taxes

Teradata’s 2019 fourth-quarter tax rate under GAAP was negative 43.8 percent compared to 21.1 percent in the fourth quarter of 2018. Excluding special items, Teradata’s non-GAAP 2019 fourth-quarter tax rate was 39.0 percent versus 17.1 percent in the fourth quarter of 2018. Teradata’s 2019 full-year tax rate under GAAP was negative 41.2 percent compared to negative 11.1 percent in 2018. Excluding special items, Teradata’s non-GAAP 2019 full-year tax rate was 24.4 percent versus 19.6 percent in 2018. The increase in the non-GAAP effective tax rate year-over-year was primarily due to earnings mix and an increase in the U.S. Global Intangible Low-Taxed Income (GILTI) tax period-over-period.

Cash Flow

For the 2019 fourth quarter, Teradata generated $54 million of cash from operating activities compared to $107 million in the same period of 2018. During the quarter, Teradata used $13 million versus using $63 million in the fourth quarter of 2018, for capital expenditures and additions to capitalized software development costs. Teradata’s 2019 fourth-quarter free cash flow was $41 million, compared to $44 million in the fourth quarter of 2018. In addition, the company added $37 million of finance leases in the fourth quarter and $115 million for the full year 2019, primarily to support subscription sales.

For the full year 2019, Teradata generated $148 million of cash from operating activities versus $364 million in 2018. During the year, Teradata used $59 million compared to using $160 million in 2018 for capital expenditures and additions to capitalized software development costs. This resulted in a 2019 full-year free cash flow of $89 million compared to $204 million in 2018.

Balance Sheet

Teradata ended 2019 with $494 million in cash. During the fourth quarter of 2019, Teradata repurchased 2.2 million shares of the Company’s common stock for approximately $61 million. For the full year, the Company repurchased 8.5 million shares for approximately $300 million. At the end of the fourth quarter, Teradata had approximately 111 million shares outstanding.

The Company had total debt of $612 million as of December 31, 2019, including $130 million of outstanding finance lease obligations. There were no funds drawn on the company’s $400 million revolving credit facility as of December 31, 2019.

Guidance

ARR and recurring revenue are both expected to increase at least 8 percent for the full year 2020.

Full-year 2020 GAAP earnings per share are expected to be $1.43 to $1.47. On a non-GAAP basis, which excludes the intellectual property (IP) restructuring tax benefit, stock-based compensation expense, and other special items, earnings per share are expected to be in the $1.18 to $1.22 range.

Recurring revenue in the first quarter of 2020 is expected to be in the $353 million to $355 million range.

GAAP earnings per share in the first quarter of 2020 are expected to be in the $1.30 to $1.32 range. Non-GAAP earnings per share, excluding the IP restructuring tax benefit, stock-based compensation expense, and other special items, in the first quarter is expected to be in the $0.22 to $0.24 range.