Teradata Corp. reported revenue of $526 million for the quarter ended September 30, 2017, compared to $552 million in the third quarter of 2016. Total recurring revenue of $267 million increased 8 percent from the third quarter of 2016, while recurring product revenue of $82 million increased 14 percent year over year and increased 9 percent compared to the second quarter of 2017. In addition, total ARR increased 10 percent from September 30, 2016, while product ARR (which excludes maintenance) increased 23 percent.   

Teradata reported GAAP net income of $13 million in the third quarter, or $0.10 per diluted share, which compared to $49 million, or $0.37 per share, in the third quarter of 2016. Stock-based compensation expense and special items reduced Teradata's third quarter net income by $23 million, or $0.19 per diluted share. Excluding stock-based compensation expense and special items as described in footnote #1, non-GAAP net income in the third quarter of 2017 was $36 million, or $0.29 per diluted share⁽¹⁾, compared to $91 million or $0.69 per diluted share in the prior year period.⁽¹⁾

"We reported better than expected revenue and earnings per share as we are seeing strong adoption of our new purchasing and deployment options available with Teradata Everywhere," said Vic Lund, President and Chief Executive Officer, Teradata. "Our strategy is working and our sales funnel is continuing to grow. We now give our customers more flexible solution choices and capabilities and provide users more control, performance and scale than they will find anywhere else. I am pleased that Teradata has turned the corner and is well positioned to deliver in the fourth quarter and build good momentum going into 2018."

Operating Income
Operating income was $7 million in the third quarter of 2017 compared to $89 million in the prior year period. On a non-GAAP basis, excluding stock-based compensation expense and special items, operating income was $50 million in the third quarter of 2017, versus $121 million in the third quarter of 2016.⁽¹⁾ The year-over-year decrease in non-GAAP operating income was due to the company's investment in transformation initiatives, as well as lower revenue in large part due to customers selecting Teradata's subscription-based purchasing options where revenue is recognized over time rather than upfront at the time of purchase.

Tax Rate
Teradata's tax rate for the third quarter was (116.7) percent compared to 45.6 percent in the third quarter of 2016. The decrease in the effective tax rate period over period was due to the reversal of tax contingencies related to prior acquisitions. The company's non-GAAP effective tax rate for the third quarter was 26.5 percent versus 23.5 percent in the same period in 2016. The increase in the non-GAAP effective tax rate period-over-period was a result of the higher percentage rate impact of special items driven by the lower pre-tax earnings denominator period-over-period. 

On an annualized basis, Teradata expects its full-year 2017 tax rate to be approximately (7) percent, compared to 43.4 percent for full year 2016. On a non-GAAP basis, the company's full year 2017 effective tax rate is expected to be approximately 28 percent, compared to 26 percent for full year 2016.

Cash Flow
During the third quarter 2017, Teradata used $8 million of cash from operating activities, compared to generating $45 million of cash in the prior-year period. Teradata used $40 million of free cash flow (cash from operating activities less capital expenditures and additions to capitalized software) in the third quarter of 2017, compared to generating $12 million in the same period in 2016.⁽³⁾ During the quarter, the company used cash to support its subscription and cloud initiatives as well as for workforce optimization activities. Year-to-date, Teradata generated $235 million of free cash flow in 2017, compared to $308 million in the same period in 2016.⁽³⁾

Balance Sheet
Teradata ended the third quarter 2017 with $1.025 billion in cash, which was substantially all held outside the United States. During the quarter, the company used $200 million to repurchase 6.3 million shares. 

As of September 30, 2017, Teradata had total debt of approximately $728 million, including $548 million outstanding on a term loan and $180 million of borrowings under its $400 million revolving credit facility.

Outlook
Revenue for the fourth quarter of 2017 is expected to be in the range of $600 million to $620 million. For the full year, Teradata expects reported revenue to decline approximately 5 percent, which compares favorably to its prior guidance that revenue was expected to decline 5 to 7 percent for the full year.

As part of Teradata's business transformation, the company is offering subscription-based purchasing options which result in revenue being recognized over time. This has had an impact on Teradata's reported revenue year-to-date in 2017, and we expect this trend to continue to impact reported revenue in a meaningful way in the fourth quarter of 2017.

Teradata expects GAAP earnings per share in the fourth quarter in the range of $0.27 to $0.32. On a non-GAAP basis, which excludes stock-based compensation expense and other special items, earnings per share is expected to be in the $0.47 to $0.52 range.⁽¹⁾  This includes an expected $0.04 negative impact on the fourth quarter earnings per share resulting from a shift in income tax expense from the third into the fourth quarter. 

For the full year 2017, Teradata has increased its expectations for GAAP earnings per share to the $0.33 to $0.38 range. On a non-GAAP basis, earnings per share is expected to increase to the $1.26 to $1.31 range.⁽¹⁾ 

Strategy Execution Update
Teradata continued to successfully execute on its strategy and experienced another strong quarter with customers continuing to take advantage of new purchasing and deployment options. The company continues to recognize the benefits of its go-to-market strategy, which focuses on customers who represent the 500 largest analytical opportunities. Additionally, Teradata is pleased with the positive reactions from customers related to its Teradata Everywhere offering, which allows customers to "analyze anything" with the addition of new analytic tools and engines, "deploy anywhere" either on premises or in the cloud, "buy any way" including subscription-based purchases, and "move anytime" which allows customers to move their software licenses freely between deployment options with Teradata's portable software licenses. The company is confident in its strategy and direction and that customers will move forward with purchases as we now take the risk out of making purchase decisions. Customers' needs will change over time, and they can buy today with confidence, knowing that the Teradata analytics platform functionality is the same across deployment options and that the software licenses are portable. Teradata looks forward to driving significant value for its shareholders as it continues to execute on its business outcome-led, technology-enabled strategy to provide high-impact business outcomes for customers.