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Teradata (TDC) Up 9% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Teradata (TDC). Shares have added about 9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Teradata due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Teradata Q2 Earnings Beat Estimates, Revenues Fall Y/Y

Teradata reported second-quarter 2020 adjusted earnings of 24 cents per share, which beat the Zacks Consensus Estimate by 14.3%. However, the figure decreased 17.2% year over year.

Revenues of $457 million also beat the consensus mark by 6%. However, the top line declined 4.4% year over year. At constant currency (cc), revenues were down 6%.

Total backlog at the end of the second quarter was $2.6 billion, up 3% year over year, driven by increased subscription bookings.

Top-Line Details

Recurring revenues (78.3% of revenues) increased 5.9% year over year (up 8% at cc) to $358 million.

Perpetual software license and hardware revenues (3.7% of revenues) plummeted 41.4% from the year-ago quarter (down 42% at cc) to $17 million.

Consulting services’ revenues (18% of revenues) dropped 26.1% from the year-ago quarter (down 24% at cc) to $82 million.

Revenues from Americas decreased 3.7% year over year (down 2% at cc) to $259 million. Europe, Middle East & Africa (EMEA) revenues declined 3.3% from the year-ago quarter (down 1% at cc) to $118 million. Revenues from the Asia-Pacific (“APAC”) were down 8% from the year-ago quarter (down 7% at cc) to $80 million.

Total annual recurring revenues (ARR) at the end of the second quarter increased 7.7% year over year (up 9% at cc) to $1.45 billion.

Operating Details

Gross margin on a non-GAAP basis expanded 610 basis points (bps) year over year to 58.9%, primarily driven by higher mix of recurring revenues.

Americas and APAC gross margins expanded 340 bps and 870 bps to 62.2% and 51.3%, respectively. EMEA gross margin surged to 56.8% from 46.7% reported in the year-ago quarter.

Recurring revenues’ gross margin on a non-GAAP basis contracted 120 bps on a year-over-year basis to 69.8%.The decline was due to a higher mix of subscription-based revenues that carry lower margins than revenues from perpetual-related maintenance and software-upgrade rights. Subscription business includes embedded hardware rentals and cloud offerings.

However, perpetual software license and hardware margin on a non-GAAP basis soared to 35.3% from 10.3% reported in the year-ago quarter.

Consulting services’ gross profit was $8 million compared with $2 million in the year-ago quarter.

Selling, general & administrative (SG&A), as well as research & development (R&D) expenses, as a percentage of revenues, increased 580 bps and 120 bps, on a year-over-year basis.

Non-GAAP operating margin expanded 330 bps on a year-over-year basis to 14%.

Balance Sheet & Other Details

As of Jun 30, 2020, Teradata had cash and cash equivalents of $494 million compared with $394 million as of Mar 31, 2020.

Total debt (including current portion) as of Jun 30, 2020, was $467 million compared with $610 million as of Mar 31, 2020. Including financial lease obligations, total debt was $613 million.

In the second quarter, Teradata generated $130 million of cash from operating activities compared with the year-ago quarter’s $55 million and previous quarter’s $10 million.

The company’s quarterly free cash flow was $115 million compared with $42 million in the year-ago quarter. Teradata had posted free cash outflow of $2 million in the previous quarter.

Guidance

For third-quarter 2020, recurring revenues are expected between $359 million and $361 million. Non-GAAP earnings are expected between 28 cents and 31 cents per share.

Teradata believes that its consulting business will continue to suffer in the second half of 2020, given the ongoing uncertainty due to coronavirus outbreak and continued remote-work mandates.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 173.33% due to these changes.

VGM Scores

Currently, Teradata has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Teradata has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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