Why Is Teradata (TDC) Down 15.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Teradata (TDC). Shares have lost about 15.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Teradata due for a breakout? 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 Q3 Earnings Lag Estimates, Revenues Fall Y/Y

Teradata reported third-quarter 2019 adjusted earnings of 32 cents per share, which missed the Zacks Consensus Estimate by 20% and decreased 11.1% year over year.

Revenues of $459 million also lagged the consensus mark by 5.5% and declined 12.7% year over year. At constant currency (cc), revenues declined 11%.

Moreover, the company revised its fourth-quarter and full-year 2019 guidance for revenues and earnings downward. Additionally, Teradata announced that its chief executive officer stepped down from his position on Nov 5.

Top-Line Details

Recurring revenues (74.7% of revenues) increased 9.9% year over year (up 11% at cc) to $343 million. The segment includes revenues from subscription-based transactions and perpetual license-related maintenance and upgrade rights.

The growth was driven by faster transition to a subscription-based business model. Notably, subscription-based transactions comprised 90% of bookings in the reported quarter.

Perpetual software license and hardware revenues (3.5% of revenues) plunged 79.2% from the year-ago quarter (down 78% at cc) to $16 million.

Consulting services revenues (21.8% of revenues) declined 27% from the year-ago quarter (down 26% at cc) to $100 million.
 
Revenues from Americas decreased 7.6% year over year (down 7% at cc) to $256 million. Europe, Middle East & Africa (EMEA) revenues declined 15.1% from the year-ago quarter (down 12% at cc) to $118 million. Revenues from Asia-Pacific (APAC) declined 22.7% from the year-ago quarter (down 21% at cc) to $85 million.

Total annual recurring revenues (ARR) at the end of the quarter increased 12% year over year (up 14% at cc).

Operating Details

Non-GAAP gross margin expanded 310 basis points (bps) year over year to 56%. Americas and EMEA gross margin expanded 470 bps and 430 bps, respectively.

Recurring revenues gross margin contracted 230 bps to 67.9% from the year-ago quarter due to lower margins from subscription-based revenues.

Perpetual software license and hardware margin declined from 44.2% in the year-ago quarter to 43.8%.

Consulting services operating income was $7 million, reflecting a decline of 36.4% year over year.

Non-GAAP operating margin contracted 130 bps on a year-over-year basis to 9.4%.

Balance Sheet & Other Details

As of Sep 30, 2019, Teradata had cash and cash equivalents of $528 million compared with $635 million as of Jun 30, 2019. Total debt (including current portion), as of Sep 30, 2019 was $596 million compared with $580 million as of Jun 30.

In the third quarter, Teradata generated $10 million of cash from operating activities compared with $33 million in the previous quarter. The company’s third-quarter free cash outflow came in at $27 million, while free cash flow was $42 million in the previous quarter.

Moreover, Teradata repurchased around 1.9 million shares worth approximately $64 million.

Guidance

For 2019, Teradata expects ARR to increase at least 8% and recurring revenues to grow between 8% and 9%.

The company expects a perpetual year-over-year revenue decline of roughly $250 million due to the continued shift to subscription-based bookings, which is expected to be completed by the end of 2019.
 
Teradata now expects 2019 consulting revenues to decline 25% year over year from its previously provided guidance of 20% decline.

Non-GAAP earnings are projected between 95 cents and $1 per share.

For fourth-quarter 2019, recurring revenues are expected between $348 million and $350 million.

Non-GAAP earnings are expected between 13 cents and 18 cents per share.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -96.56% due to these changes.

VGM Scores

Currently, Teradata has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Teradata has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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