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Teradata (TDC) Up 13.8% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Teradata (TDC - Free Report) . Shares have added about 13.8% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Teradata Q3 Earnings Beat Estimates, Revenues Fall Y/Y

Teradata reported third-quarter 2020 adjusted earnings of 43 cents per share, which beat the Zacks Consensus Estimate by 38.7%. Moreover, the figure increased 34.4% year over year.

Revenues of $454 million beat the consensus mark by 2.8%. However, the top line declined 1.1% year over year. At constant currency (cc), revenues were down 2%.

Total backlog at the end of the third quarter was $2.6 billion.

Top-Line Details

Recurring revenues (80.4% of revenues) grew 6.4% year over year (up 6% at cc) to $365 million.

Perpetual software license and hardware revenues (3.7% of revenues) rose 6.3% from the year-ago quarter (up 5% at cc) to $17 million.

Consulting services’ revenues (15.9% of revenues) dropped 28% from the year-ago quarter (down 29% at cc) to $72 million, primarily due to coronavirus-related impacts, especially on activities that are conducted on-site.

Revenues from the Americas increased 2% year over year (up 3% at cc) to $261 million. Europe, the Middle East & Africa (“EMEA”) revenues declined 2.5% from the year-ago quarter (down 6% at cc) to $115 million. Revenues from the Asia-Pacific (“APAC”) were down 8.2% from the year-ago quarter (down 9% at cc) to $78 million.

Total annual recurring revenues (ARR) at the end of the third quarter increased 8.1% year over year (up 7% at cc) to $1.5 billion.

Operating Details

Gross margin on a non-GAAP basis expanded 500 basis points (bps) year over year to 61%, primarily driven by a higher mix of recurring revenues.

Americas and APAC gross margins expanded 150 bps and 1160 bps to 63.2% and 55.1%, respectively. EMEA gross margin surged to 60% from 52.5% reported in the year-ago quarter.

Recurring revenues’ gross margin on a non-GAAP basis expanded 70 bps on a year-over-year basis to 70.4%. The growth benefited from favorable forex revaluation.

However, perpetual software license and hardware margin on a non-GAAP basis soared to 58.8% from 43.8% reported in the year-ago quarter.

Consulting services’ gross profit was $2 million compared with $7 million in the year-ago quarter.

Selling, general & administrative (SG&A), and research & development (R&D) expenses, as a percentage of revenues, increased 300 bps and 110 bps, respectively, on a year-over-year basis.

Non-GAAP operating margin expanded 540 bps on a year-over-year basis to 14.8%.

Balance Sheet & Other Details

As of Sep 30, 2020, Teradata had cash and cash equivalents of $533 million compared with $494 million as of Jun 30, 2020.

Total debt (including current portion) as of Sep 30, 2020, was $461 million compared with $467 million as of Jun 30, 2020. Including financial lease obligations, total debt was $608 million.

In the third quarter, Teradata generated $71 million of cash from operating activities compared with the previous quarter’s $130 million. Cash used in operating activities was $10 million in the year-ago quarter.

The company’s quarterly free cash flow was $58 million compared with $115 million in the previous quarter. Teradata had posted free cash outflow of $27 million in the year-ago quarter.

Guidance

For fourth-quarter 2020, recurring revenues are expected between $371 million and $373 million. Non-GAAP earnings are expected between 23 cents and 25 cents per share.

Management expects a higher mix of cloud ARR and recurring revenues to drive the top line in the fourth quarter.

However, increased cloud momentum is expected to hurt recurring revenue gross margin, which is likely to remain flat year over year in the fourth quarter. Perpetual gross margin is also expected to remain unchanged year over year.

Moreover, consulting gross margin is expected to expand sequentially.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -83.78% due to these changes.

VGM Scores

Currently, Teradata has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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