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Teradata (TDC) Beats Q3 Earnings Estimates, Lags Revenues

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Shares of Teradata Corporation (TDC - Free Report) declined marginally in the last three sessions following the announcement of its third-quarter 2018 results. The stock lost 5.2% compared with industry’s decline of 2.9% on a year-to-date basis.

Teradata reported adjusted earnings of 36 cents per share, which increased 24.1% year over year. The figure also beat the Zacks Consensus Estimate of 31 cents.

Total revenues of $526 million lagged the Zacks Consensus Estimate of $535.2 million and stayed flat year over year (up 2% at constant currency).

Almost 82% of bookings were subscription-based in the quarter. Total annual recurring revenues (ARR) at the end of the quarter were $1.24 billion. Subscription-based ARR increased more than 150% year-over-year.

Top-Line Details

Recurring revenues increased 6.8% year over year (9% at constant currency) to $312 million. The segment includes revenue from subscription based transaction and perpetual license related maintenance and upgrade rights.

Perpetual software license and hardware revenues decreased 14.4% from the year-ago quarter to $77 million due to the company’s ongoing transition to a subscription-based business model. Teradata stated that majority of its perpetual revenues are now hardware related.
 

Teradata Corporation Price, Consensus and EPS Surprise

Teradata Corporation Price, Consensus and EPS Surprise | Teradata Corporation Quote

Consulting services revenues declined 5% from the year-ago quarter to $137 million. The company is focusing on top 500 analytical companies. Hence, management expects consulting revenues to decline due to lower focus on non-top 500, lower-value, lower margin-related services.

Revenues from Americas decreased 5.1% year over year (4% at constant currency) to $277 million due to rapid transitioning to a subscription-based business model, while that from International increased 6.4% (10% at constant currency) to $249 million.

In the third quarter, the company benefited from customer wins across industries and geographies. Moreover, Teradata exited the quarter with a backlog of $1.9 billion, an increase of 55% year over year, which is a positive.

Operating Details

Non-GAAP gross margin contracted 150 basis points (bps) from the year-ago quarter to 52.9%. The company’s shift toward subscription-based transactions impacted gross margin negatively.

Gross margin for Recurring contracted 90 bps to 72.4% due to lower margins from subscription-based revenues.

Perpetual software license and hardware margins decreased 380 bps year over year, as current year revenues predominantly comprised hardware compared to a higher portion of software in the year-ago quarter.

Consulting services gross margin was 9.5% compared with 4.9% in the year-ago quarter. Teradata expects consulting gross margin to improve due to higher-value and higher-margin business consulting.

Non-GAAP operating income increased 7.7% from the year-ago period and non-GAAP operating margin increased 80 bps on a year-over-year basis to 10.6%.

Balance Sheet & Other Details

As of Sep 30, 2018, Teradata had cash and cash equivalents of 768 million compared with $882 million as of Jun 30, 2018. The company exited the quarter with total debt (including current portion) of $497 million compared with $497 million at the end of the previous quarter.

In the third quarter, Teradata used $33 million of cash from operating activities and the capital expenditure increased to $35 million, from $32 million reported in the year-ago quarter. The increase in CapEx was primarily driven by capital improvements in San Diego headquarters and increased mix of transactions moving to subscription.

Free cash outflow at the end of the third quarter was $68 million. Moreover, the company repurchased around 1.2 million shares worth approximately $49 million.

Guidance

Teradata expects 2018 full-year bookings mix to be at the higher end of the guidance range of 65% to 70% (subscription based). Moreover, the company expects recurring revenues to increase 9% in both reported and constant currency.

For 2018, Teradata expects revenues in the range of $2.13 and $2.15 billion. Non-GAAP earnings per share are projected to be between $1.22 and $1.26.

For fourth-quarter 2018, revenues are projected in the range of $555 and $575 million. Non-GAAP earnings are estimated between 41 cents and 45 cents per share.

Teradata expects recurring revenue gross margin to be approximately 70% in the fourth quarter and low 70% for full-year but to improve over the longer term.

Perpetual revenue margins are expected to be in the mid-40s range for the fourth-quarter and to be in the low 40s range for the full year.

Moreover, consulting gross margins are expected to improve significantly in the fourth quarter. For full-year 2018, consulting gross margin is expected to be 10%.

Teradata expects gross margin for the fourth-quarter to be in the low 50% range and to be approximately 50% for the full year.

The company anticipates an increase in selling, general and administrative expense in the fourth quarter pertaining to costs related to seasonally higher sales commissions and marketing activities to rebrand the company.

However, Teradata expects research & developement expense in fourth quarter to be slightly lower sequentially.

Further, management expects operating margin in fourth quarter to improve slightly on a sequential basis.

Free cash flow is expected to between $175 million and $200 million for 2018.

Zacks Rank and Stocks to Consider

Teradata currently carries a Zacks Rank #2 (Buy).

Some better-ranked stocks in the same sector include NetApp, Inc. (NTAP - Free Report) , MeetMe, Inc. (MEET - Free Report) and Upland Software, Inc. (UPLD - Free Report) . While NetApp and Upland sport Zacks Rank #1 (Strong Buy), MeetMe carries Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for NetApp, MeetMe and Upland Software is projected to be 14.1%, 20% and 20%, respectively.

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