It has been about a month since the last earnings report for Teradata (TDC - Free Report) . Shares have added about 3.2% 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’s Q4 Earnings & Revenues Down Y/Y
Teradata Corporation reported adjusted earnings of 49 cents per share, which declined 15.5% year over year. However, the figure beat the Zacks Consensus Estimate of 44 cents.
Total revenues of $588 million beat the Zacks Consensus Estimate of $566 million but declined 6.1% year over year (down 4% at constant currency).
The ongoing transition to subscription-based model dragged down revenues.
Recurring revenues increased 9.7% year over year (13% at constant currency) to $328 million. The segment includes revenues from subscription-based transaction and perpetual license related maintenance and upgrade rights.
Perpetual software license and hardware revenues decreased 38.6% from the year-ago quarter to $97 million due to the company’s ongoing transition to a subscription-based business model. Teradata stated that the majority of its perpetual revenues are now hardware related.
Consulting services revenues declined 3.6% from the year-ago quarter to $163 million. The company introduced analytics platform, Teradata Vantage in the reported quarter. Management stated that the new software is gaining significant traction among customers, which is a positive. Notably, more than 100 customers have adopted Vantage, which drove ARR in the reported quarter.
Notably, Teradata expects consulting services revenues to decline in the near term as the company realigns its focus and resources to the new software.
Total ARR at the end of the quarter increased $68 million year over year in the reported quarter. Subscription-based ARR increased more than 130% year over year.
The company witnessed robust growth in annual recurring revenues (ARR) and increasing adoption of the company’s subscription-based model. Notably, 87% of the bookings were subscription based in the reported quarter.
Revenues from Americas decreased 18.4% year over year (18% at constant currency) to $298 million due to rapid transitioning to subscription-based business model while that from International increased 11.1% (16% at constant currency) to $290 million.
Moreover, Teradata exited the quarter with a backlog of $2.5 billion, an increase of 51% year over year, which is a positive.
Total revenues in 2018 were $2.16 billion, higher than the guided range of $2.13 billion to $2.15 billion. Earnings per share came in at $1.29, much higher than the company’s guided range.
The company witnessed total bookings of 79% in 2018. Gross margin for 2018 was 50.6%, down 1% year over year.
ARR was $1.31 billion, a 10% increase from the year -ago quarter. However, Perpetual software license and hardware revenues declined 39% year over year to $97 million,
Non-GAAP gross margin stayed flat year over year at 52%. The company’s shift toward subscription-based transactions impacted gross margin negatively.
Gross margin for recurring revenues contracted 430 basis points (bps) to 68.6% due to lower margins from subscription-based revenues.
Perpetual software license and hardware margins decreased 280 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 15.3% compared with 12.4% in the year-ago quarter.
Non-GAAP operating income declined 20.4% from the year-ago period and non-GAAP operating margin declined 230 bps on a year-over-year basis to 12.6%. Notably, the year- over-year decline in operating margin was due to the ongoing transition.
Balance Sheet & Other Details
As of Dec 31, 2018, Teradata had cash and cash equivalents of $715 million compared with $768 million as of Sep 30, 2018. The company exited the quarter with total debt (including current portion) of $497 million, which stayed flat sequentially.
In the fourth quarter, Teradata generated $107 million of cash from operating activities compared with $23 million in the year-ago quarter. Capital expenditure increased to $63 million from $21 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 fourth quarter was $44 million, down $24 million sequentially. Moreover, the company repurchased around 2.6 million shares worth approximately $94 million.
Teradata expects 2019 full-year bookings mix to be 70% or higher (subscription based). Moreover, the company expects recurring revenues to increase 11-12%.
For 2019, Teradata expects perpetual revenues to decline in the range of $150 to $200 million compared to the year-ago quarter. Non-GAAP earnings per share are projected to be between $1.45 and $1.55.
Teradata expects recurring revenue gross margin to be in low 70% for the full year but to improve over the longer term. Perpetual gross margin is expected to be in range of 35% and 40% for the full year. Consulting gross margin is expected to improve 3-4% in 2019.
Free cash flow is expected to be between $200 million and $250 million for 2019.
For first-quarter 2019, recurring revenues are projected in the range of $332 and $335 million. Non-GAAP earnings are estimated between 18 cents and 20 cents per share.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -32.9% due to these changes.
At this time, Teradata has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.
Teradata has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.