Data and analytics software provider Teradata (NYSE:TDC) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue up 7.44% year on year to $462 million. Teradata made a GAAP profit of $17 million, improving from its loss of $4 million in the same quarter last year.
Teradata (TDC) Q2 FY2023 Highlights:
- Revenue: $462 million vs analyst estimates of $444.9 million (3.85% beat)
- EPS (non-GAAP): $0.48 vs analyst estimates of $0.45 (6.51% beat)
- Free Cash Flow of $46 million, down 56.2% from the previous quarter
- Full Year ARR guidance reaffirmed (6-8% year on year increase)
- Gross Margin (GAAP): 59.7%, in line with the same quarter last year
Part of point-of-sale and ATM company NCR from 1991 to 2007, Teradata (NYSE:TDC) offers a software-as-service platform that helps organizations manage their data across multiple storages and analyze it.
The customer problem that Teradata addresses is the challenge of managing large and growing amounts of data in a secure and scalable manner. With the oftentimes exponential growth of enterprise data, businesses need a reliable and scalable platform to collect, manage, and analyze data to gain insights and make good business decisions.
Teradata offers a range of software, hardware, and services so organizations can collect, store, analyze, and manage large amounts of data from multiple sources. Teradata Vantage is the cloud-based flagship product. For example, pharmaceutical giant Pfizer used Vantage to centralize and integrate data from clinical trials, manufacturing operations, and its supply chain. Vantage enabled Pfizer to perform predictive modeling to improve clinical trials yields and to eliminate redundancies in supply chain operations, leading to cost savings and better time to market for a number of popular and game-changing drugs.
From airlines looking to optimize routes and crews to e-commerce companies looking to understand consumer behavior, Teradata's customers come from a range of industries. The company generates revenue through the sale of software licenses, hardware, and services. The company offers a range of consulting and support services to help customers deploy and manage their data analytics platforms.
Generating insights from system level data is an increasing priority for most businesses, but to do so requires connecting and analyzing piles of data stored and siloed in separate databases. This is the demand driver for cloud based data infrastructure software providers, who can more readily integrate, distribute and process information vs. legacy on-premise software providers.
Competitors in engineering and design software include Snowflake (NYSE:SNOW), IBM (NYSE:IBM), and SAP (XTRA:SAP).Sales Growth
As you can see below, Teradata's revenue has been declining over the last two years, shrinking from $491 million in Q2 FY2021 to $462 million this quarter.
Teradata's quarterly revenue was only up 7.44% year on year, which isn't particularly great. On top of that, the company's revenue actually decreased by $14 million in Q2 compared to the $24 million increase in Q1 2023. Taking a closer look we can a similar revenue decline in the same quarter last year, which could suggest that the business has seasonal elements. Regardless, this situation is worth monitoring as management is guiding for a further revenue drop in the next quarter.
Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 3.54% over the next 12 months.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Teradata's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 59.7% in Q2.
That means that for every $1 in revenue the company had $0.60 left to spend on developing new products, sales and marketing, and general administrative overhead. Teradata's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Teradata's free cash flow came in at $46 million in Q2, down 55.3% year on year.
Teradata has generated $302 million in free cash flow over the last 12 months, a solid 16.5% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from Teradata's Q2 Results
Sporting a market capitalization of $5.63 billion, Teradata is among smaller companies, but its more than $504 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was good to see Teradata beat analysts' revenue and ARR (annual recurring revenue) expectations this quarter. That really stood out as a positive in these results. Next quarter's non-GAAP EPS guidance was in line. and the company largely maintained its full year guidance. On the other hand, its deteriorating gross margin was a negative. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $55.47 per share.
Is Now The Time?
When considering an investment in Teradata, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Teradata, we'll be cheering from the sidelines. Its revenue growth has been very weak, and analysts believe that growth rate will remain steady. And while its strong free cash flow generation gives it re-investment options, the downside is that its customer acquisition is less efficient than many comparable companies and its gross margins show its business model is much less lucrative than the best software businesses.
Teradata's price to sales ratio based on the next 12 months is 3.1x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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