Teradata (TDC)

Data and analytics software provider Teradata (NYSE:TDC) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 10.1% year on year to $418 million. Next quarter’s revenue guidance of $401.1 million underwhelmed, coming in 1.9% below analysts’ estimates. Its non-GAAP profit of $0.66 per share was 17% above analysts’ consensus estimates.

Company Overview

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 and analyze their data across multiple storages.

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).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Teradata’s demand was weak over the last three years as its sales fell at a 4% annual rate. This was below our standards and suggests it’s a low quality business.

This quarter, Teradata missed Wall Street’s estimates and reported a rather uninspiring 10.1% year-on-year revenue decline, generating $418 million of revenue. Company management is currently guiding for a 8% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 3.3% over the next 12 months, similar to its three-year rate. This projection is underwhelming and implies its newer products and services will not lead to better top-line performance yet.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Teradata’s ARR came in at $1.44 billion in Q1, and it averaged 3.8% year-on-year declines over the last four quarters. However, this alternate topline metric outperformed its total sales, which likely means that the recurring portions of the business are growing faster than less predictable, choppier ones such as implementation fees. That could be a good sign for future revenue growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Teradata does a decent job acquiring new customers, and its CAC payback period checked in at 47.2 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

For software companies like Teradata, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Teradata’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 60.2% gross margin over the last year. That means Teradata paid its providers a lot of money ($39.75 for every $100 in revenue) to run its business.

Teradata produced a 59.3% gross profit margin in Q1, down 1.5 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Teradata has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 13.3%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Teradata’s operating margin rose by 4.8 percentage points over the last year, showing its efficiency has improved.

This quarter, Teradata generated an operating profit margin of 15.8%, up 5.5 percentage points year on year. The increase was solid, and because its revenue and gross margin actually decreased, we can assume it was more efficient because it trimmed its operating expenses like marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Teradata has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 15.4% over the last year, better than the broader software sector.

Teradata’s free cash flow clocked in at $7 million in Q1, equivalent to a 1.7% margin. The company’s cash profitability regressed as it was 2.8 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Teradata’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 15.4% for the last 12 months will increase to 21.1%, it options for capital deployment (investments, share buybacks, etc.).

Teradata reported $368 million of cash and $588 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $451 million of EBITDA over the last 12 months, we view Teradata’s 0.5× net-debt-to-EBITDA ratio as safe. We also see its $0 of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Teradata provide full-year EPS guidance that slightly beat analysts’ expectations. We were also happy its annual recurring revenue narrowly outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed significantly and its revenue fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 4.3% to $21 immediately following the results.

Updated: June 14, 2025 at 10:30 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Teradata doesn’t pass our quality test. First off, its revenue has declined over the last three years, and analysts don’t see anything changing over the next 12 months. And while its impressive operating margins show it has a highly efficient business model, the downside is its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. On top of that, its gross margins show its business model is much less lucrative than other companies.

Teradata’s price-to-sales ratio based on the next 12 months is 1.3x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $26 on the company (compared to the current share price of $21.45).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.