Teradata: More Headwinds Ahead (NYSE:TDC)

For a high-growth tech company, Teradata Corporation (NYSE:TDC) hasn’t been doing too bad considering the high-interest rate environment that usually hammers the share price of tech stocks like TDC.

Its annual recurring revenue (ARR) in its Cloud business has been increasing, providing a foundation for long-term growth in the quarters and years ahead.

But like most companies competing in international markets, TDC has been taking a hit because of the rising interest rates and effects of a strong U.S. dollar on its performance; neither of which is likely to subside over the next three quarters or so.

While the company has bounced off of its 52-week low of $28.65, it’s still struggling to hold above the $35.00 per share mark.

In this article we’ll look at its recent quarterly performance, some weaker near-term guidance, and how the long-term outlook for the company looks like.

Some recent numbers

Revenue in the third quarter was $417 million, down 9 percent from the $460 million in revenue generated in the third quarter of 2021.

Recurring revenue in the quarter was $331 million, down 9 percent from recurring revenue of $460 million in the third quarter of 2021. Recurring revenue accounted for 79 percent of overall revenue in the quarter, up 77 percent year-over-year.

Net income crashed to $8 million, or $0.08 per share in the third quarter, compared to $17 million or $0.16 per share in the third quarter of 2021. For the first nine months of the year net income was $40 million or $0.39 per share, compared to net income for the first nine months of 2021 of $114 million, or $1.05 per share.

GAAP gross margin in the reporting period was 62.1 percent, up from the 59.8 percent in GAAP gross margin from the same quarter last year.

GAAP operating income in the third quarter was $25 million, down $5 million from the GAAP operating income of $30 million in the third quarter of 2021.

Free cash flow in the quarter jumped from $23 million last year in the third quarter to $31 million in the third quarter of 2022. Free cash flow for full-year 2022 is projected to come in at approximately $400 million.

Cash and cash equivalents at the end of the quarter were $506 million, down $88 million from the $592 million in cash and cash equivalents held at the end of calendar 2021. Long-term debt at the end of the reporting period was $498 million, compared to $324 million in long-term debt at the end of calendar 2021.

For full-year 2022 the company lowered its guidance on overall ARR, recurring revenue, and total revenue. Overall ARR is projected to drop in the low-to-mid-single-digit range as measured against overall ARR in 2021.

Recurring revenue is also guided to drop in the low-to-mid-single-digit range compared against total recurring revenue in 2021.

Total revenue is also guided to drop in the low-to-mid-single-digit range when compared against total revenue in 2021.

Even though the company had a decent quarter, it’s easy to see that rising interest rates, a strong U.S. dollar, and economic uncertainty heading into 2023 are already weighing on its performance.

With Q4 the historically best-performing quarter for TDC, when the next report comes out it’ll give a visible snapshot of the momentum the company will take into 2023, which will, at least in the first half of the year, be a challenging macro-economic environment, which will likely force more top management teams to make spending decisions based upon cost savings.

New products

TDC introduced two new products in the quarter: VantageCloud Lake and ClearScape Analytics.

VantageCloud Lake

CEO Steve McMillan identifies VantageCloud Lake as the first product the company has built on its “all-new next-generation cloud-native architecture.”

What VantageCloud Lake essentially does is provide more customized, targeted, specific use cases data can be applied to, without having to transfer the data somewhere else.

McMillan believes this will empower its customers to drive more innovation within their respective companies, which could result in the opening up of new markets and opportunities for them.

It also appears it will allow customers to get a lot more of their data by applying it to specific use cases, which should generate a stickier result for the company over the long term.

ClearScape Analytics With ClearScape Analytics the company is enhancing its existing analytics category “by introducing more than 50 new in-database time series and ML functions and integrated model ops that are designed to rapidly operationalize AI and ML initiatives.”

In a nutshell, what it does is improve the capabilities of its analytics’ solution. It is built to help companies solve some of the more complex problems they face.

Taking VantageCloud Lake and ClearScape Analytics together, they’re designed to boost the performance of its existing products at the macro level by empowering its customers to dig deeper into the analytics and provide answers or generate new innovation for their own customer bases.

In the end, what it does is make the solutions offered by TDC stickier, which should result in less churn and long-term, sustainable growth.

Conclusion

In the near term TDC faces significant headwinds, as it can’t escape the effect of the macro-economic and geopolitical impacts on its performance, including shutting down its Russian operations earlier in the year.

I think it’s going to struggle to gain much traction in its share price on a sustainable basis, and more than likely will face more downward press in the quarters ahead.

That said, its fourth quarter is historically its best-performing quarter, so if it outperforms in any way there, it’ll give the stock a boost, although I don’t think it’ll be a long one as we head into 2023.

The weakening global economy, rising interest rates and a strong dollar will continue to have an impact on the top and bottom lines of the company, and until the Fed stops raising rates, I expect that to continue.

The current entry point isn’t a bad one, but I think in the first couple of quarters of calendar 2023 it could get a better. The degree to which the share price is likely to fall will be determined by inflation and how the economy does over the next 6 months or so.

Over the long-term I like TDC, but think it needs to fall more before I would be comfortable in taking a position in it.