Teradata Corporation

Moat: 2.5/5

Understandability: 4/5

Balance Sheet Health: 4/5

Teradata Corporation is a leading provider of connected multi-cloud data platform for enterprise analytics, offering an integrated data and analytics platform designed to help companies solve their most complex data challenges.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Teradata operates in the competitive and rapidly evolving data analytics and cloud services industry. To fully grasp Teradata’s position, it’s crucial to consider its revenue distribution, competitive landscape, and what differentiates the company from its peers.

Revenue Distribution:

  • Teradata’s revenue is primarily derived from two sources: recurring revenues, which consist of subscription fees, managed services fees, and usage-based fees, and the more unpredictable term-based revenue, which primarily consists of perpetual licenses and other products that are sold one time.
  • The bulk of the company’s revenue is now recurring, reflecting its transition to a more cloud-based subscription model. For instance, in the latest earnings call (Q3’23), recurring revenue accounted for more than 75% of their total revenues.
  • Consulting services revenue is also a noteworthy, but significantly smaller, part of the business, indicating a focus on providing software and data analytics platforms more than traditional IT services.
  • Revenue is reported in three segments: Americas, EMEA (Europe, Middle East, and Africa) and APJ (Asia Pacific and Japan). Americas has consistently been the biggest segment, contributing almost half of total revenue.

Trends in the Industry:

  • The industry is moving towards cloud-based analytics solutions, where companies can gain greater scalability and flexibility.
  • There’s also an increased demand for integrated data and analytics platforms, which allows businesses to get data from different cloud sources, combining structured and unstructured data, and also utilizing AI to automate tasks.
  • Businesses are increasingly becoming more data-driven, and need strong data analytics and business intelligence tools.
  • Competition is also increasing and is now coming from both software and hardware companies.
  • The industry faces complex challenges with data security, data privacy, data availability, and data quality.

Margins:

  • Gross margin, while still high is under pressure, especially due to the transition to a subscription model which shifts the upfront revenue to recurring subscription revenue and increasing cloud costs. The software and cloud services is quite a competitive segment. The gross margin in Q3 was 67.2%.
  • Operating margins have suffered a bit recently. This is partly because of stock-based compensation and restructuring costs which are reducing the margin. In the past, the company’s operating margins have been good because of its ability to grow revenues, reduce costs, improve operations, and sell software at high prices. The operating income for Q3’23 was $58 million or 13.6%.

Competitive Landscape:

  • The data analytics and database market is highly competitive. Major competitors include cloud service providers like AWS, Microsoft and Google Cloud, and also data companies like Snowflake, Databricks, Oracle, and SAP.
  • Teradata distinguishes itself in this competitive space through its strong focus on data integration and management capabilities. Competitors often don’t have the level of capabilities across on-premises and cloud platforms that Teradata has.
  • Teradata is one of the first few companies that has developed strong capabilities in machine learning and artificial intelligence with its Vantage platform which is a huge differentiating factor as more and more companies want to use AI in its operations.

What Makes Teradata Different?:

  • Teradata provides a multi-cloud data analytics platform that integrates data from diverse environments. It’s a “solution”, not just “software”.
  • It is a leader in complex data management capabilities. For a company with massive and distributed data, it’s much better to have a single place where it is analyzed, rather than using multiple vendors.
  • The company’s business is becoming more reliant on recurring revenue as its moves more and more to a cloud subscription model. This provides better predictability for the business.
  • The company is increasingly focusing on AI capabilities and incorporating AI into its core technology stack. The move is to make the platform more appealing to enterprises that are increasingly utilizing and demanding AI analytics.

Financial Deep Dive

Let’s dive deeper into the financial health of Teradata:

  • Revenues:
    • Recurring revenues are the bulk of the company’s revenues, accounting for over 75% of total revenues. This is a good indication of the transition to a subscription-based model which is becoming more dominant in the business, giving it good revenue visibility.
    • Total revenue for the third quarter was $435 million, a decline of 2% from the same period a year prior. The reason for this decline is from the reduction of license and other type of revenues.
  • Profitability:
  • The company had a gross profit of 292 million, or a gross margin of 67.2%. The gross margin is down from 69.7% in Q3’22.
  • The company is operating with a low operating margin of 13.6% at $58 million. The main factors impacting operating margins are increases in sales and marketing costs due to the transition, an increase in stock-based compensation, and restructuring costs. The operating profit was 114.8 million in Q3 2022, a sharp decline of about 50%.
  • The net income for the quarter was 12 million dollars, or 14 cents per share.
  • Cash Flow:
    • In Q3 the company had positive free cash flow of $67 million, mainly due to solid cash generation. The management expects to be free cash flow positive for the remainder of the year as well.
  • Balance Sheet:
    • The company’s cash and marketable securities position is $700 million.
    • Long-term debt is 500 million dollars, which is relatively low when compared to the cash available and revenues of over 1.7 billion dollars.
    • Total liabilities are $1,756 million, as compared to assets of $2,485 million, meaning there’s more assets than liabilities. The total equity was $729 million, as a result of accumulated losses.
  • Recent Concerns/Problems:
  • Revenues are experiencing a downtrend, as there is transition to the new business model. This has been weighing down investor’s perception of the stock. This is expected though because, according to the company’s management, revenues are expected to improve in late 2024. * Restructuring costs, acquisitions, and a high rate of stock based compensation have been impacting the company’s profitability.
  • The company has been working through several changes in management and executives. However, there seems to be good leadership in place now. * The management is actively working to maintain a positive financial profile while implementing its strategies.

Moat Assessment

Based on the analysis, Teradata’s moat is rated as 2.5 / 5

Justification:

  • Switching costs: Teradata benefits from moderate switching costs. Its platform, once implemented, becomes difficult for customers to replace due to high integration, business continuity, large and complex data migration, and need for specialized skills for usage. There are also strong use cases, especially for big and complex customers, that makes it difficult to leave their system.
  • Scale and Cost Efficiencies: Being one of the largest vendors, allows Teradata to maintain a strong sales infrastructure and reduce marketing costs. It is now moving towards a cloud platform, which should allow it to generate more recurring revenues from a broader customer base, creating a scale advantage.
  • Intangible Assets: Teradata has expertise and unique knowledge in database analytics, AI, and machine learning. Over time, the company has earned a certain brand power and recognition.

Limitations on Moat:

  • Competition: Fierce competition from large cloud providers and niche specialists, could make it hard for the company to grow and also put price pressure which will reduce profit. Other vendors are also focusing more and more on AI capabilities.
  • Technology Churn: Rapidly evolving technology in data and AI fields could affect their value proposition and the sustainability of the products and moat.
  • Customer Lock-In: While a moat can be built from client lock-in, it can also lead to customer dissatisfaction and churn if they are not offered sufficient flexibility and scalability. This could also be a problem because customers have to commit to expensive long-term contracts, even if they’re unhappy with the service.

Risks to the Moat and Business Resilience

  • Technological Disruption: Rapid technological innovation in the cloud and AI space could make its current offerings less relevant or lead to obsolescence.
  • Competition: The company faces heavy competition from cloud vendors, tech giants and other specialized players, as mentioned before.
  • Economic Downturn: With a heavy reliance on enterprise sales, a downturn in the global economy could lead to lower revenue and profits.
  • High Operating Expenses: The company has been investing heavily in technology and marketing. Any misstep in these areas could lead to big financial losses.
  • Transition Risks: As the company transitions to a cloud-based and subscription model, it might experience volatility in earnings.
  • Talent Acquisition and Retention: The company operates in a competitive and fast paced technological space, finding and retaining top talent is a risk that must be carefully monitored.

Teradata shows resilience through:

  • Its existing relationships and long history with big, well-established enterprises. This gives them the advantage of the company’s established market position.
  • A focus on developing core competencies in integrated data management, AI and analytics should also create a sustainable market position.
  • Strong cash reserves and a manageable amount of debt offers some safety in the case of an unexpected downturn.

Understandability

Teradata’s business model, while complex at a granular level due to the multiple different products and use cases, is understood to a decent level. Thus, the business gets an understandability of 4/5.

  • While their offerings are intricate, and involve different software, data analytics, and integration capabilities, the core idea is to provide enterprise customers a single point of access to analyze data.
  • Their transition to a cloud-based and subscription model makes the business more predictable and easier to analyze for investors.
  • Focus on AI capabilities, will become a crucial factor in their moat, and it also makes the business more easily understandable for investors that understand the value AI offers.
  • Still, a good bit of technical knowledge and a strong understanding of data and analytics and accounting practices are needed for complete understanding of the inner workings of the business.
  • The intricacies of the software industry, the various products offered, their use cases, and different pricing models increases the complexity and reduces the understandability of the business.

Balance Sheet Health

Teradata’s balance sheet health is rated at 4/5:

  • The company has a manageable debt, particularly since most of it is long term.
  • Strong cash balance protects it from any short term disruptions.
  • Their operating expenses, although high, are manageable and they are working to improve profitability.
  • The business is transitioning to a high recurring-revenue model, which will reduce volatility in the future.

These are some of the reasons for a positive rating, but the debt burden should be closely monitored, as this is one of the primary weaknesses of the business.