2023-12-20 05:27:09 ET
Summary
- Teradata continues to impress analysts with its increase in recurring revenue and EPS GAAP expectations.
- The company's business model focuses on the cloud and offers comprehensive analytics and consulting services.
- TDC's strategic partnerships and focus on the multi-cloud data platform position it for future growth in the cloud market.
In my opinion, Teradata Corporation ( TDC ) is a buy because of its growing recurring revenue, increases in deferred revenue, and migration of customers to the cloud. Further exposure to business models related to new AI technologies, like Stemma Technologies, and the cloud market growth may also bring significant net sales growth. Yes, there are risks from the total amount of debt, price pressure from competitors, or alternative technologies. However, I believe that the stock appears undervalued.
Teradata: Business Model And Recurring Revenue
Teradata has evolved into a multi-cloud platform for enterprise analytics. With a focus on the cloud, Teradata VantageCloud offers a next-generation native deployment, connecting data across on-premises and multi-cloud environments. It offers solutions for various business needs, from identity management to artificial intelligence. ClearScape Analytics provides comprehensive analytics, and consulting services to help maximize investments in data and analytics.
Teradata operates globally and provides flexible purchasing options. Its cloud focus and comprehensive capabilities position it as a leader in analytics.
Its sales and marketing strategy highlights leadership in multi-cloud data platforms, with a focus on educating and guiding customers in its cloud migration. More than 80% of its employees are dedicated to revenue generating functions. Additionally, Teradata seeks strategic partnerships with cloud service providers, alliance partners, and systems consultants to expand its reach and deliver end-to-end solutions.
With that about the business model, I want to talk about the recent earnings results and the expectations of analysts. Teradata reported lower EPS GAAP than expected, but better net sales growth. With that, I believe that the most impressive is that recent EPS revisions included close to eight increases in the last 90 days. In my view, analysts out there received certain information about Teradata that made them quite optimistic about the company. Even with recent news about a decrease in recurring revenue, in my view, Teradata continues to impress analysts out there.
Source: SA
In the last quarterly report, the company noted that 82% of the total amount of revenue is represented by recurring revenue. Most importantly, management reported a significant increase in recurring revenue since 2021. In my view, further increases will most likely lead to richer stock valuations as financial predictability is easier.
Balance Sheet
As of September 30, 2023, Teradata reported cash and cash equivalents of about $348 million, accounts receivable of close to $286 million, and total current assets of about $738 million. The current ratio is lower than 1x, which I do not like.
With that, I believe that Teradata may not have a liquidity problem. The company reports a significant amount of property and equipment, which may help management talk to bankers.
Property and equipment stands at close to $249 million, with right of use assets of close to $10 million and goodwill of $396 million. Total assets were equal to $1.740 billion with an asset/liability of more than 1x. With these figures, I believe that the balance sheet appears solid.
Source: 10-Q
With a large amount of accounts receivable and little accounts payable, Teradata appears to be in need of help from banks to finance its activities. With this in mind, I believe that readers will do good by looking at the total amount of debt.
In the last quarter, payroll and benefits liabilities were close to $120 million, with deferred revenue of $477 million and total current liabilities close to $885 million. Besides, with long-term debt of about $486 million and finance lease liabilities of $70 million, total liabilities were equal to $1.618 billion.
Source: 10-Q
Teradata established a $400 million Credit Facility, replacing previous agreements, expiring June 28, 2027 with an extension option. In addition, it has a Term Loan of $500 million, with quarterly installments and an interest rate swap to cover part of the floating rate. The Credit Line is not guaranteed, but some subsidiaries are guarantors. In the last quarterly report, Teradata noted an interest rate close to 4%, so I believe that a conservative WACC would be larger than 4%.
For the three months ended September 30, 2023 and September 30, 2022, the blended all-in interest rate on the Credit Facility was 4.45% and 3.98%, respectively. Source: 10-Q
Beneficial Market Expectations, And Guidance Including FCF Growth And Net Sales Growth
I believe that it is worth having a look at the expectations delivered by management. The numbers appear beneficial. The company expected FCF of close to $320-360 million, with revenue growth of close to 1-4% and recurring revenue growth of about 4-7%.
In my view, market estimates are also beneficial. 2025 net sales are expected to be close to $2012 million, with 2025 EBITDA of $558 million, 2025 net income close to $171 million, and 2025 free cash flow of $456 million. It is worth noting that expectations include FCF growth in 2023, 2024, and 2025.
Source: Market Screener
I Would Be Expecting Further Increase In FCF Margin Growth Thanks To New Data Features
Teradata's strategy includes goals such as strengthening its cloud offering, establishing itself as a cloud-native platform, and expanding customer presence. In my view, its differentiated approach includes data features that connect multi-cloud environments, offering flexibility and reducing data silos.
Additionally, with consumer pricing and a commitment to corporate responsibility, Teradata seeks to provide a comprehensive user-centric experience while addressing global challenges. I believe that these initiatives will continue to drive FCF growth and FCF margin growth in the coming years. We have seen FCF/Net Sales growth in the past as shown in the chart below.
Source: Ycharts
I Believe That Transitions To Subscription-Based Offerings Could Bring New Net Sales Growth And Recurring Net Sales
The company appears to be moving customers towards a subscription model, which explains why recurring revenue continues to trend higher. In the last quarterly presentation, management offered certain commentaries in this regard.
Recurring revenue also included a benefit from annual upfront software subscription revenue associated with on-premises subscription software of approximately 1% compared to the first nine months of 2022. Source: 10-Q
Customers continue to transition to subscription-based offerings, consistent with our overall strategy. Source: 10-Q
I believe that the growth in current deferred revenue seen in the last 16 years indicates that subscription revenue appears to be working pretty well. Customers pay in advance for services that Teradata offers over a one year period. In my view, further increase in deferred revenue may bring new liquidity, and management may not need to receive bank financing. As a result, I believe that we could see increases in the EV/FCF ratio.
Source: Ycharts
The Global Cloud Analytics Market Growth Could Enhance Teradata's Net Sales Growth
Given the global cloud analytics market growth, which is close to 18.24% CAGR, I believe that Teradata could see net sales growth increase. Teradata does not currently deliver double digit net sales growth, however further investments in the cloud market could lead to net sales growth. The following is information about this market from experts in the field.
The global cloud analytics market size was evaluated at USD 26.8 billion in 2022 and is expected to surpass around USD 143.17 billion by 2032, growing at a CAGR of 18.24% between 2023 and 2032. Source
I also believe that we may see further increase in the number of clients moving to the cloud like we saw in the last quarter. Clients do seem to send more workloads to the cloud. They are also choosing hybrid environments, and expanding into additional cloud capabilities.
Increasing number of existing cloud customers who are adding new, incremental workloads to the cloud.
Customers expanding into additional cloud capabilities when they migrate to VantageCloud as compared to the capabilities they had in an on-premises environment.
Existing on-premises customers are adding new, incremental cloud workloads when expanding into hybrid environments.
- Source: 10-Q
The Acquisition Of Stemma Technologies May Bring Net Sales Growth Drivers Thanks To AI-enhanced Data Search Skills
I would also expect further increase in net sales growth thanks to inorganic initiatives in new markets related to artificial intelligence technologies. The acquisition of Stemma Technologies was a clear initiative that will most likely enhance the exposure to the AI-enhanced data search market.
We acquired Stemma Technologies which provided data catalog capabilities that we expect will add AI-enhanced data search and exploration to our platform. Source: 10-Q
Given that the global artificial intelligence market is expected to grow at close to 36% CAGR in the next ten years, Teradata could experience an increase in net sales thanks to this acquisition or others in the same market.
The global Artificial Intelligence market size was valued to be worth USD 177 billion in 2023. From 2023 to 2032, it is estimated to reach USD 2,745 billion growing at a CAGR of 36.8%. Source
The Share Repurchase Program Could Lead To Demand For The Stock And Stock Price Enhancement
I also believe that further open market transactions, privately negotiated transactions, or other operations under the share repurchase program could lead to substantial demand for the stock. In the last quarterly report, Teradata reminded investors that they have the right to acquire $560 million remaining under the open market share repurchase program.
Our open market share repurchase program provides for the repurchase of Teradata stock periodically on an ongoing basis in open market transactions, through 10b5-1 programs, through accelerated share repurchase programs, in privately negotiated transactions, or through the use of derivative instruments, in accordance with applicable securities rules regarding issuer repurchases. There is a total authority of $560 million remaining under the open market share repurchase program as of September 30, 2023. Source: 10-Q
My Income Statement Expectations Based On My Previous Results
My numbers include 2031 subscription software licenses of about $539 million, services of close to $1.227 billion, and total recurring revenue of $1.766 billion. I assumed median recurring growth close to 2%. With 2031 perpetual software licenses, hardware and other of -$111 million and consulting services close to -$195 million, 2031 total revenue would be $1.461 billion.
Source: My Expectations
Costs of revenue assumed included 2031 subscription software licenses of about $10 million, services and other of $531 million, and total recurring costs of about $541 million.
With perpetual software licenses, hardware and other costs of about -$12 million and 2031 consulting services of close to -$230 million, total cost of revenue would be $301 million. I also assumed 2031 gross profit of $1.159 billion, 2031 selling, general, and administrative expenses of about $584 million, and research and development expenses close to $239 million. Finally, with total operating expenses of $824 million, 2031 net income would be close to $167 million.
Source: My Expectations
My Cash Flow Expectations Based On My Assumptions And Previous Statements
My cash flow expectations are mainly based on previous cash flow expectations and the assumptions I offered before. My numbers included 2031 net income of $167 million, depreciation and amortization close to $39 million, stock-based compensation expense worth $240 million, deferred income taxes of 261 million, and changes in receivables of -$420 million.
Besides, with 2031 changes in inventories of $100 million, changes in account payables and accrued expenses close to $197 million, and 2031 deferred revenue of $35 million, 2031 net cash provided by operating activities would be close to $616 million. Finally, 2031 FCF would be close to $576 million. I believe that my figures are quite conservative.
Source: My Expectations
Valuation
With FCF projections close to $358 and $577 million from 2023 to 2031, a WACC of close to 6.5%-9%, and exit multiples close to 7x-13x, the implied price forecast would be $56-$91 per share. The median stock price would be close to $67-$81 per share.
Source: My DCF Model
The internal rate of return would be close to 4%-18% with a median of about 9%-11%. Given these figures, I really believe that Teradata appears undervalued.
Source: My DCF Model
Risks And Competitors
Teradata faces challenges in the IT industry due to pricing pressure and customer migration to cloud-based environments, which may impact renewal of subscription and support agreements.
Mergers and acquisitions in the industries served may place additional pressure on underwriting and support conditions. New emerging players may lower the overall price of services in the industry, which may lead to lower demand for the product or Teradata. Management may also have to decrease its prices, which may lower its FCF margins.
The variable length of the sales cycle, influenced by external factors and internal processes, makes revenue prediction difficult and can generate significant variability in financial results. Sales delays can also impact the financial guidance provided. In sum, lower net sales growth than expected could lower the valuation of the stock.
Additionally, I believe that there are risks with respect to the total amount of debt. If debt holders decide to block new acquisitions, or net leverage increases to higher levels, the EV/FCF ratio could lower. As a result, we may see a decrease in the stock valuation.
In my opinion, Teradata competes in a market alongside competitors of equal or greater size, facing competitors such as Amazon Web Services ( AMZN ), Microsoft Azure ( MSFT ), Snowflake ( SNOW ), IBM ( IBM ), Oracle ( ORCL ), and SAP ( SAP ). Its unique focus on multi-cloud ecosystem simplification, scalable solutions, and products designed is aimed to achieve differential business results.
My Opinion
In my view, further migration of clients to the cloud and an increase in recurring revenue and FCF margin could push the valuation of the stock price. In addition, the stock repurchase program may also contribute to generating further demand for the stock. For those reasons, in my view, TDC looks like a buy. Although it faces competitive challenges and pricing pressures, its unique position and strategic partnerships give it an advantage. I do believe that stock is cheap.
For further details see:
Teradata: Strong Recurring Revenue, AI Data Search Exposure, Yet Undervalued