Data warehousing and business analytics provider Teradata (TDC) is in the midst of a business model transformation that it hopes will turn around its fortunes. The company reports fourth-quarter and year-end 2016 results on Thursday, Feb. 9.
On Nov. 19, Teradata held an analyst meeting to make its case before the investment community that its transformation will result in higher growth. Over the past few years the company has struggled to grow. Revenue declined 7.4% in 2015 and is expected to be down 10% in 2016, according to estimates. Management thinks revenue will down 5-10% in 2017.
Customers use Teradata's hardware, software and consulting services to predict business trends, improve customer satisfaction and increase efficiencies. Insurance companies might use Teradata to find the difference in risk between the best and worst drivers. Retailers might use Teradata to find trends in cash-register data. Verizon (VZ) uses its Teradata data warehouse to create attractive offerings for customers that are profitable to the business.
Teradata's historical core has been data management, but it needs to extend out into faster-growing markets such as analytic tools, consulting and less-expensive pre-packaged analytics for smaller customers. More than 50% of the company's addressable market is the top-500 companies with gigantic data warehouses.
Data warehouses were once stored on the company's proprietary hardware, but today customers are demanding analytics across the public cloud, the private cloud, and the cloud hosted at Teradata. About 85% of Teradata's customers do not want to manage their infrastructure and are moving toward a managed cloud arrangement.
All this means Teradata has to switch from selling products to solving business problems. Instead of selling hardware and software, the company is moving to a subscription business model. In 2016, only 61% of its revenue was recurring subscriptions. By 2019, management plans to derive 86% of revenue from subscriptions.
On Oct. 27, Teradata reported third-quarter earnings of $0.69 per share, $0.10 better than the consensus estimate. Revenue fell 8.9% to $552 million versus the $556.8 million estimate.
Despite the earnings beat, the company guided down the fourth quarter. Management sees fourth-quarter EPS between $0.57 and $0.62 versus the $0.69 consensus estimate. Furthermore, management cut revenue guidance to $620 million-$640 million from $655 million.
For me, I'm reluctant to get involved in the stock of a company that is undergoing such an aggressive transformation. While I understand 2017 is considered the "trough year" with revenue is expected to be down followed by an increase of 8-10% in 2018 , I'm not entirely confident the transition will be all that smooth. In the past, Teradata has had problems growing so I'm not ready to give it the benefit of the doubt. Historically, Teradata had high prices, which drove customers away and limited the company's prospects.
The analyst consensus target price for the stock is $32, which is less than 10% higher than the current quote. For the time being, I am content to sit on the sidelines and monitor Teradata's progress.