Data and analytics software provider Teradata (NYSE:TDC) announced better-than-expected results in Q2 FY2023, with revenue up 7.44% year on year to $462 million. Teradata made a GAAP profit of $17 million, improving from its loss of $4 million in the same quarter last year.

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“Our broad-based momentum across the business generated strong financial results, including 77% Cloud ARR growth, 10% increase in Total ARR growth and EPS that exceeded our guidance,” said Steve McMillan, President and CEO, Teradata.

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 their data across multiple storages and analyze it.

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.

Sales Growth

As you can see below, Teradata's revenue has been declining over the last two years, shrinking from $491 million in Q2 FY2021 to $462 million this quarter.

Teradata's quarterly revenue was only up 7.44% year on year, which isn't particularly great. On top of that, the company's revenue actually decreased by $14 million in Q2 compared to the $24 million increase in Q1 2023. Taking a closer look we can a similar revenue decline in the same quarter last year, which could suggest that the business has seasonal elements. Regardless, this situation is worth monitoring as management is guiding for a further revenue drop in the next quarter.

Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 3.54% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Teradata's free cash flow came in at $46 million in Q2, down 55.3% year on year.

Teradata has generated $302 million in free cash flow over the last 12 months, a solid 16.5% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.

Key Takeaways from Teradata's Q2 Results

With a market capitalization of $5.63 billion, Teradata is among smaller companies, but its $504 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was good to see Teradata beat analysts' revenue and ARR (annual recurring revenue) expectations this quarter. That really stood out as a positive in these results. Next quarter's non-GAAP EPS guidance was in line. and the company largely maintained its full year guidance. On the other hand, its deteriorating gross margin was a negative. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $55.47 per share.

So should you invest in Teradata right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.