https://www.forbes.com/sites/greatspeculations/2020/02/18/dont-buy-teradatas-turnaround-story/
What Noise Traders Miss With TDC
In general, markets aren’t good at identifying value destroying companies that waste shareholder capital. Instead, due to the proliferation of noise traders, markets are more likely to pump up popular momentum stocks, while undervaluing high-quality unconflicted & comprehensive fundamental research. Here’s a quick summary for what noise traders miss when analyzing TDC:
Economic earnings are negative and declining despite improving GAAP results
Operational and capital efficiency of TDC’s business severely lags peers
Fundamentals began deteriorating before transition to SaaS and haven’t improved since
Valuation still implies significant improvement in margins
Executive Compensation Adds Risk
TDC’s executives may not care about the deteriorating fundamentals because their compensation is tied to metrics that don’t measure them accurately. In 2018, annual bonuses were tied to target GAAP revenue and non-GAAP operating income goals. As with non-GAAP net income above, non-GAAP operating income excludes real costs of doing business, such as stock-based compensation expense, and acquisition, integration, and reorganization costs. Now, that I have proof from HBS & MIT Sloan that managers manipulate their numbers, I wonder why the TDC board of directors allows these kinds of metrics to determine executive pay.
In 2018, long-term equity awards, of which 70% are performance based, were tied to target annual recurring revenue growth levels and percent of subscription-based product booking goals. Each of these target goals focuses executives on top-line growth, while ignoring costs. In 2019, these performance based equity awards will be tied to annual recurring revenue growth levels and free cash flow as a percent of revenue.
As long as TDC continues to use these flawed metrics, its executives will be incentivized to boost their growth numbers with no attention to the underlying fundamentals of the business. Instead of incentivizing executives with non-GAAP and revenue goals, I’d recommend the firm’s compensation committee tie pay to ROIC, which is directly correlated with creating shareholder value.