Teradata Beats; Raises Guidance - Analyst Blog

Teradata Corp. (TDC) reported strong third quarter earnings of 44 cents per share beating the Zacks Consensus Estimate by a nickel. Teradata also reported robust revenue growth in the quarter.

Earnings including stock-based compensation of 2 cents grew 15.8% year over year from 38 cents reported in the prior-year quarter, primarily driven by accelerating revenue growth based on higher market share in the quarter.

Revenue

Revenues increased 15.0% year over year to $489.0 million, well above the Zacks Digest Estimate of $463.0 million. This was primarily driven by 27.0% year-over-year growth in product revenue (software and hardware) to $243.0 million. Services revenue also increased 5.0% year over year to $246.0 million.

On a regional basis, Teradata achieved strong growth from the Americas in the quarter. Revenue increased 18.0% year over year to $292.0 million. Americas contributed 60.0% of total revenue in the quarter, compared with 58.0% in the prior-year quarter.

Teradata witnessed flat year-over-year growth in the Europe, Middle East and Africa (EMEA) region, while revenue increased 28.0% year over year to $88.0 million in the Asia Pacific/Japan (APJ) region. Currency fluctuations had a negative impact of 7.0% on EMEA revenue growth, but a positive impact of 9% on APJ during the quarter.

Operating Performance

Gross margin increased 370 basis points to 57.1% in the quarter, attributed to higher product gross margin and a more favorable product mix. Product gross margin increased to 70.4% from 62.3% in the prior-year quarter, partially offset by weak services margin, which decreased to 43.9% from 46.2% in the prior-year quarter.

Operating expenses (selling, general and administrative and research and development) as a percentage of sales increased 270 basis points to 35.4% in the quarter.

However, strong revenue growth and gross margin expansion fully offset this growth, driving operating margin to 21.7% in the quarter, compared with 20.7% in the prior-year quarter.

Balance Sheet and Cash Flow

Teradata's balance sheet remains strong with no debt. The company exited the quarter with $741.0 million of cash versus $724.0 million in the previous quarter. Teradata has $300 million of funds available in its credit facility. Teradata repurchased approximately 559,000 of its shares during the third quarter.

During the quarter, Teradata generated $65.0 million of cash from operating activities versus $62 million in the previous quarter. Capital expenditures in the quarter were $18 million versus $23 million in the previous quarter. This resulted in a free cash flow of $47 million versus $39 million in the previous quarter.

Outlook

Teradata raised its fiscal year 2010 revenue guidance and now expects revenue growth of 12.0%, as compared with the prior guidance range of 8.0% to 10.0%.

For fiscal 2010, GAAP earnings per share are expected in the range of $1.71 to $1.74, up from the previous guidance of $1.60 to $1.71.

Non-GAAP earnings per share are expected in the range of $1.80 to $1.83, an increase from the prior guidance range of $1.69 to $1.79. The current Zacks Consensus Estimate is pegged at $1.70 per share in earnings for fiscal 2010.

Our Take

We expect Teradata to deliver strong results in 2011. Our optimism is based on the company's position to benefit from the growing database analytics market.

We also believe that Teradata will benefit from new strategic partnerships over the long term. The company has significant partnerships with large organizations such as Microsoft Corp. (MSFT), eBay Inc. (EBAY), Oracle Corp. (ORCL), International Business Machines Corp. (IBM), AT&T Inc. (T), SAP AG (SAP) and SAS.

However, we maintain a Neutral rating on a long-term basis (6-12 months) due to increasing competition from much larger players such as Oracle Corp., Netezza Corp. (NZ), International Business Machines Corp., Microsoft Corp., Sybase and SAP AG in the same niche market.

Currently, Teradata has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).

 
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