Teradata Beats Zacks Consensus - Analyst Blog

Before the opening bell today, Teradata Corp. (TDC) reported fiscal 2010 second-quarter earnings of 44 cents per share, up 22.2% from 36 cents per share reported in the year-ago quarter. The company beat the Zacks Consensus Estimate of 41 cents per share by 3 cents.

Earnings benefited from an improved operational performance and a lower tax rate. As a result, net income grew to $74 million or 15.7% of revenues from $62 million or 14.7% of total revenue in the year-ago quarter. Earnings included 2 cents per share of stock-based compensation expense.

Management noted that Teradata delivered its finest second-quarter results in the company’s history with strong revenues and earnings growth. Moreover, operating income, operating margin and gross margin were at the highest levels than in any of the company’s previous quarters. The quarter also benefited from the highest number of new customer wins as reported in the last five years. Additionally, increased investments were key contributors to the company’s growth.

Revenue

Total revenue upped 11.6% (12% in constant currency) to $470 million from the year-ago quarter, driven by a 21.0% year-over-year increase in product revenues (software and hardware) to $223 million. The impact of changes in foreign exchange rates was minimal. Services revenues also rose 5% year-over-year to $247 million in the quarter, driven by strength in both the Consulting services and Maintenance services businesses, which were up 6% and 5% year-over-year, respectively.

On a regional basis, Teradata witnessed strong growth from the Americas, which grew 23% year-over-year in the quarter, or 22% when adjusted for currency. Americas contributed 60.0% to total revenue in the quarter versus 54.0% in the year-ago quarter.

The company experienced weakness in international markets, which were down 3.0%. Europe, Middle East and Africa (EMEA) region decreased by 8%, or 3% when adjusted for currency. EMEA contributed 23.0% to total revenue in the quarter versus 28.0% in the year-ago quarter. Decline in EMEA region was partially offset by a growth in the Asia Pacific region, which saw an increase of 9% year over year, or 3% when adjusted for currency. Asia Pacific contributed 17.0% to total revenue in the quarter versus 18.0% in the year-ago quarter.

Operating Performance

Operating income increased 26.2% year-over-year to $106 million due to higher product revenues and improvement in the gross margin, which more than offset higher SG&A expense and R&D expenses. As a result, operating margin improved to 22.6% in the quarter from 20.0% in the year-ago quarter.

Gross margin of 57.0% increased from 55.3% in the year-ago period, attributable to higher product gross margin and a more favorable product mix. Services gross margin decreased to 47.0% from 48.3% in the year-ago quarter, fully offset by a higher product gross margin, which increased to 68.2% from 64.3% in the year-ago period.

The effective income tax rate in the quarter was 30.0%, compared with 26.0% in the prior-year period, driven by an overall proportional increase in U.S. pre-tax earnings.

Balance Sheet and Cash Flow

Teradata’s balance sheet remains strong with no debt. The company exited the quarter with $724 million in cash versus $712 million cash in the previous quarter. Teradata has $300 million of funds available in credit facility.

During the quarter, Teradata generated $62 million of cash from operating activities versus $138 million of cash generated in the previous quarter. Cash from operations decreased due to lower collections of receivables. Capital expenditures in the quarter were $23 million versus $21 million in the previous quarter. This resulted in a free cash flow of $39 million versus $117 million in the previous quarter.

Guidance

As a result of record first-half revenue and earnings, Teradata anticipates that full year 2010 results will come in at the high-end of its previous guided range.

For fiscal 2010, Teradata expects revenues to be at the high end of the previous guided range of an increase of 8% to 10% from fiscal 2009 level, including a negligible benefit from currency translation.

As a result of increased pre-tax income to be generated in the United States and the uncertainty surrounding the retroactive reinstatement in 2010 of the U.S. Federal Research & Development Tax Credit, the company anticipates a potentially higher full year 2010 effective tax rate in the 27.0% to 28.0% range. Previously, the company had anticipated a tax rate of 25.5% to 26.5%.

Despite higher tax rate, the company expects earnings per share to come in at the high-end of the previous guided range of $1.60 - $1.70 range. The current Zacks Consensus Estimate is pegged at $1.69 per share in earnings for fiscal 2010.

Teradata currently has a short-term Zacks #3 Rank (Hold) rating and long-term Neutral recommendation.
 
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