Teradata Beats on Strong Sales

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Teradata Corp. (TDC) reported an exceptionally strong second quarter of 2012, with the company’s non-GAAP earnings surpassing the Zacks Consensus Estimate by 17 cents per share. Revenue was also ahead of the Zacks Consensus Estimate of $660.0 million in the reported quarter.

Quarter Details

Revenue jumped 14.0% year over year (18% on a constant currency basis) to $665.0 million. This improvement was primarily driven by a 19% year-over-year growth in product revenue (23% on a constant currency basis), 12% annual growth (14% on a constant currency basis) in maintenance services revenue and 9% (13% on a constant currency basis) year-over-year upside in consulting services revenue.

Region-wise, Teradata achieved strong growth from the Americas in the quarter. Revenue increased 17% year over year (18% on a constant currency basis) to $398.0 million on a reported basis. Europe, Middle East and Africa (:EMEA) region was particularly strong, with revenue soaring 16% year over year (27% on a constant currency basis) to $168.0 million. In comparison, Asia-Pacific/Japan revenue growth was tepid, just increasing 2.0% year over year (4% on a constant currency basis) to $99.0 million.

Gross profit (excluding stock-based compensation expense and other one-time items) soared 19% year over year to $390.0 million. Gross margin expanded 260 basis points annually to reach 58.5% in the quarter. Stock-based compensation did not materially impact gross profits in the quarter.

The year-over-year growth in gross margin was primarily driven by strong product gross profit (up 26% year over year) and services gross profit (up 14% year over year) in the quarter. Product and services gross margin expanded 380 bps and 160 bps, respectively in the quarter.    

Operating expenses climbed 7.8% year over year to $222.0 million. The upside was attributable to higher selling, general and administrative expense (SG&A), which increased 8.5% year over year to $179.0 million. Research and development (R&D) expense increased 4.8% year over year to $43.0 million.

Despite incurring higher operating expenses, Teradata witnessed a 31.0% rise in operating income (excluding stock-based compensation expense and other one-time items) to $188.0 million in the quarter. Operating margin stood at 28.2%, up 390 bps from the year-ago quarter, based on strong revenue and gross margin growth in the quarter. However, stock-based compensation reduced operating income to $178.0 million in the quarter.

Teradata’s second quarter net income (excluding stock-based compensation expense and other one-time items) was $132.0 million or 77 cents per share compared with $103.0 million or 60 cents in the year-ago period. Including stock-based compensation, net income reduced to $126.0 million or 73 cents compared with $98.0 million or 57 cents in the year-ago quarter.

Teradata exited the quarter with $821.0 million in cash versus $978.0 million in the previous quarter. As of June 30, 2012, Teradata had total long-term debt of $282.0 million compared with $286.0 million as of March 31, 2012.

Teradata generated cash flow from operations of $152.0 million in the quarter, compared with $192.0 million in the previous quarter. Free cash flow generated in the quarter was $113.0 million compared with $162.0 million in the prior quarter. The company bought back 545,000 shares for $37.0 million during the quarter.

Outlook

Teradata revised its revenue growth guidance on a constant currency basis for fiscal 2012. Revenue is expected to increase in the 14% to 16% range for full year. However, unfavorable foreign currency exchange is expected to hurt full year revenue growth by approximately 1%. Hence, Teradata continues to expect year-over-year reported revenue growth of 12.0% to 14.0% for fiscal 2012.

Teradata revised its full-year earnings guidance, which is now expected to be in the range of $2.72 to $2.82 (prior guidance $2.60 to $2.70) per share.

Recommendation

We believe that new customer wins and strengthening relationships with large vendors will be the primary revenue drivers as well as increase profits over the long term. We believe that Teradata will continue to benefit from its international expansion, improved traction from sales force expansion, new products and alliances, market share gains and a growing database analytics market.

However, increased investment in sales, higher R&D expenses and an increase in the number of competing products from big names, such as Oracle Corp. (ORCL), are resulting in continued pricing pressure that will likely limit margin expansion going forward.

We maintain our Neutral recommendation on the stock over the long term (6-12 months). Currently, Teradata has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).

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