Teradata Reports Impressive 1Q

Zacks

Teradata Corp. (TDC) reported earnings of 56 cents per share in the first quarter of 2012, exceeding the Zacks Consensus Estimate by four cents. Earnings (including stock-based compensation of four cents but excluding amortization and one-time related cost of 3 cents) surged 27.3% from 44 cents reported in the year-ago quarter.

Quarter Details

Revenue increased 21.1% year over year to $613.0 million, surpassing the Zacks Consensus Estimate of $584.0 million. This improvement was primarily driven by a 31.1% growth in product revenue (software and hardware) and a 12.5% upside in services revenue, annually.

Region wise, Teradata achieved strong growth from the Americas in the quarter. Revenue increased 26.0% year over year to $388.0 million on a reported basis. Teradata witnessed 9.0% year-over-year growth in the Europe, Middle East and Africa (:EMEA) region to $136.0 million, while Asia-Pacific/Japan revenue leaped 20.0% year over year to $89.0 million.

During the quarter, gross profit jumped 20.8% year over year to $343.0 million. Operating expenses climbed 14.7% year over year to $211.0 million. The upside was attributable to higher selling, general and administrative expense (SG&A), which increased 10.0% year over year to $165.0 million. Research and development expense also surged 35.3% year over year to $46.0 million.

Despite incurring higher operating expenses, the company witnessed a 27.0% rise in non-GAAP operating income to $136.0 million in the quarter. Operating margin stood at 22.2%, up 110 bps year over year, based on strong revenue growth in the quarter.

Teradata exited the quarter with $978.0 million in cash versus $772.0 million in the previous quarter. As of December 31, 2011, Teradata had total debt of $286.0 million.

Outlook

For fiscal 2012, Teradata expects year-over-year revenue growth of 12.0% to 14.0% (prior guidance 10.0% to 12.0%). Earnings are expected in the range of $2.60 to $2.70 (prior guidance $2.56 to $2.66) per share. The Zacks Consensus Estimate for fiscal 2012 was pegged at $2.48 per share when the company released its results.

Recommendation

We believe that new customer wins and strengthening relationships with large vendors will be the primary revenue drivers as well as profits over the long term. We expect long-term growth to come from new strategic partnerships as well.

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 #2 Rank, which implies a Buy rating on a short-term basis (1-3 months).

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