Earnings Scorecard: Teradata (TDC)

A leading provider of Enterprise Data Warehousing (EDW) solutions, Teradata Corporation (TDC) reported strong results for the second quarter 2010, beating the Zacks Consensus Estimate by 3 cents. Although Teradata’s second quarter results exceeded the Zacks Consensus Estimate, the upside was considerably low.

Overall, the analysts’ opinion remains mixed on the stock, given the company’s lackluster guidance for 2010.

Second Quarter Highlights

The company reported second quarter results on Aug 5. Earnings of 44 cents per share were up 22.2% from the year-ago quarter. Earnings benefited from an improved operational performance and a lower tax rate.

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.

Teradata’s total revenue grew 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.

Lackluster Guidance

Despite new customer wins, better operational execution, strong first-half results and robust pipeline, the company expects full year 2010 results to be at the high-end of its previously guided range, while we were expecting it to be raised.

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. In the second half of 2010, the company expects product revenues to grow in the double digit, while service revenues are expected to grow in mid-single-digits.

Expenses are expected to grow at a faster rate than revenues in the second half of 2010, with increased consulting, sales and R&D, which will particularly depress third quarter margins.

Earnings per share are expected to come in at the high-end of the previous guided range of $1.60 to $1.70. Increased investments in sales and higher R&D expenses will be a headwind for margin and EPS expansion in the second half of the year. EPS growth for the second half of 2010 and particularly in the third quarter is expected to be less than the company’s long-term target of growing EPS at twice the revenue growth. The current Zacks Consensus Estimate for earnings is pegged at $1.69 per share for fiscal 2010.

Agreements of Analysts

For the third quarter of 2010, the earnings revision trend remains negative. Out of 8 analysts covering the stock, 5 revised their estimates downward, while 1 analyst has increased projections over the last 7 days. For fiscal year 2010, 5 of 8 analysts raised their estimates while 2 analysts revised downward during the same period.

We believe, Teradata is a 2011 growth story and the second half of 2010 may be slower than expected. The Zacks Consensus Estimate for the next year remains robust. Of 8 analysts covering the stock, 6 revised their estimates upward, while 1 moved downward over the last 7 days. The positive estimate revision for 2011 is based on improved traction from sales force expansion, new products and alliances and market share gains.

Magnitude of Estimate Revisions

In accordance with the overall trend of estimate revisions for Teradata, the Zacks Consensus Estimate for the third quarter 2010 dipped a penny to 39 cents in the last 7 days. The Zacks Consensus Estimate for the full year remains unchanged at $1.69 per share. However, for 2011, the Zacks Consensus Estimate was up 3 cents in the last 7 days to $1.96.

Our Recommendation

It appears that the greater number of competing products in the market would result in continued pricing pressure, thus limiting margin expansion at Teradata. The company is up against increasing competition from much larger players such as Oracle Corp. (ORCL), Netezza Corp. (NZ), International Business Machines Corp. (IBM), Microsoft Corp. (MSFT), Sybase and SAP AG (SAP) in the data warehousing industry.

Therefore, we now believe that weaker revenues, higher costs and increasing competition could pressure performance in the second half of 2010.

We expect Teradata to deliver much improved results in 2011. We remain optimistic on the company as it is well positioned to benefit from the growing database analytics market. However, we would ask investors to remain on sidelines until the stock delivers improved traction from its sales force expansion strategy. We therefore maintain our Neutral rating on Teradata over the long term (6+ months).

TERADATA CORP (TDC): Free Stock Analysis Report

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