NZ Netezza Common Stock

Teradata Corp. (TDC) reported first quarter earnings of 44 cents per share, missing the Zacks Consensus Estimate by 2 cents. However, Teradata raised its fiscal year 2011 guidance based on strong revenue growth in the quarter.

Operating Performance

Earnings per share (EPS), including stock-based compensation of 4 cents, grew 12.0% year over year from 39 cents. Net Income was $76.0 million, up 13.4% year over year from $67.0 million in the prior-year quarter.

Gross profit was $284.0 million, up 20.3% year over year from $236.0 million in the prior-year quarter. Gross margin increased 50 basis points (bps) to 55.5% in the quarter, attributed to higher product gross margin. Product gross margin increased to 66.4% from 64.0% in the prior-year quarter, while services margin decreased to 43.9% from 47.2% in the prior-year quarter.

Operating expenses were $173.0 million, up 15.3% year over year from $150.0 million in the prior-year quarter. The year-over-year growth was attributable to higher selling, general and administrative expense (SG&A), which increased 21.1% year over year to $143.0 million. Research and development expense increased 6.3% year over year to $34.0 million.

Despite higher increase in operating expenses, non-GAAP operating income increased 24.4% year over year to $107.0 million in the quarter. Operating margin was 20.9%, up 90 bps year over year based on strong revenue growth in the quarter.

Revenue

Revenue increased 19.3% year over year to $512.0 million, which surpassed the Zacks Consensus Estimate of $485.0 million. This was driven by a 20.5% year-over-year growth in Product revenue (software and hardware) to $241.0 million and an 18.3% year-over-year growth in Services revenue.

On a regional basis, Teradata achieved strong growth from the Americas in the quarter. Revenue increased 22.0% year over year to $307.0 million on a reported basis. The Americas contributed 60.7% of total revenue in the quarter.

Teradata witnessed 18.0% year-over-year growth in the Europe, Middle East and Africa (EMEA) region to $125.0 million, while revenue increased 4.0% year over year to $74.0 million in the Asia Pacific/Japan (APJ) region. Currency fluctuations had a positive impact of 3.0% on EMEA revenue growth and 7.0% impact on APJ during the quarter.

Balance Sheet and Cash Flow

Teradata exited the quarter with $778.0 million of cash versus $883.0 million in the previous quarter. As of March 31, 2011, Teradata had total debt of $300.0 million under its revolving credit facility. Recently, Teradata repaid $280 million of its total debt.

During the quarter, Teradata generated $106.0 million of cash from operating activities versus $148.0 million in the previous quarter. Capital expenditures in the quarter were $27 million versus $21 million in the previous quarter. This resulted in a free cash flow of $79 million versus $127 million in the previous quarter.

On April 5, 2011, Teradata acquired Aster Data Systems Inc., by utilizing funds from a new $300.0 million long term loan facility, which is not reflected in the balance sheet as of March 31, 2011.

Outlook

For fiscal 2011, Teradata expects revenue growth of 14.0% to 16.0% (up from previous guidance of 12.0% to 14.0%) year over year. EPS is expected in the range of $2.13 to $2.23 (up from previous guidance of $1.80 to $1.90). The Zacks Consensus Estimate was pegged at $2.15 per share for fiscal 2011 at the time the company reported results.

Recommendation

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. (ORCL) and Netezza Corp. (NZ).

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

 
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