Teradata Corp. (TDC) reported third quarter 2011 earnings of 56 cents per share, beating the Zacks Consensus Estimate by three cents. Earnings per share (EPS), including stock-based compensation of 3 cents, grew 21.7% from 46 cents per share in the year-ago quarter.
Based on the strong quarterly result, Teradata raised its fiscal 2011 revenue and EPS outlook.
Operating Performance
Gross profit was $335.0 million, up 20.1% year over year from $279.0 million in the prior-year quarter. Gross margin decreased 150 basis points (bps) to 55.6% during the quarter. The decrease in gross margin was due to lower services margins, arising from the higher mix of low-margin Consulting Services revenue compared to higher-margin Product revenue.
Operating expenses were $206.0 million, up 19.1% year over year from $173.0 million in the prior-year quarter. The year-over-year increase was attributable to higher selling, general and administrative expense (SG&A), which increased 22.6% year over year to $163.0 million. Research and development expense also climbed 7.5% year over year to $43.0 million.
Despite incurring higher operating expenses, the company witnessed a 28.3% rise in non-GAAP operating income to $136.0 million in the quarter. Operating margin came in at 22.6%, up 90 bps year over year based on strong revenue growth in the quarter.
Revenue
Revenue increased 23.0% year over year to $602.0 million, surpassing the Zacks Consensus Estimate of $581.0 million. This was primarily driven by a year-over-year growth of 18.0% in Product revenue (software and hardware) to $287.0 million and a 28.0% year-over-year upside in Services revenue.
Region-wise, Teradata achieved strong growth from the Americas in the quarter. Revenue increased 28.0% year over year to $375.0 million on a reported basis. The Americas contributed 62.3% of the total revenue in the quarter.
Teradata witnessed 22.0% year-over-year growth in the Europe, Middle East and Africa (EMEA) region to $133.0 million, while Asia-Pacific/Japan revenue increased 7.0% year over year to $94.0 million.
Balance Sheet and Cash Flow
Teradata exited the quarter with $691.0 million in cash versus $682.0 million in the previous quarter. As of September 30, 2011, Teradata had total debt of $293.0 million.
During the quarter, Teradata generated $102.0 million of cash from operating activities versus $179.0 million in the previous quarter. Capital expenditures in the quarter were $27 million versus $33 million in the previous quarter. This resulted in a free cash flow of $75 million versus $146 million in the previous quarter. Teradata repurchased 1.1 million shares during the reported quarter.
Outlook
For fiscal 2011, Teradata expects year-over-year revenue growth of 19.0% to 21.0% (up from the previous guidance of 18.0% to 20.0%). EPS is expected in the range of $2.25 to $2.30 (up from previous guidance of $2.20 to $2.28). The Zacks Consensus Estimate for fiscal 2011 was pegged at $2.13 per share at the time the company reported results.
Recommendation
We maintain our Neutral recommendation on the stock over the long term (6-12 months) based on a weak revenue mix and increasing competition from major players such as Oracle Corp. (ORCL).
Currently, Teradata has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).
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