Teradata’s 1Q Earnings Dismal (GRPN) (KSS) (TDC) (URI)

Zacks

Teradata Corp (TDC) reported earnings of 38 cents in the first quarter of 2013, which was well short of the Zacks Consensus Estimate of 52 cents. Shares plunged 10.93% ($5.80) in after-hours trading following the disappointing results as earnings per share declined 32.1% from the year-ago quarter.

The year-over-year earnings decline was primarily due to lower revenue growth and higher investments on growth prospects in the quarter.

Revenues

Revenues declined 4.2% from the year-ago quarter (down 3.0% on constant currency) to $587.0 million and were well short of the Zacks Consensus Estimate of $640.0 million. Revenue shortfall was primarily due to weak product sales, which decreased 19.2% year over year to $249.0 million.

Services revenues increased 10.8% from the year-ago quarter to $338.0 million, driven by strong consulting (up 12.7% year over year) and maintenance revenues (up 8.6% year over year) in the quarter.

Region-wise, America’s revenues declined 8.5% year over year to $355.0 million, worse than management expectations. The year-over-year decline was primarily due to lack of significant consumer spending. According to Teradata, customers continue to add to their data warehousing capacity through small purchases or delay their purchasing decisions.

America comprised 60.5% of revenues in the first quarter and the sluggish consumer spending, particularly the absence of large transactions, negatively impacted last quarter revenues by $69.0 million.

However, on the positive side Teradata continues to win new customers as well as expand its contracts with a number of existing customers such as Kohl’s (KSS), United Rentals (URI) and Groupon (GRPN).

International accounted for 30.5% of revenues and climbed 3.1% from the year-ago quarter to $232.0 million, primarily due to sluggish performance in Japan and devaluation of yen. Asia-Pacific Japan revenues declined 12.0% year over year, while revenues in Europe jumped 13.0% from the year-ago quarter.

Margins

Gross margin (including stock-based compensation expense but excluding other one-time items) contracted 310 basis points (“bps”) from the year-ago quarter to 52.0% in the quarter, primarily due to unfavorable business mix. Product gross margin declined 390 bps from the year-ago quarter, which was partially offset by a 50 bps improvement in services gross margin.

Selling, general and administrative expense (SG&A) as a percentage of revenues increased 360 bps on a year-over-year basis to 30.5%. Research and Development (R&D) expense climbed 100 bps from the year-ago quarter to 8.5%.

Operating margin (including stock-based compensation expense but excluding other one-time items) plunged to 12.9% from 20.7% in the year-ago quarter due to lower gross margin base and higher expenses.

Net income as a percentage of revenues (including stock-based compensation expense but excluding other one-time items) was 10.1% compared with 14.8% in the year-ago quarter.

Balance Sheet & Cash Flow

Teradata exited the quarter with $853.0 million in cash versus $729.0 million in the previous quarter. As of Mar 31, 2013, Teradata had total long-term debt of $271.0 million compared with $274.0 million as of Dec 31, 2012.

Teradata generated cash flow from operations of $243.0 million in the quarter compared with $124.0 million in the previous quarter. Free cash flow generated in the quarter was $216.0 million compared with $85.0 million in the previous quarter.

Guidance

Teradata now expects revenues to be at the lower end of its previously announced guidance range of 6%-10% on a year-over-year basis. Moreover, the company expects earnings per share to be at the lower end of its earlier guidance range of $3.05-$3.20.

Teradata expects revenue growth to remain sluggish in the first half of 2013, particularly due to sluggish demand environment in America for its data warehouse related products.

Recommendation

We believe that new customer wins and strengthening relationships with large vendors will be the primary revenue drivers going forward. 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, a sluggish spending environment in the domestic market and increasing competition are resulting in continued pricing pressure that will likely limit margin expansion going forward.

Currently, Teradata has a Zacks Rank #3 (Hold).

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