Earnings Preview: Teradata Corporation

Feb. 8.10 | About: Teradata Corporation (TDC)

Teradata Corporation (NYSE:TDC) announced that it would release its 2009 fourth quarter results before the market opens on Feb 11, 2010.

During the third quarter earnings release, management had raised its outlook for fiscal 2009 due to continued focus on operational execution, which is driving growth. Accordingly, earnings per share were expected to be in the $1.34 – $1.38 range, up from its previous outlook of $1.22 –$1.28. As a result, 1 out of the 9 analysts covering the stock raised estimates for the full year 2009 in the last 30 days.

With respect to earnings surprises, Teradata recorded an average earnings surprise of 42.12% in the last reported four quarters (meaning that it beat the Zacks Consensus Estimate by 42.12% during this period).

However, the current Zacks Consensus Estimate calls for $1.37 cents per share in earnings for full-year 2009 with a 0.73% potential negative downside. This is a 6.16% decline from the $1.46 per share in earnings reported in fiscal 2008. In our view this is due to the company’s weak revenue guidance.

Revenues for the full year are expected to be down 1% to 3% on constant currency basis. Although the company expects SG&A expenses to be down, selling expense, research and development expenses, as well as amortization of capitalized software costs are expected to be higher in the fourth quarter of 2009.

We remain optimistic on Teradata, as it is well positioned to benefit from the growing database analytics market. However we would ask investors to remain on the sidelines until the stock delivers improved traction from its sales force expansion strategy.

The company’s third quarter results beat the Zacks Consensus estimate. Teradata expects long-term revenue growth of 7% to 9%. We expect improved traction from Teradata’s sales force expansion strategy, which should drive top-line growth in 2010 and beyond.

Teradata added over 40 new sales territories in 2008 and remains on track to add a total of 60 new sales territories by the end of fiscal 2009, thereby totaling 445 territories in 2009. The company expects to add another 30 teams in 2010. Revenue could accelerate, given the expansion of its sales territories and the building of its distribution channels and we opine Teradata to be a 2010 growth story.

Moreover, Teradata’s balance sheet remains strong with no debt. The company is sitting on a cash (cash plus short-term investments) balance of $704 million and generates impressive cash flow from operations. Year-to date, cash flow from operations was $364 million and free cash flow $303 million.

The data warehousing market is mature and has been dominated by large payers such as Oracle Corp. (NASDAQ:ORCL), Netezza Corp. (NZ), International Business Machines Corp. (NYSE:IBM), Microsoft Corp. (NASDAQ:MSFT), Sybase Inc. (SY) and SAP AG (NYSE:SAP).

Teradata is up against increasing competition from much larger players in the data warehousing industry, which is leading to market share erosion. With a greater number of competitive products in the market, we expect pricing pressure to continue, thereby limiting margin expansion.

While we expect the data warehousing market to benefit from increased enterprise spending in the next year or two, increased consolidation among larger players in the data warehousing industry is eating into Teradata’s market share (currently ranks fourth in terms of data warehousing market share according to IDC research).

We have a Neutral recommendation on Teradata, indicating that it would perform in line with the market. Our price target of $30.00, 20.4X 2010 EPS, represents a slight discount to the industry but a premium to the S&P 500.