Teradata Corporation: Solid Company, Questionable Investment

On October 1, Teradata (TDC) began trading on the NYSE. The company was recently spun off from NCR Corporation (NCR). Teradata begins this phase of its public life as a $5.2 billion company with shares changing hands at just under $29. Is there an investment idea in this stock now that you can invest directly in it?

Background

Teradata is a well-known vendor of data warehouse software. They have been around long enough and are big enough to have built a list of marquee clients in a number of different industries. In all, they have over 850 customers worldwide. Below is a very abbreviated list of the industries and customers served by Teradata but it will give you an idea of the reach the company has among large enterprises.

Customers

Financial Services: Bank of America (BAC), Charles Schwab (SCHW), ABN Amro (ABN), Wells Fargo (WFC)

Retail: Wal-Mart (WMT), Office Depot (ODP), Sears (SHLD), Williams-Sonoma (WSM), Bed, Bath and Beyond (BBBY)

Miscellaneous: Fed Ex (FDX), Cardinal Health (CAH), UNUM (UNN), Nationwide Insurance, Verizon (VZ), Harrah's (HET), British Airways (BIARY.PK), Delta Airlines (DAL), Travelocity, 3M (MMM), Ford (F), Coca-Cola (KO), Toshiba (TOSBF.PK).

Teradata also sells to government entities such as the US Air Force, Naval Air Command, States of New Jersey and Missouri, etc.

The data warehouse market

The company feels that the enterprise data warehouse industry is a $19 billion market growing at a 6.3% CAGR. Teradata's stated desire is to grow 30% faster than the market. This seems to be doable as long as the company avoids any major stumbles.

The company has an approximately 9% share of the total market among the Global 3000. They share this market with IBM, Microsoft, Oracle, HP and others. Gartner characterizes Teradata as the industry leader in both software and hardware.

Financials

Teradata's revenue has been steadily increasing over the last few years but growth in earnings per share seems to be slowing a bit lately. It is expected that 2007 EPS will be flat at about $1.09 with revenues coming in at around $1.6 billion. At its current stock price, it has a PE around 27, not cheap but not as richly valued as VMWare, for example.

The company sees an incremental increase in expenses as the result of going public but expects that this will be a short-term impact. As part of NCR, Teradata was taxed at a lower rate. That benefit will not be available as a stand-alone company.

Challenges

Teradata is positioned like the Cadillac of data warehouse systems. Their pitch is that they have the most efficient, scalable, flexible, highest performance system available.

As competitors reach for market share by reducing prices, however, Teradata can find themselves in the position of losing business, even at established customers. For example, Wal-Mart recently awarded a contract to Hewlett-Packard (HPQ) despite being a long-time customer of Teradata.

As prices are driven down the market expands to include smaller companies that previously could not afford a true enterprise data warehouse solution. This is a lesson that SAP is learning -- you need to be able to compete in the mid-size market as well as in the top tier.

Teradata is working to differentiate themselves from competitors by focusing on what they call "operational analytics" -- the ability to make decisions on the most up-to-date data. As business moves faster and faster, this concept is becoming more popular. Teradata's market leadership will depend on the company being able to leverage this strategy with more customers.

As competitors have added more features to their product offerings, they have been catching up to Teradata. The company needs to ensure they can provide functionality that both sets it apart from competitors and extends the platform. One way to do that is by partnering with complementary vendors. Teradata has partnered with SAS to enable the popular SAS analytics software to run on Teradata's databases.

Conclusion

Teradata is a pure play in the data warehouse sector. They are the technology leaders but have tough competitors who are making inroads into their market. These competitors are also applying pricing pressure. Freed from NCR, the company can pursue a more focused and flexible approach to managing their business. They might even become a take-over candidate. Nevertheless, I think it is too early to invest in Teradata until we can see whether their strategy is yielding the growth that management promises.

Full Disclosure: author owns no shares of TDC