Teradata Corp. (TDC) reported fourth quarter earnings of 50 cents per share, in line with the Zacks Consensus Estimate. Results were driven by robust revenue growth in the quarter, offset by lower margins. Earnings, including stock-based compensation of 3 cents, grew 4.2% year over year from 48 cents.
Revenue
Revenue increased 10.0% year over year to $548.0 million, which surpassed the Zacks Consensus Estimate of $529.0 million. This was primarily driven by 12.0% year-over-year growth in Product revenue (software and hardware) to $267.0 million. Services revenue also increased 9.0% year over year to $281.0 million.
On a regional basis, Teradata achieved strong growth from the Americas in the quarter. Revenue increased 14.0% year over year to $341.0 million on a reported basis. Americas contributed 62.2% of total revenue in the quarter.
Teradata witnessed 12.0% year-over-year growth in the Europe, Middle East and Africa (EMEA) region to $119.0 million, while revenue decreased 2.0% year over year to $88.0 million in the Asia Pacific/Japan (APJ) region. Currency fluctuations had a negative impact of 7.0% on EMEA revenue growth, but a positive impact of 7.0% on APJ during the quarter.
Operating Performance
Gross margin decreased 30 basis points to 55.7% in the quarter, attributed to lower product gross margin. Moreover, the Americas and Asia Pacific Japan regions witnessed a less favorable deal mix compared to the year-ago period. Product gross margin decreased to 65.9% from 67.8% in the prior-year quarter, while services margin increased to 45.9% from 45.1 % in the prior-year quarter.
Operating expenses (including selling, general and administrative and research and development) as a percentage of sales decreased 40 basis points to 34.3 % in the quarter. As a result, operating margin of 21.4% in the quarter was flat compared with the prior-year quarter.
Balance Sheet and Cash Flow
Teradata’s balance sheet remains strong with no debt. The company exited the quarter with $883.0 million of cash versus $741.0 million in the previous quarter.
During the quarter, Teradata generated $148.0 million of cash from operating activities versus $65 million in the previous quarter. Capital expenditures in the quarter were $21 million versus $18 million in the previous quarter. This resulted in a free cash flow of $127 million versus $47 million in the previous quarter.
Teradata has $300 million of funds available in its credit facility as of December 31, 2010. On January 21, 2011, Teradata completed the acquisition of Aprimo. The acquisition was funded by a combination of borrowing $300 million from the existing credit facility and using approximately $225 million of cash.
Teradata repurchased approximately 3 million shares for approximately $88 million during fiscal 2010.
Outlook
For fiscal 2011, Teradata expects revenue growth of 12.0% to 14.0% year over year. Earnings per share are expected in the range of $1.80 to $1.90, below the Zacks Consensus Estimates. The Zacks Consensus Estimate was pegged at $2.06 per share for fiscal 2011 at the time the company reported results.
Excluding items associated with the Aprimo acquisition as well as stock-based compensation expense, non-GAAP EPS for 2011 is expected to be in the $2.10 to $2.20 range.
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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