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Teradata Corp (TDC - Analyst Report) reported earnings of 70 cents per share in the second quarter of 2013, which comfortably beat the Zacks Consensus Estimate of 63 cents. However, earnings per share declined 4.1% from the year-ago quarter primarily due to modest revenue base and margin contraction.

Quarter Details

Revenues inched up 0.8% from the year-ago quarter (up 2.0% on constant currency) to $670.0 million and were slightly short of the Zacks Consensus Estimate of $675.0 million. Revenue shortfall was primarily due to weak product sales, which decreased 5.6% year over year to $303.0 million.

Services revenues increased 6.7% from the year-ago quarter to $367.0 million, driven by strong consulting (up 7.3% year over year) and maintenance revenues (up 6.0% year over year) in the quarter.

Region wise, America’s revenues climbed 1.8% year over year to $405.0 million. America comprised 60.4% of total revenue in the second quarter. International accounted for 39.6% of revenues and decreased 0.7% from the year-ago quarter to $265.0 million.

Gross margin (including stock-based compensation expense but excluding other one-time items) contracted 220 basis points (“bps”) from the year-ago quarter to 56.6% in the quarter, primarily due to unfavorable business mix.

Product gross margin declined 150 bps from the year-ago quarter, which was partially offset by a 170 bps improvement in services gross margin.

Selling, general and administrative expense (“SG&A”) as a percentage of revenues increased 70 bps on a year-over-year basis to 27.6%. Research and development (“R&D”) expense climbed 50 bps from the year-ago quarter to 7.0%.

Operating margin (including stock-based compensation expense but excluding other one-time items) plunged to 23.9% from 26.8% 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 17.3% compared with 18.9% in the year-ago quarter.

Teradata exited the quarter with $826.0 million in cash versus $853.0 million in the previous quarter. As of Jun 30, 2013, Teradata had total long-term debt of $263.0 million compared with $271.0 million as of Mar 31, 2013.

Teradata generated cash flow from operations of $140.0 million in the quarter compared with $243.0 million in the previous quarter. Free cash flow generated in the quarter was $102.0 million compared with $216.0 million in the previous quarter.

Guidance

Teradata now expects revenues to increase at the lower end of its previously announced guidance range of 6%-10% increase 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.

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, sluggish spending environment in the domestic market and increasing competition from EMC Corp (EMC - Analyst Report), NetApp (NTAP - Analyst Report) and Fusion-IO 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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