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Teradata Corp (TDC - Analyst Report) reported earnings of 70 cents per share in the third-quarter of fiscal 2013, which beat the Zacks Consensus Estimate by a penny. Earnings per share inched up 1.4% from the year-ago quarter and were in line with the high-end of management’s revised guided range of 69 cents to 70 cents.

Including stock-based compensation but excluding amortization of acquisition related intangible assets and transaction, integration & reorganization related costs, earnings were 65 cents per share, flat on a year-over-year basis.

Quarter Details

Revenues increased a modest 2.9% from the year-ago quarter (up 2.0% on constant currency) to $666.0 million but were slightly short of the Zacks Consensus Estimate of $671.0 million. Revenue shortfall was primarily due to weak product sales, which remained flat year over year at $306.0 million.

Services revenues increased 5.6% from the year-ago quarter to $360.0 million, driven by strong consulting (up 3.1% year over year) and maintenance revenues (up 8.8% year over year) in the quarter.

Region wise, America’s revenues increased 6.5% year over year to $409.0 million. America comprised 61.4% of revenues in the third quarter. International accounted for 38.6% of revenues and decreased 2.3% from the year-ago quarter to $257.0 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 54.7%, primarily due to unfavorable business mix.

Product gross margin declined a massive 760 bps from the year-ago quarter, which was partially offset by a 320 bps improvement in services gross margin.

Selling, general and administrative expense (SG&A) as a percentage of revenues increased 60 bps on a year-over-year basis to 27.5%. Research and development (R&D) expense decreased 30 bps from the year-ago quarter to 6.5%.

Operating margin (including stock-based compensation expense but excluding other one-time items) contracted 230 bps from the year-ago quarter due to lower gross margin base and higher SG&A expense.

Net income margin (including stock-based compensation expense but excluding other one-time items) was 14.7% compared with 16.1% in the year-ago quarter.

Teradata exited the quarter with $862.0 million in cash versus $826.0 million in the previous quarter. As of Sep 30, 2013, Teradata had total long-term debt of $278.0 million compared with $263.0 million as of Jun 30, 2013.

Teradata generated cash flow from operations of $64.0 million in the quarter compared with $140.0 million in the previous quarter. Free cash flow generated in the quarter was $29.0 million compared with $102.0 million in the previous quarter.

Guidance

For full year 2013, Teradata now expects revenues to remain flat on a year-over-year basis. Earnings are expected to be in the range of $2.70 to $2.80 per share.

Our Take

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 from EMC Corp (EMC - Analyst Report), NetApp (NTAP - Snapshot Report) and Fusion-IO are resulting in continued pricing pressure that will likely limit margin expansion going forward.

Currently, Teradata has a Zacks Rank #5 (Strong Sell).

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