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Teradata Corp. (TDC - Analyst Report) reported earnings of 49 cents per share in the first quarter of fiscal 2014, which beat the Zacks Consensus Estimate by 8 cents. Earnings per share increased 29.0% from the year-ago quarter.

Excluding stock-based compensation, amortization of acquisition related intangible assets, transaction and integration & reorganization related costs and net loss on equity investments, earnings were 54 cents per share, up 25.6% on a year-over-year basis.

Quarter Details

Revenues increased 7.0% from the year-ago quarter to $628.0 million, which beat the Zacks Consensus Estimate of $616.0 million.

Services revenues increased 5.0% from the year-ago quarter to $355.0 million, driven by strong maintenance revenues (up 9.0% year over year) in the quarter. Consulting revenues inched up 2.0% from the year-ago quarter.    

Region-wise, America’s revenues increased 8.0% year over year to $384.0 million. America contributed 61.1% of revenues in the first quarter. International accounted for 38.9% of revenues and increased 5.0% from the year-ago quarter to $244.0 million.

Gross margin (including stock-based compensation expense but excluding other one-time items) expanded 130 basis points (bps) from the year-ago quarter to 54.5%, primarily due to favorable business mix.

Product gross margin increased 60 bps from the year-ago quarter, while services gross margin declined 130 bps in the reported quarter.

Selling, general and administrative expense, (SG&A) as a percentage of revenues, decreased 60 bps on a year-over-year basis to 29.9%. Research and development (R&D) expense increased 40 bps from the year-ago quarter to 8.9%.

Operating margin (including stock-based compensation expense but excluding other one-time items) expanded 250 bps from the year-ago quarter due to higher gross margin base and declining SG&A expense.

Net income margin (including stock-based compensation expense but excluding other one-time items) was 12.6% compared with 11.1% in the year-ago quarter.

Teradata exited the quarter with $922.0 million in cash versus $695.0 million in the previous quarter. As of Mar 31, 2014, Teradata had total long-term debt of $240.0 million compared with $248.0 million as of Dec 31, 2013.

Teradata generated cash flow from operations of $343.0 million in the quarter compared with $63.0 million in the previous quarter. Free cash flow generated in the quarter was $310.0 million compared with $25.0 million in the previous quarter.

Guidance

For full-year 2014, Teradata expects revenues to grow at the lower end of its earlier given guidance range 3.0% to 7.0% on a year-over-year basis. Earnings are expected to be in the range of $2.85 to $3.00 per share, which is much higher than the Zacks Consensus Estimate of $2.68.

Our Take

We believe that new customer wins and strengthening relationships with large vendors will be the primary revenue drivers, going forward. We also believe 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 #3 (Hold).

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