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Teradata Corp. ((TDC - Analyst Report)) reported earnings of 66 cents per share (including stock-based compensation but excluding one-time items) in the second-quarter 2014, which beat the Zacks Consensus Estimate by a nickel. Earnings per share (EPS) decreased 5.7% from the year-ago quarter.

Excluding stock-based compensation EPS was 72 cents per share, down 5.7% on a year-over-year basis.

Quarter Details

Revenues climbed 1% from the year-ago quarter to $676 million, which beat the Zacks Consensus Estimate of $655 million.

Services revenues increased 2.5% from the year-ago quarter to $376 million, driven by strong maintenance revenues (up 8.1% year over year) in the quarter. Consulting revenues declined 1.9% from the year-ago quarter.    

Products revenues decreased 1% year over year to $300 million.

Region-wise, America’s revenues decreased 7.7% year over year to $374 million. Americas contributed 55.3% of total revenue in the second quarter. International accounted for 44.7% of revenues and increased 14% from the year-ago quarter to $302 million.

Gross margin (including stock-based compensation expense but excluding other one-time items) contracted 200 basis points (bps) from the year-ago quarter to 55.6%, primarily due to unfavorable business mix.

Product gross margin decreased 170 bps from the year-ago quarter, while services gross margin contracted 140 bps in the last quarter.

Selling, general and administrative expense (SG&A) as a percentage of revenues increased 20 bps on a year-over-year basis to 27.8%. Research and development (R&D) expense increased 40 bps from the year-ago quarter to 7.4%.

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-than-expected growth in expenses.

Net income (including stock-based compensation expense but excluding other one-time items) was $105 million or 66 cents compared with $116 million or 70 cents reported in the year-ago quarter.

 

Teradata exited the quarter with $934 million in cash versus $922 million in the previous quarter. As of Jun 30, 2014, Teradata had total long-term debt of $225 million compared with $240 million as of Mar 31, 2014.

Teradata generated cash flow from operations of $138 million in the quarter compared with $343 million in the previous quarter. Free cash flow generated in the quarter was $113 million compared with $310 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% to 7% on a year-over-year basis. Earnings are also expected to be at the lower end of its earlier given guidance range of $2.85 to $3.00 per share. The lower end of the guided range is much higher than the Zacks Consensus Estimate of $2.64.

Our Take

We believe that new customer wins and strengthening relationships with large vendors will be the primary revenue drivers. 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 - Analyst Report) and Nimble Storage (NMBL - Snapshot Report) are resulting in continued pricing pressure that will likely limit margin expansion in the rest of 2014.

Currently, Teradata has a Zacks Rank #4 (Sell).