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Teradata Corp. (TDC - Analyst Report) reported strong third quarter 2012 results, with earnings of 65 cents per share beating the Zacks Consensus Estimate by a couple of cents.

Quarter Details

Revenue increased 7.0% year over year (10% on a constant currency basis) to $647.0 million. However, reported revenue missed the Zacks Consensus Estimate of $667.0 million.

The year-over-year improvement was primarily driven by a 7% year-over-year growth in product revenue (9% on a constant currency basis), 10% year-over-year growth (13% on a constant currency basis) in maintenance services revenue and 6% (9% on a constant currency basis) year over year upside in consulting services revenue.

Region wise, Teradata achieved strong growth from the Europe, Middle East and Africa (EMEA) in the quarter. Revenue increased 17% year over year (28% on a constant currency basis) to $156.0 million on a reported basis. Asia-Pacific/Japan region was particularly strong, with revenue soaring 14% year over year (16% on a constant currency basis) to $107.0 million. In comparison, Americas revenue growth was tepid, just increasing 2.0% year over year (3% on a constant currency basis) to $384.0 million.

Gross profit (excluding stock-based compensation expense and other one-time items) soared 10% year over year to $361.0 million. Gross margin expanded 130 basis points from the year-ago quarter to reach 55.8% in the quarter. Stock-based compensation did not materially impact gross profits in the quarter.

The year-over-year growth in gross margin was primarily driven by strong product gross profit (up 12.2% year over year) and services gross profit (up 7.1% year over year) in the quarter. Product gross margin expanded 350 bps, which fully offset a 40 bps year-over-year contraction in services gross margin in the quarter.    

Operating expenses climbed 5.8% year over year to $218.0 million. The upside was attributable to higher selling, general and administrative expense (SG&A), which increased 6.7% year over year to $174.0 million. Research and development (R&D) expense remained flat on a year over year basis at $44.0 million.

Despite incurring higher operating expenses, Teradata witnessed a 17.2% rise in operating income (excluding stock-based compensation expense and other one-time items) to $143.0 million in the quarter. Operating margin stood at 22.1%, up 180 bps from the year-ago quarter, based on strong revenue and gross margin growth in the quarter. However, stock-based compensation reduced operating income to $156.0 million in the quarter.

Teradata’s third quarter net income (excluding stock based compensation expense and other one time items) was $104.0 million or 60 cents per share compared with $87.0 million or 51 cents in the year-ago period. Including stock-based compensation, net income reduced to $113.0 million or 65 cents compared with $96.0 million or 56 cents in the year-ago quarter.

Teradata exited the quarter with $909.0 million in cash versus $821.0 million in the previous quarter. As of September 30, 2012, Teradata had total long-term debt of $278.0 million compared with $282.0 million as of June 30, 2012.

Teradata generated cash flow from operations of $107.0 million in the quarter compared with $102.0 million in the previous quarter. Free cash flow generated in the quarter was $67.0 million compared with $75.0 million in the prior quarter.

Outlook

Teradata revised its revenue growth guidance on a constant currency basis for fiscal 2012. Revenue is expected to be at the low end of its prior guidance of 14% to 16% range for full year. Teradata continues to expect year-over-year reported revenue growth to be at the low end of its prior guidance of 12.0% to 14.0% for fiscal 2012.

Teradata revised its full year earnings guidance, which is now expected to be in the middle to the higher end of its prior range of $2.72 to $2.82 per share.

Recommendation

We believe that new customer wins and strengthening relationships with large vendors will be the primary revenue drivers as well as increase profits over the long term. 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, and an increase in the number of competing products from big names, such as Oracle Corp. (ORCL - Analyst Report), are resulting in continued pricing pressure that will likely limit margin expansion going forward.

We maintain our Neutral recommendation on the stock over the long term (6-12 months). Currently, Teradata has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).

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