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Teradata Corp’s (TDC - Analyst Report) fourth-quarter non-GAAP earnings per share increased 19.7% from the year-ago quarter to 79 cents. Including stock based compensation of 6 cents; the company reported earnings of 73 cents per share, ahead of the Zacks Consensus Estimate of 70 cents per share.

Quarter Details

Revenues increased 10% from the year-ago quarter (up 11% on constant currency) to $740 million and beat the Zacks Consensus Estimate of $724 million. The beat was primarily driven by 9% year-over-year growth in product revenue (10% on a constant currency basis), 6% year-over-year growth (7% on a constant currency basis) in maintenance services revenue and 14% (15% on a constant currency basis) year-over-year upside in consulting services revenue.

Region wise, Teradata achieved strong growth from the Europe, the Middle East and Africa (EMEA) in the quarter. Revenues from the region increased 21% year over year (24% on a constant currency basis) to $176 million. Revenues from the Asia-Pacific/Japan region increased 2% year over year (2% on a constant currency basis) to $115 million. Revenues from the Americas region grew 8% year over year (9% on a constant currency basis) to $449 million.

Non-GAAP gross profit (excluding stock-based compensation expense and other one-time items) increased 9% year over year to $418 million. Gross margin contracted 10 basis points from the year-ago quarter to 56.4% in the quarter, primarily due to unfavorable business mix. Stock-based compensation did not materially impact gross profits in the quarter.

Operating expenses increased 7.9% year over year to $260 million. The upside was attributable to a 13.5% increase in selling, general and administrative expense (SG&A), which fully offset the 10.7% decrease in Research and Development (R&D) expense.

Despite incurring higher operating expenses, Teradata witnessed a 14% rise in non-GAAP operating income (excluding stock-based compensation expense and other one-time items) to $177 million in the quarter. Operating margin stood at 23.9%, up 100 bps from the year-ago quarter, based on strong revenue and favorable product margins in the quarter. Accounting for the stock-based compensation, operating income came in at $165 million.

Teradata’s fourth-quarter non-GAAP net income (excluding stock-based compensation expense and other one-time items) was $135.0 million or 79 cents per share compared with $113.0 million or 66 cents in the year-ago period. Including stock-based compensation, net income came to $125.0 million or 73 cents compared with $107.0 million or 62 cents in the year-ago quarter.

Teradata exited the quarter with $729.0 million in cash versus $909.0 million in the previous quarter. As of Dec 31, 2012, Teradata had total long-term debt of $274.0 million compared with $278.0 million as of Sep 30, 2012.

Teradata generated cash flow from operations of $124.0 million in the quarter compared with $107.0 million in the previous quarter. Free cash flow generated in the quarter was $85.0 million.

Guidance

Teradata provided guidance for fiscal 2013. The company expects its revenues to increase in the range of 6%-10% on a year-over-year basis. Moreover, the company expects earnings per share in the range of $3.05-$3.20. The Zacks Consensus Estimate for fiscal 2013 is pegged at $3.02, below the guided range.

Recommendation

We believe that new customer wins and strengthening relationships with large vendors, such as Cisco Systems (CSCO - Analyst Report), will be the primary revenue drivers 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 (ORCL - Analyst Report) and International Business Machines (IBM - Analyst Report), 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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