Weekend Reading: Teradata (TDC) Gets Disrupted by TechStockProspector


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									                            Robert DeFrancesco’s
                      Tech-Stock Prospector
January 17, 2014

Weekend Reading: Teradata (TDC) Gets Disrupted
The following article appeared in the November 2013 issue of Tech-Stock Prospector
(TSP #141). At the time, Teradata (TDC, $47.24) shares were trading around $44,
down from a 52-week high of $69.65. The stock subsequently hit a new 52-week low of
$39.16 (on December 12) and has since bounced back a bit. Teradata will release Q4
results before the market opens on February 6.

Disruption in the tech world can be very costly. Just ask Teradata (TDC), a
provider of data warehousing and analytics solutions, which has seen its market cap
sink by roughly $6 billion over the past 14 months because of a general demand
slowdown across its installed base of customers. The company blames order delays.
But it’s apparent that some of these orders are being pushed out because customers
are evaluating newer, cheaper technologies.

A year ago on the Q3 2012 earnings call, Teradata CEO Michael Koehler telegraphed
the overall demand pause, saying the company’s strong product growth during the
previous 30 months had added significant capacity for customers in the key
Americas region (representing 61% of total revenue), giving these accounts
flexibility when it comes to adding more capacity. Teradata generally garners 95%
of its revenue from its installed base.

We wrote at the time (see TSP #129—November 2012) that the stock, then trading
around $63.30 (and already well off the September 2012 high of $80.97), had more
downside risk, even into the high $40s. We were correct on the direction, as the
shares in the middle of last month hit a new 52-week low of $41.11 after the
company negatively pre-announced results for the September quarter. The forward
P/E is down to 14 from 20 a year ago.

In Q3, Teradata’s revenue rose just 3%, dragged down by a 19% decline in the
Middle East & Africa, as well as a 21% drop in the Asia Pacific/Japan region blamed
on weak demand across China and Japan. Revenue from the Americas region did
manage a 7% gain. However, the company couldn’t take full advantage of the robust
U.S. pipeline going into Q3 because deals were pushed out of the quarter and even
into next year. On the earnings call, management said the Americas pipeline was still
solid, but that many deals were iffy for a Q4 close.

According to Koehler, as many as 30 major data warehousing “opportunities” moved
out of Q3, with “a ton” falling into 2014. Of course, the company says these accounts
are actively being worked and that not one deal has been lost. If it’s just a matter of
eventually getting these deals closed, that’s not such a bad situation. Teradata needs
to see a rebound in data warehousing product revenue in order to get back on track;
pushed deals eventually work their way to the top line.

But what if something is going on under the surface? There have been a lot of
rumblings that Hadoop, the open-source software framework for data processing, is
encroaching on Teradata’s growth path. Koehler admitted on the latest call that
customers evaluating lower-cost alternatives are causing short-term delays in
purchases. As part of the extract, transform and load (ETL) process, Hadoop ingests
and stores data very cost effectively; it can’t handle complex analytics workloads

Koehler’s argument is that ETL represents 20% to 40% of Teradata data
warehousing workloads and that 20% of those workloads (or 4% to 8% of the
company’s total workloads) are candidates to move to Hadoop. He says these
numbers are consistent with customers who have already moved some of their
workloads over to Hadoop. Some would argue Koehler is being too optimistic here
and that Hadoop represents a far greater threat.

BMO Capital agrees that ETL workloads account for 20% to 40% of the company’s
total workloads, but says recent conversations with customers suggest that the
majority of ETL workloads are moving off Teradata systems. The firm is neutral on
the stock and maintains a $50 price target. The BMO Capital analyst admits that the
firm’s sample size was small, but thinks the topic needs more discussion, especially
since this is really the first time that Teradata management is admitting Hadoop is
impacting sales.

Teradata will be in show-me mode at least until the Q4 earnings report early next
year; the company by then will have a better handle on deal closure rates. The focus
now turns to 2014 potentially being a rebound year. At this point, the 2014
consensus revenue growth estimate of 7.1% looks optimistic unless Teradata can
get some significant deals closed in the face of the rising Hadoop threat and new
competition from Amazon’s Redshift data warehousing service.


Download the January 2014 issue of Tech-Stock Prospector to your Amazon
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Here are some of the topics covered in the January 2014 issue:

*Top potential takeover targets in tech for 2014
*An update on the continued land grab in marketing automation
*How FireEye could spur more cybersecurity M&A
*Might Cisco Systems make a sizable acquisition to help jumpstart growth?
*A small-cap name that’s big in enterprise vulnerability management
*Proofpoint builds its targeted attack prevention business
*New growth drivers for ServiceNow in cloud-based IT management
*Digital-advertising play: Marin Software
*Cornerstone OnDemand stays competitive in talent management
*Qlik Technologies is ready to ride the data visualization wave
*Aruba Networks looks well positioned for the WiFi upgrade cycle
*Adobe Systems continues its move to the cloud
*Behind the big sales force reorganization at Symantec
*Demandware brings the cloud to digital commerce
*Why some savvy money managers like SolarWinds
*Nimble Storage is ready to take on the big legacy vendors
*Wall Street analysts keep boosting their Yahoo price targets
*Is Fortinet primed to execute again after naming a new CFO?
*Deal Report: RetailMeNot sees growth in digital coupons

Order the January 2014 issue of TSP here:

Tech-Stock Prospector Managing Editor Rob DeFrancesco has more than 20
years of experience covering the tech sector. He is a former senior writer with
Louis Rukeyser’s Wall Street.

TechStockProspector.com, launched in 2003, is an investment-research service
focused primarily on the networking, storage, security, wireless and software
sectors. Annual subscription: $350.

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