TERADATA CORP TDC
March 14, 2014 - 12:06am EST by
scrooge833
2014 2015
Price: 44.95 EPS $2.27 $0.00
Shares Out. (in M): 159 P/E 19.8x 0.0x
Market Cap (in $M): 7,160 P/FCF 13.7x 0.0x
Net Debt (in $M): -120 EBIT 508 0
TEV ($): 7,040 TEV/EBIT 14.0x 0.0x

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  • High ROIC

Description

How do you play the growth of big data, cloud computing, growth of social media, mobile data?  
 
Answer: Play it through the backend like Teradata.  
 
Teradata is the lower profile sibling of IBM and Oracle, but is probably better positioned not to lose its existing revenues to the rise of cloud computing, and non-SQL databases. 
 
Reasonably Priced
 
At 11 times EBITDA (less Maintenance Capex) with almost 50% returns on invested capital, Teradata is a good risk-reward investment representing a high quality business that is poised to participate in the inevitable growth of cloud computing, big data and the shift towards data-driven businesses. If you use normalized EBITDA margins, the multiple drops below 10. 
 
 
Industry Outlook is Strong
Teradata's revenues are primarily generated in three multi-billion dollar markets: data warehousing, big data analytics and marketing and analytic applications. These markets include data warehouse database software, discovery platform software, marketing application software, supporting hardware (servers, storage and interconnects), consulting services, cloud services and maintenance services. We expect that the need for analytic data solutions and marketing and analytic application software will continue to grow as organizations increasingly rely on data and analytics to compete on a global basis. This need is further driven by the convergence of the following key market dynamics we have observed:

• high levels of data growth are being driven by new data types, in particular multi-structured data, examples of which include web logs, sensor and social network data, internet text and search indexing, call detail records, genomics, biological research, medical records, seismic/exploration data, photography and video archives, and large scale e-commerce data – which the world also refer to as “big data”;

-increasing obstacles in building and managing effective analytic environments, caused by the growth and volume of new types of data and multiple data management systems;

-economic and business uncertainty combined with intense competition is driving companies to increasingly adopt analytic data technologies to address the vast complexity inherent in their markets and businesses;

-globalization, mobility, consolidation, security concerns and increased government regulation are creating the need for enhanced visibility across the entire enterprise at all times;

-improved analytic data platform affordability due to price/performance gains on server, disk, and memory hardware as well as open source software is enabling new types of usage, and the maintenance and analysis of more historical and near real-time data; and

- the adoption by customers of more real time, or “active,” environments is driving more applications, usage and capacity.

Business
 
Just to show you how diverse and robust Teradata's product portfolio is, here is a description of its business pasted from Yahoo: Teradata Corporation provides analytic data platforms, marketing and analytic applications, and related consulting services in the United States and internationally. Its analytic data platforms comprise software, hardware, and related business consulting and support services for data warehousing, active intelligence, big data analytics, and data discovery. The company’s products comprise Teradata Analytic Database Software that delivers near real-time intelligence; Teradata Workload-Specific Platforms; Teradata Aster Discovery Platform, which is pre-configured with Teradata Aster Database; and Teradata Logical Data Models that are blueprints for designing an integrated data warehouse. It also provides Teradata Integrated Marketing Applications, which helps organizations in managing marketing workflows, budget allocation, leads, analytics, and digital assets; Teradata Marketing Operations for marketing resource management; Teradata Campaign Management for planning and performance analysis; and Teradata Digital Messaging for executing personalized communications and delivering customer experiences, as well as Teradata Analytic Applications. In addition, the company provides business consulting services; technology and implementation services; management services for data integration, data warehouse, discovery, Hadoop, and business intelligence environments; and cloud services. Further, it offers customer support services, such as installation, maintenance, monitoring, back-up, and recovery services; and training services. The company serves various industries comprising banking/financial services, communications, government, insurance and healthcare, manufacturing, retail, travel and transportation logistics, and energy and utilities. It has strategic partnerships with Accenture, Capgemini, Cognizant, IBM Global Business Services, and Wipro Limited. The company was founded in 1979 and is headquartered in Dayton, Ohio.
 
High Returns on Capital
 
Returns on Capital are mouthwatering.   EBIT ($508 million) as a percentage of Net Working Capital plus Net Fixed Assets ($948 million )is slightly over 50%. 
 
Good Capital Allocation of Free Cash Flow
 
Teradata has demonstrated good stewardship of free cash flow by buying back shares.  The following table shows the amount of share buybacks since 2007.

DATECURRENT
ASSETS
CURRENT
LIABILITIES
LONG TERM
DEBT
SHARES
OUTSTANDING
12/13 3.10 Bil 1.24 Bil 248.00 Mil 159.30 Mil
12/12 3.07 Bil 1.29 Bil 274.00 Mil 165.70 Mil
12/11 2.62 Bil 1.12 Bil 290.00 Mil 167.30 Mil
12/10 1.88 Bil 694.00 Mil NA 168.10 Mil
12/09 1.57 Bil 659.00 Mil NA 168.70 Mil
12/08 1.43 Bil 653.00 Mil NA 173.60 Mil
12/07 1.29 Bil 663.00 Mil NA 178.50 Mi


Insiders like the CEO Michael Koehler, Directors Nancy Cooper and William Stavropoulos have been buying shares in the open market. CEO Michael Koehler bought $430,000 worth of shares in February 2014. 
 
Competitive Advantages:
 
Teradata has over 660 patents in its patent portfolio.  It has strong strategic partnerships with Accenture, Capgemini, Cognizant, Wipro Limited, and IBM Global Business Services. 
 
Teradata's competitive advantages and barriers for new entrants did not come over night.   Massive scale is required for profitability as it took Teradata over 20 years from its 1979 inception to generate even mediocre margins. 

Teradata was formed in 1979 as a Delaware corporation. Teradata established a relational database management system on a proprietary platform in 1984. In 1990, Teradata partnered with NCR Corporation (“NCR”) to jointly develop next-generation database systems. In 1991, AT&T Corp. acquired NCR and, later that year, NCR purchased Teradata.

In 1996, AT&T spun off NCR (including Teradata) to form an independent, publicly-traded company, NCR Corporation. In 1999, NCR consolidated its Teradata data warehousing operations and product offerings into a separate operating division. On September 30, 2007, NCR was effectively separated into two independent, publicly-traded companies through the distribution of 100% of its Teradata data warehousing business to shareholders of NCR.

Customers are reluctant to switch because of high switching costs. Approximately 85% of revenue is recurring.  

Diverse Customer Base
 
Teradata serves various companies in banking/financial services, media and entertainment, government, insurance and healthcare, manufacturing, retail, telecommunications, transportation, and travel industries.  Teradata has industry leading clients including Walmart, Coca-Cola. FedEx, Wells Fargo, Mizuho Bank, Metro AG, and many others. All in all, Teradata has over 850 customers globally with over 50% of the revenue from outside of the United States. Teradata has clients as diverse as the US Air Force to the Shanghai Stock Exchange.

High Net promoter Score

Customer satisfaction is high. Customer checks indicate retention rate is in the high 90's range annually.
 
Teradata's Product Mix is Currently Better Positioned Versus Oracle and IBM for the Migration to Cloud Computing and noSQL Solutions
 
While all three companies have its mix of older and newer technologies, my research indicates that Teradata is better positioned than IBM and Oracle as the industry migrates to cloud computing and noSQL solutions.  This is partly because Teradata has less of a legacy product and business (IBM's bare metal data center and relational databases, Oracle's relational database) to protect.  It is the classic Innovator's Dilemma.  

 

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- Insider Buying
- Good risk-reward investment exposure to the rise of cloud computing and noSQL solutions
- High quality business at a reasonable price
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