Rewarding Journey Ahead for This Data Company

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After its first quarter results, Teradata (NYSE: TDC) dropped to $58, a 7% decline from its stock price six months ago. The company's total revenue received pressure from its Americas region, due to a decrease in the purchases from customers.

Teradata reports its total revenue in three software segments: products, maintenance services, and consulting services. License sales of Teradata’s database and applications generate revenue for the product software segment. Revenue of the products software segment declined 19%, year-over-year, to $249 million. Customers delayed purchases of new and expensive data warehouses and preferred to hire consultants to improve the performance of their current data warehouse facilities. Consequently, the company’s consulting service revenue increased 11%, year-over-year, to $338 million.

To register growth in the upcoming quarters, the company is betting on its new data warehouse management's portfolio. The introduction of ‘Hadoop,’ a database management technology, in its product portfolio is expected to be the major revenue generator of the company.

No major headwind from competitor

A new database management technology, ‘Hadoop,’ earlier posed a big threat for Teradata due to its attractive low cost features.

<table> <thead></thead> <thead> <tr><th> <p><strong>Cost</strong></p> </th><th> <p><strong>Hadoop</strong></p> </th><th> <p><strong>High-end Teradata system</strong></p> </th><th> <p><strong>Low-end Teradata system</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Initial setup cost</strong></p> </td> <td> <p>$4,444,532</p> </td> <td> <p>$57,000,000</p> </td> <td> <p>$12,000,000<strong></strong></p> </td> </tr> <tr> <td> <p><strong>Annual cost including administrative and maintenance cost</strong></p> </td> <td> <p>$1,643,627</p> </td> <td> <p>$20,193,400</p> </td> <td> <p>$4,443,400</p> </td> </tr> </tbody> </table>

As per the above table, Hadoop is more economical than Teradata’s other data management technology. Facing risk from the low cost Hadoop, the company announced, on June 26, a new portfolio of data warehouse products including applications for Hadoop. The Teradata appliance for Hadoop is a standalone server installed with Hadoop. Though economical, the installation and maintenance of Hadoop requires technical expertise.

To decrease the complexities arising from installation and managing Hadoop, Teradata formed a partnership with Revelytix to include its software ‘Loom’ with Hadoop. Revelytix is a commercial software company that provides tools for enterprise information management.

Loom will bring key features to Hadoop including dynamic dataset management to decrease the complexities of Hadoop. The Hadoop market expects to grow at a rate of approximately 55% from $2.31 billion in 2013 to $8.96 billion in 2016. This growth prospect of Hadoop fortifies Teradata’s new portfolio.

The company's direct competition for data warehousing comes from Amazon.com’s (NASDAQ: AMZN) Redshift, which was introduced last year, and its wide scale commercialization started a few months ago. Amazon set a price for on-demand usage of $0.85 per hour and in a reserved instance, a one-year contract for the same service costs around $0.22. On-demand usage pricing allows the user to pay for capacity used on hourly basis. Reserved instance pricing accounts for cost for particular time period like for one year term or three year term. The on-demand cost for deploying Redshift is expected to be $4,945 per terabyte per year. This is lower than the $7,000 per terabyte per year cost of dataware solution of Teradata.

The inclusion of Hadoop and Loom enhanced the efficiency of Teradata’s dataware solution, but also increased its cost. In terms of features, Redshift isn’t a strong competitor to Teradata's data warehouse solution, but it is a profitable bet for Amazon. Redshift saves around $1000 per terabyte per year, on the basis of long term usage of capacity. Due to this cost saving strategy, Amazon will be able to target a larger customer base including small enterprises and individual customers. With this, Amazon expects its other web services' revenue to increase around 20%, year-over-year, to $6.28 billion this year.

Advancing with the Americas

Teradata will see a surge in its Americas market with new customer deals. These new customer acquisitions started at the end of the first quarter and include deals from an aerospace company and a direct broadcast satellite service provider company DirecTV (NASDAQ: DTV).

DirecTV will use Teradata’s facilities in Latin America for customer segmentation and retention. DirecTV's Latin America revenue increased 16% year-over-year, to $1.7 billion in the first quarter, primarily due to an increase in the number of customers in Argentina, Brazil, and Colombia. The middle market focused programming and the growing popularity of prepaid products of the company led to its growth in this region.

The modification of features to its data warehouse facilities, with the inclusion of Hadoop, will be an added advantage for DirecTV. DirecTV’s growth aspects from Latin America are expected to increase this region's revenue from $6.3 billion in 2012 to $7.68 billion in 2013.

Furthermore, Teradata sees an opportunity from an aerospace company. The aerospace company will use Teradata’s enterprise resource planning software for its cost reduction program. All the above mentioned new deals are expected to raise its Americas revenue around 7%, year-over-year, to $1.68 billion in 2013.

Conclusion

Teradata is one of the leading companies to provide enterprise wide data warehousing. To maintain its dominance, the company seems to be moving in the right direction with its development plans of data warehouse platforms with the inclusion of Hadoop. Teradata also expects growth in the Americas region. Even though the first quarter was quite slow, future quarters will bring growth opportunities for Teradata. I expect the above discussed strategies will bring much needed support to the stock in the future.

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Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, DirecTV, and Teradata. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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