This Computer Company Is a Long-Term Bet in a Short-Term World
One of Los Angeles’ most dynamic high-tech companies--Teradata Corp.--gets its turn before Wall Street’s earnings tribunal Tuesday. Good news could send this languishing stock sharply higher. And bad news might be even better: It could knock the stock down further, creating a true bargain for investors with a long-term perspective.
Teradata, founded 11 years ago, makes powerful computer systems that have no equal in their category. The high-priced systems, known as relational database computers, allow airlines, banks, retailers and other big companies to keep track of a multitude of data.
More important, Teradata’s systems allow companies to quickly tap into that data and massage it to their strategic advantage. A retailer, for example, can use a Teradata computer to keep track of every item sold in every store. The computer also can quickly tell the retailer which items are selling well and which are selling poorly, compared to recent history. Result: The retailer knows what to put on sale.
Likewise, an airline can use the system to keep track of reservations systemwide and decide the proper mix of full-price and bargain seats.
That type of computing takes enormous machine power, and that’s what Teradata delivers. The company name is derived from the word “terabyte,” which stands for a trillion characters of data.
Teradata was a success from its first computer sale in the mid-1980s. And so far, no other computer firm has been able to develop a system as good as Teradata’s, says analyst James Reynolds at Wedbush Morgan Securities in Los Angeles.
That has meant phenomenal growth for Teradata, as companies as diverse as Citibank, AT&T;, Boeing and American Airlines have lined up to buy the systems:
* Revenue jumped from $17 million in 1986 to $89 million in 1988, and probably exceeded $210 million in the fiscal year ended June 30.
* Operating earnings per share were 13 cents in 1987, 70 cents in 1989, and probably topped $1.10 in the year just ended.
The stock, meanwhile, rocketed from about $15 last August to a peak of $35.50 in mid-March. But it has since slipped back to $24.75 (it trades over-the-counter).
What’s the problem? Just the usual conflict between Wall Street’s short-term thinking and a company’s long-term business strategy.
Because Teradata’s systems are so expensive, a few orders can make a big difference to the bottom line in any given quarter. But the firm can’t predict that a customer will cement a deal by the end of March, say, or two weeks later. That has made it difficult for the company to match Wall Street’s expectations quarter to quarter.
In the quarter ended March 30, 1989, for example, Teradata earned just 1 cent a share. In the following quarter, earnings were 43 cents.
So after the firm reported “some softening” of sales in Britain in the first quarter of this year, some investors became suspicious. And in late June, computer analyst Rick Martin at Prudential-Bache Securities wrote a report saying that major contracts were “probably delayed” in the June 30 quarter, which might mean earnings of just 30 cents a share, versus 43 cents a year earlier.
Now, Martin believes that he probably misjudged and that Teradata did, in fact, come close to its target of $60 million in revenue in the recent quarter. That should mean the firm will match Wall Street’s expectation of just under 40 cents a share in earnings.
Michael F. G. Ashby, Teradata’s chief financial officer, won’t talk specifics before next Tuesday’s earnings announcement. But he notes that whenever the firm has run into “seriously negative” order problems in a quarter, it has telegraphed the news to Wall Street in advance.
Ashby says demand “has been and continues to be strong. . . . And demand in the U.S. has strengthened considerably.” Also, there weren’t any surprises in the recent quarter in profit margins, Ashby said.
Still, in this terribly skittish stock market, plenty of tech stocks have been murdered lately just for being off a few pennies from earnings estimates. What if Wall Street still doesn’t like whatever numbers Teradata reports for the latest quarter?
Wedbush’s Reynolds insists that the stock will eventually respond to the company’s huge earnings power in the current fiscal year and beyond. He sees Teradata earning $2 a share in the year ending next June. At $25.75 now, the stock sells for just 13 times that estimate. Reynolds thinks a fair price is $40.
The earliest that any other computer company is likely to have a system strong enough to compete with Teradata’s is in 1992, Martin says. And some analysts say there’s plenty of room for competition anyway, because the high-performance computing market that Teradata serves is among the fastest growing in the computer business. So perhaps the only event that could hurt Teradata any time soon would be a worldwide recession that would cause companies to abort capital spending plans.
Pete Nelson, whose $430-million (assets) Denver money management firm of Nelson, Benson & Zellmer owns about 174,000 Teradata shares, says the company “is one of the few tech stocks we’re comfortable holding for the long term. We like the people and we like the product, and the clientele they’ve built up tells you something.”
Briefly: Boeing Co. reported quarterly earnings after the close of trading Thursday, and the numbers seemed to be well above expectations. So the stock could soar today from its close of $59.125 Thursday. Boeing earned $1.12 a share in the June 30 quarter, versus 57 cents a year ago. Zacks Investment Research in Chicago says the highest estimate by any analyst was $1.10 for the recent quarter, and the mean estimate was 95 cents. . . .
As expected, the Securities and Exchange Commission has approved a proposal by the New York Stock Exchange to limit computerized program trading on days when the Dow Jones industrial average moves more than 50 points. Until now, the NYSE has requested--but couldn’t demand--that brokerages halt additional program selling whenever the Dow has fallen 50 points. The SEC vote means the NYSE now can make such limits mandatory. But there’s continuing suspicion about brokerages’ ability to get their program trades done no matter what the NYSE orders. . . .
Time Warner stock continues to be hammered. The stock plunged as low as $90.75 on Thursday before rebounding to close at $92.375, down 62.5 cents for the day. The price is nearing the 52-week low of $87.50. The stock was as high as $182.75 last year, after the celebrated merger of Time Inc. and Warner Communications. But optimism that the debt-laden company can climb from red to black ink soon has faded badly.
TERADATA’S PULLBACK L.A.-based computer maker Teradata Corp. has seen its shares slump since spring. Money managers are waiting for next Tuesday’s quarterly earnings report.
Aug. 11, 1989: $15.25 Thursday close: $24.75 Los Angeles Times
