Teradata Corporation (NYSE:TDC) needs a greater implementation of unified data architecture (UDA), which is key for the company's long-term growth potential.
Teradata is a provider of enterprise data warehousing (EDW), including enterprise analytic technologies and services. With the acquisition of Aprimo in early 2011, it became a provider of integrated marketing software. Teradata's data warehousing solutions are comprised of software, hardware, and related business consulting and support services.
The problem is Teradata faces competition from Hadoop on traditional EDW vendors and concern is that the technology is encroaching on workloads of more expensive technologies.
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In this situation, it would be better for the company to gain leadership in UDA, and fortunately Teradata continues to see strong adoption of UDA, including around half its top 50 customers.
BMO Capital Markets analyst Keith Bachman believes that a greater implementation of UDA is key for Teradata's long-term prospects. Although Hadoop is not designed for traditional EDW analytical workloads, more ETL (extract, transform, and load) workloads will continue to move to Hadoop over time.
Therefore, Teradata will have to be a leader in UDA, similar to the traditional EDW market. Revenues related to unified data architecture are driven by consulting and support services, which help companies design and build the best model for a UDA.
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However, new customer wins with UDA can provide sales leverage for other Teradata products, such as EDWs, Aster, and Hadoop-based appliances.
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Bachman views UDA as a meta data layer of software products that enable interaction of different parts of the business intelligence value chain. For example, the Unity layer allows end users to read data from other databases without requiring replication of the data into a Teradata system.
More broadly, the ability of Teradata's UDA portfolio will grow over time, and will enable it to work with many different data sources (and other company's products), but still keep the data warehouse as a central, and primary node in the business intelligence (BI) value chain.
Meanwhile, let's talk about the impact of Hadoop on Teradata and why Hadoop disruption is overhyped.
Teradata noted its large customers have 20-40 percent workloads that are used for ETL, of which around 20 percent are suitable candidates for Hadoop, implying a 4-8 percent gradual shift.
This might be true, but a survey conducted by TechTarget in late 2013 show that the percentage of active Hadoop users was still in the single digits, based on a sample size of 387, and approximately two-thirds had no plans to deploy Hadoop.
Bachman thinks that the sample is probably tilted toward small and medium businesses, which may not have the required Hadoop skills.
Nevertheless, Hadoop is being deployed by leading edge large organizations, and will gain more traction over time, mostly with larger organizations that can acquire and/or develop Hadoop based skills.
Hadoop will have a negative impact on Teradata's revenue growth over the next five years as more users deploy Hadoop for ETL. However, Teradata is an essential component of the BI value chain for large data intensive organizations.
The lack of tools to integrate into traditional software platforms and the lack of internal talent on the technology has restricted Hadoop from moving into core EDW functions. As such, Hadoop hype is probably ahead of adoption.
In addition, Aster and integrated marketing management (IMM) gaining traction. Although penetration of the installed base remains low, Teradata indicated that Aster is gaining adoption, including new account acquisitions. The company expects revenue of over $100 million in 2014 from Aster, Hadoop and the 1000 series appliance.
The 2000 series appliance accounted for 14 percent of total product revenue in 2013, consistent with management's comments at the higher end of the 10-15 percent range. The company added that IMM revenue would be in the $250 million - $300 million range by the end of 2014, owing in part to the increased the number of sales specialists in 2013.
However, the acknowledgment of Hadoop by Teradata management as an issue validates many bear views about death by a thousand cuts.
As a result, Teradata reclaiming a historical multiple would be challenging heading into fiscal 2014 as normalized product growth likely sub 10 percent. It would be a tall task without a significant rebound in product growth rates starting in the first half of 2014.
To drive incremental growth, the company will need revenue from new, likely smaller customers and/or a return in spend from their Top 50. The spending of its top 50 customers were down in 2013 versus 2012 but up from 201l. The company should try to achieve to 4-5 deals per year among these customers.
TDC stock trades about 14 times its forward earnings versus historically in the 15-25 times range. The stock dropped 20 percent in the last year and traded between $39.16 and $65.96 during the past 52-weeks.
To impress investors, Teradata needs to display a greater adoption rate of UDA translating to higher products growth. This should provide sales leverage for its other products, including EDWs.
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