Teradata: Heavy Hitter In A Nine Month Slump

In the midst of a half year rip roaring rally, Wall Street took a wrecking ball to data warehousing and analytics company Teradata (TDC). Shares peaked at $81 last September, only to be cut down to $48 in the last few days. Back in the Fall of 2102, Teradata warned analysts there would be significant headwinds from cutbacks in IT spending in the Americas, and the Americas constitutes 60% of the company's revenues. The company has disappointed investors for three quarters now.

Belt tightening in the executive suites of Fortune 1000 companies continues to dog the information aggregator and facilitator. However, Teradata is not alone in this fiscal fog. The entire S&P 500 technology sector was up only 5% for the first half of 2013 in an overall market that increased nearly 15%. The best first half of a year since 1999. With earnings season a few weeks away, it's crunch time for the tech sector. Many enterprise technology companies (including Teradata), have been promising second half results since the New Year.

The ranking general at Teradata is CEO Michael Koehler, and during the company's most recent conference call, he states that last quarter may be the end of his company's slide to the downside:

• "We believe the Americas hit bottom in Q1. Looking forward, the funnel for large CapEx data warehouse opportunities in Q2 has increased sequentially from Q1, while the prior year, large CapEx, data warehouse revenue in Q2 declined sequentially from Q1."
• "The second quarter will be challenging for revenue growth in the Americas, but it should be a good improvement from Q1 in terms of year-over-year quarter comparisons."
• "The large CapEx revenue headwinds in the Americas will be less severe in the second half of 2013 than they were in the first half. Large CapEx revenue in the second half of 2012 was less than what it was in the first half of 2012."

There is flimsy scientific evidence as to how much growth can be expected from the "Big Data" sub-sector in Information Technology out to the end of the decade. Last year, Big Data was the flavor of the month with promises of 15% growth as an aggregate for the next five years from the majority of research firms. Some of the stocks in the sector made lightning-quick moves to the upside, and this includes Teradata which is considered to be one of the best, if not the best data warehousing company on the planet. Competitors IBM (IBM), Oracle (ORCL) and SAP (SAP) may have something to say about that, but there is little doubt that Teradta is a top notch organization.

What most of these research companies didn't anticipate was a really lousy year. Many investors got their pockets picked when they bought in at the apex of enthusiasm for the sector last Fall. Traders with an insatiable appetite for momentum put Teradata on the Investor's Business Daily top 50 stock picks during that time. I don't believe that Teradata will get back to the lofty price levels of 2012 for at least a few years. However, that doesn't mean a patient investor can't find a decent entry point if indeed they want to invest in a company and sector that is clearly out of favor.

Despite the bad year, one big thing I like about the company is that they've increased earnings per share at a healthy clip since they were spun off from NCR (NCR) in 2007. That includes 2013. In 2012, Teradata made $2.44/share. This year, that number is projected to be between $3.05 and $3.20, the low end of guidance, but an increase just the same. The stock closed at $50.23 on Friday, so that equates to a P/E ratio of 16.3 for the year if indeed management hits its targets. Except for 2008 and 2009 when the market crashed, this gives us a historically low Price to Earnings for the company. However, this is with a six month extrapolation of the data.

This is not a small entity. It resides in the S&P 500 with an almost 9 billion dollar market cap. Research and Development was a healthy $45 million for the quarter, so they are not standing still. Net cash flow was $243 million in Q1 versus $192 million the first quarter in 2012. Teradata is also flush with cash with $865 million on the balance sheet. During Q1, they also repurchased 1.6 million shares for $94 million. The organization has approximately $230 million of share repurchase authorization remaining.

If we examine the consensus analyst estimates on Yahoo Finance, we get the something that is inline with company guidance when it relates to earnings per share: $3.01 for this year, and $3.41 for 2014. However, like with most securities, there is a wide discrepancy between the low and the high projections. In fact, for you Teradata bears, Cowen recently issued an underperform with a $45 price target for the company. Not everybody is in agreement that this is where to put your money, at least in the near term.

Earnings growth has ground to a standstill this year with the average analyst calculation of just 6.3% for 2013. A far cry from the 18% annual average the company achieved since it went public. If we look out five more years, the sell side is projecting a 13.5% growth trajectory. We can make an assumption that's not happening until spending picks up for big ticket enterprises.

The time-honored technique of buying laggards like Teradata may be a good investing option if you like to bottom fish. The current trend is buying dividend paying defensive securities, and with good reason. It was only four years ago we had an entire system overload and subsequent crash. Enough time has passed that we may have sector rotations into cyclical companies in the second half of 2013. It must be noted, specifically about this company that there was a decline in deal sizes, and number of deals in the last quarter. If we get a repeat for Q2, the stock may go lower despite rosy guidance.

Glu Mobile Goes On The Road

Earlier this week, members of the Glu Mobile (GLUU) executive team hit the road, and made two investor presentations. The first one came on May 21st, and was spearheaded by Chief Financial Officer Eric Ludwig at the Stifel Nicolaus Internet, Media & Telecom Conference. The second show was one day later at the B. Riley & Company Investor Conference, with Glu Vice President of Finance Greg Cannon as the master of ceremonies. This article will amalgamate both speeches to shed some light on topics that may enable investors to get a better grip on Glu Mobile's overall strategy, plus clarify some misconceptions about the company.

Gambling

During the past six months, Glu's shares temporarily spiked from an announcement of a move into mobile gambling with United Kingdom partner Probability PLC, and then the legalization of on-line gambling in some states in America such as Nevada and New Jersey. Day traders thought they were riding with lady luck, but the goose in share price didn't last too long. This is primarily because this relationship with Probability will not be a material contribution in 2013. Both Mr. Cannon and Mr. Ludwig emphasized this during their presentations.

Glu management believes they are just scratching the surface of what could become a meaningful revenue stream for the company. Here are some paraphrased quotes from the two presenters.

Greg Cannon:

Obviously long term you will want to be in the U.S., but with the legislation in Nevada and New Jersey, it is still too early to tell where Glu fits in. Do we want to go after our own license? Do we want to just work with a partner? So we will evaluate and use the knowledge and experience for gaming with working with Probability to determine that long term strategy.

Eric Ludwig:

We're definitely the early stages, and that’s the reason why we’ve not given any number for guidance to this in our numbers today. The UK market is still a very small revenue generating market for real-money gambling with the big prices in the states. But we think long-term, this is a great market, and has a great opportunity in the United States. Then there’s a lot of different ways to attack it, either with or without getting licenses, doing real money gambling on skill-based level and sweepstakes.

I don't know about you, but when I hear the word sweepstakes, I think of the Irish Sweepstakes, like the lottery. I'm not sure if this is what they are alluding to, but perhaps it's an extension of the mobile slot games they are providing for gamblers throughout the UK. With Probability, they are launching a White Label social casino with Zinga, Blackjack and Roulette. However, it must be emphasized, this won't be adding anything significant to the top line for awhile.

Monetization

Glu Mobile now has forty million active users playing their games on a monthly basis. Ninety percent of these consumers are on smartphones and tablets. Glu made a clean break from feature phones, and have now transitioned to primarily the iOS (AAPL) and Android (GOOG) operating systems. However, as well as Glu has executed in core game play, production values and consumer reach, they've come up short where monetization is concerned. This is why they're on the hot seat, not as a gaming entity, but as a publicly traded company.

I think management showed backbone by being up front with this, and highlighted it as the number one priority for the company as they transition from a player vs. environment organization, to a player vs. player production house. Eric Ludwig acknowledged that with the previous player vs. environment platform, the company didn't have any home run games using a baseball analogy. Just a lot of doubles and triples, or at least this is how I interpreted it. This is why the company is focusing on more social interactivity.

Games-as-a-service, Social Gaming 2.0, Player vs. Player, whatever you want to call it, this is where you're going to get the blockbuster games. They made a big step in the right direction by purchasing GameSpy last year, but now they have to produce. Although Glu Mobile has been in business for twelve years, it's still a turnaround story on Wall Street, no matter how high their production values are. They've got nowhere to run, but there are now low expectations for the company where last year, it was just the opposite.

You don't have to be a bean counter to know that monetization matters. If Glu doesn't start to increase revenues, it could be a death trap, just like Rite Aid (RAD). Rite Aid is the third largest drug store chain in the United States, yet their stock hasn't gotten over $3 for ten years now. I'm not suggesting this will be the fate for Glu, but pointing out that just because a stock is inexpensive, doesn't guarantee instantaneous results.

Third-Party Publishing

A new venture for Glu Mobile is their third-party publishing division. This may be exactly the right medicine to get the stock in gear because it will increase revenues for the company in 2013. Glu is a successful developer, so they know how to get a game to the international market. What they are doing now is partnering with small gaming companies in China, Japan and Korea that have achieved success in their native markets, and are bringing those games to the Western World by localizing the languages to English, Russian or Portuguese.

Glu has long track records with Apple, Google, Facebook (FB) and Amazon (AMZN) to get these third-party games to the right distribution channels. They're anticipating launching at least six third-party publishing titles in 2013. Two early in the third quarter, and the balance late in the third quarter, or the fourth quarter. In the long-run the third party publishing division would have the same EBITDA margin as what their internal studios will have.

Greg Cannon commented about the margin profile where it concerns the third-party games:

Obviously in the near term the gross margin will be impacted because we’re having to pay a rev share back to those partners initially. We have brought down our full year guidance to 88% on the gross margin basis to allow for those rev shares, but ultimately by reducing the R&D investment on the third party publishing, you still get to it the similar long term EBITDA margin.

It should be noted that Glu ended the first quarter with $21 million in cash, DSO [days sales outstanding] less than 60 days and no debt on the books. However, they are guiding lower to $14 million in cash by the end of the year without having to tap the capital or equity market.

Conclusion

Gambling, monetization and third-party publishing were the brunt of both presentations. Management also spoke briefly about the Quad Screen Future where they will be bringing Glu Mobile games to Apple laptops and HDTV's in addition to smartphones and tablets. You will be able to scale Glu games to all of these consumer products. Even now, you can do this to some extent. However, that is a reach into the future, and I'm more concerned about the next twelve months.

Bottom line is that the company restructured in November after a very promising Summer of 2012. What a difference a few months makes. If you want a turnaround equity with a lot of potential, Glu Mobile is the place to be. However, even though they are the poster child of pure-play mobile gaming, it's a risky investment, like all turnaround stocks.

Nuance Communications Gets A Wake-Up Call From Carl Icahn

In investing circles, some things need little introduction. Take Nuance Communications (NUAN). Nuance is synonymous with voice recognition, and their technology is held in high regard worldwide. Mainstream investors became aware of the company a few years ago when their science was the backbone of Apple's (AAPL) Siri platform on the iPhone. When anything Apple was in vogue, Nuance shot up to $31, but has since fallen on hard times, and crosses the tape at $19.

In a nutshell, Nuance is in a transition period. From desktop to mobile computing, and from just plain old software to software as a service, or a subscription based model. Q1 was terrible. Q2 was like a sequel to a horror movie. In Q2's prepared remarks issued by the company, next quarter's revenue will be $480-$495 million and earnings per share are projected to be $0.30-$0.34. This is below a consensus of $554 million in revenues and EPS of $0.49. Full year guidance also missed. Some of the blame was on poor execution in the sales department.

For the second time in three months, the stock dropped from the mid $20's, to the high teens, and some investors took notice. Most notably, billionaire financier Carl Icahn who previously had accumulated a 9.3% stake in the company. After the conference call, it was disclosed he increased his holdings to 10.7%. Like Nuance, Mr. Icahn needs no introduction to those that follow the market. Whether it's televised battles with Bill Ackman over Herbalife (HLF), or the killing Mr. Icahn made on Netflix (NFLX), Mr. Icahn is a financial celebrity.

One thing that is consistent with Icahn is that he's not in this for the consolation prize. He puts himself in a position to win. Many investors believe the atmosphere is poisoned for Nuance. It's a lost cause. I feel this is short sighted, and with the "passive" investment Icahn took in Nuance, he's giving the company a stay of execution. After all, the pressure Icahn can put on a company is the stuff of legend, even though he has not stated what his involvement will be with the speech recognition entity.

Even with the increased holdings for Icahn, if we do get an overall market correction, Nuance shares may go lower, but they seem to be forming a base in the current market melt-up. I prefer to bottom fish in good solid companies that hit speed bumps. This is why I took a position in Nuance at $19. However, the company may be stuck in neutral for the next few months, especially if comments during the conference call are any indication.

In playing Devil's Advocate as a shareholder in Nuance, let's look at some of the less that stellar statements that management published just three short weeks ago that caused the sell-off:

• Concerning the Healthcare Division: "Although recent acquisitions contributed to revenue growth, in some cases the contribution was below our expectations.".
• In the Mobile & Consumer segment: "We experienced delays in revenues due to consolidation in the smartphone market, our increased focus on pricing and delayed royalty reports.".
• In Enterprise: "We have recently under-performed in our enterprise on-premise license business and we expect that business to continue to face challenges.".
• For the overall company: "In the second half of FY 13, we expect a continuation of the current market trends, and we expect that improvement in sales execution and acquisition performance issues will take some period of time.".

Management believes that it will take until 2014 to show a resumption of organic growth. That Fiscal Year 2014 organic growth will be in the mid to upper-single digit range. So we're not talking about hyper-growth for at least two years, if at all. To increase shareholder value, the company has authorized the repurchase of up to $500 million of its outstanding shares subject to market conditions. A share buy-back is standard operating procedure for companies that have fallen out of favor.

However, you usually do a buy-back when the company is selling for a discounted price. With a current P/E Ratio of 40, this is still an expensive stock. This makes me wonder what Mr. Icahn has paid for his stake. If it's over $19, he may not exercise patience for very long. The annual Nuance Communications' shareholder meeting next January could prove very interesting.

In late April, The Wall Street Journal speculated that Nuance had hired Goldman Sachs (GS) for advice concerning Mr. Icahn. According to the article:

"Activist shareholders such as Mr. Icahn have become a major force for change in corporate America in recent years, frequently taking big stakes and pushing for improvement at underperforming companies. They have become so ubiquitous, bankers say, that in many cases companies make strategic changes preemptively when they fear they are an activist target.".

In the Q&A session during the most recent conference call, Daniel Ives from FBR Capital Markets directly asked Nuance CEO Paul Ricci: "Can you confirm you've hired a financial adviser in terms of working with your strategic alternatives?". Mr. Ricci dodged the question, and stated: "I can say that Nuance is very well advised and we work with many firms.". There was no follow up question, nor specific mention of Goldman Sachs.

The Bottom Line

With the possibility of being under the thumb of Icahn, coupled with residing in the upper echelon of technology, the Nuance breakup value could be more than a sum of its parts if current management can't get back to its previous growth trajectory. I've always liked this company, however, that doesn't necessarily translate into a rising stock price. I believe with the Icahn stake, the handwriting is on the wall for Nuance. In a year from now, shares could be considerably higher, from change within the organization, or pressure from outside the company.