Teradata Corporation (TDC) Earnings Call Transcript

Thank you. Thank you. Good afternoon and welcome to Teradata's second quarter 2026 earnings call. Steve McMillan, Terradita's President and Chief Executive Officer, will lead our call today, followed by John Ederer, Terradita's Chief Financial Officer, who will discuss our financial results in Outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our filings. Please note that Teradata intends to file the Form 10-Q for the quarter ended June 30, 2026 within the next few days. These forward-looking statements are made as of today and we undertake no duty or obligation to update them. On today's call, we will be discussing certain financial measures which exclude such items as stock based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow, adjusted free cash flow, and constant currency comparisons. Unless stated otherwise, all numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-gap to gap measures is included in our earnings release, which is accessible on the investor relations page of our website at investor.terradata.com.

A replay of this conference call will be available later today on our website. And now I will turn the call over to Steve. Thanks, Chad. And thanks to everyone for joining us today. We're pleased with our solid performance in the first half as Teradata delivered another good quarter with growth in total ARR, recurring revenue, and meaningful free cash flow improvement. Our total ARR growth reflects our belief that the hybrid capabilities we're delivering set Teradata apart. Additionally, our significant platform innovations, tangible operating leverage, and anticipated incremental gains in our retention rate underpin our confidence in the future. are reaffirming our outlook for total ARR, total revenue and recurring revenue. And we are increasing our non gap earnings per share range to $2.65 to $2.73. We're also increasing the range for adjusted free cash flow to $330 million to $350 million. The global shift to AI is profoundly affecting every major industry as enterprises face growing pressure to move AI into production. We recently surveyed 1000 senior technology and data leaders around the globe about their use of agentic AI within the enterprise. We found that nine 90% expect to increase their agentic AI investments over the next year, yet nearly two thirds have seen only small or emerging positive returns to date. In addition, 40% of technology leaders surveyed say more than 40% of their AI pilots have failed to reach production because their infrastructure was not built to support them. We are here to change that. We set a clear vision for this agentic AI era. We call it Teradata 3.0 and we have retooled our business for this clear opportunity of autonomous intelligence. Veradero's robust hybrid data foundation, in use at many of the world's leading organizations, is essential to help enterprises deploy the business infrastructure needed to get ROI from their AI initiatives. The mission critical nature of this work is not discretionary. Enterprises need it. And we believe we have the best data foundation to help organizations achieve real value from their AI initiatives. This brings me to our product innovations in Q2, which I consider one of the most significant chapters in Teradata's history. As organizations increasingly turned their attention to realizing value from AI, our product organization leaned in and accelerated the innovation pipeline to meet the market opportunity. In May, we launched the Teradata Autonomous Knowledge Platform, our foundation to deploy agentic AI without trading control for capability, governance, or performance. It runs where enterprise data already lives, on the customer's terms, and at costs that reflect how agents actually work. Most infrastructure was built to deliver one of those things at a time. Our platform is designed to deliver all three. It brings together a powerful set of new capabilities for customers, and I'll discuss the four main components. Teradata Cloud is purpose-built for the agentic era. The reality is that AI agents create computing demands unlike anything human users have generated before, and that informs how our Cloud offering is designed. Active compute and elastic compute give organizations always on power for missioning critical workloads alongside on-demand capacity for everything else. Teradata Factory extends the platform on-prem for organizations where data sovereignty is preferred or required. It delivers private AI and enterprise grade performance in a single integrated system built with Dell Technologies. And with integrated CPUs and CPUs and GPUs built in, customers can run the models that fit their needs, including foundation models, entirely on-prem. data never leaves their environment while scale and performance remain fully intact. Teradata AI Studio unifies analytics, models, agents, and vector services in one environment, so customers no longer need to source, integrate, and manage those capabilities as separate tools. Combined with our AI services consultants who bring years of domain experience, expertise and sophisticated analytics, AI initiatives can move reliably from concept to production grade execution at speed. Trusted enterprise data and built-in governance travel with every project, allowing organizations to scale with confidence. Finally, Terra is our agentic coworker, the natural language interface that gives every user governed access to enterprise data and agents. Terra includes built-in modes for data analysis, coding, and multi-agent orchestration. giving business users, data teams, and developers a single place to interact with enterprise data and AI. The connectivity that makes this possible depends on open standards. Teradata joined the GENTIK AI Foundation, where standards like the model context protocol are being built. Our enterprise MCP server is already in action with customers and our participation is intended to ensure that real world enterprise requirements, including hybrid, on-prem, and sovereign deployments, are built into those standards from the start. I'm pleased to report that the Teradata Autonomous Knowledge Platform, including its AI Studio component, reached general availability in early Q3, a couple of months after we announced it. That execution velocity reflects the confidence we have in what we've built and the step change it makes possible for our customers. The quarter brought additional innovations to market as well. We made available our enterprise-grade data analyst agent in AWS Marketplace, bringing AI-assisted conversational analytics directly into customers' existing AWS environments. agent enables advanced multi-step analytics on data that's already there with no costly movement or integration complexity. It also delivered expanded data access through upgraded native open table format support, enabling customers to query seamlessly across more distributed data without unnecessary movement or duplication. But access to data alone doesn't get enterprises to production AI. Our research shows that context fragmentation. data that exists but carries no usable meaning for agents is the defining barrier holding organizations back. In fact, 77% of executives reported that 20% or less of their data is sufficiently described for agents to use reliably. It's a challenge we hear and one we are focused on helping customers change. We're proud of the broad set of product innovations we brought forth, yet these are just the first in a series of planned announcements we'll have this year. We're going to be delighted to tell our customers more at our upcoming Autonomous World Tour events. All of these offerings will continue to leverage your differentiated hybrid capabilities and the very real need for production AI that runs anywhere, grounded and governed data and context that is critical for agentic AI. As our teams take our new platform and AI narrative to the market, they are receiving positive responses from customers and support for the need to activate the intelligence across their enterprise. We're hearing that our capabilities with one platform that supports AI, sovereign data, security, and multiple deployment scenarios are generating increasing interest. We have already had early wins from the innovations we announced and from both on-prem and cloud environments. I'll touch on a few examples. A major telecommunications company in South Asia selected Teradata Factory to power its broad AI modernization initiative. The customer deployed GPU enabled infrastructure and Teradata AI Studio to support advanced analytics, vectorization and RAG workloads. This demonstrates Teradata's growing ability to lead enterprise AI transformation conversations across emerging markets. platform, but foundational to our customers' AI ambitions. One of the largest banking groups in Japan and a longstanding Teradata customer implemented a cloud modernization project, selecting Teradata Cloud, AI Studio, and AI Services to enhance its profitability simulation and planning workloads. We expanded our relationship with a federal tax authority in Asia Pacific as it renewed its Teradata Cloud environment and balanced flexibility with the resilience and performance requirements of this critical government platform. reinforces Teradata's ability to align customer success with long-term platform growth for positioners to support future workload expansion driven by legislative change. One of North America's largest financial institutions also expanded with us, incorporating Teradata AI Studio to accelerate AI adoption and demonstrate measurable value through use cases aligned to the bank's strategic priorities. And a major US healthcare company expanded its on-prem production system in support of government regulations. Our increased engagement in the agentic AI space has not gone unnoticed. Gartner published its 2026 Magic Quadrant for AI platforms for data science and machine learning, and Teradata was named a visionary in our first year of participation. We view it as validation of Teradata as a safe haven. a serious player in the AI platform market, and note that this evaluation did not even yet include our latest product announcements. As I hand the call to John, I'll close on this. This quarter we set out a clear vision for the next era of Teradata, Teradata 3.0, anchored by our new autonomous knowledge platform built for the agentic age. And we backed that vision with delivery, bringing key components of the platform to general availability within a quarter. Our hybrid capabilities and our on-prem strength in particular continue to resonate with customers running the most demanding and regulated workloads where a solid data foundation is not discretionary. That combination of a differentiated platform and disciplined execution set the foundation for a solid first-hand first half and gives his confidence in our outlook for the year. John will cover in more detail, including the areas where we are raising our expectations. remain focused on converting this momentum into durable, profitable growth and lasting value for our shareholders. Now, over to you, John.

Thank you, Steve, and good afternoon, everyone. We delivered solid financial results in the second quarter, highlighted by continued improvement in recurring revenue, profitability, and free cash flow. Recurring revenue grew 3% year over year, marking our third consecutive quarter of positive growth. We also drove meaningful expansion in non-GAAP operating margin to 21.5% compared to 16.4% in Q2 last year, reflecting our continued focus on operational discipline and profitable growth. In addition, adjusted free cash flow was $127 million in the quarter, significantly higher than a year ago. At the midpoint of the year, we are pleased with the improvement we are making and believe these results reflect continued progress against our financial objectives and demonstrate our focus on driving sustainable shareholder value. In terms of our detailed financial results for the second quarter, total ARR grew 1% as reported and 2% in constant currency, while cloud ARR grew 8% as reported and 9% in constant currency. As we have said previously, our focus remains on driving total ARR growth, and we may see various from quarter to quarter in the mix between cloud and on premise growth. Second quarter total revenue was $410 million, flat as reported and in constant currency, which was two points above the high end of our outlook due to higher recurring revenue. Second quarter recurring revenue was $363 million, up 3% year over year as reported, and 2% in constant currency, which was three points above the high end of our outlook. The outperformance was primarily due to the timing of revenue recognition related to our on-premise business. Second quarter consulting services revenue was $39 million, down 24% year over year as reported and 23% in constant currency. While this was a softer quarter from a revenue standpoint, we have had improvement in our consulting services bookings and project backlog is growing. Additionally, we are continuing to optimize the cost structure to return the business to a low double-digit margin percentage. Looking at profitability and cash flow, please note that I will be referencing non-GAAP numbers for expenses and margins and a full reconciliation to GAAP results as provided in our press release. For the second quarter, total gross margin was 60.5%, which was up 220 basis points year-over-year, driven by a higher mix of recurring revenue. Recurring revenue gross margin was 67.8%, which was up 30 basis points versus Q2 25, driven in part by continued year over year improvement in our cloud gross margin. While recurring gross margin was lower on a sequential basis from Q1, this was in line with expectations due to the higher upfront revenue in Q1 26. Consulting services gross margin was flat. As noted, consulting services revenue came in lower than expectations, which impacted the margin in the quarter. Operating margin improved significantly on a year-over-year basis, coming in at 21.5% versus 16.4% in Q2 last year. On a year-to-date basis, operating margin is at 24.5%, which is up 540 basis points versus the first half of 2025. The margin expansion was driven by a return to revenue growth, higher gross margin, and a more optimized cost structure. Non-GAAP diluted earnings per share were 69 cents, exceeding the top end of our outlook range by 12 cents. The outperformance was primarily driven by higher recurring revenue. We generated $127 million of adjusted free cash flow in the quarter. This increased our net cash position to $323 million at the end of Q2 26. On a year-over-year basis, we have increased our net cash position by $528 million. Finally, we continue to return value to shareholders repurchasing approximately $40 million or about 1.3 million shares in the second quarter. We continue to target to use 50% of our adjusted free cash flow for share repurchases, which excludes the benefit from the SAP settlement. Also, we paid off the remaining $450 million balance on our term loan. Given the strengthened balance sheet, this will enable us to make future strategic investments in AI as well as continuing our stock buyback program and being opportunistic on strategic M&A. Before turning to our financial outlook, I'd like to provide some additional context. total ARR, we expect modest sequential dollar growth from Q2 to Q3. We continue to anticipate the majority of our growth will come in Q4. For recurring revenue, we saw improved linearity over the first half of the year compared to our initial expectations at the beginning of the year. As we discussed on last quarter's earnings call, this is a factor of revenue recognition under ASC 606 and recognizing more upfront revenue related to the on-premise portion of the business. guidance for the year remains unchanged we did experience higher growth over the first half of the year and expect slight declines on a quarterly basis over the second half of the year. Now, turning to our annual outlook for 2026, we reaffirm our ranges for total ARR, total revenue and recurring revenue. For non-GAAP earnings per share, we are increasing the range to $2.65 to $2.73. For adjusted free cash flow, given the strong first half of the year, improved recurring revenue linearity, and the benefit of paying off the debt, we are increasing the range to $330 million to $350 million. For the third quarter of 2026, recurring revenue is expected to be in the range of minus 4% to minus 2% year over year. Total revenue is expected to be in the range of minus 6% to minus 4% year over year. And non-GAAP diluted earnings per share is expected to be in the range of 55 cents to 59 cents. In terms of some of the other modeling assumptions, for the third quarter, we expect the non-GAAP tax rate to be approximately 23% and the weighted average shares outstanding to be 96.7 million. Also, we now anticipate FY26 other expenses to be approximately $19 million. In summary, we are very pleased with the first half of the year and remain confident in our ability to achieve our full year objectives. We significantly strengthened our balance sheet, generated very strong free cash flow, and continue to execute our profitable growth strategy. By driving operational efficiencies while maintaining targeted investments in innovation, we are positioning the business to benefit from meaningful operating leverage as growth accelerates, supporting further margin expansion over time.

Thank you all very much for your time today. Now let's open up the call for questions. We will now begin the question and answer period. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one again. In the interest of giving everyone an opportunity, we appreciate that you limit yourself to one one follow-up. Your first question comes from the line of Eric Woodring. Eric, your line is now open.

Great. Thank you so much for taking my questions, guys. And I just have one other quick follow-up. So I guess, John and Steve, it's a combined question for you guys. And just you sound really positive on the kind of environment Teradata is operating in right now. Obviously, a number of key product launches in the second quarter, many of which go go GA or have gone GA this quarter. As I think about your guide, just help us understand why the kind of shape of the year is first half growth versus second half declines when we're in this kind of really strong environment with new products coming out. We'd just love to like get a little bit more context because I would think the direction of the year would go the opposite direction. You could see accelerating growth. Just help us understand some of the moving pieces that maybe would make us feel more at ease understanding.

the shape of the year. And then a quick follow up, thanks. Yes, hi Eric. I'll just talk to the customer and the demand environment that we're seeing in the market. We're seeing really great interest in terms of the Teradata value proposition and how we can process data workloads, especially in the world of agentic AI. Our first half product launches were really designed to capitalize on that. And I'll talk a little bit about our Teradata factory which is our new architecture for delivering AI workloads on-prem designed from the ground up. What we're seeing is customers with Teradata are able to make a choice. They can either deploy those workloads in the cloud or they can deploy those workloads on Prem and as they are evaluating our new technologies, they are making those choices so that our overall total ARR is in a good position and that's why we want we reaffirmed our guidance for the full year. Q4 continues to be our strongest quarter from a selling perspective. And from a market perspective, we do expect to have great interest in the new product launches. Although we haven't factored a lot of those new product upside-offs.

opportunities enter our guide so far. John, do you want to talk a little bit about? Yes, Eric, let me just add maybe a couple of points of clarification around the guidance specifically. So first off, if you look at the full year expectations, whether that's for ARR or revenue, we've been very consistent on those full year outlooks. and feel like we're right in line and on target with achieving those. What has changed this year has been the linearity on the revenue side in particular, and even more specifically the recurring revenue side. And so due to the nature of ASC 606 accounting, which we talked a little bit about on the Q1 call, and And again, in our prepared remarks today, we did see more upfront revenue coming from the on-premise subscriptions over the first half of the year. That means there's a little bit less revenue to be recognized in Q3 and Q4. So we are seeing, I'll call it a displacement almost, of revenue recognition more in the first half versus the second half, and that's reflected in our revenue revenue guidance, but otherwise for the full year, total revenue and ARR are tracking very nicely with our initial ranges.

Okay, I appreciate that color guys. Thank you. And then John, maybe just a quick follow up. You just beat 2Q by 14 cents. I think the full year earnings guide went 9 cents higher. Just what are some of the earnings headwinds that I guess you're encountering in the second half? Because inherently, if 2Q is beating by more than you're raising,.

the full year, second half EPS needs to come down a little bit. So just what are the incremental headwinds we need to be taking into account? Thanks so much. Yes, Eric, thanks for the follow up. It's a little bit of the same answer, to be honest. And so when we look at the revenue performance over the first half, particularly the incremental recurring revenue coming in, that provides a big boost earning side as well. And so as we balance that out, as we move through the year, Again, our annual targets are generally going up for the earnings per share. We raised that again. but the timing of when those impacts hit has shifted on us.

Operator, we'll take the next question. Your next question comes from the line of Roddy Salton. Your line is now open.

Awesome. Yes, thanks for taking the questions, guys. First for Steve, I wanted to drill into Teradata Factory a little bit more. Can you just walk through customer conversations there? And then I'm curious in like how you expect that to drive pull through to other parts of the business? And how do you see it impacting this sort of competitive outlook in some of these shared accounts where maybe your cloud native competitors obviously don't have on-prem offices?.

and how that kind of impacts the retention outlook there. Thank you. Raddy, thanks for the question. We certainly see Teradata Factory and our ability to execute these workloads on-prem as a really differentiating point against our competitors. Just to level set everybody, Teradata Factory is our next generation architectures. It's got GPUs built in from the ground up Now, what does that mean? It means that AI workloads can run natively on both the GPUs and that infrastructure, but also on the CPUs and our massively parallel processing architecture. So that expands use cases and the footprint that we have. It allows organizations to run AI workloads right next to their data, and they can do that on Prem, which is got great use cases. For example, where data sovereignty is important and some of the customer examples I gave in their prepared remarks point straight to that. The other great thing about Teradata Factory is it's been built in conjunction partnership with Dell and building on that those Dell technologies not only gives us access to their advanced technologies it also gives us access to their go-to-market so even though Teradata factory is still to go GA in the second half of the year what we're looking at is we've We've already seen orders and interest for Teradata Factory and working with the Dell teams, we expect to have a very successful offering in the marketplace that gives customers true choice. And that's why, as we look at the overall business, what's important to us is total ARR. So when customers make the choice to deploy on-prem or in the cloud, we can capture that growth with them.

Got it. And then just a follow up for John. The balance sheet is obviously in a great place close to SAP settlement, the debt pay down. Could you just walk through how you sort of stack rank highest ROI, uses of capital here, you know, stock buyback, bolt-ons, R&D, especially given, you know, the product wants paid in. So let's just dig into your thinking there as you think.

of capital from here? Yes, sure. Roddy, happy to appreciate the question. And yes, you know, our balance sheet is in great shape. It's very strong following the retirement of our debt in the second quarter and also the strong free cash flow that we had over the first half of the year. So from a capital structure standpoint, I feel like we're in a very, very good position in terms of the current allocation priorities, I would stack rank the ones that you mentioned with organic R&D first, followed by our stock buyback program, and then strategic M&A. I guess I'll also throw in the caveat that of course we always reserve our right to change our priorities in the future, but currently if you look at the model, we're investing quite a bit in R&D this year and we're also continuing to do 50% of our free cash flow towards the buyback.

MR PRICE, Awesome. Thanks, guys. MR PRICE, Yep. MS. Your next question comes from the line of Yi-Chun Wang. You are now free to speak.

Hi, good evening. Thanks for taking the question, Steve. Definitely good to see some of the call outs among your AI use cases getting some traction for your customers. We certainly heard of rising concern from coding tools out there. there from your peers, like helping drive faster AI monetization and migration. With the launch of the autonomous platform GA recently, could you kind of help us think about how these tools are helping your customer conversation and conversion within your base, and then why the AI monetization seems to lag behind what your peers are seeing with accelerating growth recently.

Yes, thanks for the question, YC. I think there's a couple of factors coming into play. One, I think our vision and the architecture that we have for a fully agentic and autonomous knowledge platform for AI is really resonating with our customers. And what that means is we're actually agentifying our entire stack and changing the way that customers can interact with our platform. We're also really excited about the work that we're doing from a context layer perspective, which really provides context around business data to these AI agents so that they can query the platform successfully. What we see in terms of a revenue model, and we will certainly be looking to monetize some of the new products that we have coming in the stack. But what we're really going to see is increased utilization of the existing Teradata platform. And so the lag essentially is as organizations utilize these new capabilities. in the platform. It's essentially utilizing capacity and capability that they've already bought from Teradata. But not only that, one of the advantages of running these workloads on the Teradata platform is that costs and expense don't spiral out of control as these agentic workloads deploy on top of the platform. That's a unique competitive differentiation, but it does give a lag to the growth that we see from an ARR perspective, but certainly the opportunity is there. Our customers are excited about the offerings. We've had a great first half in terms of innovation, and we plan that to continue into second half. And we'll certainly be.

monetize that as we go along. That's helpful Steve. John, I have a follow up for you. Cloud ARR seems to came in and would be low expectation given the double digit guidance is out there. And then with this shift in, like some of your peers reported kind of shift in AI budget over the past couple of weeks, are you seeing any shift in your customer budget or any incremental impact from like the elongation of the middle-east situation. And then maybe get an update on kind of the stage migration from a year ago, any changes from that front. Thank you.

Yes, so there's a couple of topics in there, so I'll try to hit them all. But I think the first was really around cloud ARR growth. And you talked about the target that we had for double digit growth there. As we've been saying for probably about a year now, I would say our focus is much more on total ARR growth, not just cloud growth. We are still seeing faster growth for cloud versus on-premise subscriptions, but in any given quarter, the mix of those deals may vary a little bit. And so we still think that low double-digit growth target is the right range and the right trend line growth for our cloud business, but But again, there may be some quarterly variability. We continue to believe that the hybrid approach is resonating with customers as Steve just described, and that's reflected in the return of total ARR growth that you've seen in the model. And that's really what we're ultimately trying to drive towards. You also, I think, asked about migration activity. are seeing less of that this year. We factored less migration activity into our model, into our forecast for this year. I would say peak cloud migrations was probably a year or two ago, and we're now on the other side of that bell curve. We'll still continue to see some of that activity, but much less going forward.

Thank you. Your next question comes from the line of Patrick Walravens. Patrick, your line is now open.

Oh, great. Thank you. Steve, I just want to get a sense for, and John, I guess, whoever wants to address it, forget the revenue recognition for a second. I mean, Steve, were you satisfied with the performance of your sales organization in the quarter? And does the fact that Teradata Factory, I'm sure people are excited about it, but it's not available.

that play into how you actually ended up doing? Look, I think as I look through the quarter, our operational execution and discipline was really good. And you can see that in the results, Pat. From a go-to-market perspective, the teams have really embraced these new offers and new capabilities, are proactively taking them out to our customers. really good feedback about Teradata Factory, as we said. It's some early announcements and it's going GA. The sales teams are excited. They're energized to take these messages to our customers. I think they see the opportunity that that's going to unlock. Especially if you look at it from an on-prem perspective and the workloads that we can uniquely offer and deliver on-prem from a GPU with the NVIDIA partnership, being able to run local language models. This is a whole new area for our sales teams to get involved in. And as they're taking these messages to our customers and exploring what they can do with the Teradata platform, with all of these new announcements, it's certainly opening up opportunities for us.

Okay, and then if I could ask a follow up, I mean, it does seem like as enterprises, are rolling agents out across more and more parts of their businesses There's pressure to consolidate on a single data platform so you don't have to define things over and over again. And then at the same time, you know, there's just a lot more consumption of data. How is that playing out for you guys? I mean, are there situations where, you know, companies like, oh, sorry, we're just going to standardize on Databricks across this entire thing, or we're just going to standardize on Snowflake across this entire thing?.

Where does all that sit? Yes, I think what we're seeing is that organizations don't want to get vendor lock-in. So whether it's vendor lock-in to an individual cloud provider or vendor lock-in to particular data providers, as they look at the AI stack that they are implementing, we think there are certain requirements. control points, if you will, or certain points of differentiation inside that stack. One is the agent harness so that organizations can utilize the right language model for the right workload. The second is the context layer within the AI platform or the AI stack. We believe that we can provide real context and business context to data that's inside our customer's ecosystem better than anybody else. And then finally, to your point, Pat, these agents generate a set of workloads unlike any other workloads that we've come across before. But the pattern is clear. They're massive in terms of size and volume. They're massive in terms of concurrency, and they're massive in terms of query complexity. And just looking at those factors, the best platform in the world to solve them is Teradata and our advanced massively parallel processing architecture. And that's our differentiation when we go in on our customers, that's what's going to enable us to win. Thank you.

Your next question comes from the line of Matt Hedberg. Matt, your line is now open.