Teradata Corporation (TDC) Earnings Call Transcript & Summary

Awesome. Let's go ahead and get started. Thank you, everyone, for being here today at the UBS Global Technology and AI Conference. My name is Radi Sultan. I cover the mid-cap infrastructure software stocks here at UBS. Next up, we have Teradata. John Ederer, CFO; and Chad Bennett runs IR. So first of all, thank you very much for being here today.

Absolutely. Thanks for having us. It's been a great conference for us.

Awesome. Maybe just to kick it off, let's start at a high level. I think you very recently hit your 6-month mark at Teradata. The business has really stabilized. You've gotten into a good cadence of upbeat. So maybe just walk through your biggest learnings, the biggest takeaways in your first 6 months on the job.

Yes, for sure. Thanks again. The first 6 months are always interesting. I think every new company I've ever gone to, there's a lot to learn for a few months, and then you start to get your head up above ground again and you can start to look towards the future, and it's been great so far. I think the thing that's probably impressed me the most has been the people, the team that's at Teradata, including the leadership team, we've got a relatively new leadership team. We've had some turnover there in the last year or so. And I feel like we're working together really well and really making the right decisions for Teradata and for the future of Teradata and kind of even at the expense potentially of our own department. So we're really coming together nicely in that way. I think that the organization has a lot of resilience, if you look at the changes in our marketplace over the last, well, gosh, nearly 40 years that we've been at this, we've weathered a lot of twists and turns in the market landscape, and so I see a lot of resilience across the organization. There's a lot of enthusiasm about what's ahead for us, and I know we'll get into a little bit of this. internally, we're referring to it as Teradata 3.0. And so as we emerge from developing a cloud business and focusing a lot more on AI and what it means to be an autonomous knowledge platform we see a tremendous amount of opportunity ahead. And I think there's a lot of enthusiasm, frankly, around the company right now.

Yes. Awesome. Maybe just drilling into the AI front, I believe AI is being attached to around 1/3 of deals in the pipeline today. So maybe just talk through where are you seeing the most traction? What are some of the biggest early AI use cases where Teradata is getting pulled along?

Yes, sure. So we are starting to see, I'll call them, the early indicators of AI on our business. And we've talked about a few different things. One is the influence that we're starting to see in our pipeline, and that has been growing. So getting more sophisticated about how we track that exactly and then we're starting to see it show up in the pipeline and influencing our pipeline. The second big area is around the proof of concepts that we're doing with our customers, and we're on track to do 150 or so by the end of this year, and that number has been increasing as well. And we're getting some really good traction in these conversations. And we've got a team that's embedded in our sales organization. that goes in and really lays out a game plan for the customer in terms of how to use the Teradata platform in an AI setting. And so we've been getting into a lot of good discussions. We've developed a wide variety of use cases, frankly. Some of the things that are a little bit more common in the financial services industry. We've done some things around anti-money laundering. We've done some things around fraud detection, in the retail space, we've done some things around customer experience. And so there's different types of use cases that can be deployed and they all are tailor-made for the customer. And so one of the things that I think gives us a little bit of an advantage in this regard and why we talk about a knowledge platform is that we have the core of it, which is the enterprise data warehouse, and you need to store the data somewhere. But we also have the context around that. And that comes from decades of working in these industries, developing industry data models, and so bringing those 2 things together, I think, gives us a unique advantage.

Awesome. And maybe when you think about the AI products portfolio today, you have enterprise vector store, MCP server, agent builder, like how do you think about monetizing these offerings longer term? And maybe which of those do you see as the biggest needle mover over the next several years?

Yes. I think there -- I mean, all your children are important, right? So -- but it's -- I guess to the heart of the question, how do we ultimately monetize that? There will be opportunities for traditional cross-sell activity with distinct products. But the way this will come together more is in terms of expansion and expanding use of the Teradata platform. And so again, if you think about what's happening in an agentic world, you're now having agents take the place of humans and agents are around 24 hours a day. And so there's just going to be a much higher level of capacity needed workflow needed to be able to handle that type of an environment. And so where we benefit is by providing these tools and making Teradata a platform with which customers can build AI solutions, we benefit from that increased workflow down the line.

Got it. And a big focus on the last call was around the FTE group that you guys formed. Can you walk through a little bit of the background there, where that group has been most focused, the extent to which it's just AI? Or is it sort of around use cases for the broader platform and maybe any early wins or traction there you could share?

Yes. No, this is another important piece of our strategy. And so we did just a couple of months ago at our customer conference in October, we launched what we call AI services. And it's very analogous to what you've seen at other deployed engineering. And it's an opportunity for us to get more engaged with customers as they're trying to spin up these new types of solutions. And in a lot of ways, it's really a very natural extension of what we're doing with the proof-of-concept work. And so the team goes in, we developed a proof of concept, which is essentially a road map, a game plan for the customer to go start attacking AI solutions. The AI services team comes in right behind that as the natural next step and actually spins that project up. So now that we've identified a few opportunities, a few use cases, let's spin up the project and actually get it going. And so we think that, that will ultimately benefit us in terms of additional ARR down the road because, again, we get these projects going. We develop the need for additional capacity, and then we benefit from that.

And I guess you guys already have a pretty substantial services footprint already. How much of this sort of AI services group was the repurposing of your existing services footprint and maybe helping you streamline that versus incremental?

Yes. A lot of it is repurposing and there'll be some upskilling along the way. But if you think about that business, our consulting business, it's been going through a bit of a transition of its own. And a lot of that business was driven by cloud migration activity a few years ago. And as we've kind of hit the peak of the bell curve for migration activity, we're on the other side of that now. we're seeing that same trend in our professional services business, the consulting business. And so AI services is a new offering, but it's an opportunity to pick up some of that slack on the consulting side. And I think it's something that will start to help our business in '26 and even into '27 and beyond.

And I guess maybe just zooming out when you think about the services business more broadly going forward, like how do you think about that business from a top line and margin perspective going forward?

Yes. So from a top line perspective, first stage is getting it back to flat, right? I mean it's been declining as that migration activity has come down this year. So we need to stabilize that from a revenue standpoint. I think if you zoom out and think about that business I guess, on a relative basis to the rest of our business, we're in the, I think, kind of 12% or 13% range in terms of total revenue today. So probably something in that 10% to 15% range would be the right range for us. We still think that it's important to have some consulting services, and we believe that it's very complementary to the software business. But it doesn't need to be as big as it used to be at Teradata. From a margin perspective, we did hit a little bit of an air pocket earlier this year. Q1 and Q2, we actually had negative gross margins on the consulting side. And again, that was a lot of that migration activity coming down. We did take some corrective actions in Q2 and Q3. We brought that margin back up to positive territory in Q3, I think 8.5% in Q3. And I think there's a little bit more room to go in Q4. So we are looking for that business to be profitable and a contributor to the bottom line for sure.

Got it. And maybe just drilling down into that cloud migration piece around Q4, specifically, you guys called out a few large customers that were considering on-prem versus cloud and sort of that hadn't made the decision yet. So maybe you could just talk through sort of what are the key sort of decision factors in those customers and how you can ultimately still monetize those customers, whether they're on-prem or in the cloud?

Yes. No, it's an interesting dynamic that's been going on. And so I think if I back up maybe a couple of years ago, it was all about the cloud. How do we get to the cloud? And we were doing the same thing. We were building out our cloud business. We were working very hard to migrate customers over to the cloud. Today, the conversation has shifted a little bit. And as you've all seen at this conference, everybody is talking about AI. And how do I make those AI investments? And what do we need to do? And maybe more importantly, where do I want to be making those investments. And so we actually have customers that are working through this in real time with us and since we have the capability to provide a hybrid solution. If the customer wants to go on-prem, we can go on-prem with them. If the customer wants to go to the cloud, we can go to the cloud with them. And we have some customers that are literally considering both. And it may vary, honestly, depending on the type of workload and what they're ultimately trying to do. I think AI has changed the conversation a little bit because some of the old traditional concerns have been brought right back to the forefront. And so things like security and governance and compliance, scalability. Those are all coming back to the forefront of decision-making. And I think that's where we're starting to see some of these situations where -- and we literally have customers that are considering a migration, but they're also considering expanding on-prem.

Got it. So do you think it's sort of very specific to those handful of large customers? Or do you think it's sort of a broader, across your entire installed base, these are sort of themes that you're seeing?

Yes. I mean every situation is unique, of course. But I think that -- let me put it this way. If you think about where all the focus is. And everybody wants to invest in AI. How do we become this autonomous enterprise? How do we have agents everywhere doing things that humans used to do. If you want to embark on that journey, you've got 2 paths. One school of thought is like, okay, you're going to move everything to the cloud first and then start to build your AI solutions on top of that. Or you can work with the data where it is today and work with the existing data state and get started on AI projects today. And so I think everybody is going to have different approaches to this. I think we benefit from being able to provide that hybrid environment if somebody wants to get going today.

Got it. And maybe just as we think about sort of getting to the other side of that bell curve of cloud migrations following up on an earlier point you made, like is there a go-to-market change that also happens? I mean you mentioned the services piece and how that's sort of adapting. Like is there a broader go-to-market change it also sort of comes along with that?

There is a little bit. I mean, I'll say it's more subtle than dramatic. But again, a few years ago, we used a lot of sales calories on migration activity. And so we have a lot of people focused on that. And I will tell you, having -- not having been here a couple of years ago with this company, but having gone through SaaS transitions before, those migration deals, they always have a gravity to them. They kind of -- they just consume everybody's time and energy and attention. And they're typically big deals, big transactions. When you free yourself from that and you're in a much more traditional land and expand kind of a motion, it can actually be very freeing for the organization. And so the team has always been focused on expansions as well as new logos. But I would say, looking ahead to '26, there'll be even more so focused on the expansion activity. How do we get adoption with some of these new AI tools that we have developed, how do we start building out use cases with customers and really expanding their activity.

Yes. You mentioned new logos. I think it's a really interesting point that kind of flies under the radar as sort of the new customers that you guys are gaining. And I think that really does speak to the product investment that you guys have made. So maybe you could just talk about sort of that new customer activity you're seeing. I know maybe small from a revenue standpoint, but maybe how you think about that part of your business?

Yes. No, it's a great question. And I would agree that it has flown under the radar a little bit. I don't feel like maybe we talk about it enough. But we are having some success with new logos. And interestingly, over the last few quarters, we've seen new logo activity on-prem. And so I do think there are opportunities out there for us, particularly in highly regulated industries. We've seen some opportunities in emerging markets. And I think there are some things that we'll do from a product standpoint that would open up the more traditional channels and give us an opportunity to do more there as well.

Is there any theme amongst those customers, like a vertical or sort of, you mentioned regulated industries, like is there any sort of theme amongst those customers of how they're using the platform or theme of what vertical they're in, maybe?

Yes. If there's a theme, I would say it is coming back to folks that are in regulated industries where there's high compliance concerns, governance concerns. So we've seen that with some government contracts and things of that nature. We've seen that in the financial services industry. We've seen it in some of the more emerging markets where an on-prem solution is preferred. And so high level, those would probably be the key things.

Got it. You mentioned government. I know we've talked about federal a lot. The question comes up quite a bit. So maybe you could just quickly speak to sort of the federal exposure you guys have today and sort of maybe the opportunity there because that's a little bit of a bit more relevant.

Yes. I think there is still opportunity there. And again, it comes back to that notion of security and really wanted to control the environment versus having something in the cloud. And so I do think there's continued opportunity there. There's some work that I think we need to do in some cases, particularly in the U.S. federal government. But I think that for some of the other emerging markets, there's definitely opportunity there for us.

Got it. Maybe just shifting gears to competition. Like how do you see the competitive environment changing? Like you think win rates? I mean, I know the overall business is sort of stabilizing, but have you seen win rates from a competitive standpoint, stabilize? And maybe any pockets are you having the most success from a competitive standpoint?

Yes. I do think that stabilization is probably the right word. I think that, again, if you go back a couple of years ago, and it was all about getting to the cloud. And I think we felt like we were in a little bit of a race to migrate our customers to the cloud before somebody else did. And today, I think a lot of that activity has run its course. I mean there will still be migrations. There are still things that we're working on. But again, I think the dialogue around AI has really changed that conversation. And so hopefully, that's something that starts to move the market back in our direction. And if you think about how and when you're going to be able to deploy these AI solutions, having already being a significant part of the data estate and having that security and control around it. Not to mention the context of the industry data models, I think, gives us, again, an advantage as some of these conversations start to take hold.

And maybe just like on the go-to-market side, like how do you feel about sort of broadly speaking, the go-to-market where it is today? Any big change? I mean you guys have had a lot of changes. So maybe just how do you see sort of over the next 12 months? I mean where there are still pockets of improvement or sort of areas of focus over the next 12 months?

Yes, I think that there was a lot of work done prior to my arrival and new leadership from the top down to even the department leaders. And I think that in '25, what we've seen on the whole is just much better execution. And I think all of you have had a chance to see that in terms of our externally reported numbers and the consistency that we've been able to drive over the first 3 quarters of this year. And so I think that on the whole, the team is just executing better and we've been better organized. I think that -- I'm excited to see what can happen next year. We will focus more exclusively on expansion activity. We'll also focus on getting the AI services up and running and really start to capitalize on some of the products that we've introduced.

Got it. And you noted you're looking more at sort of the expansion side versus the migration opportunity. I mean when you think about maybe the product and the go-to-market, I think we touched a little bit on the go-to-market, but maybe just on the product side, like how do you position the product portfolio and also go to market, right, to capture that mix shift?

Yes. I would say at a high level, it's some of the themes that we've been talking about. And so what we're ultimately trying to do is position the Teradata platform as a place where you can do this type of activity. And we've built out the use cases we built out the POCs with customers, we're now going to start to operationalize that with AI services. The products that we have delivered over the course of this year, if you think about like enterprise vector store, the MCP server, the agent builder, all of these things are tools that help enable that type of work. And so we're putting all of these pieces together to be able to be that platform for AI. And still more work to do as always. But I think that we've started to put enough pieces in place where we can have these kinds of conversations and then back it up with the services to get these projects going.

Got it. Maybe the other side of the corn will be on the cost side. As we think about margins going forward, I mean, you mentioned the services piece of the business, but where do you see the most room on margins going forward? And how do you sort of balance that with the product investment that you...

Yes. We're going through our budget cycle right now for next year and also thinking about the longer-term planning. And for us, particularly for next year, our priority is going to be on the product development side of things. And so we're looking for efficiencies across other parts of the business to be able to continue to fund product innovation. I think that there's opportunity for us on the cost of revenue side. I think there's some opportunity for us on the G&A side. We've done a lot of work already on sales and marketing. And again, like I said, we want to try and maintain investment in -- on the product side of things. And so I think the net of all of that is if you kind of think about what we are trying to do from an overall model standpoint, we are certainly trying to drive growth. And ultimately, that's going to be the thing that carries us forward. but we also want to be able to drive incremental profit and cash flow to the bottom line. And so even this year in '25, where we had a year where the P&L was challenged a little bit on the top line, we did some things from an expense standpoint to make sure that we could keep margins on par and make sure that we protect free cash flow. And I think that some of the changes that we've made this year will benefit us again in '26 and we'll continue to look for ways to drop incremental profit down. And when we think longer term about like how would we ultimately get to become a Rule of 40 business, it's going to be a combination of the 2. We're going to have to drive growth certainly, but we're also going to have to continue to make margin improvements.

Got it. Yes. I imagine the margin expansion is easier when the top line is...

For sure. It's a lot easier. But look, it's -- I think it's just -- it's something that you have to be dedicated to. And markets ebb and flow. And a few years ago, companies weren't getting "paid" to generate margins. They were getting paid for growth. That ebbs and flows a little bit. Growth is still obviously very valuable and something that we want to drive as well. But I think there's an appreciation now for also having that profitability and free cash flow.

Yes. And I guess's how do you think there's sort of that sort of -- that cost versus like wanting to have that investment be positioned for growth, but also being able to drive margin expansion at the same time sort of that product investment versus...

Yes. It's kind of as I described, I think for us, we'll focus on opportunities around cost of revenue and other parts of the business so that we can preserve that R&D spending and preserve product development. And we think that when we look at the dynamics of the market around us right now, it's important for us to continue to invest in innovation to ultimately drive growth.

Got it. And when we think about free cash flow, you guys have a very healthy free cash flow profile. I mean, when you think about sort of a buyback versus M&A, sort of other uses of free cash flow, maybe just how do you think through those options sort of why 1 versus the other? And maybe just sort of the process around how you think about deploying free cash flow because it is a very important lever for you guys.

Yes, for sure. Well, I would say historically, over the last several years, we've devoted a pretty high percentage of our free cash flow to share repurchases. And we were just talking about this in another meeting. I think our share count at one point was upwards of 180 million shares, and we're now kind of in the 95 million,$96 million range. And so over the last 5 years, we've bought back a lot of stock. This year, we committed to using 50% of our free cash flow towards share repurchases. We also just announced that we've re-upped the program. So our program was set to expire in December. We re-upped for another $500 million to go towards stock buybacks. And so we've been very committed to that, and we'll continue to be committed to that as a way to return value to shareholders. I would say that we're also open to M&A activity. We -- in recent years, we haven't done a ton of that, but I think that we're in a position now to start looking at opportunities and looking at things that could accelerate our product road map. I would expect if we were to do something, it would be more of a technology tuck-in type deal, something that we could use our free cash flow to finance and really be a way to accelerate some of the things we're trying to do from a product standpoint.

Is there any particular area maybe within the product portfolio where you think should have you need that incremental investment or where you think that sort of the M&A bolt-on opportunity could be a little bit more accretive to the business?

I'm going to defer that one to my colleague here who runs Corporate Development for us.

Yes. I mean, I'm not -- I echo John's opinion on tech tuck-in focus and kind of financing those with cash flow and the balance sheet. I don't think I want to go into specific areas, but I think Sumeet, Arora, who's our new CPO, 6 or 7 months ago, laid out a pretty aggressive AI stack and road map a couple of months ago at possible that John mentioned. And I think we're doing a lot of that organically, but I think there's some things to accelerate or gap fill in that stack that -- and it's a very active market, right? I think you know or everybody knows my inbox gets hit pretty routinely. So we're open to that, right? And I think we're focused on that. And like John said, I think anything that we can do to accelerate the road map, fill gaps and potentially accelerate ARR growth. That's what we're looking at.

Yes. I mean we're not looking to be a roll-up here. We're looking for things that will complement our organic activity and really accelerate some of the things we're trying to do.

Got it. Maybe just one more on the growth opportunity before we wrap it up. When you think about maybe longer term, the business does seem to be stabilizing, gotten to a good cadence here of beats. I mean, so without guiding to next year, like can you just walk me through sort of the key puts and takes as you think about the business next year, the biggest growth drivers, where you see the most opportunity, maybe just lay it all out for us to go up.

Yes. No, certainly. I mean, look, especially coming off of the heels of last year, this year, the very important first step was stabilizing the business. And there were some critical elements to that for us. One was getting total ARR growth back to positive territory. And we were able to do that in Q2. And again, in Q3, albeit with a little bit of foreign exchange benefit, but still got those -- got that metric back to positive territory and our guidance has us in positive territory again for Q4. So that was an important milestone for us to hit and the turnaround of this. The second thing is that we continue to focus on cost efficiency. We wanted to protect margins and we wanted to protect free cash flow, and we've done those things. I think we ultimately needed to start demonstrating some consistency in the business. And I think we've been able to do that thus far this year in terms of our first 3 quarter reports. And so that was an important effort just to kind of get us back on the stable ground, put a floor out there for the stock in terms of our free cash flow and give us a solid base to build on in '26. We did make some comments on our Q3 call about '26, and we felt strongly that we could continue to grow total ARR in '26 and we should see some continued benefit from a free cash flow standpoint from some of the things that we've done this year. And so we'll continue to focus on those 2 elements among others, but continuing to make improvement on that would be the next leg of this journey, and ultimately, driving higher growth with some of the innovation that we're doing around AI and other things.

Awesome. I know it's been great to see the business stabilize and look forward to checking back in this time next year. Thank you so much guys for being here.

Thanks again. It's been a great conference. Appreciate it.

Thank you.