Teradata Corporation (TDC) Earnings Call Transcript & Summary

Good. Perfect. Hey, welcome to our next session. I'm really happy to have the Teradata team here. John, if you think Q3, it seems like a very good quarter for you guys. Share price reaction was a lot. Congratulations.

Thank you.

To bring everyone up to speed, like can you talk a little bit about what drove the upside of describe the quarter?

Yes, happy to. And thanks very much for the invitation to the conference. It's been a great event for us. And I really appreciate the opportunity to present here today. If I look back at Q3, it was interesting. I would say you almost separate it into the fundamental side of things and then the stock reaction. And from a fundamental standpoint, I think we delivered a really solid quarter. We had total ARR in positive territory, which was ahead of schedule for us. We had improvement on the margin side of things. We had a strong quarter from a free cash flow standpoint from an earnings per share standpoint. So from a fundamental point of view, there was good upside to the quarter, at least relative to the consensus expectations. Now if I'm being honest, and I look at all of that and I say, well, was that an up 30% kind of quarter? I don't know what was that. But -- and so if you separate out the stock reaction, I think coming into the quarter, I felt like we were undervalued. And I think if you look at our stock on a historical basis on a -- even just on a free cash flow multiple basis, I think we were trading at a level that was heavily discounted. And so I think we've recouped that at this point. With hindsight, I think we started to make a little bit of a move after the second quarter. We had Q1 was in line or maybe a little better than expectations. Q2 was the same. I think initially, we made a little bit of a move after Q2, but then we ran head first into a tough market for software stocks. And I think people kind of forgot until we got to Q3 and did it again.

Yes. Great. That's nice to hear. And then we did also see like -- I see it in my conversation, there's more excitement around Teradata. Again, like from the conversation you had since the quarter ended, like how -- what kind of change in tone do you get from investors?

Yes. There has been a lot more interest for sure. So there's been some nice follow-through on the stock, but also just we've been out on the conference circuit. I think this is our fourth conference this quarter. And there's been a lot of interest. Even if I just -- I've only been around for 6 months or so, if I compare and contrast to about 90 days ago, the level of interest today is considerably higher. And -- and it's been good. It's been focused on the fundamentals of the story and where does Teradata sit in this overall environment for AI. And so there's been a lot of good enthusiasm. And I think the stock movement caught people's attention, and there's been good follow-through from there to get to know the story again.

If you -- and we talked a little bit about the quarter, but like from my perspective as well, the operating profit, cash flow were kind of like the really big highlights for me. Can you talk a little bit about like the initiatives that drove that? What were the factors there that we should be aware of?

Yes, for sure. We are very focused on that side of the equation. And as we sit back and think about how are we going to ultimately drive shareholder value, a very first important step is doing some of the things that I just described. One, get a little bit more consistency in the business from a quarterly standpoint, get total ARR into positive territory. We've continued to focus on the cost side of the equation to make sure that our margins are in line and our free cash flow is in line. And ultimately, at this stage, what we're trying to do is build a solid foundation for '26 and beyond. And I think the very first important piece of that foundation is the free cash flow. If I look at our stock and I want to get a floor in place for supporting the value of our stock, it comes back to free cash flow. And so we're very focused on that. And we -- we've done a number of things over the last 12 to 18 months really to make sure that we're optimizing our cost structure and enabling ourselves to continue to drive margin improvement in free cash flow.

Yes. Okay. Yes, it makes sense. And then the like growth is -- but as you mentioned, growth is kind of going to be the main question because you can't kind of do margins forever. Can you talk a little bit about where we are on that journey?

Sure. I would agree with you that if I think about the stages of what Teradata needs to go through, especially after last year, the first stage was stabilized. And I think we've demonstrated that this year. And then it's built the foundation for continued expansion. And we talked about this a little bit on our third quarter call. We feel confident we can get back to total ARR growth this year. We did it the last couple of quarters. And we've built that foundation to continue to drive ARR -- total ARR growth next year. We're also focused on driving free cash flow growth next year. And so that's building the foundation. We are -- from an investment standpoint, we are prioritizing R&D. And we believe that continuing to invest in product innovation will help drive the next leg of growth for us. And so I do completely agree. I mean I think there's benefit to be had in our stock over the next 1 to 2 years just by margin improvement and demonstrating durable free cash flow. But then ultimately, as a public company, you need to demonstrate growth, and that's what we're ultimately driving towards.

Yes. And then talk a little bit about like -- at least for me, I sensed a little bit of change in tone like a few quarters back was all about cloud ARR, and now it's more about total ARR, kind of talk a little bit of what you're seeing here in the market that drives that. And maybe it's just me, but or like...

No, I think that's a fair observation. And -- and I would generally agree. I think that when we look at what we're seeing from our customers, there's more discussion now about what should be on-prem versus the cloud. It's not just running to the cloud for the sake of being in the cloud. And so I think that has influenced us a little bit in terms of even just how we're talking about the business. And I will tell you, though, from a financial point of view, when I look at the rest of the model and what's going to ultimately drive profitability and free cash flow, we need total ARR to grow. Cloud growth is important to us. It's the highest growing piece of the business and will continue to be a key driver, but we need the total pie to grow to then drive higher recurring revenue and ultimately higher margins in cash flow.

And then how do you go about -- like if you think about like the different things like in the past, there was cloud -- like people move to the cloud, so I get my cloud ARR number up. Thank you very much. And it's more like a transfer from one. Now if it's total ARR, like how do you -- what are the initiatives that you can see to kind of drive that number?

Yes. I think for several years, the market itself, was all about the cloud. And we were doing the same. We -- 6 or 7 years ago, we launched our cloud product. We started to migrate our customer base to the cloud. In a relatively short period of time, we drove that up over $600 million in ARR. And so we demonstrated that we can be a cloud provider as well. And I still think that's important. But to your point, some of that is left pocket, right pocket. You're migrating customers from on-prem to the cloud, and that was driving some of the exponential growth we saw a few years ago. Today, we're starting to reach a little bit more steady state. And in fact, if you look at our charts on our website, our IR charts, you'll see the breakdown of our ARR between cloud and on-prem. And you'll see over the last 4 quarters that the on-prem piece has started to stabilize. In fact, in Q3, the on-prem ARR actually increased. And so that piece stabilizing is really important for the whole model because it's a lot easier to grow if that piece is stable versus declining, right? And so for us, we're looking to drive the whole business. And we think that in terms of some of the way customers are engaging with us now, particularly around AI investments, I think there's an opportunity to grow both on-prem and the cloud.

Yes. Okay. And then the -- if you think about it, there -- what's driving -- if you think about the growth factors, so there's like find new customers, there's upsell, better, there's skew management, et cetera? Like talk a little bit about how you think about the different factors here.

Yes. For us, I would say the primary focus is on expansions in the customer base. We are well embedded in the Global 1000 and some of the largest customers in the world, and we've been working with them, in some cases, for decades, and we're looking for opportunities to continue to grow and expand with those customers. That's not to say that we've just thrown in the towel on new logos. We're very interested in driving new logo activity as well. And in fact, have had some success in recent quarters even on-prem with new logos. But I would say the bigger near-term opportunity is expanding with the customer base. And we're looking at AI as a real opportunity to drive that expansion. And so with the Teradata platform today, we started to layer in additional products, things like agent builder, things like AI factory, our MCP server, enterprise vector store, tools that help get the customer up and running on AI. We've also layered in AI services. We just recently announced this in October at our customer conference. And this -- you can think of this as kind of that forward deployed engineering group that will help enable customers to get projects up and running. We're already doing the proof of concept. This is the next logical step to get a project up and running and get them live.

And then the -- if you think about it, like, obviously, there's a lot of talk about these cloud vendors in your space. But the market has been incredibly broad and it's been very well, aged with so many different players in the market. And I'm just wondering what is the opportunity if you think about new customers around like Netezza, I think IBM put it end-of-life, Vertica is still there? Like how do you think about like customer growth?

Sure. There's -- I mean, there's opportunities on both sides for us. I think that in some ways, we almost compete in 2 adjacent markets because we can compete with the historical on-premise providers. And I think we do quite well in that world. And then we also compete on the cloud side, and then I guess we have the unique opportunity to go after customers that are looking to do both. And so being able to provide that hybrid environment is a unique differentiator for us. And so yes, certainly, as we see changes in the historical on-premise part of the market, those are opportunities for us.

And then you mentioned AI already like -- and I just came out from a start-up session where it's all about like AI is only as good as the data. You always have been like a centerpiece of where customers kind of keep the information which data, clean data, which would be in theory, very valuable. Like how do you think about your role in this world? And what are you doing about it?

I couldn't agree with you more. So I think that I do think data is at the heart of it. And so if you think about historically what Teradata has done, to your point, we've been the place where that data gets stored and then we make it available for the analytics and other elements that come on top of that, including now AI. And as we start to look forward, and think about the opportunity. We're looking at it from really kind of 2 points of context. One is just being the storage for the data. The other is providing the context around that data. And so we have decades of operating with very large customers in every major industry, whether it's financial services, retail, automotive, banking, aerospace, like we've been in those industries for decades. And we've built up industry data models in those areas. And so we think providing that context in addition to the data is critically important in an Agentic world. And so I think that we play a key role in this.

Yes. Okay. Perfect. And then is there -- do you think it's going to be more like playing out in the public cloud. So it's the cloud ARR that comes back in the focus? Or do you think you can kind of be that player on both sides as well on the on-premise side and on the cloud side?

I think it could potentially be in both. Certainly, cloud has been the fastest-growing piece of our business, and I would expect that to continue. But I think there's opportunities in both and there's opportunities from a hybrid perspective as well. It's interesting when you think about some of the historical strengths of Teradata, and really, we were built for the enterprise. We were built for large enterprise, and we were built to operate at very large scale and to do it very efficiently. And that's exactly what you need in an Agentic world. our Chief Product Officer is fond of saying, agents never sleep. And it's true. You think about human interaction with the system and maybe somebody's working 8 or 10 hours a day, you think about an agent who's literally on 24/7 and the capacity that's going to be needed to handle that sort of activity. And so I think that actually bodes well for us because we've demonstrated through our architecture that we can operate at that kind of scale and do it very efficiently for the customer.

Okay. So if I put it together, it's like as a data vehicle, you're kind of really important on both cloud and on-premise and then there's the adjacent products? Like how do you think about productizing this now? Like if I'm a customer and I come to you like how do I buy this?

Yes. I would say continued work and evolution on that front. And our product team is very busy as we speak. And I think there'll be some things that we'll announce over the first half of '26 that will help us in that regard also. And I do think, as all of us, collectively, the market dive deeper into AI. We might have to look at some creative ways to price and package the solutions going forward. Today, it's still largely volume dependent for us. And so we think in terms of capacity and ultimately, customer usage of the Teradata platform and things that drive additional workloads and drive the need for additional capacity result in ARR for us today.

And then with your kind of expanding role in this new AI world, like should that show up as well I saw I'm the number guy.

Sure. I appreciate that.

Should that show up in kind of renewal rates and stuff like that as well as the platform becomes more strategic again or it was always strategic, but you get another layer of strategic on open now with AI. Does that kind of then drive kind of renewal rates, different renewal rates? And can you start seeing that already?

Yes. We've done better on retention rates throughout '25. And I would expect these types of opportunities to continue to help us improve that and to drive overall ARR growth. And to the extent that we can make the platform relevant for these types of workloads, useful for these types of workloads, you should see that in better -- continued improvement on retention side and really on the net expansion side of things.

Yes. Okay. Perfect. Yes, makes sense. And then the -- if you think about it, like -- and that's more like an operational question. If you think about Cloud ARR as a focus, it's kind of one mindset from a sales perspective. If you look at more total ARR, it's another mindset from a sales perspective. Talk a little bit about the evolution of your go-to-market go to market for us. The other thing is also, like at the moment, the growth is not like not quite there where we wanted. How much can sales capacity help you out there as well?

Yes. I think of it may be slightly differently. And so as opposed to having to sell cloud versus on-prem in a lot of ways, it's a similar type of motion because you're ultimately selling the platform, and it's how the customer chooses to deploy it. What I think our sales force needs to continue to do is develop those use cases around AI and be able to sell that kind of capacity, right, that kind of story, if you will, and demonstrate to customers how you can use Teradata in that environment. And so I think that's the evolution that needs to take place. And I think it already is. We have a team that's been dedicated to AI and AI use cases. And they've been working directly with customers, and they're on track to do 150 proof of concepts this year. And that's a very important first step. I mean these are extensive projects that we've done with the customers to go in, really analyze everything that they're doing. And then put together a road map for them to follow to start to embark on this AI journey. And I mentioned the AI services earlier. That's the next step in this. And so now we've launched this service which can take that proof of concept, actually spin it up into a project and get to something tangible and get to something that can go live. And so we think that the combination of those 2 things will ultimately result in additional ARR for the company.

Yes. Okay. And then the -- you as a CFO, like what are you use as a metric to look out for, like, okay, more sales capacity could work here? I mean, like I don't think in the early stages because it's a lot about upselling, kind of working with the existing customers. But like how do you think about that dynamic?

Yes. We evaluate that pretty regularly. And so in fact, we're in our budgeting cycle right now. And I would say for '26, we're prioritizing more on the R&D side and product innovation. But we are also focused on sales capacity and expansion of the sales force and also developing things like AI services. And so we're placing our bets very strategically and, frankly, looking to optimize other parts of the business so that we can fund some of those initiatives.

Yes. Remind me, what's the -- on that note, like what's the margin framework that you gave out like in terms of like how like margins are evolving from here as part of the journey.

Well, we haven't really given the framework per se. And I would -- and I would admit that maybe we're overdue for something like that. I think it's been quite a while since we've had an Analyst Day. But what we have talked about is driving a profitable growth strategy, which in my mind, means we're doing 2 things. One, we are still investing for growth. And first and foremost, we have to find a way to generate incremental ARR in the business. But secondly, we want to do that in a responsible way. And we want to do that in a way where we can also drop incremental benefit to the bottom line. And again, it kind of comes back to how are we going to drive shareholder value. When I look at the stages of where we are and stabilizing the business and then expanding from there. At this point, I think we still need to drive a very balanced approach. If I think about how could we get to the rule of 40 someday, it's going to have to be a balanced approach of both growth and incremental benefit on the bottom line, incremental margin. Now if we get to the point it somewhere in the future where we're in a high-growth scenario, I'll come back and reserve the right to change my answer. But today, we're very focused on driving that incremental benefit on the margin side.

Yes. Okay. And you emphasized quite a bit like cash, cash flow, cash generation is kind of important to you, which kind of makes sense at this stage as well. How do you think about the usage of cash? There's buybacks? Obviously, at some point, as growth is returning, it's a question, do you pull back on that one and maybe M&A becomes more important, et cetera? How do we think about that?

We have been very, I would say, almost aggressive in terms of share buybacks over the last several years. This year, I think we're on track to use 50% of our free cash flow towards buying back our own stock. In prior years, we were closer to 70%, 75%. So I think we have been very aggressive on the buyback side. We did just re-up it. And so our buyback was set to expire in December. And so the Board just authorized a new buyback of $500 million that will kick in January 1. And so we intend to continue to buy back stock and support shareholders in that way. I would say we're also open to other opportunities. And so we've got a team that's actively looking at M&A opportunities again. And I think for us, it would be something that would be much more in the technology tuck-in category. We're looking for things that can accelerate our road map, particularly in AI. And so we could potentially use some of our balance sheet for that. I think we've got plenty of room to do a few things.

Yes. Okay. Yes, it makes sense. And then the -- if you -- if you think about the evolution for you guys, there's -- in this new AI world, there's certain players. If you look at you from a technology perspective, you were always like actually one of the best technology companies out there like the way you kind of work the data was always kind of leading in the industry. If you think about going back to growth as well like now that you're in the cloud, you're well established in the cloud, like how much of that is kind of changing momentum in the market in terms of mind share. And so you talked about R&D, but like there's also then the question is like, is it an R&D problem? Or is it more sales and marketing kind of debate?

Yes. Well, for us, I would say the focus on R&D is about capturing the opportunity that's right in front of us. And again, if I step back the big conversation change has been AI, without a doubt. And if you go back a couple of years ago, it was all about cloud, cloud for cloud's sake, right? Just like let's just get to the cloud. You didn't really need anything more than that. And today, the conversation is a little different. And the conversation is around how do I start to develop and deploy AI solutions? How do I become an autonomous enterprise? And that's a little bit of a different discussion. And I think there's a couple of different paths, a couple of different opportunities. There's one school of thought that is, hey, first, you need to migrate everything, right? And this is kind of -- it's a little bit of deja vu all over again, but it's the original premise of an enterprise data warehouse. First, let's migrate everything to a data warehouse and then we'll put the analytics on top of that. And so today, you have version 2 of that, which is let's migrate everything to the cloud and then we'll do AI on top of that. That is one approach. The other approach is that you could start your AI journey today. And you can work with the existing data landscape that you have. And Teradata is firmly entrenched in that data estate at Global 1000 customers. And so what we're doing from a product standpoint is building out that tool set and that capability so that customers can start their AI journey on top of Teradata.

Yes, yes, yes. Okay. That makes a lot of sense, yes. Okay. Last question for me is like if you think about it from an organizational perspective, as a CFO, like you're there not so long in the company. Like -- so when you came in like when you walked into the organization, what were the things where you realize, okay, this is where I can help them. This is kind of where I can make a difference.

Yes. I think -- I mean, look, in my role and my job, it's ultimately going to come back to the numbers, and it's going to come back to how do we drive the economic model for Teradata and how do we ultimately deliver shareholder value? And how do we do that over a longer-term period. It's not just a 1-year deal. And so we focus quite a bit on the forecast and the long-range planning of the business and where are some of the key areas where we can drive incremental value. And so cost of revenue is one area that we're very focused on right now. And I think there's -- we actually have already made some good headway on the professional services part of our business. We saw that in the third quarter. I think there's still more opportunity there. But we're also laser-focused on the recurring side of the business and making sure that we continue to improve margins there. That would give us more capacity, if you will, for operating expenses, right? And give us the opportunity to continue to invest in R&D as well as sales capacity as needed. And so we'll look for ways to optimize the G&A side, the cost of revenue side so that we can invest in the other areas.

So then if it's slightly less cloud and more on-premise that would help G&A though.

It would help a little bit.

No, not G&A, like...

That would help on the gross margin side.

Yes, yes. sure.

And so yes, I think ultimately, I think that's in large part, what the CFO role is about is helping to guide the business towards financial objectives, start to break them down into areas that people can focus on shine some light on areas where we have opportunity and drive value that way.

Perfect. John, that's a great closing statement.

Thank you.

Good to have you. Thank you.