Teradata's Mixed Q1 Earnings: Cloud Growth vs. Revenue Headwinds

Teradata Corporation (TDC) reported Q1 2025 results that painted a divided picture of its transition to a cloud-first business model. While the company beat non-GAAP earnings per share (EPS) estimates by $0.10, delivering $0.66, its revenue of $418 million fell $4.66 million short of expectations. This miss underscores lingering challenges in legacy revenue streams, even as its cloud-driven strategy shows promise. Below, we dissect the numbers, strategic shifts, and what they mean for investors.

Key Takeaways from Q1 2025

• Cloud Momentum: Public cloud Annual Recurring Revenue (ARR) grew 15% year-over-year to $606 million, a bright spot amid declining total ARR.
• Margin Improvement: Non-GAAP operating margins expanded to 21.8%, reflecting cost discipline.
• Revenue Struggles: Total revenue fell 10% YoY to $418 million, with consulting services plummeting 28%.
• Cash Flow Concerns: Free cash flow dropped to $7 million, down from $21 million a year earlier.

The EPS Beat: A Glimmer of Operational Efficiency

Teradata’s EPS beat was driven by cost controls and a strategic focus on higher-margin cloud services. The $0.66 result exceeded estimates by 15%, with management citing “disciplined execution” as a key factor. Non-GAAP gross margins held at 60.3%, though GAAP margins dipped slightly due to currency impacts.

The stock fell 4.3% post-earnings, reflecting investor disappointment over the revenue miss. However, the EPS beat and cloud growth hints at a path to stabilization—if management can arrest the revenue decline.

The Revenue Miss: Legacy Headwinds and Strategic Shifts

The $418 million revenue total marked a 10% YoY drop, with recurring revenue (86% of total) declining 8%. The steepest hit came from consulting services, which fell 28% as clients shifted away from on-premise solutions. This aligns with Teradata’s push to phase out traditional software licenses in favor of cloud subscriptions.

While cloud ARR grew 16% in constant currency, total ARR dropped 3% due to declining non-cloud revenue. The disconnect highlights the growing pains of transitioning a legacy business. CEO Steve McMillan acknowledged the “dynamic market” but emphasized that cloud momentum “remains highly relevant” amid global uncertainty.

Cash Flow and Guidance: Caution Ahead

Free cash flow slumped to $7 million, down from $21 million in Q1 2024, signaling liquidity pressures. Management’s Q2 guidance projects total revenue to drop 7-9% YoY, with full-year revenue expected to fall 4-7%. While the company reaffirmed its 14-18% public cloud ARR growth target, the broader revenue outlook suggests continued turbulence in 2025.

Analyst and Market Sentiment

Analysts remain divided. While the EPS beat and cloud progress were praised, the revenue miss and cash flow weakness drew skepticism. The stock’s 31.8% decline over the past year reflects investor wariness about its ability to sustain growth.

Conclusion: Cloud Potential vs. Near-Term Realities

Teradata’s Q1 results are a microcosm of its strategic pivot: cloud ARR growth is a clear win, but legacy revenue contraction and cash flow struggles pose risks. The stock’s 4.3% post-earnings drop underscores investor focus on top-line weakness.

However, the company’s 15% cloud ARR expansion and 21.8% non-GAAP margins suggest a path to profitability if it can stabilize recurring revenue. With a price target of $29 (implying 31% upside from $21), bulls may argue that the stock is pricing in too much pessimism.

The key question is whether cloud growth can offset legacy declines long-term. Until recurring revenue stabilizes and free cash flow improves, Teradata remains a high-risk bet on its AI and hybrid platform vision. For now, the jury is out—but the data shows progress is uneven.

Investors should monitor Q2 results for signs of revenue stabilization and cash flow recovery. Without those, the EPS beat may not be enough to sustain optimism.