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Teradata's Q1 Results Highlight Cloud Growth Amid Revenue Challenges

Nathaniel StoneWednesday, May 7, 2025 5:18 pm ET

14min read

Teradata Corporation (TDC) reported its first-quarter 2025 earnings, revealing a complex financial picture marked by strong cloud-driven growth and persistent headwinds in legacy revenue streams. While the company’s focus on AI and hybrid cloud solutions is yielding measurable progress, investors remain cautious as total revenue declined 10% year-over-year to $418 million—missing consensus estimates by $5.2 million. Below, we dissect the results, strategic shifts, and implications for investors.

Key Financial Highlights

Revenue: Total revenue fell to $418 million, down 10% YoY, with recurring revenue (86% of total) dropping 8% to $358 million. The decline reflects a strategic pivot away from legacy consulting and perpetual licenses, which fell 28% YoY.
Cloud Growth: Public Cloud ARR surged 16% in constant currency to $606 million, now representing 42% of total ARR. This growth underscores the success of Teradata VantageCloud and AI-driven solutions like the Enterprise Vector Store.
Margins: Non-GAAP operating margins expanded to 21.8% (up 270 bps YoY), driven by cost discipline. However, gross margins dipped slightly to 60.3%, suggesting margin pressure in certain segments.
EPS: Non-GAAP diluted EPS rose 16% to $0.66, outpacing estimates by 15.8%, while free cash flow fell to $7 million amid lower revenue.

Strategic Progress and Transition Pain

Teradata’s results highlight a stark contrast between its cloud ambitions and the challenges of transitioning away from traditional revenue streams:- Cloud Momentum: The 16% constant-currency growth in public cloud ARR (to $606 million) positions Teradata as a leader in data analytics and AI. The new Enterprise Vector Store, integrating structured and unstructured data for AI applications, is gaining traction in telecom, healthcare, and retail.- Legacy Declines: Recurring revenue’s 8% YoY drop and consulting services’ 28% decline signal ongoing pain from the shift to subscription models. Total ARR fell 2% in constant currency to $1.442 billion, with management targeting stabilization by year-end.- Leadership Changes: New CFO John Ederer (ex-Model N) and Chief Product Officer Sumit Arora (ex-ThoughtSpot) bring expertise in SaaS transitions and AI innovation, critical to executing the cloud-first strategy.

Outlook and Risks

2025 Guidance: The company forecasts total revenue to decline 4-7% YoY, with public cloud ARR growing 14-18%. Non-GAAP EPS is expected to rise to $2.15–$2.25, supported by margin expansion. However, free cash flow is projected at $250–$280 million, down from $263 million in 2024.
Key Risks:
Macroeconomic Uncertainty: Soft discretionary spending and IT budgets could further pressure consulting and legacy revenue.
Execution: Competitors like Snowflake and Databricks are aggressively expanding cloud analytics, requiring Teradata to accelerate innovation.
Valuation: While the 13% free cash flow yield and PEG ratio of 0.21 suggest undervaluation, the stock’s 42% YTD decline reflects investor skepticism about near-term revenue recovery.

Investment Thesis

Teradata’s Q1 results are a mixed bag for investors. On one hand, the cloud ARR growth and margin improvements validate its strategic direction. The 16% cloud ARR expansion and 21.8% operating margin point to long-term potential, especially as AI adoption accelerates. On the other hand, the revenue decline and cash flow contraction underscore the execution risks of a multi-year transition.

Bull Case: If cloud ARR growth (projected at 14-18% YoY) outperforms expectations and recurring revenue stabilizes, Teradata could return to top-line growth by late 2025. The stock’s current valuation—trading at 10x 2025E non-GAAP EPS—offers upside if margins expand further and cash flow improves.

Bear Case: Persistent macroeconomic weakness or delayed cloud adoption could prolong revenue declines, especially if competitors steal market share. The stock’s 42% YTD drop reflects these concerns, with investors demanding clearer signs of stabilization before committing capital.

Conclusion

Teradata’s Q1 results are a microcosm of its transformation: cloud growth is strong, but legacy challenges linger. While the 16% cloud ARR expansion and improved margins signal strategic progress, the 10% revenue decline and free cash flow contraction highlight near-term risks. Investors must weigh the company’s undervalued metrics (13% free cash flow yield, 0.21 PEG ratio) against execution uncertainties.

For the bulls, the $250–$280 million free cash flow guidance and leadership changes suggest a path to stabilization. However, the stock’s 4.65% post-earnings drop underscores investor skepticism about near-term recovery. While not yet a slam-dunk buy, Teradata’s valuation and cloud momentum make it a compelling long-term bet—if the company can deliver on its hybrid cloud and AI-driven growth targets by year-end.

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