Teradata Surpasses Earnings Outlook, But Revenue Growth Remains in Reverse

Date of Call: Feb 10, 2026

Financials Results

• Revenue: $421 million, up 3% YOY as reported and 1% in constant currency
• EPS: $0.74 per diluted share, exceeding the top-end of outlook range by $0.17
• Gross Margin: 62.0%, up from 60.9% in Q4 last year
• Operating Margin: 22.8%, versus 17.6% in Q4 last year

Guidance:

• Total ARR expected to grow 2-4% YOY in 2026, an improvement versus 1% constant currency growth in FY '25.
• Recurring revenue expected to grow 0-2% YOY.
• Total Revenue expected to be -2% to 0% YOY.
• Non-GAAP diluted EPS expected to be $2.55 to $2.65.
• Operating margin expected to expand approximately 100 basis points.
• Free cash flow expected to be $310 million to $330 million.
• For Q1 2026: Recurring revenue expected to grow 6-8% YOY; Total revenue expected to grow 1-3% YOY; Non-GAAP EPS expected to be $0.75 to $0.79.
• Targeting low double-digit percentage growth for cloud ARR.

Business Commentary:

Revenue and ARR Growth:

• Teradata reported total revenue of $421 million for Q4, up 3% year-over-year as reported and 1% in constant currency. Total ARR grew 3% as reported and 1% in constant currency.
• The growth was driven by higher recurring revenue, particularly from term license subscriptions, and improved retention rates.

Cloud and Hybrid Adoption:

• Cloud ARR grew 15% as reported and 13% in constant currency, now representing 46% of total ARR.
• The increase was driven by customer interest in hybrid deployment options, leveraging both on-prem and cloud environments, and the resurgence of interest in Teradata's hybrid model.

Profitability and Free Cash Flow:

• Non-GAAP operating margin improved to 22.8% in Q4 from 17.6% in the previous year. Free cash flow for the quarter was $151 million, contributing to a full-year total of $285 million.
• Profitability was enhanced by strong performance in consulting services margins and lower expenses, while free cash flow benefited from operational improvements and a lower effective tax rate.

AI and Product Innovation:

• Teradata executed more than 150 AI engagements with customers in 2025, laying a solid foundation for AI capabilities.
• The company launched several innovations, including the Enterprise Vector Store and Teradata AgentBuilder, to support AI adoption and customer expansion of AI workloads.

Outlook and Strategic Investments:

• For 2026, Teradata expects total ARR growth of 2 to 4%, recurring revenue growth of 0 to 2%, and non-GAAP diluted EPS of $2.55 to $2.65.
• The company plans to invest more in product development while driving incremental profitability and free cash flow, focusing on AI and hybrid deployment solutions.

Sentiment Analysis:

Overall Tone: Positive

• Management reported "another set of strong results" and stated the company is "solidly positioned to continue on our profitable growth path in 2026." They highlighted "strong earnings per share and continued total ARR growth," "healthy free cash flow generation," and "delivering capabilities that set Teradata apart from the competition."

Q&A:

• Question from Erik Woodring (Morgan Stanley): How material is on-premise AI today, and what percentage of customer workloads are in production versus proof of concept? How are they thinking about investing on-premise for Gen AI versus the cloud?
  Response: On-premise AI is a key growth driver; the number of POCs doubled in 2025 with many moving to production on-prem. The company is focused on expansion both in cloud and on-premises, offering choice to customers.

• Question from Erik Woodring (Morgan Stanley): Why is free cash flow guidance for 2026 showing over 10% YOY growth while EPS is nearly flat? What's driving the difference?
  Response: The discrepancy is due to a one-time tax benefit in Q4 2025 that boosted EPS but does not repeat, leading to a lower EPS growth rate. Free cash flow drivers include improved working capital and collections, with some additional tax benefit expected in 2026.

• Question from Radi Sultan (UBS): What drove the growth inflection? How much is due to a better demand backdrop versus proactive product and go-to-market actions?
  Response: The growth inflection is attributed to the opening of a new AI TAM, stabilization of business performance, improved retention rates, a cascade of product announcements (e.g., Enterprise Vector Store, AI ModelOps), and enhanced go-to-market execution.

• Question from Radi Sultan (UBS): On the 2026 outlook, does the shift towards expansion versus migration change visibility? What are the biggest areas of uncertainty?
  Response: Expansions with existing customers provide more consistent cadence versus larger, timing-uncertain migrations. Typical seasonality is expected, with Q1 being the largest renewal and erosion quarter, followed by stabilization and expansion through the year.

• Question from Adrian Wong (Citi): Could you give incremental color on the impact of large deals in Q4 and any updates on deal cycle or erosion improvements? How is AI impacting performance?
  Response: Strength was seen across industries and geographies, with good retention improvements in 2025. AI solutions are driving capacity and usage, making the platform more sticky and relevant, supporting the growth agenda into 2026.

• Question from Adrian Wong (Citi): Is the strong improvement in consulting services expected to continue into FY '26, particularly with the ramp of AI services?
  Response: Consulting services gross margin improved to nearly 19% in Q4, but that rate is not expected to continue at that high level. AI services are ramping to help offset the decline in migration-related activity.

• Question from Chirag Ved (Evercore): What is the typical conversion path from AI engagements to revenue, and the timeline from initial pilot to material ARR contribution?
  Response: AI workloads are driving capacity and usage on the Teradata platform, capturing a shift of spend within the customer base towards more sticky, advanced solutions. Sales teams are focused on growth driven by these AI workloads.

• Question from Sheldon McMeans (Barclays): How much contribution from newer AI initiatives (e.g., launched in back half of 2026) is baked into the positive growth outlook for the year?
  Response: The financial outlook does not factor in significant incremental ARR from these new capabilities, which are seen as upside opportunities for the sales team.

• Question from Jared Jungjohann (TD Cowen): What types of investments are planned for 2026 from a headcount perspective? Will you ramp sales hiring or focus on deployed engineers?
  Response: Investments will focus on product engineering and development, with some increased spending on forward-deployed engineering to support AI solutions. The company is also investing in product portfolio enhancements under the new Chief Product Officer.

• Question from Wamsi Mohan (BofA Securities): Can you discuss the linearity for the year? Should we expect normal seasonality after Q1, and acceleration in the back half from new initiatives?
  Response: ARR is expected to follow typical seasonality with erosion in Q1 and build-throughout the year. Revenue linearity is impacted by timing of upfront on-premise revenue recognition, which provides a benefit in Q1 but a headwind for the full year. New product contributions are not significantly baked into the outlook.

• Question from Unknown Analyst (Citizens): What are the key characteristics of a software company that will make it through the AI transition, similar to the SaaS transition 20 years ago?
  Response: The company must evolve from a SaaS model to an AI-native platform. Teradata's role as the data layer for AI, enabling agents to use enterprise data at scale, positions it well for the autonomous AI and knowledge platform opportunity.

• Question from John Ederer (CFO): What are the main drivers of the expected operating margin expansion in 2026?
  Response: Expansion will come from continued gross margin work, with efficiencies found across operating expenses, including investments in product R&D and cost control in G&A and sales & marketing.

• Question from Simran Biswal (RBC Capital Markets): How are increased memory pricing impacting the business and 2026 ARR?
  Response: The company has absorbed P&L impacts through contracted capacity agreements. Increased memory costs have shifted conversations with customers towards investing in innovation on the Teradata platform, supporting total ARR growth.

Contradiction Point 1

Timeline and Impact of New Product/GPU Launch

Contradictory statements on when new hardware capabilities will be available and their impact on 2026 financials.

What is the current status of the hardware refresh, customer awareness of costs, and potential model impacts during the refresh? - Sheldon McMeans (Barclays Bank PLC)

2025Q4: The new hardware platform with built-in GPUs will go GA in late Q2/3Q 2026... From a modeling perspective, minimal impact is baked into 2026, but it represents upside. - Stephen McMillan(CEO)

Is the delay in customer deployment decisions due to the upcoming hardware refresh, and is there early feedback? - Michael Richards (RBC Capital Markets)

20251105-2025 Q3: The current technology platform already enables customers to choose their deployment (workload-first model). The hybrid capabilities (like AI factory) give customers the choice to run workloads in the cloud or on-prem. - Stephen McMillan(CEO)

Contradiction Point 2

Contribution of AI Workloads and Engagements to Revenue

Inconsistent messaging on the current conversion rate of AI pilots to revenue and their role in near-term financial outlook.

What is the typical conversion path from the 150 AI engagements to revenue, and how long does it take from initial pilot to material ARR contribution? - Chirag Ved (Evercore ISI Institutional Equities)

2025Q4: AI workloads are driving capacity and usage on the Teradata platform... Sales teams are focused on growth, particularly through AI workloads, which are a key element for 2026 growth. - Stephen McMillan(CEO)

How did AI influence the pipeline and competitive win rates this quarter? - Radi Sultan (UBS)

20251105-2025 Q3: AI's influence on the pipeline continued to increase in Q3... The Teradata platform is uniquely built for AI workloads, handling large volumes of complex queries efficiently. - Stephen McMillan(CEO)

Contradiction Point 3

Business Outlook Visibility and Confidence

Shift from a cautious, deal-by-deal forecasting approach to a more definitive, growth-oriented outlook without clear justification.

What factors are driving the growth inflection, and what proportion is attributed to improved demand versus proactive product and go-to-market strategies? - Radi Sultan (UBS Investment Bank)

2025Q4: The AI marketplace is a new Total Addressable Market (TAM), driving growth in 2025... Improved services are expected to drive ARR growth in 2026. - Stephen McMillan(CEO)

How is the approach to guidance and leading indicators shaping Q4 confidence? - Radi Sultan (UBS)

20251105-2025 Q3: The guidance philosophy is to call it as seen, based on a comprehensive review of KPIs... For Q4, forecasting is done deal-by-deal with granularity, providing confidence in the outlook. - John Ederer(CFO)

Contradiction Point 4

Contribution of New Roadmap Features to 2026 Financials

Contradiction on whether new product launches in 2026 are factored into growth guidance or treated as potential upside.

How much contribution are the 2026 AI initiatives expected to make to the growth outlook? - Sheldon McMeans (Barclays Bank PLC)

2025Q4: New roadmaps come online in late Q2/3Q... the 2026 financial outlook does not currently factor in significant incremental ARR from these specific new capabilities; they are seen as upside potential. - Stephen McMillan(CEO)

What drives confidence in meaningful free cash flow growth by 2026? - Erik Woodring (Morgan Stanley)

20251105-2025 Q3: Confidence stems from strong free cash flow performance year-to-date, the positive impact of returning total ARR to growth territory, and continued cost efficiency actions taken in 2025, setting up for improvement in 2026. - John Ederer(CFO)

Contradiction Point 5

Cloud ARR Growth Consistency

Contradiction on whether cloud ARR growth met expectations and the outlook for consistency.

What's driving the growth inflection? How much is attributable to improved demand versus proactive product and go-to-market actions? - Radi Sultan (UBS Investment Bank)

2025Q4: The year focused on stabilizing performance and improving retention. - Stephen McMillan(CEO)

How did cloud ARR perform this quarter, when might the net expansion rate bottom, why isn't Q4 guidance being derisked more considering customer deployment assessments, and what underlies the confidence in "meaningful free cash flow growth" for 2026? - Erik Woodring (Morgan Stanley)

2025Q3: Cloud ARR growth of 11% met expectations, with Q3 sequentially below the annual target due to a 'pull forward' of some deals from Q2. The market has shifted from a 'headlong rush to the cloud' to a more nuanced decision on workload placement. - Stephen McMillan(CEO)