Executive Summary / Key Takeaways

• Teradata (NYSE:TDC) is executing a strategic pivot to become the trusted hybrid AI platform at enterprise scale, leveraging its differentiated technology to address the burgeoning AI and GenAI market.
• The company delivered solid Q2 2025 results, with Total ARR up 2% year-over-year (reported) and Public Cloud ARR growing 15% in constant currency, reaffirming its full-year guidance for ARR and Free Cash Flow.
• Key technological innovations like the Enterprise Vector Store, AI Factory for on-premise deployments, and the open-source MCP server are expanding Teradata's addressable market by enabling trusted, cost-effective AI solutions across hybrid environments.
• Despite macroeconomic uncertainties impacting consulting services and a shift to more "staged migrations" for large cloud deals, management's pragmatic outlook anticipates a return to total ARR growth in Q4 2025, supported by improved retention rates and operational efficiencies.
• Teradata's unique hybrid platform and proven ability to manage massive, complex data sets at scale provide a critical competitive moat against cloud-native and legacy rivals, positioning it for durable free cash flow growth.

Teradata's Evolution to a Hybrid AI Powerhouse

Teradata Corporation, a long-standing leader in data management and analytics since its incorporation in 1979, is undergoing a profound transformation. What began around 2020 as a "cloud-first" strategic pivot, dubbed "Teradata 1.0," successfully shifted its core business towards cloud offerings, rapidly growing its cloud Annual Recurring Revenue (ARR) to over $600 million. This "Teradata 2.0" phase saw the company double down on cloud growth, developing in-database innovations in analytics, AI, and machine learning to operate at tremendous enterprise scale.

Today, Teradata is firmly in its "Teradata 3.0" phase, reorienting as the "trusted hybrid AI platform at enterprise scale." This strategic evolution is a direct response to the pervasive interest in AI and Generative AI (GenAI) across industries, which demands massive volumes of trusted data, often spanning complex hybrid environments. Unstructured data, for instance, is growing three times faster than other data types, presenting both a challenge and a significant opportunity for platforms capable of leveraging it. Teradata's core business is to help organizations improve performance, enrich customer experiences, and integrate data for these advanced AI and analytics challenges.

In this dynamic landscape, Teradata faces competition from cloud data platform providers like Snowflake (SNOW), database and cloud giants such as Oracle (ORCL), and hybrid IT solution providers like IBM (IBM). While Snowflake emphasizes pure cloud agility, and Oracle bundles with broader enterprise software, Teradata carves out a unique position with its open and connected hybrid platform. This allows customers to maintain data gravity and deploy solutions where they best fit—be it in the public cloud, private cloud, or on-premises—a flexibility that many competitors struggle to match.

Technological Edge: The Foundation of Trusted AI

Teradata's core differentiated technology, Teradata Vantage, is an open and connected cloud analytics and data platform for AI, underpinned by extensive patented workload management optimization technology. This platform is designed to deliver consistent, world-class data and analytics across diverse deployment options, including AWS, Microsoft Azure, Google Cloud, private cloud, and on-premises environments. This hybrid capability is a cornerstone of its competitive strategy, enabling customers to leverage their data estate without being locked into a single vendor or environment.

The tangible benefits of Teradata's technology are evident in its performance. For example, a large Latin American bank recently trialed migrating Databricks workloads to VantageCloud, achieving 56% faster processing and 47% cost savings compared to Databricks, all without moving data out of their data warehouse. Furthermore, Teradata's massively parallel architecture has demonstrated its efficiency in running small language models (SLMs) like Hugging Face, even outperforming NVIDIA (NVDA) DPUs in some tests, highlighting its cost-effectiveness and performance for specialized AI tasks. Management also asserts that Teradata offers the lowest cost per query compared to its competition, a critical advantage for enterprises managing massive data volumes.

Teradata is aggressively investing in R&D and new technological developments to capitalize on the AI opportunity. Key innovations include:

• Enterprise Vector Store: Generally available in Q2 2025, this in-database solution is purpose-built for vector data management at enterprise scale. It cost-effectively combines structured and unstructured data with the speed needed for complex business challenges, integrating with NVIDIA's NeMo Retriever microservices. This is crucial for building trusted, efficient AI systems and moving beyond basic GenAI to sophisticated agentic AI use cases like customer complaint analyzers and augmented call centers.
• Teradata AI Factory: Introduced in Q2 2025, this brings AI/ML capabilities on-premises, integrated with NVIDIA's AI enterprise. It caters to regulated industries or those with data sovereignty requirements, providing private AI with enhanced security, governance, and cost control.
• Open Source Model Context Protocol (MCP) Server: Also launched in Q2 2025, the MCP server enables AI agents to interact with back-end data platforms to get the context needed for smart decisions. This is expected to leverage ClearScape Analytics to report on and predict business processes, significantly increasing Vantage platform usage.
• LLMOPs (Language Model Operations): A capability within Teradata ModelOps 8.1, LLMOPs accelerates the deployment, management, and monitoring of language models. It supports NVIDIA Inference Microservices and enables users to select from over 80 models for deployment into GPU environments, accelerating time to market for AI/ML initiatives.
• Open Table Format (OTF) Support: Teradata has expanded access to Iceberg and Delta Lake tables across AWS, Azure, and Google Cloud, enabling customers to build future-ready enterprises. This is seen as a tailwind for increased platform usage as more data becomes available to the Teradata engines.

For investors, these technological advancements are critical. They expand Teradata's total addressable market (TAM) by enabling new AI workloads, strengthen its competitive moat through superior cost-efficiency and hybrid deployment flexibility, and position the company as a leader in delivering trusted AI outcomes. The ability to operationalize AI solutions at scale, moving them from proof-of-concept to production, is a key differentiator, as more than 50-60% of AI workloads currently fail to make this transition.

Competitive Positioning in a Dynamic Market

Teradata's competitive strategy centers on its differentiated hybrid cloud platform and its open, connected ecosystem. This approach allows it to meet customers where they are, whether on-premises or across multiple public clouds, and to integrate diverse data types for AI workloads without vendor lock-in. This stands in contrast to many competitors who often push a cloud-only agenda or offer more rigid, bundled solutions.

Against cloud-native players like Snowflake, Teradata emphasizes its integrated migration services and deep expertise in data warehousing, which can be particularly advantageous for large enterprises with complex legacy systems. While Snowflake is recognized for its agility and ease of use in the cloud, Teradata's hybrid capabilities and demonstrated cost-efficiency, as seen in the Latin American bank example, offer a compelling alternative, especially for customers seeking to optimize cloud spend.

Compared to traditional database giants like Oracle, Teradata's specialized focus on analytics operationalization and ecosystem simplification provides a more adaptable solution for custom analytics needs. Oracle's comprehensive ecosystem is strong in scalable infrastructure, but Teradata's offerings can lead to materially lower operating costs for implementation and greater efficiency in data integration for complex cloud migrations.

Against IBM, which focuses on hybrid IT and AI through its Watson platform, Teradata's Vantage platform offers superior multi-cloud connectivity and simplified ecosystems. Teradata's end-to-end consulting services for analytics can result in notably lower operating costs for implementation, contrasting with the potential complexity and longer setup times associated with IBM's broader, more varied solutions.

Teradata has demonstrated its competitive strength through significant wins, including winning back a U.S. insurance company from Snowflake and replacing a long-standing competitor for a Middle Eastern financial institution. These successes underscore the value customers place on Teradata's lowest cost per query and its ability to deliver trusted, enterprise-grade solutions. The company's moats include its proprietary Vantage technology, which offers efficiency and faster innovation, and its strong brand coupled with deep consulting expertise. However, potential vulnerabilities include the need for continuous, aggressive investment in AI integration to avoid technological gaps and a reliance on consulting services, which can be subject to discretionary spending. High R&D requirements and complex regulatory environments act as significant barriers to entry, favoring established players like Teradata.

Financial Performance: A Foundation for Growth

Teradata's financial performance in Q2 2025 reflects its ongoing transformation and strategic focus. The company reported Total ARR of $1.49 billion, marking a 2% increase year-over-year on a reported basis, and flat in constant currency. This growth was achieved sooner than anticipated, attributed to better deal execution and improved customer retention in the quarter. Public Cloud ARR reached $634 million, growing 17% year-over-year (reported) and 15% in constant currency, aligning with the company's full-year guidance. As of Q1 2025, cloud revenue constituted 42% of total ARR, demonstrating the successful shift towards cloud offerings.

However, the Cloud Net Expansion Rate for Q2 2025 was 112%, a deceleration from 123% in Q2 2024, impacted by lower expansion activity in the prior year. Recurring revenue, a key component of the Product Sales segment, was $354 million, down 4% year-over-year in both reported and constant currency. This was primarily due to a decrease in the on-premises business, which offset growth in Public Cloud revenue. The Consulting Services segment continued to be a headwind, with revenue of $51 million, down 19% year-over-year (reported) and 20% in constant currency. This decline is an expected outcome of lower order booking activity in the second half of 2024 and into 2025, as this business is more susceptible to discretionary spending.

Consequently, the total gross margin decreased to 56.4% in Q2 2025 from 60.8% in Q2 2024, primarily due to lower consulting services margin rates and a higher mix of Public Cloud revenues, partially offset by improvements in Public Cloud margin rates.

Operating expenses increased 4% year-over-year in Q2 2025, largely due to severance charges related to restructuring, though partially offset by lower employee compensation from prior-year actions. Research and Development expenses saw additional investments in Public Cloud and AI-related technologies. Despite these dynamics, non-GAAP diluted EPS outperformed expectations at $0.47 for Q2 2025.

From a liquidity perspective, net cash provided by operating activities for the six months ended June 30, 2025, was $51 million, a decrease of $19 million year-over-year, mainly due to working capital dynamics. Free cash flow for the same period was $46 million, down from $60 million in the prior year. Teradata remains committed to returning capital to shareholders, repurchasing approximately $72 million of common stock in the first six months of 2025 and targeting to return at least 50% of free cash flow through buybacks. The company's balance sheet remains solid, with $469 million in Term Loan principal outstanding and $400 million available under its revolving credit facility, which management believes is sufficient to meet its financial obligations for at least the next twelve months.

Outlook and Strategic Trajectory

Teradata has reaffirmed its full-year 2025 guidance, signaling confidence in its strategic direction and operational execution. The company projects Cloud ARR growth in the range of 14% to 18% year-over-year in constant currency. Total ARR is anticipated to grow flat to 2% year-over-year in constant currency, with a clear expectation of returning to positive growth in Q4 2025. Total revenue guidance has been tightened to a range of -5% to -7% year-over-year in constant currency, primarily reflecting lower services bookings. Non-GAAP diluted EPS is updated to $2.17 to $2.25, and free cash flow is expected to be between $250 million and $280 million.

Management's confidence stems from several factors: improved sales execution following mid-2024 go-to-market restructuring, a meaningful improvement in retention rates, and the strategic decision to limit reliance on large eight-figure deals in the cloud ARR outlook. While some deals were pulled into Q2 2025 from Q3, leading to an anticipated modest sequential decline in total ARR and a temporary dip in cloud ARR in Q3, the overall linearity for the year is expected to accelerate in the second half. Foreign exchange rates are projected to provide a 100 to 200 basis point positive impact on reported ARR growth rates in Q4 2025. The company's estimated annual effective tax rate for 2025 is approximately 27.5%, with a forecasted $2 million tax expense related to GILTI. R&D tax changes are also expected to positively impact cash flow in 2025 and 2026.

The recent appointments of John Ederer as CFO, Sumeet Arora as CPO, and Scot Rogers as CAO, alongside the realignment of the marketing function, underscore Teradata's commitment to strengthening its leadership and operational agility. These changes, combined with ongoing cost optimization efforts, are designed to drive greater operating leverage and durable free cash flow growth.

Conclusion

Teradata is in a pivotal phase, transforming from a traditional data warehousing leader into a trusted hybrid AI platform at enterprise scale. The company's strategic pivot, marked by significant investments in AI-centric innovations like the Enterprise Vector Store and AI Factory, coupled with a renewed focus on go-to-market execution and customer retention, positions it to capitalize on the burgeoning demand for AI-powered analytics. While macroeconomic headwinds and evolving customer migration patterns present challenges, Teradata's differentiated hybrid technology and proven ability to manage complex data at scale provide a robust competitive advantage. The reaffirmed 2025 guidance, with an anticipated return to total ARR growth in Q4, suggests that Teradata is building a solid foundation for future profitable growth and durable free cash flow, making it a compelling consideration for investors seeking exposure to the evolving AI landscape.