Teradata Corp: Form 10-Q for the period ended Mar 31, 2025

You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements (Unaudited) and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the MD&A are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 (the "2024 Annual Report"). The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

At Teradata Corporation ("we," "us," "Teradata," or the "Company"), we believe that people thrive when empowered with trusted information. We are focused on helping organizations improve business performance, enrich customer experiences, and integrate data across the enterprise. As such, we strive to innovate and deliver trusted solutions for their toughest data and analytics challenges. That is why we built our comprehensive open and connected cloud analytics and data platform for artificial intelligence ("AI"). With our hybrid cloud platform, named Teradata Vantage, underpinned by our extensive patented workload management optimization technology, we are well positioned to help enterprises solve business problems and deliver business breakthroughs with its capabilities to provide harmonized data, trusted AI, and faster innovation. As a result, we believe that we empower our customers to make better, more confident decisions, engage in faster innovation, and drive positive impact within the enterprise.

Teradata is recognized by industry analysts as offering a hybrid cloud analytics and data platform with next-generation, cloud-native deployment and expansive analytics capabilities. We believe we are differentiated by providing our hybrid cloud analytics and data platform offering across an open and connected ecosystem. Our differentiated approach spans deployments in the top public cloud service provider platforms of AWS, Microsoft Azure, and Google Cloud, as well as private cloud platform instances, on-premises, and hybrid environments.

We are continuing to execute on our priorities, including supporting our customers, whether leveraging Teradata in a hybrid environment, in the cloud or on-premises, migrating customers to the cloud, helping them expand their Teradata environment or upgrade to the latest version of our platform, as well as adding new customers. We are also focused on accelerating innovation with our hybrid platform and ClearScape Analytics capabilities, delivering new AI capabilities to enable customers to take advantage of generative and agentic AI, and driving operational excellence and agility across the Company.

To allow for greater transparency regarding the progress we are making toward achieving our strategic objectives, we utilize the following financial and performance metrics:

• Annual Recurring Revenue ("ARR") - annual value at a point in time of recurring contracts.
• Total Annual Recurring Revenue ("Total ARR") - annual value at a point in time of all recurring contracts, including subscription, cloud, software upgrade rights, and maintenance. Total ARR does not include managed services and third-party software.
• Public Cloud ARR (included within Total ARR) - annual value at a point in time of all contracts related to Public Cloud implementations of Teradata VantageCloud and does not include ARR related to private or managed cloud implementations.
• Cloud Net Expansion Rate - Teradata calculates its last-twelve months dollar-based cloud net expansion rate as of a fiscal quarter end as follows:
• We identify the ARR for active cloud customers in the fiscal quarter ending one year prior to the given fiscal quarter (the "base period");
• We then identify the Public Cloud ARR in the given fiscal quarter (the "current period") from the same set of active cloud customers as the base period, including increases in usage, as well as reductions and cancellations, and additional conversions of on-premises revenues to the cloud for customers active in the base period, all in constant currency; and
• The quarterly dollar-based, Cloud Net Expansion Rate is calculated by taking the ARR from the current period and dividing by the ARR from the base period.

The last twelve-month dollar-based cloud net expansion rate is calculated by taking the average of the quarterly dollar-based cloud net expansion rate from the last fiscal quarter and the prior three fiscal quarters.

First Quarter Financial Overview

As more fully discussed in later sections of this MD&A, the following were what we view as the more significant financial items for the first quarter of 2025:

• At the end of the first quarter of 2025, Total ARR was $1.442 billion compared to $1.480 billion at the end of the first quarter of 2024, decreasing 3% as compared to the first quarter of 2024, including a 1% negative impact from foreign currency fluctuations.
• At the end of the first quarter of 2025, Public Cloud ARR was $606 million compared to $525 million at the end of the first quarter of 2024, increasing 15% as compared to the first quarter of 2024, including a 1% negative impact from foreign currency fluctuations.
• Total revenue was $418 million for the first quarter of 2025, decreasing by $47 million compared to the first quarter of 2024, with recurring revenue down 8%. Perpetual software licenses, hardware and other revenue was up 25%, and consulting services revenue decreased 28%. Foreign currency fluctuations had a 2% adverse impact on total revenue for the quarter compared to the prior year.
• Gross margin decreased to 59.3% in the first quarter of 2025 from 61.1% in the first quarter of 2024, primarily due to lower consulting services margin rates, which were largely driven by lower overall consulting services revenue compared to the prior year.
• Operating expenses for the first quarter of 2025 decreased 23% compared to the first quarter of 2024, largely due to lower employee compensation expenses and the impact of restructuring actions taken in the prior year, as well as lower stock-based compensation expense in the first quarter of 2025.
• Operating income was $66 million in the first quarter of 2025, compared to $48 million in the first quarter of 2024.
• Net income in the first quarter of 2025 was $44 million, compared to $20 million in the first quarter of 2024.
• Cloud Net Expansion Rate for the first quarter of 2025 was 115%, compared to 123% for the first quarter of 2024.

Results of Operations for the Three Months Ended March 31, 2025

Compared to the Three Months Ended March 31, 2024

Revenue

In millions

Total revenue decreased $47 million, or 10%, in the first quarter of 2025, including a 2% negative impact from foreign currency fluctuations. Recurring revenue decreased 8% as compared to the first quarter of 2024 and included a 2% negative impact from foreign currency fluctuations. Recurring revenue for the first quarter of 2025 included strong growth from Public Cloud revenue, which was more than offset by a decrease in revenue from our on-premises business, as well as a smaller benefit from annual upfront software subscription revenue recognized in the current period. Revenue from perpetual software licenses, hardware and other increased $2 million year over year. Consulting services revenue decreased 28% in the first quarter of 2025, including a 2% negative impact from foreign currency fluctuations. The consulting services revenue decrease is an expected result of the lower order booking activity in the second half of 2024.

Financial and Performance Measures

Our Total ARR is composed of three main categories: (1) Public Cloud ARR, (2) ARR related to on-premises subscription-based contracts and private cloud ("Subscription ARR"), and (3) ARR related to our legacy perpetual maintenance and software upgrade rights. At March 31, 2025 and 2024 our Total ARR consisted of:

In millions

At the end of the first quarter of 2025, Total ARR decreased 3% as compared to the first quarter of 2024. At the end of the first quarter of 2025, Public Cloud ARR increased 15% as compared to the first quarter of 2024, including a 1% negative impact from foreign currency fluctuations. Public Cloud ARR growth in the first quarter of 2025 was primarily driven by greater market awareness and customer demand of Teradata VantageCloud, our Public Cloud offering. The decreases in subscription ARR and maintenance and software upgrade rights ARR were primarily driven by customer migrations to Public Cloud ARR, on-premises erosions, elongated deal closing cycles and lower on-premises expansion activity.

In the first quarter of 2025, we experienced the following trends:

• Customers expanding into additional cloud capabilities as they see value when they migrate to VantageCloud.
• Elongated deal closing cycles and some customers implementing cloud migration projects on a staged basis over time.
• On-premises expansion activity being pushed out to future quarters.
• Uncertain industry macro-economic environment resulting in delayed customer spending, including for our consulting services.

As a portion of the Company’s operations and revenue occur outside the United States, and in currencies other than the U.S. dollar, the Company is exposed to fluctuations in foreign currency exchange rates. Based on currency rates as of March 31, 2025, Teradata is now estimating a flat-to-0.50% negative impact from currency translation on our 2025 full-year total reported revenues.

We expect to see continued elongated deal closing cycles continue and that cloud migration activity with some customer accounts will continue to be implemented on a staged basis over time. We expect expansion and migration activity as the primary contributors for Public Cloud ARR growth in 2025.

Gross Profit

In millions

The decrease in recurring revenue gross profit as a percentage of revenue was primarily due to a higher mix of Public Cloud revenues versus on-premises revenue as compared to the prior-year period, offset in part by continued improvement in our Public Cloud margin rate.

The increase in perpetual software licenses, hardware and other gross profit as a percentage of revenue was primarily driven by deal mix and the timing of revenue.

Consulting services gross profit as a percentage of revenue decreased as compared to the prior year primarily due to the decrease in revenue as compared to the prior-year period.

Operating Expenses

In millions

Selling, general and administrative ("SG&A") expense decreased year over year due to continued cost discipline focused on cost reductions across the Company, including as part of our Restructuring, as well as lower stock-based compensation expense. Research and development ("R&D") expense decreased year over year also due to continued cost discipline efforts.

Other Expense, net

In millions

Other expense, net in the first quarter of 2025 and 2024 is comprised primarily of interest expense on long-term debt and finance leases, losses resulting from foreign currency transactions, as well as benefit costs on our pension and postemployment plans, partially offset by interest income earned on our cash and cash equivalents. Other expense is lower in 2025 primarily due to decreased foreign currency losses of $9 million as compared to the prior period.

Provision for Income Taxes

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period.

The effective tax rates for the three months ended March 31, 2025 and 2024 were as follows:

For the three months ended March 31, 2025, the Company recorded $1 million of net discrete tax benefit, a majority of which related to tax benefits from uncertain tax position reversals due to the Company's completion of its IRS audit related to its 2020 federal tax return, which was largely offset by incremental tax expense from stock-based compensation vesting. The Company received a final no change audit ruling from the Congressional Joint Committee on Tax in early February of 2025.

For the three months ended March 31, 2024, the Company recorded $1 million of net discrete tax benefit, a majority of which related to additional tax expense from stock-based compensation vesting.

Effective January 1, 2024, many jurisdictions where we conduct business, including several European Union members and G20 countries, have enacted a 15% global minimum tax on the income generated in each of the jurisdictions in which we operate, referred to as "Pillar Two" of the Global Anti-Base Erosion rules framework that was undertaken by the Organization for Economic Co-operation and Development ("OECD"). We are continuing to monitor developments and evaluate the impacts of the Pillar Two rules; we do not expect the Pillar Two rules to have a material impact to our annual effective tax rate.

Effective on January 1, 2022, the U.S. tax law changed to require that R&D expenses be capitalized and amortized for tax purposes under Internal Revenue Code Section 174. This requirement has an impact on global intangible low-taxed income ("GILTI") tax. We are currently forecasting approximately $2 million of tax expense related to GILTI in our marginal effective tax rate for 2025.

We expect that a majority of our foreign earnings will be repatriated to the U.S. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix between the U.S. and other foreign taxing jurisdictions where we conduct our business.

We estimate that the full-year effective tax rate for 2025 will be approximately 28.4%, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction, the estimated impact to GILTI tax (including the requirement to capitalize R&D for tax purposes), and the estimated discrete items to be recognized in 2025. The forecasted tax rate is based on the foreign profits being taxed at an overall effective tax rate of approximately 24%, as compared to the U.S. federal statutory tax rate of 21%.

Revenue and Gross Profit by Operating Segment

On August 5, 2024, Teradata announced that it realigned its sales function and initiated global restructuring to optimize operations. Due to these organizational changes, Teradata now manages its business under two segments, which are also the Company’s operating segments: (1) Product Sales and (2) Consulting Services. Teradata’s Product Sales segment represents the results for the Recurring Revenue and Perpetual Software Licenses, Hardware and Other line items and the Consulting Services segment represents the Consulting Services line item, each as disclosed in the Company’s financial statements and in the tables in this Form 10-Q. As the revenue and gross margin trends for these business categories are already discussed in the sections above, there is no separate segment discussion presented here. Our segment information is presented in Note 12 of Notes to Condensed Consolidated Financial Statements (Unaudited).

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities was $8 million, which decreased by $19 million in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The decrease in cash provided by operating activities was primarily due to working capital dynamics and the volume and timing of billings. Teradata used approximately $5 million of cash in the first three months of 2025 for reorganizing and transforming its operations and go-to-market functions to align to its strategy, as compared to $13 million in the first three months of 2024. Teradata expects that approximately $30 to $35 million in cash will be used during 2025 in connection with the implementation of the Restructuring discussed in Note 13 of Notes to Condensed Consolidated Financial Statements (Unaudited).

Teradata’s management uses a financial measure called "free cash flow," which is not a measure defined under GAAP. We use free cash flow (which we define as net cash provided by operating activities less investing activities related to capital expenditures for property and equipment and additions to capitalized software) as one measure of assessing the financial performance of the Company, and this may differ from the definitions used by other companies. The components that are used to calculate free cash flow are GAAP measures taken directly from the Condensed Consolidated Statements of Cash Flows (Unaudited). We believe that free cash flow information is useful for investors because it relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures, for among other things, investments in the Company’s existing businesses, strategic acquisitions and repurchases of Teradata common stock. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.

The table below shows net cash provided by operating activities and net cash used in investing activities related to capital expenditures, along with free cash flow, for the following periods:

In millions

Financing activities and certain other investing activities, are not included in our calculation of free cash flow. As disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements (Unaudited), during the three months ended March 31, 2024, we entered into a Blue Chip Swap transaction in order to remit cash from our Argentine operations that resulted in a pre-tax loss on investment of $2 million that was reported as an investing activity for cash flow purposes. There were no other material other investing activities for the three months ended March 31, 2025.

Teradata’s financing activities for the three months ended March 31, 2025 and 2024 primarily consisted of cash outflows for share repurchases and payments on our finance leases. At March 31, 2025, we had no outstanding borrowings on our $400 million Revolving Facility (as defined below).

We have two share repurchase programs that were authorized by our Board of Directors:

• The dilution offset share repurchase program allows us to repurchase Teradata common stock to the extent (i) cash is received from the exercise of stock options and (ii) employees' purchase Teradata stock pursuant to the Teradata Employee Stock Purchase Plan ("ESPP"). The purpose of the dilution offset share repurchase program is to offset dilution from shares issued pursuant to the exercise of stock options and shares purchased under the ESPP.
• Our open market share repurchase program provides for the repurchase of Teradata stock periodically on an ongoing basis in open market transactions, through 10b5-1 programs, through accelerated share repurchase programs, in privately negotiated transactions, or through the use of derivative instruments, in accordance with applicable securities rules regarding issuer repurchases. The open market share repurchase program will expire on December 31, 2025. On November 1, 2021, our Board of Directors authorized an additional $1 billion for share repurchases under the open market share repurchase program. There is a total authority of $313 million remaining under the open market share repurchase program as of March 31, 2025.

In the aggregate under the dilution offset share repurchase program and the open market share repurchase program, we repurchased approximately 1.6 million shares of common stock at an average price per share of $27.92 in the three months ended March 31, 2025.

Share repurchases are reported on a trade date basis. Our share repurchase activity depends on factors such as our working capital needs, our cash requirements for capital investments, our stock price, and economic and market conditions.

Other financing activities, including net share settlement for the payroll tax liability of section 16 officers (as discussed in Item 2. Unregistered Sales of Equity Securities and Use of Proceeds), offset by proceeds from the ESPP and the exercise of stock options, net of tax was a net outflow of $2 million for the three months ended March 31, 2025 and a net outflow of $6 million for the three months ended March 31, 2024. The ESPP proceeds are included in other financing activities, net in the Condensed Consolidated Statements of Cash Flows (Unaudited).

Our total cash and cash equivalents held outside the United States in various foreign subsidiaries was $330 million as of March 31, 2025 and $350 million as of December 31, 2024. The remaining balance held in the United States ("U.S.") was $38 million as of March 31, 2025 and $70 million as of December 31, 2024. The Company expects that a majority of its foreign earnings will be repatriated to the U.S. Effective January 1, 2018, the U.S. moved to a territorial system of international taxation, and as such will generally not subject future foreign earnings to U.S. taxation upon repatriation in future years.

Management believes current cash, cash generated from operations and the $400 million available under the Credit Facility will be sufficient to satisfy future working capital, research and development activities, capital expenditures, pension contributions, and other financing requirements for at least the next twelve months. The Company principally holds its cash and cash equivalents in bank deposits and highly-rated money market funds.

The Company’s ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in the 2024 Annual Report and elsewhere in this Quarterly Report on Form 10-Q. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of the Credit Facility or its term loan agreement, the Company may be required to seek additional financing alternatives.

Long-term Debt. On June 28, 2022, we entered into a Credit Agreement that provides for (i) a five-year unsecured term loan in an aggregate principal amount of $500 million (the "Term Loan"), and (ii) a five-year unsecured revolving credit facility in an aggregate principal amount of up to $400 million, including a $50 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swingline loans (the "Revolving Facility" and, collectively with the Term Loan, the "Credit Facility"). Our long-term debt is discussed in Note 10 of Notes to Condensed Consolidated Financial Statements (Unaudited). In addition, as disclosed in Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited), Teradata entered into an interest rate swap to hedge approximately 90% (or $433 million as of March 31, 2025) of the floating interest rate of the outstanding principal of the $500 million Term Loan and a cross currency swap to hedge a portion of Euro currency exposure of its net investment in certain foreign subsidiaries. As of March 31, 2025, the Company had no borrowings outstanding under the Revolving Facility, leaving $400 million in borrowing capacity available under the Revolving Facility and the Term Loan principal outstanding was $475 million.

On September 21, 2023, the Credit Agreement was amended to establish key performance indicators with respect to certain environmental, social, and governance ("ESG") targets, pursuant to which certain positive or negative adjustments would be made to various fees and applicable margin based on Teradata’s performance against such ESG targets.

Contractual and Other Commercial Commitments. There has been no significant change in our contractual and other commercial commitments as described in the 2024 Annual Report. Our commitments and contingencies are discussed in Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited).

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting policies are those that require assumptions to be made about matters that are highly uncertain. Different estimates could have a material impact on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Our management periodically reviews these estimates and assumptions to ensure that our financial statements are presented fairly and are materially correct. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us as of March 31, 2025 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require significant management judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. The significant accounting policies and estimates that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are discussed in the 2024 Annual Report. Teradata’s senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the three months ended March 31, 2025.

New Accounting Pronouncements

See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for new accounting pronouncements.

There have not been any material changes to the market risk factors previously disclosed in Part II, Item 7A of the 2024 Annual Report.

Evaluation of Disclosure Controls and Procedures

Teradata maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including, as appropriate, the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2025, our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

We have implemented a new global cloud enterprise resource planning ("ERP") system which occurred in phases throughout 2024 and the first quarter of 2025. The ERP system is designed to improve and modernize the efficiency of certain financial and related transaction processes, accurately maintain Teradata’s financial records, enhance operational functionality, and provide timely information to our management team related to the operation of the business. We expect that the new ERP system will enhance and modernize our overall system of internal controls over financial reporting through further automation and integration of business processes. The Company completed pre-implementation and post-implementation internal control monitoring associated with the ERP system launch. While Teradata believes that this new ERP system will affect, and in some areas enhance, its internal control over financial reporting, there are inherent risks in implementing any new system, and we will continue to evaluate these control changes as part of our assessment of the control design and effectiveness throughout 2025.

Other than the ERP implementation, there have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have not been any material changes to the risk factors previously disclosed in Part I, Item IA of the 2024 Annual Report.