Teradata - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 printed mixed: revenue $418M fell 10% YoY and came in slightly below S&P Global consensus, while non-GAAP EPS of $0.66 beat materially on lower spend and FX; GAAP EPS was $0.45.
• Public cloud ARR rose to $606M (+16% CC), but total ARR declined to $1.442B (-2% CC); cloud is now 42% of total ARR, underscoring hybrid traction amid macro volatility.
• Guidance: FY25 GAAP EPS raised to $1.06–$1.16, total revenue range widened to -4% to -7% (from -4% to -6%), with non-GAAP EPS held at $2.15–$2.25; Q2 guides to non-GAAP EPS $0.37–$0.41 and revenue down 7–9% YoY (CC).
• Potential stock reaction catalysts: EPS beat despite revenue headwinds; reaffirmed return to total ARR growth in Q4; leadership hires (CFO, CPO) and new AI offerings (Enterprise Vector Store) reinforce execution and AI narrative.

What Went Well and What Went Wrong

What Went Well

• Non-GAAP EPS $0.66 beat the top end of outlook, driven by lower spend and FX; operating margin expanded to 21.8% (+270 bps YoY) due to 2024 restructuring actions.
• Public cloud ARR reached $606M (+16% CC), with cloud net expansion rate 115% and cloud now 42% of total ARR—management highlighted strong hybrid relevance amid macro uncertainty.
• Strategic AI momentum: launched Enterprise Vector Store with planned NVIDIA NeMo integration, highlighted multiple customer AI use cases, and partnership visibility (AWS, Google, Azure, NVIDIA, ServiceNow).

What Went Wrong

• Revenue $418M declined 10% YoY and landed toward the low end of expectations, pressured by services; total ARR -2% CC with erosion seasonality in Q1.
• Gross margin down YoY (non-GAAP 60.3%, -190 bps) primarily due to services; recurring revenue -6% CC, with a ~2 ppt Q2 headwind anticipated from upfront revenue.
• Q2 non-GAAP EPS guide ($0.37–$0.41) implies a sequential step-down from Q1 ($0.66) on lower volume, lower corporate spend, higher claims, and mix effects; FY25 total revenue range widened (discretionary services).

Transcript

Operator (participant)

I'd like to hand the conference over to your host today, Chad Bennett, Senior Vice President of Investor Relations and Corporate Development. You now may begin.

Chad Bennett (Senior VP of Investor Relations and Corporate Development)

Good afternoon and welcome to Teradata's first quarter 2025 earnings call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today, followed by Sumeet Arora, Teradata's Chief Product Officer, and then Charles Smotherman, Teradata's Interim Chief Financial Officer, who will discuss our financial results and outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our SEC filings. Please note that Teradata intends to file the Form 10Q for the quarter ended March 31st, 2025, later this month. These forward-looking statements are made as of today, and we undertake no duty or obligation to update them.

On today's call, we will be discussing certain non-GAAP financial measures, which exclude such items as stock-based compensation expense, other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow, constant currency comparisons, and 2025 revenue and ARR growth outlook in constant currency. Unless stated otherwise, all numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.teradata.com. A replay of this conference call will be available later today on our website. I will turn the call over to Steve.

Steve McMillan (President and CEO)

Thank you, Chad, and hello everyone. Thanks for joining us today. Teradata had a solid first quarter of 2025. We delivered public cloud ARR of $606 million, a 16% year-on-year increase in constant currency. We saw a total ARR of $1.44 billion, in line with expectations on a constant currency basis. We generated $7 million in free cash flow in the quarter, and our non-GAAP EPS was $0.66, an increase of 16% year-on-year. In Q1, we maintained our focus on execution and are seeing benefits from the actions that began in the middle of last year. Our go-to-market team is executing well against the pipeline we carried into 2025. We are seeing positive effects from the team's increasing focus on advanced analytics and industry use cases, both in cloud and on-prem.

Cloud is now 42% of our total ARR, and we are also seeing that our hybrid capabilities are very relevant in times of macro volatility. We are meeting customers in the environment that best addresses their needs now and into the future, and believe that our cloud and hybrid capabilities will resonate in the market. Many of our customers rely on insights from the Teradata environments to help them operate their businesses efficiently, even in times of uncertainty. We are monitoring the dynamic market and are working closely with customers to help them get the most out of their data and analytics as they address the uncertain climate. We have assessed the direct impact from the dynamic tariff situation, and it is expected to be immaterial to our business in 2025.

As we look ahead, we are taking a more prudent stance with respect to our services business, which is more subject to discretionary spending. As the world explores use cases of AI, it is imperative that the data behind the AI is secure, appropriately governed, and trusted. Trusted data is critical to success with AI, and agentic or autonomous AI depends on massive amounts of trusted data across both structured and unstructured sources. This integration of diverse data types at any scale is Teradata's core strength. To succeed with agentic AI, you need not just trusted data, but high-performance vector processing capabilities that can deliver the right information in the moment so that agents can take action in real time, whether someone is in a chat session, on the website, or on the phone.

These actions will increasingly be performed by AI agents that will need to seamlessly access both structured and unstructured data to derive the best answer for customers. In early March, we announced Teradata Enterprise Vector Store. This end-database solution brings the speed, power, and multidimensional scale of our hybrid analytics platform to vector data and management, a crucial infrastructure component for building trusted, effective AI systems. It is designed to help customers move beyond basic generative AI implementations towards sophisticated agentic AI and autonomous business processes. Our Enterprise Vector Store, which will integrate with NVIDIA's NeMo Retriever microservices, can enable enterprises to solve multidimensional complex problems by combining structured and unstructured data with accelerated compute to optimize RAG applications, which we believe will create a single source of truth for all of our company's AI initiatives.

We're enthusiastic about the interest we are seeing, and I'll talk about some of the examples of use cases we are working on with our customers. This quarter, we plan to introduce innovations designed for enterprises that need more control and flexibility over their AI deployments, particularly in today's dynamic and often uncertain environment. Many of our customers operate in regulated industries with strict requirements for data sovereignty and security, and we believe that our forthcoming AI on-prem capabilities will be uniquely positioned to enable independent and secure AI operations without compromising EDW service levels, a critical differentiator in today's hybrid cloud landscape. We're continuing to build and execute robust partnerships that position us well in the open ecosystems we see customers increasingly adopting. In the quarter, our teams were collaborating at customer engagements with AWS, Google Cloud, Microsoft Azure, NVIDIA, and more.

I'll cover a few examples of how our teams are helping customers trial and implement their strategies for AI with our foundation of managing trusted data. Our Global Telcos Fraud Prevention team leveraged our ClearScape Analytics and machine learning to detect targeted fraud and is achieving a 50% increase in fraud detection accuracy. Their model enhances explainability, enabling analysts to make informed decisions with 95% accuracy while reducing manual effort. A large customer in Asia-Pacific is evolving its responsible gambling models with help from us. Using our Model Ops, the customer monitors and manages its machine learning models. They use ClearScape Analytics for native analytical models, as well as the Bring Your Own Model capability for machine learning models. Their most advanced models are deployed and scored in Teradata VantageCloud, enabling scalability and lowering costs. We supported a major European airline in elevating analysis of customer feedback.

Leveraging our vector store and our Hugging Face model, we help the customer analyze text messages to detect trends and sentiments. This integrated approach is designed to help the customer ensure data protection, enhance performance, and deliver reliable results. We also helped a large grocery retailer demonstrate significant business value by categorizing customer complaints using vector embeddings and bring-your-own-language model functionality. The customer was impressed with the GenAI integration capabilities of our platform, which streamlined the classification and response process for text-based complaints, thereby enhancing service quality and efficiency. A key aspect was the high-performance processing at scale of our differentiated massively parallel processing capability. Also, a top five U.S. healthcare company significantly expanded its Teradata environment as it migrated to the cloud and works to enhance resilience against cyber threats and ensure continuity in healthcare services.

It is also implementing a GenAI solution with us to automate large amounts of audit processes and significantly improve productivity, making the healthcare system work better for everyone. These customer examples are supported with industry reports as well. Teradata was recently named a leader in the Forrester Wave on data management for analytics platforms. We were pleased to receive this recognition of the strength of our strategic vision and performance in delivering AI-powered enterprise-grade analytics at scale. We believe this report reflects our strong analytic platform capabilities, particularly for hybrid cloud deployments, where reliability and scalability are essential. With our solid performance in Q1, our ongoing focus on execution and accelerating innovation that brings trusted AI to our customers, we continue to believe that we will return to growth in 2025.

We believe that our differentiated ability to support customers' data and analytics needs, whether in the cloud, on-prem, or hybrid environments, serves us well during these times of uncertainty. As I hand over to Charles, I want to provide an update on our most recent executive appointment. Yesterday, we announced our new CFO, John Ederer, who will be starting with us next week. John is currently the CFO at Model N, a provider of revenue management solutions for life sciences and high tech. He's a seasoned financial executive and has successfully led a number of companies through SaaS transitions. I'm looking forward to working with John. I also want to thank Charles for serving as interim CFO during this quarter of transition. I am also pleased to introduce to you today our new Chief Product Officer, Sumeet Arora, who just joined us.

Most recently, Sumeet was the Chief Development Officer at ThoughtSpot. Sumeet has extensive experience in leading engineering and product management for AI-driven analytics and a proven track record in building solutions that generate significant revenue. I've asked Sumeet to make a few comments on the opportunity he sees as he joins Teradata. Sumeet, over to you.

Sumeet Arora (Chief Product Officer)

Thank you, Steve. I'm thrilled to be part of the Teradata team. I see that Teradata has unique strengths. First, its customer base is something that any business would strive to have. The top banks, airlines, telecommunication companies, healthcare providers, and retailers use Teradata every day to deliver business outcomes and data-driven experiences. There is a lot of valuable data managed within Teradata environments. Second, I see Teradata as the only platform that can work with data as it exists in most large enterprises. Data is not all clean and located in one system. Rather, it spans on-prem and multi-cloud environments for both historical as well as price performance reasons. I believe that Teradata has a unique advantage with its hybrid cloud platform. Third, just like the cloud leveled the playing field a decade ago, AI is leveling the playing field again.

There is no trusted AI without trusted data. The Teradata platform is evolving to enable AI workloads that leverage enterprise data to deliver autonomous business processes. For example, Teradata Enterprise Vector Store is an enterprise-scale and enterprise-grade vector store purpose-built for agentic workloads and RAG-based implementations. I believe that our ability to work with data across on-prem and cloud environments and deliver AI across all of this data is a competitive and price performance advantage. Together with the team, my goal is to greatly accelerate Teradata's innovation execution. We expect to do this in close partnership with our customers as we evolve from here. Working with data across hybrid environments and by delivering trusted AI capabilities, our goal will be to help our customers deploy autonomous business workflows that, in turn, improve the experience of their end customers.

I believe that Teradata is well positioned to be the business outcomes platform for the data and AI-powered enterprise. I will bring my experience in the technology industry, driving efficient and high-velocity innovation to help Teradata accelerate. Before joining Teradata, I led product engineering and design at ThoughtSpot, a data analytics company and an industry pioneer in building AI-powered natural language analytics targeted at the business user. During my time, ThoughtSpot transitioned the application to a full platform that is now replacing established incumbents and was fast to market with an agentic AI analyst solution, thereby becoming one of the earliest in-production AI-native analytics platforms in the industry. Prior to ThoughtSpot, I was at Cisco, and at both companies, I focused on building great products, great teams, as well as great businesses with a focus on execution. I look forward to helping Teradata execute and accelerate.

Now, I will pass the call to Charles.

Charles Smotherman (Interim CFO)

Thank you, Sumeet, and good afternoon, everyone. In the first quarter, we executed in line with expectations across our key metrics: total ARR, cloud ARR, free cash flow, and non-GAAP EPS. As we expected in the first quarter, we had a decline in total ARR sequentially due to the first quarter being seasonally our lowest bookings and highest erosion quarter of the year. Total ARR declined 2% year over year on a constant currency basis, which was a two-point improvement from the end of 2024. We continue to see year-over-year increase in retention rates as our customer success team drives improvements in customer health metrics across our base. Additionally, we expect meaningful year-over-year improvement in retention rates for the remainder of the year. Cloud ARR grew 16% year over year in constant currency, representing the midpoint of our 2025 outlook range.

CloudNet expansion rate was 115%, which continues to be impacted by lower expansion activity last year. Based on our increased visibility, we continue to believe that we will return to total ARR growth in Q4. We are reiterating our outlook for total ARR of flat to 2% and cloud ARR growth of 14%-18% year over year. Let me now share more details on our quarterly financial results, starting with revenue. First quarter recurring revenue was $358 million, down 8% year over year as reported and down 6% year over year in constant currency. The year-over-year growth rate was negatively impacted by one point from upfront revenue. Recurring revenue as a percentage of total revenue was 86%, up from 83% in the prior year period.

First quarter total revenue was $418 million, down 10% year over year as reported and 8% in constant currency, which was towards the low end of our expectations. In light of the overall macroeconomic uncertainty, we are expanding the low end of our total revenue outlook range by one percentage point due to the more discretionary nature of our services business. Moving to profitability and free cash flow, total gross margin for the quarter was 60.3%, down 190 basis points year-over-year, primarily due to services. Our services business continues to be impacted by lower bookings in the second half of 2024. We are optimizing our cost structure to enable us to return to a positive services margin in the second half of the year. Operating margin was 21.8%, up 270 basis points year-over-year.

The operating margin expansion is largely due to the restructuring actions taken last year. Non-GAAP diluted earnings per share was $0.66, exceeding the top end of our outlook range. The outperformance is primarily from lower spend and FX. We generated $7 million of free cash flow in the quarter, which was slightly ahead of our expectations due to accelerated collections that were due in Q2. In the first quarter, we repurchased approximately $44 million of stock or 1.6 million shares, and we continue to expect to return at least 50% of our free cash flow to shareholders in the form of share repurchases. With regards to the 2025 outlook, we reaffirm total ARR, cloud ARR, free cash flow, recurring revenue, and non-GAAP EPS. For total revenue, we are expanding the range to reflect -4% to -7% year over year on a constant currency basis.

On total ARR and cloud ARR, we continue to see the same linearity as we mentioned last quarter. In the first half, we expect the growth rate of total ARR to be below our outlook range and cloud ARR to be the low end of our range. We expect both growth rates to accelerate in the second half and return to total ARR growth in the fourth quarter. Please refer to our Q1 earnings presentation on our investor relations website for a complete list of our 2025 outlook ranges. For the second quarter of 2025, we anticipate recurring revenue to be in the range of -5% to -7% year over year on a constant currency basis. In Q2, we anticipate a 2% headwind driven by upfront recurring revenue.

We expect total revenue to be in the range of -7% to -9% year over year on a constant currency basis. We anticipate marginal negative currency impact year over year using the end-of-March rates. We anticipate non-GAAP diluted earnings per share to be in the range of $0.37-$0.41. We project the non-GAAP tax rate to be approximately 23.1% and weighted average shares outstanding to be 97 million. We had a solid start to the year. While we recognize the volatility around the current macroeconomic environment, our pragmatic approach to our 2025 outlook remains intact. The organizational changes we began last year are starting to take hold, driving meaningful improvement in retention rates, more consistent execution, and our focus on AI innovation. We remain committed to returning to total ARR growth in Q4, producing strong operating margin and free cash flow, and returning capital to shareholders.

Thank you all for your time today. Now, let's open the call for questions.

Operator (participant)

At this time, I would like to remind everyone how to ask a question. Please press the star one button on your telephone keypad. If for any reason you'd like to remove your question, it's star two. To join the question queue, please press star one. It has been asked that you limit yourself to a question with a follow-up question. Our first question is from Erik Woodring with Morgan Stanley. Your line is now open.

Erik Woodring (Equity Research Managing Director)

Great. Thanks so much, guys. Good afternoon. Steve, I just wanted to maybe take a step back. Obviously, you guys have talked about cost efficiency programs. I'm wondering what the opportunity is to cut additional costs in this business. Really, what I'm getting at is the new logo engine is a relatively small part of the business, but you spend nearly twice as much on SG&A as you do on R&D. You have a very large and very well-renowned existing customer base. Can you kind of attack that base and power your new logo engine with lower levels of total absolute OpEx spend? Ultimately, what I'm trying to get at is ways other than growing your business that you could drive free cash flow higher. That's just my first question, then I have a quick follow-up. Thanks so much.

Steve McMillan (President and CEO)

Hey, Erik. Thanks for the question. Great to hear from you. Taking that step back, as you suggested, we are absolutely focused on profitable growth. We make the right investments in our organization across all the lines, our SG&A lines, our research and development, to ensure that we optimize and grow the business overall. We are returning the business to growth from an ARR perspective in 2025. I think that will set a positive trajectory for the company as we move forward. We did a lot of restructuring in our sales team in June of last year and refocused that team in terms of pivoting towards much more analytic AI and use case-based solutions in the marketplace. We are starting to see those having traction in terms of execution.

We're clearly going to continue to optimize our investment envelope as we move forward as we drive that profitable growth strategy.

Erik Woodring (Equity Research Managing Director)

Okay. I appreciate that. Thank you, Steve. Just quick follow-up was just on the 2Q EPS guide, we're looking at a pretty significant sequential decline. Can you just maybe help us understand or better understand some of the moving pieces as to why we're getting there? Obviously, a very strong first quarter. Did you pull forward profitability, so to speak, or just help us understand why the shape of the curve in the first half looks the way it does on the EPS line? Thanks so much.

Charles Smotherman (Interim CFO)

Yes. Thank you for the question. I want to make sure you're talking about the $0.66 to the $0.40, correct?

Erik Woodring (Equity Research Managing Director)

Correct.

Charles Smotherman (Interim CFO)

Okay. Yeah. So we've got a couple of factors that are playing into this. Lower volume being one, lower corporate spend. We've got higher cloud mix impacting our second quarter, as well as lower CFC. That's offset partially by lower headcount and other corporate spend activities.

Erik Woodring (Equity Research Managing Director)

All right. Thanks so much, guys. Good luck.

Operator (participant)

Our next question is from Yitchuin Wong with Citi. Your line is now open.

Yitchuin Wong (Senior Equity Research Associate)

Hi. Thanks for taking the question here. Congrats on Sumeet hiring and John from yesterday. It's been a while since we had a full team again. I remember the excitement three, four years ago when you had Claire and Todd rounded up the team. I guess back then, there was a lot of excitement as well. Just in the three, four years, looking back on the executive management team, can you tell me what are some of the biggest lessons learned going into this year and next year with Sumeet and John in tow now, and what would you be doing differently just given some of the execution issues in the past year? We'd like to start there, please. Thanks.

Steve McMillan (President and CEO)

Yeah. Thanks for the question. Look, I think we are entering a new phase for Teradata, Teradata 3.0, if you like. If I reflect back on the last four years, we've been going on a terrific journey to transition and reinvent the company. That started off with Teradata 1.0, which was very much about pivoting the company towards cloud. In the Teradata 2.0 phase, we doubled down on that growth, clearly taking the company to over $600 million in cloud ARR. At the same time, developing innovations in both our analytics capabilities, AI capabilities, and ML capabilities, putting them in database to enable organizations to operate at tremendous scale in this new world of advanced analytics and AI.

Now, I think we're entering into the next phase, which is Teradata 3.0, where our customers are demanding from us a whole set of business outcomes that are driven and derived from the use of advanced analytics, AI, and ML solutions. We have regeared and retooled the entire company to start to address those opportunities in the marketplace. You can see from our new innovation announcements, like our Enterprise Vector Store, where we believe that Teradata has a truly differentiated capability, that that will enable us to drive new time for Teradata in terms of analytics and taking advantage of the AI opportunity in the marketplace. It has been a year; it has been a continuous time of transition and transformation for the company. We believe that we're well placed.

I think Sumeet coming on board is a testimony to that as he looks to drive that innovation engine forward into the future.

Yitchuin Wong (Senior Equity Research Associate)

Yeah. Looking forward to see that play out. I guess the other one on the product you mentioned, the hybrid is definitely picking up steam. Longer term, how do you view the impact to the cloud? What could we see kind of longer-term trajectory? Do you expect to see the subscription line and the cloud line? How would that trajectory kind of pete us out going into next year? Thanks.

Steve McMillan (President and CEO)

Yeah. Thank you. Again, we're going to return the company to ARR growth at a total level in 2025. That's powered by the real interest that we see. I talk to customers every single day from the largest organizations in the world. They really like our hybrid platform. They like to be able to observe data gravity. They like being met from a technology perspective where they would like to engage. That's either in the cloud or from an on-prem perspective. We're also seeing real interest in AI on-prem solutions. We've got a new capability coming out in third quarter to address that market space. As we look forward, we continue to see good growth in our cloud business. The midpoint of growth for our cloud business for this year is 16 points. Good growth in cloud.

We see that hybrid opportunity continues to be a good opportunity for us to execute against.

Yitchuin Wong (Senior Equity Research Associate)

Thanks.

Operator (participant)

Our next question is from Howard Ma with Guggenheim. Your line is now open.

Howard Ma (Director and Equity Research Analyst)

Great. Thanks for taking the question. One for Steve. When we think back to the period of cloud optimizations in the back half of calendar 2022 and throughout 2023, I think most would agree that Teradata benefited from more customers expanding on-prem. Subsequently, you just referred to that period as the 2.0 phase. As your VantageCloud product matured, you saw pretty nice expansions on that. The question is, given the current macro uncertainty, are there any parallels that you can draw compared to that period in time? What are your customers indicating to you in terms of their intentions to expand? Things like you guys mentioned the new Vector Store capability. Are those things giving you more visibility into expansions, whether it is on-prem or in the cloud than perhaps in the past, or maybe not necessarily?

Steve McMillan (President and CEO)

Yeah. Thanks for the question, Howard. I mean, clearly, it's a very dynamic environment out there. At our core, from a technology perspective, we have line of sight into the guidance that we've issued, both from a total ARR perspective but also from a cloud ARR perspective. What we're seeing is our customers, because just like back in the cloud optimization days, to your point, I used to say that the Teradata platform optimizes itself every millisecond, which makes us very sticky inside our customers as we deliver the most critical workloads in the world at tremendous enterprise scale. The demand for that type of technology is continuing inside our customer base.

We are using that to leverage and drive growth opportunities in terms of managing that data for our organizations and putting it into new analytical use cases, which our customers need to respond to these dynamic environments that they are in. As the team pointed out, we did experience some macro impact from a discretionary spend perspective in our consulting and services business. Our consulting and services business for us is very much a tailwind in terms of how we do services against technology deals that we have done in the past. As we look forward, as we start to increase our contribution from our total ARR perspective and our technology business starts to regain into growth territory, we expect our consulting and services business to reaccelerate into the back half of the year.

Despite there being macro uncertainty, we've got key line of sight into our results for FY25 and are looking forward to executing against that.

Howard Ma (Director and Equity Research Analyst)

Got it. Thank you, Steve. On the back of your response, I have a follow-up for Charles. It is just around retention rates. If you could put some numbers around the improvement, whether they have been up year over year or sequentially. If the prepared remarks that you gave imply that retention rate should improve sequentially throughout this year or the balance of this year. Thank you.

Charles Smotherman (Interim CFO)

Yes. Thanks for the question. Yeah. Our viewpoint has not changed from our earlier guide this year. We have actually seen improvement in 2025. If we look at how we performed in the second half of 2024, that also was improving. Our customer success team has done a phenomenal job improving those rates. We see continued improvement for the balance of the year.

Operator (participant)

Our next question is from Chirag Ved with Evercore ISI. Your line is now open.

Chirag Ved (VP)

Hi. Thanks for taking the question. Steve, I was just wondering whether you could talk through some of the main points that give you confidence in maintaining the total ARR and public cloud ARR guide and the acceleration in the back half of the year, just given more cautious commentary across the board by many other peers in software. Thank you.

Steve McMillan (President and CEO)

Yeah. Thanks for the question, Chirag. Overall, not much has changed from our internal expectations from a linearity perspective from the beginning of the year to now. We're still seeing good growth in terms of the drivers that we were expecting. We have factored into our outlook stage migrations, the uncertainty that we saw in the environment. When we set guidance at the start of the year, we set a very pragmatic guidance in terms of the overall outlook for the year. As I said previously, we do have line of sight into that execution for the year, both from a total ARR perspective and a cloud ARR perspective. As we said earlier in the year, we've actually taken out some of the very large deals, the eight-figure deals, in terms of our cloud ARR outlook and the execution profile from that.

We believe that the guidance that we've issued is solid in terms of the outlook for the full year.

Operator (participant)

All right. Thank you so much. We have a question from Matthew Hedberg with RBC. Your line is now open.

Hey, guys. This is [Mike Richardson] from Matt. Maybe just piggybacking off that question there. Said differently, we came into the year with a pragmatic guidance and seemed conservative. X, this new macro uncertainty that unfolded in the past 90 days with Liberation Day, would it be unreasonable to think that guidance could have been raised on this print? We should look at the maintain guide as a conservative approach, just given how you set it up coming into the year?

Steve McMillan (President and CEO)

Yeah. I think we've issued, as I said, pragmatic guidance for the year. In this environment, we don't want to get out over our skis, clearly. Yeah. We've issued guidance which we are confident that we have line of sight to execution with. And we've already seen those patterns in terms of execution. We've seen our new TTM team that we put in place in June of last year start to execute consistently against the opportunity pipeline that's in front of them. We've seen that meaningful improvement in our retention rates through the back half of last year, and that continuing into first quarter. And we have line of sight into that continuing and continuing to improve into second quarter and the second half of the year.

That gives us the confidence in terms of holding the guidance to where we are and delivering on the promise that we made at the start of the year.

Great. Thanks. And then just a quick follow-up. Could you remind us of your Fed exposure and then any trends you've seen there over the past quarter, specifically pertaining to DoD and any either buying ahead or pausing you might see in that vertical? Thanks again, guys.

Charles Smotherman (Interim CFO)

Yeah. Thanks for the question. We have a healthy government business globally, but the majority of that business is international, state, and local, and very minimal exposure from the federal spend at this point.

Operator (participant)

Our next question is from Derrick Wood with TD Cowen. Your line is now open.

Jared Jungjohann (Equity Research VP)

Hi, team. This is Jared Jungjohann for Derrick Wood. On the prior go-to-market changes, last quarter, you noted reps have settled into the new segment team. Now that we're another quarter down the road, could you just give us an update on some of the benefits you were seeing? Thanks.

Steve McMillan (President and CEO)

Yeah. For sure. I think what we're seeing is a real pivot towards analytic, AI, and use case business. If I look at the pipeline that the sales team are now generating, there's a lot of interest in terms of using those AI capabilities and using the Teradata platform in an AI ecosystem. We are super excited about the POCs that we've been doing with our customers. They start small. They drive usage of the existing platform. Where we come into our own is actually helping customers drive those workloads into production. Indeed, we've taken some cloud-native solutions that our customers have been deploying. Although they did the development and the testing of those solutions in other cloud-native environments, they actually deployed the model themselves in the Teradata environment.

In some cases, did that at over twice the speed and often towards half the cost in terms of execution. Those are the kind of improvements in our go-to-market model, taking those kinds of messages to our customers. We believe it makes Teradata relevant and helps us drive growth into the future.

Jared Jungjohann (Equity Research VP)

That's awesome. Good to hear. As a follow-up on that, how should we be thinking about the impact from these AI-related products on revenue this year? I understand it's early and presumably would be pretty small, but any color on that would be great. Thank you.

Steve McMillan (President and CEO)

Yeah. It's certainly early, but an exciting space for us. We certainly see a good pipeline growing and interest in energy growing. Again, we have a very, very sticky business inside Teradata, which insulates us from many impacts of the macro economy environment because of the fixed capacity nature of our contracts. As our customers utilize these AI use cases, it drives the usage of the Teradata platform and ultimately will require our customers to increase the capacity. The revenue impact from these new capabilities is likely pushed out into next year. That, combined with returning to overall ARR growth in 2025, sets a bright future for us as we execute over the next couple of years.

Operator (participant)

We have a question from Wamsi Mohan with Bank of America. Your line is now open.

Wamsi Mohan (Senior Equity Research Analyst)

Yes. Thank you. I just wanted to get back to the full-year guidance. You noted no meaningful direct impact from tariffs, but you clearly have large customers in retail, for example. There seems to be a lot of uncertainty around a vertical like that where tariffs are having meaningful impact. Could you just help us think through why maybe that does not slow down the path of increased uncertainty where maybe the customers have to do some belt tightening? Is there enough slack across other verticals maybe where you are seeing increased activity? Could you just share some color around maybe different verticals and what you are seeing today and how you expect that full-year to progress? Thank you.

Steve McMillan (President and CEO)

Hi, Wamsi. Thank you very much for the question. Yeah. I think this just goes back to the very sticky nature of Teradata. The fact that we work with the biggest organizations in the world and execute their most critical business processes, they literally run their business on Teradata. Therefore, it's very difficult to turn off that Teradata environment if you still want to close your books. As you know, we're not highly dependent on a consumption model for our revenues. Much of our revenue is generated from fixed capacity ARR contracts. Therefore, that gives us really great line of sight into how those contracts are going to grow into the next quarters of the year.

I think what we are seeing is working with organizations to help them understand that dynamic environment, working with them in the customer experience use cases, helping them forward forecast on demand planning to have the right responses in this dynamic environment, also helping them from a supply chain perspective so that they can ultimately manage their supply chain. They need the data that are in the Teradata systems to actually make these decisions to optimize their operations every day. From a Teradata perspective, we have real line of sight into the guidance that we've given. From a macro perspective, in terms of our technology sales, we're confident in the guidance that we've provided.

Wamsi Mohan (Senior Equity Research Analyst)

Okay. Thanks, Steve. If I could just follow up, could you just give us any update, if there is one, around what you're seeing from some of your boomerang customers? Thank you.

Steve McMillan (President and CEO)

Yeah. I mentioned a couple of use cases in the prepared remarks where we certainly work with customers in areas and environments which would traditionally go to our competitors, especially in the analytics space and the AI space. What I would say as well is that we're definitely seeing customers interested in the new Teradata capabilities, both from an on-prem perspective, so looking to consolidate their on-prem technologies, but also from a cloud perspective, we're seeing customers who want to optimize their cloud spend and are realizing that running some of these cloud-native solutions at enterprise scale can be prohibitively expensive. They are utilizing Teradata to control their costs as they look at the types of platforms that they want to run and deploy on. Overall, I think our hybrid capability is very highly differentiated.

With more than 60% of the customers that we have in the cloud also working with us from an on-prem perspective, we see that hybrid platform being very interesting for our customers and makes us even more sticky as we are one of the few providers that can have that capability.

Operator (participant)

Our next question is from Raimo Lenschow with Barclays. Your line is now open.

Sheldon McMeans (Equity Research VP)

Hi. This is Sheldon McMeans. I'm for Raimo. Thanks for taking our question. First for Steve. We were at the ServiceNow Analyst Day this week, and it was interesting to see you and some of the other leaders in the data analytics space up on the big screen talking about your role in the AI agent space. You mentioned a little bit on the call, but would love to hear from your perspective, how do you see the role of data warehouses, data lake providers like yourself in that ecosystem? As we think about, maybe this is a little bit of a shift to more on the transactional side or on the operational side as opposed to analytical. We'd love to hear your thoughts on how that will play out.

Steve McMillan (President and CEO)

Yeah. Thanks for the question. Yeah. We're delighted with the partnership with ServiceNow and being featured with them at their most recent Knowledge conference. I think it really points out being part of ServiceNow's data network is a really exciting opportunity for us. It really plays testimony to how we have evolved our platform over the last three or four years so we can utilize structured and unstructured data, and then we can operate and utilize data at tremendous scale inside a customer environment to provide real-time insights. We've been working with our customers on a concept we call Signal as a Service, where we send through massive amounts of data using our massively parallel systems and capabilities in a uniquely differentiated way to get real-time insights out of that data.

Working with a partner like ServiceNow, we can actually trigger workflows in the ServiceNow environment to proactively address the assessments that are coming out of our AI solution and analytics solution that we've put in place. That is agentic AI in operation. From a Teradata perspective, we see the real opportunity to make agentic AI not just a buzzword, but a really implementable solution for our customers at enterprise scale.

Sheldon McMeans (Equity Research VP)

Understood. Thanks. A quick follow-up. Another one on the retention front. Can you kind of help us understand how you think about the improvements of retention on a shifting customer perspective around Teradata and some of the things they're doing on the cloud, and then more on maybe the execution side where the customer success team is getting closer to the customer and improving execution?

Steve McMillan (President and CEO)

Yeah. As we've been saying, we're seeing meaningful improvements in our retention rates. We always knew that 2024 was going to be an outlier from a retention rate perspective. The improvement in retention rates that we saw at the end of 2024 that are continuing into 2025, and we expect to continue for the rest of the year, are really driven by a confluence of different factors. I think one is a new appreciation for our Teradata innovation and the technology set that we can drive. I think the second thing is the business value that Teradata can deliver at enormous scale and how we can do that from a very efficient and effective perspective.

I think the third thing and something that we're looking to meet to drive even more of is the innovation in the platform that we've delivered recently, be it in Databricks analytic capabilities that allows us to effectively compete with Databricks for new workloads, or bringing AI/ML models and having an open approach to bringing language models, either small language models or large language models, into the Teradata environment. That level of innovation is really capturing customer interest. It's enabling us to deliver what we call innovation days to our customers, which are deploying brand new use cases onto Teradata as a result. It's a super exciting time in the market for us.

Operator (participant)

We have a question from Pat Walravens with Citizens. Your line is now open.

Pat Walravens (Equity Research Analyst)

Oh, great. Thank you very much. Steve, I really like your hire of John Ederer. I've covered, I think, three companies in the past. Can I ask, what was it about that candidate that caused him to rise to the top of the list? What is it that you were looking for that you saw in his background or skill set?

Steve McMillan (President and CEO)

Hey, Pat. Thank you very much for the question. We really like John too. We're really looking forward to having him on board. He's going to start with us next Monday. As you said, he's been a public CFO in the past, and this is going to be his third stint. He's got great experience from a software perspective, great experience in terms of managing transitions. He's really successfully navigated for a number of organizations, and I think you know the transition towards a SaaS-based model. He knows what the KPIs are to drive that. He's also got a terrific operational capability in terms of driving operational results for an organization, both on the top line and the bottom line. We are very much looking forward to having John on the team with us.

When we set out the search and put the criteria that we wanted for the search, really John stood out as an outstanding candidate. He is going to be a great fit for us from a culture perspective, and we are really looking forward to having him on the team.

Pat Walravens (Equity Research Analyst)

Great. If I could just add a follow-up, what's an example of sort of one or two things that you would like him to tackle off at the beginning?

Steve McMillan (President and CEO)

Oh, sorry, Pat. The line broke up a little bit there. Could you ask that question again?

Pat Walravens (Equity Research Analyst)

Yeah. Sorry. I think that was on my end. What's an example of something that you'd like him to tackle in the beginning of his time with Teradata?

Steve McMillan (President and CEO)

Yeah. I think he's going to spend some time and get his feet under the table. As we said throughout this call, we've issued some really pragmatic guidance for the year. However, there are always areas in which we can improve. I think bringing in leaders like Sumeet and John gives them the opportunity to critically evaluate how we're executing and how we're performing inside Teradata, bring that external experience to us in terms of how we can operate more effectively, more efficiently, how we can drive the top line, how we can manage the business in a much more controlled way and consistent way, and really deliver on that strategy of profitable growth.

Operator (participant)

There are no further questions at this time. I'll now turn the call back over to Steve McMillan for his final remarks.

Steve McMillan (President and CEO)

Thank you very much, Dr. Reed, and thanks everyone for joining us today. As we did cover in this call, our focus on committed execution continues, and we know that our teams are out working with customers all around the world to help them deliver trusted AI solutions. We are very optimistic, yet we are being pragmatic in terms of how we are guiding, and we look forward to updating you next quarter. Thank you very much.

Operator (participant)

That concludes today's conference call. You may now disconnect your line.