Teradata TDC Q1 2026 Earnings Call Transcript

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DATE

Tuesday, May 5, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Steve McMillan
• Chief Financial Officer — John Ederer

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TAKEAWAYS

• Recurring Revenue -- $400 million, up 12% year over year as reported and 9% in constant currency, attributed primarily to higher upfront revenue from term license subscriptions contributing five points to the reported growth rate.
• Total Revenue -- $444 million, representing 6% growth year over year as reported and 4% in constant currency, exceeding the high end of company guidance by three points driven by recurring revenue.
• Cloud ARR -- Increased 13% as reported and 12% in constant currency, reflecting momentum in cloud-based subscription models.
• Total ARR -- Grew 3% as reported and 2% in constant currency, consistent with the company’s 2%-4% annual growth target.
• Consulting Services Revenue -- $43 million, a decline of 14% year over year as reported and 15% in constant currency.
• Non-GAAP Operating Margin -- 27.3%, up from 21.8% in Q1 2025, with more than 500 basis points of improvement year over year primarily due to recurring revenue and upfront revenue mix.
• Non-GAAP Diluted EPS -- $0.88, up over 30% year over year, exceeding the top end of the outlook by $0.09 from higher recurring revenue and total gross margin.
• Free Cash Flow -- $390 million, including a $359 million pretax net benefit from an SAP litigation settlement; adjusted free cash flow was $31 million, excluding this effect.
• SAP Litigation Settlement -- $480 million gross received in March, with a pretax net of $359 million and an after-tax benefit of $302 million that favorably impacted Q1 cash flow and GAAP diluted EPS by $2.90.
• Share Repurchases -- $34 million, about 1.2 million shares bought back in the quarter; company targets 50% of adjusted free cash flow for buybacks excluding SAP settlement benefit.
• Cash and Cash Equivalents -- $816 million at quarter-end, up from $368 million a year prior; net cash position of $269 million, positive for the first time since Q4 FY 2021.
• Total Gross Margin -- 63.7%, up 340 basis points year over year due to recurring revenue mix and improved consulting gross margin.
• Recurring Revenue Gross Margin -- 70%, flat year over year but up sequentially from Q4 FY 2025 because of incremental upfront recurring revenue.
• Consulting Services Gross Margin -- 4.7%, improving over 600 basis points year over year but down from the recent Q4 FY 2025 high.
• Q2 Outlook Factors -- Recurring revenue expected to face a headwind of more than 10 percentage points sequentially due to lower upfront term license revenue, with an additional three-point headwind from currency effects.
• Adjusted Free Cash Flow Outlook -- Raised to $320 million–$340 million for FY 2026, exclusive of the $302 million SAP after-tax benefit.
• Annual Revenue and EPS Guidance -- FY 2026 outlook maintained: recurring revenue expected between minus 2% and flat, total revenue between minus 4% and minus 2%, and non-GAAP diluted EPS between $2.53 and $2.57, with an expectation towards the higher end of EPS guidance.
• Hybrid Platform and AI Demand -- Management noted demand in both on-prem and cloud products driven by growing interest in hybrid platform and AI workloads.
• Product Roadmap -- Launches announced and scheduled, including MCP Server and Agent Stack, with additional innovations to be detailed at the May 7 livestream focused on enterprise AI and agentic capabilities.
• Recognition by Third Parties -- Cited as a leader in the 2026 Nucleus Research Data Science and Machine Learning Platform Value Matrix and named to the Constellation Research 2026 ShortList for Hybrid and Multicloud Analytical Data Platforms; received "Exemplary" recognition across seven categories from ISG.

SUMMARY

Teradata Corporation (NYSE:TDC) reported quarterly results that surpassed company guidance across total revenue, recurring revenue, and non-GAAP earnings per share, while delivering meaningful free cash flow bolstered by a significant litigation settlement. Management detailed robust operational execution, including balance sheet strengthening and share buybacks, as well as advancing customer wins in global financial services, retail, and public sector markets through differentiated AI and hybrid solutions. Guidance for recurring revenue, total revenue, and full-year non-GAAP EPS remains intact, with adjusted free cash flow guidance raised to reflect first-quarter performance, separate from the SAP settlement inflow. Product announcements emphasized expansion of the MCP Server and Agent Stack, with an upcoming launch event slated to introduce further enterprise AI innovations and agentic capabilities.

• John Ederer said, “Non-GAAP operating margin also improved significantly by more than 500 basis points year over year,” reflecting improving profitability metrics.
• Steve McMillan stated, “Recurring revenue grew 12% as reported year over year” and “non-GAAP earnings per share was $0.88, an increase of over 30%.”
• The SAP settlement delivered a $359 million pretax net impact and a $302 million after-tax cash benefit, “expected to provide a $302 million benefit to free cash flow in FY 2026.”
• Upfront recurring revenue primarily from on-premise subscription term licenses drove first-quarter outperformance, but is expected to be “a headwind” for sequential revenue growth in Q2.
• The company’s hybrid capabilities and AI innovations are cited as key differentiators for regulated and large-scale enterprise workloads, attracting renewed customer commitments and industry analyst recognition.
• Upcoming product launches are positioned by management as targeting enterprise transitions from AI pilots to production, with further product innovation to be disclosed during the May 7 livestream.

INDUSTRY GLOSSARY

• ARR (Annual Recurring Revenue): The value of recurring subscription revenue expected over the next twelve months, not including one-time or consulting services revenue.
• Agentic AI: Artificial intelligence implementations capable of autonomous action and decision-making via AI agents that interact with systems or data, requiring continuous operations and high concurrency.
• MCP Server: Teradata Corporation’s product offering designed to provide semantic access to enterprise data for activating AI-driven business outcomes through a natural language interface and AI agentic frameworks.
• Agent Stack: Teradata Corporation’s platform facilitating the rapid development, deployment, and management of enterprise AI agents, addressing governance, compliance, and integration challenges at scale.

Full Conference Call Transcript

Chad Bennett: Steve McMillan, Teradata Corporation's President and Chief Executive Officer, will lead our call today, followed by John Ederer, Teradata Corporation's 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 Corporation intends to file the Form 10-Q for the quarter ended March 31, 2026 within the next few days.

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 and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow, adjusted free cash flow, and constant currency comparisons. 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. And now, I will turn the call over to Steve.

Steve McMillan: Thanks, Chad, and thanks to everyone for joining us today. I am very pleased to report that Teradata Corporation is off to a strong start in 2026. With solid execution globally and our pivot to AI-led value, we outperformed against expectations in a number of key metrics. Recurring revenue grew 12% as reported year-over-year. Total revenue grew 6% as reported year-over-year. And non-GAAP earnings per share was $0.88, an increase of over 30% versus Q1 2025. We continued to see solid retention in the quarter, and customer interest in our hybrid capabilities drove a healthy growth rate in both total ARR and cloud ARR. We see that security-driven demand for sovereign AI is accelerating.

For example, financial services and health care customers are increasingly concerned about shared infrastructure for AI workloads, and this is driving traction with our AI Factory offer. The most demanding regulatory workloads in the world run on Teradata Corporation. These are workloads that are least susceptible to disruption. The trend we see is AI moving closer to the data, not data moving to AI, and that plays directly to our architecture. Every organization is grappling with the same challenge: putting AI to work for them and becoming truly autonomous enterprises. One thing is clear. To win with AI, organizations need to operate at speed and scale that was once unattainable. This is a core competence of Teradata Corporation.

Our customers have governed data estates with years or even decades of data in their Teradata Corporation environment, including codified industry knowledge, entity models, and business rules specific to financial services, health care, telecommunications, and beyond. This is their institutional memory. The analytics and reporting workflows built on top of that data have been refined over decades. The value of those workflows vastly exceeds the cost of the platform. AI multiplies the value of that institutional knowledge, and our platform is designed to execute at the speed AI requires. Our product organization is relentlessly focused on providing the strongest execution engine—reliable, high performance, and always on. Agents never sleep, and mission-critical automation requires a platform that never slows down.

In 2026, we are executing against an aggressive product roadmap and are already taking new innovations to customers. We are seeing market interest in our MCP Server. It is an on-ramp to enterprise AI, providing semantic access to the enterprise data and context that can activate real business outcomes. It eliminates friction through a natural language interface that leverages AI agents. Together, the MCP Server and our agentic framework are designed to enable querying, analysis, and management of data with full context. To address the challenge organizations face of moving from isolated pilots to production-grade agents, we are making it easy for customers to build, deploy, and manage AI agents with our Agent Stack announced earlier this year.

This new comprehensive platform is designed to simplify the life cycle of enterprise AI agents. Our Teradata Corporation Agent Stack can help customers reduce the complexity of finding and integrating trusted data and applying enterprise knowledge and context. It can also aid in enforcing governance and maintaining compliance across hybrid environments. In March, we added new capabilities to our enterprise vector store. We added multimodal data spanning text, images, and audio from our partnership with Unstructured, and we added more agentic features powered by LangChain integration.

These announcements demonstrate another significant evolution in our enterprise AI infrastructure, unifying structured and unstructured data within a single governed platform capable of supporting billions of vectors and thousands of concurrent queries from AI agents. In April, we announced the availability of our enterprise-grade Teradata Corporation Analyst Agent on Microsoft Marketplace. This brings AI-assisted conversational analytics directly into customers' existing Azure environments. We also recently participated in the Google Distributed Cloud Air Gap Center launch. Our platform runs natively on GDC, enabling organizations to operationalize Google's AI capabilities and our own analytics entirely within the air gap perimeter. No data leaves, no sovereignty is compromised.

This capability is designed to be a real value for defense, intelligence, and public sector organizations that require air-gapped sovereign AI. One of our differentiating capabilities is helping customers leverage and get value out of their environments, and that is even more important as they work to get business value from their AI investment. Here is where our AI services shine. Our AI services momentum is growing as we see customers looking to take advantage of the depth of experience that our forward-deployed teams have gained from the successful early AI engagements we have executed. We recently issued a press release outlining how our AI services helped a sample of customers from the travel and transportation industry.

Every enterprise has data, and that data is the basis of their institutional memory, yet few can turn that institutional memory into action compliantly across varied environments and efficiently at scale. Here, our expertise is driving successful engagements to help customers move from experimentation to production quickly. Third-party validation this quarter reinforces our leadership position. Nucleus Research ranked us as a leader in their 2026 Data Science and Machine Learning Platform Technology Value Matrix, ahead of platforms that have built their reputation on data science. Our hybrid capabilities are also getting noticed. Constellation Research named us to their 2026 ShortList for Hybrid and Multicloud Analytical Data Platforms.

We were one of only three vendors selected from a field of more than three dozen, reflecting a breadth that competitors structurally cannot match. More broadly, ISG recognised us as Exemplary, their highest designation, across seven categories in their 2026 AI and Data Platforms Buyer’s Guides. That breadth reflects that we are meeting enterprises wherever they are in their AI journey. This recognition reflects something that takes decades to build: the trust of the world's largest enterprises running workloads that simply cannot fail. Now I will walk through a few examples of the outcomes we are already helping customers achieve. One of the largest pan-European banks renewed and expanded its Teradata Corporation relationship.

The goal was to address business-critical workloads like financial reporting and regulatory data model convergence, underscoring Teradata Corporation's crucial role in the bank's operations. It also launched a customer journey transformation leveraging Teradata Corporation AI capabilities, including augmented agent work, enterprise LLM integration, and AI Studio. This positions Teradata Corporation as its emerging enterprise AI platform. The engagement reflects how large financial institutions increasingly rely on Teradata Corporation as a long-term strategic platform for both regulated analytics and AI. A leading global retailer based in EMEA—a win-back for us—selected our platform to replace its existing on-prem platform. After evaluating competitors, the customer concluded that Teradata Corporation delivered the best price-performance for its analytic workloads.

This reflects the durability of our value proposition for mission-critical retail analytics at scale. A leading Latin American financial institution added our AI services to encompass its enterprise AI operations. The customer recognizes they will now get continuous oversight, governance transparency, and life cycle management of AI models and agentic applications in a regulated environment. The engagement positions Teradata Corporation as this bank's long-term operational partner across the full AI life cycle. A large government agency in India committed to Teradata Corporation as it enters a new phase of digital transformation. We help unify structured and unstructured data at massive scale to deliver real-time comprehensive profiles through its online portal.

Our native object store capability was chosen to simultaneously bridge structured block storage and unstructured object storage at scale—a requirement no competing platform could meet. This example underscores our differentiated position in mission-critical, high-concurrency government analytics environments. Market data reinforces what we are seeing and hearing directly from customers. In a third-party research survey of 1 thousand senior technology and data leaders sponsored by Teradata Corporation, every single organization—100%—is actively pursuing AI; 17% have deployed it beyond pilots; and 99% have already had infrastructure scaling challenges in the attempt to move from pilot to production.

The barriers are not abstract: performance at scale, cost predictability, always-on agent demands, running new workloads along with existing production systems, and deploying across cloud, on premises, and regulated environments. Enterprises are not facing one infrastructure problem; they are facing all of them, all at once. That gap between ambition and execution is something we believe we are uniquely positioned to solve. On Thursday, we will be announcing a significant and broad set of innovations that address these challenges, helping our customers move into the next phase of enterprise intelligence while bringing autonomous AI and knowledge to organizations globally. We invite you to join our livestream on May 7 at 10:30 AM Eastern time.

You can join directly from our teradata.com website. We are confident that our new unified platform and integrated AI workspace will help enterprises rapidly move into production AI. We are quite excited about what is coming on Thursday and hope you can attend. As I pass the call to John, I will reinforce that we are very pleased with our Q1 results. Even with the current global uncertainties, our business model is robust, demand continues for our capabilities, and we see tremendous opportunity to create incremental value for our shareholders. We have sales momentum, customer interest, and an engaged partner ecosystem. And we have a great start to our product innovation pipeline and more coming very soon.

We remain focused on driving execution, increasing our differentiation, and delivering products and services that lead customers to rapidly deploy agentic AI into production. Now, John, over to you.

John Ederer: Thank you, Steve, and good afternoon, everyone. We were expecting Q1 to be a strong start to the year, and it proved to be even better than we anticipated, with total revenue, recurring revenue, and non-GAAP earnings per share all exceeding the top end of our guidance ranges for the quarter. Additionally, we got off to a fast start with strong free cash flow in the first quarter. The revenue upside was driven primarily by recurring revenue and, more specifically, the upfront portion of our on-premise subscription term license business, reflecting continued interest in our hybrid platform.

Non-GAAP operating margin also improved significantly by more than 500 basis points year-over-year, driven by higher recurring revenue and a continued focus on operating leverage to deliver profitable growth. During Q1, Teradata Corporation entered into a settlement agreement with SAP. From the settlement, Teradata Corporation received a gross payment of $480 million in late March. After accounting for legal fees and other expenses related to the SAP litigation and resulting settlement, the pretax net amount was $359 million, which benefited both operations and free cash flow. On an after-tax net basis, this is expected to provide a $302 million benefit to free cash flow in FY 2026. The settlement also positively impacted GAAP diluted earnings per share by $2.90.

Tax payments related to the settlement totaling $57 million are expected to be paid from Q2 through Q4 2026, with approximately half expected to be paid in Q2 and the remaining half expected to be split between Q3 and Q4. For the remainder of the year, we will also refer to adjusted free cash flow to provide a normalized free cash flow measure for the business. Adjusted free cash flow will reflect adjustments for the impact from the SAP settlement by excluding gross proceeds, legal and other expenses, and taxes specific to the settlement.

In terms of our detailed financial results for the first quarter, total ARR grew 3% as reported and 2% in constant currency, while cloud ARR grew 13% as reported and 12% in constant currency. First quarter total revenue was $444 million, up 6% year-over-year as reported and 4% in constant currency, which was three points above the high end of our outlook due to higher recurring revenue. First quarter recurring revenue was $400 million, up 12% year-over-year as reported and 9% in constant currency, which was four points above the high end of our outlook. The outperformance was primarily due to higher upfront revenue from term license subscriptions, which contributed five points to the year-over-year growth rate.

First quarter consulting services revenue was $43 million, down 14% year-over-year as reported and 15% in constant currency. Looking at profitability and cash flow, please note that I will be referencing non-GAAP numbers for expenses and margins, and a full reconciliation to GAAP results is provided in our press release. For the first quarter, total gross margin was 63.7%, which was up 340 basis points year-over-year, driven by a higher mix of recurring revenue and improvement in consulting gross margin. Recurring revenue gross margin was 70%, which was flat with Q1 last year, but up sequentially from Q4 FY 2025.

The sequential improvement was driven by the incremental upfront recurring revenue, but we are also continuing to make progress improving our cloud gross margins. In Q2, we expect lower upfront revenue to be a headwind to our recurring gross margin. Consulting services gross margin was 4.7%. This was down from a recent high point in Q4 FY 2025, but it did improve by over 600 basis points on a year-over-year basis. Operating margin improved significantly on a year-over-year basis, coming in at 27.3% versus 21.8% in Q1 last year. The margin expansion was driven from recurring revenue outperformance and favorable gross margin benefit from upfront revenue. For 2026, we continue to anticipate approximately 100 basis points of operating margin expansion.

Non-GAAP diluted earnings per share were $0.88, exceeding the top end of our outlook range by $0.09. The outperformance was largely driven by higher recurring revenue and total gross margin. We generated $390 million of free cash flow in the first quarter. This amount includes a $359 million benefit due to the pretax net proceeds from the SAP settlement. On an adjusted free cash flow basis, we generated $31 million. We now have $816 million of cash and cash equivalents at the end of Q1, up from $368 million in the prior-year period. This also returns the company to a positive net cash position of $269 million for the first time since Q4 FY 2021.

Finally, we continue to return value to shareholders, repurchasing approximately $34 million, or about 1.2 million shares, in the first quarter. We continue to target using 50% of our adjusted free cash flow for share repurchases, which excludes the benefit from the SAP settlement. Before turning to our financial outlook, I would like to provide some additional context regarding the use of the net proceeds from the SAP settlement. We plan to strengthen our balance sheet by deleveraging. This will maximize our optionality to make future strategic investments in AI, as well as continuing our stock buyback program.

On total ARR, we continue to expect our typical seasonality, with total ARR stabilizing in Q2 and expanding over the course of the year, showing modest sequential dollar growth from Q1 to Q2. For recurring revenue, we expect upfront recurring revenue and currency to be headwinds to the growth rate in Q2. We anticipate over a 10-point impact to the recurring revenue growth rate on a sequential basis from Q1 to Q2 due to upfront revenue. And based on the foreign exchange rates at the end of March, currency is anticipated to be approximately a three-point headwind to recurring revenue growth.

Now turning to our annual outlook for 2026, we reaffirm our ranges for total ARR, total revenue, recurring revenue, and non-GAAP earnings per share. For the non-GAAP earnings per share range of $2.55 to $2.65, we anticipate being at the higher end of that range. For adjusted free cash flow, given the strength of Q1, we are increasing our outlook and now anticipate being in the range of $320 million to $340 million. And to reiterate, our adjusted free cash flow range excludes the after-tax benefit from the SAP settlement of $302 million.

For 2026, recurring revenue is expected to be in the range of minus 2% to flat year-over-year, total revenue is expected to be in the range of minus 4% to minus 2% year-over-year, and non-GAAP diluted earnings per share is expected to be in the range of $2.53 to $2.57. In terms of some other modeling assumptions, for the second quarter, we expect the non-GAAP tax rate to be approximately 24% and the weighted average shares outstanding to be 96.3 million. Using the currency rates at the end of March 2026, we now expect minimal impact to the full-year revenue growth rate. Also, we now anticipate FY 2026 other expenses to be approximately $22 million.

In summary, we were very pleased with the start of the year and believe that we are tracking well towards our full-year targets. We significantly improved our balance sheet and generated strong free cash flow, and we are continuing to pursue our profitable growth strategy by finding margin improvement opportunities across the business while at the same time preserving investments in R&D to support future growth. Thank you all very much for your time today. We will now open the call for questions.

Operator: At this time, I would like to remind everyone that in order to ask a question, press star and then the number one on your telephone keypad. In the interest of giving everyone an opportunity, we appreciate if you would limit yourself to one question and one follow-up. Your first question comes from Radi Khalid Sultan with UBS. Your line is open.

Radi Khalid Sultan: Awesome. Thanks so much. First for Steve, just now that the business is skewing more heavily towards expansions versus cloud migrations, can you walk through how you position the business, both product and go-to-market, to reflect that? And maybe just how do you expect that to impact overall sales productivity throughout 2026?

Steve McMillan: Yeah. Thanks for the question. We are seeing really strong interest in terms of the AI that we launched last year and also the AI capabilities that we are going to talk a little bit more about at our product launch on Thursday this week on May 7. And that is certainly driving expansion for us. I think last year, we saw the trend in terms of a headlong rush to the cloud really starting to decline as an indicator in the market for us. What we have started to see is a real interest in expansion. We focused our sales force on total ARR growth, and they can get that growth from either on-prem or from the cloud.

Our strength in a hybrid environment is a real differentiator for us and is providing a growth lever when we combine that with some of our AI capabilities and the ability to operate and execute AI workloads on-premise. And that is what really some of the examples in the prepared remarks were pointing to. As we execute against that, we see sales productivity continuing to improve as well, as the sales teams have more and more things to sell and an increased value proposition to take to our customers. Thanks for the question.

Radi Khalid Sultan: Awesome. And maybe just a follow-up for John. I know it is early with AI services and the forward-deployed engineering practice. Just as you think about the P&L impact from both a top line and margin perspective, in both the near and long term from that growing services practice on the AI side, thank you.

John Ederer: Yeah. Sure. No, thanks for the question. You know, in terms of the AI services and the P&L impact for 2026, I would say it is pretty minimal. This is a new offering for us and something that we are ramping up this year. Longer term, I could see it contributing more to the P&L, but still, ultimately, it is going to be a services component. It is going to be complementary to what we are trying to do on the software side.

I would say that I see it as a critical connection point, though, and it helps us further develop our proofs of concept that we have been doing with customers, move them into production, and then ultimately drive AI-related ARR.

Radi Khalid Sultan: Awesome. Thank you.

Operator: Your next question comes from Yitchuin Wong with Citibank. Your line is open.

Yitchuin Wong: Hi. Good evening. Thanks for taking the question. Great to hear the team navigate the quarter across a variety of crosswinds that we saw over the past couple of months. Historically, this kind of uncertainty elongated enterprise IT cycles, as we heard from a couple of the larger customers that reported last week. However, the enthusiasm that we are seeing with agentic AI and with your recent GA vector product, agentic, and tons of new AI product announcements with autonomous event Thursday—excited for that. Are you finding the strategic urgency to deploy AI capabilities is overriding the localized macro caution, and what are you seeing around those cost screens and on your deal cycle in the quarter?

Steve McMillan: Yeah. Thanks for the question, YC. I think AI is in every strategic conversation that I and my team have with customers. And we can see that with some meaningful data points. If we look at our pipeline, we see a growing proportion of our pipeline today has AI attached to it. And so that reflects that every strategic conversation has that AI or analytics edge to it.

Second thing is, as we look at customers, they are having a real challenge deploying AI in production, and they see the Teradata Corporation platform, along with the announcements we have already made and the roadmap that we are going to deliver, as a platform that can deliver AI into production for them. And then third, as John was just talking about, even though we are always going to be a technology company primarily, we do have a capability in our services organization, and the set of AI services that we have launched is enabling customers to move from those pilots into production. I am not going to pivot the company towards services.

It will just be a part of enabling our technology value proposition in the marketplace, but we are certainly seeing that pivot. Everybody wants to get the business outcomes from AI, absolutely focused on doing that as quickly as possible. We intend to capitalize on that.

Yitchuin Wong: That is good to hear. I have a follow-up for John. The quarter sounded like hybrid continued to be a bigger driver, especially with sovereign AI—sets of things that could be driving higher demand for hardware—and we have a refresh cycle upcoming in 2H. I just want to touch on that. In Q4, we talked about you being able to stop the memory pricing impact given the long-dated contracts. Memory prices have continued to ramp significantly over the last few months. Could you walk us through any incremental impact that you are expecting, especially going into next year as well? Are you seeing customers respond to this memory crunch differently? Thank you.

John Ederer: Yeah. Thanks for the question. I would say that this is definitely a dynamic that we are watching very closely and evaluating near daily, and it is becoming quite pervasive in the marketplace. I would say that for us, from a financial standpoint, it is probably more of an FY 2027 challenge and opportunity as opposed to FY 2026. We will talk a little bit more later this week about some of the new products that are coming out, including the hardware refresh. Those will become available this year, but we would really expect more financial impact to occur in FY 2027.

Having said all that, from a pricing standpoint, that is the piece that we are looking at the closest. And the thing that we will focus on is to make sure that we protect ourselves from a margin standpoint as we go to market with that.

Yitchuin Wong: Thank you. Look forward to seeing everyone out there. Thanks.

Operator: Your next question comes from Erik Woodring with Morgan Stanley. Your line is open.

Ralph Firaoli: Hi. This is Ralph Firaoli on behalf of Erik. Good evening, and thank you for taking my question. I just wanted to ask: Are we at the start of an improving recurring revenue gross margin trajectory, given you just posted 70% for the first time in a year and the strongest quarter-over-quarter recurring revenue gross margin improvement in years?

Steve McMillan: Thanks for your question. I will start, and then I will hand over to John. Certainly, from an ARR perspective, we returned the company to ARR growth in 2025, and we set the expectation that we would continue and accelerate that percentage of ARR growth into 2026. We see a good path and opportunity for that to continue, based both on the expansions that we generate inside the customer base and the incredible interest that we have gotten using the platform for AI-type workloads. And then from an operating margin perspective, we have a number of initiatives in the business that we are looking at to improve operating margins as we continue forward. John.

John Ederer: Yeah. Thanks for the question. So gross margins are a little complicated on the recurring side for us. You have got different dynamics at play with both the cloud side of our business as well as the on-prem. In Q1, we did see a nice spike up in gross margin at least relative to the last couple of quarters, at 70% for the recurring, and that was largely driven by the upfront revenue that we also saw in Q1. And so this was a factor of revenue recognition and ASC 606 and getting more upfront revenue related to the on-premise piece of the business. So that had a spike in margins for this quarter.

As we look out over the remainder of the year, we would expect them to be a little bit more consistent with recent quarters that we saw in 2025. Now, underneath that, we are seeing improvement in our cloud gross margin, and that is a critical factor for us. I know we do not disclose that publicly, but we have been making good, steady progress on that, and we saw some nice improvement in Q1 on cloud gross margins as well.

Ralph Firaoli: Great. Thanks. And if I could just ask a follow-up. Could you help us better understand demand and sales linearity in the quarter, and maybe how the Middle East conflict is impacting sales cycles versus what you are hearing at the micro level as it relates to demand for data prep, unstructured data, etc.? Just any sense of how these factors are impacting your business? Thank you.

Steve McMillan: I think we are still seeing a very solid demand environment. The challenges in the Middle East have not substantially impacted our business at all, really. And the demand patterns that we are seeing really reinforce the value that organizations want to get out of the investment they are making. As I mentioned in the prepared remarks, the survey that we did showed that despite 100% of the customers that we spoke to in that survey wanting to deploy AI and get the benefit from AI, the vast majority—99%—are having their problem getting from pilot to production.

So that really is altering the conversation that we are having with customers as they look at Teradata Corporation as a platform and a knowledge platform that can deliver the agentic AI workloads that they need. So that is resulting in an environment where we can deliver on the expansions that we need to deliver to make our outlooks and actually take advantage of the market opportunity that is in front of us.

Ralph Firaoli: Great. Thank you. Very helpful.

Operator: Your next question comes from Matthew George Hedberg with RBC Capital Markets. Your line is open.

Matthew George Hedberg: Steve, as a follow-up to that earlier question, it really does seem like there is a lot of momentum in AI, and I think we will hear more about that later this week. The MCP Server interest is high. I guess I am curious: Is there a way for you to determine what the actual ARR benefit you are seeing is from these increases in AI workloads within your base?

Steve McMillan: Yeah. I think what we are seeing is that helping those customers cross the chasm from pilot to production is certainly driving usage and capacity usage of the Teradata Corporation platform. One of the benefits that we have in terms of the Teradata Corporation platform is that agentic AI workloads with always-on agents are driving a tremendous volume of queries, driving a huge concurrency of queries, and complexity of queries into the respective data platforms. That is Teradata Corporation’s sweet spot in terms of how we execute and the technology that we have got.

And I think we are seeing customers really take advantage of that, and there is a little bit of a shift from standard BI workloads towards more agentic-type workloads, but we also see the opportunity opening up to serve both in the cloud and on-premise those agentic workloads. And we see it as an opportunity for us to drive incremental ARR growth, especially with the new products that we will be announcing on Thursday of this week.

Matthew George Hedberg: That is great. And then maybe for John, it was great to hear that retention was solid in the quarter. I guess I am curious, is there anything we should keep in mind regarding large renewals for the balance of this year?

John Ederer: No. I do not think there is anything particular on that front. In general, we are seeing improved retention rates. We actually started to see that in fiscal 2025, and we are carrying that through here in 2026, and started off on a good note in Q1. So I think in general, we have done a nice job of getting closer to the customers, understanding that process better around key renewals, and making sure that we are in a good position to do that.

Matthew George Hedberg: Got it. Thanks.

Operator: Your next question comes from Raimo Lenschow with Barclays. Your line is open.

Joe McMinn: Hi, this is Joe McMinn on for Raimo. Thanks for taking our question. During the prepared remarks, you talked about the strong start to the year. You definitely have some tailwinds—security-driven demand, accelerating sovereign AI. AI interest seems to be healthy, and I completely understand we are operating in a very dynamic environment, but could you help us understand the puts and takes and maybe any balancing factors that motivated you to maintain the full-year ARR guide?

John Ederer: Well, I think that if you look at the total ARR number for Q1, on a reported basis, 3%, that is right in line with what we had guided for the full year of 2% to 4%. So I guess I view Q1 as being very consistent with our outlook for the year. And then in general, we are seeing decent demand across the product lines, and we are optimistic about some of the things that we will start to introduce later this week. Now, those will not have a material impact on FY 2026, but in general, we are seeing better demand.

Joe McMinn: Understood. Congrats on a solid quarter.

John Ederer: Thanks.

Operator: Your next question comes from Patrick Walravens with Citizens. Your line is open.

Patrick Walravens: Oh, great. Thank you very much. Could I start by asking—your comments about the trouble that clients have getting from pilot to production—can you drill down on that a little bit? Specifically, what gets in the way of moving to production?

Steve McMillan: Yeah. Pat, I think it goes to the characteristics of the workload and the data platforms that organizations are using. I have used the term before that our competitors solve complexity with incremental compute. We solve complexity with great software. And that enables us to address some of these challenges that our customers are having in terms of spiraling compute costs for their data platform. They have regulatory challenges in terms of making sure that data is well governed.

And across all of these different types of data problems, we have been solving them for customers for years, as they have built out some of the most comprehensive enterprise data warehouses, and then making sure that those solutions have the right context. And context is built on industry knowledge, industry data models, the codification of business rules, and we have helped customers and organizations span those challenges for years now. It is just another reinvention of that from an AI perspective to ensure that these AI agents have the right context to get the reliable answers in a production context to really solve business problems today.

And that is what our whole new series of offerings and capabilities over the past few months, and including what we are planning to launch over the next couple of weeks, really brings together in terms of delivering that context to our customer organizations.

Patrick Walravens: Okay. Great. And can I ask, Steve—or maybe John, I do not know who wants to pitch in on this—so other than the financial aspect of the SAP settlement, can you remind us what this whole thing was about? And is there any fundamental benefit in having resolved this dispute?

Steve McMillan: Look, I think, Pat, it is always good to clear the deck from a legal perspective and make sure that we are looking forward and looking forward to what we are actually going to do strategically with that cash. It certainly is on the balance sheet now, and it gives us a lot of strategic optionality as we move forward in terms of how we deploy that. Certainly, it solidified the balance sheet, as John pointed to, but it gives us strategic options moving forward. And we certainly see it as a vehicle that is going to enable us to increase our return to shareholders as we move forward.

So we are pretty excited about it and glad to put it behind us.

Patrick Walravens: Okay. Thank you, guys.

Operator: Your next question comes from TD Cowen. Your line is open.

Analyst: Hi. This is Jared on for Derrick. Thanks for taking my questions. First, could you comment on domestic and international revenue in the quarter and maybe pick apart some of the drivers for each of those markets?

John Ederer: Yeah. So in general, if I look back over the last few years, we have seen some differences in domestic versus international. And if you go back a couple of years, the impact of some of the churn was really more felt in the United States as opposed to the international markets. We have also seen some improving trends, even from a new logo standpoint, in some of the international markets. And so I think that is one area where the hybrid story resonates even more so than perhaps in the United States.

Analyst: Awesome. Appreciate that color. And off of that regulated industry commentary, can you just talk to some of the different trends you have been seeing in your regulated base versus nonregulated base?

Steve McMillan: Yeah. I think—and it reflects as well in some of the workloads that we have been winning—certainly governments, financial services organizations, and health care organizations are highly regulated. We see that as a great competitive moat for us. We are uniquely differentiated to enable those organizations to run agentic AI workloads against that data, and they can do it in the cloud or they can do it from an on-premise perspective or in a hybrid environment. You know, more than 50% of our customers in the cloud also operate on-prem Teradata Corporation systems.

So being able to span data across those environments, not move data into different types of solutions, has given those regulatory workloads some real benefit in terms of how they can leverage AI and agentic AI against those datasets.

Analyst: Thanks for taking my questions.

Operator: That concludes today’s Q&A session. I will now turn the call back over to Steve McMillan for his final remarks.

Steve McMillan: Thank you very much, operator. Thanks for joining us today. We are really proud of our strong start to the year and the value we are creating for shareholders. We have the technology, the expertise, and a really strong partner ecosystem. And we believe we are bringing real differentiation to the market with our autonomous knowledge platform. We intend to keep that momentum up as we help organizations build for their edge future, moving decisively from AI ambition to sustained business impact. We look forward to updating you again next quarter.

Operator: That concludes today’s conference call. You may now disconnect.

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