10-Q: Teradata Reports Mixed Q3, Cloud ARR Up 11% Amid Revenue Decline

Teradata Corporation reported a 5% decrease in total revenue for Q3 2025, reaching $416 million, while net income rose 25% to $40 million, driven by Public Cloud ARR growth and cost discipline.

Summary

• Total revenue for the third quarter of 2025 decreased by 5% to $416 million, compared to $440 million in Q3 2024.
• Net income for Q3 2025 increased by 25% to $40 million, up from $32 million in Q3 2024.
• Diluted earnings per share (EPS) for Q3 2025 was $0.42, an increase from $0.33 in Q3 2024.
• Total Annual Recurring Revenue (ARR) grew 1% to $1.490 billion at September 30, 2025, from $1.482 billion a year prior, including a 1% positive impact from foreign currency fluctuations.
• Public Cloud ARR increased 11% to $633 million at September 30, 2025, compared to $570 million at September 30, 2024, with no significant foreign currency impact.
• The Cloud Net Expansion Rate for Q3 2025 was 109%, down from 120% in Q3 2024.
• Operating expenses decreased 9% in Q3 2025, primarily due to lower employee compensation expense resulting from prior year restructuring actions.
• The company repurchased approximately 4.3 million shares of common stock at an average price of $23.94 per share during the nine months ended September 30, 2025.
• The Ninth Circuit Court of Appeals ruled in the company's favor, overturning the dismissal of antitrust and trade secret claims against SAP, with trial set for March 30, 2026.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While total revenue declined and the Cloud Net Expansion Rate decreased, net income and operating income improved due to effective cost management and a higher mix of recurring revenue. Public Cloud ARR growth remains strong, and a significant legal victory against SAP provides a positive outlook for a major litigation. However, the overall revenue contraction and slowing cloud expansion rate warrant a cautious but not negative assessment.

Positives

• Net income for Q3 2025 increased by 25% to $40 million, and diluted EPS rose to $0.42.
• Operating income for Q3 2025 increased to $61 million from $56 million in Q3 2024.
• Gross margin slightly improved to 60.8% in Q3 2025 from 60.5% in Q3 2024, driven by a greater mix of recurring revenue.
• Operating expenses decreased 9% in Q3 2025 due to cost discipline and restructuring actions.
• Public Cloud ARR grew 11% to $633 million, indicating strong customer demand for Teradata VantageCloud.
• Free cash flow for the nine months ended September 30, 2025, increased to $134 million from $129 million in the prior year.
• The Ninth Circuit Court of Appeals ruled in the company's favor, reinstating antitrust and trade secret claims against SAP, and the Supreme Court denied SAP's petition for certiorari.
• The effective tax rate decreased to 25.9% in Q3 2025 from 31.9% in Q3 2024, and to 25.6% for the nine months ended September 30, 2025, from 33.6% in the prior year.

Negatives

• Total revenue decreased by 5% in Q3 2025 and 7% for the nine months ended September 30, 2025.
• Recurring revenue decreased 2% in Q3 2025 and 4% for the nine months ended September 30, 2025, primarily due to a decrease in on-premises revenue.
• Perpetual software licenses, hardware, and other revenue decreased significantly by 57% in Q3 2025 and 20% for the nine months ended September 30, 2025.
• Consulting services revenue decreased 23% in both Q3 2025 and the nine months ended September 30, 2025, attributed to lower order booking activity and an uncertain macro-economic environment.
• The Cloud Net Expansion Rate declined to 109% in Q3 2025 from 120% in Q3 2024.
• Operating income for the nine months ended September 30, 2025, decreased to $151 million from $170 million in the prior year.
• Gross profit for the nine months ended September 30, 2025, decreased to $731 million from $815 million in the prior year, with recurring revenue gross profit percentage also declining.

Risks

• Exposure to potential gains and losses from changes in foreign currency exchange rates, despite hedging activities.
• Credit risk on accounts receivable and financial instruments, including the risk of nonperformance by counterparties.
• Concentration of supplier risk, particularly with Flex Ltd. for hardware components, where a disruption could impact customer shipments and operating results.
• Potential for significant losses if large customers default on contractual obligations.
• Uncertainty regarding the outcome and potential financial loss or cost from ongoing legal proceedings, including SAP's remaining patent counterclaims in the TD-SAP 1 lawsuit and shareholder derivative actions.
• The estimates of savings, costs, charges, and cash expenditures related to the global restructuring are subject to assumptions and may differ materially from actual amounts.
• The company may incur other costs and charges not currently contemplated due to unanticipated events related to restructuring, and may enter into additional restructuring programs in the future.

Future Outlook

The company anticipates continued cloud migration activity, with expansion and migration as primary drivers for Public Cloud ARR growth in 2025. An immaterial impact from currency translation on 2025 full-year total reported revenues is expected. The estimated full-year effective tax rate for 2025 is approximately 27%, including a forecasted $2 million tax expense related to GILTI. Management believes current cash, cash generated from operations, and the available $400 million under the Credit Facility will be sufficient to meet financial requirements for at least the next twelve months.

Management Comments

• We are focused on helping organizations improve business performance, enrich customer experiences, and integrate data across the enterprise.
• We strive to innovate and deliver trusted solutions for their toughest data and analytics challenges.
• We believe that we empower our customers to make better, more confident decisions, engage in faster innovation, and drive positive impact within the enterprise.
• Public Cloud ARR growth in the third quarter of 2025 was primarily driven by customer demand of Teradata VantageCloud, our Public Cloud offering.
• The decreases in subscription ARR and maintenance and software upgrade rights ARR were primarily driven by customer migrations to Public Cloud ARR and on-premises erosions.
• Customer interest in AI-driven use cases continues to grow across various industries.
• Uncertain industry macro-economic environment resulting in delayed customer spending, including for our consulting services.
• We continue to refocus our consulting organization on Vantage-oriented offerings and reduce our footprint in non-core consulting engagements.

Industry Context

Teradata operates in the competitive hybrid cloud analytics and data platform market, emphasizing its open and connected ecosystem across top public cloud providers (AWS, Microsoft Azure, Google Cloud) and private/on-premises environments. The company is leveraging AI capabilities, including generative and agentic AI, to address growing customer interest. The broader industry faces an uncertain macro-economic environment, which has led to delayed customer spending, particularly in consulting services. The company is also navigating global tax changes, such as the OECD's Pillar Two rules, and the U.S. One Big Beautiful Bill Act (OBBBA).

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results for direct industry benchmarking.

Corporate Governance

Legal Proceedings

• The TD-SAP 1 lawsuit against SAP SE, SAP America, Inc., and SAP Labs, LLC, alleging trade secret misappropriation and anticompetitive practices, has seen a significant development. The Ninth Circuit Court of Appeals overturned the district court's dismissal of antitrust and trade secret claims, and the Supreme Court denied SAP's petition for certiorari. Trial is now set for March 30, 2026. The likelihood of loss or a reasonably estimated range of loss for SAP's remaining patent counterclaims is not determinable.
• The TD-SAP 2 and TD-SAP 3 lawsuits against SAP were fully dismissed as a result of a partial settlement agreement.
• A putative securities class action lawsuit, Ostrander v. Teradata Corporation, was filed alleging violations of federal securities laws related to statements concerning the company's business and 2023 financial outlook. The court granted the company's motion to dismiss with leave to amend, and the plaintiff elected not to file an amended complaint.
• Two pending shareholder derivative actions, Brennan v. McMillan, et al. and Lipshutz v. McMillan, et al., adopting similar allegations as the securities class action, have been consolidated and are currently stayed. The amount of any potential financial loss or cost cannot be reasonably estimated at this stage.

Stakeholder Impact

• Shareholders: Experience mixed financial results with revenue declines but improved net income and free cash flow. The ongoing share repurchase program provides some return, while the positive legal development in the SAP case reduces a major uncertainty. However, the decline in Cloud Net Expansion Rate and overall revenue contraction may raise concerns.
• Employees: Affected by global restructuring and cost actions, which have led to employee separation benefits and related costs. The company is focused on optimizing operations and driving efficiencies.
• Customers: Benefit from continued innovation in the hybrid cloud platform and AI capabilities. However, some customers are delaying spending due to the uncertain macro-economic environment, and cloud migration projects are being implemented on a staged basis.
• Suppliers: The company has a concentration of supplier risk with Flex Ltd. for hardware components, which could impact supply chain continuity if disruptions occur.
• Creditors: The company is in compliance with all covenants under its Credit Facility, indicating sound financial management of its debt obligations.

Next Steps

• Substantially complete remaining restructuring actions by early 2026.
• Trial for the TD-SAP 1 lawsuit against SAP is set to begin with jury selection on March 30, 2026.
• Plaintiff in the Ostrander securities class action has 30 days from entry of final judgment to file a notice of appeal.
• Continue to assess the impact of new accounting pronouncements (ASU No. 2023-09, ASU No. 2024-03, ASU No. 2025-06) on consolidated financial statements.
• Continue to evaluate internal control changes related to the new global cloud ERP system throughout 2025.

Key Dates

Recommendation

Teradata presents a mixed financial picture, warranting a 'hold' recommendation for a seasoned investor. While the company demonstrates effective cost control, leading to increased net income and free cash flow, and strong growth in Public Cloud ARR (11%), the overall revenue continues to decline (5% in Q3). The significant drop in the Cloud Net Expansion Rate (from 120% to 109%) is a concern, suggesting a slowdown in existing cloud customer expansion. The positive legal development in the SAP antitrust case is a major de-risking event, but the trial is still pending. The company is in a strategic transition to cloud, and while progress is evident in cloud adoption, the overall revenue contraction and slowing expansion rate indicate ongoing challenges. Investors should monitor the pace of cloud migration, the Cloud Net Expansion Rate, and the outcome of the SAP trial before making further commitments.

Keywords

Teradata, 10-Q, Quarterly Report, Cloud Analytics, Data Platform, Public Cloud ARR, Annual Recurring Revenue, Financial Results, SEC Filing, Software Licenses, Consulting Services, Restructuring, Legal Proceedings, SAP Lawsuit, Share Repurchase, VantageCloud, AI Capabilities, Hybrid Cloud