TERADATA CORPORATION 2026 Q2 Earnings Call

Good afternoon, and welcome to Teradata's second quarter 2026 earnings call. Steve McMillan, Teradata's President and Chief Executive Officer, will lead our call today, followed by John Ederer, Teradata'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 intends to file the Form 10-Q for the quarter ended June 30th, 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. Now I will turn the call over to Steve.

Thanks, Chad, and thanks to everyone for joining us today. We're pleased with our solid performance in the first half as Teradata delivered another good quarter with growth in total ARR, recurring revenue, and meaningful free cash flow improvement. Our total ARR growth reflects our belief that the hybrid capabilities we're delivering set Teradata apart. Additionally, our significant platform innovations, tangible operating leverage, and anticipated incremental gains in our retention rate underpin our confidence in the future. We are reaffirming our outlook for total ARR, total revenue, and recurring revenue, and we are increasing our non-GAAP earnings per share range to $2.65 to $2.73. We're also increasing the range for adjusted free cash flow to $330 million to $350 million. The global shift to AI is profoundly affecting every major industry as enterprises face growing pressure to move AI into production.

We recently surveyed 1,000 senior technology and data leaders around the globe about their use of agentic AI within the enterprise. We found that 90% expect to increase their agentic AI investments over the next year. Yet nearly two-thirds have seen only small or emerging positive returns to date. In addition, 40% of technology leaders surveyed say more than 40% of their AI pilots have failed to reach production because their infrastructure was not built to support them. We are here to change that. We set a clear vision for this agentic AI era. We call it Teradata 3.0, and we have retooled our business for this clear opportunity of autonomous intelligence. Teradata's robust hybrid data foundation, in use at many of the world's leading organizations, is essential to help enterprises deploy the business infrastructure needed to get ROI from their AI initiatives.

The mission-critical nature of this work is not discretionary. Enterprises need it, and we believe we have the best data foundation to help organizations achieve real value from their AI initiatives. This brings me to our product innovations in Q2, which I consider one of the most significant chapters in Teradata's history. As organizations increasingly turn their attention to realizing value from AI, our product organization leaned in and accelerated the innovation pipeline to meet the market opportunity. In May, we launched the Teradata Autonomous Knowledge Platform, our foundation to deploy agentic AI without trading control for capability, governance, or performance. It runs where enterprise data already lives, on the customer's terms, and at costs that reflect how agents actually work. Most infrastructure was built to deliver one of those things at a time. Our platform is designed to deliver all three.

It brings together a powerful set of new capabilities for customers, and I'll discuss the four main components. Teradata Cloud is purpose-built for the agentic era. The reality is that AI agents create computing demands unlike anything human users have generated before, and that informs how our cloud offering is designed. Active compute and elastic compute give organizations always-on power for mission-critical workloads alongside on-demand capacity for everything else. Teradata Factory extends the platform on-prem for organizations where data sovereignty is preferred or required. It delivers private AI and enterprise-grade performance in a single integrated system built with Dell Technologies. With integrated CPUs and GPUs built in, customers can run the models that fit their needs, including foundation models entirely on-prem. Data never leaves their environment, while scale and performance remain fully intact.

Teradata AI Studio unifies analytics, models, agents, and vector services in one environment, customers no longer need to source, integrate, and manage those capabilities as separate tools. Combined with our AI services consultants, who bring years of domain expertise and sophisticated analytics, AI initiatives can move reliably from concept to production-grade execution at speed. Trusted enterprise data and built-in governance travel with every project, allowing organizations to scale with confidence. Tera is our agentic coworker, the natural language interface that gives every user governed access to enterprise data and agents. Tera includes built-in modes for data analysis, coding, and multi-agent orchestration, giving business users, data teams, and developers a single place to interact with enterprise data and AI. The connectivity that makes this possible depends on open standards. Teradata joined the Agentic AI Foundation, where standards like the Model Context Protocol are being built.

Our Enterprise MCP server is already in action with customers, our participation is intended to ensure that real-world enterprise requirements, including hybrid, on-prem, and sovereign deployments, are built into those standards from the start. I'm pleased to report that the Teradata Autonomous Knowledge Platform, including its AI Studio component, reached general availability in early Q3, a couple of months after we announced it. That execution velocity reflects the confidence we have in what we've built and the step change it makes possible for our customers. The quarter brought additional innovations to market as well. We made available our enterprise-grade data analyst agent in AWS Marketplace, bringing AI-assisted conversational analytics directly into customers' existing AWS environments. The agent enables advanced multi-step analytics on data that's already there, with no costly movement or integration complexity.

We also delivered expanded data access through upgraded native open table format support, enabling customers to query seamlessly across more distributed data without unnecessary movement or duplication. Access to data alone doesn't get enterprises to production AI. Our research shows that context fragmentation, data that exists but carries no usable meaning for agents, is the defining barrier holding organizations back. In fact, 77% of executives reported that 20% or less of their data is sufficiently described for agents to use reliably. It's a challenge we hear and one we are focused on helping customers change. We're proud of the broad set of product innovations we've brought forth. Yet these are just the first in a series of planned announcements we'll have this year. We're going to be delighted to tell our customers more at our upcoming Autonomous World Tour events.

All of these offerings will continue to leverage our differentiated hybrid capabilities and the very real need for production AI that runs anywhere, grounded in governed data, and context that is critical for agentic AI. As our teams take our new platform and AI narrative to the market, they are receiving positive responses from customers and support for the need to activate the intelligence across their enterprise. We're hearing that our capabilities with one platform that supports AI, sovereign data, security, and multiple deployment scenarios are generating increasing interest. We have already had early wins from the innovations we announced and from both on-prem and cloud environments. I'll touch on a few examples. A major telecommunications company in South Asia selected Teradata Factory to power its broad AI modernization initiative. The customer deployed GPU-enabled infrastructure and Teradata AI Studio to support advanced analytics, vectorization, and RAG workloads.

This demonstrates Teradata's growing ability to lead enterprise AI transformation conversations across emerging markets. We're not just a data platform, but foundational to our customers' AI ambitions. One of the largest banking groups in Japan, and a longstanding Teradata customer, implemented a cloud modernization project selecting Teradata Cloud, AI Studio, and AI Services to enhance its profitability simulation and planning workloads. We expanded our relationship with a federal tax authority in Asia Pacific as it renewed its Teradata Cloud environment and balanced flexibility with the resilience and performance requirements of this critical government platform. This reinforces Teradata's ability to align customer success with long-term platform growth while positioning us to support future workload expansion driven by legislative change. One of North America's largest financial institutions also expanded with us, incorporating Teradata AI Studio to accelerate AI adoption and demonstrate measurable value through use cases aligned to the bank's strategic priorities.

A major U.S. healthcare company expanded its on-prem production system in support of government regulations. Our increased engagement in the agentic AI space has not gone unnoticed. Gartner published its 2026 Magic Quadrant for AI platforms for data science and machine learning, and Teradata was named a visionary in our first year of participation. We view it as validation of Teradata as a serious player in the AI platform market, and note that this evaluation did not even yet include our latest product announcements. As I hand the call to John, I'll close on this. This quarter, we set out a clear vision for the next era of Teradata 3.0, anchored by our new Autonomous Knowledge Platform built for the agentic age. We backed that vision with delivery, bringing key components of the platform to general availability within a quarter.

Our hybrid capabilities and our on-prem strength in particular, continue to resonate with customers running the most demanding and regulated workloads where a solid data foundation is not discretionary. That combination of a differentiated platform and disciplined execution set the foundation for a solid first half and gives us confidence in our outlook for the year. John will cover in more detail, including the areas where we are raising our expectations. We remain focused on converting this momentum into durable, profitable growth and lasting value for our shareholders. Now, over to you, John.

Thank you, Steve, and good afternoon, everyone. We delivered solid financial results in the second quarter, highlighted by continued improvement in recurring revenue, profitability, and free cash flow. Recurring revenue grew 3% year-over-year, marking our third consecutive quarter of positive growth. We also drove meaningful expansion in non-GAAP operating margin to 21.5% compared to 16.4% in Q2 last year, reflecting our continued focus on operational discipline and profitable growth. In addition, adjusted free cash flow was $127 million in the quarter, significantly higher than a year ago. At the midpoint of the year, we are pleased with the improvement we are making and believe these results reflect continued progress against our financial objectives and demonstrate our focus on driving sustainable shareholder value.