Teradata Corporation

Good afternoon. My name is Trevor, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata 2026 First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I'd like to hand the conference over to your host today, Chad Bennett, Senior Vice President of Investor Relations and Corporate Development. You may begin your conference, sir.

Good afternoon and welcome to Teradata's first 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 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.

Thanks, Chad, and thanks to everyone for joining us today. I'm very pleased to report that Teradata 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 continue to see solid retention in the quarter, and customer interest in our hybrid capabilities grow 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 healthcare 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. 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. Our customers have governed data estates, with years or even decades of data in their Teradata environment, including codified industry knowledge, entity models, and business rules specific to financial services, healthcare, 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's an on-ramp to enterprise AI, providing semantic access to the enterprise data in 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're 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 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 introduced 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 land chain 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 Analyst Agent on Microsoft Marketplace. This brings AI-assisted conversational analytics directly into customers' existing Azure environments. We also recently participated and the Google Distributed Cloud AirGap Center launch. Our platform runs natively on GDC, enabling organizations to operationalize Google's AI capabilities and our own analytics entirely within the AirGap perimeter. No data leaks, no sovereignty is compromised. That capability is designed to be a real value for defense, intelligence, and public sector organizations that require AirGap Sovereign AI. One of our differentiating capabilities is helping customers leverage and get value out of their environments. And that's even more important as they work to get business value from their AI investment. Here's 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've 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, their 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 ranks as a leader in the 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 multi-cloud 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 recognized us as exemplary, their highest designation across seven categories in their 2026 AI and Data Platforms Buyer's Guide. That thread 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'll 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 relationship. The goal was to address business-critical workloads like financial reporting and regulatory data model convergence, underscoring Teradata's crucial role in the bank's operations. It also launched a customer journey transformation, leveraging Teradata AI capabilities, including augmented agent workflows, enterprise LLM integration, and AI studio. This positions Teradata as its emerging enterprise AI platform. The engagement reflects how large financial institutions increasingly rely on Teradata as a long-term strategic platform for both regulated analytics and AI. A leading global retailer based in EMEA was a win back for us. selecting our platform to replace its existing on-prem platform. After evaluating competitors, the customer concluded that Teradata 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 America financial institution added our AI services to encompass its enterprise AI operations. The customer recognizes they'll now get continuous oversight, governance transparency, and lifecycle management of AI models and agentic applications in a regulated environment. The engagement positions Teradata as this bank's long-term operational partner across the full AI lifecycle. A large government agency in India committed to Teradata as it entered 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 and mission-critical, high-concurrency government and analytics environments. Market data reinforces what we're seeing and hearing directly from customers. In a third-party research survey of 1,000 senior technology and data leaders sponsored by Teradata, every single organization, 100%, is actively pursuing agentic AI, yet only 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 aren't 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're uniquely positioned to solve. On Thursday, we'll 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 live stream on May 7th at 10.30 a.m. 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're quite excited about what's coming on Thursday and hope you can attend. As I pass the call to John, I'll 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 we customers to rapidly deploy agentic AI into production. Now, John, over to you.

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-gap 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 entered into a settlement agreement with SAP, From the settlement, Teradata 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 pre-tax net amount was $359 million, which benefited both operations and free cash flow.

Large financial institutions increasingly rely on Teradata as a long-term strategic platform for both regulated analytics and AI. a leading global retailer based in EMEA was a win-back for us, selecting our platform to replace its existing on-prem platform. After evaluating competitors, the customer concluded that Teradata 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 America financial institution, added our AI services to encompass its enterprise AI operations. The customer recognizes they'll now get continuous oversight, governance transparency, and lifecycle management of AI models and agentic applications in a regulated environment. The engagement positions Teradata is this bank's long-term operational partner across the full AI lifecycle. A large government agency in India committed to Teradata 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 and analytics environments. Market data reinforces what we're seeing and hearing directly from customers. In a third-party research survey of 1,000 senior technology and data leaders sponsored by Teradata, every single organization 100% is actively pursuing agentic AI. Yet only 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 aren't 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're uniquely positioned to solve. On Thursday, we'll 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 live stream on May 7th at 10.30 a.m. 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're quite excited about what's coming on Thursday and hope you can attend. As I pass the call to John, I'll 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.

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 entered into a settlement agreement with SAP. From the settlement, Teradata 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 pre-tax 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 FY26. 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 FY25. The sequential improvement was driven by the incremental upfront recurring revenue, But we're 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 FY25, but it did improve by over 600 basis points on a year-over-year basis. Operating margin improves 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 88 cents, exceeding the top end of our outlook range by 9 cents. 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 pre-tax 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 FY21. 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 to use 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'd 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. On a sequential basis from Q1 to Q2, we anticipate over a 10-point impact to the recurring revenue growth rate 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 to be 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 to be 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 the second quarter of 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 53 cents to 57 cents. 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 FY26 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're 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. Now let's open up the call for questions.

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 Randy Sultan with UBS. Your line is open.

Awesome. Thanks so much. First for Steve, just now that the business is skewing more heavily towards, you know, expansions versus cloud migrations, Could you just 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?

Yeah, thanks for the question. We're seeing really strong interest in terms of the AI capabilities that we've been launching last year and also the AI capabilities that we're going to talk a little bit more about at our product launch on Thursday this week on May 7th. And that's 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. But what we have started to see is a real interest in expansion. We've 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 next to AI workloads on premise. And that's what really some of the examples and 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.

Awesome. And let me just follow up for John. I know it's early on with the AI services and the forward deployed engineering practice. Just how do you think about the P&L impact from both, you know, a top line and margin perspective and, you know, both the near and long term from that, you know, growing services practice on the AI side? Thank you.

Yeah, sure. No, thanks for the question. You know, in terms of the AI services and the P&L impact for 26, I would say it's pretty minimal. This is a new offering for us and something that we're ramping up this year. Longer term, I could see it contributing more to the P&L, but still, ultimately, it's going to be a service component. It's going to be complementary to what we're 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 proof of concepts that we've been doing with customers, get them into production, and then ultimately to drive AI-related ARR. Awesome. Thank you.

Your next question comes from Yichun Wang with Citibank. Your line is open.

Hi, good evening. Thanks for taking my question. Great to hear the team outperform the quarter across a variety of crosswinds that we saw over the past couple months. Historically, this kind of uncertainty elongates enterprise IT cycle, as we heard from a couple of the larger caps that we reported last week. However, the enthusiasm that we are seeing with HMT-AI And with your recent GA vector product agent, a ton of new AI product announcement with autonomous event on Thursday, excited for that. Are you finding this strategic urgency to deploy AI capability is like overriding the localized macro caution? And what are you seeing around those crosswinds that are on your due cycle in the quarter?

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. The second thing is, as we look at customers, they're having a real challenge deploying AI in production. and they see the Teradata platform along with the announcements we've already made and the upcoming roadmap that we're 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. We're 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're certainly seeing that pivot. Everybody wants to get the business outcomes from AI, and they're absolutely focused on doing that as quickly as possible, and we intend to capitalize on that.

That's good to hear. I have a follow-up for John. Like the quarter sounder like hybrid continue to be like a bigger driver, especially with sovereign AI set 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 like in Q4, we talked about you'll be able to stop the memory pricing impact, even the long data contract. 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.

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's becoming quite pervasive in the marketplace. I would say that for us from a financial standpoint, it's probably more of an FY27 challenge and opportunity as opposed to FY26. We'll 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 FY27. Now, having said all that, from a pricing standpoint, That's the piece that we're looking the closest at. And the thing that we'll focus on is to make sure that we protect ourselves from a margin standpoint as we go to market with that.

Thank you. Look forward to Thursday. See everyone out there. Thanks. Sure. Thanks.

Your next question comes from Eric Wittering with Morgan Stanley. Your line is open.

Hi, this is Ralph. You're all on behalf of Eric. 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?

Yeah, thanks for your question. I'll start and then I'll hand over to John. Yeah, 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. And we see good path and opportunity for that to continue, based both on the expansions that we're generating inside our customer base, but also the incredible interest that we've gotten using the platform for AI-type workloads. And then from an operating margin perspective,

have a number of initiatives in the business that we're looking at to improve operating margins as we continue forward john yeah um yeah thanks for the question uh so gross margins are a little complicated on the recurring side for us you've got different dynamics uh at play with both the cloud side of our business as well as the on-prem uh in q1 we did see a nice spike up in gross margin at least relative to the last couple of quarters uh at 70 percent 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 to the remainder of the year, we would expect them to be a little bit more consistent with recent quarters that we saw at the end of FY25. Now, underneath that, we are seeing improvement in our cloud gross margin, and that's a critical factor for us. I know we don't 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.

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're hearing at the micro level as it relates to demand for data prep, unstructured data, et cetera. Just any sense of maybe how these couple factors are impacting your business. Thank you.

Yeah, I think we're still seeing a very solid demand environment. The challenges in the Middle East haven't substantially impacted our business at all, really. And the demand patterns that we're seeing really reinforce the value that organizations want to get out of the investments they're 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 wanted to deploy AI and get the benefit from AI, the vast majority, 99%, are having a problem getting from pilot to production. So that really is altering the conversation that we're having with customers as they look at Teradata as a platform and a knowledge platform that can deliver the agentic AI workloads that they need. So that's resulted 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's in front of us.

Great. Thank you. Very helpful.

Your next question comes from Matt Hedberg with RBC Capital Market. Your line is open.

Great, thanks for taking my question. Steve, as a follow-up to that earlier question, it really does seem like there's a lot of momentum in AI, and I think we'll hear more about that later this week. The MCP server interest is high. I guess I'm curious, is there a way for you to determine what the actual ARR benefit you're seeing from some of these increases in AI workloads within your base?

Yeah, I think what we're seeing is that helping those customers cross the chasm from pilot to production And it's certainly driving usage and capacity usage of the Teradata platform. One of the benefits that we've got in terms of the Teradata platform is agentic AI workloads with always-on agents are driving a tremendous volume of queries. They're driving a huge concurrency of queries and complexity of queries into the respective data platforms. That's Teradata's sweet spot in terms of how we execute and the technology that we've got. And I think we're seeing customers really take advantage of that. And there's a little bit of a shift from standard BI workloads towards more of agentic-type workloads. But we also see the opportunity opening up to serve both in the cloud and on-premise those agentic AI workloads. And we see it as an opportunity for us to drive incremental ARR growth, especially with the new products that we'll be announcing on Thursday of this week.

That's great. And maybe for John, it was great to hear that retention was solid in the quarter. I guess I'm curious, you know, is there anything we should keep in mind regarding large renewals for the balance of this year?

No, I don't think there's anything particular on that front. In general, we're seeing improved retention rates. We actually started to see that in fiscal 25, and we're carrying that through here in 26 and started off on a good note in Q1. So, I think in general, we've done a nice job of getting closer to the customers, understanding that process better around key renewals, and making sure that we're in good position to do that.

Got it. Thanks. Your next question comes from Romo Lenscha with Barclays. Your line is open.

Hi, this is Sheldon McMinn, Don for Romo. 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 interests seem to be healthy, and I completely understand we're operating in a very dynamic environment. But could you help us understand the puts and takes and maybe any balancing factors that motivated the maintained four-year ARR guidance?

Well, I think that if you look at the total ARR number for Q1 on a reported basis, 3%, that's 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, you know, we're seeing, you know, decent demand across the product lines. and optimistic about some of the things that we'll start to introduce later this week. Now, those won't have a material impact on FY26, but in general, we're seeing better demand.

Understood. Congrats on a solid quarter. Thanks.

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

Oh, great. Thank you very much. Could I start by asking, you're commenting 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? Yeah.