To The Moon

$Teradata(TDC)$ delivered earnings that exceeded expectations, significantly improved cash flow, and presented a monetizable roadmap for "Agentic AI" during its Q3 2025 earnings report and conference call— These signals swiftly transformed market concerns (revenue decline, cloud linearity) into a dual catalyst of "execution recovery + long-term growth narrative," triggering a rapid stock price surge. This sharp rally stems from the combined effect of four key drivers: earnings beat (EPS/FCF), upward guidance revisions, the monetizable AI narrative, and share buybacks/execution continuity. In the short term, the market has combined the downgrade of execution risks with future growth expectations, thereby driving valuation increases. Key Financial Highlights Public cloud ARR reached $633 million, up 11% year-over-year (same at constant currency), exceeding market consensus (expected around +8-10%), and up 4% quarter-over-quarter. Growth was primarily driven by surging demand for AI agent workloads, propelling customers to migrate from traditional data warehouses to the cloud. This underscores Teradata's competitive strength in hybrid cloud and AI knowledge platforms. Overall ARR grew only 1% YoY (flat at constant currency), reflecting structural weakness in non-cloud businesses and indicating that transformation efforts have not yet fully offset the contraction in on-premises operations. Total revenue reached $416 million, down 5% year-over-year (down 6% at constant currency) and up 2% quarter-over-quarter. Recurring revenue accounted for 88% ($366 million, down 2% YoY), while perpetual license and hardware revenue was negligible ($3 million, down 57% YoY). Consulting services revenue totaled $47 million (down 23% YoY). Revenue slightly exceeded analyst expectations ($411 million), but the decline was primarily driven by macroeconomic uncertainty and cautious customer spending. This indicates that while the transition to a subscription-based business model is progressing steadily, it has not yet fully offset the contraction in traditional revenue streams. Gross margin and service-side margins improved, with profit leverage beginning to materialize. Overall gross margin reached 62.3% (YoY +70bp, QoQ +400bp), with improvements observed in both service-related and recurring gross margins. Against the backdrop of "slower growth but better profitability," the company can generate higher cash flow with lower growth rates, making it highly attractive to investors shifting toward a "discounted cash flow" valuation model. Non-GAAP diluted earnings per share: $0.72, up 4% year-over-year and 53% quarter-over-quarter. This performance significantly exceeded market expectations ($0.58, 24% margin) due to improved operational efficiency (such as sales and R&D expense control) and restructuring initiatives, driving the operating margin to 23.6% (up 110 basis points year-over-year). However, while GAAP EPS of $0.42 rose 27% YoY, the pre-tax profit margin remained flat at 13% YoY. This indicates that cost management, rather than revenue expansion, was the core driver of profit improvement. Free cash flow reached $88 million, up 28% year-over-year and 76% quarter-over-quarter. This robust cash flow stemmed from a $94 million improvement in operating cash flow (up 22% year-over-year) and optimized inventory and accounts receivable management. This metric exceeded expectations, underscoring Teradata's financial resilience. However, the full-year guidance range of $260 million to $280 million implies that Q4 must maintain high efficiency to avoid potential seasonal pressures. Guidance and Management Comments Teradata's Q4 2025 guidance projects recurring revenue at -1% to -3% year-over-year (at constant currency), total revenue at -2% to -4%, and non-GAAP EPS at $0.53 to $0.57; Full-year total ARR is expected to be flat to +2%, with cloud ARR growing +14% to +18%. Non-GAAP EPS guidance has been raised to $2.38 to $2.42, and free cash flow is projected at $260 million to $280 million. We view this guidance as conservative. The ARR framework remains unchanged to account for variability in customer deployment decisions, but the EPS and cash flow increases signal confidence in execution. The "cautious yet confident" tone in the earnings call boosted credibility. Analysts questioned cloud linearity and AI persistence, but management addressed cost alignment, reasons for transactional linearity, and restructuring effects, while reaffirming full-year guidance. Risks were clearly identified without exaggeration; management's transparent and non-evasive communication reduced information asymmetry—investors view "known manageable risks" as priceable risks, making them more willing to buy; conversely, unknown execution risks lead to discounts. Key Investment Considerations From a structural perspective, Teradata's cloud ARR and AI agency business have become sustainable long-term growth engines, benefiting from enterprises' essential demand for hybrid AI knowledge platforms. For instance, QueryGrid's patented integration capabilities support workload expansion in the regulatory sector. Unlike past EDW dependencies, its 25x query potential could unlock or reshape revenue ceilings. Conversely, service and perpetual license revenues remain more susceptible to macro sentiment and project cycles. The Q3 decline signals heightened short-term volatility, reminiscent of the industry's transition pains from hardware to subscription models. Agent workloads can scale to 25x query volume and 50-100x computational resource consumption. This opportunity stems from enterprises reevaluating agent-based AI, driving evolution from generative AI to autonomous decision-making agents. Teradata's Vantage platform delivers millisecond responses through patented QueryGrid and massively parallel architecture, supporting millisecond-level responses for cross-cloud/ on-premises environments. This capability was demonstrated in Q3 customer cases, such as an automotive manufacturer expanding its AWS cloud platform for AI/ML workloads. While market consensus has yet to be fully quantified, AI's contribution to overall cloud ARR growth is projected to rise steadily within the 11% increase. New product launches: AgentBuilder and Autonomous Customer Intelligence. AgentBuilder, as a development kit, integrates open-source frameworks like Flowise and CrewAI to support rapid construction of multi-agent workflows; Autonomous Customer Intelligence embeds itself within customer experience journeys, leveraging four decades of contextual knowledge to enable real-time decision-making agents. This initiative addresses the high failure rate of AI pilots (estimated at over 70%) by accelerating the journey from concept to production through governance and contextual frameworks. Q3 financial reports indicate a significant shift in the AI project pipeline, with over 150 AI engagement initiatives underway. However, growth remains weaker than pure-play AI competitors like Snowflake, reflecting Teradata's conservative penetration strategy within its hybrid model. Service Expansion: AI Services' Sprint-Based Approach. New services adopt an agile sprint model, combining embedded experts and knowledge platforms to help enterprises scale agent use cases such as anti-money laundering, medical image processing, and customer personalization. Growth stems from addressing pain points of data fragmentation and inconsistent access. Strong Q3 free cash flow ($88 million, +28% YoY) partly reflects service efficiency, though a 23% decline in consulting revenue indicates short-term reliance on project cycles. Outperformance relative to market expectations stems from bundling with the Vantage platform, signaling a shift from hardware to AI services. In terms of ecosystem partnerships, integrations with partners like ServiceNow. Expanding agent capabilities through APIs and automated workflows to drive platformization. Q3 use cases include fraud detection for Vodafone UK and credit risk management for Sicredi. This factor strengthens Teradata's opportunities in regulated industries like finance and healthcare, where demand for deterministic AI is growing. However, while the cloud net expansion rate of 109% quarter-over-quarter remains robust, it fell short of consensus expectations, potentially due to macroeconomic caution in IT spending. Valuation Perspective Short term (0–3 months): Earnings-driven "trust restoration + AI narrative" remains dominant, with high volatility but an upward bias. Mid-term (3–12 months): Monitor the sustainability of Cloud ARR, the commercial revenue realization of AI products (AgentBuilder, Autonomous CX), and expansion into large enterprise customers. If growth continues to accelerate, valuation will be further recalibrated based on growth expectations; otherwise, valuation will revert to a discount level primarily driven by cash flow. Long-term (≥12 months): Whether the company can transform the computational power/data usage amplification effect brought by Agentic AI into long-term, high-frequency subscriptions and high-margin services will be the key determinant of its ability to escape the "growth discount."