|
|
|
|
|
|
Item 1.
|
Financial Statements.
|
Teradata Corporation
Condensed Consolidated Statements of (Loss) Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions, except per share amounts
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue
|
|
|
|
|
|
|
|
|
Recurring
|
$
|
338
|
|
|
$
|
312
|
|
|
$
|
669
|
|
|
$
|
614
|
|
|
Perpetual software licenses and hardware
|
29
|
|
|
97
|
|
|
60
|
|
|
166
|
|
|
Consulting services
|
111
|
|
|
135
|
|
|
217
|
|
|
270
|
|
|
Total revenue
|
478
|
|
|
544
|
|
|
946
|
|
|
1,050
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
Cost of recurring
|
107
|
|
|
88
|
|
|
213
|
|
|
178
|
|
|
Cost of perpetual software licenses and hardware
|
26
|
|
|
73
|
|
|
51
|
|
|
121
|
|
|
Cost of consulting services
|
109
|
|
|
133
|
|
|
222
|
|
|
278
|
|
|
Total cost of revenue
|
242
|
|
|
294
|
|
|
486
|
|
|
577
|
|
|
Gross profit
|
236
|
|
|
250
|
|
|
460
|
|
|
473
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
145
|
|
|
163
|
|
|
296
|
|
|
315
|
|
|
Research and development expenses
|
81
|
|
|
77
|
|
|
159
|
|
|
152
|
|
|
Total operating expenses
|
226
|
|
|
240
|
|
|
455
|
|
|
467
|
|
|
Income from operations
|
10
|
|
|
10
|
|
|
5
|
|
|
6
|
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
Interest expense
|
(8
|
)
|
|
(5
|
)
|
|
(17
|
)
|
|
(10
|
)
|
|
Interest income
|
6
|
|
|
4
|
|
|
12
|
|
|
7
|
|
|
Other expense
|
(3
|
)
|
|
(3
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
Total other expense, net
|
(5
|
)
|
|
(4
|
)
|
|
(10
|
)
|
|
(8
|
)
|
|
Income (loss) before income taxes
|
5
|
|
|
6
|
|
|
(5
|
)
|
|
(2
|
)
|
|
Income tax expense
|
6
|
|
|
2
|
|
|
6
|
|
|
1
|
|
|
Net (loss) income
|
$
|
(1
|
)
|
|
$
|
4
|
|
|
$
|
(11
|
)
|
|
$
|
(3
|
)
|
|
Net (loss) income per common share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
115.5
|
|
|
119.5
|
|
|
116.3
|
|
|
120.4
|
|
|
Diluted
|
115.5
|
|
|
121.5
|
|
|
116.3
|
|
|
120.4
|
|
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Teradata Corporation
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net (loss) income
|
$
|
(1
|
)
|
|
$
|
4
|
|
|
$
|
(11
|
)
|
|
$
|
(3
|
)
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(1
|
)
|
|
(21
|
)
|
|
(7
|
)
|
|
(17
|
)
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Unrealized loss on derivatives, before tax
|
(9
|
)
|
|
(3
|
)
|
|
(13
|
)
|
|
(3
|
)
|
|
Unrealized loss on derivatives, tax portion
|
2
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Unrealized loss on derivatives, net of tax
|
(7
|
)
|
|
(3
|
)
|
|
(10
|
)
|
|
(3
|
)
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustment, before tax
|
1
|
|
|
4
|
|
|
2
|
|
|
4
|
|
|
Defined benefit plan adjustment, tax portion
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Defined benefit plan adjustment, net of tax
|
1
|
|
|
3
|
|
|
2
|
|
|
3
|
|
|
Other comprehensive loss
|
(7
|
)
|
|
(21
|
)
|
|
(15
|
)
|
|
(17
|
)
|
|
Comprehensive loss
|
$
|
(8
|
)
|
|
$
|
(17
|
)
|
|
$
|
(26
|
)
|
|
$
|
(20
|
)
|
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Teradata Corporation
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except per share amounts
|
June 30,
2019
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
635
|
|
|
$
|
715
|
|
|
Accounts receivable, net
|
377
|
|
|
588
|
|
|
Inventories
|
35
|
|
|
28
|
|
|
Other current assets
|
82
|
|
|
97
|
|
|
Total current assets
|
1,129
|
|
|
1,428
|
|
|
Property and equipment, net
|
317
|
|
|
295
|
|
|
Capitalized software, net
|
49
|
|
|
72
|
|
|
Right of use assets - operating lease, net
|
58
|
|
|
—
|
|
|
Goodwill
|
396
|
|
|
395
|
|
|
Acquired intangible assets, net
|
12
|
|
|
16
|
|
|
Deferred income taxes
|
70
|
|
|
67
|
|
|
Other assets
|
92
|
|
|
87
|
|
|
Total assets
|
$
|
2,123
|
|
|
$
|
2,360
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
Current liabilities
|
|
|
|
|
Current portion of long-term debt
|
$
|
25
|
|
|
$
|
19
|
|
|
Current portion of finance lease liability
|
32
|
|
|
17
|
|
|
Current portion of operating lease liability
|
20
|
|
|
—
|
|
|
Accounts payable
|
102
|
|
|
141
|
|
|
Payroll and benefits liabilities
|
114
|
|
|
224
|
|
|
Deferred revenue
|
498
|
|
|
490
|
|
|
Other current liabilities
|
74
|
|
|
118
|
|
|
Total current liabilities
|
865
|
|
|
1,009
|
|
|
Long-term debt
|
466
|
|
|
478
|
|
|
Finance lease liability
|
54
|
|
|
30
|
|
|
Operating lease liability
|
44
|
|
|
—
|
|
|
Pension and other postemployment plan liabilities
|
102
|
|
|
113
|
|
|
Long-term deferred revenue
|
82
|
|
|
105
|
|
|
Deferred tax liabilities
|
4
|
|
|
3
|
|
|
Other liabilities
|
139
|
|
|
127
|
|
|
Total liabilities
|
1,756
|
|
|
1,865
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
|
—
|
|
|
—
|
|
|
Common stock: par value $0.01 per share, 500.0 shares authorized, 114.1 and 116.8 shares issued at June 30, 2019 and December 31, 2018, respectively
|
1
|
|
|
1
|
|
|
Paid-in capital
|
1,491
|
|
|
1,418
|
|
|
Accumulated deficit
|
(1,009
|
)
|
|
(823
|
)
|
|
Accumulated other comprehensive loss
|
(116
|
)
|
|
(101
|
)
|
|
Total stockholders’ equity
|
367
|
|
|
495
|
|
|
Total liabilities and stockholders’ equity
|
$
|
2,123
|
|
|
$
|
2,360
|
|
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Teradata Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
In millions
|
2019
|
|
2018
|
|
Operating activities
|
|
|
|
|
Net loss
|
$
|
(11
|
)
|
|
$
|
(3
|
)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
77
|
|
|
64
|
|
|
Stock-based compensation expense
|
37
|
|
|
35
|
|
|
Deferred income taxes
|
—
|
|
|
(6
|
)
|
|
Changes in assets and liabilities:
|
|
|
|
|
Receivables
|
211
|
|
|
185
|
|
|
Inventories
|
(7
|
)
|
|
2
|
|
|
Current payables and accrued expenses
|
(155
|
)
|
|
(31
|
)
|
|
Deferred revenue
|
(15
|
)
|
|
90
|
|
|
Other assets and liabilities
|
(33
|
)
|
|
(46
|
)
|
|
Net cash provided by operating activities
|
104
|
|
|
290
|
|
|
Investing activities
|
|
|
|
|
Expenditures for property and equipment
|
(27
|
)
|
|
(58
|
)
|
|
Additions to capitalized software
|
(2
|
)
|
|
(4
|
)
|
|
Net cash used in investing activities
|
(29
|
)
|
|
(62
|
)
|
|
Financing activities
|
|
|
|
|
Repurchases of common stock
|
(175
|
)
|
|
(157
|
)
|
|
Repayments of long-term borrowings
|
(6
|
)
|
|
(40
|
)
|
|
Repayments of credit facility borrowings
|
—
|
|
|
(240
|
)
|
|
Payments of finance leases
|
(9
|
)
|
|
—
|
|
|
Other financing activities, net
|
36
|
|
|
18
|
|
|
Net cash used in financing activities
|
(154
|
)
|
|
(419
|
)
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
—
|
|
|
(15
|
)
|
|
Decrease in cash, cash equivalents and restricted cash
|
(79
|
)
|
|
(206
|
)
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
716
|
|
|
1,089
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
637
|
|
|
$
|
883
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure:
|
|
|
|
|
Assets acquired under operating lease
|
$
|
4
|
|
|
$
|
—
|
|
|
Assets acquired under finance lease
|
$
|
48
|
|
|
$
|
—
|
|
Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Cash and cash equivalents
|
$
|
635
|
|
|
$
|
715
|
|
|
Restricted cash
|
2
|
|
|
1
|
|
|
Total cash, cash equivalents and restricted cash
|
$
|
637
|
|
|
$
|
716
|
|
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Teradata Corporation
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Accumulated
|
|
Accumulated Other Comprehensive
|
|
|
|
In millions
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Total
|
|
December 31, 2018
|
117
|
|
|
$
|
1
|
|
|
$
|
1,418
|
|
|
$
|
(823
|
)
|
|
$
|
(101
|
)
|
|
$
|
495
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
(10
|
)
|
|
Employee stock compensation, employee stock purchase programs and option exercises
|
1
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
48
|
|
|
Repurchases of common stock, retired
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
—
|
|
|
(58
|
)
|
|
Pension and postemployment benefit plans, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Unrealized loss on derivatives, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
March 31, 2019
|
117
|
|
|
$
|
1
|
|
|
$
|
1,466
|
|
|
$
|
(891
|
)
|
|
$
|
(109
|
)
|
|
$
|
467
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Employee stock compensation, employee stock purchase programs and option exercises
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
Repurchases of common stock, retired
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(117
|
)
|
|
—
|
|
|
(117
|
)
|
|
Pension and postemployment benefit plans, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Unrealized loss on derivatives, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
June 30, 2019
|
114
|
|
|
$
|
1
|
|
|
$
|
1,491
|
|
|
$
|
(1,009
|
)
|
|
$
|
(116
|
)
|
|
$
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Accumulated
|
|
Accumulated Other Comprehensive
|
|
|
|
In millions
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Total
|
|
December 31, 2017
|
122
|
|
|
$
|
1
|
|
|
$
|
1,320
|
|
|
$
|
(579
|
)
|
|
$
|
(74
|
)
|
|
$
|
668
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
|
Employee stock compensation, employee stock purchase programs and option exercises
|
1
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
Repurchases of common stock, retired
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(77
|
)
|
|
—
|
|
|
(77
|
)
|
|
Adoption of ASC 606
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
March 31, 2018
|
121
|
|
|
$
|
1
|
|
|
$
|
1,350
|
|
|
$
|
(637
|
)
|
|
$
|
(70
|
)
|
|
$
|
644
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
Employee stock compensation, employee stock purchase programs and option exercises
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
Repurchases of common stock, retired
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(81
|
)
|
|
—
|
|
|
(81
|
)
|
|
Pension and postemployment benefit plans, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
Unrealized loss on derivatives, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21
|
)
|
|
(21
|
)
|
|
June 30, 2018
|
$
|
119
|
|
|
$
|
1
|
|
|
$
|
1,376
|
|
|
$
|
(714
|
)
|
|
$
|
(91
|
)
|
|
$
|
572
|
|
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
These statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the results of operations, financial position and cash flows of Teradata Corporation (“Teradata” or the “Company”) for the interim periods presented herein. The year-end
2018
condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Teradata’s most recent Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
(the “
2018
Annual Report”). The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year. Prior period amounts have been restated to conform to the current year presentation, except for lease accounting discussed in Notes 2 and 12.
2. New Accounting Pronouncements
Fair Value Measurement.
In August 2018, the Financial Accounting Standards Board ("FASB") issued new guidance that modifies disclosure requirements related to fair value measurement. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this update while delaying adoption of the additional disclosures until their effective date. The Company is currently evaluating this guidance to determine the impact it may have on its disclosures.
Compensation-Retirement Benefits-Defined Benefit Plans-General
. In August 2018, the FASB issued new guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and is to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact it may have on its disclosures.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
In August 2018, the FASB issued
new guidance that reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). For public companies, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.
Codification Improvements to Financial Instruments-Credit Losses, Derivatives and Hedging, and Financial Instruments.
In June 2016, the FASB issued Accounting Standards, Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. Since the
issuance of this accounting standard, the Board has identified certain areas that require clarification and improvement. In May 2019, the FASB issued guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit losses standard to measure financial assets measured at amortized cost (except held-to-maturity securities) using the fair value option. The election is to be applied on an instrument-by-instrument basis. For entities that have already adopted the new credit losses standard, the relief is effective for fiscal years beginning after December 15, 2019 and interim periods therein, and early adoption is permitted. For all other entities, the guidance is effective upon adoption of the new credit losses standard. The company is currently evaluating this new guidance to determine the impact it may have on our financial position, results of operations or cash flows.
Recently Adopted Guidance
Leases.
In February 2016, the FASB issued new guidance under Topic 842, which requires a lessee to account for leases as finance or operating leases. Both types of leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement and cash flow recognition. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. Entities will classify leases to determine how to recognize lease-related revenue and expense. We adopted the new standard as of January 1, 2019 using the modified retrospective adoption approach utilizing the optional transition method with prior periods not recast and have elected certain of the practical expedients allowed under the standard. The Condensed Consolidated Financial Statements for the three and six months ended June 30, 2019 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with our historical accounting policy. See Note 12 for more information.
Comprehensive Income.
In February 2018, the FASB issued new guidance for Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows companies to reclassify stranded tax effects resulting from the Tax Reform Act from accumulated other comprehensive income to retained earnings. The impact of applying this standard did not have a material impact on our condensed consolidated financial statements.
Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.
In June 2018, the FASB issued new guidance to clarify and improve the scope and the accounting guidance for contributions received and contributions made. The amendments are intended to assist entities in evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) or as exchange (reciprocal) transactions and determining whether a contribution is conditional. The Company adopted this guidance on January 1, 2019, which did not have a material impact on our condensed consolidated financial statements.
3. Revenue from Contracts with Customers
Disaggregation of Revenue from Contracts with Customers
The following table presents a disaggregation of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
in millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Americas
|
|
|
|
|
|
|
|
|
Recurring
|
$
|
217
|
|
|
$
|
199
|
|
|
$
|
430
|
|
|
$
|
392
|
|
|
Perpetual software licenses and hardware
|
12
|
|
|
40
|
|
|
31
|
|
|
62
|
|
|
Consulting services
|
40
|
|
|
48
|
|
|
77
|
|
|
97
|
|
|
Total Americas
|
269
|
|
|
287
|
|
|
538
|
|
|
551
|
|
|
EMEA
|
|
|
|
|
|
|
|
|
Recurring
|
75
|
|
|
70
|
|
|
148
|
|
|
137
|
|
|
Perpetual software licenses and hardware
|
10
|
|
|
10
|
|
|
17
|
|
|
43
|
|
|
Consulting services
|
37
|
|
|
47
|
|
|
70
|
|
|
96
|
|
|
Total EMEA
|
122
|
|
|
127
|
|
|
235
|
|
|
276
|
|
|
APAC
|
|
|
|
|
|
|
|
|
Recurring
|
46
|
|
|
43
|
|
|
91
|
|
|
85
|
|
|
Perpetual software licenses and hardware
|
7
|
|
|
47
|
|
|
12
|
|
|
61
|
|
|
Consulting services
|
34
|
|
|
40
|
|
|
70
|
|
|
77
|
|
|
Total APAC
|
87
|
|
|
130
|
|
|
173
|
|
|
223
|
|
|
Total Revenue
|
$
|
478
|
|
|
$
|
544
|
|
|
$
|
946
|
|
|
$
|
1,050
|
|
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets, and customer advances and deposits (deferred revenue or contract liabilities) on the condensed consolidated balance sheet. Accounts receivable include amounts due from customers that are unconditional. Contract assets relate to the Company’s rights to consideration for goods delivered or services completed and recognized as revenue but billing and the right to receive payment is conditional upon the completion of other performance obligations. Contract assets are included in other current assets on the balance sheet and are transferred to accounts receivable when the rights become unconditional. Deferred revenue consists of advance payments and billings in excess of revenue recognized. Deferred revenue is classified as either current or noncurrent based on the timing of when the Company expects to recognize revenue. These assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period. The following table provides information about receivables, contract assets and deferred revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
in millions
|
June 30, 2019
|
|
December 31, 2018
|
|
Accounts receivable, net
|
$
|
377
|
|
|
$
|
588
|
|
|
Contract assets
|
$
|
6
|
|
|
$
|
14
|
|
|
Current deferred revenue
|
$
|
498
|
|
|
$
|
490
|
|
|
Long-term deferred revenue
|
$
|
82
|
|
|
$
|
105
|
|
Revenue recognized during the six months ended June 30, 2019 from amounts included in deferred revenue at the beginning of the period was
$402 million
.
Transaction Price Allocated to Unsatisfied Obligations
The following table includes estimated revenue expected to be recognized in the future related to the Company's unsatisfied (or partially satisfied) obligations at June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
Total at June 30, 2019
|
|
Year 1
|
|
Year 2 and Thereafter
|
|
Remaining unsatisfied obligations
|
|
$
|
2,530
|
|
|
$
|
1,182
|
|
|
$
|
1,348
|
|
The amounts above represent the price of firm orders for which work has not been performed or goods have not been delivered and exclude unexercised contract options outside the stated contractual term that do not represent material rights to the customer. Although the Company believes that the contract value in the above table is firm, approximately
$1,636 million
of the amount includes customer-only general cancellation for convenience terms that the Company is contractually obligated to perform unless the customer notifies us. The Company expects to recognize revenue of approximately
$437 million
in the next year from contracts that are non-cancelable. Customers typically do not cancel before the end of the contractual term and historically the Company has seen very little churn in its customer base. The Company believes the inclusion of this information is important to understanding the obligations that the Company is contractually required to perform and provides useful information regarding remaining obligations related to these executed contracts.
4. Contract Costs
The Company capitalizes sales commissions and other contract costs that are incremental direct costs of obtaining customer contracts if the expected amortization period of the asset is greater than one year. These costs are recorded in Other Assets on the Company’s balance sheet. The capitalized amounts are calculated based on the annual recurring revenue and total contract value for individual multi-term contracts. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are amortized as selling, general and administrative expenses on a straight-line basis over the expected period of benefit, which is typically around
four years
. These costs are periodically reviewed for impairment. The following table identifies the activity relating to capitalized contract costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
December 31, 2018
|
|
Capitalized
|
|
Amortization
|
|
June 30, 2019
|
|
Capitalized contract costs
|
|
54
|
|
|
17
|
|
|
(8
|
)
|
|
63
|
|
5. Supplemental Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
In millions
|
June 30,
2019
|
|
December 31,
2018
|
|
Inventories
|
|
|
|
|
Finished goods
|
$
|
23
|
|
|
$
|
16
|
|
|
Service parts
|
12
|
|
|
12
|
|
|
Total inventories
|
$
|
35
|
|
|
$
|
28
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
|
|
Deferred revenue, current
|
$
|
498
|
|
|
$
|
490
|
|
|
Long-term deferred revenue
|
82
|
|
|
105
|
|
|
Total deferred revenue
|
$
|
580
|
|
|
$
|
595
|
|
6. Goodwill and Acquired Intangible Assets
Effective January 1, 2019, the Company implemented an organizational change to its operating segments and will report future results under the separate segments: Americas, EMEA and APAC. The following table identifies the activity relating to goodwill by operating segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
December 31, 2018
|
|
Reassignment of Goodwill
|
|
Currency translation adjustments
|
|
June 30, 2019
|
|
Goodwill
|
|
|
|
|
|
|
|
|
Americas
|
$
|
253
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
253
|
|
|
International
|
142
|
|
|
(142
|
)
|
|
—
|
|
|
—
|
|
|
EMEA
|
—
|
|
|
88
|
|
|
—
|
|
|
88
|
|
|
APAC
|
—
|
|
|
54
|
|
|
1
|
|
|
55
|
|
|
Total goodwill
|
$
|
395
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
396
|
|
Acquired intangible assets were specifically identified when acquired and are deemed to have finite lives. The gross carrying amount and accumulated amortization for the Company's acquired intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
In millions
|
Amortization
Life (in Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
and Currency
Translation
Adjustments
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
and Currency
Translation
Adjustments
|
|
Acquired intangible assets
|
|
|
|
|
|
|
|
|
|
|
Intellectual property/developed technology
|
1 to 7
|
|
$
|
35
|
|
|
$
|
(23
|
)
|
|
$
|
35
|
|
|
$
|
(20
|
)
|
The aggregate amortization expense (actual and estimated) for acquired intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30,
|
|
In millions
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amortization expense
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For the years ended (estimated)
|
|
In millions
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
|
Amortization expense
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
7. Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. As a result of the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act”), the Company changed its indefinite reversal assertion related to its undistributed earnings of its foreign subsidiaries and no longer considers a majority of its foreign earnings permanently reinvested outside of the United States ("U.S."). As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business.
The effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
In millions
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Effective tax rate
|
|
120.0
|
%
|
|
33.3
|
%
|
|
(120.0
|
)%
|
|
(50.0
|
)%
|
For the three months and six months ended
June 30, 2019
, a
$4 million
discrete tax item was recorded related to an uncertain tax position resulting from the reversal of the Tax Court’s decision in the Altera case by the Ninth Circuit Court of Appeals on June 7, 2019. The Altera case focused on whether current U.S. Treasury Regulations requiring the inclusion of stock-based compensation expense in a taxpayer's cost-sharing calculations are valid. As a result of this discrete item and incremental tax expense related to equity compensation, the Company recorded income tax expense of
$6 million
on a pre-tax net loss of
$5 million
for the six months ended
June 30, 2019
, resulting in an effective income tax rate of
(120.0)%
.
There were no material discrete tax items recorded for the three or six month periods ended
June 30, 2018
. Discrete tax items related to interest accruals on uncertain tax positions and equity-based compensation resulted in income tax expense of
$1 million
on a pre-tax net loss of
$2 million
for the six months ended
June 30, 2018
, resulting in an effective income tax rate of
(50.0)%
.
The Company estimates its annual effective tax rate for 2019 to be approximately
21%
, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction. The 2017 Tax Act subjects U.S. shareholders to a tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The Company has elected to provide for the tax expense related to GILTI in the year the tax is incurred. The Company does not expect a material amount of tax expense related to GILTI based on our forecasted marginal effective tax rate for 2019.
8. Derivative Instruments and Hedging Activities
As a portion of Teradata’s operations is conducted outside the U.S. and in currencies other than the U.S. dollar, the Company is exposed to potential gains and losses from changes in foreign currency exchange rates. In an attempt to mitigate the impact of currency fluctuations, the Company uses foreign exchange forward contracts to hedge transactional exposures resulting predominantly from foreign currency denominated inter-company receivables and payables. The forward contracts are designated as fair value hedges of specified foreign currency denominated inter-company receivables and payables and generally mature in three months or less. The fair values of foreign exchange contracts are based on market spot and forward exchange rates and represent estimates of possible value that may not be realized in the future. Across its portfolio of contracts, Teradata has both long and short positions relative to the U.S. dollar. As a result, Teradata’s net involvement is less than the total contract notional amount of the Company’s foreign exchange forward contracts.
Gains and losses from foreign exchange forward contracts are fully recognized each period and reported along with the offsetting gain or loss of the related hedged item, either in cost of revenues or in other income (expense), depending on the nature of the related hedged item.
In June 2018, Teradata executed a five-year interest rate swap with a
$500 million
initial notional amount to hedge the floating interest rate of its Term Loan, as more fully described in Note 11. The Company uses interest rate swaps to manage interest rate risks on future interest payments caused by interest rate changes on its variable rate term loan facility. The notional amount of the hedge will step-down according to the amortization schedule of the term loan. The notional amount of the hedge was
$494 million
as of June 30, 2019.
The Company performed an initial effectiveness assessment in the third quarter of 2018 on the interest rate swap and the hedge was determined to be effective. The hedge is being evaluated qualitatively on a quarterly basis for effectiveness. Changes in fair value are recorded in Accumulated Other Comprehensive Loss and periodic settlements of the swap will be recorded in interest expense along with the interest on amounts outstanding under the term loan facility.
The following table identifies the contract notional amount of the Company’s derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
In millions
|
June 30,
2019
|
|
December 31,
2018
|
|
Contract notional amount of foreign exchange forward contracts
|
$
|
156
|
|
|
$
|
256
|
|
|
Net contract notional amount of foreign exchange forward contracts
|
$
|
46
|
|
|
$
|
35
|
|
|
Contract notional amount of interest rate swap
|
$
|
494
|
|
|
$
|
500
|
|
All derivatives are recognized in the condensed consolidated balance sheets at their fair value. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based and are an indication of the extent of Teradata’s involvement in such instruments. These notional amounts do not represent amounts exchanged by the parties and, therefore, are not a measure of the instruments. Refer to Note 10 for disclosures related to the fair value of all derivative assets and liabilities.
The Company does not hold or issue derivative financial instruments for trading purposes, nor does it hold or issue leveraged derivative instruments. By using derivative financial instruments to hedge exposures to changes in foreign exchange and interest rates, the Company exposes itself to credit risk. The Company manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of the applicable contracts.
9. Commitments and Contingencies
In the ordinary course of business, the Company is subject to proceedings, lawsuits, governmental investigations, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, intellectual property, tax matters and other regulatory compliance and general matters. We are not currently a party to any litigation, nor are we aware of any pending or threatened litigation against us that we believe would materially affect our business, operating results, financial condition or cash flows.
Guarantees and Product Warranties.
Guarantees associated with the Company’s business activities are reviewed for appropriateness and impact to the Company’s financial statements. Periodically, the Company’s customers enter into various leasing arrangements with a third-party leasing company as part of a revenue transaction, whereby the leasing company purchases the equipment from Teradata and leases it to the customer. In some instances, the Company guarantees the leasing company a minimum value at the end of the lease term on the leased equipment. As of
June 30, 2019
, the maximum future payment obligation of this guaranteed value and the associated liability balance was
$3 million
.
The Company provides its customers a standard manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls and cost of replacement parts. For each consummated sale, the Company recognizes the total customer revenue and
records the associated warranty liability under other current liabilities in the balance sheet using pre-established warranty percentages for that product class.
The following table identifies the activity relating to the warranty reserve for the
six
months ended
June 30
:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
Warranty reserve liability
|
|
|
|
|
Beginning balance at January 1
|
$
|
3
|
|
|
$
|
4
|
|
|
Accrual of warranties issued
|
1
|
|
|
2
|
|
|
Settlements (in cash or in kind)
|
(2
|
)
|
|
(3
|
)
|
|
Balance at June 30
|
$
|
2
|
|
|
$
|
3
|
|
The Company also offers extended and/or enhanced coverage to its customers in the form of maintenance contracts. The Company accounts for these contracts by deferring the related maintenance revenue over the extended and/or enhanced coverage period. Costs associated with maintenance support are expensed as incurred. Amounts associated with these maintenance contracts are not included in the table above.
In addition, the Company provides its customers with certain indemnification rights. In general, the Company agrees to indemnify the customer if a third-party asserts patent or other infringement on the part of the customer for its use of the Company’s products. The Company has entered into indemnification agreements with the officers and directors of its subsidiaries. From time to time, the Company also enters into agreements in connection with its acquisition and divesture activities that include indemnification obligations by the Company. The fair value of these indemnification obligations is not readily determinable due to the conditional nature of the Company’s potential obligations and the specific facts and circumstances involved with each particular agreement, and as such the Company has not recorded a liability in connection with these indemnification arrangements. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s consolidated financial condition, results of operations or cash flows.
Concentrations of Risk
. The Company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments, and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. Teradata’s business often involves large transactions with customers, and if one or more of those customers were to default in its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses were adequate at
June 30, 2019
and
December 31, 2018
.
The Company is also potentially subject to concentrations of supplier risk. Our hardware components are assembled exclusively by Flex Ltd. (“Flex”). Flex procures a wide variety of components used in the manufacturing process on behalf of the Company. Although many of these components are available from multiple sources, Teradata utilizes preferred supplier relationships to provide more consistent and optimal quality, cost and delivery. Typically, these preferred suppliers maintain alternative processes and/or facilities to ensure continuity of supply. Given the Company’s strategy to outsource its manufacturing activities to Flex and to source certain components from single suppliers, a disruption in production at Flex or at a supplier could impact the timing of customer shipments and/or Teradata’s operating results. In addition, a significant change in the forecasts to any of these preferred suppliers could result in purchase obligations for components that may be in excess of demand.
10. Fair Value Measurements
Fair value measurements are established utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as significant other observable inputs, such as quoted prices in active markets for similar assets or liabilities, or quoted prices in less-active markets for identical assets; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s assets and liabilities measured at fair value on a recurring basis include money market funds, interest rate swaps and foreign currency exchange contracts. A portion of the Company’s excess cash reserves are held in money market funds which generate interest income based on the prevailing market rates. Money market funds are included in cash and cash equivalents in the Company’s balance sheet. Money market fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.
When deemed appropriate, the Company minimizes its exposure to changes in foreign currency exchange rates through the use of derivative financial instruments, specifically, foreign exchange forward contracts. Additionally, in June 2018, Teradata executed a five-year interest rate swap with a
$500 million
initial notional amount in order to hedge the floating interest rate on its term-loan. The fair value of these contracts and swaps are measured at the end of each interim reporting period using observable inputs other than quoted prices, specifically market spot and forward exchange rates. As such, these derivative instruments are classified within Level 2 of the valuation hierarchy. Fair value of unrealized gains for open contracts are recorded in other assets and the fair value of unrealized losses are recorded in other liabilities in the Company's balance sheet. The fair value of foreign exchange forward contracts recorded in other assets was
$1 million
and the amount recorded in other liabilities was immaterial at
June 30, 2019
. The amount of assets and liabilities at December 31, 2018 was not material. Realized gains and losses from the Company’s fair value hedges net of corresponding gains or losses on the underlying exposures were immaterial for the three and six months ended
June 30, 2019
and 2018.
The Company’s other assets and liabilities measured at fair value on a recurring basis and subject to fair value disclosure requirements at
June 30, 2019
and
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
In millions
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
Money market funds at June 30, 2019
|
$
|
218
|
|
|
$
|
218
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Money market funds at December 31, 2018
|
$
|
246
|
|
|
$
|
246
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate swap at June 30, 2019
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
Interest rate swap at December 31, 2018
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
11. Debt
On June 11, 2018, Teradata replaced its existing five-year,
$400 million
revolving credit facility with a new
400 million
$400 million revolving credit facility (the “Credit Facility”). The Credit Facility ends on June 11, 2023, at which point any remaining outstanding borrowings would be due for repayment unless extended by agreement of the parties for up to two additional one-year periods. In addition, under the terms of the Revolving Credit Agreement, Teradata from time to time and subject to certain conditions may increase the lending commitments
under the Revolving Credit Agreement in an aggregate principal amount up to an additional
$200 million
, to the extent that existing or new lenders agree to provide such additional commitments. The outstanding principal amount of the Revolving Credit Agreement bears interest at a floating rate based upon, at Teradata’s option, a negotiated base rate or a Eurodollar rate plus, in each case, a margin based on Teradata’s leverage ratio. In the near term, Teradata would anticipate choosing a floating rate based on London Interbank Offered Rate (“LIBOR”). The Credit Facility is unsecured but is guaranteed by certain of Teradata’s material domestic subsidiaries and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities. As of June 30, 2019, the Company had
no
borrowings outstanding under the Credit Facility, leaving
$400
million in additional borrowing capacity available under the Credit Facility. The Company was in compliance with all covenants as of June 30, 2019.
Also, on June 11, 2018, Teradata closed on a new senior unsecured
$500 million
five-year term loan, the proceeds of which plus additional cash-on-hand were used to pay off the remaining
$525 million
of principal on its existing term loan. The
$500 million
term loan is payable in quarterly installments, which commenced on June 30, 2019 with
1.25%
of the initial principal amount due on each of the first eight payment dates;
2.50%
of the initial principal amount due on each of the next four payment dates;
5.0%
of the initial principal amount due on each of the next three payment dates; and all remaining principal due on June 11, 2023. The outstanding principal amount under the term loan agreement bears interest at a floating rate based upon a negotiated base rate or a Eurodollar rate plus a margin based on the leverage ratio of the Company. As of
June 30, 2019
, the term loan principal outstanding was
$494 million
. As disclosed in Note 8, Teradata entered into an interest rate swap to hedge the floating interest rate of the Term Loan. As a result of the swap, Teradata’s fixed rate on the term loan equals
2.86%
plus the applicable leverage-based margin as defined in the Term Loan agreement. As of
June 30, 2019
, the all-in fixed rate is
4.36%
. The Company was in compliance with all covenants as of
June 30, 2019
.
Teradata’s term loan is recognized on the Company’s balance sheet at its unpaid principal balance and is not subject to fair value measurement. However, given that the loan carries a variable rate, the Company estimates that the unpaid principal balance of the term loan would approximate its fair value. If measured at fair value in the financial statements, the Company’s term loan would be classified as Level 2 in the fair value hierarchy.
12. Leases
Lessee
The Company adopted ASU No. 2016-02, “Leases (Topic 842),” on January 1, 2019, which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted the standard using the modified retrospective approach utilizing the optional transition method. Prior year financial statements were not recast using this approach. The Company elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately
$68 million
and
$66 million
, respectively, as of January 1, 2019. The standard did not materially impact our consolidated net earnings or cash flows.
The Company leases property and equipment under finance and operating leases. The Company's operating leases consist of automobiles in certain countries and real estate, including office, storage and parking spaces. The duration of these leases range from 2 to 10 years. The Company's finance leases primarily consist of equipment financed for the purpose of delivering services to our customers. For leases with terms greater than 12 months, the Company recorded the related asset and obligation at the present value of lease payments over the term. Many of our leases include variable rental escalation clauses which are recognized when incurred. Some of our leases also include renewal options and/or termination options that are factored into the determination of lease payments and lease terms when it is reasonably certain that the Company will exercise these options. Lease agreements do not contain any material residual value guarantees or material restrictive covenants. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a
straight-line basis over the lease term. For real estate leases beginning in 2019 and later, we account for lease components (
e.g.
, fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components (
e.g.
, common-area maintenance costs). For automobile leases we account for lease and non-lease components together.
When available, the Company uses the rate implicit in the lease to discount lease payments to present value. However, real estate leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate the incremental borrowing rate to discount the lease payments based on information available at lease commencement. The incremental borrowing rate used in the calculation of the lease liability is based on the secured rate associated with financed lease obligations for each location of leased property.
The table below presents the lease-related assets and liabilities recorded on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
in millions, except weighted average calculations
|
Classification on the Balance Sheet
|
|
June 30, 2019
|
|
Assets
|
|
|
|
|
Operating lease assets
|
Right of use assets - operating lease, net
|
|
$
|
58
|
|
|
Finance lease assets
|
Property and equipment, net
|
|
90
|
|
|
Total lease assets
|
|
|
$
|
148
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
|
Current portion of operating lease liability
|
|
$
|
20
|
|
|
Finance
|
Current portion of finance lease liability
|
|
32
|
|
|
Noncurrent
|
|
|
|
|
Operating
|
Operating lease liability
|
|
44
|
|
|
Finance
|
Finance lease liability
|
|
54
|
|
|
Total lease liabilities
|
|
|
$
|
150
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
|
Operating leases
|
|
|
3.78 years
|
|
|
Finance leases
|
|
|
2.59 years
|
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
(1)
|
|
|
5.00
|
%
|
|
Finance leases
|
|
|
4.70
|
%
|
(1)
Upon adoption of the new lease standard, discount rates used for existing leases were established based on the Company's incremental borrowing rate at January 1, 2019. For new leases entered after January 1, 2019, the discount rate was determined based on the Company's incremental borrowing rate at lease commencement.
Lessee Costs
The table below presents certain information related to the lease costs for finance and operating leases recognized in the Company's condensed consolidated statements of loss for the three and six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
in millions
|
|
June 30, 2019
|
|
June 30, 2019
|
|
|
Finance lease cost
|
|
|
|
|
|
|
Depreciation of leased assets
|
|
5
|
|
|
9
|
|
|
|
Interest of lease liabilities
|
|
1
|
|
|
2
|
|
|
|
Operating lease cost
|
|
6
|
|
|
18
|
|
|
|
Sub-lease income from real estate properties owned and leased
|
|
(2
|
)
|
|
(4
|
)
|
|
|
Total lease cost
|
|
$
|
10
|
|
|
$
|
25
|
|
|
Other Information
The table below presents supplemental cash flow information related to cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
in millions
|
|
June 30, 2019
|
|
Operating cash flows for operating leases
|
|
$
|
12
|
|
|
Operating cash flows for finance leases
|
|
$
|
1
|
|
|
Financing cash flows for finance leases
|
|
$
|
9
|
|
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet as of June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
Operating Leases
|
|
Finance Leases
|
|
2019 (balance of year)
|
|
$
|
13
|
|
|
$
|
21
|
|
|
2020
|
|
23
|
|
|
35
|
|
|
2021
|
|
17
|
|
|
30
|
|
|
2022
|
|
11
|
|
|
5
|
|
|
2023
|
|
7
|
|
|
—
|
|
|
Thereafter
|
|
5
|
|
|
—
|
|
|
Total minimum lease payments
|
|
76
|
|
|
91
|
|
|
Less: amount of lease payments representing interest
|
|
(12
|
)
|
|
(5
|
)
|
|
Present value of future minimum lease payments
|
|
64
|
|
|
86
|
|
|
Less: current obligations under leases
|
|
(20
|
)
|
|
(32
|
)
|
|
Long-term lease obligations
|
|
$
|
44
|
|
|
$
|
54
|
|
The table below provides the undiscounted cash flows for the Company's finance lease liabilities and operating lease obligations as of December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
Operating Leases
|
|
Finance Leases
|
|
2019
|
|
$
|
24
|
|
|
$
|
19
|
|
|
2020
|
|
20
|
|
|
31
|
|
|
2021
|
|
12
|
|
|
—
|
|
|
2022
|
|
11
|
|
|
—
|
|
|
2023
|
|
6
|
|
|
—
|
|
|
Thereafter
|
|
2
|
|
|
—
|
|
|
Total minimum lease payments
|
|
$
|
75
|
|
|
$
|
50
|
|
Lessor
The Company receives rental revenue for leasing hardware offerings to its customers. For our hardware rental offering, the Company owns or leases the hardware and may or may not provide managed services. Leases sometimes include options to renew but typically do not include lessee purchase options. The revenue for these operating leases is generally recognized straight-line over the term of the contract and is included within the recurring revenue caption. Equipment used for this revenue is reported within Property and equipment, net on the condensed consolidated balance sheet.
The following table includes estimated rental revenue expected to be recognized in the future based on executed contracts at June 30, 2019:
|
|
|
|
|
|
|
|
in millions
|
Rental Revenue
|
|
2019 (balance of year)
|
$
|
38
|
|
|
2020
|
57
|
|
|
2021
|
43
|
|
|
2022
|
14
|
|
|
2023
|
—
|
|
|
Total
|
$
|
152
|
|
Rental revenue for these operating leases, reported within recurring revenue on the condensed consolidated statements of (loss) income, was
$16 million
and
$30 million
for the three and six months ended June 30, 2019, and
$9 million
and
$19 million
for the three and six months ended June 30, 2018.
13. Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the reported period. The calculation of diluted earnings per share is similar to basic earnings per share, except that the weighted average number of shares outstanding includes the dilution from potential shares resulting from stock options, restricted stock awards and other stock awards. The components of basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions, except per share amounts
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net (loss) income attributable to common stockholders
|
$
|
(1
|
)
|
|
$
|
4
|
|
|
$
|
(11
|
)
|
|
$
|
(3
|
)
|
|
Weighted average outstanding shares of common stock
|
115.5
|
|
|
119.5
|
|
|
116.3
|
|
|
120.4
|
|
|
Dilutive effect of employee stock options, restricted stock and other stock awards
|
—
|
|
|
2.0
|
|
|
—
|
|
|
—
|
|
|
Common stock and common stock equivalents
|
115.5
|
|
|
121.5
|
|
|
116.3
|
|
|
120.4
|
|
|
Net loss (income) per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
For the three months ended June 30, 2019 and six months ended June 30, 2019 and 2018, due to the net loss attributable to Teradata common stockholders, potential common shares that would cause dilution, such as employee stock options, restricted shares and other stock awards, have been excluded from the diluted share count because their effect would have been anti-dilutive. The fully diluted shares would have been
116.7 million
for the three months ended June 30, 2019 and
117.7 million
and
122.5 million
for the six months ended June 30, 2019 and 2018, respectively.
Options to purchase
1.6 million
and
1.8 million
shares of common stock for the
three and six
months ended
June 30, 2019
and
2.5 million
and
2.6 million
shares of common stock for the
three and six
months ended
June 30, 2018
were not included in the computation of diluted earnings per share because their exercise prices of these options were greater than the average market price of the common shares for the period, and therefore would have been anti-dilutive.
14. Segment and Other Supplemental Information
Effective January 1, 2019, Teradata implemented an organizational change in which Teradata now manages its business under
three
geographic regions, which are also the Company’s operating segments: (1) Americas region (North America and Latin America); (2) EMEA region (Europe, Middle East and Africa) and (3) APAC region (Asia Pacific and Japan). For purposes of discussing results by segment, management excludes the impact of certain items, consistent with the manner by which management evaluates the performance of each segment. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess financial performance. The chief operating decision maker, who is our President and Chief Executive Officer, evaluates the performance of the segments based on revenue and multiple profit measures, including segment gross profit. For management reporting purposes assets are not allocated to the segments. Prior periods have been restated to conform to the current year presentation.
The following table presents segment revenue and segment gross profit for the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Segment revenue
|
|
|
|
|
|
|
|
|
Americas
|
$
|
269
|
|
|
$
|
287
|
|
|
$
|
538
|
|
|
$
|
551
|
|
|
EMEA
|
122
|
|
|
127
|
|
|
235
|
|
|
276
|
|
|
APAC
|
87
|
|
|
130
|
|
|
173
|
|
|
223
|
|
|
Total revenue
|
478
|
|
|
544
|
|
|
946
|
|
|
1,050
|
|
|
Segment gross profit
|
|
|
|
|
|
|
|
|
Americas
|
158
|
|
|
154
|
|
|
315
|
|
|
301
|
|
|
EMEA
|
57
|
|
|
54
|
|
|
107
|
|
|
117
|
|
|
APAC
|
37
|
|
|
58
|
|
|
71
|
|
|
93
|
|
|
Total segment gross profit
|
252
|
|
|
266
|
|
|
493
|
|
|
511
|
|
|
Stock-based compensation costs
|
4
|
|
|
4
|
|
|
7
|
|
|
8
|
|
|
Acquisition, integration, reorganization and transformation-related costs
|
2
|
|
|
—
|
|
|
5
|
|
|
3
|
|
|
Amortization of capitalized software costs
|
10
|
|
|
12
|
|
|
21
|
|
|
27
|
|
|
Total gross profit
|
236
|
|
|
250
|
|
|
460
|
|
|
473
|
|
|
Selling, general and administrative expenses
|
145
|
|
|
163
|
|
|
296
|
|
|
315
|
|
|
Research and development expenses
|
81
|
|
|
77
|
|
|
159
|
|
|
152
|
|
|
Income from operations
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
5
|
|
|
$
|
6
|
|
15. Reorganization and Business Transformation
On June 4, 2018, the Company approved a plan to consolidate certain of its operations, including transitioning its corporate headquarters to San Diego, California from its location in Dayton, Ohio. This plan, which is being executed in connection with Teradata’s comprehensive business transformation from a data warehouse company to a data analytics platform company, is intended to better align the Company’s skills and resources to effectively pursue opportunities in the marketplace. The Company recognized costs o
f
$23 million
in 2018 and
$12 million
in
2019 for employee separation benefits, transition support, facilities lease related costs, outside service, legal and other exit-related costs. The employee separation benefit costs are being expensed over the time period that the employees have to work to earn them. The Company expects that it will incur costs and charges in the range of approximately
$35
to
$40 million
rel
ated to the plan and expects the actions will be completed in 2019.
Cash paid in 2018 related to the plan listed above was
$11 million
. The 2019 activity and the reserves related to the plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Balance at
December 31, 2018
|
|
Expense accruals
|
|
Cash payments
|
|
Balance at
June 30, 2019
|
|
Employee separation benefits costs related to headquarter transition and business transformation
|
$
|
11
|
|
|
$
|
4
|
|
|
$
|
(13
|
)
|
|
$
|
2
|
|
|
Transition support and other exit related costs for the headquarter transition and business transformation
|
1
|
|
|
2
|
|
|
(3
|
)
|
|
—
|
|
|
Total
|
$
|
12
|
|
|
$
|
6
|
|
|
$
|
(16
|
)
|
|
$
|
2
|
|
In addition, the Company incurred
$6 million
of accelerated amortization in the first six months of 2019 for right-of-use assets associated with the lease on its prior corporate headquarters. The remaining lease liability is included in our operating lease obligations as of June 30 2019 and is not included in the table above.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the MD&A are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q and in the
2018
Annual Report on Form 10-K. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
Teradata Corporation ("we," "us," "Teradata," or the "Company") is a leading hybrid cloud analytics software provider focusing on delivering Pervasive Data Intelligence to our customers, which we define as the ability to leverage 100% of a company’s data to uncover real-time intelligence, at scale. We help customers integrate and simplify their analytics ecosystem, access and manage data, and use analytics to extract answers and derive business value from data. Our solutions and services comprise software, hardware, and related business consulting and support services to deliver analytics across a company’s entire analytical ecosystem.
Teradata’s strategy is based on our mission of transforming how businesses work and people live through the power of data. Our target market is what we call "Megadata" companies - those companies that we believe are the world's most demanding, large-scale, users of data. These Megadata companies face significant challenges including siloed data and conflicting and duplicative solutions that typically results in considerable expense to maintain and to manage the complexity. Our strategy is to provide a differentiated set of offerings to the Megadata target market through a portfolio of integrated data and analytic solutions. Teradata Vantage is a highly-scalable, secure, highly-concurrent, and resilient analytics platform that addresses the challenges that Megadata companies face. By offering customers full integration of their datasets, tools, analytics languages, functions, and engines in one analytical platform, Teradata Vantage reduces customers’ complexity, risk, and costs. Teradata Vantage embraces leading commercial and open source technologies including our market-leading integrated data warehouse engine, and it is available in hybrid environments, on-premises or in the cloud.
All subscription-based Teradata software licenses enable portability of the software license between cloud and on-premises deployment options, which can reduce risk associated with customers’ buying decisions. Customer buying behavior continues to shift from predominantly capital-intensive purchases to these subscription-based purchasing
options. In the near term, the movement to subscription-based transactions is negatively impacting the timing of our reported revenue and our cash flows because revenue and cash related to subscription-based transactions are recognized and received over time versus upfront as was the case with the capital purchase model. However, the transition to a subscription-based model is expected to increase our recurring revenue, which should create more predictable operating results and cash flow generation. Near term impacts, however, can fluctuate based on the pace of customer adoption, which can be difficult to predict. In the longer term, we expect our reported operating results and cash flow to normalize and increase as more customers transition to these new purchasing and deployment options.
We are continuing to invest in Teradata’s future, including investments to support our cloud-based initiatives, analytical consulting and solutions, realignment of our go-to-market approach, and modernizing our infrastructure.
Teradata has introduced additional financial and performance metrics to allow for greater transparency regarding the progress we are making toward achieving our strategic objectives. These metrics include the following:
|
|
|
|
•
|
Annual Recurring Revenue ("ARR") - annual contract value for all active and contractually binding term-based contracts at the end of a period. It includes maintenance, software upgrade rights, subscription-based transactions and managed services.
|
|
|
|
|
•
|
Bookings Mix - subscription bookings divided by the sum of subscription bookings plus perpetual bookings.
|
Second Quarter Financial Overview
As more fully discussed in later sections of this MD&A, the following were significant financial items for the
second
quarter of
2019
:
|
|
|
|
•
|
Total revenue was
$478 million
for the
second
quarter of
2019
, a 12% decrease compared to the
second
quarter of
2018
, with an underlying 8% increase in recurring revenue as the Company's business shifts to subscription-based transactions offset by a 70% decrease in perpetual software licenses and hardware as deals move to subscription and an 18% decrease in consulting services revenue. Foreign currency fluctuations had a 2% negative impact on total revenue for the quarter.
|
|
|
|
|
•
|
Gross margin increased to
49.4%
in the
second
quarter of
2019
from
46.0%
in the
second
quarter of
2018
, primarily due to a higher recurring revenue mix as compared to the prior period.
|
|
|
|
|
•
|
Operating expenses for the
second
quarter of
2019
decreased by 6% compared to the
second
quarter of
2018
primarily due to cost management initiatives.
|
|
|
|
|
•
|
Operating income was
$10 million
in the
second
quarter of
2019
and
2018
.
|
|
|
|
|
•
|
Net loss in the
second
quarter of
2019
was
$1 million
, compared to net income of
$4 million
in the
second
quarter of 2018.
|
Results of Operations for the
Three Months Ended June 30, 2019
Compared to the
Three Months Ended June 30, 2018
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
In millions
|
2019
|
|
Revenue
|
|
2018
|
|
Revenue
|
|
Recurring
|
$
|
338
|
|
|
70.7
|
%
|
|
$
|
312
|
|
|
57.4
|
%
|
|
Perpetual software licenses and hardware
|
29
|
|
|
6.1
|
%
|
|
97
|
|
|
17.8
|
%
|
|
Consulting services
|
111
|
|
|
23.2
|
%
|
|
135
|
|
|
24.8
|
%
|
|
Total revenue
|
$
|
478
|
|
|
100
|
%
|
|
$
|
544
|
|
|
100
|
%
|
Total revenue was down $66 million or 12% in second quarter of 2019 and included a 2% negative impact from foreign currency fluctuations. Recurring revenue grew
8%
, which included a 3% negative impact from foreign currency fluctuations. This increase in recurring revenue is driven by our movement to subscription-based transactions from perpetual software licenses and hardware transactions, which is consistent with our strategy. Under subscription models, we recognize revenue over time as opposed to the upfront recognition under the perpetual model. We expect to continue to have a significant percentage of bookings be subscription-based, consistent with our overall strategy and to continue to grow recurring revenue and ARR year-over-year.
Revenues from perpetual software licenses and hardware decreased 70%, including a 1% negative impact from foreign currency fluctuations. We expect perpetual revenues to continue to decline as customers switch to our subscription-based offerings. However, some customers continue to purchase on a perpetual basis. Perpetual revenue is primarily hardware-related, as software is generally being sold on subscription. We expect that perpetual revenue will continue to decline in 2019 and will continue to be predominantly hardware-related.
Consulting services revenue decreased 18% and included a 3% negative impact from foreign currency as we are realigning and focusing our consulting resources on higher-margin engagements that drive increased software consumption within our targeted customer base. In the first half of the year we made progress towards our strategy of targeting Megadata companies as we continue to realign our consulting business. We expect consulting revenue to continue to decline as the Company implements this strategic change and focus.
As a portion of the Company’s operations and revenue occur outside the United States, and in currencies other than the U.S. dollar, the Company is exposed to fluctuations in foreign currency exchange rates. Based on currency rates as of July 31, 2019, Teradata is expecting one-to-two percentage points of negative impact from currency translation on our 2019 full year projected revenue growth rate.
Included below are financial and performance growth metrics for 2019:
|
|
|
|
•
|
At the end of the second quarter of 2019, ARR was $1,350 million, an 11% increase from the
second
quarter of
2018
including a 1% negative impact from foreign currency as compared to the
second
quarter of
2018
.
|
|
|
|
|
•
|
90% of our bookings mix in the
second
quarter of 2019 was subscription-based and we continue to expect 70% or more of our 2019 full-year bookings mix to be subscription-based.
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
In millions
|
2019
|
|
Revenue
|
|
2018
|
|
Revenue
|
|
Recurring
|
$
|
231
|
|
|
68.3
|
%
|
|
$
|
224
|
|
|
71.8
|
%
|
|
Perpetual software licenses and hardware
|
3
|
|
|
10.3
|
%
|
|
24
|
|
|
24.7
|
%
|
|
Consulting services
|
2
|
|
|
1.8
|
%
|
|
2
|
|
|
1.5
|
%
|
|
Total gross profit
|
$
|
236
|
|
|
49.4
|
%
|
|
$
|
250
|
|
|
46.0
|
%
|
The decrease in recurring revenue gross profit as a percent of revenue was driven by a higher mix of subscription-based revenue as compared to the prior-year period. Subscription-based transactions are typically lower margin as compared to the recurring revenue from legacy software maintenance and software upgrade rights, due to the higher mix of hardware included in subscription-based transactions. Over time, we expect subscription-based margins to increase.
The decrease in perpetual software licenses and hardware gross profit as a percent of revenue was driven by a higher mix of hardware revenue as some customers continue to purchase their hardware upfront while buying the software on a subscription basis, which is recorded in recurring revenue. In addition, our hardware gross margin was negatively impacted by currency swings on inter-company transactions in regions where we cannot hedge currency fluctuations. As we shift to subscription-based transactions and perpetual revenue declines, we expect future perpetual revenue margins to remain lower than prior periods and possibly decline as we exit perpetual-based transactions.
Consulting services gross profit as a percentage of revenue improved slightly as compared to the prior-year period as the Company is taking steps to focus consulting on the top Megadata analytic opportunities to drive consumption of our Vantage software analytics platform and on higher value and higher margin consulting offerings. We continue to expect a decline in overall consulting bookings and revenue compared to prior periods, but we expect future consulting revenue margins to increase.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
In millions
|
2019
|
|
Revenue
|
|
2018
|
|
Revenue
|
|
Selling, general and administrative expenses
|
$
|
145
|
|
|
30.3
|
%
|
|
$
|
163
|
|
|
30.0
|
%
|
|
Research and development expenses
|
81
|
|
|
17.0
|
%
|
|
77
|
|
|
14.1
|
%
|
|
Total operating expenses
|
$
|
226
|
|
|
47.3
|
%
|
|
$
|
240
|
|
|
44.1
|
%
|
The selling, general and administrative ("SG&A") expense decrease was driven primarily by lower go-to-market headcount from our prior actions to align our go-to-market teams with our focus on our Megadata and commercial target market.
Research and development ("R&D") expenses increased due to strategic investments in the new Teradata Vantage analytics platform and our cloud offerings.
Other Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
Interest income
|
$
|
6
|
|
|
$
|
4
|
|
|
Interest expense
|
(8
|
)
|
|
(5
|
)
|
|
Other
|
(3
|
)
|
|
(3
|
)
|
|
Other expense, net
|
$
|
(5
|
)
|
|
$
|
(4
|
)
|
Other expense in the
second
quarter of 2019 and 2018 is comprised primarily of interest expense on long-term debt and finance leases, partially offset by interest income earned on our cash and cash equivalents. Interest income and expense increased compared to the prior year primarily due to increases in interest rates and additional finance leases.
Provision for Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The 2018 effective tax rate was impacted by the passage of the Tax Cuts and Jobs Act (the “2017 Tax Act”), which was signed into law on December 22, 2017.
As a result of the 2017 Tax Act, the Company changed its indefinite reversal assertion related to its undistributed earnings of its foreign subsidiaries and no longer considers a majority of its foreign earnings permanently reinvested outside of the U.S.
The effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix between the U.S. and other foreign taxing jurisdictions where the Company conducts its business. The Company estimates its full-year effective tax rate for 2019 to be approximately 21%, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction and the estimated discrete items to be recognized in 2019. The forecasted tax rate is based on the overseas profits being taxed at an overall effective tax rate of approximately 18%, as compared to the federal statutory tax rate of 21% in the U.S.
The effective tax rate for the three months ended
June 30, 2019
and
June 30, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Effective tax rate
|
120.0
|
%
|
|
33.3
|
%
|
For the three months ended June 30, 2019, $4 million of discrete tax expense was recorded related to an uncertain tax position resulting from the reversal of the Tax Court’s decision in the Altera case by the Ninth Circuit Court of Appeals on June 7, 2019. The Altera case focused on whether current U.S. Treasury Regulations requiring the inclusion of stock-based compensation expense in a taxpayer's cost-sharing calculations are valid.
For the three months ended June 30, 2018, no material discrete tax items were recorded.
Revenue and Gross Profit by Operating Segment
Effective January 1, 2019, Teradata implemented an organizational change in which Teradata now manages its business under
three
geographic regions, which are also the Company’s operating segments: (1) Americas region (North America and Latin America); (2) EMEA region (Europe, Middle East, and Africa) and (3) APAC region (Asia Pacific and Japan). For purposes of discussing results by segment, management excludes the impact of certain items, consistent with the manner by which management evaluates the performance of each segment. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess financial performance. The chief operating decision maker, who is our President and Chief Executive Officer, evaluates the performance of the segments based on revenue and multiple profit measures, including segment gross profit. For management reporting purposes assets are not allocated to the segments. Our segment results are reconciled to total
company results reported under GAAP in Note 14 of Notes to Condensed Consolidated Financial Statements (Unaudited). Prior period results have been restated to conform to the current year presentation.
The following table presents segment revenue and segment gross profit for the Company for the
three months ended
June 30
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
In millions
|
2019
|
|
Revenue
|
|
2018
|
|
Revenue
|
|
Segment revenue
|
|
|
|
|
|
|
|
|
Americas
|
$
|
269
|
|
|
56.3
|
%
|
|
$
|
287
|
|
|
52.8
|
%
|
|
EMEA
|
122
|
|
|
25.5
|
%
|
|
127
|
|
|
23.3
|
%
|
|
APAC
|
87
|
|
|
18.2
|
%
|
|
130
|
|
|
23.9
|
%
|
|
Total segment revenue
|
$
|
478
|
|
|
100
|
%
|
|
$
|
544
|
|
|
100
|
%
|
|
Segment gross profit
|
|
|
|
|
|
|
|
|
Americas
|
$
|
158
|
|
|
58.7
|
%
|
|
$
|
154
|
|
|
53.7
|
%
|
|
EMEA
|
57
|
|
|
46.7
|
%
|
|
54
|
|
|
42.5
|
%
|
|
APAC
|
37
|
|
|
42.5
|
%
|
|
58
|
|
|
44.6
|
%
|
|
Total segment gross profit
|
$
|
252
|
|
|
52.7
|
%
|
|
$
|
266
|
|
|
48.9
|
%
|
Americas
Revenue decreased
6%
, which included an increase in recurring revenue of 9% offset by a decrease in perpetual software licenses and hardware revenue and decrease in consulting revenue. The increase in recurring revenue and decline in perpetual revenue were driven by the shift to subscription-based transactions. Segment gross profit as a percentage of revenues was higher primarily due to a higher mix of recurring revenue.
EMEA
EMEA revenue decreased
4%
, which included a 4% unfavorable impact from foreign currency fluctuations. An increase of 7% in recurring revenue was offset by a decrease in perpetual software licenses and hardware revenue and decrease in consulting revenue. Segment gross profit as a percentage of revenues was higher primarily due to a higher mix of recurring revenue.
APAC
APAC revenue decreased
33%
, which included a 4% unfavorable impact from foreign currency fluctuations. An increase in recurring revenue of 7% was offset by a decrease in perpetual software licenses and hardware revenue and decrease in consulting revenue. Segment gross profit as a percentage of revenues was lower primarily due to a decline in consulting margins, which more than offset a favorable higher mix of recurring revenue.
Results of Operations for the
Six Months Ended June 30, 2019
Compared to the
Six Months Ended June 30, 2018
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
In millions
|
2019
|
|
Revenue
|
|
2018
|
|
Revenue
|
|
Recurring
|
$
|
669
|
|
|
70.7
|
%
|
|
$
|
614
|
|
|
58.5
|
%
|
|
Perpetual software licenses and hardware
|
60
|
|
|
6.3
|
%
|
|
166
|
|
|
15.8
|
%
|
|
Consulting services
|
217
|
|
|
22.9
|
%
|
|
270
|
|
|
25.7
|
%
|
|
Total revenue
|
$
|
946
|
|
|
100
|
%
|
|
$
|
1,050
|
|
|
100
|
%
|
Total revenue was down $104 million or 10% in first six months ended June 30, 2019 and included a 3% negative impact from foreign currency fluctuations. Recurring revenue grew
9%
, which included a 3% negative impact from
foreign currency fluctuations. This is driven by our movement to subscription-based transactions from perpetual software licenses and hardware transactions, which is consistent with our strategy.
Revenues from perpetual software licenses and hardware decreased 64%, including a 1% negative impact from foreign currency fluctuations. The decrease in perpetual software licenses and hardware revenue is consistent with our strategy to sell more subscription-based offerings.
Consulting services revenue decreased 20% and included a 4% negative impact from foreign currency as we are realigning and focusing our consulting resources on higher-margin engagements that drive increased software consumption within our targeted customer base.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
In millions
|
2019
|
|
Revenue
|
|
2018
|
|
Revenue
|
|
Recurring
|
$
|
456
|
|
|
68.2
|
%
|
|
$
|
436
|
|
|
71.0
|
%
|
|
Perpetual software licenses and hardware
|
9
|
|
|
15.0
|
%
|
|
45
|
|
|
27.1
|
%
|
|
Consulting services
|
(5
|
)
|
|
(2.3
|
)%
|
|
(8
|
)
|
|
(3.0
|
)%
|
|
Total gross profit
|
$
|
460
|
|
|
48.6
|
%
|
|
$
|
473
|
|
|
45.0
|
%
|
The decrease in recurring revenue gross profit as a percent of revenue was driven by a higher mix of subscription-based revenue as compared to the prior-year period. Subscription-based transactions are typically lower margin as compared to the recurring revenue from legacy software maintenance and software upgrade rights, due to the higher mix of hardware in subscription-based transactions.
The decrease in perpetual software licenses and hardware gross profit as a percent of revenue was driven by a higher mix of hardware revenue as some customers continue to purchase their hardware upfront while buying the software on a subscription basis, which is recorded in recurring revenue. In addition, our hardware gross margin was negatively impacted by currency swings on inter-company transactions in regions where we cannot hedge currency fluctuations.
Consulting services gross profit as a percentage of revenue improved as compared to the prior-year period as the Company is taking steps to focus consulting on the top Megadata analytic opportunities to drive consumption of our Vantage software analytics platform and on higher value and higher margin consulting offerings.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
In millions
|
2019
|
|
Revenue
|
|
2018
|
|
Revenue
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
296
|
|
|
31.3
|
%
|
|
$
|
315
|
|
|
30.0
|
%
|
|
Research and development expenses
|
159
|
|
|
16.8
|
%
|
|
152
|
|
|
14.5
|
%
|
|
Total operating expenses
|
$
|
455
|
|
|
48.1
|
%
|
|
$
|
467
|
|
|
44.5
|
%
|
The SG&A expense decrease was driven by lower go-to-market headcount as we have realigned our go-to-market teams with our focus on our Megadata and commercial target market. This decrease was partially offset by additional expenses associated with our reorganization and restructure of our operations and our go-to-market functions, including moving our corporate headquarters to San Diego, California from the prior location in Dayton, Ohio.
R&D expenses increased due to strategic investments in the new Teradata Vantage analytics platform and our cloud offerings.
Other Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
Interest income
|
$
|
12
|
|
|
$
|
7
|
|
|
Interest expense
|
(17
|
)
|
|
(10
|
)
|
|
Other
|
(5
|
)
|
|
(5
|
)
|
|
Other expense, net
|
$
|
(10
|
)
|
|
$
|
(8
|
)
|
Other expense in the first six months of 2019 and 2018 is comprised primarily of interest expense on long-term debt and finance leases, partially offset by interest income earned on our cash and cash equivalents. Interest income and expense increased compared to the prior year, primarily due to increases in interest rates and additional finance leases.
Provision for Income Taxes
The effective tax rate for the six months ended
June 30, 2019
and
June 30, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Effective tax rate
|
(120.0
|
)%
|
|
(50.0
|
)%
|
For the six months ended June 30, 2019, $4 million of discrete tax expense was recorded related to an uncertain tax position resulting from the reversal of the Tax Court’s decision in the Altera case by the Ninth Circuit Court of Appeals on June 7, 2019. The Altera case focused on whether current U.S. Treasury Regulations requiring the inclusion of stock-based compensation expense in a taxpayer's cost-sharing calculations are valid. As a result of this discrete item and incremental tax expense related to equity compensation, the Company recorded income tax expense of $6 million on a pre-tax net loss of $5 million for the six months ended June 30, 2019, resulting in an effective income tax rate of (120.0%).
There were no material discrete tax items recorded for the six months ended June 30, 2018. Discrete tax items related to interest accruals on uncertain tax positions and equity-based compensation resulted in income tax expense of $1 million on a pre-tax net loss of $2 million for the six months ended June 30, 2018, resulting in an effective income tax rate of (50.0%).
Revenue and Gross Profit by Operating Segment
The following table presents segment revenue and segment gross profit for the Company for the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
In millions
|
2019
|
|
Revenue
|
|
2018
|
|
Revenue
|
|
Segment revenue
|
|
|
|
|
|
|
|
|
Americas
|
$
|
538
|
|
|
56.9
|
%
|
|
$
|
551
|
|
|
52.5
|
%
|
|
EMEA
|
235
|
|
|
24.8
|
%
|
|
276
|
|
|
26.3
|
%
|
|
APAC
|
173
|
|
|
18.3
|
%
|
|
223
|
|
|
21.2
|
%
|
|
Total segment revenue
|
$
|
946
|
|
|
100
|
%
|
|
$
|
1,050
|
|
|
100
|
%
|
|
Segment gross profit
|
|
|
|
|
|
|
|
|
Americas
|
$
|
315
|
|
|
58.6
|
%
|
|
$
|
301
|
|
|
54.6
|
%
|
|
EMEA
|
107
|
|
|
45.5
|
%
|
|
117
|
|
|
42.4
|
%
|
|
APAC
|
71
|
|
|
41.0
|
%
|
|
93
|
|
|
41.7
|
%
|
|
Total segment gross profit
|
$
|
493
|
|
|
52.1
|
%
|
|
$
|
511
|
|
|
48.7
|
%
|
Americas
Revenue decreased
2%
, which included a 1% unfavorable impact from foreign currency fluctuations. An increase in recurring revenue was offset by a decrease in perpetual software licenses and hardware revenue and decrease in consulting revenue. The increase in recurring revenue and decline in perpetual revenue were driven by the shift to subscription-based transactions. Segment gross profit as a percentage of revenues was higher primarily due to a higher mix of recurring revenue.
EMEA
EMEA revenue decreased
15%
, which includes a 5% unfavorable impact from foreign currency fluctuations. An increase in recurring revenue was offset by a decrease in perpetual software licenses and hardware revenue and decrease in consulting revenue. Segment gross profit as a percentage of revenues was higher primarily due to a higher mix of recurring revenue.
APAC
APAC revenue decreased
22%
, which included a 4% unfavorable impact from foreign currency fluctuations. An increase in recurring revenue was offset by a decrease in perpetual software licenses and hardware revenue and a decrease in consulting revenue. Segment gross profit as a percentage of revenues was lower primarily due to a decline in consulting margins, partially offset by a higher mix of recurring revenue.
Financial Condition, Liquidity and Capital Resources
Cash provided by operating activities decreased by $
186 million
in the
six
months ended
June 30, 2019
compared to the
six
months ended
June 30, 2018
. Teradata used approximately $46 million of cash in the first six month of 2019 for reorganizing and restructuring its operations and go-to-market functions to align to its strategy. The decrease in cash provided by operating activities was also due to cash payments in 2019 related to 2018 variable compensation that were meaningfully higher versus similar payments made in 2018 as well as the Company’s ongoing transition to subscription-based purchasing options, which results in the Company collecting less cash in the current period as customers pay over time.
Teradata’s management uses a non-GAAP measure called “free cash flow,” which is not a measure defined under GAAP. We use free cash flow (which we define as net cash provided by operating activities less capital expenditures for property and equipment and additions to capitalized software) as one measure of assessing the financial performance of the Company, and this may differ from the definition used by other companies. The components that are used to calculate free cash flow are GAAP measures taken directly from the Condensed Consolidated Statements of Cash Flows (Unaudited). We believe that free cash flow information is useful for investors because it relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures, for among other things, investments in the Company’s existing businesses, strategic acquisitions and repurchase of Teradata common stock. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.
The table below shows net cash provided by operating activities and capital expenditures for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
In millions
|
2019
|
|
2018
|
|
Net cash provided by operating activities
|
$
|
104
|
|
|
$
|
290
|
|
|
Less:
|
|
|
|
|
Expenditures for property and equipment
|
(27
|
)
|
|
(58
|
)
|
|
Additions to capitalized software
|
(2
|
)
|
|
(4
|
)
|
|
Free cash flow
|
$
|
75
|
|
|
$
|
228
|
|
Financing activities and certain other investing activities are not included in our calculation of free cash flow. There
were no other investing activities for the
six
months ended
June 30, 2019
and 2018.
Teradata’s financing activities for the
six
months ended
June 30, 2019
and 2018 primarily consisted of cash outflows for share repurchases and payments on the revolving credit facility, finance leases, and long-term debt. At
June 30, 2019
, the Company had no outstanding borrowings on the revolving credit facility. The Company purchased approximately
4.3 million
shares of its common stock at an average price per share of
$40.52
in the
six
months ended
June 30, 2019
, and
4.1 million
shares at an average price per share of
$38.14
in the
six
months ended
June 30, 2018
under the two share repurchase programs that were authorized by our Board of Directors. The first program (the “dilution offset program”), allows the Company to repurchase Teradata common stock to the extent of cash received from the exercise of stock options and the Teradata Employee Stock Purchase Plan (“ESPP”) to offset dilution from shares issued pursuant to these plans. As of
June 30, 2019
, under the Company’s second share repurchase program (the “general share repurchase program”), the Company had
$120 million
of authorization remaining to repurchase outstanding shares of Teradata common stock. On July 28, 2019 Teradata's Board of Directors authorized an additional $500 million to be utilized to repurchase Teradata common stock under this share repurchase program. The Company now has a total of $620 million authorized for share repurchases under this share repurchase program. Share repurchases made by the Company are reported on a trade date basis. Our share repurchase activity depends on factors such as our working capital needs, our cash requirements for capital investments, our stock price, and economic and market conditions.
Proceeds from the ESPP and the exercise of stock options, net of tax, were
$37 million
for the
six
months ended
June 30, 2019
and
$20 million
for the
six
months ended
June 30, 2018
. These proceeds are included in other financing activities, net in the Condensed Consolidated Statements of Cash Flows (Unaudited).
Our total cash and cash equivalents held outside the United States in various foreign subsidiaries was
$224 million
as of
June 30, 2019
and
$364 million
as of
December 31, 2018
. The remaining balance held in the United States was
$412 million
as of
June 30, 2019
and
$351 million
as of
December 31, 2018
. Prior to the enactment of the Tax Act, the Company either reinvested or intended to reinvest its earnings outside of the United States. As a result of the Tax Act, the Company has changed its indefinite reinvestment assertion related to foreign earnings that have been taxed in the United States and now considers a majority of these earnings no longer indefinitely reinvested. Effective January 1, 2018, the United States has moved to a territorial system of international taxation, and as such will generally not subject future foreign earnings to United States taxation upon repatriation in future years.
Management believes current cash, cash generated from operations and the
$400 million
available under the Credit Facility will be sufficient to satisfy future working capital, research and development activities, capital expenditures, pension contributions, and other financing requirements for at least the next twelve months. The Company principally holds its cash and cash equivalents in bank deposits and highly-rated money market funds.
The Company’s ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in the Company’s
2018
Annual Report on Form 10-K (the “
2018
Annual Report”), and elsewhere in this Quarterly Report. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of the credit facility and term loan agreement, the Company may be required to seek additional financing alternatives.
Long-term Debt.
On June 11, 2018, Teradata replaced its existing five-year,
$400 million
revolving credit facility with a new
$400 million
revolving credit facility (the “Credit Facility”). The Credit Facility ends on June 11, 2023 at which point any remaining outstanding borrowings would be due for repayment unless extended by agreement of the parties for up to two additional one-year periods. In addition, under the terms of the Revolving Credit Agreement, Teradata from time to time and subject to certain conditions may increase the lending commitments under the Revolving Credit Agreement in an aggregate principal amount up to an additional $200 million, to the extent that existing or new lenders agree to provide such additional commitments. The outstanding principal amount of the Revolving Credit Agreement bears interest at a floating rate based upon, at Teradata’s option, a negotiated base rate or a Eurodollar rate plus, in each case, a margin based on Teradata’s leverage ratio. In the near term, Teradata would anticipate choosing a floating rate based on London Interbank Offered Rate (“LIBOR”). The Credit Facility is unsecured but is guaranteed by certain of Teradata’s material domestic subsidiaries and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities. As of
June 30, 2019
, the Company had no borrowings outstanding under the Credit Facility, leaving
$400 million
in additional borrowing capacity available under the Credit Facility. The Company was in compliance with all covenants under the Credit Facility as of
June 30, 2019
.
Also, on June 11, 2018, Teradata closed on a new senior unsecured $500 million five-year term loan, the proceeds of which plus additional cash-on-hand were used to pay off the remaining $525 million of principal on its existing term loan. The $500 million term loan is payable in quarterly installments, which commenced on June 30, 2019 with 1.25% of the initial principal amount due on each of the first eight payment dates; 2.50% of the initial principal amount due on each of the next four payment dates; 5.0% of the initial principal amount due on each of the next three payment dates; and all remaining principal due on June 11, 2023. The outstanding principal amount under the term loan agreement bears interest at a floating rate based upon a negotiated base rate or a Eurodollar rate plus a margin based on the leverage ratio of the Company. As of
June 30, 2019
, the term loan principal outstanding was $494 million. Unamortized deferred issuance costs of approximatel
y $3 million are bein
g amortized over the five-year term of the loan. The Company was in compliance with all covenants under the term loan as of
June 30, 2019
.
In addition, in June 2018, Teradata executed a five-year interest rate swap with a $500 million initial notional amount in order to hedge the floating interest rate on the above-described term loan. The notional amount of the
hedge will step-down according to the amortization schedule of the term loan. The notional amount of the hedge was
$494 million
as of June 30, 2019. As a result of the swap, Teradata’s fixed rate on the term loan equals 2.86% plus the applicable leverage-based margin as defined in the Term Loan agreement. As of
June 30, 2019
, the all-in fixed rate is 4.36%.
Leases.
In the normal course of business, the Company enters into operating and finance leases that impact, or could impact, our liquidity. Leases are described in detail in Note 12 of the Notes to the Condensed Consolidated Financial Statements. The table below provides the undiscounted cash flows for the Company's minimum lease obligations as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
Operating Leases
|
|
Finance Leases
|
|
2019 (balance of year)
|
|
$
|
13
|
|
|
$
|
21
|
|
|
2020
|
|
23
|
|
|
35
|
|
|
2021
|
|
17
|
|
|
30
|
|
|
2022
|
|
11
|
|
|
5
|
|
|
2023
|
|
7
|
|
|
—
|
|
|
Thereafter
|
|
5
|
|
|
—
|
|
|
Total minimum lease payments
|
|
$
|
76
|
|
|
$
|
91
|
|
Contractual and Other Commercial Commitments.
There has been no significant change in our contractual and other commercial commitments as described in the
2018
Annual Report. Our guarantees and product warranties are discussed in Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited).
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting policies are those that require assumptions to be made about matters that are highly uncertain. Different estimates could have a material impact on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Our management periodically reviews these estimates and assumptions to ensure that our financial statements are presented fairly and are materially correct.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require significant management judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. With the exception of the adoption of ASC 842, the significant accounting policies and estimates that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are discussed in the
2018
Annual Report. Teradata’s senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the
six
months ended
June 30, 2019
. Refer to Note 12 of the Notes to the Condensed Consolidated Financial Statements for disclosures regarding estimates and judgments related to lease recognition.
New Accounting Pronouncements
See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for new accounting pronouncements.