UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2019



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33458

TERADATA CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		75-3236470
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

~~10000 Innovation Drive~~17095 Via Del Campo

~~Dayton, Ohio 45342~~San Diego, California92127

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: ~~(866)~~ (866) 548-8348

Securities registered pursuant to Section 12(b) of the Act:



Title of each class:	Trading Symbol	Name of Each Exchange on which Registered:
Common Stock, $0.01 par value	TDC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý No ¨

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yesý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý

At ~~October 27, 2017,~~July 31, 2019, the registrant had approximately ~~121.0~~114.1 million shares of common stock outstanding.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION





	Description	Page

Item 1.	Financial Statements

	Condensed Consolidated Statements of (Loss) Income (Unaudited) Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~	3

	~~Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and Nine Months Ended September 30, 2017 and 2016~~	4

	~~Condensed Consolidated Balance Sheets (Unaudited) September 30, 2017 and December 31, 2016~~2018	5

	Condensed Consolidated Statements of ~~Cash Flows~~Comprehensive Loss (Unaudited) ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	6

	~~Notes to~~ Condensed Consolidated ~~Financial Statements~~Balance Sheets (Unaudited) June 30, 2019 and December 31, 2018	7

	Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2019 and 2018	8

	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Three and Six Months Ended June 30, 2019 and 2018	9

	Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1626

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2838

Item 4.	Controls and Procedures	2838

PART II—OTHER INFORMATION

	Description	Page

Item 1.	Legal Proceedings	2938

Item 1A.	Risk Factors	2938

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2939

Item 3.	Defaults Upon Senior Securities	3039

Item 4.	Mine Safety Disclosures	3039

Item 5.	Other Information	3039




Item 6.	Exhibits	3140

	Signatures	3241

Part 1—FINANCIAL INFORMATION



Item 1.	Financial Statements.

Teradata Corporation

Condensed Consolidated Statements of (Loss) Income (Unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
In millions, except per share amounts 2017 2016 2017 2016
Revenue
Product and cloud revenue $ 172
$ 210
$ 504
$ 661
Service revenue 354
342
1,026
1,035
Total revenue 526
552
1,530
1,696
Costs and operating expenses
Cost of product and cloud 68
75
216
265
Cost of services 208
183
598
558
Selling, general and administrative expenses 161
159
481
505
Research and development expenses 82
46
230
154
Impairment of goodwill, acquired intangibles and other assets —
—
—
80
Total costs and operating expenses 519
463
1,525
1,562
Income from operations 7
89
5
134
Other (expense) income, net
Interest expense (4 ) (3 ) (11 ) (9 )
Interest income 3
2
8
4
Other income (expense) —
2
(1 ) 1
Total other (expense) income, net (1 ) 1
(4 ) (4 )
Income before income taxes 6
90
1
130
Income tax (benefit) expense (7 ) 41
(6 ) 63
Net income $ 13
$ 49
$ 7
$ 67
Net income per weighted average common share
Basic $ 0.11
$ 0.38
$ 0.05
$ 0.52
Diluted $ 0.10
$ 0.37
$ 0.05
$ 0.51
Weighted average common shares outstanding
Basic 123.7
129.7
127.3
129.6
Diluted 125.8
131.6
129.1
131.3



	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 ~~Income~~Loss (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,						Six Months Ended June 30,
In millions	2017		2016		2017		2016			2019			2018			2019			2018
Net income	$	13	$	49	$	7	$	67
Other comprehensive income:
Net (loss) income										$	(1	)	$	4		$	(11	)	$	(3	)
Other comprehensive loss:
Foreign currency translation adjustments	7		1		17		7			(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		2		3		4			1			4			2			4
Defined benefit plan adjustment, tax portion	—		—		—		(1		)	—			(1		)	—			(1		)
Defined benefit plan adjustment, net of tax	1		2		3		3			1			3			2			3
Other comprehensive income	8		3		20		10
Comprehensive income	$	21	$	52	$	27	$	77
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	September 30, 2017			December 31, 2016			June 30, 2019			December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	1,025		$	974		$	635		$	715
Accounts receivable, net	366			548			377			588
Inventories	45			34			35			28
Other current assets	72			65			82			97
Total current assets	1,508			1,621			1,129			1,428
Property and equipment, net	159			138			317			295
Capitalized software, net	136			187			49			72
Right of use assets - operating lease, net							58			—
Goodwill	398			390			396			395
Acquired intangible assets, net	23			11			12			16
Deferred income taxes	53			49			70			67
Other assets	30			17			92			87
Total assets	$	2,307		$	2,413		$	2,123		$	2,360
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	53		$	30		$	25		$	19
Short-term borrowings	180			—
Current portion of finance lease liability							32			17
Current portion of operating lease liability							20			—
Accounts payable	106			103			102			141
Payroll and benefits liabilities	139			139			114			224
Deferred revenue	364			369			498			490
Other current liabilities	94			88			74			118
Total current liabilities	936			729			865			1,009
Long-term debt	493			538			466			478
Finance lease liability							54			30
Operating lease liability							44			—
Pension and other postemployment plan liabilities	107			96			102			113
Long-term deferred revenue	17			14			82			105
Deferred tax liabilities	12			33			4			3
Other liabilities	23			32			139			127
Total liabilities	1,588			1,442			1,756			1,865
Commitments and contingencies (Note 7)
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 September 30, 2017 and December 31, 2016, respectively	—			—
Common stock: par value $0.01 per share, 500.0 shares authorized, 120.6 and 130.6 shares issued at September 30, 2017 and December 31, 2016, respectively	1			1
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	1,292			1,220			1,491			1,418
Accumulated deficit	(505		)	(161		)	(1,009		)	(823		)
Accumulated other comprehensive loss	(69		)	(89		)	(116		)	(101		)
Total stockholders’ equity	719			971			367			495
Total liabilities and stockholders’ equity	$	2,307		$	2,413		$	2,123		$	2,360

See Notes to Condensed Consolidated Financial Statements (Unaudited).

Teradata Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,						Six Months Ended June 30,
In millions	2017			2016			2019			2018
Operating activities
Net income	$	7		$	67
Adjustments to reconcile net income to net cash provided by operating activities:
Net loss							$	(11	)	$	(3	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	103			97			77			64
Stock-based compensation expense	51			49			37			35
Deferred income taxes	(22		)	(9		)	—			(6		)
Impairment of goodwill, acquired intangibles and other assets	—			80
Changes in assets and liabilities:
Receivables	182			162			211			185
Inventories	(11		)	4			(7		)	2
Current payables and accrued expenses	—			(14		)	(155		)	(31		)
Deferred revenue	(2		)	(7		)	(15		)	90
Other assets and liabilities	(7		)	(35		)	(33		)	(46		)
Net cash provided by operating activities	301			394			104			290
Investing activities
Expenditures for property and equipment	(59		)	(32		)	(27		)	(58		)
Proceeds from sale of property and equipment	—			5
Additions to capitalized software	(7		)	(54		)	(2		)	(4		)
Proceeds from sale of business	—			92
Business acquisitions and other investing activities, net	(18		)	(16		)
Net cash used in investing activities	(84		)	(5		)	(29		)	(62		)
Financing activities
Repurchases of common stock	(351		)	(69		)	(175		)	(157		)
Repayments of long-term borrowings	(23		)	(22		)	(6		)	(40		)
Proceeds from credit facility borrowings	180			—
Repayments of credit facility borrowings	—			(180		)	—			(240		)
Payments of finance leases							(9		)	—
Other financing activities, net	20			28			36			18
Net cash used in financing activities	(174		)	(243		)	(154		)	(419		)
Effect of exchange rate changes on cash and cash equivalents	8			3
Increase in cash and cash equivalents	51			149
Cash and cash equivalents at beginning of period	974			839
Cash and cash equivalents at end of period	$	1,025		$	988
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 ~~2016~~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, ~~2016~~2018 (the ~~“2016~~“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. As a result of the Company's early adoption of Accounting Standards Update 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~,presentation, except for lease accounting discussed in ~~the fourth quarter of 2016, retroactively to January 1, 2016, the restatement of prior year results resulted in a change in net cash provided by operating activities~~Notes 2 and ~~net cash used by financing activities of $3 million for the nine months ended September 30, 2016.~~12.

2. New Accounting Pronouncements

~~Revenue Recognition.~~

Fair Value Measurement. In ~~May 2014,~~August 2018, the Financial Accounting Standards Board ("FASB") issued new guidance that ~~affects any entity that either enters into contracts with customers~~modifies disclosure requirements related to ~~transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.~~fair value measurement. The new guidance will supersede the revenue recognition requirements in the current revenue recognition guidance, and most industry-specific guidance. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurementamendments in this update. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the FASB defines a five-step process which includes the following: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

~~The new revenue standard will be~~update are effective for ~~annual reporting~~fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2017, with early application~~2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows ~~entities to apply the standard retrospectively~~ for ~~all periods presented~~early adoption of any removed or ~~alternatively an entity is permitted to recognize the cumulative effect~~modified disclosures upon issuance of ~~initially applying the guidance as an opening balance sheet adjustment to retained earnings in the period of initial application (modified retrospective method).~~

The Company plans to adopt the new accounting guidance effective January 1, 2018 by utilizing the modified retrospective method. The Company is currently evaluating the impact on its consolidated financial position, results of operations and cash flows.

~~Although the Company is still evaluating the impact on its consolidated financial statements, the Company believes the most significant impacts may include the following items:~~

As the Company transitions to the new go-to-market offerings, such as subscription-based licenses rather than perpetual licenses, the Company could potentially see a more significant impact in the amount of revenue recognized over time under the current rules but upfront under the new rules. This impact could result in revenue that is adjusted to retained earnings in the period ofthis update while delaying adoption and therefore not recognized in future periods or restated to prior periods due to the Company applying the modified retrospective method of adoption. This potential impact may affect how transactions are structured in the fourth quarter to minimize the revenue that is adjusted to retained earnings;

~~The Company currently expenses contract acquisition costs and believes that the requirement to defer incremental contract acquisition costs and recognize them over the term~~ of the ~~contract to which the costs relate could have an impact, especially as the Company transitions to longer-term, over-time revenue contracts;~~

~~The amount of revenue allocated to the delivered items and recognized upfront utilizing the relative selling price model is limited to the amount that is not contingent upon the delivery of~~ additional ~~items or meeting other specified performance conditions (i.e~~., the non-contingent amount) under current rules. Under the new rules, the amounts allocated to delivered items and recognized upfront could be higher if it is probable that a significant reversal in the amount of revenue recognized will not occur in future periods upon the delivery of additional items or meeting other specified performance conditions; and

The new standard will impact our internal control environment, including our financial statement disclosure controls, business process controls, new systems and processes, and enhancements to existing systems and processes.

The Company does not expect that the new standard will result in substantive changes in our performance obligations or the amounts of revenue allocated between multiple performance obligations, with the exception of contingent revenue discussed above. The Company is still in the process of evaluating and quantifying these impacts, and our initial assessment may change as the Company continues with implementing new systems, processes, accounting policies and internal controls.

~~Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.~~ In March 2017, the FASB issued accounting guidance for “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost”. The amendment requires the service cost component of net periodic benefit cost be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period and other components of the net periodic benefit cost be presented separately from the line item that includes the service cost and outside of any subtotal of operating income. For public entities, the amendments aredisclosures until their effective ~~for interim and annual reporting periods beginning after December 15, 2017.~~date. The Company is currently evaluating this guidance to determine the impact it may have on its ~~consolidated financial statements.~~disclosures.

~~Stock Compensation.~~

Compensation-Retirement Benefits-Defined Benefit Plans-General. In ~~May 2017,~~August 2018, the FASB issued ~~accounting~~new guidance ~~for "Compensation—Stock Compensation (Topic 718) - Scope of Modification Accounting". The amendments in this update provide guidance about which changes to~~that modifies the ~~terms or conditions of a share-based payment award require an entity to apply modification accounting. The current~~ disclosure requirements ~~in Topic 718 apply regardless of whether an entity is required to apply modification accounting under~~for employers that sponsor defined benefit pension or other postretirement plans. For public companies, the ~~amendments in this update. The~~ amendments in this update are effective for ~~all entities for annual periods, and interim periods within those annual periods,~~fiscal years beginning after December 15, ~~2017. Early~~2020, with early adoption permitted, and is ~~permitted, including adoption in any interim period.~~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 ~~consolidated~~disclosures.

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issuednew 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 ~~statements.~~position, results of operations or cash flows are not expected to be material.

Codification Improvements to Financial Instruments-Credit Losses, Derivatives and ~~Hedging.~~Hedging, and Financial Instruments. In ~~August 2017,~~June 2016, the FASB issued ~~amendments~~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 ~~hedge accounting guidance. These amendments are intended to better align a company’s risk management strategies and financial reporting for hedging relationships. Under~~make an irrevocable one-time election upon adoption of the new ~~guidance, more hedging strategies will~~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 ~~eligible for hedge accounting and the application of hedge accounting is simplified. In addition,~~applied on an instrument-by-instrument basis. For entities that have already adopted the new ~~guidance amends presentation and disclosure requirements. The guidance~~credit losses standard, the relief is effective for fiscal years beginning after December 15, ~~2018 with~~2019 and interim periods therein, and early adoption ~~permitted, including~~is permitted. For all other entities, the ~~interim periods within those years.~~guidance is effective upon adoption of the new credit losses standard. The ~~guidance requires the use of a modified retrospective approach. The Company~~company is currently evaluating this new guidance to determine the impact ~~of the guidance~~it may have on our ~~consolidated~~ financial ~~statements.~~position, results of operations or cash flows.

Recently Adopted Guidance

~~Simplifying the measurement for goodwill~~.Leases. In ~~January 2017,~~February 2016, the FASB issued new guidance under Topic 842, which requires a lessee to ~~simplify~~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 ~~impairment~~new standard as of ~~goodwill. The guidance removes Step 2~~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 ~~goodwill impairment test,~~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 ~~requires~~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 ~~hypothetical purchase~~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 ~~allocation. A goodwill impairment will now be~~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 ~~by which a reporting unit’s carrying value exceeds~~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 ~~fair value, not~~customer base. The Company believes the inclusion of this information is important to ~~exceed~~understanding the ~~carrying amount of goodwill. The guidance~~obligations that the Company is contractually required to ~~be applied prospectively~~perform and ~~is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company elected~~provides useful information regarding remaining obligations related to ~~early adopt this accounting guidance effective January 1, 2017. The Company does not expect any impact from the adoption of the new accounting guidance on its consolidated financial statements.~~

~~3. Supplemental Financial Information~~

As of
In millions September 30,
2017 December 31,
2016
Inventories
Finished goods $ 33
$ 20
Service parts 12
14
Total inventories $ 45
$ 34

Deferred revenue
Deferred revenue, current $ 364
$ 369
Long-term deferred revenue 17
14
Total deferred revenue $ 381
$ 383

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:~~

segment.

In millions Balance,
December 31,
2016 Adjustments
Currency
Translation
Adjustments
Balance,
September 30,
2017
Goodwill
Americas Data and Analytics $ 251
$ 2
$ —
$ 253
International Data and Analytics 139
—
6
145
Total goodwill $ 390
$ 2
$ 6
$ 398



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

~~During the first nine months of 2017, the Company recorded additional goodwill of $2 million, for an immaterial acquisition that occurred during the period.~~

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	)

September 30, 2017 December 31, 2016
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 3 to 5
$ 41
$ (18 ) $ 71
$ (61 )
Trademarks/trade names 5
—
—
1
(1 )
In-process research and development 5
5
(5 ) 5
(4 )
Total acquired intangible assets

$ 46
$ (23 ) $ 77
$ (66 )

During the first nine months of 2017 2017, the Company recorded additional intangibles of $18 million, for intellectual property related to an immaterial acquisition that occurred during the period. The gross carrying amount of acquired intangibles was reduced by certain intangible assets previously acquired that became fully amortized and were removed from the balance sheet.

The aggregate amortization expense (actual and estimated) for acquired intangible assets is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30				Six Months Ended June 30,
In millions	2017		2016		2017		2016		2019		2018		2019		2018
Amortization expense	$	3	$	2	$	6	$	9	$	1	$	2	$	3	$	4



	Actual		For the years ended (estimated)
In millions	2018		2019		2020		2021		2022
Amortization expense	$	7	$	6	$	4	$	4	$	2

Actual For the years ended (estimated)
In millions 2016 2017 2018 2019 2020 2021 2022
Amortization expense $ 10
$ 8
$ 7
$ 5
$ 4

$ 4
$ 1

5.7. 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. ~~The Company’s intention is~~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 ~~permanently reinvest~~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 that apply a broad range of statutory income tax rates, a large majority of which are less than the U.S. statutory rate.~~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	)%

Three Months Ended September 30, Nine Months Ended September 30,
In millions 2017 2016 2017 2016
Effective tax rate (116.7 )% 45.6 % (600.0 )% 48.5 %

For the three and nine months ended September 30, 2017, a net $6 million discrete tax benefit was recognized from the reversal of uncertain tax positions on acquired tax attributes from previous acquisitions. This resulted in income tax benefit for the respective periods.

For the three months and six months ended ~~September~~June 30, ~~2016, there was~~2019, a ~~$22~~$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 ~~sale~~Company recorded income tax expense of $6 million on a pre-tax net loss of $5 million for the ~~marketing applications business that occurred on July 1, 2016. For the nine~~six months ended ~~September~~June 30, ~~2016,~~2019, resulting in an effective income tax rate of (120.0)%.

~~there~~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 ~~from~~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 ~~$76 million~~forecasted earnings mix by jurisdiction. The 2017 Tax Act subjects U.S. shareholders to a tax on global intangible ~~asset impairment recorded~~low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The Company has elected to provide for the tax expense related to GILTI in the ~~first quarter~~year the tax is incurred. The Company does not expect a material amount of ~~2016, of which $57 million was~~tax expense related to ~~non-deductible goodwill and $19 million was related to intangible assets~~GILTI based on our forecasted marginal effective tax rate for which $6 million of deferred tax benefit had been recorded, as well as the $22 million discrete tax impact from the sale of the marketing applications business recognized in the third quarter. In addition, there was a $2 million favorable tax benefit recognized due to the release of a reserve taken for a previously uncertain tax position.2019.

6.8. 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 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 exchange 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.

~~All derivatives are recognized in the consolidated balance sheets at their fair value. 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. ~~Changes in~~Across its portfolio of contracts, Teradata has both long and short positions relative to the ~~fair value~~U.S. dollar. As a result, Teradata’s net involvement is less than the total contract notional amount of ~~derivative financial instruments,~~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 ~~gain~~in other income (expense), depending on the nature of the related hedged ~~asset or liability,~~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 ~~current period earnings.~~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. ~~Across its portfolio of contracts, Teradata has both long and short positions relative~~Refer to Note 10 for disclosures related 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.~~

~~The following table identifies the contract notional amount of the Company’s foreign exchange forward contracts:~~

As of
In millions September 30,
2017 December 31,
2016
Contract notional amount of foreign exchange forward contracts $ 110
$ 156
Net contract notional amount of foreign exchange forward contracts $ 16
$ 16

~~The~~ fair value of all derivative assets and ~~liabilities recorded~~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 ~~other current assets and accrued liabilities at September 30, 2017 and December 31, 2016, were not material.~~

Gains and losses from the Company’s fair value hedges (foreign currency forward contracts and related hedged items) were immaterial for the three and nine months ended September 30, 2017 and September 30, 2016. Gains and losses from foreign exchange ~~forward contracts are~~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 ~~recognized each period and reported along with~~perform under the ~~offsetting gain or loss~~terms of the ~~related hedged item, either in cost of products or in other income (expense), depending on the nature of the related hedged item.~~applicable contracts.

7.9. Commitments and Contingencies

In the ~~normal~~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.

~~As disclosed last quarter, through internal processes, the Company discovered certain questionable expenditures for travel, gifts and other expenses at one~~ We are not currently a party to any litigation, nor are we aware of ~~its international subsidiaries doing~~any pending or threatened litigation against us that we believe would materially affect our business, ~~in a single foreign country, Turkey. Teradata promptly initiated an internal investigation into the matter, with the assistance of outside counsel~~

and forensic accountants, to determine whether the expenditures may have violated the U.S. Foreign Corrupt Practices Act (“FCPA”) or other potentially applicable anti-corruption laws. In late February 2017, the Company voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”) to alert them to the relevant events and the Company's internal investigation. Teradata has been updating the government on a regular basis regarding the status of the Company's internal investigation and findings, including remedial actions and terminations, and plans to continue to cooperate fully.

The Company continues to believe that the questionable expenditures were limited to a single subsidiary’s business operations in Turkey and involved specific individuals who are no longer with the Company. Teradata’s operations in Turkey have constituted less than one half of one percent of consolidated revenues each year as reported by the Company since 2012. Under the circumstances, Teradata currently does not anticipate a material adverse effect on its business oroperating results, financial condition ~~as a result of this matter; however, the ultimate resolution of this matter with the DOJ and SEC cannot be predicted. Any determination that the Company’s operations~~ or activities are not in compliance with existing laws or regulations could result in the imposition of fines, civil and criminal penalties, and equitable remedies, including disgorgement or injunctive relief.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 ~~coordinated~~ with a third-party leasing ~~company.~~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 ~~September~~June 30, ~~2017,~~2019, the maximum future payment obligation of this guaranteed value and the associated liability balance was $4$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 ~~nine~~six months ended ~~September~~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

In millions 2017 2016
Warranty reserve liability
Beginning balance at January 1 $ 5
$ 6
Provisions for warranties issued 4
6
Settlements (in cash or in kind) (6 ) (7 )
Balance at September 30 $ 3
$ 5

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 ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

The Company is also potentially subject to concentrations of supplier risk. Our hardware components are assembled exclusively by ~~Flextronics International~~Flex Ltd. (“~~Flextronics”~~Flex”). ~~Flextronics~~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 ~~Flextronics~~Flex and to source certain components from single suppliers, a disruption in production at ~~Flextronics~~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 ~~recognized as~~recorded in other assets and the fair value of unrealized losses are ~~recognized as liabilities.~~recorded in other liabilities in the Company's balance sheet. The fair value ~~derivative~~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 ~~recorded in other current assets and accrued liabilities~~ at ~~September 30, 2017 and~~ December 31, ~~2016, were~~2018 was not material. ~~Any realized~~Realized gains orand losses ~~would be mitigated by~~from the Company’s fair value hedges net of corresponding gains or losses on the underlying ~~exposures.~~

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 ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were as follows:


			Fair Value Measurements at Reporting Date Using								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)		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, September 30, 2017	$	483	$	483	$	—	$	—
Money market funds, December 31, 2016	$	473	$	473	$	—	$	—
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	)

Three Months Ended
September 30, Nine Months Ended
September 30,
In millions, except per share amounts 2017 2016 2017 2016
Net income attributable to common stockholders $ 13
$ 49
$ 7
$ 67
Weighted average outstanding shares of common stock 123.7
129.7
127.3
129.6
Dilutive effect of employee stock options, restricted stock and other stock awards 2.1
1.9
1.8
1.7
Common stock and common stock equivalents 125.8
131.6
129.1
131.3
Net income per share:
Basic $ 0.11
$ 0.38
$ 0.05
$ 0.52
Diluted $ 0.10
$ 0.37
$ 0.05
$ 0.51
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 ~~2.7~~1.6 million and ~~3.6~~1.8 million shares of common stock for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~4.7~~2.5 million and ~~4.9~~2.6 million shares of common stock for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 were not included in the computation of diluted earnings per ~~share. The~~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.

~~10.~~14. Segment and Other Supplemental Information

Effective ~~July~~January 1, ~~2016, following the sale of the marketing applications business,~~2019, Teradata ~~is managing~~implemented an organizational change in which Teradata now manages its business ~~in two~~under three geographic regions, which are also the Company’s operating segments: (1) Americas region (North America and Latin America); ~~and~~ (2) ~~International~~EMEA region (Europe, Middle East ~~Africa, Asia~~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 ~~margin~~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

Three Months Ended
September 30, Nine Months Ended
September 30,
In millions 2017 2016 2017 2016
Segment revenue
Americas Data and Analytics $ 292
$ 317
$ 830
$ 937
International Data and Analytics 234
235
700
690
Total Data and Analytics 526
552
1,530
1,627
Marketing Applications —
—
—
69
Total revenue 526
552
1,530
1,696
Segment gross profit
Americas Data and Analytics 173
195
482
564
International Data and Analytics 97
118
304
341
Total Data and Analytics 270
313
786
905
Marketing Applications —
—
—
34
Total segment gross profit 270
313
786
939
Stock-based compensation costs 3
3
10
11
Amortization of acquisition-related intangible asset costs —
—
—
2
Acquisition, integration, reorganization and transformation-related costs 2
1
6
6
Amortization of capitalized software costs 15
15
54
47
Selling, general and administrative expenses 161
159
481
505
Research and development expenses 82
46
230
154
Impairment of goodwill, acquired intangibles and other assets —
—
—
80
Income from operations $ 7
$ 89
$ 5
$ 134

Prior period segment information has been reclassified to conform to the current period presentation. Certain items, including amortization of certain capitalized software costs, were excluded from segment gross profit to conform to the way the Company manages and reviews the results by segment.

~~The following table presents a further disaggregation of revenue for the Company:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
In millions 2017 2016 2017 2016
Product - rights to upgrades, subscription and cloud $ 82
$ 72
$ 233
$ 211
Maintenance - software and hardware 185
175
543
517
Total recurring revenue 267
247
776
728
Product - perpetual licenses and hardware 90
137
271
411
Consulting services 169
168
483
488
Marketing applications —
—
—
69
Total revenue $ 526
$ 552
$ 1,530
$ 1,696

~~11.~~15. Reorganization and Business Transformation

~~In the fourth quarter of 2015,~~On June 4, 2018, the Company ~~announced~~approved a plan to ~~realign~~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 ~~by reducing its cost structure and focusing on~~transformation from a data warehouse company to a data analytics platform company, is intended to better align the Company’s ~~core data~~skills and ~~analytics business. This business transformation included exiting~~resources to effectively pursue opportunities in the ~~marketing applications business, rationalizing~~marketplace. The Company recognized costs of $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 ~~modifying~~charges in the ~~Company’s go-to-market approach. The Company incurred~~range of approximately $35 to $40 million related to the ~~following costs for~~plan and expects the ~~nine months ended September 30:~~actions will be completed in 2019.

Nine Months Ended September 30,
In millions 2017 2016
Employee severance and other employee related cost $ 2
$ 12
Asset write-downs 1
80
Professional services, legal and other transformation costs 24
27
Total reorganization and business transformation cost $ 27
$ 119

~~For the nine months ended September 30, 2017, costs incurred above includes $3 million for an inventory charge and other associated transformation costs~~Cash paid in 2018 related to the ~~discontinuation of Teradata's prior hardware platforms.~~ 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, ~~to the costs and charges incurred above,~~ the Company ~~made cash payments~~incurred $6 million of ~~less than $1 million~~accelerated amortization in the first six months of 2019 for right-of-use assets associated with the ~~nine months ended September 30, 2017 and $18 million for the nine months ended September 30, 2016 for employee severance related to this business transformation that did not have a material impact~~lease on its ~~Statement~~prior corporate headquarters. The remaining lease liability is included in our operating lease obligations as of ~~Operations due to Teradata's accounting for its postemployment benefits under Accounting Standards Codification 712,~~ ~~Compensation - Nonretirement Postemployment Benefits~~ ~~(“ASC 712”), which uses actuarial estimates~~June 30 2019 and ~~defers~~is not included in the ~~immediate recognition of gains or losses.~~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 ~~2016~~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.~~otherwise, except as required by law.

~~Third~~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 ~~third~~second quarter of ~~2017:~~2019:

Total revenue was ~~$526~~$478 million for the ~~third~~second quarter of ~~2017, down 5% from~~2019, a 12% decrease compared to the ~~third~~second quarter of ~~2016,~~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 ~~product and cloud~~consulting services revenue. Foreign currency fluctuations had a 2% negative impact on total revenue ~~and a 4% increase in services revenue.~~for the quarter.

Gross margin ~~decreased~~increased to ~~47.5%~~49.4% in the ~~third~~second quarter of ~~2017~~2019 from ~~53.3%~~46.0% in the ~~third~~second quarter of ~~2016, driven by~~2018, primarily due to a ~~decrease in both product and cloud and services gross margin.~~higher recurring revenue mix as compared to the prior period.

Operating expenses ~~increased by 19% in~~for the ~~third~~second quarter of ~~2017~~2019 decreased by 6% compared to the second quarter of 2018 primarily due to ~~the Company no longer capitalizing certain software development costs as well as additional spend for strategic~~cost management initiatives.

Operating income was $7$10 million in the ~~third~~second quarter of ~~2017,~~2019 and 2018.

Net loss in the second quarter of 2019 was $1 million, compared to ~~$89~~net income of $4 million in the ~~third~~second quarter of ~~2016.~~2018.

~~Net income~~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 ~~the third~~second quarter of ~~2017 was $13 million, compared~~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 ~~$49 million in the third quarter of 2016~~

~~Strategic Overview~~

~~Teradata’s strategy~~subscription-based transactions from perpetual software licenses and hardware transactions, which is ~~based around~~consistent with our ~~core belief that analytics and data unleash the potential of great companies~~allowing them to make better and faster decisions and attain competitive advantage. We empower companies to achieve high-impact business outcomes through scalable analytics on an agile data foundation. Through our focus on leading with business outcomes and a consultative approach, our goal is to servestrategy. Under subscription models, we recognize revenue over time as a trusted advisor to both the business and technical leaders in our customers’ organizations. Our business analytics solutions and technology are ideally suited for the world’s largest companies as they have the largest and most complex analytics challenges, and therefore provide the largest revenue opportunities for Teradata.

~~Our strategy is to provide a differentiated set of offerings to this target market through a portfolio of data and analytics solutions, including the following:~~

~~Hybrid Cloud: leading technology and services to deliver an analytical ecosystem deployed in a hybrid cloud architecture,~~ ~~providing analytic processing across flexible deployment options, including the Teradata Cloud and public clouds, as well as on-premises on Teradata hardware or commodity hardware;~~

~~Teradata Analytics Platform~~:~~evolution of our market-leading integrated data warehouse engine to include access~~opposed to the ~~best analytic functions and leading analytic engines, leveraging preferred tools and languages against multiple data types integrated at scale;~~

~~Business Analytics Consulting and Solutions: high-value business outcomes realized by engaging with business users through solution-based selling that leverages analytic consulting and repeatable analytical intellectual property ("IP"); and~~

~~Ecosystem Architecture Consulting: best-in-class architecture consulting expertise~~upfront recognition under the perpetual model. We expect to ~~help customers build optimized analytical ecosystems, leveraging both open source and commercial solutions.~~

~~We deliver our solutions on-premises and via the cloud, including our "as~~continue to have a ~~service" IntelliCloud™ offering. This provides our customers choice in how they deploy a Teradata analytics environment and leverage the power~~significant percentage of ~~our solutions. These flexible delivery options are designed to meet the evolving needs of our customers, and in turn, extend our market opportunity.~~

~~In support of our strategy, we are continuing to optimize our go-to-market and sales approach to improve effectiveness in demand creation and address new and expanded market opportunities, such as~~bookings be subscription-based, consistent with our ~~consultative business solutions~~overall strategy and ~~cloud offerings.~~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 ~~will~~expect perpetual revenues to continue ~~investing in partnerships to increase the number of solutions available on Teradata software, maximize customer value, and increase our market coverage.~~

We believe our more consultative, business outcome led approach and our portfolio of offerings that provide customers choice in how they procure and deploy analytics will best position us to be our customers’ trusted advisor and partner of choice for architecting, implementing, and managing their analytic solutions.

~~Our long-term strategic objectives are to:~~

~~deliver business outcomes for our customers through technology-enabled analytics at scale,~~

~~by focusing on companies with the largest analytic opportunities,~~

~~by offering market-leading hybrid cloud technology,~~

~~that is enabled by a world class go-to-market sales and support team,~~

~~with the ultimate goal of generating revenue, earnings, and cash flow growth.~~

~~Future Trends~~

We believe that future demand for our analytic solutions will increase based on the growth of new, high volume data sources such as sensor and machine-generated data, and based on data and analytics enabled use cases in areas such as the following:

~~patient service experience insights,~~

~~pharmacy analytics for healthcare companies,~~

~~raw materials and yield optimization for manufacturers,~~

~~natural language processing for better speech recognition, and~~

~~document classification to improve process automation banks.~~

Analytic environments are becoming more complex to design and manage due to increasing types of analytic tools and techniques, multiple data management systems both on premises and in the cloud, commercial and open source technologies that need to be integrated, varying service-level requirements, and the escalating growth in the volume of data. This complexity drives the need for an overall architecture to manage such environments. Demand for value-added consulting and services is increasing as customers seek help with evolving their analytic architectures and rapidly deploying their analytic architectural solutions. Companies are increasingly purchasing analytic capabilities “as a service" and strive to get value out of all their data.

Overall, analytics are growing in importance as global businesses seek new means to drive business value from the ever-increasing amounts and types of data. As a result, we expect that Teradata’s leadership status and investments in our strategic areas of focus will position us for future growth.

This anticipated growth, however, is not expected to be without its challenges from general economic conditions, competitive pressures, alternative technologies and deployment options, and other risks and uncertainties. Over the past few years, we have seen a shift in the market that included a reduction in customers’ large capital investments in traditional data analytic systems and related services. Specifically, customers have been focusing investments in their analytical ecosystems on products which have lower average selling prices than traditional analytic platforms, and changing their buying behavior with decisions shifting from IT to business users who typically want operating expense purchasing options. As a result, our revenue has been impacted by our customers’ focus on less capital-intensive options like cloud, subscription-based licenses, rental and usage-based models. In addition, an increasing percentage of our customers want to buy easy-to-use, vendor managed, on-line delivery “as-a-service” analytics rather than traditional on-premises analytic systems. One of the greatest challenges for predicting future revenue growth is forecasting the rate at which customers adopt and change the way they purchase and deploy Teradata's analytic technologies. In the short term, we expect revenue to decline as customers ~~shift~~switch to ~~these new recurring revenue models where~~our subscription-based offerings. However, some customers continue to purchase on a perpetual basis. Perpetual revenue is ~~recognized over multiple years. Longer term, we~~primarily hardware-related, as software is generally being sold on subscription. We expect ~~the year-over-year mix of revenues to normalize and increase as more customers transition to these new purchasing models.~~

~~Overall, we believe~~ that Teradata's technology is highly differentiated with our ability to handle the concurrency and service-level agreements of hundreds to thousands of mission-critical users and applications. Teradata is continuing to expand our core analytics technology into the Teradata Analytics Platform. The first step on this journey is to integrate Teradata and Aster technology, which increases the breadth of analytic use cases that can be performed by Teradata. Further, we believe the Company has the opportunity for futureperpetual revenue growth from both the expansion of our existing customers’ analytical ecosystems (from both business as well as IT users), and from the addition of new customers. We have expanded our offerings as well as our pricing options to make it easier for customers to buy and expand with Teradata including flexible offerings such as availability in the cloud and subscription-based licensing programs. Our approach offers subscription-based licensing to provide more flexible and easier purchasing options for customers. Our subscription-based license is portable across deployment options. In other words, as business or operating needs change, that license can be originally deployed on-premises on Teradata hardware or as ‘software only’ on commodity hardware that customers procure, in our Teradata Cloud, or in the public cloud; and this license can be moved at a future date to a different deployment option without additional payment. This flexibility allows our customers to deploy anywhere.

There is risk that pricing and competitive pressures on our solutions could increase in the future as major customers evaluate and rationalize their analytics infrastructure, particularly to the extent that cost becomes the top focus and lower-cost/lower performing alternatives are more seriously and frequently considered. However, such alternatives generally do not enable companies to perform mission-critical, complex analytic workloads to address customer's needed business outcomes from large-scale analytics, discovery analytics, and data management such as those enabled by Teradata’s portfolio of offerings. As the market continues to evolve, we may be challenged to generate revenue growth shorter term as customers purchase in smaller deal sizes, and more of our customers shift from upfront perpetual licenses to over-time subscription licenses at a pace which is difficult to predict.

Wewill continue to ~~believe~~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 ~~analytics will remain a high priority for~~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 ~~and longer term will drive growth for Teradata’s leading solutions. Moreover,~~as we continue to ~~be committed~~realign our consulting business. We expect consulting revenue to ~~new product development and achieving a positive yield from our research and development spending and resources, which are intended to drive future demand. As described above, we~~ continue to ~~transform our go-to-market approach to better position Teradata with both business buyers~~decline as the Company implements this strategic change and ~~IT buyers, and to expand with our existing customers as well as add new customers.~~focus.

In addition, we will continue to optimize our go-to-market structure to focus on the largest analytic opportunities, and to manage our cost structure as we broaden our product and consulting services portfolio and market penetration.

As a portion of the Company’s operations and revenue occur outside the ~~U.S.~~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 ~~October~~July 31, ~~2017,~~2019, Teradata is ~~currently not~~ expecting ~~any material~~one-to-two percentage points of negative impact from currency translation on our ~~full-year~~2019 full year projected ~~revenue.~~

~~Business Transformation~~

Teradata continues to execute on our business transformation plan. As described above, we are strengthening our consultative approach to selling data analytics that enable high-impact business outcomes for our customers and are extending our portfolio of hybrid cloud solutions. We have realigned and continue to optimize our go-to-market approach to improve sales effectiveness and achieve better financial results from our targeted customers. We will continue to invest in and prioritize initiatives that strengthen our ability to be our customers’ trusted advisor for data and analytics.

A foundational element of the Teradata strategy is Teradata Everywhere which brings together our expanded offerings across cloud and on-premises with a flexible pricing and licensing model to de-risk customer purchase decisions. Through Teradata Everywhere, customers can:

~~Analyze Anything: enables analytic users throughout the organization to use their preferred analytic tools and engines across data sources, at scale;~~

~~Deploy Anywhere: provides analytic processing in the Teradata Cloud and public clouds, as well as on-premises on Teradata hardware or commodity hardware;~~

~~Buy Any Way: allows companies to purchase our software on a subscription-basis as well as on a perpetual basis at different price points; and~~

~~Move Anytime: includes software license portability that provides flexibility to run analytics across deployment options.~~

Our shift toward subscription-based licenses is beginning to move our revenues away from traditional, upfront revenue sales and deployment models to a model where revenue is recognized over time. This has had an impact on Teradata’s reported revenue year-to-date in 2017, and we expect this trend to continue to impact reported revenue in a meaningful way in the fourth quarter of 2017. We expect the mix of our revenues to shift toward subscription-based licenses, cloud deployments, analytical ecosystems, and analytic consulting services over time, as these are faster growing revenue streams, which we believe will help increase our recurring revenue over time.

Progress on our transformation is evident through new and expanded market offerings, such as IntelliCloud and Teradata IntelliSphere™ that help future-proof and de-risk customer investments in Teradata technology. As a result, we are making it easier to buy and grow with Teradata.

Another element that is critical to Teradata's successful transformation plan is modifying our go-to-market efforts to a more consultative business outcome led approach to better address the increasing relevance of business buyers and to help customers build analytical ecosystems that include our own technologies as well as open source and other commercial solutions. We have adjusted our go-to-market efforts to address these items and to align with the way we believe that our customers want to buy data analytics solutions.

In 2017, we have continued to reinvest in the business after significantly reducing our cost structure in 2016. We have rationalized the Company's expense structure and are continuing to invest for 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 measures to allow for greater transparency regarding the progress we are making toward achieving our strategic objectives, which will continue to evolve as our business transformation progresses. These financial and performance measures currently include the following:

~~TCore~~ - is a metric that tracks a consistent unit of consumption across all of Teradata’s products over the wide variety of configuration and deployment options, both on-premises and in the cloud. It is determined from the number of physical central processing unit ("CPU") cores in a system and adjusted/reduced by the underlying hardware platform's input/output ("I/O") throughput performance capabilities.

~~Annual Recurring Revenue ("ARR")~~ ~~- is the annual value at a point in time of all of our recurring contracts, including maintenance, software upgrade rights, subscription licenses, rental and cloud and excludes managed services.~~

~~Product ARR -~~ ~~is the annual value at a point in time of all product related and cloud recurring contracts, including software upgrade rights, subscription licenses, rental and cloud.~~

~~Recurring Revenue as a Percentage of Total Revenue~~ ~~- revenue from all recurring contracts, including maintenance/support, software upgrade rights, subscription licenses, rental and cloud divided by total Company revenue.~~

~~Perpetual Equivalent Value~~ ~~- represents the estimated value the Company would have recognized as revenue if the customer had purchased certain subscription licenses, rental or cloud under historical purchasing practices (i.e., under perpetual license purchasing options) and is calculated as follows:~~

~~The value is based only on new incremental contracts with a minimum 1-year commitment that are executed during the period.~~

~~For software subscription license and rental agreements, we apply the calculated discount for each transaction to the perpetual list prices for software and hardware.~~

~~For cloud offerings, we apply the calculated discount for the transaction to the perpetual list prices for software only, excluding charges for hosting, infrastructure and support services.~~

~~For all transactions, we exclude maintenance, software upgrades and recognized revenue in the period.~~

~~In all instances, the perpetual equivalent value cannot exceed the contract value of the applicable transaction.~~

~~Business Consulting Revenue Growth~~ - revenue growth from our strategic service offerings around analytics consulting and business consulting. Although the revenue from Business Consulting represents a small percent of total Company revenue, it is a leading indicator of future TCore (consumption) growth and measures our effectiveness of becoming a trusted advisor within our customers and targeted prospects.

~~Results of Operations for the Three Months Ended September 30, 2017~~

~~Compared to the Three Months Ended September 30, 2016~~

~~Revenue~~

% of % of
In millions 2017 Revenue 2016 Revenue
Product and cloud revenue $ 172
32.7 % $ 210
38.0 %
Service revenue 354
67.3 % 342
62.0 %
Total revenue $ 526
100 % $ 552
100 %

Teradata revenue decreased $26 million or 5% in the third quarter of 2017 compared to the third quarter of 2016, primarily due to a decline in product and cloud revenue, which decreased 18% in the third quarter of 2017 from the prior-year period. As discussed under the future trends section of this MD&A, our revenue has been impacted by our customers' focus on less capital intensive buying options like cloud, subscription-based licenses, rental and usage-based models. This shift is being addressed by our business transformation strategy and continues to impact our quarterly revenue comparisons as some revenue that we would normally recognize in a given quarter may now

be spread over a number of periods. Services revenue increased 4% in the third quarter of 2017 compared to the prior-year period. The increase was primarily driven by a 6% increase in maintenance revenue. Consulting revenue was up 1%.rate.

Included below are financial and performance growth metrics for ~~the third quarter of 2017 that Teradata is tracking as part of its business transformation strategy:~~2019:

We had $267 million (51% of total revenue) of recurring revenue in the third quarter of 2017, which is 8% growth from $247 million (45% of total revenue) in the third quarter of 2016. We expect recurring revenue to grow high single digits in 2017.

~~Recurring product revenue increased 14% from the third quarter of 2016. We expect recurring product revenue to grow more than 10% in 2017.~~

~~Total Business Consulting revenue increased 23% from the third quarter of 2016. We expect Business Consulting revenue to grow approximately 20% in 2017.~~

~~We expect approximately $225 million to $250 million of perpetual equivalent contract value during 2017.~~

~~We expect ARR of $1.1 billion by~~At the end of the ~~year with approximately one third~~second quarter of ~~that being product ARR. We expect total~~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 ~~grow more than 10% and product ARR to grow approximately 25% for 2017.~~the second quarter of 2018.

~~We expect TCore growth~~90% of our bookings mix in the ~~high teens from~~second quarter of 2019 was subscription-based and we continue to expect 70% or more of our ~~2016 year-end installed base.~~2019 full-year bookings mix to be subscription-based.

Gross Profit


			% of				% of				% of				% of
In millions	2017		Revenue		2016		Revenue		2019		Revenue		2018		Revenue
Product and cloud gross profit	$	104	60.5	%	$	135	64.3	%
Service gross profit	146		41.2	%	159		46.5	%
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	$	250	47.5	%	$	294	53.3	%	$	236	49.4	%	$	250	46.0	%

The ~~product and cloud~~decrease in recurring revenue gross profit ~~variance was driven by the impact~~as a percent of ~~deal mix, which~~revenue was driven by a higher ~~overall~~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 ~~revenue.~~included in subscription-based transactions. Over time, we expect subscription-based margins to increase.

~~Service~~

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 ~~investments that~~currency swings on inter-company transactions in regions where we ~~are making in our~~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 ~~business~~on the top Megadata analytic opportunities to drive ~~increased~~ consumption of ~~Teradata's products. Service gross profit was also impacted by~~our Vantage software analytics platform and on higher value and higher margin consulting offerings. We continue to expect a ~~decrease~~decline in ~~maintenance margin due~~overall consulting bookings and revenue compared to ~~higher support and parts costs.~~prior periods, but we expect future consulting revenue margins to increase.

Operating Expenses


			% of				% of				% of				% of
In millions	2017		Revenue		2016		Revenue		2019		Revenue		2018		Revenue
Selling, general and administrative expenses	$	161	30.6	%	$	159	28.8	%	$	145	30.3	%	$	163	30.0	%
Research and development expenses	82		15.6	%	46		8.3	%	81		17.0	%	77		14.1	%
Total operating expenses	$	243	46.2	%	$	205	37.1	%	$	226	47.3	%	$	240	44.1	%

The ~~increase in Selling, General~~selling, general and ~~Administrative~~administrative ("SG&A") expense decrease was driven primarily ~~driven~~ by an increase in regional selling expense due to investments in demand creation, primarily in the Americas region, as well as additional spend to support our new strategy. This was partially was offset by the release of a prior period transformation charge related to the discontinuation oflower go-to-market headcount from our prior ~~hardware platforms.~~actions to align our go-to-market teams with our focus on our Megadata and commercial target market.

Research and ~~Development~~development ("R&D") expenses increased ~~primarily~~ due to strategic investments in ~~managed~~the new Teradata Vantage analytics platform and ~~public~~our cloud in addition to the impact from the Company no longer capitalizing certain software development costs as a result of a movement to agile development methodologies. The Company did not capitalize any R&D costsofferings.

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 ~~third~~second quarter of ~~2017 compared to $16 million in the third quarter of 2016. These development costs are now expensed as incurred as R&D expense.~~

~~Other (Expense) Income, net~~

In millions 2017 2016
Interest income $ 3
$ 2
Interest expense (4 ) (3 )
Other —
2
Other (expense), net $ (1 ) $ 1

~~Other (expense) income in the third quarter of 2017~~2019 and ~~2016~~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

As a result of the 2017 Tax Act, the Company changed its indefinite reversal assertion related to ~~permanently reinvest~~its undistributed earnings of its foreign subsidiaries and no longer considers a majority of its foreign earnings permanently reinvested outside of the U.S. ~~As a result, the~~

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 under its current structure.~~business. The Company estimates its full-year effective tax rate for ~~2017~~2019 to be approximately ~~(7)%~~21%, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction ~~for 2017~~ and the estimated discrete items ~~that will~~to be recognized in ~~2017.~~2019. The forecasted tax rate is based on the overseas profits being taxed at an overall effective tax rate of approximately ~~21%~~18%, as compared to the federal statutory tax rate of ~~35%~~21% in the U.S.

The effective tax rate for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016~~2018 were as follows:

2017 2016
Effective tax rate (116.7 )% 45.6 %



	2019		2018
Effective tax rate	120.0	%	33.3	%

For the three months ended ~~September~~June 30, ~~2017, net~~2019, $4 million of discrete tax ~~benefits of $6 million were recognized primarily~~expense was recorded related to aan uncertain tax position resulting from the reversal of ~~uncertain tax positions from acquired tax attributes~~the Tax Court’s decision in ~~previous acquisitions, which resulted~~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 ~~negative tax rate in the period.~~taxpayer's cost-sharing calculations are valid.

For the three months ended ~~September~~June 30, ~~2016, there was a $22 million~~2018, no material discrete tax ~~expense related to the sale of the marketing applications business that occurred on July 1, 2016.~~items were recorded.

Revenue and Gross Profit by Operating Segment

Effective ~~July~~January 1, ~~2016, following the sale of the marketing applications business,~~2019, Teradata ~~is managing~~implemented an organizational change in which Teradata now manages its business ~~in two~~under three geographic regions, which are also the Company’s operating segments: (1) Americas region (North America and Latin America); ~~and~~ (2) ~~International~~EMEA region (Europe, Middle East, ~~Africa, Asia~~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 ~~U.S. generally accepted accounting principles (“GAAP”)~~GAAP in Note 1014 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 ~~operating performance by~~ segment gross profit for the Company for the three months ended ~~September~~June 30:


			% of				% of				% of				% of
In millions	2017		Revenue		2016		Revenue		2019		Revenue		2018		Revenue
Segment revenue
Americas Data and Analytics	$	292	55.5	%	$	317	57.4	%
International Data and Analytics	234		44.5	%	235		42.6	%
Americas									$	269	56.3	%	$	287	52.8	%
EMEA									122		25.5	%	127		23.3	%
APAC									87		18.2	%	130		23.9	%
Total segment revenue	$	526	100	%	$	552	100	%	$	478	100	%	$	544	100	%
Segment gross profit
Americas Data and Analytics	$	173	59.2	%	$	195	61.5	%
International Data and Analytics	97		41.5	%	118		50.2	%
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	$	270	51.3	%	$	313	56.7	%	$	252	52.7	%	$	266	48.9	%

Americas ~~Data and Analytics:~~

Revenue decreased 8%6%, which included an increase in ~~the third quarter~~recurring revenue of ~~2017 from the third quarter of 2016. As discussed~~9% offset by a decrease in ~~the future trends section of this MD&A, the~~perpetual software licenses and hardware revenue and decrease in consulting revenue. The increase in recurring revenue and decline ~~was~~in perpetual revenue were driven by ~~our customers' focus on less capital-intensive buying options such~~the shift to subscription-based transactions. Segment gross profit as ~~customers moving~~a percentage of revenues was higher primarily due to ~~our cloud, subscription~~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 ~~rental~~ and ~~usage-based options.~~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 ~~services versus product~~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 ~~a lower services margin rate. Service margins were impacted by investments that we are making~~software upgrade rights, due to the higher mix of hardware in ~~our consulting business to drive increased consumption of Teradata's products. In addition, service~~subscription-based transactions.

The decrease in perpetual software licenses and hardware gross profit ~~was also impacted by~~as a ~~decrease in maintenance margin due to higher support and parts costs.~~

~~International Data and Analytics:~~ ~~Revenue~~percent of revenue was ~~flat in the third quarter of 2017 as compared the third quarter of 2016, and included a 1% positive impact from foreign currency fluctuations. Revenue variances were~~ driven by a ~~decline~~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 ~~revenues~~recurring revenue. In addition, our hardware gross margin was negatively impacted by currency swings on inter-company transactions in ~~Europe, Middle East and Africa. Revenues were relatively flat in the Asia Pacific region in the third quarter of 2017 as compared to third quarter of 2016. Segment~~regions where we cannot hedge currency fluctuations.

Consulting services gross profit as a percentage of ~~revenues was down in the third quarter of 2017 driven by a higher mix of services versus product~~ revenue ~~and investments that we are making in our consulting business to drive increased consumption of Teradata's products.~~

~~Results of Operations for the Nine months ended September 30, 2017~~

~~Compared to the Nine months ended September 30, 2016~~

~~Revenue~~

% of % of
In millions 2017 Revenue 2016 Revenue
Product and cloud revenue $ 504
32.9 % $ 661
39.0 %
Service revenue 1,026
67.1 % 1,035
61.0 %
Total revenue $ 1,530
100 % $ 1,696
100 %

Teradata revenue decreased $166 million or 10% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, in part due to the sale of the marketing applications business on July 1, 2016. Product and cloud revenue decreased 24% in the first nine months of 2017 from the prior-year period. In addition to the sale of the marketing applications business on July 1, 2016,improved as discussed under the future trends section of this MD&A, our revenue has been impacted by our customers' focus on less capital intensive buying options such as customers moving to our cloud, subscription-based licenses, rental and usage-based options. This shift is being addressed by our business transformation strategy and continues to impact our prior period revenue comparisons as some revenue that we would normally recognize in a given period may now be spread over a number of periods. Services revenue decreased 1% in the first nine months of 2017 compared to the prior-year ~~period. The decrease in services was in large part due~~period as the Company is taking steps to focus consulting on the ~~sale~~top Megadata analytic opportunities to drive consumption of ~~the marketing applications business.~~our Vantage software analytics platform and on higher value and higher margin consulting offerings.

~~Gross Profit~~Operating Expenses

% of % of
In millions 2017 Revenue 2016 Revenue
Product and cloud gross profit $ 288
57.1 % $ 396
59.9 %
Service gross profit 428
41.7 % 477
46.1 %
Total gross profit $ 716
46.8 % $ 873
51.5 %



			% 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 ~~product and cloud gross profit variance~~SG&A expense decrease was driven by ~~incremental amortization of $7 million of previously capitalized software development costs partially offset by favorable product~~lower go-to-market headcount as we have realigned our go-to-market teams with our focus on our Megadata and deal mix. During the first nine months of 2017 we had more customers purchasing our IntelliFlex offering rather than our prior 2000 Series appliance, resulting in increased margins. The prior period included a significant low margin hardware only deal.

Service gross profit was negatively impacted by investments that we are making in our consulting business to drive increased consumption of Teradata's products. Service gross profit was also impacted by routine consulting projects where we incurred and expensed certain consulting services costs before we will recognize the corresponding revenue and by lower utilization in the Americas region. Additionally, there was acommercial target market. This decrease ~~in maintenance revenue margin due to higher support and parts costs.~~

~~Operating Expenses~~

% of % of
In millions 2017 Revenue 2016 Revenue
Selling, general and administrative expenses $ 481
31.4 % $ 505
29.8 %
Research and development expenses 230
15.0 % 154
9.1 %
Impairment of goodwill, acquired intangibles and other assets —
— % 80
4.7 %
Total operating expenses $ 711
46.5 % $ 739
43.5 %

~~The decrease in SG&A expense was primarily due to the exit of the marketing applications business. This~~ was partially offset by ~~transformation~~additional expenses associated ~~costs related to the discontinuation~~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 ~~hardware platforms as well as an increase~~location in ~~marketing spend and regional selling expense~~Dayton, Ohio.

R&D expenses increased due to strategic investments in ~~demand creation, primarily in~~ the Americas region. R&D expenses were higher primarily due to the impact from the Company no longer capitalizing certain software development costs as a result of a movement to agile development methodologies. The Company did not capitalize any R&D costs in the first nine months of 2017 compared to $49 million in the prior period. These development costs are now expensed as incurred as R&D expense. The increase in R&D expense is also due to new ~~strategic initiatives around managed~~Teradata Vantage analytics platform and ~~public~~our cloud ~~in the current period.~~offerings.

During the first quarter of 2016, the Company recognized an impairment of goodwill of $57 million and acquired intangible assets of $19 million related to the sale of the marketing applications business. The Company also recorded a $4 million impairment charge related to its corporate plane that was classified as held for sale.

Other Expense, net


In millions	2017			2016			2019			2018
Interest income	$	8		$	4		$	12		$	7
Interest expense	(11		)	(9		)	(17		)	(10		)
Other	(1		)	1			(5		)	(5		)
Other expense, net	$	(4	)	$	(4	)	$	(10	)	$	(8	)

Other expense in the first ~~nine~~six months of ~~2017~~2019 and ~~2016~~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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~June 30, 2018 were as follows:

2017 2016
Effective tax rate (600.0 )% 48.5 %



	2019		2018
Effective tax rate	(120.0	)%	(50.0	)%

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~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 ~~net~~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 ~~benefit was recognized~~items recorded for the six months ended June 30, 2018. Discrete tax items related to ~~a reversal of~~interest accruals on uncertain tax positions ~~recorded in the third quarter from acquired tax attributes in previous acquisitions, which~~and equity-based compensation resulted in income tax expense of $1 million on a ~~negative~~pre-tax net loss of $2 million for the six months ended June 30, 2018, resulting in an effective income tax rate ~~in the period.~~of (50.0%).

For the nine months ended September 30, 2016, the effective tax rate included a discrete tax impact resulting from the $76 million impairment of goodwill and acquired intangibles, of which $57 million is related to non-deductible goodwill and $19 million is related to the impairment of intangibles, for which a tax benefit of $6 million was recorded, as well as a $22 million discrete tax impact from the sale of the marketing applications business recognized in the period. In addition, there was a $2 million favorable tax benefit recognized due to the release of a reserve taken for a previously uncertain tax position.

Revenue and Gross Profit by Operating Segment

The following table presents segment revenue and ~~operating performance by~~ segment gross profit for the ~~nine~~Company for the six months ended ~~September~~June 30:

% of % of
In millions 2017 Revenue 2016 Revenue
Segment revenue
Americas Data and Analytics $ 830
54.2 % $ 937
55.2 %
International Data and Analytics 700
45.8 % 690
40.7 %
Total Data and Analytics 1,530
100.0 % 1,627
95.9 %
Marketing Applications —
— % 69
4.1 %
Total segment revenue $ 1,530
100 % $ 1,696
100 %
Segment gross profit
Americas Data and Analytics $ 482
58.1 % $ 564
60.2 %
International Data and Analytics 304
43.4 % 341
49.4 %
Total Data and Analytics 786
51.4 % 905
55.6 %
Marketing Applications —
— % 34
49.3 %
Total segment gross profit $ 786
51.4 % $ 939
55.4 %



			% 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 ~~Data and Analytics:~~

Revenue decreased ~~11%~~2%, which included a 1% unfavorable impact from foreign currency fluctuations. An increase in ~~the first nine months of 2017 as compared to the first nine months of 2016. As discussed~~recurring revenue was offset by a decrease in ~~the future trends section of this MD&A, the~~perpetual software licenses and hardware revenue and decrease in consulting revenue. The increase in recurring revenue and decline ~~was~~in perpetual revenue were driven by ~~our customers' focus on less capital-intensive options like cloud, subscription~~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 ~~rental~~ and ~~usage-based models. The majority~~hardware revenue and decrease in consulting revenue. Segment gross profit as a percentage of ~~subscription-based transactions signed~~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 ~~the first nine months of 2017 were~~recurring revenue was offset by a decrease in ~~the Americas region.~~perpetual software licenses and hardware revenue and a decrease in consulting revenue. Segment gross profit as a percentage of revenues was lower ~~driven~~primarily due to a decline in consulting margins, partially offset by a higher mix of services versus product revenue and a lower services margin rate. Service margins were impacted by investments that we are making in our consulting business to drive increased consumption of Teradata's products and by lower utilization. In addition, service gross profit was also impacted by a decrease in maintenance margin due to higher support and parts costs

~~International Data and Analytics:~~ Revenue increased 1% in the first nine months of 2017 from the first nine months of 2016, which included a 2% adverse revenue impact from foreign currency fluctuations. The revenue increase was driven by improved revenues in Europe, Middle East and Africa as well as the Asia Pacific region in the first nine months of 2017 as compared to first nine months of 2016. Segment gross profit as a percentage of revenues was down in the first nine months of 2017 driven by investments that we are making in our consulting business to drive increased consumption of Teradata's products as well as an increase in consulting projects where we incurred and expensed certain consulting services costs before we will recognize the correspondingrecurring revenue.

~~Marketing Applications:~~ ~~The marketing applications business was sold on July 1, 2016.~~

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities decreased by ~~$93~~$186 million in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~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 ~~primarily~~also due to ~~lower net income (adjusted for non-cash items such~~cash payments in 2019 related to 2018 variable compensation that were meaningfully higher versus similar payments made in 2018 as ~~depreciation and impairment of goodwill and other assets),~~well as the Company’s ongoing transition to subscription-based purchasing options, which ~~was partially offset by collections of receivables.~~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 ~~define~~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,~~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:


	Nine Months Ended September 30,						Six Months Ended June 30, 2019
In millions	2017			2016			2019			2018
Net cash provided by operating activities	$	301		$	394		$	104		$	290
Less:
Expenditures for property and equipment	(59		)	(32		)	(27		)	(58		)
Additions to capitalized software	(7		)	(54		)	(2		)	(4		)
Free cash flow	$	235		$	308		$	75		$	228

In the fourth quarter of 2016, the Company began moving towards more frequent releases of its products, which significantly shortens the opportunity to capitalize software development costs. Due to the shorter development cycle and focus on rapid production associated with agile development, the Company does not anticipate capitalizing significant amounts of external use software development costs in future periods due to the relatively short duration between the completion of the working model and the point at which a product is ready for general release. These costs are currently expensed as research and development costs and are included as a component of cash provided by operating activities. This change does not impact the methodology of the free cash flow calculation. Also, during the third quarter of 2017, the Company incurred cash outflows of $9 million due to the payments for the workforce optimization that occurred during the period.

Financing activities and certain other investing activities are not included in our calculation of free cash flow. ~~For the first nine months ended September 30, 2017,~~There were no other investing activities ~~included $17 million~~ for ~~an immaterial acquisition and $1 million~~ ~~for a~~ ~~release of funds from a previous acquisition. For~~ the ~~first nine~~six months ended ~~September~~June 30, ~~2016, other investing activities included $16 million for immaterial acquisitions.~~2019 and 2018.

Teradata’s financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and 2018 primarily consisted of cash outflows for share repurchases and payments on the revolving credit facility, finance leases, and long-term debt. ~~The prior period also included payments on credit facility borrowings.~~ At ~~September~~June 30, ~~2017,~~2019, the Company had ~~$180 million~~no outstanding borrowings on the revolving credit facility. The Company purchased ~~11.5~~approximately 4.3 million shares of its common stock at an average price per share of ~~$30.59~~$40.52 in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, and ~~2.9~~4.1 million shares at an average price per share of ~~$23.83~~$38.14 in the ~~nine~~six months ended ~~September~~June 30, ~~2016~~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 ~~September~~June 30, ~~2017,~~2019, under the Company’s second share repurchase program (the “general share repurchase program”), the Company had ~~$190~~$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. ~~During the second quarter of 2017, the Company announced its intention to repurchase up to $300 million~~ additional shares of its stock under the general share repurchase program in the second half of the year. Shares are being purchased with cash from U.S. operations as well as funds provided through Teradata’s revolving credit facility.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017 and $28 million for the nine months ended September 30, 2016.~~2018. These proceeds are included in other financing activities, net in the Condensed Consolidated Statements of Cash Flows (Unaudited).

Our total in cash and cash equivalents held outside the ~~U.S.~~United States in various foreign subsidiaries was ~~$1 billion~~$224 million as of ~~September~~June 30, ~~2017~~2019 and ~~$957~~$364 million as of December 31, ~~2016.~~2018. The remaining balance held in the ~~U.S.~~United States was ~~$17~~$412 million as of ~~September~~June 30, ~~2017~~2019 and ~~$17~~$351 million as of December 31, ~~2016. Under current tax laws and regulations, if cash and cash equivalents held outside the U.S. are distributed~~2018. Prior to the ~~U.S. in~~enactment of the ~~form~~Tax Act, the Company either reinvested or intended to reinvest its earnings outside of ~~dividends or otherwise, we would be subject~~the United States. As a result of the Tax Act, the Company has changed its indefinite reinvestment assertion related to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and possible foreign withholding taxes. As of September 30, 2017, we have not provided for the U.S. federal tax liability on approximately $1.4 billion of foreign earnings that ~~are considered permanently reinvested outside~~have been taxed in the United States and now considers a majority of these earnings no longer indefinitely reinvested. Effective January 1, 2018, the ~~U.S.~~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 ~~$220~~$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 ~~2016~~2018 Annual Report on Form 10-K (the ~~“2016~~“2018 Annual Report”), and elsewhere in this Quarterly Report. If the Company is unable to generate sufficient cash flows from operations, or otherwise to 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. ~~Teradata's~~ 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 ~~March 31, 2016,~~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 ~~in March 2020.~~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 ~~September~~June 30, ~~2017,~~2019, the term loan principal outstanding was ~~$548 million and carried an interest rate of 2.625%.~~$494 million. Unamortized deferred issuance costs of ~~approximately $1~~approximately $3 million are ~~being~~being amortized over the five-year term of the loan.

Teradata's Credit Facility has a borrowing capacity of $400 million. The Credit Facility ends on March 25, 2020 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. The interest rate charged on borrowings pursuant to the Credit Facility can vary depending on the interest rate option the Company chooses to utilize and the Company’s leverage ratio at the time of the borrowing. The Credit Facility is unsecured and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities.

As of September 30, 2017, the Company had $180 million outstanding under the Credit Facility and carried an interest rate of 4.450%, leaving $220 million in additional borrowing capacity available. Unamortized deferred costs on the original credit facility and new lender fees of approximately $1 million are being amortized over the five-year term of the credit facility. The Company was in compliance with all covenants under the term loan as of ~~September~~June 30, ~~2017.~~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 ~~2016~~2018 Annual Report. Our guarantees and product warranties are discussed in Note 79 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. ~~The~~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 ~~2016~~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 ~~nine~~six months ended ~~September~~June 30, ~~2017.~~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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have not been any material changes to the market risk factors previously disclosed in Part II, Item 7A of the Company’s ~~2016~~2018 Annual Report on Form 10-K.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Teradata maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including, as appropriate, the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer ~~have~~ concluded that, as of June 30, 2019 our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as ~~of September 30, 2017.~~

appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter ended ~~September~~June 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings.

~~The information required by this item is included~~

On June 19, 2018, the Company and certain of its subsidiaries filed a lawsuit in the ~~material under Note 7~~U.S. District Court for the Northern District of ~~Notes~~California against SAP SE, SAP America, Inc., and SAP Labs, LLC (collectively, “SAP”). In the lawsuit, the Company alleges, among other things, that SAP misappropriated certain of the Company’s trade secrets within the Company’s enterprise data analytics and warehousing products and used them to ~~Condensed Consolidated Financial Statements (Unaudited)~~help develop, improve and introduce a competing product. The Company further alleges that SAP has committed copyright infringement and employed anticompetitive practices using its substantial market position in the enterprise resource planning applications market to pressure the Company’s customers and prospective customers to use SAP’s competing product and reduce or eliminate customers' and prospective customers' use of ~~this Quarterly Report~~the Company's offerings. The Company seeks an injunction barring SAP’s alleged conduct, monetary damages, and other available legal and equitable relief. In July 2019, SAP filed patent infringement counterclaims against Teradata based on ~~Form 10-Q~~five SAP patents and we plan to vigorously defend against these counterclaims. Currently, it is ~~incorporated herein by reference.~~not possible to determine the likelihood of a loss or a reasonably estimated range of loss, if any, pertaining to the counterclaims.

Item 1A. Risk Factors.

There have not been any material changes to the risk factors previously disclosed in Part I, Item IA of the Company's Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Purchase of Company Common Stock

~~During the third quarter~~Section 16 officers occasionally sell vested shares of ~~2017,~~restricted stock to the Company ~~executed~~at the current market price to cover their withholding taxes. For the six months ended June 30, 2019, the total of these purchases ~~of 6,346,980~~was 114,177 shares ~~of its common stock~~ at an average price of $46.04 per ~~share of $31.55 under~~share.

The following table provides information relating to the ~~two~~Company’s share repurchase programs ~~that were authorized by our Board of Directors.~~for the six months ended June 30, 2019:



	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Dilution Offset Program ⁽¹⁾	Total Number of Shares Purchased as Part of Publicly Announced General Share Repurchase Program ⁽²⁾	Maximum Dollar Value that May Yet Be Purchased Under the Dilution Offset Program		Maximum Dollar Value that May Yet Be Purchased Under the General Share Repurchase Program
Month	Total Number of Shares Purchased	Average Price Paid per Share
First Quarter Total	1,237,569	$	47.00	748,958	488,611	$	3,002,235	$	229,669,749
April 2019	469,999	$	44.48	68,398	401,601	$	2,510,526	$	211,761,976
May 2019	2,120,129	$	36.99	—	2,120,129	$	2,715,474	$	136,777,313
June 2019	491,077	$	35.68	110,423	380,654	$	1,482,900	$	119,767,910
Second Quarter Total	3,081,205	$	37.92	178,821	2,902,384	$	1,482,900	$	119,767,910

(1) The ~~first~~dilution offset 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 September 30, 2017, under the Company’s second~~

(2) The general share repurchase program ~~(the “general share repurchase program”),~~authorized by the Board, allows the Company ~~had $190 million of authorization remaining~~ to repurchase outstanding shares of Teradata common stock. Share repurchases made by the Company are reported on a trade date basis.

On July ~~27, 2017, the Company announced its intention~~28, 2019 Teradata's Board of Directors authorized an additional $500 million to be utilized to repurchase ~~up to $300 million~~ a~~dditional shares of its~~Teradata common stock under ~~the general~~this share repurchase ~~program, in the second half~~program. The Company now has a total of ~~the year. From July 1, 2017 through November 6, 2017, the Company repurchased $200~~$620 million ~~in shares. As of November 6, 2017 the Company had approximately $190 million of~~authorized for share repurchases under this share repurchase ~~authorization remaining.~~program.

Section 16 officers occasionally sell vested shares of restricted stock to the Company at the current market price to cover their withholding taxes. For the nine months ended September 30, 2017, the total of these purchases was 30,880 shares at an average price of $32.04 per share.

~~The following table provides information relating to the Company’s share repurchase programs for the nine months ended September 30, 2017:~~

Total
Number
of Shares Purchased

Average
Price
Paid
per Share

Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Dilution
Offset Program

Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
General Share
Repurchase Program

Maximum
Dollar
Value
that May
Yet Be
Purchased
Under the
Dilution
Offset Program

Maximum
Dollar
Value
that May
Yet Be
Purchased
Under the
General Share
Repurchase Program
Month
First Quarter Total 1,386,710
$ 31.21
536,710
850,000
$ 4,285,712
$ 485,012,249
Second Quarter Total 3,747,388
$ 28.74
150,000
3,597,388
$ 4,143,214
$ 381,678,537
July 2017 550,000
$ 31.54
—
550,000
$ 8,233,812
$ 364,330,122
August 2017 3,890,295
$ 31.32
281,500
3,608,795
$ 1,564,954
$ 251,175,809
September 2017 1,906,685
$ 32.03
—
1,906,685
$ 6,717,747
$ 190,109,377
Third Quarter Total 6,346,980
$ 31.55
281,500
6,065,480
$ 6,717,747
$ 190,109,377

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

None

Item 5. Other Information.

None

Item 6. Exhibits.




Reference Number per Item 601 of Regulation S-K			Description

2.1			Form of Separation and Distribution Agreement between Teradata Corporation and NCR Corporation (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K dated September 11, 2007 (SEC file number 001-33458)).

3.1			Amended and Restated Certificate of Incorporation of Teradata Corporation as amended and restated on September 24, 2007 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K dated September 25, 2007 (SEC file number 001-33458)).

3.2			Amended and Restated By-Laws of Teradata Corporation, as amended and restated on July 26, 2016 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K dated August 1, 2016).

4.1			Common Stock Certificate of Teradata Corporation (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q dated November 13, 2007 (SEC file number 001-33458)).

~~10.1~~10.1*			~~Fourth Amendment to Revolving Credit Agreement~~Offer Letter between Scott A. Brown and the Company dated ~~as of July 25, 2017 (incorporated by reference to Exhibit 10.3 to the Quarterly report on Form 10-Q dated August 4, 2017).~~May 31, 2019.

~~10.2~~10.2*			~~Fourth Amendment to Term Loan Agreement~~Offer Letter between Kathy Cullen-Cote and the Company dated ~~as of July 25, 2017 (incorporated by reference to Exhibit 10.4 to the Quarterly report~~ on ~~Form 10-Q dated August 4, 2017).~~June 21, 2019.

31.1			Certification pursuant to Rule 13a-14(a), dated ~~November 6, 2017.~~August 5, 2019.

31.2			Certification pursuant to Rule 13a-14(a), dated ~~November 6, 2017.~~August 5, 2019.

32			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated ~~November 6, 2017.~~August 5, 2019.

101			Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of (Loss) Income for the three and ~~nine month~~six months period ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, (ii) the Condensed Consolidated Statements of Comprehensive ~~Income~~Loss for the three and ~~nine month~~six months period ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, (iii) the Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, (iv) the Condensed Consolidated Statements of Cash Flows for the ~~nine month periods~~six months period ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, (v) the Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and ~~(v)~~six months period ended June 30, 2019 and 2018 and (vi) the notes to the Condensed Consolidated Financial Statements.

* Management contracts or compensatory plans, contracts or arrangements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	TERADATA CORPORATION

Date: ~~November 6, 2017~~August 5, 2019	By:	/s/ ~~Stephen M. Scheppmann~~Mark A. Culhane
		~~Stephen M. Scheppmann~~Mark A.Culhane ~~Executive Vice President and~~ Chief Financial Officer

3241



In millions	Balance, December 31, 2016		Adjustments		Currency Translation Adjustments		Balance, September 30, 2017
Goodwill
Americas Data and Analytics	$	251	$	2	$	—	$	253
International Data and Analytics	139		—		6		145
Total goodwill	$	390	$	2	$	6	$	398



		September 30, 2017					December 31, 2016
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	3 to 5	$	41	$	(18	)	$	71	$	(61	)
Trademarks/trade names	5	—		—			1		(1		)
In-process research and development	5	5		(5		)	5		(4		)
Total acquired intangible assets		$	46	$	(23	)	$	77	$	(66	)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company