0000816761-18-000036.txt : 20181105 0000816761-18-000036.hdr.sgml : 20181105 20181105170339 ACCESSION NUMBER: 0000816761-18-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 69 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181105 DATE AS OF CHANGE: 20181105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERADATA CORP /DE/ CENTRAL INDEX KEY: 0000816761 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 753236470 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33458 FILM NUMBER: 181160628 BUSINESS ADDRESS: STREET 1: 10000 INNOVATION DRIVE CITY: DAYTON STATE: OH ZIP: 45342 BUSINESS PHONE: 937-242-4800 MAIL ADDRESS: STREET 1: 10000 INNOVATION DRIVE CITY: DAYTON STATE: OH ZIP: 45342 10-Q 1 tdc-093018x10q.htm 10-Q Document
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 30, 2018
OR 
¨
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.)
17095 Via Del Campo
San Diego, California 92127
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (866) 548-8348
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.    Yes  ý    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).    Yes  ý    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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
  
Emerging growth company
 
¨

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 31, 2018, the registrant had approximately 118.2 million shares of common stock outstanding.

1


TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
 
 
 
 
 
 
  
Description
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II—OTHER INFORMATION
 
 
 
 
  
Description
Page
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2


 
Part 1—FINANCIAL INFORMATION
Item 1.
Financial Statements.
Teradata Corporation
Condensed Consolidated Statements of Income (Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended 
 September 30,
In millions, except per share amounts
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Recurring
$
312

 
$
292

 
$
926

 
$
846

Perpetual software licenses and hardware
77

 
90

 
243

 
271

Consulting services
137

 
144

 
407

 
413

Total revenue
526

 
526

 
1,576

 
1,530

Cost of revenue
 
 
 
 
 
 
 
Cost of recurring
93

 
84

 
271

 
223

Cost of perpetual software licenses and hardware
43

 
51

 
164

 
169

Cost of consulting services
126

 
141

 
404

 
421

Total cost of revenue
262

 
276

 
839

 
813

Gross profit
264

 
250

 
737

 
717

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
166

 
161

 
481

 
481

Research and development expenses
84

 
80

 
236

 
228

Total operating expenses
250

 
241

 
717

 
709

Income from operations
14

 
9

 
20

 
8

Other expense, net
 
 
 
 
 
 
 
Interest expense
(6
)
 
(4
)
 
(16
)
 
(11
)
Interest income
4

 
3

 
11

 
8

Other expense
(2
)
 
(2
)
 
(7
)
 
(4
)
Total other expense, net
(4
)
 
(3
)
 
(12
)
 
(7
)
Income before income taxes
10

 
6

 
8

 
1

Income tax benefit
(8
)
 
(7
)
 
(7
)
 
(6
)
Net income
$
18

 
$
13

 
$
15

 
$
7

Net income per weighted average common share
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.11

 
$
0.13

 
$
0.05

Diluted
$
0.15

 
$
0.10

 
$
0.12

 
$
0.05

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
118.7

 
123.7

 
119.9

 
127.3

Diluted
120.7

 
125.8

 
121.8

 
129.1

See Notes to Condensed Consolidated Financial Statements (Unaudited).


3


Teradata Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended 
 September 30,
In millions
2018
 
2017
 
2018
 
2017
Net income
$
18

 
$
13

 
$
15

 
$
7

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(6
)
 
7

 
(23
)
 
17

Derivatives
 
 
 
 
 
 
 
Unrealized gain on derivatives, before tax
4

 

 
1

 

Unrealized gain on derivatives, tax portion

 

 

 

Unrealized gain on derivatives, net of tax
4

 

 
1

 

Defined benefit plans:
 
 
 
 
 
 
 
Defined benefit plan adjustment, before tax

 
1

 
4

 
3

Defined benefit plan adjustment, tax portion

 

 
(1
)
 

Defined benefit plan adjustment, net of tax

 
1

 
3

 
3

Other comprehensive (loss) income
(2
)
 
8

 
(19
)
 
20

Comprehensive income (loss)
$
16

 
$
21

 
$
(4
)
 
$
27

See Notes to Condensed Consolidated Financial Statements (Unaudited).


4


Teradata Corporation
Condensed Consolidated Balance Sheets (Unaudited)
In millions, except per share amounts
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
768

 
$
1,089

Accounts receivable, net
372

 
554

Inventories
45

 
30

Other current assets
99

 
77

Total current assets
1,284

 
1,750

Property and equipment, net
226

 
162

Capitalized software, net
84

 
121

Goodwill
396

 
399

Acquired intangible assets, net
17

 
23

Deferred income taxes
54

 
57

Other assets
75

 
44

Total assets
$
2,136

 
$
2,556

Liabilities and stockholders’ equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
13

 
$
60

Short-term borrowings

 
240

Accounts payable
95

 
74

Payroll and benefits liabilities
147

 
173

Deferred revenue
384

 
414

Other current liabilities
86

 
102

Total current liabilities
725

 
1,063

Long-term debt
484

 
478

Pension and other postemployment plan liabilities
109

 
109

Long-term deferred revenue
102

 
85

Deferred tax liabilities
4

 
4

Other liabilities
152

 
149

Total liabilities
1,576

 
1,888

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, 2018 and December 31, 2017, respectively

 

Common stock: par value $0.01 per share, 500.0 shares authorized, 118.1 and 121.9 shares issued at September 30, 2018 and December 31, 2017, respectively
1

 
1

Paid-in capital
1,397

 
1,320

Accumulated deficit
(745
)
 
(579
)
Accumulated other comprehensive loss
(93
)
 
(74
)
Total stockholders’ equity
560

 
668

Total liabilities and stockholders’ equity
$
2,136

 
$
2,556

See Notes to Condensed Consolidated Financial Statements (Unaudited).


5


Teradata Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited) 
 
Nine Months Ended 
 September 30,
In millions
2018
 
2017
Operating activities
 
 
 
Net income
$
15

 
$
7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
95

 
103

Stock-based compensation expense
50

 
51

Deferred income taxes
(11
)
 
(22
)
Changes in assets and liabilities:
 
 
 
Receivables
182

 
182

Inventories
(15
)
 
(11
)
Current payables and accrued expenses
(8
)
 

Deferred revenue
7

 
(2
)
Other assets and liabilities
(58
)
 
(7
)
Net cash provided by operating activities
257

 
301

Investing activities
 
 
 
Expenditures for property and equipment
(92
)
 
(59
)
Additions to capitalized software
(5
)
 
(7
)
Business acquisitions and other investing activities, net

 
(18
)
Net cash used in investing activities
(97
)
 
(84
)
Financing activities
 
 
 
Repurchases of common stock
(206
)
 
(351
)
Repayments of long-term borrowings
(40
)
 
(23
)
Proceeds from credit facility borrowings

 
180

Repayments of credit facility borrowings
(240
)
 

Payment of capital lease
(1
)
 

Other financing activities, net
23

 
20

Net cash used in financing activities
(464
)
 
(174
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(17
)
 
8

(Decrease) increase in cash, cash equivalents and restricted cash
(321
)
 
51

Cash, cash equivalents and restricted cash at beginning of period
1,089

 
974

Cash, cash equivalents and restricted cash at end of period
$
768

 
$
1,025

 
 
 
 
Supplemental cash flow disclosure
 
 
 
Non-cash investing and financing activities:
 
 
 
Assets acquired by capital lease
$
23

 
$

Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
768

 
$
1,089

Restricted cash

 

Total cash, cash equivalents and restricted cash
$
768

 
$
1,089


See Notes to Condensed Consolidated Financial Statements (Unaudited).

6


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 2017 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, 2017 (the “2017 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, unless otherwise stated that the prior period amounts have not been restated.
During the first quarter of 2018, the Company changed its historical presentation of its revenue and cost of revenue categories. Previously, the Company presented revenue and cost of revenue on two lines: product and cloud, and services. As part of the Company’s business transformation, the Company is transitioning away from perpetual software to subscription-based transactions. To better reflect this shift in the business, the Company adopted a revised presentation in the first quarter of 2018, including the separation of recurring revenue from non-recurring product and consulting services. Recurring revenue consists of our on-premises and off-premises subscriptions, including subscription licenses recognized on a month-to-month basis, cloud, service models, hardware rentals, software upgrade rights on perpetual software licenses, maintenance and managed services. Recurring revenue is intended to depict the revenue recognition model for these transactions. The recurrence of these revenue streams in future periods depends on a number of factors, including contractual periods and customers' renewal decisions. Perpetual software licenses and hardware revenue consists of hardware, perpetual software licenses, and subscription/term licenses recognized upfront. Consulting services revenue consists of consulting, implementation and installation services.
In connection with these revisions, the Company also revised its cost of revenue classification to present costs associated with the new revenue presentation. This change in presentation does not affect the Company’s total revenues, total cost of revenues or overall total gross profit (defined as total revenue less total cost of revenue).
2. New Accounting Pronouncements

Leases.  In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance which requires a lessee to account for leases as finance or operating leases. Both 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 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. This standard is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. The standard requires a transition adoption election using either (1) a modified retrospective approach with periods prior to the adoption date being recast, or (2) a prospective adoption approach with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast. We anticipate adopting this standard on January 1, 2019 using the prospective adoption approach and electing the practical expedients allowed under the standard. We are in the process of aggregating and evaluating lease arrangements, implementing new controls and

7


processes, and implementing a lease accounting system. At this time, we are unable to reasonably estimate the increase in total assets and total liabilities, which may be material. The impact on our results of operations and cash flows is not expected to be material.

Comprehensive Income. In February 2018, the FASB issued new guidance for Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows companies to reclassify stranded tax effects resulting from the Tax Reform Act, from accumulated other comprehensive income to retained earnings. The amendments are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its 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 (2) determining whether a contribution is conditional. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

Fair Value Measurement.  In August 2018, the FASB issued new guidance that modifies disclosure requirements related to fair value measurement. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this update while delaying adoption of the additional disclosures until their effective date. The Company is currently evaluating this guidance to determine the impact it may have on its disclosures.

Compensation-Retirement Benefits-Defined Benefit Plans-General. In August 2018, the FASB issued new guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. For public companies, the amendments in this updates are effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and is to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact it may have on its disclosures.

Intangibles-Goodwill and Other-Internal-Use Software. In August 2018, the FASB issued new guidance that reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). For public companies, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.

Recently Adopted Guidance
Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) that affects any entity that either enters into contracts with customers 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. Topic 606 supersedes the revenue recognition requirements of the prior revenue recognition guidance used prior to January 1, 2018. 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

8


consistent with the guidance on recognition and measurement in this update. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of Topic 606 while the reported results for 2017 were prepared under the guidance of Accounting Standards Codification 605, Revenue Recognition, which is also referred to herein as the “previous guidance.” As a result, prior periods have not been restated and continue to be reported under the previous guidance. The cumulative effect of applying Topic 606 was recorded as an adjustment to accumulated deficit as of the adoption date. See Note 3 for the required disclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue recognition. See Note 4 for costs to obtain and fulfill a customer contract.

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. The Company adopted this amended guidance in the first quarter of 2018. The retroactive adoption of this standard resulted in an increase in operating income and a corresponding increase in other expense for the three months ended September 30 of $2 million in 2018 and $1 million in 2017 and for the nine months ended September 30 of $4 million in 2018 and $3 million in 2017.
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued an update addressing eight specific cash flow issues to reduce diversity in practice. The Company adopted this amended guidance in the first quarter of 2018. The impact on the Company's consolidated statements of cash flows was immaterial.

Classification of restricted cash. In December 2016, the FASB issued accounting guidance to address diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. Under this guidance, companies will be required to present restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The Company has adopted this amended guidance in the first quarter of 2018. The retroactive adoption impact for the nine months ended September 30, 2017 to cash, cash equivalents and restricted cash at the beginning and at the end of period was less than $1 million on our consolidated statements of cash flows.

Financial Instruments. In January 2016, the FASB issued new guidance which enhances the reporting model for financial instruments and related disclosures. This update requires equity securities to be measured at fair value with changes in fair value recognized through net income and will eliminate the cost method for equity securities without readily determinable fair values. The Company adopted this amended guidance in the first quarter of 2018. The impact on the Company's consolidated financial statements was immaterial.

Intra-entity asset transfers. In October 2016, the FASB issued accounting guidance to simplify the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Under this guidance, companies will be required to recognize the income tax consequences of an intra-entity asset transfer when the transfer occurs. Current guidance prohibits companies from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the period of adoption. The Company adopted this amended guidance in the first quarter of 2018. The impact on the Company's consolidated financial statements was immaterial.

Clarification on the definition of a business. In January 2017, the FASB issued accounting guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this amended guidance in the first quarter of 2018. The impact on the Company's consolidated financial statements was immaterial.

9



Stock Compensation. In May 2017, the FASB issued accounting guidance for "Compensation—Stock Compensation (Topic 718) - Scope of Modification Accounting." The amendments in this update provide guidance about which changes to 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 the amendments in this update. The Company has adopted this amended guidance in the first quarter of 2018. The impact on the Company's consolidated financial statements was immaterial.

Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued new guidance that intends to simplify the application of hedge accounting guidance and better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The Company has adopted this amended guidance during the second quarter of 2018 and applied it to the interest rate swap described in Note 11. The impact on the Company's consolidated financial statements was immaterial.

3. Revenue from Contracts with Customers
The Company adopted Topic 606 as of January 1, 2018 for all contracts not completed as of the date of adoption. The core principle of Topic 606 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 Company expects to be entitled in exchange for those goods or services. To achieve that core principle, the Company performs the following five steps:
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 Company satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for goods or services it transfers to the customer. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience, published credit, and financial information pertaining to the customer.
Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales, value add, and other taxes the Company collects concurrent with revenue-producing activities. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a good or service to a customer. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved. The Company uses the expected value method or the most likely amount method depending on the nature of the variable consideration. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates in the period such variances become known. Typically, the amount of variable consideration is not material.
For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract.

10


The Company must apply judgment to determine whether promised goods or services are capable of being distinct and distinct within the context of the contract. If these criteria are not met, the promised goods or services are combined with other goods or services and accounted for as a combined performance obligation. Revenue is then recognized either at a point in time or over time depending on our evaluation of when the customer obtains control of the promised goods or services. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue recorded in a given period. In addition, the Company has developed assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. The Company determines the standalone selling price for a good or service by considering multiple factors including, geographies, market conditions, product life cycles, competitive landscape, internal costs, gross margin objectives, purchase volumes and pricing practices. The Company reviews the standalone selling price for each of its performance obligations on a periodic basis and updates it, when appropriate, to ensure that the practices employed reflect the Company’s recent pricing experience. The Company maintains internal controls over the establishment and updates of these estimates, which includes review and approval by the Company’s management.
Teradata delivers its solutions primarily through direct sales channels, as well as through other independent software vendors and distributors and value-added resellers. Standard payment terms may vary based on the country in which the contract is executed, but are generally between 30 days and 90 days. The following is a description of the principal activities and performance obligations from which the Company generates its revenue:
Subscriptions - The Company sells on and off-premises subscriptions to our customers through our subscription licenses, cloud, service model, and rental offerings. Teradata’s subscription licenses include a right-to-use license and revenue is recognized upfront at a point in time unless the customer has a contractual right to cancel, where revenue is recognized on a month-to-month basis and is included within the recurring revenue caption. Subscription licenses recognized upfront are reported within the perpetual software licenses and hardware caption. Cloud and service model arrangements include a right-to-access software license on Teradata owned or third party owned hardware such as the public cloud. Revenue is recognized ratably over the contract term and included within the recurring revenue caption. Service models typically include a minimum fixed amount that is recognized ratably over the contract term and may include an elastic amount for usage above the minimum, which is recognized monthly based on actual utilization. For our rental offering, the Company owns the hardware and may or may not provide managed services. The revenue for these arrangements is generally recognized straight-line over the term of the contract and is included within the recurring revenue caption. Hardware rentals are generally accounted for as an operating lease and considered outside the scope of Topic 606. Hardware rental revenue was $11 million and $27 million for the three and nine months ended September 30, 2018, and $6 million and $15 million for the three and nine months ended September 30, 2017.
Maintenance and software upgrade rights - Revenue for maintenance and unspecified software upgrade rights on a when-an-if-available basis are recognized straight-line over the term of the contract.
Perpetual software licenses and hardware - Revenue for software is generally recognized when the customer has the ability to use and benefit from its right to use the license. Hardware is typically recognized upon delivery once title and risk of loss have been transferred (when control has passed).
Consulting services - The Company accounts for individual services as separate performance obligations if a service is separately identifiable from other items in a combined arrangement and if a customer can benefit from it on its own or with other resources that are readily available to the customer. Revenue for consulting, implementation and installation services is recognized as services are provided by measuring progress toward the complete satisfaction of the Company’s obligation. Progress for services that are contracted for at a fixed price is generally measured based on hours incurred as a portion of total estimated hours. Progress for services that are contracted for on a time and materials basis is generally based on hours expended. These input methods (e.g. hours incurred or expended) of revenue recognition are considered a faithful depiction of our efforts to satisfy services contracts and therefore reflect the transfer of services to a customer under such contracts.
Disaggregation of Revenue from Contracts with Customers

11


The following table presents a disaggregation of revenue:
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2018
 
2017*
 
2018
 
2017*
Americas
 
 
 
 
 
 
 
Recurring
$
200

 
$
188

 
$
591

 
$
549

Perpetual software licenses and hardware
29

 
50

 
92

 
118

Consulting services
48

 
54

 
145

 
163

Total Americas
277

 
292

 
828

 
830

International
 
 
 
 
 
 
 
Recurring
113

 
104

 
335

 
297

Perpetual software licenses and hardware
47

 
41

 
151

 
154

Consulting services
89

 
89

 
262

 
249

Total International
249

 
234

 
748

 
700

Total Revenue
$
526

 
$
526

 
$
1,576

 
$
1,530

*As noted above, prior period amounts have not been adjusted under the modified retrospective adoption method of Topic 606; however, as discussed in Note 1, prior period amounts have been reclassified to conform to the current year presentation.
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:
(in millions)
September 30, 2018
 
January 1, 2018
(as adjusted)
Accounts receivable, net
$
372

 
$
534

Contract assets
12

 
20

Current deferred revenue
384

 
395

Long-term deferred revenue
102

 
85


Revenue recognized during the nine months ended September 30, 2018 from amounts included in deferred revenue at the beginning of the period was approximately $345 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 September 30, 2018:

12


(in millions)
 
Total at September 30, 2018
 
Year 1
 
Year 2 and Thereafter
Remaining unsatisfied obligations
 
$
1,852

 
$
911

 
$
941


The amounts above represent the price of firm orders for which work has not been performed or goods have not been delivered and exclude unexercised contract options outside the stated contractual term that do not represent material rights to the customer. Although the Company believes that the contract value in the above table is firm, approximately $979 million of the amount includes customer-only general cancellation for convenience terms that the Company is contractually obligated to perform unless the customer notifies us. The Company expects to recognize revenue of approximately $538 million in the next year from contracts that are non-cancelable. Customers typically do not cancel before the end of the contractual term and historically the Company has seen very little churn in its customer base. The Company believes the inclusion of this information is important to understanding the obligations that the Company is contractually required to perform and provides useful information regarding remaining obligations related to these executed contracts. Further, the Company has historically generated a large portion of our business each quarter by orders that are sold and fulfilled within the same reporting period. Therefore, the amount of remaining obligations may not be a meaningful indicator of future results.
Significant Accounting Policies and Practical Expedients
The following are the Company’s significant accounting policies not already disclosed elsewhere and practical expedients relating to revenue from contracts with customers:
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment cost and are included in cost of revenues.
The Company does not adjust for the effects of a significant financing component if the period between performance and customer payment is one year or less.
The Company expenses the costs to obtain a contract as incurred when the expected amortization period is one year or less.
Impacts on Financial Statements
The Company adopted Topic 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt Topic 606, the following adjustments were made to accounts on the condensed consolidated balance sheets as of January 1, 2018:
The Company reduced current deferred revenue and accumulated deficit by $19 million for contracts that were not complete as of the date of adoption and would have been recognized in a prior period under Topic 606. The revenue adjustment primarily relates to term licenses that are recognized upfront under Topic 606 but were recognized ratably under the previous guidance.
Prior to the adoption of Topic 606, the Company expensed sales commissions on long-term contracts. Under Topic 606, the Company capitalizes these incremental costs of obtaining customer contracts. The impact of this change resulted in an increase of other assets and a reduction in accumulated deficit of $17 million on January 1, 2018.
The tax impact of these items was $10 million, which was recorded as a deferred tax liability, resulting in a net $26 million reduction in accumulated deficit on January 1, 2018.

13


In addition, the Company reclassified $20 million of contract assets from accounts receivable to other current assets on January 1, 2018.
The following summarizes the significant changes on the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2018 as a result of the adoption of Topic 606 on January 1, 2018 compared to if the Company had continued to recognize revenue under the previous guidance:
The impact to revenues was a net decrease of $9 million for the three months ended September 30, 2018 and a net increase of $11 million for the nine months ended September 30, 2018, under Topic 606.
Topic 606 resulted in the amortization of capitalized contract costs that were recorded as part of the cumulative effect adjustment upon adoption. The amortization of these capitalized costs was offset by new capitalized costs in the period resulting in $5 million and $15 million less selling, general and administrative expenses for the three and nine months ended September 30, 2018 under Topic 606.
As a result of lower revenue, which was more than offset by the capitalization of contract costs under Topic 606, net income reported under Topic 606 was higher by $3 million or $0.02 per share for the three months ended September 30, 2018. As a result of the higher revenue and capitalization of contract costs under Topic 606, net income reported under Topic 606 was higher by $12 million or $0.10 per share for the nine months ended September 30, 2018.
Total reported assets at September 30, 2018 were $22 million higher under Topic 606, which includes $32 million of capitalized contract costs that were expensed as incurred under the previous guidance, partially offset by $10 million of deferred costs related to the timing of revenue that would have been deferred under the previous guidance but recognized under Topic 606.
Total reported liabilities were $16 million less under Topic 606 primarily due to revenue that would have been deferred and recognized over time under the previous guidance, but is recognized upfront under Topic 606, offset by the change in deferred tax liability.
The adoption of Topic 606 had no impact on the Company’s total cash flows from operations.

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 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 four years. These costs are periodically reviewed for impairment. The following table identifies the activity relating to capitalized contract costs:
(in millions)
 
January 1, 2018
 
Capitalized
 
Amortization
 
September 30, 2018
Capitalized contract costs
 
17

 
20

 
(5
)
 
32


14


5. Supplemental Financial Information
 
As of
In millions
September 30,
2018
 
December 31,
2017
Inventories
 
 
 
Finished goods
$
33

 
$
18

Service parts
12

 
12

Total inventories
$
45

 
$
30

 
 
 
 
Deferred revenue
 
 
 
Deferred revenue, current
$
384

 
$
414

Long-term deferred revenue
102

 
85

Total deferred revenue
$
486

 
$
499

6. Acquired Intangible Assets

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:
 
 
 
September 30, 2018
 
December 31, 2017
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
 
$
35

 
$
(18
)
 
$
43

 
$
(20
)

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,
In millions
 
2018
 
2017
 
2018
 
2017
Amortization expense
 
$
1

 
$
3

 
$
5

 
$
6

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

 
$
7

 
$
6

 
$
4

 
$
4


$
2

 

15


7. Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. As a result of the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act”), the Company changed its indefinite reversal assertion related to its undistributed earnings of its foreign subsidiaries and no longer considers a majority of its foreign earnings permanently reinvested outside of the United States ("U.S."). As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business.
The effective tax rate is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions
 
2018
 
2017
 
2018
 
2017
Effective tax rate
 
(80.0
)%
 
(116.7
)%
 
(87.5
)%
 
(600.0
)%

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. In accordance with the SAB 118 guidance, the Company recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. For the three and nine months ended September 30, 2018, the Company recorded a $7 million tax benefit as an adjustment to the provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions the Company has made as a result of the Tax Act. This resulted in an income tax benefit for the respective periods.

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 an income tax benefit for the respective periods.

The 2017 Tax Act subjects U.S. shareholders to a tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. Entities can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the tax impact and have not yet made the accounting policy election. As of September 30, 2018, the Company was able to reasonably estimate provisional adjustments, based on current year operations only, related to GILTI and recognized the immaterial adjustments in our financial statements in our effective tax rate.

All amounts recognized associated with the 2017 Tax Act as of September 30, 2018 are provisional. Given the complexity of the 2017 Tax Act, the Company is still evaluating the tax impact. In accordance with SAB 118, the Company expects to complete the accounting in the fourth quarter of 2018.

On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock-based compensation. This opinion reversed the prior decision of the U.S. Tax Court. On August 7, 2018, the Ninth Circuit published an order withdrawing its opinion and is re-examining the opinion. The Company is awaiting the revised opinion of the Court to determine the impact, if any, on the Company.
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

16


transactional exposures resulting predominantly from foreign currency denominated inter-company receivables and payables. The forward contracts are designated as fair value hedges of specified foreign currency denominated inter-company receivables and payables and generally mature in three months or less. The fair values of foreign exchange contracts are based on market spot and forward exchange rates and represent estimates of possible value that may not be realized in the future. Across its portfolio of contracts, Teradata has both long and short positions relative to the U.S. dollar. As a result, Teradata’s net involvement is less than the total contract notional amount of the Company’s foreign exchange forward contracts.
Gains and losses from 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, 2018 and immaterial for the three and nine months ended September 30, 2017. Gains and losses from foreign exchange forward contracts are fully recognized each period and reported along with the offsetting gain or loss of the related hedged item, either in cost of revenues or in other income (expense), depending on the nature of the related hedged item.

In June 2018, Teradata executed a five-year interest rate swap with a $500 million initial notional amount to hedge the floating interest rate of its Term Loan, as more fully described in Note 11. The Company uses interest rate swaps to manage interest rate risks on future interest payments caused by interest rate changes on its variable rate term loan facility. The notional amount of the hedge will step-down according to the amortization schedule of the term loan.

The Company performed an initial effectiveness assessment in the second quarter of 2018 on the interest rate swap and the hedge was determined to be effective. The hedge is being evaluated qualitatively on a quarterly basis for effectiveness. Changes in fair value are recorded in Accumulated Other Comprehensive Income and periodic settlements of the swap will be recorded in interest expense along with the interest on amounts outstanding under the term loan facility. See Note 10 for additional disclosures related to the fair value of the hedge.
The following table identifies the contract notional amount of the Company’s derivative financial instruments:
 
As of
In millions
September 30,
2018
 
December 31,
2017
Contract notional amount of foreign exchange forward contracts
$
97

 
$
147

Net contract notional amount of foreign exchange forward contracts
$
44

 
$
23

Contract notional amount of interest rate swap
$
500

 
$


All derivatives are recognized in the consolidated balance sheets at their fair value. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based and are an indication of the extent of Teradata’s involvement in such instruments. These notional amounts do not represent amounts exchanged by the parties and, therefore, are not a measure of the instruments. Refer to Note 10 for disclosures related to the fair value of all derivative assets and liabilities.
The Company does not hold or issue derivative financial instruments for trading purposes, nor does it hold or issue leveraged derivative instruments. By using derivative financial instruments to hedge exposures to changes in foreign exchange and interest rates, the Company exposes itself to credit risk. The Company manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of the applicable contracts.


17


9. Commitments and Contingencies
In the ordinary course of business, the Company is subject to proceedings, lawsuits, governmental investigations, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, intellectual property, tax matters and other regulatory compliance and general matters. We are not currently a party to any litigation, nor are we aware of any pending or threatened litigation against us that we believe would materially affect our business, operating results, financial condition or cash flows.
Guarantees and Product Warranties. Guarantees associated with the Company’s business activities are reviewed for appropriateness and impact to the Company’s financial statements. Periodically, the Company’s customers enter into various leasing arrangements coordinated with a leasing company. 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 30, 2018, the maximum future payment obligation of this guaranteed value and the associated liability balance was $3 million.
The Company provides its customers a standard manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls and cost of replacement parts. For each consummated sale, the Company recognizes the total customer revenue and records the associated warranty liability under other current liabilities in the balance sheet using pre-established warranty percentages for that product class.
The following table identifies the activity relating to the warranty reserve for the nine months ended September 30:
In millions
2018
 
2017
Warranty reserve liability
 
 
 
Beginning balance at January 1
$
4

 
$
5

Provisions for warranties issued
3

 
4

Settlements (in cash or in kind)
(4
)
 
(6
)
Balance at September 30
$
3

 
$
3

The Company also offers extended and/or enhanced coverage to its customers in the form of maintenance contracts. The Company accounts for these contracts by deferring the related maintenance revenue over the extended and/or enhanced coverage period. Costs associated with maintenance support are expensed as incurred. Amounts associated with these maintenance contracts are not included in the table above.
In addition, the Company provides its customers with certain indemnification rights. In general, the Company agrees to indemnify the customer if a third-party asserts patent or other infringement on the part of the customer for its use of the Company’s products. The Company has entered into indemnification agreements with the officers and directors of its subsidiaries. From time to time, the Company also enters into agreements in connection with its acquisition and divesture activities that include indemnification obligations by the Company. The fair value of these indemnification obligations is not readily determinable due to the conditional nature of the Company’s potential obligations and the specific facts and circumstances involved with each particular agreement, and as such the Company has not recorded a liability in connection with these indemnification arrangements. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s consolidated financial condition, results of operations or cash flows.
Concentrations of Risk. The Company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments, and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. Teradata’s business often involves large transactions with customers, and if one or more of those customers were to default in its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant

18


losses. However, management believes that the reserves for potential losses were adequate at September 30, 2018 and December 31, 2017.
The Company is also potentially subject to concentrations of supplier risk. Our hardware components are assembled exclusively by Flex Ltd. (“Flex”). Flex procures a wide variety of components used in the manufacturing process on behalf of the Company. Although many of these components are available from multiple sources, Teradata utilizes preferred supplier relationships to provide more consistent and optimal quality, cost and delivery. Typically, these preferred suppliers maintain alternative processes and/or facilities to ensure continuity of supply. Given the Company’s strategy to outsource its manufacturing activities to Flex and to source certain components from single suppliers, a disruption in production at Flex or at a supplier could impact the timing of customer shipments and/or Teradata’s operating results. In addition, a significant change in the forecasts to any of these preferred suppliers could result in purchase obligations for components that may be in excess of demand.

10. Fair Value Measurements
Fair value measurements are established utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as significant other observable inputs, such as quoted prices in active markets for similar assets or liabilities, or quoted prices in less-active markets for identical assets; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s assets and liabilities measured at fair value on a recurring basis include money market funds, interest rate swaps and foreign currency exchange contracts. A portion of the Company’s excess cash reserves are held in money market funds which generate interest income based on the prevailing market rates. Money market funds are included in cash and cash equivalents in the Company’s balance sheet. Money market fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.
When deemed appropriate, the Company minimizes its exposure to changes in foreign currency exchange rates through the use of derivative financial instruments, specifically, foreign exchange forward contracts. Additionally, in June 2018, Teradata executed a five-year interest rate swap with a $500 million initial notional amount in order to hedge the floating interest rate on its term-loan. The fair value of these contracts and swaps are measured at the end of each interim reporting period using observable inputs other than quoted prices, specifically market spot and forward exchange rates. As such, these derivative instruments are classified within Level 2 of the valuation hierarchy. Fair value gains for open contracts are recognized as assets and fair value losses are recognized as liabilities. The fair value of interest rate swaps recorded in other assets at September 30, 2018 was $1 million. The fair value of foreign exchange forward contracts recorded in other assets and accrued liabilities at September 30, 2018 and December 31, 2017, were not material. Any realized gains or losses would be mitigated by corresponding gains or losses on the underlying exposures.
The Company’s assets and liabilities measured at fair value on a recurring basis and subject to fair value disclosure requirements at September 30, 2018 and December 31, 2017 were as follows:
 
 
 
Fair Value Measurements at Reporting Date Using
In millions
September 30, 2018
 
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
$
297

 
$
297

 
$

 
$

Interest rate swap
1

 

 
1

 

Total
$
298

 
$
297

 
$
1

 
$


19




 
 
 
Fair Value Measurements at Reporting Date Using
In millions
December 31, 2017
 
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
$
501

 
$
501

 
$

 
$

    

11. Debt

On June 11, 2018, Teradata replaced its existing five-year, $400 million revolving credit facility with a new $400 million revolving credit facility (the “Credit Facility”). The Credit Facility ends on June 11, 2023, at which point any remaining outstanding borrowings would be due for repayment unless extended by agreement of the parties for up to two additional one-year periods. In addition, under the terms of the Revolving Credit Agreement, Teradata from time to time and subject to certain conditions may increase the lending commitments under the Revolving Credit Agreement in an aggregate principal amount up to an additional $200 million, to the extent that existing or new lenders agree to provide such additional commitments. The outstanding principal amount of the Revolving Credit Agreement bears interest at a floating rate based upon, at Teradata’s option, a negotiated base rate or a Eurodollar rate plus, in each case, a margin based on Teradata’s leverage ratio. In the near term, Teradata would anticipate choosing a floating rate based on London Interbank Offered Rate (“LIBOR”). The Credit Facility is unsecured but is guaranteed by certain of Teradata’s material domestic subsidiaries and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities. As of September 30, 2018, 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 September 30, 2018.

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 will commence 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 September 30, 2018, the term loan principal outstanding was $500 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 September 30, 2018, the all-in fixed rate is 4.36%. The Company was in compliance with all covenants as of September 30, 2018.

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.

During the third quarter of 2018, the Company entered into capital leases to finance certain of its equipment purchases. Assets acquired by capital leases for the third quarter of 2018 were $23 million. The lease term for all capital leases entered into during the quarter was 3 years and the average interest rate was 4.97%. The lease obligation as of September 30, 2018 was approximately $22 million.

20



12. 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
September 30,
 
Nine Months Ended 
 September 30,
In millions, except per share amounts
2018
 
2017
 
2018
 
2017
Net income attributable to common stockholders
$
18

 
$
13

 
$
15

 
$
7

Weighted average outstanding shares of common stock
118.7

 
123.7

 
119.9

 
127.3

Dilutive effect of employee stock options, restricted stock and other stock awards
2.0

 
2.1

 
1.9

 
1.8

Common stock and common stock equivalents
120.7

 
125.8

 
121.8

 
129.1

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.11

 
$
0.13

 
$
0.05

Diluted
$
0.15

 
$
0.10

 
$
0.12

 
$
0.05

Options to purchase 2.5 million shares of common stock for the three and nine months ended September 30, 2018 and 2.7 million and 3.6 million shares of common stock for the three and nine months ended September 30, 2017 were not included in the computation of diluted earnings per share. The 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.
13. Segment and Other Supplemental Information
Teradata is managing its business in two operating segments: (1) Americas region (North America and Latin America); and (2) International region (Europe, Middle East, Africa, 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.

21


The following table presents segment revenue and segment gross profit for the Company:
 
Three Months Ended
September 30,
 
Nine Months Ended 
 September 30,
In millions
2018
 
2017
 
2018
 
2017
Segment revenue
 
 
 
 
 
 
 
 Americas
$
277

 
$
292

 
$
828

 
$
830

 International
249

 
234

 
748

 
700

Total revenue
526

 
526

 
1,576

 
1,530

Segment gross profit
 
 
 
 
 
 
 
 Americas
158

 
172

 
459

 
481

 International
120

 
98

 
330

 
306

Total segment gross profit
278

 
270

 
789

 
787

Stock-based compensation costs
3

 
3

 
11

 
10

Acquisition, integration, reorganization and transformation-related costs

 
1

 
3

 
4

Amortization of capitalized software costs
11

 
16

 
38

 
56

Total gross profit
264

 
250

 
737

 
717

Selling, general and administrative expenses
166

 
161

 
481

 
481

Research and development expenses
84

 
80

 
236

 
228

Income from operations
$
14

 
$
9

 
$
20

 
$
8


14. Reorganization and Business Transformation
In 2015, the Company announced a plan to realign Teradata’s business by reducing its cost structure and focusing on the Company’s core data and analytics business. This business transformation included exiting the marketing applications business, rationalizing costs, and modifying the Company’s go-to-market approach. No costs were incurred related to this business transformation plan for the nine months ended September 30, 2018.
On June 4, 2018, the Company approved a plan to consolidate certain of its operations, including transitioning its corporate headquarters to San Diego, California from its current location in Dayton, Ohio. This plan, which is being executed in connection with Teradata’s comprehensive business transformation from a data warehouse company to a data analytics platform company, is intended to better align the Company’s skills and resources to effectively pursue opportunities in the marketplace. The Company expects that the costs relating to this consolidation plan will include employee separation benefits, transition support, and other exit-related costs. The employee separation benefit costs are being expensed over the time period that the employees have to work to earn them.
The Company expects that it will incur costs and charges, which are substantially all cash expenditures, in the range of approximately $35 to $45 million related to the plan, consisting primarily of the following types of items:

$21 to $26 million for employee severance and other employee-related costs,
$6 to $8 million charge for facilities lease related costs, and
$8 to $11 million for outside service, legal and other associated costs.

The Company expects to incur these costs and charges in 2018 and 2019, with the majority of the cash expenditures in 2019. The Company expects the actions related to the plan will be completed by 2019.

Costs incurred for the plans listed above, for the nine months ended September 30, 2018 and 2017 are included in the table below.

22


 
Nine months Ended September 30,
In millions
2018
 
2017
Employee severance and other employee related cost
$

 
$
2

Asset write-downs

 
1

Professional services, legal and other transformation costs

 
24

Employee separation benefits costs related to headquarter transition and business transformation
7

 

Transition support and other exit related costs for the headquarter transition and business transformation
6

 

Total reorganization and business transformation cost
$
13

 
$
27

Of the $13 million total costs for the nine months ended September 30, 2018, $5 million was paid out in cash and the remainder $8 million was accrued under other current liabilities at September 30, 2018. The majority of the costs were recorded as selling, general and administrative expenses and had no impact on our segment gross profit.
For the nine months ended September 30, 2017, costs incurred above include $3 million for an inventory charge and other associated transformation costs related to the discontinuation of Teradata's prior hardware platforms.

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 2017 Annual Report on Form 10-K. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Third Quarter Financial Overview
As more fully discussed in later sections of this MD&A, the following were significant financial items for the third quarter of 2018:
Total revenue was $526 million for the third quarter of 2018, flat as compared to the third quarter of 2017, with an underlying 7% increase in recurring revenue as the Company's business shifts to subscription-based transactions offset by a 14% decrease in perpetual software licenses and hardware revenue and a 5% decrease in consulting services revenue. Foreign currency fluctuations had a 2% negative impact on total revenue for the quarter.
Gross margin increased to 50.2% in the third quarter of 2018 from 47.5% in the third quarter of 2017, primarily due to the growth in recurring revenue and improved consulting services margins resulting from operational improvements.
Operating expenses for the third quarter of 2018 increased by 4% compared to the third quarter of 2017.
Operating income was $14 million in the third quarter of 2018, compared to $9 million in the third quarter of 2017, primarily due to higher margins.
Net income in the third quarter of 2018 was $18 million, compared to $13 million in the third quarter of 2017.
Overview
Teradata Corporation is a global leader in delivering pervasive data intelligence through analytic software solutions and services. Our solutions are primarily comprised of software and may also include services and hardware

23


infrastructure. We enable companies to rise above the complexity, cost and inadequacy of today’s analytics landscape, finding answers to the toughest challenges by leveraging all of their data across any infrastructure delivering analytics that matter.

Teradata’s strategy is based on our mission of transforming how businesses work and people live through the power of data. Through our ability to deliver real-time, intelligent answers, regardless of scale or volume of query, Teradata allows companies to make better and faster decisions and attain a competitive advantage. Through our focus on leading with business outcomes and a consultative approach, our goal is to serve as a trusted advisor to both the business and technical leaders in our customers’ organizations. Teradata’s products and services are ideally suited for the world’s largest companies as they have the largest and most complex analytics challenges, where scale and performance of such solutions matter. These large and complex analytics challenges also provide the largest revenue opportunities for Teradata.
 
Analytical environments are increasing in complexity. There is more choice around analytic tools and technology than ever before, including commercial and open source solutions, as well as on-premises and cloud subscription-based options. As a result, we offer flexible purchasing and deployment options with our new Teradata Vantage analytics platform that can manage all of our customers’ data, all of the time, so they can analyze anything, deploy anywhere, and deliver analytics that matter. Teradata’s industry-leading technology offers choice and flexibility as it can be deployed across public clouds, as well as on-premises, on optimized or commodity infrastructure. All subscription-based Teradata software licenses enable portability of the software license between cloud and on-premises deployment options, which de-risks customer decisions, particularly for customers with future plans to move to the cloud. Customer buying behavior continues to move from predominantly capital 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 because revenue for subscription-based transactions is recognized over time versus upfront as was the case with the capital purchase model. However, the business transition to a subscription-based model is expected to increase our recurring revenue. Near term impacts can fluctuate based on the speed of customer adoption, which can be difficult to predict. In the longer term, we expect the year-over-year mix of revenues to normalize as more customers transition to these new purchasing and deployment options.
We 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 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") - is annual contract value for all active and contractually binding term-based contracts at the end of a period. It includes maintenance, software upgrade rights, cloud, subscription, rental and managed services.
Bookings Mix - subscription bookings divided by the sum of subscription bookings plus perpetual bookings.
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.

Recurring revenue is intended to depict the over-time revenue recognition model for these revenue streams. The recurrence of these revenue streams in future periods depends on a number of factors including contractual periods and customers’ renewal decisions.
As a portion of the Company’s operations and revenue occur outside the United States ("U.S."), 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 31, 2018, Teradata is expecting no impact from currency translation on our full year projected revenue growth rate.

24


Results of Operations for the Three Months Ended September 30, 2018
Compared to the Three Months Ended September 30, 2017
Revenue
 
 
 
% of
 
 
 
% of
In millions
2018
 
Revenue
 
2017
 
Revenue
Recurring
$
312

 
59.3
%
 
$
292

 
55.5
%
Perpetual software licenses and hardware
77

 
14.6
%
 
90

 
17.1
%
Consulting services
137

 
26.1
%
 
144

 
27.4
%
Total revenue
$
526

 
100
%
 
$
526

 
100
%
Total revenue for third quarter of 2018 was flat as compared to the third quarter of 2017 and included a 2% negative impact from foreign currency fluctuations. Recurring revenue grew 7% in the third quarter of 2018 from the prior-year period, which included a 2% negative impact from foreign currency fluctuations. Consistent with the strategy to shift to subscription-based transactions, we experienced a larger percentage of transactions shifting to a subscription-based model in the third quarter of 2018 versus the third quarter of 2017. Under subscription models, we recognize revenue over time as opposed to the upfront recognition under the perpetual model. Revenues from perpetual software licenses and hardware decreased 14% in the third quarter of 2018 as compared to the prior-year period due to the movement to subscription. The decrease included a 1% negative impact from foreign currency fluctuations. The perpetual software licenses and hardware revenue had a higher mix of hardware revenue in 2018 than 2017 as more customers are purchasing hardware upfront and software licenses on a subscription basis. Consulting services revenue decreased 5% in the third quarter of 2018 compared to the prior-year period. The decrease included a 2% negative impact from foreign currency fluctuations. As we have shifted our strategy to focus on the Top 500 analytical opportunities and business outcomes that drive consumption of our software, we are doing less lower value services.
Included below are financial and performance growth metrics for the third quarter of 2018:
Total ARR at the end of the third quarter of 2018 was $1.2 billion, an increase of 6% from the end of the third quarter of 2017. Beginning in the first quarter of 2018, recurring revenue and ARR now includes recurring revenue from our managed services business. The prior-period amounts have been updated to reflect the current period presentation.
82% of our bookings mix in the third quarter of 2018 were subscription-based. We expect subscription-based transactions to be at the high end or slightly above our estimated 65 to 70 percent of our bookings mix for the full year.
Gross Profit
 
 
 
% of
 
 
 
% of
In millions
2018
 
Revenue
 
2017
 
Revenue
Recurring
$
219

 
70.2
%
 
$
208

 
71.2
%
Perpetual software licenses and hardware
34

 
44.2
%
 
39

 
43.3
%
Consulting services
11

 
8.0
%
 
3

 
2.1
%
Total gross profit
$
264

 
50.2
%
 
$
250

 
47.5
%
The decrease in recurring revenue gross profit as a percent of revenue was driven by a higher mix of subscription- based revenue in the quarter as compared to the previous period. Subscription-based transactions are typically lower margin as compared to revenue from maintenance and software upgrade rights on perpetual software licenses.
The increase in perpetual software licenses and hardware gross profit as a percent of revenue was driven by less amortization of capitalized software in 2018 as compared to the prior-year period.
Consulting services gross profit as a percentage of revenue improved as compared to the prior year as the Company continues to focus on making operational consulting improvements.

25


Operating Expenses
 
 
 
% of
 
 
 
% of
In millions
2018
 
Revenue
 
2017
 
Revenue
Selling, general and administrative expenses
$
166

 
31.6
%
 
$
161

 
30.6
%
Research and development expenses
84

 
16.0
%
 
80

 
15.2
%
Total operating expenses
$
250

 
47.5
%
 
$
241

 
45.8
%
The increase in Selling, General and Administrative ("SG&A") expense as compared to the third quarter of 2017 was due to an increase in variable expense related to our incentive plans and additional transformation costs, including transitioning our corporate headquarters to San Diego, California from its current location in Dayton, Ohio.
The increase in Research and Development ("R&D") expenses as compared to the third quarter of 2017 was due to an increase in variable expense related to our incentive plans.
Other Expense, net
In millions
2018
 
2017
Interest income
$
4

 
$
3

Interest expense
(6
)
 
(4
)
Other
(2
)
 
(2
)
Other expense, net
$
(4
)
 
$
(3
)
Other expense in the third quarter of 2018 and 2017 is comprised primarily of interest expense on long-term debt, partially offset by interest income earned on our cash and cash equivalents. Interest income and expense increased due to increases in interest rates.
Provision for Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The 2018 and 2017 effective tax rates were both impacted by the passage of the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law on December 22, 2017, making significant changes to the U.S. Internal Revenue Code. Changes include, a corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a modified territorial tax system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. generally accepted accounting principles ("GAAP") in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.
In accordance with SAB 118, the Company has made its best estimate of the impact of the Tax Act in its 2017 and 2018 income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings of $1.3 billion was recorded in the fourth quarter of 2017 and was $145 million of tax expense, which the Company expects to pay over an 8-year period. The Company also recorded a provisional benefit of $19 million, a majority of which related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. An adjustment of $7 million of tax benefit to the provisional amounts was recorded in the third quarter of 2018 as a result of additional regulatory guidance and changes in interpretations and assumptions made by the Company. All amounts recognized associated with the Tax Act as of September 30, 2018 are provisional and the Company expects to complete its accounting in the fourth quarter of 2018 in accordance with SAB 118.
The ultimate impact may differ materially from these provisional amounts due to additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and

26


actions the Company may take due to the Tax Act. As a result of the Tax Act, the Company changed its indefinite reversal assertion related to its undistributed earnings of its foreign subsidiaries and no longer considers a majority of its foreign earnings permanently reinvested outside of the U.S.
The effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix between the U.S. and other foreign taxing jurisdictions where the Company conducts its business under its current structure. The Company estimates its full-year effective tax rate for 2018 to be approximately (17%), which takes into consideration the forecasted earnings mix by jurisdiction for 2018 and the estimated discrete items to be recognized in 2018. The forecasted tax rate is based on the overseas profits being taxed at an overall effective tax rate of approximately 25%, as compared to the federal statutory tax rate of 21% in the U.S.
The effective tax rate for the three months ended September 30, 2018 and September 30, 2017 were as follows:
 
2018
 
2017
Effective tax rate
(80.0
)%
 
(116.7
)%

For the three months ended September 30, 2018, the Company recorded a $7 million tax benefit as an adjustment to the provisional estimates resulting from additional regulatory guidance and changes in interpretations and assumptions the Company has made as a result of the Tax Act. This resulted in income tax benefit for the period.

For the three months ended September 30, 2017, net discrete tax benefits of $6 million were recognized primarily related to a reversal of uncertain tax positions from acquired tax attributes in previous acquisitions, which resulted in a tax benefit for the period.
 
Revenue and Gross Profit by Operating Segment

Teradata is managing its business in two operating segments: (1) Americas region (North America and Latin America); and (2) International region (Europe, Middle East, Africa, Asia Pacific and Japan). For purposes of discussing results by segment, management excludes the impact of certain items, consistent with the manner by which management evaluates the performance of each segment. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess financial performance. The chief operating decision maker, who is our President and Chief Executive Officer, evaluates the performance of the segments based on revenue and multiple profit measures, including segment gross profit. For management reporting purposes assets are not allocated to the segments. Our segment results are reconciled to total company results reported under GAAP in Note 13 of Notes to Condensed Consolidated Financial Statements (Unaudited).
The following table presents revenue and operating performance by segment for the three months ended September 30:
 
 
 
% of
 
 
 
% of
In millions
2018
 
Revenue
 
2017
 
Revenue
Segment revenue
 
 
 
 
 
 
 
 Americas
$
277

 
52.7
%
 
$
292

 
55.5
%
 International
249

 
47.3
%
 
234

 
44.5
%
Total segment revenue
$
526

 
100
%
 
$
526

 
100
%
Segment gross profit
 
 
 
 
 
 
 
 Americas
$
158

 
57.0
%
 
$
172

 
58.9
%
 International
120

 
48.2
%
 
98

 
41.9
%
Total segment gross profit
$
278

 
52.9
%
 
$
270

 
51.3
%
Americas: Revenue decreased 5% in the third quarter of 2018 from the third quarter of 2017. The revenue decrease includes a 1% negative impact from foreign currency fluctuations and was driven by a decrease in perpetual software licenses and hardware and consulting revenue. The decrease was partially offset by an increase in

27


recurring revenue driven by the shift to subscription-based transactions. Segment gross profit as a percentage of revenues was lower primarily due to a higher mix of hardware revenue in the third quarter of 2018 versus the third quarter of 2017.
International: Revenue increased by 6% in the third quarter of 2018 as compared to the third quarter of 2017. The revenue increase includes a 4% negative impact from foreign currency fluctuations and was driven by an increase in recurring revenue driven by the shift to subscription-based transactions and an increase in perpetual software licenses and hardware revenue. Segment gross profit as a percentage of revenues was higher primarily due to deal mix and the growth in recurring revenue.
Results of Operations for the Nine months ended September 30, 2018
Compared to the Nine months ended September 30, 2017
Revenue
 
 
 
% of
 
 
 
% of
In millions
2018
 
Revenue
 
2017
 
Revenue
Recurring
$
926

 
58.8
%
 
$
846

 
55.3
%
Perpetual software licenses and hardware
243

 
15.4
%
 
271

 
17.7
%
Consulting services
407

 
25.8
%
 
413

 
27.0
%
Total revenue
$
1,576

 
100
%
 
$
1,530

 
100
%
Total revenue increased $46 million or 3% during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The revenue increase included a 1% favorable impact from foreign currency fluctuations. Recurring revenue grew 9% in the first nine months of 2018 from the prior-year period. Consistent with the strategy to shift to subscription-based transactions, we experienced a larger percentage of transactions shifting to a subscription-based model in first nine months of 2018 versus the same period in 2017. Under subscription models, we recognize revenue over time as opposed to the upfront recognition under the perpetual model. Revenues from perpetual software licenses and hardware decreased 10% in the nine months of 2018 as compared to the prior-year period, including a 2% favorable impact from foreign currency fluctuations. We expect perpetual revenues to continue to decline as customers switch to a subscription-based model. Consulting services revenue decreased 1% in the first nine months of 2018 as compared to the prior-year period, which includes a 2% favorable impact from foreign currency fluctuations.
Gross Profit
 
 
 
% of
 
 
 
% of
In millions
2018
 
Revenue
 
2017
 
Revenue
Recurring
$
655

 
70.7
%
 
$
623

 
73.6
 %
Perpetual software licenses and hardware
79

 
32.5
%
 
102

 
37.6
 %
Consulting services
3

 
0.7
%
 
(8
)
 
(1.9
)%
Total gross profit
$
737

 
46.8
%
 
$
717

 
46.9
 %
The decrease in recurring revenue gross profit as a percent of revenue was driven by a higher mix of subscription-based revenue as compared to the prior-year period. Subscription-based transactions are typically lower margin as compared to the recurring revenue on legacy maintenance and software upgrade rights.
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.
Consulting services gross profit as a percentage of revenue improved as compared to the prior-year period as the Company continues to focus on making operational consulting improvements.

28


Operating Expenses
 
 
 
% of
 
 
 
% of
In millions
2018
 
Revenue
 
2017
 
Revenue
Selling, general and administrative expenses
$
481

 
30.5
%
 
$
481

 
31.4
%
Research and development expenses
236

 
15.0
%
 
228

 
14.9
%
Total operating expenses
$
717

 
45.5
%
 
$
709

 
46.3
%
SG&A expenses were flat as compared to the prior-year period. There was a decrease in SG&A expense due to an inventory charge and other transformation associated costs related to the discontinuation of our prior hardware platforms recorded in 2017. This was offset by investments that we are making in 2018 related to our strategic transformation initiatives, increased sales and sales support headcount, and increased variable expense related to our annual incentive plan.
R&D expenses increased primarily due to strategic investments in managed and public cloud as well as the new Teradata Vantage analytics platform and increased variable expense related to our annual incentive plan.
Other Expense, net
In millions
2018
 
2017
Interest income
$
11

 
$
8

Interest expense
(16
)
 
(11
)
Other
(7
)
 
(4
)
Other expense, net
$
(12
)
 
$
(7
)
Other expense in the first nine months of 2018 and 2017 is comprised primarily of interest expense on long-term debt, partially offset by interest income earned on our cash and cash equivalents. Interest income and expense increased due to increases in interest rates.  
Provision for Income Taxes
The effective tax rate for the nine months ended September 30, 2018 and 2017 were as follows:
 
2018
 
2017
Effective tax rate
(87.5
)%
 
(600.0
)%

For the nine months ended September 30, 2018, the Company recognized discrete tax benefits of $7 million, a majority of which related to the tax benefit recorded as an adjustment to the provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions the Company made related to the Tax Act. This resulted in income tax benefit for the period.

For the nine months ended September 30, 2017, the Company recognized a net $6 million discrete tax benefit related to a reversal of uncertain tax positions recorded in the third quarter from acquired tax attributes in previous acquisitions, which resulted in an income tax benefit for the period.
  
Revenue and Gross Profit by Operating Segment
The following table presents revenue and operating performance by segment for the nine months ended September 30:

29


 
 
 
% of
 
 
 
% of
In millions
2018
 
Revenue
 
2017
 
Revenue
Segment revenue
 
 
 
 
 
 
 
 Americas
$
828

 
52.5
%
 
$
830

 
54.2
%
 International
748

 
47.5
%
 
700

 
45.8
%
Total segment revenue
$
1,576

 
100
%
 
$
1,530

 
100
%
Segment gross profit
 
 
 
 
 
 
 
 Americas
$
459

 
55.4
%
 
$
481

 
58.0
%
 International
330

 
44.1
%
 
306

 
43.7
%
Total segment gross profit
$
789

 
50.1
%
 
$
787

 
51.4
%
Americas: Revenue for the first nine months of 2018 was flat as compared to the previous period. An increase in recurring revenue of 8%, driven by the shift to subscription-based transactions, was offset by a decrease in perpetual software licenses and hardware. Segment gross profit as a percentage of revenues was lower primarily due to a higher mix of hardware revenue as some customers continue to purchase hardware upfront while buying software on a subscription basis.
International: Revenue increased by 7% in the first nine months of 2018 as compared to the previous period. The increase was driven by a 3% favorable impact from foreign currency fluctuations and an increase in recurring revenue driven by the shift to subscription-based transactions. Segment gross profit as a percentage of revenues was higher primarily due to growth in recurring revenue and an increase in consulting services gross margin as the Company continues to focus on making operational consulting improvements.
Financial Condition, Liquidity and Capital Resources
Cash provided by operating activities decreased by $44 million in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease in cash provided by operating activities was primarily due to the Company’s ongoing transition to subscription-based purchasing options, which results in the Company collecting less cash in the current period as customers pay over time. Cash from operating activities was also impacted by a higher expense run rate versus prior-year for strategic transformation investments and fluctuations in working capital.
Teradata’s management uses a non-GAAP measure called “free cash flow,” which is not a measure defined under GAAP. We define free cash flow as net cash provided by operating activities less capital expenditures for property and equipment and additions to capitalized software, as one measure of assessing the financial performance of the Company, and this may differ from the definition used by other companies. The components that are used to calculate free cash flow are GAAP measures taken directly from the Condensed Consolidated Statements of Cash Flows (Unaudited). We believe that free cash flow information is useful for investors because it relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures, for among other things, investments in the Company’s existing businesses, strategic acquisitions and repurchase of Teradata common stock. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.

30


The table below shows net cash provided by operating activities and capital expenditures for the following periods:
 
Nine Months Ended September 30,
In millions
2018
 
2017
Net cash provided by operating activities
$
257

 
$
301

Less:
 
 
 
Expenditures for property and equipment
(92
)
 
(59
)
Additions to capitalized software
(5
)
 
(7
)
Free cash flow
$
160

 
$
235


Financing activities and certain other investing activities are not included in our calculation of free cash flow. There were no other investing activities for the nine months ended September 30, 2018. For the nine months ended September 30, 2017, other investing activities included $17 million for an immaterial acquisition and $1 million for an additional release of funds from a previous acquisition.
Teradata’s financing activities for the nine months ended September 30, 2018 and 2017 primarily consisted of cash outflows for share repurchases and payments on the revolving credit facility and long-term debt. At September 30, 2018, the Company had no outstanding borrowings on the revolving credit facility. The Company purchased approximately 5.4 million shares of its common stock at an average price per share of $38.53 in the nine months ended September 30, 2018, and 11.5 million shares at an average price per share of $30.59 in the nine months ended September 30, 2017 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 30, 2018, under the Company’s second share repurchase program (the “general share repurchase program”), the Company had $338 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. Our share repurchase activity depends on factors such as our working capital needs, our cash requirements for capital investments, our stock price, and economic and market conditions.
Proceeds from the ESPP and the exercise of stock options, net of tax, were $26 million for the nine months ended September 30, 2018 and $20 million for the nine months ended September 30, 2017. These proceeds are included in other financing activities, net in the Condensed Consolidated Statements of Cash Flows (Unaudited). During the third quarter of 2018, the Company entered into capital leases to finance its equipment purchases. Assets acquired by capital leases for the third quarter of 2018 were $23 million. The lease term for all capital leases entered into during the quarter was 3 years and the average interest rate was 4.97%. The lease obligation as of September 30, 2018 was approximately $22 million.
Our total in cash and cash equivalents held outside the U.S. in various foreign subsidiaries was $423 million as of September 30, 2018 and $1,044 million as of December 31, 2017. The remaining balance held in the U.S. was $345 million as of September 30, 2018 and $45 million as of December 31, 2017. Prior to the enactment of the Tax Act, the Company either reinvested or intended to reinvest its earnings outside of the U.S. As a result of the Tax Act, the Company has changed its indefinite reinvestment assertion related to foreign earnings that have been taxed in the U.S. and now considers a majority of these earnings no longer indefinitely reinvested. For the first nine months ended September 30, 2018, the Company repatriated $800 million of its offshore cash and utilized $280 million to pay down its credit facilities, used $206 million for share repurchases that occurred during the period and the remainder for general corporate purposes. Effective January 1, 2018, the U.S. has moved to a territorial system of international taxation, and as such will not subject future foreign earnings to U.S. taxation upon repatriation in future years.
Management believes current cash, cash generated from operations and the $400 million available under the Credit Facility will be sufficient to satisfy future working capital, research and development activities, capital expenditures, pension contributions, and other financing requirements for at least the next twelve months. The Company principally holds its cash and cash equivalents in bank deposits and highly-rated money market funds.

31


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 2017 Annual Report on Form 10-K (the “2017 Annual Report”), and elsewhere in this Quarterly Report. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of the credit facility and term loan agreement, the Company may be required to seek additional financing alternatives.
Long-term Debt. On June 11, 2018, Teradata replaced its existing five-year, $400 million revolving credit facility with a new $400 million revolving credit facility (the “Credit Facility”). The Credit Facility ends on June 11, 2023 at which point any remaining outstanding borrowings would be due for repayment unless extended by agreement of the parties for up to two additional one-year periods. In addition, under the terms of the Revolving Credit Agreement, Teradata from time to time and subject to certain conditions may increase the lending commitments under the Revolving Credit Agreement in an aggregate principal amount up to an additional $200 million, to the extent that existing or new lenders agree to provide such additional commitments. The outstanding principal amount of the Revolving Credit Agreement bears interest at a floating rate based upon, at Teradata’s option, a negotiated base rate or a Eurodollar rate plus, in each case, a margin based on Teradata’s leverage ratio. In the near term, Teradata would anticipate choosing a floating rate based on London Interbank Offered Rate (“LIBOR”). The Credit Facility is unsecured but is guaranteed by certain of Teradata’s material domestic subsidiaries and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities. As of September 30, 2018, 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 September 30, 2018.
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 will commence 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 September 30, 2018, the term loan principal outstanding was $500 million. The Company was in compliance with all covenants under the term loan as of September 30, 2018.

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 rate interest on the above-described term loan. The notional amount of the hedge will step-down according to the amortization schedule 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 September 30, 2018, the all-in fixed rate is 4.36%.
Contractual and Other Commercial Commitments. There has been no significant change in our contractual and other commercial commitments as described in the 2017 Annual Report. Our guarantees and product warranties are discussed in Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited).

32


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 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 2017 Annual Report. The changes to the revenue policy and impact to reported results are discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements (Unaudited). Teradata’s senior management has reviewed all other critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the nine months ended September 30, 2018.
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 2017 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 concluded that, as of September 30, 2018 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 appropriate, to allow timely decisions regarding required disclosure.

33


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 30, 2018 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.

On June 19, 2018, the Company and certain of its subsidiaries filed a lawsuit in the U.S. District Court for the Northern District of California against SAP SE, SAP America, Inc., and SAP Labs, LLC (collectively, “SAP”). In the lawsuit, the Company alleges that SAP misappropriated certain of the Company’s trade secrets within the Company’s enterprise data analytics and warehousing products and used them to develop and introduce a competing product. The Company further alleges that SAP has then employed anticompetitive practices using its substantial market position in the enterprise resource planning applications market to pressure the Company’s customers to switch to SAP’s competing product. The Company seeks an injunction barring SAP’s alleged conduct, monetary damages, and other available legal and equitable relief.
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 of 2018, the Company executed purchases of 1,236,802 shares of its common stock at an average price per share of $39.80 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 30, 2018, under the Company’s second share repurchase program (the “general share repurchase program”), the Company had $338 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.
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, 2018, the total of these purchases was 128,409 shares at an average price of $39.01 per share.
The following table provides information relating to the Company’s share repurchase programs for the nine months ended September 30, 2018:

34


 
 
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
 
2,052,137

 
$
37.09

 
591,708

 
1,460,429

 
$
8,696,662

 
$
446,329,050

Second Quarter Total
 
2,066,681

 
$
39.19

 
347,246

 
1,719,435

 
$
4,521,075

 
$
379,010,024

July 2018
 
35,224

 
$
37.90

 
35,224

 

 
$
5,385,660

 
$
379,010,024

August 2018
 
496,015

 
$
40.33

 
166,399

 
329,616

 
$
906,436

 
$
365,632,429

September 2018
 
705,563

 
$
39.52

 

 
705,563

 
$
1,657,248

 
$
337,745,352

Third Quarter Total
 
1,236,802

 
$
39.80

 
201,623

 
1,035,179

 
$
1,657,248

 
$
337,745,352

Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
None
Item 5. Other Information.
None

35


Item 6. Exhibits.
 
 
 
 
Reference Number
per Item 601 of
Regulation S-K
  
Description
 
 

  
 
 

  
 
 

  
 
 

  
 
 
 

 
 
 
 

  
 
 

  
 
 

  
 
 
101

  
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of Income for the three and nine month period ended September 30, 2018 and 2017, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine month period ended September 30, 2018 and 2017, (iii) the Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, (iv) the Condensed Consolidated Statements of Cash Flows for the nine month period ended September 30, 2018 and 2017 and (v) the notes to the Condensed Consolidated Financial Statements.
* Management contracts or compensatory plans, contracts or arrangements.

36


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 5, 2018
 
By:
 
/s/ Mark A. Culhane
 
 
 
 
Mark A.Culhane
Executive Vice President and Chief Financial Officer


37
EX-10.1 2 exhibit101-amendedteradata.htm EXHIBIT 10.1 Exhibit

Teradata Change in Control Severance Plan
(as Amended and Restated July 18, 2018)

Introduction
The Board of Directors of Teradata Corporation (the “Board”) recognizes that, from time to time, the Company may explore potential transactions that could result in a Change in Control of the Company. This possibility and the uncertainty it creates may result in the loss or distraction of certain key Employees of the Company to the detriment of the Company and its stockholders.
The Board considers the avoidance of such loss and distraction to be essential to protecting and enhancing the best interests of the Company and its stockholders. The Board also believes that when a Change in Control is perceived as imminent, or is occurring, the Board should be able to receive and rely on disinterested service from Employees regarding the best interests of the Company and its stockholders without concern that Employees might be distracted or concerned by the personal uncertainties and risks created by the perception of an imminent or occurring Change in Control.
In addition, the Board believes that it is consistent with the Company’s employment practices and policies and in the best interests of the Company and its stockholders to treat fairly its Employees whose employment terminates in connection with or following a Change in Control.
Accordingly, the Board has determined that appropriate steps should be taken to assure the Company of the continued employment and attention and dedication to duty of its Employees and to seek to ensure the availability of their continued service, notwithstanding the possibility or occurrence of a Change in Control.
Therefore, in order to fulfill the above purposes, the Board has caused the Company to adopt this Teradata Change in Control Severance Plan (the “Plan”).
The Plan is intended to comply with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and other applicable laws.
To the extent the separation pay portion of the Plan is a pension plan, it qualifies for exemption from Parts II, III and IV of ERISA as a plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated Employees under Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
ARTICLE I
ESTABLISHMENT OF PLAN
As of the Effective Date, the Company established the Teradata Change in Control Severance Plan, and the Plan was previously amended and restated on October 7, 2008 and on July 24, 2012 (to be effective as of January 1, 2013), and on January 30, 2017 (to be effective as of February 1, 2017). On July 18, 2018 (the “Restatement Date”), the Plan was amended and restated in its entirety, as set forth in this document to be effective as of July 18, 2018.
ARTICLE II
DEFINITIONS
As used herein, the following words and phrases shall have the following respective meanings:
(a)     “Accounting Firm”. As defined in Section 4.4(c).
(b)     “Base Salary”. The Participant’s wages or base salary on an annualized basis, excluding all bonus, overtime, health additive and incentive compensation, payable by the Company as consideration for the Participant’s services.
(c)     “Bonus Amount”. An amount equal to the Participant’s average bonus earned under the Bonus Plan for the last three full fiscal years prior to the Date of Termination (or for such lesser number of full fiscal years prior to the Date of Termination for which the Participant was eligible to earn such a bonus, and annualized in the case of any pro rata bonus earned for a partial fiscal year), provided that in the event that the Participant was not eligible to receive an annual bonus during any of the preceding three full fiscal years, an amount equal to the Participant’s Target Bonus.
(d)    “Bonus Plan”. The Company’s Management Incentive Plan or such other annual incentive bonus plan of the Company applicable to the Participant for any particular fiscal year.
(e)     “Board”. The Board of Directors of Teradata Corporation.
(f)     “Cause”. A termination for “Cause” shall have occurred where a Participant is terminated because of (A) the willful and continued failure of the Participant to perform substantially the Participant’s duties with the Company or any of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness) for a period of at least thirty (30) days after a written demand for substantial performance is delivered to the Participant by the Board or, unless the Participant is the Chief Executive Officer of the Company, the Chief Executive Officer of the Company, specifically identifying the manner in which the Board or, except if the Participant is the Chief Executive Officer, the Chief Executive Officer believes that the Participant has not substantially performed the Participant’s duties; or (B) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Participant, shall be considered “willful” unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer (except if the Participant is the Chief Executive Officer) or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Company. The termination of employment of the Participant shall not be deemed to be for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Participant and the Participant is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Participant is guilty of the conduct described in subsection (A) or (B) above, and specifying the particulars thereof in detail.
(g)     “Change in Control”. The occurrence of any of the following events:
(i)     The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act “)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of either (a) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (D) any acquisition pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section; or
(ii)     Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date of this Plan whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least two-thirds (2/3) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(iii)     Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a “Corporate Transaction”), in each case, unless, following such Corporate Transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) beneficially owns, directly or indirectly, fifty percent (50%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Corporate Transaction; and (C) at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Corporate Transaction; or
(iv)     Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
(h)     “Claimant”. As defined in Section 7.1.
(i)     “COBRA Coverage”. As defined in Section 4.2(c).
(j)     “Code”. The Internal Revenue Code of 1986, as amended from time to time.
(k)     “Company”. Teradata Corporation and any successor thereto.
(l)     “Compensation Committee”. The Compensation and Human Resource Committee of the Board.
(m)     “Date of Termination”. The date on which a Participant has a “separation from service” with the Company and its subsidiaries within the meaning of Section 409A of the Code.
(n)     “Disability”. The absence of the Participant from the Participant’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Participant or the Participant’s legal representative.
(o)     “Effective Date”. September 30, 2007.
(p)     “Employee”. Any regular, full-time or part-time employee of the Company or its Affiliates.
(q)     “ERISA”. Employee Retirement Income Security Act of 1974.
(r)    “Incumbent Board”. As defined in Section 2(g)(ii).
(s)     “Good Reason”. With respect to any Participant, the occurrence of any of the following events without the Participant’s prior written consent:
(i)     the assignment to the Participant of any duties inconsistent in any respect with the Participant’s position (including offices, titles and reporting requirements), authority, duties or responsibilities, as in effect immediately prior to a Change in Control, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Participant;
(ii)     any reduction in the Participant’s Base Salary below the Required Base Salary,
(iii)     the failure to pay incentive compensation to which the Participant is otherwise entitled under the terms of the Bonus Plan or the Teradata 2012 Stock Incentive Plan (“SIP”), or any predecessor or successor incentive compensation plans, at the time at which such awards are usually paid or as soon thereafter as administratively feasible;
(iv)     the reduction in Target Bonus or Maximum Bonus for a Participant under the Bonus Plan or the reduction in any SIP Target Award or SIP Maximum Award under the SIP or any predecessor or successor incentive compensation plan, other than in the case of a reduction in any SIP Target Award or SIP Maximum Award, such reduction is pursuant to an across-the-board reduction applicable to similarly situated executives of the Company;
(v)     the failure by the Company to continue in effect any equity compensation plan in which the Participant participates immediately prior to the Change in Control, unless a substantially equivalent alternative compensation arrangement (embodied in an ongoing substitute or alternative plan) has been provided to the Participant, or the failure by the Company to continue the Participant’s participation in any such equity compensation plan on substantially the same basis, in terms of the level of such Participant’s participation relative to other participants, as existed immediately prior to the Change in Control, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Participant;
(vi)     Except as required by law, the failure by the Company to continue to provide to the Participant employee benefits substantially equivalent, in the aggregate, to those enjoyed by the Participant under the qualified and nonqualified employee benefit and welfare plans of the Company, including, without limitation, the pension, life insurance, medical, dental, health and accident, disability retirement, and savings plans, in which the Participant was eligible to participate immediately prior to the Change in Control, other than a reduction of such benefits, in the aggregate, of less than 5% of aggregate value of such benefits as of immediately prior to the Change in Control, or the failure by the Company to provide the Participant with the number of paid vacation days to which such Participant is entitled under the Company’s vacation policy immediately prior to the Change in Control;
(vii)     the Company’s requiring the Participant to be based at any office or location (x) that is more than forty (40) miles from the principal place of employment immediately prior to the Change in Control and (y) that would increase the Participant’s commute by more than twenty (20) miles from the Participant’s commute immediately prior to the Change in Control, or the Company’s requiring the Participant to travel on Company business to a substantially greater extent than required immediately prior to the Change in Control; or
(viii)     any failure by the Company to comply with Article V.
(t)     “Maximum Bonus”. With respect to any Participant, the higher of (x) the Participant’s maximum bonus under the Bonus Plan applicable to the Participant immediately prior to the Change in Control, provided that if no maximum bonus has been established for such year under such plan, the year immediately preceding the year in which the Change in Control occurs or (y) the Participant’s maximum bonus under the Bonus Plan applicable to the Participant in effect at any time after the Change in Control.
(u)     “Outstanding Company Common Stock”. As defined in Section 2(g)(i).
(v)     “Outstanding Company Voting Securities”. As defined in Section 2(g)(i).
(w)     “Participant”. An Employee who meets the eligibility requirements of Section 3.1.
(x)    “Payment Date”. The 55th day immediately following the Date of Termination, or such later date as required by Section 4.6. Notwithstanding the preceding sentence, in the event that either (i) the Participant’s Date of Termination occurs prior to the applicable Change in Control in accordance with Section 4.1, or (ii) the Date of Termination occurs subsequent to a Change in Control in accordance with Section 4.1 but the applicable Change in Control does not constitute a “change in the ownership or effective control” of the Company or “a change in the ownership of a substantial portion of the assets” of the Company (each as defined in Section 409A(a)(2)(A)(v) of the Code and the regulations thereunder as in effect from time to time), then the Payment Date means the first business day that is more than six months following the Participant’s Date of Termination (or, if the Participant dies during such six-month period, the Participant’s death). Interest shall accrue on any amounts payable on the date set forth in the immediately preceding sentence from the Date of Termination at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code in effect on the Date of Termination.
(y)     “Plan”. The Teradata Change in Control Severance Plan.
(z)     “Plan Committee”. The committee which shall have full power and authority to administer the Plan and may delegate to one or more officers and/or Employees of the Company such duties in connection with the administration of the Plan as it may deem necessary, advisable or appropriate. Prior to a Change in Control, the Plan Committee shall consist of the members of the Compensation Committee; provided, however, that any time prior to a Change in Control, the Plan Committee may designate Incumbent Board members or individuals who were officers of the Company as of immediately prior to the Change in Control (“Incumbent Members”) to serve as the Plan Committee following the Change in Control. Once designated by the Plan Committee prior to a Change in Control to serve following a Change in Control, Incumbent Members may not be removed from the Plan Committee following the Change in Control.
(aa)    “Release”. As defined in Section 4.1.
(bb)     “Required Base Salary”. With respect to any Participant, the higher of (x) the Participant’s Base Salary as in effect immediately prior to the Change in Control and (y) the Participant’s highest Base Salary in effect at any time thereafter.
(cc)     “SIP”. As defined in Section 2(s)(iii).
(dd)    “SIP Maximum Award”. With respect to any Participant, the higher of (x) the Participant’s maximum award under the SIP or any predecessor or successor plan for the year immediately prior to the Change in Control, provided that if no maximum award has been established for such year under such plan, the most recent year preceding the Change in Control in which such an award has been established or (y) the Participant’s maximum award under the SIP or any predecessor or successor plan in effect at any time after the Change in Control.
(ee)     “SIP Target Award”. With respect to any Participant, the higher of (x) the Participant’s target award under the SIP or any predecessor or successor plan for the year immediately prior to the Change in Control, provided that if no target award has been established for such year under such plan, the most recent year preceding the Change in Control in which such an award has been established or (y) the Participant’s target award under the SIP or any predecessor or successor plan in effect at any time after the Change in Control.
(ff)     “Separation Benefit”. The benefits payable in accordance with Section 4.2 of the Plan.
(gg)     “Target Bonus”. With respect to any Participant, the higher of (x) the Participant’s target bonus under the Bonus Plan applicable to the Participant immediately prior to the Change in Control, provided that if no target bonus has been established for such year under such plan, the year immediately preceding the year in which the Change in Control occurs or (y) the Participant’s target bonus under the Bonus Plan applicable to the Participant in effect at any time after the Change in Control.
(hh)     “Welfare Benefit Period”. Two years.
ARTICLE III
ELIGIBILITY
3.1     Participation. Each Employee who is designated by the Board as a Section 16 Officer shall be eligible to be a Participant in the Plan. The Plan Committee may also designate any other Employee as a Participant. In the event the Plan Committee designates certain Participants by job title, position, function or responsibilities, an Employee who is appointed to such a position after the Effective Date of this Plan shall be eligible as a Participant upon the date he or she begins his or her duties in such position, unless otherwise determined by the Plan Committee.
3.2     Duration of Participation. Subject to Article VI, an Employee shall cease to be a Participant in the Plan when he or she (i) ceases to be an Employee or (ii) ceases to be designated by the Board as a Section 16 officer or (iii) ceases to be designated by the Board as a Participant (unless, in the case of clause (ii), the Plan Committee specifically determines that the Employee shall remain a Participant). Notwithstanding the foregoing, a Participant who is entitled, as a result of ceasing to be an Employee under the circumstances set forth in Section 4.1, to payment of a Separation Benefit or any other amounts under the Plan shall remain a Participant in the Plan until the full amount of the Separation Benefit and any other amounts payable under the Plan have been paid to the Participant.
ARTICLE IV
SEPARATION BENEFITS
4.1     Right to Separation Benefit. Except as otherwise provided in Section 4.4 and subject to the restrictions of Section 4.6, a Participant shall be entitled to receive from the Company a Separation Benefit in the amount provided in Section 4.2 if, within the two year period following the Change in Control, (i) a Participant’s employment is terminated by the Company without Cause (other than by reason of the Participant’s death or Disability) or (ii) a Participant’s employment is terminated by the Participant for Good Reason; provided, that if the termination described in clause (i), or the event constituting Good Reason giving rise to the termination described in clause (ii), as applicable, occurs within the six-month period ending on the date of such Change in Control, but the Participant can reasonably demonstrate that such termination or event, as applicable, occurred at the request of a third party who had taken steps reasonably calculated to effect a Change in Control, the termination or event, as applicable, will be treated for all purposes of this Plan as having occurred immediately following the Change in Control. Notwithstanding the foregoing, in no event shall any benefits be provided to a Participant under this Plan unless the Participant has executed a restrictive covenant and release agreement in the form attached hereto as Exhibit A (the “Release”), the Participant has not revoked the Release, and the Release has become effective and irrevocable in accordance with its terms by the Payment Date.
4.2     Separation Benefits.
(a)     In General. If a Participant’s employment is terminated in circumstances entitling him or her to a Separation Benefit as provided in Section 4.1, the Company shall pay such Participant a Separation Benefit equal to the product of (a) the sum of the Participant’s Required Base Salary and the Participant’s Bonus Amount and (b) 200%. The Separation Benefit provided in this Section 4.2(a) to a Participant who is entitled to a Separation Benefit pursuant to Section 4.1 shall be paid as follows: (x) if the Participant’s Date of Termination occurs within the two year period following a Change in Control that constitutes a “change in control event” as defined in Treasury Regulation § 1.409A-3(i)(5), such Participant’s Separation Benefit shall be paid in a lump sum in cash within thirty (30) days following the Payment Date, and (y) if the Participant’s Date of Termination occurs at any other time, such Participant’s Separation Benefit shall be paid in substantially equal installments in accordance with the Company’s normal payroll procedures, commencing within thirty (30) days after the Payment Date and continuing for two (2) years.
(b)     Accrued Incentive Pay. In addition, if a Participant’s employment is terminated in circumstances entitling him or her to a Separation Benefit as provided in Section 4.1, the Company shall pay such Participant a lump sum in cash in an amount equal to the sum of:
(i)     the amount of any unpaid annual bonus under the Bonus Plan and any vested unpaid award under the SIP or any successor plan for any completed performance period, which amount shall be paid in accordance with the terms of the applicable plan document or award agreement; plus
(ii)    the product of (x) the Bonus Amount and (y) a fraction, the numerator of which is the number of days in the bonus year in which the Date of Termination occurs through the Date of Termination and the denominator of which is 365, which amount shall be paid within thirty (30) days following the Payment Date; provided, however, that such amount shall be paid hereunder only to the extent that the Participant is not otherwise entitled to receive a partial payment for the year of termination under the terms of the applicable Bonus Plan for the period prior to the Date of Termination).
(c)     Welfare and Other Benefits.
(i)    In addition, during the Welfare Benefit Period or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall provide to a Participant entitled to a Separation Benefit, continued health care, dental and life insurance for the Participant and/or the Participant’s family at least equal to, and at the same cost to the Participant and/or the Participant’s family, as those that would have been provided to them in accordance with the plans, programs, practices and policies in effect as of immediately prior to a Change in Control or, if more favorable to the Participant, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliates and their families; provided, however, that notwithstanding the Welfare Benefit Period, such medical and other welfare benefits shall terminate upon such time as the Participant becomes reemployed with another employer and is eligible to receive such benefits under another employer provided plan. The Participant’s entitlement to COBRA continuation coverage under Section 4980B of the Code (“COBRA Coverage”) shall not be offset by the provision of benefits under this Section and the period of COBRA Coverage shall commence at the end of the Welfare Benefit Period, during which the Participant receives benefits under this Section).
(ii)    A Participant entitled to a Separation Benefit will also be entitled to participate in the Company’s outplacement assistance program, provided by the Company’s selected outplacement services firm, as in effect under the Company’s policy applicable to the Participant on the date of the Change in Control, for a period of one (1) year following his or her Date of Termination.
(iii)    In addition, to the extent a Participant entitled to a Separation Benefit was eligible to receive financial counseling benefits under the Company’s policy in effect at the time of a Change in Control, such Participant shall be entitled to receive such financial counseling benefits for a period of one (1) year following his or her Date of Termination.
(iv)    The continued benefits described in this Section that are taxable benefits (and that are not disability pay or death benefit plans within the meaning of Section 409A of the Code) are intended to comply, to the maximum extent possible, with the exception to Section 409A of the Code set forth in Section 1.409A-1(b)(9)(v) of the Treasury Regulations. To the extent that any of those benefits either do not qualify for that exception, or are provided beyond the applicable time periods set forth in Section 1.409A-1(b)(9)(v) of the Treasury Regulations, then they shall be subject to the following additional rules: (i) any reimbursement of eligible expenses shall be paid within 30 days following the Participant’s written request for reimbursement; provided that the Participant provides written notice no later than 60 days prior to the last day of the calendar year following the calendar year in which the expense was incurred; (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during any calendar year shall not affect the amount of expenses eligible for reimbursement, or in-kind benefits to be provided, during any other calendar year; and (iii) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit.
4.3     Other Benefits Payable. The Separation Benefit provided pursuant to Section 4.2 above shall be provided in addition to, and not in lieu of, all other accrued or vested or earned but deferred compensation, rights, options or other benefits which may be owed to a Participant upon or following termination, including, but not limited to accrued vacation or sick pay, reimbursement for business expenses previously incurred, amounts or benefits payable under any Bonus Plan, the SIP, stock option plan, stock ownership plan, stock purchase plan, life insurance plan, health plan, disability plan or similar or predecessor or successor plan, except that that the Separation Benefit provided pursuant to Section 4.2 above shall be in lieu of, and not in duplication of, any other severance or separation pay benefit that may be required under applicable law or under the Teradata Corporation Executive Severance Plan, the Teradata Reduction-in-Force Program or any other Company severance or reduction-in-force plan, program, policy, agreement or arrangement, unless such Company plan, program, policy agreement or arrangement provides otherwise with a specific reference to this Section. Stock options and other stock awards under the SIP will vest and become payable or exercisable upon the occurrence of a Change in Control to the extent provided in the applicable plan.
4.4     Reduction in Certain Payments.
(a)    In the event that it shall be determined by the Accounting Firm that any Payment to a Participant would be subject to the Excise Tax, the Accounting Firm shall determine whether to reduce the aggregate amount of the Payments payable to such Participant to the Reduced Amount. The Payments shall be reduced to the Reduced Amount only if the Accounting Firm determines that the Participant would have a greater Net After-Tax Benefit if the Participant's Payments were reduced to the Reduced Amount. If instead the Accounting Firm determines that the Participant would have a greater Net After-Tax Benefit if the Participant's Payments were not reduced to the Reduced Amount, the Participant shall receive all Payments to which the Participant is entitled.
(b)     If the Accounting Firm determines that the aggregate Payments otherwise payable to a Participant should be reduced to the Reduced Amount pursuant to this Section 4.4, the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof. All determinations made by the Accounting Firm under this Section 4.4 shall be binding upon the Company and the Participant and shall be made within fifteen (15) days after receipt of notice from the Participant that there has been a Payment or such earlier time as is requested by the Company. The reduction of Payments hereunder, if applicable, shall be made by first reducing any Payments due under Section 4.2(a) of this Plan, and then any Payments due under Section 4.2(b) of this Plan, and then any benefits due under Section 4.2(c) of this Plan, and then any other Payments due in the following order: (i) reduction of cash Payments, (ii) cancellation of accelerated vesting of performance-based equity awards (based on the reverse order of the date of grant), (iii) cancellation of accelerated vesting of other equity awards (based on the reverse order of the date of grant), and (iv) reduction of any other Payments due to the Participant (with benefits or payments in any group having different payment terms being reduced on a pro-rata basis). All fees and expenses of the Accounting Firm pursuant to this Section 4.4 shall be borne solely by the Company. Notwithstanding anything in this Plan to the contrary, the Company’s obligations under this Section shall not be conditioned upon the Participant’s termination of employment. By way of example, in the event of a Change in Control which does not result in a Participant’s termination of employment or entitlement to a Separation Benefit under this Plan, but which causes the accelerated vesting of such Participant’s equity awards under a separate plan giving rise to an Excise Tax, the Company’s obligations under this Section shall apply with respect to such accelerated vesting.
(c)     Definitions. The following terms shall have the following meanings for purposes of this Section 4.4.
(i)     “Accounting Firm” shall mean the Company’s then current independent outside auditors, or such other nationally recognized certified public accounting firm as may be designated by the Plan Committee immediately prior to a Change in Control, provided that in the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Plan Committee may appoint another nationally recognized accounting firm to make the determinations required under this Section 4.4 (which accounting firm shall then be referred to as the Accounting Firm hereunder), provided further that in any case, the retention of the Accounting Firm for purposes of this Section 4.4 shall be subject to review and approval, as applicable, by the Audit Committee of the Board.

(ii)     “Excise Tax” shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.

(iii)     “Net After-Tax Benefit” shall mean the aggregate Value of all Payments to a Participant, net of all taxes imposed on the Participant with respect thereto under Sections 1 and 4999 of the Code and under applicable state and local laws, as determined by the Accounting Firm.

(iv)     A “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Participant, whether paid or payable pursuant to this Plan or otherwise.

(v)     “Reduced Amount” shall mean the greatest amount of Payments that can be paid to a Participant that would not result in the imposition of the Excise Tax upon the Participant if the Accounting Firm determines to reduce Payments to the Participant pursuant to this Section 4.4.

(vi)     “Value” of a Payment shall mean the economic present value of a Payment as of the date of the Change in Control (or such other date as required pursuant to Section 280G), as determined by the Accounting Firm pursuant to Section 280G of the Code using the discount rate required by Section 280G(d)(4) of the Code.
4.5     Payment Obligations Absolute. Except as otherwise provided in Section 4.2(c), the Company’s obligation to make the payments provided for in this Plan and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company may have against a Participant or others. In no event shall a Participant be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Participant under any of the provisions of this Plan, and such amounts shall not be reduced whether or not the Participant obtains other employment.
4.6     Section 409A. For purposes of this Plan, “termination of employment” or words or phrases to that effect shall mean a “separation from service” within the meaning of Section 409A of the Code. Notwithstanding the foregoing provisions of this Article IV, if the Participant is a “specified employee,” as determined under the Company’s policy for identifying specified employees on the Date of Termination, then to the extent required in order to comply with Section 409A of the Code, all payments, benefits or reimbursements paid or provided under this Plan that constitute a “deferral of compensation” within the meaning of Section 409A of the Code, that are provided as a result of a “separation from service” within the meaning of Section 409A of the Code and that would otherwise be paid or provided during the first six months following such Date of Termination shall be accumulated through and paid or provided (together with interest from the Date of Termination at the applicable federal rate under Section 7872(f)(2)(A) of the Code in effect on the Date of Termination), on the first business day that is more than six months following the Participant’s Date of Termination (or, if the Participant dies during such six-month period, within 30 days after the Participant’s death). Further, to the extent that the Company determines that it is necessary, in order to comply with Section 409A with respect to any Participant who was a Participant in Plan immediately prior to the Restatement Date, the Company may require that any amount payable under this Plan be paid at the time and in the form applicable to such amount under the terms of the Plan immediately prior to the Restatement Date.
ARTICLE V
SUCCESSOR TO COMPANY
This Plan shall bind any successor of or to the Company, its assets or its businesses (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company’s obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The term “Company,” as used in this Plan, shall mean the Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this Plan.
ARTICLE VI
DURATION, AMENDMENT AND TERMINATION
6.1     Duration. The Plan shall continue in effect from the Effective Date through December 31, 2018; provided, however, that the Plan shall renew automatically for successive one-year periods unless the Board determines, through a resolution duly adopted by a majority of the entire membership of the Board no later than ninety (90) days prior to the expiration of the then current term, that the Plan shall not be extended, in which event the Plan shall terminate at the expiration of the then current term. In the event that a Change of Control occurs within one year following a termination, the Plan shall not so terminate. If a Change in Control occurs, this Plan shall continue in full force and effect and shall not terminate or expire until after all Participants who become entitled to any payments hereunder shall have received such payments in full.
6.2     Amendment and Termination. The Plan may be amended in any respect by resolution adopted by a majority of the Board; provided, however, in the event that a Change in Control occurs within one year following an amendment to the Plan that would adversely affect the rights or potential rights of Participants, the amendment will not be effective. In anticipation of or on or following a Change in Control, the Plan shall no longer be subject to amendment, change, substitution, deletion, revocation or termination in any respect which adversely affects the rights of Participants without the consent of each Participant so affected. For the avoidance of doubt, removal of a Participant as a Participant (other than as a result of the Participant ceasing to be an Employee) shall be deemed to be an amendment of the Plan which adversely affects the right of the Participant.
6.3     Form of Amendment. The form of any amendment or termination of the Plan shall be a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board. An amendment of the Plan in accordance with the terms hereof shall automatically effect a corresponding amendment to all Participants’ rights and benefits hereunder. A termination of the Plan shall be in accordance with the terms hereof automatically effect a termination of all Participants’ rights and benefits hereunder.
ARTICLE VII
MISCELLANEOUS
7.1     Determinations of the Plan Committee; Dispute Resolution. Any interpretation or construction of, or determination or action by, the Plan Committee with respect to the Plan and its administration shall be binding upon any and all parties and persons affected thereby, subject to the exclusive appeal procedure set forth herein, except for any interpretation or construction of, or determination or action by, the Plan Committee relating to whether a Participant has “Good Reason” to resign, which shall not be determined by the Plan Committee but instead shall be subject to de novo review. If any person eligible to receive benefits under the Plan, or claiming to be so eligible, believes he or she is entitled to benefits in an amount greater than those which he or she has received (a “Claimant”), he or she may file a claim in writing with the Teradata Benefits Committee (the “Benefits Committee”). The Benefits Committee shall review the claim and, within 90 days after the claim is filed, shall give written notice to the Claimant of the decision. If the claim is denied, the notice shall give the reason for the denial, the pertinent provisions of the Plan on which the denial is based, a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary, and an explanation of the claim review procedure under the Plan. Any person who has had a claim for benefits denied by the Benefits Committee shall have the right to request review by the Plan Committee. Such request must be in writing, and must be made within sixty days after such person is advised of the denial of benefits. If written request for review is not received within such sixty-day period, the Claimant shall forfeit his or her right to review. The Plan Committee shall review claims that are appealed, and may hold a hearing if it deems necessary, and shall issue a written notice of the final decision. Such notice shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. The decision shall be final and binding upon the Claimant and the Plan Committee and all other persons involved. Any dispute or controversy arising under or in connection with this Plan and not resolved through the foregoing process shall be settled exclusively by arbitration in the city of the Company’s headquarters, in accordance with the rules of the American Arbitration Association then in effect. In addition, and as an exclusive alternative to the filing of a claim with the Benefits Committee, a Claimant may seek to resolve a dispute or controversy by filing a claim in arbitration without first seeking the review of the Benefits Committee or Plan Committee. The arbitrator may award only those damages which are consistent with the terms of this Plan and shall not have authority to award punitive damages. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.
7.2     Indemnification. If a Participant institutes any legal action in seeking to obtain or enforce, or is required to defend in any legal action the validity or enforceability of, any right or benefit provided by this Plan, the Company shall reimburse the Participant (within 10 days following the Company’s receipt of an invoice from the Participant) for all reasonable costs and expenses relating to such legal action that are incurred at any time from the Effective Date through the Participant’s remaining lifetime or, if longer, through the 20th anniversary of the Effective Date, including reasonable attorney’s fees and expenses incurred by such Participant, unless a court or other finder of fact having jurisdiction thereof makes a determination that the Participant’s position was frivolous. In no event shall the Participant be required to reimburse the Company for any of the costs and expenses relating to such legal action. The Company’s obligations under this Section shall survive the termination of this Plan. In order to comply with Section 409A of the Code, in no event shall the payments by the Company under this Section be made later than the end of the calendar year next following the calendar year in which such fees and expenses were incurred, provided, that the Participant shall have submitted an invoice for such fees and expenses at least 30 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred. The amount of such legal fees and expenses that the Company is obligated to pay in any given calendar year shall not affect the legal fees and expenses that the Company is obligated to pay in any other calendar year, and the Participant’s right to have the Company pay such legal fees and expenses may not be liquidated or exchanged for any other benefit.
7.3     Employment Status. This Plan does not constitute a contract of employment or impose on the Participant or the Company any obligation to retain the Participant as an Employee, to change the status of the Participant’s employment, or to change the Company’s policies or those of its subsidiaries’ regarding termination of employment.
7.4     Validity and Severability. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
7.5     Section 409A Savings Clause. It is intended that the payments and benefits provided under this Plan shall either be exempt from the application of, or comply with, the requirements of Section 409A of the Code. This Plan shall be construed, administered, and governed in a manner that effects such intent. If any compensation or benefits provided by this Plan may result in the application of Section 409A of the Code, the Company shall modify the Plan in the least restrictive manner necessary in order to exclude such compensation from the definition of “deferred compensation” within the meaning of such Section 409A or in order to comply with the provisions of Section 409A, other applicable provision(s) of the Code and/or any rules, regulations or other regulatory guidance issued under such statutory provisions and without any diminution in the value of the payments to the Participants. Although the Company will use its best efforts to avoid the imposition of taxation, interest and penalties under Section 409A of the Code, the tax treatment of the benefits provided under this Plan is not warranted or guaranteed. Neither the Company, its subsidiaries nor their respective directors, officers, employees or advisers shall be held liable for any taxes, interest, penalties or other monetary amounts owed by a Participant (or any other individual claiming a benefit through the Participant) as a result of this Plan.
7.6     Governing Law. The validity, interpretation, construction and performance of the Plan shall in all respects be governed by the laws of Delaware, without reference to principles of conflict of law, and to the extent not preempted by ERISA.
7.7     Trust. The Compensation Committee may establish a trust with a bank trustee, for the purpose of paying benefits under this Plan. If so established, the trust shall be a grantor trust subject to the claims of the Company’s creditors and shall, immediately prior to a Change in Control, be funded in cash or common stock of the Company or such other assets as the Compensation Committee deems appropriate with an amount equal to 120 percent of the aggregate benefits payable under this Plan assuming that all Participants in the Plan incurred a termination of employment entitling them to Separation Benefits immediately following the Change in Control, provided, that, in the event that such funding would result in the imposition of taxes and penalties under Section 409A of the Code with respect to any current or former Section 16 officers or any “covered employees” within the meaning of Section 162(m) of the Code, the trust shall not be funded with respect to such individuals.
7.8     Withholding. The Company may withhold from any amount payable or benefit provided under this Plan such Federa