Teradata Corp 10-Q for FY2021 Q1
Teradata Corp (TDC)
10-Q
2021-05-07
For: 2021-03-31
View Original
Added on
April 10, 2026
About this 10-Q
Teradata Corp filed this 10-Q on May 7, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $491M
- up 13.1% from $434M a year earlier
- Net income
- $53M
- down 68.5% from net income of $168M a year earlier
- Diluted EPS
- $0.47
- down 68.9% from $1.51 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2021
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)
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (866 ) 548-8348
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol | Name of Each Exchange on which Registered: | ||||||||||||
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 every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ý | Accelerated filer | ¨ | ||||||||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
1
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 April 30, 2021, the registrant had approximately 109.6 million shares of common stock outstanding.
2
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. | ||||||||
3
Part 1—FINANCIAL INFORMATION
A
| Item 1. | Financial Statements. | ||||
Teradata Corporation
Condensed Consolidated Statements of Income (Unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| In millions, except per share amounts | 2021 | 2020 | |||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Subscription software licenses | $ | $ | |||||||||||||||||||||
| Services and other | |||||||||||||||||||||||
| Total recurring | |||||||||||||||||||||||
| Perpetual software licenses, hardware and other | |||||||||||||||||||||||
| Consulting services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Subscription software licenses | |||||||||||||||||||||||
| Services and other | |||||||||||||||||||||||
| Total recurring | |||||||||||||||||||||||
| Perpetual software licenses, hardware and other | |||||||||||||||||||||||
| Consulting services | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Research and development expenses | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income (loss) from operations | ( | ||||||||||||||||||||||
| Other expense, net | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Other expense | ( | ( | |||||||||||||||||||||
| Total other expense, net | ( | ( | |||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Net income per common share | |||||||||||||||||||||||
| Basic | $ | $ | |||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
4
Teradata Corporation
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| In millions | 2021 | 2020 | |||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||
| Unrealized gain (loss) on derivatives, before tax | ( | ||||||||||||||||||||||
| Unrealized gain (loss) on derivatives, tax portion | ( | ||||||||||||||||||||||
| Unrealized gain (loss) on derivatives, net of tax | ( | ||||||||||||||||||||||
| Defined benefit plans: | |||||||||||||||||||||||
| Defined benefit plan adjustment, before tax | |||||||||||||||||||||||
| Defined benefit plan adjustment, tax portion | ( | ||||||||||||||||||||||
| Defined benefit plan adjustment, net of tax | |||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||
| Comprehensive income | $ | $ | |||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
Teradata Corporation
Condensed Consolidated Balance Sheets (Unaudited)
| In millions, except per share amounts | March 31, 2021 | December 31, 2020 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Right of use assets - operating lease, net | |||||||||||
| Goodwill | |||||||||||
| Capitalized contract costs, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Current portion of finance lease liability | |||||||||||
| Current portion of operating lease liability | |||||||||||
| Accounts payable | |||||||||||
| Payroll and benefits liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Finance lease liability | |||||||||||
| Operating lease liability | |||||||||||
| Pension and other postemployment plan liabilities | |||||||||||
| Long-term deferred revenue | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ equity | |||||||||||
Preferred stock: par value $ | |||||||||||
Common stock: par value $ | |||||||||||
| Paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
6
Teradata Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three Months Ended March 31, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables | ( | ( | |||||||||
| Inventories | |||||||||||
| Current payables and accrued expenses | ( | ( | |||||||||
| Deferred revenue | |||||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Expenditures for property and equipment | ( | ( | |||||||||
| Additions to capitalized software | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Repayments of long-term borrowings | ( | ( | |||||||||
| Payments of finance leases | ( | ( | |||||||||
| Other financing activities, net | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental cash flow disclosure: | |||||||||||
| Assets acquired under operating lease | $ | $ | |||||||||
| Assets acquired under finance lease | $ | $ | |||||||||
| Annual variable incentive payout settled in equity | $ | $ | |||||||||
Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets:
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||||||||
| Restricted cash | ||||||||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
7
Teradata Corporation
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
| Common Stock | Paid-in | Accumulated | Accumulated Other Comprehensive | ||||||||||||||||||||||||||||||||
| In millions | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Employee stock compensation, employee stock purchase programs and option exercises, net of tax | — | — | — | ||||||||||||||||||||||||||||||||
| Repurchases of common stock, retired | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Pension and postemployment benefit plans, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Accumulated Other Comprehensive | ||||||||||||||||||||||||||||||||
| In millions | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||||||
| December 31, 2019 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Employee stock compensation, employee stock purchase programs and option exercises, net of tax | — | — | — | ||||||||||||||||||||||||||||||||
| Repurchases of common stock, retired | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Pension and postemployment benefit plans, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Unrealized loss on derivatives, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
8
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 2020 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, 2020 (the "2020 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 revised to conform to the current year presentation. At the beginning of the first quarter of 2021, the Company changed its historical presentation for certain components within its revenue and cost categories. To better reflect the strategy and shift in the business, the Company adopted and revised the presentation in the first quarter of 2021, including reclassifying managed services revenue of $25 million and costs of $20 million from Recurring to Consulting services and reclassifying third party revenue of $9 million and costs of $7 million from Recurring to Perpetual software licenses, hardware and other. This change in presentation does not affect the Company's total revenues, total costs of revenues or overall total gross profit (defined as total revenue less total cost of revenue).
2. New Accounting Pronouncements
Reference Rate Reform. In March 2020, the Financial Accounting Standards Board ("FASB") issued new guidance to provide relief to companies that will be impacted by the expected change in benchmark interest rates, as participating banks will no longer be required to submit London Interbank Offered Rate ("LIBOR") quotes by the U.K. Financial Conduct Authority. The new guidance allows companies to, provided the only change to existing contracts are a change to an approved benchmark interest rate, account for modifications as a continuance of the existing contract without additional analysis. For new and existing contracts, companies may elect to apply the amendments as of March 12, 2020 through December 31, 2022. The Company is currently evaluating this new guidance to determine the impact it may have on our condensed consolidated financial statements or related disclosures.
Recently Adopted Guidance
Accounting for Income Taxes. In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. The new guidance changes various subtopics of accounting for income taxes including, but not limited to, accounting for "hybrid" tax regimes, tax basis step-up in goodwill obtained in a transaction that is not a business combination, intra-period tax allocation exception to incremental approach, ownership changes in investments, interim-period accounting for enacted changes in tax law, and year-to-date loss limitation in interim-period tax accounting. We adopted the guidance in the first quarter of 2021. The adoption did not have a material impact on our condensed consolidated financial statements or related disclosures.
9
3. Revenue from Contracts with Customers
Disaggregation of Revenue from Contracts with Customers
The following table presents a disaggregation of revenue:
| Three Months Ended March 31, | |||||||||||||||||||||||
| in millions | 2021 | 2020 | |||||||||||||||||||||
| Americas | |||||||||||||||||||||||
| Recurring | $ | $ | |||||||||||||||||||||
| Perpetual software licenses, hardware and other | |||||||||||||||||||||||
| Consulting services | |||||||||||||||||||||||
| Total Americas | |||||||||||||||||||||||
| EMEA | |||||||||||||||||||||||
| Recurring | |||||||||||||||||||||||
| Perpetual software licenses, hardware and other | |||||||||||||||||||||||
| Consulting services | |||||||||||||||||||||||
| Total EMEA | |||||||||||||||||||||||
| APJ | |||||||||||||||||||||||
| Recurring | |||||||||||||||||||||||
| Perpetual software licenses, hardware and other | |||||||||||||||||||||||
| Consulting services | |||||||||||||||||||||||
| Total APJ | |||||||||||||||||||||||
| Total Revenue | $ | $ | |||||||||||||||||||||
Rental revenue, which is included in recurring revenue in the above table, was as follows:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| in millions | 2021 | 2020 | ||||||||||||||||||||||||
| Rental revenue* | $ | $ | ||||||||||||||||||||||||
*Rental revenue includes hardware maintenance.
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:
10
| As of | |||||||||||
| in millions | March 31, 2021 | December 31, 2020 | |||||||||
| Accounts receivable, net | $ | ||||||||||
| Contract assets | |||||||||||
| Current deferred revenue | |||||||||||
| Long-term deferred revenue | |||||||||||
Revenue recognized during the three months ended March 31, 2021 from amounts included in deferred revenue at the beginning of the period was $182 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 March 31, 2021:
| in millions | Total at March 31, 2021 | Year 1 | Year 2 and Thereafter | |||||||||||||||||
| Remaining unsatisfied obligations | $ | $ | $ | |||||||||||||||||
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 Capitalized contract costs, net on the Company’s balance sheet. The capitalized amounts are calculated based on the annual recurring revenue and total contract value for individual multi-term contracts. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are amortized as selling, general and administrative expenses on a straight-line basis over the expected period of benefit, which is typically around four years . These costs are periodically reviewed for impairment. The following table identifies the activity relating to capitalized contract costs:
| in millions | December 31, 2020 | Capitalized | Amortization | March 31, 2021 | ||||||||||||||||||||||
| Capitalized contract costs | $ | $ | $ | ( | $ | |||||||||||||||||||||
| in millions | December 31, 2019 | Capitalized | Amortization | March 31, 2020 | ||||||||||||||||||||||
| Capitalized contract costs | $ | $ | $ | ( | $ | |||||||||||||||||||||
11
5. Supplemental Financial Information
| As of | |||||||||||
| In millions | March 31, 2021 | December 31, 2020 | |||||||||
| Inventories | |||||||||||
| Finished goods | $ | $ | |||||||||
| Service parts | |||||||||||
| Total inventories | $ | $ | |||||||||
| Deferred revenue | |||||||||||
| Deferred revenue, current | $ | $ | |||||||||
| Long-term deferred revenue | |||||||||||
| Total deferred revenue | $ | $ | |||||||||
6. Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company expects that a majority of its foreign earnings will be repatriated back to 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 March 31, | ||||||||||||||||||||||||||
| In millions | 2021 | 2020 | ||||||||||||||||||||||||
| Effective tax rate | % | % | ||||||||||||||||||||||||
For the three months ended March 31, 2021, the Company recorded $3 million of discrete tax benefit, a majority of which related to the excess tax benefits derived from equity compensation vesting.
For the three months ended March 31, 2020, the Company recorded a net $152 million discrete tax benefit. The Company recorded approximately $157 million of discrete tax benefit related to an intra-entity asset transfer of certain of its intellectual property ("IP") to one of its Irish subsidiaries, which occurred on January 1, 2020. The tax benefit for this intra-entity asset transfer was recorded as a deferred tax asset and represents the book and tax basis difference on the transferred assets measured based on the applicable Irish statutory tax rate. The tax deductions for amortization of the IP asset will be recognized in the future, and any amortization not deducted for tax purposes will be carried forward indefinitely under Irish tax laws. The Company expects to be able to realize the deferred tax assets resulting from these intra-entity asset transfers. This tax benefit was offset by discrete tax expense of $6 million related to equity compensation vesting. As a result of these discrete items, the Company recorded $182 million of income tax benefit on a on a pre-tax net loss of $14 million for the three months ended March 31, 2020, resulting in an effective income tax rate of 1,300.0 %.
12
7. Derivative Instruments and Hedging Activities
As a portion of Teradata’s operations is conducted outside the U.S. and in currencies other than the U.S. dollar, the Company is exposed to potential gains and losses from changes in foreign currency exchange rates. In an attempt to mitigate the impact of currency fluctuations, the Company uses foreign exchange forward contracts to hedge transactional exposures resulting predominantly from foreign currency denominated inter-company receivables and payables. The forward contracts are designated as fair value hedges of specified foreign currency denominated inter-company receivables and payables and generally mature in three months or less. The fair values of foreign exchange contracts are based on market spot and forward exchange rates and represent estimates of possible value that may not be realized in the future. Across its portfolio of contracts, Teradata has both long and short positions relative to the U.S. dollar. As a result, Teradata’s net involvement is less than the total contract notional amount of the Company’s foreign exchange forward contracts.
Gains and losses from foreign exchange forward contracts are fully recognized each period and reported along with the offsetting gain or loss of the related hedged item, either in cost of revenues, operating expenses 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 10. 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. The notional amount of the hedge steps down according to the amortization schedule of the term loan. The notional amount of the hedge was $450 million as of March 31, 2021.
The Company performed an initial effectiveness assessment in the third quarter of 2018 on the interest rate swap, and the hedge was determined to be effective. The hedge is being evaluated qualitatively on a quarterly basis for effectiveness. Changes in fair value are recorded in Accumulated Other Comprehensive Loss and periodic settlements of the swap will be recorded in interest expense along with the interest on amounts outstanding under the term loan.
The following table identifies the contract notional amount of the Company’s derivative financial instruments:
| As of | |||||||||||
| In millions | March 31, 2021 | December 31, 2020 | |||||||||
| Contract notional amount of foreign exchange forward contracts | $ | $ | |||||||||
| Net contract notional amount of foreign exchange forward contracts | $ | $ | |||||||||
| Contract notional amount of interest rate swap | $ | $ | |||||||||
All derivatives are recognized in the condensed consolidated balance sheets at their fair value. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based and are an indication of the extent of Teradata’s involvement in such instruments. These notional amounts do not represent amounts exchanged by the parties and, therefore, are not a measure of the instruments. Refer to Note 9 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.
13
8. Commitments and Contingencies
Legal Proceedings. 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, other than the following:
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, among other things, that SAP misappropriated certain of the Company’s trade secrets within the Company’s enterprise data analytics and warehousing products and used them to help develop, improve, introduce, and sell one or more competing products. The Company further alleges that SAP has employed anticompetitive practices using its substantial market position in the enterprise resource planning applications market to pressure the Company’s customers and prospective customers to use SAP’s one or more competing products and reduce or eliminate customers' and prospective customers' use of the Company's offerings. The Company seeks an injunction barring SAP’s alleged conduct, monetary damages, and other available legal and equitable relief. In July 2019, SAP filed patent infringement counterclaims against Teradata based on five of SAP’s U.S. patents (one of which has since been dismissed from the suit), and the Company is vigorously defending against these counterclaims. On August 31, 2020, the Company filed a second lawsuit against SAP in the U.S. District Court for the Northern District of California. In this lawsuit as it currently stands, Teradata alleges infringement by SAP of four of Teradata’s U.S. patents and seeks an injunction barring SAP from further infringement, monetary damages, and other available legal and equitable relief. On February 16, 2021, SAP filed additional patent infringement counterclaims against Teradata based on six additional U.S. patents. On the same day, SAP also filed a lawsuit in Germany for infringement of a single German patent. Currently, it is not possible to determine the likelihood of a loss or a reasonably estimated range of loss, if any, pertaining to any of SAP’s patent counterclaims in the United States or its German lawsuit.
Other Contingencies. 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 offerings. The Company has indemnification obligations under its charter and bylaws to its officers and directors, and 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 typically 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. As such, the Company has generally not recorded a liability in connection with these indemnification arrangements. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s consolidated financial condition, results of operations or cash flows.
Concentrations of Risk. The Company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments, and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. Teradata’s business often involves large transactions with customers, and if one or more of those customers were to default in its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses were adequate at March 31, 2021 and December 31, 2020.
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
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9. Fair Value Measurements
Fair value measurements are established utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as significant other observable inputs, such as quoted prices in active markets for similar assets or liabilities, or quoted prices in less-active markets for identical assets; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s assets and liabilities measured at fair value on a recurring basis include money market funds, interest rate swaps and foreign currency exchange contracts. A portion of the Company’s excess cash reserves are held in money market funds which generate interest income based on the prevailing market rates. Money market funds are included in cash and cash equivalents in the Company’s balance sheet. Money market fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.
When deemed appropriate, the Company minimizes its exposure to changes in foreign currency exchange rates through the use of derivative financial instruments, specifically, foreign exchange forward contracts. Additionally, in June 2018, Teradata executed a five-year interest rate swap with a $500 million initial notional amount in order to hedge the floating interest rate on its term loan. The fair value of these contracts and swaps are measured at the end of each interim reporting period using observable inputs other than quoted prices, specifically market spot and forward exchange rates. As such, these derivative instruments are classified within Level 2 of the valuation hierarchy. Fair value of unrealized gains for open contracts are recorded in other assets and the fair value of unrealized losses are recorded in other liabilities in the Company's balance sheet. The fair value of foreign exchange forward contract assets and liabilities at March 31, 2021 and December 31, 2020 was not material. Realized gains and losses from the Company’s fair value hedges net of corresponding gains or losses on the underlying exposures were immaterial for the three months ended March 31, 2021 and 2020.
The Company’s other assets and liabilities measured at fair value on a recurring basis and subject to fair value disclosure requirements at March 31, 2021 and December 31, 2020 were as follows:
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| In millions | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds at March 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||
| Money market funds at December 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swap at March 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate swap at December 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||
10. Debt
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and subject to certain conditions may increase the lending commitments under the Credit Facility 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 Credit Facility 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 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 March 31, 2021, the Company had no borrowings outstanding under the Credit Facility, leaving $400 million in borrowing capacity available under the Credit Facility. The Company was in compliance with all covenants under the Credit Facility as of March 31, 2021.
Also, in June 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 previous term loan. The term loan is payable in quarterly installments, which commenced on June 30, 2019, with 1.25 % of the initial principal amount due on each of the first eight payment dates; 2.50 % of the initial principal amount due on each of the next four payment dates; 5.0 % of the initial principal amount due on each of the next three payment dates; and all remaining principal due in June 2023. The outstanding principal amount of the term loan bears interest at a floating rate based upon a negotiated base rate or a Eurodollar rate, plus in each case, a margin based on the leverage ratio of the Company. As of March 31, 2021, the term loan principal outstanding was $450 million. As disclosed in Note 7, 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 March 31, 2021, the all-in fixed rate is 4.36 %. The Company was in compliance with all covenants under the term loan as of March 31, 2021.
Teradata’s term loan is recognized on the Company’s balance sheet at its unpaid principal balance, net of deferred issuance costs, 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.
11. 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 March 31, | |||||||||||||||||||||||
| In millions, except per share amounts | 2021 | 2020 | |||||||||||||||||||||
| Net income attributable to common stockholders | $ | $ | |||||||||||||||||||||
| Weighted average outstanding shares of common stock | |||||||||||||||||||||||
| Dilutive effect of employee stock options, restricted stock and other stock awards | |||||||||||||||||||||||
| Common stock and common stock equivalents | |||||||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | $ | |||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
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12. Segment and Other Supplemental Information
Teradata manages its business under three geographic regions, which are also the Company’s operating segments: (1) Americas region (North America and Latin America); (2) EMEA region (Europe, Middle East and Africa) and (3) APJ region (Asia Pacific and Japan). For purposes of discussing results by segment, management excludes the impact of certain items, consistent with the manner by which management evaluates the performance of each segment. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess financial performance. The chief operating decision maker, who is the Company's 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.
The following table presents segment revenue and segment gross profit for the Company:
| Three Months Ended March 31, | |||||||||||||||||||||||
| In millions | 2021 | 2020 | |||||||||||||||||||||
| Segment revenue | |||||||||||||||||||||||
| Americas | $ | $ | |||||||||||||||||||||
| EMEA | |||||||||||||||||||||||
| APJ | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Segment gross profit | |||||||||||||||||||||||
| Americas | |||||||||||||||||||||||
| EMEA | |||||||||||||||||||||||
| APJ | |||||||||||||||||||||||
| Total segment gross profit | |||||||||||||||||||||||
| Stock-based compensation costs | |||||||||||||||||||||||
| Acquisition, integration, reorganization and transformation-related costs | |||||||||||||||||||||||
| Amortization of capitalized software costs | |||||||||||||||||||||||
| Total gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Research and development expenses | |||||||||||||||||||||||
| Income (loss) from operations | $ | $ | ( | ||||||||||||||||||||
13. Reorganization and Business Transformation
2020 Workforce Reduction and Real Estate Rationalization Measures
In September 2020, the Company offered a voluntary separation program ("VSP") to certain tenured employees. This global program was generally made available to active employees in good standing who (1) were at least 55 years old as of October 1, 2020 and (2) had at least ten years of service with Teradata. This program was implemented as part of the Company's efforts to improve its cost structure. On November 2, 2020, the Company approved a plan to realign and reduce its workforce and rationalize its real estate footprint. The workforce measures involve involuntary headcount reduction actions. These actions are separate from the VSP. The rationalization of the Company’s real estate footprint involves terminating leases relating to certain of the Company’s offices globally and transitioning impacted employees to a permanent virtual working environment, co-working space or a smaller facility, depending on business need. The Company is continuing to evaluate and implement additional measures that would be expected to result in further cost savings.
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The Company expects that the costs relating to these workforce reduction and real estate rationalization measures will include one-time employee separation benefits, transition support, outside services and other exit-related costs. The Company expects that it will incur total costs and charges related to these actions in the range of approximately $52 to $60 million, consisting primarily of the following:
•$13 to $15 million for employee severance and other employee-related costs, which is separate from the $28 to $30 million for costs related to the VSP,
•$4 to $7 million charge for facilities lease related costs, and
•$7 to $8 million for outside service, legal and other associated costs.
The Company incurred $8 million of these costs and charges in the first quarter of 2021 and $42 million in 2020 with the remaining costs and charges expected to be incurred in 2021 upon completion of these actions. Cash expenditures related to these actions are estimated at approximately $60 to $70 million. Approximately $12 million to $14 million of the cash expenditures relate to cash payments to international employees and which are not expected to have a material impact on the Company's Condensed Consolidated Statements of Income due to the Company accounting for its International postemployment benefits under Accounting Standards Codification 712, Compensation - Nonretirement Postemployment Benefits ("ASC 712"), which uses actuarial estimates and defers the immediate recognition of gains or losses.
The Company recognized costs of $8 million ($7 million cash and $1 million non-cash) in the first quarter of 2021 for the VSP, employee separation benefits, facilities lease related costs, outside service, legal and other associated costs. Certain benefits are being expensed over the time period that the employees are required to work to earn them to the extent the required service period extends beyond the nominal period. $3 million of these costs were recorded to Costs of revenue, $2 million were recorded to Selling, general and administrative expenses and $3 million were recorded to Research and development expenses. There was no impact to the segment gross profit.
Cash paid related to the actions described above was $17 million in 2021 and $23 million in 2020. Not included in the table below are approximately $1 million in 2021 and $2 million in 2020 of cash payments for international employees which, are not expected to have a material impact on the Condensed Consolidated Statements of Income as noted above.
The 2021 activity and the reserves related to these workforce reduction and real estate rationalization measures are as follows:
| In millions | Balance at December 31, 2020 | Expense accruals | Cash payments | Balance at March 31, 2021 | ||||||||||||||||||||||||||||
| VSP | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Employee severance and other employee-related costs | ( | |||||||||||||||||||||||||||||||
| Facilities lease related costs, outside service, legal and other associated costs | ( | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
In addition, the Company incurred non-cash costs not reflected in the table above of $1 million in 2021 and $2 million in 2020 for stock-based compensation for accelerated vesting tied to the VSP and $2 million for accelerated amortization of right-of-use assets and fixed assets in 2020 associated with the termination of leases relating to certain of the Company’s offices globally. The remaining lease liability is included in our operating lease obligations as of March 31, 2021 and is not included in the table above.
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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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 Annual Report"). The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
Teradata Corporation ("we," "us," "Teradata," or the "Company") is a leading multi-cloud data platform provider for enterprise analytics at scale. Our connected multi-cloud data platform, Teradata Vantage, allows customers to integrate and simplify their multi-cloud data and analytic ecosystems, streamline access and management of their data, and use analytics to derive business value from diverse data types. Our Teradata Vantage platform is designed and built to run across on-premises, private cloud and public cloud environments. This platform is supported by business consulting, support services and partner networks that enable customers to extract insights from across a company’s entire data and analytics ecosystem.
Teradata’s strategy is based on our differentiated value proposition for the top 10,000 largest organizations in the world. Our strategy is to provide a connected multi-cloud data platform, Teradata Vantage, that supports the needs of enterprises from start to scale. We believe that Teradata Vantage is also an effective platform for driving business outcomes, with a partnering approach, embracing modern ecosystems and enabling users to build how they want.
We are continuing to execute on our key priorities, including significant product expansion of our Teradata Vantage multi-cloud data platform offering, expanding our footprint with existing customers and adding new customers, driving focus on modern cloud partner ecosystems and driving operational efficiency and agility across the company. Our strategy is further supported by various people initiatives to drive a growth-oriented culture, as well as an increased focus on diversity, equity and inclusiveness, to attract and support high performing, top talent, and diverse teams.
To allow for greater transparency regarding the progress we are making toward achieving our strategic objectives, we utilize the following financial and performance metrics:
•Annual Recurring Revenue ("ARR") - annual contract value for all active and contractually binding term-based contracts at the end of a period. ARR includes maintenance, software upgrade rights, public cloud and on-premises subscription-based transactions.
•Public cloud ARR (included within total ARR) - annual contract value for all active and contractually binding term based contracts at the end of a period that are operated in a public cloud environment; and
•Remaining performance obligation ("RPO")/Backlog - the price of firm orders for which work has not been performed or goods have not been delivered and the Company is contractually required to perform.
COVID-19 Update
See Part I, Item 1A. "Risk factors" and Part II, Item 7, "Management discussion and analysis of financial condition and results of operations" in the 2020 Annual Report for a discussion related to risks and impact of COVID-19 on the Company. As of the date of this Quarterly Report on Form 10-Q, we are continuing to execute our pandemic response plan, and the Teradata Pandemic Response Team is refining and executing return-to-office plans with "safety first" considerations. Customer-facing teams are also proactively working to identify ways to assist customers, meet service level commitments, and engage with customers via virtual events.
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Despite these efforts, there remains a fair degree of uncertainty regarding the potential impact of the pandemic on our business, from both a financial and operational perspective, and the scope and costs associated with additional measures that may be necessary in response to the pandemic going forward. We will continue our diligent efforts to monitor and respond as appropriate to the impacts of the pandemic on our business, including the status of our workforce, supply chain, customers, suppliers, and vendors, based on the priorities described above. Our actions will continue to be informed by the requirements and recommendations of the federal, state or local authorities. We will remain agile and have contingency plans in place to appropriately respond to conditions as they unfold.
First Quarter Financial Overview
As more fully discussed in later sections of this MD&A, the following were significant financial items for the first quarter of 2021:
•At the end of the first quarter of 2021, ARR was $1.404 billion, increasing 12% as compared to the first quarter of 2020, including a 3% positive impact from foreign currency translation, as compared to the first quarter of 2020. At the end of first quarter of 2021, Public cloud ARR was $124 million, increasing 176% as compared to the first quarter of 2020, including a 6% positive impact from foreign currency fluctuations.
•Total revenue was $491 million for the first quarter of 2021, a 13% increase compared to the first quarter of 2020, with an underlying 20% increase in recurring revenue. Perpetual software licenses, hardware and other revenue was flat, and consulting services revenue decreased 4%. Foreign currency fluctuations had a 3% positive impact on total revenue for the quarter compared to the prior year.
•Gross margin increased to 62.5% in the first quarter of 2021 from 51.8% in the first quarter of 2020, primarily due to a higher recurring revenue mix as compared to the prior period.
•Operating expenses for the first quarter of 2021 decreased by 2% compared to the first quarter of 2020, primarily due to lower travel and marketing expenses partially offset by an increase in investments in cloud transformation and variable incentive compensation expense.
•Operating income was $81 million in the first quarter of 2021, compared to operating loss of $6 million in the first quarter of 2020.
•Net income in the first quarter of 2021 was $53 million, compared to $168 million in the first quarter of 2020. Net income in first quarter of 2020 was higher due to discrete tax items during the quarter.
•Total backlog of $2.702 billion at the end of the first quarter of 2021 was up 2% from the first quarter of the prior year.
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Results of Operations for the Three Months Ended March 31, 2021
Compared to the Three Months Ended March 31, 2020
Revenue
| % of | % of | |||||||||||||||||||||||||
| In millions | 2021 | Revenue | 2020 | Revenue | ||||||||||||||||||||||
| Recurring | $ | 372 | 75.7 | % | $ | 311 | 71.7 | % | ||||||||||||||||||
| Perpetual software licenses, hardware and other | 23 | 4.7 | % | 23 | 5.3 | % | ||||||||||||||||||||
| Consulting services | 96 | 19.6 | % | 100 | 23.0 | % | ||||||||||||||||||||
| Total revenue | $ | 491 | 100.0 | % | $ | 434 | 100.0 | % | ||||||||||||||||||
Total revenue increased $57 million, or 13%, in first quarter of 2021 and included a 3% positive impact from foreign currency fluctuations. Recurring revenue grew 20%, due to strong ARR growth in the fourth quarter of 2020 driven by continued growth in public cloud and subscription ARR, contributing to a higher base of recurring revenue. Continued growth in public cloud ARR also contributed to increased recurring revenue. Additionally, recurring revenue was positively impacted by a few significant on-premises customer transactions involving substantive long-term commitments which resulted in revenue being recognized on a recurring annual basis rather than a recurring quarterly basis that drove approximately $24 million of revenue into the first quarter from these few arrangements versus ratably across the four quarters of 2021. For full year 2021, we expect a mid- to high-single digit percentage increase in ARR growth and recurring revenue as compared to 2020, although we anticipate fluctuations in our quarterly recurring revenue. Public cloud ARR is expected to increase by at least 100% year-over-year. Taking into consideration the expected growth in recurring revenue, partially offset by anticipated reductions in perpetual software licenses, hardware and other revenue and consulting services revenue, we expect that total revenue will grow at a low-single-digit percentage rate in 2021 as compared to 2020.
Revenues from perpetual software licenses, hardware and other were flat in the first quarter of 2021, including a 2% positive impact from foreign currency fluctuations, as customers continue to transition to subscription-based offerings. Perpetual revenue performed better than we anticipated due primarily to deal-mix in the EMEA region and third-party software products.
Consulting services revenue decreased 4% in the first quarter of 2021, including a 4% positive impact from foreign currency fluctuations, as we are realigning and focusing our consulting resources on higher-margin engagements, both direct engagement with customers and joint engagement with partners that drive increased software consumption within our targeted customer base. Consulting revenue was also impacted by the transition to work from home and shelter-in-place orders that went in effect late in the first quarter of 2020 in response to COVID-19 as well as delays and/or cancellations of consulting projects due to customers’ reduced spending in light of COVID-19. Consulting services revenue performed better than we anticipated primarily due to higher-value engagements globally.
As a portion of the Company’s operations and revenue occur outside the United States, and in currencies other than the U.S. dollar, the Company is exposed to fluctuations in foreign currency exchange rates. Based on currency rates as of April 30, 2021, Teradata is expecting approximately two percentage points of positive impact from currency translation on our 2021 full-year total revenues.
Gross Profit
| % of | % of | ||||||||||||||||||||||
| In millions | 2021 | Revenue | 2020 | Revenue | |||||||||||||||||||
| Recurring | $ | 282 | 75.8 | % | $ | 218 | 70.1 | % | |||||||||||||||
| Perpetual software licenses, hardware and other | 12 | 52.2 | % | 8 | 34.8 | % | |||||||||||||||||
| Consulting services | 13 | 13.5 | % | (1) | (1.0) | % | |||||||||||||||||
| Total gross profit | $ | 307 | 62.5 | % | $ | 225 | 51.8 | % | |||||||||||||||
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The increase in recurring revenue gross profit as a percentage of revenue was primarily driven by a higher amount of recurring revenue at an improved gross margin rate driven by improved operating efficiencies of our subscription and cloud-based offerings. Annual revenue recognition of a few significant customer transactions, discussed above, also had a positive impact on recurring revenue gross margin.
The increase in perpetual software licenses, hardware and other gross profit as a percentage of revenue was primarily driven by deal mix compared to prior year.
Consulting services gross profit as a percentage of revenue increased as compared to the prior year primarily due to improved resource mix utilization as well as increased revenue realization and our continued strategic focus to improve consulting margins due to focus on higher-value projects. The Company continues to refocus our consulting organization on Vantage-oriented offerings and reduce our footprint in non-core consulting engagements.
Operating Expenses
| % of | % of | ||||||||||||||||||||||
| In millions | 2021 | Revenue | 2020 | Revenue | |||||||||||||||||||
| Selling, general and administrative expenses | $ | 149 | 30.3 | % | $ | 158 | 36.4 | % | |||||||||||||||
| Research and development expenses | 77 | 15.8 | % | 73 | 16.7 | % | |||||||||||||||||
| Total operating expenses | $ | 226 | 46.0 | % | $ | 231 | 53.2 | % | |||||||||||||||
The selling, general and administrative ("SG&A") expense decrease was primarily driven by lower employee cost base resulting from the workforce reduction measures in 2020, lower travel and marketing spend as compared to the prior year pre-pandemic period and improved operational execution compared to prior year.
Research and development ("R&D") expenses increased primarily due to spending focused on accelerating our cloud initiatives as well as higher variable incentive compensation expense.
Other Expense, net
| In millions | 2021 | 2020 | |||||||||
| Interest income | $ | 1 | $ | 2 | |||||||
| Interest expense | (7) | (7) | |||||||||
| Other | (3) | (3) | |||||||||
| Other expense, net | $ | (9) | $ | (8) | |||||||
Other expense, net in the first quarter of 2021 and 2020 is comprised primarily of interest expense on long-term debt and finance leases, partially offset by interest income earned on our cash and cash equivalents. Other expense, net increased compared to the prior year primarily due to lower interest income generated on investments.
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 Company expects that a majority of its foreign earnings will be repatriated to the U.S. The effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix between the U.S. and other foreign taxing jurisdictions where the Company conducts its business. The Company estimates its full-year effective tax rate for 2021 will be approximately 30%, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction and the estimated discrete items to be recognized in 2021. 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 U.S. federal statutory tax rate of 21%.
The effective tax rate for the three months ended March 31, 2021 and 2020 were as follows:
| 2021 | 2020 | ||||||||||
| Effective tax rate | 26.4 | % | 1,300.0 | % | |||||||
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For the three months ended March 31, 2021, the Company recorded $3 million of discrete tax benefit, a majority of which related to the excess tax benefits derived from equity compensation vesting.
For the three months ended March 31, 2020, the Company recorded a net $152 million discrete tax benefit. The Company recorded approximately $157 million of discrete tax benefit related to an intra-entity asset transfer of certain of its intellectual property ("IP") to one of its Irish subsidiaries, which occurred on January 1, 2020. The tax benefit for this intra-entity asset transfer was recorded as a deferred tax asset and represents the book and tax basis difference on the transferred assets measured based on the applicable Irish statutory tax rate. The tax deductions for amortization of the IP asset will be recognized in the future, and any amortization not deducted for tax purposes will be carried forward indefinitely under Irish tax laws. The Company expects to be able to realize the deferred tax assets resulting from these intra-entity asset transfers. This tax benefit was offset by discrete tax expense of $6 million related to equity compensation vesting. As a result of these discrete items, the Company recorded $182 million of income tax benefit on a on a pre-tax net loss of $14 million for the three months ended March 31, 2020, resulting in an effective income tax rate of 1,300.0%.
Revenue and Gross Profit by Operating Segment
Teradata manages its business under three geographic regions, which are also the Company’s operating segments: (1) Americas region (North America and Latin America); (2) EMEA region (Europe, Middle East, and Africa) and (3) APJ region (Asia Pacific and Japan). For purposes of discussing results by segment, management excludes the impact of certain items, consistent with the manner by which management evaluates the performance of each segment. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess financial performance. The chief operating decision maker, who is our President and Chief Executive Officer, evaluates the performance of the segments based on revenue and multiple profit measures, including segment gross profit. For management reporting purposes, assets are not allocated to the segments. Our segment results are reconciled to total company results reported under GAAP in Note 12 of Notes to Condensed Consolidated Financial Statements (Unaudited).
The following table presents segment revenue and segment gross profit for the Company for the three months ended March 31:
| % of | % of | ||||||||||||||||||||||
| In millions | 2021 | Revenue | 2020 | Revenue | |||||||||||||||||||
| Segment revenue | |||||||||||||||||||||||
| Americas | $ | 263 | 53.6 | % | $ | 244 | 56.2 | % | |||||||||||||||
| EMEA | 147 | 29.9 | % | 118 | 27.2 | % | |||||||||||||||||
| APJ | 81 | 16.5 | % | 72 | 16.6 | % | |||||||||||||||||
| Total segment revenue | $ | 491 | 100 | % | $ | 434 | 100 | % | |||||||||||||||
| Segment gross profit | |||||||||||||||||||||||
| Americas | $ | 182 | 69.2 | % | $ | 144 | 59.0 | % | |||||||||||||||
| EMEA | 88 | 59.9 | % | 61 | 51.7 | % | |||||||||||||||||
| APJ | 45 | 55.6 | % | 30 | 41.7 | % | |||||||||||||||||
| Total segment gross profit | $ | 315 | 64.2 | % | $ | 235 | 54.1 | % | |||||||||||||||
Americas
Americas revenue increased 8% as compared to the prior year. Recurring revenue was up 11% and perpetual and other revenue was flat. Consulting revenue decreased 7% as compared to the prior year. Segment gross profit as a percentage of revenues was higher primarily due to an overall higher mix of recurring revenue.
EMEA
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EMEA revenue increased 25%, which included a 8% favorable impact from foreign currency fluctuations. The overall increase in revenue included an increase of 38% in recurring revenue, flat perpetual and other revenue as well as an increase in consulting revenue of 3%. Segment gross profit as a percentage of revenues was higher primarily due to a higher mix of recurring revenue.
APJ
APJ revenue increased 13%, which included a 9% favorable impact from foreign currency fluctuations. An increase in recurring revenue of 26% and flat perpetual and other revenue was partially offset by a decrease in consulting revenue of 7%. Segment gross profit as a percentage of revenues was higher primarily due to a higher mix of recurring revenue.
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Financial Condition, Liquidity and Capital Resources
Cash provided by operating activities was $110 million, which increased by $100 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Teradata used approximately $19 million of cash in the first three months of 2021 for reorganizing and restructuring its operations and go-to-market functions to align to its strategy, as compared to $12 million in the first three months of 2020. The increase in cash provided by operating activities was primarily due to improved management of working capital.
Teradata’s management uses a non-GAAP measure called "free cash flow," which is not a measure defined under GAAP. We use free cash flow (which we define as net cash provided by operating activities less investing activities related to 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 definitions 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 repurchases of Teradata common stock. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.
The table below shows net cash provided by operating activities and net cash used in investing activities related to capital expenditures, along with free cash flow, for the following periods:
| Three Months Ended March 31, 2021 | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Net cash provided by operating activities | $ | 110 | $ | 10 | |||||||
| Less: | |||||||||||
| Expenditures for property and equipment | (4) | (10) | |||||||||
| Additions to capitalized software | (1) | (2) | |||||||||
| Free cash flow | $ | 105 | $ | (2) | |||||||
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 three months ended March 31, 2021 and 2020.
Teradata’s financing activities for the three months ended March 31, 2021 and 2020 primarily consisted of cash outflows for share repurchases and payments on the Company's finance leases and long-term debt. At March 31, 2021, the Company had no outstanding borrowings on its $400 million revolving credit facility entered into in June 2018 (the "Credit Facility"). The Company repurchased approximately 2.6 million shares of its common stock at an average price per share of $32.94 in the three months ended March 31, 2021, and 3.6 million shares at an average price per share of $20.52 in the three months ended March 31, 2020 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. On July 28, 2019, Teradata's Board of Directors authorized an additional $500 million to be utilized to repurchase Teradata common stock under the Company's second share repurchase program (the "general share repurchase program"). As of March 31, 2021, the Company had $352 million of authorization remaining under this program 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 $13 million for the three months ended March 31, 2021 and immaterial for the three months ended March 31, 2020. These proceeds are included in other financing activities, net in the Condensed Consolidated Statements of Cash Flows (Unaudited).
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Our total cash and cash equivalents held outside the United States in various foreign subsidiaries was $404 million as of March 31, 2021 and $342 million as of December 31, 2020. The remaining balance held in the United States was $138 million as of March 31, 2021 and $191 million as of December 31, 2020. The Company considers a majority of its foreign earnings will be repatriated to the United States. Effective January 1, 2018, the United States moved to a territorial system of international taxation, and as such will generally not subject future foreign earnings to United States taxation upon repatriation in future years.
Management believes current cash, cash generated from operations and the $400 million available under the Credit Facility will be sufficient to satisfy future working capital, research and development activities, capital expenditures, pension contributions, and other financing requirements for at least the next twelve months. The Company principally holds its cash and cash equivalents in bank deposits and highly-rated money market funds.
The Company’s ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in the 2020 Annual Report and elsewhere in this Quarterly Report on Form 10-Q. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of the Credit Facility or its term loan agreement, the Company may be required to seek additional financing alternatives.
Long-term Debt. There has been no significant change in our long-term debt as described in the 2020 Annual Report. Our long-term debt is discussed in Note 10 of Notes to Condensed Consolidated Financial Statements (Unaudited).
Contractual and Other Commercial Commitments. There has been no significant change in our contractual and other commercial commitments as described in the 2020 Annual Report. Our commitments and contingencies are discussed in Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited).
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting policies are those that require assumptions to be made about matters that are highly uncertain. Different estimates could have a material impact on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Our management periodically reviews these estimates and assumptions to ensure that our financial statements are presented fairly and are materially correct. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us as of March 31, 2021 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, stock-based compensation, the carrying value of our goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition.
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 2020 Annual Report. Teradata’s senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the three months ended March 31, 2021.
New Accounting Pronouncements
See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for new accounting pronouncements.
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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 2020 Annual Report.
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, as amended (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 March 31, 2021, 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.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material adverse impact to our internal controls over financial reporting as a result of most of our employees working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
Part II—OTHER INFORMATION
Item 1. Legal Proceedings.
The information required to be set forth under this Item 1 is incorporated by reference to Note 8, Commitments and Contingencies—Legal Proceedings of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.
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 2020 Annual Report, except as follows:
As stated in our recent Company's Annual Report filing under the Risk Factor "A change in our effective tax rate can have a significant adverse impact on our business," tax rules may change in a manner that adversely affects our future reported results of operations or the way we conduct our business. The Biden administration and the Democratic controlled Congress has recently issued proposals to increase the U.S. corporate income tax rate to 28% from 21%, increase the U.S. taxation of our international business operations and impose a global minimum tax. Such proposed changes, if enacted, as well as regulations and legal decisions interpreting and applying these changes, may have significant impacts on our effective tax rate, cash tax expenses and net deferred tax assets in future periods.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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Purchases of Company Common Stock
From time to time, the Company's Section 16 officers sell to the Company shares of the Company's common stock received upon vesting of restricted share units at the current market price to cover their withholding tax obligations. For the three months ended March 31, 2021, the total of these purchases was 220,314 shares at an average price of $35.75 per share.
The following table provides information relating to the Company’s share repurchase programs for the three months ended March 31, 2021:
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Dilution Offset Program (1) | Total Number of Shares Purchased as Part of Publicly Announced General Share Repurchase Program (2) | Maximum Dollar Value that May Yet Be Purchased Under the Dilution Offset Program | Maximum Dollar Value that May Yet Be Purchased Under the General Share Repurchase Program | |||||||||||||||||||||||||||||||||
| Month | ||||||||||||||||||||||||||||||||||||||
| January 2021 | 1,131,893 | $ | 25.18 | 54,817 | 1,077,076 | $ | 799,586 | $ | 389,254,180 | |||||||||||||||||||||||||||||
| February 2021 | 318,878 | $ | 31.49 | 100,000 | 218,878 | $ | 15,944,217 | $ | 383,254,259 | |||||||||||||||||||||||||||||
| March 2021 | 1,137,133 | $ | 41.08 | 377,814 | 759,319 | $ | 3,379,199 | $ | 351,832,159 | |||||||||||||||||||||||||||||
| First Quarter Total | 2,587,904 | $ | 32.94 | 532,631 | 2,055,273 | $ | 3,379,199 | $ | 351,832,159 | |||||||||||||||||||||||||||||
(1) 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 purchases under the ESPP to offset dilution from shares issued pursuant to these plans.
(2) The general share repurchase program authorized by the Board allows the Company to repurchase outstanding shares of Teradata common stock. Share repurchases made by the Company are reported on a trade date basis. On July 28, 2019, Teradata's Board of Directors authorized an additional $500 million to be utilized to repurchase Teradata common stock under this share repurchase program. The general share repurchase program expires on July 27, 2022.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
None
Item 5. Other Information.
2021 Annual Meeting of Stockholders
On May 4, 2021, the Company held its 2021 Annual Meeting of Stockholders (the "Annual Meeting"). At the Annual Meeting, the holders of a total of 97,333,605 shares of the Company’s common stock entitled to vote were present in person or represented by proxy, constituting approximately 89% of the total shares issued and outstanding and entitled to vote at the Annual Meeting. Stockholders voted on five matters:
1.a proposal to elect (i) Lisa R. Bacus, Timothy C.K. Chou, and John G. Schwarz as Class II directors and (ii) Stephen McMillan as a Class I director;
2.an advisory (non-binding) vote on executive compensation (a "say-on-pay" vote);
3.a proposal to approve the amended and restated Teradata 2012 Stock Incentive Plan (the "Amended Stock Plan");
4.a proposal to approve the amended and restated Teradata Employee Stock Purchase Plan (the "Amended ESPP"); and
5.a proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2021.
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The number of votes cast for or against, the number of abstentions, and the number of broker non-votes with respect to each matter required to be reported herein was certified by an independent inspector of elections, and are set forth below:
1.Election of (i) Ms. Bacus and Messrs. Chou and Schwarz as Class II directors for three-year terms expiring at the Company’s 2024 annual meeting of stockholders and to hold office until their respective successors are duly elected and qualified and (ii) Mr. McMillan as a Class I director for a two-year term expiring at the Company’s 2023 annual meeting of stockholders and to hold office until his successor is duly elected and qualified.
a.Lisa R. Bacus (Class II)
For: 84,849,218 Against: 1,789,426 Abstain: 123,990 Broker Non-Votes: 10,570,971
b.Timothy C.K. Chou (Class II)
For: 85,273,229 Against: 1,352,006 Abstain: 137,399 Broker Non-Votes: 10,570,971
c.John G. Schwarz (Class II)
For: 82,572,822 Against: 4,061,257 Abstain: 128,555 Broker Non-Votes: 10,570,971
d.Stephen McMillan (Class I)
For: 86,426,443 Against: 219,199 Abstain: 116,992 Broker Non-Votes: 10,570,971
2.An advisory (non-binding) vote on executive compensation (“say-on-pay”).
For: 80,231,717 Against: 6,347,997 Abstain: 182,920 Broker Non-Votes: 10,570,971
3.The approval of the Amended Stock Plan.
For: 77,692,241 Against: 8,921,735 Abstain: 148,658 Broker Non-Votes: 10,570,971
4.The approval of the Amended ESPP.
For: 86,331,120 Against: 359,035 Abstain: 72,479 Broker Non-Votes: 10,570,971
5.Ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2021.
For: 96,681,092 Against: 486,801 Abstain: 165,712
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Item 6. Exhibits.
| Reference Number per Item 601 of Regulation S-K | Description | |||||||
| 101 | Inline interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of Income for the three months period ended March 31, 2021 and 2020, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three months period ended March 31, 2021 and 2020, (iii) the Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020, (iv) the Condensed Consolidated Statements of Cash Flows for the three months period ended March 31, 2021 and 2020, (v) the Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months period ended March 31, 2021 and 2020 and (vi) the Notes to Condensed Consolidated Financial Statements. | |||||||
| 104 | Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
* Management contract or compensatory plan, contract or arrangement.
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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: May 7, 2021 | By: | /s/ Mark A. Culhane | ||||||||||||
| Mark A. Culhane Chief Financial Officer | ||||||||||||||
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