Teradata Corp: Form 10-Q for the period ended Jun 30, 2024

You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements (Unaudited) 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, 2023 (the "2023 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

At Teradata Corporation ("we," "us," "Teradata," or the "Company"), we believe that people thrive when empowered with trusted information. We are focused on helping organizations improve business performance, enrich customer experiences, and integrate data across the enterprise. As such, we strive to innovate and deliver trusted solutions for their toughest data and analytics challenges. That is why we built our comprehensive open and connected cloud analytics and data platform for artificial intelligence ("AI"). With our Teradata Vantage platform, underpinned by our extensive patented workload management optimization, we are well positioned to help enterprises solve business problems and deliver business breakthroughs with its capabilities to provide harmonized data, trusted AI, and faster innovation. As a result, we believe that we empower our customers - and our customers' customers - to make better, more confident decisions, engage in faster innovation, and drive positive impact within the enterprise.

Teradata is recognized by industry analysts as offering a cloud analytics and data platform with next-generation, cloud-native deployment and expansive analytics capabilities. We believe we are differentiated by providing our analytics and data platform offering across a secure, multi-cloud ecosystem. Our differentiated approach spans deployments in the top Public Cloud service provider platforms of AWS, Microsoft Azure, and Google Cloud, as well as private cloud platform instances, on-premises, and hybrid environments.

We are continuing to execute on our key priorities, including supporting our on-premises customers, migrating customers to the cloud, upgrading customers from VantageCloud Enterprise to VantageCloud Lake, expanding our Teradata Vantage analytics and data platform product offering (which includes VantageCloud Enterprise, VantageCloud Lake, and ClearScape Analytics), adding new customers and expanding our footprint with existing customers, informing our customers of our AI capabilities, increasing our focus on diversity and inclusiveness, and driving operational excellence and agility across the Company.

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 value at a point in time of recurring contracts.
• Total Annual Recurring Revenue ("Total ARR") - annual value at a point in time of all recurring contracts, including subscription, cloud, software upgrade rights, and maintenance. Total ARR does not include managed services and third-party software.
• Public Cloud ARR (included within Total ARR) - annual value at a point in time of all contracts related to Public Cloud implementations of Teradata VantageCloud and does not include ARR related to private or managed cloud implementations.
• Cloud Net Expansion Rate - Teradata calculates its last-twelve months dollar-based cloud net expansion rate as of a fiscal quarter end as follows:
• We identify the ARR for active cloud customers in the fiscal quarter ending one year prior to the given fiscal quarter (the "base period");
• We then identify the Public Cloud ARR in the given fiscal quarter (the "current period") from the same set of active cloud customers as the base period, including increases in usage, as well as reductions and cancellations, and additional conversions of on-premises revenues to the cloud for customers active in the base period, all in constant currency; and
• The quarterly dollar-based, Cloud Net Expansion Rate is calculated by taking the ARR from the current period and dividing by the ARR from the base period.

The last twelve-month dollar-based cloud net expansion rate is calculated by taking the average of the quarterly dollar-based cloud net expansion rate from the last fiscal quarter and the prior three fiscal quarters.

Second Quarter Financial Overview

As more fully discussed in later sections of this MD&A, the following were what we view as the more significant financial items for the second quarter of 2024:

• At the end of the second quarter of 2024, ARR was $1.465 billion compared to $1.523 billion in the second quarter of 2023, decreasing 4% as compared to the second quarter of 2023, including a 1% negative impact from foreign currency translation.
• At the end of the second quarter of 2024, Public Cloud ARR was $542 million compared to $414 million in the second quarter of 2023, increasing 31% as compared to the second quarter of 2023, including a 1% negative impact from foreign currency fluctuations.
• Total revenue was $436 million for the second quarter of 2024, a 6% decrease compared to the second quarter of 2023, with recurring revenue down 1%. Perpetual software licenses, hardware and other revenue decreased 62%, and consulting services revenue decreased 19%. Foreign currency fluctuations had a 3% adverse impact on total revenue for the quarter compared to the prior year.
• Gross margin increased to 60.8% in the second quarter of 2024 from 59.7% in the second quarter of 2023, primarily due to improved Public Cloud margin rates and lower overall perpetual and consulting services revenue compared to the prior year.
• Operating expenses for the second quarter of 2024 decreased 18% compared to the second quarter of 2023, primarily due to lower expenses and stock-based compensation expense in the second quarter of 2024.
• Operating income was $66 million in the second quarter of 2024, compared to $33 million in the second quarter of 2023.
• Net income in the second quarter of 2024 was $37 million, compared to $17 million in the second quarter of 2023.
• Cloud Net Expansion Rate for the second quarter of 2024 was 123%, compared to 121% for the second quarter of 2023.

Results of Operations for the Three Months Ended June 30, 2024

Compared to the Three Months Ended June 30, 2023

Revenue

In millions

Total revenue decreased $26 million, or 6%, in the second quarter of 2024, including a 3% negative impact from foreign currency fluctuations. Recurring revenue was down 1% as compared to the second quarter of 2023 and included a 3% negative impact from foreign currency fluctuations. Recurring revenue for the second quarter of 2024 included strong growth from Public Cloud revenue and a slight positive impact from annual upfront software subscription revenue associated with on-premises subscription software, partially offset by anticipated on-premises erosions and 3% of negative impact from foreign currency fluctuations. Revenues from perpetual software licenses, hardware and other decreased 62%, or $8 million in the second quarter of 2024, primarily due to the timing of deals and a low overall volume from this revenue category, as aligned with our strategic shift towards recurring revenue. Consulting services revenue decreased 19% in the second quarter of 2024, including a 4% negative impact from foreign currency fluctuations.

Financial and Performance Measures

Our Total ARR is composed of three main categories: (1) Public Cloud ARR, (2) ARR related to on-premises subscription-based contracts and private cloud ("Subscription ARR"), and (3) ARR related to our legacy perpetual maintenance and software upgrade rights. At June 30, 2024 and 2023 our Total ARR consisted of:

In millions

At the end of the second quarter of 2024, Total ARR decreased 4% as compared to the second quarter of 2023, including a 1% negative impact from foreign currency fluctuations. At the end of the second quarter of 2024, Public Cloud ARR increased 31% as compared to the second quarter of 2023, including a 1% negative impact from foreign currency fluctuations. Public Cloud ARR growth in the second quarter of 2024 was driven by greater market awareness and customer demand of Teradata VantageCloud, our Public Cloud offering. The decreases in subscription ARR and maintenance and software upgrade rights ARR were driven by customer migrations to Public Cloud ARR, on-premises erosions, elongated deal closing cycles and lower on-premises expansion activity.

In the second quarter of 2024, we experienced the following trends as compared to the second quarter of 2023:

• Customers expanding into additional cloud capabilities as they see value when they migrate to VantageCloud as compared to the capabilities they had in an on-premises environment.
• Elongated deal closing cycles that have resulted in anticipated deal closings moving to future quarters.
• On-premises expansion activity being pushed out to future quarters.
• Uncertain industry macro-economic environment resulting in delayed customer spending.

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 June 30, 2024, Teradata is now estimating a 1.75%-to-2.25% negative impact from currency translation on our 2024 full-year total reported revenues.

We expect to see elongated deal closing cycles to continue and are now expecting on-premises expansion activity to be pushed out to future quarters, each negatively impacting Total ARR growth in 2024. We expect expansion and migration activity as the primary contributors for Public Cloud ARR growth in 2024.

Gross Profit

In millions

The decrease in recurring revenue gross profit as a percentage of revenue was primarily due to a higher mix of Public Cloud revenues versus on-premises revenue as compared to the prior-year period, offset in part by continued improvement in our Public Cloud margin rate.

The decrease in perpetual software licenses, hardware and other gross profit as a percentage of revenue was primarily driven by deal mix and the timing of revenue.

Consulting services gross profit as a percentage of revenue decreased as compared to the prior year primarily due to the decrease in revenue as compared to the prior-year period.

Operating Expenses

In millions

Selling, general and administrative ("SG&A") expense decreased year over year due to continued cost discipline focused on cost reductions across the Company, as well as lower variable incentive compensation and stock-based compensation expense. Research and development ("R&D") expense decreased year over year also due to continued cost discipline efforts.

Other Expense, net

In millions

Other expense, net in the second quarter of 2024 and 2023 is comprised primarily of interest expense on long-term debt and finance leases, losses resulting from foreign currency transactions, as well as benefit costs on our pension and postemployment plans, partially offset by interest income earned on our cash and cash equivalents. Other expense is lower in 2024 primarily due to decreased foreign currency losses of $5 million as compared to the prior period. Interest income is lower primarily due to a lower overall cash balance.

As disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements (Unaudited), during the second quarter of 2024, we entered into a Blue Chip Swap transaction in order to remit cash from our Argentine operations that resulted in a pre-tax loss on investment of $1 million, that is reported in "Other" expense.

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 effective tax rates for the three months ended June 30, 2024 and 2023 were as follows:

For the three months ended June 30, 2024, the Company recorded $1 million of net discrete tax expense, a majority of which related to tax expense from stock-based compensation vesting.

For the three months ended June 30, 2023, the Company had no material discrete tax adjustments.

Effective January 1, 2024, many jurisdictions where we conduct business, including several European Union members and G20 countries, have enacted a 15% global minimum tax on the income generated in each of the jurisdictions in which we operate, referred to as "Pillar Two" of the Global Anti-Base Erosion rules framework that was undertaken by the Organization for Economic Co-operation and Development ("OECD"). We are continuing to monitor developments and evaluate the impacts of the Pillar Two rules; we do not expect the Pillar Two rules to have a material impact to our annual effective tax rate.

Effective on January 1, 2022, the U.S. tax law changed to require that R&D expenses be capitalized and amortized for tax purposes under Internal Revenue Code Section 174. This requirement has an impact on global intangible low-taxed income ("GILTI") tax. We are currently forecasting approximately $3 million of tax expense related to GILTI in our marginal effective tax rate for 2024.

We expect that a majority of our foreign earnings will be repatriated to the U.S. As a result, 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 we conduct our business.

We estimate that the full-year effective tax rate for 2024 will be approximately 33%, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction, the estimated impact to GILTI tax (including the requirement to capitalize R&D for tax purposes), and the estimated discrete items to be recognized in 2024. The forecasted tax rate is based on the foreign profits being taxed at an overall effective tax rate of approximately 23%, as compared to the U.S. federal statutory tax rate of 21%.

Revenue and Gross Profit by Operating Segment

Teradata manages its business under three geographic regions, which are also our 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 our management to make decisions regarding the segments and to assess financial performance. The chief operating decision maker ("CODM"), 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).

As a result of recent changes to the go-to-market organization that will be implemented in the third quarter of 2024, the Company is assessing the potential impact to the presentation of our current operating segments, including what discrete financial information will be shared with and reviewed by the CODM to evaluate performance in the future.

The following table presents segment revenue and segment gross profit for the Company for the three months ended June 30:

In millions

Americas

Americas revenue decreased 7% as compared to the prior year, including a 3% adverse impact from foreign currency fluctuations. The decrease in revenues was due to a decrease in recurring revenue of 3%, and a consulting revenue decrease of 26% ($9 million), as compared to the prior year. Segment gross profit as a percentage of revenues increased with the benefit of improved Public Cloud margins as compared to the prior-year period and a lower mix of consulting services revenue.

EMEA

EMEA revenue decreased 2%, including a 4% adverse impact from foreign currency fluctuations. Total EMEA revenue included an increase of 4% in recurring revenue, off-set by a decrease of 80% ($4 million) in perpetual software licenses, hardware and other revenue. Consulting revenue decreased by 8% ($2 million) year over year. Segment gross profit as a percentage of revenues was down slightly compared to the prior-year period as the mix impact of a greater proportion of Public Cloud revenues were partially offset by improved Public Cloud margin rates as compared to the prior-year period.

APJ

APJ revenue decreased 8%, including a 4% adverse impact from foreign currency fluctuations. Recurring revenue increased by 2% ($1 million), and consulting revenue decreased by 21% ($4 million). Perpetual software licenses, hardware and other revenue was down 60% ($3 million). Segment gross profit as a percentage of revenues was higher primarily due to an overall higher mix of recurring revenue compared to the prior-year period.

Results of Operations for the Six Months Ended June 30, 2024

Compared to the Six Months Ended June 30, 2023

Revenue

In millions

Total revenue decreased $37 million, or 4%, in the first six months of 2024, and included a 2% adverse impact from foreign currency fluctuations. Recurring revenue decreased 1%, including 2% of negative impact from foreign currency fluctuations. Within recurring revenue, Public Cloud revenue increased primarily due to expansions and migrations.

Revenues from perpetual software licenses, hardware and other were down 50% in the first six months of 2024, including 1% of adverse impact from foreign currency fluctuations, as customers continue to transition to subscription-based offerings, consistent with our overall strategy.

Consulting services revenue decreased 13% in the first six months of 2024, including a 4% negative impact from foreign currency fluctuations. The decrease is aligned with our overall strategy as our consulting business is focusing on higher-margin engagements. Consulting services revenue was also negatively impacted by ceasing our direct operations in China.

Gross Profit

In millions

Recurring revenue gross profit as a percentage of revenue was down from the prior year, as the impact of a larger percentage of Public Cloud revenue was partially offset by improvements in that Public Cloud margin rate.

The decrease in perpetual software licenses, hardware and other gross profit as a percentage of revenue was primarily driven by deal mix and overall lower revenue volume as compared to the prior year.

Consulting services gross profit as a percentage of revenue decreased as compared to the prior year primarily due to the decrease in revenue versus the prior-year period, which was partially offset through capacity management. We continue to refocus our consulting organization on Vantage-oriented offerings and reduce our footprint in non-core consulting engagements.

Operating Expenses

In millions

SG&A expenses decreased 9% for the first six months of 2024 as compared to the prior year, primarily due to continued cost discipline focused on cost reductions across the Company.

R&D expenses decreased for the first six months of 2024 as compared to prior year, due to continued cost discipline and lower outside services costs.

Other Expense, net

In millions

Other expense, net for the six months of 2024 and 2023 is comprised primarily of interest expense on long-term debt and finance leases, losses resulting from foreign currency transactions, and benefit costs associated with our pension and postemployment plans, partially offset by interest income earned on our cash and cash equivalents. Other expense is lower in the first six months of 2024 as compared to the first six months of 2023 primarily due to $14 million lower costs resulting from foreign currency transactions compared to the prior period. Interest income is lower primarily due to a lower overall cash balance.

As disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements (Unaudited), during the six months ended June 30, 2024, we entered into Blue Chip Swap transactions in order to remit cash from our Argentine operations that resulted in a pre-tax loss on investment of $3 million that is reported in "Other" expense.

Provision for Income Taxes

The effective tax rates for the six months ended June 30, 2024 and 2023 were as follows:

For the six months ended June 30, 2024, the Company recorded $2 million of net discrete tax expense, a majority of which related to tax expense from stock-based compensation vesting.

For the six months ended June 30, 2023, the Company recorded $2 million of net discrete tax benefits, a majority of which related to the excess tax benefit derived from stock-based compensation vesting.

Revenue and Gross Profit by Operating Segment

The following table presents segment revenue and segment gross profit for the Six Months Ended June 30,:

In millions

Americas

Americas revenue was down 6% as compared to the prior year, and included 2% of negative impact from foreign currency fluctuations. Recurring revenue was down 4%, while perpetual software licenses, hardware and other revenue decreased 13% ($1 million). Perpetual software licenses, hardware and other was down primarily due to the timing of transactions in the period, and the strategic shift towards recurring revenue. Consulting revenue decreased 18% ($12 million). Segment gross profit as a percentage of revenues was flat from the prior-year period with benefit from the gross profit associated with upfront revenue and improved Public Cloud margin rates compared to the prior period largely offset by a higher mix of Public Cloud revenue.

EMEA

EMEA revenue increased 3%, which included a 1% adverse impact from foreign currency fluctuations. The overall increase in revenue included an increase of 9% in recurring revenue, a 2% decrease in consulting revenue and a 75% ($9 million) decrease in perpetual software licenses, hardware and other revenue. Recurring revenue benefited from growth in Public Cloud revenues. Segment gross profit as a percentage of revenues was down slightly from the prior year, as the impact of a higher proportion of Public Cloud revenue was offset in part by improved Public Cloud margin rates.

APJ

APJ revenue decreased 7%, which included a 5% adverse impact from foreign currency fluctuations. The overall decrease in revenue included a decrease in consulting revenue of 18% ($7 million), and a decrease in perpetual software licenses, hardware and other revenue of 50% ($3 million). Recurring revenue was flat compared to the prior-year period. Segment gross profit as a percentage of revenues was negatively impacted by lower overall revenue and a higher proportion of Public Cloud revenue, offset in part by improved Public Cloud margin rates as compared to the prior year.

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities was $70 million, which decreased by $88 million in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease in cash provided by operating activities was primarily due to working capital dynamics including the impact of lower billings. Teradata used approximately $18 million of cash in the first six months of 2024 for reorganizing and transforming its operations and go-to-market functions to align to its strategy, as compared to $23 million in the first six months of 2023. Teradata expects that approximately $30 to $35 million in additional cash will be used in the last six months of 2024 in connection with the implementation of the Restructuring discussed in Note 13 of Notes to Condensed Consolidated Financial Statements (Unaudited).

Teradata’s management uses a financial 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:

In millions

Financing activities and certain other investing activities are not included in our calculation of free cash flow. As disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements (Unaudited), during the six months ended June 30, 2024, we entered into Blue Chip Swap transactions in order to remit cash from our Argentine operations that resulted in a pre-tax loss on investment of $3 million that is reported as an investing activity for cash flow purposes. There were no other material investing activities for the six months ended June 30, 2024 and 2023.

Teradata’s financing activities for the six months ended June 30, 2024 and 2023 primarily consisted of cash outflows for share repurchases and payments on our finance leases. At June 30, 2024, we had no outstanding borrowings on our $400 million Revolving Facility (as defined below).

We have two share repurchase programs that were authorized by our Board of Directors:

• The dilution offset share repurchase program allows us to repurchase Teradata common stock to the extent (i) cash is received from the exercise of stock options and (ii) employees' purchase Teradata stock pursuant to the Teradata Employee Stock Purchase Plan ("ESPP"). The purpose of the dilution offset share repurchase program is to offset dilution from shares issued pursuant to the exercise of stock options and shares purchased under the ESPP.
• Our open market share repurchase program provides for the repurchase of Teradata stock periodically on an ongoing basis in open market transactions, through 10b5-1 programs, through accelerated share repurchase programs, in privately negotiated transactions, or through the use of derivative instruments, in accordance with applicable securities rules regarding issuer repurchases. The open market share repurchase program will expire on December 31, 2025. On November 1, 2021, our Board of Directors authorized an additional $1 billion for share repurchases under the open market share repurchase program. There is a total authority of $392 million remaining under the open market share repurchase program as of June 30, 2024.

In the aggregate under the dilution offset share repurchase program and the open market share repurchase program, we repurchased approximately 4.4 million shares of common stock at an average price per share of $39.24 in the six months ended June 30, 2024.

Share repurchases 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.

Other financing activities, including net share settlement for the payroll tax liability of section 16 officers (as discussed in Item 2. Unregistered Sales of Equity Securities and Use of Proceeds), offset by proceeds from the ESPP and the exercise of stock options, net of tax was a net outflow of $6 million for the six months ended June 30, 2024 and a net outflow of $1 million (including fees from the credit facility agreement) for the six months ended June 30, 2023. The ESPP proceeds are included in other financing activities, net in the Condensed Consolidated Statements of Cash Flows (Unaudited).

Our total cash and cash equivalents held outside the United States in various foreign subsidiaries was $281 million as of June 30, 2024 and $428 million as of December 31, 2023. The remaining balance held in the United States ("U.S.") was $20 million as of June 30, 2024 and $58 million as of December 31, 2023. The Company expects that a majority of its foreign earnings will be repatriated to the U.S. Effective January 1, 2018, the U.S. moved to a territorial system of international taxation, and as such will generally 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.

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 2023 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. On June 28, 2022, we entered into a Credit Agreement that provides for (i) a five-year unsecured term loan in an aggregate principal amount of $500 million (the "Term Loan"), and (ii) a five-year unsecured revolving credit facility in an aggregate principal amount of up to $400 million, including a $50 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swingline loans (the "Revolving Facility" and, collectively with the Term Loan, the "Credit Facility"). The Credit Facility replaces our prior revolving credit agreement in the maximum principal of $400 million and our prior term loan agreement in the principal amount of $500 million, both of which were entered into in 2018 (the "Prior Agreements"). In connection with the execution of the Credit Facility, the $400 million term loan outstanding under the Prior Agreements was repaid in full. Our long-term debt is discussed in Note 10 of Notes to Condensed Consolidated Financial Statements (Unaudited). In addition, as disclosed in Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited), Teradata entered into an interest rate swap to hedge approximately 90% of the floating interest rate of the outstanding principal of the $500 million Term Loan and a cross currency swap to hedge a portion of Euro currency exposure of its net investment in certain foreign subsidiaries.

On September 21, 2023, the Credit Agreement was amended to establish key performance indicators with respect to certain environmental, social, and governance ("ESG") targets, pursuant to which certain positive or negative adjustments would be made to various fees and applicable margin based on Teradata’s performance against such ESG targets.

Contractual and Other Commercial Commitments. There has been no significant change in our contractual and other commercial commitments as described in the 2023 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 June 30, 2024 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 2023 Annual Report. Teradata’s senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the six months ended June 30, 2024.

New Accounting Pronouncements

See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for new accounting pronouncements.

There have not been any material changes to the market risk factors previously disclosed in Part II, Item 7A of the 2023 Annual Report.

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 June 30, 2024, 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

We are in the process of implementing a new global cloud enterprise resource planning ("ERP") system that is occurring in phases throughout 2024. The ERP system is designed to improve and modernize the efficiency of certain financial and related transaction processes, accurately maintain Teradata’s financial records, enhance operational functionality, and provide timely information to our management team related to the operation of the business. We expect that the new ERP system will enhance and modernize our overall system of internal controls over financial reporting through further automation and integration of business processes, although it is not being implemented in response to any identified deficiency in Teradata’s internal controls over financial reporting. As such, the implementation of our ERP system will likely affect the processes that constitute our internal control over financial reporting and will require testing for controls effectiveness as the implementation progresses. Based on the implementation status as of the filing of this Quarterly Report on Form 10-Q, we have concluded that the implementation of the ERP system thus far has not materially affected our internal control over financial reporting. However, as the next phases of the ERP system implementation are concluded, we will evaluate whether any process and/or controls changes in connection with the new ERP system necessitate changes in the design of and testing for effectiveness of internal controls over financial reporting.

Other than the ongoing ERP implementation, there have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have not been any material changes to the risk factors previously disclosed in Part I, Item IA of the 2023 Annual Report.