Item 1. BUSINESS
Overview. Teradata Corporation ("we," "us," "Teradata," or the "Company") is a leading hybrid cloud analytics software provider focused on helping companies leverage all of their data across an enterprise to uncover real-time intelligence, at scale. In doing so, we enable them to find answers to their toughest challenges.
Teradata has broadened its market opportunity by evolving from an enterprise database company to an enterprise analytics platform provider helping our customers integrate and simplify their analytics ecosystem, access and manage data, and use analytics to extract answers and derive business value from data. Our target market includes companies that we believe are the world's most demanding, large-scale users of data, have mission-critical, complex, and large-scale environments and require an integrated analytical solution that can accommodate massive scale and speed across secure, hybrid-cloud architectures. These companies face significant challenges, including siloed data and conflicting and duplicative solutions, that can result in considerable expense to maintain and to manage the complexity. They typically have invested heavily in technology, people, and infrastructure to support
analytics technology that is typically extremely complex and often does not allow their employees access to the data they need to be efficient at their jobs. In addition, these organizations are also generally experiencing a dramatic increase in data due to the digital transformation. Our view is that these factors are driving the need for these companies to integrate and simplify their analytical ecosystems while using data to find answers to their toughest business challenges. We are also focused on strategic "up-and-coming" companies that see analytics as a differentiating factor in their business models. As a result, we believe that the market for our solutions and services is large and growing.
Our solution, Teradata Vantage™, is our data warehouse and analytics platform that allows companies to leverage all of their data across an enterprise, whether on premises, in public or private clouds, or in a hybrid environment. It connects multiple sources of data for ecosystem simplification and delivers massive scale and integration. Vantage is an extremely scalable, secure, highly concurrent and resilient analytics platform that addresses the challenges faced by our target market of the largest companies by offering full integration of their datasets, tools, analytics languages, functions, and engines in one platform, enabling them to reduce complexity, risk, and costs. Vantage incorporates leading commercial and open source technologies including our market-leading integrated data warehouse engine and analytic engines. Vantage is available in public and private clouds, as well as on-premises, providing our customers with flexibility and choice to de-risk their investments. Teradata has also made it easier for customers to work with the Company and purchase Teradata's solutions via subscription-based transactions.
Our solutions are comprised of software, hardware, and related business consulting and support services. We work with our customers to enable them to optimize the value of their data and analytics to get answers to their toughest business challenges and drive business outcomes, which can include, among other things:
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Improving customer experience and profitability,
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Improving operational efficiency,
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Driving financial transformation with accurate and timely data,
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Creating a single integrated view of customers across digital and physical channels, and
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Creating more efficient utilization of assets through machine learning of sensor data.
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Our business consulting services include a broad range of offerings, including consulting to help organizations establish an analytic vision, identify and operationalize analytical opportunities, enable an analytical ecosystem architecture, and ensure their analytical infrastructure delivers value. We also offer support and maintenance services for our offerings.
Teradata operates from numerous locations within the United States with the primary locations being San Diego, California, and Atlanta, Georgia. In addition, we have sales, services, research and development, and administrative offices located in 41 countries.
For the calendar year ended December 31, 2019, we had total revenues of $1,899 million, of which approximately 56% was derived from the Americas region (North America and Latin America) and 44% from the international regions (Europe, Middle East, Africa, Asia Pacific and Japan). For financial information about our segments and geographic information, see "Note 14-Segment, Other Supplemental Information and Concentrations" in the Notes to Consolidated Financial Statements elsewhere in this Annual Report.
History. Teradata started in a garage in Brentwood, California, and was incorporated in 1979 as a Delaware corporation, driven by the need for robust computing power to harness the value of aggregated data. In 1984, Teradata established a massively parallel relational database management system that enabled companies to easily scale their data management needs using standard microprocessors, revolutionizing data analysis for customers. In 1991, Teradata was acquired and operated as a division of another company until it was spun off as an independent, publicly-traded company called Teradata Corporation (NYSE: TDC) on September 30, 2007.
Industry and Market Opportunity. Our view is that analytics is and will continue to be a management priority for leading companies. We also believe that companies have seen and are facing an ongoing, significant increase of data, and that the complexity, cost, and risk associated with managing large numbers of data silos has driven the need for companies to simplify and reduce such complexity. This is particularly true for our target market of very large companies, and we believe that these companies require tightly integrated solutions that can accommodate massive scale and speed.
We believe Teradata’s strategy positions us to address this large market opportunity within the multi-billion dollar and growing data management and analytics markets. We believe our hybrid cloud analytics software solution will lead to reduced risk and costs for these companies while enabling answers to many of their most difficult business challenges and driving business outcomes for them. We also believe these companies need help designing and implementing the right analytical ecosystem for their needs. We have tailored Teradata's offerings to meet the analytical needs of these large companies, to help them navigate the various alternatives for deployment across secure, hybrid-cloud architectures and provide flexibility and choice, which allows them to de-risk their investments.
Our Strategy. Teradata’s strategy is based on our mission of transforming how businesses work and people live through the power of data. Our strategy is to provide a differentiated set of data analytics offerings with our Vantage analytical platform to our target market. We believe that our unique portfolio of offerings helps our customers simplify their analytic ecosystems to reduce risk and costs and drive better answers for increased business value. Our Vantage platform allows companies to leverage all of their data, whether on premises, in public or private clouds, or in a hybrid environment, to help them rise above the complexity, cost, and inadequacy of today’s analytic landscape.
Our strategic objectives are to:
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Drive consumption of Vantage through new use cases and capabilities,
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Accelerate our transition to the cloud,
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Expand our go-to-market reach through focused vertical investments, deepening customer success programs and strengthening our partner relationships, and
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Deliver operational excellence through improved efficiency and execution across the organization.
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A foundational element of our strategy is Teradata’s hybrid cloud focus that brings together our offerings across cloud and on-premises deployments with flexible pricing and licensing models to de-risk customer purchase decisions.
Through Vantage, our customers can:
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"Analyze Anything" - enables analytic users throughout the organization to use their preferred analytic tools and engines across data sources, at scale.
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"Deploy Anywhere" - provides analytic processing in the cloud and on-premises, providing flexibility to change as business needs evolve.
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"Buy Any Way" - allows companies choice in how they want to consume our solutions through a variety of purchase options at different price points.
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"Move Anytime" - includes software license portability when purchased via subscription that provides the flexibility to run analytics and move the software as needed across deployment options, such as moving from on-premises to cloud, between clouds, or from cloud to on-premises.
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In support of our strategy, we continue to optimize our go-to-market and sales approach to improve effectiveness in demand creation and address new and expanded market opportunities. We plan to continue investing in partnerships to increase the number of solutions available on Teradata software, maximize customer value, and increase our market coverage. Our consulting expertise helps customers design and build optimized analytical ecosystems, which leads to reduced complexity, risk, and cost.
Customers. As described above, Teradata is focused on both business users and technology buyers at the world’s most demanding, large-scale users of data, as well as strategic "up-and-coming" companies that see analytics as a differentiating factor in their business models. Our primary focus is on increasing the consumption of Teradata's software within our target market, and in particular helping our existing customers exploit new uses of data and analytics.
Our solutions address a broad set of industries, including communications, financial services, government, healthcare, insurance, manufacturing, media and entertainment, oil and gas, retail, travel and transportation, and utilities. We believe that these industries provide a good fit for our analytic solutions and services because they tend to have the greatest analytic potential with large and growing data volumes, as well as expanding sources of data, complex data management requirements, or large and varied groups of users.
The extent to which any given customer contributes to our revenues has historically varied significantly from year to year and quarter to quarter. We have been highly successful in converting customers from perpetual to subscription-based purchasing options, which results in more ratable revenue recognition and we believe will increase the predictability of our revenue in the future. Due to the size and complexity of our sales transactions, the sales cycle is often long (typically more than a year).
Seasonality. Historically, our deal volume is seasonal, in line with customer spending patterns, with lower volume typically in the first quarter and higher volume generally in the fourth quarter of each calendar year. Such seasonality causes our working capital cash flow requirements to vary from quarter to quarter depending on the variability in the volume, timing, and mix of solution sales. As we are transitioning the business to subscription-based transactions, the business is becoming less seasonal as subscription renewals are more evenly distributed through the year, versus maintenance renewals which were typically all in the first quarter. This is impacting timing of cash collection and billings. However, typical of the enterprise software market, Teradata will continue to have significant seasonality that skews to the fourth quarter. Historically, cash provided by operating activities is higher in the first half of the year due to collections of the higher receivable balances at December 31 driven by the higher volumes in the fourth quarter and receipts from annual renewals of our maintenance support agreements. In addition, deal volume in the third month of each quarter has historically been significantly higher than in the first and second months. These factors, among others as more fully described in Item 1A, Risk Factors, elsewhere in this Annual Report, make forecasting more difficult and may adversely affect our ability to accurately predict financial results.
Backlog. Our backlog was approximately $2.7 billion at December 31, 2019, an increase from $2.5 billion on December 31, 2018. Approximately $1.4 billion of the backlog at December 31, 2019 is expected to be recognized as revenue in 2020. Backlog consists of firm contracts for work that has not yet been performed or goods that have not been delivered. Backlog includes $533 million at December 31, 2019 and $595 million at December 31, 2018 for backlog that had been invoiced, and therefore, was included in deferred revenue. Although we believe that the contract value included in backlog is firm, some contracts may provide that the Company is contractually obligated to perform but gives the customer the right to cancel for convenience by giving notice to Teradata. Customers typically do not cancel before the end of the contractual term and, historically, Teradata has not seen significant churn in its customer base.
Sales, Marketing and Partners
Sales and Marketing. We primarily sell and market our solutions and services through a direct sales force and have recently re-aligned our sales teams to best address the needs of our target market globally. We have greater than 80% of our employees in customer-facing and/or revenue-driving roles (including sales, marketing, consulting, customer service, and product engineering).
We support our sales force with marketing and training programs that are designed to:
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Grow awareness, highlighting our technology leadership, differentiation, and analytics expertise;
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Create demand for and adoption of our Vantage analytical platform;
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Educate and enable the sales force with the skills and knowledge to deliver our value proposition; and
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Provide a robust set of tools for use by our sales teams.
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Teradata focuses our brand messaging on the Company’s strength as a hybrid cloud analytics software provider. To support the Company’s growth objectives, we employ a broad range of marketing strategies, including programs to inform, educate and generate demand with customers and prospects, as well as keep our leading technology position at the forefront of the media, industry analysts, academics, and other influencers. These strategies include targeted account-based marketing, our global website, digital marketing, webinars, physical and virtual conferences and events, public and media relations, social media, and an extensive customer reference program.
Strategic Partnerships. We seek to leverage our sales and marketing reach by partnering with leading global and regional systems integrators, independent software vendors, open-source software distributors, consultants, and universities that we believe complement our differentiated offerings. Strategic partnerships are a key factor in our ability to leverage the value and expand the scope of our analytic offerings in the marketplace.
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Alliance Partners: Our partner program is focused on working collaboratively with independent software vendors in several areas, including tools, data and application integration solutions, data mining, analytics, business intelligence, and specific analytic and industry solutions. Our goal is to provide choices to our
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customers with partner offerings that are optimized and certified to work with Vantage to deliver end-to-end analytic and data solutions and to fit within the customer’s analytic environment.
Teradata has established partnerships with the top three global public cloud providers: Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform, so the Company can provide companies around the globe access to Teradata’s as-a-service capabilities in the public cloud.
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Systems Integrators: We also work with a range of systems integrators and consultants who engage in the design, implementation, and integration of analytic solutions and analytic applications for our joint customers. Our strategic partnerships with select global consulting and systems integration firms provide broad industry and technology expertise in the design of business solutions that leverage Teradata technology to enable enterprise analytics.
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In 2019, we announced a strategic partnership with Deutsche Telekom. The partnership will support the digital transformation goals of small and medium-sized businesses in Germany, giving them access to data analytics to provide the insights required for growth and innovation. This new partnership offers us market expansion opportunities with more businesses needing analytics solutions.
Competition. We compete in a large and growing data management and analytics market that is attractive to both current and new competitors. Participants in our general market include large traditional competitors such as IBM, Oracle, SAP, Amazon and Microsoft as well as new analytic services companies, cloud vendors, and open-source providers. We believe our focus on ecosystem simplification and on delivering answers and business outcomes enables us to successfully compete in our target market. We believe that our Vantage platform is highly differentiated, delivers massive scale and integration, and is uniquely positioned to provide significant business value to our customers. Coupled with our ability to deploy across cloud and on-premises, as well as offering flexibility and choice in purchasing and licensing provides our customers with the ability to de-risk their buying decisions. Our consulting capabilities deliver value to our customers, enabling the customers to be successful in their markets, while also identifying incremental use cases that increase customers' consumption of Teradata's software. We believe that our technology, purchasing flexibility, global sales and marketing reach, as well as our consulting, will collectively enable us to continue to compete successfully. For more information on competition, see Item 1A, Risk Factors, elsewhere in this Annual Report.
Key factors used to evaluate competitors in these markets include: data and analytics experience; business outcome delivery; hybrid cloud offerings and experience; customer references; technology leadership; product quality; performance, scalability, availability, and manageability; support and consulting services capabilities; management of technologies in a complex analytical ecosystem; industry knowledge; and total cost of ownership. We believe we have a competitive advantage in providing complete, integrated, and optimized analytic data platforms and analytic services that address customers’ business, technical, and architecture requirements. Our differentiation is especially strong in our target market of the world’s leading companies and their mission-critical, complex, large-scale environments and requirements.
Research and Development ("R&D"). We remain focused on designing and developing data and analytic technologies that anticipate our customers' evolving needs and deliver the answers that advance their businesses. As we seek improvements in our offerings and services, we consider our customers' current and future needs. We believe our extensive R&D workforce is one of our core strengths. Our R&D team is located in multiple locations around the world to take advantage of global engineering talent. We anticipate that we will continue to have significant R&D expenditures, which may include complementary strategic acquisitions, to help support the flow of innovative, high-quality cloud-based offerings with a superior user experience, as well as services, which are vital to our leading competitive position. For information regarding the accounting and costs included in R&D activities, see "Note 1-Description of Business, Basis of Presentation and Significant Accounting Policies" in the Notes to Consolidated Financial Statements elsewhere in this Annual Report.
Intellectual Property and Technology. The Company owns 638 patents in the United States and 11 patents in foreign countries. The foreign patents are generally counterparts of the Company’s United States patents. Many of the patents that we own are licensed to others, and we are licensed to use certain patents owned by others. While our portfolio of patents and patent applications in aggregate is of significant value to our Company, we do not believe that any individual patent is by itself of material importance to our business.
In addition, the Company owns copyrights and trade secrets in our vast code base which makes up all of the Teradata software offerings, including analytic data platforms and analytic applications. Teradata’s software offerings reflect the investment of hundreds of person-years of development work.
The source code versions of our offerings are protected as trade secrets and, in all major markets, as unpublished copyright works. We take great efforts to protect our rights in all software offerings and related intellectual property; however, there can be no assurance that these measures will be successful. The Company owns the Teradata® word and logo trademarks, which are registered in the United States and in many foreign countries, as well as other trade names, service marks, and trademarks.
Sources of Materials. Our hardware components are assembled and configured by Flex Ltd. ("Flex"). Our platform line is designed to leverage the components from manufacturers that we believe are industry leaders. Our data storage devices and memory components utilize industry-standard technologies but are selected and configured to work optimally with our software and hardware platform. Flex also procures a wide variety of components used in the assembly process on our behalf. Although many of these components are available from multiple sources, Teradata utilizes preferred supplier relationships to better ensure more consistent quality, cost and delivery. Typically, these preferred suppliers maintain alternative processes and/or facilities to ensure business continuity of supply. Given our strategy to outsource product assembly activities to Flex and to source certain components from single suppliers, a disruption in production at Flex or at a supplier, or a global shortage of components, could impact the timing or profitability of customer shipments. In addition, a significant change in the forecasts to any of these preferred suppliers could result in purchase obligations for components that may be in excess of demand.
Employees. As of December 31, 2019, we had 8,535 employees globally. We believe that our future success will depend, in part, on our ability to continue to attract, hire and retain skilled and experienced personnel.
Properties and Facilities. Our corporate headquarters are located in San Diego, California. As of December 31, 2019, we operated 101 facilities in 41 countries throughout the world. We own our San Diego complex, while all other facilities are leased.
Information About Our Executive Officers. The following table and biographies sets forth information as of February 28, 2020 regarding the individuals who are serving as our executive officers.
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Name
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Age
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Position(s)
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Victor Lund
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72
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Interim President and Chief Executive Officer
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Scott Brown
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54
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Chief Revenue Officer
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Mark Culhane
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60
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Chief Financial Officer
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Kathleen Cullen-Cote
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55
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Chief Human Resources Officer
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Martyn Etherington
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58
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Chief Marketing Officer
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Dan Harrington
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56
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Chief Services Officer
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Laura Nyquist
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66
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General Counsel
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Victor Lund. Victor Lund is the Company’s Interim President and Chief Executive Officer and has served in this role since November 2019. Mr. Lund served as Executive Chairman of the Company’s Board of Directors from January 2019 until February 2020. He previously served as the President and Chief Executive Officer of Teradata from May 2016 until January 2019. Mr. Lund has been a member of the Company’s Board of Directors since 2007 and served as chair of its Audit Committee from 2007 until May 2016. Previously, Mr. Lund was the non-executive chairman of the board of DemandTec, Inc., a publicly-held, on-demand applications company, from December 2006 until February 2012, and was a member of its board from 2005 to 2012. Prior to that, Mr. Lund was non-executive chairman of the board of Mariner Health Care, Inc., a long-term health care services company, from 2002 to 2004, and he was vice chairman of Albertson’s, Inc. from 1999 to 2002. Prior to that, he served as chairman of the board of American Stores Company from 1995 until 1999 and as its chief executive officer from 1992 until 1999. During his 22-year career with American Stores, Mr. Lund held executive positions of increasing responsibility leading to chairman and chief executive officer, including chief financial officer and executive vice president. He also serves as a director of Service Corporation International and has served on a number of publicly-traded company boards, including Del Monte Foods Company and Delta Airlines.
Scott Brown. Scott Brown is the Company’s Chief Revenue Officer and has served in this role since joining Teradata in June 2019. Prior to joining Teradata, Mr. Brown spent 22 years at Cisco Systems, a global leader in IT, networking, and cybersecurity solutions. From 2016 to 2018, he was Senior Vice President, Global Virtual Sales and Customer Success, following positions of successively increasing responsibility in direct sales, channel partnerships, technology solutions and architecture, and sales enablement, including Senior Vice President, Global Customer Success from 2015 to 2016, and Vice President, Asia Pacific and Japan Enterprise Segment from 2014 to 2016. Prior to joining Cisco Systems in 1996, he held sales leadership roles at System Software Associates, a global provider of software for industrial businesses, Effective Management Systems and PepsiCo.
Mark Culhane. Mark Culhane is the Company’s Chief Financial Officer and has served in this role since joining Teradata in November 2017. He served as the Chief Financial Officer for Lithium Technologies, a software applications company, from 2012 to 2016, and as Executive Vice President and Chief Financial Officer at DemandTec, a provider of a cloud-based collaborative optimization network for retailers and consumer products companies that was acquired by IBM in 2012, from 2001 to 2012. He currently serves on the board of directors of a private cloud-based software company, UserZoom, Inc. From June 2010 until its acquisition in April 2018, he served on the board of directors of Callidus Software, Inc., a cloud software company and global leader in sales performance management software, where he was the chair of its audit committee. From 2016 until November 2017, Mr. Culhane ran Culhane Advisory Services which provided management consulting services to venture- and private-equity-backed cloud software companies.
Kathleen Cullen-Cote. Kathleen Cullen-Cote is the Company’s Chief Human Resources Officer and has served in this role since joining Teradata in July 2019. Prior to joining Teradata, Ms. Cullen-Cote served in human resource leadership roles at PTC Inc., a global computer software and services company, from 2002 to June 2019, including Executive Vice President and Chief Human Resources Officer from April 2019 to July 2019; Corporate Vice President, Human Resources from 2012 until March 2019; Senior Vice President, Human Resources, from December 2010 to 2012; and Vice President, Human Resources, from October 2009 until December 2010. Prior to that, Ms. Cullen-Cote served in human resource leadership roles at Imark Communications, Johnson and Johnson, Raytheon, and Barry Controls.
Martyn Etherington. Martyn Etherington is the Company’s Chief Marketing Officer and has served in this role since joining Teradata in March 2018. Prior to joining Teradata, from 2015 to 2017, he served as the Chief Marketing Officer, IoT Cloud, at Cisco Jasper, a global market leader for Internet of Things connectivity management. From 2012 to 2015, he served as Executive Vice President, Chief Marketing Officer, and Chief of Staff for Mitel Networks Corporation, a telecommunications company. Mr. Etherington served as Chief Marketing Officer and Vice President, Business Operations at Tektronix/Danaher from 2002 to 2012 with responsibility for companywide strategy development and deployment, global marketing and business operations.
Dan Harrington. Dan Harrington is the Company’s Chief Services Officer and has served in this role since 2012. Previously, from 2007 to 2012, Mr. Harrington served as Executive Vice President, Technology and Support Services of Teradata. Prior to joining Teradata, he served as Vice President, Customer Services, Teradata Division of NCR Corporation, from 2005 until 2007. From 1999 to 2004, he was Vice President, Northern Europe, Teradata Division at NCR with responsibility for European sales. Prior to that, Mr. Harrington held a number of positions of increasing responsibility in the areas of sales, marketing and product management at NCR since joining the company in 1985.
Laura Nyquist. Laura Nyquist is the Company’s General Counsel and has served in this role since 2007. From November 2018 until July 2019, she served as the Company’s Chief Human Resources Officer. From 2007 until November 2018, Ms. Nyquist served as the Company’s Secretary, and from May to October 2016 and July to November 2018, she also was responsible for the Company’s human resources organization on an interim basis. Prior to joining Teradata, Ms. Nyquist held a number of senior management roles at NCR Corporation after joining that company in 1986, including Deputy General Counsel and Chief Counsel of NCR’s financial and retail solutions businesses from 2006 to 2007, Chief Counsel, Financial Solutions Division from 2004 to 2006, and Vice President, Corporate Affairs, and Secretary to the NCR Board of Directors from 1999 to 2004.
There are no family relationships between any of the executive officers or directors of Teradata.
There are no contractual obligations regarding the election of our executive officers or directors.
Information. Teradata makes available through its website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and all amendments to such reports, as soon as reasonably practicable after these reports are electronically filed or furnished to the U.S. Securities and Exchange Commission ("SEC") pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). These reports and other information are available, free of charge, at www.sec.gov. Teradata will furnish, without charge to a security holder upon written request, the Notice of Meeting and Proxy Statement for the 2020 Annual Meeting of Stockholders. Teradata will furnish the Code of Conduct and any other exhibit at cost (the Code of Conduct is also available through Teradata’s website at http://www.teradata.com/code-of-conduct/). Document requests are available by calling or writing to:
Teradata - Shareholder Relations
17095 Via Del Campo
San Diego, CA 92127
Phone: 858-485-2088
Website: www.teradata.com
Item 1A. RISK FACTORS
You should carefully consider each of the following risk factors and all other information set forth in this Annual Report. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our company in each of these categories of risks. However, the risks and uncertainties our Company faces are not limited to those set forth in the risk factors described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
In addition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
If any of the following risks and uncertainties develops into actual events or occurrences, these events could have a material adverse effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could decline.
Implementation of Strategy and Business Transformation - We may not be able to realize some or all of the anticipated benefits of our business transformation plan and execution of our strategy on a timely basis, or at all.
The successful implementation of our strategy and completion of our business transformation presents organizational and infrastructure challenges. We may not be able to implement and realize some or all of the anticipated benefits from our strategy or our business transformation plan on a timely basis, or at all. Events and circumstances, such as financial or unforeseen difficulties, delays and unexpected costs, may occur that could result in our not realizing desired outcomes. Any failure to substantially implement the transformation of the Company in accordance with our expectations could have a material adverse effect on our financial results. Even if the anticipated benefits and savings are substantially realized, there may be unforeseen consequences, internal control issues, or business impacts. Additionally, because of our restructuring efforts in connection with our business transformation plan, we may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during transitional periods. Reorganization and restructuring may require a significant amount of management and other employees' time and focus, which may divert attention from operating activities and growing our business. These challenges may be further compounded by the Company’s efforts to identify a permanent Chief Executive Officer. Failure to achieve some or all of the expected benefits of these activities could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
As part of our strategy, our business has substantially shifted from traditional, perpetual pricing and revenue model to a subscription-based model in which less revenue is recognized upfront at the time the customer enters into a transaction. The pace and extent to which customers will continue to purchase and renew our offerings on a subscription basis is variable and therefore has impacts on our results and operations. Another core component of our strategy is to expand and enhance our offerings for cloud environments. It is uncertain whether these new offerings and deployment models will prove successful or whether we will be able to develop the necessary business models, infrastructure and systems to support the business. This includes having or hiring the right talent to
execute our business strategy in a competitive job market. In addition, market acceptance of new product and service offerings will be dependent in part on our ability to include functionality and usability that address customer requirements, and to optimally price our offerings and services to meet customer demand and cover our costs. Our go-to-market, cloud and hybrid cloud strategies also must adjust to customers' changing buying preferences, and there can be no assurance that our go-to-market approach will adequately and completely address such preferences. New product and services offerings may increase our risk of liability and cause us to incur significant technical, legal or other costs. For example, with our cloud-based offerings, market acceptance is affected by a variety of factors including information security, reliability, performance, the sufficiency of technological infrastructure to support our offerings and services in certain geographies, customer concerns with entrusting a third party to store and manage its data as well as the customer's ability to access this data once a contract has expired, and consumer concerns regarding data privacy and the enactment of laws or regulations that restrict our ability to provide such services to customers. If we are unable to correctly respond to these issues, our business could be harmed.
As part of our business strategy, we also continue to dedicate a significant amount of resources to our research and development ("R&D") efforts in order to maintain and advance our competitive position, including our initiatives to provide and improve our offerings for cloud environments. However, we may not receive significant revenues from these investments for several years, if at all. R&D expenses represent a significant portion of our discretionary fixed costs. If we do not receive some or all of the expected benefits of our substantial investments in R&D, our results of operations could be adversely affected.
Renewal Rates and Support Services - If our existing customers fail to renew, or cancel, their subscription license arrangements or support agreements, or if customers do not renew on terms favorable to us, our business could be adversely affected.
Teradata’s solution offerings have been expanded to include a variety of subscription options, which impact the timing of when revenues are recognized and related cash flows are collected. Additionally, future revenue streams and cash flows could be adversely affected if customers do not renew, or cancel, their subscription arrangements. Because we have a limited history with our subscription offerings and many of our subscription contracts include cancellation provisions, we may not be able to accurately predict the rate of cancellations or customer renewals.
In addition, we currently derive a significant portion of our overall revenues from maintenance services and unspecified when-and-if-available software upgrades (collectively referred to as "support"), and we depend on our installed customer base for future revenue and cash flow from support services. The terms of our standard support arrangements generally provide for the prepayment of first-year support fees and are generally renewable on an annual basis. Some of our contracts also include cancellation provisions. The IT industry generally has been experiencing increasing pricing pressure from customers when purchasing or renewing support agreements. Mergers and acquisitions in certain industries that we serve could result in a reduction of the software and hardware being supported and put pressure on our subscription and support terms with customers who have merged. Given these factors, there can be no assurance that our current customers will renew their subscription and/or support agreements or agree to the same terms when they renew, which could result in our reducing or losing subscription and/or support fees which could adversely impact operating results.
Dependence on Key Employees - We depend on key employees and face competition in hiring and retaining qualified employees.
Our employees and access to talent are critical to our success. Our future success depends on our ability to attract and retain the services of senior management and key personnel in all functional areas of our Company, including engineering and development, marketing and sales professionals, and consultants. Competition for highly skilled personnel and acquired talent in the IT industry is intense. In addition, the Company’s ongoing search for a permanent Chief Executive Officer creates retention risks and may impact our ability to attract new talent to our organization. No assurance can be made that key personnel will remain with us, and it may be difficult and costly to replace such employees and/or obtain qualified talent who are not employees. Our failure to hire, retain and replace our key personnel could have a material adverse impact on our business operations. Additionally, there can be no assurance that the appointment of a successor Chief Executive Officer will not result in some disruption of our operations.
Highly Advanced Offerings - We need to rapidly and successfully develop and introduce new solutions that include highly advanced technology in a competitive, demanding, and rapidly changing environment. As we
develop new offerings with greater capacity, delivery and performance capabilities, the increased difficulty and complexity associated with producing these offerings may increase the likelihood of reliability, quality or operability issues.
To succeed in the intensely competitive IT industry, we must continually improve, refresh and expand our product and service offerings to include newer features, functionality, and deployment options and to keep pace with price-to-performance gains. Shortened product life cycles due to customer demands and competitive pressures impact the pace at which we must introduce and implement new technology. This requires a high level of innovation by both our software developers and the suppliers of the third-party software components included in our solutions. In addition, bringing new solutions to the market entails a costly and lengthy process, and requires us to accurately anticipate customer needs and technology trends. If we are unable to respond to market demands, develop leading technologies, timely deliver offerings to the market, and maintain leadership in analytic data solutions performance and scalability, our business operations may be adversely affected.
Because of these and other factors, our ability to introduce new or improved solutions could be adversely impacted. There can be no assurance that our innovations will be profitable, and if we cannot successfully market and sell both existing and newly developed solutions, our business and operating results could be impacted.
In addition, our offerings may contain undetected errors or security flaws, which may be found after the offerings are introduced and delivered. This risk is enhanced when offerings are first introduced or when new versions are released, as well as when we develop offerings with more advanced technology, since the increased difficulty and complexity associated with producing these offerings may increase the likelihood of reliability, quality or operability issues. Due to such complexities, our products may also fail to perform to the full specifications and expectations of our customers. Additionally, third-party components that we integrate in our solutions may have undetected quality issues that may impact the performance of our offerings. The correction and detection of errors may cause delays, lost revenues, and incremental costs. Errors in our software offerings could also affect their ability to work with other components of our offerings, could delay the development or release of new offerings, and could adversely affect their market acceptance. We may not be able to detect or remedy all errors, including those that may be deemed critical by our customers, prior to release or deployment. Such reliability, quality and operability issues may negatively impact our ability to retain current customers, including due to customer cancellations or non-renewals, as well as our ability to obtain new customers.
Our customers who rely on our solutions for business-critical uses are more sensitive to errors, which could expose us to liability, performance and warranty claims, as well as harm our reputation. These and other risks associated with new offerings may have a material adverse impact on our results of operations and future performance.
Third Party Relationships - Our future results depend in part on our relationships with key suppliers, strategic partners and other third parties.
Our development, marketing and distribution plans depend in part on our ability to form strategic alliances with third parties that have complementary offerings, software, services and skills. Our strategic partners include consultants and system integrators, software and technology providers, and indirect channel distributors in certain countries. These relationships involve risks, including our partners changing their business focus, entering strategic alliances with other companies, being acquired by our competitors, failing to meet performance criteria or improperly using our confidential information. If we fail to maintain or expand our relationships with strategic partners, or if we are forced to seek alternative technology, or technology for new solutions, that may not be available on commercially reasonable terms, our business may be adversely affected.
Third-party vendors provide important elements to our solutions; if we do not maintain our relationships with these vendors or if these vendors cease to be going concerns, interruptions in the supply of our offerings may result. There are some components of our solutions that we purchase from single sources due to price, quality, technology or other reasons. For example, we rely on Flex as a key single source contract manufacturer for our on-premises hardware systems. In addition, we buy servers from Dell Technologies Inc. and storage disk systems from NetApp, Inc. Some components supplied by third parties may be critical to our solutions, and several of our suppliers may terminate their agreements with us without cause with 180-days notice. If we were unable to purchase necessary services, parts, components or offerings from a particular vendor and had to find an alternative supplier, our shipments and deliveries could be delayed. Also, quality issues, a disruption in our supply chain or the need to find alternative suppliers could impact the costs and/or timing associated with procuring necessary offerings,
components and services. In any case, our operations could be adversely impacted. Similarly, our suppliers’ offerings and services have certain dependencies with respect to their own supply chain networks, and supply issues among our suppliers’ suppliers may also adversely impact our business.
Further, our strategic partnerships with Amazon, Google and Microsoft for our cloud offerings on AWS, Google and Azure, respectively, require significant investments to ensure that our solutions are optimized in these cloud environments. If we are unsuccessful in meeting performance requirements or obtaining future returns on these investments, our financial results may be adversely impacted.
Sales Cycle Variations - Unanticipated delays or accelerations in our sales cycles makes accurate estimation of our revenues difficult and could result in significant fluctuations in our quarterly operating results.
The length of our sales cycle varies depending on several factors over which we may have little or no control, including the size and complexity of a potential transaction, the level of competition that we encounter in our selling activities and our current and potential customers’ internal budgeting and approval process, as well as overall macro-economic conditions. Because of a generally long sales cycle, we may expend significant effort over a long period of time in an attempt to obtain an order, but ultimately not complete the sale, or the order ultimately received may be smaller than anticipated. The long sales cycle for our products also makes it difficult to predict the quarter in which sales will occur. Delays in sales could cause significant variability in our results for any particular period.
Brand Reputation - Demand for the offerings and services we sell could decline if we fail to maintain positive brand perception and recognition.
We operate a portfolio of brands with a commitment to customer service and innovation. We believe that recognition and the reputation of our brands are key to our success, including our ability to retain our existing customers and attract new customers. Operational factors such as failure to deliver high quality offerings or services, uncompetitive pricing, failure to meet delivery or performance promises or business interruptions could damage our reputation.
External factors, such as negative public remarks or accusations, could also be damaging. Damage to the perception or reputation of our brands could result in, among other things, declines in customer loyalty, customer cancellations or non-renewals, lower employee retention and productivity and vendor relationship issues, all of which could materially affect our revenue and profitability.
Competition - The IT industry is intensely competitive and evolving, and competitive pressures could adversely affect our pricing practices or demand for our offerings and services.
We operate in the intensely competitive IT industry, which is characterized by rapidly changing technology, evolving industry standards and models for consuming and delivering business and IT services, frequent new product introductions, and frequent price and cost reductions. In general, as a participant in the data analytic solutions market, we face:
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Changes in customer IT spending preferences and other shifts in market demands, which drive changes in the Company's competition;
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Changes in pricing, marketing and product strategies, such as potential aggressive price discounting and the use of different pricing models by our competitors;
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Rapid changes in product delivery models, such as on-premises solutions versus cloud solutions;
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Rapid changes in computing technology and capabilities that challenge our ability to maintain differentiation at the lower range of business intelligence analytic functions;
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New and emerging analytic technologies, competitors, and business models;
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Continued emergence of open source software that often rivals current technology offerings at a much lower cost despite its limited functionality;
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Changing competitive requirements and deliverables in developing and emerging markets; and
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Continuing trend toward consolidation of companies, which could adversely affect our ability to compete, including if our key partners merge or partner with our competitors.
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Our competitors include established companies within our industry, including IBM, Oracle, SAP, Microsoft, Google and Amazon, which are well-capitalized companies with widespread distribution, brand recognition and penetration of platforms and service offerings. The significant purchasing and market power of these larger competitors, which have greater financial resources than we do, could allow them to surpass our market penetration and marketing
efforts to promote and sell their offerings and services. In addition, many other companies participate in specific areas of our business, such as enterprise applications, analytic platforms and business intelligence software. In some cases, we may partner with a company in one area of our business and compete with them in another. The status of our business relationships with these companies can influence our ability to compete for analytic data solutions opportunities in such areas. In addition, we occasionally see additional competition from both established and emerging companies such as Snowflake, Cloudera, MongoDB and Pivotal Software. Failure to compete successfully with new or existing competitors in these and other areas could have a material adverse impact on our ability to generate additional revenues or sustain existing revenue levels.
Information Systems and Security - A breach of security, disruption, or failure of our information systems or those of our third-party providers could adversely impact our business and financial results.
Our operations are dependent on our ability to protect our computer equipment and the information stored in our databases (and the computer equipment and database information of certain suppliers and other third parties) from damage by, among other things, earthquake, fire, natural disaster, cyber-attacks, power loss, telecommunications failures, unauthorized intrusions, malicious or unintended insider actions that cause loss of data or loss of systems, including phishing schemes, and other events. The occurrence of one or more of these events could result in system failures and other interruptions in our operations, which could have a material adverse effect on our business, financial condition or results of operations.
Prior to our transformation, we generally operated pursuant to a business model, in which our customers purchased or leased hardware systems used in connection with our software solutions and the customers deployed and operated those solutions. With respect to these types of customer on-premises solutions, the customer, directly or through its selected services providers, manages all aspects of the data controls and security with respect to any confidential, private or otherwise sensitive information stored or processed through these solutions, including any personally identifiable data or information - such as non-public data regarding our customers’ employees, customers' customers, consumers, data subjects, individuals’ identities, individual financial accounts and health information including, for example, information that is regulated by the Health Insurance Portability and Accountability Act of 1996. Our software-as-a-service or cloud offerings generally require us to deploy or operate solutions for our customers, directly or through the use of third-party services providers, either on-premises at customer-selected data center facilities, or at third-party-hosted data center facilities. With respect to these cloud and software-as-a-service offerings, we and such service providers have increased roles, responsibilities and risk exposures regarding some or all aspects of the data controls and security with respect to any confidential, private or otherwise sensitive information stored or processed through these solutions on our systems or those of selected third-party providers. If unauthorized access to or use of such information or systems occurs, despite data security measures and third-party commitments to protect them, our results of operation, reputation, and relationships with our customers could be adversely impacted.
Additionally, experienced computer programmers, Nation State Sponsored Advanced Persistent Code ("NSSAPC") attackers (from countries such as Iran, China and certain European Eastern Bloc countries) and hackers may be able to penetrate our network security or that of our third-party providers and misappropriate or compromise our intellectual property or other confidential information or that of our customers, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our offerings or otherwise exploit any security vulnerabilities of our offerings. In addition, phishing-scheme-perpetrators may be able to lure employees or contractors into providing such perpetrators with information that may enable them to avoid some of our network security controls or those of third-party providers which could result in system disruptions or a loss of confidential and proprietary information.
We have been subject to actual and potential cyber-attacks, and there can be no assurance that our defensive measures will be adequate to prevent them in the future. There is risk that these types of activities will recur and persist, that one or more of them may be successful in the future, that one or more of them may have been or will be successful but not detected, prevented, remediated or mitigated by us, and the costs to us to eliminate, detect, prevent, remediate, mitigate or alleviate cyber or other security problems, viruses, worms, malicious software programs, phishing schemes and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could adversely impact our future results of operations.
International Operations - Generating substantial revenues from our international operations poses several risks.
In 2019, the percentage of our total revenues from outside of the United States was 50%. We have exposure to more than 30 functional currencies. The risks associated with the geographic scope of our business operations include, among other things the following:
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Cultural and management challenges associated with operating in developing countries;
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Longer payment cycles for sales in foreign countries and difficulties in enforcing contracts and collecting accounts receivable;
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Fluctuations in the value of local currencies;
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Tariffs or other restrictions on foreign trade or investment; and
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The impact of catastrophic weather or other negative effects of climate change and public health crises including, but not limited to, the novel coronavirus COVID-19 ("coronavirus"), on our facilities, operations and/or workforce, as well as those of our customers, supply chains and distribution channels, throughout the world, particularly those in coastal areas.
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Any of these events, among others, could materially and adversely affect our financial condition and operating results. For example, the coronavirus may impact the global economy or negatively affect various aspects of our business, including our workforce and supply chain, which could impact our ability to deliver products and services to our customers and make it more difficult to meet our expectations and obligations.
Our offerings are subject to United States export controls and, when exported from the United States, or re-exported to another country, must be authorized under applicable United States export regulations. Changes in our offerings or changes in export regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings throughout their global systems or, in some cases, prevent the export of our offerings to certain countries or customers altogether. Any change in export regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by these regulations could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations.
There is active enforcement and ongoing focus by the SEC and other governmental authorities on the United States Foreign Corrupt Practices Act ("FCPA"), the U.K. Bribery Act of 2010 (the "Bribery Act") and similar anti-bribery, anti-corruption laws in other countries. Given the breadth and scope of our international operations, we may not be able to detect improper or unlawful conduct by our international partners and employees, despite our high ethics, governance and compliance standards, which could put the Company at risk regarding possible violations of such laws, including the FCPA or the Bribery Act, and could result in various civil or criminal fines, penalties or administrative sanctions, and related costs, which could negatively impact the Company's results of operations or financial condition.
Privacy concerns and laws such as the European Union’s General Data Protection Regulation, evolving regulation of cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations may limit the use and adoption of our solutions and services and adversely affect our business.
Regulation related to the provision of services over the Internet is evolving, as federal, state and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer and use of data. In some cases, new data privacy laws and regulations, such as the European Union’s General Data Protection Regulation that took effect in May 2018 and an amended Act on the Protection of Personal Information in Japan, and the California Consumer Privacy Act, which took effect in January 2020, impose new obligations directly on the Company as both a data controller and a data processor, as well as on many of our customers. These new laws may require us to make changes to our solutions and services to enable Teradata and/or our customers to comply with the new legal requirements and may also increase our potential liability exposure through higher potential penalties for non-compliance. Further, laws such as the European Union’s proposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes, and the tracking of individuals’ online activities. These new or proposed laws and regulations are subject to differing interpretations and may be inconsistent among jurisdictions. These and other requirements could reduce demand for our solutions and services, require us to take on more onerous obligations in our contracts, restrict our ability to store, transfer and process data or, in some cases, impact our ability to offer our solutions and services in certain locations or our customers' ability to deploy our solutions globally. For example, ongoing legal challenges in Europe allowing companies to transfer personal data from the European Economic Area to the United
States could result in further limitations on the ability to transfer data across borders, particularly if governments are unable or unwilling to reach new or maintain existing agreements that support cross-border data transfers, such as the EU-U.S. and Swiss-U.S. Privacy Shield framework. Additionally, certain countries have passed or are considering passing laws requiring local data residency. The costs of compliance with, and other burdens imposed by, privacy laws, regulations and standards may limit the use and adoption of our solutions and services, reduce overall demand for our solutions and services, make it more difficult to meet expectations from or commitments to customers, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business.
In addition to government activity, privacy advocacy and other industry groups have established or may establish new self-regulatory standards that may place additional burdens on our ability to provide our solutions and services globally. Our customers expect us to meet voluntary certification and other standards established by third parties, such as related International Organization for Standardization ("ISO") standards. If we are unable to maintain these certifications or meet these standards, it could adversely affect our ability to provide our solutions to certain customers and could harm our business.
Furthermore, concerns regarding data privacy may cause our customers’ customers to resist providing the data necessary to allow our customers to use our solutions and services effectively. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our offerings or services and could limit adoption of our cloud-based solutions.
Economic Pressures and Uncertainty - Our business is affected by the global economies in which we operate and the economic climate of the industries we serve.
Our business and results of operations are affected by international, national and regional economic conditions. In particular, the IT industry in which we operate is susceptible to significant changes in the strength of the economy and the financial health of companies and governmental entities that make spending commitments for new technologies. Accordingly, adverse global economic and market conditions, including in certain economic sectors in which many of our customers operate (such as retail, manufacturing, financial services or government), may adversely impact our business. For example, adverse changes to the economy could impact the timing of purchases by our current and potential customers or the ability of our customers to fulfill their obligations to us. In addition, decreased or more closely scrutinized spending in our customers’ businesses and in the industries we serve, may adversely impact our business. Uncertainty about future economic conditions may make it difficult for us to forecast operating results and to make decisions about future investments. The Company’s success in periods of economic uncertainty may also be dependent, in part, on our ability to reduce costs in response to changes in demand and other activity.
Legal Contingencies and Regulatory Matters - We face uncertainties regarding legal proceedings, complex and changing laws and regulations, and other related matters.
In the normal course of business, we are subject to proceedings, lawsuits, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, intellectual property, a variety of local laws and regulations and other regulatory compliance and general matters. See "Note 10-Commitments and Contingencies" in the Notes to Consolidated Financial Statements elsewhere in this Annual Report. Because such matters are subject to many uncertainties, their outcomes are not predictable. There can be no assurances that the amounts required to satisfy alleged liabilities from such matters will not impact future operating results.
In addition, we are subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting, which are rapidly changing and subject to many possible changes in the future. From time to time, we may conduct internal investigations in connection with our efforts to ensure compliance with such laws and regulations, the costs or results of which could impact our financial results. In addition, we may be subject to unexpected costs in connection with new public disclosure or other regulatory requirements that are issued from time to time. Laws and regulations impacting our customers, such as those relating to privacy, data protection and digital marketing, could also impact our future business. Because we do business in the government sector, we are generally subject to audits and investigations which could result in various civil or criminal fines, penalties or administrative sanctions, including debarment from future government business, which could negatively impact the Company’s results of operations or financial condition.
In addition, our facilities and operations, including former facilities and former operations for which we may have liabilities, are subject to a wide range of environmental protection laws. There can be no assurances that the costs required to comply with applicable environmental laws will not adversely impact future operating results.
Management time and resources are spent to understand and comply with changing laws, regulations and standards relating to such matters as corporate governance, accounting principles, public disclosure, SEC regulations, Basel III and the rules of the New York Stock Exchange ("NYSE") where our shares are listed. Rapid changes in accounting standards, and federal securities laws and regulations, among others, may substantially increase costs to our organization, challenge our ability to timely comply with all of them and could have an impact on our future operating results.
Intellectual Property - Inadequate protection of Teradata’s intellectual property or infringement of intellectual property that is owned by others could impact our business and financial condition.
As a technology company, our intellectual property portfolio is crucial to our continuing ability to be a leading analytic solutions provider. We strive to protect and enhance our proprietary intellectual property rights through patent, copyright, trademark and trade secret laws, as well as through technological safeguards. These efforts include protection of the offerings and application, diagnostic and other software we develop.
To the extent we are not successful our business could be materially adversely impacted. We may be unable to prevent third parties from using our technology without our authorization or independently developing technology that is similar to ours, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States (such as Iran, China and certain European Eastern Bloc countries who may use NSSAPC to advance their own industries). With respect to our pending patent applications, we may not be successful in securing patents for these claims, and our competitors may already have applied for patents that, once issued, will prevail over our patent rights or otherwise limit our ability to sell our offerings.
While we take steps to provide for confidentiality obligations of employees and third parties with whom we do business (including customers, suppliers and strategic partners), there is a risk that such parties will breach such obligations and jeopardize our intellectual property rights. Many customers have outsourced the administration and management of their data warehouses to third parties, including some of our competitors, who then have access to our confidential information. Although we have agreements in place to mitigate this risk, there can be no assurance that such protections will be sufficient. In addition, our ability to capture and re-use field-based developed intellectual property is important to future business opportunities and margins.
We have seen a trend towards aggressive enforcement of intellectual property rights as the functionality of offerings in our industry increasingly overlaps and the volume of issued software patents continues to grow. As a result, there is a risk that we could be subject to infringement claims which, regardless of their validity, could:
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Be expensive, time consuming and divert management attention away from normal business operations;
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Require us to pay monetary damages or enter into non-standard royalty and licensing agreements;
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Require us to modify our product sales and development plans; or
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Require us to satisfy indemnification obligations to our customers.
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Regardless of whether these claims have any merit, they can be burdensome to defend or settle and can harm our business and reputation.
Internal Controls - Inadequate internal control over financial reporting and accounting practices could lead to errors, which could adversely impact our ability to assure timely and accurate financial reporting.
Internal control over financial reporting, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control objectives will be met. These inherent limitations include system errors, the potential for human error and unauthorized actions of employees or contractors, inadequacy of controls, temporary lapses in controls due to shortfalls in transition planning and oversight or resources, and other factors. Consequently, such controls may not prevent or detect misstatements in our reported financial results as required under SEC and NYSE rules, which could increase our operating costs or impair our ability to operate our business. Controls may also become inadequate due to changes in circumstances, and it is necessary to replace, upgrade or modify our internal information systems from time to time. In addition, unforeseen risks may arise in connection with financial reporting systems due to inefficient business processes, business process reengineering projects, or changes in accounting standards.
If management is not successful in maintaining a strong internal control environment, material weaknesses could occur, causing investors to lose confidence in our reported financial information. This could lead to a decline in our stock price, limit our ability to access the capital markets in the future, and require us to incur additional costs to improve our internal control systems and procedures.
Changing Tax Rates - A change in our effective tax rate can have a significant adverse impact on our business.
A number of factors may adversely impact our future effective tax rates, such as:
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The jurisdictions in which our profits are determined to be earned and taxed;
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The resolution of issues arising from tax audits with various tax authorities;
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Changes in the valuation of our deferred tax assets and liabilities;
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Adjustments to estimated taxes upon finalization of various tax returns; and
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Changes in available tax credits, especially surrounding tax credits in the United States for our research and development activities.
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Tax rules may change in a manner that adversely affects our future reported results of operations or the way we conduct our business. Further changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting project that was undertaken by the Organization for Economic Co-operation and Development ("OECD"). The OECD, which represents a coalition of member countries, recommended changes to numerous long-standing tax principles related to transfer pricing. Our income tax obligations are based in part on our corporate structure and inter-company arrangements, including the manner in which we develop, value, and use our intellectual property and the valuations of our inter-company transactions. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of these audits to determine the appropriateness of our tax provision, however, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our net income or financial condition.
Indebtedness - Our indebtedness could adversely affect our financial condition and limit our financial flexibility.
The Company's indebtedness could:
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Expose us to interest rate risk;
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Increase our vulnerability to general adverse economic and industry conditions;
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Limit our ability to obtain additional financing or refinancing at attractive rates;
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Require the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures, share repurchases and other general corporate purposes;
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Limit our flexibility in planning for, or reacting to, changes in our business and the industry; and
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Place us at a competitive disadvantage relative to our competitors with less debt.
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Further, our outstanding indebtedness is subject to financial and other covenants, which may be affected by changes in economic or business conditions or other events that are beyond our control. If we fail to comply with the covenants under any of our indebtedness, we may be in default under the loan, which may entitle the lenders to accelerate the debt obligations. To avoid defaulting on our indebtedness, we may be required to take actions such as reducing or delaying capital expenditures, reducing or eliminating stock repurchases, selling assets, restructuring or refinancing all or part of our existing debt, or seeking additional equity capital, any of which may not be available on terms that are favorable to us, if at all.
In addition, the United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), announced that it intends to phase out LIBOR by the end of 2021. We have certain financial contracts, including our revolving credit agreement, term loan agreement, and interest rate swaps, that are indexed to LIBOR. The U.S. Federal Reserve has begun publishing a Secured Overnight Funding Rate, which is intended to replace U.S. dollar LIBOR. Plans for alternative reference rates for other currencies have also been announced. At this time, we cannot predict how markets will respond to these proposed alternative rates or the effect of any changes to LIBOR or the discontinuation of LIBOR. If LIBOR is no longer available or if our lenders have increased costs due to changes in LIBOR, we may experience potential increases in interest rates on our variable rate debt, which could adversely impact our interest expense, results of operations and cash flows.
Acquisitions - Our ability to successfully complete and integrate acquisitions may be an important element of future growth.
We are continually evaluating the most effective ways to extend Teradata’s core technology and expand our analytic platforms and solutions to address multiple market segments and solution offerings. From time to time, this includes acquisitions, equity investments or joint ventures. Our operating results may fluctuate because of acquisitions and related integration activities, as well as other strategic growth transactions, and there is a risk that our financial results may be adversely affected. Such transactions entail various risks, including risks associated with:
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Assimilating and integrating different business operations, corporate cultures, personnel, infrastructure and technologies or offerings acquired or licensed;
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Retaining key employees and maintaining relationships with employees, customers, clients or suppliers of the acquired companies;
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Recurring revenue of the acquired company may decline or fail to be renewed;
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The potential for unknown liabilities, as well as undetected internal control, compliance or quality issues within the acquired or combined business or additional costs not anticipated at the time of acquisition;
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Disruptions of our ongoing business or inability to successfully incorporate acquired products, services or technologies into our solutions and maintain quality;
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Failure to achieve the projected synergies after integration of acquired companies or a decline in value of the acquired business and related impairments;
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Funding acquisition activities, whether through existing cash reserves, or through the use of debt, and the related impact on our liquidity and financial condition; and
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Failure to realize all the economic benefits from these acquisitions, equity investments or joint ventures could result in an impairment of goodwill, intangible assets or other assets, which could result in a significant adverse impact to our results of operations.
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The United Kingdom's withdrawal from the European Union could have an adverse effect on our business and financial results.
In March 2017, the United Kingdom ("U.K.") government initiated a process to withdraw from the European Union ("Brexit"). As of January 31, 2020, the U.K. is no longer a member of the European Union. Brexit has created substantial economic and political uncertainty and volatility in currency exchange rates. The uncertainty created by Brexit may cause our customers to closely monitor their costs and negatively impact our competitive position, supplier and customer relationships and financial performance. This may ultimately result in new regulatory and cost challenges for our U.K. and global operations. Any of these events could adversely affect our U.K., European and overall business and financial results.