Teradata : Earnings Discussion

INVESTOR CONTACT Nabil Elsheshai858-485-2125office

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Fourth Quarter and Full Year 2019 Earnings Discussion

Highlights:

• Annual recurring revenue (ARR) increased 9%, both reported and in constant currency, from the fourth quarter of 2018(1)
• Recurring revenue increased 7% both reported and in constant currency, from the fourth quarter of 2018 and 9%, 11% in constant currency, for the full year(1)
• Full year gross margin expansion of 290 basis points, 270 basis points on anon-GAAP basis(2)

We continued our successful transition to a subscription-based business in the fourth quarter, delivering recurring revenue and ARR in line with expectations. 89% of our bookings in the fourth quarter were subscription-based, and 88% of our full year bookings were subscription-based. As previously mentioned, we expect little to no perpetual revenue in 2020 and therefore will not be providing the bookings mix as a key metric going forward.

Revenue

Recurring revenuewhich includes revenue from subscription-based transactions, and perpetual license- related maintenance and upgrade rights, was $350 million in Q4, a year-over-year increase of 7% both reported and in constant currency(1).

Perpetual revenuecame in at $30 million for the quarter.

Consulting revenue, which was $114 million in Q4, decreased 30% both reported and in constant currency from Q4 2018. As a reminder, in line with our strategy to increase consumption of Teradata software, we are making progress right sizing our consulting business and narrowing the focus of our consulting resources to engagements that drive customer value and increase consumption of our software.

Revenue by Geography

Americas

Revenue in our Americas region decreased 12% reported, 11% in constant currency(1). This included 6% constant currency growth in recurring revenue offset by decreases in both perpetual software licenses and hardware and consulting revenue.

EMEA

Revenue in our EMEA region decreased 19% both reported and in constant currency(1). Recurring revenue increased 7% in constant currency but was offset by decreases in both perpetual software licenses and hardware and consulting revenues.

APAC

Revenue in our APAC region decreased 22%, 21% in constant currency(1). An increase in recurring revenue of 13% in constant currency was offset by decreases in perpetual software licenses and hardware and consulting revenue.

Annual Recurring Revenue (ARR)

• The fourth quarter ended with ARR of $1.427 billion

ARR increased 9% both as reported and in constant currency(1), from the prior-year period.

Gross Margins

• GAAP recurring revenue gross margin was 66.0% vs. 68.6% in Q4 2018
• Non-GAAPrecurring revenue gross margin was 68.6% vs. 71.6% in Q4 2018(2)

As expected, the lower margin year-over-year was due to the recurring revenue mix in the fourth quarter having more subscription-based revenue, which carries lower margins than revenue from perpetual-related maintenance and software upgrade rights as a result of embedded hardware rentals in our subscription business.

• GAAP gross margin in our perpetual software license and hardware business was 20.0% vs. 40.2% in Q4 2018
• Non-GAAPgross margin in our perpetual software license and hardware business was also 20.0% compared to 44.3% in Q4 2018(2)

The lower year-over-year gross margin was mainly due to deal mix. Although we saw lower year-over-year perpetual gross margin in the fourth quarter, we were just below our full-year perpetual gross margin expectation of approximately 30%.

• GAAP consulting gross margin was 9.6% vs. 15.3% in Q4 2018
• Non-GAAPconsulting gross margin was 14.9% vs. 17.2% in Q4 2018(2)

We continue to make progress on our consulting organization transformation by focusing on more strategic consulting engagements which are designed to drive increased consumption of Teradata Vantage as well as increased gross margins in our consulting business. However, in 2019 we did not see the gross margin benefits materialize as we originally expected due to the faster pace of the revenue decline as we exited the lower value engagements. Despite this, we continue to expect our consulting margins to increase significantly over time.

• GAAP overall gross margin was 50.2% vs. 49.1% in Q4 2018
• Non-GAAPoverall gross margin was 53.2%, vs. 52.0% in Q4 2018(2)

The slight improvement year-over-year in total gross margin was primarily the result of a higher mix of recurring revenue.

Operating Expenses

• GAAP operating expenses were $257 million vs. $266 million in Q4 2018
• Non-GAAPoperating expenses were $215 million vs. $232 million in Q4 2018(2)

Operating expenses were lower than the prior year period primarily due to cost management initiatives undertaken in 2019.

Operating Margin

• GAAP operating margin was negative 1.8% vs. 3.9% in Q4 2018
• Non-GAAPoperating margin was 9.7% in the quarter vs. 12.6% in Q4 2018(2)

The majority of this decline was due to the faster pace of our model transition which means we recognize revenue ratably over the contract term rather than upfront as in a perpetual model.

Income Taxes

• GAAP tax rate was negative 43.8% vs. 21.1% in Q4 2018
• Non-GAAPtax rate was 39.0% vs. 17.1% in Q4 2018(2)

Our tax rate was higher than in the same period of the prior year due to earnings mix and a higher U.S. tax on our Global Intangible Low-Taxed Income (GILTI) year-over-year.

Balance Sheet & Capital Allocation

• The fourth quarter ended with $494 million in cash and cash equivalents
• Repurchased 2.2 million shares of Teradata stock for approximately $61 million during the quarter
• Remaining share repurchase authorization as of December 31, 2019 is $503 million
• The fourth quarter ended with $612 million in debt including $130 million of outstanding finance lease obligations

Deferred revenue at the end of 2019 was $533 million, an increase of $57 million sequentially which was aided by an increase in subscription billings, but a decline of $62 million compared to the end of the prior-year period. There were a couple of drivers of this decline year-over-year.

1. Long-termdeferred revenue declined as expected due to the continued amortization of a few large prepaid deals from prior years. We expect this amortization trend to continue in 2020 as we didn't have any large prepaid deals in 2019 and currently don't expect any in 2020; and
2. The decline inshort-term deferred was driven by the planned reduction in consulting revenues, consistent with moving focus away from non-core consulting engagements.

Total backlog at the end of the fourth quarter was $2.732 billion, which increased 7% both year-over-year and sequentially.

Our backlog growth in 2019 was impacted by shorter deal durations and foreign exchange headwinds compared to the prior year. Beginning in 2019, we adjusted our compensation structure to focus on ARR growth which resulted in shorter deal durations. As a result, backlog growth was lower in 2019 and bookings calculations will not reflect underlying company growth. This change does not impact our cash flow as the cash payment terms of our billings have not changed substantially. We expect bookings duration to normalize next year.

Cash Flow

• Net cash provided by operations was $54 million in Q4 2019 compared to $107 million in Q4 2018
• Capital expenditures and additions to capitalized software were $13 million in Q4 2019
• Free cash flow was $41 million in Q4 2019 compared to $44 million in Q4 2018(3)
• Full year free cash flow was $89 million compared to $204 million for the prior year(3)
• The company added $37 million in the fourth quarter and $115 million for the full year 2019 of finance leases primarily to support subscription sales

Cash provided by operating activities decreased by $216 million in 2019 compared to 2018. Factors influencing the decline compared to the prior year include: (1) faster transition to a subscription-based model;

1. higher cash payments in 2019 related to 2018 variable compensation; (3) lower upfrontmulti-year cash payments from subscription-based transactions; and (4) we used $63 million of cash in 2019 for reorganizing and restructuring our operations and go-to-market functions to align to our strategy.

As we have previously discussed, the timing of our billings and therefore deferred revenue will fluctuate as we move to subscription revenue which is renewed and billed at the time of the initial transaction. Previously the vast majority of our maintenance revenue was co-termed to the fourth quarter which lead to a spike in deferred revenue in the fourth quarter and a corresponding spike in cash collections in the first quarter of the following year. As a result, calculating billings and billings growth on a quarterly basis will have limited value.

Supplemental Financial Information

Additional information regarding Teradata's operating results is provided below as well as on the Investor Relations page of Teradata's website at investor.teradata.com.

1. The impact of currency is determined by calculating the prior-period results using the current-year monthly average currency rates (except for currency impact on ARR which is calculated using month-end rates). See the foreign currency fluctuation schedule on the Investor Relations page of the Company's web site at investor.teradata.com, which is used to determine revenue on a constant currency ("CC") basis.

Revenue
(in millions)						For the Three Months ended December 31
										% Change as				% Change in
Recurring revenue	2019	2018				Reported				Constant Currency
$350			$328			7%			7%
Perpetual software licenses and hardware	30	97	(69%)	(69%)
Consulting services	114	163	(30%)	(30%)
Total revenue	$494			$588	(16%)	(15%)
Americas	$263	$298	(12%)	(11%)
EMEA	139	172	(19%)	(19%)
APAC	92	118	(22%)	(21%)
Total revenue	$494			$588	(16%)	(15%)
						For the Twelve Months ended December 31
										% Change as				% Change in
Recurring revenue	2019	2018				Reported				Constant Currency
	$1,362			$1,254			9%			11%
Perpetual software licenses and hardware	106	340	(69%)	(68%)
Consulting services	431	570	(24%)	(23%)
Total revenue		$1,899			$2,164		(12%)	(10%)
Americas	$1,057	$1,126	(6%)	(5%)
EMEA	492	587	(16%)	(13%)
APAC	350	451	(22%)	(20%)
Total revenue		$1,899	$2,164		(12%)	(10%)
Annual recurring revenue*	$1,427	$1,308	9%	9%

• Annual recurring revenue is defined as the annual value at a point in time of all recurring contracts, including subscription, software upgrade rights, maintenance and managed services.

2. Teradata reports its results in accordance with GAAP. However, as described below, the Company believes that certain non-GAAP measures such as non-GAAP gross profit, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per diluted share, or EPS, all of which exclude certain items (as well as free cash flow) are useful for investors. Our non-GAAP measures are not meant to be considered in isolation or as substitutes for, or superior to, results determined in accordance with GAAP, and should be read only in conjunction with our condensed consolidated financial statements prepared in accordance with GAAP.

The following tables reconcile Teradata's actual and projected results and EPS under GAAP to the Company's actual and projected non-GAAP results and EPS for the periods presented, which exclude certain specified items. Our management internally uses supplemental non-GAAP financial measures, such as gross profit, operating income, net income and EPS, excluding certain items, to understand, manage and evaluate our business and support operating decisions on a regular basis. The Company believes such non-GAAP financial measures (1) provide useful information to investors regarding the underlying business trends and performance of the Company's ongoing operations, (2) are useful for period-over-period comparisons of such operations and results, that may be more easily compared to peer companies and allow investors a view of the Company's operating results excluding stock-based compensation expense and special items, (3) provide useful information to management and investors regarding present and future business trends, and (4) provide consistency and comparability with past reports and projections of future results. Teradata's reconciliation of GAAP to non-GAAP results included in this release.

												TERADATA CORPORATION
									RECONCILIATION OF RESULTS - GAAP TO NON-GAAP
											Reflects the Impact of Special Items
									(in millions, except per share amounts - unaudited)
									For the Three Months Ended December 31
									2019																					2018
					Equity			Other			Capitalized													Equity			Other				Capitalized				% Change
				Compensation			Special			Software													Compensation			Special				Software				Non-GAAP
	GAAP			Expense			Items 2			ASC 985-20		Non-GAAP1						GAAP			Expense			Items 3				ASC 985-20			Non-GAAP1	Yr/Yr
Revenue
Recurring	$	350	$	-		$	-	$	-	$	350						$	328	$	-		$	-	$	-	$	328	7%
Perpetual software licenses and hardware		30			-				-			-			30							97			-				-				-			97	-69%
Consulting services		114			-				-			-			114							163			-				-				-			163	-30%
Total revenue		494			-				-			-			494							588			-				-				-			588	-16%
Gross profit
Recurring		231			(2)				(2)			(5)			240							225			(2)				(2)				(6)			235	2%
% of Revenue		66.0%													68.6%							68.6%														71.6%
Perpetual software licenses and hardware		6			-				-			-			6							39			-				1				(5)			43	-86%
% of Revenue		20.0%													20.0%							40.2%														44.3%
Consulting services		11			(1)				(5)			-			17							25			(2)				(1)				-			28	-39%
% of Revenue		9.6%													14.9%							15.3%														17.2%
Total gross profit		248			(3)				(7)			(5)			263							289			(4)				(2)				(11)			306	-14%
% of Revenue		50.2%													53.2%							49.1%														52.0%
Selling, general and administrative expenses		174			17				12			-			145							185			7				18				-			160	-9%
Research and development expenses		83			8				5			-			70							81			5				4				-			72	-3%
Total expenses		257			25				17			-			215							266			12				22				-			232	-7%
% of Revenue		52.0%													43.5%							45.2%														39.5%
(Loss) income from operations		(9)			(28)				(24)			(5)			48							23			(16)				(24)				(11)			74	-35%
% of Revenue		(1.8%)													9.7%							3.9%														12.6%
Other expense, net		(7)			-				-			-			(7)							(4)			-				-				-			(4)
(Loss) income before income taxes		(16)			(28)				(24)			(5)			41							19			(16)				(24)				(11)			70	-41%
Income tax expense (benefit)		7			(2)				(6)			(1)			16							4			(2)				(3)				(3)			12
% Tax rate		(43.8%)													39.0%							21.1%														17.1%
Net (loss) income	$	(23)	$	(26)		$	(18)	$	(4)	$	25						$	15	$	(14)		$	(21)	$	(8)	$	58	-57%
% of Revenue		(4.7%)													5.1%							2.6%														9.9%
Net (loss) income per common share
Basic	$	(0.21)	$	(0.23)		$	(0.16)	$	(0.04)	$	0.22						$	0.13	$	(0.12)		$	(0.18)	$	(0.07)	$	0.49	-55%
Diluted	$	(0.21)	$	(0.23)		$	(0.16)	$	(0.03)	$	0.22						$	0.13	$	(0.12)		$	(0.19)	$	(0.07)	$	0.49	-54%
Weighted average common shares outstanding
Basic		111.3													111.3							117.3														117.3
Diluted4		111.3													112.3							119.1														119.1

1) While Teradata reports its results using generally accepted accounting principles in the U.S. (GAAP), certain non-GAAP financial measures may be used to reflect operational performance and to determine the effectiveness of its

business management. Certain special items may be segregated from our GAAP results from time-to-time to reflect the on-going Earnings Per Share performance of the company. Non-GAAP measures should not be used as a substitute for, or superior to, the company's reported GAAP results.

1. Special items for the three months ended December 31, 2019 include $1 million ($0 millionafter-tax) for amortization of acquired intangible assets, $20 million ($16 million after-tax) for integration and transformation activities, and $3 million ($2 million after-tax) for legal fees associated with the lawsuit that we initiated in the second quarter of 2018.
2. Special items for the three months ended December 31, 2018 include $2 million ($2 millionafter-tax) for amortization of acquired intangible assets, $21 million ($15 million after-tax) for integration and transformation activities, including the Dayton office closure, $1 million ($1 million after-tax) for legal fees associated with the lawsuit that we initiated in the second quarter of 2018, and $3 million tax adjustment for SAB 118 adjustments related to tax reform.
3. Diluted shares are excluded from the GAAP diluted share count for because their effect would have beenanti-dilutive

											TERADATA CORPORATION
								RECONCILIATION OF RESULTS - GAAP TO NON-GAAP
										Reflects the Impact of Special Items
								(in millions, except per share amounts - unaudited)
								For the Twelve Months Ended December 31
								2019																				2018
					Equity			Other			Capitalized													Equity			Other			Capitalized						% Change
				Compensation			Special			Software										GAAP 2			Compensation			Special			Software						Non-GAAP
	GAAP			Expense			Items 3			ASC 985-20		Non-GAAP1								Expense			Items 4			ASC 985-20			Non-GAAP1			Yr/Yr
Revenue	$	1,362																		$	1,254
Recurring	$	-	$	-	$	-	$	1,362						$	-	$	-	$	-	$	1,254	9%
Perpetual software licenses and hardware		106			-			-			-			106							340			-			-						340
Consulting services		431			-			-			-			431							570			-			-			-			570	-24%
Total revenue		1,899			-			-			-			1,899							2,164			-			-			-			2,164	-12%
Gross profit		920																			880
Recurring				(6)			(3)			(25)			954									(5)			(2)			(26)			913	4%
% of Revenue		67.5%												70.0%							70.2%												72.8%
Perpetual software licenses and hardware		22			-			-			(8)			30							118			-			1			(23)			140
% of Revenue		20.8%												28.3%							34.7%												41.2%
Consulting services		13			(8)			(8)			-			29							28			(10)			(4)			-			42	-31%
% of Revenue		3.0%												6.7%							4.9%												7.4%
Total gross profit		955			(14)			(11)			(33)			1,013							1,026			(15)			(5)			(49)			1,095		-7%
% of Revenue		50.3%												53.3%							47.4%												50.6%
Selling, general and administrative expenses		621			46			36			-			539							666			33			38			-			595	-9%
Research and development expenses		328			27			10			-			291							317			18			9			-			290	0%
Total expenses		949			73			46			-			830							983			51			47			-			885		-6%
% of Revenue		50.0%												43.7%							45.4%												40.9%
Income from operations																																			-13%
	6			(87)			(57)			(33)			183							43			(66)			(52)			(49)			210
% of Revenue		0.3%												9.6%							2.0%												9.7%
Other expense, net		(23)			-			-			-			(23)							(16)			-			-			-			(16)
(Loss) income before income taxes		(17)			(87)			(57)			(33)			160							27			(66)			(52)			(49)			194	-18%
Income tax expense (benefit)		7			(10)			(15)			(7)			39							(3)			(12)			(16)			(13)			38
% Tax rate		(41.2%)												24.4%							(11.1%)												19.6%
Net (loss) income	$	(24)	$	(77)	$	(42)	$	(26)	$	121						$	30	$	(54)	$	(36)	$	(36)	$	156	-22%
% of Revenue		(1.3%)												6.4%							1.4%												7.2%
Net (loss) income per common share	$	(0.21)																		$	0.25
Basic	$	(0.67)	$	(0.36)	$	(0.23)	$	1.06						$	(0.45)	$	(0.30)	$	(0.30)	$	1.31	-19%
Diluted	$	(0.21)	$	(0.67)	$	(0.35)	$	(0.23)	$	1.05						$	0.25	$	(0.45)	$	(0.28)	$	(0.30)	$	1.29	-19%
Weighted average common shares outstanding		114.2																			119.2
Basic													114.2																		119.2
Diluted5		114.2												115.5							121.2												121.2

1. While Teradata reports its results using generally accepted accounting principles in the U.S. (GAAP), certainnon-GAAP financial measures may be used to reflect operational performance and to determine the effectiveness of its business management. Certain special items may be segregated from our GAAP results from time-to-time to reflect the on-going Earnings Per Share performance of the company. Non-GAAP measures should not be used as a substitute for,

or superior to, the company's reported GAAP results.

1. Effective January 1, 2018, as a result of its business transformation initiative, Teradata implemented a new revenue reporting structure, wherein revenues are now reported under "Recurring", "Perpetual software licenses and hardware" and "Consulting services" categories. Prior revenue and gross profit data has been reclassified to conform to the current period presentation.
2. Special items for the twelve months ended December 31, 2019 include $6 million ($5 millionafter-tax) for amortization of acquired intangible assets, $42 million ($31 million after-tax) for integration and transformation activities, including the Dayton office closure and $9 million ($6 million after tax) for legal fees associated with the lawsuit that we initiated in the second quarter of 2018.
3. Special items for the twelve months ended December 31, 2018 include $6 million ($6 millionafter-tax) for amortization of acquired intangible assets, $43 million ($31 million after-tax) for for integration and transformation activities, including the Dayton office closure, $3 million ($3 million after tax) for legal fees associated with the lawsuit that we initiated in the second quarter of 2018, and $4 million tax benefit for SAB 118 adjustments related to tax reform.
4. Diluted shares are excluded from the GAAP diluted share count for because their effect would have beenanti-dilutive

3. As described below, the Company believes that free cash flow is a useful non-GAAP measure for investors. Teradata defines free cash flow as cash provided/used by operating activities less capital expenditures for property and equipment, and additions to capitalized software. Free cash flow does not have a uniform definition under GAAP and therefore, Teradata's definition may differ from other companies' definitions of this measure. Teradata's management uses free cash flow to assess the financial performance of the Company and believes it 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 generated after capital expenditures for, among other things, investment in the Company's existing businesses, strategic acquisitions, strengthening the Company's balance sheet, repurchase of the Company's stock and repayment of the Company's debt obligations, if any. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other nondiscretionary expenditures that are not deducted from the measure. This non-GAAP measure is not meant to be considered in isolation, as a substitute for, or superior to, results determined in accordance with GAAP, and should be read only in conjunction with our condensed consolidated financial statements prepared in accordance with GAAP.

(in millions)	For the			For the
Three Months		Twelve Months
		ended December 31		ended December 31
		2019			2018		2019			2018
Cash provided by operating activities (GAAP)	$54			$107	$148			$364
Lesscapital expenditures for:
Expenditures for property and equipment	(11)			(61)	(54)			(153)
Additions to capitalized software	(2)			(2)		(5)			(7)
Total capital expenditures	(13)			(63)	(59)			(160)
Free Cash Flow (non-GAAP measure)
$41			$44		$89			$204

Teradata used $9 million of cash in the fourth quarter and $63 million of cash for the full year 2019, related to reorganizing and restructuring its operations and its go-to-market functions to align to its strategy.

Note to Investors

This news release contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. Forward-looking statements generally relate to opinions, beliefs and projections of expected future financial and operating performance, business trends, and market conditions, among other things. These forward-looking statements are based upon current expectations and assumptions and involve risks and uncertainties that could cause actual results to differ materially, including the factors discussed in this release and those relating to: the global economic environment and business conditions in general or on the ability of our suppliers to meet their commitments to us, or the timing of purchases by our current and potential customers; the rapidly changing and intensely competitive nature of the information technology industry and the data analytics business; fluctuations in our operating results, including as a result of the pace and extent to which customers shift from perpetual to subscription-based licenses; our ability to realize the anticipated benefits of our business transformation program or other restructuring and cost saving initiatives; risks inherent in operating in foreign countries, including foreign currency fluctuations; risks associated with data privacy, cyberattacks and maintaining secure and effective internal information technology and control systems; the timely and successful development, production or acquisition and market acceptance and quality of new and existing products and services, including cloud-based offerings; tax rates; senior management changes, management and workforce turnover and the ability to attract and retain executives and skilled employees; protecting our intellectual property; availability and successful exploitation of new alliance and acquisition opportunities; recurring revenue may decline or recurring contracts may be cancelled or fail to be renewed; the impact on our business and financial reporting from changes in accounting rules; and other factors described from time to time in Teradata's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 10-K, as amended by its Form 10-K/A, and subsequent quarterly reports on Forms 10-Q, as well as the Company's annual report to stockholders. Teradata 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.