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1. Basis of Presentation
These statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the results of operations, financial position and cash flows of Teradata Corporation ("Teradata" or the "Company") for the interim periods presented herein. The year-end 2010 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Teradata's most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the "2010 Annual Report"). The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year. Certain prior-year amounts have been reclassified to conform to the 2011 presentation.
Revenue Recognition
Teradata's solution offerings typically include software, software subscriptions (unspecified when-and-if-available upgrades), hardware, maintenance support services, and other consulting, implementation and installation-related ("consulting") services. Teradata records revenue when it is realized, or realizable, and earned. Teradata considers these requirements met when:
• |
Persuasive evidence of an arrangement exists |
• |
The products or services have been delivered to the customer |
• |
The sales price is fixed or determinable and free of contingencies or significant uncertainties |
• |
Collectibility is reasonably assured |
Teradata reports revenue net of any taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. The Company assesses whether fees are fixed or determinable at the time of sale. Standard payment terms may vary based on the country in which the agreement is executed, but are generally between 30 and 90 days. Payments that are due within six months are generally deemed to be fixed or determinable based on a successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition. Teradata delivers its solutions primarily through direct sales channels, as well as through alliances with system integrators, other independent software vendors and distributors, and value-added resellers (collectively referred to as "resellers"). In assessing whether the sales price to a reseller is fixed or determinable, the Company considers, among other things, past business practices with the reseller, the reseller's operating history, payment terms, return rights and the financial wherewithal of the reseller. When Teradata determines that the contract fee to a reseller is not fixed or determinable, that transaction is deferred and recognized upon sell-through to the end customer.
The Company's deliverables often involve delivery or performance at different periods of time. Revenue for software is generally recognized upon delivery with the hardware once title and risk of loss have been transferred. Revenue for software subscriptions, which provide for unspecified upgrades or enhancements on a when-and-if-available basis, is recognized straight-line over the term of the subscription arrangement. Revenue for maintenance support services is also recognized on a straight-line basis over the term of the contract. Revenue for other consulting, implementation and installation services is recognized as services are provided. In certain instances, acceptance of the product or service is specified by the customer. In such cases, revenue is deferred until the acceptance criteria have been met. Delivery and acceptance generally occur in the same reporting period. The Company's arrangements generally do not include any customer negotiated provisions for cancellation, termination or refunds that would significantly impact recognized revenue.
In October 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product's essential functionality from the scope of the industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:
• |
Provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; |
• |
Require an entity to allocate revenue in an arrangement using its best estimate of selling prices ("BESP") for deliverables if a vendor does not have vendor-specific objective evidence of selling price ("VSOE") or third-party evidence of selling price ("TPE"); and |
• |
Eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
The standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Teradata adopted these standards on a prospective basis as of the beginning of fiscal 2011 for new and materially modified arrangements originating on or after January 1, 2011.
The Company evaluates all deliverables in an arrangement to determine whether they represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value and if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of Teradata. This guidance does not generally change the units of accounting for the Company's revenue transactions. Most of the Company's products and services qualify as separate units of accounting and are recognized upon meeting the criteria as described above.
For multiple deliverable arrangements that contain non-software related deliverables, the Company allocates revenue to each deliverable based upon the relative selling price hierarchy and if software and software-related deliverables are also included in the arrangement, to those deliverables as a group based on the BESP for the group. The selling price for a deliverable is based on its VSOE if available, TPE if VSOE is not available, or BESP if neither VSOE nor TPE is available. The Company then recognizes revenue when the revenue recognition criteria are met for each deliverable. For the software group or arrangements that contain only software and software-related deliverables, the revenue recognition criteria remain unchanged as further described below.
Teradata's data warehousing software and hardware products are sold and delivered together in the form of a "Node" of capacity as an integrated technology solution. Because both the database software and hardware platform are necessary to deliver the data warehouse's essential functionality, the database software and hardware (Node) are excluded from the software rules and considered a non-software related deliverable. Teradata software applications and related support are considered software-related deliverables. Additionally, the amount of revenue allocated to the delivered items utilizing the relative selling price method is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions (the non-contingent amount).
VSOE is based upon the normal pricing and discounting practices for those products and services when sold separately. Teradata uses the stated renewal rate approach in establishing VSOE for maintenance and subscriptions (collectively referred to as postcontract customer support "PCS"). Under this approach, the Company assesses whether the contractually stated renewal rates are substantive and consistent with the Company's normal pricing practices. Renewal rates greater than the lower level of our targeted pricing ranges are considered to be substantive and, therefore, meet the requirements to support VSOE. In instances where there is not a substantive renewal rate in the arrangement, the Company allocates revenue based upon BESP, using the minimum established pricing targets as supported by the renewal rates for similar customers utilizing the bell-curve method. Teradata also offers consulting and installation-related services to its customers, which are considered non-software deliverables if they relate to the nodes. These services are rarely considered essential to the functionality of the enterprise data warehouse ("EDW") solution deliverable and there is never software customization of the proprietary database software. VSOE for consulting services is based on the hourly rates for standalone consulting services projects by geographic region and are indicative of the Company's customary pricing practices. Pricing in each market is structured to obtain a reasonable margin based on input costs.
In nearly all multiple-deliverable arrangements, the Company is unable to establish VSOE for all deliverables in the arrangement. This is due to infrequently selling each deliverable separately (such is the case with our nodes), not pricing products or services within a narrow range, or only having limited sales history. When VSOE cannot be established, attempts are made to establish TPE of the selling price for each deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. However, Teradata's offerings contain significant differentiation such that the comparable pricing of products with similar functionality cannot be obtained. This is because Teradata's products contain a significant amount of proprietary technology and its solutions offer substantially different features and functionality than other available products. As Teradata's products are significantly different from those of its competitors, the Company is unable to establish TPE for the vast majority of its products.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a standalone basis. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, purchase volumes and pricing practices.
The Company reviews VSOE, TPE and its determination of BESP on a periodic basis and updates it, when appropriate, to ensure that the practices employed reflect the Company's recent pricing experience. The Company maintains internal controls over the establishment and updates of these estimates, which includes review and approval by the Company's management. For the three months ended March 31, 2011 there was no material impact to revenue resulting from changes in VSOE, TPE or BESP, nor does the Company expect a material impact from such changes in the near term.
The adoption of the amended revenue recognition guidelines did not have a material impact on the Company's results of operations or financial condition. The Company is not able to reasonably estimate the effect of adopting these standards on future financial periods as the impact will vary based on the nature and volume of new or materially modified deals in any given period. However, in terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on total revenue in periods after the initial adoption.
Accounting for arrangements prior to January 1, 2011. For transactions entered into prior to January 1, 2011, the Company allocates revenue for multiple deliverable arrangements for which VSOE exists for undelivered elements but not for the delivered elements, using the "residual method". Teradata does not typically have VSOE for its hardware and software products. Therefore, in a substantial majority of Teradata arrangements entered into prior to January 1, 2011, the residual method is used to allocate the arrangement consideration. Under the residual method, the VSOE of the undelivered elements is deferred and accounted for under the applicable revenue recognition guidance, and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. For arrangements in which VSOE does not exist for each undelivered element, revenue for the entire arrangement is deferred and not recognized until delivery of all the elements without VSOE has occurred, unless the only undelivered element is PCS in which case the entire contract is recognized ratably over the PCS period.
Contract accounting. If an arrangement involves significant production, modification or customization of the application software or the undelivered services are essential to the functionality of the delivered software then the Company uses the percentage-of-completion or completed-contract method of accounting. The percentage-of-completion method is used when estimates of costs to complete and extent of progress toward completion are reasonably dependable. The Company typically uses labor hours or costs incurred to date as a percentage of the total estimated labor hours or costs to fulfill the contract as the most reliable and meaningful measure that is available for determining a project's progress toward completion. In circumstances when reasonable and reliable cost estimates for a project cannot be made, the completed-contact method is used whereas no revenue is recognized until the project is complete. When total cost estimates exceed revenues, the Company accrues the estimated losses immediately. For purposes of allocation of the arrangement consideration, any products for which the services are not essential are separated utilizing the relative selling price method discussed above. PCS is also separated and allocated based on VSOE and then recognized ratably over the term. The remaining contract value, which typically include application software and essential services, is then recognized utilizing the percentage-of-completion method or completed-contract methods discussed above.
Term licenses, hosting arrangements and software-as-a-service ("SaaS"). As a result of the Company's acquisition of Aprimo, Inc. ("Aprimo") on January 21, 2011 (See Note 12), Teradata's application offerings will be expanded to include, term licenses, hosting arrangements and SaaS. Teradata previously offered its software applications primarily through a perpetual licensing arrangement. In cases where the contract requires the software to be hosted by the Company and provided via an on-demand arrangement, the software is considered a subscription. If the license is of limited life and does not require the Company to host the software for the customer, the software is considered a term license. In both types of these arrangements, revenues are recognized over the term of the agreement. For hosting arrangements where customers have the right to take possession of the Company's software at any time during the hosting period, the customer's rights to the software in these circumstances are not dependent on additional software payments or significant penalties.
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2. New Accounting Pronouncements
Accounting standards updates not effective until after March 31, 2011, are not expected to have a material impact on the Company's consolidated financial position or results of operations.
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3. Supplemental Financial Information
Three Months Ended March 31, |
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In millions | 2011 | 2010 | ||||||
Comprehensive Income |
||||||||
Net income |
$ | 65 | $ | 67 | ||||
Other comprehensive income, net of tax: |
||||||||
Net change in unrealized components of defined benefit plans, net of tax |
2 | 0 | ||||||
Currency translation adjustments |
2 | 1 | ||||||
Total comprehensive income |
$ | 69 | $ | 68 | ||||
As of | ||||||||
In millions | March 31, 2011 |
December 31, 2010 |
||||||
Inventories |
||||||||
Finished goods |
$ | 38 | $ | 39 | ||||
Service parts |
28 | 26 | ||||||
Total inventories |
$ | 66 | $ | 65 | ||||
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4. Goodwill and Acquired Intangible Assets
The following table identifies the activity relating to goodwill by operating segment:
In millions | Balance December 31, 2010 |
Additions | Currency Translation Adjustments |
Balance March 31, 2011 |
||||||||||||
Goodwill |
||||||||||||||||
Americas |
$ | 85 | $ | 228 | $ | 1 | $ | 314 | ||||||||
EMEA |
17 | 86 | 0 | 103 | ||||||||||||
APJ |
34 | 65 | 0 | 99 | ||||||||||||
Total goodwill |
$ | 136 | $ | 379 | $ | 1 | $ | 516 | ||||||||
The change in goodwill for the three months ended March 31, 2011 was primarily due to the acquisition of Aprimo, Inc. ("Aprimo"), which was completed during the period. There was no change in goodwill for the three months ended March 31, 2010.
Acquired Intangible Assets were specifically identified when acquired, and are deemed to have finite lives. The gross carrying amount and accumulated amortization for Teradata's acquired intangible assets were as follows:
Original Amortization Life (in Years) |
March 31, 2011 | December 31, 2010 | ||||||||||||||||||
In millions | Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
||||||||||||||||
Acquired intangible assets |
||||||||||||||||||||
Intellectual property/developed technology |
5 to 7 | 79 | (8 | ) | 18 | (6 | ) | |||||||||||||
Customer relationships |
4 to 10 | 52 | (2 | ) | 0 | 0 | ||||||||||||||
Trademarks/trade names |
10 | 10 | 0 | 0 | 0 | |||||||||||||||
Total |
4 to 10 | 141 | (10 | ) | 18 | (6 | ) | |||||||||||||
The increase in acquired intangible assets since December 31, 2010 was due to developed technology, trademark/trade name and customer relationship assets added through the Aprimo acquisition. Further information on the intangible assets acquired as part of this acquisition is included in Note 12.
The aggregate amortization expense (actual and estimated) for acquired intangible assets for the following periods is:
Three Months Ended March 31, 2011 |
For the year ended (estimated) | |||||||||||||||||||||||
In millions | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||||||
Amortization expense |
$ | 4 | $ | 19 | $ | 20 | $ | 19 | $ | 19 | $ | 15 |
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5. Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company's intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business that apply a broad range of statutory income tax rates, certain of which are less than the U.S. statutory rate.
The effective tax rate for the three months ended March 31, 2011 and March 31, 2010 was 28% and 22%, respectively. The tax rate for the three months ended March 31, 2011 was not impacted by any material discrete tax adjustments. The tax rate for the three months ended March 31, 2010 included a $5 million tax benefit associated with the recognition of certain foreign net operating loss carryforwards resulting from an audit settlement in the first quarter of 2010.
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6. Derivative Instruments and Hedging Activities
As a portion of the Company's operations and revenue occur outside the United States and in currencies other than the U.S. dollar, the Company is exposed to potential gains and losses from changes in foreign currency exchange rates. To mitigate the impact of currency fluctuations, the Company uses foreign exchange forward contracts to hedge transactional exposures resulting from foreign currency denominated inter-company receivables and payables. The forward contracts are designated as fair value hedges of specified foreign currency denominated inter-company receivables and payables and generally mature in three months or less. The Company does not hold or issue derivative financial instruments for trading purposes, nor does it hold or issue leveraged derivative instruments. By using derivative financial instruments to hedge exposures to changes in exchange rates, the Company exposes itself to credit risk. The Company manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of the applicable contracts.
All derivatives are recognized in the Condensed Consolidated Balance Sheet at their fair value. The fair values of foreign exchange contracts are based on market spot and forward exchange rates. As these fair value amounts relate to open foreign exchange contracts which have not yet reached maturity, they represent possible gains or losses that may not be realized in the future. Changes in the fair value of derivative financial instruments, along with the loss or gain on the hedged asset or liability, are recorded in current period earnings. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based, and are an indication of the extent of Teradata's involvement in such instruments. These notional amounts do not represent amounts exchanged by the parties and, therefore, are not a measure of the instrument's fair value. Across its portfolio of contracts, Teradata has both long and short positions relative to the U.S. dollar. As a result, Teradata's net exposure is less than the total contract notional amount of the Company's foreign exchange forward contracts.
The contract notional amount of the Company's foreign exchange forward contracts was $84 million ($34 million on a net basis) at March 31, 2011, and $91 million ($51 million on a net basis) at December 31, 2010. The fair value derivative assets and liabilities recorded in other current assets and accrued liabilities at March 31, 2011 and December 31, 2010, were not material.
Gains and losses from the Company's fair value hedges (foreign currency forward contracts and related hedged items) were immaterial for the three months ended March 31, 2011 and March 31, 2010. Gains and losses from foreign exchange forward contracts are fully recognized each period and reported along with the offsetting gain or loss of the related hedged item, either in cost of products or in other income, depending on the nature of the related hedged item.
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7. Commitments and Contingencies
In the normal course of business, the Company is subject to proceedings, lawsuits, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, intellectual property, tax matters, and other regulatory compliance and general matters, including those described below.
The Company is subject to governmental investigations and requests for information from time to time. As previously reported prior to Teradata's Separation from NCR, the United States Department of Justice is conducting an investigation regarding the propriety of the Company's arrangements or understandings with others in connection with certain federal contracts and the adequacy of certain disclosures related to such contracts. The investigation arises in connection with civil litigation in federal district court filed under the qui tam provisions of the civil False Claims Act against a number of information technology companies, including the Company. The complaints against the Company remain under seal. The Company has conducted its analysis of such claims focusing on the propriety of certain transactions under federal programs under which Teradata was a contractor. During 2008 the Company shared evidence with the Justice Department of questionable conduct that the Company uncovered and is continuing to cooperate with the Justice Department in its investigation, and is in discussions with the government to resolve this matter.
A separate portion of the government's investigation relates to the adequacy of pricing disclosures made to the government in connection with negotiation of NCR's General Services Administration Federal Supply Schedule as it relates to Teradata, prior to the Company's Separation from NCR, and to whether certain subsequent price reductions were properly passed on to the government. Both NCR and the Company are participating in this aspect of the investigation, with respect to certain products and services of each, and each will assume financial responsibility for its own exposures, if any, without indemnification from the other.
The Company has an accrual of approximately $3 million related to the current best estimate of probable liability relating to these matters. The Company believes the amounts provided in its financial statements are adequate in light of the probable and estimable liabilities. The Company believes that there is not a reasonable possibility that the loss in respect of these contingent matters will materially exceed the liability reflected in the Company's financial statements, although there can be no assurance that this will in fact be the case.
Guarantees and Product Warranties. Guarantees associated with the Company's business activities are reviewed for appropriateness and impact to the Company's financial statements. Periodically, the Company's customers enter into various leasing arrangements coordinated with a leasing company. In some instances, the Company guarantees the leasing company a minimum value at the end of the lease term on the leased equipment. As of March 31, 2011, the maximum future payment obligation of this guaranteed value and the associated liability balance was $3 million.
The Company provides its customers a standard manufacturer's warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls and cost of replacement parts. For each consummated sale, the Company recognizes the total customer revenue and records the associated warranty liability using pre-established warranty percentages for that product class.
The following table identifies the activity relating to the warranty reserve for the three months ended March 31:
In millions | 2011 | 2010 | ||||||
Warranty reserve liability |
||||||||
Beginning balance at January 1 |
$ | 6 | $ | 5 | ||||
Provisions for warranties issued |
3 | 3 | ||||||
Settlements (in cash or in kind) |
(4 | ) | (3 | ) | ||||
Balance at March 31 |
$ | 5 | $ | 5 | ||||
The Company also offers extended and/or enhanced coverage to its customers in the form of maintenance contracts. The Company accounts for these contracts by deferring the related maintenance revenue over the extended and/or enhanced coverage period. Costs associated with maintenance support are expensed as incurred. Amounts associated with these maintenance contracts are not included in the table above.
In addition, the Company provides its customers with certain indemnification rights. In general, the Company agrees to indemnify the customer if a third party asserts patent or other infringement on the part of the customer for its use of the Company's products. The Company has entered into indemnification agreements with the officers and directors of its subsidiaries. From time to time, the Company also enters into agreements in connection with its acquisition and divesture activities that include indemnification obligations by the Company. The fair value of these indemnification obligations is not readily determinable due to the conditional nature of the Company's potential obligations and the specific facts and circumstances involved with each particular agreement, and as such the Company has not recorded a liability in connection with these indemnification arrangements. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company's consolidated financial condition, results of operations or cash flows.
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8. Fair Value Measurements
GAAP has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as significant other observable inputs, such as quoted prices in active markets for similar assets or liabilities, or quoted prices in less-active markets for identical assets; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company's assets and liabilities measured at fair value on a recurring basis include money market funds and foreign currency exchange contracts. A portion of the Company's excess cash reserves are held in money market funds which generate interest income based on the prevailing market rates. Money market funds are included in cash and cash equivalents in the Company's balance sheet. Money market fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. When deemed appropriate, the Company minimizes its exposure to changes in foreign currency exchange rates through the use of derivative financial instruments, specifically, forward foreign exchange contracts. The fair value of these contracts are measured at the end of each interim reporting period using observable inputs other than quoted prices, specifically market spot and forward exchange rates. As such, these derivative instruments are classified within Level 2 of the valuation hierarchy. Fair value gains for open contracts are recognized as assets and fair value losses are recognized as liabilities. The foreign exchange currency contracts in effect at March 31, 2011 and December 31, 2010 had no material fair value gains and losses. Any realized gains or losses would be mitigated by corresponding gains or losses on the underlying exposures.
The Company's assets and liabilities measured at fair value on a recurring basis at March 31, 2011 were as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In millions | March 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 342 | $ | 342 | $ | 0 | $ | 0 | ||||||||
The Company's assets and liabilities measured at fair value on a recurring basis at December 31, 2010 were as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In millions | December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 534 | $ | 534 | $ | 0 | $ | 0 | ||||||||
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9. Debt
On October 1, 2007, Teradata entered into a five-year revolving credit agreement (the "Credit Facility"), under which the Company may borrow up to $300 million. The current Credit Facility agreement ends on September 30, 2012, at which point any remaining outstanding borrowings would be due for repayment. The interest rate charged on borrowings pursuant to the Credit Facility can vary depending on the interest rate option the Company chooses to utilize and the Company's leverage ratio at the time of the borrowing. In the near term, Teradata would anticipate choosing a floating rate based on the London Interbank Offered Rate ("LIBOR"). The Credit Facility is unsecured and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities. As of March 31, 2011, the Company was in compliance with all covenants of the Credit Facility.
On January 21, 2011, the Company borrowed $300 million from the Credit Facility in connection with its acquisition of Aprimo. As of March 31, 2011, $300 million in borrowings remained outstanding, and carried an interest rate of 0.57% based upon a 30-day LIBOR rate plus a 32 basis point spread. The Company had no additional funds available under the Credit Facility as of March 31, 2011. For additional information concerning the Credit Facility, refer to Note 13.
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11. Segment and Other Supplemental Information
Teradata manages its business in three geographic regions, which are also the Company's operating segments: (1) the North America and Latin America ("Americas") region; (2) the Europe, Middle East and Africa ("EMEA") region; and (3) the Asia Pacific and Japan ("APJ") region. Management evaluates the performance of its segments based on revenue and segment margin, and does not include segment assets for management reporting purposes. Corporate-related costs are fully allocated to the segments.
The following table presents regional segment revenue and gross margin for the Company:
Three Months Ended March 31, |
||||||||
In millions | 2011 | 2010 | ||||||
Revenue |
||||||||
Americas |
$ | 307 | $ | 252 | ||||
EMEA |
125 | 106 | ||||||
APJ |
74 | 71 | ||||||
Total revenue |
506 | 429 | ||||||
Gross margin |
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Americas |
175 | 146 | ||||||
EMEA |
70 | 57 | ||||||
APJ |
30 | 33 | ||||||
Total gross margin |
275 | 236 | ||||||
Selling, general and administrative expenses |
150 | 118 | ||||||
Research and development expenses |
34 | 32 | ||||||
Total income from operations |
$ | 91 | $ | 86 | ||||
The following table presents revenue by product and services for the Company:
Three Months Ended March 31, |
||||||||
In millions | 2011 | 2010 | ||||||
Products (software and hardware)(1) |
$ | 235 | $ | 200 | ||||
Consulting services |
145 | 117 | ||||||
Maintenance services |
126 | 112 | ||||||
Total services |
271 | 229 | ||||||
Total revenue |
$ | 506 | $ | 429 | ||||
(1) |
Our data warehousing software and hardware products are often sold and delivered together in the form of a "node" of capacity as an integrated technology solution. Accordingly, it is impracticable to provide the breakdown of revenue from various types of software and hardware products. |
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12. Business Combinations
On January 21, 2011, Teradata completed its acquisition of 100 percent of the stock of Aprimo, pursuant to an Agreement and Plan of Merger, dated December 21, 2010. Aprimo is a global provider of integrated marketing software solutions. Aprimo is being integrated into Teradata's operations, and the Aprimo organization will support Teradata's applications strategy, including development, marketing, sales and services. The purpose of this acquisition is to advance Teradata's position in integrated marketing management, building on Aprimo's established and well-positioned business. Aprimo's operations are being integrated into, and its actual results will be reflected in, the Company's three geographic operating regions.
The aggregate consideration payable with respect to all of the outstanding stock and equity interests (including all outstanding warrants, stock options and restricted stock units) of Aprimo in the acquisition was $525 million in cash, subject to potential adjustments for closing working capital and certain of Aprimo's indemnification obligations under the merger agreement. The purchase price was funded in part by using existing U.S. cash, and in part by drawing-down in full the Company's Credit Facility, (see Note 9). Additionally, for the three months ended March 31, 2011, Teradata recognized approximately $3 million in acquisition-related expenses, which were recorded as General and Administrative expenses.
Preliminary Purchase Price Allocation
Pursuant to our business combinations accounting policy, the total preliminary purchase price for Aprimo was allocated to the net tangible and intangible assets based upon their preliminary fair values as of January 21, 2011 as set forth below. The excess of the preliminary purchase price over the preliminary net tangible and intangible assets was recorded as goodwill, which represents synergies of combining the businesses. The preliminary allocation of the purchase price was based upon a preliminary valuation and certain of our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the purchase price allocation that are not yet finalized relate to the fair values of certain deferred taxes, tax contingencies and residual goodwill. It is expected that none of the goodwill will be deductible for tax purposes. We expect to continue to obtain information to assist us in determining the fair value related to certain of the net assets acquired at the acquisition date during the measurement period. Our preliminary purchase price allocation for Aprimo is as follows.
In millions | ||||
Cash and cash equivalents |
$ | 26 | ||
Accounts receivables |
22 | |||
Goodwill |
379 | |||
Intangible assets |
123 | |||
Other assets |
12 | |||
Deferred revenue |
(25 | ) | ||
Other liabilities |
(12 | ) | ||
Total preliminary purchase price |
$ | 525 | ||
Preliminary Valuations of Intangible Assets Acquired
The following table sets forth the components of intangible assets acquired in connection with the Aprimo acquisition:
Dollars in millions | Preliminary Fair Value |
Weighted Average Useful Life |
||||||
Customer relationships—subscription, hosting, maintenance and perpetual software |
$ | 37 | 10 years | |||||
Customer relationships—professional services |
15 | 4 years | ||||||
Developed technology |
61 | 7 years | ||||||
Trademarks/trade names |
10 | 10 years | ||||||
Total intangible assets |
$ | 123 | 8 years | |||||
Unaudited Supplemental Financial Information
The following table presents the unaudited amounts of Aprimo revenue and income included in Teradata's condensed consolidated results of operations since the acquisition on January 21, 2011, as well as pro forma results of Teradata (including Aprimo) for the three month periods ended March 31, 2011 and March 31, 2010, had the acquisition been completed on January 1, 2010. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2010.
The actual impact of results from Aprimo from January 21, 2011 through March 31, 2011 included:
• |
a $7 million reduction in the recognition of deferred revenue and a $1 million reduction in the recognition of associated cost of revenue for which there was no further performance obligation, and |
• |
a $3 million increase in amortization of intangible assets as a result of purchase price allocations. |
The unaudited pro forma results for the three months ended March 31, 2011 include:
• |
$1 million in additional amortization charges for acquired intangible assets, |
• |
$5 million in additional revenue assuming that the majority of the required acquisition-related revenue eliminations had taken place in the prior-year period, and |
• |
$4 million in eliminated transaction and integration expenses as if those costs had been recognized in the prior-year period. |
The unaudited pro forma results for the three months ended March 31, 2010 include:
• |
$4 million in additional amortization charges for acquired intangible assets, |
• |
$8 million in elimination of deferred revenue recognition and $1 million in associated elimination of deferred cost of revenue for which there was no further performance obligation, |
• |
$4 million in transaction and integration expenses associated with the acquisition, and |
• |
$1 million in interest expense for acquisition-related borrowings from the Company's revolving credit facility. |
Certain of these adjustments reflect preliminary estimates.
In millions | Revenue | Net Income | ||||||
Actual impact of Aprimo results from 1/21/2011 to 3/31/2011 |
$ | 9 | ($ | 9 | ) | |||
Pro forma condensed combined results from 1/1/2011 to 3/31/2011 |
$ | 517 | $ | 70 | ||||
Pro forma condensed combined results from 1/1/2010 to 3/31/2010 |
$ | 443 | $ | 58 |
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13. Subsequent Events
On April 5, 2011, Teradata completed its acquisition of the remaining stock of Aster Data Systems, Inc. ("Aster Data"), pursuant to an Agreement and Plan of Merger, dated March 2, 2011. Aster Data is a market leader in advanced analytics and the management of diverse, unstructured data. The combination of Teradata and Aster Data technologies will enable businesses to perform better analytics on large sets of unstructured data, also known as "big data."
The aggregate consideration payable with respect to all of the outstanding stock and equity interests (including all outstanding warrants and vested stock options) of Aster Data is approximately $260 million, after adjustment for Aster Data's net indebtedness, transaction expenses and any severance or other change-in-control related liabilities. The aggregate consideration payable excludes the value of Teradata's pre-existing 11.2% equity investment in Aster Data and cash retention payments to be made following the completion of the acquisition in lieu of Aster Data's unvested and committed equity awards, which amounts will generally be paid on pre-existing vesting schedules on a quarterly basis over the next four years subject to employees meeting the retention and other terms and conditions thereof.
Teradata financed the acquisition of Aster Data using a portion of the funds from a new $300 million five-year, unsecured term loan, which closed on April 5, 2011. The term loan is payable in quarterly installments, commencing on June 30, 2012, with all remaining principal due on April 5, 2016. The outstanding principal amount of the term loan agreement bears interest at a floating rate based upon a negotiated base rate or a Eurodollar rate plus in each case a margin based on the leverage ratio of the Company.
As Teradata's acquisition of Aster Data closed on April 5, 2011, management is still determining the purchase price allocation. However, the substantial majority of the purchase price is expected to be allocated to goodwill and intangible assets. Additionally, the pro forma impact of the Aster Data acquisition on the Company's 2011 results of operations excluding acquisition and integration-related costs, is not expected to be material.
On April 21, 2011, the Company repaid $280 million of the outstanding balance of its revolving Credit Facility borrowings (see Note 9).
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Revenue Recognition
Teradata's solution offerings typically include software, software subscriptions (unspecified when-and-if-available upgrades), hardware, maintenance support services, and other consulting, implementation and installation-related ("consulting") services. Teradata records revenue when it is realized, or realizable, and earned. Teradata considers these requirements met when:
• |
Persuasive evidence of an arrangement exists |
• |
The products or services have been delivered to the customer |
• |
The sales price is fixed or determinable and free of contingencies or significant uncertainties |
• |
Collectibility is reasonably assured |
Teradata reports revenue net of any taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. The Company assesses whether fees are fixed or determinable at the time of sale. Standard payment terms may vary based on the country in which the agreement is executed, but are generally between 30 and 90 days. Payments that are due within six months are generally deemed to be fixed or determinable based on a successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition. Teradata delivers its solutions primarily through direct sales channels, as well as through alliances with system integrators, other independent software vendors and distributors, and value-added resellers (collectively referred to as "resellers"). In assessing whether the sales price to a reseller is fixed or determinable, the Company considers, among other things, past business practices with the reseller, the reseller's operating history, payment terms, return rights and the financial wherewithal of the reseller. When Teradata determines that the contract fee to a reseller is not fixed or determinable, that transaction is deferred and recognized upon sell-through to the end customer.
The Company's deliverables often involve delivery or performance at different periods of time. Revenue for software is generally recognized upon delivery with the hardware once title and risk of loss have been transferred. Revenue for software subscriptions, which provide for unspecified upgrades or enhancements on a when-and-if-available basis, is recognized straight-line over the term of the subscription arrangement. Revenue for maintenance support services is also recognized on a straight-line basis over the term of the contract. Revenue for other consulting, implementation and installation services is recognized as services are provided. In certain instances, acceptance of the product or service is specified by the customer. In such cases, revenue is deferred until the acceptance criteria have been met. Delivery and acceptance generally occur in the same reporting period. The Company's arrangements generally do not include any customer negotiated provisions for cancellation, termination or refunds that would significantly impact recognized revenue.
In October 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product's essential functionality from the scope of the industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:
• |
Provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; |
• |
Require an entity to allocate revenue in an arrangement using its best estimate of selling prices ("BESP") for deliverables if a vendor does not have vendor-specific objective evidence of selling price ("VSOE") or third-party evidence of selling price ("TPE"); and |
• |
Eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
The standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Teradata adopted these standards on a prospective basis as of the beginning of fiscal 2011 for new and materially modified arrangements originating on or after January 1, 2011.
The Company evaluates all deliverables in an arrangement to determine whether they represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value and if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of Teradata. This guidance does not generally change the units of accounting for the Company's revenue transactions. Most of the Company's products and services qualify as separate units of accounting and are recognized upon meeting the criteria as described above.
For multiple deliverable arrangements that contain non-software related deliverables, the Company allocates revenue to each deliverable based upon the relative selling price hierarchy and if software and software-related deliverables are also included in the arrangement, to those deliverables as a group based on the BESP for the group. The selling price for a deliverable is based on its VSOE if available, TPE if VSOE is not available, or BESP if neither VSOE nor TPE is available. The Company then recognizes revenue when the revenue recognition criteria are met for each deliverable. For the software group or arrangements that contain only software and software-related deliverables, the revenue recognition criteria remain unchanged as further described below.
Teradata's data warehousing software and hardware products are sold and delivered together in the form of a "Node" of capacity as an integrated technology solution. Because both the database software and hardware platform are necessary to deliver the data warehouse's essential functionality, the database software and hardware (Node) are excluded from the software rules and considered a non-software related deliverable. Teradata software applications and related support are considered software-related deliverables. Additionally, the amount of revenue allocated to the delivered items utilizing the relative selling price method is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions (the non-contingent amount).
VSOE is based upon the normal pricing and discounting practices for those products and services when sold separately. Teradata uses the stated renewal rate approach in establishing VSOE for maintenance and subscriptions (collectively referred to as postcontract customer support "PCS"). Under this approach, the Company assesses whether the contractually stated renewal rates are substantive and consistent with the Company's normal pricing practices. Renewal rates greater than the lower level of our targeted pricing ranges are considered to be substantive and, therefore, meet the requirements to support VSOE. In instances where there is not a substantive renewal rate in the arrangement, the Company allocates revenue based upon BESP, using the minimum established pricing targets as supported by the renewal rates for similar customers utilizing the bell-curve method. Teradata also offers consulting and installation-related services to its customers, which are considered non-software deliverables if they relate to the nodes. These services are rarely considered essential to the functionality of the enterprise data warehouse ("EDW") solution deliverable and there is never software customization of the proprietary database software. VSOE for consulting services is based on the hourly rates for standalone consulting services projects by geographic region and are indicative of the Company's customary pricing practices. Pricing in each market is structured to obtain a reasonable margin based on input costs.
In nearly all multiple-deliverable arrangements, the Company is unable to establish VSOE for all deliverables in the arrangement. This is due to infrequently selling each deliverable separately (such is the case with our nodes), not pricing products or services within a narrow range, or only having limited sales history. When VSOE cannot be established, attempts are made to establish TPE of the selling price for each deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. However, Teradata's offerings contain significant differentiation such that the comparable pricing of products with similar functionality cannot be obtained. This is because Teradata's products contain a significant amount of proprietary technology and its solutions offer substantially different features and functionality than other available products. As Teradata's products are significantly different from those of its competitors, the Company is unable to establish TPE for the vast majority of its products.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a standalone basis. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, purchase volumes and pricing practices.
The Company reviews VSOE, TPE and its determination of BESP on a periodic basis and updates it, when appropriate, to ensure that the practices employed reflect the Company's recent pricing experience. The Company maintains internal controls over the establishment and updates of these estimates, which includes review and approval by the Company's management. For the three months ended March 31, 2011 there was no material impact to revenue resulting from changes in VSOE, TPE or BESP, nor does the Company expect a material impact from such changes in the near term.
The adoption of the amended revenue recognition guidelines did not have a material impact on the Company's results of operations or financial condition. The Company is not able to reasonably estimate the effect of adopting these standards on future financial periods as the impact will vary based on the nature and volume of new or materially modified deals in any given period. However, in terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on total revenue in periods after the initial adoption.
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Three Months Ended March 31, |
||||||||
In millions | 2011 | 2010 | ||||||
Comprehensive Income |
||||||||
Net income |
$ | 65 | $ | 67 | ||||
Other comprehensive income, net of tax: |
||||||||
Net change in unrealized components of defined benefit plans, net of tax |
2 | 0 | ||||||
Currency translation adjustments |
2 | 1 | ||||||
Total comprehensive income |
$ | 69 | $ | 68 | ||||
As of | ||||||||
In millions | March 31, 2011 |
December 31, 2010 |
||||||
Inventories |
||||||||
Finished goods |
$ | 38 | $ | 39 | ||||
Service parts |
28 | 26 | ||||||
Total inventories |
$ | 66 | $ | 65 | ||||
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In millions | Balance December 31, 2010 |
Additions | Currency Translation Adjustments |
Balance March 31, 2011 |
||||||||||||
Goodwill |
||||||||||||||||
Americas |
$ | 85 | $ | 228 | $ | 1 | $ | 314 | ||||||||
EMEA |
17 | 86 | 0 | 103 | ||||||||||||
APJ |
34 | 65 | 0 | 99 | ||||||||||||
Total goodwill |
$ | 136 | $ | 379 | $ | 1 | $ | 516 | ||||||||
Original Amortization Life (in Years) |
March 31, 2011 | December 31, 2010 | ||||||||||||||||||
In millions | Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
||||||||||||||||
Acquired intangible assets |
||||||||||||||||||||
Intellectual property/developed technology |
5 to 7 | 79 | (8 | ) | 18 | (6 | ) | |||||||||||||
Customer relationships |
4 to 10 | 52 | (2 | ) | 0 | 0 | ||||||||||||||
Trademarks/trade names |
10 | 10 | 0 | 0 | 0 | |||||||||||||||
Total |
4 to 10 | 141 | (10 | ) | 18 | (6 | ) | |||||||||||||
Three Months Ended March 31, 2011 |
For the year ended (estimated) | |||||||||||||||||||||||
In millions | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||||||
Amortization expense |
$ | 4 | $ | 19 | $ | 20 | $ | 19 | $ | 19 | $ | 15 |
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In millions | 2011 | 2010 | ||||||
Warranty reserve liability |
||||||||
Beginning balance at January 1 |
$ | 6 | $ | 5 | ||||
Provisions for warranties issued |
3 | 3 | ||||||
Settlements (in cash or in kind) |
(4 | ) | (3 | ) | ||||
Balance at March 31 |
$ | 5 | $ | 5 | ||||
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Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In millions | March 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 342 | $ | 342 | $ | 0 | $ | 0 | ||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In millions | December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 534 | $ | 534 | $ | 0 | $ | 0 | ||||||||
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Three Months Ended March 31, |
||||||||
In millions | 2011 | 2010 | ||||||
Revenue |
||||||||
Americas |
$ | 307 | $ | 252 | ||||
EMEA |
125 | 106 | ||||||
APJ |
74 | 71 | ||||||
Total revenue |
506 | 429 | ||||||
Gross margin |
||||||||
Americas |
175 | 146 | ||||||
EMEA |
70 | 57 | ||||||
APJ |
30 | 33 | ||||||
Total gross margin |
275 | 236 | ||||||
Selling, general and administrative expenses |
150 | 118 | ||||||
Research and development expenses |
34 | 32 | ||||||
Total income from operations |
$ | 91 | $ | 86 | ||||
Three Months Ended March 31, |
||||||||
In millions | 2011 | 2010 | ||||||
Products (software and hardware)(1) |
$ | 235 | $ | 200 | ||||
Consulting services |
145 | 117 | ||||||
Maintenance services |
126 | 112 | ||||||
Total services |
271 | 229 | ||||||
Total revenue |
$ | 506 | $ | 429 | ||||
(1) |
Our data warehousing software and hardware products are often sold and delivered together in the form of a "node" of capacity as an integrated technology solution. Accordingly, it is impracticable to provide the breakdown of revenue from various types of software and hardware products. |
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In millions | ||||
Cash and cash equivalents |
$ | 26 | ||
Accounts receivables |
22 | |||
Goodwill |
379 | |||
Intangible assets |
123 | |||
Other assets |
12 | |||
Deferred revenue |
(25 | ) | ||
Other liabilities |
(12 | ) | ||
Total preliminary purchase price |
$ | 525 | ||
Dollars in millions | Preliminary Fair Value |
Weighted Average Useful Life |
||||||
Customer relationships—subscription, hosting, maintenance and perpetual software |
$ | 37 | 10 years | |||||
Customer relationships—professional services |
15 | 4 years | ||||||
Developed technology |
61 | 7 years | ||||||
Trademarks/trade names |
10 | 10 years | ||||||
Total intangible assets |
$ | 123 | 8 years | |||||
In millions | Revenue | Net Income | ||||||
Actual impact of Aprimo results from 1/21/2011 to 3/31/2011 |
$ | 9 | ($ | 9 | ) | |||
Pro forma condensed combined results from 1/1/2011 to 3/31/2011 |
$ | 517 | $ | 70 | ||||
Pro forma condensed combined results from 1/1/2010 to 3/31/2010 |
$ | 443 | $ | 58 |
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