TERADATA CORP /DE/ (TDC) FY 2022 MD&A

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included in this Annual Report on Form 10-K ("Annual Report"). This Annual Report contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the MD&A are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to several factors, including those discussed in other sections of this Annual Report. See "Risk Factors" and "Forward-looking Statements."

OVERVIEW

Teradata is a leading connected multi-cloud data platform for enterprise analytics, focused on helping companies leverage all their data across an enterprise, at scale. In doing so, we help companies to find answers to their toughest business challenges. All of our efforts are in support of our purpose of transforming how businesses work and people live through the power of data. Our platform is composed of our data platform – Teradata Vantage – which is designed to run across public cloud, private cloud and on-premises environments. This platform is supported by business consulting and support services that enable customers to extract insights from across a company’s entire data and analytics ecosystem. Teradata’s strategy is discussed under Part I, Item I of this Annual Report on Form 10-K.

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

To allow for greater transparency regarding the progress we are making toward achieving our strategic objectives, we utilize the following financial and performance metrics:

•Total Annual Recurring Revenue ("Total ARR") - annual value at a point in time of all recurring contracts, including subscription, cloud, software upgrade rights, and maintenance. ARR does not include managed services and third-party software.

•Public Cloud ARR (included within Total ARR) - annual value at a point in time of all contracts related to public cloud implementations of Teradata VantageCloud and does not include ARR related to private or managed cloud implementations.

•Cloud Net Expansion Rate - Teradata calculates its last-twelve months dollar-based cloud net expansion rate as of a fiscal quarter end as follows:

◦We identify the ARR for active cloud customers in the fiscal quarter ending one year prior to the given fiscal quarter (the "base period");

◦We then identify the public cloud ARR in the given fiscal quarter (the "current period") from the same set of active cloud customers as the base period, including increases in usage, as well as reductions and cancellations, and additional conversions of on-premises revenues to the cloud for customers active in the base period, all in constant currency; and

◦The quarterly dollar-based, cloud net expansion rate is calculated by taking the ARR from the current period and dividing by the ARR from the base period.

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

COVID-19 Update

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During the twelve months ended December 31, 2022, there were some continued effects of the coronavirus pandemic ("COVID-19") and the related actions by governments around the world on our business, and economies generally. However, operationally we have been able to run our business without significant interruptions. Under our return-to-office plans, none of our employees are required to return to an office environment and can choose to continue to work remotely or under a hybrid model. There remains some uncertainty regarding the potential impact of COVID-19 and new variants on our business in the future, from both a financial and operational perspective. We will continue our diligent efforts to monitor and respond as appropriate to the impacts of the pandemic on our business, including the status of our workforce, supply chain, customers, suppliers, and vendors, based on the priorities described above. Our actions will continue to be informed by the requirements and recommendations of the federal, state or local authorities. We intend to remain agile and have contingency plans in place to appropriately respond to conditions as they unfold. For more information, see "Risk Factors" under Part I, Item 1A of this Annual Report on Form 10-K.

2022 FINANCIAL OVERVIEW

As more fully discussed in later sections of this MD&A, the following are the financial highlights for 2022:

•Revenue of $1,795 million decreased by 6% in 2022 as compared to 2021, with an underlying 3% decrease in recurring revenue. Perpetual software licenses, hardware and other revenue decreased by 16% and consulting services revenue decreased by 17%. Revenue was adversely impacted primarily by foreign currency fluctuations and lost revenue from ceasing our operations in Russia in the first quarter of 2022. The decline in consulting service revenue was additionally due to our focus on higher-margin engagements and purposeful decrease in consulting services given our strategic development of a partner ecosystem. Foreign currency fluctuations had a 4% adverse impact on total revenue compared to the prior year.

•Gross profit as a percent of revenue was 60.2% in 2022, a decrease from 61.9% in 2021, primarily due to adverse impact from foreign currency fluctuations, the loss of revenue due to exiting Russia operations, and an increasing mix of cloud revenue as our cloud business continues to scale as compared to the prior year.

•Operating expenses in 2022 increased by 1% as compared to 2021, primarily driven by higher stock-based compensation expense and expenses associated with exiting our business in Russia, partially offset by favorable impact from foreign currency fluctuations, and our cost discipline initiatives.

•Operating income was $118 million in 2022, down from $231 million in 2021.

•Net income was $33 million in 2022 versus net income of $147 million in 2021, primarily due to reduced revenue. Diluted net earnings per share was $0.31 in 2022 compared to diluted earnings per share of $1.30 in 2021.

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RESULTS FROM OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

In July 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2019-07, "Codification Updates to SEC Sections-Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification", which made a number of changes meant to simplify certain disclosures in financial condition and results of operations, particularly by eliminating year-to-year comparisons between prior periods previously disclosed. In accordance with the relevant aspects of the rule covering the current year annual report, we now include disclosures on results of operations for fiscal year 2022 versus 2021 only. For discussion of fiscal year 2021 versus 2020 see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report filed with the SEC for the fiscal year ended December 31, 2021.

Revenue

2022 compared to 2021 - Total revenue decreased 6% in 2022, which included a 4% negative impact from foreign currency exchange rate fluctuations. Total revenue was adversely impacted by the loss of approximately $60 million in revenue (approximately $45 million of which related to recurring revenue) as a result of our ceasing operations in Russia during the first quarter of 2022. Recurring revenue declined 3% in 2022, which included a 4% negative impact from foreign currency exchange rate fluctuations and a 3% negative impact from the loss of Russia recurring revenue.

For full year 2023, recurring revenue is expected to increase in the range of 4% to 7% year-over-year. Total revenue is expected to increase in the range of 1% to 4% year-over-year.

Revenues from perpetual software licenses, hardware, and other were down 16% in 2022, including 4% of adverse impact from foreign currency exchange rate fluctuations, as customers continue to transition to our subscription-based offerings, consistent with our overall strategy.

Aligned with our strategy, we expect perpetual software licenses, hardware and other revenue to decline in 2023.

Consulting services revenue decreased 17%, including a 6% adverse impact from foreign currency exchange rate fluctuations, as we continue to realign and focus our consulting resources on higher-margin engagements, both direct engagement with customers and joint engagement with partners that drive increased software consumption within our targeted customer base. Consulting services revenue was also impacted by ceasing our operations in Russia.

Consistent with our continued focus on higher-margin engagements that further our strategy and a deliberate decrease in lower-margin consulting services that are outside our core strategic focus, we are forecasting 2023 consulting services revenue to be roughly flat as compared to 2022.

As a portion of our operations and revenue occur outside the United States, and in currencies other than the U.S. dollar, we are exposed to fluctuations in foreign currency exchange rates. Based on currency rates as of January 31, 2023, Teradata is estimating a 0.5%-to-1.0% negative impact from currency translation on our 2023 full-year total revenues.

Financial and Performance Measures

Total ARR is composed of three main categories: (1) Public Cloud ARR, (2) ARR related to on-premises subscription-based contracts and private cloud ("Subscription ARR"), and (3) ARR related to our legacy perpetual maintenance and software upgrade rights. Our financial and performance measures for the following years ended

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December 31 was as follows:

Total ARR decreased 1% versus the prior year, with declines in Subscription ARR and Maintenance and Software upgrade rights ARR partially off-set by growth in Public Cloud ARR. Ceasing operations in Russia adversely affected Total ARR by approximately 4% and adverse foreign currency fluctuations had a negative 3% impact.

Public Cloud ARR increased 77% versus the prior year primarily due to on-premises customers migrating to Teradata VantageCloud along with a strong net expansion rate of 117%. This growth was driven by customer demand for our differentiated offerings, resulting in new, incremental workloads for both migrations and expansions. Subscription ARR decreased 6% in 2022 from the prior year primarily due to the adverse impact of foreign currency exchange rate fluctuations and ceasing operations in Russia.

Our Maintenance and Software upgrade rights ARR declined 28% compared to 2021. This was expected as we continue to transition to a subscription model and customers increasingly purchased Teradata on a subscription and/or public cloud basis, the decline is also due to foreign currency exchange rate fluctuations and ceasing operations in Russia. Excluding foreign currency exchange rate fluctuations, our overall ARR growth was primarily driven by increased demand for our differentiated offerings, increasing partner involvement, and incremental workloads driving migrations and expansions.

For the full year 2023, Public Cloud ARR is expected to increase in the range of 53% to 57% year-over-year. Total ARR is expected to increase in the range of 6% to 8% year-over-year.

Gross Profit

The Company often uses specific terms and definitions to describe variances in gross profit. The terms and definitions most often used are as follows:

•Revenue Mix - The proportion of recurring, consulting, and perpetual software licenses, hardware and other revenue that generates the total revenue of the Company. Changes in revenue mix can have an impact on gross profit even if total revenue remains unchanged.

•Recurring Revenue Mix - The proportion of various recurring revenue offerings that comprise the total of recurring revenue. For example, a higher mix of cloud deals will have a negative impact on total recurring gross profit until we achieve scale.

•Deal Mix - Refers to the type of transactions closed within the period that generate the total perpetual software license, hardware and other revenue. For example, a higher mix of Teradata versus third-party products can impact profitability.

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Gross profit for the following years ended December 31 was as follows:

2022 compared to 2021 - The decrease in recurring gross profit as a percentage of revenue was primarily driven by decreased revenue as a result of foreign currency exchange rate fluctuations, ceasing operations in Russia, charges related to ceasing operations in Russia, and a higher recurring revenue mix that shifted to cloud.

The decrease in perpetual software licenses, hardware and other gross profit as a percentage of revenue was primarily driven by deal mix and a higher ratio of perpetual hardware to software revenue as compared to prior year as the vast majority of all customers have transitioned to our subscription-based offerings, consistent with our overall strategy.

Consulting services gross profit as a percentage of revenue decreased as compared to the prior year primarily due to lower revenue. We continue to refocus our consulting organization on Teradata Vantage-oriented offerings and reduce our footprint in non-core consulting engagements, accompanied by our strategic development of a partner ecosystem.

For 2023, we expect overall gross profit as a percentage of revenue to be slightly lower than 2022. Recurring gross margin is expected to be lower due to a higher mix of cloud revenue though cloud gross margin is expected to increase as compared to 2022. We are investing in activities that continue to drive increased adoption and consumption of the Teradata Vantage platform, including greater efficiencies with cloud service providers, offset by enhancements to our consumption pricing model. In addition, we are forecasting less of a positive impact from upfront recurring revenue as customers continue to migrate to the Cloud. Consulting services margin is expected to be at a similar gross margin rate as 2022. We anticipate lower gross margin rates in perpetual software licenses, hardware and other in 2023 compared to 2022.

Operating Expenses

2022 compared to 2021 - The increase in selling, general and administrative ("SG&A") expense was primarily driven by higher stock-based compensation and ceasing operations in Russia as compared to the prior year, partially offset by favorable impact from foreign currency exchange rate fluctuations and continued cost discipline as compared to the prior year.

R&D expenses increased in 2022 as compared to the prior year. R&D expenses were impacted by higher stock-based compensation, an increase in spending to focus our R&D efforts on accelerating our transformation and cloud-first strategy and related cloud initiatives, such as VantageCloud Lake, partially off-set by continued cost discipline initiatives as compared to the prior year.

We expect total operating expenses to decrease in 2023 as we continue to focus on our cost discipline initiatives, and align and optimize our talent needs to drive our cloud-first and profitable growth strategy.

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Other Expense, net

Other expense, net in 2022 and 2021, is comprised primarily of interest expense on long-term debt and finance leases, foreign currency transactions, as well as benefit costs for our pension and postemployment plans, partially offset by interest income earned on our cash and cash equivalents. Other expense is higher in 2022, primarily due to $22 million higher losses resulting from foreign currency transactions compared to the prior year.

Provision for Income Taxes

The effective income tax rate for the following years ended December 31 was as follows:

The 2022 effective tax rate included a net $1 million of discrete tax benefit, of which $2 million of tax benefit related to the reversal of a FIN 48 tax reserve due to the expiration of statute of limitations and $4 million of incremental tax benefit related to stock-based compensation. These tax benefits were partially offset by $5 million of discrete tax expense related to valuation allowances recorded against deferred tax assets and current receivables in Russia that are not expected to be realized as a result of the discontinuation of our business in Russia.

Effective on January 1, 2022, the U.S. tax law changed to require that R&D expenses be capitalized and amortized for tax purposes under Internal Revenue Code Section 174; as a result of this law change, we recognized approximately $4 million of tax expense related to global intangible low-taxed income ("GILTI") in our marginal effective tax rate for 2022. We expect that a majority of our foreign earnings will be repatriated to the U.S.

The 2021 effective tax rate included a net $8 million of discrete tax benefit, of which $3 million of tax benefit was related to true-up adjustments to reconcile our 2020 U.S. tax return versus the preliminary estimate as booked in its tax provision for the year ended December 31, 2020 and $2 million of tax benefit related to a reduction in the transition tax on accumulated foreign earnings resulting from the 2017 Tax Act based on our amended 2017 tax return. In addition, we recognized $4 million of incremental tax benefit related to stock-based compensation. These tax benefits were partially offset by $1 million of discrete tax expense related to adjustments to our accrual for unrecognized tax benefits in accordance with FIN 48.

We are expecting our full-year effective tax rate for 2023 to be approximately 37%, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction and the estimated discrete items to be recognized in 2023. The forecasted tax rate is based on the overseas profits being taxed at an overall effective tax rate of approximately 25%, as compared to the U.S. federal statutory tax rate of 21%.

Revenue and Gross Profit by Operating Segment

Teradata manages its business under three geographic regions, which are also the Company’s operating segments: (1) Americas region (North America and Latin America); (2) EMEA region (Europe, Middle East, and Africa) and (3) APJ region (Asia Pacific and Japan). For purposes of discussing results by segment, management excludes the impact of certain items, consistent with the manner by which management evaluates the performance of each segment. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess financial performance. The chief operating decision maker, who is our President and Chief Executive Officer, evaluates the performance of the segments based on revenue and multiple profit measures, including segment gross profit. For management reporting purposes, assets are not allocated to the segments. Our segment results are reconciled to total company results reported under GAAP in Note 14 of Notes to Consolidated Financial Statements.

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The following table presents revenue and operating performance by segment for the years ended December 31:

2022 compared to 2021

Americas

Americas revenue decreased 1% including a 1% negative underlying impact from foreign currency exchange rate fluctuations. An increase in Americas recurring revenue of 1% was offset by a decrease of 4% in perpetual software licenses, hardware and other revenue and a decrease in consulting revenue of 11% as compared to the prior year. The decrease in Americas consulting revenue was expected due to our focus on higher-margin Teradata Vantage-oriented engagements and purposeful decrease in consulting services given our strategic development of a partner ecosystem. Segment gross profit, as a percentage of revenue, decreased due to a decrease in the gross profit associated with upfront revenue, as well as a higher mix of cloud revenues, both as compared to the prior period.

EMEA

EMEA revenue decreased 14%, which included a 7% unfavorable impact from foreign currency exchange rate fluctuations. The overall decrease in revenue included a decrease of 11% in EMEA recurring revenue, a 24% decrease in consulting revenue and a decrease of 11% in perpetual software licenses, hardware and other revenue. Overall revenue decreased due to the negative effects of foreign currency exchange rate fluctuations and ceasing operations in Russia. EMEA segment gross profit, as a percentage of revenue, was lower due to the negative impact of ceasing operations in Russia, which was partially offset by positive deal mix within perpetual software licenses, hardware and other revenue.

APJ

APJ revenue decreased 12%, which included a 10% unfavorable impact from foreign currency exchange rate fluctuations. The overall decrease in revenue included a decrease in APJ recurring revenue of 7% , a decrease of 44% ($7 million) in perpetual software licenses and hardware revenue and a decrease in consulting revenue of 17%. Perpetual software licenses, hardware and other revenue was down as customers continued to transition to subscription-based offerings, consistent with our overall strategy. The decrease in consulting revenue was also consistent with our focus on higher-margin Teradata Vantage-oriented engagements and purposeful decrease in consulting services given our strategic development of a partner ecosystem. APJ segment gross profit, as a percentage of revenue, was higher primarily due to a higher mix of recurring revenue, and the impact of cost-reduction efforts within the consulting organization.

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Teradata ended 2022 with $569 million in cash and cash equivalents, a $23 million decrease from December 31, 2021, after using approximately $387 million for repurchases of Company common stock during the year. Cash provided by operating activities decreased by $44 million to $419 million in 2022 compared to 2021. The decrease in cash provided by operating activities was primarily due to lower net income in part due to ceasing operations in Russia during the first quarter of 2022 and timing of working capital dynamics. This was partially offset by the receipt of a $50 million tax refund in 2022 related to our Cares Act carryback claim, which was included in our cash provided by operating activities. Teradata used approximately $26 million of cash in 2022 for reorganization activities, including ceasing our operations in Russia, aligning our go-to-market function with our cloud-first strategy, and other activities to optimize our workforce, as compared to $40 million used in 2021 for similar purposes. Given current plans for reorganization activities, approximately $20 million of additional cash is expected to be used in 2023 for such initiatives, as compared to 2022.

Teradata’s management uses a non-GAAP measure called "free cash flow," which is not a measure defined under GAAP. We define free cash flow as net cash provided by operating activities less capital expenditures for property and equipment and additions to capitalized software. Free cash flow is one measure of assessing the financial performance of the Company, and this may differ from the definition used by other companies. The components that are used to calculate free cash flow are GAAP measures taken directly from the Consolidated Statements of Cash Flows. We believe that free cash flow information is useful for investors because it relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after capital expenditures for, among other things, investments in the Company’s existing businesses, strategic acquisitions, and repurchase of Teradata common stock. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.

The table below shows net cash provided by operating activities and capital expenditures for the following periods:

Financing activities and certain other investing activities are not included in our calculation of free cash flow. There were no material other investing activities in 2022 and 2021.

Teradata’s financing activities for the year ended December 31, 2022 primarily consisted of cash outflows of $387 million for share repurchases, repayments of our term loans of $413 million and $86 million of payments on finance leases, partially offset by $500 million from refinancing our prior term loan to our new Term Loan (as defined below) and as described in Note 12 of Notes to Consolidated Financial Statements and $5 million net inflows from other financing activities. At December 31, 2022, we had no outstanding borrowings on our $400 million Revolving Facility (as defined below).

Teradata’s financing activities for the year ended December 31, 2021 primarily consisted of cash outflows of $244 million for share repurchases, repayment of our term loan of $44 million and $92 million of payments on finance leases, partially offset by $24 million net inflows from other financing activities.

We purchased 9.4 million shares of our common stock at an average price per share of $41.16 in 2022 and 5.8 million shares of our common stock at an average price per share of $41.94 in 2021.

Share repurchases were made under two share repurchase programs initially authorized by our Board of Directors in 2008. The first of these programs (the "dilution offset program") authorizes us to repurchase Teradata common stock to the extent of cash received from the exercise of stock options and the Teradata Employee Stock Purchase

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Plan ("ESPP") to offset dilution from shares issued pursuant to these plans. As of December 31, 2022, under our second share repurchase program (the "general share repurchase program"), we had approximately $840 million of authorization remaining to repurchase outstanding shares of Teradata common stock. Share repurchases are reported on a trade date basis. As part of our general share repurchase program, on February 9, 2022, we entered into a $250 million ASR agreement with JPMorgan Chase, which concluded on May 6, 2022.

Proceeds from the ESPP and the exercise of stock options, net of tax paid for shares withheld upon equity award settlement, were $8 million in 2022 and $24 million in 2021. These proceeds are included in other financing activities, net in the Consolidated Statements of Cash Flows.

Our total cash and cash equivalents held outside the United States in various foreign subsidiaries was $405 million as of December 31, 2022 and $401 million as of December 31, 2021. The remaining balance held in the United States was $164 million as of December 31, 2022 and $191 million as of December 31, 2021. We consider a majority of our foreign earnings as not indefinitely reinvested outside the United States. Effective January 1, 2018, the United States moved to a territorial system of international taxation and, as such, will generally not subject future foreign earnings to United States taxation upon repatriation in future years.

Management believes current cash, cash generated from operations, the net cash inflow from our refinancing as described above and the $400 million available under the Credit Facility will be sufficient to satisfy future working capital, research and development activities, capital expenditures, pension contributions, and other financing requirements for at least the next twelve months. We principally hold cash and cash equivalents in bank deposits and highly-rated money market funds.

Our ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in this Annual Report. If we are unable to generate sufficient cash flows from operations, or otherwise to comply with the terms of the credit facility and term loan agreement, we may be required to seek additional financing alternatives.

Long-Term Debt. On June 28, 2022, we entered into a Credit Agreement that provides for (i) a five-year unsecured term loan in an aggregate principal amount of $500 million (the "Term Loan"), and (ii) a five-year unsecured revolving credit facility in an aggregate principal amount of up to $400 million, including a $50 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swingline loans (the "Revolving Facility" and, collectively with the Term Loan, the "Credit Facility"). The Credit Facility replaces our prior revolving credit agreement in the maximum principal of $400 million and our prior term loan agreement in the principal amount of $500 million, both of which were entered into in 2018 (the "Prior Agreements"). In connection with the execution of the Credit Facility, the $400 million term loan then outstanding, which excluded the scheduled $13 million principal installment we paid during the first quarter of 2022 under the Prior Agreements, was repaid in full. Our long-term debt and minimum debt obligations as of December 31, 2022, including our Credit Facility are discussed in Note 12 of Notes to Consolidated Financial Statements. In addition, as disclosed in Note 9 of Notes to Consolidated Financial Statements, in June 2022, we entered into an interest rate swap to hedge approximately 90% of the floating interest rate of the total $500 million Term Loan and a cross currency swap to hedge a portion of the Euro currency exposure of our net investment in certain foreign subsidiaries.

Leases. In the normal course of business, we enter into operating and finance leases that impact, or could impact, our liquidity. Leases and minimum lease obligations as of December 31, 2022 are described in detail in Note 13 of Notes to Consolidated Financial Statements.

Contractual and Other Commercial Commitments. In the normal course of business, we enter into various contractual obligations that impact, or could impact, our liquidity. The following table and discussion outline our material obligations at December 31, 2022, with projected cash payments in the periods shown:

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Transition tax is the remaining payable balance as of December 31, 2022 of the one-time tax on accumulated foreign earnings resulting from the 2017 Tax Act. The payments associated with this deemed repatriation are being paid over seven years ending in 2025. Purchase obligations are committed purchase orders and other contractual commitments for goods and services and include non-cancelable contractual payments for fixed or minimum amounts to be purchased in relation to service agreements with various vendors for ongoing telecommunications, information technology, hosting and other services.

Additionally, we had $41 million of unrecognized tax benefits recorded on our balance sheet as of December 31, 2022, of which $22 million is recorded in non-current liabilities and $19 million is reflected as an offset to deferred tax assets related to certain tax attribute carryforwards. These items are not included in the table of obligations shown above. The settlement period for the non-current income tax liabilities cannot be reasonably estimated as the timing and the amount of the payments, if any, will depend on possible future tax examinations with the various tax authorities.

We also have postemployment and international pension obligations that may affect future cash flow. These items are not included in the table of obligations shown above. We are also potentially subject to concentration of supplier risk. Our hardware components are assembled exclusively by Flex Ltd. ("Flex"). Flex procures a wide variety of components used in the manufacturing process on our behalf. Although many of these components are available from multiple sources, we utilize preferred supplier relationships to better ensure more consistent quality, cost, and delivery. Typically, these preferred suppliers maintain alternative processes and/or facilities to ensure continuity of supply. Given our strategy to outsource manufacturing activities to Flex and to source certain components from single suppliers, a disruption in production at Flex or at a supplier could impact the timing of customer shipments and/or Teradata’s operating results. In addition, a significant change in the forecasts to any of these preferred suppliers could result in purchase obligations or components that may be in excess of demand. Postemployment and pension obligations are described in detail in "Note 8—Employee Benefit Plans" in the Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements. We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting policies are those that require assumptions to be made about matters that are highly uncertain. Different estimates could have a material impact on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Our management periodically reviews these estimates and assumptions to ensure that our financial statements are presented fairly and are materially correct.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require significant management judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. The significant accounting policies and estimates that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are discussed in the paragraphs below. Teradata’s senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of Teradata’s Board of Directors. For additional information regarding our accounting policies and other disclosures required by GAAP, see "Note 1—Description of Business, Basis of Presentation and Significant Accounting Policies" in the Notes to Consolidated Financial Statements.

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Revenue Recognition

Revenue recognition for complex contractual arrangements requires judgment, including a review of specific contracts, past experience, creditworthiness of customers, international laws and other factors. Specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. We must also apply judgment in determining all performance obligations in the contract and in determining the standalone selling price of each performance obligation, considering the price charged for each product when sold on a standalone basis and applicable renewal rates for services and subscriptions. Changes in judgments about these factors could impact the timing and amount of revenue recognized between periods.

We review the standalone selling price on a periodic basis and update it, when appropriate, to ensure that the practices employed reflect our recent pricing experience. We maintain internal controls over the establishment and updates of these estimates, which includes review and approval by management. For the year ended December 31, 2022 there was no material impact to revenue resulting from changes in the standalone selling price, nor do we expect a material impact from such changes in the near term. Refer to Notes 1 and 3 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for discussion of our revenue recognition policies.

Income Taxes

In accounting for income taxes, we recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are determined based on the enacted tax rates expected to apply in the periods in which the deferred tax assets or liabilities are expected to be settled or realized. The Company made an accounting policy election in 2018 related to the 2017 Tax Act to provide for the tax expense related to GILTI in the year the tax is incurred.

Effective January 1, 2018, the United States moved to a territorial system of international taxation, and as such will generally not subject future foreign earnings to United States taxation upon repatriation in future years. The Company considers a majority of its foreign earnings not indefinitely reinvested outside of the United States. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions; accordingly, the Company has recorded $5 million of deferred foreign tax expense with respect to certain earnings that are not considered permanently reinvested. Deferred taxes have not been provided on earnings considered indefinitely reinvested.

We account for uncertainty in income taxes by prescribing thresholds and attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We record any interest and/or penalties related to uncertain tax positions in the income tax expense line on our Consolidated Statements of Income. As of December 31, 2022, the Company has a total of $41 million of unrecognized tax benefits, of which $22 million is included in the other liabilities section of the Company’s consolidated balance sheet as a non-current liability and $19 million of uncertain tax positions relates to certain tax attributes generated by the Company which are netted against the underlying deferred tax assets recorded on the balance sheet.

We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. We have recorded $69 million in 2022 and $58 million in 2021 for valuation allowances, a majority of which offset our California R&D tax credit carryfoward, as the Company expects to continue to generate excess California R&D tax credits into the foreseeable future.

On January 1, 2020, we transferred certain of our intellectual property among our wholly-owned subsidiaries, which resulted in the recognition of deferred tax assets of $157 million. The recognition of deferred tax assets from intra-entity transfers of intellectual property required us to make significant estimates and assumptions to determine the fair value of such intellectual property. Significant assumptions in valuing the intellectual property include, but are not limited to, internal revenue and expense forecasts, and the discount rate. The sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities.

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Stock-based Compensation

We issue service-based and performance-based restricted share units. We measure compensation cost for service-based restricted share unit awards at fair value and recognize compensation expense over the service period. Our performance-based restricted share units vest only if specific performance conditions are satisfied. The number of shares that will be earned pursuant to our performance-based restricted share unit awards will vary based on actual performance. No shares will vest if the threshold objectives are not met. In the event the objectives are exceeded, additional shares will vest up to a maximum payout. The cost of our performance-based restricted share awards is expensed over the performance period based upon management’s estimate and analysis of the probability of meeting the performance criteria. Because the actual number of shares to be awarded is not known until the end of the performance period, the actual compensation expense related to our performance-based restricted share unit awards could differ from our current expectations. We account for forfeitures for both service-based and performance-based restricted share units as they occur instead of estimating forfeitures at the time of grant and revising those estimates in subsequent periods if actual forfeitures differ from our estimates.

Goodwill and Acquired Intangible Assets

The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. For 2019, the Company performed a quantitative impairment test. In this test, the Company compared the fair value of each reporting unit to its carrying value. The Company typically determines the fair value of its reporting units using a weighting of fair values derived from the income and market approaches. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable companies with similar operating and investment characteristics as the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company records an impairment loss equal to the difference. In the fourth quarter of 2022, the Company performed its annual impairment test of goodwill and determined that no impairment to the carrying value of goodwill was necessary.

Determining the fair value of goodwill and acquired intangibles is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates and future economic and market conditions. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which may not reflect unanticipated events and circumstances that may occur.

Leases

Leases with durations greater than twelve months are recognized on the balance sheet. We determine if a contract contains a lease at inception. Our material operating leases primarily consist of automobiles in certain countries and real estate, including office, storage and parking space. Our operating leases generally have remaining terms of 2-4 years. Our finance leases primarily consist of equipment financed for the purpose of delivering services to our customers and generally have terms of 3 years.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, when available, we use the rate implicit in the lease. However, real estate leases do not typically provide a readily determinable implicit rate. Therefore, we estimate the incremental borrowing rate to discount the lease payments based on information available at lease commencement. The incremental borrowing rate used in the calculation of the lease liability is based on the secured rate associated with financed lease obligations for each location of leased property. Many of our leases include variable rental escalation clauses which are recognized when incurred. Some of our leases also include renewal options and/or termination options that are factored into the determination of lease payments and lease terms when it is reasonably certain that

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the Company will exercise these options. Lease agreements do not contain any material residual value guarantees or material restrictive covenants. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Changes in judgments and estimates, such as the likelihood of renewal options, impairments, or the incremental borrowing rate could impact the amounts of assets or liabilities recorded or could impact the amount of cost or expense recognized between periods.

Pension and Postemployment Benefits

We measure pension and postemployment benefit costs and credits using actuarial valuations. Actuarial assumptions attempt to anticipate future events and are used in calculating the expense and liability relating to these plans. These factors include assumptions we make about interest rates, expected investment return on plan assets, total and involuntary turnover rates, and rates of future compensation increases. In addition, our actuarial consultants also use subjective factors such as withdrawal rates and mortality rates to develop our valuations. We review and update these assumptions on an annual basis at the beginning of each fiscal year. We are required to consider current market conditions, including changes in interest rates, in making these assumptions. The actuarial assumptions that we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact to the measurement of our pension and postemployment benefit obligations and to the amount of pension and postemployment benefits expense we have recorded or may record. For example, as of December 31, 2022, a one-half percent increase/decrease in the discount rate would change the projected benefit obligation of our pension plans by approximately $6 million, and a one-half percent increase/decrease in our involuntary turnover assumption would change our postemployment benefit obligation by approximately $7 million.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

A discussion of recently issued accounting pronouncements is described in "Note 1—Description of Business, Basis of Presentation and Significant Accounting Policies" in the Notes to Consolidated Financial Statements in this Annual Report, and we incorporate such discussion by reference.