Teradata Corporation (TDC) Q1 2020 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the Q1 2020 Teradata's Earnings Conference call. [Operator instructions] I would now like to hand the conference over to Nabil Elsheshai, SVP, Corporate Development & Investor Relations. Please go ahead.

Good afternoon and welcome to Teradata's 2020 first quarter earnings call. Vic Lund, Teradata's Interim President and Chief Executive Officer will lead today's call followed by Scott Brown, Teradata's Chief Revenue Officer; and then Mark Culhane, Teradata's CFO will then discuss our financial results. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are discussed in today's earnings release, Teradata's most recent 10-K with the SEC and in the Form 10-Q for the quarter ended March 31st 2020, expected to be filed with the SEC in the next few days. We undertake no duty or obligation to update our forward-looking statements. On today's call, we will be discussing certain non-GAAP financial measures, which exclude such items such as stock-based compensation expense and other special items described in our earnings release. We'll also discuss other non-GAAP items such as free cash flow and constant currency revenue comparisons. A reconciliation of non-GAAP to GAAP is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.teradata.com. A replay of this conference call will be available later today on our website. And now I will turn the call over to Vic.

Thank you, Nabil. I am pleased to be one of the first to extend a warm Teradata welcome to our next CEO. Because I am sure you have all seen by now the Board of Directors has elected Steve McMillan as the next President and CEO of Teradata. Steve was a unanimous selection by the full board of directors following an extensive search that included many qualified candidates. In today's announcement, Mike Gianoni, our Chairman of the Board covered some of the reasons for Steve's selection. He brings outstanding credentials in operational leadership as a wide ranging business background with a history of focused execution which is one of our key initiatives. He has led successful transformation efforts with issues relevant to our own. And most importantly, he leads with the customer focus which has always been one of Teradata's main strengths. Steve has a collaborative and open leadership style and I am sure that the Teradata team will rally around and support him. He has a proven ability to bring people together to achieve outstanding results and is precisely the leader Teradata needs as we accelerate our transformation, customer success, product innovation and return to growth. Turning to where we are today, we like every other company in the Europe and impacted by COVID-19. However, we are seeing that our years of building strong customer relationships, our long-standing position of delivering mission-critical analytics is helping us in these challenging times. You will hear from Scott and Mark, now while we are being impacted, we are working from a solid base. Given the current environment, we believe we will deliver a reasonable financial performance while at the same time continuing to invest in what we'll make our business even better as we move past the impact of COVID-19. As a reminder, on the last two calls I have outlined that we need to make progress around these areas, accelerating our transformation to the cloud, we are well underway with our efforts to position us as an even stronger competitor in the cloud. Driving consumption advantage and Scott will share a number of examples of our continued progress against these course. Highly expanding our market opportunities by the interruptions caused by the pandemic, our focus on customer success and building strong partnerships continues. Most importantly, we have built a strong and cohesive ELT that is working together as a collaborative and well-coordinated game common focus in those. You all know that we have upgraded a number of our leaders and I can say this is the best team I have been around in my 20 years of association with Teradata. I know this top-notch group of executives will help Steve ramp quickly. And while we know that this year is not going to be easy, I am confident that we have plans in place to allows us to make measured and rational decisions about driving our business through these extraordinary times. Before we move to Scott, I want to express my pride in the resilience of our Teradata folks. With the COVID-19 outbreak, we took immediate actions to protect the health and safety of our people and shifted to a remote work environment for nearly all of our people. And during all of this, our great Teradata team kept executing on our priorities. You'll hear about some of our actions from both Scott and Mark. With that, I will turn it over to Scott.

Thank you, Vic. And good afternoon, everyone. Today I'm going to provide insight into three areas. How we progress throughout the quarter and the effect of COVID-19, how we have leaned in and kept an unwavering commitment to customers and what we're seeing with customers at this time and our view as we look ahead for the remainder for the year. Let's start with looking back at one of the most rapidly changing quarters I have ever seen. Mark will cover the financial specific. I will address this from the perspective of our go-to market organization. It was a quarter of opposite poles from the beginning of the New Year the quarter end. We started the year on solid footings with a good pipeline for 2020, good sales motions underway and we were on track for the quarter. Then the COVID-19 outbreak made its relentless global spread and countries around the globe began to go into lockdown. And in March, our business dramatically changed and deals were delayed as customers shifted their priorities to address the pandemic. In line with our heritage, we reasserted our strong commitments to customers and had been addressing their needs across three dimensions. We quickly adapted to collaborating and supporting customers virtually and our teams are continuing to help customers learn what can be accomplished when leveraging data and its insight. First, we confirm with customers that our consulting and support services would continue and we immediately pivoted through remotely delivering ongoing support and service at the high level of performance and availability our customers know us for. Just in the way that protected the health of both our customers and our employees. Second, we had many customers who are on the frontline in humanities battle against this virus. For example in Pharma, Healthcare, Logistics, and numerous Government Agencies. For these organizations, we are doing what we do best, helping them leverage data to get the insight they need to develop tests and vaccine, keep their supply teams running and protect the health of their population. And third, we have offered our help for those customers who are working hard to just manage through business for load and closures. It is in this arena where we have seen the greatest number of sales activities put on hold. It is against this backdrop that our long standing deep relationships with customers and commitment to their success come to the forefront. Our teams are staying in contact with these customers and we stand ready to help them when they make and again turn their focus to rebuilding their business. We believe these efforts will lead to greater consumption of Teradata over time. Customers are taking advantage of our hybrid cloud portfolio and we are seeing continued adoption of our vantage platform. As organizations see the value in its powerful access to all of their data at scale. Vantage is being bought on AWS and Azure, on-premises, and in hybrid cloud environments. A number of wins we saw where our customers are leveraging Teradata put to rest the challenges brought on by COVID-19. A global pharmaceutical company migrated its Teradata development environment to vantage on AWS to help to continue to bring lifesaving medicines and vaccines to market. A major U.S. Telco saw a dramatic increase in queries to handle the surge throughout all parts of its operations as people moved to working and schooling from home. This customer recognize analytics as mission critical to ensure operational efficiency and customer care for those relying on the nation's communications infrastructure during the pandemic. And it purchase additional capacity to support the increase and sustain user demand. Our leading provider of healthcare facilities, purchased additional capacity to enable it to manage increasing workloads directly related to the pandemic. Third data analytics are the organizations go to data platform for creating actionable outcome including supply chain analytics for PPE and ventilators, clinical trending and modeling to help the U.S. CDC baseline this devastating virus and staffing analytics to address and avert shortages. A U.S. supermarket chain added vantage on a zero advanced sequel, machine learning and graph engines to support its supply chain that would stress by COVID-19 demand. Also, in the U.S. we were being directly with both public and private agencies and the White House to help alleviate the effect of the pandemic. We're leveraging analytics to help predict where new outbreaks will likely occur, pinpoint populations most at risk and estimate which resources will be needed in specific geography. Vantage was also brought in a non-COVID wins. For example, in recognition of Teradata's partnership as a vital components of its enterprise analytic ecosystem NortonLifeLock has extended its investments in Teradata. NortonLifeLock leverages the power of vantage to deliver a complete customer 360 view and provide robust financial analysis for critical decision making. And one of the largest diversified financial services institution in the U.S. upgraded its Teradata environment to drive advanced analytics across its entire ecosystem and position it for greater use cases in the cloud including intelligent credit scoring and addressing the ever-growing threat of money laundering. Looking ahead, much is unknown as the pandemic runs its course throughout the world, yet our teams are resilient and working hard to execute their sales plans and provide value to our customers. In times like these, incumbency and existing strong relationship matter a great deal. We are seeing some customers put cloud projects on hold due to the cost and complexity of migrating to the cloud, which highlights the power of choice provide by Teradata. Our pipeline is holding and the volume of engagement has been very high in Q2 thus far. It's been encouraging to see how quickly our teams have been able to pivot to remote sales model. However, given the uncertainty, it's hard to predict when these activities will turn into transactions. We remain fully focused on driving demand for vantage and our cloud solutions. We have assertively taken a socially responsible stance to advance vantage awareness and demand with customers and prospects. To protect the health of our employees and our customers, we quickly redefine and reimagine our events to 100% digital experiences and we have postponed our annual customer conference into next year. Our virtual events allow our customers and prospects to interact with Teradata thought leader in an immersive learning environment without being affected by travel restrictions or risk from face-to-face meeting. Further, to keep sales momentum, we have developed and are executing virtual briefing centers. Bringing our Teradata experts together with customers in a fully digital environment, I'm pleased to report that in the few weeks since we launched our virtual executive briefings, we have had outstanding reaction from customers who want to continue uninterrupted dialogue with Teradata's product and engineering leaders and executives. Each visit is tailored to meet our customers' business objective as we help them get the greatest value from their data at the scale they need. We also remain on our mission to strengthen our partner ecosystem. And has continued building for the future with our regional partnership team developing relationship and engaging and join account planning with leading SIs & ISVs. This effort is strategic and will be built over time but we are seeing positive traction here. I ended my remarks last quarter with comments around our focus on executing and delivering an exceptional experience for our customers driving growth for Teradata and value for shareholders. The onset of COVID-19 had sharpened our focus into business. We are all affected by the pandemic and we'll continue to keep the health and safety of our employees and our customers as our top priority as we serve our customers. In at times like this, when organizations need to put all of their data into service to help them survive in peace or win against humanities global problem and Teradata excels in this arena. Thank you. And now, I will hand the call to Mark.

Thank you, Scott. And good afternoon, everyone. I would like to begin by discussing how COVID-19 impacted our business in Q1, what we are seeing so far in Q2 and how we are thinking about the business for the rest of 2020. First of all, I would like to reiterate what Vic and Scott said. I am extremely proud of how our company has responded to the crisis and the enthusiasm, energy, and efforts of our employees in support of our customers and each other. It is truly inspiring. Now, with regard to our business trends in Q1. Outside of China, our business was off-the-record. We had a great deal of momentum coming out of our sales kick-off in January and we're tracking to a solid quarter and here. However, as you know, we do a significant amount of our business in the last two weeks of the last month of the quarter. And we saw a substantial fall off in engagement during that time as shelter and place and other restrictions were instituted across geographies, affecting our ability to conduct business as usual. This extraordinary situation negatively impacted the close out of our quarter which directly influenced the outcome of our reported key metrics. Here, our growth, free cash flow, and recurring revenue. Coming into the quarter, we had some loan term primarily from a legacy retailer that has been in bankruptcy proceedings and a large credit card oriented financial company that has been vocal about transitioning of Teradata for the last several years. Our plan included plenty of incremental opportunities to offset this known activity in the quarter. But with the uncertainties due to COVID-19, they didn’t entirely materialize, impacting our reported ARR growth and recurring revenue. This combined with over 4 million in foreign currency headwind and an inability to get all renewals completed in a timely manner, resulted in a sequential decline in recurring revenues compared to Q4 2019. Several of these transactions closed in April. We will see some incremental impact from the retailer going through the bankruptcy proceedings in the second quarter but we know of no other incremental churn of this magnitude going forward and we have not seen a material increase in unexpected churn thus far in the second quarter. All of which are positive for us moving forward. Particularly, given the composition of our customer base which I will speak to shortly. At the perpetual revenue, it was higher than we expected as a few customers preferred to use CapEx to execute purposes. And we see some signs that this trend potentially might continue through the year given the COVID-19 environment we are in. As for consulting revenue, it was also negatively impacted during the transition to work from home and shelter and place. And some projects were suspended and or delayed. All gross margins increased 260 basis points year-over-year due to continued mix, a higher margin recurring revenue. On the other hand, recurring gross margins were down over 300 basis points due to the increased mix of lower margin cloud revenues and the impact of FX revaluation as the sudden shift in developing markets currency rates which we cannot hedge greater than incremental headwinds. We remain pleased with our progress in the cloud and expect cloud gross margins to expand substantially over the next 18 to 24 months. We also continue to expect total gross margins to be up year-over-year even with the modest increase in perpetual revenue assumptions. Turning to expenses. R&D expenses were down 10% as a result of reprioritizing certain initiatives and the related cost actions we took in Q4. We are planning to reallocate that spend to accelerate our cloud efforts. And R&D spend is likely to be flat just slightly up for the year. The increase in SG&A expense can be attributed to investments we are making in partners and customer success as well as amortization of commissions expense given our transition to a subscription model during 2019. For the year, we expect SG&A to be up low to mid-single digit. Taken together, we expect OpEx to be up low-single digit. However, we have a number of contingency plans in place to modify this if demand trends weaken versus what we see in our pipeline. Turning to free cash flow, we clearly experienced cash collection delays late in the quarter and from COVID-19 resulting in a significantly missing our cash collection forecast by over 30 million. And that negatively impacted free cash flow in the quarter. However, we have substantially collected these payments in April. Subsequent to quarter end, we have experienced request for extended payment terms from some customers in vertical that experienced in pandemic and we have largely accommodated those requests to support our customers through these trying times. Turning to the balance sheet. In addition to the cash collections impact on DSO, we did see an impact on the differed revenue due to delays in closing deals and customers getting POs approved to enable invoicing. And as companies transition to work from home in late March. This, in addition to CapEx, had a negative billings impact on deferred revenue of nearly 40 million. Our customer base consists of the largest and most stable companies in the world. They are enterprise customers not SMB customers. And our growth prospects for the year as it has been for the last few years of our transformation, is predicated on our existing customer base not on having to attract new logos which in the current environment is difficult at best. We don’t normally breakout revenue by vertical but given the extraordinary times, we want to provide additional transparency to help investors understand the dynamics with our business and customer base. We have large customers in certain sectors of retail, hospitality and travelling transportation verticals. Which have been particularly hard hit bit COVID-19. However, these customers represented less than 12% of our 2019 revenue. On the other hand, financial services, government, and healthcare customers make up over 60% of our revenue and these verticals have remained solid. Our overall business remains robust and although our supply chain has seen minor impact, we have not been impaired in our ability to deliver product or provide support to our customers. In addition, we have a number of contingency plans in place for upcoming quarters and do not expect to see significant disruption and our ability to deliver to our customers. Our financial position remains very strong. It's roughly 150 million in excess cash, significant room within our debt covenants and a 400 million revolver which we don’t currently plan to draw on. In addition, we continue to have plenty of access to credit to support our capitalized lease programs. However, we do believe it's wise to suspend our share buyback program until further notice. We bought back approximately 3.7 million shares in Q1 at an average price of $20.52 or 75 million. As a result, our full-year expected weighted average share count is approximately 111 million shares, assuming no additional share repurchases. Now, turning to our outlook for the remainder of the year. Through April, we have seen a high level of engagement with our customers albeit virtually and a very high level of deal activity and proposals for Q2. Obviously, the current conditions make the closed rates of this activity difficult to predict and we or expected to take longer to get deals done. But it provide incremental confidence in the resilience of our business model during this unprecedented time. We have also seen the majority of our consulting project moved to remote and have been able to deliver on project at the latest plan. We have been impressed by how quickly our consulting organization was able to pivot to our remote work environment and are proud of their ability to deliver on our existing agreement. However, we have seen and continue to expect to see new consulting projects being delayed or cancelled while our customers focus on getting through this pandemic. And expected will significantly impact our consulting revenues for the year. We have scrubbed our pipeline and despite the disruptions to our business, we have only seen it come down modestly. And it remains supportive of our original ARR growth guidance, so with less pushes. However, given the macro uncertainty in the second half, we believe it's wise to withdraw our previously announced annual guidance. We will reassess this on our Q2 call and keep you updated as the year progresses. We remain confident that we will see solid ARR growth, improved free cash flow versus the prior year which we still believe was the bottom and recurring revenue for the full-year greater than the prior year. But the magnitude of such growth will ultimately depend on the shape and timing of the recovery. Remember, we can make up ARR growth in a day by closing a significant deal or free cash flow by making significant cash collections in a day but recurring revenue recognition about ARR growth over the time remaining left in the calendar year. And if a deal takes longer than expected to close, that makes the recurring revenue growth more unpredictable in the current environment. We have several contingency plans in place depending on how long the pandemic interruptions last and what the second half spending environment looks like. Right now, our focus is on protecting jobs and cutting variable expenses in areas like travel and entertainment, both honing our Teradata universe customer and partner contract and moving other marketing events to virtual events while continuing our efforts in the cloud, deepening our relationships with customers that's got to drift and supporting our employee. We believe during an uncertain time incumbency as a big advantage and we are going to press that advantage while supporting our customers. We are guiding to Q2 recurring revenue on non-GAAP earnings per share. Recurring revenue is expected to be between 348 million and 352 million and non-GAAP EPS between $0.19 and to $0.22. We believe we are being appropriately conservative in this outlook and the low end of our recurring revenue guidance and limited new business in the last few months of the quarter. This is not at all indicative of our pipeline, I wanted to make sure we can deliver on our outlook given the current overall macro. A full-year non-GAAP effective tax rate is anticipated to be approximately 23%, however the quarterly effective tax rate could be somewhat variable on a quarter-to-quarter basis this year. As you saw this quarter with the unanticipated tax benefit which will reverse out in future quarters as our free cash earnings increase. Our Q2 non-GAAP EPS assumes a tax rate of 27% and a weighted average share count of approximately 110 million. As a reminder, we have an earnings discussion document that provides additional details on key business segments posted on the IR website. And with that, let's open it up to questions.

[Operator Instructions] Our first question comes from Katy Huberty from Morgan Stanley. Please go ahead, your line is opened?

Thank you. Good afternoon, Vic. Congratulations on your retirement; Steve, look forward to working with you. I wanted to ask Mark a question about recurring revenue which is you highlighted was down sequentially. And that is if you had closed the renewals that got pushed to April, would recurring revenue had still spawn. And I know you're guiding to growth for the year but there is as you know many different scenarios of what could play out. What have to happen for recurring revenue to be down year-on-year? Thanks.

Hi, great. Thanks, yes thank you Katy. Yes, so yes clearly not being able to complete our renewals timely, had some impact of that's had a big impact on the recurring line as well as almost $4 million. And so, when you add those in plus what the opportunities we had, in March that just pushed into April, we would have with the FX we would have been right at the high end of our range. And so, on a full-year basis, for recurring revenue to be lower than a year ago, we would have to see a dramatic decline in our anticipated AR growth. Because we don’t see a sort of unexpected things happening from the churn side of our business. So, we just don’t see that and anticipate that it would have that main little to know AR growth at all for the year which we just don’t expect.

Okay, thank you.

Thank you. And our next question comes from Wamsi Mohan from Bank of America. Your line is open.

Yes, thank you. I think originally the expectation coming into the year was that consulting margins would improve quite significantly through 2020. Clearly utilization rates are getting hit now because of COVID. If we maintain this trajectory of decline on totally consulting revenue. How should we think about the gross margin trajectory given some of the actions that have been already taken for 2020 and I have a quick follow-up.

Yes. So Wamsi, clearly we're striving for consulting margin improvement for 2020 over 2019 despite the impact going to monitor that very carefully. There were a number of things that we did coming out at Q4 ended Q1 to align to more of our strategic things that Scott has talked about in his prepared remarks last quarter as well as this quarter. And again but also keep in mind that the consulting margins improve across the year historically at Teradata. Q1 has clearly been the lowest gross margin quarter and then it builds throughout to Q4. But on a full-year basis, we are clearly striving for improved gross margin year-over-year.

Okay, thanks Mark. And Scott, it feels like most people are seeing an acceleration to the cloud from their customer base. So, I was just curious about your comment about almost a slowdown inch prioritizing cloud at some of your customers. Are you suggesting that the net move to cloud is slowing for Teradata or was that just a couple of customers where you experienced that when you turned on and turn the context of the comment. Thank you.

Yes, that’s a great question Wamsi. What we're focused on is a very high-end of the enterprise market, right. So, the largest companies in the world. And the movement of large foreclosing's impacts workloads is sort of the equivalent of moving in ERP system or more-or-more complex application. It takes a lot of time and investment to take a lot of incremental OpEx and part of the customer. And what we saw was a number of customers immediately cut things that were discretional spending for them and among that were OpEx related investments to move workloads from on premise to the cloud. So, I would say that things that are simple and easy for customers to move to the cloud, that moving and certainly occurring in the marketplace. But in our states, because of the complexity of what we do and moving that into the cloud requires a great deal of engineering efforts, programmers, data scientists. And frankly, the customers run their business on Teradata. The financial closes, their flaw detection, what they do for compliance, it's all highly mission critical. So, they have to make sure when they make these moves that they're done with sort of the 5/9 orientation. So, what I would say is in our case it did definitely slow the customers down a little bit because they're cutting discretionary projects in spending. They can sit on premise and frankly how we have better economic there in the short-term till they can afford to put the investments and to moving into cloud. The macro trend of moving to cloud is not changing but in the short-term we did see some folks cut projects and slow down a little bit just to save OpEx in their environment. Hopefully that answers your question.

Okay, thank you Scott.

Thank you. And our next question comes from Derrick Wood from Cowen. Please go ahead, your line is open.

Thanks. I guess, given the fact that your systems here in physical data centers, can you just talk about how customers are managing systems virtually and how much kind of remote work has impacted their ability to make new infrastructure investments and are the deal delays just in those kind of distressed verticals or is kind of remote work causing it to be delayed across a lot of vertical. And I've a follow-up.

Sure. Thanks, Derrick. I'll take the question. The first I would say is that delay that we saw at the end of March were across all verticals. Everybody was impacted, everybody had to figure out how to shelter and place, how to get their family safe, how to get the kids into a remote working environment. And frankly, as people made the move to a shelter in place and working from homes and companies were more prepared to do that than others. So, the delays that we saw were across all verticals not just those that were impacted. In terms of supporting the customers on premise, the vast majority of what we do we can actually do remotely, and we were set up to do that well in advance of this crisis. The only exception would be physical components that go bad like a processor or drive or something that needs to have hands on the equipment to make a change. And in that case, we are working with our customers to swap those components. We've had no significant outages, no significant downtime for our customers and any of those support requests we've been able to address. But the vast majority of them were able to do remotely. The same issue relative to the way the customers interact with our environment, they also are able to troubleshoot, to program, to test, to actually run the operational side remotely. So, for them again they have to make the transition to work from home but they were able to very effectively keep our platforms running the business. And then we saw a lot of customers that came to us and said we have spikes of big COVID related activities. They could have been request from healthcare providers, from the government, or just to deal what we configure in their businesses. And we did a lot to support customers by allowing them to use additional capacity at no cost to them to kind of make it through the crisis. So, serving all hands on deck but we've been able to effectively support them remotely. Did you have a follow-up, great there?

Yes, that’s helpful color. And I had a follow-up for Mark. You had been looking for a 150 million in free cash flow and others some foreign currency head. There is certainly delayed payment terms that sound like continuing at Q2. Any ballpark as to kind of how you feel about that number at this point?

Yes. So, first of all, yes all the delayed escalation activity over the last call at 8-10 business days and March all came in April. We're off to a great start. On a full-year basis, we clearly will have free cash flow in excess of what we did a year ago. We feel good about that. We still feel that '19 was the bottom where what we'll see how the things of the timing go up. But now I would expect that we're going to see a very nice uptick in free cash flow in 2020 versus 2019.

Okay. Alright, thanks.

Thank you. And our next question comes from Tyler Radke from Citi. Your line is open.

Hey, thanks a lot for taking my questions. You all are doing well. I wanted to follow-up just on the commentary on what you're seeing so far in April. Maybe if you could just kind of compare how the business environment is tracking so far relative to maybe a year ago. And then, if you could just kind of flush out what you're expecting in terms of how that progresses through the end of the quarter to hit your guidance. Thank you.

Yes, I don’t know, I'll have Scott weighing here too in a second. But clearly we're seeing lots of activity as we mentioned on our prepared remarks around the activity and the level of engagement that we've seen like obviously virtually. And it's been a lot -- lots of activity happening and engagement there. We've closed several of the transactions that we are hopeful to close in March ended up coming in the first part of first half of April. So, we feel good about how that's tracking. Scott can provide some color on how he sees this going across the balance of the quarter. But clearly the incumbent -- where the incumbent and the type of customer base and the long relate -- long term relationships we've had with our customers is building well for us. But I'll let Scott comment as well.

Yes. Tyler, what I would say is we saw a dramatic drop off in activity and just interactions with customers in that late march timeframe where they were not able to take meetings and calls and we had a lot of things that where activities that would have helped us to get deals done that were pushed. But in early April, things picked up significantly and by mid-April we were in a regular meeting cadence with our customers and they have pivoted completely to virtual interactions and so had we. And I think one of the things that unique about Teradata is our customer relationships are 10, 15, 20 years in length. And the only relationship is generally done face-to-face and at the whiteboard and over a meal. But maintaining the relationships and continuing to grow them that can be done over technology. So, as we made the shift in April, what we saw was the amount of interaction we have with our customers has actually gone up versus what we would traditionally do in an in-person sales model as we give you more touches with more people. But the relationships that we have built over many years, that relationship equity really paid off for us. So, I think the fact that we are an incumbent that we've been with them a long time, that we have contracts with them, that we have existing systems in place, but that it's happening to grow on demand, really provides them the environment that says as an incumbent they know well, we can quite quickly and easily get back to working together virtually. Or I would say that's much more difficult for somebody that's trying to land new logos or build trust or put in new systems or do proof-of-concepts. So, our outlook as we look ahead for the year from the team has been optimistic. When we look at the activities that we have in April and the deals that came over from Q1, we've been solved, we've had very little slip in terms of the things that came from Q1 to Q2. And our overall deal allowing for the year in our pipeline is very similar to what it was going into the COVID prices. So, the big question for everybody is closed rates. Customers don’t yet know exactly what their spending environments going to be. When you talk to them, they're not sure what their business is going to be, is it a "U" or a "V" shaped recovery and what will be their OpEx and CapEx budgets were able to look why to our projects and others. And so we're working together and we haven’t seen people call back but obviously they have to work to their budgets and capacity as the economy begins to come back. Hopefully that answers your question, Tyler.

Yes. That's helpful. And maybe just a follow-up for Mark. And feel free to jump into that if it makes sense. But just as you think about your prior recurring revenue guidance and understanding that you do have a nice recurring model here. I guess what made you to make the decision to suspend guidance for the full-year, I mean it sounds like you're not seeing anything unusual in terms of churn rates and or you did see a drop off in business activity in March. It seems like things are at least somewhat back to normal. So, I guess what you made your suspend guidance and then as you think about kind of the incremental ARR this year, how much of it is kind of coming from newer projects and new workloads versus existing perpetual systems or deals that are out there up with a version. Thank you.

Yes. So Tyler, the decision on guidance just given all the on macro -- the macro uncertainty. Once this economy going to reopen, like I mentioned in my prepared remarks, we can see a lot of AR growth in a day. Right, all the way up to 12 31 and achieve AR growth aspirations on what we see. But depending on when that falls and when it turns on to be amortizing the revenue makes the recurring revenue guides much more unpredictable. But we're clearly year-over-year on a quarterly basis you expect more than we had in each quarter from a year ago which tells us we're going to see recurring revenue greater than what we saw from last year. How much more is going to depend on that shape and timing of that recovery. But just felt for us while our pipeline is robust, we got a great customer base, the prudent thing here to do is just to spend the annual guidance now while we assess on our Q2 calls we'll see what transpires by the federal state local foreign governments, there over the next 90 days is how fast our things going to truly open up and what that spending environment might look like.

Yes. I guess, the only thing I would add to that is as you talk to customers, they are yet to declare what they believe their spending environments going to be like and particularly in the second half. And until we have a better understanding of how their budget situations are going to unfold for the year, I think it's prudent for us to pull the guidance. It's now lack of confidence in our part but the customers today, you talk to them, will tell you they want to continue in conversation and work forward in the projects of what they're going to have available to spend as the year goes on is an unknown and they're still working through that.

And then just to reiterate, our assumptions are coming from our existing customer base, not new logo. So, that's another important point.

Thank you. [Operator Instructions] Our next question comes from Raimo Lenschow from Barclays. Your line is open.

Hey, thanks for taking my question and hope you stay safe. And nice to see it here, just the old appointment. Quick question from me, like you talked earlier about the industries that are impacted and that's only making up about 15% of your of your total customer base. Can you talk a little bit about kind of the rest of the market, all like financial services will only realize later in terms of bad loans what's coming their way or then causes a little bit of a mess at the moment. Can you just tell like how do you quantify that 15% and then just maybe talk a little bit about your expectation for the our industry. Because the one thing we saw on previous cycles were as that can you blame one part of the economy but a recession as usually a bit more broad based. Thank you.

Yes. So, Raimo this is Mark. So yes, we said the hospitality, public transportation and certain sectors are retail, then been particularly are hit. There's approximately 12% of our revenue. So, but other parts of retail where we have presence are actually doing quite well. And financial services, telecommunication doing quite well. That along with government tops over 60% of our revenue. So, our verticals where our largest verticals are doing quite well at the moment. So, we'll see how and keep in mind, even in financial services, our customers have the largest banks in the world. They're not regional local banks. These are the biggest most stable companies in the world. These are big enterprise customers, not SMB or regionalized or smaller. It's so that also bulge well for us just given the nature of our customer base. And again, the incumbent status we have with them that we've had for decades.

Yes okay, perfect.

Yes I might.

Oh yes, go ahead.

I might just add to that, the 12% does include our oil and gas, so.

Okay, correct. That's really helpful, thank you. And then, on payment terms, so you we obviously saw like the big crisis moments in March and people were kind of asking for that. What's your expectation for the rest of the year? Do you think you have beyond that kind of extreme crisis situation and now the conversations are more normal and payment terms could become more normal again? And discussions there or like what's your planning assumptions as we go for this year?

Yes, a cross the budget. We didn’t see much in March. Clearly, we were payments that were due, came late, as everybody was scrambling to figure out how to shelter in place and where they were going to do that and where are my family and particularly we had kids in college like what do I do. Do I get them home, all those kinds of things? So, subsequent to quarter end and uncertainties prevail, some of our customers have come back and said "Hey, can we get some extent in payment terms" things that potentially we're doing Q2 and push them up to Q3 and those kinds of things. We've largely kept it and it's in some cases it's not across the board, we don’t expect that to change dramatically going forward. So, that we've clearly wanted to be there or company like the airline industry et cetera that had a tough time. So, they figured out what kind of government assistance they're going to get and so forth. And so, we feel good about it. We don’t believe it's got to have a significant impact across the balance of the year.

Okay perfect, okay thank you. Stay safe, guys.

Thank you. And that concludes the questions in the queue at this time. I'll turn the call back to Victor Lund for closing remarks.

And closing, as we move through this unprecedented time, we're going to keep our focus on our top priorities of guiding our customers through the use of data that provides the insights they need. We're going to continue to drive the improvements in our products. And we're going to be persisting in the execution that delivers reasonable financial result later. As Steve comes on board, we are confident that he will take Teradata to the next level. Thank you all, very much.

Thank you, ladies and gentlemen, this concludes our call. We appreciate your joining. You may now disconnect.