Teradata Corp (TDC) 2020 Q1 法說會逐字稿

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 and 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 described 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 31, 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 as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow and constant currency revenue comparisons. A reconciliation of non-GAAP to GAAP measures 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. As 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, has 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 a 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 [year], have been impacted by COVID-19. However, we are seeing that our years of building strong customer relationships and our long-standing position of delivering mission-critical analytics is helping us in these challenging times. You will hear from Scott and Mark that while we have been 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 will make our business even better as we move past the impact of COVID-19.

As a reminder, on the last 2 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 goals.

Finally, expanding our market opportunities. Despite 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 team, common focus and goals. 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 that this top-notch group of executives will help Steve ramp quickly.

So while we know that this year is not going to be easy, I am confident that we have plans in place to allow 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 action 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 insights into 3 areas: how we progress throughout the quarter and the effects of COVID-19, how we have leaned in and kept an unwavering commitment to customers and what we are seeing with customers at this time and our view as we look ahead for the remainder of 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 specifics, so I will address it from the perspective of our go-to-market organization.

It was a quarter of opposite poles from the beginning of the new year to quarter end. We started the year on solid footing 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 commitment to customers and have been addressing their needs across 3 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 to remotely delivering ongoing support and service at the high level of performance and availability our customers know us for, just in a way that protected the health of both our customers and our employees.

Second, we have many customers who are on the front lines in humanity's battle against this virus. For example, in pharma, health care, logistics and numerous government agencies. For these organizations, we are doing what we do best, helping them leverage data to get the insights they need to develop tests and vaccines, keep their supply chains running and protect the health of their populations.

And third, we have offered our health for those customers who are working hard to just manage through business furloughs 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 comes to the forefront. Our teams are staying in contact with these customers, and we stand ready to help them when they can 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 are where customers are leveraging Teradata to address the challenges brought on by COVID-19. A global pharmaceutical company migrated its Teradata development environment to Vantage on AWS to help it continue to bring life-saving 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 move to working and schooling from home. This customer recognized 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 purchased additional capacity to support the increased and sustained user demand.

A leading provider of health care facilities purchased additional capacity to enable it to manage increasing workloads directly related to the pandemic. Teradata analytics are the organization's go-to data platform for creating actionable outcomes, 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 Azure advanced SQL, machine learning and graph engines to support its supply chain that was stressed by COVID-19 demand. Also, in the U.S., we're working directly with both public and private agencies and the White House to help alleviate the effects 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 geographies.

Vantage was also brought in on non-COVID wins. For example, in recognition of Teradata's partnership as a vital component of its enterprise analytic ecosystem, NortonLifeLock has extended its investment 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 institutions 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 relationships matter a great deal. We have seen some customers put cloud projects on hold due to the cost and complexity of migrating to the cloud, which highlights the power of choice provided 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 a 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 redefined and reimagined 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 leaders in an immersive learning environment without being affected by travel restrictions or risk from face-to-face meetings.

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 am 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 products and engineering leaders and executives. Each visit is tailored to meet our customers' business objectives 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 have continued building for the future with our regional partnership teams, developing relationships and engaging on joint account planning with leading SIs and 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 has sharpened our focus and commitment. 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.

It is times like this when organizations need to put all of their data into service to help them survive, compete or win against humanity's global fall 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 operating normally through the first 2 months of the quarter. We had a great deal of momentum coming out of our sales kickoff in January, and we're tracking to a solid quarter and year.

However, as you know, we do a significant amount of our business in the last 2 weeks of the last month of the quarter. And we saw a substantial falloff in engagement during that time as shelter in place and other restrictions were instituted across geographies, affecting our ability to conduct business as usual. This extraordinary situation negatively impacted the closeout of our quarter, which directly influenced the outcome of our reported key metrics, ARR growth, free cash flow and recurring revenue.

Coming into the quarter, we had some known churn 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 headwinds 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.

As to perpetual revenue, it was higher than we expected as a few customers prefer to use CapEx to execute purchases, 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 in place, and some projects were suspended and/or delayed.

Total gross margins increased 260 basis points year-over-year due to continued mix to 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, created an incremental headwind. We remain pleased with our progress in the cloud and expect the 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 a 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 to slightly up for the year. The increase in SG&A spend 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 digits. Taken together, we expect OpEx to be up low single digits. However, we have a number of contingency plans in place to modify this if demand trends weakened versus what we see in our pipeline.

Turning to free cash flow. We clearly experienced cash collection delays late in the quarter from COVID-19, resulting in us 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 requests for extended payment terms from some customers and verticals that experienced an outsized impact from the 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 deferred revenue due to delays in closing deals and customers getting POs approved to enable invoicing as companies transition to work from home in late March. This, in addition to FX, 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 break out 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 travel and transportation verticals, which have been particularly hard hit by COVID-19. However, these customers represented less than 12% of our 2019 revenue.

On the other hand, financial services, telecommunications, government and health care 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 in our ability to deliver to our customers.

Our financial position remains very strong with 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. 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 repurchase.

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 close rates of this activity, difficult to predict, and we fully expect it will take longer to get deals done. But it provides incremental confidence in the resilience of our business model during this unprecedented time.

We have also seen the majority of our consulting projects move to remote and have been able to deliver on project SLAs as planned. We have been impressed by how quickly our consulting organization was able to pivot to a 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 canceled. While our customers focus on getting through this pandemic and expect this 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, though with less cushions.

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 at the bottom of ARR growth over the time remains left in the calendar year. And if a deal takes longer than expected to close, it 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, postponing our Teradata universe customer and partner contracts and moving other marketing events to virtual events while continuing our efforts in the cloud, deepening our relationship with customers that Scott addressed and supporting our employees. We believe during uncertain times, incumbency is a big advantage, and we are going to press that advantage while supporting our customers.

We are guiding to Q2 recurring revenue and non-GAAP earnings per share. Recurring revenue is expected to be between $348 million and $352 million and non-GAAP EPS between $0.19 to $0.22. We believe we are being appropriately conservative in this outlook and the low end of our recurring revenue guidance assumes limited new business in the last 2 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 macros.

The 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 pretax 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.

Vic, congratulations on your retirement. Steve, looking forward to working with you. Wanted to ask Mark a question about recurring revenue, which, as you highlighted, was down sequentially. And that is, if you had closed the renewals that got pushed to April, would recurring revenue had still fallen?

And I know you're guiding to growth for the year, but there's, as you know, many different scenarios of what could play out. What would have to happen for recurring revenue to be down year-on-year?

Great. Thank you, Katy. Yes. So yes, clearly, not being able to complete our renewals timely had some impact. FX had a big impact on the recurring line as well. It was 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 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 to mean little to no AR growth at all for the year, which we just don't expect.

And our next question comes from Wamsi Mohan from Bank of America.

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 sort of the 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 in 2020 over 2019 despite the impacts from COVID-19. Obviously, we're going to monitor that very carefully. There were a number of things that we did coming out of Q4 into 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 -- 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 margins year-over-year.

Okay. 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 in 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? I'm just trying to understand the context of that comment.

Yes. That's a great question, Wamsi. What we're focused on is the very high end of the enterprise market, right? So the largest companies in the world. And the movement of large workloads and complex workloads is sort of the equivalent of moving an ERP system or a more complex application. It takes a lot of time and investment. It takes a lot of incremental OpEx on the 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-prem to the cloud.

So I would say that things that are simple and easy for customers to move to the cloud, that movement is certainly occurring in the marketplace. But in our space, 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, their financial closes, their fraud detection, what they do for compliance, it's all highly, highly mission-critical. So they have to make sure when they make these moves. That they're done with sort of five nines 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 and spending. They can sit on-premise and, frankly, probably have better economics there in the short term, so they can afford to put the investments into 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.

And our next question comes from Derrick Wood from Cowen.

I guess given the fact that your systems are 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 verticals? And then I have a follow-up.

Sure. Sure. Thanks, Derrick. I'll take the question. The first thing I would say is the delays that we saw at the end of March were across all verticals. Everybody was impacted. Everybody had to figure out how to shelter in place, how to get their families safe, how to get their kids into a remote working environment. And frankly, as people made the move to a shelter in place and working from home. Some 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 exceptions would be physical components that go bad, like a processor or a 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, vast majority of them were able to do remotely.

The same was true 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 had 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 requests from health care providers, from the government or just to deal with reconfiguring 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 sort of in an all-hands on deck, but we've been able to effectively support them remotely.

Did you have a follow-up?

Great. Yes, that's helpful color. And a follow-up for Mark. You had been looking for $150 million in free cash flow. I know there's some foreign currency hit. There's certainly delayed payment terms. It sounds like are continuing into 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 -- as collection activity over the last, call it, 8, 10 business days of March, all came in, 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. We're -- we'll see how the things of the timing go out, but no, I would expect that we're going to see a very nice uptick in free cash flow in 2020 versus 2019.

And our next question comes from Tyler Radke from Citi.

I hope you all are doing well. I wanted to follow-up just on the commentary and 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 flesh out what you're expecting in terms of how that progresses through the end of the quarter to hit your guidance?

Yes. I don't know. I'll have Scott weigh in 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, obviously, virtually. It's been 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, 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 it going across the balance of the quarter.

But clearly, the incumbent -- we're the incumbent in the type of customer base and the long relate -- long-term relationships we've had with our customers is boding 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 time frame where they were not able to take meetings and calls, and we had a lot of things that were 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 had pivoted completely to virtual interactions and so had we.

And I think one of the things that's unique about Teradata is our customer relationships are 10, 15, 20 years in length. And building relationships 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 because we can do more touches with more people. But the relationships that we had 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 with the capacity 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 where 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 concept.

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 have been solid. We've had very little slip in terms of the things that came from Q1 to Q2. And our overall deal volume for the year in our pipeline is very similar to what it was going into the COVID crisis.

So the big question for everybody is close rates. Customers don't yet know exactly what their spending environment is going to be. When you talk to them, they're not sure what their business is going to be. Is it a U- or V-shaped recovery? And what will be the OpEx and CapEx budgets we're able to apply to our projects and others. And so we are working together, and we haven't seen people pull back, but obviously, they have to work through their budgetary processes as the economy begins to come back.

So hopefully, that answers your question, Tyler.

Yes. That's helpful. Maybe just a follow-up for Mark, and feel free to jump in, Scott, if it makes sense. But just as you think about your prior recurring revenue guidance in understanding that you do have a nice recurring model here. I guess what made you 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 while 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 made you suspend guidance?

And then as you think about kind of 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 for conversion?

Yes. So, Tyler, the decision on guidance is just given all the macro uncertainty. When is this economy going to reopen? Like I mentioned in my prepared remarks, we can see a lot of ARR growth in a day, right, all the way up to 12/31 and achieve ARR growth aspirations on what we see. But depending on when that falls and when it turns on to be amortizing to revenue makes the recurring revenue guide much more unpredictable.

But we're, clearly, year-over-year, on a quarterly basis, 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 to suspend the annual guidance now, and we'll reassess on our Q2 call as we see what transpires by the federal state, local, foreign governments here over the next 90 days as how fast are 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 environment is going to be like, in particular, 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 not a lack of confidence on our part, but the customers today, you talk to them, will tell you, they want to continue in conversation and work forward on the projects. But 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 locals. So that's another important point.

(Operator Instructions) Our next question comes from Raimo Lenschow from Barclays.

Hope you stay safe and nice to see the CEO appointment. Quick question for me. Like, you talked earlier about the industries that are impacted, and that's only making up about 15% of your total customer base. Can you talk a little bit about kind of the rest of the market? Like financial services will only realize later in terms of bad loans, what's coming their way. Oil and gas is a little bit of a mess at the moment. Can you just talk, like, how do you quantify that 15%? And then just maybe talk a little bit about your expectations for the other industries because the one thing we saw in previous cycles was that can you blame one part of the economy, but a recession is usually a bit more broad-based.

Yes. So Raimo, this is Mark. So yes, we said the hospitality, travel, transportation and certain sectors of retail that have been particularly hard hit is approximately 12% of our revenue. So -- but other parts of retail, where we have presence are actually doing quite well. Financial services, telecommunication's doing quite well. That, along with government, well, there's over 60% of our revenue.

So our verticals -- well, our largest verticals are doing quite well at the moment. So we'll see how those -- and keep in mind, even in financial services, our customers are 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, big enterprise customers, not SMB or regionalized or smaller. So that also bodes 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.

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

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

Yes, across the board. 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're going to do that and where are my family and particularly if you had kids and colleagues, like what do I do? Do I get them home, all those kinds of things. So subsequent to quarter end, and certainly, some of those things, some of our customers have come back and said, hey, can we get some extended payment terms, things that potentially are -- we're doing Q2 and push them out to Q3 and those kinds of things. We've largely kept it inside 2020.

And it's -- in some cases, it's not across the board. We don't expect that to change dramatically going forward. So -- but we clearly wanted to be there for companies like the airline industry, et cetera, that had a tough time until 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.

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.

In 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 improvements in our products, and we are going to be persisting in the execution that delivers reasonable financial result meter. 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 you joining. You may now disconnect.