Teradata Corp (TDC) Q1 2020 Earnings Call Transcript

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 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 and 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 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, like every other company in Europe, we are 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 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 will 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 efforts. We are highly 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 executive leadership team that is working together with a collaborative and well-coordinated common focus. 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 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 team. 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 employees. 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 progressed 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 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, but 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 to the 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. 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 have 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 insights. First, we confirmed with customers that our consulting and support services would continue, and we immediately pivoted to delivering ongoing support and service remotely at the high level of performance and availability our customers know us for. This protected the health of both our customers and our employees. Second, we had many customers who were on the frontline in humanity's 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 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 help for those customers who are working hard to just manage through business overload 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 are able to return 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 were customers leveraging Teradata despite the challenges brought on by COVID-19. A global pharmaceutical company migrated its Teradata development environment to Vantage on AWS to help continue bringing lifesaving medicines and vaccines to market. A major U.S. Telco saw a dramatic increase in queries to handle the surge from all parts of its operations as people moved to working and schooling from home. This customer recognizes 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. Our leading provider of healthcare facilities purchased additional capacity to enable it to manage increasing workloads directly related to the pandemic. A U.S. supermarket chain added Vantage on Azure with 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 have been 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 for non-COVID wins. For example, in recognition of Teradata's partnership as a vital component 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. 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 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 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 is 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 have postponed our annual customer conference until 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 risks 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'm pleased to report that in the few weeks since we launched our virtual executive briefings, we have had an outstanding reaction from customers who want to continue uninterrupted dialogue with Teradata's product, 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 team developing relationships and engaging in joint account planning with leading SIs and ISVs. This effort is strategic and will build 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 into business. We are all affected by the pandemic, and we will continue to keep the health and safety of our employees and our customers as our top priority as we serve our customers. At times like this, when organizations need to put all of their data into service to help them survive and succeed against humanity's global problems, 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 were tracking to a solid quarter. However, as you know, we do a significant amount of our business in the last two weeks of the last month of the quarter. We saw a substantial fall off 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, including 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 to 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, these 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 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. Regarding perpetual revenue, it was higher than we expected as a few customers preferred to use CapEx to execute purchases, and we see some signs that this trend could potentially continue through the year given the COVID-19 environment. 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. Overall gross margins increased 260 basis points year-over-year due to a continued mix of higher margin recurring revenue. However, 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 could not hedge resulted in 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. R&D spend is likely to be flat or 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 from COVID-19, resulting in significantly missing our cash collection forecast by over $30 million. This negatively impacted free cash flow in the quarter. However, we have substantially collected these payments in April. Subsequent to the quarter end, we have experienced requests for extended payment terms from some customers in verticals that experienced 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 the deferred revenue due to delays in closing deals and customers getting POs approved to enable invoicing, as companies transitioned 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, are predicated on our existing customer base, not on attracting 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 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, 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 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 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, totaling $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 close rates of this activity difficult to predict, and we are expected to 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 we have been able to deliver on projects as planned. We have been impressed by how quickly our consulting organization was able to pivot to our remote work environment, and we are proud of their ability to deliver on our existing agreements. 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. This is expected to 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. It remains supportive of our original ARR growth guidance, with less pushback. 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 and 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 follows ARR growth over the time remaining left in the calendar year. 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 while honing our Teradata universe customer and partner contracts and moving other marketing events to virtual events while continuing our efforts in the cloud, deepening our relationships with customers, and supporting our employees. We believe during an uncertain time, incumbency is a significant 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 $0.22. We believe we are being appropriately conservative in this outlook, particularly at the low end of our recurring revenue guidance due to limited new business in the last few months of the quarter. This is not at all indicative of our pipeline; I want 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.

Our first question comes from Katy Huberty from Morgan Stanley. Please go ahead, your line is open.

Thank you. Good afternoon, Vic. Congratulations on your retirement; Steve, I look forward to working with you. I wanted to ask Mark a question about recurring revenue which you highlighted was down sequentially. And that is if you had closed the renewals that got pushed to April, would recurring revenue still have declined? And I know you're guiding to growth for the year, but there are, 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? Thanks.

Hi, great. Thanks, yes. Thank you, Katy. Yes, so clearly not being able to complete our renewals timely has had a significant impact on the recurring line as well as almost $4 million. 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, been right at the high end of our range. 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 ARR growth because we don’t see unexpected things happening from the churn side of our business. Therefore, we just don’t expect to see that and anticipate that it would have little to no ARR growth at all for the year.

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 total consulting revenue, how should we think about the gross margin trajectory given some of the actions that have already been taken for 2020? 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 forward. There were a number of things that we did coming out of Q4 and into Q1 to align to more of our strategic initiatives that Scott has talked about in his prepared remarks last quarter as well as this quarter. But also keep in mind that 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 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 regarding 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?

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. The movement of large workloads impacts workloads, and it is sort of the equivalent of moving in an ERP system or more complex application. It takes a lot of time and investment to take a lot of incremental OpEx from the customer. What we saw was a number of customers immediately cut discretionary spending, and among that were OpEx related investments to move workloads from on-premise to the cloud. I would say that while things that are simple and easy for customers to move to the cloud are indeed occurring in the marketplace, in our case, because of the complexity of what we do and moving that into the cloud requires a great deal of engineering effort, programmers, and data scientists. And frankly, the customers run their business on Teradata with financial closes, flaw detection, and compliance, which are all highly mission-critical. They have to ensure these moves are done with sort of a 5/9 orientation. In our case, we did see some customers cut projects and slow down a little bit just to save OpEx in their environment. However, the macro trend of moving to cloud is not changing.

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 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? 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? I have a follow-up.

Sure. Thanks, Derrick. I'll take the question. The first point I would say is that the delays we saw at the end of March were across all verticals. Everybody was impacted; everyone had to figure out how to shelter in place, keep their family safe, and adapt to remote work environments. As people moved towards sheltering in place and working from home, some companies were more prepared than others. So, the delays we saw were across all verticals, not just those directly impacted. In terms of supporting customers on-premise, the vast majority of what we do can actually be done 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 that needs hands-on equipment change. In that case, we are working with our customers to swap those components. We've had no significant outages or downtime for our customers, and we've been able to address any of those support requests effectively. Most customers were able to run their operations remotely, troubleshoot, program, test, and keep the platforms running. Many came to us and requested help with big COVID-related activities, and we did our part by allowing them to use additional capacity at no charge to help them through the crisis. So, it has been all hands on deck, but we've been able to effectively support them remotely. Did you have a follow-up?

Yes, that’s helpful color. And I had a follow-up for Mark. You had been looking for $150 million in free cash flow, and I understand there were some foreign currency headwinds. Certainly, there were delayed payment terms, and those sound like continuing in Q2. Any ballpark as to how you feel about that number at this point?

Yes. So, first of all, yes, all the delayed escalation activity over the last quarter 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 2019 was the bottom, and we will see how the timing works out. But now I would expect that we're going to see a very nice uptick in free cash flow in 2020 versus 2019.

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

Hey, thanks a lot for taking my questions. I hope all of you 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 let Scott weigh in here too in a second. But clearly, we're seeing lots of activity as we mentioned in our prepared remarks around the engagement we have seen, obviously virtually. And there’s a lot of activity and engagement happening. We’ve closed several transactions that we were hopeful to close in March, which ended up coming early in the first half of April. So, we feel good about how that is tracking. Scott can provide some color on his outlook as we look at the balance of the quarter, but clearly, the incumbency and the type of customer base and long-term relationships we've had with our customers are building well for us.

Yes, Tyler, what I would say is we saw a dramatic drop off in activity and interactions with customers in the late March timeframe, where they were not able to take meetings and calls, and many activities that would have helped us get deals done were pushed. However, in early April, things picked up significantly, and by mid-April, we were in a regular meeting cadence with customers and they have pivoted completely to virtual interactions, and so had we. One unique aspect of Teradata is that our customer relationships span 10, 15, and even 20 years. Those relationships are often built face-to-face, at a whiteboard, and over a meal. Maintaining and even growing those relationships can still be done through technology. As we shifted in April, we saw the amount of interactions we have with customers actually increase compared to traditional in-person sales models. Our long-standing relationship equity really paid off. So, I think the fact that we are the incumbent, we’ve been with them a long time, and that we have contracts with them and existing systems in place is key. It enables us to get back to work with them virtually. This is much more difficult for those trying to land new logos or build trust or install new systems. Our outlook looking ahead for the year remains optimistic. When we examine the activities happening in April and the deal flow coming from Q1, we feel good about that overall.

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 understand 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 you did see a drop off in business activity in March. It seems like things are at least somewhat returning to normal. So, I guess what led to your decision to suspend guidance? And then as you think about the incremental ARR this year, how much of it is coming from newer projects and new workloads versus existing perpetual systems or deals that are out there?

Yes. So, Tyler, the decision on guidance was based on the macro uncertainty. Once this economy reopens, we can see significant ARR growth in a day; we can drive that all the way up to December 31 and achieve our ARR growth aspirations based on what we see. But when that falls and how that turns into revenue makes the recurring revenue guidance much more unpredictable. We do expect to see year-over-year improvement in quarterly performance and definitely believe we will see recurring revenue greater than what we had last year. However, the magnitude of that growth will relate to how the broader economic scenarios play out. Aligning with Scott's comments, until we have a clearer view of how our customers' budgets will unfold for the remainder of the year, we felt it prudent to withdraw our annual guidance.

And just to reiterate, our assumptions are coming from our existing customer base, not from new logos. That’s another important point.

Thank you. Our next question comes from Raimo Lenschow from Barclays. Your line is open.

Hey, thanks for taking my question. Hope you stay safe. Nice to see you 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 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 how you quantify that 15% and then just maybe talk a little bit about your expectation for the industry, because the one thing we saw in previous cycles was that you can blame one part of the economy, but a recession is usually a bit more broad-based.

Yes. So, Raimo, this is Mark. Yes, we mentioned that hospitality, public transportation, and certain sectors of retail have been particularly hard-hit. Those represent approximately 12% of our total revenue. However, other parts of retail where we have a presence are actually doing quite well. Financial services, telecommunications, and government sectors are doing well. These top verticals account for over 60% of our revenue, and those verticals remain solid. Overall, our business remains robust despite minor impacts to our supply chain, and we have not been impaired in our ability to deliver products or provide customer support. Additionally, we have a number of contingency plans in place for upcoming quarters and do not expect to see significant disruptions in our ability to deliver to our customers. Our financial position remains strong, with roughly $150 million in excess cash and ample room within our debt covenants.

And I might just add that the 12% does include our oil and gas sector.

Okay, correct. That's really helpful, thank you. And then, on payment terms, we saw that big crisis moment in March, and people were asking for change. What's your expectation for the rest of the year? Do you think you have passed that kind of extreme crisis situation and now the conversations are more normal, and payment terms could become more regular again?

Yes, across the board, we didn’t see much in March. Clearly, we were late on payments that were due as everybody was scrambling to figure out how to shelter in place and work with families. So, following the quarter end, some of our customers have come back and requested extended payment terms for Q2 and up to Q3. We've largely accommodated these requests to support our customers through these trying times. However, we don’t expect these requests to become widespread. So, we feel good about maintaining a stable approach and do not foresee significant impacts for the remainder of the year.

Okay, perfect. Thank you. Stay safe, guys.

Thank you. 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 the improvements in our products, and we're going to be persistent in the execution that delivers reasonable financial results 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.