Q4 2019 Earnings Call
Good morning, My name is down and I'll be your conference operator today.
I'd like to welcome everyone.
Hi Holdings fourth quarter fiscal 2019 financial results conference call all lines have been placed on mute to prevent any background noise.
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Michael Mccarthy, Vice President Investor Relations you May begin your conference.
Thank you operator, welcome to bars Q4 fiscal year 2019 investor call.
Jim Chertow or president and CEO cure, Mcgrath, where executive VP and CFO will lead this morning's call I'm sure. We'll just your prepared remarks before taking your question.
Oh sure he VP Chief administrative officer in General Counsel, and Chris Mcdougall, Chief Technology Officer also here for.
The earnings release, an investor slides referenced on this morning's call are accessible on the best repeatable website as well as the 8-K filed today with the FCC, which should aid and your understanding who buys financial results.
All references to financial measures and year over year comparisons will be.
non-GAAP numbers, except where otherwise noted.
We have included reconciliations to such measures to GAAP in the earnings release, and Investor slides, which are building on the Investor page four website.
We may make forward looking statements are based on current expectations forecasts and assumptions, which remain subject to risks uncertainties that could cause actual results to differ materially.
Information about risks and uncertainties may be found in our most recent filings with the FCC, including our Form 10-K , and subsequent Form 10-Q reports. It is a buyer's policy not to reiterate guard, we undertake no obligation to update or revise forward looking statements.
Facts or circumstances change, except as otherwise required but.
I'll now turn the call over to Jim.
Thanks, Mike Good morning, everyone and thank you for joining us. This morning, I'll provide you with my perspective on our performance and strategic priorities.
Karen will take you through the details of the quarter inter outlook for the fiscal year.
We will then open it up for questions.
With that let me provide a brief summary of the quarter in Q4, we delivered 726 million of non-GAAP revenue.
Lower guidance, primarily driven by a delay of the social security administration that was previously discussed.
Kevin will provide additional details on as I say.
Overall I'm pleased with our Q4 performance as the rest of the business executed consistent with our expectations.
Our revenue profile this quarter reflected a continued shift to a software and cloud base business.
Notably software and services as a percent of revenue increased to 83% and recurring revenue was 58%.
In Q4, we continued to deliver on our leading business model.
non-GAAP operating income came in at the top of the range at 23%.
Adjusted EBITDA was over 25%.
Well over 200 basis points quarter over quarter and year over year.
The demonstrating that from a profit perspective, we continue to be one of the best in the business.
Our performance drove cash from operations of $66 million.
Or 9%.
Which exceeded expectations.
Our cash ended the year at 752 million up $52 million year over year.
Advise ability to generate cash sets us apart from our peers.
This allows us to make the necessary investments in our people.
The necessary investments in new technology and innovation.
And our cash position also allows us to deliver on our capital allocation strategy.
It is important to note that the communications landscape continues to rapidly evolving.
Requiring a customer led approach we progress against each of our customer focus priorities presented at the outset a fiscal year 2019.
First we've expanded our existing partnership and entered into new ones that broaden our cloud offerings and extended our market reach in 2019, we invested significantly in building out our eco system of strategic partners, including most recently a rig partner.
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As well as the work, we're doing with Amazon, Google IP in very Salesforce and affinity.
Which is just the beginning and reflective of the knew about it.
These partnerships are forced multiplier and significantly expands our capabilities, which in turn will expand our revenue growth opportunities.
During these partnerships allows us to aggressively and decisively address customer opportunities and deliberate unique and differentiated solutions.
Secondly, we amplified and aggressively built out our cloud capabilities to accelerate growth.
Through investments such as ready now or private cloud all for the enterprise customers are demanding.
Thirdly, we are innovating in our core and continue to transform to a software subscription and recurring models.
Recurring revenue was up 190 basis points year over year.
Fourth we drove continuous improvement in our business model and profitability.
And lastly, we set the table to execute on our capital allocation play book and therefore I 20.
This provides a good segue to update you on the overwhelming enthusiasm we're receiving on her landmark partnership with Ringcentral.
This is game changing.
It's tipping the scales and his responses to our customers and partners request for a couple of years, which is.
That we provide a leading.
By a branded Ucas solution.
Via cloud office or ATRIO.
Provides a buyer with an opportunity to unlock value from a largely on monetize base.
And significantly expands our Tam.
Hcl helps accelerate our transformation or growth.
Has favorable unit economics, and it's accretive to operating margins.
The partnership enables a viable to focus its investments and drive growth and she has she pads collaboration and private cloud and it allows us to fortify our position preventing pure plays from coming up from SMB.
By providing our partners and customers, where they keep a by ucas capability that rounds out our portfolio.
It's trailblazing partnership is off to a great start.
It requires alignment and commitment, which clearly exists on both sides.
First we are working lockstep with Ringcentral to launch a CEO .
In late.
First quarter of next year.
Second our endpoints should be qualified on rings own arceo offer in January .
This provides us with another channel for our newest Jay series endpoints.
Third we are coordinating with a vast partner ecosystem to build out internal and external capabilities to support the first quarter watch.
Over the last few weeks I personally met with dozens of customers and partners globally to hear from them first Dan.
The feedback enthusiasm and interest from customers and partners in a CEO has been tremendous in fact exceeding my expectations.
Each and every day the momentum continues to build.
Now let me share held by is uniquely positioned to drive the industry forward and what I'm, calling blended cloud communications.
I eat in a world where customers are looking for public private and hybrid solutions.
Our wholesale cloud offer sold by our channel partners around the world knocked it out of the park.
We increased more than 140000 seats in Q4.
And that's just one quarter.
Doubling what we did in the June quarter.
This brought our total public cloud seat count to over a half a million.
Approximately a 160% year over year and 39% sequentially.
This speaks volumes on the value of the EVIA brand and our global scale as what was the commitment of our partner community to sell or cloud offers.
It also provides proof positive that are channel can successfully sell cloud and it makes a crystal clear to me that we'll be able to truly move the needle where they see a.
I already know private cloud offer launched in March.
Right and pace of the market demand continues to improve.
We ended Q4, where the TCV of approximately $90 million.
This solution was developed in designed in collaboration with our customers and is targeted at the enterprise and Midmarket segments that require unmatched reliability security and scale in a private cloud delivery model.
Here a couple of ready now customer wins, just to give you a flavor for why this is such an important differentiator and plays a significant role in providing our customers with a solution that meets their specific needs.
Leading home a commercial materials manufacturer wanted to move to the cloud.
They had several significant concerns first being able to leverage their existing investment and if I endpoints.
Second retaining their contact center routing and voice response capabilities.
Which takes significant time to invest in developed.
Third ensuring that there was a robust disaster recovery capability in place in a highly competitive process.
Already know solution was the only cloud adoption that could address and mitigate these concerns.
When it comes to private cloud if I has the flexibility scale and breadth that simply cannot be met by a public cloud model.
The second win is where the business process outsourcing that provides communication services to thousands of customers worldwide.
The company had invested significant capital to service their customer base.
Wanted to migrate to an opex model in the cloud.
Public cloud cannot deliver the flexibility and the deployment model required to support.
The global footprint of the company and the additional high value capabilities required such as speech recognition.
And attribute based routing.
Hi, ready now one out.
Direct process, where we showcased life examples of our unmatched technical capabilities.
Finally, let me talk about our industry leading services capabilities.
We have over 3000 dedicated professionals globally.
Hey scale unmatched among pure plays.
Let me highlight some examples of the successes in or maintenance professional services and in our ability to drive renewals and upgrades.
First we achieved our best maintenance renewals of the year in Q4.
Oh for approximately four points from the started the year.
This reflects the commitment over customers to buy it but more importantly, underscores the value that we are delivering day in and day out.
Second we drove significant improvement in our professional services bookings in Q4.
Up 43% quarter over quarter, and 39% year over year.
Driven by increased traction of our contact center solutions as well as consultative services.
Third our services led program.
Provides a frictionless upgrade path to our latest release.
It has been an overwhelming success.
Just last quarter, we upgraded 345001.
As a result, we are seeing improved renewals services pull through and our customers are delighted to experience. The latest innovations features and functionality reinforcing that our technology is compelling and drives value.
Let me share a few more data points on how we're successfully competing in the market.
In the fourth quarter, we had our best product in Onex service bookings.
Order in the last two years.
Approximately 10% higher than the average during the same period.
Contact center showed positive signs with our best bookings growth through the year.
The combination of public and private cloud seats grew to nearly 4 million.
We added roughly 1600, new customers and signed 109 transactions with the TCV over $1 million.
For the full year, we signed 352 deals over a million, which included 40 deals over 5 million and nine deals over 10 million of TCV.
Our ability to sell to sign and deliver large scale global deals is on matched.
Our TCV came in at approximately 2.4 billion consistent with our expectations.
We now have the platform to capitalize on the market opportunity, which continues to grow.
We are increasing our Tam and we continue to invest ahead of growth opportunities.
As such I remain bullish on our long term growth perspectives.
Going into F., why 20, EVIA has significant momentum.
And we've never had a better portfolio of solutions to bring to market.
The launch of ready now.
The Ringcentral strategic partnership.
I actually see see cast solution that we announced last month.
Our momentum with our strategic Alliance partners.
Along with the launch of subscription consumption models for our premise based offerings are just a few examples of our progress.
Before turning it over to Karen I have a couple of slots to share on the strategic process that we recently concluded.
When we initiated the review we want a three specific outcomes.
We want it to improve our technology capabilities and expand our offerings.
Return value to our shareholders and improve our balance sheet.
We delivered on all three.
The Ringcentral partnership brings together two technology leaders.
Combined with a bias execution capabilities it unlocks significant value for all stakeholders.
After an extensive review this partnership represents a market disrupting opportunity.
Second following the completion of the review of the strategic alternatives in early October we announced the return of $500 million of capital to our shareholders through a stock buyback.
Which we expect to execute against shortly.
Third we have already completed the previously announced paydown of $250 million if debt.
Result in a significant annual interest expense savings in F. Why 20, and beyond and further enhance our balance sheet.
Now carrying will take you through the details of the quarter the mechanics behind our capital allocation and our outlook for Q1 as well as definitely 20 Karen.
Thank you Jim and good morning, everyone.
That's a reminder, unless otherwise stated all financial metrics reference on this call our non-GAAP .
And the supplementary slides posted on our Investor Relations website set forth the GAAP to non-GAAP reconciliations.
Focus my commentary primarily on fourth quarter results.
Unless otherwise indicated.
For the fourth quarter, non-GAAP revenue was $726 million compared to $770 million in a year ago period.
Up from $720 million in Q3.
Our revenue results were below our forecast primarily as a result of the delays with the federal government procurement process.
Aspect to the social security administration transaction.
As well as due to foreign currency exchange rates, the impact of which was about $4 million in the quarter.
As stated on our Q3 earnings call our fourth quarter results were going to be heavily dependent upon the timing of the conclusion of the contracting process, including related so wwes and purchase sort of issuances related to the 10 year $400 million social security administration opportunity.
What did the competing vendors larger protest against the awarded the contract was causing the delay.
The late pushed it between $20 million to $25 million or park revenue from Q4.
We believe that given the social security administrations need for this upgrade coupled with the value proposition created by a bias products and services. This opportunity remains very much intact.
That said, we must Hello, Hello for the U.S. government procurement process to run its course.
Forecasting when this process might conclude is challenging so for now we are not including any revenue stemming from this contract, which social security administration.
Our Q1 fiscal 2020 guidance figures.
We did experience strong sequential product revenue growth performance in Q4, which was offset by lower maintenance revenue stemming from the declines in on premise product bookings that have occurred over the past several years and our customers transitions to our private cloud or free.
However, improved renewal rates have continued to partially mitigate the decrease in maintenance revenue.
We drove robust bookings in fourth quarter, and our quarter end TCB remained flat at $2.4 billion.
Consistent with our prior quarter cloud represented approximately 11% of non-GAAP revenue.
During the quarter, we continued to drive strong growth in the public cloud, adding 142000 seats, representing an increase of about 160% year over year.
As cloud revenue is ratable in nature, and the partner Spears and rebates or paid in period of sale. The current period cloud revenue contribution is heavily impacted on the front end.
I'll provide more color about to keep <unk>, we will use in fiscal year 20, and beyond just a few moments.
Fourth quarter product revenue was $315 million compared to $336 million in the year ago period.
Sequentially, we experienced the expected seasonally large increase in cc product bookings and revenue and we're pleased by our performance and Cc.
You see well sequentially growing modestly in the quarter continued to be impacted by the lack of a competitive you catch offering which we have now addressed with the announcement of our partnership with Ringcentral.
We expect to have Avaya branded DCIO solution in market late in Q2 fiscal 2020 and with measurable revenue contribution anticipated in the second half of fiscal 2020 .
Fourth quarter services revenue was $411 million compared to $434 million in the year ago period.
As previously mentioned.
Thank you very much will just be Posner mammography set the playback. Thank you.
This is as you want me just to continue.
Yes. Please go ahead at this time, and we'll try and like everything back together. Thank you.
Fourth quarter service revenue was 411 billion compared to 434 million of your remote period.
As previously mentioned, we expect maintenance revenues to continue to cost to decline due to the transition over to the public cloud, especially you Cas and private cloud offerings.
We ended fiscal 2019 $90 million of ready now total contract value in backlog and we expect material revenue contribution to our private cloud results from ready now fiscal 2020.
Geographically the U.S. accounted for 54% of a revenue, while EMEA Asia Pacific and Americas International represented 25%, 12% and 9% of our revenues respectively.
Turning to our gross profit metrics.
non-GAAP gross margin was 60.6% in the fourth quarter compared to 63.4% you recall period.
Gross margins overall were primarily impacted by a large multi year International services project.
non-GAAP product gross margins were 64.4% compared to 67.3% in the prior year sequentially up from 63.8% Q3.
Year over year declines continue to reflect the impact of product mix due to scaling and the ramping of our cloud solutions globally.
Untapped services margin was 57.7% compared to 60.4% in the prior year sequentially down from 58.8% due primarily to higher cost may P.S. associated with a large international base.
Project, which was completed during the quarter.
Turning to total profitability margin and cash flow metrics are for Q4 year results were positive.
Fourth quarter non-GAAP operating margin was $165 million, representing a non-GAAP EBITDA operating margin of 22.7% year on year up 230 basis points, while adjusted EBITDA was $184 million, representing an adjusted EBITDA margin of 25.3%.
Up 220 basis points year on here.
Further we generated $66 million in cash from operations, bringing our full year totaled $241 million or 8% total revenue.
During the quarter free cash flow came in at $37 million contributing to a fourth quarter ending balance of $752 million in cash and cash equivalents on our balance sheet.
Strong cash flow is a direct result of our continued and diligent management working capital as well as a result in improved collections this quarter.
I'd like to take a moment to provide some insight into the impact of the game changing Ringcentral partnership and their 500 million dollar investment on our financial statements.
We closed a partnership transaction on October 31st.
That time, Ringcentral me to $125 million cash investment in a buyer in the form or preferred equity convertible stock at $16 per share.
Upon closing the transaction Ringcentral also paid $375 million provider as a prepayment for future sales Mcgwire cloud office and other license fees.
This amount was primarily pay performance shares Ringcentral stock issued on November 12.
We sold the majority of those shares in an underwritten public offering executed ringcentral on distribution wins to reduce exposure to market volatility.
We are holding the balance of the shares as we believe that there was up with potential for both device Ringcentral as a result of our partnership.
From an accounting perspective, we will recognize the prepayment about as a contract liability on our balance sheet.
We will draw down against this amount the onetime bounty with each piece you see we turn it on as well as for the recurring revenue that you see generates.
Before moving onto our first quarter and full year fiscal 2000 guidance I want to touch on our capital allocation patches previously announced upon approval of our board of directors.
As a reminder, with over $750 million and cash on hand at the end of fiscal 2019, we did not need to sell the ringcentral shares to meet either the daily operating requirements of the company or to initiate capital allocation strategy.
On November seven two.
$250 million in term term loan debt.
This will result in annualized interest expense savings of approximately $15 million.
We expect to begin execute against our announced $500 million stock repurchase program shortly.
Purchases will be reported in our quarterly filings with the FCC.
Now turning to our outlook for December quarter, and our fiscal 2024 year.
After several years of mid to high single digit revenue declines, we see fiscal 2020 of Europe transition Provida away from significant revenues declined to one of revenue stabilization.
Our portfolio will be significantly enhanced with the ramping of already know private cloud offering combined with public cloud offering to ucas already feel in partnership with Ringcentral and you anticipated what your availability of a by his own C test for free.
Cc.
Please note that all revenue amounts are expressed on a constant currency basis, reflecting September thirtyth 2019 foreign exchange rates.
With the anticipate availability of our enhanced public and private cloud offerings mentioned above we expect to see a turnaround in our revenue trajectory beginning in the second half of fiscal 2020.
For the first quarter, we anticipate in non-GAAP revenues of between 700 million to $720 billion.
Representing a 3% to 6% annual decline as measured in constant currency.
We expect our non-GAAP operating margin for the first quarter to be approximately 21% at our adjusted EBITDA margin to be approximately 4%.
For the full year, we anticipate non-GAAP revenues between 2.82 billion to $2.90 billion, representing flat to a 2% decline in constant currency from your prior.
Well long term, we feel pretty confident in the expansion of our adjusted EBITDA margins generated from mcgwire movements in the cloud and this year transition, we do plan to invest heavily in systems tools and resources to help accelerate our progress towards the cloud.
As such we expect our non-GAAP operating margin for the full year to be between 20% 21%.
And our adjusted EBITDA margin to be between 23% and 24%.
This reflects approximately one point incremental reinvestment into the business.
We expect cash flow from operations to be approximately 5%.
Or 7% when excluding the Q on cost and fees associated with our strategic alternative evaluation process.
Finally for the fiscal year, we expect our weighted average shares outstanding to be between 95, and 100 million shares and your with approximately 80 85 million shares outstanding.
As we endeavor to provide our investors better highlight highlights into the process. The progress supply is making towards transitioning away from our premise based history I want to take a moment to talk about it keep yarns that we will be utilizing to measure this partners.
Our strategic partners and big trends are critical to of why is near and long term success.
When we announced the Ringcentral partnership in early October we introduced a new PPI captures the evolving high value and highly differentiated revenue contributions coming from a cloud emerging technologies and strategic alliance partnerships.
We are calling this metric cloud one alliance partnership revenue.
In addition to our cloud risk.
When we include our emerging technologies and strategic partnerships escape Yardi represent 15% of total revenue in fiscal 2019.
In our October Ringcentral partnership announcement, I mentioned at over the long term.
We expect this contribution to double to approximately 30% of total of White River.
We look forward to sharing our progress as we proceed throughout the fiscal 2020.
With that I'll turn the call back to Jim Jim.
Thank you Karen.
I'll close by saying.
By has product portfolio.
And a strong technology roadmap.
We have key strategic alliances in place.
Solutions portfolio has never been more relevant.
And we have a deep customer partnership relationship.
These relationships have taken years before and they are the bedrock of our business.
All of this coupled with our strong business model.
Thanks, as well position to capitalize on the opportunities ahead of us in 2020 and beyond.
Before turning it over to for Q1 thing I want to remind everyone of our upcoming a by engaging.
February 2nd through 2020 feet.
This year.
Well the heavy focus on acute communication and collaboration.
As well as the role we are playing in shaping the industry.
And will feature the full breadth of our solutions portfolio across the spectrum of you see see premise and cloud.
We are hoping that maybe you will join US again for this program.
Mike has the details and will be distributing them shortly.
With that operator, we're ready to take questions.
Thank you very much gentlemen, and Im reminder, in order to ask a question simply press Star then the number one on your telephone keypad, well pause for just the might well be compiled acuity roster.
Your first question comes from a Rod Hall of Coleman, Sir Your line is open.
[noise]. Please go ahead.
Your line is open some static though.
Hey can you get hear me now.
And we are probably topic grade.
So yeah. It does it ashwin on behalf of fraud.
I quick clarification any question.
Thank you mentioned that D. Social security contract is not included in fiscal Q1 guidance.
But can you clarify whether that is not included in fiscal 20 guidance as well or.
Because it included there.
Yeah.
I stated I mean, we really believe that first of all for security absolutely needs. The upgrade we believe the budget funding is still intact.
We believe the partnerships with our.
Business proposition, we have with our partnership.
Have a cost partners is very strong and intact. So we think it's we think the deal will close it's just a matter of timing and when it happens cryptography some impact from some of the services that to our time related to the to the year, we would certainly expect to be able to recognize the product shipments in fiscal 2020.
I just in terms of timing, how you're thinking more fiscal Q2 or sometime in fiscal second half.
Honestly as I said, because I was.
Just because the process has taken the taken a few twists and turns year.
My expectation is only my hope will be earlier, rather than later, but I think I'd be premature and giving an exact thing at this point in time.
Okay, great and if it gets this country total revenue guidance.
Calling for a hero you a decline part of that is effects, but what are you assuming in terms of decline in revenue from your current product portfolio.
Yeah I think.
I think the way I would characterize our guidance for the years.
We clearly want to recognize the fact that we've seen a great deal of shift occurring in the trends you see business.
Early in the mid market away to cloud offerings.
And therefore I have to be realistic anticipating those impacts.
In the first part of the year and quite frankly until we start to ramp a CEO , which will be as we've we talked about very much second half oriented.
It's going to have.
Okay and headwind to us throughout the year.
We feel we feel pretty optimistic about or cc business, just because of all the high differentiation that we had in our print business as well.
Between our own offerings as well as those with many of our partners. So I would say that most of what we see as the headwinds here really come from the you see business, mostly in the mid market Jim Yes, Let me just fellow that today. So I agree with care, we'll have the product available from your perspective.
Late next quarter, which is actually the end of our second quarter our fiscal year.
I will tell you that there is a lot of pent up demand.
And I can tell you that each and every day between the combined teams Dakota Mark go to market motion continues actually to gain gained momentum.
But the reality is the fact is for us will be up here in pointed out a second half play.
We really see that says as we move.
Out of 2020, and certainly into 2021.
This is this will be a significant revenue driver for us has.
21, so we.
We see the this is the sort of your transition we see that in fact, we have a very large opportunity in the long run.
But it's just going to take that's a while sorted out as you can expect somebody here. This up as we go through the second half of our fiscal year.
So we'll have to played an important role for us and 20, but beyond 20 will play a.
More importantly, each and every year as we continue to gain traction.
Thank you gentlemen, I'm just a reminder, when you're asking a question simply asking one question and one follow up question and the mines have time for US. So everyone has attempt to west a question. My next question Jonathan let the from the line of let's pretend that Cowen Your line is open.
Hi, Thanks, guys for taking the question I actually wanted to focus on slide nine of the of the deck that you put out this morning with respect to yeah with respect to payment and perhaps revenue share and this is obviously on the E. C. O offering you know <unk> the slides seems to suggest that maybe the results better than what we and I think most.
The analysts were expecting so I just wanted to kind of walk through this little bit my understanding is that the customer will be sold by a via and the channel partners actually I'll be installed by a viable.
We'll be service, principally by via and build though by Ringcentral, but in looking at this slide it suggests that maybe maybe with respect to the billing I don't have that right could you could you sort of comment on that and also and I have a follow up question. After you do thanks.
Hello, and thanks for joining this Karen I'm going to turn to a question over to.
Dennis Kodak, who is leading our partnership between central.
Sure good morning.
So I think you had it right new recap essentially the entire customer lifecycle is managed by a via from the sales and marketing to partners the Onboarding.
The customer care meeting that customer success function to support function.
And even the administration of the contract.
But as it's a self service right. The usage is provisioned out of Ringcentrals cloud. So therefore, it makes a lot of centre for them to generate the building right because they have been the customer.
Usage metrics in order to do the billing against but everything flows through a by all touch points that the customer experiences will be through avaya.
Branded services via branded people buy a batch people and our partners.
Okay. So then my follow up is just from a from an accounting standpoint, so wrinkle ex the cash from the customer and then Remits a percentage to EVIA add some portion of that I should say I'm not trying to qualify or quantify what that portion is but whenever that pushes isn't that portion then.
That is booked as gross revenue at a via or is a via in you know or is it via booking more or less.
So obviously as you rightly stated we can't get into too much of the specifics due to some of this commercial sensitivities and agreements, but we have with rain, but essentially or the payments to us come in form of too.
Components, one when the Cds actually turned on we received an upfront payment or about the for what for better word and then as well we see it continue we.
Continuing.
Portion as well, but we'll recognize over time. So it's not really it's not really something that were it's really not something that were.
Splitting it around paid only a certain amount I mean, there's a formula involved.
It is primarily in nature, and then we'll get an ongoing recurring stream as well not just one point given the prepayment.
They provided to US we will then actually convert that prepayment essentially we gathered this contract liabilities section into revenue and therefore into into our R&D and Rpls. Since we've been if you will pay in advance for those seats.
Thank you. Our next question that there were Raimo Lenschow of Barclays. Your line is open.
Hey, this is Mike on for Brian . Thanks for taking my question I, just had Oh I had a question on the new KBR that you guys discussed regarding how we would be cloud and alliance. So I just wanted to get a little bit deeper on what what emerging technologies and strategic partnerships are part of that today because obviously.
There's the old gap between you know the 11 in 15% what are those strategic partnerships that are kind of being bucket into that is that the vibrant an affinity and and what type of growth rates are you are.
Are you also expecting kind of growth from that side of it as well.
Hi, This is Jim.
Yes on parents affinity.
Okay, Salesforce and others as part of Ocean strategic alliances.
The reason why were bucking the bucketed them all in one is basically because they're assess offer today.
And in fact, if you want to represent pure SaaS revenues associated with the company, it's important to make sure that we because.
We take into consideration all those.
Assess offers that were providing to our customer base. So.
I think it's more reflective of the actual.
Okay.
From an overall cloud and SaaS model. So I think that's a good way to measure our business, obviously because we're.
I was impressed the market more than Justin.
Pure play I think it's a great representation, so let me answer that.
Are we seeing okay growth segments.
Yeah I mean.
Actually doing the emerging technologies and partnerships.
We do project that we will have grown to notice as we go to.
As we go into Two Q2 020 for sure because obviously cloud continues to.
Thanks Brandon.
So the answer is yes.
Okay. That's helpful. And then just on the on the EBITDA margin guidance that was provided the EBITDA guidance is provided could you go into a little more detail I know you talked about that you'd be spending a little bit more due to some of the transitions that are taking place can you talk about kind of the puts and takes off between you know SGN and R&D on that and and are there any.
Target numbers for the R&D side for example.
Yes, So let me just start and I'll turn it over to Jim. So as you know we ended fiscal 19 or about 24.3 of adjusted EBIT in aggregate and giving guidance somewhere between 20 324, So think of it as roughly <unk> point of reinvestment.
I'd say, we've been pretty consistent on the either or product perspective from a development perspective as we go through time, we have Rick sounds a little bit of synergy off from a development perspective, but that has mostly been due to some real estate consolidation actions that we've taken some savings that we've generated there otherwise from head count perspective in product perspective, we continue.
Invest there.
But most of what you'll be seeing would be really in the tools to help on the go to market I'll, let Jim say few words, but that.
Yes, so I mean look to the fact is if you take a look at our cloud R&D portfolio from 2019 2020.
We're basically going to be doubling our spending in cloud as far as a component to our R&D portfolio.
And obviously that's extremely important for us.
Teams are off executing to that as we speak.
When you take a look at the go to market motion.
Yes.
The fact amount or is that.
We really were not a.
Cloud company as far as being.
Sort of publicly oriented we had wholesale offer we sold through.
So for partners, we have a ready now that we sell to large enterprise as far as though overall go to market motion, we need to invest and we knew that bring those skills and from the outside in fact, we're doing actually extremely well.
And bringing in a number of industry leaders into the company at the pedigree of cloud and it's not just at the leadership position, but its threw out if you will every level.
So one of the investments we need to make is obviously driving that transition as Karen talked about it and the cloud. So we want to best not only in resources and go to market capabilities and R&D Cape resources, but we want to make sure we invest in the tools and processing capabilities because it.
Different model then.
Store model as more than a premise oriented.
So we decided that we was on invest much I think a prudent investment.
10%.
The 1% Mark of our EBITDA and invest that back into the business for sustainable growth growth in the future and again, we're quite excited about a recruitment process across the board and many of the functional areas and down.
Pipeline frankly is not quite massive so we're getting ourselves positioned for success.
The say the least as we go through 2020 across many spectrums and the business. So.
I think it's prudent investment and one that we need to invest back anywhere else.
We will continue to drive that as we go through 2020 previous couple of years. It was significant investment in portfolio.
Now, let's see him taking that to the next step investing that back into the go to market motions in that process tools and capabilities as Karen mentioned.
And thank you. Our next question that's up from a line of is a merchant of Citigroup. Please go ahead. Your line is open.
Hi, Thank you for your opportunity does a good question. If you could just hoping for understanding what with the maintenance and professional services revenue contribution within your total services revenues software and services revenue.
Right.
I don't think we get that level until we put out our.
Okay, right, so im sorry, Im a little a little ahead, there are all I could I would say.
Maintenance has really behaved quake.
Consistently as we've seen over the past over next several years. So the impact of the bookings that we've lost from a premise perspective, especially on the you see started the house over the past several years I'd have a compounding effect, we've been able to mitigate it as Jim pointed out with the continuation of the improved renewal rates.
Since we exit bankruptcy and also even this particular here. So we're actually maintenance came in even a little pretty much right on where we expect maybe even though a little better.
Even though it's you know, it's it's relatively consistent on Oh.
Quarter by quarter basis, you know there is and can sometimes be a little bit of fluctuation in there. We do conclude a rather large international a billing, but I would have said except for that Rvps business was a little on the weaker side. This year, but we probably had the strongest NPS bookings that we've seen a certainly since the company.
Certainly for the company as exit bankruptcy, and we see quite a bit of firepower coming from that professional services business in fiscal 2000, primarily because so much of RCC business.
No it requires such heavily customization into the customer environment.
So that's really a marketing well for our opportunities in that space.
If I could you okay. That's it.
Couple of quick data points one is.
Karen pointed out we didn't we really did a nice job with a program really being services led and really providing the path for our customer base that Frank was a couple releases down to make a seamless frictionless upgrade to our latest our latest releases and technology through in a 45000 lines is significant and they're now up to the system. So.
Its release and in fact that was the pace that was for the most part under attack fire competition, because they were less relevant.
Over multiple sulfur reduces down so that played well for off and how great stabilized.
Other thing is the ready now unit economics, there and it's primarily from our maintenance base moving to a private cloud are actually quite accretive to the company and again extremely sticky for those customers to stay with us So 90 million in just six months.
TCV is quite significant as Kevin pointed out are looking for ready now to become material for us as most of the balances.
Okay, and then in your guidance, obviously, you're implying a significant second half from being built between Central Park machine Thats why they are ready now revenue.
Does that change this seasonality is quite well yard.
Yes.
Sorry about that I don't know where that can you come back.
Yes, yes partnership in the guidance change your seasonality.
And you look at for the remainder of tenure and December through the rest of year.
All right would you combine.
Right now scheduled for two hours.
Well it just so bear with us.
Paul.
[noise] [noise].
Sorry about that.
A super you're just repeat that back into yep.
I was just talking about a you know your visibility into the second half.
How you are expecting seasonality to change because your partnership expiring.
Right, but that's a degree that's a great question. So you know given where we have guided Q1.
We would expect at the back into the here.
Effectively even Q2 to four would probably be somewhere.
You know I say slightly down to slightly up as we think about as we think about before year end and that would be most particular in in.
Q3 in Q4, as we've talked about with central.
Historically, we've tended to have strong quarters in in the first quarter and the fourth quarter of our business.
This year, because as we talked about before because of the lack of a real competitive you catch offering your arsenal at this for a moment.
We see somebody that's pushing out to the backend. So I think we'll we'll probably see historically more of our progress being back in Q4, and then more we'd like to calendar first quarter together I do think is a bit of anomalous your.
Great. Thank you.
Thank you let our next question comes seven Madden Ultimate lobby of Guggenheim Partners. Your line is open.
Hi.
Good morning, Thanks for taking my question, so Jim what are the natural boundaries.
For my new position, you're on cloud offering the ready now.
Versus the new is steel offering that go to market over the next couple of months.
Yes.
Look to the AC goes more geared towards obviously ucas public cloud offer.
I think capabilities is banned from the S.
As well as the MPC.
Fairness.
Opportunity, even for enterprises, where they're looking to potentially move.
Some of the businesses into late in public cloud. So we see a CLC capability to expand from very low answers sort of that the high end of our business, but exclusive around.
Who has offered.
Where we see ready now ready now really plays and sort of the mid market it up into a large enterprises and right now we're seeing that predominantly in our large enterprises, where you're talking you know certainly north of a thousand seats in some instances and fairness one could be as much as.
50 to 60000 seats on the deal that we signed a that we signed last quarter and we just signed are really significant deal.
About a week ago that we'll talk about line in our next earnings call.
Actually seats that so the ready now is really primed for those large enterprises that wants to saying flexibility capability.
Tcl associated but they want to make sure that its hosted in an environment such that its private so they both of these offers or complement one another and few well and they don't can compete with with one another so we're actually.
We're actually excited about the opportunity that she covered for the full breadth of.
But the market and most of the traction we're seeing today and most of the pent up demand were seeing.
So it's really more around sort of the midmarket piece of the business that sort of that the small in the business, which is actually quite exciting for us and equally as exciting for right.
So we think we have now the full breadth from very low one through master agent agent model, all the way up through our direct salesforce selling USIO.
Okay, great complement to.
The market.
Now serves for us on the very high end of our customers that are moving away from sort of a maintenance orientation.
And one that provides a benefit.
Okay.
Oh.
Hi, Thank you and a follow up for Karen on the buyback the average.
Check on for the year seems to indicate that this would be a fairly slow I'm just trying to gauge the cadence of the buyback.
Over the next.
Our obviously I hate to disagree with you, but the average they just gave you said that we'd be taking out anywhere between 23 and 20% of our share count in the year that doesn't seem slowed at me.
Your next question here comes from the line of made a merger with Morgan Stanley . Please go ahead. Your line is now open.
Great. Thanks, I, just wanted to get a sense with some of the change in engineering announcements yesterday, just who is kind of leading the I actually see a development now that kind of be the old head of cloud has departed and then maybe a second question for me you know just since you've gotten initial customer feedback.
On kind of the C O partnership with Ringcentral, you don't have the size of customers been what you thought you know you had tended to think that the larger customers would stay with private cloud and some of your smaller customers and moved it has that kind of readout in customer feedback. Thanks.
Yes, so that actually the leadership on the I actually see hasn't changed.
Yeah, I exceeds a new platform.
And that new platform responsibility has always residing within sort of the R&D function and.
Leadership in that I see platform hasn't changed.
Because thats always the responsibility units if you understand our standard our R&D process.
We we didn't make a change.
To maybe where you're getting ask and yesterday, we announced a new leader.
That will be joining us Anthony Portola.
From a from Tata and taken their responsibility if you will for.
We had if you will sort of a bifurcated R&D process with R&D and then if you will cloud Arnie.
A couple of reasons why we did that.
Frankly is the fact that obviously the rig announcement was pretty decisive move and the traction we're going to take on Ucas.
That is has enabled us to consolidate our efforts.
Our R&D portfolio.
Under his leadership, we will indeed be doing is.
Hitting our development, if you will core and cloud products and we're doing that because that's a response to our number one our customers.
More importantly, as part of what our deliverables are on the converging trends.
Between cloud you CCC and print.
Every deal we sell now is that converged converged deal. So this will enable us as we go forward now the ability to streamline our execution in fact print products to market test.
But shouldn't be lost in this announcement is the new role that Christmas Lukens going to play for us which is critical.
And that is being the CTO and really being the customer executive for by we didn't have that roll before.
It's one again in the spirit of what we're hearing from our customers and really providing us still the opportunity to continue to build on our leading technology and innovation roadmap.
So it's an extremely important role and Chris.
The best qualified technologists by any stretch imagination nights denim up against anyone in any other company and now we're going to be able to take advantage and leveraged and build off of our technology leadership and well look at it by has extremely fortunate.
I have two is proven leaders.
On the R&D side, Chris on the technology side, driving our portfolio for so I think it's.
So.
Positions us.
Frankly till position that we had been previously so for us.
Got excited to have these two senior leaders drive that portfolio for us as we move to nature.
And I didn't quite catch reseal comment.
Oh, just that you had expected kind of larger enterprise customers and stay with private cloud or on premises and kind of smaller customers to move the is the how has that been kind of what you've heard on a national customer feedback right nobody larger customers, maybe interested in a CEO or smaller customers for white to stay with private just any initial feedback.
On size of customer.
I would tell you that our initial feedback and it's come from a couple of different Gartner symposiums that we've done that and by the way we've been in their.
Hand in glove with rain.
Either way.
A couple of our larger enterprise customers have come up to us.
Thank God, we were just kind of go RF Q, because senior management, our executive management wanted us to introduce.
Public cloud offer and now that a buyer has it.
We're going to go we were going to go with you guys. So as I mentioned earlier I would you know obviously pick a number significant 75% the volume will be in yes, and yes and space of the market, but it will certainly be an opportunity for us.
With the Hcl offer to solution needs of our of our large enterprises as well, which is which is significant because you can just imagine a number of seats that are associated with some of these these these larger accounts and.
Collecting and building and working with our partners.
In fact.
We have had multiple Latin ever just here in New York, just a little over a week ago for two days symposium.
Meat on a weekly basis. The teams me every single day, we have joint go to market activities, we have joint development activities.
Meeting with our partners together so.
There has been a tremendous amount of Oh.
Time, and energy and really it really driving this solution, but as I mentioned, we can't wait to get it up in fairness and we're working really hard on making sure that we get the right.
Get the solution out, which will be a differentiated solution and one that our customers can actually implement seamlessly and friction Lee and as I said the opportunity on devices.
Not only from an ace yield perspective, but from an RCR perspective and.
So far that the teamwork and engagement has been.
As such met its not exceeded all of our expectations.
Great. Thank you.
Our next question comes the line of how that correspond of BW with financial your line is open.
Good morning, Thanks for taking my question a this is actually if I could calling in for Ahmed.
The question I may have missed the there was some technical difficulties on the call. If I may have missed this already if you've already said it but what impact does ringcentral have on your 2020 guidance and then I have a follow up to that as well.
Yeah, obviously, we're not going to be specific.
You're just based upon the understanding and agreements that we have with me.
We're not discreetly.
Reporting.
Or is that it is going to have a measurable benefit to our second half the year.
As we start to ramp.
Its fuel volumes.
And then my follow up is.
In terms of investing in R&D.
We'll we'll that number be reduced in 2020 because of your partnerships occurring.
No I think what gives us the ability to do is actually truly refocus and put put more wood behind the our Christmas study here for next was so we'll want to be sure that we get more of our investment into cloud into or see cash.
As well as into injury or read our private cloud investments are completed.
So we don't see any change to our investment, but really more of a focus the remaining part.
Thank you very much.
Thank you and pull our final question for state as Mike Latimore Northland Capital. Your line is open.
Hi, Thanks for taking my question businesses, we get there were far Mike Latimore.
Went back to R&D topic.
So what R&D, even go do you keep us cc going forward.
That's not something Weve, that's that's something we breakout.
I think what you did your or Jim intimate earlier that we were the Chris is playing a doubling the overall investments that we were spending.
Cloud aggregate this year, but it's not we don't breakout you see for CCC.
Okay. Thanks.
Uh huh.
Chris has been okay, great. Thank you very much settlement and I'd like to turn the call back over to Mr., Mike Mccarthy for his final comment.
Thanks, Suzanne as Jim mentioned, we will be hosting the gauge Ben in Phoenix from February 2nd to February 5th we will have details about the hotel registrations and such a formal our investor relations page or when we get back from Thanksgiving, We look forward to senior there and if you have any questions as we move.
The next couple of weeks, please feel free to give your call. The office, thanks very much of that.
And thank you gentlemen. This concludes today's conference call you may now disconnect.