Q1 2020 Earnings Call
Greetings welcome.
Welcome to the EVIA first quarter fiscal 2020 conference call.
At this time, all participants are in listen only mode.
A brief question answer session will follow the fall presentation.
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Please note this conference is being recorded.
At this time I'll turn the conference over to Michael Mccarthy, Vice President Investor Relations Mr. Mccarthy, you may now be yet.
Thank you and welcome to a buyer's Q1 fiscal year 2020, investor call, Jim charcoal, and President and CEO, Wintour, Mcgrath or EVP and CFO will lead this morning's call and share would you. Some prepared remarks before taking your questions also joining us this morning oriented Bartolo CDP and she probably talk.
Sure that's for sure GDP General counsel.
The earnings release, and Investor slides referenced on this morning's call or accessible on the investor page of our website as well as the 8-K being filed later today with the FCC, which should aid and your understanding of a buyer's financial results, we will reference non-GAAP financial measures and specifically no debt all sequential and year over year comparisons referenced.
GAAP numbers, except where otherwise noted.
We have included a reconciliation of such measures to gap in the earnings release and in our Investor slides, which are available on our Investor Relations page.
We make forward looking statements are based on current expectations forecasts and assumptions, which remains subject to risks and uncertainties that could cause actual results to differ materially information about risks and uncertainties may be found are most recent filings with the FCC, including our form 10-K, and subsequent form 10-Q reports it is a bias policy not to read.
At a rate guidance and we undertake no obligation to update or revise forward looking statements in the event facts or circumstances change, except as otherwise required by law I'll now turn the call over to Jim Jim.
Thanks, Mike Good morning, everyone and thank you for joining us this.
This morning, I'll provide you with highlights of our Q1 performance along with an update on the progress we've made on our strategic priorities.
Karen will then walk you through the details other corridor and our outlook for the fiscal year and then we'll open it up for questions.
We got off to a strong start for the fiscal year. Our Q1 non-GAAP revenue was 717 million.
Above the midpoint of our guidance range, a positive reflection on our sales and operational execution.
The composition of our revenue continues to reflect our deliberate and successful shift to a software and cloud based business model.
Notably software and services as a percentage of revenue increased to 86%.
Oh from 83% the prior quarter and prior year.
Also significant our cloud alliance partner and subscription revenue or cats grew to 80% from 15% in the prior year.
The programs, we've initiated to activate our base and to provide a seamless transition path for enterprise customers to consumption based subscription and cloud models are beginning to gain traction.
Underscoring the successful execution.
Our strategic shift.
Consistent with our customer let strategy subscription provides customers with an accelerated return on their investment.
The ability to flex license usage up and down.
And allows for faster and easier access to new technology.
Which can simply be added to the subscription bundle.
In fact, our subscription model was a contributor to growth of our cash revenue.
Equally important.
Subscription contract securus customers into longer term agreements with the bye.
Below the line our margin performance was above our guidance adjusted EBITDA came in at a 174 million or 24%.
Demonstrating our consistent top cortile operational excellence.
Importantly, we close the corridor with over 760 million of cash.
Our profitability and cash position fuels, our ability to invest in talent and innovation at levels, most others in the industry cannot.
During the quarter, we executed on our capital allocation actions as we committed.
We paid down $250 million of long term debt, which will deliver meaningful annual interest expense savings of approximately $15 million here.
I'm also very pleased with the execution.
And overall success of our stock buyback program.
We initiated our buyback on November 25th with less than six weeks left in the quarter.
During that period, we repurchased nearly 11 million shares using 132 million of the $500 million Our board had approved for the program.
Representing approximately 10% of our outstanding shares and the market at the time.
Now, let me shift gears and provide you with an update on our strategic priorities.
We identified four key areas that we are executing on as we continue our momentum.
We first focus on building private and hybrid cloud solutions, along with the necessary services capabilities.
Private and hybrid cloud uniquely tackles, and many variables large enterprises have to consider such as geographical reach compliance and security.
And application integrations just to name a few.
Importantly, it allows our customers to involve their core infrastructure well the step wise approach that aligns with their very specific enterprise business requirements.
Our private cloud.
Offers including APC S and ready now continued to gain traction.
TCV now stands at over 660 million.
Second.
We extended the benefits of public cloud to our entire customer base with our all in cloud initiative.
We closed an important gap in ucas through our strategic partnership with Ringcentral, which I'll talk more about in a moment.
We're now focusing on sicad through our own cloud native development efforts see Kaz remains on track for release in calendar Q3, our fiscal fourth quarter.
Third our new Opex consumption models like subscription.
Allows our customers to more easily take full advantage, our expanding set of cloud native Microservices, which drives further renovation and also provides new methods of collaboration through a variety of capabilities, including video mobile AI and open <unk>.
For enterprise customers, who are looking for a path to the cloud.
Subscription can't provide a transitionary first step to an op ex cloud model for many customers.
Subscription also moves them to the latest release and gives them the ability to leverage their prior investments and customized business process flows.
For our channel partners.
They moved to a cloud customer success model that results in greater customer collaboration the ability to upsell and cross sell and increased consumption of value by the customer.
For our cloud technologies, which blend you see NCC are being used to power the digital workplace.
Including AI capabilities like virtual assistant.
Speech recognition transcription.
And behavioral Perry, along with analytics and reporting.
The combination of these capabilities are unique to fight and addresses our customer needs to recreate a more personalized and customize journeys for their customers.
Now turning to a buyer cloud office in the area of enablement.
Our internal sales teams have been fully trained nearly 500 after that.
On the partner front, we have certified dozens of partners and last week at our annual customer and partner conference.
Engage we held multiple Hcl training and information sessions with well over 700 partner personnel in attendance.
In the area of technology, we remain on track to release a CEO at the end of this quarter in fact last week, we showcased the demo version of the product and its initial feature set later this month EVIA endpoints will be available for auto provisioning not only with AC out, but as part of bring.
Central's own RCR offering providing another demand engine for our devices.
Our initial launch will focus on the U.S. and will quickly expand to three additional countries and the next release cycle.
Additionally, we have identified and prioritized exclusive of I have features to incorporate into hcl that not only differentiate a CEO from other ucas solutions, but also maintains the customer and user experience.
The highly loyal EVIA customer base has come to expect.
Lastly on the go to market front.
I can tell you that the momentum from master agent to SMB to enterprise companies for Hcl in terms of pipeline growth is outpacing my expectations by the time, we launch we will have five master agents in place and we already have 200, plus agents sign to complement our existing channel partner.
Our base.
In fact, although Hcl is not yet available we have already had the opportunity to pressure test.
Many of our sales and operational processes by conducting joint calls.
These sales opportunities are indicative of the types of deals that a bias and our partner base well aggressively pursue it watch.
Let me give an example.
And one such engagement.
We had enough I installed base customer who had evaluated several ucas platforms.
And that chosen to move to a competitor.
Upon the announcement of Hcl the account team was able to position the benefits and value of a CEO and win back the customer base on the fact that they would have access to a world class Ucas platform and that would remain in a by a customer.
There are many more examples where competitive threats to our base app install as there is a direct result of Hcl.
All proof positive of the importance of having closed this gap in our portfolio.
Now I'll share some key highlights and wins.
In the first quarter, we added roughly 1300, new customers, including over 110 competitive displacements.
We signed 68 deals where the TCV over $1 million.
Including six over 5 million and three over 10 million TCV.
Our total TCV.
Is that approximately $2.3 billion consistent with our expectations.
Let me give you a couple examples of the size scope and its significance of the deals we are sign.
Our global insurance provider seeking to upgrade their existing if I infrastructure.
We positioned our new subscription offer.
The economics of the offer allows the customer to accelerate their modernization efforts.
The flexibility allows them to easily add new technology like spaces collaboration.
And for Viacom, we were able to close a five year 25 million dollar deal.
And another Q1, when we worked with a business services company that has over 100000 employees to help streamline their communications infrastructure.
We booked a 20 million dollar opportunity that simplifies their software licensing structures and provides them with a consumption based pricing and bundles the cost the future upgrades into a ratable master agreement across their six global regions.
Oh wrapped by thanking many of you on the call for joining us out of I engage in Phoenix last week.
This year's engage was our best attended and most successful customer and partner event, we've ever had.
Customer and partner feedback was excellent and the level of engagement as measured through attendance feedback and the overall budget. The event was beyond our expectations by the numbers there were approximately 3000 attendees.
95 partner sponsors 150 breakout sessions, and nearly 100 press and analysts to help amplify our message.
Had engaged we announced several solution offerings, including new capabilities for cloud collaboration product called spaces.
Arrow, our new AI routing engine partnered with affinity.
And how the hackathon with Google and get hub.
And included over 100 participants who use our communications platform as a service solution to create apps on the fly.
This engage was also different from prior ones featuring heavy involvement from our ecosystem partners like Amazon, Google Ring, Salesforce variant and Verizon just to name a few.
These partners drive scale reach and accelerate our technology capabilities, while growing our addressable markets and deliver additional value to our customers.
If I engage which truly representative of the momentum here at the company and a testament to the strength in reach of the vibrate.
With that Karen will now take you through the details of the quarter the mechanics behind our capital allocation and our outlook for Q2 and physical 20 Karen.
Thank you Jim and good morning, everyone.
As a reminder, unless otherwise stated all financial metrics referenced in this call or non gap.
Supplementary slides posted on our Investor Relations website set forth the GAAP to non-GAAP reconciliations.
All figures mentioned on this call our as reported unless otherwise indicated in constant currency.
For the quarter.
Non-GAAP revenue was $717 million compared to $748 million reported in the year ago period, which is equivalent to $744 million in constant currency.
Sequentially. This compares to 726 million as reported in Q4 fiscal 2018.
Revenue results, where the high end up guidance, we provided during our last earnings call driven by continuing growth in a number of clients looking to consume product content under opex models, whether it be for on premise or as a service offerings.
Well our subscription offering is still in its early phase we have seen real enthusiasm from our customers. We believe it will enhance the sticking to separate solutions and act as a first step for many of our customers who were interested in migrating to the public indoor private cloud.
As we discussed during our fiscal yearend call.
We're expanding upon the cloud <unk> that we have historically utilized to measure our success in the transformation of our business to the cloud as what was our ability to reduce our dependence on premise based perpetual licensing models.
Therefore, we're enhancing this metric with the new capabilities, which will measure the total revenue contribution of cloud.
Combined with the revenues from our strategic alliance partnerships and subscription revenue or caps were short.
The revenue contribution from caps represented 18% of total revenue for Q1.
Up from 15% for the full year fiscal 2019.
First quarter product revenue was $298 million compared to $326 million in the year ago period.
There are two dynamics at play here.
Firstly, we witnessed our strongest contact center quarter in the first fiscal quarter of 2019, which contributed to a very difficult compare.
This was due primarily to a very large deal that we closed with the European Bank.
Secondly, we continue to experience headwinds to where you see business.
Has been driven by the lack of a robust you catch offering.
Now will be fully addressed with the availability of a via cloud office or a field, which is planned for release in the U.S. at the end of March our fiscal second quarter.
I would like several more countries in the second half of our fiscal 2020.
First quarter services revenue was $419 million relatively flat when compared to $422 million in a year ago period.
Growth in revenue generated by our subscription offerings almost entirely mitigated the declines in hardware maintenance and software support.
Turning to gross profit metrics.
Non-GAAP gross margin was 61.4% in the first quarter compared to 62.7% in the year ago period.
Sequentially up from 60.6%.
Non-GAAP product gross margin was 65.1% compared to 65.6% in the prior year sequentially up from 64.4%.
Non-GAAP services margin was 58.7 per cent compared to 60.4% in the prior year sequentially up from 57.7%.
Turning to total profitability margin and cash flow metrics.
First quarter non-GAAP operating income was $151 million, representing a non-GAAP operating margin of 21% year on year down 160 basis points, while adjusted EBITDA was $174 million, representing an adjusted EBITDA margin of 24% down 100 basis points year on year and can.
System, what our guidance for the first quarter.
Recall that in our fourth quarter of fiscal 2019 earnings call. We highlighted that in fiscal 2020, we were planning for a one point reduction in our adjusted EBITDA margin, Yes, we increased our investment in our cloud go to market cloud development and in bringing the CEO offering to market.
Further we generated $12 million in cash flow from operations or 2% of total revenue.
If we exclude the onetime payments related to the strategic process, which we completed in October of 2019 or cash flow from operations was $58 million or 8% of total revenue.
During the quarter adjusted for the onetime payments with reference to both free cash flow came in at $32 million contributed to a contributing to a first quarter ending balance of $766 million in cash and cash equivalents on our balance sheet.
Before moving onto our second quarter guidance I'd like to spend a moment expanding on our capital allocation strategy, specifically on our execution against the previously announced share buyback program, which was approved by our board of directors in October 2019.
As a reminder, we launched in open market repurchase program utilizing a tenbfive desk one plan in late November following our fourth quarter fiscal 2019 earnings release.
As we've said we believe that this construct permits flexibility to transact in the market during quiet periods and allows us to be opportunistic from both a volume and pricing perspective.
This has resulted in a swift pace or execution.
As Jim mentioned, we bought back approximately 10% of our outstanding shares of the company in less than six weeks.
In the first quarter this equates to 10.7 million shares.
They settle to cast cost of approximately $132 million in the aggregate.
And at an average price of $12 in 27 cents per share.
In fact, you'll note that our outstanding common stock as of January 31st which will be reported in our 10-Q filing later today.
Reflects a reduction of approximately 16 million shares since our last filing or an incremental five plus million shares repurchased in the month of January alone.
We believe this fast start positions us very well in achieving our guidance objective or buying back $400 million worth of shares in fiscal 2020 onto the total board approved 500 million dollar repurchase program.
In terms of the debt pay down as a reminder, $250 million was deployed in November to pay down our long term debt.
This will generate an estimated $15 million an annualized ongoing cash expense savings.
Now turning to guidance.
Please note that all you're on your revenue changes are expressed on a constant currency basis, and all revenue amounts reflecting rates as of December 30, Onest 2019.
As a reminder, historically, our second quarter revenue compared to our first fiscal quarter revenue represents a mid single digit declined sequentially a seasonally the second quarter is normally the lowest quarter the year.
For the second quarter, we anticipate non-GAAP revenues of $675 million to $700 million, representing a minus five to minus 2% annual decline as measured in constant currency.
This quarterly range is wider than normal due to the fluidity of the Corona virus situation in China.
Well the size of our revenue generated in China is relatively small when compared to the size of our global business.
There is the potential that the current health crisis could have an impact on the closing of current quarter transactions within our trying to operations.
Regarding the supply chain side of our operations, we expect no material impact this quarter that we have adequate supplies in place and we had been developing alternate sources of supply.
So most of the first to second quarter revenue seasonality experienced last year non-GAAP operating margins and adjusted EBITDA margins are generally at their lowest point each year in the second fiscal quarter.
This has been the case in seven of our last nine years.
This is driven by a handful of annually recurring factors.
Firstly revenue was lower in the second quarter due to the seasonality highlighted above.
Secondly, annual employee social taxes, the employer matching and employee benefit increases kick in during the first calendar quarter of each year, especially in the U.S.
Thirdly, two of our largest marketing events of I engage and enterprise connect take place in the first calendar quarter of each year.
Additionally, this year, we had the added expenses associated with the C. O launch as we ramp up our sales marketing and R&D investments in anticipation of the C O product launch in the U.S. in late March.
Accordingly, we expect non-GAAP operating margin for the second quarter to be between 17, and 18% annual adjusted EBITDA margin to be between 140 and $150 million or approximately 21%.
Now turning to the full year guidance.
When we began fiscal 2020, we expected that the first half of the fiscal year, we'd have a revenue profile in terms of year on year growth performance that would look like the performance we experienced for full year fiscal 2019, which was down low to mid single digits on a constant currency basis across the quarters.
For the second half of fiscal 2020, we expected that with the availability of the CEO and the ramping up the ready now and subscription offerings that we would experience revenue that was flat to modestly up on a constant currency growth basis.
We believe that this continues to be the case.
As such we are reaffirming our expectations for full fiscal year 2020.
Non-GAAP revenue is expected to be flat to down minus 2% on a constant currency basis.
That's at foreign exchange rates as of December 30, Onest 2019. This translates to non-GAAP revenues between 2.84 billion and $2.92 billion.
Additionally, we continue to expected the adjusted EBITDA margin for the full fiscal year is expected to be between 20, 324%.
We continue to expect cash flow from operations for the fiscal year to be 5% of revenue or 7% when adjusted for the onetime strategic deal payments that were made in the first quarter fiscal 2020.
With $200 million already spent through January on the share repurchase program, we expect our weighted average outstanding shares to be between 93 97 million shares.
And the outstanding share count to be between 80 to 83 million shares at the end of fiscal 2020.
Now before I turn the call back to Jim I want to give a brief update on the status of the large SSC deal that had been awarded to avoid that is currently under appeal.
Well, we continue to be very optimistic on the final outcome of the social Security Administration Award appeal and expect to learn the outcome of the appeal sometime late in Q2, given recent experience and being abundantly cautious revenue generated from the SSC awarding question is excluded from our Q2 guide although it is still included in our.
For your expectations.
With that I'd now like to turn the call back to Jim.
Jim.
Thank you Karen before opening the call for today I would like to close by highlighting that if I continues to strengthen our portfolio of offers across you CCC and collaboration to expand our total addressable market.
We continue to execute to a purposeful and deliberate technology road map, we are committed more than ever to a customer first model.
And we've never been better position to empower our customers to customize and extend their communications infrastructure.
In closing I'm extremely pleased with the significant progress we've made on executing on our strategy.
We remain focused on our core enterprise base.
We've invested it and deliver blended you see NCC communication solutions, leveraging our nexgen all in cloud portfolio.
We'll continue to differentiate where there are world class services in our unmatched scale and breath.
We will stay the course, we will continue to invest to deliver the technology solutions the applications that deliver the experiences that matter.
Great to see the momentum is building in 2020, and I remain bullish on our long term growth perspectives.
With that operator, we're ready to take questions.
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Thank you and our first question today is from the line of Lance Vitanza with Cowen. Please proceed with your question.
Hi, guys. Thanks for taking the questions a nice job on the quarter actually wanted to ask you about spaces for enterprise I don't think that that's been discussed much up to this point and I'm wondering if you can sort of I was one of the people they sought out and engage and thought it seem pretty interesting, but could you talk a little bit about the genesis of this product in.
Whom you expected targeting.
Any thoughts on on how widely.
Any how widen circulation, we can be talking about if it goes well.
Yeah Atlantic Jim Yes. Thank you very much yeah, a couple of things. So one is.
We've actually been working on that collaboration platform I used cases for the last couple of years. In fact, we actually acquired a lot of that technology, a few years ago.
And over the last I'd say 12 months or so we've actually invested quite a bit in it.
The real key areas for us since we needed a platform that we could provide to our customers around you know basically meeting and sharing and providing again that collaboration capability.
We see this fitting into a number of different opportunities for us first of all a number of a large enterprise customers who use use prem.
View it as a as a great enhancement.
To the productivity of their companies also in areas like private cloud asset some books and equally as important with a new subscription offer we see we see an excellent fit.
For for the spaces application.
We're also take a look and frankly as providing in as sort of the collaboration platform for the company I'm a little bit more work to do on that piece of the business, but we clearly see a large opportunity across if you will at least our midmarket and enterprise customers today.
Okay. Thanks, and just as a follow up then I mean is this something that you think will be more likely to go to your existing customers is sort of an additional feature a product or or do you use. This could this be the tip of the spear to get you into a new customers.
Yeah.
Initially you know, we we're really focusing on providing the capability into if you will activate our base.
We've not had the platforms and a into product set.
In the past, but most of the releases that we announced last week and engaging in fact, even their relationship with growing on a buyer cloud offerings office is really around being a customer led company really providing the technologies that are that our customers want it and to activate and therefore grow their overall pay so.
We've spent a lot of time over the last couple of years, making sure that we sort of fortify and expand our positions whether with our current customers do I see it adds up potential worry from a greenfield perspective, the answer is yes.
There's some further on developments with spaces that will make through the balance of this fiscal year and I think will be not and a better position. A later on this fiscal year to take it. If you will really moved to a two a greenfield or real Greenfield position. I think also important is built on our C. F solution, our communications platform as a service.
So again, bringing more technology into our portfolio based upon that the investments that we made I'll also point out that last year, we invested roughly $100 million more than we had in previous years on innovation.
And as we pointed out this year, we're going to take a 1%.
It will impact to the overall EBITDA of the company to continue to build out not only the innovation aspect of the business, but also the go to market as we move more and more to cloud.
Thanks, very much I'll get back in Q.
Our next question that's from the line of Raimo Lenschow with Barclays. Please proceed with your question.
Hey, guys. This is Mike on for rhyme I'll I'll, just just a question on the on the Cc side of things I I wanted to wondering if you can kind of double click and I talk a little bit more about the development there of the cloud offering I know you said you're thinking about leasing in our fiscal Q4, and then can you also maybe touch on the relationship that you guys have now with good.
Cloud that you you touched on out of I engaged going a little more detailed there on like what Google cloud can bring to that offering.
Yeah sure. So this is Jim I'll kick it off and then we're here and with Anthony Bartolo or he VP of products and hill until that a little bit.
Little bit more color.
We have.
Well, we looked at our strategic process.
Roughly about 12 months or so about 12 to 18 months or so ago, we we kind of scans that the landscape and and really determined that from a ucas perspective.
It really made sense for us to go off and just some form of a partnership but because of our market position, our leading market position on contact center and the experience that we had within our R&D organization on C.C. that we're going to go and develop a cloud native to if you will solution on non contact center. So we've actually.
But at at this and it really the acquisition of spoken was really sort of if you will spearheaded.
The opportunity for us to go and drive that development. So we've been we've been out it for a while.
We will come out with.
I actually see Celeste Sicad solution.
By the end up our by the end of our fiscal year and we believe at least will have an initial release on that probably sometime.
Next quarter, so it's we've already gotten.
Some positive feedback as we work with a number of our key large enterprise customers.
We have about 12 of them right now that we're working with to bring this solution to market.
By the end of <unk> by the end of our our fiscal year. So we're pleased with our efforts. Obviously it is the opportunity with a buyer cloud office has also allowed us to focus.
And invest more on the.
See cast space, which we have certainly down and I'm pleased with the progress and where we are with our with our development milestones today and I would say that would certainly are on track as far as a Google I'll turn it over and Anthony and maybe anti can add a little bit more commentary around where he sees us.
On our ER Sicad solution that we're bringing forward yes. Thanks team. The other thing I'd, probably add there is that journey for US is ready started with all you can see it's coupled with our work spaces agent. This top solution, which is also delivered from the cloud and these is so today you couple that with our ROI egg cc solution it will give out.
Customers the option to either deliver a their solution.
On a on cloud public or private and in hybrid situations, which will be the predominant deployments that we're going to be seeing in that context in this space given that the contact center is so tightly coupled and intertwined with the customers business process processes. The hybrid solution will be the predominant sort of deployment.
And we seeing looked really good interest from a on this particular solution as we saw that adding gauge last week. So ER. So we welcome the Pos there and actually some of that customers are pretty as I've mentioned that lilya that customers have already begun that journey because it deploying workspace is already which is a key part of the solution.
Cool.
The Google Ccas <unk> activity that really we've probably.
The most deeply integrated of Ah Giggles partners on the on there.
Oh I solution. So that is something has gotten a lot of attention L.A.O. a portfolio and shops have increased tremendously at least from what I can tell being here at a short tenure.
The last over the last probably two to three quarters. We've got a series of other partners as well that we focus as well as I am going I O I, which is integrated throughout the portfolio. So you'll see us really put a lot of energy behind the A.O.L.A. conversational <unk> parts of the portfolio because our customers.
Looking for very customized not only journeys within their product roadmaps customized as they end customers come into the interactions with their with their companies. So you'll see a lot of energy in that space and given the base that ER that avoid it has.
You'll see a lot a lot more of us having a conversation around that with you guys over the course of the next.
Two to three quarters. It just just to close out we've we've actually done.
A fair amount of work and really building a back into the contact center, whether it's your virtual assistant speech recognition should sort of transcription as Anthony mentioned have already announced enhancement the behavioral pairing with affinity last week at engaged so if you take a look at our overall contact center solution suite with great.
We enhanced the I the way I capability.
Across the board, so and our customers are receiving that and they're very very pleased with where we're positioned and more importantly, we're writing that business. We continue to build out of additional capabilities.
Great. Thanks team I appreciate it and congrats on the quarter.
Thanks.
Our next question, it's been Atlanta, Nandan ammonia with Guggenheim Partners. Please proceed with your.
Oh.
Good morning, Thanks for taking my question. So as you have shifted your emphasis to subscription so how dramatically how did you change your R&D budgets and also your sales compensation structure to become more subscription friendly.
Yeah. This is Jim I'll start now I'll turn it over to the.
Karen quite some insights, but from an overall R&D budget perspective, I wouldn't I wouldn't necessarily call. It a significant shifts in our R&D budget.
It's really an opportunity for us to.
To offer you know that's the subscription slashed Opex service.
To our overall to our overall customer base really driving.
Enhancements to sort of the cloud native Microservices around video mobile AI Apiay.
Et cetera.
As far as our sales comp we have shifted in fairness, our sales comp would have put more emphasis.
On on driving assess oriented solutions across the board with the company.
Whether it be subscription or <unk> or be it or be a cloud and that's consistent with with with the market against themselves and then maybe just to clarify on Jim's initial comment I think a lot of the changes and an increased investment that we put over the last year to 18 months as it relates to come.
Cloud is beneficial here, we see even if the customer decides to stay with an on premise solution. We see this is a real gateway or a real opportunity to step in towards the cloud whether its private private cloud public about or whatever.
Jim pointed out we pay a premium for cloud subscription offering so our sales teams are absolutely.
And I would say actually heavily incented to so you know recurring revenue overtime.
And as we mentioned you know we announced a subscription in September timeframe in 2019 on that last quarter. You know we signed a 20 525 million dollar deal just the first quarter since we announced that so.
Again the enthusiasm.
Among our customer base and more importantly, our partners, our partner base and giving them yet another opportunity to go to go sell and activate the base at least initially is actually quite exciting. So we we believe that we'll see.
Well see a lot of our revenues being driven not only from our direct channel, but also through our partners, which is again exciting et cetera, it opens up new opportunities.
Right. Thank you and a a quick follow up on the new caps, a metric moving from 15% to 18%.
What does that now made up off because they see axio hasn't kicked in yet.
Right. So as we as we pointed out in our last earnings negative.
Clearly, we have our public private cloud, which were always the key underlying components of it we talked about enhancing for our strategic alliance partnerships and you've heard you've heard the entity and Jim talk about a couple of them today when you talk about a Google I.
And ring, obviously, which is you're right. We don't have any seo offering out there yet that comes later in the quarter, but we have some longstanding relationships with other companies like affinity and varied nuance et cetera that are in that and then obviously, there's also some minor benefit from subscription in there as well.
Okay. Thank you.
Our next question coming from the line of met a Marshall with Morgan Stanley. Please proceed with your question.
Great. Thanks, maybe first question circling back on caps. A you know you had mentioned after the announcement of a C.L. deal that you would see kind of a long term target of that or are up 30% at with it being up 18% already you know how does that change your perspective on on where you think back go.
And then maybe just a quick question on you know the cash conversion, maybe seems a little bit low and just go 20, and I know you know clearly you have the ringcentral prepayment in there but are there any other factors that we should be mindful of thanks.
Hi, good morning met yet so first of all I'd say that even though the intent of be kept metric is to really more completely represent recurring there are elements Oh point in time revenue within that especially with some of our strategic partners, where you take your revenue at a point in time, if our portion of.
The performance obligation is done so even if I look across where you're we could see you know a couple of point change in any given quarter just due to the timing of some of our some of our partnership revenue.
No I don't really see anything up we're pleased with the start that we had for the year, but I still see us driving to that 30% as we talked about over that longer term objective as it relates to two this year as guidance I think when we talked about we we expected two things what impact.
If you recall last year, we had about 8% of our revenue, we'll see if a vote a this year, we really called out 5%. If we adjusted for the onetime transaction fees associated with the strategic process, which were paid in October of last year. So you know first fiscal quarter that number is about seven point the reason.
Declining a point is really due to the fact that we actually were reinvesting one point of EBITDA margin back into the business. This year.
Got it thanks guys.
[laughter].
Our next question no line of Rod Hall with Goldman Sachs. Please proceed with your question.
Hi, Thank you for taking my question does is ashwin on behalf of fraud.
I just want to ask about the guidance our implied guidance for fiscal second half looks like you know your revenue and EBITDA guidance implies you know better than.
They have fiscal have taken out for comments then body. So.
Last couple of years, so just from a timing perspective, when should we expect to see like a positive deviation in revenue and EBITDA versus you know just how it can seasonality.
Any color you could give there will be helpful and Ah sort of related to died how should we think about the size of sicad contribution in fiscal Q4.
Sure. So if you think about as we said we expected that the second half of the year would see just with the guidance. We've given you flat to modestly increased.
Clearly, we will start to ramp a CEO in the second half of the year as well as the ready now revenue we've been talking about that for quite some time that will start to see a pretty significant increase second half versus first half for ready now also as I alluded to the fact that before security deal, which we are really feel very soon.
The only about still should be a second half event.
And then finally, we should also see some continuing a contribution from subscription business. So well seasonality you know our second and third quarters tend to be a little bit like each other I would expect or I would expect that our second half of this year, you'll see a stronger fourth quarter at a modestly improved.
Q3 as well.
Yes. This is Jim on the can contact center Sicad solution I I don't expect to see much revenue from this fiscal year in fairness.
We will bring the solution on the fourth quarter and that will that will ramp as we go through its ratified 21, right and ratable as well yeah.
Thank you just a follow up on these you Jim I want to check if you guys are planning any sales composition for the sales compositions structure changes to incentivize the base Ah Hey, Commons there.
No I mean, obviously.
From a partner perspective, we have are arranged program that we have that we have in place.
As we look through sort of if you will our master agent network.
We've been out this now because we announced the back in October you know it would be consistent so worthy of where the industry is.
But I don't I don't see it is particular point anything you know other than as the <unk>.
You know run our quarterly for informatics, and such but I don't I don't see anything that.
We very much from what we are well, we haven't or no.
Process today, right and clearly as we alluded to before our own sales teams are highly incented to drive discrete you know to drive a CEO as well as any of our other cloud initiatives.
Got it thank you.
Our next question is coming from the line of I have merchant with Citigroup. Please proceed with your question.
Great. Good morning, everyone. Thank you for taking my question.
Hi level I, just want to talk about the keep <unk> that you're talking about an hour Wow seems like on the commentary the shift was primarily driven by customers moving from on Prem keep more like Oh.
Model.
Think about yeah.
30% goal that you've outlined.
Three to four years, how should we think about EBITDA margins you know moving I see me I do you guys meet that transition.
Especially given you guys talked about incentivizing Youre Mark you go to market your partners in your sales force more heavily weighted shifting from the perpetual unlike anything too though.
It can be a subscription thank you.
Sure. So so as you may recall in some of the discussions that we've had a at some of the past earnings calls.
We actually believe that short term.
Through a combination of some of the investments that we have to make to bring this year was was actually cash offerings to market as well as just some of the transition itself that there would be some short term headwinds.
To our margins, but that overtime as we scaled, especially as we scale something like a ready now which is really which is really highly dependent on getting some scale that we would start to see our margins increased from the 24 ish percent level that we're right.
As we close last year, you know opt in to as much of 27% to 28% overtime. So you know tactically tactic we'd be in this year, probably next year as well you are relatively muted.
Impact on our EBITDA margins overall, but overtime as we start to scale them, we would expect to see a more favorable more favorable bottom line.
Great. Thank you.
The next questions from the line of Mike Latimore with Northland Capital. Please proceed with your question.
Yeah, great. Thank you in terms of the services revenue growth corridor.
The growth rate improved relative to the last several quarters and it sounds like ready now hasn't really kicked in in a big way yet so I'm just trying to figure out a little bit more what was driving improvement in the service rather and the park.
Sure. So is that this is Karen I'd say there was a couple of elements here first and foremost or professional services business.
Actually showed some nice improvement both sequentially.
Well as versus versus last year as Jim has pointed out we believe that our NPS business is a key differentiator for us as we work with many of our customers to hope implement their very heavily customized.
Solution so yes.
That was Uh huh.
Thing and I pointed out was we were able to mitigate some of the I'd say planned decreases that we would have experience for me GSS perspective, more maintenance or hardware maintenance and software support.
As more customers were actually starting to convert over to the subscription model as well. So many of these customers were able to take them instead of instead of losing them from maintenance perspective actually convert them on subscription so that helped mitigate some of the decline there I'd say at a high level. Those are the two you know really big items, Yeah, I'd just add to that.
Mike that subscription is key in a number fronts, but with our obviously with our maintenance business, even though we have long term contracts. It provides an opportunity for if you will yearly updates as we move to subscription those are three to five year deals. So lop, Dan if you will so better predictability in the business obviously.
Better <unk> recurring revenue stream and as Kevin pointed out we did see we did see an uplift obviously it was the first quarter that we had it out a from a product perspective.
Additional revenues associated with subscription so.
That [laughter] working closer with our customers building that loyalty exclusivity. If you will end with those longer term subscription contracts.
Actually this is a real benefit for the company.
And then just on your cap.
<unk> EBITDA margin there.
<unk> below corporate average now in line above sounds like it's going improve over time, but like whereas now relative to corporate.
You know I would say that it can vary depending on which to the partners that were booking a transaction in any given quarter in right now I would say that as a whole, it's probably running under the corporate average because it's a lot of investment.
That's taking place in there even from a you know a caught cost as well as a expense perspective, yeah, and I would agree with that bear in mind, a fair amount of that today is really off of our via private cloud services, which.
From an overall margin and even a prospective is lower than average, but as we start to improve sort of the the revenue construct as we move water buyer cloud office and as we move mortgage subscription you'll start to see that that change as we move on so I would agree with care.
Great. Thank you.
Thank you as a reminder, and ask the question you mean press star one.
Our next questions from Atlanta homage to correspond with VW. Please proceed with your question.
Good morning.
First off.
Kind of reactions in the current stalled base as far as you know.
Pushing out potential contractor me.
Contract.
Oh.
Oh, sorry, sorry, you break it up little bit could you could you repeat the question.
So what kind of customer pushouts or questions are you going as far as delays in purchasing when it comes the buyer cloud from the current installed this.
Yeah, Hi, this is Jim.
Actually we're not we're not seeing any.
Any push outs, if you will in buying behavior and fairness.
We obviously did you don't and haven't had an offer in the market. The Montney offers coming out yeah, obviously by the end of this quarter.
Well, what I can tell you what we are seeing if we are seeing as we now presenting this to our partners and we've we've actually communicated this throughout the.
At our eco system. If you will in fact, when we were at engage last week.
We trained to on a number of our person I don't think we Oh, we have over 500 Evine strain I think we had 700 certifications. We gave out engage last week. So really a really a lot of momentum. We are seeing though is we are seeing from a competitive perspective, where deals where if you will end up.
Pipeline to move to our competitors in fact, those if indeed been installed.
If you're in a by a customer you've been area by customer for years, obviously, you really don't have any real and desire to move in it and bring someone else since year end to your into your structure, but without an up by offer obviously it was it was free game, what we've seen with a C. O now is the fact that folks.
Do you want to stay with the by we now have a competitive offer it to via cloud offers for bringing the best technology and in support of that and we're seeing folks now a waiting to move to Hcl. When the product is available at the end of this quarter, which is which is actually quite exciting. So we're.
We're pleased with the momentum we're pleased with the backlog that we have.
We're pleased with that the product and how it's progressing through that the a sort of the R&D process in order to provide that differentiation and uniqueness that it by brings to that to the marketplace. So we're not seeing a stall we're not seeing a stall and all it at all in fact I just the opposite I would say.
Stalling others in eliminating others as people stay on the buy a platform.
Well I have made it's Anthony just to add to that little bit I think what we're seeing is we seeing and I portfolio now that is actually activating space. So it's not the line as much as now starting to have an engagement conversation with the customer on the base that a that is obviously quite knowledge.
And ER and we believe is readily available for a path to a a cloud or a consumption model conversation and that's what we think.
Okay. Thank you.
Yeah.
Thank you at this time if weekend of our question answer session and I'll turn the floor back over to Mr. Mccarthy for any closing comment.
Thanks, Rob and thanks, everyone for joining us. This morning, if you have any additional questions. Please feel free to follow up with my office will be happy to talk to them for you look forward to see what the different conferences and an enterprise connect and zones. We moved to the next reporting period, thanks very much.
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Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.