Q2 2020 Earnings Call
Greetings and welcome to via fiscal second quarter 2020 conference call. At this time all participants are in listen only mode. It question answer session will follow the formal presentation.
Hey, what's your car operator assistance during the conference. Please press Star Zero and your telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to Mike Mccarthy, Vice President Investor Relations. Thank you may begin.
Thank you and good morning, welcome to otherwise Q2 fiscal year 2020, Investor call Jericho, more president and CEO and Dermagraft arc Executive Vice President and CFO will lead this morning's call and share with you. Some prepared remarks before taking your questions joining them on the call. This morning, we'll be Anthony Bartolo, SVP and Chief product Officer.
Consistent with our social distancing mandates each of us on this morning's call or assembled from our remote locations.
The earnings release, and Investor slides referenced on this morning's call home or accessible on the Investor page of our website as well as in the 8-K filed today with the FCC, which should aid in your understanding of a bias financial results.
We will be referencing non-GAAP financial measures and specifically note that you all sequential and year over year comparisons reference non-GAAP numbers, except where otherwise noted.
We have included a reconciliation of such measures to GAAP in the earnings release and in the Investor slides.
We may make forward looking statements that are based on current expectations forecasts and assumptions, which remains subject to risks and uncertainties that could cause actual results to differ materially in particular, our business is currently being impacted by cobot 19, and its effect on the global economy. The extent of its continued impact on our business will depend on a number of factors that include the name.
Not be limited to the duration and severity of the pandemic as well as governmental and business responses to it all of which continue to evolve remain uncertain at this time.
[noise] information about risks and uncertainties may be found our most recent filings with the FCC, including our form 10-K, and subsequent form 10-Q reports, it's a bias policy not to reiterate guidance and we undertake no obligation to update or revise forward looking statements in the event facts or circumstances change except.
Otherwise required by law.
I'll now turn the call over to Jim Jim.
Thanks, Mike.
And thank you everyone for joining us. This morning, I'll provide you with highlights of our second quarter performance and a summary of our progress as we execute our strategy. Karen will then take you through the details of the quarter and our updated guidance afterwards, we'll open it up for questions.
We are living an extra ordinary times before I begin I like to thank the health care and other front my workers, who have worked tirelessly supporting our local communities throughout this crisis.
Let's go out to everyone effective.
In the face of this significant number of global challenges associated with carbon 19, which began to take hold in early February.
We delivered a strong second quarter on multiple fronts.
Let me share some highlights.
Q2, GAAP revenue was $682 million well within our guidance software and services as a percent of revenue was 88% an all time high recurring revenue was over 64%.
More than five points quarter over quarter and year over year also a record.
Both measures are evidence, we have transformed to a software and services company.
Especially noteworthy was the continued growth and our cloud alliance partner and subscription metric or caps.
Simply stated catches or metric for sasson cloud and we grew to 23% of revenue compared to 18% in Q1 and up from 15% him and all that that's why 19.
We expect that percentage of revenue from caps will continue to increase at a steady pace.
We have the largest most valued installed base in the industry and the rapid growth. This metric underscores the commitment of our customers to our company and the mission critical nature of our solutions by design. The continued mix shift to this high value revenue reflects the vision and strategy, we laid out of state.
Can hold.
This will serve as a growth engine and shows that our transformation to a software Sasson class focused company is irreversible.
On the profitability front, the company delivered adjusted EBITDA of $149 million or approximately 22% of revenue.
The high end of our guidance.
Outperformance accentuates, our continued best in class execution, and the resiliency of our business model and scale.
Lastly, we continue to execute on our capital allocation strategy, we ended the quarter with $553 million in cash.
Well, having repurchased approximately 29 million shares since launching our buyback plan in November.
Thoughtful and deliberate approach during recent market conditions allowed us to achieve our targeted repurchases on an accelerated timeline and lower aggregated costs.
We utilize the only 330 million versus the $400 million originally contemplated our strong balance sheet and liquidity position not only allows us to whether the current covert 19 store.
But provides us with flexibility on how we grow shareholder value and allows us to continue to make key technology investments in summary, I couldn't be prouder of how the company has responded on all fronts in the face of this epic global crisis.
The results, we delivered were driven by our purpose for March down a path to address the growing demand and digital consumption models and club.
For the last two quarters, we have brought dozens of new offerings and capabilities to market, including a buyer cloud office, our public Ucas offer ready now our private cloud offer video huddle rooms, extending our private and hybrid cloud capabilities with I.B.M., Microsoft and.
Amazon.
Artificial intelligence with Google.
Introducing our subscription offer.
Launching spaces, our video collaboration solution.
And see cast just to name a few.
These new solutions give us breadth and depth of technologies that others simply don't have.
To Punctuates the extent of these capabilities and just the last two months, we've provided over 2 million remote agent licenses to companies around the world to allow their employees to work from anywhere.
We launched so much anticipated a via cloud office offering and close multiple deals on day one.
We introduced a C kaz offer and already seeing customer wins and growing demand.
We accelerated global availability of secure business to business spaces video collaboration providing it to healthcare education and nonprofit organizations for free and deploying hundreds of thousands of new seats.
Lastly, our subscription volumes grew nearly 100% quarter over quarter, demonstrating customer demand for the value created through flexible cloud consumption models upgrades to the latest innovations and while bundling of a rich set of features and functionality into one simple contract.
We've long been leaders and work from anywhere capabilities from devices to video collaboration to the ability for contact center agents to seamlessly work from home.
This has enabled our customers to secure the safety of their employees, while maintaining productivity and delivering superior customer experience only if I can do it at scale and with the geographic reach let me give you just two examples.
For Teleperformance, a global leader and digitally integrated business services, we provided the capability for more than 100000 agents to work remotely and deliver the same customer experience as a traditional brick and mortar contact centers.
And for global Financial services company, we provision to over 100000 temporary licenses for over a dozen locations across the globe and less than three days.
There are many more examples how quickly responded and working with our customers globally. We have deployed over 2 million seats and just the last two months.
These new offers are fueling our ability to activate our base along with making significant strides with new customer acquisitions, let me share some numbers.
During the quarter, we added over Ptwo hundred customers with more than 100 competitive displacements, including a significant number of takeaways from Cisco Genesis and a bye.
Customers continued to make significant investments in a viable during the quarter, we signed 79 deals whether TCV of over $1 million, including 12 valued at over 5 million and three over 10 million TCV.
And we have a TCV of $2.3 billion coming out of Q2.
This traction further demonstrates that our technology is mission critical to the global enterprises and high value segments. We serve in short the strategy, we architected and are focused investments and SaaS based offers and cloud technologies are paying dividends.
Let me provide some additional color on our strategic priorities, including private hybrid public cloud and new consumption models.
Revise ability to deliver private and hybrid cloud solutions is unmatched and is a key differentiator, especially for large enterprise customers. There are several significant new wins that underscore the value we deliver.
One such example, that's what the American Red Cross.
Who chose already now private cloud platform as part of their one Red Cross initiative.
Under this program the Red Cross is transforming their disparate legacy contact center technology platforms to a single cloud based device solution.
In order to lower operational costs, and improve efficiency and streamline response to customers and clients and further rents of Red Cross mission.
This multiyear deal includes key capabilities from our ecosystem partners nuance environment, along with the by his own mobile experience and see Pat solutions.
On the public cloud front, we successfully launched if I caught office and the U.S.
The out of time launch.
Was the culmination of months of hard work.
The joint Ringcentral and if I teams.
Our go to market motion is supported by five in the most influential master agents in the market, including.
Yeah.
Telesis, Jenny Synnex until there's.
We have over 1700 agents onboarded and train as of today to sell the via cloud office.
Along with a buyer and the Ringcentral Salesforce is this gives us a huge network coverage from day, one and I'm extremely pleased with the progress.
What I'm, even more pleased about is the warm reception of Icloud office has received from our partners and customers pent up demand that we couldn't previously address made as vulnerable to attacks on our base.
The effectiveness of those attacks has diminished.
Clearly the rationale we laid out for this strategic partnership is coming true before our eyes.
We are building on the momentum, but the launch of a buyer cloud office, and Australia, Canada and the UK later this quarter.
This is indicative of how we are moving at cloud speed.
On the C cast front, we introduced our initial offer in March as planned.
We have already signed several customers. Our next milestone is slated for June when we will deliver additional digital capabilities from which point, we will have regular quarterly milestones in motion as a matter of course.
One of our early see cats customer wins was hydro Otto.
With more than 335000 customers Hydro is a critical utility company, serving Canada's capital.
The company was faced with the possibility of disruption of their call Center operations. The implementation of our seed care solution allows them to seamlessly transition with no interruption of service and sharing all customers could communicate with the company, while allowing employees to safely work from home.
Another key growth lever is our video collaboration and seeming solutions call device spaces space is pure cloud and purpose built for enterprises, what scale reach insecurity you would expect.
It's faces is unique from typical video only solutions in many ways.
First it's a business the business application mini security in availability or table Stakes.
Security extends to customer data, which is not so and there's no room for notion of pop up beds.
Equally as important it combines the best of cloud based video with voice collaboration and team room capabilities.
Spaces exists as a room or conversations documents.
And discussion threads remain.
The solution as a platform to bring teams together at any time, which represents the power of true collaboration.
Let me share a couple of real life examples.
Large universities, but geographically diverse student populations, such as far to state University.
Michigan State University, and a Kona leaseco in Italy.
Among thousands of schools globally now using spaces for their virtual classroom needs as they keep their students and teachers connected.
In the area of health care hospitals been hit hard spaces eases, a strain on their system Hospital staff can now consult virtually and collaborate over video and connect more frequently with patients.
This reduces use the PPS increases healthcare provider patient engagement, along with greater overall care.
We first saw use of our video collaboration and won province, the original epicenter.
Usage over spaces offering was up more than 2500% through the end of April and continues to grow.
Moving on to subscription this consumption based model is a real highlight for the company and has generated a total contract value or TCV of nearly $100 million in just six months.
It is an important pillar in our strategy to activate the base and our customers are embracing it and then we'll give you a couple examples.
You, Matt I needed to enable 17000 agents to work remotely we.
We quickly enabled temporary enhance software entitlements to move these agents.
The new normal well require these and other capabilities and within short order Humana moved to trade there perpetual licenses.
And signed a three year I ask subscription to tap into the wealth of our features giving them what they need when they needed.
And the area of you see we had a longstanding university clients that was on an older reliable version of telephony.
They quickly realize the benefit of ice subscription because the spaces was included.
They signed a five year subscription agreement and are beginning to upgrade their infrastructure and more importantly, we're able to quickly enable spaces for the university.
We're seeing the realization occurring across our entire base.
The bundling of these capabilities into subscription delivers an accelerated return on our customers investments moves them to the latest releases leverages their prior investment and allows customers to rapidly pivot to meet their specific needs.
It's also important to note. The continued momentum we have within our strategic partners and to share a couple of proof points.
That accentuate held by successfully executing on our commitment to grow our ecosystem first if I was named by nuance as both top producing channel partner and top broke partner for AI powered solutions.
Second.
If I also received the global partner the year award from parents systems.
Sure its ability to accelerate successful transitions to the cloud.
Additionally, last week I B M recognized the via with its Hypercloud Excellence Award for the outstanding performance of our via one cloud ready now private cloud solution.
Together, we offer unmatched capabilities that drive significant and lasting value.
To our customers.
If I is breaking new ground.
Shaping the future of how communications and collaboration technology addresses both the future of war and the modern customer and employee experience Center.
The current macro environment has only accelerated what was a developing trend and the way people work is going to fundamentally change and move to a work from anywhere model.
It will become the norm.
Work will be more distributed.
That's allowing remote workforces to stay connected or helping our customers respond to their customers urgent needs from a business perspective. This is a real opportunity and if I his position to lead.
With that Karen will now take you through the details other quarter the mechanics behind our capital allocation.
And our Q3 outlook guarantee.
Thank you Jim Good morning, everyone. As a reminder, unless otherwise stated all financial metrics referenced on this call our non-GAAP and the supplementary slides posted on our Investor Relations website set forth the GAAP to non-GAAP reconciliations.
All figures mentioned on this call or as reported unless otherwise indicated in constant currency.
For the quarter non-GAAP revenue was $683 million compared to $714 million reported a year ago period sequentially. This compares to 717 million as reported in Q1 fiscal 2020.
We finished the second quarter in line with the revenue guidance, we provided in February.
Please note that during the quarter GAAP and non-GAAP revenue have converged and the non-GAAP differences generated by fresh start accounting are now immaterial.
However, non-GAAP adjustments were immaterial in fiscal year 19, and so for a year on year purposes, we speak to non-GAAP revenue for proper comparisons.
Revenue contribution from caps for cloud Alliance partner and subscription represented 23% of total revenue for Q2.
18% for for the prior quarter and 15% for the full year fiscal 2019.
Caps revenue increased by $31 million quarter on quarter, primarily driven by subscription.
Second quarter product revenue was $245 million compared to $289 million in a year ago period and $298 million in Q1.
Hardware revenue was down over 30% year over year.
Total software product revenue was down modestly in the low single digits.
Good contact center software revenue growing and you see software revenue declining.
Second quarter services revenue was $438 million compared to $425 million, a year ago period, and 419 million in fiscal Q1.
Continuing new product placements upgrades and conversions under a subscription model represent a key growth driver for our services revenue and more than offset any declines in maintenance and support.
Turning to our gross profit metrics.
Non-GAAP gross margin was 61.1% in the second quarter compared to 61.5% in the year ago period, and 61.4% sequentially.
Non-GAAP product gross margin was 62.9% compared to 63.7% in the prior year and 65.1% in the first quarter.
Non-GAAP services margin was 60.0% compared to 60.0% in the prior year and 58.7% in Q1.
Turning to total profitability margin and cash flow metrics.
Second quarter non-GAAP operating income was $125 million, representing a non-GAAP operating margin of 18% year on year down 260 basis points, while adjusted EBITDA was $149 million, representing an adjusted EBITDA margin of 22% down 140 basis points.
Year on year, well landing at the high end of our guidance range.
Before I discuss our second quarter cash flow in liquidity in greater detail.
I'd like to address the goodwill impairment charge that was disclosed in our earnings press release. This morning.
Following the decline in the company stock price during the period, which was consistent with the way the broader market was affected by the cobot 19 impact on the global economy.
We determined that a triggering event occurred and consequently performed and then term goodwill impairment test.
As part of the goodwill impairment test, we compared the fair values, all our reporting units to the respective carrying amount as well as the allocated goodwill that was established as part of fresh start accounting in December of 2017.
Based on her analysis, we determined our projections of future revenue in the product and solutions reporting unit have been adjusted to reflect increased risk from higher market uncertainty and the accelerated reduction of product sales related to our historical on premise perpetual license or Capex model cells.
We anticipate this decline will be partially offset by the continued shift an acceleration of customers upgrading and acquiring new technology innovation through the utilization of our subscription offerings, which is now included in our services reporting unit.
The result, the carrying amount for product and solutions reporting unit exceeded its estimated fair value and resulted in a noncash impairment charge of $624 million.
Turning to cash flow, we generated $20 million in cash flow from operations or 3% of total revenue contributing to a second quarter ending cash balance of $553 million in cash cash equivalents.
Cobot 19 impacted the cash collection process in a few key areas.
Firstly, we took a 7 million dollar reserve on a receivable owed by a large distributor in our international theater of operations due to the aging of their past due.
Secondly, a handful of customers that typically take advantage of early pay discounts did not do so this quarter.
And finally in an effort to address the challenges some of our customers and partners are experiencing we have opted to extended payment terms temporarily for some of the hardest hit creditworthy customers benefiting our business near term and long term.
With this practice been relatively common place our industry right now, we're staying competitive with our peers, while strengthening relationships and building royalty, we're fortunate to have more than adequate liquidity support this initiative.
Well I'm on the topic of cash balances I'd like to provide an update on the vias capital structure and liquidity.
Start management has the most confidence in our continued ability to generate positive cash flow from operations.
Being said out of an abundance of caution and not out of immediate nor forecasted business necessity. In early April we initiated a 50 million dollar draw down on a revolving credit line to boost liquidity.
We view this as an insurance policy only reinforcing our stability and it economically turbulent environment.
As a reminder, the company has no financial covenants in its term loan or convertible notes.
Furthermore, our scheduled maturities does not factor into any of our near or mid term liquidity considerations.
Regarding our share repurchase program in Q2, we bought back in additional 18.2 million shares at a cash cost of approximately $198 million.
Our year to date share repurchases under the existing board approved plan now totals nearly 29 million shares or more than 26% of the shares to were outstanding when we implemented the program in November of 2019.
As a result, we have achieved our fiscal year 2020 objective, while only utilizing $330 million or the $400 million contemplated to be spent in fiscal 2020.
While we still retain board approval for a repurchase program of up to $500 million an aggregate for the time being we have suspended additional purchases given the existing macroeconomic conditions.
Now turning to guidance.
In light of the uncertainties in the global business environment arising from the effects of the covert 19 pandemic. The company will be withdrawing our full year guidance. Instead, we will provide an update only our expectations for the fiscal third quarter ending in June for which we have line of sight and a high degree of confidence in the 10.
Okay.
Please note that all year on year revenue changes are expressed on a constant currency basis.
And all revenue amounts reflecting rates as of March 30, Onest 2020.
For the third quarter, we anticipate non-GAAP revenues of 675 million to $705 million, representing a negative five to negative 1% annual decline as measured in constant currency.
The top end of the range includes $20 million of expected revenue contribution related to the social security administration opportunity that we've been discussing over the past several quarters.
We expect non-GAAP operating margin for the third quarter to read between 19% to 21% and our adjusted EBITDA margin to be between 150 and $170 million or between 22% to 24%.
At this time, we expect no material change to our shares outstanding before the end of our third quarter or our fiscal year end.
Which currently sit at approximately 83 million shares.
With that I'd like to now turn the call back to Jim Jim.
Thank you Karen.
In closing throughout this period of I has been decisive and taken quick action.
To provide safety for global workforce and to maintain continuity of the business, while responding to new customer demand that accelerated overnight.
I wanted to thank you via global team, who has worked so hard and move rapidly during the rise of this pandemic to respond to the needs of our customers.
It's because of their hard work and the mission critical nature of our technology that we delivered a strong quarter in context of this crisis.
I'll wrap up with this thought.
The way, we work and engage has changed in front of arise.
And this new world of work advise innovation scale and services capabilities.
Differentiate the way, we keep businesses government schools and vital healthcare organizations Ronnie.
This has created an inflection point.
And if I is at the forefront in well positioned to help our customers and capitalize on the opportunity.
Operator, we're now ready to open the line for questions.
Thank you know if he would like to ask a question. Please press star one I knew telephone keypad <unk> for me should tell indicate your line is in the question Q you May press star to if he would like to remove your question from like him and for participants using speaker equipment.
Sorry to pick up your handset before pressing the star actually we ask that you. Please ask one question and one follow up question and then we kill for additional question.
Our first question is from Raimo Lenschow Barclays. Please proceed.
Hey, Thanks for taking my question and Hope you guys are staying safe and all the best and congrats on the great quarter. Two quick question first for Jim.
If you look in terms of decline behavior that you seeing at the moment, how much of that would you qualify as a like tactical to keep the lights on versus strategic and how do you think that well kind of impact your business as people kind of slowly coming out and lifting to head up and just trying to think like how the new world will look like and just talk to what you're seeing in.
In terms of your client conversations.
And then one for Karen if you think about the cash you mentioned you kind of offered some of the payment held for some of your clients can you talk a little bit about how you see.
The cash situation and both of you as to the current crisis unfolds. Thank you.
Yeah, Hey, Raimo. This is Jim Thank you very much.
Actually I would say as we take a look we're seeing I'm.
We're really seeing it more as a strategic than and then well save tactical and you take a look at and our overall business.
We had as I mentioned, a huge increase and in our recurring revenues as well as in our services and software said overall percentage overall percentage of revenue. So what that you know, obviously, we're relying less and less on on hardware or what I'll say, one eckstein type type revenues.
We also expect to.
Begin to monetize the 2 million seats that we actually gave out for free as part of moving to remote remote worker and that's going to be a important for us for growth engines not only in this quarter, but as we go out through into Q4, and we're really starting to see that take shape.
And in a number areas, but but mostly in mostly in our overall subscription subscription business. So we're seeing a continued demand I see we've seen further strengthening our relationships with our large enterprise customers.
We're seeing the fact that what we run critical.
Locations, there was a an ever an ever increasing ever increasing demand so companies continue to invest.
In the business some are slowing on the implementation side, but we're still seeing I'm a movement to to change your movement to improve their overall customer experience and an improvement to become more distributed and how they are they operate their business.
The one example, there's government over in although in the Middle East is just declared that up their top 200.
Personnel no more than 20 can be in any one location. So therefore, you're seeing that obviously being much more distributed and and playing right into a right into our Hansen from up from a technology perspective, So I would say what we're seeing is a strategic long term three or five year type contract. So.
We're a proof points that the a strategy we've laid out is taking hold.
[noise] care.
Hey, Ryan, though so I guess I'd start by saying the first and foremost really be effective change that we saw in the current quarter was really all due to the share repurchases, which was almost $200 million I think we ended last quarter, what about $766 million with the cash instead of 553 now.
Certainly, we're we're watching very closely all of our customers and their creditworthiness their liquidity, we're pretty fortunate I think it just to say at a high level that we have a relatively small percentage of our customers are what I'll call them most affected industries.
The travel hospitality types of industries, we have no customer across our entire based from a private sector perspective, which really more than 1% clearly our federal government to places like that or are significantly larger but from a.
When they you know private perspective, there's no one customer that has any significant share of our business in total.
So as we go out for the next several quarters, obviously, we're going to want to walk watch and ensure a continued credit workers or customers, but we're quite confident with the cash that we have on hand.
That were in that were quite well positioned or even if many of these customers you don't want to extend for 60 90 920 days in terms of their payments from that perspective, we're feeling pretty good we did take one we did take one charge in the quarter actually a impairment against the potential reserve quite frankly, even that come.
Summer itself is working with us and actually paying on it to go basis. So it's not like go it's not like we don't expect to recovered sooner or later, but just under the rules for bar. Our accounting models. We did have to take a reserve it at that point in time. So obviously I think we're you know really well position here. We've we've obviously talked about your spend.
The temporarily our repurchasing the shares.
That gives us that makes it an extra $70 million worth of cash this year, we plan to spend $400 million. This year. This fiscal year in share repurchases were now only spending 330. So it really it really gets is quite a nice buffer as well.
Perfect. Thank you congratulations.
Thanks very much.
[laughter] [noise].
Our next question is from semi Chatterji with JP Morgan. Please proceed.
Hi, Good morning, Thanks for taking my question I'm just.
Two quick ones from my side.
Trends, you're seeing in the business given kind of.
The disposal location et cetera that customers are trying to ice do maybe you can comment on the balance which are the customer verticals, you're seeing the weakness and and maybe if there's a way to size what you'd exposure is to those verticals and then a quick follow up you guided flat revenues quadrant.
But improving margins so how should I read into that in terms of your mix going into next.
In.
Thanks.
Yeah sure. This is Jim all I'll address the first question then I'll turn it over to Karen to provide some some insights into the up your revenue question, so as far as the overall verticals and the strength of our business.
Actually we are seeing we're seeing strength.
Across the business in fact, so I'm not any one vertical I would say is its upward and or down we're seeing it across whether its financials government healthcare.
We are seeing a slight dip, though however, and hospitality.
But most of that frankly, it's a small percentage as Karen mentioned overall revenue. So it's not really up a needle mover for us as far as impacting overall revenue.
But for those key segments, where we're basically saying I'm trying to strength across the strength across the business.
Actually we're seeing that come in a number of forms but as we pointed out our subscription offer has been a very successful for us and the fact that we're able to move customers that were more capex oriented to us on Opex model, which is a benefit at the additional benefit is the fact that we've been.
Able to really drive our technology and innovation into these offers as well as far as the overall bundling up this solution so they're not only seeing an opportunity.
And ER and reducing overall costs, but they are seeing added benefit beginning the latest and greatest technology, so sort of sort of a win win.
Point out as I mentioned in the government areas not only in not only here in the U.S., but across the globe.
That's really been sort of a highlight for us as far as strengthen in the overall business and then we expect that continued to strengthen as we go through a as we go through the balance of the that's a go through the balance sheet, though on the fiscal year. So overall, it really isn't a huge but I'll say dislocation because we really weren't over allocated it here.
Well to one particular vertical versus a level. So what that can you want to take on that question associated with revenue.
Sure.
So I'd say from a midpoint perspective actually what we're seeing operationally is quarter on quarter, so sequentially actually growth of about 2%, but we're actually facing some headwinds from FX. So as the dollar has strengthened as we all know quite substantially over the last.
60 to 90 days, we do we do see some increased the increased headwinds from that.
I think your point was though as to the margins expanding where we were at this quarter.
If you recall.
In the prior quarter, we announced that we were actually investing quite a bit. Additionally, in the launch of a CEO as well as Jim has been talking about the.
Watching marci cats offerings as well so we always knew that Q2 was going to be a low point from us from a margin perspective in the quarter due to some of our investments that we're making to really wants to go to market as well as as well as from a development perspective, so that should start to snap back here, coupled with the with the improved operational revenue.
Quarter on quarter.
Got it.
Thank you.
Our next question is from meta Marshall with Morgan Stanley. Please proceed.
Great.
Hi, Congratulations I noted that inside the <unk> 30 contractors there my numbers and so just wanted to get a sense, whether resolution had been achieved and kind of.
Is there any changes in that timing or project, we should be thinking on and then you noted that you were a extend means in terms. They just had you had any customer request for Wuxi you know.
Counts and that's how you want accommodating though right.
Yes, sure I made a decision. Thanks I'll turn the question over to Karen, but just a little bit ensign enough. So say, yeah, we do expect.
That we should see some of that revenue begin.
Later later on this quarter.
Which is which is good news, but I will turn it over to carrying to give you. Some additional insights not only to the let's just say, but what we're doing as far as a working with our customers no payment terms Karen.
Sure. So I meter. So you know clearly its been along it's been a long road with the deal. We expect final awarding of the contract to actually take place in early July.
There's been a this been several iterations or several iterations, Dan I'd say in a very positive note. There's only two key partners general contractors, who are in position at this point and we are partnered with both of them. So we need a case, we expect go to volume will be a cure.
No clear.
Benefactor from the awarded this contract were actually occurs.
What we had been able to do though is the government under the care effect has been able to act fairly quickly here and just override some of the traditional procurement requirements to ensure that the SSH has been able to avail themselves of some contact center. So from contact center a product offering for sure.
This is to enable them to continue to enable their own employees to work remote as well as to obviously support.
Their clients. So we're seeing some of that work is likely to get pulled into this quarter, even before the official awarding the contract and we think that's goodness and as I said in my script, you know, there's a potential that we could see anywhere even.
Even up to maybe you can $20 million of that revenue in the quarter.
So it's finally, it's taking a little longer than anybody anticipated nine months ago, but finally, all oh heading into right direction for us it related to your question about Oh customers, you know I Oh in terms of flexing.
There are there seat count to recasting their amount can see count.
That's pretty much standard or that you see any time, you either do have a little bit maintenance contract or a from a subscription perspective as well as customers had become more efficient in their business overtime.
That's that's fairly regular what you see though is at the same time as your resetting the old offering whether it's a maintenance offering we're now going forward to subscription or free you were also selling additional contact content into into the count and that's as Jim has pointed out several times in his script is the real beneficiary of subscription where our customers.
Can we set where they were with your base business would take advantage of actually upgrading that older technology to the latest technology releases as well if availing themselves or the new technology that we had especially especially video collaboration spaces. So I'd say didn't see anything unusual this quarter.
Fair to what we see overtime. The one I'd say real exception would be the fact that is more customers utilize subscription enables them to actually take more content Oh from another perspective.
Got it thanks.
Yes, I just had one one comment to that turn touched on it but the new technology and being able to bundle innovation.
It was to subscription offer a couple of things number one we had maintenance contracts.
Typically three years, but they were they came up if you will for renewal each and every year secondly on maintenance contracts well, we didnt have the extendibility and we had customers that were greater than two releases down. They were if you will expose to moving to up to a different provider what subscription does for us and.
We're seeing it across the board is enables our customers who were two don't two levels down time to get the latest and greatest technology. So therefore, you know moving and showing that Extendibility and secondly, a subscription contract as a firm contract.
Three or five years not open for a renegotiation after one year like our overall overall maintenance business. So it really enables us to get closer to our customers enables us to put into the find roadmap with those customers.
And really also enables us to get better predictability in our overall revenue.
The reasons why we saw significant jump in our recurring revenues and overall as part of software and services that as a percent of our overall overall business. So when we like our customers are quite excited about this about this off.
Great. Thanks.
Our next question is from Rod Hall with Goldman Sachs. Please proceed.
[noise] I'd give it taking my question visits asking on behalf of fraud.
One question on the guidance or did you.
Gentlemen, how much of any back on the hardware business are you assuming.
Hi, it's in Q3.
And maybe comment on how that performed so far this quarter.
And I have a follow up.
Sure Karen.
Sure. So I think when we look at what occurred in Q2, I'd say, we break down the hardware performance into three and three major buckets.
First of all as we've been talking about for quite some time, there is a movement away from the traditional.
Device attaches more customers are utilizing their soft cellphones et cetera, and that has been ongoing as people have moved to the cloud and I'd say that was probably about a third of the decline that we've seen.
Secondly, we actually did have some modest supply constraints as we went through the quarter and.
Jim what Jim pointed out we're off to a pretty good start with settling up on many of those this particular quarter, if I'd expect to see some modest a bounce back as it relates to that.
And that's probably about a third of it as well and then finally, there's a third of it which quite frankly, where customers are what the point in time in March Didnt know, how their liquidity was going to look and they just put it will put a pause on things and therefore held up so I would expect that we'll certainly give any supply constraints back this quarter.
As we've looked through the first 40 days for the quarter. So far we seem to be on track or could be recapturing some of that but I still think you know what we've said all along.
You're really seeing the shift to a much more of a software and services company here and hardware is increasingly it's much smaller portion of our overall product portfolio.
Got it. Thank you then my follow up is on the CEO I'm just wondering.
Could comment on what you're seeing it down so that's my read and another thing it and then.
I think that's about the Oklahoma.
Helpful.
Yeah sure. Yeah. This is Jim so as we mentioned and consistent with rings call. We just launched this little over a month ago. So on schedule on March 31st.
We have 17 agent some partners signed up.
And we're quickly on 40 knows and trading those but probably the most important thing is that our pipeline continues to grow and I would say that we're making great progress.
There are two data points with you that I, that's indicative of where are we not only where the relationship is with rain, but more importantly, where we believe it's it's heading and where the opportunities lie. So just last Friday we.
We signed a seven figure TCV deal in the UK.
It's some thousands of seats for AK steel.
Not only truly worked with the if I in the Ringcentral teams, but was also partner led deal with one of our largest partners converge one.
And the it solution was developed to address a requirement for the national government in response to cope with 19.
The deal significant on a number of funds a number one it shows the geographic reach number two it shows that its quote partner led.
Also shows how the of buying Ringcentral teams are working and coordinating with the customer. So extremely important first of what we trust will be many seven figure TCP deals.
The second.
Really around is this relationship sort of capturing what we had intended it would capture and answer that question is if you take a look at the number of deals that we want thus far it's actually falling right in line with our expectations.
Well I mean by that is a third of those Oh, what I'll call new logos and that's really through our 1700 aging partner network, which is significant.
The other two thirds or from the evaluate base.
And they were all competitively bid.
And all one bye-bye, which shows the customer loyalty shows you that technology that we're driving into our customer base. It shows you. The fact that there was indeed this demand for are you catch solution in our and our base and probably more important there has been zero.
So to what I'll say defects or quality issues associated with any of the installation to date.
Which means that none of the relationship at the work between both organizations is really driving.
An extremely competitive solution in the market. So grant to just 50 odd or whatever it is 40 odd days in but all indications are that it's.
One of hitting on all eight cylinders and meeting all of our expectation. So we're quite excited I haven't worked rolling it out it's as I mentioned three or three additional countries. Even though this deal was a UK deal, which is going to is rolling out now, but we're quite excited about the the progress and the results that.
We achieved to date still early but very excited.
Very helpful. Thanks again.
Yep.
Our next question is from Mike Latimore with.
[noise]. Please proceed.
Great. Thank you.
On on subscription I when I when a customer goes from maintenance to subscription you talk a little bit about the revenue change there. If there is any and the EBITDA margin on subscription versus maintenance.
Yeah sure Kim why do we start with you and then Anthony if you want to add just a little bit of color on some of the.
Some of the solutions that we're driving into that interest subscription I think it'd be important as well, but why do we start would you care.
Hey, Mike So youre, obviously, what happens or is it depends on the former subscription you've sold.
If we're selling which we're seeing the bulk of our conversion so far from the maintenance perspective tend to be a traditionally premise based products as we said all along we see this is the road map to driving the customers into cloud, whether it's a public or private cloud longer time, but for pointing you know just initially what we would expect is that some of that.
Can you.
We will get the customer some credit for the existing licenses that they've already own from a perpetual basis. So it's a.
It's not leaving the customer exposed from that perspective, we will then increase or change the amount of content that their purchasing a and we will take US you know a significant portion of that revenue if its premise based point in time, the rest of it becomes ratable over time, obviously, if we get the customers onto the latest releases obviously if.
We get the customers you know utilizing its own its exclusively software I you know we would expect the margins on this business to be quite high Oh, you know mimicking the kind of margins that we see in our but we see in our software maintenance as we get through time.
Right and then on professional services out are they doing a corridor nor did they grow sequentially and then do you get professional services when they go from maintenance and subscription as well.
Yes so.
Right, Okay, Karen no bad right Yep, So Ah interesting a and I think this is a real a real kudos for our services leaders in spite of the fact that for most of the quarter or teams were not allowed to work on site.
Professional services revenue was almost flat on a quarter on quarter basis. So no real kudos to the teams for being able to do a lot of that work clearly there was some things that they probably couldn't it couldn't get too because they needed to be on site, but you know for the vast preponderance of it we were able to keep relatively flat revenue quarter on quarter, Yes, there will be.
Some work required.
For the A.P.S. business with subscription primarily as we upgrade customers from downloadable releases to the latest release and you know relatively straight forward a simple work, but there will be work Nonetheless that will continue for them as we go through time.
Great. Thank you yeah.
Our next question from Us I ever chat with Citigroup. Please proceed.
Great. Thank you for taking my question.
Oh, I guess about a little bit about you mentioned some declines in maintenance revenue during the quarter, which were obviously.
Growth in cloud.
Option. If you can just give us an indication of the range of the decline there [noise].
Question on guidance.
Fourth quarter.
It's difficult to predict right now, but if you can talk a little bit.
[laughter] given the high degree of recurring revenue that you guys.
I clearly would be well pass offerings in the field getting.
Well what are some other puts and takes to the fourth quarter.
Initial fiscal your guide that you guys. Thank you.
Yes, sure I'll start and then I'll turn over to Karen. So if you take a look at I'm sort of the clients if you're willing to traditional.
Maintenance business. This is consistent to what we've been saying in the past, which has been in the range of some sort of mid mid single digit declines I'm. So it has remained it is remain consistent so not not a lot of change and the decline of.
G.S.S. and that's carrying pointed out we've seen the increase in overall services and that's been a result.
Oh, I'm, sorry of subscription and a continued growth within oh quickly within that offer but I haven't seen any well say anomalies around maintenance continuing to track as we had as we had projected.
Are they still in fourth quarter, and so on we Didnt I'll turn it over and I'll turn that over to care and to provide some some maybe some color on hmm.
Sure. So obviously, we are playing 90 days at the time, which is the reason why we we pull back on the fourth quarter again were 40 days into the current quarter. So give me a lot more comfort. Unlike the site, which is why we were quite comfortable showing the Q3.
Your points about a recurring revenue certainly certainly our are important and you know we do think we should continue to see that momentum that weren't getting from subscription as well as for the rest of or or recurring business as well as we head into the quarter I I don't think see Cas is going to be a major.
Contributor at this space because it isn't a purely ratable a truly ratable, it's not going to have a very significant.
Benefit in the second half of the year, whether it's got to Q3 or Q4 in that regards I guess, the one thing that I would point out for the year. When we were factory our full year guidance last quarter when I realized that guidance just based upon the change in the dollar actually we've seen about a 20 million dollar headwind.
From just the strength the dollar to our operations overall, so well I feel really good about the reliability and they recurring aspect of our of our business. Overall, we are facing some headwinds I think they'll be you know a little bit more severe in in Q4 it than they were in a in Q3 or earlier this year.
And that should be neutral from an EBITDA perspective, because we're naturally hedged in most of our countries, but it will be a top line headwind.
[noise] great. Thank you.
Our next question is from Landy Vistana with Cowen and company. Please proceed.
Good morning. This is Chris tenant on for Lance Vitanza, you guys kind of allude already but I didn't want to see how cold.
Maybe basically impacting your business in terms of demand destruction fell from customers versus.
If I am having difficulty accessing customer friendly.
Because of fill orders and third call issues like that and then [laughter] fourth on rent.
[music].
Hi.
You talked about.
That revenue lost or deferred.
For how long until after all that.
Shelford home and before for that really starts to come back. Thanks.
Hi, This is Jimmy I'll I'll I'll kick it off and maybe turn over to take care and to provide some mom some additional insights but.
Well, we've seen a little bit of disruption is associated with covert has really been sort of on our on prem.
Through the channel through the channel type business and its carrying pointed out.
As we exited the quarter, but some minor supply chain disruption and then we also had just physical disruption of where people actually couldn't get to the warehouse to fulfill the orders they weren't people and locations actually placed the orders. So we saw a bit of an impact on our <unk> on a product revenues and has carried pointed out let's start.
To see those recover back as that's country start to open up little by little as we go through the the balance of this quarter.
We've seen however, significant remote services capabilities that we have in the company along with remote implementation.
So we are seeing an uptick in our overall business associated with.
Subscription primarily as well as on some of our contact Center solutions and then just some of the work that we're doing all around the overall services be ready now or even a little bit of GE, GSS switches or maintenance business because of our our remote capabilities.
We're starting to also see as I've mentioned.
As we deploy does 2 million seats out for a remote agent worker as we also provided out capabilities in a hundreds of thousands without video spaces offer in the market. We're starting to see those now come to fruition in a sense of being monetized and we expect that monetization to continue and then as we pointed out with that.
She I'll just launching we have expectations that that will continue to increase and AD growth to the to the overall revenue up the company. So overall the really the only sort of test full impact that we're seeing our had seen with she 19 was really more around I'm sort of our onex.
Hardware hardware business, but we are as I said seeing increases and none of the reasons why we saw such a huge pop. If you will then recurring revenue going up close to five points as well this software and services. So I've covered as something that aspect and accelerating the offers that we had out in the market and really drive.
Being strengthen our product line. So Karen I don't know if you wanted to add anymore or Anthony anymore to ER so that.
I think Jim just maybe one other area, we did see a couple of our bigger transformational private cloud deals just get pushed just from a decision making perspective as more customers were werent practically focused really none of those deals just given the size and the well into implementation period would have really impacted revenue.
[noise], Okay I understand there.
Hi, Ken on repo.
You tend to spend for on spent three three we thought of that $70 million.
An extra cash if you will quote unquote extra I guarantee you may have also referred to with extra cash as well so the only.
Okay.
Permanently what do you and [noise].
At one of it is behind you returned to share repo or referred to the debt repayment. Thanks.
[noise] Hi, this is Jim I I'll take that one.
Look you know, we obviously are still sort of in the throws of coping 19, you know we have some ideas as we go through our capital allocation strategy. As you know we executed on not only paying down debt. If at all so buying back a significant number of shares are for now a you know well how does this.
Sessions with the board if and when the situation allows for but you know we're not looking to do anything as Karen pointed out you through this quarter.
Around what I'll say, you know any what else execution around a cap allocation process, but it's something we review regularly but as a as cove. It eases and when it is just you know well get back to you guys on what we plan on doing.
Great. Thanks.
Yep.
[noise]. Our final question is from had me coarse sand VW asked financial please proceed.
Good morning, I was just trying to understand.
The dynamics of cover 90 on your business. If you have all these are the company's announcing layoffs and furloughs.
Well that have on your on your subscription revenue going forward.
If any.
Yes, great question actually what we do when we convert existing folks over to subscription as we balance out the number of quote licenses that are required and then we provide flexibility there first when needed. So actually we reset that's a petro licenses to that the subs.
Scripts and offer to rebalance if you have the number the number of users. So I think we have a a pretty good handle.
On exactly what that looks like a associated with the overall license demand. If you will associated as we drive subscription out and out it out into the marketplace. So as we modeled not only this quarter, but obviously as we've taken a look at Q4 Q1 as we take a look at the pipeline at backlog that we have.
On on the deals I think were very good understanding of what that will mean and I don't believe that well have you know sway if you will.
The decisions that were that we're making with these what these large enterprise customers and moving them over to subscription. So Anthony I don't know or you have any additional insights you want to add to that as.
Run on the product guys, but I I don't see I don't see any impact.
Oh actually what we're actually seeing is we're seeing through these particular activity that our customers actually prioritizing that digital investments and subscription represents one of those digital investments being at up to the pool. It allows them to activate and what it does for US is less active bank that base and that study into something about high Rota.
And you a product moodys on top of what they already had so that's what we actually see see this.
To this crisis as well as what subscription is really opening up for us.
Okay, and then how many deals do you think were delayed because of the pending release of like cloud.
Customers want it moved to that product.
I don't I I don't think anything it's actually been delayed in fairness, I don't know Anthony or care and I've not seen anything that's been delayed that's just the opposite.
Yeah, I think what what actually happens is an engaging compensation occurs between customers and ourselves we talk about what our road map looks like the timeframe that it's coming about and how they can get ready for this year because the reason element of the customer getting ready for a shift to particularly if they ran a comp.
Okay did or a complex environment. So we find that the relationship gets gets quite tight and then they understand the timeframe they need to be I prepared for such a move.
Okay. Thank you.
Yeah.
Yeah, I mean, I never question and answer session I would like to turn the conference back over to make for closing remarks.
Thanks, Jerry and thanks, everyone for joining us this morning for March quarter conference call and remarks or give any questions or further.
Comments, please feel free to give you a call a endo, we'll be able to touch base and see you in a couple different conferences that will take place virtually no through the end of the quarter.
Whenever good afternoon, and please stacey thank you.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.