Q3 2020 Avaya Holdings Corp Earnings Call
[music].
Greetings and welcome to buy a quarterly earnings call third quarter fiscal 2020 conference call. At this time, all participants are no listen only mode.
And then after that should will follow the formal presentation.
And then once you acquire operator assistance during the conference. Please press Star zero on your telephone keypad.
No. This conference is being recorded.
Now turn the conference over to your host like all Mccarthy Vice President Investor Relations. Thank you you may begin.
Thank you more so and welcome to advise the school 2020 Q3 investor call.
Charcoal, our president and CEO, one carrying Mcgrath, our executive Vice President and CFO will lead this morning's call unsure what your some prepared remarks before taking your questions. Joining up this morning, we'll be Anthony Bartolo, SVP, and Chief product Officer, and Dennis Kozak, Senior Vice President business transformation, consistent with our social distancing Mandy.
Each of us on this morning's call or somebody from our remote locations.
The earnings release, and Investor slides referenced on this morning's call or accessible on the Investor page more website as well as in the 8-K filed today with the FCC, which should aid in your understanding of a buyer's financial results will reference non-GAAP financial measures and specifically note that all sequential and year over year comparisons reference non-GAAP numbers, except.
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 koby 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 but may not be limited to severity of <unk> duration as well as actions taken or not taken by governments businesses and consumers in response to the pandemic all of which continue to evolve and remain uncertain at this time.
Information about risks uncertainties, maybe found in our most recent filings with the FCC, including our form 10-K, and subsequent 10-Q reports you just device policy not to reiterate guidance, 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.
Thank you Mike.
And thanks, everyone for joining me if I Q3 conference call.
A little over two and a half years ago, we laid out a very deliberate three step strategy.
One.
Execute on our plans for growth.
To leverage the strength of our business model.
And three rapidly grow our cloud alliance partner and subscription revenue.
Our caps.
Thanks to the team's execution, we were able to deliver outstanding results for the first time, if I achieved year over year end quarter over quarter revenue growth.
And it's these results they give me confidence we're on the right path.
More importantly, the guidance that Karen will share for the fourth quarter reflects continued momentum in our business.
In Q3, GAAP revenue was $721 million above the high end of our rage and this was up 4 million year over year, and 39 million from the prior quarter contributions from software and services rose to 89% of revenue.
Five points year over year recurring revenue, which gives us a solid book of business going into any given quarter was 64%.
Also up five point year over year.
No question our growth plans have taken hold and are yielding positive returns.
Our operating results also exceeded guidance and continued to deliver on our business model.
Adjusted EBITDA was $187 million or 26% of revenue.
We drove cash flow from operations of $45 million and ended the quarter with $742 million a cash on hand, and that was an increase of $189 million from the prior quarter.
Looking forward, we will continue to maintain the same executional discipline, while making the necessary investments in the business to maximize our customer shareholder value.
Our caps revenue has maintained an accelerated ramp to reach 30% of our revenue.
Hitting our published target over a year ahead of schedule.
And here's how I think about caps.
First it represents the traction of our bio one cloud family of offerings, which includes Sicad ucas see pet spaces and subscription.
Second it's a key indicator of our transition to cloud and set the fact is caps as a percent of revenue was 30%.
From 23% to prior quarter. This represents an increase of nearly 60 million quarter over quarter.
Third cap underscores the importance of strategic partners and the value that we along with our extensive ecosystem unlock for customers.
Lastly, the subscription component of caps is materially important for a number of reasons.
The contracts are generally 36, plus months double lights of our typical maintenance contracts.
It allows us to activate our base by bundling in additional innovations like spaces video remote working AI and contact center, what's your customers continue to consume on demand.
And it provides a seamless gateway to transition from on premise deployments to cloud deployments.
Clearly our product strategy and investment and innovative offerings cloud you consumption models and recurring revenue streams are paying off.
This is a very different company from two and a half years ago.
Via has shown amazing resilience.
We are outperforming expectations and we are accelerating rapidly in key growth areas.
The re imagined Nevada has never been more relevant to our growing base of customers and partners globally.
And I'm, especially proud of what the team accomplished during these unprecedented times.
It's important to note that the shift to work from home has been smoothed for us.
And we've not experienced any meaningful disruption in our business.
Remote capabilities are core to our DNA and we've long been a leader and enabling work from anywhere solutions.
Simply stated our technology and capabilities have put us in a right place at the right time, and our highly differentiated solutions will continue to drive strong demand well into the future.
Now I'd like to spend a couple of minutes on our growth initiatives beginning with subscription.
Customer demand for a fire one cloud subscription is extremely strong the TCV or total contract value doubled this quarter to over $200 million.
And to give you an appreciation of the size of these deals for Ti had it TCV of over 5 million and said that we're over $10 million.
Initially launch in the U.S., we have expanded internationally and are now closing deals globally.
Subscription consumption model delivers customers the latest innovations and provides a path for premise oriented customers to transition to cloud delivered models when they choose and that's around pace.
One customer and argue s. based retailer and a long time of ice class signed a new three year agreement and its upgrading its supply infrastructure to support 75000, you see users and 25000 contact center agents.
This opex model is ideal and advancing our customers digital transformation journey.
At a time when support for their work from home requirement has become an immediate priority.
Subscription, it's also keep driving new customer acquisition and competitive displacements and European financial services company based in the UK, we'll be using our subscription offering to replace the you see in contact center systems. The customer wanted an opex model that provides us flexibility access the innovation.
Like spaces on demand and the ability to integrate new digital applications.
Shifting gears, our second quarter earnings call. We discuss several actions have I initiated to help our clients in response to the spread of coping 19.
This included the use of our spaces video collaboration App and providing over two and a half million temporary remote licenses. We are starting to see a commercial benefit from these actions and customer conversions have exceeded our expectations.
I would characterize conversions and three broad buckets.
First group are those customers that separately needed to convert many of these temporary licenses to permanent.
And this is accretive to our existing contact center business.
The second largest group has incorporated these licenses into new subscription contracts the need for remote license.
Helped accelerate our sales conversions and we are seeing similar opportunities in Q4.
The third group of customers.
Is extremely important represent the company's going through digital transformation.
They are now in the process of upgrading and looking to implement new a biotechnology and developing differentiated solutions for their customers.
We are guiding them on their journey and we'll realize result of these efforts overtime.
A buyer cloud office.
Fiscal Q3 was our first full quarter in the U.S.
And we launched at Canada.
UK in Australia on June Thirtyth.
In addition, we added a new features and automated capabilities to accelerate adoption.
Although still early in its rollout a buyer cloud office is yielding positive results. The strategic partnership it's proving itself true and let me give you a couple highlights.
First we're activating our basic customers and partners by providing a you can't offer that they were demanding.
We're also winning a significant number of new logos versus our competitors.
Like myself Cisco it by eight fuse and others.
And on the go to market front.
We're on track, we signed deals in each of the four markets, where we are available.
We're now up to 19 master agents and nearly 2400 agents.
We've launched demand generation campaigns that are generating a solid pipeline and I'm pleased with how we're ramping our inside sales and customer success teams to handle the volumes.
Our next release in September will further expand functionality and bring the buyer cloud office to France, Ireland in the Netherlands.
On the Sicad shrunk.
Our public cloud offer continues to gain momentum for customers looking to ship aspects of their contact center operations to the cloud.
Cincinnati Bell experienced a 50% plus increase in call volumes during the onset of the coven 19 pandemic.
They immediately turned to a viable for a stable entering <unk> reliable solution.
That could be implemented quickly and cost effectively.
As a result of Ipi one club Sicad power nearly 300 agents to work remotely while ensuring end to end management of the customer experience and improving service and generating cost savings.
Our funnel is building nicely and I'm pleased with the uptake.
We continue to invest significantly in Sicad and in July we added digital channel capabilities to our based offering.
Our next really at the ended the quarter delivers attribute based routing integrated reporting and enhanced analytics.
Spaces.
Are you Cas collaboration platform. It's also experienced say high demand of usage.
Basis include voice video messaging and team rooms, it's available in nearly 100 countries and is offered with the via one cloud subscription as well as on a standalone basis.
Spaces usage was up over 550% from Q2, driven largely by increased demand for work from anywhere capabilities and state government and local education usage.
Lastly Alliance partners contributed significantly to our overall cash performance this quarter.
Our investment in partnership is driving entirely new innovation capabilities for customers to consume.
One example is partnering with Google.
We delivered a new virtual adviser solution to general Motors Onstar Division.
The Google dialogue flow application combines with a fire contact center capabilities to replace legacy platform.
By using machine learning it AI the system learns and responds more effectively.
This results in a better driver experience and lower cost of onstar to deliver that service.
Our work with Google is just one proof point of the power of marrying innovation.
From a via with World class leaders had a complimentary technologies to deliver highly innovative offerings that drive significant value differentiation and competitive advantage for our global base of customers.
In summary.
Thrilled with our progress and how we are executing on our strategy in the face of this global uncertainty.
But what I'm most proud about is in the face of a worldwide pandemic.
We added over 900, new customers with 139 competitive displacements, including takeaways from Cisco eight by eight Mitel and Genesis.
And to further punctuate are straight on the enterprise.
We signed 104 deals where the TCV of over $1 million, including 14 over 5 million and seven over 10 billion TCV.
The seven over 10 million is the strongest in the last few years.
Especially noteworthy.
We want a three year private cloud contract.
With a TCV of just over $20 million and a competitively bid deal against Genesis It's William.
This customer will migrate more than 10000 contact center agents now operating across multiple business lines and locations into a fully upgrader and modernize platform.
The company at pilot these alternative solution providers for more than a year and concluded that if I. If that's the address their global business needs today and into the future.
One last note.
After a protracted procurement process I can confirm that the 10 year social security administration contract worth more than $300 million has been awarded to Verizon and divide.
We couldn't be more pleased with the award and Karen will share more of those details.
In summary.
Many areas our business are growing and we are experiencing strong demand for our solutions.
We will continue to maintain our profitable business model and today, we're in a stronger financial position than ever before.
We look forward to a strong finish of our fiscal year in September.
And I have great optimism.
For where we're headed.
I'd like to thank our global employees and our customers and partners.
For what we have accomplished together.
With that let me turn it over to Karen.
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 in this call our as reported unless otherwise indicated in constant currency.
For the quarter non-GAAP revenue was $722 million compared to $720 million reported in the year ago period.
Sequentially. This compares to 683 million as reported in Q2 fiscal 2020.
As a reminder, during the quarter GAAP and non-GAAP revenue have converged and the non-GAAP differences generated by first started county or no immaterial and we expect to move forward. Similarly.
However, non-GAAP adjustments were immaterial still in fiscal year 19, and so for a year on year comparisons we speak to non-GAAP revenue for proper comparisons.
We're very pleased to we have closed our third quarter well above the revenue guidance. We provided in may and that our revenue results represent year on year growth for the first time in recent history.
Further if you recall when we kicked off fiscal 2020, we said the first half of the fiscal year would we down in the low to mid single digits.
Then in the second half for the year as our growth initiatives began to take hold of ice business would return to growth.
Our Q3 results are in line with this projection and validation that we are executing in line with a projected business plans.
Revenue contribution from caps or cloud alliance partner in subscription represented 30% of total revenue for Q3.
Up to 23% for the part from the prior quarter.
And 15% for the full year fiscal 2018.
Caps revenue increased by approximately $60 million quarter on quarter.
Well largely driven by subscription which has seen an enthusiastic reception by our both new and existing customers.
We also witnessed strong growth from our strategic alliance partners, including the ramp of provide a cloud office, which provides a measurable contribution to the metric this quarter.
With subscription revenues growing it's such a rapid pace combined with the continued ramp of our strategic Alliance partners. We achieved our long term target for caps as a percentage of revenue much faster than initially anticipated.
Subsequently, we will be revising upwards, our long term expectations for the caps metric as we entered fiscal 2021.
But it's clear the caps will continue to be a key contributor to a bias topline in the coming year.
Third quarter product revenue was $262 million compared to $298 million in the year ago period and $245 million in Q2.
Hardware revenue was down almost 30% year on year as we continue to witness the impact of the pandemic and our partners and customers.
Total software revenue was flat with declines in you see offset by contact center, which grew strongly as we successfully converted many of the temporary licenses that had been issued back in Q2.
Third quarter services revenue was $460 million.
Compared to $422 million in a year ago period.
And $438 million in fiscal Q2.
Continuing new product placements upgrades and temporary license conversions under a subscription model.
Represented a key growth driver for our services revenue.
More than offset declines in traditional maintenance and support.
Now turning to gross profit metrics total GAAP total non-GAAP gross margin was 61.1% in the third quarter compared to 60.8% in a year ago period and 61.1% sequentially.
Non-GAAP product gross margin was 60.7 per cent compared to 63.8% in the prior year and 62.9% in the second quarter.
Non-GAAP services margin was 61.3% compared to 58.8% in the prior year and 60% even in Q2.
Turning to total profitability margin and cash flow metrics.
Third quarter non-GAAP operating income was $164 million, representing a non-GAAP operating margin of 22.7%.
260 basis points year on year.
While adjusted EBITDA was $187 million, representing an adjusted EBITDA margin of 25.9%.
270 basis points on a year on year as well as above the guidance. We provided in me due to a strong mix of product and services.
Turning to cash flow, we generated $45 million in cash flow from operations or 6% of total revenue.
Contributing to a third quarter ending balance of $742 million in cash cash equivalents.
I'd like to take a moment to delve further into our strong liquidity and are substantially increased cash position this quarter.
As you may recall as part of our strategic partnership what Ringcentral. We received the majority of the prepayment in common shares of their stock.
Approximately 80% of those holdings were monetize in November of 2019, as we disclosed during our Q1 earnings call.
To further our liquidity position within this tumultuous macroeconomic climate, we opportunistically execute an open market trades for the remainder of the shares held.
This provided for incremental $118 million that you will see recognized in cash flow from investing this quarter.
Included in our cash flow from operations for the quarter was a $54 million tax payment related to the Ringcentral prepayment.
In light of our strong liquidity position in July we chose to pay back this $50 million draw. We had made on a revolver at the start of the third quarter.
In April.
Even with the resurgence of covert 19 that we have witnessed in certain U.S. states and internationally.
We feel given our current cash on hand, and the quality of our customer base that we have sufficient liquidity.
Now turning to guidance.
Please note that all year on year revenue changes or expressed on a constant currency basis, and all revenue amounts reflecting rates as of June Thirtyth 2020.
For the fourth quarter, we anticipate non-GAAP revenues of 720 million to $740 million, representing modest growth at the midpoint both quarter at quarter end year on year.
We are pleased to inform you that in mid July the social Security administration formally issued the 10 year Nexgen Telephony project award to Verizon the prime contract contractor with what you're via his partner.
This modernization project for voice and contact Center Communications consolidates, nearly 120000 endpoints onto one platform and displaces two other competitors.
The initial value of the award is well over $300 million.
We are thrilled that the significant long term contract has finally been awarded.
We believe this represents validation of why is best in class contact center and unified communication solutions.
We expect non-GAAP operating margin for the fourth quarter to be between approximately 20 and 22%.
And our adjusted EBITDA margin to be between 170, and $190 million or between approximately 24% and 26% of revenue.
As we incorporate fiscal fourth quarter guidance, we expect full year non-GAAP revenues of $2.84 billion to $2.86 billion, representing a minus 2% to minus 1% annual this decline as measured in constant currency.
We expect non-GAAP operating margin to be approximately 21% for the full fiscal year.
Similarly, our adjusted EBITDA margin should range between 680 million and $700 million or approximately 24% of revenue.
In terms of cash flow from operations for the fiscal year 2020, we expect to be approximately 4% of full year revenue.
Excluding the Q1 onetime payments from the strategic process.
And the impact from the accelerated prepayment taxes in Q3.
This equates to 7% to 8% of full year revenue.
At this time, we expect no material change to our shares outstanding before the end of our fiscal year, which currently sit at approximately 83 million shares.
With that I'd now like to turn the call back to Jim Jim.
Thank you care.
I'm really excited about the tremendous opportunities in front of us as a company.
A violent as an industry here with scale global reach and a rich portfolio of technology and solutions to address the challenges and opportunities that businesses face today.
We have an incredible base of customers.
And I'm inspired by the team of alliance around the globe.
I have a strong belief that we are well positioned for the future.
We're now happy to take your questions operator.
Thank you if he would like to ask a question. Please press star one I knew telephone keypad and confirmation tell indicate your line is in the question kill you May Press Star kill if he would like to remove your question from the Q4, but just did you did speaker equipment and may be necessary to pick up your handset before pressing the star he's.
We have three please ask one question and one follow up question every Q and very additional questions.
Our first question is from semi chatterji with JP Morgan. Please proceed.
Hi, Good morning. Thanks for taking my question you had a strong sequential and gaps revenue and they wanted to see if you can back that.
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Good leap subscriptions were the primary driver like last quarter to it and how should we think about headroom for growth.
And also there was any benefit from conversion of somebody complementary like to do that.
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Yes, Hi, this is Jim Thanks for the question you care and you want to first touch on the GAAP revenue and then maybe that can add some color.
Sure. So I think your GAAP or non-GAAP revenue the change.
Quarter on quarter is pretty consistent as terms as not being up $39 million I would say that you know obviously, we've seen a significant increase in our capture of which we talked about $60 million on a quarter on quarter basis. So you can see that the growth really is coming predominantly from subscription which makes up the lions share of that caps.
The revenue and then we've seen some fall off in the traditional you know premise based capex purchases.
Most.
Most certainly the a revenue that we've seen coming from our hardware business your hardware was down almost 30%.
On a year on year basis.
[noise] Yeah, no I would he began in.
Maybe just said a little bit more color.
As far as subscription I'm obviously.
We're still early in the transition as we pointed out we had a couple hundred million TCV, but our overall TCV is north of two $2 billion. So there's still a still a lot of work not only from an evolving customer base perspective, but also as we continue to win new competitive deals and just to add to that.
You take a look at an eco as we mentioned, we just basically had the U.S. last quarter. So we have three additional countries in there and obviously we're in three more so we we expect to see Hcl continue to gain momentum as we go through not only the balance of this.
This calendar year, but one went to 21 and beyond.
Probably the the other two leased to growth areas for us. It's we're very excited about the progress we've made on C. cats and continued quarterly deliverables on that as we continue to gain traction.
And then certainly less but not leases the amount of work that we've done with our large enterprise customers really with our private cloud offer and their movement to more of a private and public cloud and.
We're starting to see nice traction as I mentioned, we had a very significant went in in Q3 and our pipeline is building. Accordingly. So you know we have.
We're seeing our new products really starting to gain a gain the momentum not only this quarter, but but backlog building as we go into it to inflate 21.
Okay.
Just following up on these shows.
I think last quarter, you had mentioned to inspect about 20 million of revenue in fiscal <unk>.
Oh.
No awarded host.
The ramp in revenue.
It's good for you and into next year I'm pretty <unk>, you had guided for fiscal <unk>.
Yeah, I would say that just due to some cobrand limitations, we weren't able to get the full.
20 million in Q3, probably more like about half of that and I would think we're going to be somewhere around the $20 million again in Q4.
Looking that and then as we go forward, we would expect given the tenure nature to deal that you know rough numbers the managed.
Service aspect or private cloud aspect of it should be roughly about $30 million a year as we brought through towards.
Our next question is five Catharine Trebnick lifestyle <unk> company. Please proceed.
Oh, Thank you very much for taking my question My no deal with how are excellent quarter by the way in how are you seeing the competitive landscape in particular with Microsoft has been really.
Pretty actionable and working with a lot of the carriers, which happens to be one of your end user routes to market and if you could just kinda give us color around those relationships and how solid there. Thank you.
Yeah, I'll start and then I'll turn it over to Anthony to get some additional or additional insights.
Obviously you know.
Fairly competitive marketplace, we are seeing Microsoft morandi, the SMB business than in the large enterprise businesses today.
Well one of the things I think that's most encouraging it's the fact that as I talked to a number of my peers Ceos.
Especially in the time of uncertainty.
They are very comfortable added a in turning to if you will have business partner that offers more than just the product our platform.
And I believe that's what's differentiating us from a number of competitors. The fact that we have deep global expertise and technology innovation financial strain and probably a sort of whats. Most important is the fact that we have arose world class services organization in support of that so the point is they turned.
To an industry expert that can provide them with the breadth and scale that they need in order to deliver the solutions that that they need in ER and obviously in a very timely basis, especially with the Colby. So we're starting to see I'm more Microsoft, but again, it's probably more on the SMB side of the business right now so I don't.
Yes, if you want to adding more today.
Yes. Thank you. Thanks, Jim I think you got that fairly right I think what the only other thing I would add is it we cohabitate a lot with Microsoft already in a lot of accounts that obviously quite large an integrated Neal I T saw the organizations and also on the experience economy side with L.C.L. Sicad solutions and now.
Contact Center solutions as a whole you really see us, but side by side working well together in integrating well together for our customers.
Electively, though so you know that cohabitation seems to seems to work pretty well for our customers. We serviced them a fairly well Oh I expect that to continue in that landscape to not materially change change too much because at the end today as Jim mentioned, well Weve shine over though.
Particularly over these last few quarters is.
Mission critical illness of the product portfolios that we buy prospectively deployed in market and the restricted in this particular space and as a result customers choose us in conversations with other people that we integrate with inox off of being one of them.
Alright, Thank you very much.
Our next question is from Rod Hall with Goldman Sachs. Please proceed.
Hi, guys. Thanks for the question I wanted to.
Dive into Z causes a little more at the if Theres anything you could do to give a.
I'm finding on that how big it wasn't then maybe talk a little bit about sustainability of that business do it seems like something that was pulled quite a bit here because of what's going on with walk down. But then you know maybe on into the September quarter, but then after that maybe not as strong. So just curious what your thoughts on sustainability, our and anything you can tell us about the size of that and then I have.
A follow up.
Anthony what I want to take them.
Sure I think Oh, I think the size of its still in its a relatively nascent stage relative to the rest of LC because the rest of al contact center portfolio.
From a a relativity upsize perspective, what we appointed me as a customer would come in King.
The nature of your question also talks about the environment of the macro environment, what we find these customers coming in asking initially for us because solution and as we give them because we had we not only on <unk>.
It's been.
I see cause an appeal cloud you can deployed in a private cloud it can play a hybrid scenario, we end up finding that we give customers optionality with regard to their journey and love talking they may stop with US. He gets solution and then may move into one of the other parts of the portfolio. So so we don't shoehorn them in.
To just a singular a single apart. So as a result, we seeing CECO is growing and growing nicely, but as a result of having to seek as part of the portfolio are we seeing attractiveness is floating all boats. You know you know corpus and a solution base, which is quite interesting and ER and not surprising.
Depends on.
Okay, and then I wanted to go back to the other day contract. The 10 million this quarter and then your expectation for 20, Mike can you give us any idea. It how you expect that generally just split between product and services.
And whether that split would be any different this quarter. The next and so on [noise].
Yes, [laughter] curing if you don't merger I don't think though so I would think threeq and Fourq you will have a very similar split you know, mostly mostly product with a little bit of a professional services built in.
Pretty similar Threeq and Fourq, you, but I think once we get out into next year, you're going to see.
Early on in the year, some professional services and then really after that it's going to be part of our or or private cloud services offered.
Okay. So this initial revenue Karen it's.
Probably less than 10% services most of its product than a little bit like installation services I guess it as you put it yeah, it's actually the light weight actually a little bit.
A little bit more than that because there is quite a bit of professional services involved embedding the product, but yeah, I think you're thinking about right longer term before it will be a will be really more services oriented.
Right. Okay. Okay. Thank you.
Our next question is from me that Marcelo with Morgan Stanley. Please proceed.
Great. Thanks, just wanted to dive into any trends that you're seeing that kind of.
I didn't meet your expectations on kind of how customers are electing private cloud versus kind of your multitenant cloud solutions.
Communications, you know either size of customers that are validating or invalidating assumptions would be helpful. And then just second question. Just what are the fuel future features we should be expecting to roll out on the cloud contact center product this year. Thanks.
Sure Matt you want to start on that and then I'll, let a little color at the end.
I think that's the first part of the question something like that but on the second part what what you'll see is fundamentally you laid out milestones with L. Sicad solutions as we highlighted previously so we delivered on the voice product also because solution.
In early March we then met our milestone as human highlighted about a month ago on introducing l. digital channels to that particular part of the or see test solution, you'll see US then start to expand the capacity of that in a public public offering over the course of the next few months moving into.
The November December timeframe and at the same time will be increasing the deployment speed avail customizable CECO has a private.
And that's an area, where we really seeing a lot of attention. So as I mentioned, a little bit early in one of my answers, we see customers coming on the CK and then and then splintering often saying, okay, maybe I didn't want to deploy in public I would like to play in public and private in a private cloud offering and you'd give me that choice that is something.
In that compliance boxes, like et cetera, et cetera in organizations that we are seeing a lot of traction touching it stops the dialogue and then it splinters into any.
After that.
[noise] Emetic can you repeat the first question again, please thank you.
Yes. Good question was just what trends, you're seeing and you cast as far as who is looking like private cloud is likely know like.
They are multi tenant solution.
Sure.
Thank you for repeating that so on the Ucas side, what we tend to see is.
Lodge regulated industries tend to move to the private cloud that you know that's you know they really have.
And oversight from compliance or their susceptible to.
Issues associated with security and I want to downstate components. This too.
Oh man, that's what they do so.
So they'll come in they want the elasticity of a cloud, but they want it to be on their cloud within their four walls et cetera, and under there remain in mandate, so thats, where though that's a trend that we've seen I didn't think it's a new trend I think that are we seeing that trend happen for a for.
Quite some time and I suspect that will will or to see that.
Yeah, and maybe just add to that consist what we're seeing right now obviously with multi tenant only being in the marketing in the U.S. for a few months and globally now for third quarter basically just a day in a few countries but.
It's pretty consistent to what we've seen in the past and that's where on the larger enterprise side of the equation.
We're seeing private or hybrid and where are we are seeing an uptick in hybrid which is unique obviously for us around driving those solutions for the large enterprise customers. The multi tenant solution is still predominantly SMB in mid market and that's where we're seeing the growth and again the prominence if you.
But from an overall percent adoption then.
In fairness I would suspect that to stay the same at least through probably the ended this calendar year as we continue to define and rollout to the Multitenant DCIO solution and.
So I don't see though.
That changing significantly one where in the one way or another is at least we got through the balance this calendar year.
And if I may add one more thing one more thing to that met a is that one of those capabilities that we were introducing upcoming is that we can deploy private clouds in a matter of hours now and that is really gaining a lot of attention and traction so being able to deploy.
Cloud solution in how was that is highly customizable is it a unique attraction whether that's in.
Fueling a cloud all inclusive of a hybrid deployments and that's quite unique to a buy as Jim mentioned.
Yeah.
Thanks.
Our next question is from Raimo Lenschow with Barclays. Please proceed.
Congrats from a for me as well two questions first Jim can you talk a little bit about what you're seeing in terms of customer behavior, we kind of how be moved on pools coal, but think more structurally again. So was there a kind of more specific about investment decision does that more longer term versus like kind of still.
Or kind of looking more to kind of fixed kind of gaps that kind of occur within the last couple of months.
And then cure and for you I'm can you talk a little bit about what's your what's driving your decision through non cash share buybacks. Obviously, you know we still somewhat.
I would love to crisis, but you know your your performance is really you know maybe my stable strong.
Well, how you're thinking about usage of cash thank you.
Yeah sure Hammer yeah. Thanks for the question so.
Yeah, I looked at Pandemics, obviously, it's at a horrible impact on just about everyone.
That being said has accelerated our customers digital transformation.
But to treat some even say five five years, but then I don't quite see that but.
It does align perfectly with what we laid out from a from a strategy perspective so.
As I said, you know sort at the right place at the right time, and really helping customers deliver work from home capabilities Dan.
Last quarter and again this quarter, we're seeing many of the cfos putting dollars back on the table if you look to drive.
Work from home initiatives and.
As we deploy those two and a half licenses last quarter in the space with a few weeks so large companies and organizations in governments. It initially started out really to protect safety and employees.
Now what we're seeing increased demand, we're still obviously converting a lot of those.
Temporary licenses to subscription deals and also working with our customers as I mentioned on their digital transformation journey, which will extend the opportunity for for revenue growth.
We are starting to see projects now moving away from if you will the safety the employees now that that is for the most part.
Been resolved and now what everyone is looking to do is driving efficiencies and productivity effectiveness such that they can operate theres work from home agents. If you will as if they were in the office so a waste to serve their customers better ways to build the better customer experience.
And we've implemented a number of solutions along the lines. There we are continuing to.
To develop.
Tools and solutions to continue to to build on that whether it's through video and collaboration technology again, whether it's around the ease of use and effectiveness.
And we believe that they're working remotely is it's proven that.
Theres opportunities there today and that it will certainly certainly be opportunities there as we go lives as we go out through time so.
We're seeing a lotta opportunity and frankly, a lot of dollars being.
Being spent a nod and really now driving efficiencies more from one place carrying I'd take the second one.
[noise] Nicholas Sarah.
Karen how we awesome, Okay, I don't know sorry your next okay.
And some I T issues here this morning so.
So right <unk> first of all we still think it's important to note we still retain board approval for the repurchase program up to 500 million in total.
The program does remain open and obviously as you have the right do you start that without any notification. So just putting that out there I would say that you know due to the current still ongoing uncertainty I think it's pretty pretty safe to say that we believe it's prudent right now to maintain healthy cash balance at this time.
I would say, we're working very closely the board and our advisors are we going to number the bakes into talk to us and focus on the right balance within our capital allocation.
We're very pleased with with the effectiveness of the program that we ran earlier. This year, we were able to retire 20 should sort of our shares outstanding. However, I think we also seen that in times of extreme market volatility.
You know both debt and equity markets, you know companies would single B, Oh Breedis get hammered.
Increased just a lot of volatility so that certainly is in our minds as well as we work with the board and think about what the future will be whether we focus more on on recruiting our leverage and debt pay down versus a versus the buyback. So all of that is in the calculus that we have to come through but right now we're pretty pleased with our cash position.
And at the same time, you know very pleased that we're able to achieve the objectives that we put in place <unk> years to retire 26% of our shares.
Okay perfect. Thank you.
Congrats.
Thanks very much.
Our next question is from Chris <unk> with Cowen and company. Please proceed.
Hi, everyone. Thanks for taking or question I feel that I want to start on perhaps revenue getting to 30% of revenue. That's great. You put your target can you talk about where you think that target.
Going and door, what what that new target. So that's about.
For your gross margin outlook, and then and then on top of that your capacity or desire to reinvest say more than the <unk> point of either party that you've talked about redeploying into the R&D and elsewhere for 2021 and beyond.
Yeah, Karen you want to thick initial.
Yes, so I think for first and foremost obviously from a subscription perspective.
You know as right now we have a fairly healthy mix split between premise based product as well as.
As as well as cloud based software for the premise based obviously, you know customers hosting that portion of it.
And therefore, the gross profit margin and that is quite lucrative.
As we start to see a larger and larger portion of the subscription be driven via more cloud. Obviously the margins will you know did decline modestly once you're at scale. Obviously, you have you were able to generate pretty good margins there as well. So we would see that you know transitioning over time, but I think.
Yeah, I think that's probably over the next several years.
Well, it's hard to see if you will see those trends don't see huge huge impact here because I believe that we'll be able to us as he was pointing out because we were able to put up or if we're able to put up our you scale or private club much quicker I think the margin or try to margin is pretty strong.
You know first and foremost there I think margins going to carry 18 pretty strong in subscription.
We think out remind me again, the second part of the a of the question.
As we move below gross marketing the capacity of the desire to dream Yeah. Okay got you are investing okay.
Yes, why things this year, if you recall, we did say we're going to invest a point.
Good morning. This year, so I think first and foremost or we did that it actually has been mitigated in terms of.
Visibility externally just because of the covert related implications, obviously with new with no customer traveling and the people not troubling general we've been able to actually under run are expected in other areas, while still making the investments in this space.
You know the more we've learned as we continue to work and deployed a cloud based business I think we're you know we do see the continue we need for increased in <unk> and enhanced investment inside of our inside sales or digital sales engine. So I think we'll probably continue to see that investment as we go out next year as well, obviously, we're not ready.
To provide guidance for next year, but I do think you know, it's one of the things that we're seeing a competitive landscape.
Investment and go to market is really no most critical along the way and we'll probably continue to do that into the early part of next year as well.
Yeah, I guess my head.
Yet we haven't pulled back on any of our R&D investments in light of the the crisis that basically started back in that February March timeframe. So.
We havent slowed that investment in fact.
I would say, we probably have accelerated some of that spending simply because of the opportunities we see in front of us.
That Unfortunately, copel has brought forward and that's around a lot a new work from home type capabilities as well as sort of an acceleration of what we see with the opportunities what would see kaz opportunities and as well as see past frankly as we go out into next year I don't suspect that we will.
Be slowing our investments in R&D at all because it seems that made great great progress this year in well well keep that momentum going.
As we continue to build out this new portfolio. So.
Pretty robust now and as we go through the next 12 months will become that much more robust so well continue to invest.
And in R&D, and Fortunately for us having a strong liquidity position allows us to continue to do those investments and make a stronger if you will Dan. So we'll continue that focus.
But that's really helpful. Thank my my only other question is on the relationship between contract value were backlog value and your revenues because over the last 12 months.
Im going to 18 months you guys really.
Yeah.
Revenue decline, but obviously got nice turned the corner to positive revenue growth, but all happening over a period over a course in which backlog Latin to call. The $2.4 billion to 2.3 down to 2.2 today too as we think about subscription models and then customer preferences for for Opex going forward [noise] out.
Well you contract backlog and as a metric versus you know how we used to look at it.
[noise] you want to take care you want me to address the okay, yes, so listen from my perspective, obviously <unk>.
Backlog continues to be an important metric overall I would say that anytime you look like backlog you do have to be cognizant of the fact that you do go through periods of renewal cycle over a larger portion of the business is up for renewal at any given point in time to that's going to have implications.
Sometime within quarters and the like.
What you will hear from us as we move out into our next our next fiscal year is we're going to be working on having some metrics. In addition to our caps, perhaps metric that give a better indication of the annual recurring nature of our business overall and I think that will you know that will start to move to the forefront as being more of a a meaningful.
Metric and meaningful tracking the progress that we've made in addition to supporting a with the caps metric. So backlog not that are important but I think they are nature of that backlog will become what we want to focus on and as we enter into our new fiscal year, we'll be introducing those metrics. We just didn't make it was right to introduce some you're halfway through the year, we'd like to do that.
As we get out into the new fiscal <unk>.
Got it. Thank you guys appreciate it.
Our next question is from I'd say a merchant Citigroup. Please proceed.
Thank you for taking my questions.
Good morning.
Quick question regarding guidance.
I think seasonality wise typically the fourth quarter fiscal fourth quarter can you guys pretty strong if I recall, a 45% and you have obviously secular tailwinds here Oh.
Oh, one like pilots and building out different geographies, you have incremental social security.
You can help me on that seasonality that would be great and then I've a follow up as well. Thank you.
Sure. So I think the first thing with recognize is obviously Q3 or from a seasonality perspective was a little better then history and again some of that had to do with the fact that we were able to monetize as many of those temporary licenses.
Jim as Jim referenced so clearly our Q3 stepped it up versus our historical view.
I'd also say as they work with a larger portion of our business becomes recurring in nature. We would we would expect not that there'll be an absence of complete seasonality, but that business as you start to sell less of a capex model. The businesses started is going to start to look a lot more linear within quarters and I think we're seeing that now, especially you know for threeq.
Quarters, now up to 200 million costs with the TCV under subscription is starting to flatten out some of the deltas.
Between the quarters and that.
And I think that's what we're starting to see as well, you're obviously Q3 little better.
Because of some of the high subscription I hope that helps obviously from some of the covert and Q4, obviously continuing the momentum forward.
We did put a guidance there would be unfair to put a guide out there you didnt acknowledge still the presence of the presence of of course, it's still a implications out there. So we are trying to be you know.
Turning to comparable basis with the guy that we put out.
Great Yeah, it's you're not hi, I'm, sorry, I just had one other thing if you look under the numbers in Q4 first of all first half for us was typically higher than than second half.
Secondly, if you look at Q4.
Most all the uptick in Q4 was driven by federal on the ended there the entity or an increase spending with federal.
That's going to be somewhat mitigated, obviously would miss Colby this year and we just signed the assets say deal.
And so on and then I would agree with carrying that.
Seasonality.
It's a much different now quote unquote with cloud and SaaS business large recurring revenues. So on so you know, we but Q4 again it was mostly driven by a but by an uptick in federal.
Okay, and then really gets too you know, 30%, having it seems that and I know you guys are going up.
Provide your next fiscal Guy.
I think initially metrics were around.
You did this target just 30% cloud section you would get you.
Well, it's about 2% to 4% you would get to EBITDA margins are bringing in a high 20.
I mentioned, 28% how should we think about that relative to expect you know relative to your guide and I'd be look out into 21 way you could have more private cloud offerings as well, which is I understand typically have lower EBITDA margin.
Sure. So from my perspective, I think I've got put out there you know a year ago West October really doesn't contemplate the implications of cobot. So as you rightly say, we'll we'll be looking ahead as we enter into new year.
I'm thinking about the long range model all in all but you know as we thought about what we said we were going to do this year I think we're executing pretty consistently in that we would start to return to growth.
Modest growth, obviously because of the implications of covert but growth. Nonetheless here in Q4 and at least with what we have you know what we have line of sight out here into Q4.
So it really your I think with momentum should continue in that way, but I think it's a little earlier I see that's really you know grew up there in confirmed what we see about the long term aspects of the two to four and ER and behind I 20 margin at this point you sorry really would like to get through this year end you don't get through a revamp of our long range plan and then come back out.
Got it as well.
[noise]. Thank you.
[noise] and our final question is from I mean person with either of you as financial please proceed.
Hey, good morning, things, particularly question.
I'll be quick the colder driving the process to the cloud or is a customers who we're anxiously waiting for you have this a public cloud solution and my second question is how much of the decline in selling a carbon pitch it could become permanent.
Yeah. Thanks, Great question.
Actually what cobot has done for US is really showcased I would say I'm sort of the value. That's still remains with voice in that so it's a key element.
And in fact premise based seats are still very relevant and a work from anywhere world. So if you take a look at our subscription growth.
That's on premise seats, frankly that we have converted.
To to subscription.
Workover does provide the opportunity because obviously, though subscription seats are certainly a gateway to cloud if and when our customers want to move so we see this asset that's a real opportunity in and more importantly, you know some overtime there's been.
That's a fair amount written about the fact is premise that are not that in fact, what subscription it by far is not at all those two and a half main licenses are on prem seats.
I do think covered is moved is moving folks to the cloud faster on someone's I'm talking I believe I do believe covert is playing a role so generally more ended.
I'm sorry.
Nobody has accelerated the move to digital transformation, so youre seeing a bit of an uptick in the mid market and to the business.
Oh associated with movement movements to the cloud, but I'm not on the higher end large enterprise businesses.
It's.
It's really for US we see it has to move the subscription.
And and then therefore, the most to cloud right behind that which is really important about our private cloud offers that Anthony just referenced and how they fit into the equation as we've gone to at play that's why 21 as well as our hybrid offers we see though says it's real differentiators in effect.
We're seeing nice traction with our customers to date.
Okay, great. Thank you.
[noise], that's usually that question answer session I would like to turn the conference back over to my goal for closing remarks.
Thank you very much for joining us. This morning are we look forward to speaking with you. Soon if you have any additional questions or follow up please feel free to give me a call. My office look forward reporting back to you in November take care.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time, but thank you for you if I could speech and.