Q4 2020 Avaya Holdings Corp Earnings Call
Greetings and welcome to Avaya fiscal 2024th quarter Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero and your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over tobacco Mccarthy Vice President of Investor Relations. Thank you you may begin.
Thank you welcome to <unk> fiscal 2024th quarter and that's true.
Jericho or president and CEO, and Dermagraft and Chief Financial Officer will lead this morning's call and share with you. Some prepared remarks before taking your questions [laughter] consistent with social distancing mandates each of us on this morning's call are somewhat from our books.
The earnings release, and Investor slides reference books mornings call are accessible on the Investor Page book, where I'm sorry, that's what was in the 8-K filed today with the FCC, which day, you and your understanding and bars financial results, we will reference non-GAAP financial measures and specifically note, both sequential and year over year comparisons reference non-GAAP numbers.
Except where otherwise noted.
We have included a reconciliation of such measures to GAAP and the earnings release and 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 COVID-19, and its effect on the global economy.
The extent of its continued impact to our business will depend on a number of factors that include but may not be limited to severity and duration as well as actions taken and not taken by governments businesses and consumers in response to the pandemic and all of which continue to evolve and remain uncertain at this time.
Formation about risks and uncertainties may be found in our most recent filings with the FCC, including our form 10-K, and subsequent form 10-Q reports.
<unk> policy not to reiterate guidance and we undertake no obligations to update or revise forward looking statements and the event facts or circumstances change, except as otherwise required by law.
I will now turn the call over to Jim.
Yeah. Thanks, Mike.
Good morning, and thank you to everyone joining our call.
I'm very pleased to share quarterly and full year results with you. This morning by its Q4 was by all measures and exceptional Corp, and was the capstone to a remarkable year for the company.
We delivered on our financial commitments.
Gross significant shareholder value and deliberate innovations to our customers throughout this highly dynamic competitive and challenging and park.
Just three years ago, we laid out a strategy to be a leader and digital transformation for enterprise customers and to transform a bias to a cloud SaaS company.
Our performance this quarter is proof that we are executing and making significant progress and that strategy.
What is even more compelling and.
A digital first initiatives have accelerated and I believe we are uniquely positioned to lead and provide our customers with scale and reach security and innovation required to tackle these new challenges and opportunities had and I cannot be more excited about our future.
Before moving to the numbers.
Let me say, how proud I am of our team's focus commitment and resiliency during a period of adversity and great uncertainty.
Their dedication to our customers partners and each other has been nothing short of amazing.
With that let me hit the headlines.
If I, if Q4 was a quarter where outcomes are driven by outstanding execution hitting.
Hitting on all cylinders across every dimension of the business.
Q4, non-GAAP revenue was $757 million above.
Above the high end of our guidance revenue was up $35 million from Q3 and $31 million from the prior year.
This was our second quarter in a row, where we posted quarter over quarter and year over year growth.
Adjusted EBITDA was $200 million or 26.4% of revenue.
Which also exceeded the high end of guidance.
Cash flow from operations was $70 million and.
And we ended the quarter with $727 million of cash.
With regards to our capital structure, we continue to strengthen our financial position, we refinanced 1 billion of debt and execute and 800 million term loan amend and extend.
These moves and extended our debt maturities reduced refinancing risk and improved our financial flexibility.
We delivered excellent results not just growth.
From a profitable growth and I'm delighted with our progress and the foundation, we laid going into fiscal 2021.
Now to the details on some key areas of momentum.
First is the progress we continue to make on our caps or cloud Alliance partners and subscription revenue metric.
Cash during the quarter grew to 33% of revenue.
Approximately 15%.
And no less than one year, we have doubled our cash revenue to a billion dollar run rate business.
Cats is also important because it truly represents how far our business ascom as the cloud and SaaS company and is indicative of our transformation our caps growth not only highlight that we are on the right path, but a further demonstrate the relevance of our technology and solutions and today's market.
The subscription component of caps and <unk>.
Activating our base by bundling additional innovations like if I spaces video remote working a hot and contact center, along with a number of other cloud solutions allow customers to consume on demand and also provides a seamless gateway to transition from on premise to cloud the per.
And that's resulting in significant growth and our enterprise hybrid business.
Proof of its success is and the numbers and Q4 alone we signed over 100 subscription deals totaling a TCV of nearly $200 million.
Let me share a significant subscription way and competitive displacement and the financial services industry.
One of the largest banks and the U.S. is at the forefront of using technology as a competitive differentiator and more than a thousand retail branches and offices across 40 states abide is enabling their migration to the cloud with our subscription solution. They will transition over 70000 users from using Cisco.
Two if I and their retail branches, while also supporting and increasing population of remote workers.
The second example is from the health care industry, where a line that help and enterprise customer that operates and over 100 hospitals and clinics made the decision to transition 47000, and you see and CCC just subscription.
To support a key corporate initiatives our solution provides them the flexibility to more easily support their remote agent and they cope with it safety operational and customer service challenges posed during a coke.
Now, let me move onto the cloud component.
Specific to public Ucas September was our second full quarter and the market with a buyer cloud office.
We also launched and Australia, Canada and the UK.
Not only are we gaining traction with our installed base, but we are seeing success and new customer acquisitions.
And Q4, we more than doubled the number of customers and more than doubled the number of active partners and agents that sold our solution.
Well certainly early innings, we are really excited about the adoption across all segments, including enterprise. One such example was the art institutes it system, a private schools throughout the United States. They.
They selected have icloud office to support 700 users across eight campuses over the five year agreement a viable play a critical role and helping the art institutes managed their multilocation requirements with increased flexibility functionality and centralized operations.
Yeah, and another example comes from Canada Kinex is a key business partner whereby that is at the forefront I'll provide and you see solutions to the Canadian market.
They found that a fire cloud office best fits their needs for seamless integration and to their business services across multiple North American office and.
International expansion of a buyer cloud office continues.
At the end of September, we launched and France, Ireland and the Netherlands.
And just last week, we announced the expansion and to five.
Other European markets.
By the end of this calendar year, the solution will be available and 12 countries.
Turning to a vial one cloud see cash our pipeline continues to grow and we are seeing significant traction in the U.S. and Canada, where the solution is currently available.
One customer a large social services agency on the East Coast selected by one class C cash for over a thousand contact center agents and Supervisors, who support nearly 1.8 million low income citizens advice solution was chosen to enable remote work capabilities, while also helping to improve.
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Turning to another example, and Harris County, Texas, The third largest county in the U.S., we created a hybrid solution to support COVID-19 case investigations and contact Tracy.
With the solution the county can reach individual and traced contact true automated outbound notifications and.
As a result, the county has increased case investigation capacity by nearly 25 per se.
We are continuing to rapidly build out see cash capabilities.
Well also teaming with our ecosystem of partners. One example is with very low one of our most strategic and long term partners back in October we jointly announced cloud hosted workforce engagement solutions.
This complements our see cash solution and will accelerate customer adoption.
Our next release at the end of December broadens, our a pea I first approach with a digital framework to support messaging and chat email and custom channel integration.
Let me close with our private cloud solutions demand remains strong and customers are making large long term commitments to our private cloud platform.
We are able to set up private implementations with the same speed up public.
And we are doing so on a global basis.
This is fueling opportunities, especially with customers and industries or public cloud either isn't available or cannot meet the storage and security regulatory or privacy related requirements other businesses.
One example is with a global provider of CRM and BPL services.
Realizing public cloud would not address their needs. They leveraged our one cloud solution and a private cloud deployment and order to consolidate their or by a third party solutions and to a single unified framework, which includes workforce management speech analytics quality management and encryption.
Shifting to advise spaces are workstream collaboration platform, we are seeing significant increase and new seats and usage.
Which more than doubled sequentially.
Although this solution was only rolled out nine months ago. It was already featured and the Gartner Magic quadrant for meeting solutions.
This offering.
It's available in nearly 100 countries and includes voice video chat messaging and team rooms.
[noise] spaces is continuing to make a difference around the world technique.
Technology security is a significant issue.
For one of the largest energy companies based from the Middle East.
40% of their staff work is on site and security compliance prevented the use of remote working solutions to connect onsite teams with remote teams. This.
This had a major impact on team efficiency and productivity.
Faces not only offered the collaboration capabilities they need it.
But was able to address the security concerns.
Closer to home St. John's Lutheran School, just outside Chicago transition their entire student body to an immersive online learning program in August the school is using a biased spaces exclusively and after seeing great success in the classroom. Thanks.
St. John's is now using spaces for their ongoing operations, including faculty and board meetings.
We are continuing to make significant strides and our workstream collaboration platform and recently announced a strategic partnership with and video to further improve the user experience by removing background noise and he virtual green screen background, and and any ability to generate life transcriptions.
Lastly on the strategic partner component of caps, we continue to drive significant new growth opportunities with partners such as affinity Google Nuance Salesforce dot com and very low to name a few.
And let me just share a couple of highlights.
Just last quarter, we announced the availability of Google Conversational day I solution.
Since we launched we booked well over a dozen new deals and continue to build a robust pipeline.
Contact center customers looking to leverage this capability.
Another example is with fair, where we just announced the integration and fair and knowledge management with a buy one cloud C. cats. This is an important capability that will accelerate adoption of our cash platform.
As digital transformation continues to accelerate comps.
Companies have reprioritized their own strategic initiatives, thereby creating an opportunity for a buyer to lead in this space.
The combination of these offerings and capabilities drives our ability to close large global opportunities that most others simply cannot the proof.
And Q4 alone, we signed 135 deals with a TCV of over $1 million.
This represents a 30% increase from the prior quarter and is by far the largest number of deals of this type that we sign and the last two years.
In total these represent well over $400 million and TCV sales.
17, and these deals were greater than 5 million and four were greater than 10 million with one deal over $25 million and the face of a worldwide pandemic or almost all of our commercial operations are being conducted virtually we won over 1500, new logos and the quarter nearly a third.
75% increase from Q3.
This is not only a testament to our filling it away deals from the competition, but to the relevance of our technology and the trust customers place and an established brand to support their mission critical needs.
I'm extremely proud of these results.
And especially of our global teams, which have shown amazing tenacity and resolve throughout this fiscal year.
And that's why 20, and we've made significant steps forward and our cloud and SaaS transformational journey.
Let me summarize four key focus areas for the year first.
First we have successfully position the company for growth, we posted two quarters of quarter over quarter and year over year growth.
And our all important caps number grew from 15% to 26% of revenue and EPS why 20.
Representing a 73% growth.
Second we have maintained our profitability while reinvesting in the business for the full year, our adjusted EBITDA was $710 million or 24.7% exceeding last years performance.
Third we continue to innovate across our entire portfolio of solutions. Our teams one another Edison award of ice basis was added to the Gartner Magic quadrant.
We introduced public Ucas, and see kaz offerings to the market.
And on the day I from were making significant investments both organically and through partnerships with affinity Google and and video among others.
Lastly, we made decisive moves to enhance shareholder value and improve our capital structure through effective execution of our share repurchase program and by improving our balance sheet by paying down debt and extending maturities.
By all measures it was an exceptional year across multiple dimensions of our business.
Looking forward as we continue to build on our momentum and reposition the company. We will begin reporting annual recurring revenue or they are as the new performance metrics.
And not only will this provide increased transparency into our cloud growth.
It measures against our cloud peers.
Hearing will share additional details, but let me give you a snapshot of EPS why 20.
Overall, a R.R. grew by more than 400% year over year.
Contact center and our hybrid businesses were significant contributors to this growth.
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 Web site 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 $757 million. This compares to $726 million reported a year ago and $722 million in Q3 fiscal 2020.
As a reminder, during the quarter GAAP and non-GAAP revenue have converged and the non-GAAP differences generated by fresh start accounting are now immaterial. However.
However, non-GAAP adjustments were immaterial in fiscal year 90, and so from a year on year comparison, we speak to non-GAAP revenue for proper comparisons. We expect this to be the last quarters I've mentioned non-GAAP revenue comparability.
Our four Q performance was led by North America, which delivered strong year on year growth for the third quarter in a row.
North Americas for Q results also benefited from a larger contribution from the U.S. government sector and we had originally guided specifically because of the timing of deliverables associated with the social security administration contract.
As Jim mentioned earlier revenue contribution from caps or cloud alliance partner and subscription remains a strong indicator of the rapid transformation of our business.
This quarter caps represent 33% of total revenue up from 30% and three Q.
Caps for full year fiscal 2000, and the aggregate came in at 26%, which compares to 15% for the full year fiscal 2018.
We continue to see growth from our subscription and strategic alliance partner offerings further proof that opex and cloud consumption levels are much preferred and the market over the historically dominant capex engagements.
As more of our software is contracted via subscription the shift of our perpetual license business too and Opex model benefits and services segment, why would adversely impacts the product and solution segment.
We are seeing this rebalance while still maintaining the same high levels of revenue coming from recurring streams and from software and services.
For our fourth fiscal quarter recurring revenue accounted for 63% of total revenue with software and services accounting for 88%.
Fourth quarter product revenue was $269 million compared to $315 million and the year ago period and $262 million in Q3.
And I just mentioned within the product segment, we saw the impact of the shift to subscription as well as continued declines in hardware driven by long term market trends and exacerbated by the cobot pandemic.
Benefiting from subscription fourth quarter service revenue was 488 million up from $411 million and the year ago period and $460 million in fiscal Q3.
Throughout the second half of fiscal 2020 subscription adoption has increased both from the conversion of Cobra temporary free licenses.
And the continued rapid accelerate acceleration our customers driving a digital transformation across their enterprise.
Digital transformation initiatives have helped increase contact center revenue contribution to our total business from just about 30% of our revenue two years ago to 40 per cent for all of fiscal 2020.
Turning to our gross profit metrics non-GAAP gross margin was 61.2% in the fourth quarter compared to 60.6% in the year ago period, and 61.1% sequentially.
Non-GAAP and product gross margin was 60.2 per cent compared to 64.4% in the prior year and 60.7% in the third quarter.
A larger revenue contribution from our strategic Alliance partners in the quarter contributed to the quarter on quarter product gross margin decline.
Non-GAAP services margin continues to improve driven by subscription.
This quarter services gross margin was 61.7 per cent compared to 57.7% in the prior year and 61.3% in Q3.
Turning to total profitability margin and cash flow and metrics, which were strong for both our fiscal Q4 and fiscal year 2020.
Fourth quarter non-GAAP operating income was $170 million, representing a non-GAAP operating margin of 22.5%.
And 20 point basis points year on year, while adjusted EBITDA was $200 million, representing an adjusted EBITDA margin of 26.4%.
Up 110 basis points year on year.
Our continued disciplined operational execution and additional cost savings related to cope with such as minimal levels and travel and expense offset cloud R&D and go to market investments made in the business during the period.
Turning to cash flow we.
We generated $70 million and cash flow from operations were 9% of total revenue contributing to a fourth quarter ending cash balance of $727 million.
As a reminder.
This cash balance reflects the repayment of the $50 million revolver draw that was repaid and joy.
As for the full fiscal year, our CFO totaled $147 million, representing 5% of revenue.
Well on the topic of cash during the quarter, we took advantage of favorable market conditions to extend our debt maturities by using the proceeds from day $1 billion senior notes offering to execute a partial pay down of our term loans.
In addition, we extended maturities and another $800 million and term loans for three additional years.
Between the notes offering and the term loan extension, we moved approximately $1.8 billion of maturities from 2024 out to 2027 and 2028.
These actions and extended weighted average debt maturities from 4.1 to 6.1 years, enabling us to reduce financing risk and improve financial flexibility.
Summarizing fiscal year 2020, non-GAAP revenue was $2.879 billion compared to $2.908 billion reported in the year ago period.
Non-GAAP operating income was $610 million, representing a non-GAAP operating margin of 21.2% down 40 basis points year on year.
Adjusted EBITDA was $710 million, representing an adjusted EBITDA margin of 24.7% up 40 basis points year on year.
And finally, you exit the year with a caps run rate and is more than doubled for fiscal year 2018 and.
In addition to the performance, we guided to and delivered upon our capital allocation program for the year was successful across several fronts.
We opportunistically bought back 26% of our outstanding common shares and well below current trading levels.
We paid a significant portion of our long term debt and.
And we improved our capital structure by extending debt maturities.
Now turning to guidance for one Q 21, as well as full year fiscal 21.
Please note that all year on year revenue changes are expressed on a constant currency basis, and all revenue amounts reflecting rates as of September Thirtyth 2020.
For the first quarter of our fiscal year 2021, we anticipate GAAP revenues of 710 million to $730 million representing growth at the mid point year on year.
We expect non-GAAP operating margin for the first quarter to be between approximately 20% and 21%.
And our adjusted EBITDA margin to be between 165 and $180 million or between approximately 23 and 25 per cent of revenue.
Looking forward towards fiscal year 2021, we expect full year and GAAP revenues of between 2.875 and $2.925 billion.
Representing a range of flat to one per cent revenue growth as measured in constant currency.
This estimate reflects continuing caution concerning and certainty of a cold and related resurgence and businesses globally as.
As well as reflecting that more from a volume 2021 subscription bookings will be coming from or a vial, one cloud public and private cloud offerings and the second half from fiscal 2021, which are ratable transactions from a revenue recognition perspective.
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We expect non-GAAP operating margin to be between approximately 19% and 21% for the full fiscal year.
Similarly, our adjusted EBITDA margin to range between 660 and $710 million.
Or between approximately 23 and 24% of revenue roughly.
Reflecting a continued increase in cloud R&D investments as well as go to market spending, especially and sales and marketing and.
Our cloud offerings in the channel.
Additionally, we anticipate that travel and expense will likely be returning to more normal activity levels in the second half of fiscal 2021 with anticipated anticipated lessening of the impacts and the cobot pandemic.
In terms of cash flow from operations for full fiscal year 2021 week.
We expect to be between two and 3% of full year revenue. This.
This is primarily due to the expected continued acceleration in our shift to a subscription licensing model, which extends out the cash conversion cycle versus the prior predominately capex licensing model, which has cash receipts more closely aligned with revenue recognition.
At this time, we expect our shares outstanding to be between approximately 80, and 85 million shares and fiscal 2021 year and.
Now before I hand, the call back to Jim I'd like to spend a few moments expanding on our existing caps transformational metric as well as provide some context around another metric that we are introducing.
Aimed at providing enhanced visibility into a value is progress toward becoming a recurring subscription and cloud company.
As a reminder, we introduced the caps metric at the beginning of fiscal year 2000.
As you've seen from our results we've made great progress during the year and actually exceeded our 30% long term target in the second half of the year full year ahead of schedule.
This was largely due to the rapid uptake of a viable and cloud subscription.
In fiscal 2021, we expect the share of cash revenue will continue to grow meaningfully due to the continued acceleration on Rover via one cloud family of offerings.
We therefore expect that for the next fiscal year caps will represent between 35 and 40% of our annual revenue up from 26% for all of fiscal 2020.
To give investors a better forward looking view into our broader based one cloud software solutions driving our growth.
We are introducing a new annualized recurring revenue metric or or or.
This metric is similar to what our industry peers report and will reflect only the recurring components of a fly is one cloud portfolio, which includes multiple deployment options based on customer choice.
We believe the one cloud aerostar provides investors with a better view into our long term revenue growth potential and trajectory.
Our one cloud and Youre or grew from $35 million at the end of fiscal year and $19 million to $191 million exiting fiscal year 2000.
After just one year of our one cloud solutions being and market.
Our expectation is that our one cloud and our our will double by year end fiscal 21 approach.
Approaching 15% of our revenue.
We anticipate as we exit fiscal year 23, it would represent over $1 billion of annual revenue.
And we rapidly transition to this new model, we do expect that there will be headwinds to our cash flow during the fiscal year 21 in fiscal year 22 period as a subscription versus capex sales drive significantly different cash flow dynamics.
To explain some of the puts and takes during our revenue model transition. We didn't include it in our supplementary earning materials and simple illustration on slide 18, our revenue recognition and its associated cash flow free typical premise based subscription deal.
And comparing the mechanics of the legacy perpetual license against subscription billing and cash flow and the latter follows a ratable pattern typical of a SaaS model.
And this example revenue recognition proceeds cash flow, creating a working capital headwind in the first year and a tailwind in years two and three.
Because of this we will see a reduction or a deferral and cash flow and fiscal years 21 and 22.
As we exit fiscal 2023, we believe will return to our long term CFO target levels of between 10 and 13% of revenue.
He was our belief that the one cloud here are a metric will come through any noise created by the transition and provide a better gauge of our progress to a cloud business model.
In summary, we believe the introduction of our one cloud they are metric combined with our existing caps metric will provide investors enhanced visibility into a volume is transformational cloud journey.
With that I would now like to turn the call back to Jim Jim.
Thank you Karen.
Almost two months and now into our new fiscal year I cannot emphasize enough how far the company has come and the last couple of years as the buy continues on its transformation journey.
Taking a step that as I reflect on the year.
We moved to a very different place from the and Fiat that many of you may remember.
We are at the moment and the company's 20 year history to regain our leadership position.
We've worked hard to align our company, our investments and our innovation with where the market is headed and more importantly, with what our customers want.
Let me close by Reemphasizing, a couple key points.
Our global team has not only deliver on the promises we have made to our customers.
But far exceeded expectations.
And today's digital first world. The company has never been and a better position to leverage its true strength and the value proposition of our core platforms and the cloud.
And demand for our large enterprise partners as strong accelerated by the need to automate digitized and implement new ways of doing business.
Looking at it by 21, we have an opportunity to help shape, our customers' futures and we are embracing it we will remain focused on public cloud both ucas, Nancy cash private cloud and Workstream collaboration platform with our spaces solution.
In closing.
The company has successfully navigating through these challenging times, while we continue to strengthen our position to lead our enterprise customers as they accelerate their own transformations.
With that we're now happy to take your questions.
Thank you and if he would like to ask a question. Please press star one and your telephone in cash.
GAAP Amazing Kelly and maybe your line up and again, you May press star too and I Didnt answer. Thank you.
Surfactant and infusion authors and it may be necessary to take and didn't have that work here at least where price sorry, yes, we should revisit.
Hi, a and I know anything that I'd rained out yet and I, just wish and went back and did or discussed Karen no. No I think the final cash flow air our section.
It should be fine.
Running through what those couple of times.
And that was the only thing that was and that was up and air from me from has [noise].
All right and keep one came from the guys. Okay.
Everything is good I have my notes.
I'll start working on this one we all day, however, guys question and from Lance the town and try with Cowen and company and he or she didn't look forward to hearing from you and moving hi, guys can you hear me and it sounds like there's some there's anything and play that.
Record and to wait and see when it didn't file here, yeah, I'm, sorry, I'll range back and hope Mike Mike Okay, Great No.
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Sorry, low hey.
Hey.
Yes, okay, great great.
Great job on the quarter I mean, it sounds like everything was better than expected, but was there any revenue that you think was pulled forward from the first quarter you mentioned in the prepared remarks, the assets say contract could you quantify that or provide some additional color around that circumstance and that and I'm wondering is that pull forward. The reason.
That's the low end of your revenue and guide for the first quarter is down year over year.
Yeah, Hey, Lance this is Jim and I think you can hear as much. So yes, yes, yes, yes. Thanks for the question so I.
I wouldn't characterize Q4 as having.
And he pulled forward what I would say to your point on social security and definitely came in stronger than we had anticipated a and.
As well as subscription was obviously, a big driver for the quarter as a number of our customers are looking to accelerate their digital transformation.
Obviously subscription provide some and easy path to modernize their infrastructure and provide some flexibility.
To really consume new innovation and <unk> products much like our work and collaboration product and spaces. So I basically say that you know, it's really Q4 is a testament to the to our investments our and our innovation sort of the leadership position that we have an enterprise and it really intersects well.
With a robust portfolio and stretch we like we laid out as far as this quarter.
Again Q4 by all measures was it was a great quarter force and in fact, I would say that Q1 guidance.
Number one suggests as care and pointed out a mid point year on year growth would continue and I also think it's important to note.
That as we continue to grow and capture revenue and our and our which we set and the call. We expect to double this year as you look sort of at the construct my point is we are continuing to shift more and more to our of our revenue to a cloud and recurring model and even with and we are still.
Expecting growth.
521.
[noise] Chase I could just ask one more on the balance sheet and I guess the question is why do you and I'm afraid to slide deck here, but why do you want to maintain 400 million of cash when the minimum is 250 million and then I guess, even using the 400.
And it's sort of like the threshold level, you got an extra 325 million of cash above that level. So what would you like to do with that excess cash you know debt repayment.
Implemented dividend M&A you get the idea.
Yeah sure let me start and then I'm obviously.
And so I'll turn it over to access to care and so first obviously.
In the midst of Cove, and I think it's prudent at this particular point in time, obviously to have and.
Significant cash and I think at the same time I think it's also noteworthy to take a look adjusted growth how aggressively been and 2000 and and 25, we first of all we pay down 8% of our debt, we purchased repurchased 26% of our shares care and pointed out that we basically refinanced and and in a minute to extend for.
Close to 65% of our debt and moving it out you know from four to six years.
So I think we've been fairly aggressive and and one year period, even with the less if you will six months from our fiscal year and the face a a worldwide pandemic unlikely we've seen in ER and our lifetimes. So I would say that we are continuing to work with our board around any and all options, but but.
With that I'll turn it over to care and you may want to add a little bit a little bit more color.
Yeah, I don't I think Jim you captured it pretty well, obviously, where it's as we said in the prior quarters, we do want to continue to be conservative.
And and just because the pandemic is still so it's still raging and and kind of unpredictable 0.1 0.2, we have expressed a bias towards you know focusing on and getting our debt or low and improving our overall leverage ratio. So that would be second a priority and then obviously always want to keep a little bit of dry powder as well I'm pretty you know.
And he potential investments that we might need to make but you know right now I'd say first and foremost is really focused on just weathering yeah. These rather uncertain times overall and correct.
Our economy level.
[noise], Thanks, guys I'll get back in queue. Appreciate the time, yes.
Yep, Thanks, let excellence.
Our next question is from Raimo Lenschow with Barclays. Please proceed.
Ah Congrats from me as well and and thank you for the extra disclose or that's really really helpful and.
First question is and Jim if I look at the ear our guidance to long term, one the ability and and F Y 20 free and that's to me suggest there's obviously still a lot of stuff still coming and we're only at the early innings, maybe talk a little bit about where we are and they see all you mentioned your and some country.
Trees, and you still have a doubling of partners and and see causes more like it seems we are still in the early stages. So this is just a beginning of a journey, but yeah I'm just trying to like <unk> billion and that your ours seems like a big number and then I had one follow up here and.
Yeah, No. That's a great question. Thanks, Thanks, Raimo. So a couple of things. So one on the air front its care and pointed out we have worked hard with our strategy that we laid out and you really become and cloud and SaaS company about three years ago.
And I think we're right on track to low executing on net strategy. So a real testament to our to the employees here, we have it and that added by they're executing extremely well.
And it is obviously in the next couple of years to get that number crossing a billion dollars is it's clearly obviously north of 35% range as part of overall revenue, so a pretty a pretty steep ramp, but where again, we have high confidence and our ability to generate that performance as far as hcl.
We really are and in the early innings, I mean, obviously and the where only and month seven months eight of the overall deployment of a CEO clearly the first quarter was just predominantly or and the in the U.S. over the summer months. We've added a few countries and we've just announced they never going to be adding five.
Additional countries and they'll be on board by the end of December. So we have 12 countries now.
We are now and and rolling out throwing out a C up and.
And we have expectations, obviously is moving to the calendar year 21 that we'll continue to build on that.
We are excited and say the least about where we are with the performance and acceptance of of a CEO not only from our partner community, but from enterprise customers as well and obviously, we we are putting a if you will a significant amount of investment.
And to our a CEO infrastructure and our go to market organizations and our support organization. If you will like customer success and inside sales and more importantly, as we continue to roll this out and each of the countries around the world and as we can and point out we think we're going at least and best at least one point.
Our our EBITDA performance back in like we did this year so back into the go to market functions as well as continuing and in fact grow our investment and R&D as we go through 2021 and order for us to execute on the plan they care and just just laid out so I would say were.
I'm really excited I think we're right on where we thought we would be with a COO at this particular time, obviously doubling the number of customers and one quarter is significant and as we look at our backlog as we look at how well we're integrating organizationally what would bring I think is actually.
We've been real pleasant surprise for likes and better term with that how the organizations are jelling and how were collectively goal going to market and you know we're a as I said, it's we really only have a handful of countries that have any more than about three months ago.
Go to market time under their belt, but we have high expectations and EPS by 21, and as we look at you know our funnel and our pipeline I would suggest that you you know, we're we're pretty comfortable with what we're seeing on the horizon for us.
For our a C O M a C and market acceptance.
Perfect. Thank you and then to follow up a cure and that's if I think about profitability. Yet obviously, we living you know low what travel costs et cetera, and I get that and your guidance, but and and one suspect has these kind of crisis reshape how you think about kind of Seattle spending [laughter] Ah you don't like you know it.
Yeah unlikely, we're going back to the old normal and that's going to be like you and you normally like how much you'll guide looks like and your normal versus an old normal. Thank you.
Sure Yeah, I think as Jim pointed out there's a couple of things going on a couple of dynamics going on and one is the dynamic and we will return to some level of new normal activity and I think you're 100% right. It will probably not be at the same levels of.
T and eight.
Travel and entertainment as well as even facility spending we have been able to introduce and Rightsizing as we go through type on the flip side of it is I think our early entre here now and they see O and North Sea Cats offerings, you know recognize that we need to continue to build out our our go to market infrastructure, especially in support of our channel partners as well. So I think what you'll see is a kind of a share.
Shift of the emphasis and spending into more a bulwark behind you know playing out that full ecosystem of go to market and that's what we've contemplated in our and our guidance for fiscal 2021.
Okay makes sense. Thank you.
Thanks, Michael.
Our next question is from meta Marshall with Morgan Stanley. Please proceed.
Great. Thanks, and I wanted to dive into the contact center a little bit maybe first question. You know you noted some improvements in your press release on additional feature sets, but if there's any other critical milestone development milestones coming up you had hoped to have a lot of that products finished by the end of the year.
And then maybe second and just initiatives to push that customers that to kind of the <unk> there.
The subscription product and where you think contact center as a percentage of revenue can go from that 40% you laid out from fiscal 20. Thanks.
Yes, Hi, Matt and this is Jim I'll, Oh interest it for so yes, and the contact center.
Yeah, We're obviously, we announced the product roughly about six months ago.
We're actually quite pleased on our progress on our progress to date.
To date were predominantly more around sort of and digital digital solution with our contact center.
We have follow on releases as early and the next I would say two months or so we'll be moving outside of the U.S. and Canada. So we'll be moving.
To roughly about I'd say 30 countries plus or minus associated with that.
We have enhanced obviously features and content that will be building into the product and very very short order around omni channel or bring your own carrier and a number of other significant features and the marketplace and we have.
And the teams deployed we're ramping up obviously, our go to market functions in order to go execute and so that would not only apartment community, but as well as our service provider community and our direct workforce and I'm one of the reasons why we brought Steven Spears on to the company back in September and was.
It was approved and cloud leader and his previous jobs, and we're already making and enhancing I should say are all our go to market functions to provide the capabilities needed as well as the systems to execute on that and I'm. So we're not we think we're in and very very good shape and what I do and I'll turn it over day Anthony is here with me to give you maybe a little bit.
More insights into sort of where we are and the progression sure. Thanks, Jim and medical and Christian So we introduced to it we are continuing with the milestones that we've laid out on previous calls we introduced our digital channels and the beta that Jim had mentioned.
We're expanding into he by the UK and all islands, and followed by Mexico and in a and you'll see those coming in in January and we've already seen a funnel double the over these last last quarter and reporting and so we're seeing we're seeing some good progress day.
[noise] and as far as that.
Yeah. It does in terms of kind of percentage of revenue our initiatives to push the customer and a two to those new products.
Pretty care and so I would tell you we are seeing a obviously with subscription with significant uptake as low as we pointed out a key component of that is obviously with the with the contact centers.
And really the.
Deploying our subscription offer out there and it's been accepted far beyond even our wireless expectation.
Our contracts are in the range of three to five years.
So it's a nice entre into fortifying.
Our relationship with our customers from more importantly, providing him and easy Avenue to upgrade and technology and entre into into cloud.
We're also seeing as we now have a year under our belt with subscription and number of those customers coming back as you would expect and asking for.
And this and.
At this time private cloud solutions to take sort of subscription to the next level and really moving to and overall private cloud solution again, which we're.
Excited about what the opportunities in front of us. So we're seeing nice growth in 2020 and contact center, so really off the heels of subscription and it's it's it's actually executing to our plan on on an entre if you will to to the cloud so care and I don't know if you want it and any more to that or no.
No I think this new gross covered it I mean, obviously just as you said with more of the subscription that we've seen to date really been kind of saxenda, driven and we would expect that the 40% would continue we continue to grow and well you know we don't have oh from real formal number out there, but we certainly think longer term it could be more than half the revenue of the company.
Great. Thanks.
[noise]. Our next question comes from semi Chatterji with JP Morgan. Please proceed.
Hi, good morning, Thanks for taking my question.
And if I can just start with asking to get killed talks on the <unk> and it'd be deals that we saw and the momentum and revenues.
North America, and they do it and I think the other regions would have been more kind.
And a flattish.
Outside of the government spending.
Are you seeing any impact on any variances in terms of customer conversion non wins between the regions either because of the macro or where youre brought up kind of a road map or launch expansion is at this point and I've a follow up.
Yeah, Tricare and you want to you want to take that one and I can add a little bit more and so.
Hi, Simon Yep. So first of all I think you know the U.S.U.S. government absolute did did very well, but I would say, we cross all the industry verticals in the U.S. we.
We did we did very well in fact, even in some of the industry verticals that we were concerned about who are most heavily hit by the but by the covert the cobi pandemic, we've behaved better and those industries as well I think the issues that weve seen internationally is really that the shutdowns and I have had a bigger effect.
And their ability and ability to conduct business you know a lot of the business is very personal and these and these jurisdictions and I think that's where they struggled a little bit more than than what the U.S. has oh, we do see now with the international starting to adopt a migration to subscription quicker or we'd expect them to start to just start to catch up.
As the year goes on but of course, the U.S. I'd say it was strong across all of our all of our industry verticals and international really more heavily impacted by coated.
Oh, sorry.
And maybe I'll just ask my follow up and which was also from acute and.
And your guide and global to 300 million increase and gaps revenue and based on your guidance from revenue growth being kind of zero to one that would imply about like 50 to 300 million decline and the remainder of the business I just wanted to see if you can get to the broad buckets, there and what are the primary areas that are driving that decline.
50 to 300.
I understand the move from subscription, but I don't think that day some of this decline.
So that would be helpful. If things and buckets that for me.
Sure, but I think you know overall, we have you know we have been very quick to acknowledge that this market trends from the traditional way of selling you know selling product have shown that premise based product is going to be declining, especially and or capex model by high single digits to low to low to low double.
Digits as we go through time, and that's what we factored it we would expect to continue to see the true traditional business, especially from a hardware perspective, we will continue to decline and very consistent.
With the market trends and that's really but that's really the message turned that you're going to see and our business. As we go through time, a very significant part of our business is still is still premise based in terms of the rollout and maintenance that's out there and that all has to work its way through and.
So we expect that portion of the business to continue to face headwinds as more and the business starts to shift to subscription and cloud and we'll start to see that you know more than offset it obviously with our growth with our growth projections for the full year and longer term, but just in the current period of time and we'd really is coming from our traditional product premise based product business and the maintenance.
Associates is associated with it.
Thank you.
Our next question is from Us I am or channel with Citigroup. Please proceed.
Great. Thank you for taking my question and congratulations and a strong quarter.
I'm curious one quick question and you kind of look forward and you gave us some growth metrics and how to think about and transition from 21 to 23, and just want to kind of understand and if you look at your long term model and you get to the cash flow metrics. You know what are some puts and takes that and you should think about from the margin EBIT.
Margin perspective, and and you look at that 21 as well you know again and you can walk us through some of the puts and takes.
And to your guide.
If you know what could drive it coming from.
And just you know guy hiring.
Iran, and my thanks to keep out and keep keep and look at thank you for it so.
I mean, firstly I would be naive if we didn't acknowledge that the covert pandemic is still out there and you know what we feel we've got a pretty good insight into our customers and from a funnel perspective, as Jim pointed out and when we think we got.
Good control of the business and quite frankly, we've seen some of our guys reporting and internationally, especially and control some of our European countries at the businesses or are shut down almost entirely and that's always a concern that you have to acknowledge so that's the one thing just tactically, but that we would think about over the longer term I mean, we really do see more and the business.
Greetings to subscription as I pointed out in my prepared remarks, we expect that more of that subscription or subscription bundles are going to be delivered more as a service. So more cloud content, which means we'll be taking more and more that ratably. So what we should see an increase in bookings as reflected in our metro.
Metric that we're talking about you know more of that revenue is going to come and it's going to come after overtime.
We.
Our doubling down as Jim pointed out on the investments that we made from a from a cloud perspective, especially from a cash perspective and.
And then were Befuddling, obviously, a lot of money into our go to market we've had <unk>.
Good opportunity over the last six to eight months to really learn a lot about you know selling or selling public cloud and you know understanding what it takes to fully support that and and so those are the types of things that are factored into the you know the next year from an EBITDA perspective, and and I think we had that pretty well bracketed.
In terms of where we should be and adequate we've demonstrated time and time again, we're pretty prudent and how we manage our cost and expense and we should have that pretty tightly and tightly managed.
Longer term you know the opportunity to true truly scale, our our cloud offerings or is it.
He is really going to give us the ability to expand its going to give us and the ability to expand our margins will become more efficient and from a cloud go to market perspective, and you know, we think there's opportunity and or you know and or our sales go to market as well as we've always said, we think we'll continue to see some improvement.
And our product gross margins as we start to move and leading away from Germany as we start to move away from as we start to move away from a hardware.
Great. Thank you.
Thank you.
Our next question is from Rod Hall with Goldman Sachs. Please proceed.
Hi, Thanks for taking my question is validating that on <unk>.
And you find doubleclick and see Caf momentum there.
Wanted to see if that is an index could build it to Bob I.
I suppose and this high enough and help me get volume and then maybe talk about couple of a couple of the sustainability of that business to and they got caught up.
Yes, sure, Yes, Hi, this is Jimmy I'll.
I'll turn it over to Anthony and give you some perspectives and to into what we're doing and see cats, and and Thats DPL on that a little bit at the end share.
So what we're seeing is that a the take up rate is quite interesting customer base. What we find is there approaching us on the sea has pure cloud public a part of our business and as it starts to roll out in multiple countries, we start and see that funnel build I mentioned, a little bit earlier and that itself.
And just just within a quarter alone and.
And just the the sizing and that's going to depend on how quickly do we get the rollout and each of those different countries and even if we see that that customer.
Doesn't sort of roll immediately into a public cloud solution, a lot and times they start to see the breadth and the portfolio and then moving to a private cloud solutions, where our hybrid type of solution. So you may see and we do see and distribution of the customer coming into our store front looking for right.
Public cloud c. cancellation, but and that leaving the school procuring a hybrid or a private cloud solution or some pumps enhancing their on prem through a true subscription. So that's what we've seen so you're seeing that some of those numbers spread across that particular or that particular portfolio, because we because we have that oh.
Let Brent.
[noise] no they happen.
Our next question is from Catharine Trebnick with Colliers. Please proceed.
Oh, congratulations on the strong quarter my question and deal with the I. change your scene and in sales with the pandemic, you're seen more digital marketing and even the bar.
It's more of that and.
Did your Marquis and same mark.
Your face to face meeting did you noted even happening now in Europe. So what initiatives are you putting together for this change and I see Yeah. My day I think it will be the new normal and then is that affecting the size of your <unk> sales force and and are you shifting people maybe to do more inside sales like that.
Right could you just kind of go through that for me. Thank you.
Yeah sure. This is Jim so and it's a great question and you know obviously one of the reasons why we brought Simon Harrison on and joined US back in January as we sort of refocus and double down on our overall marketing efforts here within the company and Simon and team and doing and doing a great job, especially as you point out and though and the world and.
Digital and I'll ask Steven and Spears, who is here with US said, a little bit more color to that but as far as our overall workforce.
And what are we shifting.
We are under and you know a bit of a transformation within our go to market efforts. We are obviously, adding to not only our inside sales teams globally, but also customer success teams as well as we deploy more of our cloud solutions out into the marketplace and secondly, we're adding a number of what I'll call specialist.
And and really generating cloud, especially with our larger enterprise customers and in fact, we've added.
A number of folks into the organization that have the experience to work with partners and it's not only were true transitioning our current bars from hardware.
Hardware on Prem type sales and.
But also adding a number of new partners that that are solely oh, I've their expertise and delivering cloud solutions to the marketplace. So there's been a fair amount of transformation underway I think you'll see a bit more here and in the company. So that we're in a position to leverage and and satisfy our customers demands.
Whether overall cloud solution, so it's actually a pretty exciting and even there. The current divided team. This is actually a.
Very excited about an opportunity to drive and selling and actually go to the customers with solutions that they require but a little bit more insight into the actual what we're doing from a overall marketing perspective to see if and how they want it and if they're not well well. Thank you Catherine for the question I do believe that we're seeing a tremendous shift and a lot.
Of momentum as it relates to our reaching to our customers and partners and and digital methods. You can see that we were able to execute very strongly we gave away and number of of free trial licenses at the beginning of coal that and that turned into it you know really a windfall of net new business in.
In the quarter and I think as we continue to evolve our offerings or will you know continue to reach into those digital channels and really provide a lot more frictionless commerce.
Commerce opportunities for our customers to leverage a day.
During you know these unprecedented times as Jim alluded to a you can look two and a number of changes that will continue to evolve within our sales methodology, but really that key focus on customer success and now as we transition these customers and the subscription Oh, you'll see a renewed focus.
Because from from a via on that customer success component.
Alright, thank you.
Our next question is from Mike Latimore with Northland Capital markets. Please proceed.
Great Yeah. Congratulations on a strong result listener in terms of the subscription bookings I think you said 400 million and fiscal 20 here.
What's how much of that 400 million are you likely to recognize and fiscal 21.
Sure and you want to take this from sure.
So Mike as we've laid out and it was to roughly a we take anywhere from between 50 and 60% of the premise based a point and tight given given the probably the subscription given their premise based content within it. So you know I think the illustration that we put out there.
You know and got 400 million, you'll probably get you know somewhere on the magnitude of.
Oh about 25% more per quarter, what part and your per year and.
Following years.
And then you have an opportunity obviously too when you renew it again true renewed with the you know the point in time portion of it again, assuming that it doesn't change and the bundled up and change in year four.
Okay got it.
And then it sounds like you're having a lot of success and the contact Center segment. I guess is there any way to highlight or describe what percent of some of your of your top contract and our customers whether its top 20 or 50 or something that are on subscription already.
Yes.
Gary you want to you yeah. So honestly I don't have it at the tip of my fingers right now we did move some of our largest BP OWS.
Back in and third quarter, and second and third quarter.
So I know that you know very very clearly two of our largest contact center customers were moved and we've also had a couple of big banks I tell you what maybe give me or give me a chance to come back to you guys on that one I mean, we've been trying to manage it you know from a migration perspective, given weather the natural renewal cycle comes up.
But we have moved to what to say a couple of or bigger banks and a couple of and mortgage or a beep yos [noise] yeah.
Yeah, I think you and I think the I think the midpoint is that we're at a very early stages of that transition and the contact and and so very early innings.
The other thing that my guess and we're starting to see now and I know last quarter is the fact that we've won a number of new customers with our subscription and from so it was originally.
Designed obviously to go after our installed base and and and and enhance our customer base that was predominantly on a a maintenance contract and.
And provide them and accessibility to new to new technology and drive a if you will that opex model, but and solution has been so successful were starting to see a number of.
Greenfield new customers sign on to subscription and we expect that will continue as well so.
Okay, and another opportunity for us as we move into 2021.
Great and just last on professional services.
They have been doing lately and I guess do you recognize those kind of at point in time, as well or that get built into a ratable recognition.
Yeah. This is here and so its a book services as all are all tied into six and six accounting to percentage of completion and so as you deliver unless there's very specific milestones and acceptance criteria for the customers and know it tends to be a just based upon deliverables.
Yeah, and as far as growth.
HM.
Yeah, our NPS revenue was basically flat from F.Y. 19 too low.
The F.Y. 20, which is one could expect actually I think that's actually a very good performance, especially with cold and hitting and number of our customers and and more importantly, the sort of large enterprise where people are not not at work. So obviously, they do a lot of work virtually but still a P.S. is still sort of a.
A person sort of human.
Interaction with the customer base. So the fact that we were flat year on year I think is.
This is actually really really great performance and non bodes well for us as we go into a flight and flight 21. So we're.
We're certainly pleased with with our professional services.
Revenue and organization.
Yeah Brent.
Thank you.
And our final question is from had made course and with the Debbie and financial Please proceed.
Hi, Good morning, I just wanted to see is there a difference and economics between your via cloud office and one cloud is there a particular product that you were looking forward to push this year versus the prior year.
I'll start off and they care and going into the specifics, we don't necessarily push any product over any other product we have a very robust portfolio, which is great and fact.
More than most of our competitors because we provide the opportunity to public private.
And our hybrid so when we sit down with our customers, we listen to our customers. We obviously have an opportunity and and present the different optionality for what their what their needs are so we don't.
And fuel portray one versus versus another we are customer let organization and it's great that we have the portfolio and offerings are really to tackle any segment and the industry. We we participate and as far as the overall from a financial perspective, I don't know care and what color you can add to that or are not sure.
I mean, I think as we've laid out in the past you know obviously V. C O offering because were not hosting it is actually a you know mirrors in many ways and sort of a premise based likes and so high.
Relatively high gross margins and.
And the like and then obviously you know you're ramping you're ramping your your own cloud, but I would think over time you know when you take into account the full go to market cost and all the rest of it they're all fairly consistent in terms from a bottom line profitability.
Okay. Thank you.
Okay.
I would now like to turn the conference back over to Michael for closing remarks.
Thanks for joining US everyone. This morning I. Appreciate your time look forward to speaking with you and over the days and weeks ahead, we should be reporting the December quarter early and February and we'll we'll get noted that out and so if we get closer to that day. Thanks very much for your time and enjoy good holiday season and take care.
[noise].