Q3 2021 Avaya Holdings Corp Earnings Call
Greetings and welcome to Avaya fiscal 2021 third quarter earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
And 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'll now turn the conference over to Michael Mccarthy, Vice President of Investor Relations. Thank you you may begin.
Thank you welcome to our buyers and fiscal 2021, and Q3 Investor call Jim share it to all our president and CEO Kieran Mcgrath, our executive Vice President and CFO will lead this morning's call and share with you some prepared remarks before taking your questions.
Joining me this morning will be Anthony Bartolo, Chief product Officer, Steven Spears, Chief revenue Officer, and Dennis Kozak, Senior Vice President of Global Channel.
Consistent with social distancing mandates each of us on this morning's call are assembled from a remote location.
The earnings release, and Investor slides, which include highlights from our ESG initiatives and performance referred to on this morning's call are accessible on our investor page of our website as well as and the 8-K filed today with the SEC.
You should aid you and your understanding of our buyers financial results.
All financial metrics referenced on this call are non-GAAP with the exception of revenue. We have included a reconciliation of such non-GAAP metric measures to GAAP and the earnings release and Investor slides.
We may make forward looking statements that are based on current expectations forecasts and assumptions, which remain subject to risks and uncertainties that could cause actual results to differ materially.
In particular, if the global economy continues to be impacted by COVID-19, and the extent and its continued impact on our business will depend on a number of factors that include but may not be limited to the severity and duration, including the emergence of new variants as well as actions taken and we're not taken by governments businesses and consumers and response to the.
<unk> stomach all of which continue to evolve and remain uncertain at this time.
Information about risks and uncertainties, maybe found in our most recent filings with the SEC, including our form 10-K, and subsequent 10-Q reports. It is the price policy not to reiterate guidance and we undertake no obligations to update or revise forward looking statements and the event facts or circumstances.
Stances change, except as otherwise required by law I will now turn the call over to Jim.
Thanks, Mike Good morning, everyone and thanks for joining us today.
Across every business segment and an industry. We are seeing large enterprise is turning to avaya more and more to guide them through their digital transformation journey.
Our technology and solutions are providing customers with the ability to grow their businesses, while improving their own customer experiences and we continue to make the investments that strengthen our portfolio.
<unk> innovation and extend our digital capabilities to meet the new and emerging opportunities in front of us.
Our third quarter performance speaks volumes to the significant progress we've made on the transformational journey that we embarked on.
We are executing ahead of plan and I could not be prouder of the Avaya team further resiliency adaptability and the capabilities they bring to bear each and every day.
The solid financial results, we delivered exceeded expectations across the board and revenue profitability and most importantly, and a R. R.
Equally encouraging is that we are seeing strong performance across all areas of our business, including our traditional business segments.
Our 3 pronged strategy to transform to cloud and SaaS grow the business and sustain our highly profitable business model continues to guide the way we are operating and we will continue to double down on our strength in these areas.
Starting with our Q3 represented another strong quarter growing 23% sequentially and over 275% from a year ago.
Our growth continues to outpace our plan and as a result, we are again raising the high end of our guidance to 500 million for the end of the fiscal year.
It is noteworthy that over 95% of our <unk> comes from enterprise contracts greater than 100, K and value and over a fifth of our deals are greater than $5 million and value.
This is a testament to the strength of our brand innovation and digital capabilities and underscores our leading position as the partner of choice to enterprise companies, who rely on avaya to power their mission critical operations.
<unk> is a true indicator of traction and our transition to cloud and SaaS and we will grow from nearly 200 million and FY 'twenty to $490 million to $500 million at the end of FY 'twenty 1.
We are well ahead of schedule and we are now anticipating to hit 1 billion and <unk> by the end of 2022.
Moving to revenue, we delivered our fifth consecutive quarter of year over year revenue growth. The composition of that revenue continues to improve with 40% coming from caps over 64% of it recurring in nature and roughly 90% of revenue from software and services.
Our revenue performance continues to improve and it is reflective of the investments, we're making and skills innovation and our ecosystem and demonstrates that the fundamentals of our business model remains solid and underscores our shift is taking hold.
And important is our ability to continue to drive strong profitability as the business delivered $173 million of adjusted EBITDA or approximately 24% of revenue consistent with expectations that we previously shared.
We are sustaining our model while at the same time, making investments in R&D and go to market required to strengthen our position.
Karen will walk you through the details of our financial performance and a moment.
A key component of our go to market transformation and <unk> ability to leverage his significant strength that comes from our breadth depth and global reach along with our technology and highly differentiated capabilities.
To amplify the strength and take advantage of the demand we are seeing we implemented a land adopt expand and renew and go to market motion.
On the land front.
We continue to see significant new customer acquisition.
We added approximately 1700, new logos this quarter. The most we've added in the past 2 years.
This success reflects the competitiveness and market acceptance of our new offerings and.
Large enterprises continue to set the pace.
Once again.
And we signed 100 deals with $1 million of T C V or more.
For the fifth consecutive quarter.
19 of those deals were greater than $5 million, and 3 were greater than $10 million and value.
For adoption and expansion. This is best evidenced by the continued strength of our recurring revenues and increasingly longer contract lengths and cloud and subscription as well as the potency of our new offers.
Each of which I'll touch on in a minute.
And the renewable front retention rates have never been more meaningful as we were making the transition to the cloud.
And this is 1 of the areas, where we're making significant investments and expanding our technical expertise and customer success resources to capitalize on the opportunity to grow the total lifetime value of our customers.
Over the last 3 years, we have developed a powerful portfolio of solutions to unlock the inherent opportunity that comes with having long term loyal relationships with our customers.
Starting with Avaya private cloud. This solution enables the customization that is critical to supporting the complex day to day needs of our enterprise customers that want a cloud experience, but still have regulatory requirements and security policies to meet or simply want and need to operate and a blended <unk>.
And environment.
And importantly, private cloud represents a meaningful commitment, but typically higher lifetime customer value.
A measure of this success is our bookings growth and hammering that success home over the last year or a R. R has more than doubled.
1 such customer general Atomics, a large defense contractor needed or you see solution that maintains compliance with federal information processing standards. They selected our secure private cloud solution to meet the needs of 18000 users across more than 25 sites, which also includes remote work.
And capabilities.
This is a 5 year $15 million deal and representative of the type of private cloud deals, we are winning and seeing and our pipeline.
Moving to Avaya, 1 cloud subscription and this is a real value vector for us, which drives profit longer term commitments of approximately 3 years significant upside and provides our clients with a simpler path to move to the cloud when and how they choose day.
Demand for more consumption like models remains strong.
And although we have millions of seats already under contract. We are still in the early stages of converting our massive global installed base.
In addition, we are pleased with our new logo wins, which approximately doubled from what we reported to you and March attracting new customers highlights the market shift from Capex to Opex, along with the importance of having highly flexible offers.
For example, we just won a multi year multi million dollar subscription deal and South America.
The financial services companies adopting a unified avaya platform to provide a total U C. N C C transformation for their employees customers, including multi experienced contact center I V. R. W. E M and video across social media and traditional channels.
Avaya as solution with differentiator over the competitors based on the strength of our full portfolio along with professional services capabilities and then appreciation for our overall customer experience strategy.
Demand for public cloud solutions grew in line with our expectations as we continued to expand our go to market motion and layer model for.
And for <unk> in particular, we are seeing a strong level of customer engagement. Our pipeline is building as we continue our global rollout. In addition, we are building and investing in our ecosystem of partners.
Who are and will continue to play an increasingly larger role and our CCAR and go to market.
Notably, we recently announced how we've expanded our relationship with sales force by making the full range of deployment options for Avaya, 1 cloud contact center integrated with Salesforce service cloud.
I'm also delighted to welcome the team from C T integrations to the Avaya family.
Avaya closed on this strategic tuck in acquisition earlier this month.
He provides avaya with additional digital capabilities over the top for a contact center installed base, along with a rich library of connectors for rapid integration into additional third party solutions, helping to supercharge, our public see cash solution.
[noise] Avaya cloud office, we delivered our best quarter, yet and we are positioned to continue that momentum as our new agent channel grows additional features are released and international expansion continues.
Our win rates continue to improve including 1 customer win over 12000 seats and it is clear that our services capabilities and coverage are real differentiators and.
And the big Apple.
We are proud to have been selected by the Empire State Realty Trust to provide Avaya cloud office to over 500 users across their 14 retail and office locations, including the iconic Empire State building itself.
The first building to reach the cloud is now fully connected to the cloud.
And in a competitive deal Empire State Realty Trust said that the flexibility scalability and cost savings were the key reasons behind their decisions.
Another example is Agnes Scott College and Georgia.
And not only did they want to move to the cloud and improve their communication and collaboration capabilities.
But they also needed to ensure compliance at scale with carriers law and E 911.
The University selected Avaya cloud office from more than a thousand users setting affordability modernization and compliance is key decision factors.
Turning to see pass this is a force multiplier for our platform with C. Pass we are able to rapidly integrate and composed solutions that combine third party applications, where their own spaces and seek has offerings, providing customers with significant value and driving a faster return on their investment.
Speed of deployment and compose ability are increasingly important as we continue to look for new ways to work and what remains a very dynamic work environment.
AOR from C. Pat's grew 52% quarter over quarter and demand for these capabilities to support the extension of our platform is increasing significantly.
And 1 particular use case that resonates with me is how avaya working with a partner was able to deploy our collaboration solution and supportive India's medic C..2 initiative and just stays using spaces and C pass.
This initiative connects and COVID-19 patients with qualified doctors from anywhere to support their recovery, while helping lighten and overburdened health care system and fills a critical GAAP and patient care.
In summary, Avaya is innovation engine has never been stronger.
We have strengthened our portfolio significantly over the past 18 months.
And have a rich pipeline of new and enhanced solutions coming down the pike.
Which is enabling our customers to improve their customers' experiences and compete and win.
With that I'll hand, the call over to Karen.
Thank you Jim Good morning, everyone. As a reminder, all figures mentioned in this call are as reported unless otherwise indicated and constant currency.
As Jim highlighted in his remarks, the success of Avaya as business model transformation journey continues to be measured by the 2 key performance indicators that we have been utilizing to track our transformation progress.
Caps and wouldn't cloud era.
Both of these metrics continue to significantly exceed our own and very aggressive expectations.
This has enabled us to confidently predict that we will achieve our $1 billion..1 cloud are our target by the end of the 2022 calendar year.
Turning to the numbers for.
For the third quarter of our fiscal 2021 revenue was $732 million.
This represents a fifth consecutive quarter of as reported year on year growth, which was plus 2% and the quarter or -1% and constant currency over the $721 million in the year ago period, and compares to $738 million in Q2 of fiscal 2021.
Our 1 cloud Ara metric exited the quarter at $425 million, which represents 23 per cent of sequential growth and is up 276 per cent year on year.
And alignment Avaya is a core strength and the enterprise segment customers paying greater than $1 million annually accounts for 64 percentage of total a R. R.
Similarly contact center was again about 60% of our total 1 cloud L. R.
Revenue contribution from caps or cloud Alliance partners and subscription represented 40% of total revenue consistent with Q2.
We are pleased that the June quarter recorded the largest yet revenue contribution from our public cloud solutions, which included Avaya cloud office.
For our third fiscal quarter recurring revenue accounted for 64% of total revenue.
Meanwhile, software and services represented 88 per cent. These.
These metrics reflect robust hardware product contribution seen this quarter.
Non-GAAP gross margin was 61, 5% and the third quarter compared to 61, 2% and the year ago period, and 61, 8% sequentially.
Turning to total profitability margin and cash flow metrics for the quarter.
Third quarter non-GAAP operating income was $146 million, representing a non-GAAP operating margin of 20% down 280 basis points year on year.
Adjusted EBITDA was $173 million, representing an adjusted EBITDA margin of 24% down 230 basis points year on year.
As we have discussed in prior earnings meetings, consistent with our business transformation Avaya continues to significantly step up our cloud investments in both R&D and sales and marketing.
In Q3 this results in nearly a 13% year on year dollar investment increase in these 2 categories.
Non-GAAP EPS was <unk> 75 cents and the third quarter compared to 95 cents and the year ago period and 74 sequentially.
Now turning to cash flow, we generated $11 million from operations or 2 percentage of total revenue contributing to an ending cash balance of $562 million.
Fiscal year to date, we have generated $35 million of cash flow from operations as.
As we have discussed in our prior earnings calls the rapid movement to cloud and subscription model, where cash flows move from primarily received upfront to receipt ratably is requiring a larger working capital balance impacting CFO and.
We exceeded our $1 billion target for our 1 cloud are are we expect the working capital requirements to begin to subside and CFO flow generation to then trend toward double digit as a percentage of revenue annually.
Now turning to guidance for fourth quarter and fiscal 'twenty, 1 and full year of fiscal 2021.
Please note that all year on year revenue changes are expressed on a constant currency basis, and all revenue amounts reflect rates as of July 31.2021.
For our full year fiscal 2021 guidance, we are raising our revenue guidance to be between $2.93, and $2.96 billion.
This midpoint represents growth of between approximately 2% and 3% at current FX rates and between 1% and 2% as measured in constant currency.
Accordingly, we expect fourth quarter revenues of between $720 million to $750 million.
As a reminder, fourth quarter of last year, we benefited from a 1 time large product delivery related to the 10 year $300 million total contract value Social security administration contract.
This impacts our fourth quarter revenue growth compare by roughly 3 full percentage points.
In terms of our forward looking 1 cloud era are a metric we are once again, increasing our full year guidance based on the rack and rapid bookings acceleration our team is driving.
We now expect to exit the current fiscal year with 1 cloud air are between 490 and $500 million.
At the midpoint this upward revision to guidance represents an increase of approximately $40 million from the guidance. We provided in may and demonstrates almost 160 per cent year over year growth.
Furthermore, we are tightening our caps revenue guidance range by raising the low and from 37 per cent to 39% of full year revenue.
This lifts hard guidance range to between 39 to 40 per cent of the full fiscal year, representing about $400 million of caps revenue growth year over year.
We expect non-GAAP operating margin to be approximately 20 per cent for the full year.
Additionally, we are again raising the low end of our adjusted EBITDA guidance and tightening the range to $700 million to $715 million or approximately 24 per cent of revenue at the midpoint.
This range affirms our ability to generate profitability, while simultaneously, making cloud investments and scaling a R. R.
This reflects non-GAAP operating margin for the fourth quarter to be between approximately 18 and 19%.
And our adjusted EBITDA to be between 160, and $175 million or approximately <unk> 23 per cent of revenue.
Turning to shares outstanding guidance and earnings per share, we expect our weighted average shares to be between approximately 87, and 88 million shares outstanding at fiscal 2021 year and.
We expect non-GAAP EPS for the fiscal year to be between $3.5 and $3.16.
For the fourth quarter non-GAAP EPS to be between 66 and 78 cents.
This compares to non-GAAP EPS of <unk> 93 in the year ago period.
For the full fiscal year cash flow from operations has been revised to approximately 1 percentage of revenue as an outcome of the companys accelerated our growth, which is resulting in the near term higher working capital requirements that I described earlier and my comments.
With that I'd now like to turn the call back to Jim Jim.
Thank you Karen.
As our customers continue to address through a hybrid work model. We see a continued acceleration of digital transformation, new business models and increased reliance on cloud, especially private cloud for large enterprises.
Decisive steps, we've taken along with the investments we have made to execute on our multi year strategy has to avaya well positioned to lead our customers through their digital journey and it shows and our results. We are reshaping the company embracing near term disruptions and driving fundamentally positive longer term results for the benefit of our <unk>.
Customers shareholders and employees our business is healthy our year to day performance and outlook is strong and we are confident and our business model.
With that we'll open it up for questions.
Thank you and see it relates to ask a question. Please press star 1 on your telephone keypad and <unk>.
Information and tone will indicate your line is and the question can you.
You May press star 2 if he would like to remove your question from the queue.
And from participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question is from Lance.
And it turns out with Cowen. Please proceed.
Alright, thanks, guys. Thanks for taking the questions.
And let me start with you actually if I could you mentioned that margin pressure you called out due to investment and R&D and I think you also said and sales and marketing but.
And then you said, 13% increase and in the investment spend in dollars, but what if we sort of adjusted for that would margins how would margins that look year on year I know they were down you called out they were down 250 basis, what's your share year on year would they have been flat to up had it not been for those investments or would they still have been down due to the other.
Pressure that you have based on the conversion of the business from that.
Point and time sales to subscription and I'm, just trying to get a better sense for how the interplay there looks.
Sure.
Thanks, Laura So I think it's fair to say that with low or our business. In total we are investing quite quite heavily and all.
And R&D service delivery and.
Our overall growth our go to market investments to drive that clouded our that we talked about I'd.
And I'd say first and foremost at the premise business, so still quite profitable.
And and and as Carey is carrying a lot of the load and to offset and mitigate some of those investments.
To sum up I think it will be quite fair to say that if we were to normalize for that fairly significant increase and just R&D go to market and some of the some of the service delivery enhancements that we would've probably been up against a very very strong quarter that we had and the year ago time period.
So in.
In general we have all along been trying to aggressively grow our top line, you know, especially and in the cloud and area are while being cognizant and balancing and focusing on maintaining.
High level of profitability that I think few if any of our competitors can really do.
Okay, Thanks, and Jim for Jim You've had a nice run of year on year revenue growth, but you're guiding down from <unk> I guess, a skeptic would ask perhaps the revenue growth we've seen until now and perhaps that's just been a pull forward given work from home and Covid trends and that in 'twenty 2.
2 we're going to return to that sort of that same old avaya, where we have the perennial declines in both revenue and EBITDA, what what would you say to those that would make that claim.
Yeah, Thanks, Lance well first of all.
As Kieran pointed out.
We raised the midpoint of our guidance for revenue EBITDA and cash for this quarter.
I think putting that into perspective, we are also delivering for the first time and my 14 years here year on year revenue growth and I think.
And Thats, a big news story, and I and I want to thank the <unk> employees and our customers for that.
Thirdly is the acceleration of our <unk> Chevy and indication that in fact, our strategy has taken hold the business is healthy and our customers are calling on us whether it's for a traditional business private or public cloud to say that we have and solutions they need in order for them to remain competitive.
Lastly, I would point out that with Kieran mentioned, if you compare it to last year, we had a 3% 1 time improvement associated with the SSA and.
Turnarounds are hard.
Avaya is <unk>.
<unk> our own aggressive expectations I believe we are a different story than the rest and we.
We're looking to continue to drive.
A steady drumbeat of continued momentum and continued traction as we go through this multiyear transformation. So.
And fairness with disagree wholeheartedly with the fact that this is the same old avaya.
And in fact, we're not the same low avaya for the last 18 months to 2 years I think we've posted strong numbers. Our business is accelerating our shift is taking hold and as Karen mentioned, we are investing big time, and as you can imagine moving to cloud and building out that infrastructure.
The partner ecosystem, the skills and technology and capabilities, we need internally is no small feat.
And.
This company has executed yet, let's say close to fall asleep over the last 2 years still maintaining 24% EBIT as a percentage of revenue and we're doing net purposefully as Kieran pointed out. So we are making the right balance and investments back in the business. So.
And I wouldn't I wouldn't compare this avaya company to any company of Yours test.
Okay.
And Jim and inland so.
And obviously Lance you know from our perspective and where.
Going through this revenue trends transformation and the effects to our P&L or balance sheet, our cash flow, they're all very consistent with this form of a transformation and they're all very much in line with our long term financial framework I mean, we really feel very good where we are right and there. We're looking out in front of US we see a very strong demand profile at which across public private.
Hybrid and all of which has been engineered as part of our 1 cloud portfolio. So honestly I think we're feeling really confident about where we are right now and the strength and what we pointed out and area are I mean long term. This is going to drive very significant growth for this business. So I think where the third quarter and then that we're calling for the full year.
It speaks volumes to the health of the business and the progress that we've made on our transformation.
Thanks, guys, great job on the AAR front, and particular I'll turn it over thanks.
Okay. Thank you.
Our next question is from Raimo and Lynn Shah with Barclays. Please proceed.
Hello, and good morning, and this is Ravi answer Ryan and thanks for taking my question, maybe we could just start with any of the drivers this quarter and they are and then any incremental changes that led to net.
You didn't move your 1 billion and our target to fiscal 'twenty 2 thank you.
Yes, Hi, this is Jim.
I'll take it and then I'll turn it over to Kieran So let me.
Let me take maybe this in 2 parts first of all.
I think the number 1 reason keep in mind we've been.
Just started measuring <unk> this year.
And where we finished last year, we were roughly almost 200 million per and it'd be $500 million this year and $1 billion next year and.
And we're looking at this is as I mentioned steady traction steady momentum and the fact that 1 quarter may be different and the other but I think you need to make sure you're taking a look at the long game here and not just not just playing for quarter on quarter incremental strides and Keith.
<unk> and a double the business over a 3 year period of time, I think is pretty significant and.
And something that is.
Sort of benchmark from any companies. So I think the real reason is the success is the fact that how much we've invested in and strength in the portfolio to go to market motion, how we engage and embrace our channel partners, which are significant and set of growth at a company and how well we built out our internal systems in order to manage this secondly.
And secondly, if you take a look at.
Over this past year, we've continued to improve guidance quarter on quarter.
As we've gone through this year and Thats really effect and a matter of where we're seeing growth and subscription we had our best quarter ever and Q3 from a TCE perspective couple that with the fact that we had our.
Our best quarter, and private as well as public cloud I referenced 1 private cloud deal I can tell you as I mentioned these are representative of all of our private cloud deals and if you take a look at our backlog and our.
Our funnel and clearly it's much greater than where we were not just 3 months ago, but even even 6 months ago. So our strategy has taken hold and we're seeing huge demand.
And we're able to actually not only accelerated demand, but more importantly execute on that demand when it comes to implementations associated with <unk>.
Cloud, both private and public and Thats. The main reason why we raised guidance and pulls it in roughly.
Roughly a year ahead of where we thought we would be.
Yeah.
Great. Thank you and then maybe if I could just follow up.
On a similar note I know I know last quarter, you had talked about for subscription specifically about I think 20 per cent.
A portion of the sales that are from new customers. So maybe within description and more broadly with the business, what you're seeing between new customers migrating over to somebody and you are sorry existing customers migrating to your newer offerings versus actual and new customers being added it would be helpful. As well. Thank you.
Yeah sure. So a couple of things so first of all obviously with a huge installed base, probably the leading installed base of anyone in the and the industry.
Seeing.
A number of our customers take advantage of subscription and they may point out that it's not just traditional business onto a different delivery mechanism.
90, some percent of these are all hybrid and nature. So the fact of the matter is that they're upgrading to bringing and cloud elements embedded in the solution and in fact are getting more value.
And they had before so we're very excited about the hybrid growth associated with subscription. So you shouldnt think of subscription as a maintenance replacement.
Far more than that.
As far as the new customers I would say the new customer base as far as the number of customers from our existing base. This quarter represented a number that's close to 10% of the.
Of the total which by the way is may sound like a small number but it's.
It's not a small number and overall number of customers nor should 1 view that as.
A relatively small number as far as the opportunity that's true.
And in front of us and it's it's great to see that this offer.
Is not only.
A value to our customer base, but from a competitive perspective from a differentiation perspective, obviously this 10% we're not avaya customers previously and 1 of the reasons why it's led to at least the 2 year plus.
Hi.
The number of new logos that we won.
As well as the continued 100 plus deals of greater than $1 million.
Of our <unk>.
<unk> I'm sorry, so we're in the early innings still we see a lot more in front of us and.
Going to continue to double down and on our investments as we've pointed out and we're going to continue to take advantage of the market that's in front of us.
Great.
Makes sense, thanks for taking my questions. This morning.
Sure.
Our next question is from George Sutton with Craig Hallum. Please proceed.
Thank you guys and answer to the earlier.
<unk> question the skeptical Investor question I would just say the new Avaya has there are the old Avaya did not.
And I think that's fairly simple so I'm very intrigued by the fact, you're moving forward your IRR expectations and I wondered if we could just get a little bit of a better sense of when we get to that $1 billion number what what will be the representation of your existing customers and your view who have migrated.
<unk>.
Versus the new customers that you're bringing in.
Yes. So thanks, George appreciate it I'll start and I'll turn it over and maybe it's secure.
So first of all I think it's noteworthy to point out that as Karen mentioned, 60% of our <unk> coming from contact centers.
I think it's probably also noteworthy window, we didn't bring it up.
And that in the past year, our contact center <unk> has more than quadrupled.
Representative of the foothold and strength that we have on large complex enterprise customers and the contact center, which is our sweet spot and we see significant opportunities in front of us and those large deals large complex enterprise customers, who are calling on avaya to lead them through their digital transformation, that's a very important point.
When we get to the $1 billion at the end of next year.
And Youre looking at a percent of how much fs converted off of and existing installed base.
Hard for me to give you an exact percentage, but I would tell you that it's.
Theres more than <unk>.
<unk> 50 per cent of the runway left to go.
So to the point where is this a 1 year point and time program of the here and the answer is no. This is has the technology has a sustainability and.
Has expansion and front of it and even by this time next year, we still have huge runway in front of us.
So that's an important point.
Italy is how much of that will be on new customers.
And I can tell you that as far as our we're seeing.
Nice growth as I mentioned and private cloud.
We're seeing nice growth and subscription, but private cloud really is starting to become more and more of a component of the overall.
And our composition.
And if you take a look as I mentioned, just 1 deal and where we are the backlog deals were working the amount of interest through Rfps and RF queues.
I would suspect and many of those big deals.
Though they may be single customer are quite large and overall value. So I believe the customer growth will probably be and the 5% to 10% range over the next.
The next year or sales, so probably getting us upwards and the 20%, 25%, but the dollar value could become much more significant over time as we.
Drive more and more into the largest of the large enterprises and and the mix component.
Again heavily skewed towards contact center, so hopefully that answers your question.
That's great and as a follow up to your comment on the importance of see cash the zoom ring I'm, sorry, zoom a $5.9 combination is obviously attempting to move them into more of an enterprise capability.
I don't think the market appreciates the types of customers you go after vs. The types of customers. They go after for that offering but I wonder if you could give you a perspective on that acquisition.
Yes, sure I think you bring up a good point George.
And.
I think 1 thing we need to keep in mind is how 1 determines and classifieds enterprise versus non enterprise.
And if you take a look at and as you look at the segmentation with it with and contact Center I would suggest that we play and a completely different zones and <unk>.
5.9 so it's fine that they're all within a particular <unk>.
Mid market type segment.
That's a clear differentiation because it has to do with complexity expertise and so on but I think if you look at the.
The acquisition I don't think its a surprise to anybody that.
And Theres, a need for consolidation and this industry and I think.
Zoom and 5.9 obviously took advantage of that but if you can contrast that to Avaya, we launched the avaya cloud portfolio over a year ago, probably close to 18 months 18 months ago and the fact that we saw the value of an integrated platform strategy and in fact, we've had an integral.
<unk> platform strategy has been the leader and UC and Cc for years and this transaction to me. It's just proof positive that advice and a great position I mean, congratulations and welcome to the neighborhood.
Rising tide lifts all boats. So we're excited about it.
And so excited about the fact that it demonstrates that this is a strong market and the fact that those that have an integrated platform like avaya has a huge opportunity to win and the market going forward and accuracy and that being representative and <unk>, because that's where the that's where the industry is moving to a cloud and SaaS model. So.
That's a great recognition of where we are and in fact as I mentioned doubling year over year is extremely important and.
And another differentiator, we have as we operate and 190 countries.
We have these solutions available around the globe and.
And we are winning not just in North America, but we are winning and APAC, we are winning and EMEA, we were winning and calla and in fact, you take advantage of our breast our scale and our expertise and the fact that we have and integrated platform and the fact that we now have and in a market.
A complete CX offer.
Owning UC and Cc collaboration and video increasingly more and more AI <unk>.
Positions us and a great position, if you will and in order to capture and win and this market and that's what we're all about we're all about execution were all about winning and we're all about investing now to take advantage of the market in front of us and to strengthen our foothold. So I think it's great that they had this announcement.
And we're and we're looking forward to.
The months quarters and years ahead to compete with them.
Good stuff thanks, Jeff.
Yeah.
Our next question is from Sydney Chatterji with J P. Morgan. Please proceed.
Hi, good morning, Thanks for taking my questions.
And Jim I, just wanted to start with.
And most of these startup on you did provide some details from seat and integrations and be at Glu.
And.
I just wanted to see if you can go a bit deeper and I mean, the way I and II.
And really kind of mix you gives you more expertise and the addressable market opportunities that you are already targeting doesn't really expand that addressable market size, but just wanted to get a bit more detailed low how youre thinking about the implications. So.
In terms of just the addressable market opportunity for you and Banana Republic.
And that's a great. That's a great question and I think you hit the key attracting the matters.
Our M&A strategy is 1 that focused primarily true.
And it's 1 that's also designed to work with new startup fresh companies that.
And that brings certain skills and.
Expertise into our into our company.
Such that we can continue to leverage the opportunity in front of us and that's exactly what we did with <unk> suite <unk> suite with a partner of ours and they are.
And a partner of ours since 2016.
We're working with them hand, and gloves on a number of.
Key opportunities in front of us, especially digital and the digital space.
And as we looked at this we wanted to bring if you will see T suite into the into the family because we wanted to make sure that we have that expert teams skill team, but more importantly to allow us to rapidly deploy digital capabilities over the top.
For our contact center, not just our installed base, but for all of the opportunities and our backlog and funnel and front of us and frankly Cts suite as an integrated component.
And just made perfect sense to bring this team into the company.
To supercharge us for lack of a better term and really delivering.
<unk> solution. So we can make sure that there are dedicated and focused on delivering the avaya platform with our with our current team it's been.
Ronnie and his team have done an outstanding job.
And frankly, they were part of the family anyway as a partner so it's been a really seamless.
Sort of integration, even though it was just recently announced in.
Quote unquote, we're off to the races. So we're excited about the opportunity that this brings and.
We believe it's going to help us as I said sort of supercharge and number of our digital capabilities to continue to keep us at the forefront of innovation and and <unk>.
Yes.
Okay.
And I have a follow up for Kieran.
It's good to see the target being gross flow award, but it obviously.
And then means here and it almost doubling year on next year.
Think about the cash flow.
And next year like how should we think about the magnitude of improvement compared to the ceiling value and I think guiding to 1% of revenue and this was possible and what kind of headwinds the activation and var might bring.
In terms of the magnitude of improvement for next year.
<unk> sure so listen.
And as we've said before we're in the middle of this transformation from Capex to the cloud and subscription and obviously, it's a pretty dramatic change and when a customer pays you in terms of.
Upfront point in time as opposed to over time so.
The good news is as we've increased the IRR.
Obviously its indication of just the traction that we're getting and the business and that traction has been accelerating.
My expectation is that.
We said, we expect to get to $1 billion by the end of 'twenty 2022 calendar year. So doubling we're going to go from a run rate of $75.1 million a quarter to a 100 ish million per quarter and then.
Therefore, I do expect that we'll continue to see some working capital requirements.
And with what I would expect this year, so I continue to see low single digit.
CFO from operations, but I believe that once we get to that $1 billion. This starts to turnaround and the working capital requirements and you'll start to decline and we start to move I would say fairly rapidly towards that double digit CFO that we talked about remember I've always said by the second half of 2023, we will see.
A fairly aggressive.
Run back to the double digits that we expect so I'd say, we're really pleased with the rate and pace of the of the take up we expect that the working capital requirements will continue to next year, probably indicates low single digits CFO again next year, but then.
Very subsequent improvement in 'twenty 3 and beyond.
Alright, thank you.
Our next question is from S. CMO channel with Citigroup. Please proceed.
Great. Thank you for the opportunity.
Currently about 60% of your E. R. R is from contact center.
And we think about and grit and you've had great success, and we think about some of your UCC customers coming on board to your subscription and cloud offering.
That tends to be much more competitive market versus the contact center.
Should we think about this range of investment and Opex investment.
Going forward and similarly, the impact to the EBITDA margin.
As we think about more update UCC customers adopting your subscription and cloud offerings.
Yes.
Karen do you want.
Take that nurse and narrow it okay sure so.
So I think first and foremost.
The investments that we're making right now obviously they have some tactical impacts.
But we really think it's prudent for us to continue to do whatever is.
And is required for avaya to expand <unk> into.
Into as you say, the combined UC and <unk>.
UC and Cc, both from a subscription public private and hybrid. So we we are really doubling down and that do I think there'll be a modest type of.
Of.
Headwind or impact.
From a profitability perspective.
Not unlike this year, where we talked about about a point of impact we've been very cognizant of trying to balance growth with ensuring that we can continue to maintain the profitability that we that we are really I think very unique compared to the rest of the industry on so I think we continue to accelerate this growth and do it with with margins.
Very consistent with where we're at today.
And maybe a little less and the.
And where we were a year ago, we're right around that mid twenty's that we've been able to operate on them pretty successfully 4 quarter range.
What are out over the last over the last couple of years.
Yeah and I.
I think another thing just to add to <unk>.
The answer is the fact that we've been on.
Obviously, very optimized and very disciplined and our overall structure of the company.
And if you take a look at our office I would say we're a bit.
And more differentiated and others, what I mean by that is.
The U C.
And did the business is obviously very competitive at the low end and the SMB.
A lot around our cost of retail space.
We are and really not overly active in that space to be honest with you and nor do we see that as an area that we're going to invest and significantly because of the compression by the just how populated that spaces and the fact of what's the dollar value is only to be over time as that becomes.
More.
Competitive.
And number of folks continue to.
As you said.
Impeding with the same sort of customer base, we operate more in the mid market to high and where there's not as much pressure.
And in fact, and that's where we're seeing our growth as I mentioned is really around the enterprise space, 96% of our <unk> deals greater than 100000.
Karen pointed out 64% of our deals greater than 1 million and stack that up against anybody.
And so and 20 plus percent or greater than $5 million.
And Thats, where were seeing the traction that we're seeing the backlog and that's where we're seeing the opportunities in front of us. So.
Really not into the.
Into the low and highly competitive.
Tremendous cost pressure type type opportunities.
Fair enough and and if I may like you know as you do more with UCP.
And perhaps even integrated offering.
And that tends to be a little bit more services.
We're still.
And I would say just and software side of things.
Clearly our services margins are doing very well here is that the I'm just I'm just questioning if that's the piece that we should expect services margins to kind of hover around even as we do more of these hybrid offerings more integrated that require a lot more consulting and professional advice.
Related to the deal.
Yes. This is Jimmy I don't see anything net.
This significantly going to change.
You know around overall services revenues Corp.
Really as we drive more and more automation and especially into the areas of.
And our private cloud and the opportunities that are there in front of us I think.
I think our I don't see a real change too.
And to the services margins as we move as we move forward.
Pretty.
Well defined business model, there and we've been and the services business for many many years, it's a key component to the revenue and profitability and the company.
And I suspect it will continue to operate.
As it has and the past so I don't see much of a change.
Okay. Thank you very much.
Our next question is from Katherine try and break with Colliers. Please proceed.
Thanks for taking my question I have a couple of them..1 is any update on the security contact and can you refresh me. If that included contact center that was such a large contact that a contract that you signed last year.
Karen you want that.
Sure so.
First and foremost that Youre right Kathryn it was a combination of both UC and contact center as well, where we displaced displace from some competitors. So.
Very pleased with that.
I think we're making good progress in terms of rate and pace with the contract as we talked about last quarter, we had a very significant set of deliverables that.
And that we executed upon back in Q2 from a professional services perspective.
From this point out nowhere and were working until the date, we stand up and we stand up new.
Private cloud and we move forward from there.
Anthony or Steve and if you guys wanted anything more.
No I think you've got it right on that 1 Kieran So I think we're on a good tracking.
Right and pace for that 1 and its both UC and cc.
And the follow on question is I always get pushed back from the buy side on the competitive landscape. So when I say that you know you guys are no longer a downer share donor they push back and say well you know Genesis and all 5.9.
Cetera et cetera. So can you talk on these larger contracts you know big and styles that you have why you think youre no longer a share donor and who do you see trying to you know perhaps a move in on your territory and what's your best defense. Thanks.
Yes, that's great question and.
And I think you just ticket step back and look at our performance.
Over the last 18.
18 months or so.
The way, we've rounded out our portfolio with the number of.
New announcements and the fact that not only the announcements, but these but these products are actually starting to take hold and the market just in the last year 18 months, we announced subscriptions and 7 quarters old we announced spaces, we announced cash both private public and we announced our relationship with ring Central We just started shipping.
18, 18 months ago, we now have AI solutions into the into the marketplace. We have C pass now up and running and really providing that over the top.
At the edge. If you will so we can do our composer book and not to sort of 1 large complex.
Sort of.
Implementation, we now have the capability through Apis with our customers that they can compartmentalize. This they can do it and how and if and when they want it.
And now you look at the revenue growth and more importantly, the bookings growth of all these new products continually sets the pace for us as we move forward. So if you wanted to go back 2 years ago, and somebody said, we were donor well, yes, I mean, we werent growing revenue we were declining 6% a year, we didn't have any AOR growth to speak up and in fact, we weren't met.
And yet we didn't even have a caps metric to determine.
Our revival and the new World and are we relevant.
So yes, you want to go back 2 years and it seems to everybody keeps trying to bring us back 2 or 3 years ago.
For a company that actually was.
Investing heavily in the future and my point about turnarounds effected and matters, we're very different story, where not only saying what we're doing but we're actually executing to what we said we were down and they would do and if you take a look at our wins 1700, new competitive logos last quarter.
Again over 100 deals greater than a million dollars a number of key large customer wins globally around <unk>.
Around the customer base.
If you go back over the last 12 months, we've had over 6000, new customer logos I'd stand that up to anybody so.
Somebody wants to go out there and say, we're donor God bless them. They can say what everyone. We're not going to get down to that level. I don't believe we are we're focused on winning where focus on continuous improvement and we're focused on providing solutions for our customers to win and competed and their marketplace and I trust that the results that we posted.
<unk> volume pseudo progression that we've made over the last over the last 4 to 6 quarters or introduce more Trust me. This team is heads down.
To do more we are not taking our foot off the pedal by any stretch of imagination, and we're going to be consistent we're going to grow.
We're going to make sure that we're executing each and each and every day. So I mean, that's what we're focused on and others can they can say what they can say what they wish.
Thank you.
Our next question is from meta Marshall with Morgan Stanley. Please proceed.
Great. Thanks, a couple of questions from me.
Is there any sort of stat, you can give either with new logos are kind of the the air base that you've built up and just how many of those are companies and you see.
And.
And then maybe second question.
And the initiatives around.
Renewals or kind of.
Investing and team I assume to kind of work on increasing renewals just any kind of details you can give there around what those initiatives actually entail.
Yeah, Hey, Matt I'll take that first of all and I'll, let Karen talk to you about the.
And the renewals, but if you take a look at our <unk>.
Buildup.
As I mentioned.
We do have an integrated platform of UC and Cc.
And obviously the bulk of them are consistent with that integrated.
And integrated platform, so pick a number its and the nineties I don't know.
Average 90.
And 91, but it's certainly well into the nineties.
Fact that.
And we're providing this combination UC cc and all those all those <unk> deals and.
And now we're seeing as I mentioned.
More of a hybrid solution coming into those deals as well.
With some of our new technologies associated with the collaboration and video and AI and so on and so.
It's it's well into the nineties.
I'll, let Karen talk about what we're seeing from a renewal perspective.
So and 1 of the examples that I have given historically was even if a customer decides to renew their entire maintenance base. The GSS maintenance base theyre going to push very hard for some price performance improvements.
Minimum 3 years to 5% every quarter, what we've been seeing just on the subscription and alone is we've been able to see net renewal rates as we convert this maintenance over to subscription of anywhere from 115 to 120, we turned in an extremely strong quarter this quarter, which means the run rate that.
We're getting just said the bundled subscription is anywhere from 20 to 25 points higher than it would have been from the GSS perspective. So.
Just proof positive of just the progress that we can make on expanding the wallet share with the customer just moving to subscription and that obviously gets better when we start to convert customers into private.
And public cloud, where the multiples are even more expenses than that so overall I think it bodes very well for us in terms of net renewal and net retention rates.
To continue to drive the customer into subscription and then into public and private cloud.
Yes.
Great. Thanks.
Our next.
Question is from and then <unk>.
And with Dws financial please proceed.
Good morning could you just talk about these new logos day, you're adding.
Where are they coming from the on Prem or they cloud and are you.
Driving these ads through any kind of promotions through your <unk>.
And the agents and channel partners.
Yes. This is Jim so first of all the 17 new.
<unk> hundred and new logos are.
Composition of frankly.
And everything.
And that we had and.
I will give you a stat that.
You take a look at ACO.
75%.
And that's our ACO volume this past quarter with new logos.
My point about not being a donor and making sure we have a rounded solution.
That said that speaks volumes to them.
They also come from the large enterprise has clearly put 1700 youre not going to have a thousand and large enterprise wins, but as far as dollar value and significance it's actually.
Quite quite impressive and again the reasons why we had.
15 deals I believe it was over 5 million over 5.
$5 million representative of the largest and large enterprises.
They come from both the channel as well as from from direct so Theres, obviously as I've mentioned before we're seeing.
Demand across across all businesses here for us and in all geographies and I.
I will tell you we're not doing anything.
To.
Sometimes I use determined rent market share so where would you go crazy and you put a bunch of incentives in place and.
Order to our space.
But this on steroids here in order to try to pump your volumes were not doing any of that.
This is consistent and I think you can see it across the across the board. This is really around the products, it's really around our teams and our organization and our skills and I would say.
And maybe you could frame it as organic real growth versus <unk> growth.
And and that's exactly and that's exactly what we're doing and we haven't done anything.
Over the top.
2.
And I have something thats not grounded.
And it's not sustainable as we move forward.
Hey, This is Karen just 1 just 1 clarification. So Jim is right 75 per cent of the new customers were new logo. It's about 50 percentage of seats, our new logo, which is kind of consistent what we've seen the lessor and corners.
Yes.
Alright, thank you.
Yes.
And.
Yes.
And our final question comes from Rod Hall with Goldman Sachs. Please proceed.
Yes. Thanks for fitting me in guys just 2 quick ones from me 1.
You still have that.
<unk> amount of product sales and I'm, just curious a lot of supplies issues, where other companies selling hardware.
It'd be nice and you guys could comment on that what thats doing the underlying margins and.
The product part of the revenue and then also dsos.
Kind of elevated the last couple of quarters and I'm just curious.
You know what what you expect DSO trajectory to be into next quarter do you expect that to come down and.
Any other color you could give us on what's going on with the Dsos would be great. Thanks.
Yes sure. This is Jim I'll hit the supply channel, let Karen and the Dsos and the supply chain.
I have to give credit to Fred and his team as SVP in charge of supply chain, we have not had any disruption.
In fact, just the opposite we still continue to put the same percentage, which is a significant percentage of all our products on the ocean. We have been working with our supply base for years, and we have a very intricate.
Arrangement with our suppliers on.
Yes.
And how we manage our supply chain, so a real credit to our to our team. So we did not see any disruption last quarter.
Obviously.
So this quarter, we have not seen any disruption as we go out through September.
I don't foresee any disruption based upon what we're seeing in front of us with our demand profile with.
Balanced with our supply profile so.
Kudos to the extended supply and supply chain team, but I don't see any.
Any of that disruption affecting us this quarter.
This is Karen just 1 thing I'd add to Jim's point on the supply chain I would say, we did see and elevated cost of transport, but really didn't show up and our product margins just because of overall favorable favorable product mix.
Related to that so we're able to contain that through the mix relate.
Related to Dsos back to free <unk> team again, they continue to do a and outstanding job and collecting.
Our receivables on a very timely basis, we've been averaging pretty consistently 52 to 54 days over the last 10 quarters and we've seen no difference and that as we've talked about all along really the change and what we've seen from our cash collections is really just due to the model transformation change and nothing to do with the collective.
We're very fortunate, especially given the enterprise nature of our accounts to have a very credit worthy installed base.
Who pays their bills on time, so we really right now I'm not highlighting any any delinquent to DSO of any material amount.
Yes.
Great Okay and thank you.
Okay.
And have reached the end of our question and answer session I would like to turn the conference back over to Michael Mccarthy for closing comments.
Thanks, Sherry and thanks, everyone for joining us. This morning, we look forward to catching up with you over the next days and couple of weeks. If you have any questions directly please feel free to give a call or drop me an email and we'll look forward to touching base take care.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
[music].