Q2 2022 Avaya Holdings Corp Earnings Call
Greetings welcome to Avaya as fiscal 2022 quarter, two investor call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
And please note that this conference is being recorded.
I'll now turn the conference over to Ralph win. Thank you Sir you may begin.
Thank you operator.
I'll come to Avaya as fiscal 2022 second quarter Investor call.
Jim <unk>, our president and CEO and 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 them. This morning will be Stephen spheres, Chief revenue officer.
The earnings release, and Investor slides, which include highlights of our ESG initiatives and performance referenced on this morning's call are accessible on the investor page of our website.
As well as in the 8-K filed today with the SEC.
These should aid in your understanding of IX financial results.
All financial metrics referenced on this call are non-GAAP with the exception of revenue.
We've included a reconciliation of such non-GAAP metrics to GAAP in 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.
The global economy, and our business are being impacted by the Russia, Ukraine conflict and.
And related sanctions and export controls recently imposed by the U S U K and the EU on certain industries in Russian parties as a result of the conflict as well as responses about the governance of Russia or other jurisdictions.
In addition, COVID-19 continues to impact the global economy, and the extent of its continued impact on our business will depend on a number of factors all of which are outside of our control.
All these factors 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 our quarterly reports on Form 10-Q.
It was a vice policy not to reiterate guidance and.
And we undertake no obligations to update or revise forward looking statements that facts or circumstances change.
Except as otherwise required by law.
I will now turn the call over to Jeff.
Thanks Ralph.
Hello, everyone and thank you for joining today's call them.
I'm pleased to report of our second quarter results. This morning.
Let me begin by thanking our global team as they continue to exceed expectations and implementing and driving the strategy we've laid out.
We are delivering avaya, one cloud solutions to our customers at an accelerated rate and continue to make significant headway on our multiyear transformational journey to a cloud and SaaS business model.
It's important to highlight a number of key indicators of the progress of our transformation.
First is avaya, one cloud error, we drove record growth for this key industry K P. I with 130 million quarter over quarter increase and over $400 million year over year increase to $750 million.
To hit $1 billion <unk> Mark by the end of calendar year 2022 is well paved.
Recurring revenue reached a record for us growing from 66% a year ago to 69% in Q2.
This is a strong indicator that our focus investment and actions are paying off.
Third software and services as a percent of revenue came in at 89%.
Fourth 75% of new bookings came from Avaya, one cloud the first time, we reached that threshold.
And we had record private cloud bookings as well.
And finally, our caps metric ended the quarter at 54%.
Up from 40% a year ago.
These metrics serve as proof positive that we are successfully repositioning the company from our historic onetime revenue model to a recurring one hour.
Our strategy is taking hold faster than we had anticipated leading to a significant shift in our fundamental business model.
To summarize.
Enterprise digital transformation initiatives continue to push forward as companies look to avaya to help them transform their worker and their customer experiences.
The strength of our success with enterprise customers continues to fuel growth in our key cloud and recurring metrics.
95% of error comes from enterprise contracts greater than 100 K 60.
60% of those greater than 1 million a R. R and 20% comes from those greater than $5 million segment.
As further proof of our enterprise leadership, we once again signed approximately 100 deals with over $1 million in T. C. V 18, greater than 5 million eight greater than $10 million and we had two deals worth over 25 million T. C V, including one that was greater than $70 million.
We haven't discussed seats in some time, but it's noteworthy that we booked over 3 million seats to Avaya, one cloud this quarter, which underscores our success migrating customers at a faster rate than we predicted.
I cannot be more delighted with how far we've come in such a short time.
While the underlying momentum of our business remains very strong revenue and profitability did not meet our expectations for the quarter.
Primarily due to two dynamics.
Our record a R. R is a reflection of the shift away from onetime in point in time revenue to recurring revenues.
This rapid adoption by our customers now, including government as well had an impact on our top line.
While this shift is consistent with our strategy and business model. It is also occurring faster than we projected.
As we look at total bookings, 72% this quarter came from Avaya, one cloud solutions compared to 58% last quarter and 37% a year ago.
We estimate this shift had a 40 million dollar impact on revenue for the quarter.
As a result.
Of the increase in recurring contracts there are a couple important points to make first revenue isn't lost it as one business and will materialize over the life of these long term contracts.
Our cloud business is obviously healthy and growing and this is consistent with our strategy and indicative of the accelerated chapter in our business.
Second.
Avaya has a significant customer base in Russia, The war in Ukraine, including the sanctions on Russia and the overhang on the rest of Europe is beginning to create top line pressure.
The impact on operations reduced revenue by roughly $5 million for the quarter.
Karen will provide additional detail on both dynamics and their impact on the second half outlook in a few moments.
Now I'd like to emphasize some key performance highlights that will further demonstrate the underlying strength of our business.
You want cloud <unk> is our most important performance metric it holistically measures. The overall strength of our cloud portfolio, whether delivered any hybrid private or public model.
Our one cloud AOR grew 21% sequentially and is up 118% year over year.
In addition, we yet again signed over 1400, new logos this quarter.
There is no better proof that avaya is well positioned to be the brand of choice for digital communication solutions.
This impressive growth underscores the strength of our solutions and the commitment of our customers as we move them to cloud based solutions.
Let me share with you a couple of key customer wins.
Watson clinic based in Florida, So it's almost a million patients every year. They chose Avaya cloud office to replace an aging Siemens platform for the 3600 users across 15 locations. This new customer selected avaya because of the ease of centralized management.
Integration between sites and expansion of channels to include voice video chat and conferencing.
Another win was finance informatica.
The central service provider for savings banks in Germany.
They chose a private you see cloud platform powered by Avaya technology to support 313 banks, representing 230000 seats with 2 million calls per day.
Moving to Avaya on one cloud see Cas.
Our deliberate approach to building out C caps capabilities with geographic expansion and partner enablement.
Continues to yield the results we expect.
We set out to deliver differentiated <unk> solutions with the flexibility of public private or hybrid deployments in order to monetize inactivate or massive contact center installed base and we're doing exactly that.
The deal we signed with life insurance company of Alabama is a perfect example of Avaya C caps capabilities, winning new business.
They chose to move to a public cloud C cask solution to solve for their numerous legacy technology challenges. The solution allows flexibility for employees to work remotely while having access to all the same tools. They would have if they were in the office.
We also saw continued momentum for private see Cas in Q2, we had one of our strongest booking quarters to date.
Yeah.
One example is the top insurer in the U K that is moving to a private cloud to accelerate their business transformation.
They also needed to effectively support at home work requirements, along with having the capability to flex to 5500 agents during peak business periods.
You've heard me talk about the importance of revised partner ecosystem.
Two our growth plans and the importance of gaining additional market reach through such relationships I'm excited to announce that just in the past two months, we have signed two new global strategic partnerships.
Both will be real needle movers for our business in particular, our sic has offerings.
First I'd like to touch on Alcatel Lucent enterprise.
Through this partnership Aley will offer Avaya, one cloud C class, including our AI identity management security and workforce engagement management capabilities to their global base of nearly 1 million customers in over 50 countries.
The teams are making great progress on enablement and we expect this to result in new revenue streams for us as early as the start of our fiscal Q4.
The second is with Microsoft.
As you may have read in the press release, we announced a significant expansion of our partnership which goes well beyond just the go to market effort focused on <unk>.
There were three key pillars to this agreement, including working directly with Microsoft to more rapidly move private cloud customers to the use of our platform.
Joint co selling efforts to move current premise based customers to either a hybrid or a pure cloud model and thirdly see Cas is available in the Microsoft Azure marketplace, and collaboratively sold by Avaya and Microsoft sales teams.
Although in the early innings, it's relationships like these that show the global strength of Avaya, one cloud portfolio and reinforced my confidence in our ability to successfully execute on our overall cloud strategy.
Well see Cas solutions are indispensable to organizations customer experience strategies, we believe avaya one cloud C pass represents the leading edge of collaboration for digital communications.
In addition to helping customers see.
<unk> speed deployment of highly differentiated capabilities C pass provides the flexibility for customers to customize and build their own applications and integrate them to our platform and.
And our most significant C pass deal to date.
The University of Iowa hospitals, and clinics Joseph I S. C pass capabilities to enable 25000, Ucas and 750 C. Catch users. Our C pass is helping them to provide superior patient service a robust resiliency strategy further sites and improve.
<unk> for their students and employees.
A second example, underscores the flexibility see pet springs with Carter machinery.
Or is the third largest caterpillar dealership network in North America based.
They selected Avaya cloud office integrated with our one cloud see Cas device as a service and C pass virtual agent and a five year deal that will reach more than 2000 users across 34 sites.
This was a competitive win for via displacing Cisco.
Avaya as full suite of solutions are vital to our global installed base.
Capabilities, we bring to the table the differentiation, we unlock along with the value we provide to customers are keys to our continued success.
To these the strength of our brand our partner ecosystem and our global reach and it's fair to say, we have a unique ability to service the world's leading and most complex enterprises at scale.
And it explains why customers are choosing to buy it.
We have increased confidence in the momentum of our business, we are committed to delivering business impacting innovation, maintaining our competitive edge.
And we continue to focus on the long game investing in growth drivers and doing so profitably.
Now, let me turn it over to Karen to take you through the details along with an update of our guidance for the year.
Thank you Jim Good morning, everyone. As a reminder, all figures mentioned during this call are as reported unless otherwise indicated in constant currency.
Our second quarter marked a significant inflection point in the overall acceleration of our transformation.
The first time ever of Iris total contract value of one cloud bookings represented over 70% of <unk> total solution bookings. This is further evidence that our customers are rapidly migrating to a cloud opex model.
One very positive outcome from this performance is that the second quarter marks a milestone in the expansion rate of our recurring revenue base represented by our one cloud era or K P. I.
As Jim noted in his remarks, we generated $130 million of new E. R ending the quarter with a balance of $750 million and we are well positioned to achieve our calendar year end target of $1 billion of a R. R.
The $750 million or one cloud error represents 21% sequential growth and 118% growth year over year.
This was primarily driven off of a record subscription GCB bookings of $328 million.
Of those subscription deals that came from a maintenance migration, we continue to realize a very healthy 20% uplift on those contracts as clients continue to gain value from our robust one cloud subscription offerings.
Additionally for the second quarter in a row, we added over 200, new logos subscription customers.
Equally significant our one cloud public and one cloud private new bookings was especially strong in the quarter, reflecting growth of over 60% sequentially and up over 80% year over year.
Shifting to revenue Q2 revenue of $716 million was below our guidance due to two primary reasons.
First in spite of a record one cloud subscription bookings.
Senator of revenue recognized in the quarter from those subscription bookings was lower again this quarter.
It is important to note that this revenue is not lost.
Instead, it will be recognized in future periods.
Let me provide a little more color.
In Q2, we processed 681 cloud subscription deals.
The overwhelming majority of these deals were standard deals, which generated the expected point in time revenue contribution, which is roughly 60% of the total contract value taken at this point in time revenue in the current quarter.
However, a handful of deals impacted our in quarter revenue recognition by approximately $40 million versus our model and versus Q2 guidance.
For example, there were two large deals within the U S. Federal government, which included annual physical funding appropriation clauses.
This limited the contract value eligible for point in time recognition to only the current year as opposed to the multi year value.
The impact of these two contracts was almost half of the $40 million impact we experienced in the quarter.
Please note that in these two cases there.
Deferred revenue for the right to use license in future years will be recognized annually upon reaching each contract anniversary.
The second revenue impact versus our guidance was related to the crisis and conflict in Ukraine, which impacted our Q2 revenue in eastern Europe by approximately $5 million.
This is expected to have a much more significant second half impact to our wireless business due to the announced sanctions and the adverse economic conditions created in eastern Europe .
Getting deeper into the numbers for.
For the second quarter of our fiscal 2022 revenue was $716 million down, 3% as reported and 2% in constant currency against the $738 million as reported in the year ago period.
Revenue contribution from caps, where cloud alliance partner and subscription represented 54% of total revenue up 10 percentage points sequentially and versus 40% in the year ago period.
For our second fiscal quarter recurring revenue accounted for 69% of total revenue.
While software and service revenue represented 89% total revenue.
Subsequently software revenue our newest kpis as a percent of total revenue came in at 67%.
Turning to our gross profit metrics.
non-GAAP gross margin was 56, 7% in the second quarter compared to 61, 8% in the year ago period and down almost one point sequentially.
Product margins of 46, 6% were impacted by the fact that we saw a much larger portion of our software revenue generated through subscription hybrid agreements, which sit in our services segment.
Hardware margins within product was slightly improved over last quarter continued to be pressured by industry wide supply chain impacts.
Services margin came in at 61, 3% up almost a point quarter on quarter due to increasing subscription revenue contribution.
Turning to total profitability margin and cash flow metrics for the quarter.
Second quarter non-GAAP operating income was $115 million, representing a non-GAAP operating margin of 16% down 400 basis points year on year.
Adjusted EBITDA was $145 million, representing an adjusted EBITDA margin of 20% down 370 basis points year on year, primarily due to the previously mentioned point in time revenue dynamics and lower product gross margins.
non-GAAP EPS was <unk> 53 cents in the quarter compared to 74 cents in the year ago period, and 42 sequentially.
Cash flow from operations was negative $2 million contributing to second quarter, ending cash balance of $324 million.
As discussed at our Investor day cash flow continues to be impacted by our transition to subscription and the cloud where customers paid cash overtime versus primarily upfront capex licensing model.
Consistent with the transition acceleration contract assets, which largely reflect deferred billings continues to grow rapidly from $664 million at the end of Q1 to $771 million at the end of Q2.
The addition of $107 million is the largest quarterly contribution to date.
And represents a strong pool of future billings and cash collections from Avaya.
In the quarter cash flow from operations was aided by a restructuring of our interest rate swap contracts, which extended our interest rate protection for an additional three years now extended to cover the periods from 2024 to 2027 and resulted in net cash proceeds of $52 million.
This is the most recent in a series of actions taken by a buyer over the last two and a half years to strengthen our capital structure and enhanced our financial flexibility, including the measures taken to improve our weighted average debt maturity profile.
We are also currently evaluating options to boost liquidity and to address the convertible notes, which come due in June of 2023.
Now turning to guidance.
Please note that all year on year revenue changes are expressed on a constant currency basis, and all revenue amounts reflecting rates as of April 32022.
In terms of our forward looking one cloud are our metric we are increasing our guidance for the full year and now expect to end fiscal year 2022 between 940 and $960 million.
At the midpoint this represents growth of 79% year over year.
This expectation we are firms that previously committed target of exiting the 2022 counter here with one cloud are are at or above $1 billion.
Turning to revenue, we expect full year revenue to be between 2.815, and $2 85 5 billion.
This is year on year revenue declining between minus five and minus 4% on an as reported basis.
And down minus four to minus 3% on a constant currency basis.
At the midpoint. This represents a reduction of $165 million in annual revenue from our prior guidance.
Roughly two thirds of this change can be attributed to an accelerating shift to the one cloud portfolio a more recurring revenue model and one third to the crisis and eastern Europe .
Which also includes the impact of the strengthening U S dollar.
For the third quarter of fiscal year 2022, we anticipate revenues of 685 million to $700 million, which at the midpoint represents constant currency decline of about 4%.
Or down 5% on an as reported basis.
We expect full year, adjusted EBITDA to be between $580 million and $600 million.
The reduction from our prior full year adjusted EBITDA guidance of $680 million to $700 million, primarily reflects the impact from the lower fiscal 2022 revenue.
Please note that given the increasing velocity of the transition to one cloud and the macroeconomic conditions in eastern Europe , we are taking immediate actions to adjust and align our operating structure.
This is evidenced by our guidance, reflecting an approximate three percentage point improvement in second half fiscal 2022, non-GAAP operating profit and adjusted EBITDA margins compared to the first half levels.
At the midpoint this implies a 21% adjusted EBITDA margin for fiscal year 2022.
We expect non-GAAP operating margin for the fiscal year to be approximately 17%.
For the third quarter non-GAAP operating margin is expected to be between approximately 16 and 17 per cent.
And our adjusted EBITDA to be between 140, and $150 million or between 20 and 21% of revenue.
We expect non-GAAP EPS for the full year to be between $2.09 and $2 25. This.
This compares to $3 16 in the prior year.
For the third quarter, we expect non-GAAP EPS to be between 48 and 56 cents.
This compares to non-GAAP EPS of <unk> 75 in the year ago period.
Due to the combination of the full year reduction in revenue and the rapidly accelerating shift to one cloud and away from traditional Capex license sales were cashes received overtime versus primarily upfront.
We are reducing our expectation for full year fiscal <unk> to be approximately negative 7% of total revenue.
We expect to maintain quarter in cash balances in the $253 million range.
With that I would now like to turn the call back to Jim Jim.
Yeah.
Thank you Karen.
I'll wrap by saying that the significant progress we saw this quarter signifies our strategy is taking hold and this shift is reflected in our revised second half guidance.
Our transition is forging ahead, and we are showing solid tangible results were.
We are taking action and it's very difficult environment to serve our customers, while continuing to invest in innovation.
No one could have predicted the rate and pace at which we are moving to the cloud as you're moving quickly to fortify our position.
Excited about <unk> future and even more excited about our team's ability to deliver on the opportunity in front of us.
Before we open it up for questions, let me end by saying that our thoughts and prayers.
Go out to all those who are impacted by the Russia, Ukraine War.
<unk> customers partners and many team members throughout Europe , including Ukraine and Russia.
The devastation is truly sobering.
Operator.
Let's open it up for questions.
Thank you Sir at this time, we'll be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing any starches.
We ask that you limit yourselves to one question and one follow up.
One moment, please when we poll for any questions.
Our first question comes from the line of Ryan Macwilliams with Barclays. Please proceed with your question.
Thanks, taking the question.
Kieran on some of the conservatism you're baking into the full year guide in regards to potential EU headwinds are you seeing longer sales cycles or weaker pipeline or any hesitancy in your customer conversations or was this guidance, mostly based on impacted customers in that region.
Yeah. So for starts I mean, youll see when we we issue our Q Tonight.
We're seeing a big hit obviously with the sanction companies either in Russia. So we first and foremost of the $60 million that we're attributing to the impact.
To our full year revenue guidance coming from from.
The conflict in Ukraine $45 million of it is coming out of Russia itself and essentially it's from customers some of which are like Sberbank there've been sanctioned and we can no longer take revenue from those customers. We can't do business with them and then there's about $15 million that we are seeing mostly in eastern Europe , but actually in some western European countries as well where there is.
As a re prioritization of investments and just a slowing of cycle in those areas. So of the $165 billion with the midpoint.
Midpoint revenue change that we put out $60 million of it is coming from the conflict in Ukraine, and 45 of that is directly identifiable to Russia.
Yeah.
I appreciate the color. Thank Kieran life's earnings you mentioned some deals that were pushed out of the first quarter did you see those deals closed in second quarter and I guess, how did that impact results from this point. Thanks.
Yeah, we had about $10 million that pushed last quarter of which one was about $6 million from one of our large defense contractors, we actually close that deal early in early in our second quarter. So that had no impact on the quarter.
You said the color thanks, guys.
Thank you. Our next question comes from George Sutton with Craig Hallum. Please proceed with your question.
Thank you one of the things that I think sounds like a change quarter over quarter is that the government is getting more aggressive in moving to the cloud and that does it.
Change some of the dynamics of your business can you just walk more specifically through that government dynamic.
Yeah, Hey, George this is Jim and good morning.
Youre spot on.
We saw a pretty big uptick in Q2 and in fact, we expect to see continued strength as we go through the balance of this up this fiscal year. So we.
We had a.
A number of new of new wins, and frankly, as Karen pointed out pretty significant T. T V.
You know obviously based on the annual physical funding requirements, we're really only allowed to take one year.
One year of overall revenue.
The other important thing to notice these are mostly five year deals as well so based upon the anniversary date, obviously that revenue will come due in.
80% or so of that.
Uh huh.
So yes.
We're pretty excited with the uptick the teams are doing a really nice job and it's for both by the way subscription as well as private.
And we're seeing this both in the fed as well as in sweat as well.
Understand okay.
Relative to your two global partnerships that you announced I wondered if you could give us some picture of the significance that those might have been in your next fiscal year.
Yeah. So obviously those are two key deals both with Microsoft and Eileen as I pointed out.
Really sort of solidifies the work that we've been doing within our R&D organization.
Really bringing <unk> to.
The market at a very thoughtful thoughtful pace.
I believe we'll start to see some revenue.
Revenue in fairness.
Fourth quarter of this fiscal year.
As far as with Microsoft.
Much more involved engagement frankly, so my expectation is you'll probably see that start to really take hold as we go into the fiscal year 2023, we have.
A lot of work going on with <unk> with Microsoft both there.
Sales folks selling of <unk> as well as the partnerships around doing some work with those guys as far as hosting our private and public cloud solutions, So where.
We're pretty excited about where we are even though it's very early with Microsoft.
The engagement.
<unk>.
It's actually been then outstanding so.
To the Microsoft team and the team here, we're really building out the sport.
So on the side of it I think George we really feel very strongly that the capabilities that they have in terms of delivery will really help us accelerate especially as we're launching a lot of these very large private cloud deals that we've seen so leveraging all the expertise that they have combined with our own in depth knowledge of the contact center side of the house really.
I really think this will help us as we go through time to really monetize a lot of these big deals I'm sorry.
Yeah.
Perfect. Thanks, guys.
Yeah.
Thank you. Our next question comes from Lance Vitanza with Cowen. Please proceed with your question.
Hey, Good morning, this is Jonathan on for Lance.
The first one is on a R.
How much of the improvement come from Mexico.
Let me in migration and new wins.
The bulk of the bulk of what we're seeing in terms of raw dollars.
Bill coming from our existing customer base. So migrations, if you will but if you recall in mind, where you noted in my comments, we talked about having 680.
Subscription transactions in the quarter almost 240 of those actually came from new logos now. The difference is many of these new logos come at a relatively smaller landing size and then you would you adapt you upsell you renew the traditional air model in that regard so while the dollar has been primarily.
<unk> driven and the quantity overall by migrations, we are seeing over the last several quarters and increasing comp.
Really contributions coming from new logos as well.
Understood.
And my last one.
Given that the converts are due within a year can you walk us through what the company is.
Thinking like what is your plan to address it.
Sure. So I mean, obviously, we're well aware that in June of 'twenty, three we hit the 350 million convert coming due.
Working with our banking colleagues.
To address to address the convert.
We expect to actually act here in the reasonably near future.
Doing that I should also just also point out that we also have the ABL of $100 million to $150 million that we also have on hand to leverage it but I think that we should be able to address the prepay.
Prepayment of the convert if you will of the pre funding of the convert.
Coming up in the next in the next several months.
Got it okay. Thank you.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue.
Our next question comes from the line of Ahmed cohorts on would be Ws financial. Please proceed with your question.
Good morning. My first question is just on the ability to have clarity in this business model that you're going more and more into cloud.
If youre going with our cloud first sales approach.
Wise.
What was your projections always faltering as when you report quarterly results.
Why why can't you have a stable outlook.
So let me this is Jim let me.
So first as Karen pointed out.
A couple of dynamics first one about what's going on obviously.
Ukraine.
It had a negative effect on second half, but I think your question is.
It's more about what's going on and why haven't we done a better job predicting if you will the acceleration.
And how is that affecting the overall revenue performance of the company.
Let me address that second.
And that's the migration of our customer base as we pointed out is accelerating faster.
If you take a look at the.
The bookings growth for the quarter and you take a look at it private cloud and subscription.
In fairness, we had record growth in both of those areas for the company.
When you dig into private cloud.
Yes, as we pointed out obviously the work that we're doing with Microsoft and others and bringing on the Activations now at an accelerated rate because the bookings increase.
We believe we're over that hurdle, there's some optimization work we need to do in those revenues.
Q3 and Q4.
But really what's driving that $40 million in the second half is subscription.
And the fact is that as you take a look at subscription.
The point in time revenue that we recognize.
Much lower.
And that's specifically related to the large deals and in fairness to strength that we have an enterprise.
And as you look at that.
Deals of this magnitude.
More times than not it's not unusual to have increased contract flexibility as part of the solution for the contract.
We've learned this over the last couple of quarters in fairness as we've been accelerating the move to cloud and as I mentioned we.
We had record bookings last quarter.
So we saw that hit us a bit if you will in the first quarter and as we pointed out here rather significant.
Point in time decrease not an overall revenue decreased just that that revenue is now ratable over the life of the contract at that point in time. So we had historically has had roughly around 60% or so ability to recognize that revenue within quarter going forward, we've taken that percentage.
Now aligned it more to the larger deals and really what we're seeing as far as some of the flexibility we need in these larger contracts and what would that percentage down to the lower 50% range.
So that has had a result.
Lower revenue attainment.
Again revenues that are not lost but just a rebalancing of the portfolio and the profile moving further as we develop as we continue to increase our overall recurring revenues as a percentage of.
Revenue.
Revenue profile so.
It's really more of a reflection.
Well the flexibility we're building into these long term contracts with our enterprise customers, but not not a lawsuit.
We've taken.
<unk> taken it we've rebalanced that we repositioned it and.
And that's what the guidance update.
Take care and provided to you.
Okay. Thank you I think.
I, just maybe I could just add one other point, which is.
If this had been if this Mike migration for US has been done.
<unk> 606, this would have a much more predictable much easier transition.
Because you were not going to have all of this point in time related to these longer term subscription and cloud side.
Applications.
I know you've got to understand we need to get a better arm around that and I think we have well.
If you will.
Two quarters in a row now who we see lower realization rates, that's what we built into our models going forward.
The real point here is that we are signing significant deals on these scripts and hybrid contracts as well as in our public and private clouds.
There will start to rollout as we go through time, you will see much more of our business become more ratable and less at this point in time fluctuations. So you'll understand that we need to do a better job of getting insight into this.
You know what I do think the 606 accounting this is.
Unnecessarily complicated things with vegetables, we've got to look like.
Okay, great. Thank you.
Yeah.
Thank you we have reached the end of the question and answer session I would now like to turn the call back over to Ralph for any closing remarks.
Okay, well. Thank you everyone for joining us this morning for our second fiscal quarter Conference call. We look forward to speaking with you all again soon and have a great week.
Yes.
Yeah.
Thank you everyone that does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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