Avaya Holdings Corp.

Greetings and welcome to the fiscal first quarter 2021 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Michael McCarthy, Vice President of Investor Relations. Please go ahead, sir. You may begin.

Thank you, and welcome to Avaya's fiscal 2021 Q1 investor call. Jim Cherico, our President and CEO, and Karen 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 Anthony Bartolo, our Chief Product Officer, Stephen Spears, our 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 our remote locations. The earnings release and investor slides referenced on this morning's call are accessible on the investor page of our website, as well as in the 8K file today with the SEC, which should aid in your understanding of Avaya's financial results. All financial metrics referenced on this call are non-GAAP with the exception of revenue, which we will report on a GAAP basis now and going forward since it's now comparable on year-on-year GAAP basis due to the immateriality of past Fresh Start accounting adjustments. We have 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 and forecasts and assumptions, which remain subject to risks and uncertainties that could cause actual results to differ materially. In particular, the global economy continues to be impacted by COVID-19, and to the extent it's continued impact on our business and that of our customers, partners, and suppliers will depend on a number of factors that include, but may not be limited to, severity and duration, as well as actions taken or not taken by governments, businesses, and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. Information about risks and uncertainties may be found in our most recent filings with the SEC, including our Form 10-K. It's a biased policy not to reiterate guidance, and we undertake no obligations to update or revise forward-looking statements in the event facts or circumstances change, except otherwise required by law. I'll now turn the call over to Jim.

Thanks, Mike. Good morning, everyone, and thank you for joining the call today. I'm excited to share Viya's Q1 results and provide the details and color on what is an exceptional start to our fiscal year. Building on the momentum we created in 2020, we emerged even stronger. We delivered our third consecutive quarter of year-over-year revenue growth and exceeded our guidance across all metrics. Our success reflects the team's commitment to execute the strategy We put in place three years ago to transform Avaya to an enterprise leader in cloud-based communication and collaboration solutions. Avaya's strategy has put us ahead of the curve in helping customers through their digital transformation journeys and work from anywhere initiatives. These significant and lasting changes to the way we all work have been accelerated and amplified by today's operating realities. It's clear. customers are increasingly choosing us to help shape and power them along their journeys. And it's equally clear our expertise, scale, global reach, breadth of solutions, and innovation at the edge are key differentiators as to why they are turning to Avaya. We have worked hard and structurally improved the business on a number of fronts, and it shows in our numbers. We've executed on a series of important initiatives and focused our efforts time, and investments to redefine Avaya as a cloud company. To gauge our strength in cloud, just last quarter we announced that we would be reporting ARR as a key performance metric, a watershed moment for the company. In Q1, ARR was up 38% sequentially. That represents growth of over 70 million, and our total ARR now stands at over 260 million. And while we saw ARR growth across all areas of the business, Contact Center, in particular, was a significant driver, increasing 44% sequentially. Secondly, revenue from our cloud alliance partner and subscription growth engines, i.e. CAPS, has more than doubled from a year ago. ending the quarter at 34 percent of total revenue. This is remarkable progress in just one year, and CAPS remains on track to be a billion-dollar business by year end, further proof we are on the right trajectory. Third, our success is not just from activating our massive base. In fact, Q1, we signed over 1,600 new logos, displacing a significant number of competitors. What's especially noteworthy is the mix shift to new logos consisting of cloud and subscription. In Q1, 40% of new logos were cloud and subscription, an increase of 29% from the prior quarter. Our ability to assign new customers in a highly competitive market underscores the advancements we made, and our investments in new solutions will continue to contribute in a bigger way each and every quarter as i look ahead what gives me confidence in our ability to drive sustainable growth is the improvement we see in overall bookings bookings are a leading indicator and represent the traction in our new solutions and services total bookings have grown sequentially in each of the last four consecutive quarters a via one cloud which includes public private and hybrid solutions has more than doubled during this period. Contact center remains particularly strong, and I'll share more in a moment. I also want to take a moment to emphasize an important distinction regarding Avaya as we execute on our transformation. We are built for profitable growth, and through disciplined execution, we continue to drive high margins even as we execute the transition from a product and perpetual business model to a recurring one. To sum up this quarter, we delivered adjusted EBITDA at $190 million or 25.6% of revenue, up approximately 10% from the prior year and above our guidance. And we finished with solid free cash flow and a strong cash position. Having worked through these unprecedented times over the past many months, The Avaya team kept its eye on the ball, met challenges and opportunities head on while staying true to our strategy. As a result, our investments in innovation are paying off. We are delivering significant value to our customers, and our ecosystem of partners is a real differentiator. Our growth is broad-based and leverages our strength in the enterprise across new and existing customers, across new solution areas, as well as core. and in particular, in cloud and subscription. What is even more encouraging is that our solution portfolio has many unique attributes versus others in our industry. And while we have a number established solutions and products that will prove out for many years to come requiring minimal investment, we also have a very significant and attractive portfolio of new technology and solutions and growth factors like cloud, AI, and CPaaS. This richness of offers, flexibility, and capability to deliver at scale provides us the ability to win now and well into the future. I'm proud of how far we've come, of the rate and pace of continued progress across the business, and could not be prouder of the team's execution. Based on our continued positive momentum, We are increasing our full-year guidance across multiple key metrics, including revenue, ARR, profitability, and cash flow. Karen will provide the specifics. Moving on to the details of the quarter, let me share some performance highlights from several key growth areas where we placed significant emphasis and investment. They are bearing fruit, and I'm pleased with the progress. A biased contact center business is generating strong growth. Total contact center bookings have grown sequentially over the last four quarters and are now up 40% on a trailing four-quarter basis. Q1 was our highest bookings quarter for CC in four years. CCAS was a major growth driver, and our new public CCAS offering is live now in the U.S., U.K., and Ireland. and we are rolling it out to more than a dozen countries throughout the year. We also continue to expand the solution by adding omnichannel and AI capabilities that are reshaping agent and customer experience. Initially launched as a direct offer, momentum is increasing for CCaaS as we activate the channel to sell. Just yesterday, we announced the addition of two key partners in the U.K., who will start selling immediately. Our growth trajectory in both public and private cloud CCaaS represents significant future value for our customers, Avaya, and our shareholders. A recent win with United Biosource, a leading provider of pharmaceutical support service, highlights this value. UBC is deploying our AI-based conversational intelligence cloud into their on-site contact center as a hybrid cloud enhancement initial use case included natural language processing to extract key phrases from patient inquiries which improves resolution time and provides improved customer experience and quality of service our ability to deliver contact center solutions coupled with ai particularly in a hybrid environment sets avaya apart from pure cloud players in fact private and hybrid cloud provides the flexibility security and optionality our enterprise customers require only avaya offers customers the best of both premise and cloud deployments private cloud bookings alone in the quarter represented 131 million dollars of tcv sendler the nation's leading loan service provider needed a path to the cloud as they migrated away from their on-prem infrastructure. They concluded that Avaya offered a more comprehensive and integrated UC CC solution to meet their performance requirements and expansion plans. And not only are we leading their migration to private cloud, but we are helping to improve agent productivity, customer experience, and to streamline their multi-vendor environment to Avaya. A third growth area, CPaaS, is an increasingly powerful differentiator for Avaya. CPaaS spans our UC and CC portfolio, enabling customers to more easily innovate at the edge of their network. Avaya CPaaS has become a CCaaS force multiplier, accelerating the ability to customize and add new applications, unlocking value and putting the power of innovation directly into the hands of our customers. One such customer is American Equity Investment Life Insurance Company. Using Avaya's CPaaS platform, they are enhancing their existing notification services and cloud IVR capabilities. They plan to stream metadata and transcriptions to their in-house data lake for further analytics by utilizing Avaya's conversational intelligence. CPaaS solves incredibly complex and compelling use cases without the complication of burdensome integration and investments in expensive and protracted customizations. A significant point of pride for our team is how we put Avaya CPaaS capabilities to work in the battle against COVID-19. Our solutions enable contact tracing, faster access to vaccinations, and help organizations of all types more effectively handle an exponential increase in digital interactions. For example, Nebraska Medical used our CPAS platform to help manage the enormous shift in patient interaction types early on in the pandemic. Now they can easily and rapidly adjust their processes and workflows to provide direction on COVID-19 testing and vaccine administration. As the world continues to combat COVID-19, we stand at the forefront. delivering capabilities that power life-saving apps, notifications, and the work-from-anywhere solutions that have become our way of life. Avaya Spaces, our Workstream collaboration solution, is leveraging our CPaaS platform and continues to gain traction and is a key element of our UC&C strategy where it will serve not only as the digital workplace for our enterprise customers to communicate and collaborate internally, but it will form a basis for a more collaborative customer engagement. This rich collaboration platform provides more than just video. It's voice, messaging, and team rooms. A great example of the scale and capability of Spaces was its deployment at Jitex last quarter. Jitex is the largest technology event of its kind, and the Dubai World Trade Center chose Avaya Spaces to enable conference experiences for over 30,000 virtual attendees from over 30 countries, engaging with 350 companies, sponsors, and exhibitors. Shifting gears to Avaya Cloud Office, customer demand continues to grow. The number of ACO customers grew approximately 80%, and seats more than doubled in just one quarter. Our pipeline continues to improve, and we sign deals in all of the 12 countries where the solution is available and our partner ecosystem is expanding. Also in the December quarter, we nearly doubled the number of 100 plus seat deals booked compared to the previous quarter as we see strong customer interest in larger deployments. Moving to subscription, we continue to perform well ahead of expectations. Launched just one year ago, we have signed a total of approximately $565 million of subscription TCV. These contracts are longer in duration than maintenance deals of the past, add significant innovation, and move customers to the latest core technology. Equally important is the growth we are seeing internationally. We are also seeing significant success using subscription as a new customer acquisition tool. In Q1 alone, we signed over 325 subscription deals, of which over 20% were with new customers. Before turning the call over to Karen, I'd like to add a last bit of color on customer wins with a particular focus on how we are competing in the large enterprise segment. The foundation of our business is built on delivering a highly differentiated set of capabilities that service the world's largest companies and governments. The complexity and scale that we can handle and the experience, innovation, and breadth that we bring to bear is unparalleled. Our commitment to large enterprise customers continues to yield amazing results. In Q1, we signed 119 deals with a TCV greater than $1 million. Fourteen of these deals were greater than $5 million and six were greater than $10 million, with three deals over $25 million of TCV. We are proud of our ability to deliver innovation at this scale and to some of the world's most well-known and trusted brands. With that, I'll turn it over to Karen.