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spk07: 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.
spk12: 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.
spk04: 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.
spk00: Thank you, Jim. Good morning, everyone. As a reminder, all figures mentioned on this call are as reported unless otherwise indicated in constant currency. For the first quarter of our fiscal 2021, GAAP revenue was $743 million. This represents year-on-year growth of 4% as reported or 3% in constant currency over the $715 million in the year-ago period and compares to $755 million in Q4 of fiscal 2020. We delivered our third consecutive quarter of year-over-year revenue growth. We continue to deliver on our aggressive ARR commitments in Q1. Our one cloud ARR metric exited the quarter at $262 million, which represents 38% in sequential growth. We couldn't be more pleased with the consistent execution our teams are delivering across the globe. A standout in this performance comes from North America, which has now turned in four consecutive quarters of year-over-year growth. Overall, our revenue and ARR momentum is fueled by our strong suite of subscription and cloud offerings, and we continue to see an increasing share of our quarterly revenue streams and ARR being driven by Contact Center. Revenue contribution from caps or cloud alliance partners and subscription, a strong indicator of the transformation of the business, represented 34% of total revenue, up from 33% in 4Q 2020. Our sequential quarterly increase includes Avaya Cloud Office, ACO, which experienced very strong quarter-on-quarter seed growth. In dollar terms, CAP's revenue doubled year-over-year. For our first fiscal quarter, recurring revenue accounted for 65% of total revenue, an all-time record high for the company. Meanwhile, software and services revenue continues to represent 88% of total revenue. Both of these metrics reflect the strength of Avaya's cloud and subscription offerings, delivering year-on-year growth for the third consecutive quarter. Turning to our gross profit metrics, non-GAAP gross margin was 61.8% in the first quarter compared to 61.5% in the year-ago period and 61.3% sequentially. The gross margins achieved at this level have been a direct result of our transitioning our offering base to high-margin recurring subscription software, which is accounted for as part of our services segment. Turning to total profitability margin and cash flow metrics for the quarter. First quarter non-GAAP operating income was $163 million, representing a non-GAAP operating margin of 21.9% of 80 basis points year-on-year. Adjusted EBITDA was $190 million, representing an adjusted EBITDA margin of 25.6%, up 130 basis points year-on-year. An improving mix of higher value, higher margin software, combined with operational discipline helped produce these strong results. It is this discipline that provides us the financial flexibility to increase our investment in R&D, to enrich the value of our cloud portfolio, and to build out our channel ecosystem. Beginning this quarter, we are introducing non-GAAP EPS in our reporting. This aligns Avaya with the broader software industry and underscores our focus on profitable growth. In our investor presentation, you will find slides that describe the key assumptions on how our non-GAAP earnings per share is calculated. We are bringing forward this metric as the non-GAAP reconciliation is now noticeably simpler for the fiscal years 20 and 21 period compared to fiscal years 18 and 19, during which fresh start accounting made year-over-year comparisons rather complicated. It should also be noted that for non-GAAP EPS calculation purposes, we are effectively including RingCentral's approximately 8 million preferred shares in the calculation. We will provide non-GAAP EPS guidance on both a quarterly and fiscal year basis going forward. Non-GAAP EPS was $0.90 in the first quarter, compared to $0.61 in the year-ago period and $0.93 sequentially. Turning to cash flow, we generated $48 million in cash flow from operations, or 6% of total revenue, contributing to a first quarter ending cash balance of $750 million. We are putting our strong cash position to work and plan to pay down $100 million of our existing December 2024 term loan balance in the current quarter. Furthermore, this morning we are also announcing our intent to extend maturities of the remaining balance of the December 2024 term loan. We expect to conclude this transaction before the end of the month. We are strengthening our capital structure by paying down debt and further improving our weighted average debt maturity profile. Now, turning to guidance for 2Q21 and full-year 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 January 31st, 2021. For the second quarter of our fiscal year 2021, we anticipate revenues of $710 million to $725 million, representing growth of just over 5% year-on-year at the midpoint. We expect non-GAAP operating margin for the second quarter to be approximately between 19 and 21%, and our adjusted EBITDA to be between $160 and $175 million, or between approximately 23 and 24% of revenue. We expect non-GAAP EPS to be between $0.70 and $0.82 for the quarter. This compares to non-GAAP EPS of $0.57 in the year-ago period. Building on our expected strong first-half performance and momentum, we are increasing our full-year fiscal 2021 revenue guidance to between $2.90 and $2.94 billion. This represents growth of 1% to 2% at current FX rates, and the midpoint represents approximately 1% revenue growth as measured in constant currency. Additionally, given this momentum, we now expect one cloud ARR will exit the current fiscal year between $415 and $425 million. The midpoint of this guidance represents an increase versus our prior year-end exit ARR guidance of approximately $40 million, further underscoring the rapid transformation of our business and the increased traction in our cloud and subscription adoption. We expect non-GAAP operating margin to be between approximately 20% and 21%. The result of these projected revenue improvements is that we are increasing our guidance for adjusted EBITDA to range between $680 and $720 million, or between approximately 23% and 24% of revenue, demonstrating Avaya's ability to deliver revenue growth without compromising profitability. We expect non-GAAP EPS for the fiscal year to be between $3.05 and $3.37. At the midpoint, this reflects 6% year-on-year growth. In terms of our cash flow from operations for fiscal year 2021, we are increasing our guidance to be between 3% and 4% of full year revenue. At this time, we expect our shares outstanding to be between approximately 83 and 86 million shares at fiscal 2021 year end. With that, I'd like to turn the call back to Jim. Jim?
spk04: Thank you, Karen. Avaya is hitting its stride, and the company has come so far in just a few short years. Our teams are navigating the challenges presented by COVID-19 and breaking through without missing a beat, all while executing on our transformation strategy to move to a cloud and SaaS business model and maintain profitable growth. OneCloud ARR and CAPS, our key performance measures, are exceeding expectations. Our contact center solutions are increasingly contributing to our growth. as customers leverage the full range of public, private, and hybrid deployment options. We have a robust portfolio of innovation to fuel continued and future growth. And we remain good stewards of capital, having announced this morning that we will pay down $100 million of our December 2024 term loan, while also extending the maturity of the remaining balance. Our progress clearly demonstrates how well Avaya is positioned to serve our customers and to compete and win in the cloud. I'm very optimistic about our future and energized by our traction and the expanding opportunity fueled by digital, by cloud, and by our technology innovations. With that, we will now open it up for questions. Thank you.
spk07: At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line into the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. Please limit yourself to one question and one follow-up afterwards. One moment while we poll for questions. Our first question comes from the line of Remo Lancho with Barclays. You may proceed with your question.
spk10: Hey, this is Frank from Remo. Congrats on the quarter. These are really strong numbers here. I have just one from my end. Wanted to dig a little bit deeper into the contact center side, particularly on CCAS. I was wondering if you could provide some more color to the feedback of the offering as it matures, the customers you're seeing the most success with, and how you see the opportunity in CCAS. Thanks.
spk04: Yeah, hey, Frank, this is Jim. Thank you. Thank you very much. Really appreciate it. Yeah, as we take a look at CCAST, really the success we're seeing is a combination of multiple factors first um as we take a look at that ccas as you mentioned we are seeing um the results of the tremendous amount of investment we've made and really driving capabilities to support the digital transformation you know i.e sort of the work from anywhere uh capabilities we've also as you probably noticed recently building out our partner network and really delivering AI to the solution, which is a real differentiator from us, be it through Google, be it through AWS, or even for that factor, our own conversational intelligence. We're seeing a nice uplift as well as you look at our capability to build out features such like workforce management, expanding CCaaS into our channel capability around the globe, We added two new countries this past quarter, which is UK and Ireland. We are going to be adding roughly a dozen new countries to the offer as we go through the balance of the year. You know, so our goal has been pretty simple since we started really entering the CCAT space roughly about a year ago. And that's to bring the features and functionality differentiation by leveraging our IP and our internal capabilities with our partner network really to build out sort of the ecosystem to drive the solutions. And we're really very pleased with where we are, and we're pretty excited about the fact that we continue to add and we'll continue to add, you know, expanded omni-channel integration into the marketplace in the near future as well. So I would say everything is right on track, and customer acceptance has certainly been in line with expectation.
spk10: Perfect. Thank you.
spk07: Our next question comes from the line of George Sutton, with Ted Palum. You may proceed with your question.
spk13: Thank you. Very impressive results, guys. Congratulations. I think a headline number clearly is the ARR and the 38% sequential growth, which is good for any company. But I wondered if you could talk a little bit more about the composition of what's driving that and also the strong ARR guide.
spk04: Yeah, sure, George. This is Jim. Let me start off and then maybe I'll ask Kieran to add a little bit of color afterwards. But, you know, it's really sort of a manifestation of what we started a couple years ago down this deliberate path, really to reignite our innovation engine. and bringing Avaya, if you will, to return to relevance in the enterprise market space. And the great news is that effort is really starting to now feel the impact and is shown in the numbers. And I think ARR is a real reflection of that. Our capability to deliver what I'll call significant and attractive offers, and more importantly, having the capability to, one, deliver those, and secondly, to compete and win in the marketplace really shows sort of what we call here sort of the new Avaya. And to your point, underneath the numbers, it's actually pretty amazing how we're starting to see uplift across the board. So fact of the matter is that our guidance now represents an increase year over year of 120%. If you take a look, 60% of that growth comes from our contact center, 40% quarter-on-quarter growth within the contact center alone, and 65% of those deals are greater than $1 million. Again, fortifying the position of strength that we have in the enterprise communication space. And then if you take sort of another slice at it, the hybrid component and really delivering technology uh through our subscription offers you know is in the 40 range uh of our arr so we're seeing sort of the breadth of our offers across the board and really fortifying again uh the position of a buy in uh and a large enterprise but i don't care if you want to add any more color or not for that i think jim the one thing that i would add because you covered uh you covered it quite well the one thing i would add is that we
spk00: We're continuing to see now an uptick in actually new landings, right, with new logos. These are customers who are actually buying new. So, you know, previous to this, we started with migrations. We expanded migrations to upsells. We also started new landings with our own existing customers. But now what we're starting to see, and you heard Jim refer to it in his comments as well, is actually a fairly substantial portion of our existing subscription deals are actually new logos as well. So this is really – this proves out the point that the customers are continually willing to buy in this cloud-like model. So a lot of momentum in that space as well. And as Jim pointed out in his prepared remarks as well, not just in the U.S. where we got the early momentum early last year, but also internationally now. We're really getting a lot of traction with subscription, which is truly building out. is building out our overall numbers and, you know, supplementing that with all of our private cloud bookings that Jim referred to as well. So across the board, you know, just progress that really well ahead of what we were even modeling for ourselves, you know, a year ago. Great stuff. Thanks for the additional detail.
spk04: Yeah. Thanks, George.
spk07: Our next question comes from the line of Lance Vitanza with Cowan. You may proceed with your question.
spk05: Hi, guys. Thanks for taking my questions. I have two to deal with. The first is, at the midpoint, you mentioned your full-year revenue guide is up. I think you said it was up 1%. And I'm just trying to square that with, you know, the up 3% that we observed in the first quarter and the guide for up 5%. And the commentary, which sounds uniformly favorable, but You know, is there anything in particular, I mean, as we think about the back half, it would seem that you're expecting softness out there, which I don't think is necessarily what you mean to imply. But, you know, I know you have a difficult competition for with the Social Security Administration contract. Are there other items we should be aware of? To what extent are you just reflecting prudent conservatism, or are you expecting market conditions to deteriorate somewhat as we move throughout the year?
spk04: Yeah, hey, Lance, why don't we tackle that one first, and then I'll start off, and again, I'll turn it over to Karen. But, you know, I don't know if I would characterize it as conservative. I probably would suggest that it's more reflective of being a quarter in to the year. We are seeing, you know, good strength in bookings, ARR, CAPS, cloud, as we referenced. But I believe it takes into consideration an awareness of today's operating realities and the fact that we want to be prudent. But that being said, you know, obviously we raised our guidance across the board, so we're certainly optimistic. We're also optimistic about the traction of our new products that are coming online and our ability to not only compete but to win and our capability in execution, which this company has done an absolutely phenomenal job in execution across the board for many years, and that's a real testimony to the employees we have at the company. I would end by just suggesting that we do, as we mentioned, have a very strong pipeline. And that's what gives us the confidence in our trajectory. And frankly, that's why it gives us the confidence and our ability to raise our guidance for the year. But with that, let me turn it over to Karen for a few additional inputs.
spk00: Lance, I think you hit on, obviously, a difficult compare with the SSAB on Q4, sure. That's part of it. But I think, as we said in the last quarter as well, we really see more of our subscription bundles and more of our bookings overall really starting to have more as-a-service content delivered to it. which will have an increasing amount of ratable revenue, which means we'll take the revenue over time. And we would expect to see that reflected in the ARR metric. So we really think that momentum with the bookings is going to continue. We just think how that's actually going to be recognized between point in time and over time from any kind of a period perspective is reflected in the guidance. But then you should be able to look through that and see the improving ARR guidance that we put out there as well today. So honestly, we don't really see any slowdown from a momentum perspective.
spk05: That makes sense. I should have figured that out on my own. My other question is on the new adjusted EPS sign, which I love, but I'm just wondering, what was the rationale for making that, for including that going forward today? You know, are you trying to refocus investors or are you responding to investors who have been saying, you know, have been perhaps clamoring for you to provide that? I'm just trying to get a sense for what led you to make the decision.
spk00: Sure. Well, let me take that one. So, you know, probably this time last year, I actually talked about our intent to start, you know, to look and sound a lot more like a a profitable publicly traded software company. And internally, you know, just for all of our disclosure controls, all the rest of it, we were managing the EPS metric last year. You know, we felt the timing was right now for two things. One is we absolutely were committed, made a commitment to our board as well as, you know, privately to many of you, I told you I was going to announce this metric. That's point one. Point two is now finally in winter 21, we have really good comps year-on-year basis for no real confusion over the fresh start accounting. It's a lot cleaner in terms of our metrics year-on-year, and we just thought that now was the real time to do it. And also, it's becoming increasingly clear to me that if I don't do it, other people are going out there and doing themselves. And it was really important that we emphasize the mechanics of how we're doing this and that folks also took into consideration that we also had to ensure that the preferred shares also were recognized as part of the calculation that Ring has, and some portion of the profit was attributed to them as well. So we wanted to make sure there was absolute clarity as to how the calc was being made, and we refer to that in our investor deck, as well as just the timing of really ensuring that everyone recognized that we were driving profitable software growth. Very good.
spk05: Thanks, guys, for your time. Thanks, Len.
spk09: Thanks, Lance.
spk07: Our next question comes from the line of Sameek Chattarji with J.P. Morgan. You may proceed with your question.
spk08: Hi. Thanks for the question. This is Joe Cardoso on First Sonic. My first question comes around the guidance as well. So if you look at the full year guidance, you raised it for the full year in terms of revenue one cloud ar however you maintain the caps revenue growth can you parcel out the variance you're seeing between the metrics and what's driving one or like those other ones to grow as opposed to the caps revenue
spk00: Sure. Well, I think it goes very consistent with the explanation that I just provided to Lance in the prior question. And that is that, you know, more of the revenue that we expect to recognize in the second half of the year will become more point in time, which is really the caps, if you recall, is a metric that captures the transformation of the business at any one point in time, while the ARR metric points to the future. So the guidance that we had put out there where we expected that the dollars would would grow 35 to 40% year on year and that we would actually end up somewhere between 35 and 40% of our total revenue being caps in nature. It held, it held because more of the bookings that we expect to see as we go through time will actually come as radical revenue over time, and therefore we'll recognize in future periods. So that guidance already encompassed those changes, and I think that's the key reason for not increasing that as well.
spk08: static at it, and it makes sense. And then my second question, if I look at your large deal activity over the past couple of quarters, it looks like the quantity has improved, but also the quality with the amount of deals greater than 10 and even 25 million also expanding. Can you provide any color to what's driving it? Is it the size of customers that you're dealing with? Is it specific to the solutions that you're delivering? Any color would be appreciated. Thank you.
spk04: Yeah, this is Jim. Thanks for the question. Great observation. No, I just think it has to do with the fact of our capabilities to roll out new solutions and the fact of our strength now in the contact center, in all fairness, and the capabilities to incorporate some of our strategic partners solutions inside of our portfolio offerings, as well as our investments like Spaces and other key collaboration and AI tools into those offers. So it's a combination one of that. And secondly, you know, we are starting to see a number of customers now start to embrace and book our private cloud offers. We've spent a lot of time in really bringing to the marketplace our private cloud uh solutions especially on contact center and in fact we're deploying those now sort of if you will at the speed as a public offer and it's enabling our customers to get that agility and their deployments and customizations that they need so it's a combination one of the increased um content in our overall offers as well as building out the portfolio and you know really having our customers now start to embrace not only the public but private as well as the hybrid capabilities that we bring to market got it appreciate the insight guys and congrats on the results thank you our next question comes from the line of madam marshall with morgan stanley you may proceed with your question
spk11: Hello, this is Eric. I'm from EDA. Thanks for taking our question. I wanted to dig a little bit more into the new logos that you won. You mentioned that 40% of those were cloud and subscription, but I'm wondering if anything is driving kind of the 60% to be on-premise and if they tended to be maybe a smaller customer of a certain vertical.
spk04: Yeah, hi, this is Jim. Thanks, Eric, for the question. Yeah, if you take a look at the bookings component, we are starting to see, you know, I'll say premise not going away, for lack of a better term. And I think, obviously, that's a significant advantage for us and really provides the uniqueness that Avaya has the capability to offer that full breadth of solutions. We're also seeing, you know, our customers need to move to, if you will, more of a ratable environment. you know, OPEX-type model, especially if you take a look at where they are and what's going on in the realities of today's world. So many of the larger contact centers today don't necessarily need the number of agents that they might have had before. Therefore, by definition, the number of licenses whether they work from home or just that their business performance has changed with the impact of COVID. So subscription provides them the operating model to take full advantage of that. So in essence, repurposing sort of what they've had and provides them the capability to obviously work from home and the other features and more of your work from anywhere type environment. So we're seeing some really large deals, as I pointed out, three deals alone just last quarter, in excess of $25 million of TCV, which is a first for us, which is actually rather significant, and also is the point where we thought that this was really intended to be a sort of a maintenance sort of replacement for as we started our initial focus. But with 20% of the subscription deals being new customer wins, really goes to show you the value of the offer that we have out there. It's much more than a maintenance replacement for sure. So I think it's a combination of a number of factors, but Our largest of large enterprises are looking for ways to optimize as well as get productivity in need with a trusted partner like Avaya. So it's a win-win solution for them. It's obviously a win-win solution for us. And, you know, we're obviously doing better than expected in fairness, as you guys know, on subscription deals. And we're excited about the pipeline we have in front of us.
spk00: If I just might add just a quick comment as well. These logos, they're not necessarily small ones either. So even though Jim talked about success we've had with the largest of the largest enterprises continuing, we've actually seen our new logos on the on-premise side, the pure plain on-premise, you know, still averaging about $20,000 of TCV. So they're not that small either. And it just goes to show that, you know, in spite of all of the, you know, all of the market trends as well, there's still a lot of business out there to be had in the traditional business of, you know, CapEx on-prem.
spk11: Got it. That's really helpful. Thank you.
spk07: Our next question comes from the line of Asaya Merchant with Citigroup. You may proceed with your question.
spk06: Great. Thank you for the opportunity. And again, congratulations on a strong quarter. If I can just ask a little bit, I think Jim mentioned in his opening remarks some channel investments in the ecosystem. If you guys can elaborate a little bit more on that and what specifically are you guys, and as we look forward into the next couple of years, are we expecting this run rate of investments as you guys then start to benefit from the rollout across you know, several countries globally. Thank you.
spk04: Yeah, so there's a couple things. This is Jim. First and foremost, building out our channel ecosystem. We are building this out now, as I mentioned, for our CCAT solution. So we think that's going to provide us with some nice opportunities in front of us. If you take a look at our ACO offer, we increased our partner ecosystem last quarter by 20% over the previous quarter. So as we not only are building out into 12 countries, we are also continuing to build out a partner ecosystem with partners that focus on driving cloud solutions. So we're quite excited to see that continued growth there from an ACO. And for that fact, they'll also start selling and many have our CCaaS solution coupled with that. So it's great on both aspects. Thirdly, a number of programs that we now have out into our ecosystem, not only for cloud but also for subscription, and equally as important as we start now to roll out our private cloud solutions, which will probably begin in earnest next quarter. But we do have a handful of our current partner base now selling our private solutions as well. So, you know, look, the channel is extremely important to us. 70% of our revenues are through the partners. They are an extension of Avaya. When we go to market together, we win. We embrace that. They understand. And, you know, we were quite new to cloud. And one of the benefits of the ACO relationship, in fairness, gives us sort of the cloud DNA and capabilities that, in fairness, we didn't have a year ago. I mean, we've only been in that business now since March 31st of last year. And it's really, really enabling us and, more importantly, acting as a force multiplier to accelerate our capabilities in cloud, not only here in the U.S., but globally. and really enabling us to build that infrastructure, the billing, the insight sales, customer success, quoting, you name it. If you look at where we were a year ago to where we are today, it's simply amazing how quickly we've come up that learning curve. So all of those things are obviously incorporated in building that out. And again, what gives us high confidence because we've had a year worth of accelerated learning and immersive learning, if you will. And, you know, we've come a long way in the last 12 months. And one of the reasons why now we're building that ecosystem out, in fairness, need to know what you're doing before you start to expand and um i think we actually know quite well what we're doing and as you can see we're expanding at a fairly rapid rate and and really showing in the results of the company so quite excited about that opportunity great thank you our next question comes from the line of catherine
spk01: how about nick with foliars you may proceed with your question oh thank you for taking my question very impressive quarter gentlemen um anthony if you're on the line i have a question for you and could you parse more on the hybrid on how the hybrid customers are really driving some of the ccast opportunities i think that You had such impressive results with CCAS, and I'm really trying to understand better where the threads are, and perhaps it's with some of your hybrid customers. Thanks.
spk03: Sure, Catherine. Thanks very much for the question. Look, we continue to expand on the previous CCAS investments that we've made, and we continue to mature it, and we continue to add capabilities. And through CCAS, as well as our CPaaS capabilities, we're infusing it with AI capabilities as well. So we bring those AI capabilities, those progressive features that are laid on top of our CCaaS solutions. And in some cases, when we have customers who have a a on-prem solution, we would layer on top of that a capability such as conversational intelligence, which is purely delivered from the cloud, which will create a hybrid scenario for the customer. So they can maintain their on-prem deployment and deliver some key capabilities such as AI capabilities via the pure cloud scenario, making it a hybrid type of solution. We've seen that with those couple of examples that Jim had mentioned a little bit earlier. I believe it was American Equity Investment and Nebraska. And also with some of our key... strategic partners such as Viren and Nuance where we deliver some of those solutions as well via the pure public cloud as well. So that would add and enhance a hybrid scenario. We've got a long tail of ecosystem partners that are quite strategic that really sort of fit the bill for customers because what we're seeing is that customers don't need to compromise the agility of their deployment anymore with lack of customizations. They come to Avaya, they recognize that we can now effectively deploy private clouds or multi-instance solutions, and we can deploy those at the speed of public solutions. So they no longer have to compromise on customizations as a result, and they're finding that incredibly valuable. Thanks for the question. It was an excellent one.
spk01: Thank you. And the follow up is competitively, who are you seeing? And, you know, it seems like you guys are really at five nines comes to mind. They're really moving up market. Can you just address the competitive landscape? Thanks.
spk03: Sure. The competitive landscape hasn't fundamentally changed for us. It's relatively segmented, and we see pretty much the bulk of the competitors, but it depends on the segment. So as we go into – we measure large enterprise at a much higher bar than – than maybe some of the competition does. But at the same time, we compete across each of those particular segments. So we're seeing the same play as Catherine. That dynamic hasn't changed for us during this particular quarter at all.
spk01: All right. Thank you very much. Congratulations. Thank you.
spk07: Our next question comes from the line of Mike Lattimore with Northland Capital Markets. You may proceed with your question.
spk02: Thanks very much. Yeah, in terms of the subscription bookings, I think it was $180 million. How much of that was recognized in the quarter itself?
spk04: Gary, do you want to take that?
spk00: Yep. So in general, just from a subscription booking perspective, we're anywhere from between 55% to 60%. will get point in time depending on, you know, the amount of embedded cloud that's with the solution as well. But just as a general rule of thumb, it's probably right around in the last quarter about 55%. Got it.
spk02: And then I think you mentioned that 20% of subscription was new logos. Was that 20% of PCV or customer count?
spk00: Yeah, that was a customer count.
spk02: Okay, great. Thank you. Thank you.
spk07: Our next question comes from the line of Hamed Korsand with BWS Financial. You may proceed with your question.
spk09: Hi, good morning. Firstly, just wanted to see how much of your install base that was on-prem has converted to cloud, and how fast is it taking to reach scale when you launch via cloud office in these new markets? Is it getting to scale very quickly, and
spk04: and how dependent are you on those on channel partners to get to that scale when you're launching these new markets yeah sure um rough numbers uh i would say is in the neighborhood to your first question it's about 30 percent you know plus or minus it varies but i would say that's probably a representative number um if you're asking how much is dependent on uh channel partners You know, I guess I can answer that question a couple different ways. You know, obviously, the largest to large are more oriented towards direct sales approach versus a channel approach. So we're seeing, obviously, a lot of opportunity, as I mentioned, especially when you talk about 119 deals over a million dollars of TCV. And, you know, we've been running at that consistent rate now, I would say, probably for the better part of a year or more. So both are equally as important. They're more, obviously, oriented to the largest and large. But at the same time, our channel has a highly – preponderance towards the number with 70% of the overall revenues being driven through the channel. So we don't look at one being, if you will, more important than the other. They're both extremely important for what we need to do. And we're focused on really driving both the channel as well as our overall direct workforce in really enabling our customers and really assisting them on their digital transformation journey. So, you know, I wouldn't rate one over the other. In fairness, they're both equally important to our delivering of innovation to scale.
spk03: I'll just add a tangent here. With regards to the amount of customers who are enjoying the Bio1 Cloud, The conversion rate for that customer to the 30%, that's actually occurring in terms of one form or another of our cloud solution. They haven't completely converted over their whole enterprise too. They're on that particular journey and we're managing that journey with them. So there's tons of headroom that still remains. as a result of that particular journey. And in some cases, it's a protracted journey because they've got highly complex, highly integrated solutions, and we're a trusted advisor on managing through that journey.
spk09: And just to follow up, how big is the funnel for $25 million over sales? It seems like you accelerated in December versus September as far as the deal count goes.
spk00: I mean, that's not something that we put out. I mean, a lot can shift. You know, a deal could be just because a customer maybe decided to add another year of duration or something like that. So, you know, we tend to measure things from an ACV perspective, first and foremost, just because we want to understand what the run rate to the business is going to be. Okay. Thank you.
spk07: Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Michael McCarthy for closing remarks.
spk12: Thanks, Laura. And thanks, everyone, for joining us this morning for the December quarter call and results. If you have any additional questions, please feel free to reach out to my office and look forward to engaging you throughout the conference season ahead. Take care and have a good afternoon.
spk07: Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.
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