Avaya Holdings Corp.

Greetings and welcome to Avaya's fiscal 21 second quarter investor call. At this time, all participants are in the listen-only mode. A question and answer session will follow the following presentation. If anyone should require operator assistance during the conference, please press the telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael McCarthy, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Welcome to Avaya's fiscal 2021 second quarter. Jim Cherico, 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 Anthony Bartolo, chief product officer, Stephen Spears, chief revenue officer, and Dennis Kozak, senior vice president of Global Channel. Consistent with social distancing mandates, each of us on this morning's call are assembled from our remote location. The earnings release and investor slides, which now 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 the 8K filed today with the SEC. These should aid in your understanding of the buyer's financial results. All financial metrics referenced on this call are non-GAAP, with the exception of revenue. We have included a reconciliation of such non-GAAP metric measures to GAAP 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. In particular, the global economy continues to be impacted by COVID-19, and the extent of its continued impact on our business will depend on a number of factors that include, but may not be limited to, severity and duration, as well as actions taken 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 on Form 10-K and subsequent Form 10-Q reports. It is advised 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 as 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 pleased to share that Avaya delivered a standout Q2, executing well across multiple dimensions of our business. And I couldn't be prouder of what our global team accomplished by posting revenue and EBITDA results that were above guidance and by accelerating our ARR growth more rapidly than we had anticipated. Consistent with our strategy, this progress comes as a direct result of the surge of additional investments we have made in our go-to-market and R&D. These investments have broadened our spectrum of cloud capabilities throughout our Viya OneCloud form of CCaaS, UCaaS, and CPaaS solutions. It is clear that our business has undergone a structural change, and as you look at the construct of our revenues, we have seen a meaningful shift over the last four quarters. In fact, our business continues to outperform our expectations, which is a testament to the strength of our brand, digital capabilities roadmap, and our ability to address the diversity and breadth of requirements that come with servicing global large-scale complex enterprise customers. If you put this in context, the main point, as I have previously stated, Avaya is now a cloud-first company. Today, we are operating in a totally new business environment, and customers are increasingly turning to Avaya as a trusted and proven partner because of our differentiation, superior customer experience, ability to accelerate business transformation, and to drive their success in this new highly distributed world. Today's market dynamics have accelerated digital transformation efforts, and as a result, we are engaging in significantly more in-depth and strategic conversations with enterprise customers, which is driving growth in larger and longer-term contract commitments. More importantly, our results represent the significant work undertaken and the strategic investments we have been making over the last several years to reshape our portfolio to be a leader in enterprise communications and collaboration solutions. Now, I'll run through some key performance highlights that underscore we have the right approach and are on the right track for continued success. We see continued momentum in a number of areas as we execute the three-pillar strategy we communicated over a year ago. First, to move to a recurring revenue business model driven by cloud and subscription. Second, to grow our overall business. And we have a rich pipeline within our portfolio to sustain that performance. And finally, to do this while maintaining our profitable business model, which is even more important in these times and supports our transition. Starting with ARR, this is where we are focused, and it's the clearest measure of our success as we execute on our strategy. ARR grew to $344 million in Q2, up 31% sequentially and up nearly 400% from a year ago, reflecting the speed at which we are seeing the structural change in our business. Our large enterprise segment, which we define as contracts with a TCV of greater than 1 million, was the main driver of our ARR growth, driven largely by contact centers. Large deals represented over 60% of total ARR. Overall, our ARR performance is exceeding my highest expectations. CAPS is maintaining its growth trajectory, now representing 40% of revenue. That's a 17-point increase year over year. CAPS is not only an important indicator of our overall transition to a new revenue profile, but it is a wonderful indicator at the adoption, of our new products and solutions. As I look at forward indicators of revenue, overall bookings remain strong, up 14% year-over-year. TCV is at $2.1 billion, demonstrating a continued strong backlog of business. Another indicator of large enterprise traction is the number of significant deals we signed in Q2. This represented the fourth quarter in a row in which we signed more than 100 deals with a TCV of over 1 million. Sixteen of these deals were greater than $5 million, and seven were greater than $10 million, with one deal over $25 million. On the competitive front, we displaced a significant number of competitors for the third consecutive quarter, where we signed approximately 1,500 new logos. On the profitability front, adjusted EBITDA came in at $177 million, or 24% of revenue, which is up 220 basis points year over year. The playbook for our industry is not a secret. The key is therefore how you execute. Our team is doing a great job. And it's the combination of these results and our visibility into the second half of FY21 that gives us the confidence to again raise our guidance for revenue, ARR, caps, and EBITDA for the fiscal year. Karen will provide additional detail shortly. We've had many notable accomplishments over the last quarter, too many to go through on this call. So I'll just touch on a few that demonstrate how our investments are accelerating innovation, enhancing our competitiveness, and delivering value to our customers. First, I couldn't be any more pleased with the progress we've made as we continue to expand our contact center solutions. As a measure of our progress in Q2, CCAS C-count was up significantly from the prior quarter and the pipeline of opportunities continues to grow. CCaaS is now available in the early 40 countries. We continue to add additional capabilities to the platform and recently announced full omni-channel, attribute-based agent matching, agent personalization, and predictive analytics. Attento, a global provider of CRM and BPO services, selected our CCaaS to manage customer interactions for their customer, GoodRx. Another customer, All One Health, needed a communications platform that would deliver scalability and reliability through the next stage of their exciting plans. They chose Avaya CCAS to help enable their diverse workforce, including in-house doctors, nurses, clinical staff, health counselors, and call center agents. CPaaS accelerates customers' ability to combine new applications with existing infrastructure to unlock additional value. This is a real home run for customers looking to innovate at the edge. The ability to cost-effectively, easily, and rapidly deploy new technology for communications and collaboration purposes has never been more critical. And Avaya OneCloud CPaaS delivers exactly that. As an example, we deployed Avaya CPaaS across the Texas-based Round Rock School District. In addition to mass notification capability, we integrated notifications across a variety of platforms, including mobile devices, email, social media, indoor and outdoor signage, and more. Our solution unlocks value potential that simply could not have been addressed in the past. Shifting now to Avaya Spaces. we announced groundbreaking news this past quarter in two specific areas. First is related to incorporating AI into the platform. Working with NVIDIA, we used AI to deliver capabilities such as background noise removal, image enhancement, and virtual assistants. These are indicative of our leadership in AI. We also launched Spaces Calling. Customers now have the ability to place cloud-based voice and video calls directly from their Spaces browser, leveraging their Avaya Aura infrastructure. Leveraging existing infrastructure for cloud-based calling is a real disruptor and game changer for customers, providing them a cloud-based experience while also giving them the flexibility to migrate their business communication systems to our cloud at a pace that makes sense for their business. Momentum for Spaces continues to grow, and we are winning a significant number of new customers and doing so at scale. One such example of a recent win was at Sainte-Denise, host of the 2024 Olympics. They selected Avaya Spaces as their work-from-anywhere collaboration solution for approximately 8,000 users. After a critical review of more than 10 alternative solutions, They awarded the gold medal to Spaces because it's feature-rich and offers superior security, scalability, and ease of use. Moving to Avaya Cloud Office, we are seeing positive growth in a number of areas, and we're also pleased to see the increased pull-through of CCaaS and CPaaS resulting in deals with a larger ARPU for Avaya. The solution is now available in 13 countries, and we are rapidly the number of agents and partners authorized to sell. Not only are they authorized, but during the quarter, the number of agents selling grew by 40% from the prior quarter. While a significant value proposition of Avaya Cloud Office is the ability for us to mobilize and convert our UC base, over 70% of our wins were brand new customers. We also saw significant customer growth overall, increasing our total customer count by 50% in Q2. Moving on to subscription. We see strength across our and continue to transition our base of loyal customers on traditional software contracts to this flexible consumption model. Subscription allows customers that consume our technology how they want whether cloud, off-cloud, or a hybrid approach. Our international rollout is also progressing well. And the number of partners selling subscription is increasing steadily. I cannot be more delighted with the progress. While subscription performance is strong across all segments of our business, we are experiencing significant demand in the contact center. Subscription is also quickly involved into a new customer acquisition engine with nearly 100 deals coming from new logos, whereas just a year ago it was zero. The most important aspect of this deliberate transition of our base to subscription is the increase we are seeing in recurring revenue, which came in at a record 66% this quarter, whereas just two years ago it was under 60%. Recurring revenue, as you know, is significantly more predictable and de-risks us away from our past more volatile license-based model. Making this transition successfully is an exceptional accomplishment in the software industry. Private cloud is a key element of our subscription offering, and I want to specifically call out two notable private cloud deals. The first is a new five-year agreement with Qatar Airways, serving customers in over 70 countries in 12 different languages. They're deploying our advanced digital engagement, global workforce optimization, and automation in preparation for the FIFA World Cup in 2022. The second is with Clarios, a world leader in advanced energy solutions. Clarios is deploying 5,000 unified communication users across 22 countries on our private cloud platform to support their global team. Demand for private cloud deals remain tied with a very strong pipeline coming into the second half of the fiscal year. As we continue to advance our strategic initiatives and execute on our operational targets consistent with what we told you in our last earnings call, we came into the year with strong momentum. We also knew that the seeds we had sown in new technologies and capabilities with significant growth factors would start to take hold in FY21 and beyond. and they have. In short, based on our performance, I'm confident and very excited about the future potential for new solutions, which are opening a larger and growing TAM for a buyer. Best of all, we are still in the early innings. We remain deliberate in how we build out these new platforms, and we are listening closely to our customers to make sure we're developing the capabilities to best address their needs particularly as the distributed work environment continues to evolve. Before I turn it over to Karen, it's important to recognize and thank the entire Avaya team, 8,000 strong, for their continued dedication and flawless execution throughout the quarter, and most importantly, for their focus on delivering value to our customers. It is truly an outstanding team. With that, I'll hand the call over to Karen.