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spk05: 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.
spk02: 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.
spk06: 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.
spk01: 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 second quarter of our fiscal 2021, revenue was $738 million. This represents year-on-year growth of 8% as reported or 7% in constant currency over the $682 million in the year-ago period and compares to $743 million in Q1 of fiscal 2021. Year-over-year growth continues to be driven primarily by our rapid migration to the software subscription model and an increasing contribution from the Viya OneCloud. Additionally, this quarter we saw a year-to-year and sequential boost from professional services as several key deliverables were accelerated on the Security Administration Project in this quarter. As Jim highlighted, we continue to deliver on our aggressive ARR commitments in Q2. Our OneCloud ARR metric exited the quarter at $344 million, which represents 31% of sequential growth. Avaya OneCloud offerings are driving this ARR momentum, with second quarter growth continuing to be powered by subscription bookings and an increasing contribution from Avaya OneCloud public and private. Contact center was again about 60% of total OneCloud ARR. In line with Avaya's core strength in the enterprise segment, customers paying greater than $1 million annually accounted for over 60% of total ARR. As a reminder, we established CAPS to give investors insight into our successful delivery of Avaya's highly differentiated software solutions in the cloud consumption models that make the most sense for our customers. This quarter, revenue contributions from CAPS represented 40% of total revenue up from 34% in Q1. For our second fiscal quarter, recurring revenue accounted for two-thirds of our total revenue. Meanwhile, software and services represented 90% of total revenue. Through focused investment and deliberate execution, Avaya has clearly evolved into a software and services business and away from a hardware-centric model. Non-GAAP gross margin was 61.8% in the second quarter compared to 61.1% in the year-ago period and flat sequentially. Product margins were down modestly while services margins improved during the quarter, reflecting the shift from perpetual licenses to subscription and public cloud offerings. Overall, our services margin improvement is consistent with our structural shift toward delivering our solutions in cloud consumption models available to customers through our Avaya OneCloud portfolio. Turning to total profitability margin and cash flow metrics for the quarter, second quarter non-GAAP operating income was $148 million, representing a non-GAAP operating margin of 20.1%, up 180 basis points year-on-year. Adjusted EBITDA was $177 million, representing an adjusted EBITDA margin of 24%, up 220 basis points year-on-year. This reflects our operational efficiency, even as we are making the vital investments necessary to scale our cloud capabilities, including our channel partner programs and global expansion, all bolstering our ARR momentum. Non-GAAP EPS was $0.74 in the second quarter compared to $0.57 in the year-ago period and $0.90 sequentially. The strong year-over-year growth in this metric is the result of two factors, increased profit and the benefits from the significant number of shares repurchased in the first half of fiscal 2020. Now turning to cash flow, we consume $24 million in cash flow from operations, or negative 3% of total revenue. Our cash flow was primarily impacted by two in-quarter variables. The first was the timing of interest payments on our senior secured notes, which are paid semi-annually, reflecting a $29 million quarter-over-quarter increase in interest payments. The second was our pension contribution payments that were $26 million higher than in the prior quarter. Due to the passage of the American Rescue Plan Act, the company does not expect to make any additional contributions to our U.S. pension plans for the remainder of fiscal 2021. We ended the quarter with a cash balance of $593 million. This reflects the $100 million debt paydown we completed in February, along with the favorable refinancing of $743 million of term loans that previously matured in 2024. In addition to extending the maturity to December 2027, We reduced the interest rate by 25 basis points. The success of our capital allocation initiatives across this past year is a proof point of the market and the industry's confidence in Avaya's execution and strategy. Now turning to guidance for 3Q21 and full year fiscal 21. Please note that all year-on-year revenue changes are expressed on a constant currency basis and all revenue amounts reflect rates as of April 30th, 2021. For the third quarter of our fiscal year 2021, we anticipate revenues of 720 to $735 million, representing growth of 1% year over year at the midpoint. We expect non-GAAP operating margin for the third quarter to be between approximately 19 and 20%, and our adjusted EBITDA to be between 160 and $170 million, or approximately 23% of revenue. We expect non-GAAP EPS to be between 66 cents and 73 cents for the quarter. This compares to non-GAAP EPS of 95 cents in the year-ago period. Quarter-over-quarter progression of EPS reflects dilutive impacts that I will cover in more detail when discussing the full-year guidance. In terms of our full-year fiscal 2021 revenue guidance, we are increasing our revenue guidance to be between 2.920 and $2.955 billion. This represents growth of 2% to 3% at current FX rates and represents approximately 1% revenue growth at the midpoint as measured in constant currency. We are tightening our caps revenue guidance range by raising the low end from 35% to 37% of the full year revenue. This now lifts our guidance range to 37% to 40% for the full fiscal year, representing over 50% growth year over year. Turning to OneCloud ARR, we continue to see very strong momentum and are increasing our full-year guidance. We now expect to exit the current fiscal year between $450 and $460 million. At the midpoint, this reflects an upward revision to guidance of an increase of approximately $35 million from the prior guided targets and demonstrates over 130% year-over-year growth. We expect non-GAAP operating margin to be between approximately 20% and 21%. Additionally, we are raising the low end of our adjusted EBITDA guidance and tightening the range to $690 to $720 million, or approximately 24% of revenue at the midpoint of this range, demonstrating Avaya's ability to deliver revenue growth while maintaining profitability. Turning to shares outstanding guidance and earnings per share, we expect our weighted average shares to now be between approximately 87 and 89 million shares outstanding, at fiscal 2021 year-end. This increase in outstanding share count primarily reflects the appreciation of Avaya's stock price, resulting in dilutive impacts from previously issued convertible notes, warrants, and stock awards. Due to this share count increase, we expect non-GAAP EPS for the fiscal year to be between $3.02 and $3.20. At the midpoint, this reflects mid-single-digit percentage year-over-year growth. In terms of cash flow from operations for fiscal year 2021, we are maintaining our guidance of between 3% and 4% of full-year revenue. With that, I'd now like to turn the call back to Jim. Jim?
spk06: Thank you, Karen. Let me offer a couple closing thoughts. As we've all tried to navigate this past year the best we can, the world has fundamentally changed, and we will not be going back the way we used to work instead we are moving forward into a new work environment and now more than ever our customers are relying on a biased solutions and expertise to help them navigate through uncharted waters our leadership position in communications and collaboration has never been stronger our innovation pipeline has never been as robust or potent Our model is robust and sustainable, and we are benefiting from the disciplined execution that Avaya is known for and for our focus on profitable growth. We are well positioned to continue our success, and I am confident of where we are heading and that demand will remain strong for the foreseeable future. With that, we will now open for questions.
spk05: At this time, we will 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 zone will indicate your line is in 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 to pick up your handset before pressing the star keys. As a reminder, when asking a question, we ask that you please limit yourself to one main question and one follow-up. One moment, please, as we pull. Our first question comes from the line of George Sun with Craig Hallam. Please proceed with your question.
spk04: Thank you. My congratulations on getting the gold medal. So I wanted to just walk through something relative to enterprise demand. You know, we sit on a lot of these calls and hear about SMB and mid-market. you obviously are focusing in many cases on larger enterprises and have a unique ability to give them either a private or a public cloud option. Can you just give us a sense of the migration of those larger enterprises to the cloud? Cause I think that's what's behind a lot of these results.
spk06: Yeah. Hey George, Jim, thank you very much. Um, so a couple of things, number one is if you take a look at our large enterprises, obviously we have, um, We have the capability to deliver the solutions across a breadth of technology. One is obviously our subscription, which we launched in the market about six quarters ago. The demand in the funnel, in fairness, has never been stronger. And we're finding that our large enterprise customers are looking for sort of the same flexibility, if you will, from a recurring revenue and consumption-based model and really moving away from, you know, having this burden of having all of these licenses, especially in the new work environment where many of their employees are working from home. And our philosophy has always been that we're going to honor how our customers really want to have their solutions. So whether it's the cloud, off-cloud, or hybrid, We're in the business to support our customers. And with the pandemic, you know, it's accelerated the world of digitization, cloud, and, again, the need for our customers to really have a flexible consumption model. And we're going to remain committed to provide the solutions that our customers choose. So we're seeing a huge increase in subscription. That being said, where we saw, again, a significant uptick, not so much in the revenue but in recurring revenue, was our private cloud solution. We're seeing strong traction. And really, that's a fit-purpose solution. And it's addressing a huge market opportunity for us as our large enterprise customers simply can't or do not want to jump right into a public cloud solution. And Avaya is really only one of a few companies that can even participate in this. You know, you're born in a cloud company, don't have a private cloud solution. And we're seeing a sizable number of our contact centers wanting to move, our contact center customers wanting to move to that private mode. And, you know, if you just take a step back, the market today is about $7 to $8 billion from a TAM perspective. If you go out three, four years, Gartner's projecting that that's going to more than double up to $16 to $17 billion. So we believe we're in the perfect spot to continue to grow and participate in this huge, huge TAM growth for our customers. And, you know, lastly, is what are we doing on the public side? And I think the public solution that we have out there, which really, you know, we started internally a couple years ago, but really it's only been in the market for about a year. You know, we believe that we have a well-engineered solution. It's economical for our customers. As I said earlier, we're in 40 countries. We're going to target 60 by the end of the year. We continue to add more and more capabilities. And, you know, I would punctuate all that. It's evidenced, again, by our large deals. And, you know, we continue to, you know, have over 100 large deals a quarter. you know, significant dollars with 16 being greater than $5 million. So, and, oh, by the way, the traction that we're getting against our competition. And we're finding when you get into large contact centers greater than 500 seats, that's where we have a significant advantage against our competition. And that's, again, proof points to our services organization, proof point to the expertise that we bring to the market each and every day. So, a bit long-winded, but we're quite excited with the results that we've had to date. And, you know, as we look at our backlog and pipeline, we're very excited about the opportunity in front of us.
spk04: So if I could just focus my follow-up on the ACO offering and speaking to your partner, the suggestion has been a surprising level of new wins versus just migration wins. Could you just address that?
spk06: Yeah, you know, It's proving out to the sort of the premise by which we did the relationship, you know, and partnership with RingCentral. And that was the fact that, you know, when you thought about Avaya, it was an old legacy company that was trying to compete in the world of hardware. We're at the UC part of the, UCAS part of the market that shifted to cloud. And we knew we had significant opportunity, and that's why we partnered with Ring, to not only solution, you know, provide a solution to our install bases, but also be able to compete and win in the market with really with our brand, our expertise, our overall capabilities. And, in fact, it's coming true. And we're really excited. And I also think it shows the relationship on just how committed we are to our channel and to our partner community. They're an extension of us, a combination of us. And I've said many times that when we go to market with our partners, we win. There's no better force. And, you know, a real tribute to not only the partners, the existing partners, but the new partners that we've brought on board. And, you know, active partners were up by 40%. Customers grew by 50%. So, you know, it's working exactly as we had planned. So, again, we're pretty excited and excited about the opportunity in front of us.
spk05: Good stuff. Thanks. Our next question comes from the line of Raymond Lenshow with Barclays. Please proceed with your question.
spk03: Hey, congratulations from me as well. That was a great quarter. Jim, if you think about the market and the growth momentum you can see there, how much do you think is the whole market doing better? Because a lot of your other competitors are also kind of sounding pretty bullish versus you kind of doing some company-specific stuff. And then... Question for Kieran. The follow-on question is for Kieran. Kieran, if I look at the guidance for caps, I mean, you're already kind of doing really well. Is there anything I should be aware of in the next quarter that might bring that caps kind of momentum down a little bit again?
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