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spk12: Greetings. Welcome to Avaya Fiscal 2021 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Michael McCarthy, Vice President of Investor Relations. Thank you. You may begin.
spk11: Thank you. Welcome to Avaya's Fiscal 2021 Q3 Investor Call. Jim Cherico, our President and CEO, 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 Channels. 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, which include highlights of our ESG initiatives and performance, referred to on this morning's call, are accessible on our investor page of our website, as well as in the 8K file today with the SEC. These should aid you in your understanding of Avaya'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, if 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, the virus's severity and duration, including the emergence of new variants, 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 and subsequent 10-Q reports. It is Avaya's 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 will now turn the call over to Jim.
spk09: Thanks, Mike. Good morning, everyone, and thanks for joining us today. Across every business segment and industry, we are seeing large enterprises turning to Avaya more and more to guide them through their digital transformation journey. Our technology and solutions are providing customers with the ability to grow their businesses while improving their own customer experiences, and we continue to make the investments that strengthen our portfolio, drive innovation, and extend our digital capabilities to meet the new and emerging opportunities in front of us. Our third quarter performance speaks volumes to the significant progress we've made on the transformational journey that we embarked on. We are executing ahead of plan, and I cannot be prouder of the Avaya team for their resiliency, adaptability, and the capabilities they bring to bear each and every day. The solid financial results we delivered exceeded expectations across the board in revenue, profitability, and most importantly, in ARR. Equally encouraging is that we are seeing strong performance across all areas of our business, including our traditional business segments. Our three-pronged strategy to transform to cloud and SaaS, grow the business, and sustain our highly profitable business model continues to guide the way we are operating, and we will continue to double down on our strengths in these areas. Starting with ARR, Q3 represented another strong quarter, growing 23% sequentially and over 275% from a year ago. Our growth continues to outpace our plan, and as a result, we are again raising our the high end of our guidance to $500 million for the end of the fiscal year. It is noteworthy that over 95% of our ARR comes from enterprise contracts greater than $100K in value, and over a fifth of our deals are greater than $5 million in value. This is a testament to the strength of our brand, innovation, and digital capabilities, and underscores our leading position as the partner of choice to enterprise companies who rely on Avaya to power their mission-critical operations. ARR is a true indicator of traction in our transition to cloud and SaaS, and we will grow from nearly 200 million in FY20 to 490 to 500 million at the end of FY21. We are well ahead of schedule, and we are now anticipating to hit 1 billion in ARR by the end of 2022. Moving to revenue. we delivered our fifth consecutive quarter of year-over-year revenue growth. The composition of that revenue continues to improve, with 40% coming from caps, over 64% of it recurring in nature, and roughly 90% of revenue from software and services. Our revenue performance continues to improve, and it is reflective of the investments we are making in skills, innovation, and our ecosystem, and demonstrates that the fundamentals of our business model remain solid and underscores our shift is taking hold. Important is our ability to continue to drive strong profitability as the business delivered $173 million of adjusted EBITDA or approximately 24% of revenue, consistent with expectations that we previously shared. We are sustaining our model while at the same time making investments in R&D and go-to-market required to strengthen our position. Karen will walk you through the details of our financial performance in a moment. A key component of our go-to-market transformation is our ability to leverage the significant strength that comes from our breadth, depth, and global reach, along with our technology and highly differentiated capabilities. To amplify these strengths and take advantage of the demand we are seeing, we implemented a land, adopt, expand, and renew go-to-market motion. On the land front, we continued to see significant new customer acquisition. We added approximately 1,700 new logos this quarter, the most we've added in the past two years. This success reflects the competitiveness and market acceptance of our new offerings. Large enterprises continue to set the pace. Once again, we signed 100 deals with 1 million of TCV or more for the fifth consecutive quarter. 19 of those deals were greater than $5 million, and three were greater than $10 million in value. For adoption and expansion, this is best evidenced by the continued strength of our recurring revenues, increasingly longer contract lengths in cloud and subscription, as well as the potency of our new offers, each of which I'll touch on in a minute. On the renew front, retention rates have never been more meaningful as we are making the transition to the cloud. This is one of the areas where we are making significant investments and expanding our technical expertise and customer success resources to capitalize on the opportunity to grow the total lifetime value of our customers. Over the last three years, we've developed a powerful portfolio of solutions to unlock the inherent opportunity that comes with having long-term loyal relationships with our customers. Starting with Avaya Private Cloud, This solution enables the customization that is critical to supporting the complex day-to-day needs of our enterprise customers that want a cloud experience but still have regulatory requirements and security policies to meet or simply want and need to operate in a blended hybrid environment. Importantly, private cloud represents a meaningful commitment with typically higher lifetime customer value. A measure of this success is our bookings growth and hammering that success home over the last year, our ARR has more than doubled. One such customer, General Atomics, a large defense contractor, needed our UC solution that maintains compliance with federal information processing standards. They selected our secure private cloud solution to meet the needs of 18,000 users across more than 25 sites. which also includes remote working capabilities. This is a five year, $15 million deal and representative of the type of private cloud deals we are winning and seeing in our pipeline. Moving to Avaya OneCloud subscription. This is a real value vector for us, which drives profit, longer term commitments of approximately three years, significant upside, and provides our clients with a simpler path to move to the cloud when and how they choose. demand for more consumption-like models remains strong. And although we have millions of seats already under contract, we are still in the early stages of converting our massive global install base. In addition, we are pleased with our new logo wins, which approximately doubled from what we reported to you in March. Attracting new customers highlights the market shift from CapEx to OpEx, along with the importance of having highly flexible offers. For example, we just won a multi-year, multi-million dollar subscription deal in South America. The financial services company is adopting a unified Avaya platform to provide a total UCNCC transformation for their employees, customers, including multi-experience contact center, IVR, WEM, and video across social media and traditional channels. Avaya's solution was differentiated over the competitors based on the strength of our full portfolio, along with professional services capabilities, and an appreciation for our overall customer experience strategy. Demand for public cloud solutions grew in line with our expectations as we continued to expand our go-to-market motion and layer model. For CCaaS in particular, we are seeing a strong level of customer engagement Our pipeline is building as we continue our global rollout. In addition, we are building and investing in our ecosystem of partners who are and will continue to play an increasingly larger role in our CCaaS go-to-market. Notably, we recently announced how we've expanded our relationship with Salesforce by making the full range of deployment options for Viya One Cloud Contact Center integrated with Salesforce Service Cloud. I'm also delighted to welcome the team from CT integrations to the Avaya family. Avaya closed on the strategic tuck-in acquisition earlier this month. CT provides Avaya with additional digital capabilities over the top for our contact center install base, along with a rich library of connectors for rapid integration into additional third-party solutions, helping to supercharge our public CCaaS solution. Via Cloud Office, we delivered our best quarter yet, and we are positioned to continue that momentum as our new agent channel grows, additional features are released, and international expansion continues. Our win rates continue to improve, including one customer win over 12,000 seats, and it is clear that our services capabilities and coverage are real differentiators. In the Big Apple, We are proud to have been selected by the Empire State Realty Trust to provide Avaya Cloud Office to over 500 users across their 14 retail and office locations, including the iconic Empire State Building itself. The first building to reach the cloud is now fully connected to the cloud. And in a competitive deal, Empire State Realty Trust said that the flexibility, scalability, and cost savings were the key reasons behind their decisions. Another example is Agnes Scott College in Georgia. Not only did they want to move to the cloud and improve their communication and collaboration capabilities, but they also needed to ensure compliance at scale with Carey's Law and E911. The university selected Avaya Cloud Office for more than 1,000 users, citing affordability, modernization, and compliance as key decision factors. Turning to CPaaS. This is a force multiplier for our platform. With CPaaS, we are able to rapidly integrate and compose solutions that combine third-party applications with our own spaces and CCaaS offerings, providing customers with significant value and driving a faster return on their investment. Speed of deployment and composability are increasingly important as we continue to look for new ways to work in what remains a very dynamic work environment. ARR from CPaaS grew 52% quarter over quarter, and demand for these capabilities to support the extension of our platform is increasing significantly. One particular use case that resonates with me is how Avaya, working with a partner, was able to deploy our collaboration solution in support of India's MEDIC C2 initiative in just days using Spaces and CPaaS. This initiative connects COVID-19 patients with qualified doctors from anywhere to support their recovery while helping lighten an overburdened healthcare system and fills a critical gap in patient care. In summary, Avaya's innovation engine has never been stronger. We have strengthened our portfolio significantly over the past 18 months and have a rich pipeline of new and enhanced solutions coming down the pike, which is enabling our customers to improve their customers' experiences and compete and win. With that, I'll hand the call over to Kerry.
spk00: Thank you, Jim. Good morning, everyone. As a reminder, all figures mentioned in this call are as reported unless otherwise indicated in constant currency. As Jim highlighted in his remarks, The success of Avaya's business model transformation journey continues to be measured by the two key performance indicators that we have been utilizing to track our transformation progress, CAPS and OneCloud ARR. Both of these metrics continue to significantly exceed our own very aggressive expectations. This has enabled us to confidently predict that we will achieve our $1 billion OneCloud ARR target by the end of the 2022 calendar year. Turning to the numbers, for the third quarter of our fiscal 2021, revenue was $732 million. This represents a fifth consecutive quarter of as reported year-on-year growth, which was plus 2% in the quarter or minus 1% in constant currency over the $721 million in the year-ago period and compares to $738 million in Q2 of fiscal 2021. Our OneCloud ARR metric exited the quarter at $425 million, which represents 23% of sequential growth and is up 276% year-on-year. In line with Avaya's core strength in the enterprise segment, customers paying greater than $1 million annually accounted for 64% of total ARR. Similarly, Contact Center was again about 60% of our total OneCloud ARR. Revenue contribution from CAPS, or Cloud Alliance Partners and Subscription, represented 40% of total revenue consistent with Q2. We are pleased that the June quarter recorded the largest yet revenue contribution from our public cloud solutions, which included Avaya Cloud Office. For our third fiscal quarter, recurring revenue accounted for 64% of total revenue. Meanwhile, software and services represented 88%. These metrics reflect robust hardware product contributions seen this quarter. Non-GAAP gross margin was 61.5% in the third quarter compared to 61.2% in the year-ago period and 61.8% sequentially. Turning to total profitability margin and cash flow metrics for the quarter, Third quarter non-GAAP operating income was $146 million, representing a non-GAAP operating margin of 20%, down 280 basis points year-on-year. Adjusted EBITDA was $173 million, representing an adjusted EBITDA margin of 24%, down 230 basis points year-on-year. As we have discussed in prior earnings meetings, consistent with our business transformation avaya continues to significantly step up our cloud investments in both r d and sales marketing in q3 this results in nearly a 13 year-on-year dollar investment increase in these two categories nine gap eps was 75 cents in the third quarter compared to 95 cents in the year ago period and 74 cents sequentially now turning to cash flow We generated $11 million from operations, or 2% of total revenue, contributing to an ending cash balance of $562 million. This goal year-to-date, we have generated $35 million of cash flow from operations. As we have discussed in our prior earnings calls, the rapid movement to cloud and subscription model, where cash flows move from primarily receipt upfront to receipt routably, is requiring a larger working capital balance, impacting CFFO. As we exceed our $1 billion target for our OneCloud ARR, we expect the working capital requirements to begin to subside and CFFO generation to then trend toward double digit as a percentage of revenue annually. Now turning to guidance for fourth quarter fiscal 21 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 July 31st, 2021. For our full year fiscal 2021 guidance, we are raising our revenue guidance to be between $2.93 and $2.96 billion. This midpoint represents growth of between approximately 2% and 3% at current FX rates and between 1% and 2% as measured in constant currency. Accordingly, we expect fourth quarter revenues of between $720 to $750 million. As a reminder, fourth quarter of last year, we benefited from a one-time large product delivery related to the 10-year $300 million total contract value Social Security Administration contract. This impacts our fourth quarter revenue growth compare by roughly three full percentage points. In terms of our forward-looking OneCloud ARR metric, we are once again increasing our full-year guidance based on the rapid bookings acceleration our team is driving. we now expect to exit the current fiscal year with one cloud ARR between 490 and $500 million. At the midpoint, this upward revision to guidance represents an increase of approximately $40 million from the guidance we provided in May and demonstrates almost 160% year over year growth. Furthermore, we are tightening our caps revenue guidance range by raising the low end from 37% to 39% of full year revenue. This lifts our guidance range to between 39% to 40% of the full fiscal year, representing over $400 million of caps revenue growth year over year. We expect non-GAAP operating margin to be approximately 20% for the full year. Additionally, we are again raising the low end of our adjusted EBITDA guidance and tightening the range to $700 to $715 million, or approximately 24% of revenue at the midpoint. This range affirms our ability to generate profitability while simultaneously making cloud investments and scaling ARR. This reflects non-GAAP operating margin for the fourth quarter to be between approximately 18% and 19%, and our adjusted EBITDA to be between $160 and $175 million, or approximately 23% of revenue. Turning to shares outstanding guidance and earnings per share, We expect our weighted average shares to be between approximately 87 and 88 million shares outstanding at fiscal 2021 year end. We expect non-GAAP EPS for the fiscal year to be between $3.05 and $3.16. For the fourth quarter, non-GAAP EPS to be between 66 cents and 78 cents. This compares to non-GAAP EPS of 93 cents in the year-ago period. For the full fiscal year, cash flow from operations has been revised to approximately 1% of revenue as an outcome of the company's accelerated ARR growth, which is resulting in the near-term higher working capital requirements that I described earlier in my comments. With that, I'd now like to turn the call back to Jim. Jim?
spk09: Thank you, Karen. As our customers continue to adjust to a hybrid work model, we see a continued acceleration of digital transformation, new business models, and increased reliance on cloud, especially private cloud for large enterprises. The decisive steps we have taken, along with the investments we have made to execute on our multi-year strategy, has provided a well-positioned to lead our customers through their digital journey, and it shows in our results. We are reshaping the company, embracing near-term disruptions, and driving fundamentally positive longer-term results for the benefit of our customers, shareholders, and employees. Our business is healthy, our year-to-date performance and outlook is strong, and we are confident in our business model. With that, we'll open it up for questions.
spk12: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Lance Betanza with Cowen. Please proceed.
spk08: Hi, thanks, guys. Thanks for taking the questions. Karen, let me start with you, actually, if I could. You mentioned that margin pressure you called out due to investments in R&D, and I think you also said in sales and marketing, but... And then you said 13% increase in the investment spend in dollars. But if we sort of adjusted for that, how would margins have looked year on year? I know they were down, you know, you called out they were down 250 basis points or so year on year. Would they have been flat to up had it not been for those investments? Or would they still have been down due to the other pressure that you have based on the conversion of the business from point-in-time sales to subscription. I'm just trying to get a better sense for how the interplay there looks.
spk00: Sure. Thanks, Lance. So I think it's fair to say that, listen, our business in total, we are investing quite heavily in R&D, service delivery, and our overall go-to-market investments to drive that cloud AR that we talked about. I'd say first and foremost that the premise business is still quite profitable and is carrying a lot of the load to offset and mitigate some of those investments. To sum up, I think it would be quite fair to say that if we were to normalize for that fairly significant increase in just R&D, go-to-market, and some of the service delivery enhancements, that we would have probably been up against a very, very strong quarter that we had in the year-ago time period. So, you know, in general, we've all along been trying to aggressively grow our top line, you know, especially in the cloud and ARR, while being cognizant and balancing and focusing on maintaining, you know, a high level of profitability that I think few of any of our competitors can really do.
spk08: Okay, thanks. And for Jim, you've had a nice run of year-on-year revenue growth, but you're guiding down for 4Q. I guess a skeptic would ask, perhaps the revenue growth we've seen until now, perhaps that's just been a pull forward given work from home and COVID trends and that In 22, we're going to return to that sort of that same old Avaya where we have the perennial declines in both revenue and EBITDA. What would you say to those that would make that claim?
spk09: Yeah, thanks, Lance. Well, first of all, as Karen pointed out, we raised the midpoint of our guidance for revenue, EBITDA, and caps for this quarter. I think putting that into sort of perspective here, we are also delivering for the first time in my 14 years here year-on-year revenue growth. And I think that's a big news story, and I want to thank the Envi employees and our customers for that. Thirdly, is the acceleration of our ARR should be an indication that, in fact, our strategy has taken hold, the business is healthy, and our customers are calling on us, whether it's for a traditional business, private or public cloud, to say that we have the solutions they need in order for them to remain competitive. Lastly, I would point out that what Karen mentioned, if you compare it to last year, we had a 3% one-time improvement associated with SSA. And look, you know, turnarounds are hard. I think Avaya is exceeding our own aggressive expectations. I believe we're a different story than the rest. And we're looking to continue to drive, you know, a steady drumbeat of continued momentum and continued traction as we go through this multi-year transformation. So I, in fairness, would disagree wholeheartedly with the fact that this is the same old Avaya. And in fact, we're not the same old Avaya for the last 18 months to two years. I think we've posted strong numbers. Our business, our shift is taking hold. And as Karen mentioned, we are investing big time. And as you can imagine, moving to cloud and building out that infrastructure, the partner ecosystem, the skills and technology and capabilities we need internally is no small feat. And this company has executed, I would say, close to flawlessly over the last two years, still maintaining 24% EBITDA as percent of revenue. And we're doing that purposefully, as Karen pointed out. So we are making the right balance in investments back in the business. So I wouldn't compare this Avaya company to any company of years past.
spk00: Jim and Lance, so obviously, Lance, from our perspective, we're going through this revenue transformation, and the effects to our P&L Our balance sheet, our cash flow, they're all very consistent with this form of a transformation, and they're all very much in line with our long-term financial framework. I mean, we really feel very good where we are right now. We're looking out in front of us. We see a very strong demand profile, which, you know, across public, private, hybrid, all of which has been engineered as part of our OneCloud portfolio. So, honestly, I think we're feeling really confident about where we are right now and the strength in what we pointed out in our ARR. I mean, long-term, this is going to drive, you know, very significant growth. for this business. So I think the third quarter and then the more we're calling for the full year just speaks volumes to the health of the business and the progress that we've made on our transformation.
spk08: Thanks, guys. Great job on the ARR front in particular. I'll turn it over. Thanks. Thank you.
spk12: Our next question is from Remo Lenshaw with Barclays. Please proceed.
spk08: Hey, good morning. This is Robbie on for Remo. Thanks for taking my question. Maybe we can just start with any of the drivers this quarter of ARR and then any incremental changes that led you to move your $1 billion ARR target to fiscal 22. Thank you.
spk09: Yeah, hi, this is Jim. I'll take it and then I'll turn it over to Karen. So let me take maybe this in two parts. First of all, I think the number one reason, keep in mind we've just started measuring ARR this year And where we finished last year, we were roughly almost $200 million. We're going to be $500 million this year and $1 billion next year. We're looking at this, as I mentioned, steady traction, steady momentum. And the fact that one quarter may be different than the other, but I think you need to make sure you're taking a look at the long game here and not just playing for quarter-on-quarter incremental strides. And continuing to double the business over a three-year period of time, I think, is pretty significant and something that is – sort of a benchmark for many companies. So I think the real reason is the success is the fact that how much we've invested in strengthening the portfolio to go to market motion, how we've engaged and embraced our channel partners, which are significant to the growth of the company, and how well we've built out our internal systems in order to manage this. Secondly, if you take a look at, you know, over this past year, we've continued to improve guidance quarter on quarter as we've gone through this year. And that's really affected the matter of where we're seeing growth. In subscription, we had our best quarter ever in Q3 from a TCV perspective. Couple that with the fact that we've also had our best quarter in private as well as public cloud. I referenced one private cloud deal. I can tell you, as I mentioned, these are representative of all of our private cloud deals. And if you take a look at our backlog and our funnel, clearly it's much greater than where we were not just three months ago but even six months ago. So our strategy has taken hold. We're seeing huge demand, and we're able to actually not only accelerate that demand but, more importantly, execute on that demand when it comes to implementations associated with cloud, both private and public. And that's the main reason why we raised guidance and pulled it in, roughly a year ahead of where we thought we would be.
spk08: Great, thank you. And then maybe if I could just follow up On a similar note, I know last quarter you talked about for subscription specifically about, I think, 20% or a portion of deals that are from new customers. So maybe within subscription and more broadly with the business, what you're seeing between new customers migrating over to some of your new or, sorry, existing customers migrating to your newer offerings versus actual new customers being added would be helpful as well. Thank you.
spk09: Yeah, sure. So a couple things. So first of all, obviously, with a huge install base, probably the leading install base of anyone in the industry, we're seeing a number of our customers take advantage of subscription. And I may point out that it's not just traditional business onto a different delivery mechanism. Ninety-some percent of these are all hybrid in nature. So the fact of the matter is that they're upgrading. They're bringing in cloud elements embedded in the solution. And, in fact, they're getting more value than they had before. So we're very excited about the, quote, hybrid growth associated with subscriptions. So you shouldn't think of a subscription as a maintenance replacement. It's far more than that. As far as the new customers, I would say the new customer base as far as the number of customers from our existing base this quarter represented a number that's close to 10% of the total, which, by the way, may sound like a small number, but it's not a small number in overall number of customers. nor should one do that as, you know, a relatively small number as far as the opportunity that's in front of us. And it's great to see that this offer is not only, you know, of value to our customer base, but from a competitive perspective, from a differentiation perspective, Obviously, this 10% were not Avaya customers previously. One of the reasons why it's led to at least a two-year-plus high on the number of new logos that we won, as well as the continued 100-plus deals of greater than 1 million of ARR, RTCP, I'm sorry. So we're in the early innings still. We see a lot more in front of us, and, you know, we're going to continue to double down on our investments, as we've pointed out, and we're going to continue to take advantage of the market that's in front of us.
spk08: Great. That definitely makes sense. Thank you for taking my questions, Mark. Sure.
spk12: Our next question is from George Sutton with Craig Hallam. Please proceed.
spk10: Thank you. Guys, in answer to the earlier skeptics question, the skeptical investor question, I would just say the new Avaya has ARR, the old Avaya did not. I think that's fairly simple. So I'm very intrigued by the fact you're moving forward your ARR expectations and I wondered if we could just get a little bit of a better sense of when we get to that billion-dollar number, what will be the representation of your existing customers, in your view, who have migrated versus the new customers that you're bringing in?
spk09: Yep. So thanks, George. I appreciate it. I'll start now. I'll turn it over maybe to Kerry. So first of all, I think it's noteworthy to point out that, as Karen mentioned, 60% of our ARRs come from contact centers. I think it's probably also noteworthy, though we didn't bring it up, that in the past year, our contact center ARR has more than quadrupled. So representative of the foothold and strength that we have on large, complex enterprise customers in the contact center, which is our sweet spot, and we see significant opportunities in front of us and those large deals, large, complex enterprise customers who are calling on Avaya to lead them through their digital transformation. That's a very important point. When we get to the $1 billion at the end of next year, if you're looking at a percent of how much has converted off of an existing install base, hard for me to give you an exact percentage, but I would tell you that there's more than – 50% of the runway left to go. So to the point where is this a one-year point in time, you know, program of the year? The answer is no. This has the technology, has the sustainability, it has expansion in front of it, and even by this time next year, we still have a huge runway in front of us. So that's an important point. Thirdly, how much of that will be on new customers? I can tell you that as far as ARR, we're seeing nice growth, as I mentioned, in private cloud. We're seeing nice growth in subscription. But private cloud really is starting to become more and more of a component of the overall ARR composition. And if you take a look, as I mentioned, just one deal, where we are, the backlog, deals are working, the amount of interest through RFPs and RFQs, I would suspect in many of those big deals, though they may be single customer, are quite large in overall value. So I believe the customer growth will probably be in the 5% to 10% range over the next year or so, so probably getting us upwards in the 20%, 25%. But the dollar value could become much more significant over time as we move drive more and more into the largest of large enterprises and in the mixed component, again, heavily skewed towards contact center. So hopefully that answered your question.
spk10: That's great, and as a follow-up to your comment on the importance of CCAS, the Zoom 5.9 combination is obviously attempting to move them into more of an enterprise capability. I don't think the market appreciates the types of customers you go after versus the types of customers they go after for that offering, but I wondered if you could give your perspective on that acquisition.
spk09: Yeah, sure. I think you bring up a good point, George, and I think one thing we need to keep in mind is how one determines and classifies enterprise versus non-enterprise. And if you take a look at, as you look at the segmentation within contact center, I would suggest that we play in a completely different zone than 5.9. So it's fine that they're all within a particular mid-market type segment. But I think that's a clear differentiation because it has to do with complexity, expertise, and so on. But I think if you look at the acquisition, I don't think it's a surprise to anybody that there is a need for consolidation in this industry. And I think, you know, Zoom and Five9 obviously took advantage of that. But if you can contrast that to Avaya, we launched the Avaya OneCloud portfolio over a year ago, probably close to 18 months ago. And the fact that, you know, we saw the value of an integrated platform strategy. In fact, we've had an integrated platform strategy as being the leader in UC and CC for years. And this transaction, to me, has just proved positive that Avai is in a great position. I mean, congratulations. Welcome to the neighborhood. Rising tide lifts all boats. So we're excited about it. We're also excited about the fact that it demonstrates that this is a strong market. And the fact that those that have an integrated platform like Avaya have a huge opportunity to win in the market going forward. And I think you're seeing that being representative in ARR because that's where the industry is moving to a cloud and SaaS model. So, you know, I think that's a great recognition of where we are. And, in fact, as I mentioned, doubling year over year is extremely important. I think another differentiator we have is we operate in 190 countries. We have these solutions available around the globe. And we are winning not just in North America, but we are winning in APAC. We are winning in EMEA. We are winning in CALA. And the fact you take advantage of our breadth, our scale, and our expertise, and the fact that we have an integrated platform, and the fact that we now have into the market, you know, a complete CX offer, owning UC, CC, collaboration, video, increasingly more and more AI. positions us in a great position, if you will, in order to capture and win in this market. And that's what we're all about. We're all about execution. We're all about winning. And we're all about investing now to take advantage of the market in front of us and to strengthen our foothold. So I think it's great that they had this announcement, you know, and we're looking forward to the months, quarters, and years ahead to compete with them.
spk10: Good stuff. Thanks, Jim.
spk12: Our next question is from Sameek Chatterjee with JPMorgan. Please proceed.
spk01: Hi. Good morning. Thanks for taking my questions. Jim, I just wanted to start off on, you did provide some details on CT integrations and the acquisition. Just wanted to see if you can go a bit deeper. I mean, the way I understood it, it really kind of makes you, gives you more expertise in the addressable market opportunities that you're already targeting. doesn't really expand that addressable market as such, but just wanted to get a bit more details about how you're thinking about the implications in terms of just the addressable market opportunity for you. And then I'll follow. Yeah.
spk09: Thanks. That's a great question, and I think you hit the key. The fact of the matter is our M&A strategy is one that's focused primarily through consultants, and it's one that's also designed to work with new startup, fresh companies that bring certain skills and expertise into our company such that we can continue to leverage the opportunity in front of us. And that's exactly what we did with CT Suite. CT Suite was a partner of ours. They've been a partner of ours since 2016. We're working with them, you know, hand in glove on a number of key opportunities in front of us, especially digital technology. in the digital space. And as we looked at this, we wanted to bring, if you will, CT Suite into the family because we wanted to make sure that we have that expert team, skill team, but more importantly, to allow us to rapidly deploy digital capabilities over the top for our contact center, not just our install base, but for all of the opportunities in our backlog and funnel in front of us, that, frankly, CT Suite is an integrated component. So it just made perfect sense to bring this team into the company to supercharge us, for lack of a better term, in really delivering CCAS solutions so we can make sure that they're dedicated and focused on delivering the Avaya platform with our current team. It's been – Ronnie and his team have done an outstanding job. Frankly, they were part of the family anyway as a partner, so it's been a really seamless – sort of integration, even though it was just recently announced, and, you know, quote, unquote, we're off to the races. So, you know, we're excited about the opportunity that this brings, and, you know, we believe it's going to help us, as I said, sort of supercharge a number of our digital capabilities to continue to keep us at the forefront of innovation in CCAS.
spk01: I did have a follow-up for Kiran. Kiran, it's good to see the ARR target being brought forward, but it obviously then means you're almost doubling ARR next year. When I think about the cash flow for next year, how should we think about the magnitude of improvement compared to this year where you're, I think, guiding to 1% of revenue? Just what's possible, what kind of headwinds does the acceleration of the ARR metric bring in terms of the magnitude of improvement for next year?
spk00: Hi, Samik. Sure. So listen, as we've said before, we're in the middle of this transformation from CapEx to the cloud subscription. And obviously, it's a pretty dramatic change in what a customer pays you in terms of you know, upfront point in time as opposed to overtime. So, you know, the good news is as we've increased the ARR, you know, obviously it's indication of just the traction that we're getting in the business and that traction has been accelerating. My expectation is that As we said, we expect to get to $1 billion by the end of 2022 calendar year. So doubling, we're going to go from a run rate of 75-ish million a quarter to 100-ish million a quarter. And therefore, I do expect that we'll continue to see some working capital requirements in line with what I would expect this year. So I continue to see low single-digit CFFO from operations. But I believe that once we get to that billion dollars, this starts to turn around and the working capital requirements start to decline. And we start to move, I'd say, fairly rapidly towards that double-digit CFFO that we talked about. Remember, I've always said by the second half of 2023, we will see a fairly aggressive run back to the double digits. uh that we expect so i i say we're really pleased with the rate and pace uh of the of the take up we expect that the working capital uh requirements will continue to next year probably indicates you know low single digits cffo again next year but then a you know very substantive improvement in 23 and beyond thank you thank you our next question is from a cm merchant with citigroup please proceed
spk03: Great. Thank you for the opportunity. If I may, like, currently about 60% of your ARR is from contact center. You know, as we think about, and you've had great success with that, as we think about some of your UCC customers coming on board to your subscriptions and cloud offerings, that tends to be much more competitive market versus the contact center. You know, how should we think about this rate of investment in and OPEX investment going forward and similarly, you know, the impact to the EBITDA margins as we think about more of the UCC customers adopting your subscription and cloud offerings?
spk09: Thank you. Jeremy, do you want to try to take that first and then I'll let, okay.
spk00: Sure. Yeah, so I think first and foremost, that you know the investments that we're making right now obviously they have some tactical impacts um but we really think it's prudent for us to continue to do whatever is is required for Avaya to expand that ARR into, as you say, the combined UC and CC, both from a subscription, public, private, and hybrid. So we are really doubling down on that. Do I think there'll be a modest type of headwind or impact? From a profitability perspective, yeah, not unlike this year where we talked about a point of impact. We've been very cognizant of trying to balance growth with ensuring that we continue to maintain the profitability that we are really, I think, very unique compared to the rest of the industry on. So I think we continue to accelerate this growth. and do it with margins very consistent with where we're at today. Maybe a little less than where we were a year ago, but right around that mid-20s that we've been able to operate on pretty successfully for quarter out over the last couple of years.
spk09: Yeah, and I think another thing just to add to Karen's answer is the fact that we've been obviously – very optimized and very disciplined in our overall structure of the company. And if you take a look at our offers, I would say we're a bit more differentiated than others. What I mean by that is the UC, you know, end of the business is obviously very competitive at the low end in the SMB, you know, a lot around, I'll call it the retail space. We're really not overly active in that space, to be honest with you, nor do we see that as an area that we're going to invest in significantly because of the compression by just how populated that space is and the fact of what's the dollar value going to be over time as that becomes more competitive as a number of folks continue to, as you said, you know, competing with the same sort of customer base. We operate more in the mid-market to high-end, where there's not as much pressure. In fact, and that's where we're seeing our growth, as I mentioned, is really around the enterprise space. 96% of our ARR deals greater than 100,000. Karen pointed out 64% of our ARR deals greater than a million. I'd stack that up against anybody. um you know so and 20 plus percent are greater than five million um and that's where we're seeing the traction that's where we're seeing the backlog and that's where we're seeing the opportunities in front of us so we're really not into the uh into the low end highly competitive um you know tremendous cost pressure type uh type opportunities
spk03: Fair enough. And if I may, as you do more of the UCC and perhaps even integrated offerings, that tends to be a little bit more services versus I would say just the software side of things. Clearly, your services margins are doing really well here. I'm just questioning if that's the pace that we should expect the services margins to kind of hover around, even as we do more of these hybrid offerings, more integrated that require a lot more consulting and professional advisory related to those types of deals. Thank you.
spk09: Yeah, this is Jimmy. I don't see anything that is significantly going to change, you know, around overall services revenues. Clearly, as we drive more and more automation, especially into the area of private cloud and the opportunities that are there in front of us, I think, you know, I think I don't see a real change to services. into the services margins as we move forward. We have a pretty well-defined business model there. We've been in the services business for many, many years. It's a key component to the revenue and profitability of the company, and I suspect it will continue to operate as it has in the past. So I don't see much of a change.
spk03: Okay. Thank you very much.
spk12: Thank you. Our next question is from Catherine Trenbrook with Colliers. Please proceed.
spk02: Thanks for taking my question. I have a couple of them. One is, any update on the Social Security contact? And can you refresh me if that included contact center that was such a large contract that you signed last year? Thanks.
spk09: Karen, you want that?
spk00: sure well so uh first and foremost you're right catherine it was a combination of both uc and and contact center as well where we displaced uh displaced some competitors so um you know very pleased with that uh we think we're making you know good progress in terms of rate and pace uh with the contract as we talked about uh last quarter we had a very significant set of deliverables that we executed upon back in Q2 from a professional services perspective. You know, from this point out now where we're working until the date we stand up the new private cloud and we move forward from there. Anthony or Stephen, if you guys want to add anything more.
spk07: No, I think you got it right on that one, Kieran. So I think we're on good track and right in pace for that one. And it's both UC and CC.
spk02: And the follow-on question is, I always get pushback from the buy side on the competitive landscape. So when I say that, you know, you guys are no longer a donor, pure donor, they push back and say, well, you know, Genesis, you know, 5.9, blah, et cetera, et cetera. So can you talk on these larger contracts, you know, big installs that you have, why you think you're no longer a shared donor and who do you see trying to, you know, perhaps move in on your territory and what's your best defense? Thanks.
spk09: Yeah, that's a great question. Thanks. And I think if you just take a step back and look at our performance over the last 18 months or so, the way we've rounded out our portfolio with the number of New announcements and the fact that not only the announcements, but these products are actually starting to take hold in the market. Just in the last year, 18 months, we announced subscriptions at seven quarters old. We announced spaces. We announced CCAS, both private and public. We announced the relationship with RingCentral. We just started shipping. 18 months ago. We now have AI solutions into the marketplace. We have CPaaS now up and running and really providing that over the top, you know, at the edge, if you will, so we can do our composable and not do sort of one large complex solution. sort of uh you know implementation we now have the capability through apis with our customers that they can compartmentalize this they can do it how and if and when they want it i mean it's a and now you look at the revenue growth more importantly the bookings growth of all these new products continually sets the pace for us as we move forward so if you wanted to go back two years ago and somebody said we were a donor well yeah i mean we weren't growing revenue we were declining six percent a year We didn't have any ARR growth to speak of. In fact, we weren't measuring it. We didn't even have a caps metric to determine, you know, are we viable in the new world or are we relevant? So, yeah, you want to go back two years, and it seems everybody keeps trying to bring us back two, three years ago for a company that actually was, you know, investing heavily in the future. And my point about turnarounds, the fact of the matter is we're a very different story. We're not only saying what we're doing, but we're actually executing to what we said we were going to go do. And if you take a look at our wins, 1,700 new competitive logos last quarter. Again, over 100 deals greater than a million dollars. A number of key large customer wins globally around the customer base. You know, if you go back over the last 12 months, we've had over 6,000 new customer logos. I'd stand that up to anybody. Somebody wants to go out there and say we're a donor, God bless them. They can say whatever they want. We're not going to get down to that level. I don't believe we are. We're focused on winning. We're focused on continuous improvement. We're focused on providing solutions for our customers to win and compete in their marketplace. And, you know, I trust that the results that we've posted speaks volumes to the progression that we've made over the last four to six quarters. Granted, there's more. Trust me, this team is heads down. To do more, we are not taking our foot off the pedal by any stretch of the imagination. And we're going to be consistent. We're going to grow. And we're going to make sure that we're executing each and every day. So, I mean, that's what we're focused on. Others can say what they wish.
spk12: Thank you. Our next question is from Mita Marshall with Morgan Stanley. Please proceed.
spk04: Great, thanks. A couple questions for me. One, is there any sort of stat you can give either with new logos or kind of the ARR base that you've built up of just how many of those are combination UCCC deals? And then maybe second question, you noted some initiatives around renewals or kind of investing in a team, I assume, to kind of work on increasing renewals, just any kind of details you can give there around what those initiatives actually entail. Thank you.
spk09: Yeah, and I'll take that first. I'll let Karen talk to you about the renewals. But if you take a look at our AR buildup, as I mentioned, you know, we do have an integrated platform of UC and CC. And obviously the bulk of them are consistent with that integrated platform. So pick a number. It's in the 90s. You know, I don't know if it's 90-what, but it's all into the 90s of the fact that, you know, we're providing this combination, UCCC, and all those AR deals. And now we're seeing, as I mentioned, more of a hybrid solution coming into those deals as well with some of our new technologies associated with collaboration and video and AI and so on. So it's well into the 90s. I'll let Karen talk about what we're seeing from a renewal perspective.
spk00: I mean, so one of the examples that I've given, you know, historically was even if a customer decides to renew their entire, you know, maintenance base, their GSS maintenance base, they're going to push very hard for some price performance improvements, you know, minimum 3 or 5% every quarter. What we've been seeing just on the subscription alone is we've been able to see net renewal rates as we convert this maintenance over to subscription of anywhere from 115 to 120. I mean, we turned in an extremely strong quarter this quarter, which means the run rate that we're getting just at the bundled subscription is anywhere from 20 to 25 points higher than it would have been from the GSS perspective. So it just proved positive of just the progress that we can make on expanding the wallet share with the customer just moving the subscription and that obviously gets better when we start to convert customers into private and public cloud where the multiples are even more expensive than that so you know overall i think it bodes very well for us in terms of net renewal and their retention rates to continue to drive the customer into subscription and then into public and into private cloud great thanks
spk12: Our next question is from Ahmed Korsand with BWS Financial. Please proceed.
spk06: Good morning. Could you just talk about these new logos that you're adding? Where are they coming from? Are they on-prem? Are they cloud? And are you driving these ads through any kind of promotions through your agents and channel partners?
spk09: Yeah, this is Jim. So first of all, the 1700 new logos are a composition of frankly everything that we have. I will give you a stat that if you take a look at ACO, 75% of our ACO volume this past quarter was new logos. My point about not being a donor and making sure we have a rounded solution That speaks volumes to that. They also come from the large enterprises. Clearly, with 1,700, you're not going to have 1,000 large enterprise wins. But as far as dollar value and significance, it's actually quite impressive and, again, the reasons why we had 15 deals, I believe it was, over $5 million, representative of the largest of large enterprises. You know, they come from both the channel as well as from direct. So there's, you know, obviously, as I mentioned before, you know, we're seeing demand across all businesses here for us in all geographies. I will tell you, we're not doing anything to – Sometimes I use the term rent market share. So where you go crazy and you put a bunch of incentives in place in order to put spiffs on steroids here in order to try to pump your volumes. We're not doing any of that. This is consistent. I think you can see it across the board. This is really around the products. It's really around our teams and our organization and our skills. And I would say, you know, maybe you could frame it as organic real growth versus SPF growth. And that's exactly what we're doing. We haven't done anything over the top to have something that's not grounded in and it's not sustainable as we move forward.
spk00: This is Karen. Just one clarification. So while Jim is right, 75% of the customers with a new logo, it's about 50% of the seats are new logo, which is kind of consistent with what we've seen the last several quarters.
spk09: Yeah. All right. Thank you.
spk12: And our final question comes from Raj Hall with Goldman Sachs. Please proceed.
spk05: Yeah, thanks for putting me in, guys. Just two quick ones for me. One, you still have a considerable amount of product sales. I'm just curious, a lot of supplies issues for other companies selling hardware. I guess it'd be nice if you guys could comment on that, what that's doing to the underlying margins in the product, part of the revenue. And then also DSOs. kind of elevated the last couple quarters. I'm just curious, you know, what you expect DSO trajectory to be into next quarter. Do you expect that to come down? And any other, you know, color you can give us on what's going on with the DSOs would be great. Thanks.
spk09: Yeah, this is Jim. I'll hit the supply chain. I'll let Karen hit the DSOs. On the supply chain, I have to give credit to Fred Hayes and his team. Fred runs SVP in charge of supply chain. We have not had any disruption. In fact, just the opposite. We still continue to put the same percentage, which is a significant percentage of all our product, on the ocean. We have been working with our supply base for years, and we have a very intricate arrangement with our suppliers on how we manage our supply chain, so a real credit to our team. So we did not see any disruption last quarter. Obviously, to this quarter, we have not seen any disruption as we go out through September. I don't foresee any disruption based upon what we're seeing in front of us with our demand profile, with balance with our supply profile. So kudos to the extended supply chain team. But I don't see any of that disruption affecting us this quarter.
spk00: Yeah, this is Karen. Just one thing I'd add to Jim's point on the supply chain. I would say we did see an elevated cost of transport, but really didn't show up in our product margins just because of overall favorable product mix related to that. So we're able to contain that through the mix. Related to DSOs, back to Fred Hayes' team again, they continue to do an outstanding job by collecting our receivables on a very timely basis. We've been averaging pretty consistently 52 to 54 days over the last umpteen quarters, and we've seen no difference in that. As we've talked about all along, really the change in what we've seen from our cash collections is really just due to the model transformation change and nothing to do with the collectability. We're very fortunate, especially given the enterprise nature of our accounts, to have a very credit-worthy install base who pays their bills on time. So really right now I'm not highlighting any delinquent DSO of any material amount. Great. Okay. Thank you.
spk12: We have reached the end of our question and answer session. I would like to turn the conference back over to Michael McCarthy for closing comments.
spk11: Thanks, Sherry, and thanks, everyone, for joining us this morning. We look forward to catching up with you over the next days and couple of weeks. If you have any questions directly, please feel free to give a call or drop me an email. We'll look forward to touching base. Take care.
spk12: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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