Avaya Holdings Corp.

Greetings. Welcome to Avaya's fiscal 2022 quarter two investor 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. And please note that this conference is being recorded. I'll now turn the conference over to Ralph Wynne. Thank you, sir. You may begin.

Thank you, operator. Welcome to Avaya's fiscal 2022 second quarter investor call. Jim Cherico, our president and CEO, and Karen McGrath, our executive vice president and CFO, will lead this morning's call and share with you some prepared remarks before taking your questions. Joining them this morning will be Stephen Spears, chief revenue officer. The earnings release and investor slides, which 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 in the 8-K file today with the SEC. These should aid in your understanding of Avaya's financial results. All financial metrics referenced on this call are non-GAAP, with the exception of revenue. We've included a reconciliation of such non-GAAP metrics to GAAP in the earnings release and investor slides. We may make forward-looking statements that are based on current expectations, forecasts, and assumptions, which remain subject to risks and uncertainties that could cause actual results to differ materially. In particular, the global economy and our business are being impacted by the Russia-Ukraine conflict and related sanctions and export controls recently imposed by the U.S., U.K., and the EU on certain industries and Russian parties as a result of the conflict, as well as responses by the governments of Russia or other jurisdictions. In addition, COVID-19 continues to impact the global economy, and the extent of its continued impact on our business will depend on a number of factors, all of which are outside of our control. All these factors 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 our quarterly reports on Form 10-Q. It is advised policy not to reiterate guidance, and we undertake no obligation 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.

Thanks, Ralph. Hello, everyone, and thank you for joining today's call. I'm pleased to report Avaya's second quarter results this morning. Let me begin by thanking our global team as they continue to exceed expectations in implementing and driving the strategy we've laid out. We are delivering Avaya OneCloud solutions to our customers at an accelerated rate and continue to make significant headway on our multi-year transformational journey to a cloud and SaaS business model. It's important to highlight a number of key indicators of the progress of our transformation. First is the Viya OneCloud ARR. We drove record growth for this key industry KPI with $130 million quarter-over-quarter increase and over $400 million year-over-year increase to $750 million. The path to hit $1 billion ARR mark by the end of calendar year 2022 is well paved. Second, recurring revenue reached a record for us, growing from 66% a year ago to 69% in Q2. This is a strong indicator that our focus, investment, and actions are paying off. Third, software and services as a percent of revenue came in at 89%. Fourth, 75% of new bookings came from Avaya OneCloud. The first time we reached that threshold, And we had record private cloud bookings as well. And finally, our caps metric ended the quarter at 54%, up from 40% a year ago. These metrics serve as proof positive that we are successfully repositioning the company from our historic one-time revenue model to a recurring one. Our strategy is taking hold faster than we had anticipated, leading to a significant shift in our fundamental business model. To summarize, enterprise digital transformation initiatives continue to push forward as companies look to Avaya to help them transform their worker and their customer experiences. The strength of our success with enterprise customers continues to fuel growth and our key cloud and recurring metrics. 95% of ARR comes from enterprise contracts greater than 100K. 60% of those greater than 1 million ARR and 20% comes from those greater than 5 million segments. As further proof of our enterprise leadership, we once again signed approximately 100 deals with over 1 million in TCV, 18 greater than 5 million, 8 greater than 10 million, and we had two deals worth over 25 million TCV, including one that was greater than 70 million. We haven't discussed seats in some time, but it's noteworthy that we booked over 3 million seats to Avaya OneCloud this quarter, which underscores our success migrating customers at a faster rate than we predicted. I cannot be more delighted with how far we've come in such a short time. While the underlying momentum of our business remains very strong, revenue and profitability did not meet our expectations for the quarter, primarily due to two dynamics. Our record ARR is a reflection of the shift away from one time and point in time revenue to recurring revenues. This rapid adoption by our customers, now including government as well, had an impact on our top line. While this shift is consistent with our strategy and business model, it is also occurring faster than we projected. As we look at total bookings, 72% this quarter came from Avaya OneCloud solutions compared to 58% last quarter and 37% a year ago. We estimate this shift had a $40 million impact on revenue for the quarter. As a result of the increase in recurring contracts, there are a couple important points to make. First, revenue isn't lost. It is one business. and will materialize over the life of these long-term contracts. Our cloud business is obviously healthy and growing, and this is consistent with our strategy and indicative of the accelerated shift in our business. Second, Avaya has a significant customer base in Russia. The war in Ukraine, including the sanctions on Russia, and the overhang on the rest of Europe is beginning to create top-line pressure. The impact on operations reduced revenue by roughly $5 million for the quarter. Karen will provide additional detail on both dynamics and their impact on the second half outlook in a few moments. Now I'd like to emphasize some key performance highlights that will further demonstrate the underlying strength of our business. Avaya OneCloud ARR is our most important performance metric. It holistically measures the overall strength of our cloud portfolio whether delivered in a hybrid, private, or public model. Our OneCloud ARR grew 21% sequentially and is up 118% year over year. In addition, we yet again signed over 1,400 new logos this quarter. There is no better proof that Avaya is well positioned to be the brand of choice for digital communication solutions. This impressive growth underscores the strength of our solutions and the commitment of our customers as we move them to cloud-based solutions. Let me share with you a couple of key customer wins. Watson Clinic, based in Florida, serves almost a million patients every year. They chose Avaya Cloud Office to replace an aging Siemens platform for the 3,600 users across 15 locations. This new customer selected Avaya because of the ease of centralized management, integration between sites, and expansion of channels to include voice, video, chat, and conferencing. Another win was Finance Informatica, the central service provider for savings banks in Germany. They chose a private UC cloud platform powered by Avaya technology to support 313 banks representing 230,000 seats with 2 million calls per day. Moving to Avaya OneCloud CCaaS. Our deliberate approach to building out CCaaS capabilities with geographic expansion and partner enablement continues to yield the results we expect. We set out to deliver differentiated CCaaS solutions with the flexibility of public, private, or hybrid deployments in order to monetize and activate our massive contact center install base, and we're doing exactly that. The deal we signed with Life Insurance Company of Alabama is a perfect example of Avaya CCaaS capabilities winning new business. They chose to move to a public cloud CCaaS solution to solve for their numerous legacy technology challenges. The solution allows flexibility for employees to work remotely while having access to all the same tools they would have if they were in the office. We also saw continued momentum for private CCaaS. In Q2, we had one of our strongest booking quarters to date. One example is a top insurer in the UK that is moving to our private cloud to accelerate their business transformation. They also needed to effectively support at-home work requirements along with having the capability to flex to 5,500 agents during peak business periods. You've heard me talk about the importance of a VICE partner ecosystem. To our growth plans, and the importance of gaining additional market reach through such relationships. I am excited to announce that just in the past two months, we have signed two new global strategic partnerships. Both will be real needle movers for our business, in particular, our CCaaS offerings. First, I'd like to touch on Alcatel-Lucent Enterprise. Through this partnership, ALE will offer via one cloud CCaaS, including our AI, identity management, security and workforce engagement management capabilities to their global base of nearly 1 million customers in over 50 countries. The teams are making great progress on enablement and we expect this to result in new revenue streams for us as early as the start of our fiscal Q4. The second is with Microsoft. As you may have read in the press release, we announced a significant expansion of our partnership which goes well beyond just a go-to-market effort focused on CCaaS. There are three key pillars to this agreement, including working directly with Microsoft to more rapidly move private cloud customers to the Azure platform. Second, joint co-selling efforts to move current premise-based customers to either a hybrid or pure cloud model. And thirdly, CCaaS is available in the Microsoft Azure marketplace and collaboratively sold by Avaya and Microsoft sales teams. Although in the early innings, it's relationships like these that show the global strength of Avaya OneCloud portfolio and reinforce my confidence and our ability to successfully execute on our overall cloud strategy. While CCaaS solutions are indispensable to organizations, customer experience strategies We believe Avaya OneCloud CPaaS represents the leading edge of collaboration for digital communications. In addition to helping customers simplify speed deployment of highly differentiated capabilities, CPaaS provides the flexibility for customers to customize and build their own applications and integrate them to our platform. And our most significant CPaaS deal to date, the University of Iowa Hospitals and Clinics shows Avaya CPAS capabilities to enable 25,000 UCAS and 750 CCAS users. Our CPAS is helping them to provide superior patient service, a robust resiliency strategy for their sites, and improve experiences for their students and employees. A second example underscores the flexibility CPAS brings with corridor machinery. Carter is the third largest Caterpillar dealership network in North America. They selected Avaya Cloud Office integrated with our OneCloud CCaaS device as a service and CPaaS virtual agent in a five-year deal that will reach more than 2,000 users across 34 sites. This was a competitive win for Avaya displacing Cisco. Avaya's full suite of solutions are vital to our global install base. The capabilities we bring to the table, the differentiation we unlock, along with the value we provide to customers are keys to our continued success. Add to these the strength of our brand, our partner ecosystem, and our global reach, and it's fair to say we have a unique ability to service the world's leading and most complex enterprises at scale. And it explains why customers are choosing Avaya. We have increased confidence in the momentum of our business. We are committed to delivering business-impacting innovation, maintaining our competitive edge, and we continue to focus on the long game, investing in growth drivers and doing so profitably. Now, let me turn it over to Karen to take you through the details along with an update of our guidance for the year.