Avaya Holdings(NYSE: AVYA) results of May9 Q2 2019 earnings call, 20198: 30 AM ETCompany to Michael McCarthy-Jim Chirico, Vice President of Investor Relations-President and ceo McGrathSenior Vice President and CFOShefali Shah-Senior Vice President and Chief Executive Officer and GCChris McGugan-Raimo Lenschow, senior vice president of solutions and technical conference call participants-Buck-in Vitan ligationAndy Cowan DandanRabbinski-Morgan Stanney barajiGoldman Sachs GroupStifens, businessman of incia-Holsa-CitigroupGood morning.My name is Krista and I will be your conference operator today.At that time, you are welcome to participate in the call of Avaya's financial report for fiscal 2019 in the second quarter.
Michael McCarthy, vice president of investor relations, you can start your meeting.Michael McCarthyWelcome to Avaya Q2 annual 2019 investor request.Jim, our President and CEO?Our senior vice president and chief financial officer Kieran McGrath will lead this morning's conference call and share some prepared comments with you before answering your questions.
Shefali Shah, our senior vice president and chief executive officer;Chris McGugan, senior vice president of solutions and technology, is also here for a conference call this morning.Earnings posting, CFO reviews and investor slides cited on the phone this morning can be found on our website's investor relations page and 8-K filed an application with SEC today and should help you understand Avaya's financial results.We will referGAAP Financial indicators and, in particular, all consecutive and annual-over-Years refer to our non-GAAP numbers, unless otherwise stated.
The earnings release and investor slides contain the reconciliation of these measures with GAAP, which can be found on the Investor Relations page of our website.We may make progress.Based on some forward-looking statements of current expectations, forecasts and assumptions, these statements are still affected by risks and uncertainties that may lead to significant differences in actual results.Information on risks and uncertainties can be found in our recent submission to the SEC, including our Form 10-K and subsequent Forms 10-Q reports.
Avaya's policy is not to reiterate guidance and we have no obligation to update or revise it forwardStatements in the event of a change in facts or circumstances, unless otherwise required by law.I will transfer the phone to Jim now.Thanks, Mike.Good Morning, everyone. thank you for joining us.My comments this morning focused mainly on our 19-year performance in the second quarter, and then Kieran will show you the numbers.Our top performance and earnings are lower than expected, which is not the way we start the calendar year.
In response, we have implemented some corrective actions to improve performance.While I was disappointed with our performance last quarter, overall, given the momentum and attractiveness we saw in many business areas, including the cloud, I am still confident in our way forward in serving and emerging technologies.Our income shortage is caused by a combination of two factors.
First, we have experienced the problem of product transition execution.Specifically, at the contact center, we missed the key in-house technical delivery related to the new partner delivery.We have taken prompt action to address this issue, which will be corrected later this quarter.
In UC, we encountered operational execution issues in the channel inventory related to the transition from the old model endpoint to the new J series.We have addressed the root cause and implemented corrective actions, but we may need to return to normal operational levels by the beginning of the fourth quarter.The second is the result of a Reuters report late on the company's potential deals.
This creates uncertainty between our customers and partners and leads to significant changes in purchasing behavior.We have implemented a customer outreach and communication program that emphasizes our innovation, strength and market leadership to help solve this problem.But the bottom line is that while it is difficult to determine the quantitative impact, the timing of speculation obviously has an impact.
Looking ahead, I will continue to believeThe term outlook for Avaya remains solid.We have invested in our technology and talents.Design our go-to-Market systems and processes that drive customer developmentled strategy.
We have and are implementing our script to meet the long-term challenges of the companyLong-term growth strategy.In the second quarter, the team continued to focus actively on our key growth plans that invest in our core, accelerate innovation and bring new and emerging technologies to market, cloud growth and high deliveryProvide value for customers.We have made progress in some key areas, showing strength.
Now, our shift to software and services is 83%, and our recurring revenue is 59%.Public cloud seats grew by more than 165% year on yearover-Quarter 25%-over-More than 290,000 seats.Driven by our launch of the ReadyNow private cloud, the total value of the new contract in the second quarter was booked at more than $60 million.
In the service sector, our professional service revenue has performed best in the last four quarters.We see an improvement in our maintenance base.The total value of our contract remains at about $2.
4 billion, up 3% year on yearover-year.
We are building a broader ecosystem that includes alliances with big friends like Salesforce, IBM, and Google.Our continued focus is on identifying and leveraging the main growth opportunities in the market.Let me give you a few examples.We continued to seek contact with new and existing customers, and in the second quarter we added about 1,500 new logos, signed 78 deals with a total contract value of over $1 million.
It includes nine transactions of more than $5 million and two transactions of more than $10 million.One of these key deals was made with the US State Department.S.Modernize the entire communications infrastructure.
Avaya is the only company able to address the agency's special needs and interoperable challenges through a unique system.Our ability to consistently deliver differentiated solutions is commonplace.Another example is CHRISTUS Health, an Avaya customer for more than 20 years.
They choose from more than oneSupplier environment, including Mitel, Shoretel, and Cisco product portfolio for Avaya contact center solutions.They chose Avaya because of the value we bring from an improved customer experience perspective.Their full implementation of 60 hospitals and 175 clinics will be completed later next year.
Let me turn to the cloud now.
In the cloud, we see the continued momentum among us.Market and enterprise products.We have added nearly 60,000 public cloud seats powered by NX CaaS, bringing our total number of seats to over 290,000.Our 2/3 increase in seats comes from countries outside the United States.
Across South America, Asia and Europe, our global strength is evident.In addition, we are starting to see the appeal of the storefront, which is a simple portal for online purchase and fulfillment.This has been provided to the United States.
-From the beginning of this year, customers based in Germany.Launch to Canada and the United StatesK.The market is on track and will continue to grow in the second half of this year.This has expanded our scope of action.to-Market approach in the SME sector, customers can take advantage of the benefits of purchasing UC and CC cloud products online from one supplier.
In the private cloud, we ended the quarter with 3.4 million seatsOur private cloud strategyNow, the solution just launched on January is being mid-Both the market and global companies want to migrate to the cloud in a secure and reliable way.Although we are still in the initial stage of this solution, we are already signing customers.
I would like to take a moment to highlight the victory of two notable private cloud customers.In a deal worth about $11 million, a large Mexican telecom company chose us to integrate about 10,000 contact center seats in a private cloud model.As part of the deal, we will replace 3,500 Genesys seats and get a workforce management solution from NICE.
The deal also provides further benefits in new applications and has the potential to replicate globally.Besides, an AmericanS.-S.-based insurance companies have signed an agreement of more than $30 million to migrate 60,000 unified communications and 30,000 contact center seats to our private cloud solution.The customer also chose to take advantage of our newly released devices-as-a-Service provided.
The ability to deliver compelling solutions through multiple delivery models and market segments is Avaya's unique advantage.Our embrace of emerging technologies clearly resonates.We are at the forefront of mass innovation and have made significant progress in mobility and AI products in the second quarter.
In terms of mobility, we signed deals with innovative business processes outside source C and 811 of hi-fi mobile routing providers.The disruptive impact of our technology is being shown at a higher and higher frequency.Last month we signed a new customer who just learned about our mobile solution at a user group meeting a few weeks ago.
Customers are in a hurry to accelerate their journey to digital transformation.In terms of artificial intelligence, we are continuing the concept verification work for 2 senior engineersBig retail and big infrastructure providers test our smart solutions for dialogue.Both sides are keen to leverage existing contact center investments to improve the overall customer experience.
In addition, in the field of artificial intelligence, our cooperation with Afiniti continues to provide real and measurable benefits to our customers.We now have more than 20 joint customers who benefit from the pairing of Avaya and Afiniti corporate behavior and have more than 20,000 agents paired with their customers.These are some of the world's largest providers of wireless, Wired, medical and hotel services in the United States.
Australia, Brazil, United States, Mexico, CanadaK.and Turkey.We have five customers running our new local integration and expect two other customers to go live this month.Our success in bringing innovation to the market has once again been recognized by third place --Industry analystAragon Research again named Avaya as the leader in unified communications and collaboration in 2019, while Avaya also gained Gartner Peer insight into unified communications customer options for the second consecutive year.
Now I want to change it and I want to reiterate the earnings report that was released this morning.Upon receipt of the letter of intent, the company hired JPMorgan Chase, a leading investment bank, to assist in exploring strategic alternatives aimed at maximizing shareholder value.The board has not set a timetable for this process, nor has it made any decision on any strategic alternatives.
There is no guarantee that the exploration of strategic choice will yield any specific results.Unless or until the company determines that further disclosure is appropriate or necessary, the company does not intend to provide an update.Let me share my thoughts on our annual reset.
Our conversations with partners and customers over the past few weeks have clearly demonstrated something.They have confidence in the company, confidence in our innovation, and confidence in our ability.However, with our performance in the first half of the year, the product transition issues that will continue in the third quarter, and the announcement of our engagement with JPM, we consider it prudent to re-evaluate and revise our expectations for the full year.
Before I hand it over to Kieran, I will conclude by reiterating that my confidence in our company, partners, employees and customers remains high.The brands and channels of our new products have never been as relevant as they are now, and more customer-driven.We continue to make progress on the way forward.
Kieran will now give you details on the second quarter financial and second half guidance.Kieran?Thank you, Jim. good morning, everyone.Before we start, I would like to mention that all references to financial indicators are notGAAP unless otherwise stated.In addition, please note that we have issued additional commentary on the financial performance of this quarter, as well as any relevant forms and generally recognized accounting principles, no.
GAAP reconciliation on our investor network site.Talking about our performance in fiscal 2019 in the second quarter.Non-GAAP's revenue is $0.714 billion, well below our guidance.Software and services accounted for about 83% of our revenue in the second quarter, and 59% of our revenue was recurring.
During this period, cloud services accounted for about 11% of our revenue.Second quarter nonCompared with $0.289 billion in the same period last year, GAAP product revenue was $0.317 billion.In our product business, both the contact center and unified communications are significantly lower than we expected.
As Jim mentioned in his speech, the product transition problem within our control accounts for about $20 million to $25 million of the shortfall, although we believe the remaining balance is due to the Reuters report released at the end of this quarter.Second quarter nonCompared with $0.425 billion in the same period last year, GAAP service revenue was $0.44 billion.The year-over-The annual decline in service revenue is once again driven by a decline in maintenance revenue, while professional services and private cloud revenue are largely unchanged from last year.
While we expect maintenance revenue to continue to be a headwind factor in gross revenue growth, we are encouraged by the continued increase in renewal rates, which we believe will help mitigate the long-term decline in maintenance revenue.Our Rise in renewal rates, coupled with encouraging data points such as the other quarter of this year --over-The annual increase in the value of our total contracts has enabled us to see the situation, thus enhancing our confidence in the revised outlook for the second half of the year.Geographically, the United StatesS.Accounting for 53% of our revenue, while EMEA in Asia-Pacific and American international account for 27%, 11% and 9% of our income, respectively.
Before proceeding with our earnings performance, I would like to take a few minutes to discuss the impact of ASC 606.As mentioned in our earnings call last quarter, the most important impact of accounting changes is related to how we calculate professional service contracts, compared to when services are completed and accepted according to the new standards, it is basically considered to be implemented.In addition, when the service contract also includes the product, when the product is delivered, not the completion and acceptance of the service, the product income is confirmed.
At the beginning of the fiscal year, we actively adjusted the internal key performance indicators and incentive compensation plans to drive performance under the new standards.In view of these business changes, using the ASC 605 reconciliation form disclosed in our press release, our financial results for fiscal 19 cannot be directly compared.In addition, in addition to the above-mentioned impact on revenue, this change has also had a corresponding impact on our cash flow performance, since in many cases revenue recognition is now ahead of customer billing and cash collection.
We expect the difference between the two standards to normalize as the service engagement reaches completion milestones in the next few quarters.Turn to profit indicators.Non-The gross profit margin of GAAP in the second quarter was 61.Compared to 62, 5%.4% a year agoOverall, our gross profit margin was negatively affected by the lower number and adverse combinations, which came from a reduction in software revenue this quarter, partly by a reduction in platform costs and productivity of our productsNon-The gross profit margin of GAAP products is 63.
7% compared to 68.
5% of the previous yearThe profit margin of GAAP service is 60.Compared to 0%, 58.The previous year was 0%.Despite our lowthan-expected non-GAAP gross margin in the quarter, we continue to think thatAs our business portfolio adapts better to our shift to software, GAAP gross margin will be on the risecentric model.Second quarter nonGAAP operating income of $0.
149 billion,The operating profit margin of the month is generally recognized as an accounting principle.9%;The adjusted EBITDA was $0.166 billion and the adjusted EBITDA profit margin was 23.2%.In addition, we generated $37 million in cash flow from operations, $11 million in free cash flow, and as of this quarter we had $0.
735 billion in cash and cash equivalents on our balance sheetDue to the increase in cash tax, our cash balance decreased in turn.Look ahead to our outlook for the third quarter and fiscal 2019.As mentioned in our press release earlier today, we are reducing guidance for fiscal 2019.
Our revised outlook is both cautious and conservative, as it takes into account the impact of uncertainty arising from inbound interest and lower interest ratesthan-Expected product sales in the first half of this fiscal year.In addition, our quarterly historical sequence model supports the third quarter, roughly in line with the second quarter revenue, followed by a stronger fourth quarter.Our prospects for the second half of the year are supported by our current backlog, as well as the current understanding of our pipeline;Plus is expected to increase in cloud seats;Further cooperation with service providers and system integrators;Most importantly, sales and channel execution in the graphics area have been improved.
In the third quarter, we expectGAAP revenue was $0.71 billion to $0.725 billion.Our non-The operating profit margin of GAAP is expected to be about 20%, and the adjusted EBITDA profit margin is about 23%.We expect a weighted average of about 0.111 billion outstanding shares in the third quarter.
Throughout the fiscal year, we currently expect ourGAAP revenue is within $2.Between $925 billion and $2.975 billion.We now expect cloud revenue to account for 11% to 12% of our revenue, compared with our previous forecast of 12% to 14%.Our updated view reflects a higherthan-The expected combination of public cloud seats sold by our partner channel, due to the cost of rebidding, corresponds to a lower net income for the current fiscal year.
In addition, although we are very satisfied with the market appeal of ReadyNow since its launch in January, given the size and complexity of early transactions, the conversion from booking to revenue is slower than expected.While we expect that the early portfolio of customers will place more emphasis on simple deployments, it is encouraging that early adopters are large and complex global businesses with a unique set of needs, reflects the broad appeal of the platform.We expect this momentum to diminish over time as more diverse customer groups take advantage of the platform.
In addition, looking forward to the future, in addition to cloud revenue, we no longer provide annual guidance related to our expected revenue portfolio.While we will continue to report the actual results so that investors can understand our software, services and important recurring income for any given period, due to the timing and composition of large transactions, there may be a large degree of variability in our income portfolio, which is difficult to predict accurately.So we think it would be more appropriate to look at our revenue portfolio over a longer period of timeSemester expectations.
Shift to margin.
For a whole year, we look forward to ourThe operating profit margin of GAAP is about 22%, and the adjusted EBITDA profit margin is about 24%.In addition, we expect our operating cash flow to be between 7% and 8% of revenue.Finally, we expect a weighted average of about 0.
111 billion shares issued throughout the year.Operator, we are ready to answer the question now.Question-and-Answer session operator [operator note] your first question comes from a line by Raimo Lenschow at Barclays.
Your line is open.
Raimo LenschowJim, can you talk about the product line in more detail?I get --I think I get it, but I still want to know why it's going to take a few quarters to correct it?Then ask Kieran a question.Can you compare in 605, 606, like what would be the number if I liked Apple?to-Apple contrast?Jim, Raimo.It has something to do with our endpoints, not with the general product.
We transition from the current product set to the new J series.In fact, we were a bit aggressive in shipping some old endpoints to the channel at the beginning of the quarter, based on what we thought would be-Based on the speed of sales we think.In fact, from the perspective of [grants], our new endpoint is frankly more positive than we thought.
So these people are actually doing better than expected.But unfortunately, we-Our old 96xx phone still has a fair number of channels.So it's clear that you can only pay so much in the Channel, and obviously we 've put in place a mechanism to make sure we don't overfill the channel.
So, if you want, there is a slower turn on the old end point.It won't take us through the end of the year, it will take us through the end of the quarter, maybe it will take us to the beginning of July, that is, the fourth quarter, before we return to normal operating levels.But I can tell you that the J series is actually doing better, but the 96 X series is a little slower.
When you look at our performance in the first 5 or 6 weeks of this quarter, we are actually in the process of passing through the 96x phone, and if we don't advance a little, we are on track.So I think we are in line with the expectations we set.But this is good news, bad news.The good news is that the J series is moving faster than we expected, so the bad news is that the 96 XX is moving a bit slower.
But all this may be balanced in the time frame of July.As I said before, Kieran mcgrso Raimo, with the change from 606 to 605 (sic) [605 to 606], in fact, we have realigned many of our internal key performance indicators and incentive compensation plans to truly focus on driving revenue growth under the new standards.With the adoption of 606, the concept of installation, completion or customer acceptance is not very important for quarterly revenue recognition.
So what we found this yearto-Due to our business experience, a larger proportion of our products do not meet the full standards of IC or installation, which is almost as fast as our historical experience suggests.Let me give you an example.We refreshed $96 million of deferred revenue at the end of the previous fiscal year as retained earnings restated in the opening balance.In the first six months of the year, more than 3/4 of customers have officially accepted and signed-Turn off in the complete standard for this installation.
What we've --What we are currently following is that by the end of the second quarter only about 1/3 people have actually been closed.So if you think so-We have discussed that the value of 606 has increased by about $50 million in the first quarter and $36 million in the second quarter, of which $86 million, essentially 40-Plus million, it's really because we haven't reached the full standard for this installation yet.We think this will strike a balance by the end of the year.
In fact, we have introduced some system implementation in order to push this forward on a more proactive and faster basis to help solve this problem.Of course, I just don't think we have an apple.and-Apple contrast.So if you look at 605 and 605 a yearto-Based on the date, it's--I want to say it will drop by about 10%.
What I'm trying to say is that half of it is actually due to the first half of the year-This opening balance will take longer to reach the installed commit.One of its points is actually related to money. in terms of money, we are very affected;The rest of it will then be a combination of existing professional service contracts bundled together, not submitted near installation-As fast as we wish;And the operational issues we mentioned in the script today.
So, of course, this is--Unexpected consequences, we are trying to get our arms around faster.But I think we may be over.As far as our focus shift is concerned, rotate a little bit.Your next question comes from the relationship between Lance Vitanza and Cowen.
Lance Vitanza and Kieran, thank you for your helpful explanation of why you see it this way.I think you answered part of it, but on the currency side, I would like to ask you that you mentioned a negative growth point, but I think 605 to 605.--If we look at it the way it is reported and the way it is reported, I think we should look at it that way, what is the impact of these currencies against the wind?Is this changed or is it still about 1?Kieran mcgryes, it was slightly above 1 point in the first quarter.
Lance in Vitan tie okaySlightly more than 1 point.Okay.Then I would also like to ask you questions about cloud seating.If I--I think you called this out and missed it, you added a lot of cloud seats in the second fiscal quarter?In fact, we added about 60,000 public cloud seats this quarter.
60 thousand Lance VitanzaDo you also have the number of private cloud seats?Or...From a private perspective, Kieran mcgrso, what we are currently doing is actually an actual booking from an income perspective.Obviously we have added a lot to the contract, but as I have discussed, given the speed and speed of time to money, it can be said that in these respects, I haven't reported these as seats just because I want to be consistent in tracking revenue.
Lance in Vitan ligation SurOkay.
So, I think, from the last quarter, it's a change, right, when you have a big--Private seating for 200,000-Cloud seat number, which--I think these have been announced but have not started booking yet.Is that right?I think you just need to separate the private sector.-Or what we are talking about now and the public ".
So from a public cloud perspective, everything is much faster in these areas, and the billing time is much faster.Overall, we added about 60,000 seats in the quarter, and now we have added about 290,000 seats.Lance in Vitan tie okayThen on the income guidance, the annual income guidance fell by $0.
15 billion at the midpoint.
If we go back to these three factors, you can get technical delivery on the contact center side;Obviously, you have the end part in UC;Then there's Reuters.I mean, can you split the $0.15 billion downdraft into these three categories, just rough numbers?Kieran McGrath yes.So when I think about this, the first thing I would say is that our service business actually performed very close to our plan in the first half of this year, just because any of our subscription revenue or any maintenance that relies on shipments of products in the first half of the year will be affected.
I will put it somewhere--I'm looking at one of my guys here, a total reduction of 10% to 20% is related to the maintenance and subscription reduction I will get in the first half of the year.I also think that from an operational perspective we may still be talking about another 20% to 25% because we will take a little time to get rid of the operational issues we are facing, mainly in the first half of the year.Finally, we have a few big things.In our view, we have some very large government contracts.
When you are dealing with the government, the problem you always have is that the partner is finally selected to actually help you with the actual physical delivery ---It's time for customers to sow-This will have an impact on our income time.So cautiously, while I saw some of our very important opportunities in this area in the second half of the year, I really think that some of them may be timed out in the first year-Probably in the first part of next year.I would say, it could be nearly half of my total.
I'll say after that, I'm just a little bit of a composition--This uncertainty related to rumors and so on may drag on more, which is a bit conservative.Lance Vitanza GrayThen give me another question, since then.Jim, if you believe in the basic trajectory of the business you have laid out, isn't this the absolute worst time to consider selling the company?Aren't you better proof of restoring growth and then blowing the wind on the sail?I mean, I know you received an unsolicited expression of interest, but why not tell them, no, thanks, it's not the time now?First of all, maybe I will answer this question in two ways.
First of all, it's obviously against us--The clear and concise disclosure we provided this morning at the earnings call.But perhaps in this spirit-Because you may have more problems with the same thing and we will make it more productive.Maybe I will add a little color at this time too.
Like other listed companies, our goal is to create shareholder value.So we hired JPMorgan to evaluate the strategic options.They include all of these strategic choices, if you wish.
Therefore, independent assessment, assessment of capital allocation, assessment of acquisitions and other strategic financial transactions, and so on.So I guess I'll end up saying, like other listed companies, I really shouldn't have a lot of stuff ---I can say it fairly, Lance.Your next question comes from the lines of Nandan amradi and Guggenheim.
Nandan AmladiSo I would like to ask about the maintenance renewals that move customers from maintenance contracts to some sort of subscription arrangement.Can you describe the situation?If any news in the Reuters article has any effect on this?Jim ChiricoYes.I'm Jim, of course.First of all, we don't see the impact on the Reuters article, and what I'm going to say is that the renewal is transferred to the cloud.
What I want to say is that we are more based on buying habits.Traditionally, at the end of the quarter, this is more in line with the contact center, the software-Type in shipments that people just suspend because of lack of better terms, if you want.According to the first article, there is obviously a follow-up speculation since then.
As for the overall update and migration to the cloud, I will hand it over to Kieran for some extra color.But from the point of view of the overall update of the business, we did a good job.There is an important focus in this regard.
As Kieran pointed out, our maintenance business is actually planned and fairly stable.But as Kieran says, the expectations for the future are based on some--From the perspective of the first half, we have finished [.But I will hand it over to Kieran for some extra color.
Kieran McGrath yes.
I guess I just want to say that in terms of what I think about maintenance, it's clear that some of these will be moving to the cloud.But what I want to say is that it's still early.A lot of the public cloud seats we get are actually--Many of them are also new signs.
I would say that what you are seeing here is our private cloud and our off-the-shelf evidence, and now we are starting to see some of this shift happening.But in terms of the overall impact of maintenance related to real-time conversion to the cloud, I don't think it has much impact on revenue in the second half of the year.I will put more issues on maintenance in the second half of the year, which really has something to do with the shortage of product shipments we discussed in the first half of the year.
As Kieran pointed out earlier, we are very encouraged by the appeal of Avaya privatecloud ReadyNow.But these are big, complex deals.What I'm saying is that we have 15 or 18 important POCs that are going on.I highlighted two specific deals in the comments.
$11 million, one of $30 million.
So they are important.
But based on these clearly subscription-oriented, cloud-oriented, we are starting to generate revenue from these aspects even this quarter.But the time it entered was a bit like--More stable-From the national point of view, this will be 2020.Therefore, it will not have a significant impact on the figures for fiscal 19.
But this is a good baseline for us when we go to 2020 and later.I can tell you that all POCs are progressing well and we are encouraged.But it's not that we can see a decent amount of revenue this year, but that gives us an opportunity when we enter 2020.
Your next question comes from the meta-Marshall series at Morgan Stanley.Tianshun LapinskiThis is Eric in yuan.Maybe just look at the public cloud products.Could you please comment on where the main agent found some of the most attractive places?What are the typical seat sizes they have [illegible?Jim ChiricoYes.
I'll probably --Chris McGugan is here.
I'll give it to Chris later.
But this is more on your SMB portfolio when you look at the master agent.According to the current offering, it is fair to say that is the case for us anywhere as the storefront is just beginning to gain traction and is already at 25-to-Up to 50 seats and up to 200 seats.To be fair, the appeal was a bit slow for us and one of the reasons we launched the storefront, to be fair, we renovated the storefront and Chris will be talking about it.
The German storefront we recently announced has actually gained good traction and is more aimed at your low end.Your 5-to-50 compared to the products we currently offer in the US.Therefore, it is at the low end of the SME market.
I think Jim's description of the store is very, very good.We have made some optimizations to it to enhance the services provided through our master agent, enabling them to sell not only UC services, but also relay and our CPaaS platform.So we have expanded the offers they can get.
We believe that this creates additional stickiness for these major agents in the market and creates opportunities for them to increase their revenue.Erik lapinskit is really helpful.If I could--one more quick.If you want to partner through your channel, do they have any requirements today?Maybe more incentives or newer products?This is Jim.No, I'm not going to say they're asking for any incentive.
Or something like that.
I would --We have worked very closely with our channel partners.Or IP office mid-As Kieran said, the market solution actually works very well in the market, which is equivalent to our--If not more than we expected.I think the drama that we run with them, the incentive plan that we carry out with them, is enough, I think.
And --So they didn't ask, and I think the new storefront opportunity also offers some additional opportunities for several of our partners, if you 'd like.So --Even private cloud solutions are sold through channels.So they are actually very excited because we are now rolling out this feature and providing this feature to our channel partners in another directionto-Their market vehicles.
So they are very excited about the private house now.cloud solution.Your next question is from Rod Hall at Goldman Sachs.This is baraji representing Rod Hall.I want to follow up on cloud reviews--Private cloud comments you made earlier.
Number of clouds--The number of seats is about 3.It was 7 million last quarter, it was 3.7 million this quarter.So I just wanted to confirm that there is no drop in the private cloud seats?And then I did.up.Kieran McGrath yes.There are 1.4 rounded up, as you expect when you renew your contract with your client.
They will make some resets to the number of seats they have increased productivity in [old] stores.So it actually leads to a slight reduction in rounding, which is why you might hear 3.4 million impact on the private sector.As I said before, if we start counting all the revenue generated--We only count income.
If we start to calculate the output under the contract, this number will be a little higher than this number.But we're just trying to be consistent on how to call it.Good, Balaji Krishna.Then on the guide, do you energise the oral contributions of the June and September guidelines?On top of that, I think if we look at your full year guidance, even if you have given up, you need to have a very meaningful improvement in the fourth quarter to reach your goal.
-Hit the low end of the tour guide.
You will see a sharp drop here for several quarters.So, can you comment on the visibility of the end of the fiscal year?How confident are you about hitting the target?Kieran McGrath yes.So I guess --Let me start with the last part of your question.
If we look back, we have seven or eight years of history with this company.We have a fairly consistent seasonality every quarter between our businesses.To be honest, in general, though we lead-We are sure to be more active in guiding the business to where it is going in the first quarter, but history will say that the first quarter is always down by about 4% to 5%--Actually, close to 7%.
We ended up falling about 4%, so we fell about 7%.History also shows that the second quarter to the third quarter is roughly flat, may rise by 0.1% or 0.2% Q2 to Q3.There is always a very strong Q4.Q4 is traditionally more powerful for any company.
Just because this year is also a government year, we have become stronger --end as well.So actually when I-When we chose this guide, I mean I did read a lot of history as well, as I said in the prepared comments, I have a good understanding of my backlog, get Into My pipeline and the speed at which I want to monetize it.So you're right. I hope our q4 will be stronger.This will be very consistent with historical performance, as well as with the pipeline and backlog support I 've seen.
Regarding the question you are talking about, I mean, we don't have this kind of granular guidance in the business.Suffice it to say that this is clearly a key part of what we have provided so far.Good, Balaji Krishna.If I could steal it againSo SG & A costs, as you said earlier this year, you have achieved A reduction in those costs.
But at the same time, sales of your products are accelerating.Do you feel you need to invest more on SG & A to support some growth at the end of the year?I know you spent a lot last year, but this is--SG & A significantly reduced costs-In any case, is this bad for your revenue growth? This is probably what I want to ask.What I'm trying to say is, focus--Really, we see a lot of things a year.
on-The annual basis for the reduction is actually based on two key projects.One reason is that the actual variable commission actually drops, just because the team's percentage of the commissions they expect to deliver is not that much.This is not a statement of numbers.It's just that they're earning variable pay.
The other is --In fact, I would say that half of the reduction is actually due to the fact that foreign exchange is also reducing the number of dollars.We put our non-AmericanS.Back in dollars.As with less income, I have less expenses.So if I look at my yearon-I would say that this year's cut could be divided into 50-50, half is the Commission that our sales people get, and the other half is the Commission related to foreign exchange.
This is Jim.
You shouldn't think it's a reduction in quotas.No staff at all.In fact, we are expanding our market.to-As we move to the cloud, our market footprint in many areasSubscription orientedoriented go-to-market company.In areas such as consulting services, in areas that drive architects, they can actually work on complex solutions, and one of the areas where you think professional services are doing better.
So, I won't do that to you if you want, because we are re-controlling the numbers.Another thing we are doing is building our partner community through strategic alliances, which also gives us the opportunity not only to take advantage of our partners and customers, more sales can also be created and driven through strategic alliances using expertise.So it's --Any imagination should not be explained by pulling back the reins on your front line --to-Market organization.
The operator and your next question comes from the Dmitry Netis line at Stephens.There are two issues with the Dmitry NetisI if you can.A is in competition environment on two is in channel on.
So I will pack it into one if you allow.
In terms of competition, if I divide your business into three barrels, small business, small businessThe market, then the big business, in the small and medium-sized enterprises, you will still experience the biggest drag of competitive power?Or do you see the pressure on other barrels as well?I think you will, just want to give--Understand what may change in the competitive landscape as you arrive in the fourth quarterover-quarter here?Then the second question comes more on the channel and you do mention that with the passage of the year, or when you exit the year and what you expect there, the trend mix of the cloud goes down, relative to the rebate step-You mentioned it.If you can give us your location and bring it over?Maybe explain what's going on?Are you pushing a bigger commission with your channel partners?Is this the reason for the rebate?-to step up?Also give us a little prospect there?Jim ChiricoYes.This is Jim.Why don't I play first--First question, then I will hand it over to Chris to provide color in a competitive environment.
So first on the ChannelObviously --So, there are a few things.First, the transition that you think you can understand, if you want, and how you can transfer the market to reality, in fact, how the market moves, that's why we have a little-There is currently a little extra stock if you wish-What would be in the old and if they were looking for some sort of best level.Again, the good news is that the J series we sell is faster, but the hotel has only so much space and we can obviously get revenue from the sales.
But the speed is--Still strong in sales.
If you look at the cloud business and our work related to the cloud, as Kieran specifically points outOn the market, we do have some holes like other people related to the project.So the good news and the bad news is that we see higher demand than we expected.Therefore, the rebate is being adjusted and it will only take us a while to get into a stable state.
So, the key is that we offer free calls in promotions related to IP office, and normally we will be in about 3 to 4 months, then flush them out based on the type of material price list we get for them.So in the last few quarters, we 've seen sales growth, so the growth of rebates and overall cloud revenue have declined slightly, but more from the MRR perspective, but if you look at ARR, it's actually quite powerful, and we'll get a balance here in the next few months.But our incentive plan-Everyone has different projects, whether through the master agent, how they pay the agent or the master agent and how they work with the partner.
I will not say that we are normal and consistent, and we certainly will not jeopardize anything, nor will we try to do anything that is different from the overall competition to drive the market.Regarding the difference or different parts of the market related to the competitive environment, I will hand it over to Chris and give you some insight.Jim, Chris.Dmitry, when --You asked three market segments and where we saw the competition.
There will definitely be a small competition in the market as it involves a lot of UCaaS players and CCaaS players who take up some smaller space there.There's a small amount in the middle.market sector.But we still see a strong demand for our UCaaS in the medium termmarket for --From a cloud perspective, and our premise-Technology that serves a specific market.Our next question comes from Asiya merchants at Citigroup.
Many of my questions have been answered, but there is only one question for Kieran.Capital expenditure is higher than the previous requirement that management share on analyst day.Maybe you can give some more colors that look like a restructuring and some others have gone down.
Is this --Yes, it would be great if you could provide more colors on it.To make sure I hear your words clearly, are you talking about capital expenditures?Asiya MerchantYes.As far as I know, your capital expenditure requirements have increased a bit compared to what was previously shared.
I think it's $75 million to $85 million and now you expect it to be $100 million-Yes, if you can clarify.Kieran mcgri believes this part is related to the speed and speed we receive and pilot many large enterprise customers in the private cloud.So obviously you have to start building the infrastructure.
As I described, we initially thought it would be more vanilla type to accept our private cloud products earlier.What we see is that the complexity of our largest and largest enterprises is much greater.With this we are just trying to get past it from a buildingOut of perspective.
You know, I don't think we're going to say anything, for a long time-Semester, any difference from what I have set up in our long term planTerm model of annual capital expenditure.Asiya MerchantOkay.I mean, it's related to this because private cloud products require more complex capital spending or traffic transactions.Is that --You guys on Analyst Day talked about our profit margin expansion when we entered fiscal 19, and then it was longer --The terminology goal is also shared with the actual situation in fiscal 18.
I don't know, how does this incremental capital expenditure change, so the depreciation is higher, and how does the operating expenses related to rebates and so on change?So how does this factor affect your long term?Long-term prospects for profit margin expansion?Kieran McGrath yes.I don't think our views have changed.As we move from a traditional hardware device-type business to more software types, and more importantly, the emerging software-type business, I think our profits will be more positive.Obviously, there are a few short-term quarters or tacticallyterm hits.
But we don't see any change in time.
The term re-mixes the model into the software and higher gross margin, which should follow.Asiya MerchantOkay.If you can, do it again.The scale of the cloud is often largeoriented game.And maybe --If you can clarify this, when you talk to customers, they will see the growth trajectory of your cloud revenue relative to some of the other competitors, admittedly, relative to Avaya's installation base and customer base, they may be smaller in size.
Are you going to be resisted because your trajectory is not performing well in the overall market?Will this go into any discussion, as the cloud tends to be more of a scale game, and you are obviously not performing well on the cloud side compared to your competitors.Jim kelicwell, if we look at it-We grew 165%.on-year.We grew 25% in the quarter.on-quarter.We are not actively involved.margin, low-Profit margin for small and medium-sized enterprises.
If you look at our private cloud, we don't talk about the overall size of the funnel, and as Kieran says, we're going to be cautious about the way we advertise, because we will advertise according to the time when we actually receive the overall reservation.We actually did a good job.We have 15 POCs, as I said.Due to the performance of the quarter, we will obviously emphasize more because it continues to gain momentum and traction.In fact, no one in the market is private.Cloud solutions for our large enterprises.
Personally, if you-I would prefer to focus on what we have, which is the jewel on the crown of the business, rather than trying to be one of the many people in the SME world who are vying for a piece of territory.So I think that's what you see.But I personally have an IP office mid-The market is growing at its pace and pace.In fact, it is expected to continue to grow at the level of performance in the past.
As we mentioned, private cloud is $30 million deals, $11 million deals, etc.We have 15 well-run POCs, and the funnel behind it is actually very powerful.So please keep an eye on this information.
So I think you need to see what value you bring and what difference you bring.In the long run, it may be more important that you are actually able to bring what technology to market as well.This is our focus as we continue to focus on our long-term goals.
The operator and our next question comes from the Hamed Khorsand series at BWS Financial.Hamed KhorsandSo first of all, can you talk about the rounding you talk about in a private seat?Because I mean about 10%.Starting from 3, this cannot be a rounding error.
7 million to 3.
4 million?Kiran mcguano, No.
Let's cut that off quickly.
When we --In general, we are talking about it.We have 7 million seats in total.-I think we said nearly 300,000 seats in the public cloud, which means 3.4 million.I think that means private could be close to 3 last quarter.
What I want to say is that there are 1.
4 Rounding between 3.
5 million and 3.
Only 4 million private space.
Overall, we are still talking about 3.
7 million seatsHamid holsandoSo the number of seats has not changed.Okay.That's how I am--This confused me.Finally, I would like to ask you why there is no improvement if you add staff?Where are the numbers added to the business?I mean the improvement, in terms of customer retention and real revenue growth?Jim ChiricoYes.So we started this year with 7,900 people and I think we ended this quarter with 8,100 people.
So, at the corporate level, we 've actually grown into investing in papers and investing more resources in emerging technologies.to-Market research and development and some other services are the three main functions.To be honest, I don't know the specifics of everyone's end.
But we do continue to invest in what I call new growth opportunities.We're also re-balancing, just like you're moving from hardware to hardware --For a company that is more of a subscription to software and services --For the company.So there's some rebalancing behind this.So we actually hired quite a few people inside the company.
Therefore, if there is any doubt about the whole [, it is not very sure how to provide more colors].Hamed KhorsandSo a lot--Is it really like a product development issue in terms of getting customers to spend more money with you?Or is it because of the headlines of Reuters, more of a relationship position, causing some problems?Probably the best feature of the Reuters headlines is that the article came out and people don't know how to explain the article, our customers themselves.To be fair, the competition took advantage of the article and provided their perspective to the customer base.
They basically-Although we were very proactive when it came out, you did quite a bit of business in the last week and 10 days of the quarter, and this is where they basically came out, they want to know better where we are going.So, as I mentioned in the revenue script, we spent quite a bit of time, proactively, talking to our customers through it.However, according to the timing of this article, the purchase behavior we saw at the end of the quarter did change.
It was just.
..Kiran megrast-May be interested to add here that in the last month of each quarter we make up about 50% of our revenue.A large part of this actually happened in the last week of the quarter.When Hamed KhorsandWhy began to change their spending habits ---They didn't do this activity when you went bankrupt.
I mean, now you have a better foundation, not bankruptcy.-Are you talking about someone taking over you more than going to Chapter 11?Jim ChiricoYes.I mean, we saw it, too.Kieran McGrathI says this is true, definitely the bankruptcy we see.
Customer freezes and purchasing personnel come in to drive and the strategy personnel come in to question the commitment to it.Jim chilicoy means I hate it--Back in the past, but on the day of November, an article in The Wall Street Journal sparked speculation.Five years ago, three years agoS.Until people want to solve the problem, the order basically stopped overnight.
People explain things in their way, which is similar in design just around the facts of uncertainty.So they --We 've seen a very significant change in the purchase pattern, like "Can someone explain to me what's going on? What does this mean? How can I explain it?And are you..."You know, the laundry list is still going on and I won't bore everyone.
But --So it only took a little time.
But again, the time of the article and the speculation in the customer's mind have an impact on the purchase behavior.In fact, as Kieran said, based on what we announced in the earnings release, we are cautious in future business.I think it may be fair and wise.Now we have no further problems.I will transfer the call to Mr.The closing words of President and Chief Executive of Jim cheriko.
Thank you, operator.
I just want to take a moment to reiterate a few points before we finish the call.First of all, Avaya is in a unique position to lead our customers through this journey of digital transmission, and as we continue to operate on a large scale, our business is global.Our investment in growth is aligned with our open opportunities.
Market and enterprise customers are more active in turning to cloud services.Based on the complete and functional solutions we can providePrivate, hybrid, and public goods in UC and CC all have a wealth of features.We are layered in the right strategic partnerships that are built with companies at the forefront of shaping the cloud environment.
Companies including Salesforce, IBM, Google, Afiniti and Verint.We are taking advantage of the opportunity to work with these partners to bring solutions to the market that customers require.We will also continue to invest in our growth sector.
So I would like to thank you for your time this morning and hope you have a wonderful day.Thank you.This is the end of today's conference call.You can disconnect now