Avaya Holdings Corp.
Q4 2020 Earnings Call Transcript

Published: 18 Nov 2020

[Operator:]

Greetings. And welcome to Avaya Fiscal 2020 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Mike McCarthy, Vice President of Investor Relations. Thank you. You may begin.

[Michael McCarthy:]

Thank you. Welcome to Avaya's Fiscal 2020 fourth quarter investor call. Jim Chirico, our President and CEO; and Kieran McGrath, our Chief Financial Officer will lead this morning's call and share with you some prepared remarks before taking your questions. Consistent with our social distancing mandates, each of us on this morning's call are assembled from our remote locations. The earnings release and investor slides referenced on this morning's call are accessible on the Investor page of our website, as well as in the 8-Q filed today with the SEC, which should aid you in your understanding of Avaya's financial results. We will reference non-GAAP financial measures and specifically note all sequential and year-over-year comparisons reference non-GAAP numbers, except where otherwise noted. We have included a reconciliation of such measures to GAAP in the earnings release and in the 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, our business is currently being impacted by COVID-19 and its effect on the global economy. The extent of its continued impact on our business will depend on a number of factors that include, but may not be limited to, severity and duration as well as actions taken or not taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. Information about risks and uncertainties may be found in our most recent filings with the SEC, including our Form 10-K and subsequent Form 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 otherwise required by law. I will now turn the call over to Jim.

[Jim Chirico:]

Yes. Thanks, Mike. Good morning and thank you to everyone joining our call. I'm very pleased to share our quarterly and full year results with you this morning. Avaya's Q4 was by all measures an exceptional quarter and was the capstone to a remarkable year for the company. We delivered on our financial commitments, drove significant shareholder value, and delivered innovations to our customers to wrap this highly dynamic, competitive, and challenging environment. Just 3 years ago, we laid out a strategy to be a leader in digital transformation for enterprise customers, and to transform Avaya to a cloud SaaS company. Our performance this quarter is proof that we are executing and making significant progress on that strategy.

[Kieran McGrath:]

Thank you, Jim. Good morning, everyone. As a reminder unless otherwise stated, all financial metrics referenced on this call are non-GAAP, and the supplementary slides posted on our Investor Relations website, set forth the GAAP to non-GAAP reconciliations. All figures mentioned in this call are as reported, unless otherwise indicated in constant currency. For the quarter non-GAAP revenue was $757 million, this compares to $726 million reported a year ago and $722 million in Q3 of fiscal 2020. As a reminder, during the quarter GAAP and non-GAAP revenue have converged and the non-GAAP differences generated by fresh start accounting are now immaterial. However, non-GAAP adjustments were material in fiscal year ‘19. And so from a year-on-year comparison, we speak to non-GAAP revenue for proper comparisons. We expect this to be the last quarter that mentions non-GAAP revenue comparability. Our 4Q performance was led by North America which delivered strong year-on-year growth for the third quarter in a row. North America's 4Q results also benefited from a larger contribution from the US government sector than we had originally guided, specifically because of the timing of deliverables associated with the Social Security Administration contract. As Jim mentioned earlier, revenue contribution from CAPS, or cloud Alliance partner and subscription remains a strong indicator of the rapid transformation of our business. This quarter CAPS represented 33% of total revenue, up from 30% in 3Q. CAPS for full year fiscal ‘20 in aggregate came in at 26%, which compares to 15% for the full year fiscal 2019. We continue to see growth from our subscription and strategic alliance partner offerings. Further prove that OpEx and cloud consumption models are much preferred in the market over the historically dominant CapEx engagements. As more of our software is contracted via subscription, the shift of our perpetual licensed business to an OpEx model benefits the services segment, while it adversely impacts the product and solutions segment. We are seeing this rebalance, while still maintaining the same high levels of revenue coming from recurring streams and from software and services. For our fourth fiscal quarter, recurring revenue accounted for 63% of total revenue, with software and services accounting for 88%. Fourth quarter product revenue was $269 million, compared to $315 million in the year ago period, and $262 million in Q3. As I just mentioned, within the product segment, we saw the impact of the shift to subscription, as well as continued declines in hardware, driven by long-term market trends and exacerbated by the COVID pandemic. Benefiting from subscription, fourth quarter service revenue was 488 million, up from $411 million in the year ago period, and $460 million in fiscal Q3. Throughout the second half of fiscal 2020, subscription adoption has increased both from the conversion of COVID temporary free licenses, and the continued rapid acceleration of our customers driving digital transformation across their enterprise. Digital transformation initiatives has helped increase context center revenue contribution of our total business from just about 30% of our revenue to two years ago to 40% for all of fiscal 2020. Turning to our gross profit metrics. Non-GAAP gross margin was 61.2% in the fourth quarter, compared to 60.6% in the year ago period, and 61.1% sequentially. Non-GAAP product gross margin was 60.2% compared to 64.4% in the prior year, and 60.7% in the third quarter. A larger revenue contribution from our strategic alliance partners in the quarter contributed to the quarter-on-quarter product gross margin decline. Non-GAAP services margin continues to improve driven by subscription. This quarter services gross margin was 61.7% compared to 57.7% in the prior year, and 61.3% in Q3. Turning to total profitability margin and cash flow metrics, which were strong for both our fiscal Q4 and fiscal year 2020. Fourth quarter non-GAAP operating income was $170 million, representing a non-GAAP operating margin of 22.5%, down 20 basis points year-on-year, while adjusted EBITDA was $200 million, representing an adjusted EBITDA margin of 26.4%, up 110 basis points year-on-year. Our continued disciplined operational execution and additional cost savings related to COVID such as minimal levels of travel and expense, offset cloud R&D and go-to-market investments made in the business during the period. Turning to cash flow, we generated $70 million in cash flow from operations or 9% of total revenue, contributing to a fourth quarter ending cash balance of $727 million. As a reminder, this cash balance reflects the repayment of the $50 million revolver draw that was repaid in July. As for the full fiscal year, our CFFO totaled $147 million, representing 5% of revenue. On the topic of cash. During the quarter, we took advantage of favorable market conditions to extend our debt maturities by using the proceeds from a $1 billion senior notes offering to execute a partial pay down of our term loans. In addition, we extended maturities on another $800 million of term loans for three additional years. Between the notes offering and the term loan extension, we moved approximately $1.8 billion in maturities from 2024 to 2027, and 2028. These actions are extended weighted average debt maturities from 4.1 to 6.1 years, enabling us to reduce financing risk and improve financial flexibility. Summarizing fiscal year 2020. Non-GAAP revenue was $2.879 billion compared to $2.908 billion reported in the year ago period. Non-GAAP operating income was $610 million, representing a non-GAAP operating margin of 21.2%, down 40 basis points year-on-year. Adjusted EBITDA was $710 million, representing an adjusted EBITDA margin of 24.7%, up 40 basis points year-on-year. And finally, we exited the year with a CAPS run rate that is more than doubled for fiscal year 2019 ended. In addition to the performance we guided to and delivered upon, our capital allocation program for the year was successful across several fronts. We opportunistically bought back 26% of our outstanding common shares at well below current trading levels. We repaid a significant portion of our long term debt. And we improved our capital structure by extending debt maturities. Now turning to guidance for 1Q ’21, as well as full year fiscal ‘21. Please note that all year-on-year revenue changes are expressed on a constant currency basis, and all revenue amounts reflecting rates as of September 30, 2020. For the first quarter of our fiscal year 2021, we anticipate GAAP revenues of $710 million to $730 million, representing growth at the midpoint year-on-year. We expect non-GAAP operating margin for the first quarter to be between approximately 20% and 21%. And our adjusted EBITDA margin to be between $165 million and $180 million, or between approximately 23% and 25% of revenue. Looking forward towards fiscal year 2021, we expect full year GAAP revenues of between $2.875 billion and 2.925 billion, representing a range of flat to 1% revenue growth as measured in constant currency. This estimate reflects continuing caution concerning uncertainty over COVID related resurgence and businesses globally, as well as reflecting that more of Avaya 2021 subscription bookings will be coming from our Avaya OneCloud public and private cloud offerings in the second half of fiscal 2021, which are ratable transactions from a revenue recognition perspective. We expect non-GAAP operating margin to be between approximately 19% and 21% for the full fiscal year. Similarly, our adjusted EBITDA margin can range between $660 million and $710 million, or between approximately 23% and 24% of revenue, reflecting a continued increase in cloud R&D investments, as well as go-to-market spending, especially in sales and marketing of our cloud offerings in the channel. Additionally, we anticipate that travel and expense will likely be returning to more normal activity levels in the second half of fiscal 2021, with anticipated lessening of the impacts of the COVID pandemic. In terms of cash flow from operations for full fiscal year 2021, we expect to be between 2% and 3% of full year revenue. This is primarily due to the expected continued acceleration in our shift to a subscription licensing model, which extends out the cash conversion cycle versus the prior predominantly CapEx licensing model, which has cash receipts more closely aligned with revenue recognition. At this time, we expect our shares outstanding to be between approximately 80 and 85 million shares at fiscal 2021 year end. Now before I hand the call back to Jim, I'd like to spend a few moments expanding on our existing CAPS transformational metric, as well as provide some context around another metric that we are introducing aimed at providing enhanced visibility into a Avaya’s progress toward becoming a recurring subscription and cloud company. As a reminder, we introduced a CAPS metric at the beginning of fiscal year ‘20. As you've seen from our results, we've made great progress during the year and actually exceeded our 30% long-term target in the second half of the year, a full year ahead of schedule. This was largely due to the rapid uptake of Avaya OneCloud subscription. In fiscal 2021, we expect to share with CAPS revenue will continue to grow meaningfully due to the continued acceleration on rollout Avaya OneCloud family of offerings. We therefore expect that for the next fiscal year, CAPS will represent between 35% and 40% of our annual revenue, up from 26% for all of fiscal 2020. To give investors a better forward looking view into our broader based OneCloud software solutions driving our growth, we are introducing a new annualized recurring revenue metric or ARR. This metric is similar to what our industry peers report, and will reflect only the recurring components of Avaya’s OneCloud portfolio, which includes multiple deployment options based on customer choice. We believe the OneCloud ARR provides investors with a better view into our long-term revenue growth potential, and trajectory. Our OneCloud ARR grew from $35 million at the end of fiscal year ‘19 to $191 million exiting fiscal year ‘20. After just one year of our OneCloud solutions been in market, our expectation is that our OneCloud ARR will double by year end fiscal ‘21, approaching 15% of our revenue. We anticipate as we exit fiscal year ’23, it will represent over $1 billion of annual revenue. As we rapidly transition to this new model, we do expect that there will be headwinds to our cash flow during the fiscal year ‘21 and fiscal year ‘22 period, as a subscription versus CapEx sales drive significantly different cash flow dynamics. To explain some of the puts and takes during our revenue model transition, we've included in our supplementary earning materials, a simple illustration on slide 18 of revenue recognition and its associated cash flow for a typical premise-based subscription deal. In comparing the mechanics of a legacy perpetual license against subscription, the billing and cash flow of the latter follows a ratable pattern typical of a SaaS model. In this example, revenue recognition proceeds cash flow, creating a working capital headwind in the first year, and a tailwind in years two and three. Because of this, we will see a reduction or deferral in cash flow in fiscal years ‘21 and ‘22. As we exit fiscal 2023, we believe we'll return to our long-term CFFO target levels of between 10% and 13% of revenue. It is our belief that the OneCloud ARR metric will cut through any noise created by the transition and provide a better gauge of our progress to a cloud business model. In summary, we believe the introduction of our OneCloud ARR metric, combined with our existing CAPS metric will provide investors enhanced visibility into Avaya’s transformational cloud journey. With that, I would now like to turn the call back to Jim. Jim?

[Jim Chirico:]

Thank you, Kieran. Almost two months now into our new fiscal year, I cannot emphasize enough how far the company has come in the last couple of years, as Avaya continues on its transformation journey. Taking a step back, as I reflect on the year, we've moved to a very different place from the Avaya that many of you may remember. We are at the moment in the company's 20 year history to regain our leadership position. We've worked hard to align our company, our investments and our innovation, with where the market is headed, and more importantly, with what our customers want. Let me close by reemphasizing a couple key points. Our global team has not only delivered on the promises we have made to our customers, but far exceeded expectations. In today's digital first world, the company has never been in a better position to leverage its true strengths and the value proposition of our core platforms in the cloud. And demand for our large enterprise partners is strong, accelerated by the need to automate, digitize and implement new ways of doing business. Looking at FY ‘21, we have an opportunity to help shape our customer’s futures and we are embracing it. We will remain focused on public cloud both UCaaS and CCaaS, private cloud and workstream collaboration platform with our Spaces solution. In closing, the company is successfully navigating through these challenging times, while we continue to strengthen our position to lead our enterprise customers as they accelerate their own transformation. With that, we're now happy to take your questions.

[Operator:]

Thank you.

[Jim Chirico:]

I think we went back and did or discussed, Kieran, no, I think the final cash flow ARR section should be fine, running through with those couple of times. And that was the only thing that was - that was up in the air for me from his

[Operator:]

Our first question is from Lance Vitanza with Cowen and Company.

[Lance Vitanza:]

Hi, guys. Can you hear me? It sounds like there is some No problem. Okay, great. Great job on the quarter. And it sounds like everything was better than expected. But was there any revenue that you think was pulled forward from the first quarter? You mentioned in the prepared remarks the SSA contract? Could you quantify that or provide some additional color around that circumstance? And then I'm wondering, is that pull forward, the reason that the low end of your revenue guide for the first quarter is down year-over-year?

[Jim Chirico:]

Yeah. Hey, Lance. This is Jim. I think you can hear us also? Thanks for the question. So I wouldn't characterize Q4 is having any pull forward. What I would say to your point on Social Security, it definitely came in stronger than we had anticipated. As well as subscription was obviously a big driver for the quarter, as a number of our customers are looking to accelerate their digital transformation. Obviously, subscription provides them an easy path to modernize their infrastructure, provide some flexibility to really consume new innovation products, much like our workstream collaboration, product and Spaces. So I basically say that, you know, it's really Q4 is a testament to the - to our investments, our innovation, sort of the leadership position, that we have in enterprise. And it really intersects well with the robust portfolio and strategy we laid out. As far as this quarter, again, Q4 by all measures was a great quarter for us. But in fact, I would say that Q1 guidance, number one suggests, as Kieran pointed out, midpoint year-on-year growth would continue. And I also think it's important to note that as we continue to grow in CAPS revenue, and our ARR, which we said on the call, we expect to double this year, as you look sort of at the construct, my point is, we are continuing to shift more and more of our revenue to a cloud and recurring model. And even with that, we are still expecting growth for FY ‘21.

[Lance Vitanza:]

Okay. If I could just ask one more on the balance sheet. I guess the question is, why do you - and I'm afraid of slide deck here. But why do you want to maintain $400 million of cash when the minimum is $250 million? And then I guess even using the $400 million is sort of like the threshold level, you've got an extra $325 million of cash above that level. So what would you like to do with that excess cash, you know, debt repayment, implemented dividend, M&A, can you give me the idea

[Jim Chirico:]

Yeah, sure. Let me start, and then, obviously, I'll turn it over to Kieran. So first, obviously, in the midst of COVID, I think it's prudent at this particular point in time, obviously, to have significant cash. And I think at the same time, I think it's also noteworthy to take a look at just how aggressive we’ve been in 2020, right. First of all, we paid down 8% of our debt, repurchase 26% of our shares. Kieran, pointed out that we basically refinanced and did an amend of extend for close to 65% of our debt moving it out, you know, from four to six years. So I think we've been fairly aggressive in a one year period, even with the last, if you will, six months of our fiscal year in the face of a worldwide pandemic, unlikely we've seen in our lifetimes. So I would say that we are continuing to work with our board around any at all options. But with that, I'll turn it over to Kieran, you may want to add a little bit more color.

[Kieran McGrath:]

Yeah, I think Jim, you've captured it pretty well. Obviously, Lance, as we said in the prior quarters, we do want to continue to be conservative. And just because the pandemic is still so – is still raging and kind of unpredictable point one. Point two, we have expressed a bias towards, you know, focusing on getting our debt lowered and improving our overall leverage ratios. So that would be second our priority. And then obviously, always want to keep a little bit of dry powder as well, for any, you know, any potential investments that we might need to make. But right now, I’d say, first and foremost is really focused on just weathering these rather uncertain times, overall, at the macro economy level.

[Lance Vitanza:]

Thanks, guys. I’ll get back in queue. Appreciate the time.

[Jim Chirico:]

Thanks. Lance.

[Kieran McGrath:]

Thanks. Lance.

[Operator:]

Our next question is from Raimo Lenschow with Barclays. Please proceed.

[Raimo Lenschow:]

Congrats from me as well. And thank you for the extra disclosure that's really, really helpful. First question is, Jim, if I look at the ARR guidance, the long term $1 billion in FY ‘23, that's to me suggested, obviously, is still a lot of stuff still coming, and we're only at the early innings. Maybe talk a little bit about where we are in ACO? You mentioned, you're in some countries, and you still have a doubling of partners, and then CCaaS as well, like, it seems to be still in the early stages. So this is just the beginning of a journey. But I'm just trying to - like the $1 billion in ARR seems like a big number. And then I had one follow up for Kieran.

[Jim Chirico:]

Yeah, no, that's a great question. Thanks. Thanks very much. So a couple of things. So one on the ARR front, as Kieran pointed out. We've worked hard with our strategy that we laid out, really becoming a cloud and SaaS company about three years ago. And I think we're right on track to executing on that strategy. So a real testament to our - to the employees, here we have at Avaya, they're executing extremely well. And it is, obviously in the next couple of years to get that number crossing a $1 billion. It's currently you know, obviously north of 35% range as part of overall revenue. So pretty steep ramp. But again, we have high confidence in our ability to generate that performance. As far as ACO, we really are in the early innings. I mean, obviously in the - we're only in month seven, month eight of the overall deployment of ACO, clearly the first quarter was just predominantly in the US. Over the summer months, we've added a few countries. And we've just announced that we're going to be adding five additional countries, and there will be on board by the end of December. So we have 12 countries now that we are now out and rolling out ACO. And we have expectations obviously is within the calendar year ‘21, that we'll continue to build on that. We are excited to say the least about where we are with the performance and acceptance of ACO, not only from our partner community, but from enterprise customers as well. And obviously, we are putting, if you will, a significant amount of investment into our ACO infrastructure, in our go to market organizations, in our support organizations, if you will, like customer success, and inside sales. And more importantly, as we continue to roll this out in each of the countries around the world. And as we - Kieran pointed out, we're going to at least invest at least one point of our EBITDA performance back in, like we did this year. So back in the go to market functions, as well as continuing, in fact, grow our investment in R&D as we go through 2021 in order for us to execute on the plan that Kieran just laid out. So I would say we're really excited. I think we're right on where we thought we would be with ACO at this particular time. Obviously, doubling the number of customers in one quarter is significant. As we look at our backlog, as we look at how well we're integrating organizationally with Ring, I think is actually been a really pleasant surprise for lack of a better term, with how the organizations are gelling and how we're collectively going to market. And, you know, we're as I said, it's - we really only have a handful of countries that have any more than about three months of go to market time under their belt, but we have high expectations in FY ‘21 and as we look at, you know, our funnel and our pipeline, I would suggest that we're pretty comfortable with what we're seeing on the horizon for our ACO market acceptance.

[Raimo Lenschow:]

Perfect. Thank you. And then the follow up for Kieran. If I think about profitability, obviously we living you know, lower travel costs, et cetera. And I get that in your guidance. But in one aspect has this kind of crisis reshaped how you think about kind of field spending et cetera, you know like, it's unlikely going back to the old normal isn't going to be like a new normal. Like, how much your guidance include like a new normal versus an old normal? Thank you.

[Kieran McGrath:]

Sure. Yeah, I think, Raimo, as Jim pointed out, there is a couple of things going on, a couple of dynamics going on. One is the dynamic of, we will return to some level of new normal activity. And I think you're 100%, right, it will probably not be at the same level of T&E, travel and entertainment, as well as even facility spending. We've been able to do some right-sizing as we go through time. On the flip side of it is, I think our early entree here now ACO, and our substantial offerings, recognize that we need to continue to build out our go to market infrastructure, especially in support of our channel partners, as well. So I think what you'll see is a kind of a shift of the emphasis in spending into more of the bulwark behind, you know, playing out that full ecosystem of go to market. And that's what we've contemplated in our guidance for fiscal 2021.

[Raimo Lenschow:]

Okay, make sense. Thank you.

[Kieran McGrath:]

Thanks, Raimo.

[Operator:]

Our next question is from Meta Marshall with Morgan Stanley. Please proceed.

[Meta Marshall:]

Great, thanks. I wanted to dive into the contact center a little bit. Maybe first question, you noted some improvements in your press release on additional feature sets. But if there's any other critical milestone, development milestones coming out, you had hoped to have a lot of that products finished by the end of the year? And then maybe second just initiatives to push that customer set to kind of the subscription product and where you think contact center as a percentage of revenue can go from the 40% you laid out from fiscal ‘20. Thanks.

[Jim Chirico:]

Yeah, Meta. This is Jim, I’ll take the first one. On the contact center, we're - obviously we announced the product roughly about six months ago. We're actually quite pleased on our progress to date. Today, we're predominantly more around sort of a digital solution with our contact center. We have follow on releases as early as in the next, I would say, two months or so where we'll be moving outside of the US and Canada. So we'll be moving to roughly about, I’d say 30 countries plus or minus associated with that. We have enhanced, obviously, features and content that we'll be building into the product in very short order, around omni channel, Bring Your Own Carrier and a number of other significant features in the marketplace. We have the teams deployed, we're ramping up. Obviously, our go to market functions in order to go execute and sell that with our partner community, but as well as our service provider community and our direct workforce. One of the reasons why we brought Stephen Spears on to the company back in September, was a proven cloud leader in his previous jobs. And we're already making and enhancing I should say our all, our go to market functions, to provide the capabilities needed, as well as the systems to execute on that. So we're - now we think we're in very good shape. And what I'll do is, I'll turn it over to Anthony, who's here with me to give you maybe a little bit more insights into sort of where we are in the progression.

[Anthony Bartolo:]

Sure. Thanks, Jim, and Meta good question. So we've introduced - we're continuing with the milestones that we've laid out on previous calls. We've introduced digital channels in beta that Jim had mentioned. We're expanding into EU by the UK and Ireland, followed by Mexico in – and you will see those coming in January. And we've already seen our funnel double over this last quarter that we're reporting on. So we're seeing some good progress there.

[Meta Marshall:]

Yeah, thus in terms of kind of percentage revenue or initiatives to push the customer to those new products?

[Anthony Bartolo:]

Recurring, so I would say we are seeing, obviously with subscription with significant uptake, as we pointed out. A key component of that is obviously with the contact centers. And really the polling Art subscription offer out there. It's been accepted far beyond even our wildest expectation. Our contracts are in the range of three to five years. So it's a nice entree into fortifying our relationship with our customers, but more importantly providing them an easy avenue to upgraded technology and entree into cloud. We are also seeing as we now have a year under our belt with subscription, a number of those customers coming back as we would expect, and asking for, at this time private cloud solutions to take sort of subscription to the next level, and really moving to an overall private cloud solution, again, which we're excited about with the opportunities in front of us. So we're seeing nice growth in 2020 in contact center. So really off the heels of subscription, and it's actually executing to our plan on an entrée, if you will, to the cloud. So Kieran, I don't know if you want to add any more to that or not.

[Kieran McGrath:]

No, I think you guys covered it. I mean, obviously, just as you said, with more of the subscriptions that we've seen to date, really being contact center driven. And we would expect that the 40% would continue - will continue to grow. And, well, I don't have a formal number out there. But we certainly think longer term it could be more than half the revenue of the company.

[Meta Marshall:]

Thanks.

[Operator:]

Our next question comes from Samik Chatterjee with JPMorgan. Please proceed.

[Samik Chatterjee:]

Hi. Good morning. Thanks for taking my question. I had a couple and if I can just start with asking to get your thoughts on the regional videos that we saw in the momentum of revenues. North America did better. And I think the other regions were a bit more kind of flattish quarter-on-quarter. Outside of the government spending are you seeing any impact or any variances in terms of customer conversion or wins between the regions, either because of the macro or where your product roadmap or launch expansion is at this point? And I have a follow up.

[Jim Chirico:]

Yeah, Kieran, you want to take that one. And I can add a little bit more in the end.

[Kieran McGrath:]

Hi, Sam. Yeah, so first of all, I think, you know, the US government actually did very well. But I would say we crossed all the industry verticals in the US. We did very well. In fact, even in some of the industry verticals that we were concerned about who were most heavily hit by the COVID, the COVID pandemic, we behaved better in those industries as well. I think the issues that we've seen internationally is really that the shutdowns have had a bigger effect in their ability to conduct business. A lot of the business is very personal, in these jurisdictions. And I think that's why they struggled a little bit more than what the US has. We do see now with the international starting to adopt the migration to subscription quicker, we expect them to start to catch up as the year goes on. But across the US, I'd say it was strong across all of our industry verticals and international really more heavily impacted by COVID.

[Samik Chatterjee:]

So maybe I’ll - have my follow up then, which will also for Kieran here. Kieran, you are guiding to about $300 million increase in CAPS revenue. And based on your guidance for total revenue growth being kind of zero to one that could imply about like $250 million to $300 million and decline in the remainder of the business? So I just want to see if you can give me kind of the broad buckets there of what are the primary areas that are driving that decline of $250 million to $300 million. I understand the move with subscription, but we don't think that price some of this decline. So that would be helpful, if you can bucket that for me.

[Kieran McGrath:]

Sure. But I think overall, we have been very quick to acknowledge that it is market trends from the traditional way of selling, you know, selling product has shown that premise based product is going to be declining, especially in our CapEx model by high single digits to low double digits as we go through time. And that's what we factored in, we've expected to continue to see that traditional business especially you know, from a hardware perspective will continue to decline very consistent with the market trends, I mean, that's really - that's really the massive turn that you're going to see in our business as we go through time. A very significant part of our business is still premise based in terms of the - a lot of maintenance that's out there, and that all has to work its way through. So we expect that portion of the business to continue to face headwinds, as more of the business starts to shift to subscription and cloud and we'll start to see that more than offset it, obviously, with our growth projection for the full year and longer term. But just in the current period of time, it really is coming from our traditional product, premise based product business and the maintenance that is associated with it.

[Samik Chatterjee:]

Thank you.

[Operator:]

Our next question is from Asiya Merchant with Citigroup. Please proceed.

[Asiya Merchant:]

Great. Thank you for taking my questions and congratulations on a strong quarter. Here is one quick question and you kind of look forward, you gave us some great metrics on how to think about the transition from fiscal ‘21 to ‘23. I just want to kind of understand, as we look at your long term model, if you get to those cash flow metrics, what are some puts and takes that we should think about from the margin, EBITDA margin perspective? And as you look at fiscal ‘21, as well, again, if you can walk us through some of the puts and takes to your guide, what could drive it coming to the lower end of your guide versus higher end, some things to keep out, or keep a look at? Thank you.

[Kieran McGrath:]

So, firstly, you know, I would be naive if we didn't acknowledge that the COVID pandemic is still out there. And you know, what we feel we've got a pretty good insight into our customers. From a funnel perspective, as Jim pointed out, and we think we got good control of the business. And quite frankly, we've seen some of our guys reporting in internationally, especially in countries, some of our European countries as the businesses are shut down almost entirely. And that's always a concern that you have to acknowledge. So that's the one thing just tactically that we would think about. Over the longer term, I mean, we really do see more of the business migrating to subscription, as I pointed out in my prepared remarks, we expect that more of that subscription, or our subscription bundles are going to be delivered more as a service. So more cloud content, which means we'll be taking more and more that ratably. So what we should see an increase in bookings, as reflected in our ARR metric that we're talking about, more of that revenue is going to come after overtime. We are doubling down, as Jim pointed out on the investments that we made from a cloud perspective, especially from CCaaS perspective. And then we're funnelling obviously a lot of money into our go to market. We've had a good opportunity over the last six to eight months to really learn a lot about, selling public cloud, and understanding what it takes to fully support that end-to-end. So those are the types of things that are factored into the next year, from a EBITDA perspective. And I think we had that pretty well bracketed in terms of where we should be and I think we’ve demonstrated time and time again, we're pretty prudent in how we manage our costs and expenses. And we should have that pretty tightly managed. Longer term, the opportunity to truly scale our cloud offerings, is really going to give us the ability to expand, is going to give us the ability to expand our margins. We’ll become more efficient from a cloud go to market perspective. And we think there's opportunity in our sales go to market, as well, as we've always said, we think we'll continue to see some improvement in our product gross margins, as we start to move away from hardware.

[Asiya Merchant:]

Great. Thank you.

[Kieran McGrath:]

Thanks, Asiya.

[Operator:]

Our next question is from Rod Hall with Goldman Sachs. Please proceed.

[Bala Reddy:]

Hi. Thanks for taking my question. This is Bala Reddy on for Rod. I just want to double click on to CCaaS momentum there, I wanted to see if there is anything that you could do to help us understand the size of it and how big it was? And then maybe talk a little bit about the sustainability of that disaster. And then I have a follow up.

[Jim Chirico:]

Yeah, sure. Yeah, hi. This is Jim. I'll turn it over to Anthony to give you some perspectives into what we're doing on CCaaS and DPO I’ll add a little bit at the end.

[Anthony Bartolo:]

Sure. What we've seen is that the take up rate is quite interesting with our customer base, what we find is they're approaching us on the CCaaS pure cloud, public part of our business. And as it starts to roll out in multiple countries we started to see that funnel build. I mentioned a little bit earlier that it's doubled just within the quarter alone. In terms of the sizing, that's going to depend on how quickly we get the rollout in each of those countries. And if we see that that customer doesn't sort of roll immediately into a public cloud solution, a lot of the times they start to see the breadth of the portfolio and move into our private cloud solutions or our hybrid type of solution. So you may see and we do see a distribution of the customer coming into our storefront, looking for a public cloud CCaaS solution, but ended up leaving the store procuring a hybrid or a private cloud solution or sometimes enhancing their on-prem through subscription. So that's what we've seen. So you're seeing that some of those numbers spread across that particular portfolio because we have that particular breadth.

[Bala Reddy:]

Thanks, Anthony.

[Operator:]

Our next question is from Catharine Trebnick with Colliers. Please proceed.

[Catharine Trebnick:]

Oh, congratulations on the strong quarter. My question has to do with the change you're seeing in sales, with the pandemic you're seeing more digital marketing, even the bars looking to switch more to digital marketing, same mark, lock fewer face to face meetings, as you noted, even happening now in Europe. So what initiatives are you putting together for this change? And I think my day I think it will be the new normal. And then is that affecting the size of your sales force? And are you shifting people maybe to do more inside sales, et cetera? Could you just kind of go through that for me? Thank you.

[Jim Chirico:]

Yeah, sure. This is Jim. So that's a great question. And obviously, one of the reasons why we brought Simon Harrison on and joined us back in January, as we sort of refocus and doubled down on our overall marketing efforts here within the company, and Simon and team is doing a great job, especially as you point out in the world of digital. And I'll ask Stephen Spears, who's here with us to add a little bit more color to that. But as far as our overall workforce, and what are we shifting, we are under, you know, a bit of a transformation within our go to market efforts. We are obviously adding to not only our inside sales teams globally, but also customer success teams as well as we deploy more of our cloud solutions out into the marketplace. And secondly, we're adding a number of what I’ll call specialists in really generating cloud, especially with our larger enterprise customers. And in fact, we've added a number of folks into the organization that have the experience to work with partners. And it's not only transitioning our current bars, from, you know, hardware on-prem type sales, but also adding a number of new partners that are solely have their expertise in delivering cloud solutions to the marketplace. So there's been a fair amount of transformation underway. I think you'll see a bit more here in the company, so that we're in a position to leverage and satisfy our customers demands, whether overall cloud solution. So it's actually pretty exciting. And even the current Avaya team is actually very excited about an opportunity to drive and sell and actually go to the customers with the solutions that they require. But a little bit more insight into the actual - what we're doing from an overall marketing perspective. Stephen, I don’t know you want to add anything on that.

[Stephen Spears:]

Well, thank you, Catherine, for the question. I do believe that we're seeing a tremendous shift and a lot of momentum, as it relates to reaching to our customers and partners in digital methods. You can see that we were able to execute very strongly. We gave away a number of free trial licenses at the beginning of COVID. That turned into, you know, really a windfall of net new business in the quarter. And I think as we continue to evolve our offerings, we’ll continue to reach into those digital channels, and really provide a lot more frictionless commerce opportunities for our customers to leverage during these unprecedented times. As Jim alluded to, you can look to a number of changes that will continue to evolve within our sales methodology. But really that key focus on customer success. And now as we transition these customers into subscription, you'll see a renewed focus from Avaya on that customer success component.

[Catharine Trebnick:]

All right. Thank you.

[Operator:]

Our next question is from Mike Latimore with Northland Capital Markets. Please proceed.

[Mike Latimore:]

Great. Yeah, congratulations on the strong results that never come. In terms of the subscription bookings, I think you said $400 million in fiscal ’20 here? How much of that $400 million are you likely to recognize in fiscal ‘21?

[Jim Chirico:]

Kieran, you want to take this one?

[Kieran McGrath:]

Sure. So Mike, as we've laid out illustratively, we take anywhere from between 50% and 60% of the premise based at point in time, given the – pardon me, the subscription, given the premise based content within it. So I think the illustration that we put out there that - of that $400 million you’ll probably get somewhere on the magnitude of about 25% more per quarter, pardon me, per year, in the following years. And then you had opportunity, obviously, to when you renew it again to, renew with the point in time, you know, that, again, assuming that it doesn't change - this bundle doesn't change in year 4.

[Mike Latimore:]

Okay, got it. And then it sounds like you're having a lot of success in the contact center segment, I guess, is there any way to highlight or describe what percent of your of your top contact center customers, whether it's top 20, or 50, or something that are on subscription already?

[Jim Chirico:]

Kieran, you wan to…

[Kieran McGrath:]

Yeah. So honestly, I don't have it at the tip of my fingers right now. We did move some of our largest BPOs, back in third quarter, in second and third quarter. So I know that very clearly two of our largest contact center customers were moved. We've also had a couple of big banks. I’ll tell you what, maybe give me a chance to come back to you guys on that one. I mean, we've been trying to manage it, from a migration perspective, given when the natural renewal cycle comes up. But we have moved, like I say, couple of our bigger banks and a couple of our larger BPOs.

[Jim Chirico:]

Yeah, I think the meta point is that we're at a very early stages of that transition in contact center. So very early innings. The other thing - that might be other thing we're starting to see now in the last quarter is the fact that we've won a number of new customers with our subscription order. So it was originally designed obviously to go after install base and enhance the customer base that was predominantly on our maintenance contract, and then provided the accessibility to new technology and drive a few of that OpEx model. But solution has been so successful, we're starting to see a number of greenfield new customers sign on to subscription and we expect that will continue as well. So again, another opportunity for us as we move into 2021.

[Mike Latimore:]

Great. And just last on professional services, how they've been doing lately, and I guess, do you recognize kind of its point in time as well, or is that get built into a ratable recognition?

[Kieran McGrath:]

This is Kieran. Services is all tied into 606 Accounting to present your completion. So as you deliver, unless there's very specific milestones, and acceptance criteria for the customer. So no, it tends to be just based upon deliverables.

[Jim Chirico:]

Yeah. Our APS revenue is basically flat from FY ‘19 to FY ‘20, which is, one could expect actually, I think that's actually very good performance, especially with COVID hitting a number of our customers and more importantly, this sort of large enterprise where people are not at work. So obviously, they do a lot of work virtually. But still, APS is still sort of a person sort of human interaction with the customer base. So the fact that we were flat year-on-year, I think is actually really great performance and thus well for us as we go into FY ‘21. So we're certainly pleased with our professional services revenue and organization.

[Mike Latimore:]

Great. Thank you.

[Operator:]

And our final question is from Hamid Khorsand with the BWS Financial. Please proceed.

[Hamid Khorsand:]

Hi, good morning. I just wanted to see, is there a difference in economics between your Avaya Cloud Office and OneCloud? Is there a particular product that you were looking forward to push this year versus the prior?

[Jim Chirico:]

I'll start off with that and then Kieran can get into the specifics. We don't necessarily push any product over any other product. We have a very robust portfolio, which is great. In fact, more than most of our competitors because we provide the opportunity to public, private, and to our hybrid. So when we sit down with our customers, we listen to our customers, we obviously have an opportunity and present the different optionality for what their needs are. So we don't - if you will portray one versus another. We are a customer-led organization, and it's great that we have that portfolio and offerings, really to tackle any segment of the industry we participate in. As far as the overall - from a financial perspective, I don't know, Kieran, what color you can add to that or not?

[Kieran McGrath:]

Sure. I mean, I think as we played out in the past, you know, obviously, the ACO offering, because we're not hosting it is actually, you know, mirrors in many ways. It's sort of a premise-based license, so high – relatively high gross margins, and the like. And then obviously, you're ramping your own cloud, but I would think over time, when you take into account the full go to market cost and then all the rest of it, they're all fairly consistent in terms of bottom line profitability.

[Hamid Khorsand:]

Okay, thank you.

[Kieran McGrath:]

Okay.

[Operator:]

I would now like to turn the conference back over to Michael for closing remarks.

[Michael McCarthy:]

Thanks for joining us, everyone this morning. Appreciate your time. We look forward to speaking with you over the days and weeks ahead. We should be reporting the December quarter early in February and we'll get note of that out as we get closer to that date. Thanks very much for your time and enjoy a good holiday season. And take care.