Avaya Holdings Corp.
Q3 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good morning. My name is Kelly and I will be your conference operator today. At this time, I'd like to welcome everyone to the Third Quarter Fiscal 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Please limit yourself to one question and one follow-up question. Thank you. Mr. Peter Schuman, Senior Director of Investor Relations, you may begin your conference.

[Peter Schuman:]

Thank you, Kelly. Welcome to Avaya's Q3 fiscal 2018 investor call. Jim Chirico, our President and CEO; Pat O'Malley, our SVP and CFO; Shefali Shah, our CAO and GC; and Laurent Philonenko, our SVP of Innovation are here for today's call. The earnings release, CFO commentary, and investor slides referenced on this call are accessible on the Investor page of our website and should aid in your understanding of Avaya’s financial results. We will reference non-GAAP financial measures and specifically note that all sequential and year-over-year comparisons reference non-GAAP numbers except where otherwise noted. A reconciliation of such measures to GAAP is included in the earnings release and investor slides, and is available on the Investor page of our website. We may make forward-looking statements that are based on current expectations, forecasts, assumptions, and remain subject to risks and uncertainties that could cause actual results to differ materially. Information about risk and uncertainties may be found in our most recent filings with the SEC, including our Form 10 and subsequent Form 10-Qs and in our earnings release today. It is Avaya's policy not to reiterate guidance and we undertake no obligation to update or revise forward-looking statements in the event facts or circumstances change. I will now hand the call over to Jim.

[Jim Chirico:]

Thank you, Peter, and good morning everyone. It's a pleasure to discuss the many positive developments at Avaya. I'll cover our solid third quarter performance in a moment. With a couple of quarters behind us as we prepare to close out the fiscal year, I'd like to spend a few minutes to take stock of where we are and discuss our accomplishments in fiscal 2018. I'm proud of our progress to-date. Rather we are outpacing our plan of our R&D pipeline, our business looks today and equally as important how we're moving forward. Before continuing, I would like to acknowledge the most important ingredient in our success, our employees at Avaya. Thank you for your continued passion, commitment, and valuable contributions. Our progress over the last three quarters has exceeded my expectations and gives me confidence we have the right strategy. We have financial strength, we continue to make progress each and every day and we have reversed a 10-year revenue trend in just three quarters, the company has transformed. We embarked on this journey with eyes wide open regarding the effort required to change the course of the company and drive growth. We've been through transformations before at Avaya. As a result, we have the deep respect for what it takes and we are making significant strides. We laid out a strategy focused on growth, innovation, and becoming a customer led organization. We developed a plan to operationalize this strategy or executing against it, we have overcome various headwinds, we faced it, we dealt with it, and we never lost focus on delivering on our commitments to our customers, partners, and shareholders. We've implemented massive changes touching every part of the company while it didn't happen overnight, we acted quickly, decisively, with purpose to address today's challenges and prepare for tomorrow's success, it's been a true turnaround. It was almost a year since I was honored to be named CEO. Looking back we overcame a fair share of hurdles and navigated numerous challengesnot the least of which was emerging from Chapter XI. Since then I personally traveled around the world in the last nine months speaking with thousands of customers and partners reconnecting, listening, learning, and now implementing. This is what it means to be a customer led organization. Having the benefit of over 10 years of experience with Avaya I knew very well what the company was capable of doing. We are actively changing the culture. We're improving the day-to-day performance, investing in innovation across multiple dimensions, while rebalancing and positioning the company for sustainable growth. These accomplishments not only demonstrate that we have the right plan and discipline to execute but also creates the momentum required to drive growth in fiscal 2019. Now let's look at where we are against our five stated strategic priorities for 2018. Number one transforming the business. 82% of our revenue came from software and services up over three points from a year ago and a third quarter record. Our recurring revenue was 59% an all time high an indication of customer satisfaction and confidence, and cloud revenue increased to over a 11% of our revenue. Number two building momentum. This is the second consecutive quarter with year-over-year revenue growth which is the first for the company. We have driven three consecutive quarters of funnel and bookings growth across UC, CC, and our professional services business. Leading indicators and the strength of our business and new products are gaining strong traction in the market now accounting for more than 34% of product revenue, demonstrating that our innovation engine is firing on all cylinders. Thirdly, we're playing offense and winning. We've added 5,000 new logos and nearly a 1,000 partners launching a master agent partner program and signing over 300 deals valued at a $1 million or higher. Launching 74 new products, including several significant AI offerings in just three quarters mass attraction. Number four; we're investing significantly in people and technology, investing more on technology in the last two quarters than we did in all of fiscal 2017. We strengthened our portfolio along four dimensions, strengthening out our multichannel offer with scale, cloud and features, adding value to our installed base by delivering new desktop for our CC customers, and integrating conferencing for UC, driving innovation in disruptive areas such as AI and mobility, and expanding our UC offer in collaboration in innovative endpoint in hotel rooms. On the people front, we've rolled out new cultural principles, we've attracted new talent and we've strengthened our management team. Lastly, we significantly enhanced our financial flexibility and leveraged it to make the prudent investments underpinning our progress. We will realize improved cash flow with the repricing of our debt, we continue to strengthen our balance sheet with the recent convertible offering, we have maintained the industry-leading business model over the last three quarters an average of 25% adjusted EBITDA, Gross margins up 62%, operating income of 21%, and continue to generate roughly 10% of our revenue in cash. Turning to the results we delivered in Q3, let me start by saying it represents another record setting quarter on multiple dimensions of our business. Performance in our core business remains strong achieving $755 million in revenue. We now have six straight quarters of revenue stability and overall bookings are up across the board. In our contact centers bookings increased 4% quarter-over-quarter and 24% year-over-year. UC bookings remained strong up 2% from the prior quarter and 13% year-over-year. Cloud is exceeding expectations now represents over 11% of revenue up quarter-over-quarter and year-over-year. Quarter-over-quarter mid-market MRR increased 43% and enterprise MRR grew 107%, while private cloud bookings rose 4% year-over-year. Our maintenance business continues to stabilize with revenue increasing sequentially for the first time in over a year. And renewal rates hit the best levels we've had in eight quarters. Professional services bookings increased 17% over the last quarter and 48% year-over-year. Customer demand for our new products continues to grow. Overall new product revenue grew 45% year-over-year. This is a direct result of meeting our customer needs coupled with our increased R&D investments. Momentum for Oceana, our flagship contact center solution continues to accelerate. We signed our largest omnichannel opportunity to-date with over 9,000 policies; revenue was three times greater than the prior quarter. Avaya Mobile experienced our groundbreaking mobile total free solution for contact centers has already hit multiple early milestones including the first patent and three customer contracts. Our enterprise cloud contact center offer is gaining traction with two large deployments underway which we expect to triple before the end of the year. Our partnership with Afiniti is on track; we have nine POCs underway and have over 125 opportunities in the pipeline. The value proposition of turning contact center from cost centers into profit centers is clear. Just signing in March, it's early but strong. And last -- and on the last call, I referenced our new endpoints. I'm proud to say revenue from these next-generation IP phones grew 70% sequentially and the demand is steady. Now we’re not stopping here. Lastly, I'm very proud that Avaya has returned to a leadership position in the Gartner Magic Quadrant for both Contact Center and Unified Communication. These two achievements are a true testament to our ability to execute and more importantly to the value we are driving for our customers in our core business. Now let me turn it over to Pat to provide more details on the financials.

[Pat O'Malley:]

Thank you, Jim. A couple of notes upfront. First as a reminder unless otherwise indicated financial results discussed for all periods on this call are non-GAAP and exclude our networking business divested in Q4 2017 and references to year-to-date results on this call will be on a combined basis. Reconciliations from GAAP to non-GAAP are included in the earnings release, investor slides, the CFO commentary, and are also available on the investor page of our website. Second, when referencing Q2 fiscal 2018, Q3 fiscal 2018, and Q4 fiscal 2018, these will be referred to as Q2, Q3, and Q4 unless otherwise noted. Before discussing our outlook and diving into our third quarter financial results, I’ll make some observations I believe provide useful context. First, our year-to-date financial results demonstrate that we have achieved a fundamental 2018 objective of driving revenue stability ahead of schedule. Second, consistent with our stated 2018 strategic priorities, we have continued to enhance our financial flexibility through a number of actions. Specifically we leveraged favorable market conditions to reduce $14 million of annual interest expense by repricing our outstanding debt and to strengthen our balance sheet and enhance our liquidity with the issuance of the $350 million of convertible notes. I will now highlight selected Q3 financial results. Revenue grew 1% year-over-year and was essentially flat from the prior quarter. At constant currency, non-GAAP revenue decreased less than 1% year-over-year and increased slightly sequentially. Services revenue of $433 million was down $15 million from the prior year and was down $7 million sequentially. The year-over-year decrease was primarily from lower maintenance revenue as a result of the continued shift to OpEx models. Within services both our managed services and maintenance posted sequential revenue gains in Q3, while only APS revenue declined. Three APS deals in the U.S. shifted into Q4. We do expect APS revenue to grow in Q4. Product revenue from the channel was $233 million and grew 13% year-over-year and was 4% higher sequentially. As a reminder, channel product revenue is recognized when we sell into the distributor and continues to account for more than two-thirds of our total product revenue. Gross margin of 61.9% decreased year-over-year by 10 basis points and was 50 basis points lower sequentially. This is mostly driven to product mix. We expect gross margin to benefit in Q4 due to a higher software revenue mix. Operating expenses, R&D plus SG&A of $316 million increased $10 million year-over-year and increased $1 million sequentially. R&D increased by $2 million year-over-year and SG&A increased $8 million year-over-year. R&D expense was $50 million, an increase of $2 million year-over-year and was flat sequentially. The R&D expense reflects our continued commitment to drive innovation in our products and technology that will enable us to expand our customer base and enable top-line revenue growth in fiscal 2019. SG&A expense was $266 million. This was an increase of $8 million year-over-year and $1 million sequential. SG&A increased primarily due to sales commission expense related to higher bookings and administrative obligations and tax structure planning cost have continued following emergence. These one-time tax planning activities are expected to optimize our tax structure and yield significant cash tax benefits in fiscal 2019 and beyond. These costs in this quarter were approximately $9 million. Operating income was $151 million or 20% of revenue. Adjusted EBITDA was $175 million or 23.2% of revenue. Looking at our capital structure, during Q3, we issued $350 million in convertible notes with net proceeds of $314 million after expenses including the call spread. We took advantage of favorable market conditions to significantly improve our cash concession and enhance our financial flexibility. The offering diversifies our capital structure and/or investor base. To summarize including the call spread, the notes have a low cash coupon of approximately 3%. The notes do not contain financial covenants or require ratings. The notes will not be dissolved in dilution until our stock prices rises above $37.36 75% above the $21.35 closing stock price on June 6, 2018. As a result of the offering, we expect to have additional analyst coverage in 2018. As part of our ongoing activities to improve our capital structure, we successfully reprice our $2.9 billion senior secured term loan saving the company 50 basis points in interest rates or approximately $14 million annually in cash interest. Turning to the balance sheet, cash and cash equivalents were $685 million as of the end of Q3 compared to $311 million at the end of the prior quarter. The sequential change is primary due to the net proceeds of $314 million from the convertible notes issuance and operating cash flow of $83 million, offset by capital expenditures of $18 million. Free cash flow defined as operating cash flow minus CapEx was $65 million or 9% of revenue. In summary, during Q3, we continued to improve our capital structure and increase our operational efficiency and productivity as demonstrated by our strong cash generation. Taking into consideration our recent acquisition, our continued investment in R&D, sales enablement, tools and people, and our ongoing efforts to improve our operating efficiencies, we are providing a following forecast for the fourth quarter and fiscal 2018. For Q4, GAAP revenue of $705 million to $735 million, non-GAAP revenue of $760 million to $780 million, GAAP operating loss between $24 million or 3% of GAAP revenue to GAAP operating income of $30 million or 2% of revenue. Non-GAAP operating income of $153 million to $172 million or 20% to 22% of non-GAAP revenue. Adjusted EBITDA of $175 million to $195 million or adjusted EBITDA margin of approximately 23% to 25% of non-GAAP revenue. For fiscal 2018, GAAP revenue $2.82 billion to $2.85 billion, non-GAAP revenue of $3.05 billion to $3.07 billion. Operating loss of $87 million to $124 million, non-GAAP operating income of $633 million to $652 million or approximately 21% of non-GAAP revenue. Adjusted EBITDA of $743 million to $763 million or 24.5% to 25% of non-GAAP revenue. For fiscal 2018, our revenue outlook will be at the higher end of our previous guidance and our adjusted EBITDA outlook is consistent and within range of previous updates. As for the fiscal 2019 outlook, we will provide that update on our fourth quarter earnings call. Now I'd like to turn it over to Jim for some additional remarks.

[Jim Chirico:]

Thank you, Pat. Let me share a few thoughts before going into Q&A. As we head into the final stretch of fiscal year 2018, I'd like to share our plans to enhance shareholder value through growth in 2019. No one has our scale, reach, depth, or financial strength and our technical expertise is unmatched. This differentiates us and uniquely positions us to provide value to our customers. Our experience sets up apart from our competition. We have the means, the talent and the luxury to play the long game focused on fundamental. As technology cycles contract and the pace of innovation increases, we remain focused on the most important thing delivering long-term value to our customers rather than whatever happens would be the flavor of the day. In 2019 we will continue to prioritize and accelerate investments in four key business areas that will serve as our growth engines. First, optimizing our core business. We have the industry's largest installed base with nearly 145 million line NC across UC and CC with over 130,000 customers globally including 90% of the Fortune 100. We are the clear incumbent. Our customers want us to provide a seamless integrated experienced by investing in continuous improvement of features, simplicity, automation, and new user experience. They want solutions that are extendable to the cloud when they are ready to move in a way that they want to consume it. Moreover they told us that one size does not fit all. Second, providing breadth and depth in our cloud solutions. Our customer requirements for both UC and CC demand will range from private, public, to hybrid cloud and every combination thereof. Avaya's delivery across all fronts and we will continue to invest in the multiple dimensions of cloud. The Spoken acquisition was a critical first stepping stone in support of our cloud strategy; it offers an Avaya Solution for the enterprise contact centers. Our private cloud and managed services business with three million seats under management makes us a market leader and uniquely positions us to deploy cloud at scale. Thirdly, investing in new solutions, partnerships, and alliances. We recognize that certain experiences that were not previously possible are quickly becoming a reality and we are committed to bringing the benefits of these emerging technologies to our customers. For example, AI not about technical elegance, it's about harnessing the value from the vast amount of data at our disposal to create new experience. We have five AI offers in the marketplace today. They set us apart from our competition driving significant value for our customers; they’re disruptive and most importantly generating revenue today. These include smart routing and behavioral fairway, conversational interfaces that enable sub-service, real-time text to speech transcription, aging guidance and performance improvement, and integrations with IBM, Google and Salesforce. We also launched the Avaya mobile experience to keep mobile calls to contact centers within the mobile network end-to-end reducing cost and more importantly offering mobility, omnichannel experiences. This is just the beginning; we are building a true platform that supports more mobile applications. For example, we are developing Identity-as-a-Service which takes advantage of Blockchain in the latest security technologies. These are just a snippet of the innovation taking place. Number four, we’re delivering high value services. Services plays a critical role in our business. The simple fact is that technology requires professional services that range from advisory to support operational management. We will continue to provide world-class support, professional services, and managed services, for enterprise communication. While it may seem simple, it requires highly trained people and advanced technologies. Here again our experience serves to differentiate us. Our services strategy is and continues to offer a broad set of solutions to our customers that reflect business value we bring. So in closing, during our short time in limited operating history as a public company, we have had three consecutive quarters of fitting our guidance. We have not only met investor expectation but also achieved revenue stability ahead of schedule. This demonstrates three things, we developed an effective plan understanding what’s needed to be done to hit our objectives, we had the focus and the disciplines to execute, that’s a combination of the right plan effective execution leads to the desired value enhancing outcomes. We have the confidence in our ability to continue on this path as management understands this business. We have broadened the right talent and we have the operating cadence as a team and as a company that I've not seen before. We have made significant and prudent investment in areas of growth to reap benefits in the long-term. Just as we made it happen in fiscal year 2018, we will make it happen in 2019. Now I will turn it over to Kelly to begin Q&A.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Lance Vitanza from Cowen. Please go ahead.

[Lance Vitanza:]

Hi, thanks for taking the questions. Jim, the company’s clearly recovering from some time of under investing in new product offerings primarily in cloud, Spoken was a part of that recovery as you added public cloud technology to the contact center offering, are you satisfied now with how you’re offering stack-up versus those of your peers or is there additional work that you need to do in contact center in particular to just sort of recapture the leading technological edge?

[Jim Chirico:]

Hey Lance, this is Jim, I will take the question. So in our cloud strategy is to offer solutions that really address all market segments from S&P contact center, it’s enterprise that you see contact center. From a contact center perspective, I’m satisfied to where our overall cloud offers are today both from the capability to the Oceana to offer that both the public and private, the capabilities that we have within our managed services and more importantly the opportunity to serve our large incumbent base where we have over six million lines on contact center. So from an overall technology perspective the Spoken acquisition has actually met expectations. Since acquiring that we finished the migration of our own data center AWS, so we now have enhanced capabilities and that also positions us for international expansion later on this year. The multi-tenant digital capabilities that we now have within our cloud capabilities also is significant and uniquely positions us and we have a pretty intensive roadmap for additional functionality that we will be driving out over the next months and quarters to come. So I'm quite pleased on the progress we've made to-date.

[Lance Vitanza:]

And then if just as a follow-up, if I could ask you from the standpoint of Unified Communications, is there another acquisition that similar to what Spoken did on CC that that might accelerate the timeframe there or are you confident that that you've got the pieces in place to sort of build it organically?

[Jim Chirico:]

A couple of things. So first of all we all know we're positioned from UC perspective but I think more importantly is the fact that we play in a different field if you will and some of the others with our large base. So we haven't lost sight of the fact of where we are and where we're going in effect. Having a 11% of our revenues now being generated by cloud, mid-market up 43% as I mentioned is above expectation. But specifically to your point, I will share my own personal point of view and I'm sure consistent with many others is the fact that anybody that observes the industry were starting to see a pace of consolidation that we haven't seen in prior years. And my expectation is that this pace of consolidation not only is but will remain increasing over years passed, and from us -- from a strategic rationale perspective, we certainly consider all options, they include acquisitions or JVs or strategic partnerships, when evaluating those we actually have a pretty detailed, disciplined framework that we take a look at across all aspects, right. What's the differentiation, what is the innovation, what’s the value, what’s the opportunities in synergies, talent so on and so forth. So it's certainly on our radar as it should be but as customary as a public company it's our policy and not to comment on any valuations at this point.

[Operator:]

Your next question comes from the line of Raimo Lenschow from Barclays. Please go ahead.

[Mohit Gogia:]

Thanks guys. This is Mohit Gogia on for Raimo. Congrats guys on another solid quarter. But Jim staying on that contact center topic, the Spoken acquisition seems like it’s performing well in regards to your expectation, I'm just wondering if you can give us an update on as to the platforming division which you guys have disclosed over the last four quarters as to how the progress is looking there. And then also I was wondering, so I saw in the press release that you mentioned about the robust pipeline for the contact center service offering, wondering is this mostly sort of excelling into the existing customer base or you also able to get new logos from the added service offering, the multi-tenant added service offering. Thank you.

[Jim Chirico:]

Yes, so thank you. Let me take the second one first, this is Jim again. So in reality is it's a combination of both, it's with cloud provides us an opportunity to sort of expand outside of our normal incumbent base and in fact we're doing that. If you take a look at last quarter and a number of these were contact center wins, we actually displaced one I should say 78 deals just last quarter with a revenue value north of $25 million. So we now have the capability we now have the technology, we now have the innovation, we can actually anticipate if you will before TAM and we're being obviously expanding our breadth as we continue to drive more and more customers to Avaya. So we're quite pleased with the 78 displacements. As far as where we are on the platform and our public proceeding with Oceana Integration and UC migration and so on I’ll turn it over to Laurent, who is here to give you some of the key specifics be it in BPOs and so on but Laurent, if you want to tackle the Oceana integration UC migration piece platform?

[Laurent Philonenko:]

Yes, so when we acquired at Spoken we definitely had a plan to over time migrate or take LOGs from contact center and Unified Communications to emerge tight on the cloud. We are on that trajectory, so we first of all we migrated the Spoken architecture to AWS for UC CC reasons; it also will help us with international solution. Second we have delivered the Oceana digital channels meaning chat and email et cetera in merchandizing on-cloud fashion around the Spoken architecture like Jim noted earlier. Third we do have a roadmap where we are into continue to make our full suite of solutions available in merchandizing on-cloud fashion. That is linked to progress over the next month and then quarters. Another team is working really well from integration point of view with the rest of Avaya. We have one engineering team which is driving [indiscernible] now between what was Spoken and what was Avaya. So it’s really one team seeking a cluster approach to what we’re looking.

[Operator:]

Your next question comes from the line of Hamed Khorsand from BWS Financial. Please go ahead.

[Hamed Khorsand:]

Hi good morning. First off could you just talk about the bookings growth that you’re seeing, is there a particular customer category or product line that’s driving that bookings growth.

[Jim Chirico:]

Yes, this is Jim, I'll take this one. Actually we're seeing the bookings growth across the portfolio of offers which is great so it's really just demonstrating as I mentioned, the overall strength in the business. So this is the third consecutive quarter that we've seen bookings growth which is significant in fact as I've said I've been here 10 years is not too many sort of shrieks if you will that we've actually had three consecutive quarters of bookings growth and again it's a combination of a number of factors. One is on the CC space, if you take a look at some of the product enhancements that we made to Oceana and how Oceana is gaining traction now in the marketplace, that's obviously a key for what's occurring in contact center. And also as I mentioned the capability now that we have AI. We have a marketed AI solution across multiple platforms which is also helping to drive our contact center bookings. So they've differentiated and set us apart. On UC, we've invested quite a bit in UC, and really building out the stack over the last nine to 12 months. We refreshed our complete line of endpoints, started that back in the March timeframe up through this past quarter. So completely new set of endpoints in fact it’s probably about seven years since we had done that. Secondly we've taken a look at a number of offers from a cloud perspective in the IPO. mid market space which is gaining nice traction, the introduction of now three master agents driving additional bookings and certainly running that out if you will with Equinox which is really a collaboration offer in the marketplace that continues to gain traction quarter-over-quarter. Now we'll couple that with some new technologies like powergrooom and some other new announcements. And I think the last important part is from a verticals perspective which we didn’t touch on but verticals are obviously very key to us and we're seeing areas in hospitality, areas in healthcare with unique applications that are driving an increase in the overall UC bookings -- booking as well. So it’s actually moving well. And on the managed services side, it’s our professional services side I’m sorry, as you become more complex as we drive more technology since the marketplace drives a skill based and uniqueness to help our customers implement those solutions and so we've invested quite a bit over the last nine months in rescaling our APS organization to really drive value and that's exactly what they're doing to unlock value. So the good news in fairness is it's not one particular segment, it’s across UC CC and professional services, so it's across the breadth of the company.

[Hamed Khorsand:]

Okay and the other question I had is how many channel partners did you have in the quarter with and was the 4% growth that you reported from the channel, was that because you added new channel partners or is that because your existing channel partners are actually buying more from you?

[Jim Chirico:]

Yes, so it’s a couple, so we ended the quarter with about 6,000 channel partners. This last quarter we added 300 channel partners, so a nice number. What's interesting too is these channel partners if you are channel partners that are going to lead us to the future, so they are channel partners that really drive if you will new and emerging technologies but the channel revenues are up across the board and it's a combination of a number of different factors. But the net of it is again some of it is cloud, some is that our new endpoints, some of it is frankly some of the increased demand that we’re seeing across the -- from a software perspective. So it’s a multiple combinations but we have 6,000, we added 300, we're on track to the plan that we set out and we're seeing a nice ramp on with these new channel partners because obviously it takes somewhere between plus or minus a year before they get fully ramped. And so building that pipeline of new partners bodes well as we go into fiscal year 2019.

[Operator:]

Your next question comes from the line of Mike Latimore from Northland Capital Markets. Please go ahead.

[Mike Latimore:]

Yes, thanks, congratulations on the quarter and year. I guess first on Spoken, I saw that you are going to basically have a UCAS offering come out of the Spoken acquisition at some point; can you just provide a little update on that?

[Laurent Philonenko:]

So Laurent here, we do have a plan to provide tooling merchandize on-cloud UC, so we are well on the way on that plan, we released in June of this year a UC of rather service [ph] which is based on the continued rise on the product -- IP of this product so with centralized management continue to rise in terms of the technology you will expect in a cloud offer. So we are in that motion and we are continuing to make that offer more scalable, may go upward or we do things across the corporation. So this is what we are doing and that work is again a joint work between the ex Spoken team and the ex Avaya team, it is really one team working on that cloud.

[Mike Latimore:]

Okay, got it. And then can you just help me think the bookings numbers you gave, I think you said in the press release that bookings were up 3% but then you said contact center I think was up 24% and UC was up 13%, so I would have thought that given the strength of those two main segments of your business total bookings would have been up more than 3%, can you sum things up?

[Jim Chirico:]

Yes, sure I think between quarter-on-quarter and year-on-year, so 13% on UC was year-on-year, quarter-on-quarter was 2%, and obviously UC is still a pretty big component of the overall revenue. So the blended average was that Mike, I think that's the difference.

[Operator:]

Your next question comes from the line of Dmitry Netis, William Blair. Please go ahead.

[Dmitry Netis:]

Okay, thanks for taking the question. Perhaps two questions pretty kind of high level, one to touch on the channel and you guys mentioned a nice number of channel partners you added in the quarter and you said 300 and you also said there is about 1,000 that you have added over the last remember 12 months I think maybe what you said plus 5,000 logo, so there is a nice traction there and that is all kind of relative to some of the pure plays that are very aggressive it seems out there in the channel trying to win, hard to mind with these channel partners in the mid-market and larger enterprise. So my question to you is what are you seeing out there as far as maybe channel inflation, the residual commissions that you ought to be given out to channel partners to keep them around or keep them kind of selling your solutions versus your pure play competitors.

[Jim Chirico:]

Yes, I won’t. Yes, this is Jim. So I’ll give you sort of a high level view. So there is constant tuning in constant development if you will of new and emerging partners and the fact is that we are seeing some consolidation in what I’ll say the more legacy hardware oriented partner community and that’s really driven by the fact that just pressure on some of these guys in struggling to convert to the cloud. So we’re keeping our finger on that, we know we have a pulse on that and that’s why we’re driving it with 1,000 departments over the last three quarters and providing sort of the roadmap to us as we go into new 2019 with more cloud capable partners and we’re working and investing in government. So that’s on that front. As far as programmatic or something that we’re doing from overall royalty perspective to sort of keep our right foot place in the marketplace, we’re not doing anything that I would say is any different than we have historically done in fairness. There is demand for our product sets that we have today, we are growing in UC and it’s a combination of really the feature content that we provide, the solutions we provide and sort of how we package those together with also with CC offers as well. And our cloud is continuing to accelerate at that pretty high rates. So today we haven’t really done very much if you will to do that to generate any demand. I will say that we have implemented a program however and it’s mostly channel driven and that’s really going after our old legacy base. So whether it’s CS1K based or whether it’s some down level communication manager releases we have put together a program in order to convert those customers to our latest platform. That has actually had some I believe outstanding results though we have a funnel and this is your older velocity type technology as I mentioned and the migration plan has actually yielded some significant results. So we introduced this back in the beginning of last quarter, we’ve generated about $40 million of sales to-date but probably more important is that there is roughly $200 million of pipeline which is -- that was if you will the community that would be opportunistic for pure plays to go after and the fact that they had older technology, they weren’t and they would be looking for different alternatives. So we’ve actually executed better than I thought. We will be converting the pipeline over the next say six to nine months or so but the conversion rate has exceeded our expectation, the interest has exceeded our expectation and I think we hit the mark on this one. So it’s going after both CM as well as going after the CS1K. So we’re no longer opening our sales up if you will and we’re putting programs in place to make sure that we protect our base and actually bring our base to the latest technologies and we move with them. So that’s worked out quite well.

[Dmitry Netis:]

Thanks Jim and the 6,000 parts that you talked about of those 6000 how many are capable of selling cloud solutions today? About half, 75% all of it, give us a perspective there?

[Jim Chirico:]

Yes it's, I would say probably in the neighborhood of 25% to 30% in all fairness probably in that range. They can do it but guys that are I would say proficient would be probably somewhere around the 25% to 30% range so and continuing to increase but somewhere in that range of the ones we have in market.

[Dmitry Netis:]

All right.

[Jim Chirico:]

Yes the ones that we’ve had, the new ones obviously are certainly capable so.

[Dmitry Netis:]

Good, got it. And then last high level sort of question on the collaboration space, you had mentioned Equinox starting to pick up in bookings, are you seeing sort of -- as far as the market goes, is there a general compression in the market or do you still continue to see growth a pretty extensive growth in that market as solutions like flax sort of penetrate kind of the team messaging space and teams from Microsoft are starting to come in as well into that marketplace, some of the pure plays out there are pretty aggressive as well. How you’re seeing the market growth in a collaboration market, web conferencing, video conferencing et cetera just looking at lobby and result, they seem to have indicated some compression there and I don’t know if this is their company specific issue or market specific issue, so I wanted to raise that question to you as well, see what you’re seeing?

[Jim Chirico:]

Yes, overall we’re seeing it up, we see that there are still opportunities in all fairness for all of us frankly; I think it’s still early in the game. I will turn it over to Laurent if he has any, he wants any additional insights from a product perspective but we’re seeing -- we’re now seeing anything that would suggest some downward pressure.

[Laurent Philonenko:]

Yes, what we’re seeing is lot of customers wanting to expand our solutions. Obviously I think the solution which is very well integrated with our installed base Internet [indiscernible] which we are leveraging more I would say. Second, we’re seeing more and more bank government entity enterprises really moving to digitalization of renewed services in their competition and part of this new services are frankly collaboration services. So in our mind, it's market expansion, yes you have new carriers, lot of new solutions out there but we believe it’s an opportunity, the next opportunity for us.

[Peter Schuman:]

This is Peter. Turning to fourth quarter of fiscal 2018 Avaya will be meeting with investors in the New York City with BWS Financial and we will be attending the City Conference in September 6th in the meantime we always welcome to contact our Investor Relations department at [phone] with any questions. Thank you for joining us and this concludes today's call.

[Operator:]

This concludes today’s conference call. You may now disconnect.