Avaya Holdings Corp (AVYA) 2018 Q1 法說會逐字稿

Good morning. My name is [Miriama] and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter fiscal 2018 earnings conference call. (Operator Instructions).

Thank you. Mr. Peter Schuman, Senior Director of Investor Relations, you may begin your conference.

Thank you, Miriama. Welcome to Avaya's Q1 fiscal year 2018 investor call. Jim Chirico, our President and CEO; Pat O'Malley, our Senior Vice President and CFO; Shefali Shah, our CAO and GC; and Laurent Philonenko, our SVP of R&D, are here for today's call.

The earnings release and investor slides referenced on this call are accessible on the investor page of our website and the SEC website. We will reference non-GAAP financial measures. Due to our emerging from Chapter 11 mid-quarter and the application of fresh start accounting on that date, pre- and post-emergence results are not directly comparable, but we have combined them for the quarters and we believe it provides the most meaningful basis for analyzing our results.

We 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 also available on the investor page of our website.

We will make forward-looking statements, including Q2 and FY 2018 guidance that are based on current expectations, forecasts and assumptions and remain subject to risks and uncertainties that could cause the actual results to differ materially. Information about risks and uncertainties may be found in our most recent filings with the SEC, including our Form 10 and in the Q1 2018 --- fiscal year 2018 -- Form 10-Q to be filed and in today's earnings release. It is Avaya's policy not to reiterate guidance and we undertake no obligations to update or revise forward-looking statements if events, facts or circumstances change.

I will now hand the call over to Jim Chirico, our President and CEO. Jim?

Thank you, Peter. I'm very excited to join all of you for Avaya's first earnings call as a public company in over 10 years. Let me start by stating it is my distinct privilege and honor to have the name CEO at the beginning of the fiscal year while the Company has delivered outstanding results in Q1 FY 2018, even while we were in Chapter 11 for the better part of the quarter.

We've now had four straight quarters of revenue stability and we're building from there. These results are a real testament to the loyalty of our customers, partners, our global team and the strength of our brand. I'm delighted for the opportunity to share with you how far we've come and even more excited about the future. But before we get into the details, let me take a few minutes to provide an overview of the first quarter, to set context on how I see Avaya and how we're positioned to lead the market.

Q1 2018 was a milestone quarter, as we emerged from Chapter 11 after addressing our capital structure. As a result, we strengthened our balance sheet by reducing our obligations by over $4 billion. We freed up over $300 million in cash flow to invest in the business. We will use this to fund our acquisition of Spoken Communications and invest in R&D as well as our people, processes and systems to deliver leading-edge technologies.

We continue to improve on our industry-leading business model. We ended the quarter with 26.6% adjusted EBITDA as a percent of non-GAAP revenue, which further facilitates our ability to invest. We continue to execute on our strategy, with a record 82% of our revenue derived from software and services; 57% was recurring revenue. We recovered in our contact center business by converting pent-up demand to revenue.

One of my first actions as CEO was to initiate the transformation of Avaya to dramatically and sustainably improve performance and drive growth. I've assembled a new senior management team who are action-oriented, have a disruptive mindset and the DNA and willingness to move the business forward and achieve our objectives. We introduced five cultural principles, which will define how Avaya operates. They are: teamwork, accountability, trust, empowerment and simplicity. These will lay the groundwork for a winning company.

We've take immediate action with a clear vision and implemented a number of key initiatives. First, we established a dedicated cloud business unit. We also named the Chief Revenue Officer, announced our first significant acquisition and exceeded our revenue plans with an outlook of revenue stability in FY 2018 with a lens on growth in FY 2019. We're gaining a significant traction in the cloud.

In summary, number one, we're transforming the Company. Number two, we will continue building momentum by being aggressive. Number three, we are playing offense. Number four, we're making the necessary investments in people and innovation to position our company for growth. And number five, we will continue to enhance and leverage our financial flexibility.

Now, let me share some significant accomplishments from the quarter. We achieved non-GAAP revenue of $775 million, roughly flat with Q4 FY 2017. This is especially notable, as historically the first quarter is negatively impacted by seasonality. We added over 1,300 new customers and 265 new channel partners. We signed approximately 90 deals, each with over $1 million total contract value, which was outstanding.

We capitalized on opportunities after our timely emergence. This demonstrated a level of restored customer confidence in our brand, as further shown in our sequential growth in key areas. Contact center revenues grew by 16%. Avaya Private Cloud revenues grew by 3%. Professional services grew by over 10%. Our mid-market cloud seats grew by 41%, while monthly recurring revenue grew 39% in the same segment.

Switching gears, let me share some highlights around innovation. We extended our position as a proven technology leader by launching 70 new products in FY 2017. In Q1, at GITEX in Dubai, we demonstrated block chain technology to measure satisfaction of customers in real time. This happiness index has just been named the 2017 Award finalist for the Edison Award.

We announced the acquisition of Spoken, also including their IntelligentWire AI solution, which applies deep learning to live voice conversation and reduces after-call work and significantly improves the customer experience. We continue to build on Avaya Oceana, our next generation omnichannel contact center solution. We recently enhanced the Oceana desktop so agents can see where customers have engaged across all communication channels. This improves agent efficiency and effectiveness and leads to greater customer satisfaction.

Our Equinox meeting solution for video conferencing was launched, with the same capabilities of our premise solution now via the cloud. And we introduced our market-leading IP office Unified Communications solution as a pure cloud offering.

We're hitting on all cylinders, and I can't thank our customers, partners, and employees enough for their commitment. Our management team is executing, our cultural principles are taking hold, our momentum in the business continues and we're driving successful outcomes. This gives me high confidence that we will continue to achieve our revenue objectives in 2018 and set the stage for growth in 2019.

Now let me turn it over to Pat, who will take you through to financial detail for the quarter and our outlook. Pat?

Thank you, Jim. Please note that I will be revealing our non-GAAP income statement unless otherwise noted. Non-GAAP revenue for Q1 fiscal year 2018 was $775 million, down $15 million compared to the prior quarter due to seasonality in business and down $100 million year over year, primarily as a result of the sale of the Networking business and the effects of the transition from legacy hardware, shifting to our Software and Services business. Excluding the impact of the sale of the Networking business, non-GAAP revenue declined approximately 2% from the prior quarter, which is better than typical seasonal trends and approximately 5% lower compared to Q1 fiscal 2017.

Non-GAAP product revenue of $330 million decreased 4% from the prior quarter and decreased 18% year over year. Excluding the impact of the sale of the Networking business, product revenue decreased 4% sequentially and year over year.

Non-GAAP service revenue of $445 million was down less than 1% sequentially and decreased 6% year over year. Excluding the impact of the sale of the Networking business, service revenue decreased less than 1% sequentially and was 4% lower year over year.

Non-GAAP gross margin of 61.8%, a record percentage for a first-quarter result, improved year over year by 10 basis points, reflecting better product mix as a result from the X of the networking business, offset by lower volumes. Compared to the immediately preceding quarter, non-GAAP gross margin was lower by 150 basis points, mostly a result of geographical and product mix.

Non-GAAP product gross margin for Q1 fiscal year 2018 was 64.8%, up 100 basis points compared to the prior year, which is attributable both to improved product mix and down 490 basis points sequentially, which reflects weaker geographical and product mix. Services gross margin of 59.6% decreased by 30 basis points compared to the prior year, while it was up 120 basis points from the prior quarter, reflecting improved productivity.

I will now cover our cost structure. Total non-GAAP operating expenses R&D plus SG&A of $307 million decreased $10 million sequentially and $41 million year over year. SG&A of $260 million was $10 million lower compared to the fourth quarter of fiscal 2017 and was $26 million lower than the same period during the prior year. The reductions reflect the ongoing cost structure improvements and are also a result of the sale of the Networking business.

R&D expense totaled $47 million or approximately 14% of product revenue and an increase of $4 million year over year excluding the Network business. While we improved R&D efficiency, we continued to deliver a steady pipeline of innovations across the product portfolio.

Non-GAAP operating income was $172 million or 22.2% of revenue, a record percentage for a first-quarter result, and compares to $192 million or 29.9% of revenue for Q1 fiscal year 2017 and $183 million or 23.2% for the immediately preceding quarter. Non-GAAP operating income for Q1 fiscal 2018 reflects the success of our cost reduction efforts, which have improved the operational efficiency of the Company.

Non-GAAP net loss for the Q1 fiscal year 2018 was $68 million or 8.8% of non-GAAP revenue and compares to non-GAAP net income of $19 million for Q1 fiscal 2017 and $162 million at Q4 fiscal 2017.

Adjusted EBITDA, including the OCI amortization add-back, was $206 million or 26.6% of revenue for Q1 fiscal year 2018 and compares to $238 million or 27.2% of revenue during the first quarter of fiscal 2017 and $225 million or 28.5% of revenue for the immediately preceding quarter.

Turning to the balance sheet, cash and cash equivalents were $417 million as of December 31, 2017 compared to $876 million for the prior quarter and $209 million for Q1 fiscal year 2017. The sequential change in cash and cash equivalents is primarily due to the emergence payments to the former debt holders, the PBGC and other creditors, repayment of the debt facility and debt issuance costs and professional fees, offset by proceeds of the new term loan.

Inventories increased about $28 million sequentially to approximately $124 million. Days of inventory increased by 1 day to 30 days from 29 days reported in Q4 fiscal 2017, due to lower revenue levels. This level of inventory represents consistent operating levels.

Accounts receivable totaled $413 million at the end of Q1 fiscal year 2018, a decrease of approximately $123 million on a sequential basis. Days sales outstanding were approximately 48 days, a decrease of 12 days from the prior quarter. The primary reason for the decrease of the days sales outstanding was a result of more linear collections throughout the quarter and a benefit of 3 days sales outstanding due to the reclass of receivables to other assets.

Capital expenditures were approximately $15 million in Q1 fiscal year 2018, down from $17 million in Q4 fiscal 2017. Depreciation and amortization in the first quarter 2018 was approximately $53 million, down $10 million on a sequential basis and a decline of $37 million year over year.

I will now discuss our demand indicators for Q1 fiscal year 2018. Bookings are becoming less than indicator going forward. Recall Avaya still had the Networking business during the first quarter of last year. Total bookings declined year over year due, primary to the reductions seen in the Networking business and associated services and softer Unified Communication business and associated maintenance. Excluding the Networking business on a sequential basis, we had softer bookings during the seasonally down period. We have since seen a recovery in the overall company's bookings since emerging from Chapter 11.

Product revenue for Q1 fiscal year 2018 was $330 million, $13 million lower than the prior quarter, and $71 million lower than the prior year. The decrease year over year is primary as a result of the sale of the Networking business, which contributed $53 million of the decline. Excluding the Networking business, product revenue was down [$18 million] year over year and $12 million sequentially.

Service revenue of $445 million in Q1 fiscal year 2018 was down $29 million from the prior year, $10 million as a result of the sale of the Networking business and the remainder from lower maintenance revenue. We saw stabilization of service revenue on a sequential basis during Q1 fiscal year 2018, with only a $2 million difference from the immediately preceding quarter, as we had sequential growth in both the cloud and managed services and onetime professional services grew double-digit percentages. Both cloud and managed services revenue and professional services each accounted for over 9% of the total company revenue.

Now focusing on the distribution channel, reported product revenue to the channel, excluding Networking, was $226 million, down 11% sequentially and 10% year over year. 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. Distributor revenue inventories of $110 million declined by $5 million from Q4 fiscal 2017 to Q1 fiscal year 2018 and were $9 million lower from Q1 fiscal 2017.

I will now discuss our financial outlook. Given our current visibility and expectations for the balance of the calendar year, we expect results for the second quarter of fiscal 2018 to include the following. GAAP revenue of $660 million to $680 million and non-GAAP revenue of $750 million to $770 million. GAAP operating loss of 16% to 20% of revenue and non-GAAP operating profit of 20% to 22% of non-GAAP revenue. GAAP net loss of $1.35 to $1.55 per diluted share and non-GAAP net income of $0.80 to $0.90 per diluted share. Adjusted EBITDA of $180 million to $200 million or adjusted EBITDA margin of approximately 25% of non-GAAP revenue. Total cash requirements for restructuring, pension and OPEB, cash taxes and capital spending in the second quarter are expected to be between $80 million and $90 million.

Now looking at the fiscal year 2018 financial forecast, this forecast does not include any financial results from our pending acquisition of Spoken. Also, taking into consideration Avaya's continued investment in R&D, sales enablement, tools and people and our ongoing efforts to improve Avaya's operating efficiencies, we are now targeting the following annual forecast for fiscal year 2018. GAAP revenue of $2.775 billion to $2.9 billion and non-GAAP revenue of $3 billion to $3.1 billion. GAAP operating loss of 4% to 6% of revenue and non-GAAP operating margin of 21% to 22% of non-GAAP revenue. Approximately $175 million of expected interest expense. Adjusted EBITDA, $750 million to $800 million or adjusted EBITDA margin of approximately 25% to 26% of non-GAAP revenue. GAAP net income of $2.85 billion to $2.95 billion. Capital expenditures of $60 million to $75 million for the year. Approximately 110 million basic and diluted shares outstanding.

We remain committed to continuing to increase the operational efficiency and productivity of the organization. Moving forward as a software and services company, we are focused on driving additional cost structure improvements while continuing to invest in our product portfolio and maintaining outstanding customer support and satisfaction. We expect an increasing proportion of revenue to come from software and services and from recurring revenue.

Now I'd like to turn the call over to Jim for some additional remarks.

Thank you, Pat. Now before we turn it over to questions, in closing I'd like to remind you first that we are transforming the Company. We will continue building momentum by being aggressive. We are playing on offense. We're making the necessary investments in people and innovation to position our company for growth and we will continue to enhance and leverage our financial flexibility.

So with that, I'd like to turn it over to Miriama and begin our Q&A session.

Thank you. (Operator Instructions). Mike Latimore, Northland Capital.

Great. Thanks a lot. Nice quarter there. Just wanted to follow up on the comment you made about a recovery in bookings as you came out of bankruptcy. Can you just describe that a little bit more? Is that across a couple -- both contact center UC, services? Is it --- are there certain verticals that just couldn't buy when you were in bankruptcy that are buying now? Can you just provide a little more color on kind of what you are seeing from that bookings recovery?

Yes, sure. This is Jim Chirico and thanks for the question. We're seeing bookings --- when we take a look at bookings, it's really a product and our 1X, if you will, professional services bookings. So we saw an increase in bookings and recoveries back in contact center, which obviously is important. We did see a recovery back in our professional services business.

UC, in fairness, was down but you've got to look at sort of the details underneath of that. As you take a look at our legacy products, the gateways and servers which are still trending off at about 20% to 25% a year, and that's the obviously the move to more software. We did see some compression there but as you start to look at the end points, we started to see a recovery. So UC is down but it was consistent with what we've been seeing in our strategy and what we've been obviously talking to the analysts about. So, as you take a look at sort of the growth and the future products that the good news there is it recovered back in our core and flagship products.

Got it. And then just in terms of operating cash flow, how should we think about operating cash flow relative to the EBITDA guidance you've given? What kind of delta might be there?

So if you take a look at what should we generate -- you want to do operating cash or as I look at the free cash flow, because we told you some of the other expenditures. But we should generate a positive free cash flow anywhere from $50 million to $75 million a quarter, depending on our investments.

And so I think that's how we look at it. So that's -- obviously that will accumulate on the balance sheet for further investment until we deploy it. But that's how we're looking at that.

Great. Thank you.

Thanks, Mike.

Lance Vitanza, Cowen.

Hi. Thanks for taking the question. Jim, could you repeat the comments that you made a minute ago regarding contact center revenue growth converting pent-up demand in revenue? It sounded pretty interesting but you went it through it kind of quickly. Could you provide some incremental color on what's driving that pent-up demand and how long do you expect the tailwind to last and so forth?

Yes, sure. No problem. Thanks for the call. Our contact center revenues grew 16% quarter on quarter. So a nice recovery back, in fact a bit better than we had anticipated. A lot of that had to do with the emergence from Chapter 11 in December. More importantly, it also had to do with the disclosure hearing we had back in August that really provided the clarity around the fact that we will indeed be exiting Chapter 11.

Obviously, with contact center it took -- had some challenges associated with going into Chapter 11, just based upon some risk and uncertainty of what the outcome may be. So we always had a pent-up demand of backlog; our customers have been very loyal. In fact, they held off, for all intents and purposes, moving some of their transitions over in upgrades to our contact center. The team has done a nice job, recovered a lot of that back; bookings actually grew. And we're still seeing that same momentum as we go into this quarter.

We are excited also about the Spoken acquisition and the capabilities that that brings, with full cloud multi-tenant capabilities and our ability to offer our high enterprise contact center customers a real path now to the cloud. And that is gaining significant traction and we expect to close on that acquisition this month. But it was 16% quarter on quarter.

If I could just -- as a follow up, you touched on the R&D spending and I'm just wondering if you could talk --- and maybe this is maybe more for Pat. The run rate that you're on now, where do you see that going as you move further from emergence and how does that run rate compare with what Avaya was doing over the past few years? Thank you.

So we're running -- if you take a look at that $47 million, we stepped up our investment in the core, as you saw -- a lot of folks when they saw the Networking business cut out of the financial model they thought there was a reduction in our investment in our R&D; that wasn't the case. It was just the elimination of that. We've increased investment, like I said, this quarter. I think anywhere from 15% to 16% of revenue is probably appropriate. We're under that right now. But I think we'll continue to look to make investment where we see revenue opportunities. And obviously with our guide for the year, we see really -- we really see --- we're aiming for that flat revenue this year for pivot to growth. So we will continue to invest in products streams, and like I said, that was the first step. But we continue to try to maintain our overall profitability. So it has to fit in the whole piece but our bias is on R&D, like I said, sales enablement and other tools. So we will continue to make investments there while we get efficiencies in other places.

Yes. If I might just add a little bit to that, Pat, so Pat referenced the numbers. But as I mentioned, we are certainly going to take advantage of our financial flexibility. Previously we basically capitalized our financial strength to pay debt. Now we're going to capitalize on our financial strength to grow revenue and grow our business and really provide the products and solutions that our customers require. So we are going through not only additional investment within R&D, obviously building out the Spoken acquisition, which takes some further investment, building out our cloud business unit which will require some additional investment, but also repositioning and rebalancing our spend from more traditional investments to more of in the cloud and in emerging technologies. So there's a transformation also occurring within the R&D organization.

So I think that we will continue to spend, as Pat said, and spend more than we had previously. We are indeed making the necessary investments. And we started that in earnest in Q1 as we've pointed out, and you'll start to see some of the results of that as we go through the follow-on quarters, which we will provide all of you updates on the earning calls.

Raimo Lenschow, Barclays.

Hey, thanks for taking my questions. Jim, one for you. Can you talk a little bit about your ambitions you have with your dedicated cloud unit? You obviously kind of got leadership in there now. How do you see that playing out in context of like the overall portfolio of what you're having? So how do you make sure kind of -- they're not starting to compete with each other and it kind of stays like -- that you kind of create a nice migration and path there?

And then I have one follow-up for Pat.

Yes, sure. Thanks. Great question. So I think we're moving more from ambition to reality, to be honest with you. So as I mentioned, we just announced in the first quarter pure cloud play on the mid-market. We are now building out Spoken, which was really purpose-built for Avaya and it is native cloud; it is full multi-tenet capability. We've actually have the R&D teams meet, we put Mercer Rowe in charge of the integration of who is our cloud business unit leader of Spoken. We're gaining traction and, in fact, I think I'll be pretty happy to share some results with you next earnings call on what we've actually been able to accomplish this particular quarter.

Secondly, the cloud business unit is also working to make sure that we have pure cloud offers across the entire spectrum of the market segments. We haven't played in all market segments to date. I can tell you there's a fair amount of excitement with really melding our R&D with our Zang acquisition along the lines of Spoken. I wouldn't look at that acquisition as BPO, top enterprise, contact center solution only. There's a lot of technologies that we can lever and there's a lot of excitement and dynamics going on within the organization. And the synergy has actually been --- is there.

So we're pretty excited. And I think everybody is aligned on where we need to go. I talked about simplicity and I will just digress. There's only six EC members. We meet regularly. We have full alignment and transparency with one another that our ability to make decisions, get the teams aligned has been faster than ever. The level of accountability and ownership within the teams is exciting. They're now empowered to go make the decisions and run the business. So it's -- there's a different sense of energy, a different vibe if you will and it's -- the excitement is there. So I look forward to continuing to provide you guys updates on our progression over time. But it's all -- frankly, it's all working well and that's a fact.

Okay. Perfect. Thanks for that. That was very clear. Question from Pat. If I look at the Q2 guidance and then the full-year guidance, so Q2 was stepping down a little bit from Q1. Could you talk a little bit, (inaudible) like [newer] about the seasonalities that you usually see in the year versus what you see this year in terms of revenue progression? Thank you.

We generally see -- on the top line we generally see much more seasonality than we provided. It was generally down 6%. So if you take a look this quarter, we're -- on the high end obviously we're essentially flat. So we're -- this quarter, like Jim said, we're investing to grow and some of the things we started last quarter hopefully allows us to operate solidly in that range of the revenue. And on the OpEx side, we do have -- besides seasonality, you do have some FX headwinds for us. I mean, the nice benefit, we get a little on the revenue, but we probably take a little more in the costs. So we're just watching that. You can tell the euro has been very strong and that's where probably were our biggest areas. We don't have a hedging program coming out of bankruptcy. In the future, we will get a fully functional hedging program. So we're somewhat exposed to currency shifts but we know how to manage that as well. So with that seasonality, I think the guide's pretty in line with that. Clearly on the revenue, we could certainly beat that historical seasonality.

Perfect. Very clear. Thank you.

Hamed Khorsand, BWS Financial.

Hi, Good morning. So first off, in your form of --- you're trying to go after the market in a aggressive manner. Are you trying to go directly to customers or potential customers or are you trying to regrow the channel partner count?

Yes. This is Jim. Thanks for the question. A couple things. Number one is we continue to work with our channel partners. We realize the importance of them. In fact, we've probably never been closer to our partners and I've been here 10 years in the 10-year history at the company. I spoke at C1 -- I was a keynote speaker at C1 sales conference just last week, as a matter of fact. So we're aligned with our distributors. In fact I talk to Dennis Polk, the CEO of SYNNEX, yesterday and Dave Johnson the day before at Jenne. So I spent a fair amount of my time continuing to build out/ develop strategies, co-investment opportunities with our channel partners. And I think we have a huge opportunity there to continue to leverage and grow throughout the channel. So I don't see anything that's disruptive; in fact, I view it more as an opportunity.

You know, the net of it is, there was a belief that the channel economics don't work. That's not a channel problem; that would be a kind of Avaya problem. We've addressed our business model, we've addressed our structure, provided -- improved our overall productivity and efficiency. Our business model, as a result of what we --- Pat demonstrated in EBITDA and so on -- actually works with the channel. And I think there's -- and we are working on a number of strategic initiatives to build that out. One example is, as we go to the cloud, we just this quarter had begun to sign up master agents. We have not had master agents. We will provide you more color on that next quarter in the earnings call, but we now have master agents that we're signing up and that's obviously driving cloud through the channel. We have a number of other initiatives that we think both companies will not only grow but will grow profitably as well. So we continue to use and will use the channel.

Okay. Just one follow-up. As you move into the cloud, is it material yet, or at what point will it become material that your cloud revenue causes your revenue top line to look weak just because it's a monthly basis kind of recurring revenue number?

Obviously our Avaya Private Cloud is significant. It's roughly about 10% of our overall revenues and growing; we grew 3% last quarter. And it's -- most people, especially in the high-end enterprise, they want to make sure they sort of take the step to cloud and our Avaya Private Cloud solution provides that. We also now provide a capability where we can host that, which is a new offer that we've just recently announced, which I think is significant and again another step in the journey for a lot of these large enterprise companies.

As far as our pure play, be it in mid-market or down or below that, we're a little bit early in the game, but the good news is it's a $50 billion business and there's only about 10% penetration. So we're early in a game that's early and in its game. So we have -- in fairness, we have a little catch-up to do; there's no doubt about that. There are a number of pure play cloud folks that have actually done quite well in the SMB space. When we had that heavy debt structure we needed to generate $950 million to service our cash requirements. We needed to determine what and where we would invest and we wanted to make sure we'd protect the enterprise.

As far as being aggressive, we no longer -- we now have the flexibility, we now can go on the offense. We now can be aggressive and we can now serve all markets in the cloud. And that is certainly our objective, that is certainly our focus and I think in the not-too-distant future you will see us become a significant presence in markets we do not necessarily serve today.

Okay, thank you.

Charlie Jones, Marshall Wace.

Hi there, guys. I note that you gave a guidance for fiscal Q2 EPS but not for the full year. If I look at that $0.80 to $0.90 and I annualize that, is that a reasonable proxy for what you could do on a forward 12-month basis?

That's a great question. Obviously we [struggle to buy on] that with a fresh start accounting. If you take a look at it -- and you know I'll be glad to have follow-ups with you when you look at the Q that we'll be filling tomorrow. If you take a look at, successor period --- the predecessor period, we had 500 million shares. And then for the 15 days we had the 110 million shares. So we really have a sort of apples and oranges.

So I think the way you're approaching it is probably the right way. But I think what you'd probably need to look at is optimize -- you take your model and take your EBITDA and gross it up and just use about 110 million shares outstanding for the year to get your EPS because I'm not able to provide that. So that's the challenge right now. But there's a lot of discussion in that. But I think the way you're approaching it is the right way.

Okay, thanks, guys.

Mike Latimore, Northland Capital Markets.

Great, thanks. Just on taxes, what tax rates are we using? And can you just give some general color on kind of cash tax payments?

Yes, so let me do the latter first. Cash tax for the U.S. this year, given where we were and the losses, we'll have no taxes in the U.S. this year, even though our statutory rate for the U.S. would be about 26% based on the new tax law, but that's really not relevant. So for the U.S. it would really be no taxes but starting in fiscal 2019 there will be. For the rest of the world it's about $35 million to $37 million for cash taxes for the year. So that would be a good model. Effective tax rates are kind of way off the chart with all the NOLs, but if you look at it going forward, 10% effective tax rate, given that we'll have GAAP losses, it's going to be sort of a benefit, but I think if you use 10%. Once we come out of this year, through the bankruptcy period you have a period of time to utilize some of NOLs and so we're looking at that. So next year, fiscal 2019, we'll be a much more normalized tax rate company so you can model that very well. But I think the way you're looking at it from a cash is probably the right way, anywhere from $35 million to $38 million for the year.

Great, thanks. And then just on the Spoken acquisition, obviously it gives your customers a nice path to the cloud. I guess, are you seeing that sort of give current customers just a little more confidence in, say, investing in current software with the idea that eventually they can move to the cloud at their own pace?

Absolutely. Yes. This is Jim. Yes, absolutely. There's been -- since we announced it back in January there's been, I would say, significant interest in traction. So yes, absolutely.

Great, thanks a lot.

Rob Jost, Invesco.

Hi, thanks. I wanted to follow up on the Spoken acquisition. Can you talk about the contribution you expect that give and who your natural competitors are for that product?

Yes, I mean, we have not necessarily identified what -- the contribution as far as revenue associated with it. We do believe that it will certainly be accretive within the next 18 to 24 months. They, in fairness, do not have a large customer base. We didn't buy it for revenue; we bought it for technology. It certainly rounds out our portfolio and again, not just in the high-end BPO market but also the capability to leverage that technology across our portfolio. So it's a significant technology investment.

The competitors in this space are your traditional competitors, so your traditional contact center specialists. We believe with this we will have a differentiation. The other thing, I think, that's important about this acquisition is the IntelligentWire group underneath of Spoken, which is AI. And some pretty slick technologies -- in fact, we're already demoing those with a number of key customers with the product set. So we look to build out that and round that with our own technology here, so should be a significant play. As you take a look at, as I said, where we think we see growth and as we move to at least a lens on growth in 2019, this will certainly be a key contributor to that -- number one, by the path to move our current installed base to the cloud, which is significant but even more importantly to compete in areas and win in areas that we haven't done prior to that, because we now have -- it's open. We now have the capability to sort of [monetize] this and actually go out into the market and have a differentiation from a product set.

So it's early in the game, but as I said, this is what we needed. We needed to obviously not only have the capability for multi-tenant in the cloud, but we needed this for the customers to extend their journey and it's been more than well-received.

Yes. This is Pat. Your comment -- as Jim said, this wasn't a short-term revenue play. Obviously it gives us access to revenue streams at a quicker pace, but that won't be for fiscal year 2018. So if you're looking for 2018, (inaudible) you'd expect some EBITDA drag if you will, but as Jim highlighted earlier in this conversation, we're still in a transformation for R&D. So as we make that investment there, we'll look to optimize in other areas. So it's going to --- it's not that we're going to integrate it right away. Obviously, we want them to do what they do very well, but it's our job to monitor the whole portfolio. So if you just look at Spoken, you may get a misread that when you just see a drag on there that's it's a drag from that aspect because there might be operational efficiencies in other parts of the business.

Hey, Pat, this is -- if I may add one other one, which is I think significant and it's the team. Avaya had not been known as a cloud company. Transformations, cultural shifts are actually quite difficult. We actually have the team that is coming to the company via Spoken, our peer cloud folks and there's quite a few of them. And in fact we're not -- not only that, but we're building out, which is part of our investment, that team, in support of where we need to go. So that with the melding of the engineering and R&D forces we have here in the company, I think is a real win-win. So I do want to point out that this team of highly professional engineers and others is also a reason why we also made the acquisition.

Okay, that's helpful and --

Did you have something else, Rob?

No, I just want to add a quick follow-up, which is to --- I was just going to ask. On the demand you've been seeing and it sounds like you're going to be seeing into the next quarter, have you had the ability to kind of see through what was pent up versus what is coming organically? Is that sort of a division, is that available?

We know --

Anecdotally.

We know what it is, if you will, sort of pent-up -- the pent-up demand we had for all intents and purposes was on the contact center side of the business. We know as we closed on some in the first quarter, obviously this demand will take a period of time to, if you will, ripple through, probably the better part of three to four quarters, but we are seeing a pick-up in RFPs. Unfortunately, as where we were, we were in some cases not allowed to -- from a risk appliance perspective to participate in a number of RFQs or RFPs. That's (inaudible). We did have some demand that some of the C3 folks wanted to understand that where they were going to place their long-term investment and bets. We know where that is. That is breaking free. We saw some, as I mentioned, uptick in Q1 and that will roll itself out probably through the better part of our fiscal year, which ends in September. But I don't think that's anything that we will share, to be honest with you. It's part of our backlog activities, but we obviously have a very good pulse on what it is.

Okay, thanks.

Thanks, Rob.

We will take one more caller. Stan Manoukian, Independent Credit Research.

Good morning. Thanks for taking my questions. I just have one and one follow-up. I was wondering if you can tell me a little bit more about changes in your marketing and sales strategy in regards to addition of your cloud-based services related to middle markets. What kind of changes in profitability we should expect in relation to these changes?

Sure, yeah. This is Jim. So one of the changes obviously is the fact that we now -- is billing out the cloud business unit, we now have dedicated sales resources associated with the cloud. We have also invested in customer success teams. We have also invested heavily in our marketing programs associated with inside sales and how you drive different activities associated with marketing because it's obviously a different go-to-market play than traditional, I would say.

So that is currently all being built out, which is on track and what we're seeing and one of the reasons why we have started down the path of master agents and so on. And we have a number of other places that we're building out. But the cloud business unit will have its own, if you will, dedicated go-to-market organization to go drive this. Some they will do direct, some they will do in support of existing sales organizations we have in the Company. I think we have that pretty well defined. I don't think you're going to get -- I know we won't get into any account control or any of those issues that sometimes occur when you do an acquisition. We're off to what I would say a good start. I would say a fast start, that the teams are busy. But it will be --- as you noted, it will be a different go-to-market sort of play than we have had traditionally in the way we service our partners and the way that we service our customers.

And sort of as a follow-up, how long do you think it will take you sort of to adjust finally after bankruptcy emergence to start thinking about growth in your revenues and making potentially some acquisitions or sort of growing organically into this environment?

Well as Pat --- as we mentioned earlier, we see --- as you know, the Company for 10 years is on average probably declined in revenue somewhere between 6% and 8%. Our view, based upon our range, take out Networking, if you will, because it's no longer here, normalize 2017 to 2018. FY 2017, we did a little less than $3.1 billion. Pat's guidance was $3 billion to $3.1 billion. So we will be what we will be, but we view that as basically being stable, somewhere between down 1% or 1.5% at the mid-range to flat, so that frankly is much better than we've ever done before.

We also view, as I said, with the lens on growth for 2019. I'm not in a position to provide you guidance for -- or Pat, FY2019 now, but clearly a lens on where we are. If you also just take a look at the guidance that Pat provided you for the second quarter, normalized for Networking, we could actually be up year-on-year in the second quarter.

So I will stop there, but the Company is obviously focused on revenue. We're going to invest in revenue. We have the right business model to support revenue growth. Everybody in this company is focused on it. There are a number of interesting initiatives that are launched and supported. So, you know, we will be able to provide you more guidance on follow-on calls.

Great and best of luck.

Thank you.

Thank you.

I will now turn the call back over to Peter Schuman, IR, for closing remarks.

Thank you, Miriama. During the second quarter of fiscal 2018, Avaya will be meeting with investors on March 13th at the Enterprise Connect Conference in Orlando, Florida. In the meantime, you're always welcome to contact our Investor Relations department at 669-242-8098 with any questions that arise. Thank you for joining us and this concludes today's call.

Ladies and gentlemen, that concludes today's quarterly earnings call. Thank you for your participation. You may now log off.