Avaya Holdings Corp (AVYA) 2018 Q2 法說會逐字稿

Good morning. My name is Matthew, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) Peter Schuman, Senior Director of Investor Relations, you may begin your conference.

Thank you, Matthew. Welcome to Avaya's Q2 Fiscal Year '18 Investor Call. Jim Chirico, our President and CEO; Pat O’Malley, our SVP and CFO; and Shefali Shah, our CAO and GC 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 the SEC website. We will reference non-GAAP financial measures, and specifically note that all sequential and year-over-year comparisons reference non-GAAP numbers, except otherwise noted. A reconciliation of such measures to GAAP is included in the earnings release and slide, and is available on the Investor page of our website. We may make forward-looking statements that are based on current expectations, forecast, assumptions, and remains subject to risk and uncertainties that could cause 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 subsequent Form 10-Q 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 Chirico, our President and CEO. Jim?

Thank you, Peter. Good morning, everyone, and thank you for joining today's call. I'm excited to share that our growth strategy is yielding positive results, and our actions drove record-setting Q2 performance. These strong results are evidence that we're moving fast and at a pace ahead of schedule during our first full quarter as a public company. We are continuing our journey to transform the company. We are building momentum by being aggressive. We are proceeding with a disciplined focus on performance and execution. We're making the necessary investments in people and innovation, and even though we're early in our transformation, I'm pleased with where we are.

Excluding the Networking business, our non-GAAP revenues were $756 million. This represents the first year-on-year revenue increase in 6 years. I'm proud of our consistent earnings, representing our 5th straight quarter of revenue stability. What made Q2 even more exceptional is that, historically, we've experienced seasonal headwinds, resulting in 6% to 8% sequential declines.

Let me share some relevant highlights from the quarter. We continue to solidify and strengthen our business performance, driving a record 83% of revenue in software and services, which is an 11% increase over just the last 6 quarters. We also drove record recurring revenues of 58%, an increase of 14% over the same period, demonstrating we have the right plan, people and management system in place. We set new records for the second quarter in operating metrics. They include non-GAAP gross margin of 62.4%, non-GAAP operating margin of 20.7%, and productivity levels of $374,000 per employee. We also closed roughly 110 deals over $1 million, which is a 20% increase over quarter 1 and a 44% increase year-over-year. General traction continues to improve across all theaters.

Revenues through distribution improved 2% quarter-over-quarter and 5% year-over-year. We signed over 350 new channel partners, adding to our ecosystem. Additional health indicators in the channel remained positive, including sales out and channel inventory levels. Our professional services grew for the third consecutive quarter, up approximately 7% quarter-over-quarter and 15% year-over-year. We're forging ahead with our cloud strategy, with double-digit improvements in monthly recurring revenues or MRR for both mid-market and enterprise segments, and I'll share more in a moment. Market demand for our new products and solutions showed significant gains, with revenues from our new offers increasing 36% quarter-over-quarter and 81% year-over-year. This impressive strength in performance is driven by our focus on several key strategic areas: number one, cloud; second, services; thirdly, contact center solutions; and last but certainly not least, new product introductions and innovation.

First on cloud. A one-size-fits-all approach to cloud will not be successful, and our comprehensive solutions are a proven differentiator. Our cloud offerings include private, hybrid, public cloud, all the way from SMB up to large enterprises, as well as governmental agencies. Cloud revenue grew as a percent of total revenue. Mid-market MRR grew 53% quarter-over-quarter and enterprise MRR grew 76% quarter-over-quarter, clear indications that our cloud transformation is taking hold. We also launched a new master agent program. We announced Jenne and Intelisys, the industry's leading cloud distributor, as master agents, with several others in the pipeline. Master agents will set the stage for significant seat growth, as they onboard their own agents, selling Avaya cloud.

Finally BPO. It represents a significant end market for Avaya and cloud. In recognition, we appointed a leader for our global BPO practice. We also announced a BPO cloud solution will be available in June for our APAC region, where a majority of our BPOs have operations. This solution leverages the Spoken Communication acquisition, and combined capabilities with our own contact center solutions. As evidence of traction, we closed a multiyear, multimillion-dollar contract with one of the world's largest BPOs. Under that contract, Alorica will transition 100,000 agents across their global contact center operations to deliver compelling customer experience for hundreds of their clients and millions other end customers.

Turning to services. We continue to invest in talent, automation and processes, delivering the highest quality and the most flexible UC and CC services available in the industry. Our services performance this quarter validates that our strategy is succeeding, and signifies a recovery in this important growth lever. Professional services grew 7% quarter-over-quarter, and 15% year-over-year to our highest revenue levels in over 2 years. This was driven in large part by our consultative and value-added service offerings. Professional services bookings also increased 11% quarter-over-quarter. Managed services bookings increased 7% quarter-over-quarter. And our maintenance business improved with a 15% increase in annual contract value bookings quarter-over-quarter and 10% year-over-year. These results are the best we've seen in more than 6 quarters. An increase in these long-term contracts is a clear sign of partner and customer confidence.

We are #1 in the contact center space. Our technology investments in CC are focused on solutions that provide improved customer experience and drive value for our clients. We are also pleased with the success of our newest CC multichannel offering called Oceana. We are unlocking significant opportunities by providing a simple migration path to multichannel that enhance agents' performance, and improves the overall customer experience. Adoption is taking hold. This quarter, there are over 20 new Oceana deals. Oceana bookings were 3x greater than Q1, representing over a 200% sequential growth. Although contact center revenues declined sequentially related to a large contract that was recognized in Q1, Q2 grew 2% year-on-year, and the average size deal was the largest since FY '16. There is also clear growth in CC bookings, which increased 4% both quarter-over-quarter and year-on-year.

Switching gears, let me spend a few minutes sharing details on how our investments in new products and solutions. I previously discussed leveraging our improved capital structure to invest, which we are doing to fuel our innovation pipeline. Excluding networking, we increased investments in technology approximately 6% in just the last quarter-over-quarter, and we've invested in excess of $200 million in just the last year. During this period, we launched several new products in messaging, conferencing, video, contact center multichannel, mobility, AI, cloud and new endpoints. And as I said, revenues from new products and solutions showed significant growth of 36% quarter-over-quarter and 81% year-on-year.

Let me just spend a minute on mobility. We launched a game-changing solution, called Avaya Mobile Experience. This solution for contact centers automatically detects incoming calls from mobile numbers and treats them as mobile-to-mobile calls. This reduces the total cost of expense for inbound 800 numbers. In addition, the caller also benefits from a number of more personalized experiences with the agent. We launched 3 significant solutions in the world of artificial intelligence for contact centers. First, we announced the availability of Ava. Ava is the AI framework that allows bots to operate with any messaging application. It uses natural language processing, and connects in real time to contact center infrastructure. Ava is available in nearly 40 languages today, and is already being implemented with several customers. Secondly, we announced the availability of IntelligentWire, an offering that came with the Spoken acquisition. IntelligentWire offers real-time dialogue transcription, and automatically summarizes calls. This saves significant times for agents, and increases contact center productivity. We also signed a strategic partnership with Afiniti. This joint Avaya-Afiniti solution analyzes customer data to quickly pair callers with the best agent to meet their specific needs. This drives better customer experience, increases agent productivity. This proven technology is already delivering billions of dollars in improvement and profitability to major businesses globally.

I'd also like to add that we also received a covenant Edison Award this quarter for our blockchain solution, called the Avaya Happiness Index, a solution that helps track customer moods and enables organizations to respond more quickly to user trends. In UC, we also made a number of major announcements. We launched a new range of redesign endpoints that enable new services and applications that are cloud-ready. We signed our first customers for open SIP phones, a growth market and expanded our line of android programmable voice and video devices with a new entry-level model. We are focused on key investments to drive the future of our business, which positions us for growth in FY '19.

In addition, we launched the loyalty together program for customers and partners to facilitate the transition of legacy installed base customers to cloud. We accelerated the introductions of various vertical solutions that include hospitality, healthcare, emergency services and public safety. And we continue to drive innovation through strategic acquisitions and partnerships, which include Spoken and Afiniti.

We are consistently exploring new ways to help businesses transform the customer experience to create differentiation and business value. So you'll be hearing much more on this front in the calls to come. As I noted before, we continue our execution focus to strengthen our industry-leading business model. We maintained our EBITDA margin envelope of approximately 25%, as committed. We are generating ample cash to support our business transformation, ending the quarter with over $300 million in cash and generating cash flow from operations greater than 7%. Bookings for product and 1x services increased 9% quarter-over-quarter, and 15% year-over-year, excluding networking. We added over 1,200 new logos worldwide in just the second quarter. Cloud grew in the mid to high double digits. Maintenance renewals are returning to historical levels, and the list goes on and on. By any measure, a strong quarter.

I'd especially like to thank each member of the Avaya team for working passionately to serve our clients to transform the way business connects. Our results are a direct reflection of the team's commitment to win, and we're just getting started. The evidence is clear. The transformation is progressing. We remain on track to achieve our revenue objectives for FY '18, and set the stage for growth in FY '19 and beyond.

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

Thank you, Jim. Please note that along with the earnings release today, we posted the CFO commentary in addition to slides, on our investors relations website. This should aid in your understanding of Avaya's financial results and make this call more productive. Any reference to fiscal year Q1 '18 results will be on a combined basis. I will now highlight select Q2 fiscal year '18 financial results. Non-GAAP revenue was well above seasonal during Q2 fiscal year '18, and excluding the revenue related to Avaya's former Networking business, revenue grew slightly compared to Q2 fiscal year '17 and declined approximately 2% from Q1 fiscal year '18. At constant currency, non-GAAP revenue declined 2% year-over-year, and was 3% lower from Q1 fiscal '18.

Non-GAAP gross margin of 62.4% was a record percentage for Avaya second quarter result, and improved year-over-year by 150 basis points, and was up 60 basis points sequentially, reflecting better product mix, a result of the exit from Networking business and improved productivity, offset by lower volumes.

Compared to Q1 fiscal year '18, non-GAAP gross margin was higher by 60 points, mostly as a result of product mix. Non-GAAP operating expenses, R&D plus SG&A of $315 million decreased $16 million year-over-year, and increased $8 million sequentially. SG&A expense of $265 million was $9 million lower than the same period during the prior year and $5 million higher compared to Q1 fiscal year '18. The reductions year-over-year reflect the ongoing cost structure improvements and are also the result of the sale of the networking business in Q4 fiscal year '17. The sequential increase in fiscal year Q2 '18 reflects higher compensation expenses related to employee benefits that are generally higher at the start of the calendar year and the effects of foreign exchange rates. SG&A has been running higher than anticipated due to in some part, additional administrative obligations, and tax structure planning costs that have continued after emergence. We expect some level of these costs to continue to remain for the fiscal year, but largely be complete before the start of fiscal year '19.

GAAP and non-GAAP R&D expense totaled $50 million for Q2 fiscal year '18. R&D expense represent an increase of $3 million year-over-year, excluding the Networking business, an increase of $3 million from Q1 fiscal year '18. The increased R&D spend has continued commitment to drive innovation on our products and technology that will allow us to expand our customer base and enable top line revenue growth in fiscal year '19. Non-GAAP operating income was $157 million or 20.7% of non-GAAP revenue, a record percentage for a second quarter result. Adjusted EBITDA was $187 million or 24.7% of non-GAAP revenue for Q2 fiscal year '18. With the acquisition, Spoken, we will lose about 100 to 150 basis points on adjusted EBITDA, going forward, until that new business scales appropriately to offset the additional costs.

Taxes. During Q2 fiscal year '18, we had an effective tax benefit rate of 9.4%. Cash taxes this current quarter were $6 million. Given the effect of fresh start accounting, our effective tax rate for fiscal year '18 is not a fair measure of our long-term effective tax rate. Therefore, we will provide a cash tax effect each quarter until the beginning of fiscal year '19. At that point, our effective tax rate should be more indicative of our long-term model. We expect cash taxes of about $9 million each quarter for the remainder of fiscal year '18. Due to operating loss tax credits, we are not a U.S. taxpayer in fiscal year '18, and expect to only pay foreign taxes of approximately $35 million this year.

Turning to the balance sheet. Cash and cash equivalents were $311 million as of March 31, 2018 compared to $417 million at the end of the prior quarter. The sequential change in cash and cash equivalents is primarily due to cash provided by operating activities of $54 million in Q2 fiscal year '18, offset primarily by payments of approximately $158 million for the acquisition of Spoken Communications, interest in principal payments for the term loan of $53 million, $14 million of restructuring charges, and $26 million of pension contributions. Accounts receivable totaled $366 million at the end of Q2 fiscal year '18 compared to $413 million on a sequential basis. Day sales outstanding based on non-GAAP revenue was approximately 59 days, which includes AR deferred revenue netting, as a result of fresh start accounting. Using the same approach would have been 57 days in Q1 fiscal '18 versus the 48 days reported. On a go-forward basis, we will continue to use this approach as the effects of fresh start accounting roll through the subsequent quarters.

Depreciation and amortization in Q2 fiscal year '18 was approximately $123 million, up from $53 million recorded on a sequential basis and from $88 million during Q2 fiscal year '17. The increase in depreciation and amortization on a sequential basis is a result of the full quarter impact of fresh-start accounting, which required that we increase intangible and fixed assets to the fair values as of December 15, 2017. We expect depreciation and amortization to be at this high level for the next few years, as the impact of fresh start accounting has aligned consistent with the underlying fixed assets.

Looking at demand indicators for Q2 fiscal year '18. Bookings, excluding the Networking business on a year-over-year basis, improved 7%, while on a sequential basis bookings increased by 6%. Excluding the Networking business in constant currency, bookings improved 5% year-over-year, while increasing 5% on a sequential basis. Service revenue of $440 million in Q2 fiscal '18 was down $16 million from the prior year, $12 million as a result of the sale of the Networking business, and the remainder from lower maintenance revenue as a result of the continued shift to the customer consumption models of less CapEx to a more OpEx model. We saw stabilization of service revenue on a sequential basis during Q2 fiscal '18, with only a $5 million decline from immediately preceding quarter. As Jim has highlighted, many of our comments of our service revenue have posted strong sequential gains, highlighting the improvement of this part of the business.

Distribution channel. Reported product revenue to the channel, excluding networking, was $223 million and grew 3% year-over-year and 1% lower sequentially. As a reminder, channel product revenue is recognized when we sell into the distributor, and it continues to account for more than 2/3 of our total product revenue.

Before I discuss the financial outlook, I'd like to mention we remain committed to continue to increase the operational efficiency and productivity of the organization. Moving forward as a software and services company, we're focused on driving additional cost structure improvements, while continuing to invest in our product portfolio, and maintaining outstanding customer support and satisfaction.

Finally, we're building a stronger financial model that supports additional investments for future growth. Taking into considerations Avaya's acquisition, Spoken, 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 forecast for Q3 fiscal year 2018. Revenue of $690 million to $705 million; non-GAAP revenue of $750 million to $770 million; GAAP operating loss of 8% to 8.5% of revenue, non-GAAP operating profit of 20% to 21% of non-GAAP revenue; GAAP operating loss of $55 million to $60 million; non-GAAP operating income of $150 million to $160 million; cash taxes of approximately $9 million; GAAP net loss of $0.89 to $0.97 per diluted share; adjusted EBITDA of $170 million to $190 million or adjusted EBITDA margin of approximately 24% to 25% non-GAAP revenue. This includes the impact of the Spoken acquisition; approximately 111 million shares outstanding. Total cash requirements for restructuring, pension and OPEB, cash taxes, capital spending and interest expense in the third fiscal year 2018 are expected to be: restructuring, $25 million; pension OPEB, $20 million; cash taxes, $9 million; CapEx, $20 million to $25 million; interest expense, $50 million.

Turning to the fiscal year 2018 outlook. We have previously divided a full year outlook on March 2, 2018 Q1 fiscal year '18 earnings call. The only update we have to the previous fiscal year '18 outlook is that EBITDA will be decreased by $20 million for the fiscal year, as a result of our acquisition, Spoken.

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

Thank you, Pat. Let me share a few thoughts before we turn it over for Q&A. We are ahead of our plan. Our focus on execution and performance drove an outstanding Q2 for the company. We are delivering technology the way our customers wanted, more as a service, resulting in more software and recurring revenues, which were both all-time highs this past quarter. We are focused on driving positive results across-the-board, and that's setting the stage for growth in fiscal year '19. In closing, we continue to focus on the following strategic priorities: transforming the company, building momentum, playing offense, investing in our people and innovation and leveraging and enhancing our financial flexibility.

With that, I'd like to end by thanking our employees, partners and customers for the dedication and support. Matt, I'll turn it over to you now to begin Q&A.

(Operator Instructions) Our first question comes from the line of Lance Vitanza with Cowen.

Hard to limit it to just one, but let me focus on the Spoken acquisition. So you were already working with them before the acquisition. I'm wondering if that makes the integration any faster, any easier, and where that process stands? Is it 80% done, 50% done? And then I have a follow-up if I can.

Yes. Hey, Lance. Thanks. This is Jim. We have been working with Spoken because, actually, what they were doing -- what they were developing was purpose-built for the Avaya platform. So it made sense on a number of fronts. As you pointed out, first of all, from a time-to-market perspective; secondly, from a technology-integration perspective; thirdly, we actually knew each other. As far as where we are with the integration, the integration is completed. The organizations are defined. The roadmap for further enhancements and improvements, as we continue to build out on our cloud platforms, are in place and we're continuing that level of execution. So I would say that the integration went smoothly, all fairness, and the teams are combining now with the Avaya and Spoken resources working together as one, as well as I might add, our Zang folks in Canada to continue to accelerate our deployment of newer cloud technologies, going forward.

And Lance, just to add one more bit of color. We talked about when we made that -- when we had that -- when we made that acquisition, we talked about 12 to 18 months to get the synergies and the product rolling to make that accretive to the model. So we still believe that. As Jim said, the integration -- the organizations are aligned. And so now, as we deploy that through our existing customer base, we should certainly start seeing that be meaningful in the top line and start getting synergies of the organizations. But like I said, that's 12 to 18 months. If we could do it sooner, great. But as you know these things, this one seems a little easier, given that, as Jim says, purpose-built, but we still have to integrate, and that takes a little bit of time.

Okay. So then the $20 million reduction to the guidance, so does that suggest then -- I mean, that -- you closed the transaction in March, so it's about 6.5 months-or-so of time in the '18 numbers. So is -- does that suggest that the -- sort of the annual burn rate then at Spoken is more like $40 million? And therefore, I guess, I'm trying to think about the impact that it may have had on the quarter that you just reported.

So on the quarter, we've just said it only had about $2 million -- $1 million and some change, $1 million to $2 million. So it wasn't significant in this quarter. Now the GAAP would have more because you have all the consideration on there, but for true operationals, like $1 million, $1.5 million. So that $20 million, I would -- you could accelerate to say $40 million for a full year. That would imply nothing's going on. So that's -- as you can see, we didn't update our revenue guide. We'll get some revenue there, but this year is not significant. It's getting customers rolled over, and you'll start seeing the -- it manifests itself to our top line and some synergies through the rest of the P&L. But for a period, we're putting a little of extra muscle into them to make sure that gets supercharged. And so we feel comfortable with those numbers, and we do feel comfortable with the 12 to 18 months that this could be accretive. So I wouldn't really go model $40 million. But if that's what we have right now, that would be fine, but I think we should get less and less drag as the fiscal '19 goes on.

Our next question comes from the line of Raimo Lenschow with Barclays.

It's Mohit Gogia, dialing in for Raimo. So Jim, I just wanted to understand your take on the -- how you see the competitive landscape in contact center evolving, going forward? And how -- so Avaya is going to be positioned to sort of take market share, improve its offerings, continue its product innovation. So recently, we have seen some non-traditional vendors moving to contact centers. We saw Twilio announced their contact center offering at the Enterprise Connect Conference. IBM, which is another nontraditional local vendor, entering to the contact center market, so I was just curious as to how do you think why we had seen an influx of nontraditional vendors in the space? And how Avaya is positioned to maintain its position in the market going forward.

Yes. Sure. I think it's -- sort of I need to look at it by segment. So first, at your high end, obviously, competition continues to fuel our innovation. It kind of gets us excited to make sure that we can meet customer demand. I do think at the high-end, we are starting to see some strong bookings. We're starting to see our funnel increase, which is a positive sign. I think to the degree that we can continue to leverage the opportunity, and be a real differentiator, with partnering with folks like Afiniti, to bring really new differentiated solutions that others don't have. Building on top of our capabilities and voice isn't easy, and we're still #1 in that space. To a degree that we continue to build out Oceana, and continue to mature that product line, I think, provides us the opportunity in certainly the world of multichannel to remain extremely competitive, if not, gain some market share. And then coupled with the AI, technologies we're bringing in, either through mobility or just through productivity of TCL, and really changing the landscape of a contact center from being a call center to being a profit center. I think we're well-positioned to continue our #1 position there, and we're continuing to look at ways to expand that. On the contact center sort of mid-market space, which is starting to get a little bit more, if you will, from a cloud perspective, I think we're in a good spot. We have -- and we'll be announcing a number of solutions to remain competitive in that space. We see our contact center revenues increasing. As I mentioned, we're up year-on-year in bookings. Funnel is up. The new product adoption is up. Oceana is finally starting to take hold. We're seeing a significant number of large deals. And last, but not least, we're just on the cusp of really generating, what I believe, a significant traction with BPOs. I was just in Singapore 10 days ago, and I met with 30 of our largest BPOs for the better part of half a day while we were in Singapore. They all flew in, and I would say there's significant amount of excitement. They understand our technology, and we're looking forward to really double down, for lack of a better term, to build out that marketplace. So competition is fierce, whether you're in the SMB space, mid-market space, UC space, CC space. I do see the platforms consolidating as we move forward, which is one of the reasons why I think you're seeing more "competitors" get into CCS. They go with sort of a common platform, but I think we're well-positioned to compete, as we move forward. So our innovation pipeline is certainly quite strong.

Our next question comes from the line of Mike Latimore with Northland Capital.

In terms of the -- you talked about sort of normal revenues, seasonal patterns in the March quarter, I think you said, being down 6% to 8% sequentially. Is there a normal kind of booking sequential pattern to? Do they typically decline or roll a little bit sequentially in the March quarter?

Yes. They pretty much go hand-to-hand, Mike. This is Jim. So sequentially, they're down as well. The second quarter has always been sort of the Achilles heel for the company, going back to at least the 10 years that I've been here. We've been able to reverse that trend this quarter. A lot of that is associated with the fact of new products taking hold, the fact that we spent a lot of time on our services business as well, and have -- worked long and hard with that. And last but not least is the amount of effort we've put in into our partner community, and we're very close now with our partners. They are certainly an extension of Avaya. There was a lot of potential friction and noise in the system, but we've worked long and hard with our partners both [distis] and partners, and then obviously, with the products that we have. So it's a completely different sort of go-to-market motion in the company has had in years past, and it's one of the reasons I believe that. We sort of turned the corner here in the second quarter, and we're looking forward to move as we move in the future.

And then just on cloud, I think you said that it grew double-digit. I just wanted to clarify that you did say that. And then second, what percent of revenue was cloud?

Cloud and overall grew 2 points as a percent of the revenue for the company. It's roughly about 11%, up 9% or so from previous quarter. So it continues to grow. We're now well north of 3 million seats and growing. So -- but overall percent of revenue, it's right around 11% of revenue, up 2% quarter-on-quarter.

Our next question comes from the line of Hamed Khorsand with BWS Financial.

Could you talk about a little bit about these 1,200 new logos and provide a little bit more details as like -- quantify what kind of customer base they are, and how your approach to the market has changed. If it has changed, are you going more the SMB route? Or are you trying to get more enterprise customers? Can you just provide some details on the strategy here that you want to go forward?

Yes. So the 1,200 are obviously driven by the channel. Some of those are obviously associated with our current channel partners, and then as I said, we grew over 300 channel partners quarter-on-quarter. If you look -- I would say, a large portion of those are more in your SMB mid-market space, obviously. We are, in fairness, looking to penetrate the SMB space much more than we have before. I believe we can be extremely competitive, more importantly, be very disruptive in that space where we have, in all fairness, played, certainly, within cloud in the past. So we're beginning to roll that out. I think it's -- it's clearly an opportunity for us. So it's early, but we'll certainly make sure that we have a strong presence. But most of that is driven through channel partners. Most of that has been focused in the SMB to sort of your smaller and mid-market.

Okay. And just a follow-up. As far as the channel partners that you're adding, are they just signing up, and saying, "Hey, we're just a channel partner." Are you actually seeing some sort of new customer activity from these channel partners that are coming onboard again?

Well, we've been adding roughly about, I don't know, just north of 1,000 channel partners a quarter for the last, say, 4 quarters or more. So as you sign one up, there is an enablement process that's required to get them up to speed, if you will. So the ones we signed this particular quarter, in fairness, didn't generate a whole lot of revenue. But the ones that we had signed up in Q1 and our Q4 are indeed generating revenues. So it's -- 1,200 suggests that the pipeline continues to fill in, if you will. So they'll start -- typically, it takes anywhere from 60 to 90 days or so to get them up through the enablement process, certification process, so on and so forth. So very little of that was in revenues this quarter. But as I said, setting the stage, building the pipeline for future growth.

This is Pat. We actively manage that. If we see some of the channel partners not getting distinction or traction, we go in, reach out, and whether it's an enablement or maybe it's just the wrong partner. So -- because you don't want to sign up someone that's not really going to generate revenue for you long-term. So we do have a tail analysis as well on that. But as Jim said, their start-up cost least, and so you got to get them up and running. And then, 1 to 2 and beyond quarter, as they start generating, where, obviously, we couldn't reach, but we actually monitor the current health of all our partners.

And our next question comes from the line of Rob Jost with Invesco.

I wanted to start with the foreign exchange. It looks like you got a bit of a benefit from that. And I was wondering if you could help me kind of get through some of the noise here. And what was the benefit to EBITDA net of all the moving pieces from that ForEx?

So we actually had a -- on the top line, we had a benefit. But in -- if you take look in the sales and margin expense, a bit of that, given where we have a lot of the sales team overseas and we're unhedged. We actually had a $2 million, almost $3 million net hit to the P&L. And a lot of it, the OpEx was -- it went through the SG&A, and then through the other income expense, but it was a net drag this quarter.

Okay. That's really helpful. And then on your SMB strategy, can you talk a bit about how -- kind of how your win rate has been versus some of the other, particularly on the cloud space?

We actually -- this is Jim, Rob. So we actually -- on the SMB space, it's pretty hard because most of it's driven through partner. So I don't actually have in front of me win rate because we don't actually report that, obviously, for where we go, a bit more direct. We certainly have win/loss rates. But on the SMB space, a lot of that is driven through distributor partners. So we don't necessarily track it at that level.

As well, we have been signing up -- as Jim mentioned, we signed up the -- our master agents that will be starting to give us some insight as well, because that's the space that served very effectively there, and that's -- we've been on-boarding those. So obviously, we believe that transition to the cloud is in early innings, as well as us into SMB. As Jim said, we think we have a competitive offering, and that offering will expand. But it's early in the game for us there, but obviously, there's been growth there. And so by enabling the master agents and working with our partners, we should expect to see more of that.

The one thing I can add to that is, as I mentioned, we are, and have seen growth both in prem and on cloud in our seats, so they've increased. Secondly, as I mentioned, we're going to -- that's mostly a price decision. I can tell you that we are going to -- as I said, become a bit more aggressive, plan the offense, take advantage of our financial flexibility. So we are not going to lose deals based on price. So we're going to make sure that we take advantage of that. And the other point is, we're one of a few that actually have an advantage because we actually have our own endpoints. So we are taking in some of the promos and some of the announcements. We're taking opportunity to leverage, if you will, our capability because we do manufacture our own end points. So we believe that's going to become more and more as a competitive advantage for us because of the opportunity we have there. So as I said, more to come on that space, but we're gaining seats. So record profits, as far as margin, and we will make sure that we continue to take advantage of that. And we now have a whole new refresh line of endpoints that we just announced, as I mentioned. So we're -- it's early, but we're excited about the opportunity there for us.

There are no more questions at this time. I'll turn the call back over to Peter.

Thank you, Matthew. During the third quarter fiscal '18, Avaya will be meeting with investors at the Barclays High Yield Bond & Syndicated Loan Conference in Colorado Springs on May 22, at the Cowen & Company TMT Conference in New York City, New York on May 30. 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. Thank you.

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