Avaya Holdings Corp (AVYA) 2021 Q4 法說會逐字稿

Greetings, and welcome to the Avaya Fiscal 2021 Fourth Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Michael McCarthy, Vice President of Investor Relations for Avaya. Thank you. Please go ahead.

Thank you. Welcome to Avaya's Fiscal 2021 Q4 Investor Call. Jim Chirico, our President and CEO; and Kieran McGrath, our EVP and CFO, will lead this morning's call and share with you some prepared remarks before taking your questions. Joining them this morning will be Stephen Spears, Chief Revenue Officer; Todd Zerbe, Senior Vice President of Engineering; and Dennis Kozak, Senior Vice President of Global Channel.

The earnings release and investor slides, which include highlights of our ESG initiatives and performance referenced on this morning's call, are accessible on the Investor page of our website as well as in the 8-K filed today with the SEC. These should aid you in your understanding of Avaya's financial results.

All financial metrics referenced on this call are non-GAAP with the exception of revenue. We have included a reconciliation of such non-GAAP metrics to GAAP in the earnings release and investor slides.

We may make forward-looking statements that are based on current expectations, forecasts and assumptions, which remain subject to risks and uncertainties that could cause actual results to differ materially. In particular, the global economy continues to be impacted by COVID-19 and to the extent of its continued impact on our business will depend on a number of factors that include, but may not be limited to, the virus' severity and duration, the emergence of new variants, changes in infection rates, the vaccine participation rate, the effectiveness of vaccines and the speed with which the vaccine can be distributed as well as regulations and requirements impacting the return to our offices and our ability to visit customer sites and actions taken or not taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time.

Information about risks and uncertainties may be found in our most recent filings with the SEC, including our Form 10-K. It's Avaya's policy not to reiterate guidance, and we undertake no obligations to update or revise forward-looking statements in the event facts or circumstances change, except as otherwise required by law.

Before handing the call over to Jim, I'd like to remind the participants on this morning's call that we'll be hosting an Investor Day meeting in conjunction with Avaya ENGAGE, which will be held down in Orlando on Tuesday, December 14. Registration information is available on our website on the Investor Relations page under the Events tab. Members of Avaya's executive leadership team will be providing updates on Avaya's business strategy, technology development road map, growth opportunities and updated long-term financial model.

I'll now turn the call over to Jim.

Thanks, Mike. Good morning, everyone, and thank you for joining today's call. Avaya's fiscal 2021 was a landmark year for the company. What our team accomplished represents a pivotal point in our history and is a defining moment for the company. And it will play a central role in our success story of Avaya as we move forward.

If you take a step back and put this past year into context, it is a year marked by many firsts, and the outstanding results we delivered exceeded expectations on most every front. These results are not only a reflection of how far we've come but importantly, reinforce the speed at which we are delivering on our value creation strategy: grow the company, evolve to a cloud and SaaS business model and remain highly profitable.

Let me start with growth. In Q4, we delivered our sixth consecutive quarter of year-over-year revenue growth. Revenue was $760 million. For the full year, revenue came in at $2.973 billion. Most impressive is the fact that we reversed a history of annual revenue declines, delivering year-over-year growth for the fiscal year closing up approximately $100 million, a first for Avaya. It marks a real and substantive milestone for the company. And I couldn't be prouder of the performance or more thankful for the commitment and loyalty our customers and partners as we've navigated a purposeful and deliberate journey of transformation.

This growth has been fueled by investments we made in talent, go-to-market, digital initiatives and our innovation engine. Especially notable is the momentum in the large enterprise segment where for the sixth quarter in a row, we signed over 100 deals with a TCV greater than $1 million. This included 18 over $5 million, of which 7 were over $10 million. Clearly, this is a strong proof point that customers have embraced their road map and are on board with our strategy.

In addition, we once again signed over 1,600 new logos, reinforcing the competitiveness, differentiation and value of our solutions. Most important to note is the fact that none of this would have been possible without the efforts of our global Avaya team. Their resilience, dedication and focus on delivering for our customers was outstanding, and I'm extremely proud of how the team performed.

On the cloud front, we continue to exceed expectations across many key metrics. A year ago, we introduced Avaya OneCloud ARR as the leading indicator of our cloud transition. We finished FY '21 with $530 million of ARR. That's up 25% sequentially and 177% year-over-year. We grew over $100 million in just the fourth quarter alone, another first for us.

To add some color, nearly 20% of our ARR comes from contracts greater than $5 million and over 60% from contracts greater than $1 million. And in total, over 95% of our ARR is from our enterprise segment. Additionally, 60% of ARR is driven by enterprise contact center, and we are converting this highly coveted base rapidly.

We are not following the crowd. We have the best of both worlds. We are operating like a start-up, but with a significant IP, technology, market share and the installed base assets of an enterprise leader. This is fueling our exponential growth, $500-plus million of ARR in 2021 to $1 billion of ARR in 2022 to $2 billion in FY '24.

Our second key indicator is our CAPS metrics, which reached 44% of revenue for the quarter, up 11 points from the prior year and 14 points to 40% for the full year. CAPS remains a measure of our highest calorie revenue comprised of Cloud, Alliance Partner and Subscription. I am particularly proud of the growth here as is a direct reflection of the new Avaya, the potency of our new innovations and the importance of our go-to-market ecosystem of partners.

Last, on profitability. Adjusted EBITDA was $179 million for the quarter and $719 million for the full year, both approximately 24% of revenue. As we committed to The Street and to our customers, we've executed on our plans to maintain high profitability while also investing back significantly into the business, and our success shows in the numbers.

Avaya is a very different company today from just 4 years ago when we went public. There has been a tremendous amount of effort and progress made on reshaping the company and transforming our business to be the leader in enterprise communications and collaboration.

When we first shared our vision to be the leader in digital transformation for enterprise customers, our path was clear: to become a customer-led company, one that works directly with our customers to unlock value, to return to being an innovation leader in order to expand our product and service offerings and to leverage our vast channel and technology partner ecosystem, all with a focus on growing and transforming to a cloud business model.

A measure of our progress to date. As of the end of September, we are approaching 10% of the company's combined UC and CC installed base on an Avaya OneCloud solution. This is consistent with the overall market adoption we are seeing in the enterprise segment. And it is clear that the best is yet to come, and we are well positioned to be leaders.

Our subscription hybrid offer has been a key driver of this transition and represents roughly 80% of our $530 million of ARR. Customers are committing to 3-year-plus contracts, which by definition means they are making a commitment to Avaya's road map, to our vision of the composable enterprise and to continue their journey in a deliberate and agile way.

To those that look at subscription as a simple conversion of traditional maintenance contracts, nothing could be further from the truth. Today, subscription hybrid includes significant cloud capabilities such as Avaya Spaces, Cloud Contact Center AI, Avaya Conversational Intelligence and our cloud notification service, among others. And we continue to add additional capabilities, including many from our ecosystem of partners.

And furthermore, we are seeing a 15% uplift on average and in many cases, well north of 20% as customers make the move. One example is Wipro, which shows Avaya OneCloud subscription as the next step on their digital transformation journey because it offers ease of expansion and flexible migration as part of their cloud plans. Wipro's 17,500 users and 3,500 agents will benefit from a full-solution suite, which includes multiple ecosystem components from our API Exchange marketplace.

Not only are we converting current customers, but again, in Q4, we signed over 150 subscription hybrid deals with new customers. Take Amtrak, which recently chose Avaya OneCloud to deliver advanced quality monitoring and biometrics that will reduce losses from fraud by approximately 50% while improving customer satisfaction. In a highly competitive situation, our ability to deliver full cloud capabilities immediately was key to being chosen ahead of the incumbent provider and multiple other competitors.

Turning to public cloud. Our UCaaS and CCaaS public cloud offerings continue to gain significant traction as they expand both in terms of capabilities and geographic availability. Our progress is ahead of our expectations, and these offers will be major drivers for recurring revenue and profitability going forward.

First is CCaaS. Over the last couple of quarters, we've made significant strides in maturing our CCaaS offering in terms of reach, go-to-market scale and capabilities. CCaaS is now available in 49 countries and will reach 100 countries by the end of 2022. Initially offered through our direct sales force, we are now beginning to leverage our expansive channel network by bringing these partners fully online.

Take North America, where we've enabled over 160 of our value-added resellers. Globally, we signed 11 master agents with access to thousands of agents as we accelerate our efforts to enable the channel. We are seeing significant signs of momentum with our pipeline more than doubling in just the last quarter.

Also helping to drive CCaaS traction is the integration of our offer with Avaya Cloud Office by RingCentral. We believe this will be an important driver of seat growth in the SMB and mid-markets.

One example is a recent win in the Netherlands. Waste management and recycling company, Van Happen Containers, migrated to Avaya OneCloud CCaaS and Avaya Cloud Office. Reliability, greatly reduced on-site systems maintenance and platform integration were key drivers for their decision, along with integration of other channels such as WhatsApp and Facebook, all integrated with their CRM.

Another international win was Transcosmos, a Japanese-based global BPO. They are using our CCaaS along with Google Cloud Contact Center AI to compose effortless customer experiences, reduce wait times, improve efficiencies and all-around satisfaction.

Avaya Cloud Office continues to perform well, and we saw significant progress during the quarter. Now available in 13 countries, we continue to add Avaya-specific innovations to the platform along with integration, as I just mentioned, to our own Avaya CCaaS solution.

We won multiple $1 million TCV deals during the quarter. We grew the number of customers by nearly 25% and total seats by almost 30%. Customers continue to choose Avaya Cloud Office because it combines best in public UCaaS with Avaya's enterprise capabilities.

One new customer, Preferred Home Care of New York, a leading home care agency, chose our UCaaS to replace their existing system. With thousands of calls per day, they were experiencing persistent outages that created significant risk for staff and patients. This led to them to seek a cloud-based solution, and they selected us for over 500 users. Their solution includes videoconferencing, collaboration, messaging and calling.

On the private cloud front, we continue to see significant adoption as measured by new bookings and activations. TCV bookings of our Avaya OneCloud Private were up over 500% from the prior year, demonstrating the rapid acceleration we are seeing in demand for cloud capabilities delivered in a private cloud mode.

While this growth rate will moderate as the denominator grows, the right way to think about this is Avaya is the only major UC and CC solution provider that can offer public and/or private cloud platform delivery models at enterprise scale. This is a significant differentiator for us.

One example of a recent private cloud win is with MAHLE, a global automotive supplier with over 70,000 employees and 160 production locations. They were struggling with inconsistent customer and employee experiences while using 19 voice vendors. They chose our private cloud solution and will now consolidate their fragmented base of vendors to a single Avaya platform. We will continue to see strong demand for private cloud and expect this to remain a major long-term growth driver. Before turning it over to Kieran, I just want to thank our partners, employees and customers again for what was an incredible milestone year for Avaya.

With that, let me turn it over to Kieran.

Thank you, Jim. Good morning, everyone. As a reminder, with the exception of revenue, unless otherwise stated, all financial metrics referenced on this call are non-GAAP. And the supplementary slides posted on our Investor Relations website set forth the GAAP to non-GAAP reconciliations. All figures mentioned in this call are as reported unless otherwise indicated in constant currency.

I'll start with a few key highlights that punctuate what was a milestone year for Avaya. At $2.973 billion in revenue for fiscal 2021, up 3% year-over-year, we generated revenue growth for the first time in well over a decade. Highlighting our significant progress, we achieved $530 million of OneCloud annually recurring revenue, up from $191 million last year, significantly exceeding the high end of our guidance range.

Most notably, this reference marks the progress of our transition to the cloud and the relevance of our market-leading solutions. CAPS or Cloud, Alliance Partner and Subscription, reached the high end of fiscal year guidance at approximately 40% of revenue, up from 26% last year with the fourth quarter hitting a record of 44% of revenue.

Getting deeper into the numbers. Our OneCloud ARR metric grew 25% sequentially and is up 177% year-on-year. Customers paying greater than $1 million annually continued to be more than 60% of total ARR. Similarly, contact center was again about 60% of total ARR.

In terms of revenue, our fourth quarter generated $760 million, which compares to $755 million in the year ago period and $732 million in the third quarter. For the full fiscal year, we reached $2.973 billion, which compares to $2.873 billion in the year ago period.

Fiscal 2021 revenue does include a $15 million adjustment for the understatement of revenues in prior periods. For the fiscal year, recurring revenue accounted for 66% of total revenue, with software and services accounting for 88%.

Turning to margins. For the fourth quarter, non-GAAP gross margin was 60.4% compared to 61.3% in the year ago period and 61.5% sequentially. Margin this quarter was reflective of higher contribution from our hardware offerings.

For the year, the shift between services and product is more pronounced, where fiscal year 2021 product margin was 59.9% compared to 62.3% in the year ago period, while services margin came in at 62.1% compared to 60.7% in the year ago period. These aggregate to a total non-GAAP gross margin of 61.3% compared to 61.3% for fiscal 2020 or flat year-over-year.

In terms of total profitability margin and cash flow metrics, profit margins continue to reflect the substantial investments in R&D and go-to-market that we have been communicating all year. That is putting roughly 1 point of adjusted EBITDA margin back into the business. We are very pleased with the positive results these investments are having, driving our current and future ARR momentum.

Fourth quarter adjusted EBITDA was $179 million, representing an adjusted EBITDA margin of 23.6%, down 290 basis points year-on-year, consistent with our plan. Q4 non-GAAP operating margin was $145 million, representing a non-GAAP operating margin of 19.1%, down 340 basis points year-on-year. Non-GAAP EPS was $0.77 in the fourth quarter compared to $0.93 in the year ago period and $0.75 sequentially.

Summarizing other key performance indicators for our transformational fiscal year 2021. Adjusted EBITDA was $719 million, representing an adjusted EBITDA margin of 24.2%. Non-GAAP EPS was $3.16 for the year, up from $3.03 last year.

We ended the fiscal year with a cash balance of $498 million; cash flow from operations at $30 million, representing 1% of revenue. This was expected and is consistent with our revenue model transformation. Additionally, we should note that during the year, we paid down $100 million of term loan.

Now turning to guidance for 1Q '22 and full year fiscal '22. Please note that all year-on-year revenue changes are expressed on a constant currency basis, and all revenue amounts reflect rates as of October 31, 2021.

In terms of our forward-looking OneCloud ARR metric, we expect to exit fiscal year 2022 between $880 million and $910 million. At the midpoint, this represents growth of nearly 70% year-over-year. This expectation reaffirms the previously communicated target of exiting the 2022 calendar year with OneCloud ARR at or above $1 billion.

Turning to revenue. Avaya's business model transformation continues. As such, the mix between point-in-time and ratable software revenue streams continue to shift increasingly into a larger, more ratable base. Therefore, we expect full year fiscal 2022 revenues of between $2.975 billion and $3.025 billion, representing growth of 1% to 2% as measured in constant currency or 0% to 2%, assuming the FX rates as of October 31.

We expect Q1 revenue to be between $725 million and $745 million. Revenue generated from CAPS for the year is expected to be between 45% and 50% of revenue. At the midpoint, this reflects growth of 20% year-over-year.

While we are still in the midst of our transition to a recurring cloud software business model, I remind investors that we will continue to invest heavily in the capabilities required to support an expanding cloud customer base. As such, we expect non-GAAP operating margin to be between approximately 19% and 20% for the full fiscal year.

Similarly, our adjusted EBITDA should be between $700 million and $720 million or approximately 24% of revenue. We expect Q1 to closely follow these margin levels with non-GAAP operating margin between 18% and 19%, and adjusted EBITDA margin of approximately 23% or between $160 million and $175 million.

I'd now like to take a moment to comment on our cash flow trajectory during our revenue model transition. The shift from CapEx to OpEx contracts has manifested with significant growth of contract assets on the balance sheet, reflecting deferred billings over a multiyear period. Since the introduction of our OneCloud portfolio of offerings in early 2020, we saw $164 million of growth in contract assets in fiscal 2020 and an additional $239 million in fiscal 2021 to end the year at $606 million. As the mix of our purely ratable cloud contracts reach critical mass, our revenue recognition, billings and cash flow will more closely align.

We significantly outperformed our fiscal 2021 OneCloud annually recurring revenue objectives. And as a result, Q1 of fiscal 2022, we will see significant cash payouts for bonuses, commissions, accelerators and incentive multipliers. Therefore, we are expecting Q1 cash flow from operations will be approximately negative 7% of revenue. For the full fiscal year 2022, we expect cash flow from operations will be approximately 1% of revenue, consistent with fiscal 2021.

Turning to shares outstanding guidance and earnings per share. We expect our weighted average shares outstanding to be between approximately 88 million and 90 million shares for fiscal 2022. We expect non-GAAP EPS for the fiscal year to be between $2.85 and $3.03. For the first quarter, we expect non-GAAP EPS to be between $0.63 and $0.75.

While we will cover our longer-term financial targets in greater detail at our Investor Day, which will be held as part of the ENGAGE user conference on Tuesday, December 14, I do want to take this opportunity to also provide an early look beyond fiscal 2022 and towards the fiscal 2023 and 2024 time frames, referencing Slides 16 and 17 in our investor deck.

As we continue to aggressively migrate our customers into our OneCloud portfolio, we expect to exit fiscal 2024 at $2 billion of OneCloud annually recurring revenue. This represents an almost 4x increase when compared to our fiscal 2021 exit point and is double our calendar year-end 2022 ARR target.

In fiscal 2023, we expect total revenue to increase by the [mid-single digits] (sic, see press release, "low- to mid-single digits"), and we continue to invest in the business. We expect adjusted EBITDA margins will remain in the 23% to 24% range. CFFO will improve to the mid- to high single digits as a percent of revenue as contract assets become billable and more are converted into cash flow.

Moving to fiscal 2024. Total revenue growth will accelerate by mid- to high single digits. This acceleration is a result of our OneCloud portfolio making up the majority of our business in fiscal 2024. We expect adjusted EBITDA dollars will grow while the margin levels remain constant at between 23% and 24% as a percent of revenue. CFFO in fiscal 2024 will increase significantly into the low double digits as a percentage of revenue.

Avaya is a very different software company today exiting fiscal 2021. We continue to exceed our own high expectations as demonstrated by the success of ARR and the return to revenue growth. Through the investments we have made in our OneCloud portfolio, we are confident in the future of Avaya and our ability to deliver on our long-term targets.

With that, I'd now like to turn the call back to Jim. Jim?

Thank you, Kieran. Looking ahead, there is significant opportunity for Avaya. Our business is thriving and continues to gain momentum. We are growing ARR at a remarkable pace and transitioning customers to the cloud. Our innovation engine is running strong, and we have an incredible global team and partner community.

We've invested significantly back in the business, and it is paying dividends. The investment our enterprise customers are making in Avaya is the single greatest validation that we are accelerating in the right direction. This is why I'm excited for what the future holds and why I'm confident in our ability to drive profitable growth as a leading enterprise cloud company. And we look forward to providing you more details about the opportunities we see ahead during our Investor Day in December.

With that, operator, please open it up for questions.

(Operator Instructions) Our first question comes from the line of Ryan MacWilliams with Barclays.

Strong OneCloud results once again. I thought it was interesting, 94% of your OneCloud ARR comes from customers with over $100,000 in ARR. So as your customers are transitioning to subscription, are you starting to see early signs of larger customers who are now considering moving from their on-prem subscription to cloud solutions?

Yes. Ryan, this is Jim. Thank you very much. In fact, we're seeing momentum across the board, be it that in private cloud or public cloud and/or the hybrid cloud solutions as we take a look. As we pointed out and as you pointed out, 94% are coming from our large enterprises. We're really pleased with that.

More importantly, when you take a look at the performance, 60% of that ARR is greater than $1 million, 20% greater than $5 million. And equally as important, 60% of our ARR is from contact centers, so further fortifying our leadership in large enterprise customers and really, as I mentioned, sort of a validation that our portfolio and our innovation is lined up where our customers want us to be.

So significant content is in subscription. But really, what subscription is, it's really a vehicle for us to deliver our OneCloud solutions. And that's exactly what we're doing, and that's our ability to consume our solutions, be it hybrid, private or public.

We did reach $530 million. We're very pleased with that, more than doubling not only subscription, but we also more than doubled our private and public. And we're seeing traction across the board. And I think this is extremely important because having the portfolio that we do really provides differentiation and relevance, where if you were just delivering UCaaS or CCaaS or hybrid, private or public, one size does not fit all in today's market. And I hear that consistently from many of our -- the CEOs of the customers that we serve.

And it's an important point because operating at the global scale that we do, operating with the largest of large enterprises, if you really want to compete and win, you need to provide the capabilities that really enable our customers to continue to operate and win in the markets that they serve. So we're really pleased with the performance across the board.

Perfect. One more for me. Kieran, one thing that stuck out to me in the press release was the cash flow from operations guidance for the next 2 years. Does your OneCloud results add more visibility into your business model going forward? And would you mind just adding maybe a little more color in your confidence in these new CFO targets?

Well, absolutely. So I mean if it starts very much what you would expect as you see a revenue model transition. This is exactly unfolding as we had expected.

And quite frankly, we've looked at a lot of peer companies who've also gone through this model. And they underwent very similar cash flow transformation. So from our perspective, the shift from CapEx to the OpEx has increased the working capital requirements. And essentially over the last 2 years since we introduced our OneCloud portfolio, we've added over $400 million worth of contract assets, essentially deferred accounts receivable.

So you're absolutely spot on with your question. It does dramatically increase the visibility to what we see. What I look at in '22 is another year as we continue to accelerate the ARR. We reach a point as we exit '22 into '23, where now suddenly, we start to see more of the requirements for incremental contract assets start to decline and stabilize.

And actually, we get mid- to high single digits in '23. And out in '24, we actually see even a modest tailwind as we've reached and really aligned both billings and new bookings. And essentially at that time of the year, I would expect to be low double digits, right around at the 12% of CFFO. So with good line of sight.

Our next question comes from the line of George Sutton with Craig-Hallum Capital Group.

Nice results. So I'm interested, Kieran, on the 2024 ARR expectations. When you mentioned that OneCloud was 10% of the installed base today, how high would you anticipate that being in 2024 to achieve that ARR number? And how far do you think that ultimately goes?

Yes. So obviously, George, we'll go through a lot more detail at Investor Day. But as I said right now, all of our ARR is OneCloud ARR.

As Jim pointed out in his prepared remarks, our subscription hybrid is a vehicle for delivering cloud content to date. But I think to the element of your piece, as we think about where we look at that $2 billion out there, I would see well north of 50% of our OneCloud ARR coming from public and private cloud out in fiscal '24.

Just a follow-up for Jim. I'll ask the question everybody on the call wants to ask given the Vonage acquisition this morning. Can you just give us a forward-looking analysis from your seat relative to industry consolidation?

Yes. I mean it's pretty clear that this is a hot space, and there's been a lot of consolidation, as you well know, both papered and yet closed. And I think it just is further proof point that the industry, number one, is not only just consolidating, but it gets to the point where you take a look at Avaya. We're the #1 provider that offers the complete suite in one size does not fit all.

And back to my previous comments: one, you're going to win and more importantly win at a global scale and more importantly, win in where the real value is created, and that's in large complex enterprises; you have to have the capability to deliver UCaaS with CCaaS; and you have to have the capability to provide what customers require: hybrid, private and/or public.

And I continue to see the marketplace consolidating, but it's really consolidating around this full platform. And it's really consolidating exactly aligned with our strategy, and that's sort of this dynamic, composable enterprise; and to deliver the complete suite, not only from a worker experience, but more importantly, from a customer experience as well.

So we're -- it's always exciting to be in a hot space. We think we're positioned exactly where we need to be. And no doubt, I believe there's going to continue to be consolidation as folks figure out how they can get that complete platform that Avaya is offering into the market today.

Our next question comes from the line of Samik Chatterjee with JPMorgan.

This is Joe Cardoso on for Samik Chatterjee. Just one question for me, and I just wanted to touch on the large deal activity. You have obviously some great execution relative to driving larger and larger deal activity, particularly over the last 2 years around those disclosures there.

I was just curious if you could provide more color around what's driving that large deal activity and whether you're seeing a majority of that coming from the CC side as opposed to the UC side? And then additionally, I was just curious to hear if any of that activity is coming from any of the new logos Avaya is winning or if it's largely being cultivated from the existing customer base.

Yes. Thanks. I think it has to get -- it has to do with a number of factors. So first and foremost, it has a lot to do with what our teams have been doing really to reposition us back as an enterprise leader in cloud and communications. And the fact that the acceleration from a digital transformation perspective within the industry has opened up opportunities, and for that fact has brought those opportunities right in line what we've been doing over the last 3 to 4 years from our strategy.

So it's nice to see that our strategy is turning into execution. And frankly, that's a little bit different from the Avaya of the past. But that's who we are and what we're going to be doing moving forward.

And also, I think it's a vote of confidence in Avaya with our large enterprise customers because they're looking to -- especially in the new work dynamic, they are looking to consolidate a number of their providers into some -- into one single trusted provider that again can offer a full portfolio, full suite of solutions because the opportunity to try to integrate a number of specific applications, simply, number one, it's not affordable. But secondly, it's extremely complex and doesn't scale for where they need to move within their overall market.

So as a result of that, we're seeing a significant increase in large deals. In fact, our large deal volume in FY '21 was well north of $400 million as we have communicated. We were up roughly 15% from where we were in 2020.

But I think to really punctuate this is the number of deals greater than $5 million, the number of deals greater than $10 million, no one can post the results that we have, which again, is a real vote of confidence in our customers and in our solutions that we're delivering to the marketplace today. And our expectation is that's going to continue as we go into FY '22.

And just to follow-on. Obviously, a lot of our new logos which we've seen an increasing step-up actually in our, obviously, cloud and subscription as well, many of those follow the traditional land, adapt, expand, renew. So they're not as big, but actually, over the last several quarters, we've actually even seen some of the new logo landing points being quite -- been quite large as well, which is also a good indication of our presence with the enterprise customers.

Our next question comes from the line of Lance Vitanza with Cowen and Company.

Congratulations. And I apologize, my phone has been cutting in and out. But -- so hopefully, this hasn't already been covered. But I wanted to talk about the accelerating revenue growth in the model from '23 to '24. And just trying to get a better sense on exactly what's driving that trend.

Is the driver -- is it moderating legacy declines just given that the maintenance piece is getting smaller and smaller? Or is it more accelerating cloud growth? And with respect to -- is it coming from existing customers? Or do you see the -- does the funnel suggest that the acceleration comes from attracting new customers more so than the existing customers? Any color around that would be helpful.

Sure. So Lance, this is Kieran. So we did put a file in our investor deck, Slide 17, which really tried to illustrate, I think, exactly the point that you made. So as you look out through time, our on-prem solutions are transforming and are migrating to the cloud. And we're positioned really to capture that business with our broad OneCloud portfolio.

And you can see from the optic on the left-hand side, our on-premise is becoming a smaller and smaller portion of the overall business. And therefore, that 20% reduction becomes less and less of a drag as we move to our transition.

And finally, to your point, if you look at the extreme right-hand side, you see the flywheel that's being created by our OneCloud ARR. And that is clearly coming from both the migration of our existing very strong enterprise customers, but also from this new logo. As you heard Jim referenced, another quarter with 1,600 new logos, over 6,000 new logos in the current year.

So we obviously expect the bulk of this growth to continue to be driven by upselling to our existing enterprise customers, our OneCloud portfolio set of offerings. But also we fully expect that new logos are going to play a meaningful role in that as we go forward.

Okay. And then just if I could get one more in. I just wanted to ask you about the Amtrak decision to go with a public cloud solution. Does that -- is that in any way a shift in your view in terms of enterprise willingness to engage in public cloud rather than private or hybrid?

No. I mean I wouldn't consider it so much a shift in that, Lance, to be honest with you. I think it's just sort of a manifestation of the fact of the solutions and the innovation and where the market is going. And the fact, again, in just our overall capabilities to make sure that we're delivering that sort of agile uniqueness that others can't in order to drive these solutions.

When you take a look the content within that solution metrics and others, I mean, it's pretty sick. It's much different than if you were to go take a look at where the company was, say, 2 years ago or 3 years ago.

And I think that's attributed to the fact of how we moved from what was traditionally what I call sometimes around here as a product company to how we've moved now to being more of a customer or a customer-led company and really our ability to unlock that value and really create a lens towards lifetime value, which we're doing with our move to cloud and that the stickiness of these relationships, I think, is extremely important.

And I think it's showing not only our customers voting with their wallets, but they're buying into our future, and they're building off of our future. And that's why we're winning a number of new deals and -- but more importantly, as Kieran mentioned, we're also really expanding and really monetizing our installed base, which obviously is a key to not only the strategy but the growth of the company.

Our next question comes from the line of Catharine Trebnick with Colliers Securities.

Excellent quarter, gentlemen. I have a question more on, believe it or not, the PBXs. Mitel has CloudLink and NEC just offered a bridge connect. And according to them that -- well, Mitel's so-called link to RingCentral, but at a high level, it looks like the PBX is a slower turn to actually the cloud. And I wanted to get your opinion on what you're seeing there if you actually think that's the case or not or how fast that actually a traditional legacy PBX customer might actually move to the cloud.

Yes, sure. Catharine, this is Jim. I'll turn this over to Dennis Kozak, and then maybe add a little bit of color afterwards.

Sure. So look, we see -- obviously, we've had a lot of success within our Avaya Cloud Office business, where we're able to migrate not only our PBXs to the cloud, but also a lot of our competitors, including Mitel. But we do also see for a PBX that may have been sold in the last 1 to 3 years, customers are initially resistant of doing another upgrade, right?

And so a lot of times we go in to talk about with Avaya Spaces, our ability to bring our messaging and collaboration platform to them on top of IP Office or on top of Aura. When the customer is ready for PBX migration, we pitch Avaya Cloud Office.

Okay. And is there any way you can give us what the CCaaS revenue was part of the -- or contribution in the ARR this quarter? You did that last quarter.

Yes. Well, our overall ARR for the quarter is $530 million. Roughly 80% of that was delivered via subscription. So the private, public piece of our ARR was, therefore, in the 20-plus percent range.

I can tell you that doubled in FY '21 and is expected to more than double as a component of ARR as we go through fiscal '22. So becoming a larger and larger component of overall ARR.

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

Just want to understand, of the logos that you've been continually winning, especially on the cloud side, are they already cloud-native? Or are you bringing them on to the cloud?

Dennis, you want to try it?

Sure. Absolutely. So that point is in our competitive wins. We're usually head-to-head against the cloud provider. Generally speaking, it's usually a premise-based customer of some kind that wants to upgrade to the cloud. And we find that our agents are out there bidding Avaya Cloud Office or our other OneCloud solutions on a pretty regular basis. Occasionally, we aren't taking part of sales cloud migrations, and we're participating in bringing customers over to Avaya Cloud Office.

And these master agents that you announced that you have a lot of new ones, have they been previous Avaya channel partners?

Yes. So what we mentioned in the script today, we talked about the 11 we signed up adding Avaya OneCloud CCaaS to their portfolio.

So it will be easy for them to just bring on board and then just quickly just start selling it?

Right. Absolutely. Yes. So it's just very much like our Avaya Cloud Office rollout. We go through a very rigorous process to onboard these master agents and their subagents to be able to effectively position our product. So they have to understand how it works, the features, the benefits, the competitive landscape, what's the customer journey look like from a migration from premise to cloud.

This is Jim. Yes, I think it's also important to note again that when you take a look at our geographic reach, we now have CCaaS, as just mentioned, in 45 countries. And as I mentioned, we will be expanding that, our CCaaS offerings to roughly 100 by the end of the fiscal '22, so by the end of September of next year.

We also have 165 partners in North America and roughly 60 partners in international markets enabled now with CCaaS to go in and compete and win. So we're exactly right on track to where we said we would be, and we still remain very confident about the Avaya OneCloud CCaaS ARR growth, as I mentioned, more than doubling in FY '22.

Our next question comes from the line of Asiya Merchant with Citigroup.

Congratulations on a great quarter. My question is more kind of on the model, and I'm sure more of these details would be shared at the analyst event. But the downtick in margins, looking further out, how confident are you in that downtick in margin to the 23% to 24% on an adjusted EBITDA level?

In other words, with all the competition stepping up in this space, is there risk that we could see further impact to these EBITDA margins? Or there is significant confidence at these levels?

It's Kieran. So I'll take that one. So clearly, as you've seen to date, as we are really working to stand up, first, the investments you're seeing right now, I believe, from an R&D perspective, clearly go-to-market perspective as well, as we start to sign larger and larger deals and more of them, we're obviously standing up the infrastructure.

And what we're really reflecting there as we go out through time, it's really the scaling of these offers. And we're making a really explicit decision here to invest to drive the top line, to drive the growth from a revenue perspective and all the rest of that.

And what we're really seeing here is more service delivery just scaling type of metrics. I feel pretty confident at this level. Obviously, if we came in at 24% last year, we're looking to be somewhere around 24% in '22 as well. I think we've built in the appropriate level of conservatism, if you will, in being able to sustain that as we get out through time. Jim?

Yes. Just to add to that. I mean look, one thing, I've been here 14 years. One thing this company knows how to do, it knows how to execute. And as we've said, I think for the last couple of years now pretty consistently, that we're going to invest back in the business. And we're going to maintain our EBITDA between 23% and 24%. And the team has executed on that flawlessly over the last couple of years, even through the sort of the heavy lift of the transition since we've gone public over the last 4 years, so a real tribute to the Avaya team.

One could say it's a bit of a downtick, but 23.4%, 23.5% versus 24%. That's in line with our strategy. It's aligned with our expectations. But by no stretch of imagination should someone think that, that has any downside risk to it. In fact, we've increased our R&D expenditures in FY '21. I think we're spending roughly in the neighborhood of about $240 million.

We increased significantly in our go-to-market capabilities, and we've increased significantly in our systems in order to be cloud-ready. And I kind of call this as we take a look at the company, we -- getting us in game shape. And what do I mean by that?

It's one thing to have the technology to convert and transition a company to cloud. It's another to have the intangibles, the infrastructure on what you need to do in order to execute, in order to really drive that transition to cloud.

And we've invested heavily over the last 2 years, and we have a -- obviously, a pretty significant plan to invest again this year. And that's to build those intangibles to get this company in game shape so we can compete and win with the competition. So we have a very good understanding of where our money is being allocated.

We have a very good understanding of what it takes for us to, from a strategic positioning perspective, to be competitive and win in this market. And I would tell you that the team is definitely in game shape in order to win as we go out through the next couple of years.

So I'm very confident in what we posted, and it's exactly in line with what we've had posted. And that's a purposeful EBITDA number predicated on the amount of investment required not to move us from the middle of the pack to the front of the pack.

I mean Asiya, just to conclude with what Jim said, if there's any surprise in what we've seen, it's just been actually take-up and the rate and pace acceleration that we've seen with the OneCloud ARR that's really helping to influence those numbers. But like I said, I feel pretty confident that, that's quite doable.

Okay. And then if you can talk a little bit about the 1Q guide and then the seasonality for the remainder of the year. I know that comps are a little bit off relative to the prior fiscal year because you guys had some contracts that probably helped in 1Q '21. So if you can just talk a little bit about how we should think about seasonality for fiscal '22.

Sure. So with the guidance that we put out there at $725 million to $745 million in the first quarter, from a constant currency basis, essentially they're down 2% to basically flat. It kind of implies that the rest of the year on a constant currency basis is getting to somewhere between 1% and 3% in terms of growth.

And what you're starting to see now is as we start to stand up more of these private cloud offerings, literally, it's ratable revenue, the time to money is a little longer. We start to see the business should become a little less cyclical as we go through time and a little bit more continuous growth. So that's kind of the way we're seeing it right now as we look out.

Our next question comes from the line of Rod Hall with Goldman Sachs.

Most of my questions have been answered. I wanted to come back to this $15 million of adjusted revenue. A couple of questions on that. One is we're assuming that was all in Q4. Could you guys just confirm whether that's all Q4? Or did you adjust prior periods that add into that $15 million?

Yes. The bulk of it was in Q4, but we did take a little in Q3 as well. I mean it's just essentially, without getting too technical here, we're standing up SAP's RAR module. And the old system that we were using, which was RevPro, was essentially understating. In certain scenarios, it was actually understating revenue, which essentially means it wasn't allocating revenue of the product. It was keeping it on the balance sheet.

And we identified a series of instances. We went back and looked through time, obviously, consulting closely with our auditors as well. And there was never any quarter over the last 3 years since we introduced 606 would have been worth more than $1 million to $2 million in any given quarter. So that's essentially what it was all related to. But the bulk of it was in Q4, but there was a small amount in Q3 as well.

Sounds like You're saying like maybe $1 million in Q3 or something, $14 million in Q4?

Yes. It was a couple of -- $2 million in Q3 and about $12 million or $13 million in Q4.

Okay. And then the other question is did you guys non-GAAP that out? Or it's in the non-GAAP numbers?

No. It's in our non-GAAP numbers.

Okay. Okay. And then when you -- you kind of previewed what you're going to talk about at least in terms of long-term target on the Analyst Day. I wonder like -- so when we get to the Analyst Day, what is it that -- what do you think needs to be dug into more? Can you maybe elaborate a little bit on how you think that will go in terms of detail? I'm not asking you for the detail, but what are the parts of businesses...

So listen, I mean, we've heard our investors, right? Our investors are quite anxious to get a view of the new Avaya, where we're going, right? Obviously, due to the COVID, we haven't had a chance to get together for a while.

But what we want to really be able to do is you've already got the preview of my numbers. I'll slice them a couple of different ways for you. But I think the real intent here is to look closely at the rest of our business and understand the capabilities that we have with our portfolio, with our go-to-market and the rate and pace of how we're making the change.

Those are the things that Jim and I and the leadership team really want to explore and share in greater detail with you all. But I mean, the numbers are out there. We feel really confident of them. We'll obviously give a little bit better visibility into the splits between the cloud and the subscription hybrid portion. But I think we wanted to make sure that at least to date that you had a view beyond fiscal '22, given that we're still in this transition year in '22.

Our next question comes from the line of Meta Marshall with Morgan Stanley.

A couple of questions. One, just given kind of the traction that you're seeing in UCaaS and CCaaS, just where are you seeing the most opportunities to expand your partner community, particularly as a lot of these transitions get wrapped up in CRM transitions?

And then maybe second, and you'll probably discuss this more at the Analyst Day, but just given CGS' evolution to have a lot more kind of AI and analytics capabilities, just where do you see M&A? Or is there a need for M&A to kind of help advance that portfolio?

Okay. So I'll start with that. So certainly, in terms of UCaaS and CCaaS, it's a very competitive landscape. But we find that a combination of the Avaya brand, the platform, our experience, our ability to execute, we do very, very well. Only go head to head. We're finding that customers are sending out RFPs to 5, 6 vendors. All agents are responding back with Avaya Cloud Office, so we're really happy with the take-up rate.

With the attractiveness of the Avaya brand, our partner program and our ability to support the partners, even with our existing partners that have [turned agents] and our newly recruited partners are all seeing traction with the solution. So we're very pleased with that.

Yes. This is Jim. Just on your question about delivering, be it organic or inorganic solutions to build out sort of our CCaaS AI and overall analytics, a couple of things on that front. First and foremost, we have a very large ecosystem of API Exchange marketplace and a number of folks that are helping us develop solutions.

Secondly, if you take a look at sort of at a higher level, some of the strategic partnerships that we have around that ecosystem with the likes of Google and others, it's fairly extensive. NVIDIA, the list goes on and on of key partners that we're using to drive solutions back into our product capability.

As far as another, we believe, to be a real enabler for us to further drive that is really our full suite of CPaaS services that we bring to the marketplace. And really what CPaaS really provides us, that true capability to drive composable enterprise framework that you'll be hearing more and more about, as you pointed out, Meta, in our Investor Day.

And lastly, just as far as M&A, we'll keep our eye on the ball. We obviously did a technology tuck-in here last quarter with CT Suite, which provides us some digital capabilities, frankly, that we didn't have within the company. But I think we have a pretty defined road map of melding, for lack of a better term, partnership capability Avaya organically driven solutions into the marketplace, coupled with inorganic M&A solutions to help sort of round that out and deliver the solutions to our customers.

But you'll hear a lot about our CPaaS capabilities and where we see that. And we've often referred to that as sort of a force multiplier. And we'll get into a lot of detail about the value that, that brings to Avaya and how that's going to really drive a lot of our growth in our Avaya OneCloud platform.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. McCarthy for any final comments.

Thanks, Melissa, and thanks, everyone, for joining us this morning for an update on our Q4 results. We're looking forward to speaking to you again at our Investor Day on December 14. Have a wonderful Thanksgiving holiday. Take care.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.