Avaya Holdings Corp (AVYA) 2020 Q4 法說會逐字稿

Greetings, and welcome to Avaya's Fiscal 2020 Fourth Quarter Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Michael McCarthy, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Welcome to Avaya's Fiscal 2020 Fourth Quarter Investor Call. Jim Chirico, our President and CEO; and Kieran McGrath, our Chief Financial Officer, will lead this morning's call and share with you some prepared remarks before taking your questions. Consistent with social distancing mandates, each of us on this morning's call are assembled from our remote locations. The earnings release and investor slides referenced on this morning's call are accessible on the Investor page of our website as well as in the 8-K filed today with the SEC, which should aid you in your understanding Avaya's financial results. We will reference non-GAAP financial measures and specifically note that all sequential and year-over-year comparisons reference non-GAAP numbers, except where otherwise noted. We have included a reconciliation of such measures to GAAP in the earnings release and the investor slides. We may make forward-looking statements that are based on current expectations, forecasts and assumptions, which remain subject to risks and uncertainties that could cause actual results to differ materially. In particular, our business is currently being impacted by COVID-19 and its effect on the global economy. The extent of its continued impact on our business will depend on a number of factors that include, but may not be limited to, severity and duration as well as actions taken and not taken by governments businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. Information about risks and uncertainties may be found in our most recent filings with the SEC, including our Form 10-K and subsequent Form 10-Q reports.] It is Avaya's policy not to reiterate guidance, and we undertake no obligations to update or revise forward-looking statements in the event facts or circumstances change, except as otherwise required by law.

I will now turn the call over to Jim.

Yes. Thanks, Mike. Good morning, and thank you to everyone joining our call. I'm very pleased to share our quarterly and full year results with you this morning. Avaya's Q4 was, by all measures, an exceptional quarter and was the capstone to a remarkable year for the company. We delivered on our financial commitments, drove significant shareholder value and delivered innovation to our customers throughout this highly dynamic, competitive and challenging environment. Just 3 years ago, we laid out a strategy to be a leader in digital transformation for enterprise customers and to transform Avaya to a cloud SaaS company. Our performance this quarter is proof that we are executing and making significant progress on that strategy. What is even more compelling is that digital-first initiatives have accelerated, and I believe we are uniquely positioned to lead and provide our customers with scale, reach, security and innovation required to tackle these new challenges and opportunities head on. I cannot be more excited about our future.

Before moving to the numbers, let me say how proud I am of our team's focused commitment and resiliency during a period of adversity and great uncertainty. Their dedication to our customers, partners and each other has been nothing short of amazing. With that, let me hit the headlines. Avaya's Q4 was a quarter where outcomes were driven by outstanding execution, hitting on all cylinders across every dimension of the business. Q4 non-GAAP revenue was $757 million, above the high end of our guidance. Revenue was up $35 million from Q3 and $31 million from the prior year. This was our second quarter in a row where we posted quarter-over-quarter and year-over-year growth. Adjusted EBITDA was $200 million or 26.4% of revenue, which also exceeded the high end of guidance. Cash flow from operations was $70 million and we ended the quarter with $727 million of cash.

With regards to our capital structure, we continue to strengthen our financial position. We refinanced $1 billion of debt and executed an $800 million term loan amend and extend. These moves extended our debt maturities, reduced refinancing risk and improved our financial flexibility. We delivered excellent results, not just growth but profitable growth, and I'm delighted with our progress and the foundation we laid going into fiscal 2021. Now to the details on some key areas of momentum. First is the progress we continue to make on our CAPS, our Cloud Alliance Partners and subscription revenue metric. CAPS during the quarter grew to 33% of revenue, up approximately 15%. And in less than 1 year, we have doubled our CAPS revenue to $1 billion run rate business. CAPS is also important because it truly represents how far our business has come as a cloud SaaS company and is indicative of our transformation. Our CAPS growth not only highlights that we are on the right path, but it further demonstrates the relevance of our technology and solutions in today's market.

The subscription component of CAPS is activating our base by bundling additional innovations like Avaya Spaces, video, remote working, AI and contact center along with a number of other cloud solutions, allowing customers to consume on demand. It also provides a seamless gateway to transition from on-premise to cloud deployments, resulting in significant growth in our enterprise hybrid business. Proof of its success is in the numbers. In Q4 alone, we signed over 100 subscription deals, totaling a TCV of nearly $200 million.

Let me share a significant subscription win and competitive displacement in the financial services industry. One of the largest banks in the U.S. is at the forefront of using technology as a competitive differentiator in more than 1,000 retail branches and offices across 40 states. Avaya is enabling their migration to the cloud. With our subscription solution, they will transition over 70,000 users from using Cisco to Avaya in their retail branches, while also supporting an increasing population of remote workers.

A second example is from the health care industry, where Allina Health, an enterprise customer that operates in over 100 hospitals and clinics, made the decision to transition 47,000 UC and CCCs to subscription to support a key corporate initiative.

Our solution provides them the flexibility to more easily support the remote agents as they cope with the safety, operational and customer service challenges posed during COVID.

Now let me move on to the cloud component. Specific to public UCaaS, September was our second full quarter in the market with Avaya Cloud office. We also launched in Australia, Canada and the U.K. Not only are we gaining traction with our installed base, but we are seeing success in new customer acquisitions. In Q4, we more than doubled the number of customers. And more than doubled the number of active partners and agents that sold our solution. While still in the early innings, we are really excited about the adoption across all segments, including enterprise. One such example was the Art Institutes, a system of private schools throughout the United States. They selected Avaya Cloud Office to support 700 users across 8 campuses. Over the 5-year agreement, Avaya will play a critical role in helping the Art Institutes manage their multi-location requirements with increased flexibility, functionality and centralized operations.

Yet another example comes from Canada. Connex is a key business partner of Avaya, that is at the forefront of providing UC solutions to the Canadian market. They found that Avaya Cloud Office best fits their needs for seamless integration into their business services across multiple North American offices. International expansion of Avaya Cloud Office continues. At the end of September, we launched in France, Ireland and the Netherlands. And just last week, we announced the expansion into 5 other European markets. By the end of this calendar year, the solution will be available in 12 countries.

Turning to Avaya OneCloud CCaaS. Our pipeline continues to grow, and we are seeing significant traction in the U.S. and Canada, where the solution is currently available. One customer, a large social services agency on the East Coast selected Avaya OneCloud CCaaS for over 1,000 contact center agents and supervisors who support nearly 1.8 million low-income citizens. Avaya solution was chosen to enable remote work capabilities while also helping to improve response to inquiries about essential benefits.

Turning to another example. In Harris County, Texas, the third largest county in the U.S., we created a hybrid solution to support COVID-19 case investigations and contact tracing. With this solution, the county can reach individuals and trace contacts through automated outbound notifications. As a result, the county has increased case investigation capacity by nearly 25%. We are continuing to rapidly build out CCaaS capabilities, while also teaming with our ecosystem of partners. One example is with Verint, one of our most strategic and long-term partners. Back in October, we jointly announced cloud-hosted workforce engagement solutions. This complements our CCaaS solution and will accelerate customer adoption. Our next release at the end of December, broadens our API first approach with a digital framework to support messaging, chat, e-mail and custom channel integration.

Let me close with our private cloud solutions. Demand remains strong, and customers are making large long-term commitments to our private cloud platform. We are able to set up private implementations with the same speed of public, and we are doing so on a global basis. This is fueling opportunities, especially with customers and industries where public cloud either isn't available or cannot meet the stringent security, regulatory or privacy related requirements of their businesses. One example is with the global provider of CRM and BPO services. Realizing public cloud will not address their need, they leveraged our OneCloud solution in a private cloud deployment in order to consolidate there Avaya third-party solutions into a single unified framework, which includes workforce management, speech analytics, quality management and encryption.

Shifting to Avaya Spaces, our workstream collaboration platform, we are seeing significant increase in new seats and usage, which more than doubled sequentially. Although this solution was only rolled out 9 months ago, it was already featured in the Gartner Magic Quadrant for meeting solutions. This offering is available in nearly 100 countries and includes voice, video chat, messaging and team rooms. Spaces is continuing to make a difference around the world. Technology security is a significant issue for one of the largest energy companies based in the Middle East. 40% of their staff work is on site and security compliance prevented the use of remote working solutions to connect on-site teams with remote teams. This had a major impact on team efficiency and productivity. Spaces not only offer the collaboration capabilities they needed, but was able to address the security concerns.

Closer to home, St. John's Lutheran School, just outside Chicago, transition their entire student body to an immersive online learning program in August. The school is using Avaya Spaces exclusively and after seeing great success in the classroom, St. John's is now using Spaces for their ongoing operations, including faculty and board meetings. We are continuing to make significant strides in our workstream collaboration platform. And recently announced a strategic partnership with NVIDIA to further improve the user experience by removing background noise, any virtual green screen background and adding the ability to generate live transcriptions.

Lastly, on the strategic partner component of CAPS, we continue to drive significant new growth opportunities with partners such as Afiniti, Google, Nuance, salesforce.com and Verint, to name a few.

And let me just share a couple of highlights. Just last quarter, we announced the availability of Google Conversational AI solution. Since we launched, we booked well over a dozen new deals and continue to build a robust pipeline of contact center customers looking to leverage this capability. Another example is with Verint, where we just announced the integration of

Verint knowledge management with Avaya OneCloud CCaaS. This is an important capability that will accelerate adoption of our CCaaS platform.

As digital transformation continues to accelerate, companies have reprioritized their own strategic initiatives, thereby creating an opportunity for Avaya to lead in this space. The combination of these offerings and capabilities drives our ability to close large global opportunities that most others simply cannot.

The proof, in Q4 alone, we signed 135 deals with a TCV of over $1 million. This represents a 30% increase from the prior quarter and is by far the largest number of deals of this type that we've signed in the last 2 years.

In total, these represent well over $400 million in TCV. 17 of these deals were greater than $5 million and 4 were greater than $10 million with 1 deal over $25 million. In the face of a worldwide pandemic, where almost all of our commercial operations are being conducted virtually, we won over 1,500 new logos in the quarter, nearly a 75% increase from Q3. This is not only a testament to our ability to win deals from the competition, but to the relevance of our technology and the trust customers place in an established brand to support their mission-critical needs.

I am extremely proud of these results and especially of our global teams, which have shown amazing tenacity and resolve throughout this fiscal year.

In FY '20, we made significant steps forward in our cloud and SaaS transformational journey. Let me summarize 4 key focus areas for the year: first, we have successfully positioned the company for growth. We posted 2 quarters of quarter-over-quarter and year-over-year growth and our all important CAPS number grew from 15% to 26% of revenue in FY '20, representing a 73% growth; second, we have maintained our profitability while reinvesting in the business. For the full year, our adjusted EBITDA was $710 million or 24.7%, exceeding last year's performance; third, we continue to innovate across our entire portfolio of solutions. Our teams won another Edison award. Avaya Spaces was added to the Gartner Magic Quadrant. We introduced public UCaaS and CCaaS offerings to the market. And on the AI front, we are making significant investments, both organically and through partnerships with Afiniti, Google and NVIDIA, among others.

Lastly, we made decisive moves to enhance shareholder value and improve our capital structure through effective execution of our share repurchase program and by improving our balance sheet by paying down debt and extending maturities.

By all measures, it was an exceptional year across multiple dimensions of our business. Looking forward, as we continue to build on our momentum and reposition the company, we will begin reporting annual recurring revenue or ARR as a new performance metric. Not only will this provide increased transparency into our cloud growth, but it measures us against our cloud peers. Kieran will share additional details, but let me give you a snapshot of FY '20. Overall, ARR grew by more than 400% year-over-year. Contact center and our hybrid businesses were significant contributors to this growth.

With that, let me turn it over to Kieran.

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

For the quarter, non-GAAP revenue was $757 million. This compares to $726 million reported a year ago and $722 million in Q3 of fiscal 2020. As a reminder, during the quarter, GAAP and non-GAAP revenue have converged, and the non-GAAP differences generated by fresh start accounting are now immaterial. However, non-GAAP adjustments were material in fiscal year '19, and so from a year-on-year comparison, we speak to non-GAAP revenue for proper comparisons. We expect this to be the last quarter that mentions non-GAAP revenue comparability.

Our 4Q performance was led by North America, which delivered strong year-on-year growth for the third quarter in a row. North America's 4Q results also benefited from a larger contribution from the U.S. government sector than we had originally guided specifically because of the timing of deliverables associated with the social security administration contract.

As Jim mentioned earlier, revenue contribution from CAPS or Cloud Alliance Partner & Subscription remains a strong indicator of the rapid transformation of our business. This quarter, CAPS represented 33% of total revenue, up from 30% in 3Q. CAPS for full year of fiscal '20 in aggregate came in at 26%, which compares to 15% for the full year fiscal 2019. We continue to see growth from our subscription and strategic Alliance Partner offerings, further proof that OpEx and cloud consumption models are much preferred in the market over the historically dominant CapEx engagements.

As more of our software is contracted via subscription, the shift of our perpetual license business to an OpEx model benefits the services segment, while it adversely impacts the Product & Solutions segment. We are seeing this rebalance while still maintaining the same high levels of revenue coming from recurring streams and from software and services. For our fourth fiscal quarter, recurring revenue accounted for 63% of total revenue with software and services accounting for 88%. Fourth quarter product revenue was $269 million compared to $315 million in the year ago period and $262 million in Q3. As I just mentioned, within the product segment, we saw the impact of the shift to subscription as well as continued declines in hardware, driven by long-term market trends and exacerbated by the COVID pandemic. Benefiting from subscription, fourth quarter service revenue was $488 million, up from $411 million in the year ago period and $460 million in fiscal Q3. Throughout the second half of fiscal 2020, subscription adoption has increased both from the conversion of COVID temporary free licenses and the continued rapid acceleration of our customers driving a digital transformation across their enterprise. Digital transformation initiative has helped increase contact center revenue contribution of our total business from just about 30% of our revenue 2 years ago to 40% for all of fiscal 2020.

Turning to our gross profit metrics. Non-GAAP gross margin was 61.2% in the fourth quarter compared to 60.6% in the year ago period and 61.1% sequentially. Non-GAAP product gross margin was 60.2% compared to 64.4% in the prior year and 60.7% in the third quarter. Our larger revenue contribution from our strategic alliance partners in the quarter contributed to the quarter-on-quarter product gross margin decline. Non-GAAP services margin continues to improve, driven by subscription. This quarter, services gross margin was 61.7% compared to 57.7% in the prior year and 61.3% in Q3.

Turning to total profitability margin and cash flow metrics which was strong for both our fiscal Q4 and fiscal year 2020. Fourth quarter non-GAAP operating income was $170 million, representing a non-GAAP operating margin of 22.5%, down 20 point -- basis points year-on-year, while adjusted EBITDA was $200 million, representing an adjusted EBITDA margin of 26.4%, up 110 basis points year-on-year. Our continued disciplined operational execution and additional cost savings related to COVID, such as minimal levels of travel expense, offset cloud, R&D and go-to-market investments made in the business during the period.

Turning to cash flow. We generated $70 million in cash flow from operations or 9% of total revenue, contributing to a fourth quarter ending cash balance of $727 million. As a reminder, this cash balance reflects the repayment of the $50 million revolver draw that was repaid in July. As for the full fiscal year, our CFFO totaled $147 million, representing 5% of revenue. While on the topic of cash, during the quarter, we took advantage of favorable market conditions to extend our debt maturities by using the proceeds from a $1 billion senior notes offering to execute a partial paydown of our term loans. In addition, we extended maturities on another $800 million of term loans for 3 additional years. Between the notes offering and the term loan extension, we moved approximately $1.8 billion of maturities from 2024 out to 2027 and 2028. These actions extended weighted average debt maturities from 4.1 to 6.1 years, enabling us to reduce financing risk and improve financial flexibility.

Summarizing fiscal year 2020. Non-GAAP revenue was $2.879 billion, compared to $2.908 billion reported in the year ago period. Non-GAAP operating income was $610 million, representing a non-GAAP operating margin of 21.2%, down 40 basis points year-on-year. Adjusted EBITDA was $710 million, representing an adjusted EBITDA margin of 24.7%, up 40 basis points year-on-year. And finally, we exited the year with a CAPS run rate that is more than double for fiscal year 2019 ended. In addition to the performance we guided to and delivered upon, our capital allocation program for the year was successful across several fronts. We opportunistically bought back 26% of our outstanding common shares at well below current trading levels. We repaid a significant portion of our long-term debt, and we improved our capital structure by extending debt maturities.

Now turning to guidance for 1Q '21 as well as full year fiscal '21. Please note that all year-on-year revenue changes are expressed on a constant currency basis and all revenue amounts reflecting rates as of September 30, 2020. For the first quarter of our fiscal year 2021, we anticipate GAAP revenues of $710 million to $730 million, representing growth at the midpoint year-on-year. We expect non-GAAP operating margin for the first quarter to be between approximately 20% and 21%, and our adjusted EBITDA margin to be between $165 million and $180 million, or between approximately 23% and 25% of revenue.

Looking forward towards fiscal year 2021, we expect full year GAAP revenues of between $2.875 billion and $2.925 billion, representing a range of flat to 1% revenue growth as measured in constant currency. This estimate reflects continuing caution concerning uncertainty of a COVID-related resurgence on businesses globally as well as reflecting that more of Avaya's 2021 subscription bookings will be coming from our Avaya OneCloud, public and private cloud offerings in the second half of fiscal 2021, which are ratable transactions from a revenue recognition perspective.

We expect non-GAAP operating margin to be between approximately 19% and 21% for the full fiscal year. Similarly, our adjusted EBITDA margin should range between $660 million and $710 million or between approximately 23% and 24% of revenue, reflecting a continued increase in cloud R&D investments as well as go-to-market spending, especially in sales and marketing of our cloud offerings in the channel. Additionally, we anticipate that travel and expense will likely be returning to more normal activity levels in the second half of fiscal 2021 with an anticipated lessening of the impacts of the COVID pandemic.

In terms of cash flow from operations for full fiscal year 2021, we expect to be between 2% and 3% of full year revenue. This is primarily due to the expected continued acceleration in our shift to a subscription licensing model, which extends out the cash conversion cycle versus the prior predominantly CapEx licensing model, which has cash receipts more closely aligned with revenue recognition.

At this time, we expect our shares outstanding to be between approximately 80 million and 85 million shares at fiscal 2021 year-end.

Now before I hand the call back to Jim, I'd like to spend a few moments expanding on our existing CAPS transformational metric as well as provide some context around another metric that we are introducing, aimed at providing enhanced visibility into Avaya's progress towards becoming a recurring subscription and cloud company. As a reminder, we introduced a CAPS metric at the beginning of fiscal year '20. As you've seen from our results, we've made great progress during the year, and actually exceeded our 30% long-term target in the second half of the year, a full year ahead of schedule. This was largely due to the rapid uptake of Avaya OneCloud subscription. In fiscal 2021, and we expect the share of CAPS revenue will continue to grow meaningfully due to the continued acceleration of our Avaya, OneCloud family of offerings. We, therefore, expect that for the next fiscal year, CAPS will represent between 35% and 40% of our annual revenue, up from 26% for all of fiscal 2020.

To give investors a better forward-looking view into our broader-based OneCloud software solutions driving our growth. We are introducing a new annualized recurring revenue metric, or ARR. This metric is similar to what our industry peers report and will reflect only the recurring components of Avaya's OneCloud portfolio, which includes multiple deployment options based on customer choice.

We believe that OneCloud ARR provides investors with a better view into our long-term revenue growth potential and trajectory. Our OneCloud ARR grew from $35 million at the end of Fiscal Year '19 to $191 million exiting Fiscal Year '20 after just 1 year of our OneCloud solutions being in the market. Our expectation is that our OneCloud ARR will double by year-end fiscal '21, approaching 15% of our revenue. We anticipate, as we exit Fiscal Year '23, it will represent over $1 billion of annual revenue. As we rapidly transition to this new model, we do expect that there will be headwinds to our cash flow during the fiscal year '21 and fiscal year '22 period, as a subscription versus CapEx sales drive significantly different cash flow dynamics.

To explain some of the puts and takes during our revenue model transition, we have included in our supplementary earning materials, a simple illustration on Slide 18 of revenue recognition and its associated cash flow for a typical premise-based subscription deal. And comparing the mechanics of legacy perpetual license against subscription, the billing and cash flow of the latter follows a ratable pattern typical of a SaaS model. In this example, revenue recognition precedes cash flow creating a working capital headwind in the first year and a tailwind in years 2 and 3. Because of this, we will see a reduction or a deferral in cash flow in fiscal years '21 and '22. As we exit fiscal 2023, we believe we'll return to our long-term CFO target levels of between 10% and 13% of revenue. It is our belief that the OneCloud ARR metric will cut through any noise created by the transition and provide a better gauge of our progress to a cloud business model.

In summary, we believe the introduction of our OneCloud ARR metric, combined with our existing CAPS metric, will provide investors enhanced visibility into Avaya's transformational cloud journey.

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

Thank you, Kieran. Almost 2 months now into our new fiscal year, I cannot emphasize enough how far the company has come in the last couple of years, as Avaya continues on its transformation journey. Taking a step back, as I reflect on the year, we've moved to a very different place from the Avaya that many of you may remember. We are at the moment in the company's 20-year history to regain our leadership position. We've worked hard to align our company, our investments and our innovation with where the market is headed and more importantly, with what our customers want. Let me close by reemphasizing a couple of key points. Our global team has not only delivered on the promises we have made to our customers, but far exceeded expectations. In today's digital-first world the company has never been in a better position to leverage its true strength and the value proposition of our core platforms in the cloud. And demand for our large enterprise partners is strong accelerated by the need to automate, digitize and implement new ways of doing business. Looking at FY '21, we have an opportunity to help shape our customers' features, and we are embracing it. We will remain focused on public cloud, both UCaaS and CCaaS, private cloud and work stream collaboration platform with our Spaces solution. In closing, the company is successfully navigating through these challenging times, while we continue to strengthen our position to lead our enterprise customers as they accelerate their own transformation.

With that, we're now happy to take your questions.

(Operator Instructions) Our first question is from Lance Vitanza with Cowen and Company.

Can you hear me? It sounds like there's some cassette play on the call.

Okay. Great. Great job on the quarter. I mean it sounds like everything was better than expected, but was there any revenue that you think was pulled forward from the first quarter? You mentioned in the prepared remarks, the SSA contract. Could you quantify that or provide some additional color around that circumstance? And then I'm wondering, is that pull forward, the reason that the low end of your revenue guide for the first quarter is down year-over-year?

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

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

Yes, yes, sure. Let me start and obviously, I'll turn it over to Kieran. So first, obviously, in the midst of COVID, I think it's prudent at this particular point of time, obviously, to have significant cash. And I think at the same time, I think it's also noteworthy to take a look at just how aggressive we've been in 2020, right? We -- first of all, we paid down 8% of our debt. We repurchased 26% of our shares. Kieran pointed out that we basically refinanced and did an amend of extend for close to 65% of our debt moving it out from 4 to 6 years. So I think we've been fairly aggressive in a 1-year period, even with the last, if you will, 6 months of our fiscal year in the face of a worldwide pandemic unlike we've seen in our lifetimes.

So I would say that we are continuing to work with our Board around any and all options. But with that, I'll turn it over to Kieran. You may want to add a little bit more color?

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

Our next question is from Raimo Lenschow with Barclays.

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

Yes. No, that's a great question. Thanks, Raimo. So a couple of things. So one, on the ARR front, as Kieran pointed out, we've worked hard with our strategy that we laid out really becoming a cloud and SaaS company about 3 years ago. And I think we're right on track to executing on that strategy. So a real testament to the employees here we have at Avaya. They're executing extremely well. And it is, obviously, in the next couple of years to get that number crossing $1 billion is it's clearly obviously north of 35% range as part of overall revenue. So a pretty steep ramp. But again, we have high confidence in our ability to generate that performance. As far as ACO, we really are in the early innings. I mean, obviously, in the -- we're only in month 7, month 8 of the overall deployment of ACO, clearly the first quarter was just predominantly in the U.S. Over the summer months, we've added a few countries and we've just announced that we're going to be adding 5 additional countries, and they'll be onboard by the end of December.

So we have 12 countries now that we are now out and rolling out ACO, and we have expectations, obviously, as we move into the calendar year '21 that we'll continue to build on that.

We are excited, to say the least about where we are with the performance and acceptance of ACO, not only from our partner community, but from enterprise customers as well. And obviously, we are putting, if you will, a significant amount of investment into our ACO infrastructure and our go-to-market organizations and our support organizations, if you will, like customer success and inside sales. And more importantly, as we continue to roll this out in each of the countries around the world. And as Kieran pointed out, we're going to at least invest at least one point of our EBITDA performance back in, like we did this year, so back into the go-to-market functions as well as continuing, in fact, grow our investments in R&D as we go through 2021, in order for us to execute on the plan that Kieran just laid out.

So I would say we're really excited. I think we're right on where we thought we would be with ACO at this particular time. Obviously, doubling the number of customers in one quarter is significant. As we look at our backlog, as we look at how well we're integrating organizationally with Ring, I think, has actually been a real pleasant surprise for like the better term with it how the organizations are gelling and how we're collectively going to market. And we're -- as I said, it's -- we really only have a handful of countries that have any more than about 3 months of go-to-market time under their belt, but we have high expectations in FY '21. And as we look at our funnel and our pipeline, I would suggest that we're pretty comfortable with what we're seeing on the horizon for our ACO market acceptance.

Perfect. And then a follow-up for Kieran. If I think about profitability, obviously, we're living lower travel costs, et cetera, and I get that in your guidance. But in what respect has these kind of crisis reshape how you think about kind of sales spending, et cetera, like it's unlikely we're going back to the old normal, COVID be like new normal, like how much your guidance (inaudible) like a new normal versus an old normal?

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

Our next question is from Meta Marshall with Morgan Stanley.

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

Yes, Meta, this is Jim. I'll address the first. So yes, on the contact center -- yes, we're -- obviously, we announced the product roughly about 6 months ago. We're actually quite pleased on our progress to date. To date, we're predominantly more around sort of a digital solution with our contact center. We have follow-on releases as early as in the next I would say, 2 months or so, where we'll be moving outside of the U.S. and Canada.

So we'll be moving to roughly about, I'd say, 30 countries, plus or minus, associated with that. We have enhanced obviously, features and content that we'll be building into the product in very short order around omnichannel, bring your own carrier and a number of other significant features in the marketplace. We have the teams deployed. We're ramping up, obviously, our go-to-market functions in order to go, execute and sell that with apartment community, but as well as our service provider community and our direct workforce. One of the reasons why we brought Stephen Spears on to the company back in September, who's a proven cloud leader in his previous jobs, and we're already making and enhancing, I should say, all our go-to-market functions to provide the capabilities needed as well as the systems to execute on that.

So we're -- we think we're in very good shape. And what I'll do is I'll turn it over to Anthony, who is here with me to give you maybe a little bit more insights into sort of where we are in the progression.

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

Yes. Just in terms of kind of percentage of revenue or initiatives to push the customers to those new products?

Kieran. So I would tell you, we are seeing, obviously, with subscription with significant uptake, as we pointed out, a key component of that is obviously with the contact centers. And really deploying our subscription offer out there, it's been accepted far beyond even our wireless expectation. Our contracts are in the range of 3 to 5 years. So it's a nice entrée into fortifying our relationship with our customers, but more importantly, providing them an easy avenue to upgrade the technology and entrée into cloud.

We are also seeing, as we now have a year under our belt with subscription, a number of those customers coming back, as you would expect, and asking for at this time, private cloud solutions to take sort of subscription to the next level and really moving to an overall private cloud solution of, again, which we're excited about with the opportunities in front of us. So we're seeing nice growth in 2020 in contact center. So really off the heels of subscription, and it's actually executing to our plan on an entrée, if you will, to the cloud. So Kieran, I don't know if you want to add any more to that or not.

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

Our next question comes from Samik Chatterjee with JP Morgan.

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

Yes, sure. Kieran, do you want to take that one and I can add a little bit more at the end.

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

Sorry, maybe I'll just ask my follow-up and which was also for Kieran here. Kieran, you're guiding to about a $300 million increase in CAPS' revenue and based on your guidance for total revenue growth being kind of 0 to 1, that would imply about like $250 million to $300 million decline in the remainder of the business.

So I just wanted to see if you can give me kind of the broad buckets there of what are the primary areas that are driving that decline of 250 to 300? I understand the [OneCloud] subscription, but I don't think that drives some of this decline. So that would be helpful if you can bucket that for me.

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

Our next question is from Asiya Merchant with Citigroup.

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

Sure. Yes. So I mean, firstly, I would be naive if we didn't acknowledge that the COVID pandemic is still out there. And we feel we've got a pretty good insight into our customers from a funnel perspective, as Jim pointed out, and we think we've got good control of the business. And quite frankly, we've seen some of our guys reporting internationally, especially in some of our European countries that the businesses are shut down almost entirely. And that's always a concern that you have to acknowledge. So that's the one thing just tactically that we would think about. Over the longer term, I mean, we really do see more of the business migrating to subscription. As I pointed out in my prepared remarks, we expect that more of that subscription -- our subscription bundles are going to be delivered more as a service, so more cloud content, which means we'll be taking more and more of that ratably.

So while we should see an increase in bookings as reflected in our ARR metric that we're talking about, more of that revenue is going to come after -- over time. We are doubling down, as Jim pointed out, on the investments that we made from a cloud perspective, especially from a CCaaS perspective. And then we're funneling, obviously a lot of money into our go-to market. We've had a good opportunity over the last 6 to 8 months to really learn a lot about selling public cloud and understanding what it takes to fully support that end-to-end. So those are the types of things that are factored into the next year from an EBITDA perspective. And I think we have that pretty well bracketed in terms of where we should be. I mean, I think we've demonstrated that time and time again, were pretty prudent in how we manage our cost and expense, and we should have that pretty tightly managed.

Longer term, the opportunity to truly scale our cloud offerings is really going to give us the ability to expand. It's going to give us the ability to expand our margins. We'll become more efficient from a cloud go-to-market perspective. And we think there's opportunity in our sales go-to-market as well, as we've always said. We think we'll continue to see some improvement in our product gross margins, as we start to move away from hardware.

Our next question is from Rod Hall with Goldman Sachs.

This is Bala Reddy on for Rod. I just want to double (inaudible) CCaaS momentum there. I wanted to see if there is anything that you could do to help us understand the size of it and how big it was? And then maybe talk about -- talk a little bit about the sustainability of that business too? And I have a follow-up.

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

Sure. What we're seeing is that the take-up rate is quite interesting with our customer base. What we find is they're approaching us on the CCaaS' pure cloud public part of our business. And as it starts to roll out in multiple countries, we started to see that funnel build. I mentioned a little bit earlier that it's doubled just within the quarter alone.

In terms of the sizing, it's going to depend on how quickly we get the rollout in each of those separate countries. And if we see that, that customer doesn't sort of roll immediately into a public cloud solution, a lot of the times, they start to see the breadth of the portfolio and move into our private cloud solutions or our hybrid type of solutions. So you may see, and we do see a distribution of the customer coming into our store front looking for a public cloud CCaaS solution, but ends up leaving the store procuring a hybrid or a private cloud solution or sometimes enhancing their on-prem through subscription. So that's what we're seeing. So you're seeing that some of those numbers spread across that particular portfolio because we have that particular breadth.

Our next question is from Catharine Trebnick with Colliers.

Congratulations on the strong quarter. My question has to do with the change you're seeing in sales. With the pandemic, you're seeing more digital marketing, even the VARs looking to switch more to digital marketing framework, fewer face-to-face meetings as you denoted, even happening now in Europe. So what initiatives are you putting together for this change. And I see -- my take, I think, will be the new normal. And then is that affecting the size of your sales force? And are you shifting people maybe to do more inside sales, et cetera? Could you just kind of go through that for me?

Yes, sure. This is Jim. So that's a great question. And obviously, one of the reasons why we brought Simon Harrison on, who joined us back in January as we sort of refocus and double down on our overall marketing efforts here within the company and Simon and the team have been doing a great job, especially as you point out, in the world of digital. And I'll ask Stephen Spears who is here with us to add a little bit more color to that. But as far as our overall workforce, and what are we shifting, we are under a bit of a transformation within our go-to-market efforts. We are obviously adding to, not only our inside sales teams globally, but also customer success teams as well, as we deploy more of our cloud solutions out into the marketplace.

And secondly, we're adding a number of, what I'll call, specialists in really generating cloud, especially with our larger enterprise customers. And in fact, we've added a number of folks into the organization that have the experience to work with partners. It's not only we're transitioning our current bars from hardware on-prem type sales but also adding a number of new partners that are solely -- have their expertise in delivering cloud solutions to the marketplace.

So there's been a fair amount of transformation underway. I think you'll see a bit more here in the company, so that we're in a position to leverage and satisfy our customers' demands with our overall cloud solution. So it's actually pretty exciting. And even the current Avaya team is actually very excited about an opportunity to drive and sell and actually go to the customers with the solutions that they require. But a little bit more insight into the actual -- what we're doing from an overall marketing perspective. Stephen, I don't know if you want to add anything or not?

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

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

Yes. Congratulations on the strong results this year. In terms of the subscription bookings, I think you said $400 million in fiscal '20 here. What -- how much of that $400 million are you likely to recognize in fiscal '21?

Kieran, do you want to take this one?

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

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

Kieran, do you want to add?

Yes. So honestly, I don't have it at the tip of my fingers right now. We did move some of our largest BPOs back in third quarter -- in second and third quarter. So I know that very clearly, 2 of our largest contact center customers were moved. We've also had a couple of big banks. I tell you what, maybe give me a chance to come back to you guys on that one. I mean, we've been trying to manage it from a migration perspective, given when the natural renewal cycle comes up but we have moved, like I said, couple of our bigger banks and a couple of our larger BPOs.

Yes. I think, Kieran -- I think the matter point is that we're at our very early stages of that transition on the contact center. So very early innings.

Mike, the other thing we're starting to see now in last quarter is the fact that we've won a number of new customers with our subscription holder. So it's originally designed, obviously, to go after our installed base and enhance our customer base that was predominantly on our maintenance contract and then provide accessibility to new technology and drive, if you will, that OpEx model. But the solution has been so successful, and we're starting to see a number of greenfield new customers sign on to subscription, and we expect that will continue as well. So again, another opportunity for us as we move into 2021.

Great. And then just last on Professional Services. How have they been doing lately? And I guess, do you recognize those kind of at point in time as well? Or that gets built into a ratable recognition?

This is Kieran. So services is all tied into 606 accounting to a percentage of completion. So as you deliver -- unless there's very specific milestones and acceptance criteria for the customers. So now it tends to be just based upon deliverables.

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

And our final question is from Hamed Khorsand with BWS Financial.

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

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

As far as the overall -- from a financial perspective, I don't know, Kieran, what color you can add to that or not.

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

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

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