Markets

Avaya Holdings Corp (AVYA) Q4 2019 Earnings Call Transcript

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Avaya Holdings Corp (NYSE: AVYA)
Q4 2019 Earnings Call
Nov 20, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Suzanne, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Avaya Holdings' Fourth Quarter Fiscal 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Michael McCarthy, Vice President, Investor Relations, you may begin your conference.

Michael W. McCarthy -- Vice President of Investor Relations

Thank you, operator. Welcome to Avaya's Q4 Fiscal Year 2019 Investor Call. Jim Chirico, our President and CEO, and Kieran McGrath, our Executive VP and CFO will lead this morning's call and share with you some prepared remarks before taking your questions. Shefali Shah, EVP, Chief Administrative Officer and General Counsel, and Chris McGugan, Chief Technology Officer, are also here for today's call.

The earnings release and investor slides referenced on this morning's call are accessible on the Investor page of our website as well as the 8-K filed today with the SEC, which should aid in your understanding of Avaya's financial results. All reference to financial measures and year-over-year comparisons will be to non-GAAP numbers, except where otherwise noted. We have included reconciliation to such measures to GAAP in the earnings release and investor slides, which are available on the Investor page of our website.

We may make forward-looking statements that are based on current expectations, forecasts, and assumptions, which remain subject to risks, uncertainties that could cause actual results to differ materially. Information about risks and uncertainties may be found in our most recent filings with the SEC, including our Form 10-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 of facts or circumstances change, except as otherwise required by law.

I'll now turn the call over to Jim.

Jim Chirico -- President and Chief Executive Officer

Thanks, Mike. Good morning everyone and thank you for joining us. This morning, I'll provide you with my perspective on our performance and strategic priorities; then Kieran will take you through the details of the quarter and our outlook for the fiscal year. We will then open it up for questions.

With that, let me provide a brief summary of the quarter. In Q4, we delivered $726 million of non-GAAP revenue, below our guidance, primarily driven by a delay of the social security administration that was previously discussed. Kieran will provide additional details on SSA. Overall, I'm pleased with our Q4 performance as the rest of the business executed consistent with our expectations. Our revenue profile this quarter reflected a continued shift to a software and cloud-based business. Notably, software and services as a percent of revenue increased to 83% and recurring revenue was 58%.

In Q4, we continued to deliver on our leading business model. Non-GAAP operating income came in at the top of the range at 23%. Adjusted EBITDA was over 25%, up over 200 basis points quarter-over-quarter and year-over-year, further demonstrating that, from a profit perspective, we continue to be one of the best in the business. Our performance drove cash from operations of $66 million, or 9%, which exceeded expectations.

Our cash ended the year at $752 million, up $52 million year-over-year. Avaya's ability to generate cash sets us apart from our peers. This allows us to make the necessary investments in our people, the necessary investments in new technologies and innovation and our cash position also allows us to deliver on our capital allocation strategy.

It is important to note that the communications landscape continues to rapidly evolve, requiring a customer-led approach. We progressed against each of our customer focused priorities presented at the outset of fiscal year 2019. First, we've expanded our existing partnership and entered into new ones that broaden our cloud offerings and extended our market reach. In 2019, we invested significantly in building out our ecosystem of strategic partners, including most recently our Ring partnership as well as the work we are doing with Amazon, Google, IBM, Verint, Salesforce and Affinity, which is just the beginning and reflective of the new Avaya.

These partnerships are a force multiplier and significantly expand our capabilities, which in turn will expand our revenue growth opportunities. Forming these partnerships allows us to aggressively and decisively address customer opportunities and deliver unique and differentiated solutions.

Secondly, we amplified and aggressively built out our cloud capabilities to accelerate growth through investments such as ReadyNow, our private cloud offer, that enterprise customers are demanding. Thirdly, we are innovating in our core and continue to transform to a software subscription and recurring model. Recurring revenue was up 190 basis points year-over-year. Fourth, we drove continuous improvement in our business model and profitability, and lastly, we set the table to execute on our capital allocation playbook in FY '20.

This provides a good segue to update you on the overwhelming enthusiasm we're receiving on our landmark partnership with RingCentral. This is game changing. It's tipping the scales and is responsive to our customers' and partners' request for a couple of years, which is that we provide a leading Avaya branded UCaaS solution.

Avaya Cloud Office or ACO provides Avaya with an opportunity to unlock value from a largely un-monetized base and significantly expands our TAM. ACO helps accelerate our transformation to growth, has favorable unit economics, and is accretive to operating margins. The partnership enables Avaya to focus its investments and drive growth in CCaaS, CPaaS collaboration and private cloud, and it allows us to fortify our position, preventing pure plays from coming up from SMB by providing our partners and customers with a key Avaya UCaaS capability that rounds out our portfolio.

This trailblazing partnership is off to a great start. It requires alignment and commitment, which clearly exists on both sides. First, we are working lockstep with RingCentral to launch ACO in late first quarter of next year. Second, our endpoints should be qualified on Ring's own RCO offer in January. This provides us with another channel for our newest J Series endpoints. Third, we are coordinating with our vast partner ecosystem to build out internal and external capabilities to support the first quarter launch.

Over the last few weeks, I've personally met with dozens of customers and partners globally to hear from them firsthand. The feedback, enthusiasm, and interest from customers and partners in ACO has been tremendous, in fact, exceeded my expectations. Each and every day, the momentum continues to build.

Now let me share how Avaya is uniquely positioned to drive the industry forward in what I'm calling blended cloud communications i.e., in a world where customers are looking for public, private, and hybrid solutions. Our wholesale cloud offer sold by our channel partners around the world knocked it out of the park. We increased more than 140,000 seats in Q4 and that's just one quarter, doubling what we did in the June quarter. This brought our total public cloud seat count to over 0.5 million, up approximately 160% year-over-year and 39% sequentially. This speaks volumes on the value of the Avaya brand and our global scale, as well as the commitment of our partner community to sell our cloud offers. It also provides proof positive that our channel can successfully sell cloud, and it makes it crystal clear to me that we'll be able to truly move the needle with ACO.

Our ReadyNow private cloud offer launched in March. The rate and pace of the market demand continues to improve and we ended Q4 with a TCV of approximately $90 million. This solution was developed and designed in collaboration with our customers and is targeted at the enterprise and mid-market segments that require unmatched reliability, security, and scale in a private cloud delivery model.

Here are a couple of ReadyNow customer wins, just to give you a flavor for why this is such an important differentiator and plays a significant role in providing our customers with a solution that meets their specific needs. A leading home and commercial materials manufacturer wanted to move to the cloud. They had several significant concerns, first, being able to leverage their existing investment in Avaya endpoints; second, retaining their contact center routing and voice response capabilities, which takes significant time to invest and develop; third, ensuring that there is a robust disaster recovery capability in place. In a highly competitive process, our ReadyNow solution was the only cloud option that could address and mitigate these concerns. When it comes to private cloud, Avaya has the flexibility, scale, and breadth that simply cannot be met by a public cloud model.

The second win is with a business process outsourcer that provides communication services to thousands of customers worldwide. The company had invested significant capital to service their customer base and wanted to migrate to an opex model in the cloud. Public cloud cannot deliver the flexibility and the deployment model required to support the global footprint of the company and the additional high value capabilities required such as speech recognition and attribute-based routing. Avaya ReadyNow won out through a process where we showcased live examples of our unmatched technical capabilities.

Finally, let me talk about our industry-leading services capabilities. We have over 3,000 dedicated professionals globally, a scale unmatched among pure plays. Let me highlight some examples of the successes in our maintenance professional services and in our ability to drive renewals and upgrades. First, we achieved our best maintenance renewals of the year in Q4, up approximately 4 points from the start of the year. This reflects the commitment of our customers to Avaya, but more importantly underscores the value that we are delivering day in and day out.

Second, we drove significant improvement in our professional services bookings in Q4, up 43% quarter-over-quarter and 39% year-over-year, driven by increased traction of our contact center solutions as well as consultative services. Third, our services-led program provides a frictionless upgrade path to our latest releases. It has been an overwhelming success. Just last quarter, we upgraded 345,000 lines. As a result, we are seeing improved renewals, services pull-through and our customers are delighted to experience the latest innovations, features, and functionality reinforcing that our technology is compelling and drives value.

Let me share a few more data points on how we're successfully competing in the market. In the fourth quarter, we had our best product in 1x service bookings quarter in the last two years, approximately 10% higher than the average during the same period. Contact center showed positive signs with our best bookings growth for the year. The combination of public and private cloud seats grew to nearly $4 million. We added roughly 1,600 new customers and signed 109 transactions with a TCV over $1 million. For the full year, we signed 352 deals over $1 million, which included 40 deals over $5 million and nine deals over $10 million of TCV. Our ability to sign and deliver large-scale global deals is unmatched. Our TCV came in at approximately $2.4 billion, consistent with our expectations.

We now have the platform to capitalize on the market opportunity, which continues to grow. We are increasing our TAM and we continue to invest ahead of growth opportunities. As such, I remain bullish on our long-term growth perspectives. Going into FY '20, Avaya has significant momentum and we've never had a better portfolio of solutions to bring to market. The launch of ReadyNow, the RingCentral strategic partnership, and our IX-CC CCaaS solution that we announced last month, our momentum with our strategic alliance partners, along with the launch of subscription consumption models for our premise-based offerings are just a few examples of our progress.

Before turning it over to Kieran, I have a couple of thoughts to share on the strategic process that we recently concluded. When we initiated the review, we wanted three specific outcomes. We wanted to improve our technology capabilities and expand our offerings, return value to our shareholders and improve our balance sheet. We delivered on all three. The RingCentral partnership brings together two technology leaders. Combined with Avaya's execution capabilities, it unlocks significant value for all stakeholders. After an extensive review, this partnership represents a market-disrupting opportunity.

Second, following the completion of the review of the strategic alternatives in early October, we announced a return of $500 million of capital to our shareholders through a stock buyback, which we expect to execute against shortly. Third, we have already completed the previously announced pay-down of $250 million of debt that will result in a significant annual interest expense savings in FY '20 and beyond and further enhance our balance sheet.

Now Kieran will take you through the details of the quarter, the mechanics behind our capital allocation, and our outlook for Q1 as well as FY '20. Kieran?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Thank you, Jim, and 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. I will focus my commentary primarily on fourth quarter results, unless otherwise indicated.

For the fourth quarter, non-GAAP revenue was $726 million compared to $770 million in the year-ago period and up from $720 million in Q3. Our revenue results were below our forecast, primarily as a result of the delays with the federal government procurement process with respect to the Social Security Administration transaction, as well as due to foreign currency exchange rates, the impact of which was about $4 million in the quarter. As stated on our Q3 earnings call, our fourth quarter results were going to be heavily dependent upon the timing of the conclusion of the contracting process including related SOWs and purchase order of issuances related to the 10-year $400 million Social Security Administration opportunity.

One of the competing vendors lodged a protest against the award of the contract to us causing the delay. The delay pushed between $20 million to $25 million of product revenue out from Q4. We believe that given the Social Security Administration's need for this upgrade, coupled with the value proposition created by Avaya's products and services, this opportunity remains very much intact. That said, we must allow for the US government procurement process to run its course. Forecasting when this process might conclude is challenging. So for now, we are not including any revenue stemming from this contract with Social Security Administration in our Q1 fiscal 2020 guidance figures.

We did experience strong sequential product revenue growth performance in Q4, which was offset by lower maintenance revenue stemming from the declines in on-premise product bookings that have occurred over the past several years, and our customers' transitions to our private cloud offering. However, improved renewal rates have continued to partially mitigate the decrease in maintenance revenue. We drove robust bookings in the fourth quarter and our quarter-end TCV remained flat at $2.4 billion.

Consistent with our prior quarter, cloud represented approximately 11% of non-GAAP revenue. During the quarter, we continued to drive strong growth in the public cloud, adding 142,000 seats, representing an increase of about 160% year-over-year.

As cloud revenue is ratable in nature and the partner SPIFFs and rebates are paid in period of sale, the current period cloud revenue contribution is heavily impacted on the front-end. I'll provide more color about the KPI we will use in fiscal year '20 and beyond in just a few moments.

Fourth quarter product revenue was $315 million compared to $336 million in the year-ago period. Sequentially, we experienced the expected seasonally large increase in CC product bookings and revenue and we're pleased by our performance in CC. UC, while sequentially growing modestly in the quarter, continued to be impacted by the lack of a competitive UCaaS offering, which we have now addressed with the announcement of our partnership with RingCentral.

We expect to have Avaya branded ACO solution in market late in Q2 fiscal 2020 and with measurable revenue contribution anticipated in the second half of fiscal 2020. Fourth quarter services revenue was $411 million compared to $434 million in the year-ago period. As previously mentioned [Technical Issue]

Operator

Thank you very much. We'll just be pausing for a moment while we reset the playback. Thank you.

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Hey Suzanne, do you want me just to continue to read?

Operator

Yes. Please go ahead at this time and we'll try and link everything back together. Thank you.

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Fourth quarter service revenue was $411 million compared to $434 million in the year ago period. As previously mentioned, we expect maintenance revenues to continue to decline due to the transition of their public cloud, especially UCaaS and private cloud offerings. We ended fiscal 2019 with $90 million of ReadyNow total contract value in backlog and we expect material revenue contribution to our private cloud results from ReadyNow in fiscal 2020.

Geographically, the US accounted for 54% of our revenue, while EMEA, Asia-Pacific and Americas International represented 25%, 12%, and 9% of our revenues respectively.

Turning to our gross profit metrics, non-GAAP gross margin was 60.6% in the fourth quarter compared to 63.4% in the year-ago period. Gross margins overall were primarily impacted by a large multi-year international services project. Non-GAAP product gross margins were 64.4% compared to 67.3% in the prior year, sequentially up from 63.8% in Q3. Year-over-year declines continue to reflect the impact of product mix due to scaling and the ramping of our cloud solutions globally.

Non-GAAP services margin was 57.7% compared to 60.4% in the prior year, sequentially down from 58.8% due primarily to higher costs in APS associated with a large international base multi-year project, which was completed during the quarter.

Turning to total profitability margin and cash flow metrics, our 4Q and full year results were positive. Fourth quarter non-GAAP operating margin was $165 million, representing a non-GAAP EBITDA operating margin of 22.7% year-on-year, up 230 basis points, while adjusted EBITDA was $184 million, representing an adjusted EBITDA margin of 25.3%, up 220 basis points year-on-year.

Further, we generated $66 million in cash flow from operations, bringing our full year total to $241 million or 8% of total revenue. During the quarter, free cash flow came in at $37 million, contributing to a fourth quarter ending balance of $752 million in cash and cash equivalents on our balance sheet. This strong cash flow is a direct result of our continued and diligent management of working capital as well as a result of improved collections this quarter.

I'd like to take a moment to provide some insight into the impact of the game-changing RingCentral partnership and their $500 million investment on our financial statements. We closed the partnership transaction on October 31st. At that time, RingCentral made a $125 million cash investment in Avaya in the form of preferred equity convertible stock at $16 per share.

Upon closing the transaction, RingCentral also paid $375 million to Avaya as a prepayment for future sales of Avaya Cloud Office and other license fees. This amount was primarily paid in the form of shares of RingCentral stock issued on November 12th. We sold the majority of those shares in an underwritten public offering executed with RingCentral on the date of issuance to reduce exposure to market volatility. We are holding the balance of the shares as we believe that there is uplift potential for both Avaya and RingCentral as a result of our partnership.

From an accounting perspective, we will recognize the pre-payment amount as a contract liability on our balance sheet. We will draw down against this amount with a one-time bounty with each ACO seat we turn on as well as for the recurring revenue that each seat generates.

Before moving on to our first quarter and full year fiscal '20 guidance, I want to touch on our capital allocation actions previously announced upon approval of our Board of Directors. As a reminder, with over $750 million of cash on hand at the end of fiscal 2019, we did not need to sell the RingCentral shares to meet either the daily operating requirements of the company or to initiate the capital allocation strategy. On November 7th, we paid down $250 million in term loan debt. This will result in annualized interest expense savings of approximately $15 million. We expect to begin to execute against our announced $500 million stock repurchase program shortly. The repurchases will be reported in our quarterly filings with the SEC.

Now turning to our outlook for the December quarter and our fiscal 2020 full year, after several years of mid to high single-digit revenue declines, we see fiscal 2020 as a year of transition for Avaya, away from significant revenue decline to one of revenue stabilization. Our portfolio will be significantly enhanced with the ramping of our ReadyNow private cloud offering, combined with public cloud offerings in UCaaS, our ACO in partnership with RingCentral, and the anticipated late-year availability of Avaya's own CCaaS offering, IX CC.

Please note that all revenue amounts are expressed on a constant currency basis, reflecting September 30th, 2019 foreign exchange rates. With the anticipated availability of our enhanced public and private cloud offerings mentioned above, we expect to see a turnaround in our revenue trajectory beginning in the second half of fiscal 2020. For the first quarter, we anticipate non-GAAP revenues of between $700 million to $720 million, representing a 3% to 6% annual decline, as measured in constant currency. We expect our non-GAAP operating margin for the first quarter to be approximately 21% and our adjusted EBITDA margin to be approximately 24%.

For the full year, we anticipate non-GAAP revenues between $2.82 billion to $2.90 billion, representing flat to a 2% decline in constant currency from the year prior.

While long-term we feel very confident in the expansion of our adjusted EBITDA margins generated from Avaya's movement to the cloud, in this year of transition, we do plan to invest heavily in systems, tools, and resources that help accelerate our progress toward the cloud. As such, we expect our non-GAAP operating margin for the full year to be between 20% and 21% and our adjusted EBITDA margin to be between 23% and 24%. This reflects approximately 1 point of incremental reinvestment into the business. We expect cash flow from operations to be approximately 5% or 7% when excluding the Q1 costs and fees associated with our strategic alternative evaluation process.

Finally, for the fiscal year, we expect our weighted average shares outstanding to be between 95 million and 100 million shares and to end the year with approximately 80 million to 85 million shares outstanding.

As we endeavor to provide our investors better highlights into the process -- the progress Avaya is making toward transitioning away from our premise-based history, I want to take a moment to talk about a KPI that we will be utilizing to measure this progress.

Our strategic partners and big trends [Phonetic] are critical to Avaya's near and long-term success. When we announced the RingCentral partnership in early October, we introduced a new KPI that captured the evolving high value and highly differentiated revenue contributions coming from our cloud, emerging technologies, and strategic alliance partnerships. We are calling this metric cloud and alliance partnership revenue.

In addition to our cloud revenue, when we include our emerging technologies and strategic partnerships, this KPI represented 15% of total revenue in fiscal 2019. In our October RingCentral partnership announcement, I mentioned that over the long term, we expect this contribution to double to approximately 30% of total Avaya revenue. We look forward to sharing our progress as we proceed throughout the fiscal 2020.

With that, I'll turn the call back to Jim. Jim?

Jim Chirico -- President and Chief Executive Officer

Thank you, Kieran. I'll close by saying, Avaya has a broad product portfolio and a strong technology road map. We have key strategic alliances in place, our solutions portfolio has never been more relevant, and we have a deep customer and partnership relationship. These relationships have taken years to form and they are the bedrock of our business. All of this, coupled with our strong business model, makes us well positioned to capitalize on the opportunities ahead of us in 2020 and beyond.

Before turning it over for Q&A, I want to remind everyone of our upcoming Avaya ENGAGE event held February 2nd through the 5th, 2020 in Phoenix. This year, the event will have a heavy focus on the future of communication and collaboration as well as the role we are playing in shaping the industry and will feature the full breadth of our solutions portfolio across the spectrum of UC, CC, premise and cloud. We are hoping that many of you will join us again for this program. Mike has the details and will be distributing them shortly.

With that, operator, we're ready to take questions.

Questions and Answers:

Operator

Well, thank you very much, gentlemen. [Operator Instructions] And our first question comes from Rod Hall of Goldman Sachs. Your line is open. Please go ahead, Mr. Hall. Your line is open. There is some static though.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Hey, can you guys hear me now?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Yeah, we can hear you.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Okay. Great. Yeah, this is Ashwin on behalf of Rod. I have a quick clarification and a question. I think you mentioned that the social security contract is not included in fiscal Q1 guidance, but can you clarify whether that is not included in fiscal '20 guidance as well, or is it included there?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Yeah. As I stated, we really believe that -- first of all, social security absolutely needs the upgrade. We believe the budget funding is still intact. We believe the partnerships with our -- the business composition that we have with our partnership -- partners is very strong and intact. So we think it's -- we think the deal will close. It's just a matter of timing and when it happens. Clearly there will be some impact from some of the services that are time-related to the year, but we would certainly expect to be able to recognize the product shipments in fiscal 2020.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

And just in terms of timing, are you thinking more fiscal Q2 or sometime in fiscal second half?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Honestly, as I said, because I was -- just because the process has taken a few twists and turns here, my expectation and my hope will be earlier rather than later, but I think I'd be premature in giving an exact date at this point in time.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Okay, great. And if you look at fiscal '20 total revenue guidance, you're calling for a year-over-year decline, part of that is FX. But what are you assuming in terms of decline in revenue from your current product portfolio?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Yeah. I think the way I would characterize our guidance for the year is we clearly want to recognize the fact that we've seen a great deal of shift occurring in the premise UC business primarily in the mid-market away to cloud offerings. And therefore I have to be realistic in anticipating those impacts in the first part of the year, and quite frankly, until we start to ramp ACO, which will be, as we talked about, very much second-half oriented. It's going to have a significant headwind to us throughout the year. We feel pretty optimistic about our CC business just because of all of the high differentiation that we have in our prem business as well, between our own offerings as well as those of many of our partners. So I would say that most of what we see as the headwinds here really come for the UC business mostly in the mid-market. Jim?

Jim Chirico -- President and Chief Executive Officer

Yeah. Let me just add a little bit. So I agree with Kieran. We'll have the product available from the UCaaS perspective late next quarter, which is actually the end of our second quarter of our fiscal year. I will tell you that there is a lot of pent-up demand and I can tell you that each and every day between the combined teams, the go-to market motion continues actually to gain momentum. But the reality of the fact is, this for us will be, as Kieran pointed out, a second-half play, but we really see this as we move sort of out of 2020, certainly into 2021 that this is -- this will be a significant revenue driver for us as we move into '21. So we see this as a sort of a year of transition. We see that in fact we have a very large opportunity in the long run, but it's just going to take us a while sort of as you can expect to sort of gear this up as we go through the second half of our fiscal year. So it will have played an important role for us in '20, but beyond '20, it will play a more important role in each and every year as we continue to gain traction.

Operator

Thank you, gentlemen. [Operator Instructions] Our next question comes from the line of Lance Vitanza of Cowen. Your line is open.

Lance Vitanza -- Cowen and Company -- Analyst

Hi, thanks guys for taking the question. I actually wanted to focus on Slide 9 of the deck that you put out this morning with respect to payment and perhaps revenue share, and this is obviously on the ACO offering. The slide seems to suggest that maybe the result is better than what we and I think most analysts were expecting. So I just wanted to kind of walk through this a little bit. My understanding is that the customer will be sold by Avaya and the channel partner essentially, it will be installed by Avaya, will be serviced principally by Avaya, and built though by RingCentral. But in looking at this slide, it suggests that maybe with respect to the billing, I don't have that right. Could you sort of comment on that? And also I have a follow-up question after you do. Thanks.

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Thanks for joining. This is Kieran. I'm going to turn that question over to Dennis Kozak who is leading our partnership with RingCentral. Dennis?

Dennis Kozak -- Senior Vice President, Business Transformation

Yes, sure. Good morning. So I think you had it right in your recap. Essentially the entire customer life cycle is managed by Avaya from the sales and marketing, the partners, the on-boarding, the customer care, meaning the customer success function, the support function, and even the administration of the contract. But as it's a SaaS service, the usage is provisioned out of RingCentral's cloud. So therefore, it makes a lot of sense for them to generate the billing, right, because they have the customer usage metrics in order to do the billing against, but everything flows through Avaya, all touchpoints that the customer experiences will be through Avaya branded services, Avaya branded people, Avaya advantaged people and our partners.

Lance Vitanza -- Cowen and Company -- Analyst

Okay. So then my follow-up is just from an accounting standpoint. So Ring collects the cash from the customer and then remits a percentage to Avaya or some portion of that, I should say. I'm not trying to qualify or quantify what that portion is, but whatever that portion is, is it that portion then that is booked as gross revenue at Avaya or is Avaya booking more or less?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

So obviously, Lance, as you rightly stated, we can't get into too much of the specifics due to some of the commercial sensitivities and agreements that we have with Ring, but essentially the payments to us come in the form of two components. One, when the seat is actually turned on, we receive an upfront payment or a or a bounty for, want of a better word. And then as well, we see a continuing portion as well that we'll recognize over time. So it's not really -- it's not really something that we are -- it's really not something that we're splitting it or paid only a certain amount. I mean, there is a formula involved that upfront is primarily in nature and then we'll get an ongoing recurring stream as well.

Now, just one point, given the prepayment that they've provided to us, we will then actually convert that prepayment essentially moving out of this contract liability section into revenue and therefore into our I&E and our P&L, since we've been, if you will, paid in advance for those seats.

Operator

Thank you. Our next question comes from Raimo Lenschow of Barclays. Your line is open.

Mike -- Barclays -- Analyst

Hey, this is Mike on for Raimo. Thanks for taking my question. I just had a -- I had a question on the new KPI that you guys discussed regarding how it would be cloud and alliance. So I just wanted to get a little bit deeper on what emerging technologies and strategic partnerships are part of that today because obviously there is the gap between the 11% and 15%? What are those strategic partnerships that are kind of being bucketed into that? Is that the Verint and Affinity and what type of growth rates are you -- are you also expecting kind of growth from that side of it as well?

Jim Chirico -- President and Chief Executive Officer

Yeah. Hi, this is Jim. Yes, on Verint, Affinity, you could look at Salesforce and others as part of those strategic alliances. The reason why we're bucking them -- bucketed them all into one is basically because they were SaaS offer today. And in fact, if we want to represent pure SaaS revenues associated with the company, it's important to make sure that we -- because we take into consideration all of the SaaS offers that we're providing to our customer base service. So I think it's more reflective of the actual sort of volume that -- when we move [phonetic] from an overall cloud into SaaS model. So I think it's a good way to measure our business, obviously, because we're -- see that that you've always cover the breadth of the market more than just individual pure play. So I think it's a great representation, so the answer to that is yes.

Are we seeing growth in those segments? Yeah. I mean, they're actually dealing with the emerging technologies and partnerships. We do project that we will have growth in those as we go into -- as we go into 2020 for sure because obviously cloud continues to expand in the marketplace. So the answer is yes.

Mike -- Barclays -- Analyst

Okay. That's helpful. And then just on the EBITDA margin guidance that was provided, the EBITDA guidance that was provided, could you go into a little more detail? I know you talked about that you'd be spending a little bit more due to some of the transitions that are taking place. Can you talk about kind of the puts and takes between SG&A and R&D on that and are there any target numbers for the R&D side, for example?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Yeah. So let me just start and then I'll turn it over to Jim. So as you know, we ended fiscal '19 at about 24.3% of adjusted EBITDA in aggregate and we've given guidance somewhere between 23%, 24%. So think of it as roughly a point of reinvestment. I'd say we've been pretty consistent on the [indecipherable] from a product perspective, from a development perspective as we go through time. We have recognized a little bit of synergy from a development perspective, but that has mostly been due to some real estate consolidation actions that we've taken and some savings that we've generated there. Otherwise, from a headcount perspective and a product perspective, we continue to invest there, but most of what you'll be seeing will be really in the tools to help on the go-to-market and I'll let Jim say a few words about that.

Jim Chirico -- President and Chief Executive Officer

Yes. So I mean, the fact is, if you take a look at our cloud R&D portfolio, from 2019 to 2020, we're basically going to be doubling our spending in cloud as far as a component of our R&D portfolio. And obviously that's extremely important for us and the teams are off executing to that, as we speak. When you take a look at the go-to-market motion, look, the fact of the matter is that really we're not a cloud company as far as being sort of publicly oriented. We have a wholesale offer we sell through partners. We have ReadyNow that we sell to the large enterprise. But as far as our overall go-to-market motion, we need to invest and we do it, bring those skills in from the outside. In fact, we're doing actually extremely well on recruitment and bringing in a number of industry leaders into the company that have the pedigree of cloud. And it's not just at the leadership position, but it's throughout, if you will, every level within the organization. So one of the investments we need to make is obviously driving that transition, as Kieran talked about it, in the cloud.

So we want to invest not only in resources and go to market capabilities and R&D capabilities -- resources, but we want to make sure we invest in the tools and the processing capabilities because it's a different model than an historic model as more of a premise-oriented company. So we decided that we were going to invest, which is I think a prudent investment, 1% or around the 1% mark of our EBITDA and invest that back into the business for sustainable growth in the future.

And again, we're quite excited about the recruitment process across the board in many of the functional areas and pipeline, frankly, is quite massive. So we're getting ourselves positioned for success, if you say the least, as we go through 2020 across many spectrums in the business. So I think it's a prudent investment and one that we need to invest back in growth and we will continue to drive that as we go through 2020. Previous couple of years, it was a significant investment in portfolio. Now it's been taking that to the next step, investing that back into the go-to-market motions and the process tools and capabilities that Kieran mentioned.

Operator

And thank you. Our next question is from the line of Asiya Merchant of Citigroup. Please go ahead. Your line is open.

Asiya Merchant -- Citigroup -- Analyst

Hey, thank you for the opportunity, guys. Quick question, if you could just help us with understanding what was the maintenance and professional services revenue contribution within your total services revenues, software and services revenues?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

No, I don't think we get that level of discrete until we put out our K, right? So I'm sorry, I'm a little ahead there. All I could -- I would say, maintenance has really behaved quite consistently, as we've seen over the past several years. So the impact of the bookings that we've lost from a premise perspective, especially on the UC side of the house over the past several years, that have a compounding effect. We've been able to mitigate it, as Jim pointed out, with the continuation of the improved renewal rates both since we exited bankruptcy and also even this particular year. So actually maintenance came in even a little -- pretty much right on where we expected, maybe even a little better. APS, even though it's relatively consistent on a quarter-by-quarter basis, there is and can sometimes be a little bit of fluctuation in there. We did conclude a rather large international billing, but I would have said, except for that, our APS business was a little on the weaker side this year. But we probably had the strongest APS bookings that we've seen certainly since the company has exited bankruptcy and we see quite a bit of firepower coming from that Professional Services business in fiscal '20, primarily because so much of our CC business requires such heavy customization into the customer environment. So that's really heartening well for our opportunities in that space.

Asiya Merchant -- Citigroup -- Analyst

Okay. That's--

Jim Chirico -- President and Chief Executive Officer

Yeah, if I could just add a couple of quick data points. One is, as Kieran pointed out, we did -- we really did a nice job with a program really being services led and really providing the path for our customer base that frankly was a couple of releases down to make a seamless, frictionless upgrade to our latest -- our latest releases and technology. 345,000 lines is significant and they're now up to the latest release. And in fact that was the base that was, for the most part, under attack by our competition because they were less relevant as they were multiple software releases down. So that played well for us and helped to stabilize the maintenance revenue.

Asiya Merchant -- Citigroup -- Analyst

Great.

Jim Chirico -- President and Chief Executive Officer

The other thing is that ReadyNow, the unit economics there, and it's primarily from our maintenance base moving to a private cloud, are actually quite accretive to the company, and again, extremely sticky for those customers to stay with us. So $90 million in just six months of TCV is quite significant, and as Kieran pointed out, we're looking for ReadyNow to become material for us as we go through the balance of this fiscal year.

Asiya Merchant -- Citigroup -- Analyst

Okay. And then on your guidance, obviously you're implying a strong significant second half from the -- both the RingCentral partnership as well as your ReadyNow revenues. If -- does that change the seasonality quite a bit for -- sorry about that. I don't know where that came from, but -- so does the partnership and the guidance change your seasonality as you look at for the remainder of the year from December through the rest of the year?

Jim Chirico -- President and Chief Executive Officer

All right. [Speech Overlap] Asiya, could you just repeat the back-end of it again?

Asiya Merchant -- Citigroup -- Analyst

Yeah, I was just talking about your visibility into the second half and how you're expecting seasonality to change because of your partnership with Ring.

Jim Chirico -- President and Chief Executive Officer

Right. That's a great question. So given where we have guided Q1, we would expect that the back end of the year -- in fact I believe in Q2 to Q4 would probably be somewhere, I'd say, slightly down to slightly up as we think about the full year. And that would be most particular in Q3 and Q4, as we've talked about with the RingCentral. Historically, we've tended to have strong quarters in the first quarter and the fourth quarter of our business. This year, because -- as we talked about before, because of the lack of the competitive UCaaS offering our arsenal at this very moment, we see some of that is pushing out to the back end. So I think we'll probably see historically more of our progress being back to Q4 and then more back to calendar first quarter again. I do think it's a bit of an anomalous year.

Asiya Merchant -- Citigroup -- Analyst

Great. Thank you.

Operator

Thank you. And our next question comes from Nandan Amladi of Guggenheim Partners. Your line is open.

Nandan Amladi -- Guggenheim Partners -- Analyst

Hi, good afternoon or good morning. Thanks for taking my question. So Jim, what are the natural boundaries for when you position your own cloud offering, the ReadyNow, versus the new ACO offering that will go to market over the next several months?

Jim Chirico -- President and Chief Executive Officer

Yeah. I mean, look, the ACO is more geared toward obviously a UCaaS public cloud offer. It does have the capability to span from the S as well as the MPs in fairness. It does have an opportunity even for our enterprises where they're looking to potentially move some of the businesses into a public cloud. So we see ACO has the capability to expand from very low, all the way up to sort of the high end of our business, but exclusive around a UCaaS offer.

Where we see ReadyNow, ReadyNow really plays in sort of the mid-market and up into our large enterprises and right now we're seeing it predominantly in our large enterprises where you are talking certainly north of 1,000 seats, in some instances, and in fairness, one could be as much as 50,000 to 60,000 seats on the deal that we signed last quarter. And we just signed a really significant deal in -- about a week ago that we'll talk about in our next earnings call that actually exceeds that.

So the ReadyNow is really primed for those large enterprises that want the same flexibility, capability, TCO associated, but they want to make sure that it's hosted in an environment such that it's private. So they -- both of these offers sort of complement one another, if you will, and they don't compete with one another. So we're actually excited about the opportunity to actually cover, if you will, the full breadth of the market. And most of the traction we're seeing today and most of the pent-up demand we're seeing at ACO is really more around sort of the mid-market piece of the business than sort of the small end of the business, which is actually quite exciting for us and that equally is exciting for Ring. So we think we have now the full breadth from the very low end through a master agent model, all the way up through our direct sales force selling ACO, and as I said, a great complement to the market that ReadyNow serves for us on the very high end of our customers that are moving away from sort of a maintenance orientation and one that provides the benefit of a cloud offering.

Nandan Amladi -- Guggenheim Partners -- Analyst

Thank you. And a follow-up for Kieran on the buyback. The average share count for the year seems to indicate that this would be fairly slow. I'm just trying to gauge the cadence of the buyback over the next quarter or two.

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Obviously, I hate to disagree with you, but the average that I just gave you said that we'd be taking out anywhere between 23% and 28% of our share count in the year. That doesn't seem slow to me.

Operator

Your next question here comes from the line of Meta Marshall with Morgan Stanley. Please go ahead. Your line is now open.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks. I just wanted to get a sense of with some of the change in engineering announcements yesterday, just who is kind of leading the IX-CC development now that kind of the old head of cloud has departed?

And then maybe a second question for me, just as you've gotten initial customer feedback on kind of the ACO partnership with RingCentral, have the size of customers been what you thought? You had tended to think that the larger customers would stay with private cloud and some of your smaller customers would move to ACO. Has that kind of proved out in customer feedback? Thanks.

Jim Chirico -- President and Chief Executive Officer

Yeah. So actually the leadership on the IX-CC hasn't changed. The IX-CC is a new platform, and that new platform responsibility has always resided within sort of the R&D function and the leadership in that IX-CC platform hasn't changed because that's always the responsibility of [indecipherable] R&D process. We did make a change to maybe where you're getting at and yesterday we announced a new leader that will be joining us, Anthony Bartolo from Tata, and taken the responsibility, if you will, for what we had, if you will, sort of a bifurcated R&D process with R&D and then if you will cloud R&D.

A couple of reasons why we did that move, frankly is the fact that obviously the Ring announcement was a pretty decisive move in the direction we're going to take on UCaaS. That has enabled us to consolidate our efforts in our R&D portfolio. And under Anthony's leadership, we will indeed be doing exactly that, consolidating our development of, if you will, core and cloud products and we're doing that because that's a response to our -- number one, our customers, more importantly as part of what our deliverables are on the converging trends between cloud, UC, CC and prem. Almost every deal we sell now is a converged deal. So this will enable us as we go forward now the ability to streamline our execution and in fact bring products to market faster.

But shouldn't be lost in this announcement is the new role that Chris McGugan is going to play for us, which is critical and that is being the CTO and really being the customer executive for Avaya. We didn't have that role before. It's one, again, in the spirit of what we're hearing from our customers and really providing us still the opportunity to continue to build on our leading technology and innovation road map. So it's an extremely important role and Chris is the best qualified technologist by any stretch of imagination. I'd stand him up against anyone in any other company. And now we're going to be able to take advantage and leverage and build off of our technology leadership. And the way I look at it, Avaya is extremely fortunate to have two proven leaders in Anthony on the R&D side, Chris on the technology side, driving our portfolio forward. So I think it positions us frankly to a position that we hadn't been at previously. So we're quite excited to have these two senior leaders drive that portfolio forward as we look to the future.

And I didn't quite catch your ACO comment.

Meta Marshall -- Morgan Stanley -- Analyst

Just that you had expected kind of larger enterprise customers to stay with private cloud or on-premise and kind of smaller customers to move to ACO. Has that been kind of what you've heard in initial customer feedback or has there been any larger customers maybe interested in ACO or smaller customers still willing to stay with private? Just any initial feedback on size of the customer.

Jim Chirico -- President and Chief Executive Officer

I'd tell you that our initial feedback and it's coming from a couple of different Gartner symposiums that we've been at, and by the way, we've been in there hand and glove with Ring, by the way, and a couple of our larger enterprise customers have come up to us and said, well, thank god. We were just going to go RFQ because senior management, our executive management wanted us to introduce a public cloud offer. And now that Avaya has it, we're going to go with you guys. So as I mentioned earlier, I would obviously pick a number, significant 75% of the volume will be in the S&M space of the market, but it will certainly be an opportunity for us with the ACO offer to solution needs of our large enterprises as well, which is significant, because you can just imagine the number of seats that are associated with some of these larger accounts and we're collecting and building and working with our partners. And in fact, we have had multiple -- Vlad and I were just here in New York just a little over a week ago for a two-day symposium. Vlad and I meet on a weekly basis; the teams meet every single day. We have joint go-to-market activities, we have joint development activities, we're meeting with our partners together. So there has been a tremendous amount of time and energy and really -- they're really driving the solution. But as I mentioned, we can't wait to get it out, in fairness, and we're working really hard on making sure that we get the right -- we get the solution out, which will be a differentiated solution and one that our customers can actually implement seamlessly and frictionally [Phonetic]. And as I said, the opportunity on devices, not only from an ACO perspective, but from an RCO perspective and so far the teamwork and engagement has been -- has met, if not exceeded all of our expectations.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Hamed Khorsand of BWS Financial. Your line is open.

Vahid Khorsand -- BWS Financial -- Analyst

Good morning. Thanks for taking my question. This is actually Vahid calling in for Hamid. The question, I may have missed this, there were some technical difficulties on the call. So I may have missed this already, if you've already said it. But what impact does RingCentral have on your 2020 guidance? And then I have a follow-up to that as well.

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Yeah. Obviously we're not going to be specific just based upon this understanding in agreement that we have with Ring, we're not discreetly reporting on those results. All I can say is that it is going to have a measurable benefit to our second half of the year, as we start to ramp the ACO volumes.

Vahid Khorsand -- BWS Financial -- Analyst

And then my follow-up is, in terms of investing in R&D, will that number be reduced in 2020 because of your partnership with Ring?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

No, I think what it gives us the ability to do is actually truly refocus and put more wood behind the arrow, well, Chris is nodding here, next to us. So we'll want to make sure that we get more of our investment into cloud, into our CCaaS solution as well as into ensuring our ReadyNow, our own private cloud investments are completed. So we don't see any change to our investment, but really more of a focus on our remaining product.

Vahid Khorsand -- BWS Financial -- Analyst

Thank you very much.

Operator

Thank you. And for our final question for today, it is Mike Latimore of Northland Capital. Your line is open.

Vijay Devar -- Northland Capital Markets -- Analyst

Yeah. Hi, thanks for taking my questions. This is Vijay Devar for Michael Latimore. Going back to R&D topic, so what percent of R&D will go to UC versus CC going forward?

Kieran McGrath -- Senior Vice President and Chief Financial Officer

That's not something we break out. I think what you did here -- Jim intimated earlier that we are -- that Chris is planning on doubling the overall investment that we were spending on cloud in aggregate this year, but it's not -- we don't break out the UC versus CC.

Vijay Devar -- Northland Capital Markets -- Analyst

Okay. Yeah. Thanks. That's helpful.

Michael W. McCarthy -- Vice President of Investor Relations

Okay. Suzanne?

Operator

Okay, great. Thank you very much, gentlemen. And I'd like to turn the call back over to Mr. McCarthy for his final comments.

Michael W. McCarthy -- Vice President of Investor Relations

Thanks, Suzanne. As Jim mentioned, we will be hosting the ENGAGE event in Phoenix from February 2nd to February 5th. We will have details about the hotel, registrations and such upon our Investor Relations page when we get back from Thanksgiving. We look forward to seeing you there. And if you have any questions as we move through the next couple of weeks, please feel free to give me a call in the office. Thanks very much, Suzanne.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Michael W. McCarthy -- Vice President of Investor Relations

Jim Chirico -- President and Chief Executive Officer

Kieran McGrath -- Senior Vice President and Chief Financial Officer

Dennis Kozak -- Senior Vice President, Business Transformation

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Lance Vitanza -- Cowen and Company -- Analyst

Mike -- Barclays -- Analyst

Asiya Merchant -- Citigroup -- Analyst

Nandan Amladi -- Guggenheim Partners -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Vahid Khorsand -- BWS Financial -- Analyst

Vijay Devar -- Northland Capital Markets -- Analyst

More AVYA analysis

All earnings call transcripts

AlphaStreet Logo

10 stocks we like better than Avaya Holdings Corp.
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Avaya Holdings Corp. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of June 1, 2019

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

AVYA

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More