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Avaya Holdings Corp (NYSE:AVYA)
Q1 2020 Earnings Call
Feb 10, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to the Avaya First Quarter Fiscal 2020 Conference Call. [Operator Instructions]

At this time, I'll turn the conference over to Michael McCarthy, Vice President of Investor Relations. Mr. McCarthy, you may now begin.

Michael McCarthy -- Vice President of Investor Relations

Thank you, and welcome to Avaya's Q1 fiscal year 2020 investor call. Jim Chirico, our President and CEO; and Kieran McGrath, our EVP and CFO will lead this morning's call and share with you some prepared remarks before taking your questions. Also joining us this morning are Anthony Bartolo, EVP and Chief Product Officer; and Shefali Shah, EVP and General Counsel.

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 being filed later today with the SEC, which should aid in your understanding of 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 in our investor slides, which are available on our Investor Relations page. We 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. 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. 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 highlights of our Q1 performance along with an update on the progress we've made on our strategic priorities. Kieran will then walk you through the details of the quarter and our outlook for the fiscal year, and then we'll open it up for questions. We got off to a strong start for the fiscal year. Our Q1 non-GAAP revenue was $717 million, above the midpoint of our guidance range, a positive reflection on our sales and operational execution. The composition of our revenue continues to reflect our deliberate and successful shift to a software and cloud-based business model. Notably, Software and Services as a percent of revenue increased to 86% up from 83% the prior quarter and prior year. Also significant, our Cloud, Alliance Partner & Subscription revenue or CAPS grew to 18% from 15% in the prior year.

The programs we've initiated to activate our base and to provide a seamless transition path for enterprise customers to consumption-based subscription and cloud models are beginning to gain traction underscoring the successful execution of our strategic shift. Consistent with our customer-led strategy, subscription provides customers with an accelerated return on their investment, the ability to flex license usage up and down and allows for faster and easier access to new technology, which can simply be added to the subscription bundle. In fact, our subscription model was a contributor to growth of our CAPS revenue.

Equally important subscription contracts, secures customers into longer-term agreements with Avaya. Below the line, our margin performance was above our guidance. Adjusted EBITDA came in at a $174 million or 24%, demonstrating our consistent top quartile operational excellence. Importantly, we closed the quarter with over $760 million of cash. Our profitability and cash position fuels our ability to invest in talent and innovation at levels most others in the industry cannot. During the quarter, we executed on our capital allocation actions as we committed. We paid down $250 million of long-term debt, which will deliver meaningful annual interest expense savings of approximately $15 million a year.

I'm also very pleased with the execution and overall success of our stock buyback program. We initiated our buyback on November 25th with less than six weeks left in the quarter. During that period, we repurchased nearly 11 million shares using a $132 million of the $500 million our Board had approved for the program representing approximately 10% of our outstanding shares in the market at the time.

Now let me shift gears and provide you with an update on our strategic priorities. We identified four key areas that we are executing on as we continue our momentum. We first focus on building private and hybrid cloud solutions along with the necessary services capabilities. Private and hybrid cloud uniquely tackles the many variables large enterprises have to consider such as geographical reach, compliance and security, and application integrations, just to name a few. Importantly, it allows our customers to evolve their core infrastructure with a stepwise approach that aligns with their very specific enterprise business requirements.

Our private cloud offers including APCS and ReadyNow continue to gain traction. TCV now stands at over $660 million. Second, we extended the benefits of public cloud to our entire customer base with our all-in cloud initiatives. We closed an important gap in UCaaS through our strategic partnership with RingCentral, which I'll talk more about in a moment. We are now focusing on CCaas through our own cloud native development efforts. CCaaS remains on track for release in calendar Q3, our fiscal fourth quarter. Third, our new opex consumption models like subscription allows our customers to more easily take full advantage of our expanding set of cloud native micro services, which drives further innovation and also provides new methods of collaboration through a variety of capabilities, including video, mobile, AI and open APIs.

Our enterprise customers who are looking for a path to the cloud, subscription can provide a transitionary first step to an opex cloud model for many customers. Subscription also moves them to the latest release and gives them the ability to leverage their prior investments and customized business process flows. Our channel partners, they moved to a cloud customer success model that results in greater customer collaboration, the ability to upsell and cross-sell and increase consumption of value by the customer.

Fourth, our cloud technologies which blend UC and CC are being used to power the digital workplace including AI capabilities like virtual assistant, speech recognition, transcription and behavioral pairing along with analytics and reporting. The combination of these capabilities are unique to Avaya and addresses our customer needs to recreate a more personalized and customized journeys for their customers.

Now turning to Avaya Cloud Office. In the area of enablement, our internal sales teams have been fully trained, nearly 500 of them. On the partner front, we have certified dozens of partners in last week at our annual customer and partner conference Engage, we held multiple ACO training and information sessions with well over 700 partner personnel and attendance. In the area of technology, we remain on track to release ACO at the end of this quarter, in fact last week we showcased the demo version of the product and its initial feature set. Later this month Avaya endpoints will be available for auto provisioning, not only with ACO, but as part of RingCentral's own RCO offering providing another demand engine for our devices.

Our initial launch will focus on the US and will quickly expand to three additional countries in the next release cycle. Additionally, we have identified and prioritized exclusive Avaya features to incorporate into ACO that not only differentiate ACO from other UCaaS solutions, but also maintains the customer and user experience that the highly loyal Avaya customer base has come to expect.

Lastly, on the go-to-market front, I can tell you that the momentum from master agent to SMB to enterprise companies for ACO in terms of pipeline growth is outpacing my expectations. By the time we launch, we will have five master agents in place and we already have 200 plus agents sign to complement our existing channel partner base. In fact, although ACO is not yet available, we have already had the opportunity to pressure test many of our sales and operational processes by conducting joint calls. These sales opportunities are indicative of the types of deals that Avaya, and our partner base will aggressively pursue at launch.

Let me give you an example. In one such engagement, we had an Avaya installed base customer who had evaluated several UCaaS platforms and had chosen to move to a competitor. Upon the announcement of ACO, the account team was able to position the benefits and value of ACO and win back the customer based on the fact that they would have access to a world-class UCaaS platform and that would remain an Avaya customer. There are many more examples where competitive threats to our base have installed as a direct result of ACO. All proof positive of the importance of having close this gap in our portfolio.

Now I'll share some key highlights and wins. In the first quarter, we added roughly 1,300 new customers, including over 110 competitive displacements. We signed 68 deals with a TCV over $1 million, including $6 million over $5 million, and $3 million over $10 million TCV. Our total TCV is that approximately $2.3 billion, consistent with our expectations. Let me give you a couple of examples of the size, scope and significance of the deals we are signing. Our global insurance provider seeking to upgrade their existing Avaya infrastructure we positioned our new subscription offer. The economics of the offer allows the customer to accelerate their modernization efforts that flexibility allows them to easily add new technology like spaces collaboration, and for Avaya, we were able to close a five year $25 million deal.

And another Q1 win, we worked with a business services company that has over 100,000 employees to help streamline their communications infrastructure. We booked a $20 million opportunity that simplifies their software licensing structures and provides them with a consumption based pricing and bundles, the cost of future upgrades into a ratable master agreement across their six global regions.

I'll wrap up by thanking many of you on the call for joining us at Avaya Engage in Phoenix last week. This year's Engage was our best attended and most successful customer and partner event we've ever had. Customer and partner feedback was excellent and the level of engagement as measured through attendance, feedback and the overall buzz at the event was beyond our expectations. By the numbers there were approximately 3,000 attendees, 95 partner sponsors, 150 breakout sessions and nearly 100 press and analysts to help amplify our message.

At Engage, we announced several solution offerings including new capabilities for our cloud collaboration product called Spaces. Arrow, our new AI routing engine partnered with Afiniti and held a hackathon with Google and GitHub and included over 100 participants who use our communications platform as a service solution to create apps on the fly. This Engage was also different from prior ones featuring heavy involvement from our ecosystem partners like Amazon, Google, Ring, Salesforce, Verint and Verizon, just to name a few. These partners drive scale reach and accelerate our technology capabilities while growing our addressable markets and deliver additional value to our customers. Avaya Engage was truly representative of the momentum here at the company and a testament to the strength and reach of the Avaya brand.

With that Kieran will now take you through the details of the quarter, the mechanics behind our capital allocation and our outlook for Q2 and fiscal '20. Kieran?

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Thank you, Jim, and good morning, everyone. As a reminder, unless otherwise stated all financial metrics referenced in 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 or as reported unless otherwise indicated in constant currency. For the quarter, non-GAAP revenue was $717 million compared to $748 million reported in the year-ago period, which is equivalent to $744 million in constant currency. Sequentially, this compares to $726 million as reported in Q4 of fiscal 2019. Revenue results were at the high end of guidance we provided during our last earnings call, driven by continuing growth in the number of clients looking to consume product content under opex models, whether it be for our on-premise or as a service offerings.

While our subscription offering is still in its early phase, we have seen real enthusiasm from our customers. We believe it will enhance the stickiness of our solutions and act as a first step for many of our customers who are interested in migrating to the public and or private cloud. As we discussed during our fiscal year end call, we're expanding upon the cloud KPIs that we have historically utilized to measure our success in the transformation of our business to the cloud as well as our ability to reduce our dependence on premise-based perpetual licensing models. Therefore we're enhancing this metric with a new KPI, which will measure the total revenue contribution of cloud, combined with the revenues from our strategic alliance partnerships and subscription revenue or CAPS for short. The revenue contribution from CAPS represented 18% of total revenue for Q1, up from 15% for the full year fiscal 2019.

First quarter product revenue was $298 million compared to $326 million in the year-ago period. There are two dynamics at play here. Firstly, we witnessed our strongest contact center quarter in the first fiscal quarter of 2019, which contributed to a very difficult compare. This was due primarily to a very large deal that we closed with the European bank. Secondly, we continue to experience headwinds to our UC business. This has been driven by the lack of a robust UCaaS offering, which now will be fully addressed with the availability of Avaya Cloud Office or ACO which is planned for release in the US at the end of March, our fiscal second quarter followed by several more countries in the second half of our fiscal 2020.

First quarter Services revenue was $419 million relatively flat when compared to $422 million in the year-ago period. Growth in revenue generated by our subscription offerings almost entirely mitigated the declines in hardware, maintenance and software support.

Turning to gross profit metrics, non-GAAP gross margin was 61.4% in the first quarter compared to 62.7% in the year-ago period sequentially, up from 60.6%. Non-GAAP product gross margin was 65.1% compared to 65.6% in the prior year, sequentially up from 64.4%. Non-GAAP services margin was 58.7% compared to 60.4% in the prior year sequentially up from 57.7%.

Turning to total profitability margin and cash flow metrics. First quarter non-GAAP operating income was $151 million, representing a non-GAAP operating margin of 21%, year-on-year down 160 basis points, while adjusted EBITDA was $174 million representing an adjusted EBITDA margin of 24%, down 100 basis points year-on-year and consistent with our guidance for the first quarter. Recall that in our fourth quarter of fiscal 2019 earnings call, we highlighted that in fiscal 2020, we were planning for a 1 point reduction in our adjusted EBITDA margin, as we increased our investments in our cloud go-to-market, cloud development and in bringing the ACO offering to market.

Further, we generated $12 million in cash flow from operations or 2% of total revenue. If we exclude the one-time payments related to the strategic process, which we completed in October of 2019 our cash flow from operations was $58 million or 8% of total revenue. During the quarter adjusted for the one-time payments we referenced above, free cash flow came in at $32 million contributed to -- contributing to a first quarter ending balance of $766 million in cash and cash equivalents on our balance sheet.

Before moving on to our second quarter guidance, I'd like to spend a moment expanding on our capital allocation strategy and specifically on our execution against the previously announced share buyback program, which was approved by our Board of Directors in October 2019. As a reminder, we launched an open market repurchase program utilizing a 10b5-1 plan in late November following our fourth quarter fiscal 2019 earnings release. As we have said, we believe that this construct from its flexibility to transact in the market during quiet periods and allows us to be opportunistic from both the volume and pricing perspective, which has resulted in the swift pace of our execution.

As Jim mentioned, we bought back approximately 10% of our outstanding shares of the Company in less than six weeks. In the first quarter, this equates to 10.7 million shares at a settled cash cost of approximately $132 million in the aggregate, and at an average price of $12.27 per share. In fact you will note that our outstanding common stock as of January 31st, which will be reported in our 10-Q filing later today reflects a reduction of approximately 16 million shares since our last filing or an incremental 5 million plus shares repurchased in the month of January alone. We believe this fast start positions us very well in achieving our guidance objectives or buying back $400 million worth of shares in fiscal 2020 under the total board approved $500 million repurchase program.

In terms of the debt pay down, as a reminder, $250 million was deployed in November to pay down our long-term debt. This will generate an estimated $15 million of annualized ongoing cash and expense savings.

Now turning to guidance. Please note that all year-on-year revenue changes are expressed on a constant currency basis and all revenue amounts reflecting rates as of December 31st, 2019. As a reminder, historically, our second quarter revenue compared to our first fiscal quarter revenue represents a mid-single-digit decline sequentially, as seasonally the second quarter is normally the lowest quarter of the year. For the second quarter, we anticipate non-GAAP revenues of $675 million to $700 million representing a minus 5% to minus 2% annual decline as measured in constant currency. This quarterly range is wider than normal, due to the fluidity of the coronavirus situation in China. While the size of our revenue generated in China is relatively small when compared to the size of our global business, there is the potential that the current health crisis could have an impact on the closing of current quarter transactions within our China operations.

Regarding the supply chain side of our operations, we expect no material impact this quarter as we have adequate supplies in place and we have been developing alternate sources of supply. Similar to the first to second quarter revenue seasonality experienced this year, non-GAAP operating margins and adjusted EBITDA margins are generally at their lowest point each year in the second fiscal quarter. This has been the case in seven of our last nine years. This is driven by a handful of annually recurring factors.

Firstly revenue was lower in the second quarter due to the seasonality highlighted above. Secondly, annual employee social taxes, the employer matching and employee benefit increases kick-in during the first calendar quarter of each year, especially in the US. Thirdly, two of our largest marketing events, Avaya Engage and Enterprise Connect take place in the first calendar quarter of each year. Additionally, this year we have the added expenses associated with the ACO launch as we ramp up our sales, marketing and R&D investments in anticipation of the ACO product launch in the US in late March. Accordingly, we expect non-GAAP operating margin for the second quarter to be between 17% and 18% and our adjusted EBITDA margin to be between $140 million and $150 million or approximately 21%.

Now turning to the full year guidance. When we began fiscal 2020, we expected that the first half of the fiscal year would have a revenue profile in terms of year-on-year growth performance that would look like the performance we experienced for full year fiscal 2019, which was down low to mid-single digits on a constant currency basis across the quarters. For the second half of fiscal 2020, we expected that with the availability of ACO and the ramping of the ReadyNow and subscription offerings that we would experience revenue that was flat to modestly up on a constant currency growth [Phonetic] basis.

We believe that this continues to be the case. As such we are reaffirming our expectations for full fiscal year 2020. Non-GAAP revenue is expected to be flat to down minus 2% on a constant currency basis. At foreign exchange rates as of December 31st, 2019, this translates to non-GAAP revenues between $2.84 billion and $2.92 billion. Additionally, we continue to expect that the adjusted EBITDA margin for the full fiscal year is expected to be between 23% and 24%. We continue to expect cash flow from operations for the fiscal year to be 5% of revenue or 7% when adjusted for the one-time strategic deal payments that were made in the first quarter of fiscal 2020.

With $200 million already spent through January on the share repurchase program, we expect our weighted average outstanding shares to be between 93 million and 97 million shares and the outstanding share count to be between 80 million to 83 million shares at the end of fiscal 2020. Now before I turn the call back to Jim, I want to give a brief update on the status of the large SSA deal that have been awarded to Avaya, that is currently under appeal. While we continue to be very optimistic on the final outcome of the social security administration award appeal and expect to learn the outcome of the appeal sometime late in Q2. Given recent experience and been abundantly cautious, revenue generated from the SSA awarding question is excluded from our Q2 guide, although it is still included in our full year expectations.

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

Jim Chirico -- President and Chief Executive Officer

Thank you, Kieran. Before opening the call for Q&A, I would like to close by highlighting that Avaya continues to strengthen our portfolio of offers across UC, CC and collaboration to expand our total addressable market. We continue to execute to a purposeful and deliver technology roadmap. We are committed, more than ever to a customer first model and we've never been better positioned to empower our customers to customize and extend their communications infrastructure.

In closing, I'm extremely pleased with the significant progress we've made on executing on our strategy. We remain focused on our core enterprise base, we've invested in and deliver blended UC and CC communication solutions, leveraging our next-gen all-in cloud portfolio. We will continue to differentiate with our world-class services and our unmatched scale and breadth. We will stay the course, we will continue to invest to deliver the technology, the solutions, the applications that deliver the experiences that matter. Great to see the momentum is building in 2020 and I remain bullish on our long-term growth perspectives.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Thank you. And our first question today is from the line of Lance Vitanza with Cowen. Please proceed with your question, today.

Lance Vitanza -- Cowen and Company -- Analyst

Hi, guys. Thanks for taking the questions and nice job on the quarter. I actually wanted to ask you about Spaces for enterprise. I don't think that that's been discussed much up to this point. And I'm wondering if you could sort of -- I was one of the people that saw it out at Engage and thought it seem pretty interesting, but could you talk a little bit about the genesis of this product and whom you expect to target and any thoughts on how widely -- how wide in circulation we could be talking about if it goes well.

Jim Chirico -- President and Chief Executive Officer

Yeah. Hey, Lance, it's Jim. Yeah. Thank you very much. Yeah, a couple of things, so one is we've actually been working on the collaboration platform i.e. Spaces for the last couple of years. In fact we actually acquired a lot of the technology a few years ago. And over the last I'd say 12 months or so, we've actually invested quite a bit in it. The real key here is for us as we needed a platform that we could provide to our customers around basically meeting and sharing and providing again that collaboration capability. We see this fitting into a number of different opportunities for us. First of all, a number of our large enterprise customers who use prem or view it as a great enhancement to the productivity of their companies also in areas like private cloud assets on books and equally as important like our new subscription offer, we see an excellent fit for the Spaces application. We also take a look and frankly as providing it as sort of the collaboration platform for the Company. A little bit more work to do on that piece of the business, but we clearly see a large opportunity across, if you will, at least our mid-market and enterprise customers today.

Lance Vitanza -- Cowen and Company -- Analyst

Okay, thanks. And just as a follow-up then. I mean, is this something that you think will be more likely to go to your existing customers as sort of an additional feature or product, or do you use this -- could this be the tip of the spear to get you into new customers?

Jim Chirico -- President and Chief Executive Officer

Initially, we're really focusing on providing the capability to, if you will activate our base. We've not had the platforms and the product set in the past. But most of the releases that we announced last week in Engage, and in fact even their relationship with Ring on Avaya Cloud Office, is really around being a customer-led company and really providing the technologies that our customers want, and to activate and therefore grow their overall base. So we've spent a lot of time over the last couple of years making sure that we sort of fortify and expand our positions with our current customers.

Do I see it as a potential where we -- from a greenfield perspective? The answer is, yes. There is some further developments with Spaces that we'll make through the balance of this fiscal year, and I think we'll be in a better position later on the fiscal year to take it, if you will and really move to a greenfield position. I think also important is it's built on our CPaaS solution, our communications platform as a service. So again bringing more technology into our portfolio based upon the investments that we made.

I'll also point out that last year we invested roughly $100 million more than we had in previous years on innovation. And as we pointed out, this year we're going to take a 1%, if you will, impact to the overall EBITDA of the company to continue to build out not only the innovation aspect of the business, but also the go-to-market as we move more and more to cloud.

Lance Vitanza -- Cowen and Company -- Analyst

Thanks very much. I'll get back in queue.

Operator

Our next question is from the line of Raimo Lenschow with Barclays. Please proceed with your question.

Mike -- Barclays -- Analyst

Hey guys, this is Mike [Phonetic] on for Raimo. Just a question on the CC side of things, I wanted to -- I'm wondering if you could kind of double click and talk a little bit more about the development there of the cloud offering. I know you said you're expecting a release in our fiscal Q4. And then can you also maybe touch on the relationship that you guys have now with Google Cloud that you touched on at Avaya Engage, go into a little more detail there on like what Google Cloud can bring to that offering.

Jim Chirico -- President and Chief Executive Officer

Yeah, sure. So, this is Jim. I'll kick it off and then we're here with Anthony Bartolo, our EVP of Products and he'll add a little bit more color. But we have -- we looked at our strategic process roughly about 12 months or so, about 12 months to 18 months or so ago, we kind of scanned the landscape and really determined that, from a UCaaS perspective, it really made sense for us to go off and do some form of partnership. But because of our market positioning -- our leading market position on contact center and the experience that we had within our R&D organization on CC, that we're going to go and develop a cloud-native, if you will, solution-on contact center. So we've actually been at this. And really the acquisition of Spoken was really, sort of, if you will, spearheaded the opportunity for us to go and drive that development. So we've been at it for a while.

We will come out with our IX-CC/CCaaS solution by the end of our fiscal year. And we believe, at least, we'll have an initial release on that probably sometime next quarter. So it's -- we've already gotten some positive feedback as we've worked with a number of our key large enterprise customers. We have about 12 of them right now that we're working with to bring this solution to market by the end of our fiscal year. So we're pleased with our efforts. Obviously, the opportunity with Avaya Cloud Office has also allowed us to focus and invest more on the CCaaS space, which we have certainly done. And I'm pleased with the progress and where we are with our development milestones to date. And I would say that we're certainly on track. As far as Google, I'll turn it over to Anthony, and maybe Anthony can add a little bit more commentary around where he sees us on our CCaaS solution that we're bringing forward.

Anthony Bartolo -- Executive Vice President and Chief Product Officer

Yeah. Thanks, Jim. The only thing I'd probably add there is that journey for us has really started with IXCC. It's coupled with our Workspaces agent desktop solution, which is also delivered from the cloud and is so today. You couple that with our IXCC solution, it will give our customers the option to either deliver their solutions on cloud, public or private. And in hybrid situations, which will be the predominant deployments that we're going to be seeing in the contact center space, given that the contact center is, so tightly coupled and intertwined with the customer's business processes, the hybrid solution will be the predominant sort of deployment part. And we're seeing a lot of really good interest from -- on this particular solution as we saw at Engage last week. So we're well on the path there. And actually some of the customers have already -- as I've mentioned a little earlier, the customers have already begun that journey because they're deploying Workspaces already, which is a key part of the solution.

The Google CCAI activity. That relate -- we're probably the most deeply integrated of Google's partners on their CCAI solution. So that is something has gotten a lot of attention. Our AI portfolio and chops have increased tremendously, at least from what I can tell being here at a short tenure, over the last -- over the last probably two to three quarters. We've got a series of other partners as well that we work with, as well as homegrown AI, which is integrated throughout the portfolio. So you'll see us really put a lot of energy behind the AI, conversational AI parts of the portfolio, because our customers are looking for very customized, not only journeys within their product road map, but customized as their end customers come into the interactions with their companies. So you'll see a lot of energy in that space and given the base that Avaya has. You'll see a lot more of us having a conversation around that with you guys over the course of the next two to three quarters.

Jim Chirico -- President and Chief Executive Officer

Yeah. Just to close out, we've actually done a fair amount of work on really building AI back into the contact center. Whether through vertical assistants, speech recognition, transcription, as Anthony mentioned have already -- we announced an enhancement of behavior pairing with Afiniti last week at Engage. So, if you take a look at our overall contact center solutions, we've greatly enhanced the AI capability across the Board. So -- and our customers are receiving that and are very, very pleased with where we're positioned, and more importantly, where our road map is, as we continue to build out additional capabilities.

Mike -- Barclays -- Analyst

Great. Thanks, Jim. I appreciate it, and congrats on the quarter.

Jim Chirico -- President and Chief Executive Officer

Thanks.

Operator

Our next question is from the line of Nandan Amladi with Guggenheim Partners. Please proceed with your question.

Nandan Amladi -- Guggenheim Partners -- Analyst

Good morning. Thanks for taking my question. So as you've shifted your emphasis to subscriptions, how dramatically had you changed your R&D budgets and also your sales compensation structure to become more subscription friendly?

Jim Chirico -- President and Chief Executive Officer

Yeah. This is Jim. I'll start and then I'll turn it over to Kieran to provide some insights. But from an overall R&D budget perspective, I wouldn't necessarily call it a significant shift in our R&D budget. It's really an opportunity for us to offer that subscription/opex service to our overall customer base, really driving enhancements to sort of the cloud-native micro services around video, mobile, AI, APIs, etc. As far as our sales comp, we have shifted, in fairness, our sales comp with more emphasis on driving SaaS-oriented solutions across the Board with the Company, whether it be subscription or be it cloud, and that's consistent with the market.

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Yeah. And so maybe just to clarify on Jim's initial comment, I think a lot of the changes and an increased investment that we put over the last year to 18 months, as it relates to cloud is beneficial here. We see even if the customer decides to stay with an on-premise solution, we see this as a real gateway or a real opportunity to step them toward the cloud, whether it's private cloud, public cloud, or whatever. As Jim pointed out, we pay a premium for cloud and subscription offering. So our sales teams are absolutely incented, and I would say actually heavily incented to sell recurring revenue over time.

Jim Chirico -- President and Chief Executive Officer

Yeah. And as we mentioned, we announced the subscription in the September time frame of 2019. And last quarter, we signed a $25 million deal in just the first quarter, since we announced it. So again, the enthusiasm from our customer base, and more importantly, our partners -- our partner base, and giving them yet another opportunity to go sell and activate the base at least initially is actually quite exciting. So, we believe that we'll see a lot of our revenue is being driven not only from our direct channel, but also through our partners, which is again exciting as it opens up new opportunities for us.

Nandan Amladi -- Guggenheim Partners -- Analyst

All right. Thank you. And a quick follow-up on the new CAPS metric moving from 15% to 18%. What is that now made up off? Because ACO hasn't kicked in yet?

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Right. So as we've pointed out in our last earnings, Nandan, clearly, we have our public-private cloud, which were always the key underlying components of it. We talked about enhancing for our strategic alliance partnerships. And you've heard Anthony and Jim talk about a couple of them today. When you talk about Google and Ring, obviously, which as you're right, we don't have an ACO offering out there yet that comes later in the quarter. But we have some long-standing relationships with our companies like Afiniti and Verint, Nuance, etc., that are in that. And then obviously there's also some minor benefit from subscription in there as well.

Nandan Amladi -- Guggenheim Partners -- Analyst

Okay. Thank you.

Operator

Our next question is coming from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks. Maybe first question, circling back on CAPS. You had mentioned, after the announcement of the ACO deal, that you would see kind of a long-term target of that, of around 30%. With it being at 18% already, how does that change your perspective on where you think that could go? And then maybe just a quick question on the cash conversion. Maybe it seems a little bit low in fiscal '20, and I know, clearly you have the RingCentral prepayment in there, but are there any other factors that we should be mindful of? Thanks.

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Hi, good morning, Meta. Yeah, so, first of all, I'd say, that even though the intent of the CAPS metric is to really more completely represent recurring. There are elements of point in time revenue within that, especially with some of our strategic partners, where you take the revenue at a point in time, if our portion of the performance obligation is done. So, even if I looked across last year, we could see a couple of point change in any given quarter, just due to the timing of some of our partnership revenue. So, I don't really see anything. I'm pleased with the start that we had for the year, but I still see us driving to that 30%, as we talked about over that longer-term objective.

As it relates to this year's guidance, I think when we talked about, we expected two things would impact. If you recall last year, we had about 8% of our revenue was CFFO. And this year we really called out 5%. If we adjusted it for the one-time transaction fees associated with the strategic process, which were paid in October of last year, so in our first fiscal quarter, that number is about 7 points. The reason we're declining 1 point is really due to the fact that we actually were reinvesting 1 point of EBITDA margin back into the business this year.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. Thanks, guys.

Operator

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

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Hi. Thank you for taking my question. This is Ashwin on behalf of Rod. I just want to ask about the guidance or implied guidance for fiscal second half. It looks like your revenue and EBITDA guidance implies better than -- better fiscal half, second half performance than what we saw last couple of years. So just from a timing perspective, when should we expect to see like a positive deviation in revenue and EBITDA versus historical seasonality? Any color you could give there will be helpful. And sort of related to that, how should we think about the size of CCaaS contribution in fiscal Q4?

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Sure. So, if you think about -- as we said, we expected that the second half of the year would see just with the guidance that we've given, be flat to modestly increased. Clearly, we will start to ramp ACO in the second half of the year, as well as the ReadyNow revenue, we've been talking about that for quite some time that we'll start to see a pretty significant increase second half versus first half for ReadyNow. Also, as I alluded to the fact that the Social Security deal, which we are really feel very strongly about, still should be a second half event. And then finally, we should also see some continuing contribution from the subscription business. So, while seasonality, our second and third quarters tend to be a little bit like each other, I would expect that our second half of this year will see a stronger fourth quarter and a modestly improved Q3 as well.

Jim Chirico -- President and Chief Executive Officer

Yeah. This is Jim. On the contact center CCaaS solution. I don't expect to see much revenue in this fiscal year, in fairness. We will bring the solution out in the fourth quarter, and that will ramp and go through [Speech Overlap] 2021.

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Right. And ratable as well.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Thank you. Just a follow-up on ACO. Jim, I want to check if you guys are planning any sales compensation -- further sales compensation structure changes to incentivize the base? Any comments there?

Jim Chirico -- President and Chief Executive Officer

No. I mean, obviously from a partner perspective, we have Edge programs that we have in place. As we look through sort of, if you will, our Master Agent network, we've been at this now, because we announced it back in October. It will be consistent, so where the industry is. But I don't see it at this particular point. Anything other than as we run our quarterly programmatics and such, but I don't see anything that would vary much from what we have in our process today.

Kieran McGrath -- Executive Vice President and Chief Financial Officer

And clearly, as we alluded to before, our own sales teams are highly incented to drive ACO as well as any of our other cloud initiatives.

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

Our next question is coming from the line of Asiya Merchant with Citigroup. Please proceed with your question.

Asiya Merchant -- Citigroup -- Analyst

Great. Good morning, everyone. Thank you for taking my question. At a high level, I just want to talk about the KPIs that you're talking about now within cloud. It seems like from the commentary, the shift was primarily driven by customers moving from on-prem to more like a opex driven model. If you think about -- I know that transition to that 30% goal that you've outlined over the next three years to four years, how should we think about EBITDA margins moving as you guys make that transition? Especially given you had talked about incentivizing your go-to-market, your partners and your sales force more heavily toward shifting from the perpetual licensing to the subscription model? Thank you.

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Sure. So, as you may recall some of the discussions that we've had at some of the past earnings calls, we actually believe that short-term, through a combination of some of the investments that we have to make to bring ACO as well as our CCaaS offerings to market, as well as just some of the transition itself that there would be some short-term headwinds to our margins. But that, over time as we scaled, especially as we scale something like a ReadyNow, which is really highly dependent on getting some scale, that we would start to see our margins increase from the 24%-ish level that we're at, as we closed last year up to as much of 27% to 28% over time. So tactically being this year probably, next year as well, relatively muted impact on our EBITDA margins overall. But over time, as we start to scale them, we would expect to see more favorable bottom line.

Asiya Merchant -- Citigroup -- Analyst

Great. Thank you.

Operator

The next question is from the line of Mike Latimore with Northland Capital. Please proceed with your question.

Mike Latimore -- Northland Capital -- Analyst

Yeah. Great, thank you. In terms of the services revenue growth in the quarter, the growth rate improved relative to the last several quarters. And it sounds like ReadyNow hasn't really kicked in in a big way yet. So I'm just trying to figure out a little bit more, what was driving improvement in the service growth rate in this quarter?

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Sure. So this is Kieran. I'd say there was a couple of elements here. First and foremost, our professional services business actually showed some nice improvement both sequentially as well as versus last year. As Jim has pointed out, we believe that our APS business is a key differentiator for us, as we work with many of our customers to help implement their very heavily customized solutions. So APS was -- helped.

The other thing, and I pointed that out was, we were able to mitigate some of the -- I'd say planned decreases that we would have experienced from the GSS perspective from our maintenance -- hardware maintenance and software support as more customers were actually starting to convert over to the subscription model as well. So many of these customers, we were able to take them, instead of losing them from a maintenance perspective actually convert them on subscription. So that helped mitigate some of the decline there. I'd say at a high level those are the two really big items.

Jim Chirico -- President and Chief Executive Officer

Yeah. I'd just add to that, Mike, that subscription is key in a number of fronts. But with our -- obviously, with our maintenance business, even though we have long-term contracts, it provides an opportunity for, if you will yearly updates. As we move to subscription, those are three-year to five-year deals. So locked in, if you will. So better predictability in the business, obviously, better recurring revenue stream. And as Kieran pointed out, we did see an uplift obviously with the first quarter that we had it out from a product perspective, additional revenues associated with subscription. So that working closely with our customers, building that loyalty exclusivity if you will, and with those longer-term subscription contracts, actually is a real benefit for the Company.

Mike Latimore -- Northland Capital -- Analyst

And then just on your CAPS business, is the EBITDA margin there? Is that sort of below corporate average now, in line above? It sounds like it's going to improve over time. But like where is it now relative to corporate?

Kieran McGrath -- Executive Vice President and Chief Financial Officer

I would say that it can vary depending on which of the partners that were booking a transaction in any given quarter. Right now, I would say that as a whole is probably running under the corporate average because there's a lot of investment that is taking place in there even from a cost as well as a expense perspective.

Jim Chirico -- President and Chief Executive Officer

Yeah. And I would agree with that. Bear in mind, a fair amount of that today is really off of our Avaya private cloud services, which from an overall margin and EBITDA perspective, is lower than average. But as we start to improve sort of the revenue construct as we move more to Avaya Cloud Office and as we move more to subscription. You'll start to see that, that change as we move on. So, I would agree with Kieran.

Mike Latimore -- Northland Capital -- Analyst

Great. Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Hamed Khorsand with BWS. Please proceed with your question.

Hamed Khorsand -- BWS Financial -- Analyst

Good morning. So first off, what kind of reaction are you seeing from the current installed base as far as pushing out potential contracts or maintenance contract, given the [Indecipherable].

Kieran McGrath -- Executive Vice President and Chief Financial Officer

I'm sorry, you're breaking up a little bit. Could you repeat the question?

Hamed Khorsand -- BWS Financial -- Analyst

Yeah. So what kind of customer push outs, or questions are you getting as far as delays in purchasing, when it comes to Avaya cloud from the current installed base?

Jim Chirico -- President and Chief Executive Officer

Yeah. Hi, this is Jim. Actually we're not seeing any push outs, if you will in buying behavior, in fairness. We obviously don't and haven't had an offer in the market. The offer is coming out, obviously by the end of this quarter. What I can tell you -- we are seeing is we are seeing, as we now presenting this to our partners and we've actually communicated this throughout the -- throughout our ecosystem, if you will. In fact, when we were at Engage last week, we trained a number of our personnel. I think, we have over 500 Avayans trained. I think we had 700 certifications we out at Engage last week. So really a lot of momentum.

What we are seeing though is, we are seeing from a competitive perspective, where deals were, if you will, in the pipeline to move to our competitors. In fact, those have indeed been stalled. If you're an Avaya customer, you've been an Avaya customer for years. Obviously, you really don't have any real desire to move and bring someone else into your structure but without an Avaya offer obviously it was free game. What we've seen with ACO, now is the fact that folks do want to stay with Avaya. We now have a competitive offer, it's Avaya cloud offers, we're bringing the best technology in support of that.

And we're seeing folks now waiting to move to ACO when the product is available at the end of this quarter, which is actually quite exciting. So we're pleased with the momentum, we're pleased with the backlog that we have. So we're pleased with the product and how it's progressing through the sort of the R&D process in order to provide that differentiation and uniqueness, it brings to the marketplace, so we're not seeing a stall at all. In fact, just the opposite. I would say installing others and eliminating others as people stay on the Avaya platform.

Anthony Bartolo -- Executive Vice President and Chief Product Officer

Hi, Hamed. It's Anthony. Just to add to that a little bit. I think what we're seeing is we're seeing a portfolio, now that is actually activating this space. So it's not delaying as much as now starting to have an engagement conversation with the customer on a base that is obviously quite large and we believe it's readily available for a path to a cloud or a consumption model conversation, and that's what we're seeing.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. Thank you.

Operator

Thank you. At this time, we've reached the end of our question-and-answer session. And I'll turn the floor back over to Mr. McCarthy for any closing comments.

Michael McCarthy -- Vice President of Investor Relations

Thanks, Rob. And thanks everyone for joining us this morning. If you have any additional questions, please feel free to follow-up with my office, we'll be happy to tackle them for you and look forward to seeing you at the different conferences and at Enterprise Connect as we move to the next reporting period. Thanks very much.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Michael McCarthy -- Vice President of Investor Relations

Jim Chirico -- President and Chief Executive Officer

Kieran McGrath -- Executive Vice President and Chief Financial Officer

Anthony Bartolo -- Executive Vice President and Chief Product Officer

Lance Vitanza -- Cowen and Company -- Analyst

Mike -- Barclays -- Analyst

Nandan Amladi -- Guggenheim Partners -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Ashwin Kesireddy -- Goldman Sachs -- Analyst

Asiya Merchant -- Citigroup -- Analyst

Mike Latimore -- Northland Capital -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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