Avaya Holdings Corp (AVYA) Q3 2021 Earnings Call Transcript

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Avaya Holdings Corp (AVYA)
Q3 2021 Earnings Call
Aug 9, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Avaya's Fiscal 2021 Third Quarter Earnings Call. [Operator Instructions]. Please, note this conference is being recorded.

I would now turn the conference over to Michael McCarthy, Vice President of Investor Relations. Thank you. You may begin.

Michael W. McCarthy -- Vice President Investor Relations

Thank you. Welcome to Avaya's fiscal 2021 Q3 Investor call. Jim Chirico, our President and CEO; and Kieran McGrath, our Executive Vice President and CFO, will lead this morning's call and share with you some prepared remarks before taking your questions. Joining them this morning will be Anthony Bartolo, our Chief Product Officer; Stephen Spears, Chief Revenue Officer; and Dennis Kozak, Senior Vice President of Global Channel. Consistent with social distancing mandates, each of us on this morning's call are assembled from our remote locations.

The earnings release and investor slides, which include highlights of our ESG initiatives and performance referred to 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. This should aid in your understanding revised financial results. All financial metrics referenced on this call are non-GAAP, with the exception of revenue. We have included a reconciliation of such non-GAAP metric measures to GAAP in the earnings release and investor slides. We may make forward-looking statements that are based on current expectations, forecasts and assumptions, which remain subject to risks and uncertainties that could cause actual results to differ materially.

In particular, the global economy continues to be impacted by COVID-19 and the extent of its continued impact on our business will depend on a number of factors that include, but may not be limited to, severity and duration including the emergence of new variants as well as actions taken or not taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. Information about risks and uncertainties may be found in our most recent filings with the SEC, including our Form 10-K and subsequent 10-Q reports. It's Avaya's policy not to reiterate guidance, and we undertake no obligations to update or revise forward-looking statements in the event facts or circumstances change, except otherwise required by law.

I'll now turn the call over to Jim.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Thanks, Mike. Good morning everyone and thanks for joining us today. Across every business segment in the industry, we are seeing large enterprises turning to Avaya more and more to guide them through their digital transformation journey. Our technology and solutions are providing customers with the ability to grow their businesses while improving their own customer experiences and we continue to make the investments that strengthen our portfolio, drive innovation and extend our digital capabilities to meet the new and emerging opportunities in front of us. Our third quarter performance speaks volumes to the significant progress we've made on the transformational journey that we embarked on. We are executing ahead of plan and I could now be prouder of the Avaya team for their resiliency, adaptability and the capabilities they bring to bear each and every day.

The solid financial results we delivered exceeded expectations across the board in revenue, profitability and most importantly in ARR. Equally encouraging is that we are seeing strong performance across all areas of our business, including our traditional business segments. Our 3-pronged strategy to transform to cloud and SaaS, grow the business and sustain our highly profitable business model continues to guide the way we are operating and we will continue to double down on our strengths in these areas.

Starting with ARR, Q3 represented another strong quarter growing 23% sequentially and over 275% from a year ago. Our growth continues to outpace our plan, and as a result, we are again raising the high end of our guidance to $500 million for the end of the fiscal year. It is noteworthy that over 95% of our ARR comes from enterprise contracts greater than $100,000 in value and over a fifth of our deals are greater than $5 million in value. This is a testament to the strength of our brand, innovation and digital capabilities and underscores our leading position as the partner of choice to enterprise companies who rely on Avaya to power their mission critical operations. ARR is a true indicator of traction in our transition to cloud and SaaS and we will grow from nearly $200 million in FY20 to $490 million -$500 million at the end of FY21. We are well ahead of schedule and we are now anticipating to hit $1 billion in ARR by the end of 2022.

Moving to revenue, we delivered our fifth consecutive quarter of year-over-year revenue growth. The composition of that revenue continues to improve with 40% coming from CAPS, over 64% of it recurring in nature and roughly 90% of revenue from software and services. Our revenue performance continues to improve and it is reflective of the investments we are making in skills, innovation and our ecosystem and demonstrates that the fundamentals of our business model remains solid and underscores our shift is taking hold. Important is our ability to continue to drive strong profitability, as the business delivered $173 million of adjusted EBITDA or approximately 24% of revenue. Consistent with expectations that we previously shared, we are sustaining our model while at the same time making investments in R&D and go-to-market required to strengthen our position. Kieran will walk you through the details of our financial performance in a moment.

A key component of our go-to-market transformation is ability to leverage the significant strength that comes from our breadth, depth and global reach, along with our technology and highly differentiated capabilities. To amplify these strengths to take advantage of the demand we are seeing, we implemented a land, adopt, expand and renew go-to-market motion.

On the land front, we continue to see significant new customer acquisition. We added approximately 1,700 new logos this quarter, the most we've added in the past two years. This success reflects the competitiveness and market acceptance of our new offerings. Large enterprises, continue to set the pace. Once again, we signed 100 deals with $1 million of TCV or more for the fifth consecutive quarter. 19 of those deals were greater than $5 million and three were greater than $10 million in value.

For adoption and expansion. This is best evidenced by the continued strength of our recurring revenues, increasingly longer contract lengths in cloud and subscription as well as the potency of our new offers, each of which I'll touch on in a minute.

On the renewal front, retention rates have never been more meaningful as we are making the transition to the cloud. This is one of the areas where we are making significant investments and expanding our technical expertise and customer success resources to capitalize on the opportunity to grow the total lifetime value of our customers. Over the last three years, we've developed a powerful portfolio of solutions to unlock the inherent opportunity that comes with having long-term loyal relationships with our customers.

Starting with Avaya private cloud, this solution enables the customization that is critical to supporting the complex day-to-day needs of our enterprise customers that want to cloud experience, but still have regulatory requirements and security policies to meet or simply want and need to operate in a blended hybrid environment. Importantly, private cloud represents a meaningful commitment, but typically higher lifetime customer value. A measure of this success is our bookings growth and hammering that success on over the last year, our ARR has more than doubled. One such customer, General Atomics, a large defense contractor needed our UC solution that maintains compliance with federal information processing standards. They selected our secure, private cloud solution to meet the needs of 18,000 users across more than 25 sites, which also includes remote working capabilities. This is a five-year, $15 million deal and representative of the type of private cloud deals we are winning and seeing in our pipeline.

Moving to Avaya OneCloud subscription. This is a real value vector for us which drives profit, longer-term commitments of approximately three years, significant upside and provides our clients with a simpler path to move to the cloud when and how they choose. Demand for more consumption like models remains strong, and although we have millions of seats already under contract, we are still in the early stages of converting our massive global installed base. In addition, we are pleased with our new logo wins, which approximately doubled from what we reported to you in March, attracting new customers highlights the market shift from capex to opex along with the importance of having highly flexible offers. For example, we just won a multi [Indecipherable] Avaya platform to provide a total UC and [Indecipherable] including multi experience contact center, IVR, WEM and video across social media and traditional channels. Avaya's solution was differentiator over the competitors based on the strength of our full portfolio along with professional services capabilities and then appreciation for our overall customer experience strategy.

Demand for public cloud solutions grew in line with our expectations as we continue to expand our go-to-market motion and layer model. For CCaaS in particular, we are seeing a strong level of customer engagement, our pipeline is building as we continue our global rollout. In addition, we are building and investing in our ecosystem of partners who are and will continue to play an increasingly larger role in our CCaaS go-to-market. Notably, we recently announced how we've expanded our relationship with Salesforce by making the full range of deployment options for Avaya OneCloud contact center integrated with Salesforce service cloud. I'm also delighted to welcome the team from CT integrations to the Avaya family. Avaya closed on the strategic tuck-in acquisition earlier this month. CT provides Avaya with additional digital capabilities over the top for our contact center installed base along with a rich library of connectors for rapid integration into additional third-party solutions, helping to supercharge our public CCaaS solution.

Avaya Cloud Office. We delivered our best quarter yet and we are positioned to continue that momentum as our new agent channel grows, additional features are released and international expansion continues. Our win rates continue to improve, including one customer win over 12,000 seats, and it is clear that our services capabilities and coverage are real differentiators. in the big apple, we are proud to have been selected by the Empire State Realty Trust to provide Avaya Cloud Office to over 500 users across their 14 retail and office locations, including the iconic Empire State Building itself. The first building to reach the cloud is now fully connected to the cloud.

And in a competitive deal, Empire State Realty Trust said that the flexibility, scalability and cost savings were the key reasons behind their decision. Another example is Agnes Scott College in Georgia. Not only did they want to move to the cloud and improve their communication and collaboration capabilities, but they also needed to ensure compliance at scale with Kari's Law in E911. The university selected Avaya Cloud Office for more than a 1,000 users, setting affordability, modernization and compliance as key decision factors.

Turning to CPaaS. This is a force multiplier for our platform. With CPaaS, we are able to rapidly integrate and compose solutions that combine third party applications with their own spaces and CCaaS offerings, providing customers with significant value and driving a faster return on their investment. Speed of deployment and composability are increasingly important as we continue to look for new ways to work and what remains a very dynamic work environment.

ARR from CPaaS grew 52% quarter-over-quarter and demand for these capabilities to support the extension of our platform is increasing significantly. One particular use case that resonates with me is how Avaya working with a partner was able to deploy our collaboration solution in support of India's Medic CII initiative and just days using Spaces and CPaaS. This initiative connects COVID-19 patients with qualified doctors from anywhere to support their recovery while helping lighten and overburden healthcare system and fills a critical gap in patient care.

In summary, Avaya's innovation engine has never been stronger. We have strengthen our portfolio significantly over the past 18 months and have a rich pipeline of new and enhanced solutions coming down the pike, which is enabling our customers to improve their customers' experiences and compete and win.

With that, I'll hand the call over to Kieran.

Kieran McGrath -- Chief Financial Officer

Thank you, Jim. Good morning, everyone. As a reminder, all figures mentioned on this call are as reported unless otherwise indicated in constant currency. As Jim highlighted in his remarks, the success of Avaya's business model transformation journey continues to be measured by the two key performance indicators that we have been utilizing to track our transformation progress. CAPS and OneCloud ARR. Both of these metrics continue to significantly exceed our own very aggressive expectations. This has enabled us to confidently predict that we will achieve our $1 billion OneCloud ARR target by the end of the 2022 calendar year.

Turning to the numbers, for the third quarter of our fiscal 2021, revenue was $732 million, this represents a fifth consecutive quarter of as reported year-on-year growth, which was plus 2% in the quarter or minus 1% in constant currency over the $721 million in the year ago period, and compares to $738 million in Q2 of fiscal 2021. Our OneCloud ARR metric exited the quarter at $425 million, which represents 23% of sequential growth and is up 276% year-on-year. In line with Avaya's core strength in the enterprise segment, customers paying greater than $1 million annually accounted for 64% of total ARR. Similarly, contact center was again about 60% of our total OneCloud ARR. Revenue contribution from CAPS or Cloud Alliance Partners and Subscription represented 40% of total revenue consistent with Q2. We are pleased that the June quarter recorded the largest yet revenue contribution from our public cloud solutions, which included Avaya Cloud Office.

For our third fiscal quarter, recurring revenue accounted for 64% of total revenue. Meanwhile, software and services represented 88%. These metrics reflect robust hardware product contribution seen this quarter. Non-GAAP gross margin was 61.5% in the third quarter compared to 61.2% in the year ago period and 61.8% sequentially.

Turning to total profitability margin and cash flow metrics for the quarter. Third quarter non-GAAP operating income was $146 million, representing a non-GAAP operating margin of 20%, down 280 basis points year-on-year. Adjusted EBITDA was $173 million representing an adjusted EBITDA margin of 24%, down 230 basis points year-on-year. As we have discussed in prior earnings meetings, consistent with our business transformation Avaya continues to significantly step up our cloud investments in both R&D and sales and marketing. In Q3, this results familiar 13% year-on-year dollar investment increase in these two categories. Non-GAAP EPS was $0.75 in the third quarter compared to $0.95 in the year ago period and $0.74 sequentially.

Now turning to cash flow, we generated $11 million from operations or 2% of total revenue contributing to an ending cash balance of $562 million. Fiscal year-to-date we have generated $35 million of cash flow from operations. As we have discussed in our prior earnings calls, the rapid movement to cloud and subscription model where cash flows move from primarily receipt upfront to receipt ratably is requiring a larger working capital balance impacting CFFO. As we exceed our $1 billion target for our OneCloud ARR, we expect the working capital requirements to begin to subside and CFFO generation to then trend toward double digit as a percentage of revenue annually.

Now turning to guidance for fourth quarter fiscal '21 and full year fiscal 2021. Please note that all year-on-year revenue changes are expressed on a constant currency basis and all revenue amounts reflect rates as of July 31, 2021. For our full-year fiscal 2021 guidance, we are raising our revenue guidance to be between $2.93 billion and $2.96 billion. This midpoint represents growth of between approximately 2% and 3% at current FX rates and between 1% and 2% as measured in constant currency. Accordingly, we expect fourth quarter revenues of between $720 million to $750 million. As a reminder, fourth quarter of last year, we benefited from a one-time large product delivery related to the 10-year $300 million total contract value Social Security Administration contract. This impacts our fourth quarter revenue growth compare by roughly three full percentage points. In terms of our forward-looking OneCloud ARR metric, we are once again increasing our full year guidance based on the rapid bookings acceleration our team is driving. We now expect to exit the current fiscal year with OneCloud ARR between $490 million and $500 million. At the midpoint, this upward revision to guidance represents an increase of approximately $40 million from the guidance we provided in May and demonstrates almost 160% year-over-year growth. Furthermore, we are tightening our CAPS revenue guidance range by raising the low-end from 37% to 39% of full year revenue. This lifts our guidance range to between 39% to 40% of the full fiscal year, representing over $400 million of CAPS revenue growth year-over-year.

We expect non-GAAP operating margin to be approximately 20% for the full year. Additionally, we are again raising the low end of our adjusted EBITDA guidance and tightening the range to $700 million to $715 million or approximately 24% of revenue at the midpoint. This range affirms our ability to generate profitability while simultaneously making cloud investments and scaling ARR. This reflects non-GAAP operating margin for the fourth quarter to be between approximately 18% and 19% and our adjusted EBITDA to be between $160 million and $175 million or approximately 23% of revenue.

Turning to shares outstanding guidance and earnings per share. We expect our weighted average shares to be between approximately 87 million and 88 million shares outstanding at fiscal 2021 year-end. We expect non-GAAP EPS for the fiscal year to be between $3.5 and $3.16. For the fourth quarter, non-GAAP EPS to be between $0.66 and $0.78. This compares to non-GAAP EPS of $0.93 in the year ago period. For the full fiscal year, cash flow from operations has been revised to approximately 1% of revenue as an outcome of the company's accelerated ARR growth, which is resulting in the near term higher working capital requirements that I described earlier in my comments.

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

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Thank you, Kieran. As our customers continue to adjust to our hybrid work model, we see a continued acceleration of digital transformation, new business models and increased reliance on cloud, especially private cloud for large enterprises. The decisive steps we have taken along with the investments we have made to execute on a multi-year strategy has Avaya well-positioned to lead our customers through their digital journey and it shows in our results. We are reshaping the company, embracing near term disruptions and driving fundamentally positive longer-term results for the benefit of our customers, shareholders and employees. Our business is healthy, our year-to-date performance and outlook is strong and we are confident in our business model.

With that we'll open it up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Lance Vitanza with Cowen. Please proceed.

Lance Vitanza -- Cowen and Company LLC. -- Analyst

Hi, thanks guys. Thanks for taking the questions. Kieran, let me start with you actually, if I could. You mentioned that margin pressure you called out due to investments in R&D and I think you also said in sales and marketing, but -- and then you said 13% increase in the investment spend in dollars, but what -- if we sort of adjusted for that, would margins -- how would margins have looked year-on-year, I know they were down, you called out they were down 200 bps -- basis points or so year-on-year, would they have been flat up, had it not been for those investments or would they still have been down due to the other pressure that you have based on the conversion of the business from point in time sales to subscription?. I'm just trying to get a better sense for how the interplay there looks?

Kieran McGrath -- Chief Financial Officer

Sure. Thanks, Lance. So, I think it's fair to say that, listen, our business in total, we are investing quite heavily in R&D service delivery and our overall go-to-market investments to drive that cloud ARR that we talked about. I'd say, first and foremost of the premise business still quite profitable and is carrying a lot of the load that's offset and mitigate some of those investments.

To sum up, I think will be quite fair to say that if we were to normalize for -- that fairly significant increase in just R&D, go-to-market and some of the service delivery enhancements that we would have probably been up against a very, very strong quarter that we had in the year ago time period. So -- in general, we have all along been trying to aggressively grow our top line, especially in the cloud and ARR while being cognizant in balancing and focusing on maintaining a high level of profitability that I think few, if any, of our competitors can really do.

Lance Vitanza -- Cowen and Company LLC. -- Analyst

Okay, thanks. And Jim -- for Jim. You've had a nice run of year-on-year revenue growth, but you're guiding down for 4Q. I guess a skeptic would ask perhaps the revenue growth we've seen until now, perhaps that's just been a pull forward given work from home and COVID trends, and that in '22, we're going to return to that sort of, that same old Avaya, where we have the perennial declines in both revenue and EBITDA. What would you say to those that would make that claim?

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah. Thanks, Lance. Well, first of all as Kieran pointed out, we raised the midpoint of our guidance for revenue, EBITDA and CAPS for this quarter. I think putting that into sort of perspective, we are also delivering for the first time in my 14 years here, year-on-year revenue growth. And I think that's a big new story, and I want to thank you Avaya employees and our customers for that.

Thirdly, as the acceleration of our ARR should be an indication that in fact, our strategy has taken hold, the business is healthy and our customers are calling on us, whether it's for traditional business, private or public cloud to say that we have the solutions they need in order for them to remain competitive.

Lastly, I would point out that with Kieran mentioned, if you compare it to last year, we had 3% one time improvement associated with SSA. And look, turnarounds are hard, I think Avaya is exceeding our own aggressive expectations. I believe we're a different story than the rest. And we're looking to continue to drive a steady drumbeat that continue momentum and continue traction as we go through this multiyear transformation. So, I in fairness with disagree wholeheartedly with the fact that this is the same old Avaya.

And in fact, we are not the same Avaya, for the last 18 months to two years, I think we posted strong numbers, our business [Indecipherable], our shift is taking hold and as Kieran mentioned we are investing big time. And as you can imagine, moving to cloud and building out that infrastructure, the partner ecosystem to skills and technology and capabilities we need internally is no small feat and up -- this company has executed, I would say close to flawlessly over the last few years, still maintaining 24% EBITDA as a percent of revenue and we're doing that purposely as Kieran pointed out. So, we are making the right balanced investments back in the business. So, I wouldn't compare this Avaya company to any company of years past.

Kieran McGrath -- Chief Financial Officer

Thanks, Jim and Lance. So obviously, Lance. From our perspective, we're going through this revenue trends transformation and the effects to our P&L, our balance sheet, our cash flow and they're all very consistent with this form of the transformation and they're all very much in line with our long-term financial framework. I mean, we really feel very good where we are right now, we're looking at in front of us, we see a very strong demand profile at which across public, private, hybrid, all of which has been engineered as part of our OneCloud portfolio. So honestly, I think we're feeling really confident about where we are right now and the strength in what we pointed out in our ARR. I mean, in the long-term this is going to drive very significant growth for this business. So, I think, we're -- the 3rd quarter and then that more we're calling for the full year just speaks volumes to the health of the business and the progress that we've made on our transformation.

Lance Vitanza -- Cowen and Company LLC. -- Analyst

Thanks, guys, great job on the ARR front in particular. I'll turn it over. Thanks.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Thank you.

Operator

Our next question is from Raimo Lenschow with Barclays. Please proceed.

Ravi Kumar -- Barclays -- Analyst

Good morning. This is Ravi on for Raimo. Thanks for taking my question. Maybe just start with any of the driver, this quarter of ARR and then any incremental changes that led to -- that led you to move your $1 billion ARR target to fiscal '22?. Thank you.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah. Hi, this is Jim. I'll take it, and then I'll turn it over to Kieran. So, let me take up maybe this in two parts. First of all, I think the number one reason, keep in mind we've been just started measuring ARR this year and where we finished last year we were roughly almost $200 million, we're going to be $500 million this year and $1 billion next year. And we're looking at this as, as I mentioned steady traction, steady momentum. And the fact that one quarter may be different than the other, but I think you need to make sure you're taking a look at the long game here and not just playing for quarter-on-quarter incremental strides. And continuing to double the business over a three-year period of time I think is pretty significant and something that is sort of a benchmark for many companies. So, I think the real reason in this success is the fact that how much we've invested in strengthening the portfolio to go-to-market motion, how we engage and embrace our channel partners, which are significant to the growth of a company and how well we've built out our internal systems in order to manage this.

Secondly, if you take a look at over this past year, we've continued to improve guidance quarter-on-quarter as we've gone through this year and that's really affected a matter of where we're seeing growth. In subscription, we had our best quarter ever in Q3 from a TCV perspective. Couple that with the fact that we have offset our best quarter in private as well as public cloud, I referenced one private cloud deal, I can tell you as I mentioned, these are representative of all of our private cloud deals.

And if you take a look at our backlog in our funnel, clearly it's much greater than where we were not just three months ago, but even six months ago. So, our strategy is taking hold. We're seeing huge demand and we're able to actually not only accelerate that demand, but more importantly execute on that demand when it comes to implementations associated with cloud, both private and public. And that's the main reason why we've raised guidance and pulled it in roughly a year ahead of where we thought we would be.

Ravi Kumar -- Barclays -- Analyst

Great, thank you. And then maybe if I could just follow up on a similar note. I know, last quarter you talked about your subscription specifically about, I think 20%, a portion of deals are from new customers. So maybe within description and more broadly with the business. What you're slowing between new customers migrating over to some -- sorry, existing customers migrating to your newer offerings versus actual new customers being added would be helpful as well? Thank you.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah, sure. So a couple of things. So first of all, obviously, with a huge installed base, probably the leading installed base of anyone in the industry. We're seeing a number of our customers take advantage of subscription. And I may point out that it's not just a traditional business onto a different delivery mechanism. 90-some percent of these are all hybrid in nature. So the fact of the matter is that they're upgrading, they're bringing in cloud elements embedded in the solution and in fact, they're getting more value than they had before. So we're very excited about that hybrid growth associated with subscription. So you shouldn't think of subscription as a maintenance replacement. It's far more than that.

As far as the new customers, I would say the new customer base, as far as the number of customers from our existing base, this quarter represented a number that's close to 10% of the total, which by the way is may sound like a small number, but it's not a small number in overall number of customers, nor should one view that as a relatively small number as far as the opportunity that's in front of us and it's great to see that this offer is not only a value to our customer base, but from a competitive perspective, from a differentiation perspective, obviously this 10% where not Avaya customers previously, one of the reasons why it's led to at least the two-year plus high on the number of new logos that we won, as well as the continued hundred plus deals of greater than $1 million of ARR -- or TCV, I'am sorry. So, we're in the early innings still, we see a lot more in front of us and we're going to continue to double down on our investments as we've pointed out, and we're going to continue to take advantage of the market that's in front of us.

Ravi Kumar -- Barclays -- Analyst

Great. That definitely make sense. Thanks for taking my questions.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Sure.

Operator

Our next question is from George Sutton with Craig-Hallum. Please proceed.

George Sutton -- Craig-Hallum -- Analyst

Thank you, guys. Answer to the earlier skeptics question, the skeptical investor question, I would just say the new Avaya has ARR, the old Avaya did not. Now, I think that's fairly simple. So, I'm very intrigued by the fact you're moving forward, you're ARR expectations and I wondered if we could just get a little bit of a better sense of, when we get to that $1 billion dollar number, what will be the representation of your existing customers in your view, who have migrated versus the new customers that you're bringing in?

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah. So. Thanks, George. Appreciate it. I'll start and I'll turn it over maybe to Kieran. So first of all, I think it's noteworthy to point out that as Kieran mentioned 60% of our ARR is coming from contact centers. I think it's probably also noteworthy, though we didn't bring it up that in the past year our contact center ARR has more than quadrupled. So representative of the foothold and strength that we have on large complex enterprise customers in the contact center, which is our sweet spot and we see significant opportunities in front of us in those large deals, large complex enterprise customers who are calling out Avaya to lead them through their digital transformation that's a very important point.

When we get to the $1 billion at the end of next year, if you're looking at a percent of how much has converted off of an existing installed base, hard for me to give you an exact percentage, but I would tell you that it's -- there's more than 50% of the runway left to go. So, to the point where is this a one-year point in time program of the year, and the answer is no. This is -- has the technology, has the sustainability and has the expansion in front of it and even by this time next year we still have huge runway in front of us. So that's an important point.

Thirdly, as how much of that will be our new customers. I can tell you that as far as ARR, we're seeing nice growth as I mentioned in private cloud, we're seeing nice growth in subscription, but private cloud really is starting to become more and more of a component of the overall ARR composition. And if you take a look as I mentioned just one deal on where we are at the backlog, deals we're working, the amount of interest through RFPs and RFQs, I would suspect in many of those big deals, though they may be single customer or quite large in overall value. So, I believe the customer growth will probably be in the 5% to 10% range over the next year or so. So probably getting us upwards in the 20% -- 25%, but the dollar value could become much more significant over time as we drive more and more into the largest or large enterprise and in the mix component again heavily skewed toward contact center. So, hopefully that answers your question.

George Sutton -- Craig-Hallum -- Analyst

That's great. And as a followup to your comment on the importance of CCaaS, the Zoom brings -- I'm sorry, Zoom and Five9's combination is obviously attempting to move them into more of an enterprise capability. I don't think the market appreciates the types of customers you go after versus the types of customers they go after for that offering. I wonder if you could give you a perspective on that acquisition?

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yes, sure. I think you bring up a good point, George. And I think one thing we need to keep in mind is how [Phonetic] long the term it's and classify enterprise versus non-enterprise. And if you take a look at -- as you look at the segmentation with the contact center, I would suggest that we play in a completely different zone than Five9, so it's fine that they're all within a particular mid-market type segment. I mean, I think that's a clear differentiation because it has to do a complexity expertise and so on. But I think if you look at the acquisition, I don't think it's a surprise to anybody there, there is a need for consolidation in this industry and I think Zoom and Five9 obviously took advantage of that. But if you contrast that to Avaya, we launched the Avaya OneCloud portfolio over a year ago, probably close to 18 months ago and the fact that we saw the value of an integrated platform strategy. In fact, we had an integrated platform strategy as being the leader in UC and CC for years. And this transaction to me is just proof positive that Avaya's in a great position. I mean, congratulations. Welcome to the neighborhood -- rising tide lifts all boats. So we're excited about it. We're also excited about the fact that it demonstrates that this is a strong market. And the fact that those that have an integrated platform like Avaya have a huge opportunity to win in the market going forward. And I think you're seeing that being represented as an ARR because that's where the industry is moving to a cloud and SaaS model. So I think that's a great recognition of where we are. And in fact, as I mentioned, doubling year-over-year is extremely important.

I think another differentiator we have is, we operate in 190 countries. We have these solutions available around the globe and we are winning not just in North America, but we are winning in APAC, we are winning in EMEA, we are winning in CALA and the fact you take advantage of our breadth, our scale and our expertise and the fact that we have an integrated platform and the fact that we now having into the market a complete CX offer owning UC, CC, collaboration, video, increasingly more and more AI, positions us in a great position, if you will, in order to capture and win in this market. And that's what we're all about. We're all about execution, we're all about winning and we're all about investing now to take advantage of the market in front of us and to strengthen our foothold. So, I think it's great that they had this announcement and we're looking forward to the months, quarters and years ahead to compete them.

George Sutton -- Craig-Hallum -- Analyst

[Phonetic] Picked up. Thanks, Jim.

Operator

Our next question is from Samik Chatterjee with JP Morgan. Please proceed.

Samik Chatterjee -- JPMorgan -- Analyst

Hi, good morning. Thanks for taking the questions. Jim, I just wanted to start -- firstly start off on -- you did provide some details on CT Integrations and the acquisition -- Just wanted to see if you can go a bit deeper. I mean, the way I understood it is really kind of makes you -- give you more expertise in the addressable market opportunities that you're already targeting, doesn't really expand that addressable market as such. But just wanted to get a bit more details about how you're thinking about the implications of -- in terms of just the addressable market opportunity for you? And the I have a follow-up.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah. Thanks. That's a great question. And I think you hit the key. The fact of the matter is our M&A strategy is one that's focused primarily through tuck-ins. And it's one that's also designed to work with new start-up fresh companies that bring certain skills and expertise into our company, such that we can continue to leverage the opportunity in front of us. And that's exactly what we did with CT Suite. CT Suite was a partner of ours. They've been a partner of ours since 2016. We're working with them hand and glove on a number of key opportunities in front of us, especially in digital -- in the digital space.

And as we looked at this, we wanted to bring, if you will, CT Suite into the family because we wanted to make sure that we have that expert team, skill team but more importantly, to allow us to rapidly deploy digital capabilities over the top for our contact center, not just our installed base, but for all of the opportunities in our backlog and funnel in front of us, that, frankly, CT Suite is an integrated component. So it just made perfect sense to bring this team into the company to supercharge us, so I lack of a better term in really delivering CCaaS solution, so we can make sure that they are dedicated and focused on delivering the Avaya platform with our current team. It's been Ronnie and his team has done an outstanding job, frankly they were part of the family anyway as a partner. So it's been a really seamless sort of integration, even though it's just recently announced then, "we're off to the races". So we're excited about the opportunities this brings in. We believe it's going to help us as I said, sort of supercharge a number of our digital capabilities to continue to keep us at the forefront of innovation in CCaaS.

Samik Chatterjee -- JPMorgan -- Analyst

I did have a follow-up for Kieran. Kieran, its great got to see the ARR target being cross forward, but it obviously then means you're almost doubling ARR next year. When I think about the cash flow for next year, like how should we think about the magnitude of improvement compared to this year where you were, I think, guiding to 1% of revenue. Just what's possible and what kind of headwinds does the acceleration of the ARR metric bring in terms of the magnitude of improvement for next year?

Kieran McGrath -- Chief Financial Officer

Hi Samik. Sure. So listen. As we said before, we're in the middle of this transformation from capex to the cloud and subscription. And obviously, it's a pretty dramatic change in when a customer pays you in terms of upfront point in time as opposed to over time. So the good news is as we've increased the ARR, obviously, its indication is just the traction that we're getting in the business and that traction has been accelerating. My expectation is that, as we said, we expect to get to $1 billion by the end of 2022 calendar year. So doubling, we're going to go from a run rate of $75-ish million a quarter to 100-ish million a quarter. And therefore, I do expect that we'll continue to see some working capital requirements in line with what I would expect this year.

So, I continue to see low single digit CFFO from operations. But I believe that once we get to that $1 billion, this starts to turn around and the working capital requirements start to decline and we start to move, I'd say, fairly rapidly toward that double-digit CFFO that we talked about. Remember, I've always said, by the second half of 2023, we're going to see a fairly aggressive run back to the double-digits that we expect. So, I'd say we're really pleased with the rate and pace of the take-up. We expect that the working capital requirements will continue to next year probably indicates low single digits CFFO again next year. But then a very subsequent improvement in '23 and beyond.

Samik Chatterjee -- JPMorgan -- Analyst

Great, thank you.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Thanks, Samik.

Operator

Our next question is from Asiya Merchant with Citigroup. Please proceed.

Asiya Merchant -- Citigroup -- Analyst

Great, thank you for the opportunity. Before I may, like currently about 60% of your ARR is from contact center. As we think about -- and you've had great success in that. As we think about some of your UCC customers coming on board to your subscription and cloud offering and that tends to be much more competitive market versus the contact center. How should we think about this rate of investment and opex investment going forward? And similarly, the impact to the EBITDA margins as we think about more of the UCC customers adopting your subscription and cloud offerings? Thank you.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Kieran, do you want to try to take that questions and I'll add. Okay.

Kieran McGrath -- Chief Financial Officer

Okay. Sure. Yeah. So I think first and foremost the investments that we're making right now, obviously, they have some tactical impacts, but we really think it's prudent for us to continue to do whatever is required for Avaya to expand that ARR into as you say the combined UC and CC both from a subscription, public, private and hybrid. So we are really doubling down on that. So I think that'll be a modest type of headwind or impact from a profitability perspective, not like this year when we talked about a point of impact. We've been very cognizant of trying to balance growth with ensuring that we continue to maintain the profitability that we are really, I think very unique compared to the rest of the industry. So I think we continue to accelerate this growth and do it with margins very consistent with where we're at today. It may be a little less than where we were a year ago, but right around that mid '20s that we've been able to operate on pretty successfully for quarter what around over the last the last couple of years.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah, Asiya. I think another thing just to add to Kieran's answer is the fact that we've been obviously very optimized and very disciplined in our overall structure of the company. And if you take a look at our office, I would say we're a bit more differentiated and others. What I mean by that is that you see -- the business is obviously very competitive at the low end in the SMB, a lot around, I'll call it a retail space. We're really not overly active in head space to be honest with you, nor do we see that as an area that we're going to invest in significantly because of the compression by the just now populated that space is and the fact of what's the dollar value is only to be over time as that becomes more competitive as number of folks continue to, as you said, competing with the same sort of customer base. We operate more in the mid-market to high end where there is not as much pressure, and in fact, and that's where we're seeing our growth as I mentioned is really around the enterprise space 96% of our ARR deals greater than $100,000. Kieran pointed out 64% of our ARR deals greater than $1 million at stack that up against anybody. So, in 20 plus percent or greater than $5 million and that's where we're seeing the traction, that's where we're seeing the backlog and that's where we're seeing the opportunities in front of us. So we're really not into the low-end highly competitive tremendous cost pressure type opportunities.

Asiya Merchant -- Citigroup -- Analyst

Fair enough. And if I may, like as you do more of the UCC and perhaps even integrated offering. That tends to be a little bit more services versus, I would say, just the software side of things. Clearly, your services margins are doing really well here. Is that the -- I'm just questioning if that's the pace that we should expect the services margins to kind of hover around even as we do more of these hybrid offerings more integrated that require a lot more consulting and professional advisory related to those types of deals?

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah, this is Jim. I don't see anything that is significantly going to change around overall services revenues, currently as we drive more and more automation, especially into the area of private cloud in the opportunities that are there in front of us. I think our -- I don't see a real change to -- into the services margins as we move forward. We have a pretty well-defined business model there. We've been in the services business for many, many years. It's a key component to the revenue and profitability of the company and I suspect it will continue to operate as it has in the past. So, I don't see much of a change.

Asiya Merchant -- Citigroup -- Analyst

Okay, thank you very much.

Operator

Our next question is from Catharine Trebnick with Colliers. Please proceed.

Catharine Trebnick -- Colliers -- Analyst

Thanks for taking my question. I have a couple of them. One is, any update on the social security contract and can you refresh me if that included contact center that was such a large contract that you signed last year. Thanks.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Kieran, do you want that?

Kieran McGrath -- Chief Financial Officer

Sure. So, first and foremost, you're right, Catherine. It was a combination of both UC and contact center as well where we displaced some competitors, so very pleased with that. We think we're making good progress in terms of rate and pace. With the contract as we talked about last quarter, we had a very significant set of deliverables that we execute upon back in Q2 from a professional services perspective. From this point out now where we're working until the date we stand up the new private cloud and we move forward from there. Anthony or Stephen, if you guys want to add anything more.

Stephen Spears -- Chief Revenue Officer

No, I think you got it right on that one Kieran. So I think we are on the track right in pace for that one and it's both UC and CC.

Catharine Trebnick -- Colliers -- Analyst

And the follow-on question is, I always get pushed back from the buy side on the competitive landscape. So when I say that you guys are no longer a donner pour donner, they push back and say, well, Genesys, Five9, et cetera, etc. So can you talk on these larger contracts, big installs that you have. Why you think you're no longer a shared donner? And who do you see trying to perhaps move in on your territory and what's your best defense?

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah, that's a great question. Thanks. I think you could just take a step back and look at our performance over the last 18 months or so. The way we've rounded out our portfolio with a number of new announcements and the fact that not only the announcements, but these products are actually starting to take hold in the market. Just in the last year, 18 months, we announced subscriptions at seven quarters old. We announced Spaces. We announced CCaaS, both private public. We announced the relationship with RingCentral, we just started shipping 18 months ago. We now have AI solutions into the marketplace. We have CPaaS now up and running and really providing that over-the-top at the edge, if you will, so we can do our composable and not do sort of one large complex sort of implementation. We now have the capability through APIs with our customers that they can compartmentalize this. They can do it with how and if and when they want it. I mean, it's -- and now you look at the revenue growth, more importantly, the bookings growth of all these new products continually sets the pace for us as we move forward.

So if you wanted to go back two years ago and somebody said we were a donner. Well, yes, I mean, we weren't growing revenue. We were declining 6% a year. We didn't have any ARR growth to speak of. In fact, we weren't measuring it. We didn't even have a CAPS metric to determine are we viable in the new world or are we relevant? So yes, you want to go back 2 years, and it seems everybody keeps trying to bring us back two, three years ago for a company that actually was investing heavily in the future. And my point about turnarounds, the fact of the matter is we're a very different story. We're not only saying what we're doing, but we're actually executing to what we said we were going to go do. And if you take a look at our wins, 1,700 new competitive logos last quarter, again, over 100 deals greater than $1 million, a number of key large customer wins globally around the customer base. If you go back over the last 12 months, we've had over 6,000 new customer logos. I'd stand that up to anybody.

So somebody wants to go out there and say, we're a donner, God bless them, they can say whatever we're not going to get down to that level. I don't believe we are. We're focused on winning. We're focused on continuous improvement. We're focused on providing solutions for our customers to win and compete in their marketplace. And I trust that the results that we posted speaks volumes to the progression that we've made over the last four to six quarters. Fred to do some more, trust me, and his team is heads down to do more. We are not taking our foot off the pedal by any stretch in the imagination. And we're going to be consistent, we're going to grow, and we're going to make sure that we're executing each and every day. So I mean that's what we're focused on. Others, they can say what they wish.

Catharine Trebnick -- Colliers -- Analyst

Thank you.

Operator

Our next question is from Meta Marshall with Morgan Stanley. Please proceed.

Meta Marshall -- Morgan Stanley & Co. LLC -- Analyst

Great, thanks. A couple of questions for me. One, is there any sort of stat you can give either with you logos are kind of the ARR base you built up, how many of those are combination of [Phonetic] UC and CC?

And then, maybe second question. You noted some initiatives around renewals or kind of investing in the team, I assume, to kind of work on increasing renewals. Just any kind of details you can give there around what about those initiatives actually entail?

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah. Hey, Meta. I'll take that first. I'll then let Kieran talk to you about the renewals. But if you take a look at our ARR buildup, as I mentioned, we do have an integrated platform of UC and CC. And obviously, the bulk of them are consistent with that integrated platform. So pick a number, it's in the 90s. I don't know if it's [Indecipherable], but it's certainly into the 90s of the fact that we're providing this combination UC, CC in all those ARR deals. And now we're seeing, as I mentioned, more of a hybrid solution coming into those deals as well with some of our new technologies associated with collaboration and video and AI and so on. So it's well into the 90s. I'll let Kieran talk about what we're seeing from a renewal perspective

Kieran McGrath -- Chief Financial Officer

Hi, Meta. So one of the examples that I've given historically was even if a customer decides to renew their entire maintenance base through GSS maintenance base, they're going to push very hard for some price performance improvements, in the minimum 3% to 5% every quarter. What we've been seeing just on the subscription alone is we've been able to see net renewal rates as we convert this maintenance over to subscription of anywhere from 115 to 120. I mean, we returned in a extremely strong quarter this quarter, which means the run rate that we're getting just at the bundle subscription is anywhere from 20 points to 25 points higher than it would have been from the GSS perspective. So just prove positive of just the progress that we can make on expanding the wallet share with the customer just moving to subscription and that obviously gets better when we start to convert customers into private and public cloud with the multiples or even more expensive than that. So, overall I think it bodes very well for us in terms of net renewal and their retention rates to continue to drive the customer into subscription and then into public and the private cloud.

Meta Marshall -- Morgan Stanley & Co. LLC -- Analyst

Great, thanks.

Operator

Our next question is from Hamed Khorsand with BWS Financial. Please proceed.

Hamed Khorsand -- BWS Financial -- Analyst

Good morning. Could you just talk about these new logos that you're adding. Where are they coming from? Are they on-prem? Are they cloud? And are you driving these ads through any kind of promotions through your agents and channel partners?

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah, this is Jim. So first of all, the 17 new -- 1,700 new logos are a composition of, frankly, everything that we have. I will give you a stat that if you take a look at ACO, 75% of our ACO volume this past quarter was new logos. My point about not being a donner and making sure we have a rounded solution that speaks volumes to that. They also come from the large enterprises, clearly, with 1,700, you're not going to have 1,000 large enterprise wins. But as far as dollar value and significance, it's actually quite impressive. And again, the reasons why we had 15 deals, I believe it was over $5 million -- over $5 million representative of the largest and large enterprises. They come from both the channel as well as from direct. So there's obviously, as I mentioned before, we're seeing demand across all businesses, therefore in all geographies.

I would tell you, we're not doing anything to sometimes I use the term rent market share. So where we do go crazy and you put a bunch of incentives in place in order to -- or spiffs, but spiffs on steroids here in order to try to pump your volumes. We're not doing any of that. This is consistent. I think you can see it across the board. This is really around the products. It's really around our teams and our organization and our skills. And I would say maybe you could frame it as organic real growth versus spiff growth. And that's exactly what we're doing. We haven't done anything over the top to have something that's not grounded and it's not sustainable as we move forward.

Kieran McGrath -- Chief Financial Officer

Hey, this is Kieran. Just one clarification. So, Jim is right, 75% of the customers were new logos. It's about 50% of the seats are new logo, it's kind of consistent what we've seen over the last several quarters.

Hamed Khorsand -- BWS Financial -- Analyst

Yeah. All right, thank you.

Operator

And our final question comes from Rod Hall with Goldman Sachs. Please proceed.

Rod Hall, CFA -- Goldman Sachs -- Analyst

Yeah, thanks for fitting me in guys. Just two quick ones for me. One, you still have a considerable amount of product sales. I'm just curious as a lot of supplies issues for other companies selling hardware, I guess, it'd be nice of you guys to comment on that, what that's doing to the underlying margins in the product part of the revenue? And then also DSOs kind of elevated the last couple of quarters. I'm just curious what you expect DSO trajectory to be into next quarter? Do you expect that to come down? And any other color you could give us on what's going on with the DSOs would be great. Thanks.

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Yeah, this is Jim. I'll hit the supply chain, I'll let Kieran hit the DSOs. On the supply chain, I have to give credit to Fred Hayes and his team. Fred is actually [Indecipherable] supply chain. We have not had any disruption. In fact, just the opposite, we still continue to put the same percentage, which is a significant percentage of all our product on the ocean. We have been working with our supply base for years, and we have a very intricate arrangement with our suppliers on how we manage our supply chain, so a real credit to our team. So we did not see any disruption last quarter. Obviously, to this quarter, we have not seen any disruption as we go out through September. I don't foresee any disruption based upon what we're seeing in front of us with our demand profile with balance with our supply profile. So kudos to the extended supply chain team, but I don't see any of that disruption affecting us this quarter.

Kieran McGrath -- Chief Financial Officer

Yeah, this is Kieran Just one thing I'd add to Jim's point on the supply chain. I would say, we did see an elevated cost of transport, but really didn't show up in our product margins just because of overall favorable product mix related to that. So, we're able to contain that through the mix.

Related to DSOs back to Fred Hayes team again, they continue to do an outstanding job on collecting our receivables on a very timely basis. We've been averaging pretty consistently 52 days to 54 days over the last umpteen quarters and we've seen no difference in that as we've talked about all along really the change in what we've seen from our cash collections is really just due to the model, transformation change and nothing to do with the collectability. We're very fortunate, especially given the enterprise nature of our accounts to have a very creditworthy installed base who pays their bills on time, so we really right now not highlighting any delinquent DSO of any material amount on that.

Rod Hall, CFA -- Goldman Sachs -- Analyst

Great. Okay, thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Michael McCarthy, for closing comments.

Michael W. McCarthy -- Vice President Investor Relations

Thanks. Sherry and thanks everyone for joining us this morning. We look forward to catching up with you over the next days and couple of weeks. If you have any questions directly, please feel free to give a call or drop me an email. We'll look forward to touching base. Take care.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Michael W. McCarthy -- Vice President Investor Relations

James M. Chirico, Jr. -- Director, President And Chief Executive Officer

Kieran McGrath -- Chief Financial Officer

Stephen Spears -- Chief Revenue Officer

Lance Vitanza -- Cowen and Company LLC. -- Analyst

Ravi Kumar -- Barclays -- Analyst

George Sutton -- Craig-Hallum -- Analyst

Samik Chatterjee -- JPMorgan -- Analyst

Asiya Merchant -- Citigroup -- Analyst

Catharine Trebnick -- Colliers -- Analyst

Meta Marshall -- Morgan Stanley & Co. LLC -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Rod Hall, CFA -- Goldman Sachs -- Analyst

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