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Avaya cloud revenue grows, but profitability remains elusive

Avaya reported a net loss of $130 million last quarter, but the vendor still appears largely on track to hit its annual targets. Avaya cloud revenue rose modestly as a percentage of total earnings.

Avaya Inc.'s revenue decreased slightly in the second quarter of fiscal year 2018, but company executives said the vendor was on track to hit annual targets and begin reversing a years-long financial decline in the near future.

Avaya reported adjusted, or pro-forma, revenues of $757 million for the three months that ended March 31, down 3% from the prior quarter and down 8% from the second quarter of fiscal year 2017. After excluding one-time costs, the company recorded sales of $672 million for the period. Avaya posted a net loss of $130 million during its first full quarter since going public.

Avaya cloud offerings generated 11% of the company's revenue last quarter, up 2 percentage points quarter-over-quarter, CEO Jim Chirico told investors on a conference call Thursday.

The vendor has roughly half as much cash in the bank as it did this time last year -- $311 million vs. $764 million. Avaya recently shelled out $158 million to acquire Spoken Communications, a cloud contact center vendor, and has also been using cash to repay debts and fund pensions.

But Avaya executives have done a good job managing expectations in fiscal year 2018, said Steve Blood, analyst at Gartner. The company has been roughly hitting its quarterly revenue targets and appears largely on track to meet its end-of-year forecast, he said.

"Avaya is having to make notable investments to recover the challenges of last year, so from an analyst perspective, we're expecting to see greater costs for the business in the short term as it responds to those investment demands," Blood said. "This is possibly reflected in the losses for Q2 and loss guidance for Q3."

Avaya is expecting to bring in adjusted annual revenue between $3 billion and $3.1 billion this fiscal year, down from more than $3.2 billion in fiscal year 2017. Avaya spent much of last year in bankruptcy court, after filing for Chapter 11 relief from $6 billion worth of debt.

Avaya's competitors have seized upon the vendor's financial woes to steal customers over the past year. Genesys Telecommunications Laboratories launched a sales initiative targeting Avaya customers early last year. Last week, the contact center vendor said it won contracts with more than 360 of those businesses since that time.

However, Avaya's installed base seems to be more comfortable with the vendor's financial situation now that the company has exited bankruptcy, said Zeus Kerravala, principal analyst at ZK Research in Westminster, Mass. "You can't sell them panic like you did before," he said.

Avaya cloud revenue ticks upward

My sense is that the bleeding has stopped, but it's too early to see the impact of the recent management changes.
Irwin Lazaranalyst, Nemertes Research

Avaya executives highlighted several items in the second-quarter balance sheet that arguably demonstrate the company is enjoying modest success as it transitions to a cloud-first business model.

Software and services generated 83% of Avaya's adjusted revenue in the second quarter -- an all-time high, and up from 79% during the second quarter of fiscal year 2017. Recurring revenues also reached a record peak, accounting for 58% of adjusted earnings.

Avaya said it won 1,200 new customers during the quarter and increased sales of Avaya cloud products, particularly to small and midsize businesses.

"The evidence is clear. The transformation is progressing. We remain on track to achieve our revenue objectives for FY18 and set the stage for growth in FY19 and beyond," Chirico told investors.

Excluding networking revenues, a business division the company sold last year, Avaya's adjusted revenues in the second quarter of fiscal year 2018 were actually $2 million higher than during the second quarter of 2017 -- representing the first year-over-year increase in six years, Chirico said.

Avaya's revenue numbers underscore the difficulty of shifting from selling hardware to selling software and services, said Irwin Lazar, analyst at Nemertes Research. That is, Avaya's overall revenues are declining even as recurring revenues from Avaya cloud grow.

"My sense is that the bleeding has stopped, but it's too early to see the impact of the recent management changes," Lazar said. "I think they will remain in a transformational period at least through the end of this year."

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