Ronald Hudson - Fotolia
Avaya revenue slump expected to continue in 2020
Avaya revenue fell short of projections in the fourth fiscal quarter, capping a year of disappointing returns. The company told investors that revenue would likely decline in 2020.
Avaya shares closed down 5% Wednesday after the company failed to hit its financial targets for the fourth fiscal quarter and predicted that revenue would likely decline again in 2020.
Avaya brought in $723 million in the three months ended Sept. 30, despite projecting revenues between $735 million and $755 million. The quarter capped a year of disappointing returns, with the company generating just under $2.89 billion after initially telling investors it would sell between $3.01 billion and $3.12 billion worth of products and services.
Avaya attributed its underperformance in the fourth quarter in large part to a delay in executing a 10-year $400 million deal to sell phone systems and contact center software to the Social Security Administration. A competing vendor has challenged the contract, sparking a procurement review that Avaya expects will further delay revenues at least through the current quarter.
Meanwhile, the Avaya revenue slump is projected to continue in fiscal 2020, which began Oct. 1, with the company forecasting receipts of $2.81 billion to $2.89 billion. But analysts credit Avaya for at least significantly slowing the rate of its revenue decline in the two years since emerging from bankruptcy in late 2017.
Company executives said 2020 would be a transformational year for Avaya as it finally introduces a unified communications as a service (UCaaS) offering in partnership with RingCentral. The product will plug a gap in the vendor's portfolio, which cloud-based competitors had exploited to steal the longtime customers of Avaya's on-premises gear.
But Avaya is poised to face a significant challenge in a few years, said Steve Blood, analyst at Gartner. Many large enterprises aren't ready to replace on-premises communications gear because they spent a lot of money on it. But, eventually, that calculation will change.
In the meantime, Avaya is selling maintenance and other services to those customers. The company has highlighted the growth of its software and services segment, which now represents 83% of total revenue, up from 71% in fiscal 2015.
"Avaya will talk about that as having loyal customers," Blood said. "We will look at that differently. We don't think they are so much loyal as they need a stop-gap to hold off while they build their strategy with other providers."
Avaya's answer to that impending problem has been to invest in a single-tenant cloud product called ReadyNow. It gives each customer a separate instance of the software on servers in an Avaya data center. The architecture allows for a higher level of security and customization than would be possible in a Multi-tenant cloud. Avaya said its large enterprise customers prefer that approach.
Partnerships have emerged as another critical aspect of Avaya's cloud strategy. Avaya is now relying on vendors like RingCentral and Afiniti to deliver innovative products and features. Just last week, Avaya announced it would partner with Google to bring a suite of AI capabilities to contact center customers in 2020.
Avaya plans to begin reporting to investors the percentage of revenue attributable to cloud, partnerships and emerging technologies combined. As of last quarter, that figure stood at 15%, but Avaya expects it will reach 30% once the RingCentral partnership ramps up.
The cloud alone accounted for 11% of revenue in fiscal 2019. That's up from 10% last fiscal year but below the company's original estimate of 12% to 14%. Avaya has sold nearly 4 million licenses for cloud telephony and contact center software, up from 3.5 million at the end of fiscal 2018.
Meanwhile, Avaya is retooling its executive team. On Tuesday, Avaya announced that its top cloud executive, Gaurav Passi, was no longer with the company.
Anthony Bartolo will become chief product officer overseeing on premises and cloud portfolio next month. He is currently a top executive at Tata Communications, a networking and communications service provider, and previously spent four years with Avaya.
As part of the shuffle, Chris McGugan, currently senior vice president of solutions and technology, will become CTO.