Avaya – Cloud Transition & Long-term Growth Outlook

What TAM should we be considering for Avaya? I think the company talks about a USD 60bn TAM, breaking out between CPaaS [communications-platform-as-a-service], contact centre, unified communications and workstream collaboration, and that’s going to grow to USD 100bn over the next two years. What do you see as the most important constituent parts to monitor from a market perspective?

You mentioned that CPaaS is growing the most and Avaya talks about a 33% growth rate. The company’s big strategy right now is the OneCloud ARR, which consists of cloud and subscription revenues, and it’s talking about 90% and 40% growth respectively for cloud and subscription over the same time frame. When we compare those growth levels to market levels, do you expect that to be a function of existing customer migration allowing for a higher pace, its ability to gain market share? What do you see as the big difference in the growth rates?

Do you think there’s a compounding effect on the erosion of the EBITDA contribution, when we think about what is lost when we pivot it away from the perpetual licence? On the contact centre side of things, something like software assurance has very high margin. Do you think some of the degradation to the revenue during the migration will look even more exacerbated from an EBITDA perspective?

How do you see Avaya’s product suite standing in the market? I think you talked about CPaaS to start. When we think about the companies that have so much developer mind share, such as Twilio, Sinch, Bandwidth or even Nexmo, how strong is Avaya’s CPaaS product and what might that mean for how much more slowly it might grow than that 30%-plus market growth?

I know that historically a lot of the sales motion was developer-led. On its investor presentation slide deck, Avaya talks about having 120,000 developers, which pales in comparison when you think about the millions Nexmo and Twilio have. How difficult is it to improve the developer mind share there?

Could you discuss unified communications and what Avaya is planning or starting to do with UCaaS [unified-communications-as-a-service], obviously through the Ring partnership? How does its standing against competition look there for you?

It’s important to distinguish between public cloud adoption vs something more like private or hybrid cloud. How much could the unified communications and contact centre markets be public-cloud-penetrated over the next five years? It’s probably worth differentiating between downmarket and upmarket. It sounds as if downmarket on both sides of the coin will highly penetrate in public cloud, whereas those penetration levels might be significantly lower for upmarket.

How strong would you say Avaya’s unified communications hybrid product is in terms of going to market with the upmarket customers the company is hoping to sell to?

The last product to focus on is Spaces. I see that as a bit similar to players such as Slack, and workstream collaboration might be a USD 30bn-plus market in itself. Does Spaces have a lot of market resonance relative to other collaboration tools such as Slack or Teams?

I know a lot of the ARR growth strategy is focusing on the existing base. Avaya likes to talk about six million contact centre agents and 100 million unified communications seat base that the company is looking to migrate. I feel the first question around is the know-your-customer dynamic, where I think only 33 million pay maintenance on the unified communications side, so I would imagine there’s a similar dynamic where a few million need to be tracked down on the contact centre side. Are those non-paying customers very likely to come back, and what does that cut out of the install base that they’re looking to target?

In the 33 million that are paying on the Avaya side for the unified communications side, you mentioned that it’s good to think about Avaya Cloud Office as perhaps a better way to address the public cloud dynamic on the downmarket side of things, so is the 33 million paying predominantly enterprise or a good split between upmarket and downmarket?

Do you see Ring’s products scaling to upmarket, whether it’s from a reliability standpoint or coming back to the customisability that’s necessary? You don’t see a lot of enterprise adoption for a lot of these pure cloud players, so does it come back to again that it’s going to be an Avaya hybrid unified communications solution that drives a lot of any of the 22 million or 33 million adoptions from an upmarket perspective?

You brought up the contract dynamic, where obviously when they’re under contract, and Avaya did a lot of work in 2021 to move customers over to subscription contracts, which probably put them under this three-year restriction. Is there a good way to think about how quickly the cloud transition occurs longer term? Avaya only has 7-8% of the base that’s adopted OneCloud to date and is aiming to get to 15-20% by 2024, so if you mid-point that, 5% of the base additionally is adopting OneCloud. Presumably, that’s not a 100% win rate on renewals, some are going to stay on on-prem or churn out. What is a good rule of thumb for renewals in any given year? How quickly are customers even looking to do an RFP [request for proposal]?

Presumably there will be some laggard customers who choose to stay on-prem over the next renewal but might look to adopt something cloud-oriented over subsequent renewals. Of the six million contact centre agents and the 33 million paying unified communication users, what does a benchmark for success look like for you once the transition is over? Should Avaya be able to retain north of 50%, north of 70% of that, or is it going to be much more difficult?

On the on-prem side, in the instance that customers are looking for an alternative vendor, who are some competitors you think Avaya would be the biggest share donor for if they can’t get around to retaining that base well?

I think it struck me interesting that the current unified communications seat prices are all USD 5, maybe get to USD 10-12, whereas the public cloud players such as Zoom or RingCentral are USD 20-25. Why is pricing so low for Avaya? To your point around Microsoft or Google being able to bundle it with their work office suites, is there a lot of commodity on the horizon for unified communications pricing?

The volume discounts might fade out as the seat count gets a little more accurate, getting rid of redundancies. Is there anything to say on the contact centre side of things? Are USD 12 contact centre seats relative to Five9 on the public cloud side of things running at a USD 140 ARPU almost also a function of the deal sizes or of how little Avaya is selling in digital, IVA [intelligent voice automation] or WFO [workforce optimisation]?

Do you think Avaya is getting good add-on? I know Nuance is more like WFO. Do you think they’re getting a lot of the value-add stuff added on or does the fact that Avaya is third-party-oriented and integrated take away from getting a more fully loaded contact centre seat?

Am I wrong to think that when Avaya starts looking to get adoption for the CCaaS [contact-centre-as-a-service] product that those things will be priced for? I sent you prior to the Interview a flowchart that includes MRR for contact centre and unified communications with penetration to the base to think about what ARR numbers the company can reach, and the lowest that it’s throwing out there for contact centre is USD 60, which is materially higher than that USD 12. When it does look to adopt in hybrid or subscription or even private and public cloud, are those things going to be priced for? What does that make you think about what a good per-seat price it could actually attain, when you do include those things?

Avaya talks about contact centre representing already 60% of ARR mix. As it continues to grow ARR, do you expect that to shift at all, or is contact centre really in the driver’s seat for you?

When we think about the migration playing out from now until 2024, do you feel pretty good about Avaya getting to USD 1bn in ARR by year end, USD 2bn by 2024?

Do you feel pretty okay with Avaya reaching north of USD 5bn ARR over a longer-term basis? I know you mentioned migrating at 70-80% could be seen as success, and that same chart that I sent you, if we even consider the lowest pricing, 50% penetration will get the company to USD 5.7bn ARR. Do you feel, as this plays out over multiple renewal cycles, that getting to north of USD 5bn or even higher is pretty obtainable?

You brought up a good point as well around actual new logo wins. Obviously, Avaya is competing in a broader space, and if you include virtual agents, it might be 25 million on the contact centre side and 400 million points of presence on the unified communications side. Do you see new logo wins being a material growth driver even post the transition? What’s the company’s right to win anything that exists at the base of it all?

I think Avaya talks about growing the business at 15-20% post-migration. Do you see any world in which the long-term financial model for this business, post-2024 specifically, can be a 15-20% grower, based on what we’ve been talking about?

Do you see the RingCentral partnership as a big technology ownership risk for Avaya over the longer term? Let’s say the predominant amount of OneCloud ARR that comes on the unified communication side of things is Avaya Cloud Office, is there anything holding back RingCentral from clawing that whole customer relationship back over the longer term?

Would you expect RingCentral to be more contentious over time? Obviously, it seems the company is trying to accelerate its growth from these partnerships, and Avaya is not the only one. Do you see it really trying to own the customer relationship, or can that be a happy marriage longer term?

We alluded to margins, but obviously Avaya has been operating at low-to-mid-20s. When you think about the CAC [customer acquisition cost], the R&D costs, whatever the company needs to be spending to facilitate a lot of the transition, could margins fall below 20% as it works through things? Do you think, in a terminal way, the business can have north of 30% margins? Could this also be attainable on a longer-term basis?

Is there anything you feel we missed or do you have any closing remarks?