Avaya Makes Its Case to InvestorsAvaya Makes Its Case to Investors

On Wed., Dec. 12, Avaya held its first investor conference since going public about a year ago. This conference is a critical event for the company. Why?

A higher stock price leads to a larger market cap and more resources to make investments. And while stock price really has nothing to do with technology or service or any criteria for purchasing, many IT professionals do follow the financial markets -- and when investors lose confidence and stock price falls, doubt can creep into the buyer’s mind. Instilling confidence with the investment community is important for these reasons.

Avaya held the event at the New York Stock Exchange -- a cool venue but a hassle to get to compared to Midtown locations. Despite that, the turnout was better than I expected, with somewhere in the neighborhood of 125 financial analysts, many from the big firms, in attendance (plus one industry analyst). I’d tempered my expectations on attendance for a number of reasons, including the fact that the company has only been listed for about a year, the low number of sell-side analysts covering the stock, low trading volumes, and some confusion about how the company is positioned in the cloud. For these reasons, this was the perfect venue for CEO Jim Chirico and other executives to make Avaya’s case, and I think they did that.

A Transition in Phases

During his keynote, Chirico talked about the transition of Avaya in phases. Think of the current year, 2018, as the year of creating stability. Avaya couldn’t attain revenue growth until the decline ended, which it did this year – as evidenced in four consecutive quarters of revenue stabilization.

Looking ahead, Avaya has guided investors to a modest compound annual growth rate (CAGR) of 0% to 3% in 2019 and 2% to 4% beginning in 2020, with 25% coming from the cloud. This is low compared to CAGR projections of the cloud pure-plays, but it is notable given the company is coming off of several years of revenue decline. While it’s shifting from an on-premises to cloud model, it’ll take a couple of years for the innovations being built today to move the needle. I think this is a conservative number, and if Avaya executes on its strategy, it should easily be able to grow in mid-to-high single digits.

Chirico provided a number of proof points that 2018 was indeed the year Avaya transformed itself. The most notable was that 82% of its revenue is now from software and services, with 57% being recurring revenue. Its cloud business grew a little over 300% with the total number of seats being about 200,000 with 55,000 coming in the fourth quarter alone. Total contract value of recurring revenue is now $2.4 billion.

Another interesting statistic is that Avaya added 7,000 new logos in 2018. One of the concerns from investors is whether its business is limited to its installed base, but the jump in new logos should quell that fear -- at least for now. One final data point was the number of large deals. Most of the cloud pure-plays count a $1 million deal as large, and Avaya had 44 deals at that size. More impressive are the 55 deals at more than $5 million and 15 at $10 million. Of course, these large Avaya deals include more than cloud services, but they do demonstrate that when dealing with enterprise-class customers, the scale of deals is an order of magnitude larger than those typical for cloud pure-plays.

Four Pillars for Growth

After discussing the foundation set in 2018, Chirico switched gears to what's ahead. Avaya’s growth strategy is based on the following four pillars:

Innovate the Core -- This is actually a double entendre, as it refers to driving more innovation into its core products but also modernizing its massive installed base. Avaya’s biggest asset remains its installed base, which is about 5.5 million of 13.5 million (41%) contact center seats and 139 million (31%) of 450 million seats. Chirico referred to the Avaya base, which includes 90% of the Fortune 100, as the “envy of the industry.” In fact, enterprise-class customers comprise 80% of the base, providing Avaya excellent opportunity to play to its strengths. Most large customers want a hybrid offering, and Avaya is arguably best positioned to deliver that better than any other vendor.

For example, a business with 10,000 contact center seats isn’t likely to move everything into a public cloud for a number of reasons, including security and control of data. A likely migration path would be for the business to want to maintain its current voice platform and then layer on other digital channels. A pure-play would need to rip and replace, which can be disruptive.

Bring Emerging Technology to Market -- This revolves primarily around mobility and artificial intelligence (AI). In mobility, Avaya is largely focused on its unique toll-free “800” service that brings context to the contact center when customers call in via mobile phones. During his presentation, Innovation SVP Laurent Philonenko explained that 70% of 800 calls come from cell phones, ususally with no context. Avaya’s goal for this service is to hit $100 million by fiscal year 2021.

Related to mobility is the identity management service the company is working on. Identity management in contact center interactions is highly inefficient, with callers needing to provide credit card numbers, names, addresses, and other info. Avaya is developing technology that uses a combination of voice, video, blockchain, and more to change identity.

AI is an area Avaya has actually been strong in for years. I think back to 2012 and the company’s Context Store product for bringing context to interactions. Today, we call that “AI.” Back then we just called it “context.”

Also, the Afiniti partnership announced earlier this year provides better contact center routing for improved agent efficiency. Avaya’s real-time coaching, which allows on-the-fly agent training, obviates the need for classroom training. Avaya will focus on these four key areas for AI: Ava bots, predictive routing, conversation intelligence, and insights.

Avaya’s stated goal is to hit $100 million in AI-related revenue by FY2021; I find this goal a bit strange goal since AI should be infused into almost every part of the portfolio by then. With AI, in theory, the more customers buy, the more they save.

Go Broad and Deep in the Cloud -- Avaya recently launched its new marketplace for UCaaS and CCaaS, as I wrote about earlier this week in the post “Avaya Gets Jiggy With Public Cloud,” but the journey is just beginning. Avaya will continue to revamp its product line to be cloud-first, but will offer public, private, and hybrid flavors. Down-market, it will use its as-a-service offerings to go toe to toe with the cloud pure-plays and will focus on custom architectures upmarket.

Create High-Value Services -- The services business holds tremendous potential for Avaya, as it needs to lead its large enterprise engagements with services. The company has 2,000 service people, which is more than most of the pure-play UCaaS and CCaaS providers have in total employees. Upmarket, there is money to be made in the areas of high-value consulting services, upselling through customer success, optimization services, and business process change. A goal for Avaya should be to move to a model where services are embedded into the deals.

Painting a Positive Picture

At the event, I caught up with many financial analysts, and most agreed that Avaya made its case and provides a good investment opportunity, albeit one that requires patience. Given the current stock price, there isn’t a tremendous amount of downside risk. However, a number of factors could affect its growth and prevent the stock from moving.

The bear case on Avaya is that it’s unable to establish itself as a credible cloud provider and remains on the outside looking in. Given the brand equity RingCentral, Vonage, and other cloud providers have, particularly in the midmarket, this is a possibility -- so Avaya has work to do here.

Avaya has always had great products, but has had a hard time connecting the dots between product innovation and business transformation. From what I’ve seen, this is a strength of Avaya’s marketing chief, Becky Carr.

Lastly, and this is the biggest risk factor: Is Avaya’s channel ready to make this transition with the company? At its size, Avaya must rely on channel and transitioning a group that large is no easy task. But Avaya has been methodically churning out the ones that it feels won’t make the shift and adding in new ones, as CEO Chirico noted.

Overall, I think Avaya painted a positive picture at the event. The product is in place, and it has a big installed base. Now it just needs to execute.

Editor's Note: This post has been updated for clarification on certain data points.