Avaya Holdings' (AVYA) CEO Jim Chirico on Q1 2018 Results - Earnings Call Transcript

Avaya Holdings Corp (AVYA) Q1 2018 Earnings Conference Call March 1, 2018 9:00 AM ET

Executives

Peter Schuman – Senior Director of Investor Relations

Jim Chirico – President and Chief Executive Officer

Pat O’Malley – Senior Vice President and Chief Financial Officer

Analysts

Raimo Lenschow – Barclays

Lance Vitanza – Cowen

Charlie Jones – Marshall Wace

Mike Latimore – Northland Capital Markets

Rob Jost – Invesco

Stan Manoukian – Independent Credit Research

Operator

Good morning. My name is Mariama and I will be your conference operator today. At this time I would like to welcome everyone to the First Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Peter Schuman, Senior Director of Investor Relations, you may begin your conference.

Peter Schuman

Thank you, Mariama. Welcome to Avaya’s Q1 fiscal year 2018 investor call. Jim Chirico, our President and CEO; Pat O’Malley, our Senior Vice President and CFO; Shefali Shah, our CAO and GC; and Laurent Philonenko, our SVP of R&D are here for today’s call.

The earnings release and investor slides referenced on this call are accessible on the investor page of our website and the SEC website. You’ll reference non-GAAP financial measures due to our emerging from Chapter 11 mid-quarter and the application of fresh start accounting on that day pre and post emergence results are not directly comparable, but we have combined them for the quarters and we believe it provide to most meaningful basis for analyzing our results.

We specifically note that all sequential and year-over-year comparisons reference non-GAAP numbers to except where otherwise noted. A reconciliation of such measures to GAAP is included in the earnings release and investor slides and also available on the investor page of our website. We will make forward looking statements including Q2 and FY 2018 guidance that are based on current expectations, forecasts, and assumptions, and remain subject to risks and uncertainties that could cause actual results to differ materially. Information about risk and uncertainties maybe found in our most recent filings with the SEC including our Form 10 and Q1 2018 – fiscal year 2018 Form 10-Q to be filed in today's earnings release. It is Avaya’s policy not to reiterate guidance and we undertake no obligations to update or revise forward looking statements and event facts or circumstances change.

I will now hand the call over to Jim Chirico, our President and CEO. Jim?

Jim Chirico

Thank you, Peter. I'm very excited to join all of you for Avaya’s first earnings call as a public company in over 10 years. Let me start by stating it is my distinct privilege and honor to have the name CEO at the beginning of the fiscal year. While the company has delivered outstanding results in Q1 FY 2018, even while we're in Chapter 11 for the better part of the quarter.

We've now had four straight quarters of revenue stability, and we're building from there. These results are a real testament to the loyalty of our customers, partners, our global team and the strength of our brand. I'm delighted for the opportunity to share with you how far we've come and even more excited about the future. But before we get into the details, let me take a few minutes to provide an overview with the first quarter. To say context on how I see Avaya, and how we're positioned to lead the market.

Q1 2018 was a milestone quarter as we emerged from Chapter 11 after addressing our capital structure. As a result we strengthen our balance sheet by reducing our obligations by over $4 billion. We've freed up over $300 million in cash flow to invest in the business. We will use this to fund our acquisition of Spoken communications and invest in R&D as well as our people, processes and systems to deliver leading edge technologies.

We continuing to improve on our industry leading business model. We ended the quarter with 26.6% adjusted EBITDA as a present of non-GAAP revenue, which further facilitates our ability to invest. We continue to execute on our strategy with the record 82% of our revenue derived from software and services, 57% was recurring revenue. We recovered in our contact center business by converting pent up demand to revenue.

One of my first actions as CEO was to initiate the transformation of Avaya to dramatically and sustainably improve performance and drive growth. I’ve assembled the new senior management team who are action oriented have a disruptive mindset and the DNA and willingness to move the business forward and achieve our objectives. We introduced five cultural principles, which will define how Avaya operates, their teamwork, accountability, trust empowerment and simplicity. These will lay the groundwork for a winning company.

We’ve take an immediate action with a clear vision and implemented a number of key initiatives. First, we established a dedicated cloud business unit. We also named the Chief Revenue Officer, announce our first significant acquisition and exceeded our revenue plans with an outlook of revenue stability in FY 2018 with the lens on growth in FY 2019. We're gaining a significant tractions in the cloud.

In summary, number one, we're transforming the company. Number two, we will continue building momentum by being aggressive. Number three, we are playing offense. Number four, we're making the necessary investments in people and innovation to position our company for growth. And number five, we will continue to enhance and leverage our financial flexibility.

Now, let me share some significant accomplishments from the quarter. We achieved non-GAAP revenue with $775 million roughly flat with Q4 FY 2017. This is especially notable as historically the first quarter is negatively impacted by seasonality. We had over 1,300 new customers and 265 new channel partners. We find approximately 90 deals each with over $1 million total contract value, which was outstanding. We capitalized on opportunities after our timely emergence this demonstrated a level of restored customer confidence in our brand as further shown in our sequential growth in key areas.

Contact center revenues grew by 16%. Avaya Private Cloud revenues grew by 3%. Professional services grew by over 10%. Our mid-market cloud seats grew by 41% while monthly recurring revenue grew 39% in the same segment.

Switching gears let me share some highlights around innovation. We send it our position as a proven technology leader by launching 70 new products in FY 2017. In Q1 a GITEX Tech in Dubai we demonstrated block chain technology to measure satisfaction of costumers in real time. This happiness index as just been named the 2017 Award finalist for the Edison Award.

We announced the acquisition of Spoken, also including their intelligent wire AI solution, which applies deep learning to live voice conversation, and reduces after co-work and significantly improves the customer experience. We continue to build on Avaya Oceana our next generation omnichannel contact center solution. We recently enhanced the Oceana desktop so agents can see where customers have engaged across all communication channels. This improves agent efficiency and effectiveness and leads to greater customer satisfaction.

Our Equinox meeting solution for video conferencing was launched. With the same capability of our Primus solution now via the cloud. And we introduced our market leading IP office Unified Communications solution as a pure cloud offering. We're hitting on all cylinders, and I can't thank our customers, partners, and employees enough with their commitment. Our management team is executing, our cultural principles are taking hold, our momentum in the business continues and we're driving successful outcomes. This gives me high confidence that we will continue to achieve our revenue objectives in 2018 and set the stage for growth in 2019.

Now let me turn it over to Pat, who will take you through to financial detail for the quarter and our outlook. Pat?

Pat O’Malley

Thank you, Jim. Please note that I will be revealing our non-GAAP income statement unless otherwise noted. Non-GAAP revenue for Q1 fiscal year 2018 was $775 million down $15 million compared to the prior quarter to the seasonality in business and down $100 million year-over-year primarily as a result of the sale of Networking business and the effects of the transition from legacy hardware shifting to our Software and Services business.

Excluding the impact of the sale of the Networking business, non-GAAP revenue decline approximately 2% from the prior quarter, which is better than typical seasonal trends and approximately 5% of lower compared to Q1 fiscal 2017.

Non-GAAP product revenue of $330 million decreased 4% from the prior quarter and decreased 18% year-over-year. Excluding the impact of the sale of the Networking business product revenue decreased 4% sequentially and year-over-year.

Non-GAAP service revenue of $445 million was down less than 1% sequentially and decreased 6% year-over-year. Excluding the impact of the sale of the Networking business, service revenue decreased less than 1% sequentially and was 4% lower year-over-year.

Non-GAAP gross margin of 61.8%, a record percentage for our first quarter result, improved year-over-year by 10 basis points reflecting better product mix as a result from the X of the networking business offset by lower volumes. Compared to an easily preceding quarter, non-GAAP gross margin was lower by 150 basis points mostly a result of geographical and product mix.

Non-GAAP product gross margin for Q1 fiscal year 2018 was 64.8% up 100 basis points compared to the prior year, which is attributable both to improved product mix and down 490 basis points sequentially, which reflects weaker geographical and product mix.

Services gross margin of 59.6% decreased by 30 basis points compared to the prior year, while was up 120 basis points from the prior quarter reflecting improved productivity as points from the prior quarter reflecting improved productivity.

I will now cover our cost structure. Total non-GAAP operating expenses R&D plus SG&A of $307 million decreased $10 million sequentially and $41 million year-over-year. SG&A of $260 million was $10 million lower compared to the fourth quarter fiscal 2017 and was $26 million lower than the same period during the prior year. The reduction reflect the ongoing cost structure improvements and are also result of the sale of the Networking business.

R&D expense totaled $47 million or approximately 14% of product revenue and in an increase of $4 million year-over-year excluding the network business, while we improved R&D efficiency, we continue to deliver a steady pipeline of innovations across the product portfolio.

Non-GAAP operating income was $172 million or 22.2% of revenue, a record percentage for a first quarter result, and compared to $192 million or 29.9% of revenue for Q1 fiscal year of 2017 and $183 million or 23.2% for the immediately preceding quarter.

Non-GAAP operating income for Q1 fiscal 2018 reflects the success for cost reduction efforts which have improved the operational efficiency of the company.

Non-GAAP net loss for the Q1 fiscal year 2018 was $68 million or 8.8% of non-GAAP revenue and compares to non-GAAP net income of $19 million for Q1 fiscal 2017 and $162 million at Q4 fiscal 2017.

Adjusted EBITDA including the OCI amortization effect was $206 million or 26.6% of revenue for Q1 fiscal year 2018 and compares to $238 million or 27.2% of revenue during the first quarter of fiscal 2017 and $225 million or 28.5% of revenue for the immediately preceding quarter.

Turning to the balance sheet. Cash and cash equivalents were $417 million as of December 31, 2017 compared to $876 million for the prior quarter and $209 million for Q1 fiscal year 2017. The sequential change in cash and cash equivalents is primarily due to the emergence payments to the former debt holders the PBGC and other creditors repayment of the debt facility and debt issuance costs and professional fees offset by proceeds of the new term loan.

Inventories increased about $28 million sequentially to approximately $124 million. Days of inventory increased by one day to 30 days from 29 days reported in Q4 fiscal 2017 due to lower revenue levels. This level of inventory represents consistent operating levels.

Accounts receivable totaled $413 million at the end of Q1 fiscal year 2018 a decrease of approximately $123 million on a sequential basis. Day sales outstanding were approximately 48 days, a decrease of 12 days from the prior quarter. The primary reason for the decrease of the day sales outstanding was result of more linear collections throughout the quarter and a benefit of three day sales – day sales outstanding due to the reclass of receivable to other assets.

Capital expenditures were approximately $15 million in Q1 fiscal year 2018 down from $17 million in Q4 fiscal 2017.

Depreciation and amortization in the first quarter 2018 was approximately $53 million down $10

million on a sequential basis and decline of $37 million year-over-year.

I will now discuss our demand indicators for Q1 fiscal year 2018. Bookings are becoming less than indicator going forward. Recall Avaya is still had a networking business during the first quarter of last year. Total bookings declined year-over-year due primary to the reductions seen in the networking business and associated services, and software unified communication business and associated maintenance. Excluding the networking business on sequential basis, we had software bookings during the seasonally down period. We have since seen a recovery in the overall company's bookings since emerging from Chapter 11.

Product revenue for Q1 fiscal year 2018 was $330 million, $30 million lower than the prior quarter and $71 million lower in the prior year. The decreased year-over-year is primary as a result of the sale of the Networking business, which contributed $53 million of the decline excluding in networking business product revenue was down $80 million year-over-year and $12 million sequentially.

Service revenue of $445 million in Q1 fiscal year 2018 was down $29 million from the prior year. $10 million as a result the sale of the Networking business and the remainder from lower maintenance revenue. We saw stabilization of service revenue on sequential basis during Q1 fiscal year 2018 with only $2 million difference from immediately preceding quarter as we had sequential growth in both the cloud and managed services and onetime professional services grew double digit percentages. Both cloud and managed services resident revenue and professional services each accounted for over 9% the total company revenue.

Now focusing on the distribution channel. Reported product revenue to the channel excluding networking was $226 million down 11% sequentially and 10% year-over-year. As a reminder our channel product revenue has recognized when we sell into the distributor and continues the account for more than two thirds of our total product revenue. Distributor revenue inventories of $110 million declined by $5 million from Q4 fiscal 2017 to Q1 fiscal year 2018 and were $9 million lower from Q1 fiscal 2017.

I will now discuss her financial outlook. Given our current visibility and expectations for the balance of the calendar year, we expect results for the second quarter of fiscal 2018 to include the following.

GAAP revenue of $660 million to $680 million and non-GAAP revenue of $750 million to $770 million. GAAP operating loss of 16% to 20% of revenue and non-GAAP operating profit of 20% to 22% of non-GAAP revenue.

GAAP net loss of $1.35 to $1.55 per diluted share and non-GAAP net income of $0.80 to $0.90 per diluted share. Adjusted EBITDA of $180 million to $200 million or adjusted EBITDA margin approximately 25% of non-GAAP revenue. Total cash requirements for restructuring pension and OPEB cash taxes and capital spending in the second quarter are expected to be between $80 million and $90 million.

Now looking at fiscal year 2018 financial forecasts. This forecast does not include any financial results from our pending acquisition of Spoken. Also take into considerations Avaya’s continued investment in R&D, sales enablement, tools and people and our ongoing efforts to improve Avaya’s operating efficiencies. We are now targeting a falling annual forecast for fiscal year 2018.

GAAP revenue of $2.775 billion to $2.9 billion and non-GAAP revenue of $3 billion to $3.1 billion. GAAP operating loss of 46% of revenue and non-GAAP operating margin of 21% to 22% of non-GAAP revenue, approximately $175 million of expected interest expense. Adjusted EBITDA $750 million to $800 million, our adjusted EBITDA margin of approximately 25% to 26% of non-GAAP revenue.

GAAP net income of $2.85 – net income of $2.85 billion to $2.95 billion. Capital expenditures of $60 million to $75 million for the year, approximately $110 million basic and diluted shares outstanding. We remain committed to the continued – continuing to increase the operational efficiency and productivity of the organization. Moving forward as a software and services company, we are focused on driving additional cost structure improvements while continue to invest in our product portfolio and maintaining outstanding customer support and satisfaction. We expect an increasing proportion of revenue to come from software and services and from recurring revenue.

Now I’d like to turn the call over to Jim for some additional remarks.

Jim Chirico

Thank you, Pat. Now before we turn it over to questions. In closing I’d like to remind you first that we are transforming the company. We will continue building momentum by being aggressive. We are playing on offense, we’re making the necessary investments in people and innovation to position our company for growth and we will continue and have some leverage to our financial flexibility.

So with that, I like to turn it over to Mariama and begin our Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Mike Latimore, Northland Capital. Your line is open.

Mike Latimore

Great. Thanks a lot. Nice quarter there. Just wanted to follow-up on the comment you made about recovery and bookings as you came out of bankruptcy. Can you just describe that a little bit more, is that across the couple contact center you see – services does it – are there certain verticals that just couldn’t buy when you are in bankruptcy that are buying out? Can you just provide a little color on kind of what you are seeing from that bookings recovery?

Jim Chirico

Yes. Sure Mike. This is Jim Chirico and thanks for the question. We’re seeing bookings – when we take a look at booking it’s really a product and are 1x if you will professional services bookings. So we saw an increase in bookings and recoveries back in contact center, which obviously is important. We did see a recovery back in our professional services business.

UC and fairness was down but you got to look at sort of the details underneath of that. As you take a look at our legacy products, the gateways and servers which are still trending off at 20% to 25% a year and that’s the obviously the move to more software. We did see some compression there but as you start to look at the end points, we started to see a recovery. So UC is down but it was consistent with what we’ve been seeing in our strategy and what we’ve been obviously talking to the analyst about. So, if you take a look at sort of the growth and the future products that the good news there is it recovered back in our core and flagship products.

Mike Latimore

Got it. And then just in terms of operating cash flow. How should we think about operating cash flow relative to the EBITDA guidance you’ve given? What kind of delta might be there?

Pat O’Malley

So if you take a look at what should we generate is, [indiscernible] operating cash or as I look at the free cash flow because we told you some of the other expenditures. But we should generate applause of free cash flow anywhere from $50 million to $75 million a quarter depending on our investments.

And so I think that’s how we look at it. So that’s obviously that will accumulate on the balance sheet for further investment until we deploy it. But that’s how we’re looking at that.

Mike Latimore

Great. Thank you.

Pat O’Malley

Thanks, Mike.

Operator

Your next question comes from Lance Vitanza with Cowen. Your line is open.

Lance Vitanza

Hi. Thanks for taking the question. Jim, Could you repeat the comments that you made a minute ago regarding contact center revenue growth converting pent up demand in revenue. It sounded pretty interesting but you went it through kind of quickly. Could you provide some incremental color on what’s driving that pent up demand and how long do you expect the tailwind to last so forth.

Jim Chirico

Yes. Sure, no problem, Vince. Thanks for the call. Our contact center revenues grew 16% quarter on quarter. So a nice recovery back, in fact a bit better than we had anticipated. A lot of that had to do with the emergence from chapter 11 and in December. More importantly it also had to do with the disclosure hearing at back in August that really provided the clarity around the fact that we will indeed be exiting chapter 11.

Obviously with contact centers had some challenges associated with going to chapter 11 just based upon some risk and uncertainty of what the outcome maybe. So we always had a pent up demand at backlog, our customers have been very loyal. In fact, they held off from intensive purposes moving some of their transitions over in upgrades to our contact center. The teams has done a nice job, recovered a lot of that back bookings actually grew. And we’re still seeing that same momentum as we go into this quarter.

We are excited also about the Spoken acquisition and capabilities that brings with full cloud multi-tenant capabilities and our ability to offer our high enterprise contact center customers a real path now to the cloud. And that is gaining significant traction and we expect to close on that acquisition this month. But it was 16% quarter on quarter.

Lance Vitanza

If I could just as a follow up, you touched on the R&D spending. And I’m just wondering if you could talk – and maybe this is maybe more for Pat. The run rate that you’re on now where do you see that going as you move further from emergence and how does that run rate compare with what Avaya was doing over the past few years? Thank you.

Pat O’Malley

So we’re running, if you take a look at that $47 million, we’ve stepped up our investment in the core as you saw a lot of folks when they saw the networking business cut out of the financial model they thought there was a reduction in our investment in our R&D that wasn’t the case. It was just the elimination of that. We’ve increased investment I said this quarter, I think anywhere from 15% to 16% of revenues probably appropriate. We’re under that right now.

But I think we’ll continue to look to make investment where we see revenue opportunities. And obviously with our guide for the year, we see really see – we’re aiming for that flat revenue this year for pivot to grow. So we will continue invest in products streams and I said that was the first step. But we continue to try to maintain our overall profitability. So it has to fit in the whole piece but our bias is on R&D, I said sales enablement and other tools. So we will continue to make investments there while we get in efficiencies in other places.

Jim Chirico

Yes. If I might just add a little bit to that Pat, so Pat referenced the numbers. But as I mentioned, we are certainly going to take advantage of our financial flexibility. Previously we basically capitalize our financial strength to pay debt. Now we’re going to capitalize on our financial strength to grow revenue and grow our business and really provide the products and solutions that our customers require. So we are going through not only additional investment within R&D, obviously building out the Spoken acquisition, which takes some further investment. Building out our cloud business unit which we require some additional investment. But also repositioning in rebalancing our spend for more traditional investments two more of in the cloud in emerging technologies. So there's a transformation also occurring within the R&D organization.

So I think that we will continue to spend as Pat said, we spend more than we’ve had previously we are indeed making the necessary investments. And we started that in earnest in Q1 as we pointed out, and you'll start to see some of the results of that as we go through the follow-on quarters, which we will provide all of you updates on the earning calls.

Operator

Your next question comes from Raimo Lenschow with Barclays. Your line is open.

Raimo Lenschow

Hey, thanks for taking my questions. Jim one for you. Can you talk a little bit about your ambitions you have with your dedicated cloud units you obviously kind of have got leadership in there now. How do you see that playing out in context of like the overall portfolio of what you’re having? So how do you make sure kind of -- they're not starting to compete with each other and it kind of speeds like -- that you kind of create a nice migration and fast there. And then I have one follow-up for Pat.

Jim Chirico

Yes, sure. Thanks. It’s a great question. So I think we're moving more from ambition to reality to be honest. So as I mentioned we just announced in the first quarter pure cloud play on the mid-market. We are now building out Spoken, which was really purpose built for Avaya and it is native cloud, is full multi-tenet capability. We've actually have the R&D teams meet, we put Mercer Rowe in charge of the integration of who is our Cloud business unit leader of Spoken. We're gaining traction and, in fact, I think I'll be pretty happy to share some results with you in next earnings call and what we've actually been able to accomplish this particular quarter.

And secondly that the cloud business unit is also working to make sure that we have a pure cloud offers across the entire spectrum of the market segments. Having played in our market segments to date. I can tell you there's a fair amount of excitement with really melding our R&D with our Zang acquisition along the lines of Spoken. I wouldn't look at that acquisition as BPO, top enterprise, contact center solution only. There's a lot of technologies that we can lever and there's a lot of excitement and dynamics going on within the organization. And the synergy is this actually been – is there.

So we're pretty excited. And I think everybody is aligned on where we need to go. I talked about simplicity and I will just stay aggressor in it. There's only six EC members. We meet regularly we have full alignment and transparency with one another that is our ability to make decisions get the teams aligned has been faster than ever the level of accountability and ownership within the teams is exciting. They're now empowered, to go make decisions and run the business. So it's -- there's a different sense of energy, different vibe if you will and it's -- the excitement is there. So I look forward to continue to provide you guys updates on our progression overtime. But it's all frankly it's all working well and that's a fact.

Raimo Lenschow

Okay. Perfect and thanks for that. That was very clear. And question from Pat. If I look at the Q2 guidance and then the full year guidance, so Q2 is stepping down a little bit from Q1. Could you talk a little bit, but also – about the seasonality that you usually see in the year versus what you see this year in terms of revenue progression? Thank you.

Pat O’Malley

We generally see -- on the top line we generally see much more seasonality than we provided, you generally down 6%. So we take a look this quarter -- on the high end obviously we’re essentially flat. So we're -- this quarter like Jim said, we’re invested in the grow in some of the things we started last quarter and hopefully allow us to operate solidly in that range of the revenue. And on the OpEx side, we do have besides seasonality you do have some FX headwinds for us. I mean the nice benefit we get a little on the revenue, but we probably take a little more in the cost. So we're just watching that – you tell the euro has been very strong and that's where the probably were biggest areas we don't have a hedging program coming out of bankruptcy in the future we will get a fully functional hedging program. So we're somewhat exposed to currency shifts, but we know how to manage that as well. So with that seasonality I think the guides are pretty in line with that clearly on the revenue we could certainly beat that historical seasonality.

Raimo Lenschow

Perfect, very clear. Thank you.

Operator

Your next question comes from [indiscernible]. Your line is open.

Unidentified Analyst

Hi, Good morning. So first off and your form of – and you’re trying to go after the market in a aggressive manner. Are you trying to go directly to customers or potential customers are you trying to re-grow the channel partner?

Jim Chirico

Yes. This is Jim, thanks for the question. A couple things. Number one is, we continue to work with our channel partners. We realize the importance of them. In fact, we've probably never been closer to our partners and I've been here 10 years and 10 year history at the company. I spoke at C1, I was a keynote speaker at C1 Sales Conference just last week as a matter of fact. So we're aligned with our distributors, in fact I talk to Dennis Foe, CEO of [indiscernible] yesterday and Dave Johnson a day before Jenny. I spent a fair amount of my time continuing to build out develop strategies, co-investment opportunities with our channel partners. And I think we have a huge opportunity there to continue leveraging grow throughout the channel. So I don't see anything that's disruptive, in fact I view it more as an opportunity.

The net of it is, there was a belief that the channel economics don't work. That's not a channel problem that would be a kind of Avaya problem. We've addressed our business model, we've addressed our structure provided and improved their overall productivity and efficiencies. Our business model as a result of what we – Pat demonstrated in EBITDA and so on. Actually works with the channel. And I think there's -- and we are working on a number of strategic initiatives to bill that out.

One example is, as well as we go to the cloud we just at this quarter have begun to sign up Master agents. We have not had Master agents, we will provide you more color on that next quarter in the earnings call, but we now have Master agents that we're signing up and that's obviously driving a cloud through the channel. We have a number of other initiatives that we think both companies will not only grow because will grow profitably as well. So we continue to use and will use the channel.

Unidentified Analyst

Okay. Just one follow-up. As you move into the cloud it isn't material yet, or will have a point will become serial -- your cloud revenue causes your revenue top line what we just because -- it's a monthly basis kind of recurring revenue number.

Jim Chirico

Obviously our Avaya Private Cloud is significant. It's roughly about 10% of our overall revenues and growing, we grew 3% last quarter. And it's most people especially in high end enterprise, they want to make sure they sort of take the step to cloud and Avaya Private Cloud solution provides that we also now provide a capability where we can host that, which is a new offer that we've just recently announced, which I think is significant and again another step in the journey for a lot of these large enterprise company.

As far as our pure play, be it in mid market or down or below that. We're bit early in the game, but the good news is $50 billion business and is only about 10% penetration. So we're early in the game that's early and it's in this game. So we have in fairness -- we have a little catch up to do there's no doubt about that. It's there are a number of pure play cloud folks that have actually done quite well in the S&P space. When we had the heavy debt structure we needed to generate $950 million to service our cash requirements. We needed to determine what and where we would invest and we wanted to make sure we protect the enterprise.

As far as being aggressive we no longer, we now have this flexibility, we now can go in the offence. We now can be aggressive and we can now serve all markets in the cloud. And that is certainly our objective, that is certainly our focus and I think in the not too distant future you will see us become a significant presence in markets we do not necessarily serve today.

Unidentified Analyst

Okay, thank you.

Jim Chirico

Thank you.

Operator

And your next question comes from Charlie Jones with Marshall Wace. Your line is open.

Charlie Jones

Hi guys. I know that you gave guidance for fiscal Q2 EPS but not for full year. If I look at that $0.80 to $0.90 and I annualize that, is that a reasonable proxy for what you could in a forward 12 months basis?

Jim Chirico

Obviously that’s a great question. Obviously we struggle about on that with fresh start accounting. If you take a look at it and you know I'll be glad to have follow-ups with you when you look at the Q that we’ll be filling tomorrow. If you take a look at the successor period – the predecessor period, we had 500 million shares. And then for the 15 days we had 110 million shares. So we really have a sort of apples and oranges.

So I think the way you're approaching is probably the right way. But I think what you probably need to look at is optimize, you take your model and take your EBITDA and gross it up and just use about 110 million shares outstanding for the year to get your EPS because I'm not able to provide that. So that's the challenge right now. But there's a lot of discussion there. But I think the way you're approaching is the right way.

Charlie Jones

Okay thanks guys.

Jim Chirico

Yes.

Pat O’Malley

Thanks.

Operator

Your next question comes from Mike Latimore with Northland Capital Markets. Your line is open.

Mike Latimore

Great, thanks. Just on taxes, what tax rates are we using? And can you just give some general color on kind of cash tax payments?

Pat O’Malley

Yes so let me do the latter first cash tax for the U.S. this year given where we were and the losses will have no tax in the U.S. this year even though our statutory rate for the U.S. would be about 26% based on the new tax law, but that's really not relevant. So for the U.S. it would really be no taxes but starting in fiscal 2019 there will be. For the rest-of-the-world it’s about $35 million to $37 million for cash taxes for the year. So that would be a good model. Effective tax rates are kind of way off the chart with all the NOLs, but if you look at it going forward, 10% effective tax rate given that we’ll have GAAP losses, it's going to be sort of a benefit, but I think if you use 10%. Once we come out of this year through, the bankruptcy period you have a period of time to utilize some of NOLs and so we're looking at that.

So next year, fiscal 2019 we’ll be a much more normalized tax rate company. So you can model that very well. But I think the way you're looking at it from the cash is probably the right way anywhere from $35 million to $38 million for the year.

Mike Latimore

Great, thanks. And then just on the Spoken acquisition obviously it gives your customers a nice path to the cloud. I guess, are you seeing that sort of give current customers just a little more confidence and they investing in current software with the idea that eventually they can move to the cloud at their own pace.

Pat O’Malley

Yes absolutely.

Jim Chirico

Yes this is Jimmy yes absolutely. There's been since we announced it back in January there's been, I’d say, significant interest in traction. So yes absolutely.

Mike Latimore

Great, thanks a lot.

Operator

Your next question comes from Rob Jost with Invesco. Your line is open.

Rob Jost

Hi, thanks. I wanted to follow-up in the Spoken acquisition. Can you talk about the contribution you expect that give and who your natural competitors are for that product?

Jim Chirico

Yes I mean, we have not necessarily identified what the contribution as far as revenue associated with it. We do believe that will certainly be accretive within the next 18 to 24 months. They in fairness do not have a large customer base. We didn't buy for revenue, we bought it for technology. It certainly runs out our portfolio and again not just in the high end BPO market, but also the capability to leverage that technology across our portfolio. So it’s a significant technology investment.

The competitors in this case are traditional competitors, so your traditional contact center specialists. We believe with this we will have a differentiation. The other thing, I think, that's important about this acquisition is the IntelligentWire group underneath Spoken, which is AI. And some recent technologies in fact were already demoing those with a number of key customers with their product set. So we look to build out that and around that with our own technology here so should a significant play. As you take a look at, as I said, where we think we see growth and as we move to at least lend on growth in 2019, this will certainly be a key contributor to that number one by the path to move our current install base to the cloud which is significant even more importantly to compete in areas and win in areas that we haven’t done prior to that, because we know how it’s open, we know how the capability to sort of marginalize this and actually go out into the market and have a differentiation from a product set.

So it's early in the game, but as I said this is what we needed. We needed to obviously not only have the capability for multi tenant in the cloud, we needed for the customers to extend their journey. And it’s been more than what we see.

Pat O’Malley

Yes, this is Pat, your comment as Jim said this was in a short term revenue play, obviously it gives access to revenue streams in a quicker pace, but that won't be for fiscal year 2018. So you're looking 2018, you don’t want come, you’d expect some EBITDA drag if you will, but as Jim highlighted earlier in this conversation are we're starting transformation for R&D. So as we make that investment there, we’ll look to optimize in other areas. So it's going to – it’s not that we’re going to integrate it right away. Obviously, we want them to do what they do very well, but it's our job to monitor whole portfolio. So if you just look at Spoken, you may get a miss read that when you just see a drag on there that's it's a drag from that aspect because there’s might be operational efficiencies in other parts of business.

Jim Chirico

Hey, Pat, just if I may add one other one, which is I think significant and it’s the team. Avaya had not been known as a cloud company. Transformations, cultural shifts are actually quite difficult. We actually have a team that is coming to the company via Spoken, our peer cloud folks and there’s quite a few of them. And in fact we’re not over that, but we’re building out which is part of our investment that team in support of where we need to go. So if that with the melding of the engineering and R&D forces we have here in the company, I think it’s a real win-win. So I do want to point out that these team of highly professional engineers and others as us so a reason why we also made the acquisition.

Rob Jost

Okay, that’s helpful and…

Jim Chirico

Did you have something else, Rob?

Rob Jost

No, I just want to add a quick follow up, which is to – I am just going to ask. On the demand you’ve been seeing and it sounds like you’re going to be seeing it in the next quarter. Have you had the ability to kind of see through what was pent-up versus what is coming organically? Is that sort of a division? Is that available?

Jim Chirico

We know what it is if you will sort of pent-up, the pent-up demand we had for ostensive purposes was on the context side of the business. We know as we closed on some in the first quarter, obviously this demand will take you a period of time to – if you will ripple through, probably the better part of three to four quarters, but we are seeing a pick up in RFPs. Unfortunately as where we were in some cases not allowed to from a risk appliance perspective to participate in a number of RFQs or RFPs, that’s three up. We did have some demand that some of the C3 folks wanted to understand that where they were going to place their long-term investment and bets. We know where that is. That is breaking free. We saw some as I mentioned an uptick in Q1. And that will roll itself out probably through the better part of our fiscal year, which ends in September. But I don’t think that anything that we will share to be honest with you. It’s part of our backlog activities, but we obviously have a very good pulse on what it is.

Rob Jost

Okay, thanks.

Jim Chirico

Thanks, Rob.

Operator

We will take one more caller. Your next question comes from Stan Manoukian with Independent Credit Research. Your line is open.

Stan Manoukian

Good morning. Thanks for taking my questions. I just have one and one follow up. I was wondering if you can tell me a little bit more about changes in your marketing and sales strategy in regards to addition of your cloud-based services related to middle markets. What kind of changes and profitability we should expect in relation to these changes?

Jim Chirico

Sure, yeah, this is Jim. So, one of the changes obviously the fact that we now is billing out the cloud business units, we now have dedicated sales resources associated with the cloud. We have also invested in customer success teams. We have also invested heavily in our marketing programs associated with inside sales and how you drive different activities associated with marketing because it’s obviously a different go-to marketplace and traditional I would say.

So that is currently all being – that’s all being built out, which is on track and what we’re seeing in one of the reasons why we have started down the path of master agents and so on. And we have a number of other places that we’re building out. But the cloud business unit will have its own, if you will, dedicated go-to market organization to go drive this, some they will do direct, some they will do in support of existing sales organizations we have in the company. I think we have that pretty well defined. I don’t think you’re going to get it.

I know we won’t get into any account control or any of those issues that sometimes occur when you do an acquisition. We’re off to what I would say a good start. I would say a fast start that the teams busy. And but it will be – as you noted it will be a different go-to market sort of play than we have had traditionally and the way we service our partners and the way we service our customers.

Stan Manoukian

And sort of as a follow up. How long do you think it will take you sort of to adjust finally after bankruptcy emergence just start to thinking about growth in your revenues and making potentially some acquisitions or sort of growing organically into this environment?

Jim Chirico

Well as Pat – as we mentioned earlier, we’d see – as you know the company for ten years is on average probably declined in revenue somewhere between 6% and 8%. Our view based upon our range take out network if you will because there’s no longer here normalized 17 to 18. FY 2017, we did a little less than $3.1 billion. Pat’s guidance was $3 billion to $3.1 billion. So we will be what we will be, but we view that as basically being stable somewhere between down 1% or 1.5% at the mid-range to flat, so that’s frankly is much better than we’ve ever done before.

We also view as I said with the lens on growth for 2019 and not positioned to provide you guidance for our Pat at FY2019 now, but clearly a lens on where we are. If you also just take a look at the guidance that Pat provided you for this second quarter normalized for networking, we could actually be up year-on-year in the second quarter. So I will stop there, but the company is obviously focused on revenue. We’re going to invest in revenue. We have the right business model to support. Revenue growth, everybody in this company is focused on and there are a number of interesting initiatives that are launched and supported. So you know we will be able to provide you more guidance on following calls.

Stan Manoukian

Great, and best of luck.

Jim Chirico

Thank you.

Pat O’Malley

Thank you.

Operator

I will now turn the call back over to Peter Schuman, IR, for closing remarks.

Peter Schuman

Thank you, Mariama. During the second quarter of fiscal 2018, Avaya will be meeting with investors on March 13^th at the Enterprise Connect Conference in Orlando, Florida. In the meantime, you’re always welcomed to contact our Investor Relations department at 669-242-8098 with any questions that arise. Thank you for joining us and this concludes today's call

Operator

Ladies and gentlemen that concludes today’s quarterly earnings call. Thank you for your participation. You may now logoff.