Avaya Holdings Corp. (NYSE:AVYA) Q2 2018 Earnings Conference Call May 10, 2018 8:30 AM ET
Peter Schuman - Senior Director of Investor Relations
Jim Chirico - President and Chief Executive Officer
Patrick O'Malley - Senior Vice President and Chief Financial Officer
Lance Vitanza - Cowen Inc.
Mohit Gogia - Barclays
Mike Latimore - Northland Capital
Hamed Khorsand - BWS Financial, Inc.
Robert Jost - Invesco Ltd.
Good morning. My name is Matthew and I will be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter Fiscal 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Mr. Peter Schuman, Senior Director of Investor Relations, you may begin your conference.
Thank you, Matthew. Welcome to Avaya's Q2 fiscal year 2018 investor call. Jim Chirico, our President and CEO; Pat O'Malley, our SVP and CFO; and Shefali Shah, our CAO and GC are here for today's call.
The earnings release, CFO commentary and investor slides referenced on this call are accessible on the Investor page of our website and the SEC website. We will reference non-GAAP financial measures and specifically note that all sequential and year-over-year comparisons reference non-GAAP numbers except otherwise noted.
A reconciliation of such measures to GAAP is included in the earnings release and slides, and is available on the Investor page of our website. We may make forward-looking statements that are based on current expectations, forecasts, assumptions, and remain subject to risks and uncertainties that could cause actual results to differ materially.
Information about risks and uncertainties may be found in our most recent filings with the SEC, including our Form 10 and subsequent Form 10-Q, and our earnings release today. It is Avaya's policy not to reiterate guidance and we undertake no obligation to update or revise forward-looking statements in the event facts or circumstances change.
I will now hand the call over to Jim Chirico, our President and CEO. Jim?
Thank you, Peter. Good morning, everyone, and thank you for joining today's call. I'm excited to share that our growth strategy is yielding positive results and our actions drove record-setting Q2 performance. These strong results are evidence that we're moving fast and at a pace ahead of schedule during our first full quarter as a public company.
We are continuing our journey to transform the company. We are building momentum by being aggressive. We are proceeding with a disciplined focus on performance and execution. We are making the necessary investments in people and innovation. And even though we're early in our transformation, I'm pleased with where we are.
Excluding the Networking business, our non-GAAP revenues were $756 million. This represents the first year-on-year revenue increase in six years. I'm proud of our consistent earnings, representing our fifth straight quarter of revenue stability. What made Q2 even more exceptional is that historically we've experienced seasonal headwinds resulting in 6% to 8% sequential declines.
Let me share some relevant highlights from the quarter. We continue to solidify and strengthen our business performance, driving a record 83% of revenue in software and services, which is 11% increase over just the last six quarters. We also drove record recurring revenues of 58%, an increase of 14% over the same period, demonstrating we have the right plan, people and management system in place.
We set new records for the second quarter in operating metrics. They include: non-GAAP gross margin of 62.4%; non-GAAP operating margin of 20.7%, and productivity levels of $374,000 per employee. We also closed roughly 110 deals over $1 million, which is a 20% increase over quarter one and a 44% increase year-over-year.
Channel traction continues to improve across all theatres. Revenues through distribution improved 2% quarter-over-quarter and 5% year-over-year. We signed over 350 new channel partners, adding to our ecosystem. Additional health indicators in the channel remain positive, including sales out and channel inventory levels. Our professional services grew for the third consecutive quarter, up approximately 7% quarter-over-quarter and 15% year-over-year.
We're forging ahead with our Cloud strategy with double-digit improvements to monthly recurring revenues, or MRR, for both midmarket and enterprise segments. And I'll share more in a moment.
Market demand for our new products and solutions showed significant gains, with revenues from our new offers increasing 36% quarter-over-quarter and 81% year-over-year. This impressive strength in performance is driven by our focus on several key strategic areas. Number one, cloud; second, services; thirdly, contact center solutions; and last, but certainly not least, new product introductions and innovation.
First on Cloud, a one-size-fits-all approach to cloud will not be successful. And our comprehensive solutions are a proven differentiator. Our Cloud offerings include private, hybrid, public cloud, all the way from SMB, up to large enterprises, as well as governmental agencies. Cloud revenue grew as a percent of total revenue.
Midmarket MRR grew 53% quarter-over-quarter and enterprise MRR grew 76% quarter-over-quarter, clear indications that our cloud transformation is taking hold. We also launched a new Master Agent program. We announced Jenne and Intelisys, the industry's leading cloud distributor as Master Agents with several others in the pipeline. Master agents will set the stage for significant seat growth as they onboard their own agents selling Avaya Cloud.
Finally BPO, it represents a significant end-market for Avaya and Cloud. In recognition, we appointed a leader for our global BPO practice. We also announced a BPO cloud solution will be available in June for our APAC region, where a majority of our BPOs have operations. This solution leverages the Spoken Communications acquisition and combined capabilities with our own contact center solutions.
As evidence of traction, we closed a multiyear, multimillion dollar contract with one of the world's largest BPOs. Under that contract Alorica will transition 100,000 agents across their global contact center operations to deliver compelling customer experience for hundreds of their clients and millions of their end customers.
Turning to services, we continue to invest in talent automation and processes delivering the highest quality in the most flexible UC and CC services available in the industry. Our services performance this quarter validate that our strategy of succeeding and signified the recovery in this important growth level.
Professional services grew 7% quarter-over-quarter and 15% year-over-year to a highest revenue levels in over two years. This was driven a large part by our consultative and value-added service offerings. Professional services bookings also increased a 11% quarter-over-quarter. Managed services bookings increased 7% quarter-over-quarter. And our maintenance business improved with a 15% increase in annual contract value bookings quarter-over-quarter and 10% year-over-year. These results are the best we've seen in more than six quarters. An increase in these long-term contracts is a clear sign of partner and customer confidence.
We are number one in the contact center space. Our technology investments in CC are focused on solutions that provide improved customer experience and drive value for our clients. We are also pleased with the success of our newest CC multichannel offering called Oceana.
We're unlocking significant opportunities by providing a simple migration path to multichannel that enhance agents' performances and improved the overall customer experience. Adoption is taking hold. This quarter there are over 20 new Oceana deals. Oceana bookings were three times greater than Q1, representing over a 200% sequential growth.
Although, contact center revenues declined sequentially related to a large contract that was recognized in Q1. Q2 grew 2% year-on-year and the average size deal was the largest since fiscal 2016. There was also clear growth in CC bookings, which increased 4% both quarter-over-quarter and year-on-year.
Switching gears, let me spend a few minutes of sharing details on how our investments in new products and solutions. I previously discussed leveraging our improved capital structure to invest, which we are doing to fuel our innovation pipeline. Excluding Networking, we increased investments in technology approximately 6% in just last quarter-over-quarter, and we've invested an excess of $200 million in just last year.
During this period, we launched several new products in messaging, conferencing, video, contact center multichannel, mobility, AI, cloud, and new endpoints. And as I said, revenues from new products and solutions showed significant growth of 36% quarter-over-quarter, and 81% year-on-year.
Let me spend a minute on mobility, we launched a game changing solution called Avaya Mobile Experience. This solution for contact centers automatically detects incoming calls from mobile numbers and treats them as mobile-to-mobile calls. This reduces the total cost of expense for inbound 800 numbers. In addition, the caller also benefits from a number of more personalized experiences with the agent.
We launched three significant solutions in the world of artificial intelligence for contact centers. First, we announced the availability of Ava. Ava is the AI framework that allows bots to operate with any messaging application, it uses natural language processing and connects in real time to contact center infrastructure. Ava is available in nearly 14 languages today, and it's already being implemented with several customers.
Secondly, we announced the availability of IntelligentWire, and offering that came with Spoken acquisition. IntelligentWire offers real time dialogue transcription and automatically summarizes calls. This saves significant time for agent and increases contact center productivity.
We also signed a strategic partnership with Afiniti. This joined Avaya Afiniti solution analysis customer data to quickly pair callers with the best agent to meet their specific needs. This drives better customer experience increases agent productivity. This proven technology is already delivering billions of dollars in improvement and profitability to major businesses globally.
I'd also like to add that we also received a covident [ph] Edison Award this quarter for our Blockchain solution called the Avaya Happiness Index, a solution that helps track customer moods and enables organizations to respond more quickly to user trends.
In UC, we also made a number of major announcements. We launched a new range of redesign endpoint that enables new services and applications that are cloud ready. We signed our first customers for Open SIP phones, a growth market and expanded our line of android programmable voice and video devices with a new entry level model.
We're focused on key investments to drive the future of our business, which positions us for growth in fiscal 2019. In addition, we launched a loyalty program for customers and partners to facilitate the transition of legacy installed base customers to cloud. We accelerated the introductions of various vertical solutions that include hospitality, health care, emergency services and public safety. And we continue to drive innovation through strategic acquisitions and partnerships, which includes Spoken and Afiniti.
We are consistently exploring new ways to help businesses to transform the customer experience to create differentiation and business value. So you'll be hearing much more on this front in the calls to come. As I noted before, we continue our execution focus to strengthen our industry leading business model. We maintain our EBITDA margin envelope of approximately 25% as committed.
We are generating ample cash to support our business transformation and in the quarter with over $300 million in cash and generating cash flow from operations greater than 7%. Bookings for product and 1x [ph] services increased 9% quarter-over-quarter and 15% year-over-year, excluding Networking.
We added over 1,200 new logos worldwide in just the second quarter. Cloud grew in the mid to high double-digits. Maintenance renewals are returning to historical levels, and the list goes on and on, by any measure a strong quarter.
I'd especially like to thank each member of the Avaya team for working passionately to serve our clients to transform the way businesses connects. Our results are a direct reflection of the teams' commitment to win, and we're just getting started. The evidence is clear. The transformation is progressing. We remain on track to achieve our revenue objectives for fiscal 2018 and set the stage for growth in fiscal 2019 and beyond.
Now, let me turn it over to Pat, who will take you through the financial details for the quarter and our outlook. Pat?
Thank you, Jim. Please note that along with the earnings release today, we posted the CFO commentary in addition to slides on our investor relations website, issued to aid in your understanding of Avaya's financial results and make this call more productive. Any reference to fiscal year Q1 2018, results will be on a combined basis.
I'll now highlight from our Q2 fiscal year 2018 financial results. Non-GAAP revenue was well above seasonal during Q2 fiscal year 2018 and excluding the revenue related to Avaya's former Networking business. Revenue grew slightly compared to Q2 fiscal year 2017 and declined approximately 2% from Q1 fiscal year 2018. At constant currency, non-GAAP revenue declined 2% year-over-year and was 3% lower from Q1 fiscal 2018.
Non-GAAP gross margin of 62.4% was a record percentage for Avaya second quarter result, and improved year-over-year by 150 basis points, and was up 60 basis points sequentially reflecting better product mix a result of the exit from Networking business and improved productivity offset by lower volumes. Compared to Q1 fiscal year 2018, non-GAAP gross margin was higher by 60 points mostly as a result of product mix.
Non-GAAP operating expenses, R&D plus SG&A of $315 million decreased $16 million year-over-year and increased $8 million sequentially. SG&A expense of $265 million was $9 million lower than the same period during the prior year and $5 million higher compared to Q1 fiscal year 2018. The reductions year-over-year reflect the ongoing cost structure improvements, and are also the result of the sale of the Networking business in Q4 fiscal year 2017.
The sequential increase in fiscal year Q2 2018 reflects higher compensation expenses related to employee benefits that are generally higher at the start of the calendar year and the effects of foreign exchange rates.
SG&A has been running higher than anticipated due to in some part additional administrative obligations and tax structure planning costs that have continued after emergence. We expect some level of these costs to continue to remain for the fiscal year, but largely be complete before the start of fiscal year 2019.
GAAP and Non-GAAP R&D expense totaled $50 million for Q2 fiscal year 2018. R&D expense represented an increase of $3 million year-over-year excluding the Networking business and an increase of $3 million from Q1 fiscal year 2018. The increased R&D spend is continued commitment to drive innovation on our products and technology that will allows us to expand our customer base and enable top-line revenue growth in fiscal year 2019.
Non-GAAP operating income was $157 million or 20.7% of non-GAAP revenue, a record percentage for a second quarter result. Adjusted EBITDA was $187 million or 24.7% of non-GAAP revenue for Q2 fiscal year 2018.
With the acquisition of Spoken, we will lose about 100 to 150 basis points on adjusted EBITDA going forward, until that new business scales appropriately to offset the additional costs.
Taxes, during the Q2 fiscal year 2018, we had an effective tax benefit rate of 9.4%. Cash taxes this current quarter were $6 million. Given the effect of fresh start accounting, our effective tax rate for fiscal year 2018 is not a fair measure of our long-term effective tax rate. Therefore, we will provide a cash tax effect each quarter, until the beginning of fiscal year 2019.
At that point, our effective tax rate should be more indicative of our long-term model. We expect cash taxes of about $9 million each quarter for the remainder of fiscal year 2018. Due to operating loss tax credits, we are not a U.S. taxpayer in fiscal year 2018 and expect to only pay foreign taxes of approximately $35 million this year.
Turning to the balance sheet, cash and cash equivalents were $311 million as of March 31, 2018, compared to $417 million at the end of the prior quarter. The sequential change in cash and cash equivalents is primarily due to cash provided by operating activities of $54 million in Q2 fiscal year 2018, offset primarily by payments of approximately $158 million for the acquisition of Spoken Communications, interest and principal payments for the term loan of $53 million, $14 million of restructuring charges, and $26 million of pension contributions.
Accounts receivable totaled $366 million at the end of Q2 fiscal year 2018, compared to $413 million on a sequential basis. Days sales outstanding based on non-GAAP revenue was approximately 59 days, which includes AR deferred revenue netting as a result of fresh start accounting, using the same approach it would have been 57 days in Q1 fiscal 2018 versus the 48 days reported.
On a go forward basis, we will continue to use this approach as the effects of fresh start accounting roll through the subsequent quarters.
Depreciation and amortization in Q2 fiscal year 2018 was approximately $123 million, up from $53 million reported on a sequential basis and from $88 million during Q2 fiscal year 2017. The increase in depreciation and amortization on a sequential basis is a result of the full quarter impact of fresh start accounting, which required that we increase intangible and fixed assets to their fair values as of December 15, 2017.
We expect depreciation and amortization to be at this higher level for the next few years, as the impact of fresh start accounting has aligned consistent with the underlying fixed assets.
Looking at demand indicators for Q2 fiscal year 2018, bookings excluding the Networking business, on a year-over-year basis improved 7% while on a sequential basis bookings increased by 6%. Excluding the Networking business, in constant currency, bookings improved 5% year-over-year, while increasing 5% on a sequential basis.
Service revenue of $440 million in Q2 fiscal 2018 was down $16 million from the prior year, $12 million as a result of the sale of the Networking business, and the remainder from lower maintenance revenue as a result of the continued shift of the customer consumption models of a less CapEx to a more OpEx model.
We saw stabilization of service revenue on a sequential basis during Q2 fiscal 2018, with only a $5 million decline from the immediately preceding quarter. As Jim has highlighted, many of our components of our service revenue have posted strong sequential gains highlighting the improvement of this part of the business.
Distribution channel, reported product revenue to the channel excluding Networking was $223 million and grew 3% year-over-year, and 1% lower sequentially. As a reminder, channel product revenue is recognized when we sell-in to the distributor and continues to account for more than two-thirds of our total product revenue.
Before I discuss the financial outlook, I'd like to mention, we remain committed to continue 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 continuing to invest in our product portfolio and maintaining outstanding customer support and satisfaction. Finally, we are building a stronger financial model that supports additional investments for future growth.
Taking into consideration Avaya's acquisition of Spoken, continued investment in R&D, sales enablement, tools and people, and our ongoing efforts to improve Avaya's operating efficiencies, we are now targeting the following forecast for Q3 fiscal year 2018. Revenue of $690 million $705 million, non-GAAP revenue of $750 million to $770 million; GAAP operating loss of 8% to 8.5% of revenue, non-GAAP operating profit of 20% to 21% of non-GAAP revenue; GAAP operating loss of $55 million to $60 million, non-GAAP operating income of $150 million to $160 million. Cash taxes of approximately $9 million.
GAAP net loss of $0.89 to $0.97 per diluted share. Adjusted EBITDA of $170 million to $190 million or adjusted EBITDA margin of approximately 24% to 25% of non-GAAP revenue. This includes the impact of the Spoken acquisition, approximately 111 million shares outstanding.
Total cash requirements for restructuring, pension and OPEB, cash taxes, capital spending and interest expense in the third fiscal year 2018 are expected to be: restructuring $25 million; pension and OPEB $20 million; cash taxes $9 million; CapEx $20 million to $25 million; interest expense $50 million.
Turning to the fiscal year 2018 outlook. We are previously provided a full year on March 2, 2018 Q1 fiscal year 2018 earnings call. The only update we have to the previous fiscal year 2018 outlook is the EBITDA will be decreased by $20 million for the fiscal year as a result of our acquisition of Spoken.
Now I'd like to turn it over to Jim for some additional remarks.
Thank you, Pat. Let me share few thoughts before we turn it over for Q&A. We're ahead of our plan, our focus on execution and performance drove an outstanding Q2 for the company. We are delivering technology, the way our customers wanted, more as a service, resulting in more software and recurring revenues, which were both all-time high in this past quarter. We are focused on driving positive results across the board, and that setting the stage for growth in fiscal year 2019.
In closing, we continue to focus on the following strategic priorities, transforming the company, building momentum, playing offence, investing in our people and innovation, and leveraging and enhancing our financial flexibility.
With that, I'd like to end by thanking our employees, partners and customers for their dedication and support. Matt, I'll turn it over to you now to begin Q&A.
[Operator Instructions] Our first question comes from the line Lance Vitanza with Cowen. Your line is open.
Hey, guys, thanks for taking the question. Hard to limit it to just one, but let me focus on the Spoken acquisition. So you were already working with them before the acquisition. I'm wondering if that makes the integration any faster, any easier, and where that process stands. Is it 80% done, 50% done. And then I have a follow-up if I can.
Yeah, hey, Lance, thanks. This is Jim. We have been working with Spoken, because actually what they were doing, what they were developing was purpose-built for the Avaya platform. So it made sense on a number of fronts, as you pointed out, first of all from a time to market perspective; secondly, from a technology integration perspective; thirdly, we actually knew each other.
As far as where we are with the integration, the integration is completed. The organizations are defined. The roadmap for further enhancements and improvements as we continue to build out on our Cloud platforms are in place. And we're continuing that level of execution. So I would say that the integration went smoothly in all fairness, where the teams are combining now with the Avaya and Spoken resources working together as one. As well as I might add our Zang folks in Canada to continue to accelerate our deployment of newer cloud technologies going forward.
And, Lance, I would just add - to this I'd add one more bit of color. We talked about when we make that - when we had that - when we made that acquisition we talked about 12 to 18 months to get the synergies and the product rolling to make that accretive to the model. So we still believe that. As Jim said, the integration is - the organizations are aligned. And so, now as we deploy that through our existing customer base, we should certainly start to see that be meaningful in the top-line and start getting synergies of the organizations.
But actually that's 12 to 18 months. If we could do it sooner, great, but as you know these things, this one seems a little easier, given that as Jim says purpose-built, but we still have to integrate that. It takes a little bit of time.
Okay. So then, that the $20 million reduction to the guidance, so does that suggest then, I mean, that you closed the transaction in March. So it's about 6.5 months or so of time in the 2018 number. So does that suggest that the sort of the annual burn rate then at Spoken is more like $40 million? And therefore, I guess, I'm trying to think about the impact that it may have had on the quarter that you just reported.
So on the quarter we just had it only had about $2 million, $1 million and some change, $1 million to $2 million, so it wasn't significant in this quarter. Now, the GAAP would have more, because you have all the consideration on there. But for true operational it's like $1 million, $1.5 million. So that $20 million, I would - you could accelerate to say $40 million for a full year. That would imply nothing is going on. So that's, as you could see, we didn't update our revenue guide.
We'll get some revenue there, but this year it's not significant. It's getting customers rolled over and you'll start seeing it manifest itself through top-line and some synergies through the rest of the P&L. But for a period, we're putting a little of extra muscle into them and make sure that gets super-charged. And so we feel comfortable with those numbers and we do feel comfortable with the 12 to 18 months that this could be like freed up.
So I wouldn't really go model $40 million, but if that's all you have right now that'd be fine. But I think we should get less and less drag as the fiscal 2019 goes on.
Okay, thank you.
Our next question comes from the line of Raimo Lenschow with Barclays. Your line is open.
Thank you. It's Mohit Gogia dialing in for Raimo. Thanks for taking my question guys. So, Jim, I just wanted to understand your take on the - how you see the competitive landscape in contact center evolving going forward. And how so - why is it going to be positioned to sort of take market share, improve its offerings, continuing its product innovation. So recently we have seen some non-traditional vendors move into contact center. We saw Twilio announced their contact center offering at the Enterprise Connect conference.
APN [ph], which is another non-traditional low-code [ph] vendor entering into contact center market. So I was just curious as to how do you think why we have seen an influx of non-traditional vendors in this space, and how Avaya is positioned to maintain its position in the market going forward? Thanks for taking my question.
Yeah, sure, thank you very much. I think you sort of need to take a look at it by segments. So first at your high end, first, obviously competition continues to fuel our innovation kind of get us excited, make sure that we can meet customer demand. I do think at the high end, we are starting to see some strong bookings. We're starting to see our funnel increase, which is a positive sign.
I think to the degree that we can continue to leverage the opportunity and be a real differentiator with partnering with folks like Afiniti to bring really new differentiated solutions that others don't have, building on top of our capabilities, and voices and EZ, and we're still number one in that space. To agree that we continue to build out Oceana and continue to mature that product line, I think provides us the opportunity and certainly in the world of multichannel to remain extremely competitive and not gained some market share.
And then coupled with the AI technologies, we are bringing in either through mobility or just through productivity, TCO, and really changing the landscape of a contact center from being a cost center, to being a profit center. I think we're well positioned to continue our number one position there and we're continuing to look at ways to expand that.
On the contact center sort of mid-market space, which is starting to get a little bit more if you will from cloud perspective, I think we are in a good spot. We have and we'll be announcing a number of solutions to remain competitive in that space. We see our contact center revenues increasing. As I mentioned, we're up year-on-year in bookings, funnel is up. The new product adoption is up. Oceana is finally starting to take hold. We're seeing a significant number of large deals.
And last but not least, we're just on the cusp of really generating what I believe significant traction with BPOs. I was just in Singapore 10 days ago, and I met with 30 of our largest BPOs for the better part of a half day. While we were in Singapore they all flew in. And I would say there is significant amount of excitement. They understand our technology and we're looking forward to really double down for lack of a better term to build out that marketplace.
So, yeah, competition is fierce, whether you are in the SMB space, midmarket space, UC space, CC space, I do see the platform is consolidating, as we move forward, which is one of the reasons why I think you're seeing more competitors, quote unquote, get into CCS, they go with sort of the common platform. But I think we're well positioned to compete as we move forward. So our innovation pipeline is certainly quite strong.
Our next question comes from the line of Mike Latimore with Northland Capital. Your line is open.
Yeah, great. Thanks a lot. Nice quarter there. In terms of the - you talked about sort of normal revenue seasonal patterns in the March quarter. I think you said being down 6% to 8% sequentially. What - is there a normal kind of booking sequential pattern too? Do they typically decline or grow a little bit sequentially in the March quarter?
Yeah. They pretty much go hand to hand, Mike. This is Jim. So sequentially they're down as well. The second quarter has always been sort of Achilles' heel for the company going back at least the 10 years that I've been here. We've been able to reverse that trend this quarter. A lot of that is associated with the fact of new products taking hold, the fact that we spend a lot of time on our services business as well, and have worked long and hard with that.
And last but not least is the amount of effort we put into our partner community. And we're very close now with our partners. They are certainly an extension of Avaya. There was a lot of potential friction or noise in the system. But we've worked long and hard with our partners, both distributors and partners, and then obviously with the products that we have.
So it's a completely different sort of go-to-market motion in the company has had in years past. And that's one of the reasons I believe that we sort of turned the corner here in the second quarter, and we're looking forward to move as we move into future.
Great. And then just on Cloud, I think you said that grew double-digit. I just want to clarify that you did say that. And then second, what percent of revenue was in Cloud?
Cloud in overall grew 2 points as a percent of the revenue for the company. It's roughly about 11%, up 9% or so from previous quarter. So it continues to grow. We're now well north of 3 million seats and growing. So - but overall, percent of revenue, it's right around 11% of revenue, up 2% quarter on quarter so.
Yeah, I got it, I got it. Thank you.
Our next question comes from the line of Hamed Khorsand with BWS Financial. Your line is open.
Hi, good morning. Hey, could you talk about a little bit about these 1,200 new logos and provide a little bit more detail, just like quantify what kind of customer base they are and how your approach to the market has changed if it has changed? Are you going more the SMB route? Or are you try and get more enterprise customers? If you could just provide some details on the strategy here that you want to go forward.
Yes, so the 1,200 are obviously driven by the channel. Some of those are obviously associated with the channel partners. And then, as I said, we grew over 300 channel partners quarter on quarter. If you look, I would say, a large portion of those are more of your SMB, midmarket space obviously. We are in fairness looking to penetrate the SMB space much more than we have before. I believe we can be extremely competitive, more importantly, be very disruptive in that space where we haven't in all fairness played, certain within cloud in the past.
So we're beginning to roll that out. I think it's clearly an opportunity for us. So it's early, but we'll certainly make sure that we have a strong presence. But most of that is driven through channel partners. Most of that has been focused in the SMB to sort of your smaller and midmarket.
Okay. And then just a follow-up, as far as the channel partners that you're adding, are they just signing up and saying, hey, we're just channel partner? Are you actually seeing some sort of new customer activity from these channel partners that are coming onboard again?
Well, we've been adding roughly about, I don't know, just north of a 1,000 channel partners a quarter for the last four quarters or more. So as you sign one off there is an enablement process, that's required to get them up to speed if you will. So the ones we signed, this particular quarter, in fairness, didn't generate all our revenue. But the ones that we have signed up in Q1 and our Q4 are indeed generating revenue. So it's a - 1,200 suggests that the pipeline continues to fill in if you will.
So they'll start. Typically, it takes anywhere from 60 to 90 days or so to get them up through the enablement process, certification process, so on and so forth. So very little of that was in revenues this quarter, but as I said, setting the stage, building the pipeline for future growth.
Yeah, and this is Pat. We actively manage that. If we see some of the channel partners not getting stiction [ph] or traction, we go and reach out and whether it's an enablement or maybe it's the strong partner, so - because you don't want to sign up someone that's not really going to generate revenue for you long time.
So we do have a tail analysis as well in that. But as Jim said, there are startup costs with these. And so, you got to get them up and running. And then one to two and beyond quarters they start generating. We're - obviously we couldn't reach, but actually monitor the current health of all of our partners.
Okay. Thank you.
And our next question comes from the line of Rob Jost with Invesco. Your line is open.
Hey, thanks. I wanted to start with the foreign exchange. It looks like you got a bit of a benefit from that. And I was wondering if you could help me kind of get through some of the noise here. And what was the benefit to EBITDA net of all the moving pieces from that ForEx?
So we actually had a - on the top-line we had a benefit. But if you take a look even the sales and marketing expense bit of that, given we have a lot of the sales team overseas and we're un-hedged, we actually had $2 million, almost $3 million net hit to the P&L. And lot of it, the OpEx was - it went through the SG&A and through the other income/expense. But it was a net drag this quarter.
Okay. That's really helpful. And then on your SMB strategy, can you talk a bit about how - kind of how your win-rates has been versus some of the other, particularly on the Cloud space?
We actually - this is Jim, Rob. So we actually - on the SMB space it's pretty hard, because most of it is driven through partner. So I don't actually have in front of me, win rate, because we don't actually report that. Obviously, for we go, a bit more direct. We certainly have win/loss rates. But on the SMB space, a lot of that is driven through distributor, distributor partners. So we don't necessarily track it at that level.
As well we've been signing up, as Jim mentioned, we sign up the - our Master Agents that will be starting to give us some insight to that as well, because that's a space that served very effectively there. And that's - we've been onboarding those. So obviously, we're - we believe the transition of the Cloud is in the early innings as well us into SMB. As Jim said, we think we have a competitive offering and that offering will expand. But it's earlier in the game for us there, but obviously, there has been growth there. So by enabling the Master Agents and working with our partners, we should expect to see more of that.
The one thing I can add to that is as I mentioned we are - and have seen growth both in prem and on cloud in our seats. So they've increased. Secondly…
Secondly, as I mentioned, we're going to - that's mostly a price decision. I can tell you that we are going to, as I said, become a bit more aggressive playing the offence, take advantage of our financial flexibility. So we are not going to lose deals based on price. So we are going to make sure that we take advantage of that.
Then the other point is we're one of the few that actually have an advantage, because we actually have our own endpoints. So we are taking some of the promos and some of the announcements. We're taking opportunity to leverage, if you will, our capability, because we do manufacture our own endpoints. So we believe that's going to become more and more as a competitive advantage for us, because of the opportunity we have there. So as I said, more to come on that space. But we're gaining seats. We saw record profits as far as margin. And we will make sure that we continue to take advantage of that.
And we now have a whole refreshed line of endpoints that we just announced as I mentioned. So, we're - it's early, but we're excited about the opportunity there for us.
Got it. Thanks.
There are no more questions at this time. I'll turn the call back over to Peter.
Thank you, Matthew. During the third quarter fiscal 2018, Avaya will be meeting its investors at the Barclays High Yield Bond & Syndicated Loan Conference in Colorado Springs on May 22 and at the Cowen & Company TMT Conference in New York City, New York on May 30. In the meantime, you're always welcome 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.
Thank you. Ladies and gentlemen, that concludes today's quarterly earnings call. Thank you for your participation. You may now logoff.