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Avaya earnings show cloud, recurring revenue growth

The latest Avaya earnings report shows the company is increasing cloud sales and hitting revenue targets, even as it continues to operate at a loss.

Avaya hit revenue targets, increased cloud sales and added customers in its second full quarter as a public company -- welcome news for customers and partners anxious for proof that the company is regaining its financial footing following last year's bankruptcy.

Avaya reported revenue of $755 million in the third quarter of 2018 -- down from $757 million last quarter, but within the vendor's previously announced targets. When excluding sales from the networking division, which Avaya sold last year, adjusted revenue was 1% higher than during the third quarter of 2017.

To keep pace with competitors like Microsoft and Cisco, Avaya is looking to reduce its dependence on large, one-time hardware purchases by selling more monthly cloud subscriptions. This transition can make it difficult to show positive quarter-over-quarter and year-over-year growth in the short term.

Recurring revenue accounted for 59% of Avaya's adjusted earnings in the third quarter -- up from 58% the previous quarter. Cloud revenue represented just 11% of the quarter's total, but monthly recurring revenue from cloud sales increased by 43% in the midmarket and 107% in the enterprise market, compared with last quarter.

Avaya reported an $88 million net loss in the third quarter. Still, the company's operations netted $83 million in cash, which is a more critical financial indicator, in this case, than net income, said Hamed Khorsand, analyst at BWS Financial Inc., based in Woodland Hills, Calif.

"This is a company that's still in transition as far as their accounting goes, with the bankruptcy proceedings," Khorsand said. "[The net cash flow] actually tells you that the company is adding cash to its balance sheet."

Also during the third quarter, Avaya regained top ratings in Gartner's yearly rankings of unified communications (UC) and contact center infrastructure vendors. Avaya's one-year absence from the leadership quadrant in the Gartner report probably slowed growth, Khorsand said, because C-suite executives place value in those standings.

Avaya's stock closed up 3.61%, at $20.68 per share, following the Avaya earnings report on Thursday.

Avaya earnings report highlights product growth

The Avaya earnings report showed the company added 1,700 customers worldwide during the third quarter. It also launched and refreshed several products, including an updated workforce optimization suite for contact centers and a new version of Avaya IP Office, its UC offering for small and midsize businesses.

The product releases demonstrate that Avaya continued to invest in research and development, even as it spent most of 2017 engaged in Chapter 11 bankruptcy proceedings, said Zeus Kerravala, principal analyst at ZK Research in Westminster, Mass.

"As long as we continue to see this steady stream of new products coming out, I think it should give customers confidence," Kerravala said. "Channel partners tend to live on new products, as well."

The bankruptcy allowed Avaya to cut its debt in half to a level it can afford based on current revenue. But years of underinvestment in product continue to haunt the vendor, as it tries to play catch-up with rivals Cisco and Microsoft, which analysts generally agreed have pulled ahead of all other vendors in the UC market.

Avaya acquired cloud contact center vendor Spoken Communications earlier this year, gaining a multi-tenant public cloud offering. Avaya plans to use the same technology to power a UC-as-a-service product in the future.

"We are investing significantly in people and technology, investing more on technology in the last two quarters than we did in all of fiscal 2017," said Jim Chirico, CEO at Avaya.

Avaya is expecting to bring in adjusted revenue between $760 and $780 million in the fourth quarter, which would bring the fiscal year's total to a little more than $3 billion.

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