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In its first year out of bankruptcy, Avaya reversed a decadelong trend of percentage-point revenue declines in the upper single digits and grew its core business: contact centers. However, unified communications revenue was down once again in the latest Avaya earnings report, underscoring the vendor's challenges in that market as it chases leaders Microsoft and Cisco.
Avaya reported adjusted, or pro forma, revenue of $3.057 billion in fiscal 2018, a performance that fell within the targets the vendor set at the year's outset. When excluding sales from the networking division, which it sold last year, Avaya's adjusted revenue was down 2% compared with fiscal 2017. In the fourth quarter ended Sept. 30, Avaya brought in $770 million, up from $755 million in the third quarter.
The company grew its flagship contact center business in fiscal 2018, after losing customers and revenue last year, according to a year-end Avaya earnings report filed this week. Avaya didn't release detailed figures for the full year, but said contact center product revenue was 11% higher in the fourth quarter of 2018 than in the fourth quarter of 2017.
However, the vendor's unified communications (UC) product revenue continued a yearslong decline. Sales in that segment were down 7% year over year in the fourth quarter, although they were up 1% from the third quarter. Despite the dip, Avaya said its UC products performed better in the fourth quarter than they had in over a year -- and CFO Pat O'Malley called a 1% decline in annual UC product revenue "a tremendous turnaround compared to the past several years."
Avaya is working to climb back from years of underinvesting in cloud technologies. Cloud services accounted for 11% of total revenue in fiscal 2018, up from 9% last fiscal year. Next year, the vendor expects cloud to comprise between 12% and 14% of its business.
"The biggest outcome of this is that they are showing momentum in the number of cloud seats [and] cloud revenue ramping up, [with] recurring revenue becoming a bigger portion of their revenue," said Hamed Khorsand, analyst at BWS Financial Inc., based in Woodland Hills, Calif. "And they are showing that revenue is stabilizing after years of year-over-year decline."
During fiscal 2018, Avaya acquired cloud contact center vendor Spoken Communications and began targeting the midmarket with new cloud UC offerings. CEO Jim Chirico told investors that two-thirds of roughly 2,000 midmarket customers were new as of this year. But Avaya will face stiff competition in 2019, as Cisco also gears up to aggressively target the midmarket with products and partners newly acquired from BroadSoft.
Avaya said it had 3.5 million public and private cloud UC and contact center seats combined as of the end of fiscal 2018. But that's compared to a base of more than 140 million on-premises users. Avaya more than tripled its public cloud seats during the fiscal year, although they still only number in the hundreds of thousands.
Meanwhile, in fiscal 2018, the company generated a record-high 82.2% of total revenue from software and services and 57.4% of total revenue from annually recurring sources. Those income sources will continue to be an important financial indicator, as businesses increasingly opt to avoid substantial one-time hardware costs by purchasing monthly subscriptions to cloud products.
Avaya went public in January after spending most of 2017 hamstrung by bankruptcy proceedings that it initiated to restructure excessive debt. Company executives said previously that their goal was to stop the bleeding in fiscal 2018 and begin growing revenue in fiscal 2019.
Exceeding analysts' expectations, Avaya said it expected to generate adjusted revenue between $3.05 billion and $3.15 billion next fiscal year.