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RingCentral and Avaya have struck a deal to sell a product based on the former's cloud-based unified communications technology to the latter's legacy customers.
The blockbuster partnership will give RingCentral access to one of the industry's largest base of customers and resellers -- while plugging a significant technological gap for Avaya, which lacks a robust unified communications-as-a-service (UCaaS) offering.
The announcement Thursday capped weeks of speculation that Avaya might sell itself to a private equity firm or merge with UC rival Mitel. The company said in August that it was in advanced talks with multiple parties for a deal to compensate shareholders.
"In many respects, this is a game-changer for Avaya," CEO Jim Chirico told investors on a conference call Thursday. "At the core of this relationship is the fact that you have two industry leaders working together to address a very important market need that Avaya previously could not."
Avaya Cloud Offering by RingCentral -- a dual-branded offering based on RingCentral's UCaaS platform -- will launch in the first quarter of 2020. Avaya's partners will sell the product, and both companies share responsibility for activation, deployment and customer care.
Chirico emphasized that Avaya would enhance RingCentral's product with its technology and services. Software engineers from the two companies will work together to develop the product in the coming months.
"Let me be clear, this is not a reseller relationship," Chirico said. "This is an Avaya offer."
On a separate conference call, RingCentral executives offered conflicting messaging.
"RingCentral owns the customer, obviously," RingCentral CFO Mitesh Dhruv said. "Think of Avaya as a super master agent in this relationship."
The two companies will develop ways to make it easier to switch from Avaya's legacy gear to the UCaaS product, such as the ability to transfer on-premises settings, integrations and user profiles to the cloud. The offer will also work well with Avaya's phones and devices.
The partnership brings together two direct competitors, raising questions about the extent to which Avaya and RingCentral will continue to sell against each other.
Asked whether RingCentral could still sell directly to Avaya customers, Chirico said he didn't want to discuss specifics of the arrangement. On a separate call, RingCentral CEO Vlad Shmunis said, "We are still within our rights to do whatever else we have been doing."
But Shmunis went on to say that RingCentral's sales and marketing costs would be lower when selling through Avaya, suggesting that RingCentral would prefer that Avaya sell RingCentral's platform to Avaya customers.
"We feel that our overall economics with this arrangement will be at least at level if not superior to what we are able to achieve internally," Shmunis said.
Many of Avaya's legacy customers are no longer generating revenue for the company, representing a significant growth opportunity. But revenue-sharing with RingCentral will reduce the potential financial boon for Avaya, said Steve Blood, analyst at Gartner.
"This Avaya-RC deal could increase revenues for Avaya in the near term, especially sales of desk phones, but as it is stepping away from being a manufacturer in the UCaaS space, its margins are going to be challenged, which will put pressure on other parts of the business to cut costs further," Blood said.
Avaya's partners had been imploring the company to develop a UCaaS product for years. The company's failure to pivot to cloud quickly enough contributed to a years-long revenue slump that culminated in a Chapter 11 bankruptcy filing in 2017.
Access to RingCentral's UCaaS platform will free Avaya to focus on developing cloud collaboration and contact center technologies, as well as a communications platform-as-a-service (CPaaS) offering, company executives said. Avaya plans to release a multitenant cloud contact center within one year.
"For Avaya, they can finally stop worrying about trying to develop their own UCaaS, which they've never successfully been able to do," said Irwin Lazar, analyst at Nemertes Research. "For RingCentral, it opens the door to a much larger global market (Avaya has an installed base of 100 million), channels and Avaya's support services."
The deal will provide Avaya with immediate cash. RingCentral will take a 6% stake in Avaya by purchasing $125 million worth of stock. The vendor will also pay $375 million in advance for licensing rights and future commissions, primarily by offering stock to Avaya.
Avaya will use those funds to help fund the repurchase of up to $500 million worth of stock and to pay down $250 million worth of debt.
The partnership is subject to a federal antitrust review, which Avaya expects to conclude within 60 to 90 days. The boards of directors of both companies have already approved the deal, scheduled to take effect in the fourth quarter of 2019.
"The financial investment takes some burden off of Avaya," said Rob Arnold, analyst at Frost & Sullivan. "It adds a strong public cloud UCaaS solution to Avaya's catalog and enables Avaya to focus on the cloud contact center, CPaaS, collaboration and private cloud."