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Edited Transcript of MITL earnings conference call or presentation 4-May-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Mitel Networks Corp Earnings Call

Ottawa Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Mitel Networks Corp earnings conference call or presentation Thursday, May 4, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael W. McCarthy

Mitel Networks Corporation - VP of IR

* Richard D. McBee

Mitel Networks Corporation - CEO, President and Director

* Steven E. Spooner

Mitel Networks Corporation - CFO

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Conference Call Participants

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* Andrew Brice McGee

National Bank Financial, Inc., Research Division - Associate

* Gregory John Burns

Sidoti & Company, LLC - Telecommunications Analyst

* Jonathan Kees

Summit Redstone Partners, L.L.C - MD and Senior Analyst

* Robert Peters

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Todd Adair Coupland

CIBC World Markets Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Mitel Networks First Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Vice President of Investor Relations, Michael McCarthy. You may begin.

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Michael W. McCarthy, Mitel Networks Corporation - VP of IR [2]

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Thank you, Leanne. Good morning, everyone. It's my pleasure to welcome you to Mitel's discussion for our fiscal 2017 first quarter results for the period ended March 31. Yesterday afternoon, after the close, the company issued a press release publishing those results, a copy of which is available on our website at mitel.com.

Our press release contains discontinued operations and continuing operations following the closing of the sale of our mobile unit during the period. In addition, the press release contains as reported U.S. GAAP results as well as a reconciliation of non-GAAP measures to the U.S. GAAP results. To assist in better communicating these results, we have posted a set of supplemental slides, which you can find on the Investor Relations section of mitel.com. A replay of this conference will be available on our website until we report second quarter results in late July. This morning, I'm joined by Rich McBee, President and CEO; and Steve Spooner, CFO. Rich and Steve will review the quarter, and then open the call for Q&A.

Before turning the call over to Rich, I'd like to remind listeners of the live call and subsequent rebroadcasts that some of the statements made during this call will be referencing both GAAP and non-GAAP financial results. Non-GAAP financial measures do not have any standardized meaning and are, therefore, unlikely to be comparable to similar measures presented by other companies. We use non-GAAP financial measures to assist management and investors in understanding our past financial performance and prospects for the future. Non-GAAP measures are among the primary indicators management uses as a basis for our planning and forecasting of future periods. Investors are cautioned that non-GAAP financial measures should not be relied on as a substitute for financial measures prepared in accordance with GAAP. Reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measure can be found attached to our earnings release disseminated yesterday after the market closed.

Also, please take note of the caution regarding forward-looking statements included in the press release we issued this morning, as those matters we will be discussing on this call include forward-looking statements and, as such, are subject to risks and uncertainty. Those risks and uncertainties are discussed in detail in our most recent annual report on Form 10-K, which identifies important risk factors that could cause actual results to differ materially from forward-looking statements we make. All comparisons throughout this call will be on a year-over-year and pro forma basis, unless otherwise stated.

I will now like to turn the call over to Rich for his commentary on the quarter. Rich?

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Richard D. McBee, Mitel Networks Corporation - CEO, President and Director [3]

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Thanks, Mike, and good morning, everyone. We are joining you today from our offices in London where we've just completed a review of our European operations with local management teams. As you know, Mitel holds the number-one market share position in Europe and, based on our discussions with management this week, I am confident we are well positioned to expand our European market leadership even further.

Today, I'll walk through a brief review of the business highlights for the first quarter. I will give an update on the workforce reductions announced last night. And then, I will briefly speak on to how we see the UC markets evolving in line with the global digital business transformation. Steve will follow up with more in-depth discussion of our financial results before we move into Q&A.

First quarter revenues, non-GAAP EPS and adjusted EBITDA were above the mid-point of our guidance and slightly ahead of published analyst consensus estimates. During this seasonally slower period, the team executed well in highly-competitive markets which are being impacted daily by a series of ongoing market dynamics which include the migration from premise-based to cloud solutions, opportunities related to the viability of competitors, FX headwinds and near-term political uncertainties ahead of Brexit and elections in the major European markets and anticipated tax reform in the U.S.

Tight expense management enabled us to deliver modest operating margin improvement, but we still see opportunities to further streamline our global operating structure to enhance profitability, improve cash flow and keep Mitel in a position to capitalize on the consolidation opportunities we see developing in our global markets throughout the year. The challenge ahead in every company in our sector is to balance our investment to maximize the opportunity in today's market with the investment needed for tomorrow's.

In April, after the quarter closed and with the sale of the mobile business behind us, we conducted a comprehensive business review to ensure our resources were focused on our 2 critical business imperatives: our singular focus on the unified communications collaboration market and our ability to invest for the future and expansion in line with our strategy. In conjunction with our earnings announced last night, we have also initiated proactive action to ensure our operating expenses align with our current and future business needs. This includes the integration of what were the independent premise and cloud sales organizations and the independent premise and cloud service organizations. By doing this, we eliminate significant duplication and have significantly better aligned ourselves with our customers. In conjunction with these initiatives, we anticipate a workforce reduction of approximately 10%, expected to be completed between now and the end of the year. This is expected to generate annualized savings of approximately $30 million. Steve will discuss the estimated in-year impacts and onetime charges.

In our cloud business, recurring seats were up 40% year-over-year, bringing our total recurring seat count to 588,000. The revenue generated by these seats is reported as cloud recurring in our P&L. Total seats, that's including private cloud technologies whose revenues are captured in our product revenue line, were up 49% year-over-year, bringing our installed base of cloud users to 3.26 million. Recurring cloud bookings were again up a solid 32% year-over-year to the third quarter in a row with over 30% growth. As we discussed on our last call, the limiting factor in our ability to recognize more cloud recurring revenue has been our installation capacity. I also discussed that it would take a few quarters to increase our delivery capacity to get back to our model growth rate, which is progressing on schedule.

In the first quarter, we saw increased customer migration to cloud-based services and applications. Here in the U.K., we moved a new multi-national 1,500 seat customer in the pharmaceutical and chemicals industry into the cloud. The customer was originally considering an on-premise solution for their 6 sites to maintain local presence in the countries they serve. Mitel World Cloud enabled them to connect their country offices and workforce, offering them a centralized model with core services in 3 hubs: Germany, the U.S. and the U.K., all managed from one partner with full support from Mitel.

In the U.S., a services company that provides IT solutions, web development and a multi-channel customer care solutions integrating voice, e-mail, live chat and social monitoring, chose Mitel for a multimedia cloud contact center to support 800 agents. We displaced the existing pure play cloud contact provider in this solution. Our technology leadership position, large installed base of enterprise customers and global footprint ideally position Mitel to upgrade those customers seeking cost effective high-ROI cloud solutions.

In our enterprise business, we continued to see good growth and expansion opportunities, particularly in the large enterprise space in Europe where we had a number of large notable wins. In Germany, we won 2 large enterprise deals in the health care space, based on the strength and total cost of ownership of our solutions. Both were multi-year deals, one valued at approximately EUR 8 million and the other just over EUR 3 million. Another noteworthy large deal in Germany came in the education space, valued at more than EUR 3.5 million over a multi-year period. We are capitalizing on our strength in the education vertical in markets all across the world.

Solid sales results came during a very dynamic quarter for the business at large. We completed the sale of our Mobile Division in late February, which was the catalyst for realigning our capital structure and the way we manage our business strategic and tactically. With the proceeds generated, we reduced our debt and strengthened our balance sheet. We renegotiated our credit facility to take advantage of better rates and enhanced flexibility. Both will be major assets supporting our strategy to be a consolidator. In addition, our annualized net interest expense in 2017 will be down significantly compared to last year.

We announced a share buyback program of up to 7.8 million shares, designed to unlock value we believe is still inherent in Mitel shares. With this program in place, we have the ability to directly return excess cash flow generated by the business to shareholders.

And we added depth and breadth to our senior leadership team to ensure that we are best positioned for the significant opportunities ahead. Todd Abbott has joined us in the role of EVP of Global Sales. His extensive experience and deep understanding of Mitel's markets will accelerate programs and initiatives in place that will simplify the way customers do business with Mitel, driving market share gains and revenue growth. Todd takes over from Graham Bevington, who will now work directly for me in his new role of EVP of Business Development focusing on M&A. In this position, the company will leverage Graham's expertise both in market and technology and his global network of industry relationships to ensure that we are well positioned to capitalize on consolidation opportunities.

To conclude, Mitel is driving in a UCC landscape that is utterly transformed from where it was a year ago. Competitive displacement has accelerated digital transformation and has become not only real, but is now a top priority for the CEOs I speak with worldwide. We believe every customer will move some part of their operations to the cloud. That's why we are making everything we offer customers cloud-capable, ensuring that the traditional customer premise technology can easily migrate to the cloud, whether public, private or hybrid, when customers are ready to make that move. Vertical applications will be the differentiator in the future. We featured some of these during our Analyst Day event and will do so in a much broader way for customers and channel partners at the Mitel Next event later this month, to be held in Texas. We entered the second quarter focused on our customers, positioned to capitalize on market opportunities and taking the actions to build a business model capable of translating strong execution into value for our shareholders.

I will now turn the call over to Steve to review the financials.

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Steven E. Spooner, Mitel Networks Corporation - CFO [4]

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Thank you, Rich. Good morning, everyone. In my prepared remarks, I will cover highlights of our financial results from the continuing operations for the March quarter. I will then conclude with our guidance for Q2.

With the divestiture of the mobile business unit in February, you will see in our financial statements issued last night that the mobile division is classified as a discontinued operation consistent with the treatment in the December quarter, and the face of our financial statements shows the results of the continuing operations. During these prepared remarks, I will speak to our non-GAAP results and focus on constant currency growth rates. A reconciliation to the related GAAP amounts has been included in our earnings press release as well as the investor deck that is posted on our website.

As Rich mentioned, Q1 was a solid quarter for Mitel, posting revenues, adjusted EBITDA and non-GAAP earnings well within our guidance ranges for the quarter, and all exceeding consensus estimates. Earnings per share were $0.09, up 29% versus the prior year, and also above consensus estimates.

As discussed during Analyst Day in March, following the divestiture of our mobile division and the subsequent reorganization of the continuing business, Mitel is now organized in a single operating segment as a global provider of business communications and collaboration software and services. Revenues and gross margins are now reported as products, services and cloud recurring.

Total revenue in Q1 was $223 million, down 2% year-over-year. Product revenue was $133 million, also down 2% year-over-year. In a tough premise-based market, we saw growth in product sales in several key geographies this quarter and we're overall pleased with our product revenue performance. Service revenue was $59 million, down 7% year-over-year, primarily as a result of the decline in our hardware maintenance and other legacy services and some project timing. Our software-based maintenance revenues, which we refer to as Software Assurance, continue to grow and were up 8% year-over-year. Cloud recurring revenue of $31 million in Q1 was up 10% over the prior year. As Rich mentioned, we have been challenged with capacity constraints within our retail cloud business, which has lengthened the time from booking to revenue generation. Cloud bookings were up 32% year-over-year. However, due to short-term capacity constraints, our implementation backlog has increased. Driving down that backlog and improving our time from booking to revenue remains a key focus for the next several months. Our total company recurring revenues were approximately $77 million in Q1, up 3% year-over-year. Recurring revenues now account for 34% of total annual revenue, an increase of 160 basis points (sic) [170 basis points] year-over-year.

Now turning to gross margins. Total gross margin for the first quarter was 53.4%, up 60 basis points year-over-year. Product gross margins were 55.2% and were down 240 basis points, primarily as a result of mix as we saw a higher proportion of hardware-based revenues this quarter. Service gross margins were 50.8% and were up 680 basis points, largely as a result of initiatives we have undertaken to improve the utilization and efficiency of our services personnel. Our cloud recurring gross margins were 50.6%, up 100 basis points year-on-year, largely as a result of continuing healthy growth in our higher-margin wholesale cloud offers.

Total operating expenses for the quarter were $103 million, which were down $3 million year-over-year. Realized savings from restructuring activities in SG&A and R&D more than offset new investments made in cloud. These results exclude special charges in restructuring costs, amortization of acquisition related intangible assets and stock-based compensation. Adjusted EBITDA on the quarter was $21 million or 9.4% of revenue, down 3% year-on-year, and down 10 basis points as a percentage of revenue, reflecting our continued investments for cloud growth. Non-GAAP earnings per share were $0.09, up $0.02 versus the prior year, largely as a result of lower interest expenses arising from our reduced debt balance and the favorable terms negotiated in our recently closed new credit facility.

During the March quarter, Mitel repaid $364 million of debt with proceeds from the divestiture of the mobile business unit. In addition, we refinanced our senior secured credit facilities. These new credit facilities are comprised of a $150 million term loan and a $350 million revolving credit facility. Our leverage ratio in March was 1.17, comparing favorably to our permitted ratio of 3.5. At the end of the March 2017 quarter, Mitel had $57 million in cash and cash equivalents. With the new credit facilities in place, our liquidity has increased from $147 million at the end of December to $329 million at the end of March, 2017.

In our first quarter, Mitel repurchased 120,000 shares at an average price of $6.97 under our previously announced stock buyback program. This volume reflected us having only one open trading day between the announcement of our Q4 2016 results and the commencement of our quarterly blackout period. We remain committed to utilize excess cash to repurchase shares in the absence of any near-term attractive M&A opportunities. Mitel exited the first quarter with a global workforce of 3,228 employees in our continuing operations, down from 3,300 1 year ago.

Now on to our business outlook. With roughly half our business being in Europe, we continue to face foreign currency headwinds primarily from the British pound and the euro, which have both continued to decline against the U.S. dollar. In our second quarter, we expect foreign currency declines to create a revenue headwind of approximately $8 million, which is reflected in our guidance ranges for the quarter. In light of the significant actions being taken to integrate our sales and service organizations, which comprise roughly 2/3 of our total staffing, along with other cost reduction programs we are putting in place, we are taking a very prudent approach to our revenue guidance for the June quarter.

For the second quarter ending June 2017, we currently expect revenues to be in the range of $230 million to $255 million. Gross margin percentage is expected to be 53.5% to 55.5%. Adjusted EBITDA margins are expected to be 10% to 15% of revenue. And non-GAAP net income is expected to be in the range of 5.5% to 9.5%. Share count for the March quarter should be approximately 126.5 million fully diluted shares.

With respect to the cost reduction actions announced today, we anticipate that these actions will generate annualized savings of approximately $30 million, of which $24 million will impact operating expenses with the other $6 million improving gross margin. Based on the expected timing of the proposed actions, we estimate an in-year impact of approximately $17 million. As a result of these actions, we anticipate a one-time workforce reduction charge in the range of $25 million to $35 million. This range reflects the varying mix of employees, tenure and local country requirements, which we are actively working through. Please refer to the IR deck on our website for our current view of the estimated impacts by quarter. In light of these actions, we reiterate our confidence in the calendar year '17 target model that we announced at our Investor and Analyst Day in March, with heightened potential to achieve our adjusted EBITDA range.

In summary, Q1 was another solid quarter for Mitel, with both revenue and earnings exceeding consensus estimates. The pay down of debt along with the refinancing of our credit facilities have de-leveraged our balance sheet and significantly improved our liquidity. The restructuring actions announced this morning will further streamline our operations and put us on a path to achieve our target operating model. These changes will put a short-term drain on cash as we incur workforce rebalancing and other related charges, but will serve to further strengthen our operations going forward. These actions are expected to contribute meaningfully to OpEx run rate savings in the second half of this year.

This concludes our formal remarks so I'll now ask the operator if she could please review the procedures for asking questions and open up the lines. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Greg Burns with Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Telecommunications Analyst [2]

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Could you talk a little bit more about the constraints on the cloud side? How far along are you in kind of alleviating that bottleneck? And I guess where are you in the process? And kind of when do you foresee being at sufficient scale to be able to handle your current pace of bookings?

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Richard D. McBee, Mitel Networks Corporation - CEO, President and Director [3]

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Yes. So there's a couple pieces of that. First of all, we're really pleased with the booking rate because that shows that our solutions are being well adopted in the market. 30% -- over 30% growth for the last 3 quarters on a pretty big number is very solid growth. Part of solving the equation to increase our capacity for delivery of solutions: number one is we're adding additional people into our cloud delivery service organization. But number two, bringing the 2 service organizations together will really multiply the capacity that we have. So we're going to see it continue to -- we had a small increase in it over Q4 to Q1. We'll see a bigger increase in this quarter. And then, I think the second half of the year we'll be pretty locked. Obviously, what we want to do is make sure that we keep that order rate going and then make sure that we bring the capacity online both from external sources as well as bringing the enterprise service organization into the fold. It takes a lot less time to train those guys. They're doing private cloud installations and so getting the recurring ones isn’t a big technical step to get those guys trained up to do that. So it's all hands on deck and we expect significant improvement in the current quarter and then the second half of the year we'll be fully ready to go.

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Gregory John Burns, Sidoti & Company, LLC - Telecommunications Analyst [4]

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Okay. Steve, I missed maybe some of the commentary about the buyback. But did you buy back any stock this quarter? And the guide looks like you're looking for the diluted share count to be up in the second quarter so I'm just wondering kind of what your thoughts are on executing on the buyback.

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Steven E. Spooner, Mitel Networks Corporation - CFO [5]

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Yes. So we did have a buyback in the quarter, but there was only one, actually, trading day that we were able to be buying shares back. We bought 120,000 shares back on that one day. And yes, we do expect to be in the market this quarter, buying under the share buyback program.

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Operator [6]

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Your next question comes from Todd Coupland with CIBC.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [7]

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I wanted to ask about the target model. So I think the guide for margins, EBIT margins, was 15% to 17% for the year. So with this restructuring second half impact it sounds like you're reiterating to be in that range.

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Steven E. Spooner, Mitel Networks Corporation - CFO [8]

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Yes. Yes, I think when we set the -- I think if we look today or reflect back on the Analyst Day, our guide for '17 reflected significant improvement coming off the '16 results. And that guide reflected the actions that we were -- the reviews that were being carried out that Rich mentioned and our expectation that we would be taking these actions to align our cost structure to put us on, confidently put us on, the trajectory towards that target model. So the message I would have to The Street is we are reiterating our confidence in that target model both for '17 and beyond. And I would think investors should have heightened confidence in our ability to achieve those targets in light of these actions.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [9]

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Okay. But just to be clear, Steve, you had anticipated this restructuring at the time you set the guide. The timing hadn’t been worked out. But you had thought you were going to put a restructuring in place in order to allow you to get to that guide.

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Steven E. Spooner, Mitel Networks Corporation - CFO [10]

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Yes.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [11]

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Okay. And what are the puts and takes, in your mind, in terms of getting to the low or the high end of that range as we think about the balance of the year? You mentioned currency in the second quarter. But what are the other issues that would cause you to be at the low or high end of that range?

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Steven E. Spooner, Mitel Networks Corporation - CFO [12]

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Yes. I think on the restructuring actions, just the pace at which we can implement those, the continued ramp-up of our cloud delivery capabilities, the continued pace of our bookings growth. And I think if you look at the enterprise business, we're clearly outperforming the competition with our results on the kind of the premise or enterprise side of the house. So continuing strong performance there. Those are the key levers. Product mix clearly -- as we look at margin, product mix within our enterprise business is the key driver for whether our margins are at the low end or the high end of the range. With cloud, similarly, it's the mix of kind of wholesale versus retail offerings. The more of the mix that is leaning towards wholesale, the margins are higher. So those are the key drivers on the margin side.

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Operator [13]

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Your next question comes from Rob Peters with Cormark Securities.

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Robert Peters, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [14]

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Just wanted to ask maybe if you could talk about the dynamic you're seeing in the Americas right now. And maybe kind of contrast some of the growth you're seeing Europe and maybe what you see in that market going into the back half of the year that might see some of that growth shift over to the Americas segment.

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Richard D. McBee, Mitel Networks Corporation - CEO, President and Director [15]

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Yes. So I'll take that and then, Steve, if you want to chime in with anything. First of all, in the Americas we see great opportunity. We are -- with some of the companies that have stated that they're in trouble or they're looking at strategic options; it's provided us a really good opportunity in the market. So our funnels are growing extremely large in the Americas. There is uncertainty. People are waiting to see how taxes are going to be treated, and so kind of that political uncertainty, which is causing a little bit of pause right now. And then, we actually we had some execution issues. And so we've had some duplication of things that -- and when we streamlined this, our selling organization, bringing our cloud and enterprise organizations together, we think that we're going to actually give us more capacity, not less capacity. So there's kind of 3 factors for us in the Americas. And we feel pretty confident we're on the right track. We've been prudent in our Q2 guide because we have made changes and we want to make sure that we navigate through those changes, which I have full confidence we will. But the funnels are looking good. We've got the execution issues taken care of. We don’t control the political ones so… Our win rates are good and we expect performance to improve.

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Robert Peters, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [16]

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Perfect. And maybe just to follow up on kind of some of the dynamics you're seeing in the marketplace, if you could give any color on the applications you're deploying in the UCC right now and just any traction. I know we saw a lot of various examples at the Investor Day.

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Richard D. McBee, Mitel Networks Corporation - CEO, President and Director [17]

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Yes. We're really excited about the applications. The reality is we are seeing a transition in the market, where customers are less concerned about the call control and more concerned about the devices, how they interact with the call control and the applications that enable them like the mass event notification, some of the IoT things that we showed at Analyst Day. We have numerous conversations going on with customers. And you saw some of the large orders that we announced in this quarter. I mean EUR 8.5 million, EUR3.5 million. Those are directly tied to the applications and the collaboration capabilities that we have. So the reality is, with a couple of the dynamics going on with some of our competitors in the market and our focus on these applications providing real solutions, we're getting a lot more looks and, candidly, we're winning more deals.

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Operator [18]

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Your next question comes from Jonathan Kees with Summit Redstone.

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Jonathan Kees, Summit Redstone Partners, L.L.C - MD and Senior Analyst [19]

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I wanted to, I guess, dive a little bit deeper in terms of the wholesale. It seems like that boosted gross margins for cloud recurring, which is good. I wanted to -- and I may have also missed this from -- I didn’t see it on the press release. I didn’t see the ARPU numbers that were normally given there for retail. What's the direction of that? How are the carrier initiatives with that in terms of the deployment? Are you somewhat close to signing up more carriers in terms of your indirect channel? And yes, just more color on that, please.

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Steven E. Spooner, Mitel Networks Corporation - CFO [20]

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It's Steve here. So I will chime in and Rich can comment as he sees fit. So your first question on wholesale growth. Yes, we continue to see increased traction with Mitel's wholesale cloud offerings through a growing number of service providers. We've commented before that when you land one of these service provider or carrier relationships it takes a long time to kind of work through the big machine, so to speak, of a carrier. But we're starting to see them now kind of gearing up and we're seeing the benefit of that on the revenue line and that clearly does strengthen our recurring cloud margins. We continue to add carriers every quarter. Very pleased with that. With respect to your question on the ARPU, consistent with the change to our cloud reporting, one of the questions that we -- one of the sources of confusion we had previously was we would give a retail ARPU but a total recurring cloud seats. So we're just limiting our metrics to recurring cloud seats, recurring cloud revenue. But to answer your question directly, our retail ARPU continues to be stable, in the high $40s, $50 range. So really, really consistent with what we've seen in the past 4 or 5 quarters.

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Jonathan Kees, Summit Redstone Partners, L.L.C - MD and Senior Analyst [21]

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Okay, great. And I wanted to also ask in terms of more follow-up on that competitive dynamic question. You talked about, in the press release, a win from Avaya. A lot of the wins, is it more from that one particular competitor? Or are you seeing -- I guess where are most of your wins coming from? Is it more from just the premise guys? Enterprise was up for you guys and…

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Richard D. McBee, Mitel Networks Corporation - CEO, President and Director [22]

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Yes. I think that there's kind of 2 major impacts. So the 30% growth in our recurring cloud; that's not coming from Avaya. That's coming from the market and so that set of competitors. In the Avaya situation; good company, but they're in tough times. And we've seen our funnels have, specifically to Avaya, Avaya opportunities, are in the couple hundred million range. Now these systems that we're competing with Avaya are not short-term systems. These are systems that will have long sales cycles. They're multi-year win you win them. But we've seen our funnels grow a couple hundred million. So we're focused on those. It's a great opportunity for us. A lot of customers are looking what's out there. And some of the large orders that I even announced on this call were Avaya orders, house accounts. So it provides us a great opportunity. Our win rates are strong. So when we say that there is change in the market down around the lower end, that's our solutions and we're just doing good against one group of competitors. But up on the upper end, which is I'd call the middle enterprise to large enterprise, the opportunities that are primarily coming through are large Avaya opportunities. And our win rates are strong on those. Again, the sales cycle on those ones are 180 days or it could even be a year. But we are heavily in the hunt in that area.

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Operator [23]

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(Operator Instructions) Your next question comes from Richard Tse with National Bank.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Associate [24]

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It's actually Andrew in place of Richard. Just kind of hoping that you can give me a better sense, now that your segment reporting is refreshed, what you're seeing anecdotally for the pace of growth in Q1 on your enterprise products versus your cloud products.

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Steven E. Spooner, Mitel Networks Corporation - CFO [25]

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Well, yes, I think, Andrew, just on a go-forward basis we're not going to get down to that level of granularity in our reporting. But I think when we did our reconciliation in kind of our old target model and reporting to the new that we presented at the March Investor Day, we highlighted that, last year we saw the private cloud and kind of the CapEx-based wholesale cloud growing in that kind of 20%-plus range. And again, while we don’t break that out in our reporting today, I would say, particularly given, as you're seeing -- we're continuing to see performance in line with that. So very strong. Our hybrid story we think is the best in the market. We continue to see strong take-up from enterprise customers. And our comment about increasing take-up from service providers offering wholesale; that applies not just to the recurring side. We have wholesale service providers who are buying on a CapEx basis and they continue to grow as well and that growth is reflected in our enterprise performance or in our products revenue line.

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Richard D. McBee, Mitel Networks Corporation - CEO, President and Director [26]

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Yes. I think in the third-party reported market share, we continue to take market share in almost every one of our major markets. So we feel good about that. So that’s our product solution. Like I said, 32% growth in recurring cloud, so those solutions are very well received in the marketplace. And so we think that we're doing better. The core premise-based market is still in decline, but we see our solutions declining less than that, and we think that with our applications strategy we'll be even able to close that gap further. So I think right now, from a products perspective, we're in a strong position to compete in the market. With this bringing the channels together, I think that's going to even make us more competitive from the standpoint of having a single simple voice to the customer for solutions. And when you bring 2 relatively large organizations together, obviously we described some synergies that we're having, but it also gives us added capacity. And that added capacity will help us, I think, continue to be able to take share in each one of our core markets.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Associate [27]

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Okay. And then, maybe just a follow-up on Todd's question regarding the target model. When you think about that free cash flow potential slide that was presented at the Analyst Day, was yesterday's restructuring announcement reflected in that? And maybe, if it wasn’t, should we be thinking about that slide for its 2018 potential? Essentially, what I'm trying to get at is a sense of when the timing on when you believe the conversion of cash flow and your EBITDA target will start to converge.

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Steven E. Spooner, Mitel Networks Corporation - CFO [28]

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Yes. No, that's a good point. I think when I made the comment earlier in response to one of the earlier questions, we certainly did anticipate taking actions. We had, I believe -- our target model, I mean we model down to EBITDA so we don’t -- but so while we didn’t specifically guide on special charges, we had kind of communicated to The Street that we would -- I think we had talked about roughly $25 million of restructuring charges in '17 as being our best view. I would say, in light of the fact that we -- our comprehensive review that we completed that led to these actions frankly identified further opportunities to improve our operating performance, clearly we're going to be at -- we will be -- we've taken more cost out than we had anticipated. And that is driving up the cash -- that will drive up the cash cost in-year. We believe in-year, this year, we're probably talking another -- probably these actions will probably drive about $10 million of cash out. We have roughly $11-or-so million in the first quarter. So that $25 million estimate I'd probably push to $35-plus million. The good news is, though, we've taken -- we are taking more substantial actions that -- the caution that I want to give the market is don’t take the target model up. The reality is, as I look at how -- where consensus estimates are today, they are well below what we have communicated for '17 as where we believe we can get the business performance to. So I interpret that to be a lot of folks saying, "Well, we're going to wait and see." And I think, with these concrete actions that we have taken, the investment community at large should have heightened confidence with our ability to achieve the target model we previously communicated.

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Operator [29]

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And I'm showing no further questions. I would now like to turn the call back to Michael McCarthy for any further remarks.

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Michael W. McCarthy, Mitel Networks Corporation - VP of IR [30]

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Yes. Thanks, Leanne, and thank you, everybody, for joining us this morning. We appreciate your time. We will be out on the road quite a bit with several conferences we'll be participating in through the month of May. As always, feel free to give me a call or e-mail me if you have any additional questions or thoughts you'd like address. Thanks again for your time.

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Operator [31]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone, have a great day.