Avaya Reports First Fiscal Quarter 2014 Financial Results

SANTA CLARA, CA--(Marketwired - Feb 18, 2014) -

• Business model advances year-on-year
• Cash growth from operations and asset sales

First Quarter 2014 Highlights:

• Revenue of $1,158 million
• Operating income of $91 million, non-GAAP operating income⁽¹⁾ of $196 million
• Adjusted EBITDA⁽¹⁾ of $240 million, 20.7% of revenue

Avaya Inc., a global provider of business communications and collaboration systems, software and services, reported results for the first fiscal quarter ended December 31, 2013.

Total revenue for the first quarter was $1,158 million, seasonally down 3.5% when compared to the prior quarter. On a year over year basis revenue was down 6.6% compared to the first quarter of fiscal 2013. For the first fiscal quarter, adjusted EBITDA was $240 million which compares to adjusted EBITDA of $295 million for the prior quarter and $251 million for the first quarter of fiscal 2013. Non-GAAP operating income was $196 million compared to non-GAAP operating income of $244 million for the prior quarter and $193 million for the first quarter of fiscal 2013. First quarter cash flow from operations was $64 million. Cash and cash equivalents totaled $300 million as of December 31, 2013. Subsequent to the end of the first fiscal quarter, the company also completed the sale of its facility in Westminster, Colorado for approximately $58 million, net of applicable fees and related expenses.

"Avaya's first quarter results demonstrated progress in the execution of our strategy and improved operational efficiency," said Kevin Kennedy, president and CEO. "We delivered year-over-year profitability improvements and increased cash while advancing our business model. Avaya remains focused on execution and aligning our organization to optimize our innovative product portfolio while pursuing new and attractive market opportunities."

First Fiscal Quarter Highlights

• Revenue of $1,158 million decreased 3.5% compared to the prior quarter and decreased 6.6% compared to the first quarter of fiscal 2013
• Gross margin was 55.7% compared to 56.8% for the prior quarter and 53.7% for the first quarter of fiscal 2013. Operating income was $91 million compared to operating income of $113 million for the prior quarter and up nearly four times compared to $23 million for the first quarter of fiscal 2013
• Non-GAAP gross margin⁽¹⁾ was 57.2% compared to 58.1% for the prior quarter and 55.6% for the first quarter of fiscal 2013. Non-GAAP operating income was $196 million compared to non-GAAP operating income of $244 million for the prior quarter and $193 million for the first quarter of fiscal 2013
• Adjusted EBITDA was $240 million or 20.7% of revenue compared to $295 million or 24.6% of revenue for the prior quarter and $251 million or 20.2% of revenue for the first quarter of fiscal 2013
• First quarter 2014 non-GAAP gross margin and adjusted EBITDA were record levels in the first quarter of any fiscal year for the company.
• Product revenue of $574 million decreased by 7.0% compared to the prior quarter and decreased by 9.0% compared to the first quarter of fiscal 2013.
• Avaya Global Services revenue of $584 million increased 0.2% compared to the prior quarter and decreased 4.1% compared to the first quarter of fiscal 2013
• First quarter 2014 capital expenditures and capitalized software totaled $33 million compared to $34 million for the prior quarter and $30 million for the first quarter of fiscal 2013
• The provision for income taxes includes charges related to valuation allowances and to the transfer of intellectual property
• For the first fiscal quarter, percentage of revenue by geography was:
  • U.S. - 54%
  • Asia-Pacific - 10%
  • EMEA - 26%
  • Americas International - 10%

Conference Call and Webcast
Avaya will discuss these results at 5:00 a.m. PST on Tuesday, February 18, 2014 in a live webcast and conference call. To join the webcast, listeners should access the investor page of our website (www.avaya.com/investors). Supplementary materials will be available at the same location. Following the live webcast, a replay will be available at the same web address in our event archives.

To access the webcast by phone, dial 800-882-9327 in the U.S. or Canada and 706-645-9730 for international callers using the conference passcode number of 31446838. To ensure you are connected prior to the start, we suggest you access the website or the call 10-15 minutes before the start time.

For those unable to participate during the live event, a replay of the conference call will be available beginning at 8:00 a.m. PST on February 18, 2014 through March 18, 2014 by dialing 855-859-2056 or 800-585-8367 within the United States and 404-537-3406 outside the United States. The replay access code is 31446838.

About Avaya
Avaya is a global provider of business collaboration and communications solutions, providing unified communications, contact centers, networking and related services to companies of all sizes around the world. For more information please visit www.avaya.com.

Certain statements contained in this press release may be forward-looking statements. These statements may be identified by the use of forward-looking terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "should" or "will" or other similar terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these are reasonable, such forward looking statements involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results to differ materially from any future results expressed or implied by these forward-looking statements. For a list and description of such risks and uncertainties, please refer to Avaya's filings with the SEC that are available at www.sec.gov. Avaya disclaims any intention or obligation to update or revise any forward-looking statements.

^[1] Refer to Supplemental Financial Information accompanying this press release for a reconciliation of GAAP to non-GAAP numbers and for reconciliation of adjusted EBITDA for the fourth quarter of fiscal 2013 see our Form 8-K filed with the SEC on November 20, 2013 at www.sec.gov.

Avaya Inc.
Consolidated Statements of Operations
(Unaudited; in millions)
				For the three months ended December 31,
				2013				2012
REVENUE
	Products			$	574			$	631
	Services				584				609
					1,158				1,240
COSTS
	Products:
		Costs (exclusive of amortization of acquired technology intangible assets)			228				261
		Amortization of acquired technology intangible assets			14				22
	Services				271				291
					513				574
GROSS PROFIT					645				666
OPERATING EXPENSES
	Selling, general and administrative				395				384
	Research and development				95				118
	Amortization of intangible assets				57				57
	Restructuring charges, net				7				84
					554				643
OPERATING INCOME					91				23
	Interest expense				(119	)			(108	)
	Loss on extinguishment of debt				-				(3	)
	Other income (expense), net				1				(6	)
LOSS BEFORE INCOME TAXES					(27	)			(94	)
(Provision for) benefit from income taxes					(27	)			9
NET LOSS				$	(54	)		$	(85	)

Avaya Inc.
Consolidated Balance Sheets
(Unaudited; in millions)
			December 31,				September 30,
			2013				2013
ASSETS
Current assets:
	Cash and cash equivalents		$	300			$	288
	Accounts receivable, net			686				716
	Inventory			226				245
	Deferred income taxes, net			62				52
	Other current assets			266				253
TOTAL CURRENT ASSETS				1,540				1,554
	Property, plant and equipment, net			326				334
	Deferred income taxes, net			26				34
	Intangible assets, net			1,426				1,486
	Goodwill			4,103				4,092
	Other assets			168				172
TOTAL ASSETS			$	7,589			$	7,672
LIABILITIES
Current liabilities:
	Debt maturing within one year		$	35			$	35
	Accounts payable			436				408
	Payroll and benefit obligations			221				256
	Deferred revenue			666				671
	Business restructuring reserve, current portion			74				92
	Other current liabilities			259				257
TOTAL CURRENT LIABILITIES				1,691				1,719
	Long-term debt			6,042				6,051
	Pension obligations			1,494				1,510
	Other postretirement obligations			284				290
	Deferred income taxes, net			251				243
	Business restructuring reserve, non-current portion			74				78
	Other liabilities			474				450
TOTAL NON-CURRENT LIABILITIES				8,619				8,622
Commitments and contingencies
STOCKHOLDER'S DEFICIENCY
	Common stock			-				-
	Additional paid-in capital			2,943				2,937
	Accumulated deficit			(4,654	)			(4,600	)
	Accumulated other comprehensive loss			(1,010	)			(1,006	)
TOTAL STOCKHOLDER'S DEFICIENCY				(2,721	)			(2,669	)
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY			$	7,589			$	7,672

Avaya Inc.
Condensed Statements of Cash Flows
(Unaudited; in millions)
				For the three months ended December 31,
				2013				2012
Net cash (used for) provided by:
		Net loss		$	(54	)		$	(85	)
		Adjustments to net loss			132				101
		Changes in operating assets and liabilities			(14	)			(10	)
	Operating activities				64				6
	Investing activities				(43	)			(31	)
	Financing activities				(10	)			(26	)
	Effect of exchange rate changes on cash and cash equivalents				1				(1	)
Net increase (decrease) in cash and cash equivalents					12				(52	)
Cash and cash equivalents at beginning of period					288				337
Cash and cash equivalents at end of period				$	300			$	285

Avaya Inc.
Supplemental Schedules of Revenue
(Unaudited; in millions)
For the Three Months Ended											For the Three Months Ended December 31,
Mar. 31,			June 30,			Sept. 30,					Revenues						Mix						Change
2013			2013			2013					2013			2012			2013			2012			Amount				Pct.
									Revenue by Segment
$	473		$	497		$	553		Global Communications Solutions		$	507		$	573		44	%		46	%		$	(66	)		-11.5	%
	-			(1	)		-			Purchase accounting adjustments		-			-		0	%		0	%			-			-
	56			64			64		Networking			67			58		6	%		5	%			9			15.5	%
	529			560			617		Total ECS product revenue			574			631		50	%		51	%			(57	)		-9.0	%
	589			590			583		AGS			584			609		50	%		49	%			(25	)		-4.1	%
$	1,118		$	1,150		$	1,200		Total revenue		$	1,158		$	1,240		100	%		100	%		$	(82	)		-6.6	%
									Revenue by Geography
$	592		$	639		$	659		U.S.		$	631		$	670		54	%		54	%		$	(39	)		-5.8	%
									International:
	298			297			313			EMEA		303			331		26	%		27	%			(28	)		-8.4	%
	116			105			113			APAC - Asia Pacific		114			123		10	%		10	%			(9	)		-7.5	%
	112			109			115			Americas International - Canada and Latin America		110			116		10	%		9	%			(6	)		-5.2	%
	526			511			541		Total International			527			570		46	%		46	%			(43	)		-7.5	%
$	1,118		$	1,150		$	1,200		Total Revenue		$	1,158		$	1,240		100	%		100	%		$	(82	)		-6.6	%

Use of non-GAAP (Adjusted) Financial Measures

The information furnished in this release includes non-GAAP financial measures that differ from measures calculated in accordance with generally accepted accounting principles in the United States (GAAP), including adjusted EBITDA, non-GAAP gross margin as a percentage of revenue, and non-GAAP operating income.

EBITDA is defined as net income (loss) before income taxes, interest expense, interest income and depreciation and amortization. Adjusted EBITDA is EBITDA further adjusted to exclude certain charges and other adjustments permitted in calculating covenant compliance under our debt agreements as further described in our SEC filings.

We believe that including supplementary information concerning adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our debt agreements and because it serves as a basis for determining management compensation. In addition, we believe adjusted EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our current capital structure. Accordingly, adjusted EBITDA measures our financial performance based on operational factors that management can impact in the short-term, namely the Company's pricing strategies, volume, costs and expenses of the organization.

Adjusted EBITDA has limitations as an analytical tool. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, based on our debt agreements the definition of adjusted EBITDA allows us to add back certain non-cash charges that are deducted in calculating net income (loss). Our debt agreements also allow us to add back restructuring charges, certain fees payable to our private equity sponsors and other specific cash costs and expenses as defined in the agreements and that portion of our pension costs, other post-employment benefits costs, and non-retirement post-employment benefits costs representing the amortization of pension service costs and actuarial gain or loss associated with these employment benefits. However, these are expenses that may recur, may vary and are difficult to predict. Further, our debt agreements require that adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

Non-GAAP gross margin excludes the amortization of acquired technology intangible assets, share based compensation and purchase accounting adjustments. We have included non-GAAP gross margin because we believe it provides additional useful information to investors regarding our operations by excluding those charges that management does not believe are reflective of the Company's ongoing operating results when assessing the performance of the business.

Non-GAAP operating income excludes the amortization of technology intangible assets, restructuring and impairment charges, acquisition and integration related costs, share based compensation, impairment of long lived assets and purchase accounting adjustments. We have included non-GAAP operating income because we believe it provides additional useful information to investors regarding our operations by excluding those charges that management does not believe are reflective of the company's ongoing operating results when assessing the performance of the business.

These non-GAAP measures are not based on any comprehensive set of accounting rules or principles and have limitations as analytical tools in that they do not reflect all of the amounts associated with Avaya's results of operations as determined in accordance with GAAP. As such, these measures should only be used to evaluate Avaya's results of operations in conjunction with the corresponding GAAP measures.

The following tables reconcile GAAP measures to non-GAAP measures:

Avaya Inc.
Supplemental Schedule of Non-GAAP Adjusted EBITDA
(Unaudited; in millions)
			For the three months ended December 31,
			2013				2012
Net loss			$	(54	)		$	(85	)
	Interest expense			119				108
	Interest income			-				(1	)
	Provision for (benefit from) income taxes			27				(9	)
	Depreciation and amortization			118				114
EBITDA				210				127
	Restructuring charges, net			7				84
	Sponsors' fees			2				2
	Integration-related costs			2				4
	Loss on extinguishment of debt			-				3
	Third-party fees expensed in connection with the debt modification			-				4
	Non-cash share-based compensation			6				2
	Other			2				-
	(Gain) loss on foreign currency transactions			(2	)			2
	Pension/OPEB/nonretirement postemployment benefits and long-term disability costs			13				23
Adjusted EBITDA			$	240			$	251

Avaya Inc.
Supplemental Schedules of Non-GAAP Reconciliations
(Unaudited; in millions)
				For the Three Months Ended
				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,
				2012				2013				2013				2013				2013
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin
	GAAP Gross Profit			$	666			$	586			$	627			$	681			$	645
	GAAP Gross Margin				53.7	%			52.4	%			54.5	%			56.8	%			55.7	%
	Items excluded:
		Amortization of acquired technology intangible assets			22				14				13				14				14
		Impairment of capitalized software development costs			-				-				1				-				-
		Share-based compensation			1				-				2				2				3
		Purchase accounting adjustments			-				-				1				-				-
	Non-GAAP Gross Profit			$	689			$	600			$	644			$	697			$	662
	Non-GAAP Gross Margin				55.6	%			53.7	%			56.0	%			58.1	%			57.2	%
Reconciliation of Non-GAAP Operating Income
	GAAP Operating Income (Loss)			$	23			$	(72	)		$	14			$	113			$	91
		Percentage of Revenue			2	%			-6	%			1	%			9	%			8	%
	Items excluded:
		Amortization of acquired assets			79				71				70				70				71
		Restructuring and impairment charges, net			84				18				63				35				7
		Acquisition/ integration-related costs			5				6				5				4				3
		Share-based compensation			2				1				4				4				6
		Impairment of capitalized software development costs			-				-				1				-				-
		Incremental accelerated depreciation associated with vacating facilities			-				-				3				18				16
		Other			-				-				-				-				2
		Goodwill impairment			-				89				-				-				-
		Resolution of legal matters			-				-				10				-				-
		Purchase accounting adjustments			-				-				1				-				-
	Non-GAAP Operating Income			$	193			$	113			$	171			$	244			$	196
	Percentage of Revenue				15.6	%			10.1	%			14.9	%			20.3	%			16.9	%
Weighted average shares outstanding (1)					489.5				489.7				490.0				490.4				491.1
Non-GAAP net income/(loss) per share (2)				$	0.17			$	(0.01	)		$	0.10			$	0.31			$	0.10
(1) Weighted average shares outstanding - refers to the shares outstanding of Avaya Holding Corp. (Parent).
(2) Non-GAAP net income/(loss) per share - is determined by dividing the non-GAAP net income/(loss) of Avaya Inc. by the average number of commons shares outstanding of Parent, without adjustments for the net loss of Parent and the net effect of participating securities and accreted dividends of the Parent on net income/(loss) attributable to common shareholders.

Avaya Inc.
Supplemental Schedules of Non-GAAP Reconciliation of Gross Profit and Gross Margin by Portfolio
(Unaudited; in millions)
					For the Three Months Ended
					Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,
					2012				2013				2013				2013				2013
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Products
		Revenue			$	631			$	529			$	560			$	617			$	574
			Costs (exclusive of amortization of technology intangible assets)			261				236				234				232				228
		Amortization of technology intangible assets				22				14				13				14				14
	GAAP Gross Profit					348				279				313				371				332
	GAAP Gross Margin					55.2	%			52.7	%			55.9	%			60.1	%			57.8	%
	Items excluded:
		Amortization of acquired technology intangible assets				22				14				13				14				14
		Impairment of capitalized software development costs				-				-				1				-				-
		Purchase accounting adjustments				-				-				1				-				-
	Non-GAAP Gross Profit				$	370			$	293			$	328			$	385			$	346
	Non-GAAP Gross Margin					58.6	%			55.4	%			58.5	%			62.4	%			60.3	%
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Services
		Revenue			$	609			$	589			$	590			$	583			$	584
		Costs				291				282				276				273				271
	GAAP Gross Profit					318				307				314				310				313
	GAAP Gross Margin					52.2	%			52.1	%			53.2	%			53.2	%			53.6	%
	Items excluded:
		Share-based compensation				1				-				2				2				3
	Non-GAAP Gross Profit				$	319			$	307			$	316			$	312			$	316
	Non-GAAP Gross Margin					52.4	%			52.1	%			53.6	%			53.5	%			54.1	%