SOURCE: Avaya Inc.

Avaya Inc.

February 09, 2015 16:01 ET

Avaya Reports First Fiscal Quarter 2015 Financial Results

SANTA CLARA, CA--(Marketwired - Feb 9, 2015) -

  • Revenue of $1,079 million
  • Operating Income of $104 million, Non-GAAP Operating Income(1) of $193 million
  • Adjusted EBITDA(1) of $239 million, 22.2% of revenue

Avaya reported financial results for the first fiscal quarter ended December 31, 2014.

Total revenue for the quarter was $1,079 million, down $47 million compared to the prior quarter. On a year over year basis revenue was down $52 million compared to the first quarter of fiscal 2014. After adjusting for fluctuations in foreign exchange rates, revenue was down 3 percent sequentially and year-over-year, in line with historical quarterly sequential patterns.

For the quarter, adjusted EBITDA(1) was $239 million which compares to adjusted EBITDA of $253 million for the prior quarter and $237 million for the first quarter of fiscal 2014. GAAP operating income was $104 million and non-GAAP operating income was $193 million which compares to non-GAAP operating income of $212 million for the prior quarter and $193 million for the first quarter of fiscal 2014. The company was free cash flow positive for the quarter, with cash and cash equivalents totaling $328 million as of December 31, 2014. 

"Revenue for Avaya's first fiscal quarter was constrained by the effect of exchange rates, December sales execution and deal timing. Non-GAAP gross margin, non-GAAP operating margin and adjusted EBITDA margin achieved record results for a first fiscal quarter. Our performance demonstrated improved year-over-year operating model efficiency and continued execution of our strategic plan," said Kevin Kennedy, president and CEO. "Looking ahead, Avaya remains focused on our sales and marketing transformation and enhancing our portfolio of engagement solutions to drive toward increasing our private cloud, networking, and mid-market penetration and gaining share in our existing markets."

First Fiscal Quarter Highlights

  • Product bookings were up year-over-year, while product book-to-bill was below 1.0, consistent with typical first fiscal quarter patterns
  • The total future contracted value for private cloud and managed services increased 20 percent from the first quarter of fiscal 2014, ending the quarter at over $800 million
  • Revenue of $1,079 million, down by $47 million when compared to the prior quarter, of which $13 million was due to exchange rate fluctuations, and also down by $52 million when compared to the first quarter of fiscal 2014, of which $19 million was due to exchange rate fluctuations
  • Gross margin 59.1% compared to 58.2% for the prior quarter and 56.6% for the first quarter of fiscal 2014 
  • Non-GAAP gross margin was 60.1% compared to 59.7% for the prior quarter and 58.1% for the first quarter of fiscal 2014
  • Operating income was $104 million which compares to operating income of $62 million for the prior quarter and operating income of $87 million for the first quarter of fiscal 2014
  • Non-GAAP operating income was $193 million compared to non-GAAP operating income of $212 million for the prior quarter and $193 million for the first quarter of fiscal 2014
  • Adjusted EBITDA was $239 million or 22.2% of revenue compared to $253 million or 22.5% of revenue for the prior quarter and $237 million or 21.0% of revenue for the first quarter of fiscal 2014
  • For the first fiscal quarter, percentage of revenue by geography was:
    • U.S. - 53% - EMEA - 28%
    • Asia-Pacific - 9% - Americas International - 10%

Conference Call and Webcast
Avaya will host a conference call to discuss its financial results and Q&A at 2:00 p.m. PST on Monday, February 9, 2015. On the call will be Kevin Kennedy, president and CEO, and Dave Vellequette, CFO. The call will be moderated by John Nunziati, senior director of investor relations.

To join the live webcast and view supplementary materials, listeners should access the investor page of Avaya's website (www.avaya.com/investors). Following the live webcast, a replay will be available at the same web address in the event archives. 

To access the live webcast by phone, dial 877-876-9176 in the U.S. or Canada and 785-424-1667 for international callers, using the conference ID: AVQ115. Listeners should access the webcast or the call 10-15 minutes before the start time to ensure they are connected prior to the start time. 

A replay of the conference call will be available beginning at 5:00 p.m. PST on February 9 through March 9, 2015, by dialing 800-695-0395 within the United States or 402-220-1388 outside the United States.

About Avaya
Avaya is a leading provider of solutions that enable customer and team engagement across multiple channels and devices for better customer experience, increased productivity and enhanced financial performance. Its world-class contact center and unified communications technologies and services are available in a wide variety of flexible on-premise and cloud deployment options that seamlessly integrate with non-Avaya applications. The Avaya Engagement Environment enables third parties to create and customize business applications for competitive advantage. Avaya's fabric-based networking solutions help simplify and accelerate the deployment of business critical applications and services. 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 2014 see our Form 8-K filed with the SEC on November 13, 2014 at www.sec.gov.

Avaya Inc.  
Consolidated Statements of Operations  
(Unaudited; in millions)  
  Three months ended  
  December 31,  
  2014     2013  
REVENUE              
  Products $ 549     $ 574  
  Services   530       557  
    1,079       1,131  
COSTS              
  Products:              
    Costs (exclusive of amortization of acquired technology intangible assets)   203       228  
    Amortization of acquired technology intangible assets   9       14  
  Services   229       249  
    441       491  
GROSS PROFIT   638       640  
               
OPERATING EXPENSES              
  Selling, general and administrative   374       393  
  Research and development   88       95  
  Amortization of acquired intangible assets   57       58  
  Restructuring charges, net   15       7  
    534       553  
OPERATING INCOME   104       87  
               
  Interest expense   (112 )     (119 )
  Other income, net   14       1  
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES   6       (31 )
Provision for income taxes of continuing operations   (3 )     (26 )
INCOME (LOSS) FROM CONTINUING OPERATIONS   3       (57 )
Income from discontinued operations, net of income taxes   -       3  
NET INCOME (LOSS) $ 3     $ (54 )
               
               
               
Avaya Inc.  
Consolidated Balance Sheets  
(Unaudited; in millions)  
           
  December 31,     September 30,  
  2014     2014  
ASSETS              
Current assets:              
  Cash and cash equivalents $ 328     $ 322  
  Accounts receivable, net   704       745  
  Inventory   192       197  
  Deferred income taxes, net   21       24  
  Other current assets   238       224  
TOTAL CURRENT ASSETS   1,483       1,512  
  Property, plant and equipment, net   279       281  
  Deferred income taxes, net   46       52  
  Acquired intangible assets, net   1,157       1,224  
  Goodwill   4,047       4,047  
  Other assets   136       141  
TOTAL ASSETS $ 7,148     $ 7,257  
               
LIABILITIES              
Current liabilities:              
  Debt maturing within one year $ 32     $ 32  
  Accounts payable   406       416  
  Payroll and benefit obligations   208       228  
  Deferred revenue   669       668  
  Business restructuring reserve, current portion   86       86  
  Other current liabilities   260       254  
TOTAL CURRENT LIABILITIES   1,661       1,684  
               
  Long-term debt   5,973       5,991  
  Pension obligations   1,493       1,535  
  Other postretirement obligations   267       273  
  Deferred income taxes, net   254       249  
  Business restructuring reserve, non-current portion   111       119  
  Other liabilities   421       475  
TOTAL NON-CURRENT LIABILITIES   8,519       8,642  
               
Commitments and contingencies              
STOCKHOLDER'S DEFICIENCY              
  Common stock   -       -  
  Additional paid-in capital   2,969       2,962  
  Accumulated deficit   (4,828 )     (4,831 )
  Accumulated other comprehensive loss   (1,173 )     (1,200 )
TOTAL STOCKHOLDER'S DEFICIENCY   (3,032 )     (3,069 )
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY $ 7,148     $ 7,257  
               
               
               
Avaya Inc.  
Condensed Statements of Cash Flows  
(Unaudited; in millions)  
  Three months ended  
  December 31,  
  2014     2013  
Net cash provided by (used for):              
  Net loss Net income (loss) $ 3     $ (54 )
  Income from discontinued operations, net of income taxes   -       3  
  Income (loss) from continuing operations   3       (57 )
    Adjustments to income (loss) from continuing operations for non-cash items   86       120  
    Changes in operating assets and liabilities   (25 )     (6 )
    Continuing operating activities   64       57  
    Discontinued operating activities   -       7  
  Operating activities   64       64  
  Investing activities   (26 )     (43 )
  Financing activities   (22 )     (10 )
  Effect of exchange rate changes on cash and cash equivalents   (10 )     1  
Net increase in cash and cash equivalents   6       12  
Cash and cash equivalents at beginning of period   322       288  
Cash and cash equivalents at end of period $ 328     $ 300  
               
               
               
Avaya Inc.
Supplemental Schedules of Revenue
(Unaudited; in millions)
                                 
Three Months Ended       Three Months Ended December 31,
                Revenues   Mix   Change
                                        Pct.,
                                        net
Mar.   June   Sept.                               of
31,   30,   30,                               FX
2014   2014   2014       2014   2013   2014   2013   Amount   Pct.   impact
                                         
            Revenue by Segment                            
$476   $450   $520   GCS   $481   $507   45%   45%   $(26)   -5%   -4%
56   61   59   Networking   68   67   6%   6%   1   1%   3%
532   511   579   Total ECS product revenue   549   574   51%   51%   (25)   -4%   -3%
528   543   547   AGS   530   557   49%   49%   (27)   -5%   -3%
$1,060   $1,054   $1,126   Total revenue   $1,079   $1,131   100%   100%   $(52)   -5%   -3%
                                         
                                         
            Revenue by Geography                            
532   $543   $588   U.S.   $572   $604   53%   53%   $(32)   -5%   -5%
            International:                            
313   297   321     EMEA   301   303   28%   27%   (2)   -1%   3%
112   108   111     APAC - Asia Pacific   101   114   9%   10%   (13)   -11%   -11%
103   106   106     Americas International - Canada and Latin America   105   110   10%   10%   (5)   -5%   2%
528   511   538   Total International   507   527   47%   47%   (20)   -4%   0%
$1,060   $1,054   $1,126   Total revenue   $1,079   $1,131   100%   100%   $(52)   -5%   -3%

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 and excludes the results of discontinued operations for all periods presented. 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, impairment of long lived assets 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)  
           
  Three months ended  
  December 31,  
  2014     2013  
Income (loss) from continuing operations $ 3     $ (57 )
  Interest expense   112       119  
  Provision for income taxes   3       26  
  Depreciation and amortization   94       119  
EBITDA   212       207  
  Restructuring charges, net   15       7  
  Sponsors' fees   2       2  
  Integration-related costs   1       2  
  Non-cash share-based compensation   7       6  
  Change in certain tax indemnifications   (9 )     -  
  Gain on foreign currency transactions   (6 )     (2 )
  Pension/OPEB/nonretirement postemployment benefits and long-term disability costs   17       13  
  Other   -       2  
Adjusted EBITDA $ 239     $ 237  
               
               
               
Avaya Inc.    
Supplemental Schedules of Non-GAAP Reconciliations    
(Unaudited; in millions)    
                             
  Three Months Ended  
  Dec. 31,     Mar. 31,     June 30,     Sept. 30,     Dec. 31,  
  2013     2014     2014     2014     2014  
                                       
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin                                      
  Gross Profit - Adjusted for discontinued operations $ 640     $ 597     $ 607     $ 655     $ 638  
  Gross Margin - Adjusted for discontinued operations   56.6 %     56.3 %     57.6 %     58.2 %     59.1 %
                                       
  Items excluded:                                      
    Amortization of acquired technology intangible assets   14       14       14       14       9  
    Share-based compensation   3       4       3       3       2  
    Incremental accelerated depreciation associated with vacating a facility   -       6       -       -       -  
  Non-GAAP Gross Profit - Adjusted for discontinued operations $ 657     $ 621     $ 624     $ 672     $ 649  
                                       
  Non-GAAP Gross Margin - Adjusted for discontinued operations   58.1 %     58.6 %     59.2 %     59.7 %     60.1 %
                                       
                                       
Reconciliation of Non-GAAP Operating Income                                      
  Operating Income - Adjusted for discontinued operations $ 87     $ -     $ 48     $ 62     $ 104  
    Percentage of Revenue   7.7 %     0.0 %     4.6 %     5.5 %     9.6 %
                                       
  Items excluded:                                      
    Amortization of acquired intangible assets   72       71       70       70       66  
    Restructuring and impairment charges, net   7       42       45       71       15  
    Integration-related costs   3       2       1       3       1  
    Divestiture-related costs   -       -       2       -       -  
    Share-based compensation   6       8       6       5       7  
    Incremental accelerated depreciation associated with vacating certain facilities   16       19       -       -       -  
    Resolution of certain legal matters   -       -       8       -       -  
    Other   2       -       -       1       -  
                                       
Non-GAAP Operating Income - Adjusted for discontinued operations $ 193     $ 142     $ 180     $ 212     $ 193  
                                       
Non-GAAP Operating Margin - Adjusted for discontinued operations   17.1 %     13.4 %     17.1 %     18.8 %     17.9 %
                                       
                                       
                                       
                                       
Avaya Inc.
Supplemental Schedules of Non-GAAP Reconciliation of Gross Profit and Gross Margin by Portfolio
(Unaudited; in millions)
                             
  Three Months Ended  
  Dec. 31,     Mar. 31,     June 30,     Sept. 30,     Dec. 31,  
  2013     2014     2014     2014     2014  
                                       
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Products                                      
    Revenue $ 574     $ 532     $ 511     $ 579     $ 549  
    Costs (exclusive of amortization of technology intangible assets) Costs (exclusive of amortization of acquired technology intangible assets)   228       206       199       221       203  
    Amortization of technology intangible assets Amortization of acquired technology intangible assets   14       14       14       14       9  
  GAAP Gross Profit   332       312       298       344       337  
  GAAP Gross Margin   57.8 %     58.6 %     58.3 %     59.4 %     61.4 %
                                       
Items excluded:                                      
    Amortization of acquired technology intangible assets   14       14       14       14       9  
    Incremental accelerated depreciation associated with vacating a facility   -       3       -       -       -  
  Non-GAAP Gross Profit $ 346     $ 329     $ 312     $ 358     $ 346  
                                       
  Non-GAAP Gross Margin   60.3 %     61.8 %     61.1 %     61.8 %     63.0 %
                                       
                                       
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Services                                      
    Revenue $ 557     $ 528     $ 543     $ 547     $ 530  
    Costs   249       243       234       236       229  
  GAAP Gross Profit   308       285       309       311       301  
  GAAP Gross Margin   55.3 %     54.0 %     56.9 %     56.9 %     56.8 %
                                       
  Items excluded:                                      
    Share-based compensation   3       4       3       3       2  
    Incremental accelerated depreciation associated with vacating a facility   -       3       -       -       -  
  Non-GAAP Gross Profit $ 311     $ 292     $ 312     $ 314     $ 303  
                                       
  Non-GAAP Gross Margin   55.8 %     55.3 %     57.5 %     57.4 %     57.2 %