Avaya Reports First Quarter Fiscal 2016 Financial Results

SANTA CLARA, CA--(Marketwired - Feb 8, 2016) -

First Quarter Fiscal 2016:

• Revenue of $958 million
• Operating Income of $91 million, Non-GAAP Operating Income⁽¹⁾ of $185 million
• Adjusted EBITDA⁽¹⁾ of $228 million, 23.8% of revenue
• Signed $189 million in cloud and managed service contracts

Avaya reported financial results for the first fiscal quarter ended December 31, 2015.

Total revenue for the first quarter was $958 million, down $50 million compared to the prior quarter, down $121 million year-over-year, and below the Company's expected range. For the quarter, adjusted EBITDA⁽¹⁾ was $228 million which compares to adjusted EBITDA of $246 million for the prior quarter and $239 million for the first quarter of fiscal 2015. GAAP operating income was $91 million and non-GAAP operating income was $185 million which compares to non-GAAP operating income of $202 million for the prior quarter and $193 million for the first quarter of fiscal 2015. 

"In the first fiscal quarter, the company's business model advanced, continuing the transition to a software and services platform. Estimated total contract value increased sequentially and year-over-year to record levels and key metrics, such as non-GAAP gross margins, non-GAAP operating margin, and adjusted EBITDA as a percentage of revenue increased year-over-year. Revenue declined year-over-year and was below our expectations while free cash flow was positive and we continued to execute on our cost reduction initiatives," said Kevin Kennedy, president and CEO. "As we progress through fiscal 2016, Avaya expects further improvements to our cost structure while driving progress on our key initiatives."

First Fiscal Quarter Highlights

• Estimated total contract value was $3.1 billion up 5% from the first quarter of fiscal 2015 in constant currency. This amount includes over $900 million for private cloud and managed services, a 16% increase from the first quarter of fiscal 2015 in constant currency.
• Revenue from flagship products and services accounted for a record 49.6% of total revenue and revenue from core products and services accounted for 43.7% of total revenue. Cloud and managed services revenue grew 5% year-over-year and contact center revenue grew 5% year-over-year on a normalized basis.
• Gross margin was 60.4% compared to 61.1% for the prior quarter and 59.1% for the first quarter of fiscal 2015 
• Non-GAAP gross margin was 61.3% compared to 62.0% for the prior quarter and 60.1% for the first quarter of fiscal 2015
• Adjusted EBITDA was $228 million or 23.8% of revenue compared to $246 million or 24.4% of revenue for the prior quarter and $239 million or 22.2% of revenue for the first quarter of fiscal 2015
• For the first fiscal quarter, percentage of revenue by geography was:
  • U.S. - 55% 
  • EMEA - 25%
  • Asia-Pacific - 11% 
  • Americas International - 9%

Conference Call and Webcast
Avaya will host a financial results webcast and conference call to discuss its financial results and Q&A at 2:00 PM PST on February 8, 2016. 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 financial results 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 financial results live webcast by phone, dial 888-632-3381 in the U.S. or Canada and 785-424-1678 for international callers, using the conference ID: AVQ116. 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 financial results live webcast and conference call will be available beginning at 2:00 PM PST on February 9 through March 9, 2016, by accessing event archives from the investor page of Avaya's website (www.avaya.com/investors). 

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, including statements about our future financial and operational performance, planned and unrealized future savings, as well as statements about our future growth plans and drivers. These statements may be identified by the use of forward-looking terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "our vision," "plan," "potential," "predict," "should," "will" or "would" or the negative thereof or other variations thereof or other comparable 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 are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance, or achievements to differ materially from any future results, performance, or achievements 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 and in particular, our 2015 Form 10-K filed with the SEC on November 23, 2015. Avaya disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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 2015 see our Form 8-K filed with the SEC on November 16, 2015 at www.sec.gov.

Avaya Inc.
Consolidated Statements of Operations
(Unaudited; in millions)
				Three months ended December 31,
				2015				2014
REVENUE
	Products			$	464			$	549
	Services				494				530
					958				1,079
COSTS
	Products:
		Costs (exclusive of amortization of acquired technology intangible assets)			164				203
		Amortization of acquired technology intangible assets			8				9
	Services				207				229
					379				441
GROSS PROFIT					579				638
OPERATING EXPENSES
	Selling, general and administrative				333				374
	Research and development				75				88
	Amortization of acquired intangible assets				57				57
	Restructuring charges, net				23				15
					488				534
OPERATING INCOME					91				104
	Interest expense				(118	)			(112	)
	Other income, net				4				14
(LOSS) INCOME BEFORE INCOME TAXES					(23	)			6
Provision for income taxes					(4	)			(3	)
NET (LOSS) INCOME				$	(27	)		$	3

Avaya Inc.
Consolidated Balance Sheets
(Unaudited; in millions)
			December 31, 2015				September 30, 2015
ASSETS
Current assets:
	Cash and cash equivalents		$	344			$	323
	Accounts receivable, net			628				678
	Inventory			172				174
	Deferred income taxes, net			31				26
	Other current assets			204				171
TOTAL CURRENT ASSETS				1,379				1,372
	Property, plant and equipment, net			280				282
	Deferred income taxes, net			32				34
	Acquired intangible assets, net			904				970
	Goodwill			4,073				4,074
	Other assets			124				130
TOTAL ASSETS			$	6,792			$	6,862
LIABILITIES
Current liabilities:
	Debt maturing within one year		$	25			$	7
	Accounts payable			372				379
	Payroll and benefit obligations			200				229
	Deferred revenue			665				665
	Business restructuring reserve, current portion			87				90
	Other current liabilities			293				282
TOTAL CURRENT LIABILITIES				1,642				1,652
	Long-term debt			5,956				5,960
	Pension obligations			1,642				1,690
	Other postretirement obligations			183				194
	Deferred income taxes, net			265				262
	Business restructuring reserve, non-current portion			64				67
	Other liabilities			417				415
TOTAL NON-CURRENT LIABILITIES				8,527				8,588
Commitments and contingencies
STOCKHOLDER'S DEFICIENCY
	Common stock			-				-
	Additional paid-in capital			2,985				2,981
	Accumulated deficit			(5,002	)			(4,975	)
	Accumulated other comprehensive loss			(1,360	)			(1,384	)
TOTAL STOCKHOLDER'S DEFICIENCY				(3,377	)			(3,378	)
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY			$	6,792			$	6,862

Avaya Inc.
Condensed Statements of Cash Flows
(Unaudited; in millions)
				Three months ended December 31,
				2015				2014
Net cash (used for) provided by:
	Net (loss) income			$	(27	)		$	3
		Adjustments to net (loss) income for non-cash items			93				86
		Changes in operating assets and liabilities			(11	)			(25	)
	Operating activities				55				64
	Investing activities				(32	)			(26	)
	Financing activities				6				(22	)
	Effect of exchange rate changes on cash and cash equivalents				(8	)			(10	)
Net increase in cash and cash equivalents					21				6
Cash and cash equivalents at beginning of period					323				322
Cash and cash equivalents at end of period				$	344			$	328

						Avaya Inc.
						Supplemental Schedules of Revenue
						(Unaudited; in millions)
Three Months Ended								Three Months Ended December 31,
								Revenues				Mix				Change
Mar. 31, 2015		June 30, 2015		Sept. 30, 2015				2015		2014		2015		2014		Amount		Pct.		Pct., net of FX impact
						Revenue by Segment
$440		$435		$440		GCS		$414		$481		43%		45%		$(67)		-14%		-12%
47		59		59		Networking		50		68		5%		6%		(18)		-26%		-25%
487		494		499		Total ECS product revenue		464		549		48%		51%		(85)		-15%		-14%
508		505		509		AGS		494		530		52%		49%		(36)		-7%		-3%
$995		$999		$1,008		Total revenue		$958		$1,079		100%		100%		$(121)		-11%		-9%
						Revenue by Geography
$531		$538		$562		U.S.		$528		$572		55%		53%		$(44)		-8%		-8%
						International:
266		263		243			EMEA	239		301		25%		28%		(62)		-21%		-16%
104		107		113			APAC - Asia Pacific	106		101		11%		9%		5		5%		9%
94		91		90			Americas International - Canada and Latin America	85		105		9%		10%		(20)		-19%		-8%
464		461		446		Total International		430		507		45%		47%		(77)		-15%		-10%
$995		$999		$1,008		Total revenue		$958		$1,079		100%		100%		$(121)		-11%		-9%

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 of America (GAAP), including EBITDA, 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 as described in our SEC filings.

We believe that including supplementary information concerning Adjusted EBITDA is appropriate because it serves as a basis for determining management and employee 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, such as our pricing strategies, volume, costs and expenses of the organization and it presents our financial performance in a way that can be more easily compared to prior quarters or fiscal years.

EBITDA and Adjusted EBITDA have limitations as analytical tools. EBITDA measures do not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. While EBITDA 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 excludes the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, our formulation of Adjusted EBITDA allows the addition of certain non-cash charges that are deducted in calculating net income (loss), and restructuring charges, certain fees payable to our private equity sponsors and other specific cash costs and expenses 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 as set forth in the reconciliation of GAAP to non-GAAP numbers shown below. However, these are expenses that may recur, may vary and are difficult to predict.

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, third party sales transformation 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,
			2015				2014
Net (loss) income			$	(27	)		$	3
	Interest expense			118				112
	Provision for income taxes			4				3
	Depreciation and amortization			93				94
EBITDA				188				212
	Restructuring charges, net			23				15
	Sponsors' fees			2				2
	Integration-related costs			-				1
	Third-party sales transformation costs			2				-
	Non-cash share-based compensation			4				7
	Change in certain tax indemnifications			-				(9	)
	Gain on foreign currency transactions			(6	)			(6	)
	Pension/OPEB/nonretirement postemployment benefits and long-term disability costs			15				17
Adjusted EBITDA			$	228			$	239

Avaya Inc.
Supplemental Schedules of Non-GAAP Reconciliations
(Unaudited; in millions)
				Three Months Ended
				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,
				2014				2015				2015				2015				2015
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin
	Gross Profit			$	638			$	592			$	584			$	616			$	579
	Gross Margin				59.1	%			59.5	%			58.5	%			61.1	%			60.4	%
	Items excluded:
		Amortization of acquired technology intangible assets			9				7				10				9				8
		Share-based compensation			2				-				-				-				-
	Non-GAAP Gross Profit			$	649			$	599			$	594			$	625			$	587
	Non-GAAP Gross Margin				60.1	%			60.2	%			59.5	%			62.0	%			61.3	%
Reconciliation of Non-GAAP Operating Income
	Operating Income			$	104			$	83			$	84			$	100			$	91
		Percentage of Revenue			9.6	%			8.3	%			8.4	%			9.9	%			9.5	%
	Items excluded:
		Amortization of acquired intangible assets			66				64				65				66				65
		Restructuring charges, net			15				10				7				30				23
		Integration-related costs			1				-				-				2				-
		Third-party sales transformation costs			-				-				-				-				2
		Acquisition-related costs			-				-				1				-				-
		Share-based compensation			7				4				4				4				4
		Other			-				1				-				-				-
	Non-GAAP Operating Income			$	193			$	162			$	161			$	202			$	185
	Non-GAAP Operating Margin				17.9	%			16.3	%			16.1	%			20.0	%			19.3	%

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,
				2014				2015				2015				2015				2015
Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin - Products
		Revenue		$	549			$	487			$	494			$	499			$	464
		Costs (exclusive of amortization of technology intangible assets)			203				182				186				173				164
		Amortization of acquired technology intangible assets			9				7				10				9				8
	GAAP Gross Profit				337				298				298				317				292
	GAAP Gross Margin				61.4	%			61.2	%			60.3	%			63.5	%			62.9	%
	Items excluded:
		Amortization of acquired technology intangible assets			9				7				10				9				8
	Non-GAAP Gross Profit			$	346			$	305			$	308			$	326			$	300
	Non-GAAP Gross Margin				63.0	%			62.6	%			62.3	%			65.3	%			64.7	%
Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin - Services
		Revenue		$	530			$	508			$	505			$	509			$	494
		Costs			229				214				219				210				207
	GAAP Gross Profit				301				294				286				299				287
	GAAP Gross Margin				56.8	%			57.9	%			56.6	%			58.7	%			58.1	%
	Items excluded:
		Share-based compensation			2				-				-				-				-
	Non-GAAP Gross Profit			$	303			$	294			$	286			$	299			$	287
	Non-GAAP Gross Margin				57.2	%			57.9	%			56.6	%			58.7	%			58.1	%