SOURCE: Avaya Inc.

Avaya Inc.

February 08, 2016 16:00 ET

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 %