Avaya Reports Fourth Fiscal Quarter and Fiscal Year 2014 Financial Results

SANTA CLARA, CA--(Marketwired - Nov 13, 2014) -

Fourth Quarter 2014:

• Revenue of $1,126 million
• Operating Income of $62 million, Non-GAAP Operating Income⁽¹⁾ of $212 million
• Adjusted EBITDA⁽¹⁾ of $253 million, 22.5% of revenue

Fiscal 2014:

• Revenue of $4,371 million
• Operating Income of $197 million, Non-GAAP Operating Income⁽¹⁾ of $727 million
• Adjusted EBITDA⁽¹⁾ of $898 million, 20.5% of revenue

Avaya reported financial results for the fourth fiscal quarter and full fiscal year ended September 30, 2014.

Total revenue for the fourth quarter was $1,126 million, up $72 million when compared to the prior quarter. On a year over year basis revenue was down $43 million compared to the fourth quarter of fiscal 2013. For the fourth fiscal quarter, adjusted EBITDA⁽¹⁾ was $253 million which compares to adjusted EBITDA of $223 million for the prior quarter and $291 million for the fourth quarter of fiscal 2013. GAAP operating income was $62 million and non-GAAP operating income was $212 million which compares to non-GAAP operating income of $180 million for the prior quarter and $240 million for the fourth quarter of fiscal 2013. Cash and cash equivalents totaled $322 million as of September 30, 2014. 

For fiscal 2014, Avaya reported revenue of $4,371 million, down 4.5% compared to fiscal 2013 revenue of $4,578 million. Non-GAAP operating income was $727 million in fiscal 2014 compared to $700 million in fiscal 2013. Fiscal 2014 adjusted EBITDA of $898 million was down $24 million compared to fiscal 2013.

"Avaya's fourth quarter results delivered a strong finish to the fiscal year. Revenue increased sequentially evidencing progress in our sales and marketing transformation. Solid bookings and backlog indicate a favorable demand environment for our products and services," said Kevin Kennedy, president and CEO. "As we move into fiscal 2015, Avaya continues to focus on accelerating our sales and marketing transformation, enhancing our product portfolio, and generating growth." 

Fourth Fiscal Quarter Highlights

• Revenue of $1,126 million increased $72 million compared to the prior quarter and decreased $43 million compared to the fourth quarter of fiscal 2013
• Product revenue of $579 million increased by 13% compared to the prior quarter and decreased 6% compared to the fourth quarter of fiscal 2013. Product book-to-bill was greater than 1.0
• Avaya Global Services revenue of $547 million increased 1% compared to the prior quarter and decreased 1% compared to the fourth quarter of fiscal 2013
• Gross margin was 58.2% compared to 57.6% for the prior quarter and 57.7% for the fourth quarter of fiscal 2013 
• Non-GAAP gross margin was 59.7% compared to 59.2% for the prior quarter and 59.0% for the fourth quarter of fiscal 2013
• Fourth fiscal quarter 2014 non-GAAP gross margin was a record level for the company
• Operating income was $62 million which compares to operating income of $48 million for the prior quarter and operating income of $109 million for the fourth quarter of fiscal 2013
• Non-GAAP operating income was $212 million compared to non-GAAP operating income of $180 million for the prior quarter and $240 million for the fourth quarter of fiscal 2013
• Adjusted EBITDA was $253 million or 22.5% of revenue compared to $223 million or 21.2% of revenue for the prior quarter and $291 million or 24.9% of revenue for the fourth quarter of fiscal 2013
• For the fourth fiscal quarter, percentage of revenue by geography was:
  • U.S. - 52% 
  • Asia-Pacific - 10%
  • EMEA - 29%
  • Americas International - 9%

Full Fiscal Year 2014 Highlights

• Revenue of $4,371 million decreased 4.5% compared to fiscal 2013
• Product revenue of $2,196 million decreased 6% compared to fiscal 2013
• Avaya Global Services revenue of $2,175 million decreased 3% compared to fiscal 2013
• Gross margin was 57.2% compared to 55.3% for fiscal 2013. Non-GAAP gross margin was 58.9% compared to 56.8% for fiscal 2013 
• Operating income was $197 million which compares to operating income of $145 million for fiscal 2013. Non-GAAP Operating Income was $727 million or 16.6% of revenue compared to $700 million or 15.3% of revenue for fiscal 2013
• Adjusted EBITDA was $898 million or 20.5% of revenue compared to $922 million or 20.1% of revenue for fiscal 2013
• Full fiscal year 2014 Non-GAAP Gross Margin % and Adjusted EBITDA % were records for the company in any fiscal year

Conference Call and Webcast
Avaya will host a conference call to discuss these financial results and related Q&A at 2:00 p.m. PST on November 13, 2014. 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 800-862-9098 in the U.S. or Canada and 785-424-1051 for international callers, using the conference ID: AVQ414. 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 November 13 through December 12, by dialing 800-753-0348 within the United States or 402-220-2672 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 Development Platform 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 third quarter of fiscal 2014 see our Form 8-K filed with the SEC on August 5, 2014 at www.sec.gov.

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Avaya Inc.
Consolidated Statements of Operations
(Unaudited; in millions)
				Three months ended								Fiscal year ended
				September 30,								September 30,
				2014				2013				2014				2013
REVENUE
	Products			$	579			$	617			$	2,196			$	2,337
	Services				547				552				2,175				2,241
					1,126				1,169				4,371				4,578
COSTS
	Products:
		Costs (exclusive of amortization of acquired technology intangible assets)			221				232				854				963
		Amortization of acquired technology intangible assets			14				14				56				63
	Services				236				249				962				1,022
					471				495				1,872				2,048
GROSS PROFIT					655				674				2,499				2,530
OPERATING EXPENSES
	Selling, general and administrative				376				372				1,531				1,511
	Research and development				90				102				379				445
	Amortization of acquired intangible assets				56				56				227				228
	Restructuring charges, net				71				35				165				200
	Acquisition-related costs				-				-				-				1
					593				565				2,302				2,385
OPERATING INCOME					62				109				197				145
	Interest expense				(112	)			(121	)			(459	)			(467	)
	Loss on extinguishment of debt				-				-				(5	)			(6	)
	Other income (expense), net				33				(5	)			25				(14	)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES					(17	)			(17	)			(242	)			(342	)
(Provision for) benefit from income taxes of continuing operations					(32	)			29				(51	)			35
(LOSS) INCOME FROM CONTINUING OPERATIONS					(49	)			12				(293	)			(307	)
Income (loss) from discontinued operations, net of income taxes					30				11				62				(57	)
NET (LOSS) INCOME				$	(19	)		$	23			$	(231	)		$	(364	)

Avaya Inc.
Consolidated Balance Sheets
(Unaudited; in millions)
			September 30,				September 30,
			2014				2013
ASSETS
Current assets:
	Cash and cash equivalents		$	322			$	288
	Accounts receivable, net			745				702
	Inventory			197				245
	Deferred income taxes, net			24				52
	Other current assets			224				241
	Assets of discontinued operations			-				59
TOTAL CURRENT ASSETS				1,512				1,587
	Property, plant and equipment, net			281				334
	Deferred income taxes, net			52				34
	Intangible assets, net			1,224				1,497
	Goodwill			4,047				4,048
	Other assets			141				172
TOTAL ASSETS			$	7,257			$	7,672
LIABILITIES
Current liabilities:
	Debt maturing within one year		$	32			$	35
	Accounts payable			416				401
	Payroll and benefit obligations			228				251
	Deferred revenue			668				671
	Business restructuring reserve, current portion			86				92
	Other current liabilities			254				256
	Liabilities of discontinued operations			-				19
TOTAL CURRENT LIABILITIES				1,684				1,725
	Long-term debt			5,991				6,051
	Pension obligations			1,535				1,510
	Other postretirement obligations			273				290
	Deferred income taxes, net			249				237
	Business restructuring reserve, non-current portion			119				78
	Other liabilities			475				450
TOTAL NON-CURRENT LIABILITIES				8,642				8,616
Commitments and contingencies
STOCKHOLDER'S DEFICIENCY
	Common stock			-				-
	Additional paid-in capital			2,962				2,937
	Accumulated deficit			(4,831	)			(4,600	)
	Accumulated other comprehensive loss			(1,200	)			(1,006	)
TOTAL STOCKHOLDER'S DEFICIENCY				(3,069	)			(2,669	)
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY			$	7,257			$	7,672

Avaya Inc.
Condensed Statements of Cash Flows
(Unaudited; in millions)
				Fiscal year ended September 30,
				2014				2013
Net cash (used for) provided by:
	Net loss Net loss			$	(231	)		$	(364	)
	Income (loss) from discontinued operations, net of income taxes				62				(57	)
	Loss from continuing operations				(293	)			(307	)
		Adjustments to loss from continuing operations for non-cash items			467				381
		Changes in operating assets and liabilities			(138	)			57
		Continuing operating activities			36				131
		Discontinued operating activities			4				20
	Operating activities				40				151
		Continuing investing activities			(33	)			(113	)
		Discontinued investing activities			101				-
	Investing activities				68				(113	)
	Financing activities				(60	)			(79	)
	Effect of exchange rate changes on cash and cash equivalents				(14	)			(8	)
Net increase (decrease) in cash and cash equivalents					34				(49	)
Cash and cash equivalents at beginning of period					288				337
Cash and cash equivalents at end of period				$	322			$	288

Avaya Inc.
Supplemental Schedules of Revenue
(Unaudited; in millions)
Three Months Ended											Three Months Ended September 30,
Dec., 31			Mar. 31,			June 30,					Revenues						Mix					Change
2013			2014			2014					2014			2013			2014		2013			Amount			Pct.
									Revenue by Segment
$	507		$	476		$	450		GCS		$	520		$	553		46	%	47	%		$	(33	)	-6	%
	67			56			61		Networking			59			64		5	%	6	%			(5	)	-8	%
	574			532			511		Total ECS product revenue			579			617		51	%	53	%			(38	)	-6	%
	557			528			543		AGS			547			552		49	%	47	%			(5	)	-1	%
$	1,131		$	1,060		$	1,054		Total revenue		$	1,126		$	1,169		100	%	100	%		$	(43	)	-4	%
									Revenue by Geography
$	604		$	532		$	543		U.S.		$	588		$	628		52	%	54	%		$	(40	)	-6	%
									International:
	303			313			297			EMEA		321			313		29	%	27	%			8		3	%
	114			112			108			APAC - Asia Pacific		111			113		10	%	9	%			(2	)	-2	%
	110			103			106			Americas International - Canada and Latin America		106			115		9	%	10	%			(9	)	-8	%
	527			528			511		Total International			538			541		48	%	46	%			(3	)	-1	%
$	1,131		$	1,060		$	1,054		Total revenue		$	1,126		$	1,169		100	%	100	%		$	(43	)	-4	%

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								Fiscal year ended
			September 30,								September 30,
			2014				2013				2014				2013
(Loss) income from continuing operations			$	(49	)		$	12			$	(293	)		$	(307	)
	Interest expense			112				121				459				467
	Interest income			(1	)			-				(2	)			(2	)
	Provision for (benefit from) income taxes			32				(29	)			51				(35	)
	Depreciation and amortization			98				123				434				455
EBITDA				192				227				649				578
		Impact of purchase accounting adjustments		-				-				-				1
		Restructuring charges, net		71				35				165				200
		Sponsors' fees		1				2				7				7
		Acquisition-related costs		-				-				-				1
		Integration-related costs		2				3				7				15
		Divestiture-related costs		-				-				2				-
		Loss on extinguishment of debt		-				-				5				6
		Third-party fees expensed in connection with the debt modification		-				-				2				18
		Non-cash share-based compensation		5				4				25				11
		Gain on sale of investments and long-lived assets, net		-				-				-				(1	)
		Gain on sale of TBU business		(14	)			-				(14	)			-
		Change in certain tax indemnifications		(1	)			-				4				-
		Impairment of long-lived assets		-				-				-				1
		Venezuela hyperinflationary and devaluation charges		-				-				2				1
		Resolution of certain legal matters		-				-				8				10
		(Gain) loss on foreign currency transactions		(17	)			5				(18	)			(5	)
		Pension/OPEB/nonretirement postemployment benefits and long-term disability costs		13				15				51				79
		Other		1				-				3				-
Adjusted EBITDA			$	253			$	291			$	898			$	922

Avaya Inc.

Supplemental Schedules of Non-GAAP Reconciliations

(Unaudited; in millions)

				Three Months Ended																																Fiscal year ended
				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				September 30,
				2012				2013				2013				2013				2013				2014				2014				2014				2014				2013
Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin
	Gross Profit - Adjusted for discontinued operations			$	659			$	579			$	618			$	674			$	640			$	597			$	607			$	655			$	2,499			$	2,530
	Gross Margin - Adjusted for discontinued operations				54.6	%			53.3	%			55.4	%			57.7	%			56.6	%			56.3	%			57.6	%			58.2	%			57.2	%			55.3	%
	Items excluded:
		Amortization of acquired technology intangible assets			22				14				13				14				14				14				14				14				56				63
		Impairment of capitalized software development costs			-				-				1				-				-				-				-				-				-				1
		Share-based compensation			1				-				2				2				3				4				3				3				13				5
		Incremental accelerated depreciation associated with vacating a facility			-				-				-				-				-				6				-				-				6				-
		Purchase accounting adjustments to revenue			-				-				1				-				-				-				-				-				-				1
	Non-GAAP Gross Profit - Adjusted for discontinued operations			$	682			$	593			$	635			$	690			$	657			$	621			$	624			$	672			$	2,574			$	2,600
	Non-GAAP Gross Margin - Adjusted for discontinued operations				56.5	%			54.6	%			56.8	%			59.0	%			58.1	%			58.6	%			59.2	%			59.7	%			58.9	%			56.8	%
Reconciliation of Non-GAAP Operating Income
	Operating Income - Adjusted for discontinued operations			$	18			$	12			$	6			$	109			$	87			$	-			$	48			$	62			$	197			$	145
		Percentage of Revenue			1	%			1	%			0.5	%			9.3	%			7.7	%			0.0	%			4.6	%			5.5	%			4.5	%			3.2	%
	Items excluded:
		Amortization of acquired intangible assets			80				71				70				70				72				71				70				70				283				291
		Restructuring and impairment charges, net			84				18				63				35				7				42				45				71				165				200
		Integration-related costs			5				6				5				4				3				2				1				3				9				20
		Divestiture-related costs											-				-				-				-				2				-				2				-
		Share-based compensation			2				1				4				4				6				8				6				5				25				11
		Impairment of capitalized software development costs			-				-				1				-				-				-				-				-				-				1
		Incremental accelerated depreciation associated with vacating certain facilities			-				-				3				18				16				19				-				-				35				21
		Resolution of certain legal matters			-				-				10				-				-				-				8				-				8				10
		Purchase accounting adjustments to revenue			-				-				1				-				-				-				-				-				-				1
		Other			-				-				-				-				2				-				-				1				3				-
	Non-GAAP Operating Income - Adjusted for discontinued operations			$	189			$	108			$	163			$	240			$	193			$	142			$	180			$	212			$	727			$	700
	Non-GAAP Operating Margin - Adjusted for discontinued operations				15.7	%			9.9	%			14.6	%			20.5	%			17.1	%			13.4	%			17.1	%			18.8	%			16.6	%			15.3	%

Avaya Inc.

Supplemental Schedules of Non-GAAP Reconciliation of Gross Profit and Gross Margin by Portfolio

(Unaudited; in millions)

				Three Months Ended																																Fiscal year ended
				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				September 30,
				2012				2013				2013				2013				2013				2014				2014				2014				2014				2013
Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin - Products
		Revenue		$	631			$	529			$	560			$	617			$	574			$	532			$	511			$	579			$	2,196			$	2,337
		Costs (exclusive of amortization of technology intangible assets) Costs (exclusive of amortization of acquired technology intangible assets)			261				236				234				232				228				206				199				221				854				963
		Amortization of technology intangible assets Amortization of acquired technology intangible assets			22				14				13				14				14				14				14				14				56				63
	GAAP Gross Profit				348				279				313				371				332				312				298				344				1,286				1,311
	GAAP Gross Margin				55.2	%			52.7	%			55.9	%			60.1	%			57.8	%			58.6	%			58.3	%			59.4	%			58.6	%			56.1	%
	Items excluded:
		Amortization of acquired technology intangible assets			22				14				13				14				14				14				14				14				56				63
		Impairment of capitalized software development costs			-				-				1				-				-				-				-				-				-				1
		Incremental accelerated depreciation associated with vacating a facility			-				-				-				-				-				3				-				-				3				-
		Purchase accounting adjustments to revenue			-				-				1				-				-				-				-				-				-				1
	Non-GAAP Gross Profit			$	370			$	293			$	328			$	385			$	346			$	329			$	312			$	358			$	1,345			$	1,376
	Non-GAAP Gross Margin				58.6	%			55.4	%			58.5	%			62.4	%			60.3	%			61.8	%			61.1	%			61.8	%			61.2	%			58.9	%
Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin - Services
		Revenue		$	576			$	557			$	556			$	552			$	557			$	528			$	543			$	547			$	2,175			$	2,241
		Costs			265				257				251				249				249				243				234				236				962				1,022
	GAAP Gross Profit				311				300				305				303				308				285				309				311				1,213				1,219
	GAAP Gross Margin				54.0	%			53.9	%			54.9	%			54.9	%			55.3	%			54.0	%			56.9	%			56.9	%			55.8	%			54.4	%
	Items excluded:
		Share-based compensation			1				-				2				2				3				4				3				3				13				5
		Incremental accelerated depreciation associated with vacating a facility			-				-				-				-				-				3				-				-				3				-
	Non-GAAP Gross Profit			$	312			$	300			$	307			$	305			$	311			$	292			$	312			$	314			$	1,229			$	1,224
	Non-GAAP Gross Margin				54.2	%			53.9	%			55.2	%			55.3	%			55.8	%			55.3	%			57.5	%			57.4	%			56.5	%			54.6	%