SOURCE: Avaya Inc.

Avaya Inc.

November 11, 2015 13:00 ET

Avaya Reports Fourth Quarter and Fiscal Year 2015 Financial Results

SANTA CLARA, CA--(Marketwired - Nov 11, 2015) -

Fourth Quarter Fiscal 2015:

  • Revenue of $1,008 million
  • Operating Income of $100 million, Non-GAAP Operating Income(1) of $202 million
  • Adjusted EBITDA(1) of $246 million, 24.4% of revenue

Fiscal Year 2015:

  • Revenue of $4,081 million
  • Operating Income of $371 million, Non-GAAP Operating Income(1) of $718 million
  • Adjusted EBITDA(1) of $900 million, 22.1% of revenue
  • Record levels for Product Gross Margin and Service Gross Margin

Avaya reported financial results for the fourth fiscal quarter and fiscal year ended September 30, 2015.

Total revenue for the fourth quarter was $1,008 million, up $9 million compared to the prior quarter, down year-over-year, and within the Company's expected range. For the quarter, adjusted EBITDA(1) was $246 million which compares to adjusted EBITDA of $207 million for the prior quarter and $253 million for the fourth quarter of fiscal 2014. GAAP operating income was $100 million and non-GAAP operating income was $202 million which compares to non-GAAP operating income of $161 million for the prior quarter and $212 million for the fourth quarter of fiscal 2014. 

For fiscal 2015, Avaya reported revenue of $4,081 million, down 7% compared to fiscal 2014 revenue of $4,371 million, or down 4% in constant currency. GAAP operating income was $371 million and non-GAAP operating income was $718 million in fiscal 2015 compared to $727 million in fiscal 2014. Fiscal 2015 adjusted EBITDA of $900 million was $2 million higher compared to fiscal 2014. Free cash flow was $91 million for the fiscal year, with cash and cash equivalents totaling $323 million as of September 30, 2015. 

"The transformation of the company advanced throughout fiscal 2015. We saw positive leading indicators of demand and grew revenue in our areas of investment and diversification. Operationally, we extended our multi-year upward trend of increased gross margin and adjusted EBITDA percentage for the fifth consecutive year," said Kevin Kennedy, president and CEO. "In fiscal 2016, Avaya will continue to focus on operational optimization to increase its margins and will continue providing the market with industry leading products and services."

Fourth Fiscal Quarter Highlights

  • Product book-to-bill for the quarter was greater than 1.0. Total bookings for the fourth quarter were 3% below the prior year in constant currency
  • Total revenue under contract was $3.0 billion and increased 1% from the fourth quarter of fiscal 2014 in constant currency. Included in revenue under contract is contracted revenue for private cloud and managed services which increased 11% from the fourth quarter of fiscal 2014 in constant currency, ending the quarter at over $800 million
  • Revenue from flagship products and services accounted for a record 49% of total revenue and revenue from core products and services accounted for 43% of total revenue
  • Gross margin was 61.1% compared to 58.5% for the prior quarter and 58.2% for the fourth quarter of fiscal 2014 
  • Non-GAAP gross margin was 62.0% compared to 59.5% for the prior quarter and 59.7% for the fourth quarter of fiscal 2014
  • Adjusted EBITDA was $246 million or 24.4% of revenue compared to $207 million or 20.7% of revenue for the prior quarter and $253 million or 22.5% of revenue for the fourth quarter of fiscal 2014
  • For the fourth fiscal quarter, percentage of revenue by geography was:
    • U.S. - 56% 
    • EMEA - 24%
    • Asia-Pacific - 11% 
    • Americas International - 9%

Fiscal Year Highlights

  • Total bookings for the fiscal year were down 2% compared to fiscal 2014 in constant currency
  • Revenue of $4,081 million was down $290 million compared to fiscal 2014, and was $168 million lower in constant currency
  • Product revenue of $2,029 million was down $167 million compared to fiscal 2014, and was $123 million lower in constant currency
  • Services revenue of $2,052 million down $123 million compared to fiscal 2014, and was $45 million lower in constant currency
  • Gross margin was 59.5% compared to 57.2% for fiscal 2014
  • Non-GAAP gross margin was 60.5% compared to 58.9% for fiscal 2014
  • Adjusted EBITDA was $900 million or 22.1% of revenue compared to $898 million or 20.5% of revenue for fiscal 2014
  • For the fiscal year, percentage of revenue by geography was:
    • U.S. - 54% 
    • EMEA - 26%
    • Asia-Pacific - 10% 
    • Americas International - 10%

Conference Call and Webcast
Avaya will host a financial results webcast and conference call to discuss its financial results and Q&A at 11:00 AM PST on November 11, 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 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 877-876-9177 in the U.S. or Canada and 785-424-1666 for international callers, using the conference ID: AVQ415. 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 11:00 AM PST on November 12 through December 12, 2015, by dialing 800-688-4915 within the United States or 402-220-1319 outside the United States.

2015 Analyst and Investor Meeting
Avaya announced previously that it will be hosting a meeting for analysts and investors on Thursday, November 12, 2015 at 1:00 PM PST. The meeting will be webcast live for remote participation. Details for accessing the webcast and supporting slides, which will be posted before the start of the event, can be found on the Investor Relations page of the company's website, at this link: http://www.avaya.com/investors/events/avaya-2015-analyst-and-investor-meeting/ Access to an archived replay of the event will be available at the same site, starting at 8 AM PST on Friday, November 13, 2015.

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 third quarter of fiscal 2015 see our Form 8-K filed with the SEC on August 4, 2015 at www.sec.gov.

Avaya Inc.  
Consolidated Statements of Operations  
(Unaudited; in millions)  
             
    Three months ended September 30,     Fiscal year ended September 30,  
                         
    2015     2014     2015     2014  
REVENUE                                
  Products   $ 499     $ 579     $ 2,029     $ 2,196  
  Services     509       547       2,052       2,175  
      1,008       1,126       4,081       4,371  
COSTS                                
  Products:                                
    Costs (exclusive of amortization of acquired technology intangible assets)     173       221       744       854  
    Amortization of acquired technology intangible assets     9       14       35       56  
  Services     210       236       872       962  
      392       471       1,651       1,872  
GROSS PROFIT     616       655       2,430       2,499  
OPERATING EXPENSES                                
  Selling, general and administrative     346       376       1,432       1,531  
  Research and development     82       90       338       379  
  Amortization of acquired intangible assets     57       56       226       227  
  Restructuring charges, net     30       71       62       165  
  Acquisition-related costs     1       -       1       -  
      516       593       2,059       2,302  
OPERATING INCOME     100       62       371       197  
  Interest expense     (117 )     (112 )     (452 )     (459 )
  Loss on extinguishment of debt     -       -       (6 )     (5 )
  Other income, net     11       33       13       25  
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES     (6 )     (17 )     (74 )     (242 )
Provision for income taxes of continuing operations     (67 )     (32 )     (67 )     (51 )
LOSS FROM CONTINUING OPERATIONS     (73 )     (49 )     (141 )     (293 )
Income from discontinued operations, net of income taxes     -       30       -       62  
NET LOSS   $ (73 )   $ (19 )   $ (141 )   $ (231 )
                                 
                                 
                                 
Avaya Inc.  
Consolidated Balance Sheets  
(Unaudited; in millions)  
             
    September 30,
2015
    September 30,
2014
 
ASSETS                
  Current assets:                
  Cash and cash equivalents   $ 323     $ 322  
  Accounts receivable, net     678       745  
  Inventory     174       197  
  Deferred income taxes, net     23       24  
  Other current assets     171       211  
  TOTAL CURRENT ASSETS     1,369       1,499  
  Property, plant and equipment, net     282       281  
  Deferred income taxes, net     50       52  
  Acquired intangible assets, net     970       1,224  
  Goodwill     4,074       4,047  
  Other assets     130       99  
TOTAL ASSETS   $ 6,875     $ 7,202  
LIABILITIES                
Current liabilities:                
  Debt maturing within one year   $ 7     $ 19  
  Accounts payable     379       416  
  Payroll and benefit obligations     229       228  
  Deferred revenue     665       668  
  Business restructuring reserve, current portion     90       86  
  Other current liabilities     279       254  
TOTAL CURRENT LIABILITIES     1,649       1,671  
  Long-term debt     5,960       5,949  
  Pension obligations     1,690       1,535  
  Other postretirement obligations     194       273  
  Deferred income taxes, net     263       249  
  Business restructuring reserve, non-current portion     67       119  
  Other liabilities     415       475  
TOTAL NON-CURRENT LIABILITIES     8,589       8,600  
Commitments and contingencies                
STOCKHOLDER'S DEFICIENCY                
  Common stock     -       -  
  Additional paid-in capital     2,981       2,962  
  Accumulated deficit     (4,972 )     (4,831 )
  Accumulated other comprehensive loss     (1,372 )     (1,200 )
TOTAL STOCKHOLDER'S DEFICIENCY     (3,363 )     (3,069 )
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY   $ 6,875     $ 7,202  
                 
                 
                 
Avaya Inc.  
Condensed Statements of Cash Flows  
(Unaudited; in millions)  
   
    Fiscal year ended
September 30,
 
    2015     2014  
Net cash (used for) provided by:                
  Net loss   $ (141 )   $ (231 )
  Income from discontinued operations, net of income taxes     -       62  
  Loss from continuing operations     (141 )     (293 )
    Adjustments to loss from continuing operations for non-cash items     440       467  
    Changes in operating assets and liabilities     (84 )     (138 )
    Continuing operating activities     215       36  
    Discontinued operating activities     -       4  
  Operating activities     215       40  
  Investing activities     (129 )     68  
  Financing activities     (53 )     (60 )
  Effect of exchange rate changes on cash and cash equivalents     (32 )     (14 )
Net increase in cash and cash equivalents     1       34  
Cash and cash equivalents at beginning of period     322       288  
Cash and cash equivalents at end of period   $ 323     $ 322  
                 
                 
                 
          Avaya Inc.                            
          Supplemental Schedules of Revenue                            
          (Unaudited; in millions)                            
                                         
Three Months Ended       Three Months Ended September 30,
                Revenues   Mix   Change
Dec. 31, 2014   Mar. 31, 2015   June 30, 2015       2015   2014   2015   2014   Amount   Pct.   Pct.,
net
of
FX impact
                                         
            Revenue by Segment                            
481   $440   $435   GCS   $440   $520   44%   46%   $(80)   -15%   -13%
68   47   59   Networking   59   59   6%   5%   -   0%   2%
549   487   494   Total ECS product revenue   499   579   50%   51%   (80)   -14%   -12%
530   508   505   AGS   509   547   50%   49%   (38)   -7%   -3%
1,079   $995   $999   Total revenue   $1,008   $1,126   100%   100%   $(118)   -10%   -7%
                                         
                                         
            Revenue by Geography                            
572   $531   $538   U.S.   $562   $588   56%   52%   $(26)   -4%   -4%
            International:                            
301   266   263     EMEA   243   321   24%   29%   (78)   -24%   -19%
101   104   107     APAC - Asia Pacific   113   111   11%   10%   2   2%   4%
105   94   91     Americas International - Canada and Latin America   90   106   9%   9%   (16)   -15%   -3%
507   464   461   Total International   446   538   44%   48%   (92)   -17%   -11%
1,079   $995   $999   Total revenue   $1,008   $1,126   100%   100%   $(118)   -10%   -7%
                                         
                                         
                                         

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 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, 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, our formulation of Adjusted EBITDA allows the addition of certain non-cash charges that are deducted in calculating net income (loss), 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, 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 September 30,     Fiscal year ended September 30,  
                       
  2015     2014     2015     2014  
Loss from continuing operations $ (73 )   $ (49 )   $ (141 )   $ (293 )
  Interest expense   117       112       452       459  
  Interest income   -       (1 )     (1 )     (2 )
  Provision for income taxes   67       32       67       51  
  Depreciation and amortization   92       98       371       434  
EBITDA   203       192       748       649  
  Restructuring charges, net   30       71       62       165  
  Sponsors' fees   2       1       7       7  
  Acquisition-related costs   -       -       1       -  
  Integration-related costs   2       2       3       7  
  Divestiture-related costs   -       -       -       2  
  Loss on extinguishment of debt   -       -       6       5  
  Third-party fees expensed in connection with the debt modification   -       -       8       2  
  Non-cash share-based compensation   4       5       19       25  
  Gain on investments and sale of long-lived assets, net   -       -       (1 )     -  
  Gain on sale of TBU business   -       (14 )     -       (14 )
  Change in certain tax indemnifications   -       (1 )     (9 )     4  
  Venezuela hyperinflationary and devaluation charges   -       -       -       2  
  Resolution of certain legal matters   -       -       -       8  
  Gain on foreign currency transactions   (12 )     (17 )     (14 )     (18 )
  Pension/OPEB/nonretirement postemployment benefits and long-term disability costs   17       13       69       51  
  Other   -       1       1       3  
Adjusted EBITDA $ 246     $ 253     $ 900     $ 898  
                               
                               
                               
Avaya Inc.  
Supplemental Schedules of Non-GAAP Reconciliations  
(Unaudited; in millions)  
                               
    Three Months Ended  
    Sept. 30,     Dec. 31,     Mar. 31,     June 30,     Sept. 30,  
    2014     2014     2015     2015     2015  
                                         
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin                                        
  Gross Profit   $ 655     $ 638     $ 592     $ 584     $ 616  
  Gross Margin     58.2 %     59.1 %     59.5 %     58.5 %     61.1 %
                                         
  Items excluded:                                        
    Amortization of acquired technology intangible assets     14       9       7       10       9  
    Share-based compensation     3       2       -       -       -  
  Non-GAAP Gross Profit   $ 672     $ 649     $ 599     $ 594     $ 625  
                                         
  Non-GAAP Gross Margin     59.7 %     60.1 %     60.2 %     59.5 %     62.0 %
                                         
                                         
Reconciliation of Non-GAAP Operating Income                                        
  Operating Income   $ 62     $ 104     $ 83     $ 84     $ 100  
    Percentage of Revenue     5.5 %     9.6 %     8.3 %     8.4 %     9.9 %
                                         
  Items excluded:                                        
    Amortization of acquired intangible assets     70       66       64       65       66  
    Restructuring charges, net     71       15       10       7       30  
    Integration-related costs     3       1       -       -       2  
    Acquisition-related costs     -       -       -       1       -  
    Share-based compensation     5       7       4       4       4  
    Other     1       -       1       -       -  
                                         
  Non-GAAP Operating Income   $ 212     $ 193     $ 162     $ 161     $ 202  
                                         
  Non-GAAP Operating Margin     18.8 %     17.9 %     16.3 %     16.1 %     20.0 %
                                         
                                         
                                         
Avaya Inc.
Supplemental Schedules of Non-GAAP Reconciliation of Gross Profit and Gross Margin by Portfolio
(Unaudited; in millions)
                               
    Three Months Ended  
    Sept. 30,     Dec. 31,     Mar. 31,     June 30,     Sept. 30,  
    2014     2014     2015     2015     2015  
                                         
Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin - Products                                        
  Revenue   $ 579     $ 549     $ 487     $ 494     $ 499  
  Costs (exclusive of amortization of technology intangible assets)     221       203       182       186       173  
  Amortization of technology intangible assets     14       9       7       10       9  
  GAAP Gross Profit     344       337       298       298       317  
  GAAP Gross Margin     59.4 %     61.4 %     61.2 %     60.3 %     63.5 %
                                         
Items excluded:                                        
  Amortization of acquired technology intangible assets     14       9       7       10       9  
Non-GAAP Gross Profit   $ 358     $ 346     $ 305     $ 308     $ 326  
                                         
Non-GAAP Gross Margin     61.8 %     63.0 %     62.6 %     62.3 %     65.3 %
                                         
Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin - Services                                        
  Revenue   $ 547     $ 530     $ 508     $ 505     $ 509  
  Costs     236       229       214       219       210  
GAAP Gross Profit     311       301       294       286       299  
GAAP Gross Margin     56.9 %     56.8 %     57.9 %     56.6 %     58.7 %
                                         
Items excluded:                                        
  Share-based compensation     3       2       -       -       -  
Non-GAAP Gross Profit   $ 314     $ 303     $ 294     $ 286     $ 299  
                                         
Non-GAAP Gross Margin     57.4 %     57.2 %     57.9 %     56.6 %     58.7 %