SOURCE: Avaya Inc.

May 09, 2013 16:16 ET

# Avaya Reports Second Fiscal Quarter 2013 Results

SANTA CLARA, CA--(Marketwired - May 9, 2013) -

Second Quarter 2013

• Revenue of $1.12 billion • Non-GAAP Operating Income(1) of$113 Million
• Adjusted EBITDA(1) of $172 Million Avaya Inc., a global provider of business communications and collaboration systems, software and services, today reported results for the second quarter of fiscal 2013. For the second fiscal quarter, revenue was$1.12 billion, down 9.8% compared to the prior quarter, primarily due to seasonality in all four theaters as customers continued to have extended procurement cycles. On a year over year basis revenue was down 11.1% compared to the second quarter of fiscal 2012. Non-GAAP operating income was $113 million compared to non GAAP operating income of$193 million for the prior quarter and $138 million for the second quarter of fiscal 2012. Second quarter adjusted EBITDA was$172 million which compares to adjusted EBITDA of $251 million for the prior quarter and$200 million for the second quarter of fiscal 2012. Cash flow from operations was $82 million for the second quarter. Cash and cash equivalents was$302 million as of March 31, 2013 compared to $285 million as of December 31, 2012. "Avaya's second quarter revenue evidenced impacts from a cautious spending environment which extended our sales cycle and as a result, this quarter's seasonal declines were at the low end of our historical range," said Kevin Kennedy, President and CEO, Avaya. "Given this environment, we will continue to execute and deliver operational efficiencies and productivity improvements while maintaining our focus on product innovation, new customers and market leadership." Second Fiscal Quarter Highlights • Revenue of$1.12 billion decreased 9.8% compared to the prior quarter and decreased 11.1% compared to the second quarter of fiscal 2012
• Gross margin was 52.4% compared to 53.7% for the prior quarter and 48.8% for the second quarter of fiscal 2012
• Non-GAAP gross margin(1) was 53.7% compared to 55.6% for the prior quarter and 52.8% for the second quarter of fiscal 2012
• Adjusted EBITDA was $172 million or 15.4% of revenue compared to$251 million or 20.2% of revenue for the prior quarter and $200 million or 15.9% of revenue for the second quarter of fiscal 2012 • Product revenue of$529 million declined by 16.2% compared to the prior quarter and 17.0% compared to the second quarter of fiscal 2012.
• Avaya Global Services revenue of $589 million decreased 3.3% compared to the prior quarter and decreased 5.0% compared to the second quarter of fiscal 2012 • For the second fiscal quarter, percentage of revenue by geography was, U.S. with 53%, EMEA with 27%, Asia - Pacific with 10% and Americas International with 10%. (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 first quarter of fiscal 2013 see our Form 8-K filed with the SEC on February 5, 2013 at www.sec.gov. Conference Call and Webcast Avaya will host a conference call to discuss these results at 5:00 p.m. EDT on Thursday, May 9, 2013. To access the conference call, dial 800-882-9327 in the U.S. or Canada and 706-645-9730 for international callers and provide the operator the conference passcode number of 47490648. To ensure you are on the call from the start, we suggest you access the call 10-15 minutes prior to the start of the call. For those unable to participate, a replay of the conference call will be available beginning at 8:00 p.m. EDT on May 9 through June 9, by dialing 855-859-2056 within the United States and 404-537-3406 outside the United States. The replay access code is 47490648. WEBCAST Information: Avaya will webcast this conference call live. To ensure that you are on the webcast, we suggest that you access our website (www.avaya.com/investors) 10-15 minutes prior to the start. Supplementary materials accompanying the conference call are available at the same location. Following the live webcast, a replay will be available on our archives at the same web address. About Avaya Avaya is a global provider of business collaboration and communications solutions, providing unified communications, contact centers, networking and related services to companies of all sizes around the world. For more information please visit www.avaya.com. Certain statements contained in this press release are 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 expectations, assumptions, estimates and projections 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. 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.  Avaya Inc. Consolidated Statements of Operations (Unaudited; in millions) For the three months ended March 31, For the six months ended March 31, 2013 2012 2013 2012 REVENUE Products$ 529 $637$ 1,160 $1,386 Services 589 620 1,198 1,258 1,118 1,257 2,358 2,644 COSTS Products: Costs (exclusive of amortization of intangibles) 236 280 497 591 Amortization of technology intangible assets 14 49 36 99 Services 282 315 573 637 532 644 1,106 1,327 GROSS PROFIT 586 613 1,252 1,317 OPERATING EXPENSES Selling, general and administrative 381 414 765 847 Research and development 113 117 231 228 Amortization of intangible assets 57 56 114 112 Goodwill impairment 89 - 89 - Restructuring and impairment charges, net 18 90 102 111 Acquisition-related costs - 2 - 3 658 679 1,301 1,301 OPERATING (LOSS) INCOME (72 ) (66 ) (49 ) 16 Interest expense (116 ) (108 ) (224 ) (217 ) Loss on extinguishment of debt (3 ) - (6 ) - Other income (expense), net 2 (12 ) (4 ) (13 ) LOSS BEFORE INCOME TAXES (189 ) (186 ) (283 ) (214 ) (Provision for) benefit from income taxes (3 ) 24 6 26 NET LOSS$ (192 ) $(162 )$ (277 ) $(188 )  Avaya Inc. Consolidated Balance Sheets (Unaudited; in millions) March 31, September 30, 2013 2012 ASSETS Current assets: Cash and cash equivalents$ 302 $337 Accounts receivable, net 681 782 Inventory 255 255 Deferred income taxes, net 21 18 Other current assets 280 252 TOTAL CURRENT ASSETS 1,539 1,644 Property, plant and equipment, net 353 364 Deferred income taxes, net 44 43 Intangible assets, net 1,625 1,775 Goodwill 4,093 4,188 Other assets 196 180 TOTAL ASSETS$ 7,850 $8,194 LIABILITIES Current liabilities: Debt maturing within one year$ 35 $37 Accounts payable 409 438 Payroll and benefit obligations 247 262 Deferred revenue 689 616 Business restructuring reserve, current portion 103 84 Other current liabilities 253 302 TOTAL CURRENT LIABILITIES 1,736 1,739 Long-term debt 6,068 6,084 Pension obligations 1,708 1,763 Other postretirement obligations 343 360 Deferred income taxes, net 209 204 Business restructuring reserve, non-current portion 56 51 Other liabilities 443 429 TOTAL NON-CURRENT LIABILITIES 8,827 8,891 Commitments and contingencies DEFICIENCY Common stock - - Additional paid-in capital 2,929 2,926 Accumulated deficit (4,513 ) (4,236 ) Accumulated other comprehensive loss (1,129 ) (1,126 ) TOTAL DEFICIENCY (2,713 ) (2,436 ) TOTAL LIABILITIES AND DEFICIENCY$ 7,850 $8,194  Avaya Inc. Condensed Statements of Cash Flows (Unaudited; in millions) For the six months ended March 31, 2013 2012 Net cash (used for) provided by: Net loss$ (277 ) $(188 ) Adjustments to net loss 308 324 Changes in operating assets and liabilities 57 (105 ) Operating activities 88 31 Investing activities (59 ) (63 ) Financing activities (59 ) (20 ) Effect of exchange rate changes on cash and cash equivalents (5 ) 7 Net decrease in cash and cash equivalents (35 ) (45 ) Cash and cash equivalents at beginning of period 337 400 Cash and cash equivalents at end of period$ 302 $355  Avaya Inc. Supplemental Schedules of Revenue (Unaudited; in millions) For the Three Months Ended For the Three Months Ended March 31, June 30, Sept. 30, Dec. 31, Revenues Mix Change 2012 2012 2012 2013 2012 2013 2012 Amount Pct. Revenue by Segment$ 561 $588$ 573 Global Communications Solutions $473$ 574 42 % 46 % $(101 ) -17.6 % (1 ) - - Purchase accounting adjustments - (1 ) 0 % 0 % 1 - 74 64 58 Networking 56 64 5 % 5 % (8 ) -12.5 % 634 652 631 Total ECS product revenue 529 637 47 % 51 % (108 ) -17.0 % 616 625 609 AGS 589 620 53 % 49 % (31 ) -5.0 %$ 1,250 $1,277$ 1,240 Total revenue $1,118$ 1,257 100 % 100 % $(139 ) -11.1 % Revenue by Geography$ 666 $694$ 670 U.S. $592$ 678 53 % 54 % $(86 ) -12.7 % International: 330 327 331 EMEA 298 327 27 % 26 % (29 ) -8.9 % 128 126 123 APAC - Asia Pacific 116 117 10 % 9 % (1 ) -0.9 % 126 130 116 Americas International - Canada and Latin America 112 135 10 % 11 % (23 ) -17.0 % 584 583 570 Total International 526 579 47 % 46 % (53 ) -9.2 %$ 1,250 $1,277$ 1,240 Total Revenue $1,118$ 1,257 100 % 100 % $(139 ) -11.1 % 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 GAAP, including adjusted EBITDA, Non-GAAP gross margin 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 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 technology intangible assets, impairment of long lived assets, transition services agreement costs incurred in connection with the acquisition of Nortel's enterprise solutions business, share based compensation 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) For the three months ended March 31, For the six months ended March 31, 2013 2012 2013 2012 Net loss$ (192 ) $(162 )$ (277 ) $(188 ) Interest expense 116 108 224 217 Interest income - (1 ) (1 ) (2 ) Provision for (benefit from) income taxes 3 (24 ) (6 ) (26 ) Depreciation and amortization 107 143 221 286 EBITDA 34 64 161 287 Impact of purchase accounting adjustments - 1 - 1 Restructuring charges, net 18 90 102 111 Sponsors' fees 2 2 4 4 Acquisition-related costs - 2 - 3 Integration-related costs 5 3 9 8 Loss on extinguishment of debt 3 - 6 - Third-party fees expensed in connection with the debt modification 14 - 18 - Non-cash share-based compensation 1 2 3 5 Loss on investments and sale of long-lived assets, net - 2 - 3 Goodwill impairment 89 - 89 - Venezuela hyperinflationary and devaluation charges 1 - 1 - (Gain) loss on foreign currency transactions (17 ) 11 (15 ) 12 Pension/OPEB/nonretirement postemployment benefits and long-term disability costs 22 23 45 45 Adjusted EBITDA$ 172 $200$ 423 $479  Avaya Inc. Supplemental Schedules of Non-GAAP Reconciliations (Unaudited; in millions) For the Three Months Ended Mar. 31, June 30 Sept. 30, Dec. 31 Mar. 31 2012 2012 2012 2012 2013 Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin GAAP Gross Profit$ 613 $623$ 646 $666$ 586 GAAP Gross Margin 48.8 % 49.8 % 50.6 % 53.7 % 52.4 % Items excluded: Amortization of technology intangible assets 49 47 46 22 14 Impairment of capitalized software development costs - 2 4 - - Share-based compensation 1 1 1 1 - Purchase accounting adjustments 1 1 1 - - Non-GAAP Gross Profit $664$ 674 $698$ 689 $600 Non-GAAP Gross Margin 52.8 % 53.9 % 54.7 % 55.6 % 53.7 % Reconciliation of Non-GAAP Operating Income GAAP Operating (Loss) Income$ (66 ) $23$ 76 $23$ (72 ) Percentage of Revenue -5 % 2 % 6 % 2 % -6 % Items excluded: Amortization of acquired assets 105 104 103 79 71 Restructuring and impairment charges, net 90 21 15 84 18 Acquisition/integration-related costs 6 6 6 5 6 Share-based compensation 2 2 1 2 1 Impairment of capitalized software development costs - 2 4 - - Goodwill impairment - - - - 89 Purchase accounting adjustments 1 1 1 - - Non-GAAP Operating Income $138$ 159 $206$ 193 \$ 113 Percentage of Revenue 11.0 % 12.7 % 16.1 % 15.6 % 10.1 %