SOURCE: Avaya Inc.

Avaya Inc.

May 07, 2014 07:00 ET

Avaya Reports Second Fiscal Quarter 2014 Financial Results

SANTA CLARA, CA--(Marketwired - May 7, 2014) -

  • Ongoing improvement in operational execution
  • Initiated redemption of unsecured notes due in 2015

Second Quarter 2014 Highlights:

  • Revenue of $1,060 million
  • Gross Margin of 56.3% of revenue, non-GAAP Gross Margin of 58.6% of revenue
  • Adjusted EBITDA(1) of $185 million, 17.5% of revenue

Avaya Inc., a global provider of business communications and collaboration systems, software and services, reported results for the second fiscal quarter ended March 31, 2014.

Total revenue for the second quarter was $1,060 million, down 6.3% when compared to the prior quarter. On a year over year basis revenue was down 2.4% compared to the second quarter of fiscal 2013. For the second fiscal quarter, adjusted EBITDA was $185 million which compares to adjusted EBITDA of $237 million for the prior quarter and $167 million for the second quarter of fiscal 2013. GAAP operating income was breakeven and Non-GAAP operating income was $142 million compared to non-GAAP operating income of $193 million for the prior quarter and $108 million for the second quarter of fiscal 2013. Cash and cash equivalents increased $84 million from the prior quarter and totaled $384 million as of March 31, 2014. Subsequent to the end of the second fiscal quarter, the company also announced the redemption of its senior unsecured notes due 2015 for approximately $150 million, representing the aggregate principal amount of those notes, plus accrued and unpaid interest through the May 15, 2014 redemption date.

"Avaya delivered second quarter results which reflected better than recent historical revenue seasonality. While revenue was slightly below our outlook, backlog increased and we demonstrated ongoing improvement in operational execution," said Kevin Kennedy, president and CEO. "We believe the overall market environment continues to provide growth opportunities for Avaya. Our portfolio is aligned to customers' needs and we are tuning our organization to deliver a broad set of products, software, and services."

Second Fiscal Quarter Highlights

  • Revenue of $1,060 million decreased 6.3% compared to the prior quarter and decreased 2.4% compared to the second quarter of fiscal 2013
  • Product revenue of $532 million decreased by 7.3% compared to the prior quarter and increased 0.6% compared to the second quarter of fiscal 2013. Product book-to-bill was greater than 1.0
  • Avaya Global Services revenue of $528 million decreased 5.2% compared to the prior quarter and also decreased 5.2% when compared to the second quarter of fiscal 2013
  • Gross margin was 56.3% compared to 56.6% for the prior quarter and 53.3% for the second quarter of fiscal 2013. Operating income was breakeven ($0 million) compared to operating income of $87 million for the prior quarter and compared to $12 million for the second quarter of fiscal 2013
  • Non-GAAP gross margin(1) was 58.6% compared to 58.1% for the prior quarter and 54.6% for the second quarter of fiscal 2013. Non-GAAP operating income was $142 million compared to non-GAAP operating income of $193 million for the prior quarter and $108 million for the second quarter of fiscal 2013
  • Adjusted EBITDA was $185 million or 17.5% of revenue compared to $237 million or 21.0% of revenue for the prior quarter and $167 million or 15.4% of revenue for the second quarter of fiscal 2013
  • Second fiscal quarter 2014 non-GAAP gross margin and adjusted EBITDA percentage were record levels in the second quarter of any fiscal year for the company.
  • Second fiscal quarter 2014 cash and cash equivalents totaled $384 million compared to $300 million for the prior quarter and $302 million for the second quarter of fiscal 2013
  • For the second fiscal quarter, percentage of revenue by geography was:
    • U.S. - 50% 
    • Asia-Pacific - 11%
    • EMEA - 29%
    • Americas International - 10%
  • As previously, disclosed, the IT Professional Services business ("ITPS") was sold on March 31, 2014 and is reported in discontinued operations

Conference Call and Webcast
Avaya will discuss these results at 5:00 a.m. PDT on Wednesday, May 7, 2014 in a live webcast and conference call. To join the webcast, listeners should access the investor page of our website (www.avaya.com/investors). Supplementary materials will be available at the same location. Following the live webcast, a replay will be available at the same web address in our event archives.

To access the webcast by phone, dial 800-882-9327 in the U.S. or Canada and 706-645-9730 for international callers using the conference passcode number of 24442437. To ensure you are connected prior to the start, we suggest you access the website or the call 10-15 minutes before the start time.

For those unable to participate during the live event, a replay of the conference call will be available beginning at 5:00 p.m. PDT on May 7, 2014 through June 7, 2014 by dialing 855-859-2056 or 800-585-8367 within the United States and 404-537-3406 outside the United States. The replay access code is 24442437.

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 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 first quarter of fiscal 2014 see our Form 8-K/A filed with the SEC on April 25, 2014 at www.sec.gov.

   
Avaya Inc.  
Consolidated Statements of Operations  
(Unaudited; in millions)  
   
    For the three months ended
March 31,
    For the six months ended
March 31,
 
    2014     2013     2014     2013  
REVENUE                                
  Products   $ 532     $ 529     $ 1,106     $ 1,160  
  Services     528       557       1,085       1,133  
      1,060       1,086       2,191       2,293  
COSTS                                
  Products:                                
    Costs (exclusive of amortization of acquired technology intangible assets)     206       236       434       497  
    Amortization of acquired technology intangible assets     14       14       28       36  
  Services     243       257       492       522  
      463       507       954       1,055  
GROSS PROFIT     597       579       1,237       1,238  
OPERATING EXPENSES                                
  Selling, general and administrative     397       379       790       760  
  Research and development     101       113       196       231  
  Amortization of intangible assets     57       57       115       115  
  Restructuring charges, net     42       18       49       102  
      597       567       1,150       1,208  
OPERATING INCOME     -       12       87       30  
  Interest expense     (116 )     (116 )     (235 )     (224 )
  Loss on extinguishment of debt     (4 )     (3 )     (4 )     (6 )
  Other (expense) income, net     (2 )     2       (1 )     (4 )
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES     (122 )     (105 )     (153 )     (204 )
(Provision for) benefit from income taxes of continuing operations     (1 )     (7 )     (27 )     3  
LOSS FROM CONTINUING OPERATIONS     (123 )     (112 )     (180 )     (201 )
Income (loss) from discontinued operations, net of income taxes     27       (80 )     30       (76 )
NET LOSS   $ (96 )   $ (192 )   $ (150 )   $ (277 )
                                 
                                 
                                 
Avaya Inc.  
Consolidated Balance Sheets  
(Unaudited; in millions)  
             
    March 31,
2014
    September 30,
2013
 
ASSETS                
Current assets:                
  Cash and cash equivalents   $ 384     $ 288  
  Accounts receivable, net     659       702  
  Inventory     222       245  
  Deferred income taxes, net     62       52  
  Other current assets     252       241  
  Assets of discontinued operations     -       59  
TOTAL CURRENT ASSETS     1,579       1,587  
  Property, plant and equipment, net     261       334  
  Deferred income taxes, net     28       34  
  Intangible assets, net     1,368       1,497  
  Goodwill     4,058       4,048  
  Other assets     153       172  
TOTAL ASSETS   $ 7,447     $ 7,672  
LIABILITIES                
Current liabilities:                
  Debt maturing within one year   $ 32     $ 35  
  Accounts payable     390       401  
  Payroll and benefit obligations     225       251  
  Deferred revenue     692       671  
  Business restructuring reserve, current portion     70       92  
  Other current liabilities     273       256  
  Liabilities of discontinued operations     -       19  
TOTAL CURRENT LIABILITIES     1,682       1,725  
  Long-term debt     6,026       6,051  
  Pension obligations     1,458       1,510  
  Other postretirement obligations     277       290  
  Deferred income taxes, net     255       237  
  Business restructuring reserve, non-current portion     80       78  
  Other liabilities     475       450  
TOTAL NON-CURRENT LIABILITIES     8,571       8,616  
Commitments and contingencies                
STOCKHOLDER'S DEFICIENCY                
  Common stock     -       -  
  Additional paid-in capital     2,951       2,937  
  Accumulated deficit     (4,750 )     (4,600 )
  Accumulated other comprehensive loss     (1,007 )     (1,006 )
TOTAL STOCKHOLDER'S DEFICIENCY     (2,806 )     (2,669 )
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY   $ 7,447     $ 7,672  
                 
                 
                 
Avaya Inc.  
Condensed Statements of Cash Flows  
(Unaudited; in millions)  
   
    For the six months ended
March 31,
 
    2014     2013  
Net cash (used for) provided by:                
  Net loss   $ (150 )   $ (277 )
  Income (loss) from discontinued operations, net of income taxes     30       (76 )
  Loss from continuing operations     (180 )     (201 )
    Adjustments to net loss for non-cash items     240       212  
    Changes in operating assets and liabilities     (28 )     68  
    Continuing operating activities     32       79  
    Discontinued operating activities     4       9  
  Operating activities     36       88  
    Continuing investing activities     (9 )     (59 )
    Discontinued investing activities     98       -  
  Investing activities     89       (59 )
  Financing activities     (28 )     (59 )
  Effect of exchange rate changes on cash and cash equivalents     (1 )     (5 )
Net increase (decrease) in cash and cash equivalents     96       (35 )
Cash and cash equivalents at beginning of period     288       337  
Cash and cash equivalents at end of period   $ 384     $ 302  
                 
                 
                 
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  
2013   2013   2013       2014   2013   2014   2013     Amount     Pct.  
                                                       
                  Revenue by Segment                                    
$ 497   $ 553   $ 507   Global Communications Solutions   $ 476   $ 473   45 % 44 %   $ 3     0.6 %
  (1 )   -     -     Purchase accounting adjustments     -     -   0 % 0 %     -     -  
  64     64     67   Networking     56     56   5 % 5 %     -     0.0 %
  560     617     574   Total ECS product revenue     532     529   50 % 49 %     3     0.6 %
  556     552     557   AGS     528     557   50 % 51 %     (29 )   -5.2 %
$ 1,116   $ 1,169   $ 1,131   Total revenue   $ 1,060   $ 1,086   100 % 100 %   $ (26 )   -2.4 %
                                                       
                                                       
                  Revenue by Geography                                    
$ 605   $ 628   $ 604   U.S.   $ 532   $ 560   50 % 52 %   $ (28 )   -5.0 %
                  International:                                    
  297     313     303     EMEA     313     298   29 % 27 %     15     5.0 %
  105     113     114     APAC - Asia Pacific     112     116   11 % 11 %     (4 )   -3.4 %
  109     115     110     Americas International - Canada and Latin America     103     112   10 % 10 %     (9 )   -8.0 %
  511     541     527   Total International     528     526   50 % 48 %     2     0.4 %
$ 1,116   $ 1,169   $ 1,131   Total Revenue   $ 1,060   $ 1,086   100 % 100 %   $ (26 )   -2.4 %
                                                       
                                                       
                                                       

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)  
                         
    For the three months ended
March 31,
    For the six months ended
March 31,
 
    2014     2013     2014     2013  
Loss from continuing operations   $ (123 )   $ (112 )   $ (180 )   $ (201 )
  Interest expense     116       116       235       224  
  Interest income     (1 )     -       (1 )     (1 )
  Provision for (benefit from) income taxes     1       7       27       (3 )
  Depreciation and amortization     118       107       237       222  
EBITDA     111       118       318       241  
    Restructuring charges, net     42       18       49       102  
    Sponsors' fees     2       2       4       4  
    Integration-related costs     2       5       4       9  
    Loss on extinguishment of debt     4       3       4       6  
    Third-party fees expensed in connection with the debt modification     2       14       2       18  
    Non-cash share-based compensation     8       1       14       3  
    Reversal of tax indemnification reserve     (3 )     -       (3 )     -  
    Venezuela hyperinflationary and devaluation charges     2       1       2       1  
    Other     -       -       2       -  
    Loss (gain) on foreign currency transactions     2       (17 )     -       (15 )
    Pension/OPEB/nonretirement postemployment benefits and long-term disability costs     13       22       26       45  
Adjusted EBITDA   $ 185     $ 167     $ 422     $ 414  
                                 
                                 
                                 
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,  
  2013     2013     2013     2013     2014  
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin                                      
  Gross Profit - Adjusted for discontinued operations $ 579     $ 618     $ 674     $ 640     $ 597  
  Gross Margin - Adjusted for discontinued operations   53.3 %     55.4 %     57.7 %     56.6 %     56.3 %
                                         
  Items excluded:                                      
    Amortization of acquired technology intangible assets   14       13       14       14       14  
    Impairment of capitalized software development costs   -       1       -       -       -  
    Share-based compensation   -       2       2       3       4  
    Incremental accelerated depreciation associated with vacating a facility   -       -       -       -       6  
    Purchase accounting adjustments to revenue   -       1       -       -       -  
  Non-GAAP Gross Profit - Adjusted for discontinued operations $ 593     $ 635     $ 690     $ 657     $ 621  
                                         
  Non-GAAP Gross Margin - Adjusted for discontinued operations   54.6 %     56.8 %     59.0 %     58.1 %     58.6 %
                                       
                                       
Reconciliation of Non-GAAP Operating Income                                      
  Operating Income - Adjusted for discontinued operations $ 12     $ 6     $ 109     $ 87     $ -  
    Percentage of Revenue   1 %     1 %     9 %     8 %     0 %
                                         
  Items excluded:                                      
    Amortization of acquired assets   71       70       70       72       71  
    Restructuring and impairment charges, net   18       63       35       7       42  
    Acquisition/integration-related costs   6       5       4       3       2  
    Share-based compensation   1       4       4       6       8  
    Impairment of capitalized software development costs   -       1       -       -       -  
    Incremental accelerated depreciation associated with vacating certain facilities   -       3       18       16       19  
    Other   -       -       -       2       -  
    Resolution of legal matters   -       10       -       -       -  
    Purchase accounting adjustments to revenue   -       1       -       -       -  
                                         
  Non-GAAP Operating Income - Adjusted for discontinued operations $ 108     $ 163     $ 240     $ 193     $ 142  
                                         
  Non-GAAP Operating Margin - Adjusted for discontinued operations   9.9 %     14.6 %     20.5 %     17.1 %     13.4 %
                                       
                                       
                                       
Avaya Inc.  
Supplemental Schedules of Non-GAAP Reconciliation of Gross Profit and Gross Margin by Portfolio  
(Unaudited; in millions)  
                               
    For the Three Months Ended  
    Mar. 31,     June 30,     Sept. 30,     Dec. 31,     Mar. 31,  
    2013     2013     2013     2013     2014  
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Products                                        
    Revenue   $ 529     $ 560     $ 617     $ 574     $ 532  
    Costs (exclusive of amortization of acquired technology intangible assets)     236       234       232       228       206  
    Amortization of acquired technology intangible assets     14       13       14       14       14  
  GAAP Gross Profit     279       313       371       332       312  
  GAAP Gross Margin     52.7 %     55.9 %     60.1 %     57.8 %     58.6 %
                                           
  Items excluded:                                        
    Amortization of acquired technology intangible assets     14       13       14       14       14  
    Impairment of capitalized software development costs     -       1       -       -       -  
    Incremental accelerated depreciation associated with vacating a facility     -       -       -       -       3  
    Purchase accounting adjustments to revenue     -       1       -       -       -  
  Non-GAAP Gross Profit   $ 293     $ 328     $ 385     $ 346     $ 329  
                                           
  Non-GAAP Gross Margin     55.4 %     58.5 %     62.4 %     60.3 %     61.8 %
                                         
                                         
Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin - Services                                        
    Revenue   $ 557     $ 556     $ 552     $ 557     $ 528  
    Costs     257       251       249       249       243  
  GAAP Gross Profit     300       305       303       308       285  
  GAAP Gross Margin     53.9 %     54.9 %     54.9 %     55.3 %     54.0 %
                                           
  Items excluded:                                        
    Share-based compensation     -       2       2       3       4  
    Incremental accelerated depreciation associated with vacating a facility     -       -       -       -       3  
  Non-GAAP Gross Profit   $ 300     $ 307     $ 305     $ 311     $ 292  
                                           
  Non-GAAP Gross Margin     53.9 %     55.2 %     55.3 %     55.8 %     55.3 %
                                         
                                         

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