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	%