SOURCE: Avaya Inc.

Avaya Inc.

August 05, 2014 16:01 ET

Avaya Reports Third Fiscal Quarter 2014 Financial Results

SANTA CLARA, CA--(Marketwired - Aug 5, 2014) -

  • Revenue of $1,054 million
  • Gross Margin of 57.6% of revenue, non-GAAP Gross Margin of 59.2% of revenue
  • Adjusted EBITDA of $223 million, 21.2% of revenue

Avaya Inc., a global provider of business communications and collaboration systems, software and services, reported results for the third fiscal quarter ended June 30, 2014.

Total revenue for the third quarter was $1,054 million, down $6 million when compared to the prior quarter. On a year over year basis revenue was down $62 million compared to the third quarter of fiscal 2013. For the third fiscal quarter, adjusted EBITDA(1) was $223 million which compares to adjusted EBITDA of $185 million for the prior quarter and $217 million for the third quarter of fiscal 2013. GAAP operating income was $48 million and non-GAAP operating income was $180 million which compares to non-GAAP operating income of $142 million for the prior quarter and $163 million for the third quarter of fiscal 2013. Cash and cash equivalents totaled $315 million as of June 30, 2014. 

"Avaya's third quarter results reflected revenues which were in line with recent historical sequential seasonality and further strength in margins," said Kevin Kennedy, president and CEO. "The company continues to demonstrate strong execution of our strategy to broaden our innovative product portfolio and drive our sales and services transformation addressing both the enterprise and mid-market segments."

Third Fiscal Quarter Highlights

  • Revenue of $1,054 million decreased $6 million compared to the prior quarter and decreased $62 million compared to the third quarter of fiscal 2013
  • Product revenue of $511 million decreased by 3.9% compared to the prior quarter and decreased 8.8% compared to the third quarter of fiscal 2013. Product book-to-bill was greater than 1.0
  • Avaya Global Services revenue of $543 million increased 2.8% compared to the prior quarter and decreased 2.3% compared to the third quarter of fiscal 2013
  • Gross margin was 57.6% compared to 56.3% for the prior quarter and 55.4% for the third quarter of fiscal 2013. Non-GAAP gross margin was 59.2% compared to 58.6% for the prior quarter and 56.8% for the third quarter of fiscal 2013. 
  • Third fiscal quarter 2014 non-GAAP gross margin and non-GAAP Services gross margin were record levels for the company. 
  • Operating income was $48 million which compares to breakeven operating income for the prior quarter and operating income of $6 million for the third quarter of fiscal 2013. Non-GAAP operating income was $180 million compared to non-GAAP operating income of $142 million for the prior quarter and $163 million for the third quarter of fiscal 2013
  • Adjusted EBITDA was $223 million or 21.2% of revenue compared to $185 million or 17.5% of revenue for the prior quarter and $217 million or 19.4% of revenue for the third quarter of fiscal 2013
  • Non-GAAP operating income and adjusted EBITDA on both a dollar basis and a percentage of revenue basis were record levels for the third quarter of any fiscal year for the company.
  • For the third fiscal quarter, percentage of revenue by geography was:
    • U.S. - 52%
    • Asia-Pacific - 10%
    • EMEA - 28%
    • Americas International - 10%

Conference Call and Webcast
Avaya will host a conference call to discuss these financial results and related Q&A at 2:00 p.m. PDT on August 5, 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 800-894-5910 in the U.S. or Canada and 785-424-1052 for international callers, using the conference ID: AVQ314. 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. PDT on August 5 through September 5, by dialing 800-839-2418 within the United States or 402-220-7210 outside the United States.

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 second quarter of fiscal 2014 see our Form 8-K filed with the SEC on May 7, 2014 at www.sec.gov.

Follow Avaya on Twitter, Facebook, YouTube, LinkedIn, Flickr, and the Avaya Connected Blog.

   
   
Avaya Inc.  
Consolidated Statements of Operations  
(Unaudited; in millions)  
   
    Three months ended     Nine months ended  
    June 30,  June 30, 
    2014     2013     2014     2013  
REVENUE                                
  Products   $ 511     $ 560     $ 1,617     $ 1,720  
  Services     543       556       1,628       1,689  
      1,054       1,116       3,245       3,409  
COSTS                                
  Products:                                
    Costs (exclusive of amortization of acquired technology intangible assets)     199       234       633       731  
    Amortization of acquired technology intangible assets     14       13       42       49  
  Services     234       251       726       773  
      447       498       1,401       1,553  
GROSS PROFIT     607       618       1,844       1,856  
OPERATING EXPENSES                                
  Selling, general and administrative     365       379       1,155       1,139  
  Research and development     93       112       289       343  
  Amortization of intangible assets     56       57       171       172  
  Restructuring charges, net     45       63       94       165  
  Acquisition-related costs     -       1       -       1  
      559       612       1,709       1,820  
OPERATING INCOME     48       6       135       36  
  Interest expense     (112 )     (122 )     (347 )     (346 )
  Loss on extinguishment of debt     (1 )     -       (5 )     (6 )
  Other expense, net     (7 )     (5 )     (8 )     (9 )
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES     (72 )     (121 )     (225 )     (325 )
Benefit from (provision for) income taxes of continuing operations     8       3       (19 )     6  
LOSS FROM CONTINUING OPERATIONS     (64 )     (118 )     (244 )     (319 )
Income (loss) from discontinued operations, net of income taxes     2       8       32       (68 )
NET LOSS   $ (62 )   $ (110 )   $ (212 )   $ (387 )
                                 
                                 
                                 
Avaya Inc.  
Consolidated Balance Sheets  
(Unaudited; in millions)  
             
    June 30,
2014
    September 30,
2013
 
ASSETS                
Current assets:                
  Cash and cash equivalents   $ 315     $ 288  
  Accounts receivable, net     644       702  
  Inventory     207       245  
  Deferred income taxes, net     67       52  
  Other current assets     267       241  
  Assets of discontinued operations     -       59  
TOTAL CURRENT ASSETS     1,500       1,587  
  Property, plant and equipment, net     272       334  
  Deferred income taxes, net     34       34  
  Intangible assets, net     1,294       1,497  
  Goodwill     4,049       4,048  
  Other assets     148       172  
TOTAL ASSETS   $ 7,297     $ 7,672  
LIABILITIES                
Current liabilities:                
  Debt maturing within one year   $ 32     $ 35  
  Accounts payable     376       401  
  Payroll and benefit obligations     215       251  
  Deferred revenue     678       671  
  Business restructuring reserve, current portion     76       92  
  Other current liabilities     300       256  
  Liabilities of discontinued operations     -       19  
TOTAL CURRENT LIABILITIES     1,677       1,725  
  Long-term debt     6,009       6,051  
  Pension obligations     1,392       1,510  
  Other postretirement obligations     269       290  
  Deferred income taxes, net     267       237  
  Business restructuring reserve, non-current portion     90       78  
  Other liabilities     442       450  
TOTAL NON-CURRENT LIABILITIES     8,469       8,616  
Commitments and contingencies                
STOCKHOLDER'S DEFICIENCY                
  Common stock     -       -  
  Additional paid-in capital     2,957       2,937  
  Accumulated deficit     (4,812 )     (4,600 )
  Accumulated other comprehensive loss     (994 )     (1,006 )
TOTAL STOCKHOLDER'S DEFICIENCY     (2,849 )     (2,669 )
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY   $ 7,297     $ 7,672  
                 
                 
                 
Avaya Inc.  
Condensed Statements of Cash Flows  
(Unaudited; in millions)  
    Nine months ended
June 30,
 
    2014     2013  
Net cash (used for) provided by:                
  Net loss Net loss   $ (212 )   $ (387 )
  Income (loss) from discontinued operations, net of income taxes     32       (68 )
  Loss from continuing operations     (244 )     (319 )
    Adjustments to net loss for non-cash items     338       330  
    Changes in operating assets and liabilities     (73 )     72  
    Continuing operating activities     21       83  
    Discontinued operating activities     4       16  
  Operating activities     25       99  
    Continuing investing activities     (57 )     (89 )
    Discontinued investing activities     98       -  
  Investing activities     41       (89 )
  Financing activities     (39 )     (68 )
  Effect of exchange rate changes on cash and cash equivalents     -       (8 )
Net increase (decrease) in cash and cash equivalents     27       (66 )
Cash and cash equivalents at beginning of period     288       337  
Cash and cash equivalents at end of period   $ 315     $ 271  
                 
                 
                 
Avaya Inc.  
Supplemental Schedules of Revenue  
(Unaudited; in millions)  
   
Three Months Ended       Three Months Ended June 30,  
Sept. 30,   Dec. 31,   Mar. 31,       Revenues   Mix     Change  
2013   2013   2014       2014   2013   2014   2013     Amount     Pct.  
                                                       
                  Revenue by Segment                                    
$ 553   $ 507   $ 476   GCS   $ 450   $ 497   42 % 44 %   $ (47 )   -9 %
  -     -     -     Purchase accounting adjustments     -     (1 ) 0 % 0 %     1     -  
  64     67     56   Networking     61     64   6 % 6 %     (3 )   -5 %
  617     574     532   Total ECS product revenue     511     560   48 % 50 %     (49 )   -9 %
  552     557     528   AGS     543     556   52 % 50 %     (13 )   -2 %
$ 1,169   $ 1,131   $ 1,060   Total revenue   $ 1,054   $ 1,116   100 % 100 %   $ (62 )   -6 %
                                                       
                                                       
                  Revenue by Geography                                    
$ 628   $ 604   $ 532   U.S.   $ 543   $ 605   52 % 54 %   $ (62 )   -10 %
                  International:                                    
  313     303     313     EMEA     297     297   28 % 27 %     0     0 %
  113     114     112     APAC - Asia Pacific     108     105   10 % 9 %     3     3 %
  115     110     103     Americas International - Canada and Latin America     106     109   10 % 10 %     (3 )   -3 %
  541     527     528   Total International     511     511   48 % 46 %     -     0 %
$ 1,169   $ 1,131   $ 1,060   Total revenue   $ 1,054   $ 1,116   100 % 100 %   $ (62 )   -6 %
                                                       

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     Nine months ended  
    June 30,     June 30,  
    2014     2013     2014     2013  
Loss from continuing operations   $ (64 )   $ (118 )   $ (244 )   $ (319 )
  Interest expense     112       122       347       346  
  Interest income     -       (1 )     (1 )     (2 )
  (Benefit from) provision for income taxes     (8 )     (3 )     19       (6 )
  Depreciation and amortization     99       110       336       332  
EBITDA     139       110       457       351  
  Impact of purchase accounting adjustments     -       1       -       1  
  Restructuring charges, net     45       63       94       165  
  Sponsors' fees     2       1       6       5  
  Acquisition-related costs     -       1       -       1  
  Integration-related costs     1       3       5       12  
  Divestiture-related costs     2       -       2       -  
  Loss on extinguishment of debt     1       -       5       6  
  Third-party fees expensed in connection with the debt modification     -       -       2       18  
  Non-cash share-based compensation     6       4       20       7  
  Gain on sale of investments and long-lived assets, net     -       (1 )     -       (1 )
  Change in certain tax indemnifications     8       -       5       -  
  Impairment of long-lived assets     -       1       -       1  
  Venezuela hyperinflationary and devaluation charges     -       -       2       1  
  Resolution of legal matters     8       10       8       10  
  Other     -       -       2       -  
  (Gain) loss on foreign currency transactions     (1 )     5       (1 )     (10 )
  Pension/OPEB/nonretirement postemployment benefits and long-term disability costs     12       19       38       64  
Adjusted EBITDA   $ 223     $ 217     $ 645     $ 631  
                                 
                                 
                                 
Avaya Inc.  
Supplemental Schedules of Non-GAAP Reconciliations  
(Unaudited; in millions)  
                               
    Three Months Ended  
    June 30,     Sept. 30,     Dec. 31,     Mar. 31,     June 30,  
    2013     2013     2013     2014     2014  
                                         
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin                                        
  Gross Profit - Adjusted for discontinued operations   $ 618     $ 674     $ 640     $ 597     $ 607  
  Gross Margin - Adjusted for discontinued operations     55.4 %     57.7 %     56.6 %     56.3 %     57.6 %
                                           
  Items excluded:                                        
    Amortization of acquired technology intangible assets     13       14       14       14       14  
    Impairment of capitalized software development costs     1       -       -       -       -  
    Share-based compensation     2       2       3       4       3  
    Incremental accelerated depreciation associated with vacating a facility     -       -       -       6       -  
    Purchase accounting adjustments to revenue     1       -       -       -       -  
  Non-GAAP Gross Profit - Adjusted for discontinued operations   $ 635     $ 690     $ 657     $ 621     $ 624  
                                           
  Non-GAAP Gross Margin - Adjusted for discontinued operations     56.8 %     59.0 %     58.1 %     58.6 %     59.2 %
                                         
Reconciliation of Non-GAAP Operating Income                                        
  Operating Income - Adjusted for discontinued operations   $ 6     $ 109     $ 87     $ -     $ 48  
    Percentage of Revenue     0.5 %     9.3 %     7.7 %     0.0 %     4.6 %
                                         
  Items excluded:                                        
    Amortization of acquired assets     70       70       72       71       70  
    Restructuring and impairment charges, net     63       35       7       42       45  
    Acquisition/integration-related costs     5       4       3       2       1  
    Divestiture-related costs     -       -       -       -       2  
    Share-based compensation     4       4       6       8       6  
    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       -       -       -       8  
    Purchase accounting adjustments to revenue     1       -       -       -       -  
                                         
Non-GAAP Operating Income - Adjusted for discontinued operations   $ 163     $ 240     $ 193     $ 142     $ 180  
                                         
Non-GAAP Operating Margin - Adjusted for discontinued operations     14.6 %     20.5 %     17.1 %     13.4 %     17.1 %
                                         
                                         
                                         
Avaya Inc.  
Supplemental Schedules of Non-GAAP Reconciliation of Gross Profit and Gross Margin by Portfolio  
(Unaudited; in millions)  
                               
    Three Months Ended  
    June 30,     Sept. 30,     Dec. 31,     Mar. 31,     June 30,  
    2013     2013     2013     2014     2014  
                                         
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Products                                        
    Revenue   $ 560     $ 617     $ 574     $ 532     $ 511  
    Costs (exclusive of amortization of technology intangible assets)     234       232       228       206       199  
    Amortization of technology intangible assets     13       14       14       14       14  
  GAAP Gross Profit     313       371       332       312       298  
  GAAP Gross Margin     55.9 %     60.1 %     57.8 %     58.6 %     58.3 %
                                           
  Items excluded:                                        
    Amortization of acquired technology intangible assets     13       14       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   $ 328     $ 385     $ 346     $ 329     $ 312  
                                           
  Non-GAAP Gross Margin     58.5 %     62.4 %     60.3 %     61.8 %     61.1 %
                                         
                                         
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Services                                        
    Revenue   $ 556     $ 552     $ 557     $ 528     $ 543  
    Costs     251       249       249       243       234  
  GAAP Gross Profit     305       303       308       285       309  
  GAAP Gross Margin     54.9 %     54.9 %     55.3 %     54.0 %     56.9 %
                                           
  Items excluded:                                        
    Share-based compensation     2       2       3       4       3  
    Incremental accelerated depreciation associated with vacating a facility     -       -       -       3       -  
  Non-GAAP Gross Profit   $ 307     $ 305     $ 311     $ 292     $ 312  
                                         
  Non-GAAP Gross Margin     55.2 %     55.3 %     55.8 %     55.3 %     57.5 %
                                         

Contact Information