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.

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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	%