Avaya Reports Third Fiscal Quarter 2015 Financial Results

SANTA CLARA, CA--(Marketwired - Aug 4, 2015) -

Revenue of $999 million
Operating Income of $84 million, Non-GAAP Operating Income⁽¹⁾ of $161 million
Adjusted EBITDA⁽¹⁾ of $207 million, 20.7% of revenue

Avaya reported financial results for the third fiscal quarter ended June 30, 2015.

Total revenue for the quarter was $999 million, up $4 million compared to the prior quarter. On a year-over-year basis revenue was down $55 million compared to the third quarter of fiscal 2014. After adjusting for fluctuations in foreign exchange rates, total revenue for the quarter was up 1 percent sequentially and down 2 percent year-over-year. The sequential change was in line with recent seasonal patterns.

For the quarter, adjusted EBITDA⁽¹⁾ was $207 million which compares to adjusted EBITDA of $208 million for the prior quarter and $223 million for the third quarter of fiscal 2014. GAAP operating income was $84 million and non-GAAP operating income was $161 million which compares to non-GAAP operating income of $162 million for the prior quarter and $180 million for the third quarter of fiscal 2014. The company was free cash flow positive for the quarter, with cash and cash equivalents totaling $328 million as of June 30, 2015.

"Avaya revenue for the fiscal third quarter was up sequentially. Revenue of $999 million was one million dollars below our expected range. Non-GAAP product gross margins remained healthy, free cash flow was positive for the third consecutive quarter, and we executed a successful debt refinancing to reduce near term debt maturities. Customers again recognized Avaya with an increase in our net promoter score. This metric has reached best-in-class level and continues to trend upward," said Kevin Kennedy, president and CEO. "In the second half of the calendar year, Avaya will continue to address our cost structure while driving our sales and marketing transformation to build momentum in cloud, networking and midmarket, as well as in our market-leading team and customer engagement solutions."

Third Fiscal Quarter Highlights

Product book-to-bill for the quarter was slightly below 1.0. Bookings for product and one-time services were 6% below the prior year in constant currency
The total future contracted value for private cloud and managed services increased 17% from the third quarter of fiscal 2014 in constant currency, ending the quarter at over $800 million
Revenue was $999 million. Compared to the prior quarter, this was up by $4 million and was up by $6 million at constant currency. Revenue was $55 million below the third quarter of fiscal 2014, of which $36 million was due to changes in exchange rates
Gross margin was 58.5% compared to 59.5% for the prior quarter and 57.6% for the third quarter of fiscal 2014
Non-GAAP gross margin was 59.5% compared to 60.2% for the prior quarter and 59.2% for the third quarter of fiscal 2014
Operating income was $84 million which compares to operating income of $83 million for the prior quarter and operating income of $48 million for the third quarter of fiscal 2014
Non-GAAP operating income was $161 million compared to non-GAAP operating income of $162 million for the prior quarter and $180 million for the third quarter of fiscal 2014
Adjusted EBITDA was $207 million or 20.7% of revenue compared to $208 million or 20.9% of revenue for the prior quarter and $223 million or 21.2% of revenue for the third quarter of fiscal 2014
For the third fiscal quarter, percentage of revenue by geography was:
- U.S. - 54%
- EMEA - 26%
- Asia-Pacific - 11%
- Americas International - 9%

Conference Call and Webcast
Avaya will host a conference call to discuss its financial results and Q&A at 2:00 p.m. PDT on August 4, 2015. 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). To access the live webcast by phone, dial 877-876-9177 in the U.S. or Canada and 785-424-1666 for international callers, using the conference ID: AVQ315. 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.

Following the live webcast, a replay can be accessed at the website noted above. The replay will be available beginning at 5:00 p.m. PDT on August 4, 2015 through September 4, 2015, by dialing 800-688-4915 within the United States or 402-220-1319 outside the United States.

About Avaya
Avaya is a leading provider of solutions that enable customer and team engagement across multiple channels and devices for better customer experience, increased productivity and enhanced financial performance. Its world-class contact center and unified communications technologies and services are available in a wide variety of flexible on-premise and cloud deployment options that seamlessly integrate with non-Avaya applications. The Avaya Engagement Environment enables third parties to create and customize business applications for competitive advantage. Avaya's fabric-based networking solutions help simplify and accelerate the deployment of business critical applications and services. 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 2015 see our Form 8-K filed with the SEC on May 7, 2015 at www.sec.gov.


Avaya Inc.
Consolidated Statements of Operations
(Unaudited; in millions)

			Three months ended June 30,						Nine months ended June 30,
			2015			2014			2015			2014
REVENUE
	Products		$	494		$	511		$	1,530		$	1,617
	Services			505			543			1,543			1,628
				999			1,054			3,073			3,245
COSTS
	Products:
		Costs (exclusive of amortization of acquired technology intangible assets)		186			199			571			633
		Amortization of acquired technology intangible assets		10			14			26			42
	Services			219			234			662			726
				415			447			1,259			1,401
GROSS PROFIT				584			607			1,814			1,844
OPERATING EXPENSES
	Selling, general and administrative			356			365			1,086			1,155
	Research and development			82			93			256			289
	Amortization of acquired intangible assets			55			56			169			171
	Restructuring charges, net			7			45			32			94
				500			559			1,543			1,709
OPERATING INCOME				84			48			271			135
	Interest expense			(113	)		(112	)		(335	)		(347	)
	Loss on extinguishment of debt			(6	)		(1	)		(6	)		(5	)
	Other (expense) income, net			(11	)		(7	)		2			(8	)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES				(46	)		(72	)		(68	)		(225	)
(Provision for) benefit from income taxes of continuing operations				(3	)		8			-			(19	)
LOSS FROM CONTINUING OPERATIONS				(49	)		(64	)		(68	)		(244	)
Income from discontinued operations, net of income taxes				-			2			-			32
NET LOSS			$	(49	)	$	(62	)	$	(68	)	$	(212	)


Avaya Inc.
Consolidated Balance Sheets
(Unaudited; in millions)

		June 30, 2015			September 30, 2014
ASSETS
Current assets:
	Cash and cash equivalents	$	328		$	322
	Accounts receivable, net		647			745
	Inventory		179			197
	Deferred income taxes, net		20			24
	Other current assets		215			211
TOTAL CURRENT ASSETS			1,389			1,499
	Property, plant and equipment, net		280			281
	Deferred income taxes, net		42			52
	Acquired intangible assets, net		1,038			1,224
	Goodwill		4,075			4,047
	Other assets		96			99
TOTAL ASSETS		$	6,920		$	7,202
LIABILITIES
Current liabilities:
	Debt maturing within one year	$	7		$	19
	Accounts payable		375			416
	Payroll and benefit obligations		218			228
	Deferred revenue		679			668
	Business restructuring reserve, current portion		77			86
	Other current liabilities		264			254
TOTAL CURRENT LIABILITIES			1,620			1,671
	Long-term debt		5,947			5,949
	Pension obligations		1,379			1,535
	Other postretirement obligations		267			273
	Deferred income taxes, net		259			249
	Business restructuring reserve, non-current portion		76			119
	Other liabilities		409			475
TOTAL NON-CURRENT LIABILITIES			8,337			8,600
Commitments and contingencies
STOCKHOLDER'S DEFICIENCY
	Common stock		-			-
	Additional paid-in capital		2,977			2,962
	Accumulated deficit		(4,899	)		(4,831	)
	Accumulated other comprehensive loss		(1,115	)		(1,200	)
TOTAL STOCKHOLDER'S DEFICIENCY			(3,037	)		(3,069	)
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY		$	6,920		$	7,202


Avaya Inc.
Condensed Statements of Cash Flows
(Unaudited; in millions)
			Nine months ended June 30,
			2015			2014
Net cash (used for) provided by:
	Net loss		$	(68	)	$	(212	)
	Income from discontinued operations, net of income taxes			-			32
	Loss from continuing operations			(68	)		(244	)
		Adjustments to loss from continuing operations for non-cash items		324			338
		Changes in operating assets and liabilities		(71	)		(73	)
		Continuing operating activities		185			21
		Discontinued operating activities		-			4
	Operating activities			185			25
	Investing activities			(97	)		41
	Financing activities			(56	)		(39	)
	Effect of exchange rate changes on cash and cash equivalents			(26	)		-
Net increase in cash and cash equivalents				6			27
Cash and cash equivalents at beginning of period				322			288
Cash and cash equivalents at end of period			$	328		$	315


Avaya Inc.
Supplemental Schedules of Revenue
(Unaudited; in millions)

Three Months Ended								Three Months Ended June 30,
								Revenues				Mix				Change
Sept. 30, 2014		Dec. 31, 2014		Mar. 31, 2015				2015		2014		2015		2014		Amount			Pct.		Pct., net of FX impact

						Revenue by Segment
$	520	$	481	$	440	GCS		$	435	$	450	44	%	42	%	$	(15	)	-3	%	0	%
	59		68		47	Networking			59		61	6	%	6	%		(2	)	-3	%	-4	%
	579		549		487	Total ECS product revenue			494		511	50	%	48	%		(17	)	-3	%	-1	%
	547		530		508	AGS			505		543	50	%	52	%		(38	)	-7	%	-3	%
$	1,126	$	1,079	$	995	Total revenue		$	999	$	1,054	100	%	100	%	$	(55	)	-5	%	-2	%


						Revenue by Geography
$	588	$	572	$	531	U.S.		$	538	$	543	54	%	52	%	$	(5	)	-1	%	-1	%
						International:
	321		301		266		EMEA		263		297	26	%	28	%		(34	)	-11	%	-4	%
	111		101		104		APAC - Asia Pacific		107		108	11	%	10	%		(1	)	-1	%	2	%
	106		105		94		Americas International - Canada and Latin America		91		106	9	%	10	%		(15	)	-14	%	-5	%
	538		507		464	Total International			461		511	46	%	48	%		(50	)	-10	%	-3	%
$	1,126	$	1,079	$	995	Total revenue		$	999	$	1,054	100	%	100	%	$	(55	)	-5	%	-2	%

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 June 30,						Nine months ended June 30,
		2015			2014			2015			2014
Loss from continuing operations		$	(49	)	$	(64	)	$	(68	)	$	(244	)
	Interest expense		113			112			335			347
	Interest income		-			-			(1	)		(1	)
	Provision for (benefit from) income taxes		3			(8	)		-			19
	Depreciation and amortization		93			99			279			336
EBITDA			160			139			545			457
	Restructuring charges, net		7			45			32			94
	Sponsors' fees		1			2			5			6
	Acquisition-related costs		1			-			1			-
	Integration-related costs		-			1			1			5
	Divestiture-related costs		-			2			-			2
	Loss on extinguishment of debt		6			1			6			5
	Third-party fees expensed in connection with the debt modification		8			-			8			2
	Non-cash share-based compensation		4			6			15			20
	Gain on investments and sale of long-lived assets, net		(1	)		-			(1	)		-
	Change in certain tax indemnifications		-			8			(9	)		5
	Venezuela hyperinflationary and devaluation charges		-			-			-			2
	Resolution of certain legal matters		-			8			-			8
	Loss (gain) on foreign currency transactions		3			(1	)		(2	)		(1	)
	Pension/OPEB/nonretirement postemployment benefits and long-term disability costs		18			12			52			38
	Other		-			-			1			2
Adjusted EBITDA		$	207		$	223		$	654		$	645


Avaya Inc.
Supplemental Schedules of Non-GAAP Reconciliations
(Unaudited; in millions)

			Three Months Ended
			June 30,			Sept. 30,			Dec. 31,			Mar. 31,			June 30,
			2014			2014			2014			2015			2015

Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin
	Gross Profit - Adjusted for discontinued operations		$	607		$	655		$	638		$	592		$	584
	Gross Margin - Adjusted for discontinued operations			57.6	%		58.2	%		59.1	%		59.5	%		58.5	%

	Items excluded:
		Amortization of acquired technology intangible assets		14			14			9			7			10
		Share-based compensation		3			3			2			-			-
	Non-GAAP Gross Profit - Adjusted for discontinued operations		$	624		$	672		$	649		$	599		$	594

	Non-GAAP Gross Margin - Adjusted for discontinued operations			59.2	%		59.7	%		60.1	%		60.2	%		59.5	%


Reconciliation of Non-GAAP Operating Income
	Operating Income - Adjusted for discontinued operations		$	48		$	62		$	104		$	83		$	84
		Percentage of Revenue		4.6	%		5.5	%		9.6	%		8.3	%		8.4	%

	Items excluded:
		Amortization of acquired intangible assets		70			70			66			64			65
		Restructuring charges, net		45			71			15			10			7
		Integration-related costs		1			3			1			-			-
		Divestiture-related costs		2			-			-			-			-
		Acquisition-related costs		-			-			-			-			1
		Share-based compensation		6			5			7			4			4
		Resolution of certain legal matters		8			-			-			-			-
		Other		-			1			-			1			-

	Non-GAAP Operating Income - Adjusted for discontinued operations		$	180		$	212		$	193		$	162		$	161

	Non-GAAP Operating Margin - Adjusted for discontinued operations			17.1	%		18.8	%		17.9	%		16.3	%		16.1	%


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,
			2014			2014			2014			2015			2015

Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Products
		Revenue	$	511		$	579		$	549		$	487		$	494
		Costs (exclusive of amortization of technology intangible assets)		199			221			203			182			186
		Amortization of acquired technology intangible assets		14			14			9			7			10
	GAAP Gross Profit			298			344			337			298			298
	GAAP Gross Margin			58.3	%		59.4	%		61.4	%		61.2	%		60.3	%

	Items excluded:
		Amortization of acquired technology intangible assets		14			14			9			7			10
	Non-GAAP Gross Profit		$	312		$	358		$	346		$	305		$	308

	Non-GAAP Gross Margin			61.1	%		61.8	%		63.0	%		62.6	%		62.3	%


Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Services
		Revenue	$	543		$	547		$	530		$	508		$	505
		Costs		234			236			229			214			219
	GAAP Gross Profit			309			311			301			294			286
	GAAP Gross Margin			56.9	%		56.9	%		56.8	%		57.9	%		56.6	%

	Items excluded:
		Share-based compensation		3			3			2			-			-
	Non-GAAP Gross Profit		$	312		$	314		$	303		$	294		$	286

	Non-GAAP Gross Margin			57.5	%		57.4	%		57.2	%		57.9	%		56.6	%