SOURCE: Avaya Inc.

Avaya Inc.

August 04, 2015 16:00 ET

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 %