SOURCE: Avaya

Avaya

August 11, 2016 16:01 ET

Avaya Reports Third Quarter Fiscal 2016 Financial Results

SANTA CLARA, CA--(Marketwired - August 11, 2016) -

Third Quarter Fiscal 2016:

  • Revenue of $882 million
  • Operating Income of $58 million, Non-GAAP Operating Income(1) of $180 million
  • Adjusted EBITDA(1) up sequentially and year-over-year to $223 million at a record 25.3% of revenue

Avaya reported financial results for the third fiscal quarter ended June 30, 2016.

Total revenue for the third quarter was $882 million, down $22 million compared to the prior quarter, and down $117 million year-over-year, as demand for unified communications hardware continued to decline. GAAP operating income was $58 million and non-GAAP operating income was $180 million which compares to non-GAAP operating income of $162 million for the prior quarter and $161 million for the third quarter of fiscal 2015. For the quarter, adjusted EBITDA(1) was $223 million which compares to adjusted EBITDA of $205 million for the prior quarter and $207 million for the third quarter of fiscal 2015.

"Avaya's third fiscal quarter results demonstrate the progress of the company's transformation and the effects of a challenging global economy. Despite slowing economic conditions, revenue was within our stated range and adjusted EBITDA exceeded our stated range. In constant currency, cloud and managed services revenue grew 6 percent year-over-year and contact center revenue increased year-over-year. Non-GAAP gross margin, non-GAAP operating margin, and adjusted EBITDA as a percentage of revenue all improved year-over-year, with adjusted EBITDA percentage at a record level, driven by improved services margins and lower operating expenses," said Kevin Kennedy, president and CEO. "As we move towards the end of the fiscal year, we'll remain focused on improving our capital structure and progressing further on our key initiatives."

Third Fiscal Quarter Highlights

  • Estimated total contract value was approximately $3.1 billion up 7% from the third quarter of fiscal 2015 in constant currency. This amount includes over $850 million for private cloud and managed services, an 11% increase from the third quarter of fiscal 2015 in constant currency
  • Cloud & managed services revenue grew 6% year-over-year, and contact center product revenue increased slightly year-over-year, each in constant currency
  • Gross margin was 61.5% compared to 59.8% for the prior quarter and 58.5% for the third quarter of fiscal 2015
  • Non-GAAP gross margin was a record 62.4% compared to 60.7% for the prior quarter and 59.5% for the third quarter of fiscal 2015
  • Adjusted EBITDA was $223 million or a record 25.3% of revenue compared to $205 million or 22.7% of revenue for the prior quarter and $207 million or 20.7% of revenue for the third quarter of fiscal 2015
  • For the third fiscal quarter, percentage of revenue by geography was:
    • U.S. - 55%
    • EMEA - 23%
    • Asia-Pacific - 12%
    • Americas International - 10%
  • Continued assessment of capital structure improvement opportunities:
    • Constructive dialogue with creditor groups and their advisors
    • Assessment of intellectual property portfolio underway and monetization effort in process
    • Trend of consolidation in our markets is enabling us to obtain competitive and market-based valuations for our businesses

Conference Call and Webcast
Avaya will host a webcast and conference call to discuss its financial results at 2:00 PM PDT on August 11, 2016. 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. Note that since the ongoing process to assess alternatives for improving the company's capital structure includes exploration of various potential asset-related transactions, there will be no Q&A during the call. At the time of the webcast, this financial results press release, supplementary slides, and links to Avaya's SEC filings will all be available on the investor page of Avaya's website (www.avaya.com/investors).

To join the financial results webcast, listeners should access the investor page of Avaya's website (www.avaya.com/investors). Following the webcast, a replay will be available at the same web address in the event archives.

To access the financial results webcast by phone, dial 888-632-3384 in the U.S. or Canada and 785-424-1675 for international callers, using the conference ID: AVQ316. 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 financial results webcast and conference call will be available beginning at 2:00 PM PDT on August 12 through September 12, 2016, by accessing event archives from the investor page of Avaya's website (www.avaya.com/investors).

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-premises and cloud deployment options that seamlessly integrate with non-Avaya applications. Avaya Breeze enables third parties to create and customize business applications for competitive advantage. The Avaya 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, including statements about our future financial and operational performance, planned and unrealized future savings, capital structure alternatives, as well as statements about our future growth plans and drivers. These statements may be identified by the use of forward-looking terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "our vision," "plan," "potential," "predict," "should," "will" or "would" or the negative thereof or other variations thereof or other comparable 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 are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance, or achievements to differ materially from any future results, performance, or achievements 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 and in particular, our 2015 Form 10-K filed with the SEC on November 23, 2015. Avaya disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

[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 2016 see our Form 8-K filed with the SEC on May 16, 2016 at www.sec.gov.

  
Avaya Inc. 
Consolidated Statements of Operations 
(Unaudited; in millions) 
  
  Three months ended
June 30,
  Nine months ended
June 30,
 
  2016  2015  2016  2015 
REVENUE                
 Products $398  $494  $1,286  $1,530 
 Services  484   505   1,458   1,543 
   882   999   2,744   3,073 
COSTS                
 Products:                
  Costs (exclusive of amortization of acquired technology intangible assets)  141   186   461   571 
  Amortization of acquired technology intangible assets  7   10   22   26 
 Services  192   219   599   662 
   340   415   1,082   1,259 
GROSS PROFIT  542   584   1,662   1,814 
                 
OPERATING EXPENSES                
 Selling, general and administrative  317   356   1,027   1,086 
 Research and development  66   82   211   256 
 Amortization of acquired intangible assets  57   55   170   169 
 Restructuring charges, net  44   7   88   32 
   484   500   1,496   1,543 
OPERATING INCOME  58   84   166   271 
                 
 Interest expense  (117)  (113)  (352)  (335)
 Loss on extinguishment of debt  -   (6)  -   (6)
 Other income (expense), net  1   (11)  7   2 
                 
LOSS BEFORE INCOME TAXES  (58)  (46)  (179)  (68)
                 
Provision for income taxes  (57)  (3)  (66)  - 
                 
NET LOSS $(115) $(49) $(245) $(68)
                 
  
Avaya Inc. 
Consolidated Balance Sheets 
(Unaudited; in millions) 
       
  June 30,
2016
  September 30,
2015
 
ASSETS        
Current assets:        
 Cash and cash equivalents $269  $323 
 Accounts receivable, net  532   678 
 Inventory  162   174 
 Deferred income taxes, net  -   26 
 Other current assets  196   171 
TOTAL CURRENT ASSETS  1,159   1,372 
 Property, plant and equipment, net  268   282 
 Deferred income taxes, net  43   34 
 Acquired intangible assets, net  782   970 
 Goodwill  4,072   4,074 
 Other assets  138   130 
TOTAL ASSETS $6,462  $6,862 
         
LIABILITIES        
Current liabilities:        
 Debt maturing within one year $24  $7 
 Accounts payable  330   379 
 Payroll and benefit obligations  165   229 
 Deferred revenue  710   665 
 Business restructuring reserve, current portion  87   90 
 Other current liabilities  268   282 
TOTAL CURRENT LIABILITIES  1,584   1,652 
         
 Long-term debt  5,975   5,960 
 Pension obligations  1,666   1,690 
 Other postretirement obligations  189   194 
 Deferred income taxes, net  266   262 
 Business restructuring reserve, non-current portion  63   67 
 Other liabilities  401   415 
TOTAL NON-CURRENT LIABILITIES  8,560   8,588 
         
Commitments and contingencies        
         
STOCKHOLDER'S DEFICIENCY        
 Common stock  -   - 
 Additional paid-in capital  2,993   2,981 
 Accumulated deficit  (5,220)  (4,975)
 Accumulated other comprehensive loss  (1,455)  (1,384)
TOTAL STOCKHOLDER'S DEFICIENCY  (3,682)  (3,378)
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY $6,642  $6,862 
         
  
Avaya Inc. 
Condensed Statements of Cash Flows 
(Unaudited; in millions) 
  
  Nine months ended
June 30,
 
  2016  2015 
Net cash (used for) provided by:        
 Net loss Net loss $(245) $(68)
  Adjustments to net loss for non-cash items  296   324 
  Changes in operating assets and liabilities  (21)  (71)
 Operating activities  30   185 
 Investing activities  (80)  (97)
 Financing activities  3   (56)
 Effect of exchange rate changes on cash and cash equivalents  (7)  (26)
Net (decrease) increase in cash and cash equivalents  (54)  6 
Cash and cash equivalents at beginning of period  323   322 
Cash and cash equivalents at end of period $269  $328 
         
  
Avaya Inc. 
Supplemental Schedules of Revenue 
(Unaudited; in millions) 
                          
Three Months Ended   Three Months Ended June 30, 
        Revenues Mix  Change 
Sept. 30, 2015 Dec. 31, 2015 Mar. 31, 2016   2016 2015 2016  2015  Amount  Pct.  Pct., net of FX impact 
                                
         Revenue by Segment                      
$440 $414 $379 GCS $351 $435 40% 44% $(84) -19% -19%
 59  50  45 Networking  47  59 5% 6%  (12) -20% -19%
 499  464  424 Total ECS product revenue  398  494 45% 50%  (96) -19% -19%
 509  494  480 AGS  484  505 55% 50%  (21) -4% -3%
$1,008 $958 $904 Total revenue $882 $999 100% 100% $(117) -12% -11%
                                
                                
         Revenue by Geography                      
$562 $528 $505 U.S. $487 $538 55% 54% $(51) -9% -9%
         International:                      
 243  239  218  EMEA  206  263 23% 26%  (57) -22% -21%
 113  106  104  APAC - Asia Pacific  102  107 12% 11%  (5) -5% -4%
 90  85  77  Americas International - Canada and Latin America  87  91 10% 9%  (4) -4% 1%
 446  430  399 Total International  395  461 45% 46%  (66) -14% -13%
$1,008 $958 $904 Total revenue $882 $999 100% 100% $(117) -12% -11%
                                

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 of America (GAAP), including EBITDA, adjusted EBITDA, non-GAAP gross margin and non-GAAP operating income.

EBITDA is defined as net income (loss) before income taxes, interest expense, interest income and depreciation and amortization. Adjusted EBITDA is EBITDA further adjusted to exclude certain charges and other adjustments as described in our SEC filings.

We believe that including supplementary information concerning Adjusted EBITDA is appropriate because it serves as a basis for determining management and employee 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, such as our pricing strategies, volume, costs and expenses of the organization and it presents our financial performance in a way that can be more easily compared to prior quarters or fiscal years.

EBITDA and Adjusted EBITDA have limitations as analytical tools. EBITDA measures do not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. While EBITDA 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 excludes the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, our formulation of Adjusted EBITDA allows adjustment for certain amounts that are included in calculating net income (loss) as set forth in the reconciliation of GAAP to non-GAAP numbers shown below, including, but not limited to, restructuring charges, certain fees payable to our private equity sponsors and other advisors, resolution of certain legal matters, and a portion of our pension and post-employment benefits costs which represents the amortization of pension service costs and actuarial gain (loss) associated with these benefits. However, these are expenses that may recur, may vary and are difficult to predict.

Non-GAAP gross profit and gross margin excludes the amortization of acquired technology intangible assets, share based compensation, costs to settle certain legal matters, 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 acquired technology intangible assets, restructuring and impairment charges, acquisition and integration related costs, third party sales transformation and advisory costs, share based compensation, costs to settle certain legal matters, 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,
 
   2016   2015   2016   2015  
Net loss  $(115 ) $(49 ) $(245 ) $(68 )
 Interest expense   117    113    352    335  
 Interest income   (1 )  -    (1 )  (1 )
 Provision for income taxes   57    3    66    -  
 Depreciation and amortization   93    93    277    279  
EBITDA   151    160    449    545  
 Restructuring charges, net   44    7    88    32  
 Sponsors' and other advisory fees   9    1    15    5  
 Acquisition and integration-related costs   1    1    2    2  
 Third-party sales transformation costs   -    -    5    -  
 Loss on extinguishment of debt   -    6    -    6  
 Third-party fees expensed in connection with the debt modification   -    8    -    8  
 Non-cash share-based compensation   4    4    12    15  
 Gain on sale of investments and long-lived assets, net   -    (1 )  -    (1 )
 Change in certain tax indemnifications   -    -    -    (9 )
 Resolution of certain legal matters   2    -    53    -  
 (Gain) loss on foreign currency transactions   (1 )  3    (10 )  (2 )
 Pension/OPEB/nonretirement postemployment benefits and long-term disability costs   13    18    42    52  
 Other   -    -    -    1  
Adjusted EBITDA  $223   $207   $656   $654  
                 
   
Avaya Inc.  
Supplemental Schedules of Non-GAAP Reconciliations  
(Unaudited; in millions)  
                      
   Three Months Ended  
   June 30,   Sept. 30,   Dec. 31,   Mar. 31,   June 30,  
   2015   2015   2015   2016   2016  
                           
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin                          
 Gross Profit  $584   $616   $579   $541   $542  
 Gross Margin   58.5 %  61.1 %  60.4 %  59.8 %  61.5 %
                           
 Items excluded:                          
  Amortization of acquired technology intangible assets   10    9    8    7    7  
  Resolution of certain legal matters   -    -    -    1    1  
 Non-GAAP Gross Profit  $594   $625   $587   $549   $550  
                           
 Non-GAAP Gross Margin   59.5 %  62.0 %  61.3 %  60.7 %  62.4 %
                           
Reconciliation of Non-GAAP Operating Income                          
 Operating Income  $84   $100   $91   $17   $58  
  Percentage of Revenue   8.4 %  9.9 %  9.5 %  1.9 %  6.6 %
                           
 Items excluded:                          
  Amortization of acquired intangible assets   65    66    65    63    64  
  Restructuring charges, net   7    30    23    21    44  
  Acquisition and integration-related costs   1    2    -    1    1  
  Advisory fees   -    -    -    2    7  
  Third-party sales transformation costs   -    -    2    3    -  
  Share-based compensation   4    4    4    4    4  
  Resolution of certain legal matters   -    -    -    51    2  
                           
 Non-GAAP Operating Income  $161   $202   $185   $162   $180  
                           
 Non-GAAP Operating Margin   16.1 %  20.0 %  19.3 %  17.9 %  20.4 %
                     
   
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,  
   2015   2015   2015   2016   2016  
                           
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Products                          
  Revenue  $494   $499   $464   $424   $398  
  Costs (exclusive of amortization of technology intangible assets) Costs (exclusive of amortization of acquired technology intangible assets)   186    173    164    156    141  
  Amortization of technology intangible assets Amortization of acquired technology intangible assets   10    9    8    7    7  
 GAAP Gross Profit   298    317    292    261    250  
 GAAP Gross Margin   60.3 %  63.5 %  62.9 %  61.6 %  62.8 %
                           
 Items excluded:                          
  Amortization of acquired technology intangible assets   10    9    8    7    7  
  Resolution of certain legal matters   -    -    -    1    1  
 Non-GAAP Gross Profit  $308   $326   $300   $269   $258  
                           
 Non-GAAP Gross Margin   62.3 %  65.3 %  64.7 %  63.4 %  64.8 %
                           
                           
Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Services                          
  Revenue  $505   $509   $494   $480   $484  
  Costs   219    210    207    200    192  
 GAAP Gross Profit   286    299    287    280    292  
 GAAP Gross Margin   56.6 %  58.7 %  58.1 %  58.3 %  60.3 %
                           
 Items excluded:                          
  None   -    -    -    -    -  
 Non-GAAP Gross Profit  $286   $299   $287   $280   $292  
                           
 Non-GAAP Gross Margin   56.6 %  58.7 %  58.1 %  58.3 %  60.3 %