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Avaya Reports Second Fiscal Quarter 2014 Financial Results


May 7, 2014 - SANTA CLARA, CA


  • Ongoing improvement in operational execution
  • Initiated redemption of unsecured notes due in 2015

Second Quarter 2014 Highlights:

  • Revenue of $1,060 million
  • Gross Margin of 56.3% of revenue, non-GAAP Gross Margin of 58.6% of revenue
  • Adjusted EBITDA(1) of $185 million, 17.5% of revenue

Avaya Inc., a global provider of business communications and collaboration systems, software and services, reported results for the second fiscal quarter ended March 31, 2014.

Total revenue for the second quarter was $1,060 million, down 6.3% when compared to the prior quarter. On a year over year basis revenue was down 2.4% compared to the second quarter of fiscal 2013. For the second fiscal quarter, adjusted EBITDA was $185 million which compares to adjusted EBITDA of $237 million for the prior quarter and $167 million for the second quarter of fiscal 2013. GAAP operating income was breakeven and Non-GAAP operating income was $142 million compared to non-GAAP operating income of $193 million for the prior quarter and $108 million for the second quarter of fiscal 2013. Cash and cash equivalents increased $84 million from the prior quarter and totaled $384 million as of March 31, 2014. Subsequent to the end of the second fiscal quarter, the company also announced the redemption of its senior unsecured notes due 2015 for approximately $150 million, representing the aggregate principal amount of those notes, plus accrued and unpaid interest through the May 15, 2014 redemption date.

"Avaya delivered second quarter results which reflected better than recent historical revenue seasonality. While revenue was slightly below our outlook, backlog increased and we demonstrated ongoing improvement in operational execution," said Kevin Kennedy, president and CEO. "We believe the overall market environment continues to provide growth opportunities for Avaya. Our portfolio is aligned to customers' needs and we are tuning our organization to deliver a broad set of products, software, and services."

Second Fiscal Quarter Highlights

  • Revenue of $1,060 million decreased 6.3% compared to the prior quarter and decreased 2.4% compared to the second quarter of fiscal 2013
  • Product revenue of $532 million decreased by 7.3% compared to the prior quarter and increased 0.6% compared to the second quarter of fiscal 2013. Product book-to-bill was greater than 1.0
  • Avaya Global Services revenue of $528 million decreased 5.2% compared to the prior quarter and also decreased 5.2% when compared to the second quarter of fiscal 2013
  • Gross margin was 56.3% compared to 56.6% for the prior quarter and 53.3% for the second quarter of fiscal 2013. Operating income was breakeven ($0 million) compared to operating income of $87 million for the prior quarter and compared to $12 million for the second quarter of fiscal 2013
  • Non-GAAP gross margin(1) was 58.6% compared to 58.1% for the prior quarter and 54.6% for the second quarter of fiscal 2013. Non-GAAP operating income was $142 million compared to non-GAAP operating income of $193 million for the prior quarter and $108 million for the second quarter of fiscal 2013
  • Adjusted EBITDA was $185 million or 17.5% of revenue compared to $237 million or 21.0% of revenue for the prior quarter and $167 million or 15.4% of revenue for the second quarter of fiscal 2013
  • Second fiscal quarter 2014 non-GAAP gross margin and adjusted EBITDA percentage were record levels in the second quarter of any fiscal year for the company.
  • Second fiscal quarter 2014 cash and cash equivalents totaled $384 million compared to $300 million for the prior quarter and $302 million for the second quarter of fiscal 2013
  • For the second fiscal quarter, percentage of revenue by geography was:
    • U.S. - 50%
    • Asia-Pacific - 11%
    • EMEA - 29%
    • Americas International - 10%
  • As previously, disclosed, the IT Professional Services business ("ITPS") was sold on March 31, 2014 and is reported in discontinued operations

Conference Call and Webcast
Avaya will discuss these results at 5:00 a.m. PDT on Wednesday, May 7, 2014 in a live webcast and conference call. To join the webcast, listeners should access the investor page of our website (www.avaya.com/investors). Supplementary materials will be available at the same location. Following the live webcast, a replay will be available at the same web address in our event archives.

To access the webcast by phone, dial 800-882-9327 in the U.S. or Canada and 706-645-9730 for international callers using the conference passcode number of 24442437. To ensure you are connected prior to the start, we suggest you access the website or the call 10-15 minutes before the start time.

For those unable to participate during the live event, a replay of the conference call will be available beginning at 5:00 p.m. PDT on May 7, 2014 through June 7, 2014 by dialing 855-859-2056 or 800-585-8367 within the United States and 404-537-3406 outside the United States. The replay access code is 24442437.

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 first quarter of fiscal 2014 see our Form 8-K/A filed with the SEC on April 25, 2014 at www.sec.gov.



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

For the three For the six months
months ended ended
March 31, March 31,
------------------ ------------------
2014 2013 2014 2013
-------- -------- -------- --------
REVENUE
Products $ 532 $ 529 $ 1,106 $ 1,160
Services 528 557 1,085 1,133
-------- -------- -------- --------
1,060 1,086 2,191 2,293
-------- -------- -------- --------
COSTS
Products:
Costs (exclusive of amortization
of acquired technology
intangible assets) 206 236 434 497
Amortization of acquired
technology intangible assets 14 14 28 36
Services 243 257 492 522
-------- -------- -------- --------
463 507 954 1,055
-------- -------- -------- --------
GROSS PROFIT 597 579 1,237 1,238
-------- -------- -------- --------
OPERATING EXPENSES
Selling, general and
administrative 397 379 790 760
Research and development 101 113 196 231
Amortization of intangible assets 57 57 115 115
Restructuring charges, net 42 18 49 102
-------- -------- -------- --------
597 567 1,150 1,208
-------- -------- -------- --------
OPERATING INCOME - 12 87 30
Interest expense (116) (116) (235) (224)
Loss on extinguishment of debt (4) (3) (4) (6)
Other (expense) income, net (2) 2 (1) (4)
-------- -------- -------- --------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (122) (105) (153) (204)
(Provision for) benefit from income
taxes of continuing operations (1) (7) (27) 3
-------- -------- -------- --------
LOSS FROM CONTINUING OPERATIONS (123) (112) (180) (201)
Income (loss) from discontinued
operations, net of income taxes 27 (80) 30 (76)
-------- -------- -------- --------
NET LOSS $ (96) $ (192) $ (150) $ (277)
======== ======== ======== ========



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

March 31, September 30,
2014 2013
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 384 $ 288
Accounts receivable, net 659 702
Inventory 222 245
Deferred income taxes, net 62 52
Other current assets 252 241
Assets of discontinued operations - 59
------------- -------------
TOTAL CURRENT ASSETS 1,579 1,587
------------- -------------
Property, plant and equipment, net 261 334
Deferred income taxes, net 28 34
Intangible assets, net 1,368 1,497
Goodwill 4,058 4,048
Other assets 153 172
------------- -------------
TOTAL ASSETS $ 7,447 $ 7,672
============= =============
LIABILITIES
Current liabilities:
Debt maturing within one year $ 32 $ 35
Accounts payable 390 401
Payroll and benefit obligations 225 251
Deferred revenue 692 671
Business restructuring reserve, current
portion 70 92
Other current liabilities 273 256
Liabilities of discontinued operations - 19
------------- -------------
TOTAL CURRENT LIABILITIES 1,682 1,725
------------- -------------
Long-term debt 6,026 6,051
Pension obligations 1,458 1,510
Other postretirement obligations 277 290
Deferred income taxes, net 255 237
Business restructuring reserve, non-current
portion 80 78
Other liabilities 475 450
------------- -------------
TOTAL NON-CURRENT LIABILITIES 8,571 8,616
------------- -------------
Commitments and contingencies
STOCKHOLDER'S DEFICIENCY
Common stock - -
Additional paid-in capital 2,951 2,937
Accumulated deficit (4,750) (4,600)
Accumulated other comprehensive loss (1,007) (1,006)
------------- -------------
TOTAL STOCKHOLDER'S DEFICIENCY (2,806) (2,669)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY $ 7,447 $ 7,672
============= =============



Avaya Inc.
Condensed Statements of Cash Flows
(Unaudited; in millions)

For the six months ended
March 31,
----------------------------
2014 2013
------------- -------------
Net cash (used for) provided by:
Net loss $ (150) $ (277)
Income (loss) from discontinued operations,
net of income taxes 30 (76)
------------- -------------
Loss from continuing operations (180) (201)
Adjustments to net loss for non-cash items 240 212
Changes in operating assets and
liabilities (28) 68
------------- -------------
Continuing operating activities 32 79
Discontinued operating activities 4 9
------------- -------------
Operating activities 36 88
------------- -------------
Continuing investing activities (9) (59)
Discontinued investing activities 98 -
------------- -------------
Investing activities 89 (59)
Financing activities (28) (59)
Effect of exchange rate changes on cash and
cash equivalents (1) (5)
------------- -------------
Net increase (decrease) in cash and cash
equivalents 96 (35)
Cash and cash equivalents at beginning of
period 288 337
------------- -------------
Cash and cash equivalents at end of period $ 384 $ 302
============= =============



 Avaya Inc. Supplemental Schedules of Revenue (Unaudited; in millions) For the Three Months Ended For the Three Months Ended March 31,-------------------- ------------------------------------- June Sept. Dec. 30, 30, 31, Revenues Mix Change ------------- --------- ------------ 2013 2013 2013 2014 2013 2014 2013 Amount Pct.------ ------ ------ ------ ------ ---- ---- ------ ---- Revenue by Segment Global Communications$ 497 $ 553 $ 507 Solutions $ 476 $ 473 45% 44% $ 3 0.6% Purchase accounting (1) - - adjustments - - 0% 0% - - 64 64 67 Networking 56 56 5% 5% - 0.0%------ ------ ------ ------ ------ ---- ---- ------ ---- Total ECS 560 617 574 product revenue 532 529 50% 49% 3 0.6% 556 552 557 AGS 528 557 50% 51% (29) -5.2%------ ------ ------ ------ ------ ---- ---- ------ ----$1,116 $1,169 $1,131 Total revenue $1,060 $1,086 100% 100% $ (26) -2.4%====== ====== ====== ====== ====== ==== ==== ====== ==== Revenue by Geography$ 605 $ 628 $ 604 U.S. $ 532 $ 560 50% 52% $ (28) -5.0%------ ------ ------ ------ ------ ---- ---- ------ ---- International: 297 313 303 EMEA 313 298 29% 27% 15 5.0% APAC - Asia 105 113 114 Pacific 112 116 11% 11% (4) -3.4% Americas International - Canada and 109 115 110 Latin America 103 112 10% 10% (9) -8.0%------ ------ ------ ------ ------ ---- ---- ------ ---- Total 511 541 527 International 528 526 50% 48% 2 0.4%------ ------ ------ ------ ------ ---- ---- ------ ----$1,116 $1,169 $1,131 Total Revenue $1,060 $1,086 100% 100% $ (26) -2.4%====== ====== ====== ====== ====== ==== ==== ====== ==== 

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) For the three For the six months months ended ended March 31, March 31, ------------------ ------------------ 2014 2013 2014 2013 -------- -------- -------- --------Loss from continuing operations $ (123) $ (112) $ (180) $ (201) Interest expense 116 116 235 224 Interest income (1) - (1) (1) Provision for (benefit from) income taxes 1 7 27 (3) Depreciation and amortization 118 107 237 222 -------- -------- -------- --------EBITDA 111 118 318 241 Restructuring charges, net 42 18 49 102 Sponsors' fees 2 2 4 4 Integration-related costs 2 5 4 9 Loss on extinguishment of debt 4 3 4 6 Third-party fees expensed in connection with the debt modification 2 14 2 18 Non-cash share-based compensation 8 1 14 3 Reversal of tax indemnification reserve (3) - (3) - Venezuela hyperinflationary and devaluation charges 2 1 2 1 Other - - 2 - Loss (gain) on foreign currency transactions 2 (17) - (15) Pension/OPEB/nonretirement postemployment benefits and long-term disability costs 13 22 26 45 -------- -------- -------- --------Adjusted EBITDA $ 185 $ 167 $ 422 $ 414 ======== ======== ======== ======== Avaya Inc. Supplemental Schedules of Non-GAAP Reconciliations (Unaudited; in millions) For the Three Months Ended ------------------------------------------------ Sept. Mar. 31, June 30, 30, Dec. 31, Mar. 31, 2013 2013 2013 2013 2014 -------- -------- -------- -------- --------Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin Gross Profit - Adjusted for discontinued operations $ 579 $ 618 $ 674 $ 640 $ 597 Gross Margin - Adjusted for discontinued operations 53.3% 55.4% 57.7% 56.6% 56.3% Items excluded: Amortization of acquired technology intangible assets 14 13 14 14 14 Impairment of capitalized software development costs - 1 - - - Share-based compensation - 2 2 3 4 Incremental accelerated depreciation associated with vacating a facility - - - - 6 Purchase accounting adjustments to revenue - 1 - - - -------- -------- -------- -------- -------- Non-GAAP Gross Profit - Adjusted for discontinued operations $ 593 $ 635 $ 690 $ 657 $ 621 ======== ======== ======== ======== ======== Non-GAAP Gross Margin - Adjusted for discontinued operations 54.6% 56.8% 59.0% 58.1% 58.6% ======== ======== ======== ======== ======== Reconciliation of Non-GAAP Operating Income Operating Income - Adjusted for discontinued operations $ 12 $ 6 $ 109 $ 87 $ - Percentage of Revenue 1% 1% 9% 8% 0% Items excluded: Amortization of acquired assets 71 70 70 72 71 Restructuring and impairment charges, net 18 63 35 7 42 Acquisition/integration -related costs 6 5 4 3 2 Share-based compensation 1 4 4 6 8 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 - - - Purchase accounting adjustments to revenue - 1 - - - -------- -------- -------- -------- -------- Non-GAAP Operating Income - Adjusted for discontinued operations $ 108 $ 163 $ 240 $ 193 $ 142 ======== ======== ======== ======== ======== Non-GAAP Operating Margin - Adjusted for discontinued operations 9.9% 14.6% 20.5% 17.1% 13.4% ======== ======== ======== ======== ======== Avaya Inc.Supplemental Schedules of Non-GAAP Reconciliation of Gross Profit and Gross Margin by Portfolio (Unaudited; in millions) For the Three Months Ended ------------------------------------------------ Sept. Mar. 31, June 30, 30, Dec. 31, Mar. 31, 2013 2013 2013 2013 2014 -------- -------- -------- -------- --------Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Products Revenue $ 529 $ 560 $ 617 $ 574 $ 532 Costs (exclusive of amortization of acquired technology intangible assets) 236 234 232 228 206 Amortization of acquired technology intangible assets 14 13 14 14 14 -------- -------- -------- -------- -------- GAAP Gross Profit 279 313 371 332 312 GAAP Gross Margin 52.7% 55.9% 60.1% 57.8% 58.6% Items excluded: Amortization of acquired technology intangible assets 14 13 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 $ 293 $ 328 $ 385 $ 346 $ 329 ======== ======== ======== ======== ======== Non-GAAP Gross Margin 55.4% 58.5% 62.4% 60.3% 61.8% ======== ======== ======== ======== ======== Reconciliation of Non-GAAP Gross Profitand Non-GAAP Gross Margin - Services Revenue $ 557 $ 556 $ 552 $ 557 $ 528 Costs 257 251 249 249 243 -------- -------- -------- -------- -------- GAAP Gross Profit 300 305 303 308 285 GAAP Gross Margin 53.9% 54.9% 54.9% 55.3% 54.0% Items excluded: Share-based compensation - 2 2 3 4 Incremental accelerated depreciation associated with vacating a facility - - - - 3 -------- -------- -------- -------- -------- Non-GAAP Gross Profit $ 300 $ 307 $ 305 $ 311 $ 292 ======== ======== ======== ======== ======== Non-GAAP Gross Margin 53.9% 55.2% 55.3% 55.8% 55.3% ======== ======== ======== ======== ======== 

Media Inquiries:
Deb Kline
908-953-6179 (office)
klined@avaya.com

Investor Inquiries:
Matthew Booher
908-953-7500 (office)
mbooher@avaya.com

John Nunziati
408-562-3780 (office)
jfnunziati@avaya.com

MarketWire

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