Avaya Reports Second Fiscal Quarter 2015 Financial Results

SANTA CLARA, CA--(Marketwired - May 7, 2015) -

Revenue of $995 million
Operating Income of $83 million, Non-GAAP Operating Income⁽¹⁾ of $162 million
Adjusted EBITDA⁽¹⁾ of $208 million, 20.9% of revenue

Avaya reported financial results for the second fiscal quarter ended March 31, 2015.

Total revenue for the quarter was $995 million, down $84 million compared to the prior quarter. On a year over year basis revenue was down $65 million compared to the second quarter of fiscal 2014. After adjusting for fluctuations in foreign exchange rates, total revenue for the quarter was down 6 percent sequentially and 3 percent year-over-year. The sequential change was in line with recent seasonal patterns.

For the quarter, adjusted EBITDA⁽¹⁾ was $208 million which compares to adjusted EBITDA of $239 million for the prior quarter and $185 million for the second quarter of fiscal 2014. GAAP operating income was $83 million and non-GAAP operating income was $162 million which compares to non-GAAP operating income of $193 million for the prior quarter and $142 million for the second quarter of fiscal 2014. The company was free cash flow positive for the quarter, with cash and cash equivalents totaling $332 million as of March 31, 2015.

"Avaya's fiscal second quarter performance demonstrated continued execution of our company transformation and we delivered revenue which was in line with the recent sequential seasonal pattern but below our expectations. Customer demand indicators remain positive with year-over-year improvement in most operational metrics and in our net promoter score. We are also advancing our financial position with a capital structure transaction," said Kevin Kennedy, president and CEO. "Looking ahead, Avaya remains focused on our sales and marketing transformation and enhancing our portfolio of engagement solutions to increase our cloud, networking, and mid-market penetration and gain share in our existing markets."

Second Fiscal Quarter Highlights

Product book-to-bill for the quarter was greater than 1.0. Bookings for product and one-time services were essentially flat year-over-year in constant currency
The total future contracted value for private cloud and managed services increased 24 percent from the second quarter of fiscal 2014, ending the quarter at over $800 million
Revenue of $995 million, down by $84 million when compared to the prior quarter, of which $16 million was due to exchange rate fluctuations, and also down by $65 million when compared to the second quarter of fiscal 2014, of which $33 million was due to exchange rate fluctuations
Gross margin was 59.5% compared to 59.1% for the prior quarter and 56.3% for the second quarter of fiscal 2014
Non-GAAP gross margin was 60.2% compared to 60.1% for the prior quarter and 58.6% for the second quarter of fiscal 2014
Operating income was $83 million which compares to operating income of $104 million for the prior quarter and breakeven operating income for the second quarter of fiscal 2014
Non-GAAP operating income was $162 million compared to non-GAAP operating income of $193 million for the prior quarter and $142 million for the second quarter of fiscal 2014
Adjusted EBITDA was $208 million or 20.9% of revenue compared to $239 million or 22.2% of revenue for the prior quarter and $185 million or 17.5% of revenue for the second quarter of fiscal 2014
For the second fiscal quarter, percentage of revenue by geography was:
- U.S. - 53%
- EMEA - 27%
- 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 3:00 p.m. PDT on May 7, 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). 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 877-876-9177 in the U.S. or Canada and 785-424-1666 for international callers, using the conference ID: AVQ215. 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 6:00 p.m. PDT on May 7 through June 7, 2015, by dialing 800-757-4761 within the United States or 402-220-7215 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 and include statements about our anticipated capital structure transaction. 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 2015 see our Form 8-K filed with the SEC on February 9, 2015 at www.sec.gov.


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

			Three months ended March 31,						Six months ended March 31,
			2015			2014			2015			2014
REVENUE
	Products		$	487		$	532		$	1,036		$	1,106
	Services			508			528			1,038			1,085
				995			1,060			2,074			2,191
COSTS
	Products:
		Costs (exclusive of amortization of acquired technology intangible assets)		182			206			385			434
		Amortization of acquired technology intangible assets		7			14			16			28
	Services			214			243			443			492
				403			463			844			954
GROSS PROFIT				592			597			1,230			1,237

OPERATING EXPENSES
	Selling, general and administrative			356			397			730			790
	Research and development			86			101			174			196
	Amortization of acquired intangible assets			57			57			114			115
	Restructuring charges, net			10			42			25			49
				509			597			1,043			1,150
OPERATING INCOME				83			-			187			87

	Interest expense			(110	)		(116	)		(222	)		(235	)
	Loss on extinguishment of debt			-			(4	)		-			(4	)
	Other (expense) income, net			(1	)		(2	)		13			(1	)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES				(28	)		(122	)		(22	)		(153	)
Benefit from (provision for) income taxes of continuing operations				6			(1	)		3			(27	)
LOSS FROM CONTINUING OPERATIONS				(22	)		(123	)		(19	)		(180	)
Income from discontinued operations, net of income taxes				-			27			-			30
NET LOSS			$	(22	)	$	(96	)	$	(19	)	$	(150	)


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

		March 31, 2015			September 30, 2014
ASSETS
Current assets:
	Cash and cash equivalents	$	332		$	322
	Accounts receivable, net		688			745
	Inventory		190			197
	Deferred income taxes, net		23			24
	Other current assets		216			211
TOTAL CURRENT ASSETS			1,449			1,499
	Property, plant and equipment, net		278			281
	Deferred income taxes, net		47			52
	Acquired intangible assets, net		1,093			1,224
	Goodwill		4,053			4,047
	Other assets		91			99
TOTAL ASSETS		$	7,011		$	7,202

LIABILITIES
Current liabilities:
	Debt maturing within one year	$	19		$	19
	Accounts payable		384			416
	Payroll and benefit obligations		217			228
	Deferred revenue		722			668
	Business restructuring reserve, current portion		95			86
	Other current liabilities		235			254
TOTAL CURRENT LIABILITIES			1,672			1,671

	Long-term debt		5,920			5,949
	Pension obligations		1,395			1,535
	Other postretirement obligations		266			273
	Deferred income taxes, net		255			249
	Business restructuring reserve, non-current portion		70			119
	Other liabilities		410			475
TOTAL NON-CURRENT LIABILITIES			8,316			8,600

Commitments and contingencies

STOCKHOLDER'S DEFICIENCY
	Common stock		-			-
	Additional paid-in capital		2,973			2,962
	Accumulated deficit		(4,850	)		(4,831	)
	Accumulated other comprehensive loss		(1,100	)		(1,200	)
TOTAL STOCKHOLDER'S DEFICIENCY			(2,977	)		(3,069	)
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY		$	7,011		$	7,202


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

			Six months ended March 31,
			2015			2014
Net cash (used for) provided by:
	Net loss		$	(19	)	$	(150	)
	Income from discontinued operations, net of income taxes			-			30
	Loss from continuing operations			(19	)		(180	)
		Adjustments to loss from continuing operations for non-cash items		184			240
		Changes in operating assets and liabilities		(20	)		(28	)
		Continuing operating activities		145			32
		Discontinued operating activities		-			4
	Operating activities			145			36
	Investing activities			(60	)		89
	Financing activities			(46	)		(28	)
	Effect of exchange rate changes on cash and cash equivalents			(29	)		(1	)
Net increase in cash and cash equivalents				10			96
Cash and cash equivalents at beginning of period				322			288
Cash and cash equivalents at end of period			$	332		$	384


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

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

						Revenue by Segment
$	450	$	520	$	481	GCS		$	440	$	476	44	%	45	%	$	(36	)	-8	%	-5	%
	61		59		68	Networking			47		56	5	%	5	%		(9	)	-16	%	-14	%
	511		579		549	Total ECS product revenue			487		532	49	%	50	%		(45	)	-8	%	-6	%
	543		547		530	AGS			508		528	51	%	50	%		(20	)	-4	%	0	%
$	1,054	$	1,126	$	1,079	Total revenue		$	995	$	1,060	100	%	100	%	$	(65	)	-6	%	-3	%


						Revenue by Geography
$	543	$	588	$	572	U.S.		$	531	$	532	53	%	50	%	$	(1	)	0	%	0	%
						International:
	297		321		301		EMEA		266		313	27	%	29	%		(47	)	-15	%	-8	%
	108		111		101		APAC - Asia Pacific		104		112	11	%	11	%		(8	)	-7	%	-5	%
	106		106		105		Americas International - Canada and Latin America		94		103	9	%	10	%		(9	)	-9	%	0	%
	511		538		507	Total International			464		528	47	%	50	%		(64	)	-12	%	-6	%
$	1,054	$	1,126	$	1,079	Total revenue		$	995	$	1,060	100	%	100	%	$	(65	)	-6	%	-3	%

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 March 31,						Six months ended March 31,
		2015			2014			2015			2014
Loss from continuing operations		$	(22	)	$	(123	)	$	(19	)	$	(180	)
	Interest expense		110			116			222			235
	Interest income		(1	)		(1	)		(1	)		(1	)
	(Benefit from) provision for income taxes		(6	)		1			(3	)		27
	Depreciation and amortization		92			118			186			237
EBITDA			173			111			385			318
	Restructuring charges, net		10			42			25			49
	Sponsors' fees		2			2			4			4
	Integration-related costs		-			2			1			4
	Loss on extinguishment of debt		-			4			-			4
	Third-party fees expensed in connection with the debt modification		-			2			-			2
	Non-cash share-based compensation		4			8			11			14
	Change in certain tax indemnifications		-			(3	)		(9	)		(3	)
	Venezuela hyperinflationary and devaluation charges		-			2			-			2
	Loss (gain) on foreign currency transactions		1			2			(5	)		-
	Pension/OPEB/nonretirement postemployment benefits and long-term disability costs		17			13			34			26
	Other		1			-			1			2
Adjusted EBITDA		$	208		$	185		$	447		$	422


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

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

Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin
	Gross Profit - Adjusted for discontinued operations		$	597		$	607		$	655		$	638		$	592
	Gross Margin - Adjusted for discontinued operations			56.3	%		57.6	%		58.2	%		59.1	%		59.5	%

	Items excluded:
		Amortization of acquired technology intangible assets		14			14			14			9			7
		Share-based compensation		4			3			3			2			-
		Incremental accelerated depreciation associated with vacating a facility		6			-			-			-			-
	Non-GAAP Gross Profit - Adjusted for discontinued operations		$	621		$	624		$	672		$	649		$	599

	Non-GAAP Gross Margin - Adjusted for discontinued operations			58.6	%		59.2	%		59.7	%		60.1	%		60.2	%


Reconciliation of Non-GAAP Operating Income
	Operating Income - Adjusted for discontinued operations		$	-		$	48		$	62		$	104		$	83
		Percentage of Revenue		0.0	%		4.6	%		5.5	%		9.6	%		8.3	%

	Items excluded:
		Amortization of acquired intangible assets		71			70			70			66			64
		Restructuring and impairment charges, net		42			45			71			15			10
		Integration-related costs		2			1			3			1			-
		Divestiture-related costs		-			2			-			-			-
		Share-based compensation		8			6			5			7			4
		Incremental accelerated depreciation associated with vacating certain facilities		19			-			-			-			-
		Resolution of certain legal matters		-			8			-			-			-
		Other		-			-			1			-			1

	Non-GAAP Operating Income - Adjusted for discontinued operations		$	142		$	180		$	212		$	193		$	162

	Non-GAAP Operating Margin - Adjusted for discontinued operations			13.4	%		17.1	%		18.8	%		17.9	%		16.3	%


Avaya Inc.
Supplemental Schedules of Non-GAAP Reconciliation of Gross Profit and Gross Margin by Portfolio
(Unaudited; in millions)

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

Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Products
		Revenue	$	532		$	511		$	579		$	549		$	487
		Costs (exclusive of amortization of acquired technology intangible assets)		206			199			221			203			182
		Amortization of acquired technology intangible assets		14			14			14			9			7
	GAAP Gross Profit			312			298			344			337			298
	GAAP Gross Margin			58.6	%		58.3	%		59.4	%		61.4	%		61.2	%

	Items excluded:
		Amortization of acquired technology intangible assets		14			14			14			9			7
		Incremental accelerated depreciation associated with vacating a facility		3			-			-			-			-
	Non-GAAP Gross Profit		$	329		$	312		$	358		$	346		$	305

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


Reconciliation of Non-GAAP Gross Profit and Non-GAAP Gross Margin - Services
		Revenue	$	528		$	543		$	547		$	530		$	508
		Costs		243			234			236			229			214
	GAAP Gross Profit			285			309			311			301			294
	GAAP Gross Margin			54.0	%		56.9	%		56.9	%		56.8	%		57.9	%

	Items excluded:
		Share-based compensation		4			3			3			2			-
		Incremental accelerated depreciation associated with vacating a facility		3			-			-			-			-
	Non-GAAP Gross Profit		$	292		$	312		$	314		$	303		$	294

	Non-GAAP Gross Margin			55.3	%		57.5	%		57.4	%		57.2	%		57.9	%