Avaya Reports First Quarter Fiscal 2019 Financial Results

  • GAAP revenue was $738 million; Non-GAAP revenue was $748 million
  • GAAP operating margin of 6.8%; Non-GAAP operating margin of 22.7%
  • Midmarket cloud revenue grew over 150% year-over-year
  • Strong large deal activity with 3 deals over $10 million, 10 over $5
    million, and 83 over $1 million

SANTA CLARA, Calif.–(BUSINESS WIRE)–Avaya Holdings Corp. (NYSE: AVYA) today reported financial results for
the first quarter ended December 31, 2018.

         
GAAP (1) Non-GAAP (2)
(In millions, except percentages)     Q1 2019     Q4 2018     Q1 2018 Q1 2019     Q4 2018     Q1 2018
Revenue $ 738 $ 735 $ 752 $ 748 $ 770 $ 775
Gross margin 55.1 % 53.1 % 58.5 % 62.7 % 63.4 % 62.6 %
Operating margin 6.8 % 1.5 % 5.1 % 22.7 % 20.4 % 22.2 %
 

“We demonstrated another quarter of operational excellence, setting
records across several key performance metrics. However, our revenue was
impacted by a few discrete items versus our outlook, which included the
federal government shutdown. That said, our product portfolio has never
been stronger, and our cloud solutions continue to win the support of
our customers, who are choosing Avaya for the innovative solutions that
we are bringing to market,” said Jim Chirico, President and CEO of Avaya.

First Quarter Fiscal 2019 Financial Results:

  • On October 1, 2018, Avaya adopted the new revenue recognition
    standard, Accounting Standards Codification 606 (“ASC 606”), using the
    modified retrospective transition method. Accordingly, results for
    reporting periods beginning after September 30, 2018 are presented
    under ASC 606 while prior period financial information is not adjusted
    and continues to be reported in accordance with GAAP that existed
    prior to the adoption of ASC 606 (“ASC 605”).
  • GAAP revenue was $738 million, $3 million higher than the fourth
    quarter of fiscal 2018, and $14 million lower than the Combined first
    quarter of fiscal 2018(1) ended December 31, 2017. Non-GAAP
    revenue(2) was $748 million, $22 million lower than the
    fourth quarter of fiscal 2018, and $27 million lower than the Combined
    first quarter of fiscal 2018.
  • GAAP gross margin was 55.1% compared to 53.1% for the fourth quarter
    of fiscal 2018 and 58.5% for the Combined first quarter of fiscal 2018(1).
    Non-GAAP gross margin(2) was 62.7%, compared to 63.4% for
    the fourth quarter of fiscal 2018 and 62.6% for the Combined first
    quarter of fiscal 2018.
  • GAAP operating income was $50 million, compared to GAAP operating
    income of $11 million for the fourth quarter of fiscal 2018 and $38
    million for the Combined first quarter of fiscal 2018(1).
    Non-GAAP operating income(2) was $170 million, compared to
    $157 million for the fourth quarter of fiscal 2018, and $172 million
    for the Combined first quarter of fiscal 2018.
  • GAAP net income was $9 million, compared to $268 million for the
    fourth quarter of fiscal 2018, and $3,214 million for the Combined
    first quarter of fiscal 2018(1).
  • Adjusted EBITDA(2) was $189 million or 25.3% of non-GAAP
    revenue, compared to adjusted EBITDA of $178 million, or 23.1% of
    non-GAAP revenue, for the fourth quarter of fiscal 2018 and $206
    million, or 26.6% of non-GAAP revenue, for the Combined first quarter
    of fiscal 2018.
  • Cash provided by operating activities was $86 million, compared to
    cash provided by operating activities of $25 million for the fourth
    quarter of fiscal 2018 and cash used for operating activities of $374
    million for the Combined first quarter of fiscal 2018(1).
  • At the end of the first quarter of fiscal 2019, cash and cash
    equivalents totaled $743 million, compared to $700 million at the end
    of the fourth quarter of fiscal 2018 and $417 million at the end of
    the Combined first quarter of fiscal 2018.

(1) Due to the company’s emergence from Chapter 11
proceedings during the first quarter of fiscal 2018 and adoption of
fresh start accounting effective on December 15, 2017, the results for
the first quarter fiscal year 2018 are required by GAAP to be presented
separately as the predecessor period from October 1, 2017 through
December 15, 2017 (the “Predecessor” period) and the successor period
from December 16, 2017 through December 31, 2017 (the “Successor”
period). The application of fresh start accounting results in a new
basis of accounting, making the results of the Predecessor period not
comparable to the results of the Successor period. Where applicable we
have, however, combined results of the Predecessor and Successor periods
for discussion purposes as we believe it provides the most meaningful
basis to analyze our period over period results. Refer to the
Supplemental Financial Information accompanying this press release for
more information, including a reconciliation of combined results to our
Predecessor and Successor results.

(2) Non-GAAP revenue, Non-GAAP gross margin, Non-GAAP
operating margin, Non-GAAP operating income and adjusted EBITDA are not
measures calculated in accordance with generally accepted accounting
principles in the U.S. (“GAAP”). Refer to the Supplemental Financial
Information accompanying this press release for more information,
including a reconciliation of these measures to the most closely
comparable measure calculated in accordance with GAAP.

Note: We define the midmarket as firms with between 250 and 1,000
agents for CC and between 1,000 and 5,000 employees for UC

First Quarter Fiscal 2019 Business Metrics

  • Total Contract Value increased 8% year-over-year to $2.4 billion
  • 83% of Non-GAAP revenue was Software & Services
  • 61% of Non-GAAP product revenue was Software
  • 57% of Non-GAAP revenue was Recurring
  • Added approximately 1,600 new logos
  • Generated $65 million in free cash flow*

*Note: We define free cash flow as cash flow from operating activities
less capital expenditures

First Quarter Fiscal 2019 Company Highlights

  • Introduced new Private Cloud Solutions for Unified Communications and
    Contact Center
  • Launched a new online storefront that simplifies access to UCaaS and
    CCaaS solutions
  • Announced a new Device-as-a-Service (DaaS) offering
  • Delivered public safety breakthrough with next generation location
    reporting solutions for emergency responders
  • Enhanced channel partner program with increased focus on solution
    selling, simplification, and cloud offerings
  • Expanded Avaya A.I. Connect ecosystem with new partners and offers
    using AI and machine learning technologies for Unified Communications
    and Contact Center
  • Extended Workforce Engagement Management (WEM) with Verint Systems for
    the new Avaya OneCloud WEM
  • Won the 2018 Aragon Research Innovation Award for Artificial
    Intelligence (AI) in People-Centric Collaboration

Financial Outlook – Q2 Fiscal 2019 under ASC 606

Our financial outlook reflects the adoption of ASC 606, which became
effective for Avaya on October 1, 2018. Avaya has adopted ASC 606 using
the modified retrospective transition method.

  • GAAP revenue of $730-$760 million; non-GAAP revenue of $740-$765
    million
  • GAAP operating margin of 5.5-8.0% of revenue; non-GAAP operating
    margin of 21.5-22.5%
  • GAAP operating income of $40-$60 million, non-GAAP operating income of
    $159-$172 million
  • Cash taxes of approximately $30 million, +/- $3 million
  • Adjusted EBITDA of $178-$191 million, or adjusted EBITDA margin of
    24.0-25.0% of non-GAAP revenue
  • Approximately 111 million shares outstanding

Financial Outlook – Fiscal 2019 under ASC 606

  • GAAP revenue of $3.01-$3.12 billion, non-GAAP revenue of $3.05-$3.15
    billion
  • GAAP and non-GAAP R&D of $220-$225 million; 15-16% of non-GAAP product
    revenue
  • Operating income of $200-$280 million, non-GAAP operating income of
    $675-$730 million; 22-23% of non-GAAP revenue
  • Adjusted EBITDA $763-$819 million, or 25-26% of non-GAAP revenue
  • Approximately 113 million shares outstanding

Avaya’s outlook does not include the potential impact of any business
combinations, asset acquisitions, divestitures, strategic investments,
or other significant transactions that may be completed after
February 11, 2019. Actual results may differ materially from Avaya’s
outlook as a result of, among other things, the factors described under
“Forward-Looking Statements” below.

Conference Call and Webcast

Avaya will host a webcast and conference call to discuss its financial
results and Q&A at 8:30 AM ET/5:30 AM PT on February 11, 2019. On the
call will be Jim Chirico, President and CEO, and Pat O’Malley, Senior
Vice President and CFO. The call will be moderated by Mike McCarthy,
Vice President of Investor Relations.

To join the financial results live webcast and view supplementary
materials including an earnings presentation and CFO commentary,
listeners should access the investor page of Avaya’s website https://investors.avaya.com.
Following the live webcast, a replay will be available in the event
archives at the same web address for a period of one year.

To access the financial results call live by phone, dial +1-866-393-4306
in the U.S. or Canada and +1-734-385-2616 for international callers.
Listeners should access the webcast or the call 10-15 minutes before the
start time to ensure they are able to connect.

A replay of the financial results live conference call will be available
for two business days soon after the call by phone by dialing
+1-855-859-2056 in the U.S. or Canada and +1-404-537-3406 for
international callers, using the conference access code: 3187748.

Links to this financial results press release and accompanying slides
are available on the investor page of Avaya’s website https://investors.avaya.com.

About Avaya

Businesses are built on the experiences they provide, and every day
millions of those experiences are built by Avaya (NYSE: AVYA). For over
one hundred years, we’ve enabled organizations around the globe to win –
by creating intelligent communications experiences for customers and
employees. Avaya builds open, converged and innovative solutions to
enhance and simplify communications and collaboration – in the cloud,
on-premise or a hybrid of both. To grow your business, we’re committed
to innovation, partnership, and a relentless focus on what’s next. We’re
the technology company you trust to help you deliver Experiences that
Matter. Visit us at www.avaya.com.

Cautionary Note Regarding Forward-Looking Statements

This document contains certain “forward-looking statements.” All
statements other than statements of historical fact are
“forward-looking” statements for purposes of the U.S. federal and state
securities laws. 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,” “preliminary,” “predict,” “should,” “will,” or
“would” or the negative thereof or other variations thereof or
comparable terminology and include, but are not limited to, the outlook
for the second quarter of fiscal 2019 and fiscal year 2019, including
the expected impact of the adoption of ASC 606. The company has based
these forward-looking statements on its current expectations,
assumptions, estimates and projections. While the company believes these
expectations, assumptions, estimates and projections are reasonable,
such forward-looking statements are only predictions and involve known
and unknown risks and uncertainties, many of which are beyond its
control. These factors are discussed in the Company’s Annual Report on
Form 10-K filed with the Securities and Exchange Commission (the “SEC”),
and may cause its 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 further
list and description of such risks and uncertainties, please refer to
the company’s filings with the SEC that are available at
www.sec.gov.
The company cautions you that the list of important factors included in
the company’s SEC filings may not contain all of the material factors
that are important to you. In addition, in light of these risks and
uncertainties, the matters referred to in the forward-looking statements
contained in this report may not in fact occur. The company undertakes
no obligation to publicly update or revise any forward-looking statement
as a result of new information, future events or otherwise, except as
otherwise required by law.

 

Avaya Holdings Corp.

Condensed Consolidated Statements of Operations (Unaudited)

(In millions, except per share amounts)

 
      Successor       Predecessor    

Non-GAAP
Combined

Three months
ended
December 31,
2018

   

Period from
December 16, 2017
through
December
31, 2017

Period from
October 1, 2017
through
December
15, 2017

Three months
ended
December 31,
2017

REVENUE
Products $ 324 $ 71 $ 253 $ 324
Services 414   77   351   428  
738   148   604   752  
COSTS
Products:
Costs 115 33 84 117
Amortization of technology intangible assets 43 7 3 10
Services 173   30   155   185  
331   70   242   312  
GROSS PROFIT 407   78   362   440  
OPERATING EXPENSES
Selling, general and administrative 257 50 264 314
Research and development 53 9 38 47
Amortization of intangible assets 40 7 10 17
Restructuring charges, net 7   10   14   24  
357   76   326   402  
OPERATING INCOME 50 2 36 38
Interest expense (60 ) (9 ) (14 ) (23 )
Other income (expense), net 22 (2 ) (2 ) (4 )
Reorganization items, net     3,416   3,416  
INCOME (LOSS) BEFORE INCOME TAXES 12 (9 ) 3,436 3,427
(Provision for) benefit from income taxes (3 ) 246   (459 ) (213 )
NET INCOME $ 9   $ 237   $ 2,977   $ 3,214  
 

Avaya Holdings Corp.

Condensed Consolidated Balance Sheets (Unaudited)

(In millions, except per share and shares amounts)

 

     

December 31,
2018

   

September 30,
2018

ASSETS
Current assets:
Cash and cash equivalents $ 743 $ 700
Accounts receivable, net 327 377
Inventory 68 81
Contract assets 120
Contract costs 118
Other current assets 106   170
TOTAL CURRENT ASSETS 1,482 1,328
Property, plant and equipment, net 239 250
Deferred income taxes, net 28 29
Intangible assets, net 3,149 3,234
Goodwill 2,764 2,764
Other assets 97   74
TOTAL ASSETS $ 7,759   $ 7,679
LIABILITIES
Current liabilities:
Debt maturing within one year $ 29 $ 29
Accounts payable 295 266
Payroll and benefit obligations 121 145
Contract liabilities 482 484
Business restructuring reserve 50 51
Other current liabilities 152   148
TOTAL CURRENT LIABILITIES 1,129   1,123
Non-current liabilities:
Long-term debt, net of current portion 3,095 3,097
Pension obligations 652 671
Other post-retirement obligations 177 176
Deferred income taxes, net 161 140
Business restructuring reserve 43 47
Other liabilities 370   374
TOTAL NON-CURRENT LIABILITIES 4,498   4,505
TOTAL LIABILITIES 5,627   5,628
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value; 55,000,000 shares authorized, no
shares issued or outstanding at December 31, 2018 and September 30,
2018
Common stock, $0.01 par value; 550,000,000 shares authorized;
110,708,203 shares issued and 110,695,523 shares outstanding at
December 31, 2018; and 110,218,653 shares issued and 110,012,790
shares outstanding at September 30, 2018
1 1
Additional paid-in capital 1,745 1,745
Retained earnings 388 287
Accumulated other comprehensive (loss) income (2 ) 18
TOTAL STOCKHOLDERS’ EQUITY 2,132   2,051
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 7,759   $ 7,679
 

Avaya Holdings Corp.

Condensed Statements of Cash Flows

(Unaudited; in millions)

 
      Successor       Predecessor    

Non-GAAP
Combined

Three months
ended
December 31,
2018

   

Period from
December 16, 2017
through
December
31, 2017

Period from
October 1, 2017
through
December
15, 2017

Three months
ended
December 31,
2017

Net cash provided by (used for):
Operating activities $ 86 $ 40 $ (414 ) $ (374 )
Investing activities (22 ) (2 ) (13 ) (15 )
Financing activities (18 ) (102 ) (102 )
Effect of exchange rate changes on cash, cash equivalents, and
restricted cash
(3 ) 3   (2 ) 1  
Net increase (decrease) in cash, cash equivalents, and restricted
cash
43 41 (531 ) (490 )
Cash, cash equivalents, and restricted cash at beginning of period 704   435   966   966  
Cash, cash equivalents, and restricted cash at end of period $ 747   $ 476   $ 435   $ 476  
 

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 the combined three month period ending December 31,
2017 and financial measures labeled as “non-GAAP” or “adjusted.”

Although GAAP requires that we report on our results for the periods
October 1, 2017 through December 15, 2017 and December 16, 2017 through
December 31, 2017, separately, management reviews the company’s
operating results for the three months ended December 31, 2017 by
combining the results of these periods because such presentation
provides the most meaningful comparison of our results. The company
cannot adequately benchmark the operating results of the 16-day period
ended December 31, 2017 against any of the previous periods reported in
its condensed consolidated financial statements and does not believe
that reviewing the results of this period in isolation would be useful
in identifying any trends regarding the company’s overall performance.
Management believes that the key performance metrics such as revenue,
gross margin and operating income, among others, when combined for the
three months ended December 31, 2017 provide meaningful comparisons to
other periods and are useful in identifying current business trends.

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 described in our SEC filings and the tables below.

We believe that including supplementary information concerning adjusted
EBITDA is appropriate because it serves as a basis for determining
management and employee compensation and it is used as a basis for
calculating covenants in our credit agreements. In addition, we believe
adjusted EBITDA provides more comparability between our historical
results and results that reflect purchase accounting and our current
capital structure. We also present EBITDA and adjusted EBITDA because we
believe analysts and investors utilize these measures in analyzing our
results. 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. However, 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), however, these are expenses that may recur, may vary
and are difficult to predict.

We also present the measures non-GAAP revenue, non-GAAP gross margin,
non-GAAP operating margin and non-GAAP operating income, as a supplement
to our unaudited condensed consolidated financial statements presented
in accordance with GAAP. We believe these non-GAAP measures are the most
meaningful for period to period comparisons because they exclude the
impact of the earnings and charges noted in the applicable tables below
that resulted from matters that we consider not to be indicative of our
ongoing operations.

The presentation of these non-GAAP financial measures is not intended to
be considered in isolation from, as substitute for, or superior to, the
financial information prepared and presented in accordance with GAAP,
and may be different from the non-GAAP financial measures used by other
companies. In addition, these non-GAAP measures have limitations in that
they do not reflect all of the amounts associated with the company’s
results of operations as determined in accordance with GAAP.

We do not provide a forward-looking reconciliation of expected second
quarter and full year fiscal 2019 adjusted EBITDA, Non-GAAP operating
income, Non-GAAP R&D or Non-GAAP revenue guidance as the amount and
significance of special items required to develop meaningful comparable
GAAP financial measures cannot be estimated at this time without
unreasonable efforts. These special items could be meaningful.

The following tables present Successor, Predecessor and combined results
and reconcile historical GAAP measures to non-GAAP measures.

 

Avaya Holdings Corp.

Supplemental Schedules of Non-GAAP Adjusted EBITDA

(Unaudited; in millions)

 
      Successor       Predecessor    

Non-GAAP
Combined

Three months
ended
December 31, 2018

   

Period from
December 16, 2017
through
December
31, 2017

Period from
October 1, 2017
through
December
15, 2017

Three months
ended
December 31, 2017

Net income $ 9 $ 237 $ 2,977 $ 3,214
Interest expense 60 9 14 23
Interest income (3 ) (2 ) (2 )
Provision for (benefit from) income taxes 3 (246 ) 459 213
Depreciation and amortization 117   22   31   53  
EBITDA 186 22 3,479 3,501
Impact of fresh start accounting adjustments 3 27 27
Restructuring charges, net 7 10 14 24
Advisory fees 1 8 3 11
Acquisition-related costs 3
Reorganization items, net (3,416 ) (3,416 )
Non-cash share-based compensation 6 1 1
Loss on sale/disposal of long-lived assets, net 1 1
Resolution of certain legal matters 37 37
Change in fair value of Emergence Date Warrants (18 ) 5 5
Loss (gain) on foreign currency transactions 1 (2 ) (2 )
Pension/OPEB/nonretirement postemployment benefits and long-term
disability costs
    17   17  
Adjusted EBITDA $ 189   $ 71   $ 135   $ 206  
 

Avaya Holdings Corp.

Supplemental Schedules of Non-GAAP Revenue

(Unaudited; in millions)

 
      Successor             Successor
Three Months Ended

Q118
Non-GAAP
Combined
Results
(4)

Change Three Months Ended

Dec. 31,
2018

   

Adj. for
Fresh Start
Accounting

   

Non-
GAAP
Dec. 31,
2018

Amount     Pct.    

Pct., net
of fx
impact

Sept. 30,
2018 (1)

   

June 30,
2018 (2)

   

Mar. 31,
2018 (3)

Revenue by Segment
Products & Solutions $ 326 $ $ 326 $ 330 $ (4 ) (1 )% (1 )% $ 336 $ 322 $ 317
Services 422 422 445 (23 ) (5 )% (4 )% 434 433 440
Unallocated amounts (10 ) 10         n/a n/a    
Total revenue $ 738   $ 10   $ 748   $ 775   $ (27 ) (2 )% (1 )% $ 770   $ 755   $ 757
 
Revenue by Geography
U.S. $ 394   $ 7   $ 401   $ 425   $ (24 ) (4 )% (4 )% $ 417   $ 399   $ 409
International:
EMEA 199 1 200 208 (8 ) (1 )% % 202 202 196
APAC – Asia Pacific 78 1 79 76 3 5 % 8 % 81 86 83
Americas International 67   1   68   66   2   3 % 7 % 70   68   69
Total International 344   3   347   350   (3 ) 1 % 3 % 353   356   348
Total revenue $ 738   $ 10   $ 748   $ 775   $ (27 ) (2 )% (1 )% $ 770   $ 755   $ 757
 
      (1) Q418 Non-GAAP Results       (2) Q318 Non-GAAP Results
Three Months Ended Three Months Ended

Sept. 30,
2018

   

Adj. for
Fresh Start
Accounting

   

Non-
GAAP
Sept. 30,
2018

June 30,
2018

   

Adj. for
Fresh Start
Accounting

    Non-GAAP
June 30, 2018
Revenue by Segment
Products & Solutions $ 336 $ $ 336 $ 322 $ $ 322
Services 434 434 433 433
Unallocated amounts (35 ) 35     (63 ) 63  
Total revenue $ 735   $ 35   $ 770   $ 692   $ 63   $ 755
 
Revenue by Geography
U.S. $ 393   $ 24   $ 417   $ 356   $ 43   $ 399
International:
EMEA 196 6 202 193 9 202
APAC – Asia Pacific 78 3 81 81 5 86
Americas International 68   2   70   62   6   68
Total International 342   11   353   336   20   356
Total revenue $ 735   $ 35   $ 770   $ 692   $ 63   $ 755
 

Contacts

Media Inquiries:
Alex Alias
669-242-8034
alalias@avaya.com

Investor Inquiries:
Michael McCarthy
919-425-8330
mikemccarthy@avaya.com

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