Avaya Reports Second Quarter Fiscal 2019 Financial Results

  • GAAP revenue was $709 million; non-GAAP revenue was $714 million
  • GAAP operating margin of 5.4%; non-GAAP operating margin of 20.9%
  • Public cloud seats increased more than 165% year-over-year
  • Solid large deal activity with 78 deals over $1 million, 9 over $5
    million, and 2 over $10 million
  • Engaged J.P. Morgan to evaluate strategic alternatives to maximize
    shareholder value

SANTA CLARA, Calif.–(BUSINESS WIRE)–Avaya Holdings Corp. (NYSE: AVYA) today reported financial results for
the second quarter ended March 31, 2019.

   

 

GAAP

Non-GAAP (1)
(In millions, except percentages) Q2 2019   Q1 2019   Q2 2018 Q2 2019   Q1 2019   Q2 2018
Revenue $ 709 $ 738 $ 672 $ 714 $ 748 $ 757
Gross margin 54.4 % 55.1 % 48.1 % 61.5 % 62.7 % 62.4 %
Operating margin 5.4 % 6.8 % (13.2 )% 20.9 % 22.7 % 20.7 %
 

“Our topline results and earnings fell short of expectations,” said Jim
Chirico, President and CEO of Avaya. “In response, we have implemented a
number of corrective actions to drive improved performance. While I’m
disappointed in our results last quarter, overall, I remain confident
about our path forward given the momentum and traction we are seeing in
many segments of our business including cloud, services and emerging
technologies.”

Mr. Chirico added, “Following the receipt of expressions of interest,
the Company has engaged J.P. Morgan to assist in exploring strategic
alternatives intended to maximize shareholder value. The Board has not
set a timetable for the process nor has it made any decisions related to
any strategic alternatives at this time. There can be no assurance that
the exploration of strategic alternatives will result in any particular
outcome. The Company does not intend to provide updates unless or until
it determines that further disclosure is necessary.”

Second 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 $709 million, $29 million lower than the first
    quarter of fiscal 2019, and $37 million higher than the second quarter
    of fiscal 2018ended March 31, 2018. Non-GAAP revenue(1)
    was $714 million, $34 million lower than the first quarter of fiscal
    2019, and $43 million lower than the second quarter of fiscal 2018.
  • GAAP gross margin was 54.4%, compared to 55.1% for the first quarter
    of fiscal 2019 and 48.1% for the second quarter of fiscal 2018.
    Non-GAAP gross margin(1) was 61.5%, compared to 62.7% for
    the first quarter of fiscal 2019 and 62.4% for the second quarter of
    fiscal 2018.
  • GAAP operating income was $38 million, compared to GAAP operating
    income of $50 million for the first quarter of fiscal 2019 and an
    operating loss of $89 million for the second quarter of fiscal 2018.
    Non-GAAP operating income(1) was $149 million, compared to
    $170 million for the first quarter of fiscal 2019, and $157 million
    for the second quarter of fiscal 2018.
  • GAAP net loss was $13 million, compared to GAAP net income of $9
    million for the first quarter of fiscal 2019, and GAAP net loss of
    $130 million for the second quarter of fiscal 2018.
  • Adjusted EBITDA(1) was $166 million or 23.2% of non-GAAP
    revenue, compared to adjusted EBITDA of $189 million, or 25.3% of
    non-GAAP revenue, for the first quarter of fiscal 2019 and $187
    million, or 24.7% of non-GAAP revenue, for the second quarter of
    fiscal 2018.
  • Cash provided by operating activities was $37 million, compared to
    cash provided by operating activities of $86 million for the first
    quarter of fiscal 2019 and cash provided by operating activities of
    $54 million for the second quarter of fiscal 2018.
  • At the end of the second quarter of fiscal 2019, cash and cash
    equivalents totaled $735 million, compared to $743 million at the end
    of the first quarter of fiscal 2019 and $311 million at the end of the
    second quarter of fiscal 2018.

(1) Non-GAAP revenue, non-GAAP gross margin, non-GAAP
operating expenses, non-GAAP operating income, non-GAAP operating margin
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.

Second Quarter Fiscal 2019 Business Metrics*

  • Total Contract Value (TCV) increased 3% year-over-year to $2.4 billion
  • 83% of non-GAAP revenue was Software & Services
  • 58% of non-GAAP product revenue was Software
  • 59% of non-GAAP revenue was Recurring
  • Added approximately 1,500 new logos
  • Generated $37 million in cash flow from operations, $11 million in
    free cash flow

*We define TCV as the value of all active ratable contracts that have
not been recognized as revenue, including both billed and unbilled
backlog. We define free cash flow as cash flow from operating activities
less capital expenditures.

Second Quarter Fiscal 2019 Company Highlights

  • Introduced a cloud transformation program to help organizations map
    the most effective and efficient path to implement Avaya OneCloud
    solutions for public, private or hybrid communications deployments
  • Extended AI and Cloud integration with Google Cloud to provide
    customers with more intelligent, flexible solutions
  • Announced integration with Nuance to deliver new, easy-to-navigate
    conversational interfaces for AI-enhanced customer experiences
  • Launched Avaya for Communities program to provide economically
    disadvantaged women-owned small businesses in the US with
    communications and collaboration solutions to support their growth and
    success
  • Announced enhancements to Open SIP portfolio
  • Expanded video offerings to deliver intelligent huddle room experiences
  • Appointed Jacqueline Yeaney to Avaya’s Board of Directors

Financial Outlook – Q3 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 $707-$722 million; non-GAAP revenue of $710-$725
    million
  • GAAP operating income of $30-$40 million; GAAP operating margin of ~5%
  • Non-GAAP operating income of $140-$150 million; non-GAAP operating
    margin of ~20%
  • Adjusted EBITDA of $160-$170 million; Adjusted EBITDA margin of ~23%
  • Approximately 111 million weighted average shares outstanding

Financial Outlook – Fiscal 2019 under ASC 606

  • GAAP revenue of $2.900-$2.950 billion; non-GAAP revenue of
    $2.925-$2.975 billion

    • Cloud and innovation 11-12% of non-GAAP revenue
  • GAAP operating income of $163-$191 million; GAAP operating margin of
    ~6%
  • Non-GAAP operating income of $625-$660 million; non-GAAP operating
    margin of ~22%
  • Adjusted EBITDA of $700-$730 million; Adjusted EBITDA margin of ~24%
  • Cash flow from operations of 7-8% of non-GAAP revenue
  • Approximately 111 million weighted average shares outstanding
  • Cash requirements for restructuring, pension & OPEB, cash taxes,
    capital spending and interest expense for fiscal year 2019 are
    expected to be:

    • Restructuring: $50-$55 million
    • Pension/OPEB: ~$65 million
    • Cash Taxes: $55-$65 million
    • Capital Expenditures: ~$100 million
    • Interest Expense: $200-$205 million

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 May 9,
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 live webcast and conference call to discuss its
financial results at 8:30 a.m. Eastern Time on May 9, 2019. To access
the live conference call by phone, listeners should dial +1-833-224-0545
in the U.S. or Canada and +1-647-689-4064 for international callers. To
join the live webcast, listeners should access the investor page of
Avaya’s website at https://investors.avaya.com.

Following the live webcast, a replay will be available on the investor
page of Avaya’s website for a period of one year. A replay of the
conference call will be available for one week soon after the call by
phone by dialing +1-800-585-8367 in the U.S. or Canada and
+1-416-621-4642 for international callers, using the conference access
code: 6988044.

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 third quarter of fiscal 2019 and fiscal year 2019, including the
expected impact of the adoption of ASC 606, and statements about the
Board’s exploration of strategic alternatives. 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. Risks and uncertainties that may cause these forward-looking
statements to be inaccurate include, among others: the announcement that
the Board is exploring strategic alternatives and the potential impact
of such announcement on the Company’s current or potential customers,
partners or personnel; the cost of such exploration and the disruption
it may have on the Company’s operations, including diverting the
attention of the Company’s management and employees; and other risks
discussed in the Company’s Annual Report on Form 10-K and subsequent
Quarterly Reports on Form 10-Q filed with the Securities and Exchange
Commission (the “SEC”). These risks and uncertainties may cause the
Company’s 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(1)

Three
months
ended
March 31,
2019

 

Three
months
ended
March 31,
2018

 

Six
months
ended
March 31,
2019

 

Period from
December 16,
2017
through
March
31, 2018

Period from
October 1,
2017
through
December
15,

2017

Six months ended
March 31, 2018
REVENUE
Products $ 287 $ 293 $ 611 $ 364 $ 253 $ 617

Services

422   379   836   456   351   807  
709   672   1,447   820   604   1,424  
COSTS
Products:
Costs 105 110 220 143 84 227
Amortization of technology intangible assets 44 41 87 48 3 51
Services 174   198   347   228   155   383  
323   349   654   419   242   661  
GROSS PROFIT 386   323   793   401   362   763  
OPERATING EXPENSES
Selling, general and administrative 251 282 508 332 264 596
Research and development 52 50 105 59 38 97
Amortization of intangible assets 41 40 81 47 10 57
Restructuring charges, net 4   40   11   50   14   64  
348   412   705   488   326   814  
OPERATING INCOME (LOSS) 38 (89 ) 88 (87 ) 36 (51 )
Interest expense (58 ) (47 ) (118 ) (56 ) (14 ) (70 )
Other income (expense), net 1 (3 ) 23 (5 ) (2 ) (7 )
Reorganization items, net         3,416   3,416  
(LOSS) INCOME BEFORE INCOME TAXES (19 ) (139 ) (7 ) (148 ) 3,436 3,288
Benefit from (provision for) income taxes 6   9   3   255   (459 ) (204 )
NET (LOSS) INCOME $ (13 ) $ (130 ) $ (4 ) $ 107   $ 2,977   $ 3,084  
(LOSS) EARNINGS PER SHARE
Basic $ (0.12 ) $ (1.18 ) $ (0.04 ) $ 0.97   $ 5.19  
Diluted $ (0.12 ) $ (1.18 ) $ (0.04 ) $ 0.96   $ 5.19  
Weighted average shares outstanding
Basic 110.8   109.8   110.5   109.8   497.3  
Diluted 110.8   109.8   110.5   110.8   497.3  
 

(1) See “Use of non-GAAP (Adjusted) Financial Measures”
below.

 
   

Avaya Holdings Corp.

Condensed Consolidated Balance Sheets (Unaudited)

(In millions, except per share and shares amounts)

 
March 31, 2019

September 30,
2018

ASSETS
Current assets:
Cash and cash equivalents $ 735 $ 700
Accounts receivable, net 300 377
Inventory 66 81
Contract assets 146
Contract costs 127
Other current assets 136   170
TOTAL CURRENT ASSETS 1,510 1,328
Property, plant and equipment, net 236 250
Deferred income taxes, net 26 29
Intangible assets, net 3,066 3,234
Goodwill 2,764 2,764
Other assets 105   74
TOTAL ASSETS $ 7,707   $ 7,679
LIABILITIES
Current liabilities:
Debt maturing within one year $ 29 $ 29
Accounts payable 275 266
Payroll and benefit obligations 117 145
Contract liabilities 500 484
Business restructuring reserve 42 51
Other current liabilities 143   148

TOTAL CURRENT LIABILITIES

1,106   1,123
Non-current liabilities:
Long-term debt, net of current portion 3,093 3,097

Pension obligations

622 671
Other post-retirement obligations 174 176
Deferred income taxes, net 160 140
Business restructuring reserve 39 47
Other liabilities 378   374
TOTAL NON-CURRENT LIABILITIES 4,466   4,505
TOTAL LIABILITIES 5,572   5,628
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value; 55,000,000 shares authorized, no
shares issued or outstanding at March 31, 2019 and September 30, 2018
Common stock, $0.01 par value; 550,000,000 shares authorized;
110,730,362 shares issued and 110,717,682 shares outstanding at
March 31, 2019; and 110,218,653 shares issued and 110,012,790 shares
outstanding at September 30, 2018
1 1
Additional paid-in capital 1,750 1,745
Retained earnings 378 287
Accumulated other comprehensive income 6   18
TOTAL STOCKHOLDERS’ EQUITY 2,135   2,051
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 7,707   $ 7,679
 
       

Avaya Holdings Corp.

Condensed Statements of Cash Flows

(Unaudited; in millions)

 
Successor Predecessor

Non-GAAP
Combined(1)

Six
months
ended
March 31,
2019

 

Period from
December 16,
2017
through
March
31,

2018

Period from
October 1,
2017
through
December
15,

2017

Six months
ended
March 31,
2018

Net cash provided by (used for):
Operating activities $ 123 $ 94 $ (414 ) $ (320 )
Investing activities (48 ) (175 ) (13 ) (188 )
Financing activities (39 ) (11 ) (102 ) (113 )
Effect of exchange rate changes on cash, cash equivalents, and
restricted cash
(1 ) 9   (2 ) 7  
Net increase (decrease) in cash, cash equivalents, and restricted
cash
35 (83 ) (531 ) (614 )
Cash, cash equivalents, and restricted cash at beginning of period 704   435   966   966  
Cash, cash equivalents, and restricted cash at end of period $ 739   $ 352   $ 435   $ 352  
 

(1) See “Use of non-GAAP (Adjusted) Financial Measures”
below.

 

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 six month period ending March 31, 2018
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 (the “Predecessor” period) and
December 16, 2017 through March 31, 2018 (the “Successor” period),
separately, management reviews the Company’s operating results for the
six months ended March 31, 2018 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 106-day period ended March 31, 2018 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 six months ended March 31, 2018
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 expenses, non-GAAP operating income and non-GAAP
operating margin, 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 third
quarter and full year fiscal 2019 non-GAAP revenue, non-GAAP gross
margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP
operating margin or adjusted EBITDA 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
March 31,
2019

 

Three
months
ended
March 31,
2018

 

Six
months
ended
March 31,
2019

 

Period from
December 16,
2017
through
March
31,

2018

Period from
October 1,
2017
through
December
15,

2017

Six
months
ended
March 31,
2018

Net (loss) income $ (13 ) $ (130 ) $ (4 ) $ 107 $ 2,977 $ 3,084
Interest expense 58 47 118 56 14 70
Interest income (4 ) (1 ) (7 ) (1 ) (2 ) (3 )
(Benefit from) provision for income taxes (6 ) (9 ) (3 ) (255 ) 459 204
Depreciation and amortization 108   123   225   145   31   176  
EBITDA 143 30 329 52 3,479 3,531
Impact of fresh start accounting adjustments 6 86 9 113 113
Restructuring charges, net 4 40 11 50 14 64
Advisory fees 1 4 2 12 3 15
Acquisition-related costs 4 7 7 7 7
Reorganization items, net (3,416 ) (3,416 )
Non-cash share-based compensation 5 5 11 6 6
Loss on sale/disposal of long-lived assets, net 2 2 1 3

Resolution of certain legal matters

37 37
Change in fair value of Emergence Date Warrants (3 ) 10 (21 ) 15 15
Loss on foreign currency transactions 6 3 7 1 1
Pension/OPEB/nonretirement postemployment benefits and long-term
disability costs
        17   17  
Adjusted EBITDA $ 166   $ 187   $ 355   $ 258   $ 135   $ 393  
 
     

Avaya Holdings Corp.

Supplemental Schedules of Non-GAAP Revenue

(Unaudited; in millions)

 
Three Months Ended Change Three Months Ended

Mar. 31,
2019

 

Adj. for
Fresh Start
Accounting

 

Non-
GAAP
Mar. 31,
2019

 

Non-
GAAP
Mar. 31,
2018 (4)

Amount   Pct.  

Pct., net
of fx
impact

Non-
GAAP
Dec. 31,
2018 (1)

 

Non-
GAAP
Sept. 30,
2018
(2)

 

Non-
GAAP
June 30,
2018 (3)

Revenue by Segment

Products & Solutions $ 289 $ $ 289 $ 317 $ (28 ) (9 )% (8

)%

 

$ 326 $ 336 $ 322
Services 425 425 440 (15 ) (3 )%

(2

)%

422 434 433
Unallocated amounts (5 ) 5         n/a

n/a

 

   
Total revenue $ 709   $ 5   $ 714   $ 757   $ (43 ) (6 )% (4 )% $ 748   $ 770   $ 755
 

Revenue by Geography

U.S. $ 375   $ 3   $ 378   $ 409   $ (31 ) (8 )% (8 )% $ 401   $ 417   $ 399
International:
EMEA 188 1 189 196 (7 ) (4 )% (1 )% 200 202 202
APAC – Asia Pacific 79 1 80 83 (3 ) (4 )% (2 )% 79 81 86

Americas International

67     67   69   (2 ) (3 )%

2

%

68   70   68
Total International 334   2   336   348   (12 ) (3 )% (1 )% 347   353   356
Total revenue $ 709   $ 5   $ 714   $ 757   $ (43 ) (6 )% (4 )% $ 748   $ 770   $ 755
 

Contacts

Media Inquiries:
Alex Alias
669-242-8034
[email protected]

Investor Inquiries:
Michael McCarthy
919-425-8330
[email protected]

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