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.-- May 9, 2019 -- Avaya Holdings Corp. (NYSE: AVYA) today reported financial results for the second quarter ended March 31, 2019.

"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.

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.

Source: Avaya Newsroom