Avaya Reports Fourth Quarter and Fiscal 2019 Financial Results

• $723 million Q4 FY19 GAAP revenue; $2.887 billion FY19 GAAP revenue
• 83.8% of GAAP revenue from software and services, 58.9% of GAAP recurring revenue in FY19
• 352 deals signed with a TCV greater than $1 million, 40 over $5 million and 9 over $10 million in FY19

Santa Clara, Calif., - November 20, 2019 - Avaya Holdings Corp. (NYSE: AVYA) today reported financial results for the fourth quarter and fiscal year ended September 30, 2019.

"Avaya made significant progress positioning the company for future growth and accelerating our relevance in cloud during fiscal 2019,” stated Jim Chirico, president and CEO of Avaya. “Notably, we grew our public cloud seats by approximately 160% year over year; we launched ReadyNow, an enterprise-class private cloud solution, and have already booked $90 million of total contract value; we announced a Microsoft partnership to bring our next generation CCaaS to market on Azure; and we recently closed our strategic partnership for UCaaS with RingCentral. The investments across our portfolio, especially in contact center, cloud, services and AI, have materially strengthened our position and solidified our platform for future growth.”

Mr. Chirico added, “Successfully concluding the strategic review process provided a decisive go forward path and, as a result, we announced three important initiatives to accelerate growth and deliver shareholder value. First, the partnership with RingCentral is a game changer for Avaya and is expected to fundamentally change the industry landscape. Second, we expect to begin to execute against our previously announced $500 million stock repurchase program shortly, and third, we have already completed the pay down of $250 million of debt that will result in significant annual interest expense savings and further enhance our balance sheet.”

Fourth Quarter Fiscal 2019 Financial Results⁽¹⁾

• 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 has not been adjusted and continues to be reported in accordance with GAAP that existed prior to the adoption of ASC 606 ("ASC 605").
• GAAP revenue for the fourth quarter of fiscal 2019 was $723 million, $6 million higher than the third quarter of fiscal 2019, and $12 million lower than the fourth quarter of fiscal 2018 ended September 30, 2018. Non-GAAP revenue for the fourth quarter of fiscal 2019 was $726 million, $6 million higher than the prior quarter, and $44 million lower than the fourth quarter of fiscal 2018.
• GAAP gross margin for the fourth quarter of fiscal 2019 was 54.2% compared to 54.4% for the third quarter of fiscal 2019 and 53.1% for the fourth quarter of fiscal 2018. Non-GAAP gross margin was 60.6%, compared to 60.8% for the third quarter of fiscal 2019 and 63.4% for the fourth quarter of fiscal 2018.
• GAAP operating income for the fourth quarter of fiscal 2019 was $52 million, compared to an operating loss of $613 million for the third quarter of fiscal 2019, and operating income of $11 million for the fourth quarter of fiscal 2018. Non-GAAP operating income⁽¹⁾ for the fourth quarter of fiscal 2019 was $165 million, compared to $145 million for the prior quarter, and $157 million for the fourth quarter of fiscal 2018.
• GAAP net loss for the fourth quarter of fiscal 2019 was $34 million, compared to net loss of $633 million for the third quarter of fiscal 2019, and net income of $268 million for the fourth quarter of fiscal 2018.
• Adjusted EBITDA⁽¹⁾ was $184 million or 25.3% of non-GAAP revenue, compared to adjusted EBITDA of $167 million, or 23.2% of non-GAAP revenue, for the third quarter of fiscal 2019 and $178 million, or 23.1% of non-GAAP revenue, for the fourth quarter of fiscal 2018.
• Cash provided by operating activities for the fourth quarter of fiscal 2019 was $66 million, compared to $52 million during the third quarter of fiscal 2019 and $25 million during the fourth quarter of fiscal 2018. Cash provided by operating activities for fiscal 2019 was $241 million.
• At the end of the fourth quarter of fiscal 2019, cash and cash equivalents totaled $752 million, compared to $729 million at the end of the third quarter of fiscal 2019 and $700 million at the end of the fourth quarter of fiscal 2018.

Fourth Quarter Fiscal 2019 Business Metrics⁽¹⁾

• Total Contract Value (TCV) of $2.4 billion*
• 83% of non-GAAP revenue was Software & Services
• 61% of non-GAAP product revenue was Software
• 58% of non-GAAP revenue was Recurring
• Added approximately 1,600 new logos
• Large deal activity with 109 deals over $1 million, 14 over $5 million, and 3 over $10 million
• Generated $66 million in cash flow from operations, $37 million in free cash flow⁽¹⁾

⁽¹⁾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.

*We define TCV as the value of all active ratable contracts that have not been recognized as revenue, including both billed and unbilled backlog.

Fourth Quarter Fiscal 2019 Company Highlights

• Public cloud seats increased approximately 160% year-over-year.
• Avaya will adopt hybrid cloud solutions from IBM to help expand Avaya’s ReadyNow private cloud unified communications and contact center offerings internationally.
• Avaya expands ReadyNow into the EMEA and APAC regions.
• Avaya launched its new Avaya IX Subscription program targeted at customers looking for flexible consumption-based pricing alternatives to traditional perpetual models when consuming Avaya’s world-class communications and collaboration solutions. The Avaya IX Subscription program will also facilitate customers’ transition to cloud.
• Avaya and Tenfold, the world’s leading provider of next generation CTI solutions, announced a strategic partnership to enable joint clients to improve their customer experience, increase productivity of their sales and service teams, and operationalize AI with richer contextual customer data to drive predictive engagement.
• TMC, a global, integrated media company, recognized three of Avaya’s offerings for their innovation and leadership in the UC and Contact Center markets.

The Avaya IX Collaboration Unit, an open “all-in-one” next-generation huddle-room video conferencing solution, was named a TMC 2019 Communications Solutions Products of the Year Award. An all-in-one collaboration device that does not require a laptop connection, it sits on top of the video screen, has integrated microphones, and provides a wide field of view which is important for huddle spaces that are typically not very deep but can be very wide.

Avaya’s Mobile Experience was named a 2019 Communications Solutions Products of the Year Award winner. Avaya Mobile Experience is an Avaya owned and operated cloud-based service that supports the advancement of a business’ digital transformation to become more mobile-centric. Avaya Mobile Experience helps enable omni-channel interactions with smartphone users, reducing the time callers spend on legacy voice interactions with an organization’s contact center.

The Avaya OneCloud™ unified communications and contact center platform was named a 2019 Communications Solutions Products of the Year Award. Avaya OneCloud helps meet the business needs for a cloud solution that delivers flexible features, functions, and value-without any compromise for small-medium businesses (SMB), mid-market or large enterprise organizations featuring public, private and hybrid cloud options.

Fiscal 2019 Financial Highlights

• GAAP revenue: $2.887 billion; Non-GAAP revenue: $2.908 billion
• GAAP gross margin: 54.6%; Non-GAAP gross margin: 61.4%
• GAAP operating margin: -16.4%; Non-GAAP operating margin: 21.6%
• Adjusted EBITDA: $706 million; Adjusted EBITDA margin: 24.3%
• Cash flow from operations: $241 million, Free cash flow: $128 million

Financial Outlook - Q1 Fiscal 2020 under ASC 606

• GAAP revenue of $698 million to $718 million; Non-GAAP revenue of $700 million to $720 million
  • This non-GAAP revenue figure reflects a constant currency decline in September 30th 2019 FX rates of -6% to -3%
• GAAP operating income of $2 million to $12 million; GAAP operating margin of 0% to 2%
• Non-GAAP operating income of $145 million to $155 million; non-GAAP operating margin of ~21%
• Adjusted EBITDA of $165 million to $175 million; Adjusted EBITDA margin of ~24%

Financial Outlook - Fiscal Year 2020 under ASC 606

• GAAP revenue of $2.81 billion to $2.89 billion; Non-GAAP revenue of $2.82 billion to $2.90 billion
  • This non-GAAP revenue figure reflects a constant currency decline in September 30th 2019 FX rates of -2% to 0%
• GAAP operating income of $130 million to $180 million; GAAP operating margin of 5% to 6%
• Non-GAAP operating income of $560 million to $610 million; non-GAAP operating margin of 20% to 21%
• Adjusted EBITDA $650 million to $700 million; Adjusted EBITDA margin of 23% to 24%
• Cash flow from operations of ~5% of non-GAAP revenue
  • Excluding Q1 FY20 one time strategic process fees: ~7%
• Approximately 95 to 100 million weighted average shares outstanding; ending share count of approximately 80 to 85 million shares
• Cash requirements for restructuring pension & OPEB, cash taxes, capital spending and net cash interest payments for fiscal year 2020 are expected to be:
  • Restructuring: $35 million to $40 million
  • Pension/OPEB: ~$55 million
  • Cash Taxes: $65 million to $75 million
  • Capital Expenditures: ~$120 million
  • Net Cash Interest Payments: $190 million to $195 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 November 20, 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 AM Eastern Time on November 20, 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: 6257079.

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 twelve month period ending September 30, 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 September 30, 2018 (the "Successor" period) separately, management reviews the Company’s operating results for the twelve months ended September 30, 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 289-day period ended September 30, 2018 against any of the previous or succeeding 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 key performance metrics such as revenue, gross margin and operating income, among others, when combined for the twelve months ended September 30, 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 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. Adjusted EBITDA excludes the impact of earnings or charges resulting from matters that we do not consider 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. In addition, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

We also present the measures non-GAAP revenue, non-GAAP gross margin, 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.

In addition, we present the liquidity measures of free cash flow and adjusted cash flow. Free cash flow is calculated by subtracting capital expenditures from Net cash provided by operating activities. We believe free cash flow is a measure often used by analysts and investors to compare the cashflow and liquidity of companies in the same industry. Adjusted cash flow is defined as cash flow from operations adjusted to remove one-time anticipated payments in connection with our strategic process in Q1 fiscal 2020. We provide guidance regarding Adjusted cash flow because we believe it provides a more meaningful way to analyze period over period results.

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 first quarter and full year of fiscal 2020 non-GAAP revenue, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA or adjusted cash flow 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.