Avaya Reports First Quarter Fiscal 2020 Financial Results

• $715 million 1Q FY20 GAAP revenue; $717 million 1Q FY20 Non-GAAP revenue

• Cloud, Alliance Partner & Subscription revenue was 18%

• Repurchased 10.7 million shares of stock and paid down $250 million of long-term debt

Santa Clara, Calif., - February 10, 2020 - Avaya Holdings Corp. (NYSE: AVYA) today reported financial results for the first quarter ended December 31, 2019.

First Quarter Financial Highlights

• GAAP Operating income was $15 million; Non-GAAP Operating income was $151 million
• Adjusted EBITDA was $174 million
• CFFO was 2% of revenue, and 8% of revenue when adjusted for one-time strategic deal payments
• Cloud, Alliance Partner & Subscription revenue was 18% of revenue
• Repurchased $132 million of common stock, or 10.7 million shares, at an average price of $12.27 per share

"Our solid operational execution resulted in revenues and adjusted EBITDA above the mid-point of our guidance for the quarter," stated Jim Chirico, President and CEO of Avaya. He added, “At the same time, we continued to strengthen our position in public, private, and hybrid cloud communications markets, including our newest cloud-based UCaaS offering, Avaya Cloud Office, which is on schedule for introduction at the end of March. The increased breadth and depth in our portfolio enable us to deliver innovative and tailored solutions using consumption models, such as subscription, that facilitates our customers transition to the cloud using Avaya technology."

Mr. Chirico concluded, "During the quarter, we made substantial progress in returning capital to our shareholders. In early November, we paid down $250 million in long-term debt and by the end of December, we repurchased nearly 11 million shares using approximately $132 million of the $500 million program approved by our Board.”

Additional Key Performance Metrics

• Revenue year-over-year decline of 3%; non-GAAP revenue year-over-year decline of 4% in constant currency(1)
• Total Contract Value (TCV) of $2.3 billion*
• 86% of non-GAAP revenue was Software & Services
• 65% of non-GAAP product revenue was Software
• 59% of non-GAAP revenue was Recurring
• Added approximately 1,300 new logos
• Large deal activity with 68 deals over $1 million, 6 over $5 million, and 3 over $10 million

⁽¹⁾ Non-GAAP revenue, Non-GAAP gross margin, Non-GAAP operating margin, Non-GAAP operating income, adjusted EBITDA, and constant currency are not measures calculated in accordance with generally accepted accounting principles in the U.S. (“GAAP”). Adjusted EBITDA margin is calculated based on non-GAAP Revenue. Refer to the "Use of non-GAAP (Adjusted) Financial Measures" below for more information on the calculation of constant currency. 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.

Business Highlights

• Avaya added several new well-recognized and respected industry leaders to strengthen the company’s position in the market as a leader in enterprise communications and accelerate the company’s momentum as it executes on its strategy and transformation to the cloud. They include Anthony Bartolo, executive vice president, Products and Solutions; Simon Harrison, Chief Marketing Officer; Jon Brinton, vice president, North America Channel Sales; and William Madison, vice president North America Cloud Sales. Each of these leaders brings with them significant strategic and operational expertise along with proven track records in their respective disciplines.
• Avaya was recognized with two Frost & Sullivan awards:
  • 2019 Customer Value Leadership Award for Customer Journey Intelligence, recognizing the advanced AI and other Customer Journey Intelligence innovations that have been built into Avaya’s broad, industry-leading portfolio of customer and employee engagement solutions.
  • 2019 North America Product Leadership Award in the enterprise safety solutions market for Public Safety Solutions.
• Avaya IX™ Workspaces was named as a 2019 Contact Center Technology Award winner, presented by CUSTOMER magazine. Avaya IX Workspaces helps to improve agent productivity and the overall customer experience by integrating multiple applications into a single agent desktop and by empowering customer support personnel to personalize the customer experience by enabling them to view and interact with customer journey details.
• Google Cloud Contact Center (CC) AI capabilities are now integrated with Avaya IX Contact Center solutions and is now available for customers globally. The powerful combination of Avaya AI conversation services and Google Cloud CC AI are providing a better experience for clients by seamlessly blending automated and assisted experiences throughout a customer’s interaction with the contact center.

Financial Outlook - 2Q Fiscal 2020 - unless otherwise noted, values reflect December 31st, 2019 FX rates

• GAAP revenue of $673 million to $698 million; Non-GAAP revenue of $675 million to $700 million
  • This non-GAAP revenue figure reflects a constant currency decline of (5)% to (2)%
• GAAP operating income of $22 million to $32 million; GAAP operating margin of 3% to 5%
• Non-GAAP operating income of $116 million to $126 million; non-GAAP operating margin of 17% to 18%
• Adjusted EBITDA of $140 million to $150 million; Adjusted EBITDA margin of ~21%

Financial Outlook - Fiscal Year 2020 - unless otherwise noted, values reflect December 31st, 2019 FX rates

• GAAP revenue of $2.83 billion to $2.91 billion; Non-GAAP revenue of $2.84 billion to $2.92 billion
  • This non-GAAP revenue figure reflects a constant currency decline 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 $600 million; non-GAAP operating margin of 20% to 21%
• Adjusted EBITDA $650 million to $700 million; Adjusted EBITDA margin of 23% to 24%
• CFFO of ~5% of revenue, and ~7% of revenue when adjusted for one-time strategic deal payments
• Approximately 93 million to 97 million weighted average shares outstanding; ending share count of approximately 80 million to 83 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 February 10, 2020. 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 February 10, 2020. To access the live conference call by phone, listeners should dial +1-877-858-7671 in the U.S. or Canada and +1-201-389-0939 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 +1-877-660-6853 in the U.S. or Canada and +1-201-612-7415 for international callers, using the conference access code: 13698454.

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 financial measures labeled as “non-GAAP” or “adjusted.”

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.

The Company presents constant currency information to provide a framework for assessing how the Company’s underlying businesses performance excluding the effect of foreign currency rate fluctuations. To present this information current and comparative prior period results for entities reporting in currencies other than U.S. dollars are converted into U.S. dollars at the exchange rate in effect on the last day of the Company’s prior fiscal year (i.e. September 30, 2019).

In addition, we present the liquidity measure of free 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 cash flow and liquidity of companies in the same industry.

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 nonGAAP 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 of fiscal 2020 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 reconcile historical GAAP measures to non-GAAP measures.