Avaya Reports Third Quarter Fiscal 2018 Financial Results

Avaya Holdings Corp. (NYSE: AVYA) today reported financial results for the third quarter and first nine months of fiscal 2018 ended June 30, 2018.

GAAP revenue was $692 million, including $2 million related to Avaya’s former Networking business, which was sold on July 14, 2017. Revenue for the second quarter of fiscal 2018, was $672 million, including $1 million related to the Networking business. Revenue for the third quarter of fiscal 2017 ended June 30, 2017 was $803 million, including $54 million related to the Networking business.

Non-GAAP revenue adjusted to further exclude the revenue of the Networking business was $753 million for the third quarter of fiscal 2018, $3 million lower than the prior quarter, and $4 million higher than the third quarter of fiscal 2017, with both changes resulting primarily from the impact of foreign currency translation.

“Our third quarter results represent continued stability in our business and establishes a solid foundation for a strong finish to the fiscal year end,” said Jim Chirico, President and CEO, Avaya. “We continue to execute on our strategy and innovate. We are building strength in our core business, integrating digital technologies like AI, mobility, accelerating our move to the cloud, and expanding our services capabilities. Avaya is well-positioned to grow, while delivering ongoing value to our customers.”

Gross margin was 50.9% compared to 48.1% for the second quarter of fiscal 2018 and 61.4% for the third quarter of fiscal 2017. Non-GAAP gross margin was 61.9%, compared to 62.4% for the second quarter of fiscal 2018 and 62.0% for the third quarter of fiscal 2017.

Operating loss was $49 million, compared to operating loss of $89 million for the second quarter of fiscal 2018 and operating loss of $43 million for the third quarter of fiscal 2017. Non-GAAP operating income for the third quarter of fiscal 2018 was $151 million, or 20.0% of non-GAAP revenue, compared to $157 million for the prior quarter and $169 million for the third quarter of fiscal 2017.

Net loss was $88 million, compared to net loss of $130 million for the second quarter of fiscal 2018, and a net loss of $98 million for the third quarter of fiscal 2017.

Adjusted EBITDA was $175 million or 23.2% of non-GAAP revenue, compared to adjusted EBITDA of $187 million, or 24.7% of non-GAAP revenue, for the second quarter of fiscal 2018 and $204 million, or 25.4% of non-GAAP revenue, for the third quarter of fiscal 2017.

Cash provided by operating activities for the third quarter of fiscal 2018 was $83 million, compared to $54 million during the second quarter of fiscal 2018 and $72 million during the third quarter of fiscal 2017. Cash and cash equivalents totaled $685 million at the end of the third quarter of fiscal 2018, compared to $311 million at the end of the second quarter of fiscal 2018 and $729 million at the end of the third quarter of fiscal 2017. The sequential increase in cash and cash equivalents is primarily due to $314 million of net proceeds from the issuance of convertible notes and cash flow from operations of $83 million offset by capital expenditures of $18 million.

⁽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.

Third Quarter Fiscal 2018 Business Highlights

• The new Avaya IP Office™ launched globally, with enterprise-grade capabilities including cloud unified communications (UC) with voice and video, meetings, team collaboration, and content sharing.
• A new version of the Avaya Workforce Optimization suite for contact centers was released, which advances customer engagement and data privacy, and helps enterprises address GDPR requirements.
• Avaya Essential and J Series next-generation IP phones deliver new productivity for both enterprise and mid-market customers.
• Obtained first patent and customer implementation for groundbreaking Avaya Mobile Experience technology that optimizes the experience for mobile callers into the contact center.
• Telarus, the largest privately-held technology services distributor (master agent) in the U.S., joined Intelisys and Jenne in offering Avaya cloud (UC) and contact center (CC) solutions.
• The Customer Relationship Management Institute for the fifth year recognized Avaya with the NorthFace scoreboard award for excellence in customer service.
• Nuance, a charter member of the Avaya AI Connect program, recognized Avaya as their top-producing partner in North America. Workforce Optimization partner, Verint, also named Avaya their CALA partner of the year.
• Avaya announced the new Avaya Innovation Incubator, chartered with creating disruptive solutions with a focus on mobility, security and artificial intelligence.
• A record of over 2,800 customers and partners attended Avaya Engage Mexico and over 400 attendees at Asia Engage.

Third Quarter Fiscal 2018 Performance Highlights

• Non-GAAP revenue grew 1% year-over-year (excluding networking).
• Bookings grew 3% year-over-year (excluding networking).
• Continued strength in our business model as a software & services company:
  • Software and services accounted for 82% of non-GAAP revenue, up year-over-year from 79%;
  • Recurring revenue represented 59% of non-GAAP revenue, up year-over-year from 57%; and
  • 97 deals over $1 million of Total Contract Value, up 33% year-over-year.
• Avaya Cloud Contact Center, our secure multitenant contact center as a service (CCaaS) solution, has over 40,000 seats signed and over a dozen deals in pipeline.
• Added over 1,700 new logos worldwide.

Third Quarter Fiscal 2018 Financial Highlights

• Avaya Inc. repriced its $2.9 billion Senior Secured Term Loan saving over $14 million in annual cash interest expense.
• Completed an offering of $350 million in aggregate principal amount of 2.25% convertible notes due 2023 significantly improving liquidity and financial flexibility.
• Cash and cash equivalents was $685 million and cash flow from operating activities was $83 million for the quarter.

Financial Outlook – Q4 Fiscal 2018

• GAAP revenue of $705-$735 million, non-GAAP revenue of $760-$780 million
• GAAP operating loss of 3% to operating income of 2% of revenue, non-GAAP operating profit of 20-22% of non-GAAP revenue
• GAAP operating loss of $24 million to operating income of $13 million, non-GAAP operating income $153-$172 million
• Cash taxes of approximately $6 million
• Adjusted EBITDA of $175-195 million or adjusted EBITDA margin of 23-25% of non-GAAP revenue
• Approximately 111 million shares outstanding

Financial Outlook – Fiscal Year 2018

• GAAP Revenue of $2.82-$2.85 billion, non-GAAP revenue of $3.05-$3.07 billion
• R&D ofapproximately $197 million, non-GAAP R&D of $197 million or approximately 15% of non-GAAP product revenue
• SG&A of approximately $2.75 billion, non-GAAP SG&A of approximately $1.06 billion or 34-35% of non-GAAP revenue
• Operating loss of $87-$124 million, non-GAAP operating income of $633-$652 million or approximately 21% of non-GAAP revenue
• Adjusted EBITDA $743-$763 million, or 24.5-25.0% of non-GAAP revenue

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 August 9, 2018. 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 August 9, 2018.  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 Peter Schuman, Senior Director of Investor Relations.

To join the financial results live webcast and view supplementary materials including 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: 1795778.

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