Avaya Reports First Quarter Fiscal 2017 Financial

SANTA CLARA, CA --(Marketwired - February 08, 2017) -

First Quarter Fiscal 2017:

• Revenue of $875 million, high-end of preliminary results
• Gross margin 60.9%, non-GAAP gross margin 61.5%
• Operating income of $65 million, non-GAAP operating income of $187 million or 21.4% of revenue, a record percentage of revenue for a first fiscal quarter
• Adjusted EBITDA ⁽¹⁾ up $10 million year-over-year to $238 million or 27.2% of revenue, a record percentage of revenue for a first fiscal quarter

Avaya reported financial results for the first fiscal quarter ended December 31, 2016.

Total revenue for the first quarter was $875 million, down $83 million compared to the prior quarter due to lower hardware and networking revenue as a result of seasonality and extended procurement cycles. First quarter revenue was also down $83 million year-over-year, due to lower demand for unified communications hardware and associated maintenance and professional services and extended procurement cycles. Non-GAAP gross margin was 61.5%, a first fiscal quarter record, which compares to 61.8% for the prior quarter and 61.3% for the first quarter of fiscal 2016. GAAP operating income was $65 million, which compares to a loss of $428 million in the prior quarter and income of $91 million during the first quarter of fiscal 2016. Non-GAAP operating income was $187 million which compares to $229 million for the prior quarter and $185 million for the first quarter of fiscal 2016. For the quarter, adjusted EBITDA ⁽¹⁾ was $238 million or 27.2% of revenue, a record percentage of revenue for first fiscal quarter results, and compares to adjusted EBITDA of $284 million for the prior quarter and $228 million for the first quarter of fiscal 2016.

Cash used for operating activities was $44 million for the first fiscal quarter 2017 due primarily to payments associated with higher advisory fees and company employee incentive plans. Cash and cash equivalents totaled $209 million as of December 31, 2016, a decrease of $127 million from the prior quarter and $135 million lower from the first quarter of fiscal 2016. Subsequent to the first fiscal quarter 2017, Avaya entered into a debtor-in-possession (DIP) financing of $725 million, and made an initial draw of $425 million. This DIP financing, combined with the company's cash from operations, was sized to provide sufficient liquidity during chapter 11 to support ongoing business operations and minimize disruption.

"By taking the necessary action to address our capital structure, we are better positioned to strengthen our successful software and services portfolios," said Kevin Kennedy, president and CEO. "Avaya's transformation continues as our product portfolio evolves to a richer mix of software and service platforms."

"We will continue to invest in market leading products and services for our customers in 2017, and deliver competitive differentiated service and support," continued Mr. Kennedy. "As we progress through fiscal 2017, we remain focused on increasing value for all of our stakeholders."

First Fiscal Quarter Highlights

• Company book-to-bill was approximately 1. Total bookings for the first fiscal quarter decreased 15% from the prior quarter and were 8% below the prior year in constant currency, reflecting extended procurement cycles
• Estimated total contract value was approximately $3 billion, which is flat from the first quarter of fiscal 2016 in constant currency and adjusted for a prior-period de-booking. This amount includes $716 million for private cloud and managed services, a 6% decrease from the first quarter of fiscal 2016 in constant currency and adjusted for a prior-period de-booking
• Net Promoter Score of 57 for customer satisfaction driven by industry-leading service and support
• Product revenue of $401 million decreased 14% from the prior quarter and 13% year-over-year, service revenue of $474 million declined 2% sequentially and 3% year-over-year, each in constant currency
• Cloud and managed services revenue grew 1% year-over-year and networking improved 20% year-over-year, each in constant currency
• Software and services accounted for more than 76% of total revenue in first quarter 2017
• Recurring revenue represented approximately 54% of total revenue, up from 50% year-over-year, in constant currency
• Gross margin was 60.9%, flat compared to the prior quarter, and up slightly from 60.4% for the first quarter of fiscal 2016
• Non-GAAP gross margin was 61.5% compared to 61.8% for the prior quarter and 61.3% for the first quarter of fiscal 2016
• Adjusted EBITDA was $238 million or 27.2% of revenue, a record percentage of revenue for first fiscal quarter results, compared to $284 million or 29.6% of revenue for the prior quarter and $228 million or 23.8% of revenue for the first quarter of fiscal 2016
• For the first fiscal quarter, percentage of revenue by geography was: - U.S. -- 53% - EMEA -- 27% - Asia-Pacific -- 10% - Americas International -- 10%

Conference Call and Webcast

Avaya will not host a conference call and webcast to discuss its Q1 2017 financial results.

Links to this financial results press release and accompanying slides are all available on the investor page of Avaya's website ( www.avaya.com/investors ).

About Avaya

Avaya enables the mission critical, real-time communication applications of the world's most important operations. As the global leader in delivering superior communications experiences, Avaya provides the most complete portfolio of software and services for contact center and unified communications with integrated, secure networking -- offered on premises, in the cloud, or a hybrid. Today's digital world requires some form of communications enablement, and no other company is better positioned to do this than Avaya. For more information, please visit www.avaya.com .

Cautionary Note Regarding the Chapter 11 Cases

The Company's security holders are cautioned that trading in securities of the Company during the pendency of these Chapter 11 cases will be highly speculative and will pose substantial risks. It is possible some or all of the Company's currently outstanding securities may be cancelled and extinguished upon confirmation of a restructuring plan by the Bankruptcy Court. In such an event, the Company's security holders would not be entitled to receive or retain any cash, securities or other property on account of their cancelled securities. Trading prices for the Company's securities may bear little or no relation to actual recovery, if any, by holders thereof in the Company's Chapter 11 cases. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.

Cautionary Note Regarding Forward-Looking Statements

This document contains certain forward-looking statements. 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 other comparable terminology and include, but are not limited to, statements regarding the Company's expected motions to be filed in the Chapter 11 proceeding and the dispositions of such motions, continued operations and customer and supplier programs while in a Chapter 11 proceeding, cash needed to support our operations while in a Chapter 11 proceeding, ability to lower debt and interest payments, ability to operate while in a Chapter 11 proceeding, ability to pay our creditors, credit rating and ability to manage its pension obligations. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe 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 our control, including, but not limited to: the actions and decisions of our creditors and other third parties with interests in the Chapter 11 cases; our ability to maintain liquidity to fund our operations during the Chapter 11 cases; our ability to obtain Bankruptcy Court approvals in connection with the Chapter 11 cases; our ability to consummate any transactions once approved by the Bankruptcy Court and the time to consummation of such transactions; adjustments in the calculation of financial results for the quarter or year end, or the application of accounting principles; discovery of new information that alters expectations about financial results or impacts valuation methodologies underlying financial results; accounting changes required by United States generally accepted accounting principles; and other factors affecting the Company detailed from time to time in the Company's filings with the SEC that are available at www.sec.gov . These and other important factors may cause our 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 list and description of such risks and uncertainties, please refer to Avaya's filings with the SEC that are available at www.sec.gov and in particular, our 2015 Form 10-K filed with the SEC on November 23, 2015. We caution you that the list of important factors included in our 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 document may not in fact occur. Avaya disclaims any intention or obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise, except as otherwise required by law.

¹ Refer to Supplemental Financial Information accompanying this press release for a reconciliation of GAAP to non-GAAP numbers and for reconciliation of adjusted EBITDA for the fourth quarter of fiscal 2016 see our Form 8-K filed with the SEC on January 19, 2017 at www.sec.gov .

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 Adjusted EBITDA and non-GAAP gross margin.

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.

We believe that including supplementary information concerning Adjusted EBITDA is appropriate because it serves as a basis for determining management and employee compensation. In addition, we believe Adjusted EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our current capital structure. Accordingly, 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. While EBITDA measures are frequently used as measures of operations and the ability to meet debt service requirements, 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) as set forth in the following table including, but not limited to, restructuring charges, certain fees payable to our private equity sponsors and other advisors, resolution of certain legal matters and a portion of our pension costs and post-employment benefits costs which represents the amortization of pension service costs and actuarial gain (loss) associated with these benefits. However, these are expenses that may recur, may vary and are difficult to predict.

The estimate of Adjusted EBITDA provided in this press release has been determined consistent with the methodology for calculating Adjusted EBITDA as set forth in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2015.

Non-GAAP gross margin excludes the amortization of acquired technology intangible assets, share based compensation, costs to settle certain legal matters, impairment of long lived assets, and purchase accounting adjustments. We have included non-GAAP gross margin because we believe it provides additional useful information to investors regarding our operations by excluding those charges that management does not believe are reflective of the Company's ongoing operating results when assessing the performance of the business.

Non-GAAP operating income excludes the amortization of acquired technology intangible assets, restructuring and impairment charges, acquisition and integration related costs, third party sales transformation and advisory costs, share based compensation, costs to settle certain legal matters, impairment of long lived assets and purchase accounting adjustments. We have included non-GAAP operating income because we believe it provides additional useful information to investors regarding our operations by excluding those charges that management does not believe are reflective of the company's ongoing operating results when assessing the performance of the business.

These non-GAAP measures are not based on any comprehensive set of accounting rules or principles and have limitations as analytical tools in that they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP. As such, these measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures.

The following tables reconcile GAAP measures to non-GAAP measures:

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