Avaya Reports Fourth Quarter and Fiscal 2018 Financial Results

Q4 FY'18

• Revenue was $735 million
• Non-GAAP revenue was $770 million, of which 82.6% was from Software and Services, a fourth quarter record, and 56.2% was from recurring revenue
• Midmarket Public Cloud MRR grew 165% year-over-year
• Signed deals with significant Total Contract Value ("TCV"), including 12 deals over $5 million, and 117 deals over $1 million

FY'18

• Revenue for the Combined periods described below was $2.851 billion
• Non-GAAP revenue for the Combined periods described below was $3.057 billion, of which 82.2% was from Software and Services and 57.4% was from recurring revenue, both annual records
• UCaaS/CCaaS seats grew 312% year-over-year
• Added over 6,800 new logos
• Signed deals with significant TCV including 15 deals over $10 million, 55 deals over $5 million and over 440 deals over $1 million

Santa Clara, Calif., - December 4, 2018 - Avaya Holdings Corp. (NYSE: AVYA) today reported financial results for the fourth quarter and fiscal year ended September 30, 2018.

“Our strong finish to the fiscal year was the direct result of accelerating business momentum driven by our forward facing investment strategy,” said Jim Chirico, President and CEO, Avaya. "Our public cloud solutions are gaining traction as we leverage the strong Avaya brand and our enterprise installed base. Additionally, we are investing in technology that complements our core solutions, including artificial intelligence and mobility. Our foundation is solid and we are well positioned for growth in 2019 and beyond.”

GAAP revenue for the fourth quarter of fiscal 2018 was $735 million, $43 million higher than the third quarter of fiscal 2018, and $55 million lower than the fourth quarter of fiscal 2017 ended September 30, 2017. Non-GAAP revenue for the fourth quarter of fiscal 2018 was $770 million, $15 million higher than the prior quarter, and $20 million lower than the fourth quarter of fiscal 2017.

GAAP gross margin for the fourth quarter of fiscal 2018 was 53.1% compared to 50.9% for the third quarter of fiscal 2018 and 62.8% for the fourth quarter of fiscal 2017. Non-GAAP gross margin was 63.4%, compared to 61.9% for the third quarter of fiscal 2018 and 63.3% for the fourth quarter of fiscal 2017.

GAAP operating income for the fourth quarter of fiscal 2018 was $11 million, compared to an operating loss of $49 million for the third quarter of fiscal 2018, and operating income of $69 million for the fourth quarter of fiscal 2017. Non-GAAP operating income(1) for the fourth quarter of fiscal 2018 was $157 million, compared to $151 million for the prior quarter, and $183 million for the fourth quarter of fiscal 2017.

Net income for the fourth quarter of fiscal 2018 was $268 million, compared to net loss of $88 million for the third quarter of fiscal 2018, and net income of $27 million for the fourth quarter of fiscal 2017.

Adjusted EBITDA⁽¹⁾ for the fourth quarter of fiscal 2018 was $178 million or 23.1% of non-GAAP revenue, compared to adjusted EBITDA of $175 million, or 23.2% of non-GAAP revenue, for the third quarter of fiscal 2018 and $225 million, or 28.5% of non-GAAP revenue, for the fourth quarter of fiscal 2017.

For fiscal 2018, Avaya reported revenue for the “Combined” Predecessor period (October 1, 2017 through December 15, 2017) and the “Successor” period (from December 16, 2017 through September 30, 2018)⁽²⁾ of $2,851 million, a decrease of 13% compared to fiscal 2017, or down 14% in constant currency. Non-GAAP revenue adjusted to further exclude the revenue of the Networking business was $3,049 million for the Combined fiscal 2018 periods, $47 million lower than fiscal 2017, resulting primarily from lower service revenue.

Gross margin for the Combined fiscal 2018 periods was 52.8%. Non-GAAP gross margin for the Combined fiscal 2018 periods was 62.5%, which compares to 62.0% for fiscal 2017. Operating loss for the Combined fiscal 2018 periods was $89 million, primarily a result of $275 million for the amortization of intangible assets as well as $95 million of restructuring charges, compared to operating income of $171 million for fiscal 2017. Non-GAAP operating income was $637 million, or 20.8% of revenue, for the Combined fiscal 2018 periods, compared to $703 million, or 21.5% of revenue for fiscal 2017. Net income for the Combined fiscal 2018 periods was $3,264 million compared to a net loss of $182 million in the prior year. Combined fiscal 2018 adjusted EBITDA of $746 million represented 24.4% of non-GAAP revenue, compared to $866 million for fiscal 2017.

Cash provided by operating activities for the fourth quarter of fiscal 2018 was $25 million, compared to $83 million during the third quarter of fiscal 2018 and $166 million during the fourth quarter of fiscal 2017. Cash used for operating activities for the Combined fiscal 2018 periods was $212 million, primarily due to payments related to the company's reorganization and emergence from bankruptcy, which included payments to the PBGC ($340 million), general unsecured creditors ($58 million) and the Avaya pension plan for represented employees ($49 million), compared to $291 million cash provided by operating activities for fiscal 2017.

Cash and cash equivalents totaled $700 million at the end of the fourth quarter of fiscal 2018, compared to $685 million at the end of the third quarter of fiscal 2018 and $876 million at the end of the fourth quarter of fiscal 2017. The sequential increase in cash and cash equivalents is primarily due to positive cash flows from operating activities and proceeds from the sale of assets, partially offset by capital expenditures. The year-over-year change in cash and cash equivalents is primarily due to cash outflows including emergence payments to the former debt holders, the PBGC and other creditors, and funding of the acquisition of Spoken, offset by net proceeds from the issuance of convertible notes and cash generated from operations.

⁽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.

⁽²⁾Due to the company’s emergence from Chapter 11 proceedings during the first quarter of fiscal 2018 and adoption of fresh start accounting effective on December 15, 2017, the results for fiscal year 2018 are required by GAAP to be presented separately as the predecessor period from October 1, 2017 through December 15, 2017 (the “Predecessor” period) and the successor period from December 16, 2017 through September 30, 2018 (the “Successor” period). The application of fresh start accounting results in a new basis of accounting making the results of the Predecessor period not comparable to the results of the Successor period. Where applicable we have, however, combined results of the Predecessor and Successor periods for discussion purposes as we believe it provides the most meaningful basis to analyze our results. Refer to Supplemental Financial Information accompanying this press release for more information, including a reconciliation of combined results to our Predecessor and Successor results.

Q4 FY'18 Highlights

• Grew non-GAAP revenue 2% and bookings 6% quarter-over-quarter (excluding Networking)
• Added over 1,600 new logos
• Invested in Cogito, a leader in AI for contact center solutions
• Recognized for innovation and leadership:
  • Avaya unified communications solutions named Customers’ Choice in 2018 Gartner Peer Insights
  • Avaya VantageTM awarded Best Endpoint Solution of 2018 at UC Today
  • Winner in three categories of the 2018 Conarec Awards
  • Received 2018 Competitive Strategy Innovation and Leadership Award by Frost & Sullivan

FY'18 Combined Periods Highlights

• Grew product revenue during fiscal 2018 (excluding Networking)
• Grew TCV by 7%, year-over-year to over $2.4 billion (excluding Networking)
• Increased cloud revenue to approximately 11% of non-GAAP revenue, up from 9% during fiscal 2017.
• Invested in innovation and technology:
  • Acquired Spoken Communications, a leading innovator in CCaaS solutions
  • Launched 117 new products
  • Global launch of new Avaya IP Office™, with enterprise-grade capabilities including cloud UCaaS with voice and video, meetings, team collaboration, and content sharing
  • Established an Innovation Incubator, chartered with creating disruptive solutions with a focus on mobility, security and artificial intelligence
  • Obtained first patent and customer implementations for groundbreaking Avaya Mobile Experience technology that optimizes the experience for mobile callers into the contact center
  • Entered a strategic alliance including joint development to incorporate Afiniti International Holding’s AI and analytics into the industry-leading Avaya contact center platform
• Launched Cloud Master Agent program to accelerate sales of cloud solutions to small and midmarket businesses
• Named to Gartner's Leaders Quadrant for both Contact Center and Unified Communications Magic Quadrants, and received CRN’s prestigious 2018 5-Star Partner Program rating for ninth consecutive year

Our financial outlook presented below reflects the adoption of the new ASC 606 revenue recognition standard that became effective October 1, 2018 and replaced ASC 605. Avaya has adopted the modified retrospective transition method.

The net impact of adoption is expected to be a decrease of fiscal 2019 Adjusted EBITDA compared to ASC 605, substantially offset by earlier revenue recognition for certain products and services under ASC 606 and incremental revenue.

Financial Outlook - Q1 Fiscal 2019 under ASC 606

• GAAP revenue of $740-$765 million, non-GAAP revenue of $750-$775 million
• GAAP operating income of 4-7% of revenue, non-GAAP operating income of 21.5-22.5% of non-GAAP revenue
• GAAP operating income of $30-$50 million, non-GAAP operating income of $162-$173 million
• Cash taxes of approximately $8 million
• Adjusted EBITDA of $185-$197 million, or adjusted EBITDA margin of 24.5-25.5% of non-GAAP revenue
• Approximately 111 million shares outstanding

Financial Outlook - Fiscal Year 2019 under ASC 606

• GAAP revenue of $3.01-$3.12 billion, non-GAAP revenue of $3.05-$3.15 billion
• GAAP and non-GAAP R&D of $220-$225 million, or 15-16% of non-GAAP product revenue
• Operating income of $200-$280 million, non-GAAP operating income of $675-$730 million or 22-23% of non-GAAP revenue
• Adjusted EBITDA $763-$819 million, or 25-26% of non-GAAP revenue
• Approximately 113 million shares outstanding

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 December 4, 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 December 4, 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 an 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: 3187748.

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

2018 Investor Day

Avaya will move up the start time for its 2018 Investor Day on Wednesday, December 12 in New York City by 30 minutes. The webcast is now scheduled to begin promptly at 12:30 p.m. ET and is expected to conclude at approximately 4:30 p.m. ET. The event will be webcast live and all interested parties are invited to access the webcast from the investor page of Avaya’s website https://investors.avaya.com.

About Avaya

Businesses are built on the experiences they provide, and every day millions of those experiences are built by Avaya (NYSE: AVYA). For over one hundred years, we’ve enabled organizations around the globe to win - by creating intelligent communications experiences for customers and employees. Avaya builds open, converged and innovative solutions to enhance and simplify communications and collaboration - in the cloud, on-premise or a hybrid of both. To grow your business, we’re committed to innovation, partnership, and a relentless focus on what’s next. We’re the technology company you trust to help you deliver Experiences that Matter. Visit us at www.avaya.com.

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