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Avaya Reports First Fiscal Quarter 2013 Results

SANTA CLARA, CA -- (Marketwire) -- 02/05/13 --


First Quarter 2013

  • Revenue of $1.24 billion
  • Operating Income of $23 Million, Non-GAAP Operating Income(1) of $193 Million
  • Adjusted EBITDA(1) of $251 Million

Avaya Inc., a global provider of business communications and collaboration systems, software and services, today reported results for the first quarter of fiscal 2013. For the first fiscal quarter, revenue was $1.24 billion, down 2.9% compared to the prior quarter, primarily due to seasonality and reduced demand in the U.S. Federal Government sector and the Americas International theater. On a year over year basis revenue was down 10.6% compared to the first quarter of fiscal 2012. The revenue decline was primarily due to lower customer demand in a cautious spending environment. Operating income was $23 million compared to operating income of $76 million for the prior quarter and $82 million for the first quarter of fiscal 2012. First quarter adjusted EBITDA was $251 million which compares to adjusted EBITDA of $267 million for the prior quarter and $279 million for the first quarter of fiscal 2012. Cash flow from operations was $6 million for the first quarter. Cash and cash equivalents was $285 million as of December 31, 2012 compared to $337 million as of September 30, 2012.

"Avaya's first quarter results evidenced continued operational discipline as revenue declined due to the current cautious economic environment," said Kevin Kennedy, President and CEO, Avaya. "We continued to take the necessary actions to reduce our cost structure and improve our profitability. Avaya will continue to execute and deliver operational efficiencies and productivity improvements while maintaining our focus on growth, through product innovation and improved alignment of our go to market investments."

First Fiscal Quarter Highlights

  • Revenue of $1.24 billion decreased 2.9% compared to the prior quarter and decreased 10.6% compared to the first quarter of fiscal 2012
  • Gross margin was 53.7% compared to 50.6% for the prior quarter and 50.8% for the first quarter of fiscal 2012
  • Non-GAAP gross margin(1) was 55.6% compared to 54.7% for the prior quarter and 54.4% for the first quarter of fiscal 2012
  • Adjusted EBITDA was $251 million or 20.2% of revenue compared to $267 million or 20.9% of revenue for the prior quarter and $279 million or 20.1% of revenue for the first quarter of fiscal 2012
  • Global Communications Solutions revenue of $573 million decreased 2.6% compared to the prior quarter and decreased 14.1% compared to the first quarter of fiscal 2012
  • Networking revenue of $58 million decreased 9.4% compared to the prior quarter and decreased 29.3% compared to the first quarter of 2012
  • Avaya Global Services revenue of $609 million decreased 2.6% compared to the prior quarter and decreased 4.5% compared to the first quarter of 2012
  • For the first fiscal quarter, percentage of revenue by geography was, U.S. with 54%, EMEA with 27%, Asia - Pacific with 10% and Americas International with 9%
  • The Company had $285 million in cash and cash equivalents as of December 31, 2012

(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 2012 see our Form 8-K filed with the SEC on December 11,2012 at www.sec.gov.

Conference Call and Webcast
Avaya will host a conference call to discuss these results at 5:00 p.m. EST on Tuesday, February 5, 2013. To access the conference call, dial 800-882-9327 in the U.S. or Canada and 706-645-9730 for international callers and provide the operator the conference passcode number of 91163824. To ensure you are on the call from the start, we suggest you access the call 10-15 minutes prior to the start of the call.

WEBCAST Information: Avaya will webcast this conference call live. To ensure that you are on the webcast, we suggest that you access our website (www.avaya.com/investors) 10-15 minutes prior to the start. Supplementary materials accompanying the conference call are available at the same location. Following the live webcast, a replay will be available on our archives at the same web address.

About Avaya
Avaya is a global provider of business collaboration and communications solutions, providing unified communications, contact centers, networking and related services to companies of all sizes around the world. For more information please visit www.avaya.com.

Certain statements contained in this press release are 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," "plan," "potential," "predict," "should" or "will" or other similar terminology. 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. 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. Avaya disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


                                 Avaya Inc.
                   Consolidated Statements of Operations
                          (Unaudited; in millions)

                                                     For the three months
                                                      ended December 31,
                                                   ------------------------
                                                       2012         2011
                                                   -----------  -----------
REVENUE
  Products                                         $       631  $       749
  Services                                                 609          638
                                                   -----------  -----------
                                                         1,240        1,387
                                                   -----------  -----------
COSTS
  Products:
    Costs (exclusive of amortization of
     intangibles)                                          261          311
    Amortization of technology intangible assets            22           50
  Services                                                 291          322
                                                   -----------  -----------
                                                           574          683
                                                   -----------  -----------
GROSS PROFIT                                               666          704
                                                   -----------  -----------
OPERATING EXPENSES
  Selling, general and administrative                      384          433
  Research and development                                 118          111
  Amortization of intangible assets                         57           56
  Restructuring and impairment charges, net                 84           21
  Acquisition-related costs                                  -            1
                                                   -----------  -----------
                                                           643          622
                                                   -----------  -----------
OPERATING INCOME                                            23           82
Interest expense                                          (108)        (109)
Loss on extinguishment of debt                              (3)           -
Other expense, net                                          (6)          (1)
                                                   -----------  -----------
LOSS BEFORE INCOME TAXES                                   (94)         (28)
Benefit from income taxes                                   (9)          (2)
                                                   -----------  -----------
NET LOSS                                           $       (85) $       (26)
                                                   ===========  ===========



                                 Avaya Inc.
                        Consolidated Balance Sheets
                          (Unaudited; in millions)

                                                December 31,  September 30,
                                                    2012           2012
                                               -------------  -------------
ASSETS
Current assets:
  Cash and cash equivalents                    $         285  $         337
  Accounts receivable, net                               763            782
  Inventory                                              258            255
  Deferred income taxes, net                              16             18
  Other current assets                                   260            252
                                               -------------  -------------
TOTAL CURRENT ASSETS                                   1,582          1,644
                                               -------------  -------------
  Property, plant and equipment, net                     360            364
  Deferred income taxes, net                              45             43
  Intangible assets, net                               1,697          1,775
  Goodwill                                             4,188          4,188
  Other assets                                           193            180
                                               -------------  -------------
TOTAL ASSETS                                   $       8,065  $       8,194
                                               =============  =============
LIABILITIES
Current liabilities:
  Debt maturing within one year                $          34  $          37
  Accounts payable                                       446            438
  Payroll and benefit obligations                        236            262
  Deferred revenue                                       617            616
  Business restructuring reserve, current
   portion                                               122             84
  Other current liabilities                              240            302
                                               -------------  -------------
TOTAL CURRENT LIABILITIES                              1,695          1,739
                                               -------------  -------------
  Long-term debt                                       6,075          6,084
  Pension obligations                                  1,754          1,763
  Other postretirement obligations                       351            360
  Deferred income taxes, net                             207            204
  Business restructuring reserve, non-current
   portion                                                78             51
  Other liabilities                                      438            429
                                               -------------  -------------
TOTAL NON-CURRENT LIABILITIES                          8,903          8,891
                                               -------------  -------------
Commitments and contingencies
DEFICIENCY
  Common stock                                             -              -
  Additional paid-in capital                           2,927          2,926
  Accumulated deficit                                 (4,321)        (4,236)
  Accumulated other comprehensive loss                (1,139)        (1,126)
                                               -------------  -------------
TOTAL DEFICIENCY                                      (2,533)        (2,436)
                                               -------------  -------------
TOTAL LIABILITIES AND DEFICIENCY               $       8,065  $       8,194
                                               =============  =============


                                 Avaya Inc.
                     Condensed Statements of Cash Flows
                          (Unaudited; in millions)

                                                     For the three months
                                                      ended December 31,
                                                   ------------------------
                                                       2012         2011
                                                   -----------  -----------
Net cash (used for) provided by:
    Net loss                                       $       (85) $       (26)
    Adjustments to net loss                                101          157
    Changes in operating assets and liabilities            (10)        (141)
                                                   -----------  -----------
  Operating activities                                       6          (10)
  Investing activities                                     (31)         (36)
  Financing activities                                     (26)         (10)
  Effect of exchange rate changes on cash and cash
   equivalents                                              (1)           1
                                                   -----------  -----------
Net decrease in cash and cash equivalents                  (52)         (55)
Cash and cash equivalents at beginning of year             337          400
                                                   -----------  -----------
Cash and cash equivalents at end of year           $       285  $       345
                                                   ===========  ===========


                                 Avaya Inc.
                       Supplemental Revenue Schedules
                          (Unaudited; in millions)

 For the Three Months                         For the Three Months
        Ended                                  Ended December 31,
---------------------                --------------------------------------
 Mar.   June  September                 Revenues      Mix         Change
  31,    30,     30,                 ------------- ---------  -------------
 2012   2012    2012                  2012   2011  2012 2011  Amount   Pct.
------ ------ -------                ------ ------ ---- ----  ------  -----

                      Revenue by
                       Segment
                      ---------------
                      Global
                       Communications
$  574 $  561 $   588  Solutions     $  573 $  667   46%  48% $  (94) -14.1%
                       Purchase
                        accounting
    (1)    (1)      -   adjustments       -      -    0%   0%      -      -
    64     74      64 Networking         58     82    5%   6%    (24) -29.3%
------ ------ -------                ------ ------ ---- ----  ------  -----
                      Total ECS
                       product
   637    634     652  revenue          631    749   51%  54%   (118) -15.8%
   620    616     625 AGS               609    638   49%  46%    (29)  -4.5%
------ ------ -------                ------ ------ ---- ----  ------  -----
$1,257 $1,250 $ 1,277 Total revenue  $1,240 $1,387  100% 100% $ (147) -10.6%
====== ====== =======                ====== ====== ==== ====  ======  =====


                      Revenue by
                       Geography
                      ---------------
$  678 $  666 $   694 U.S.           $  670 $  748   54%  54% $  (78) -10.4%
------ ------ -------                ------ ------ ---- ----  ------  -----
                      International:
   327    330     327  EMEA             331    365   27%  26%    (34)  -9.3%
                       APAC - Asia
   117    128     126   Pacific         123    126   10%   9%     (3)  -2.4%
                       Americas
                        International
                        - Canada and
   135    126     130   Latin America   116    148    9%  11%    (32) -21.6%
------ ------ -------                ------ ------ ---- ----  ------  -----
                      Total
   579    584     583  International    570    639   46%  46%    (69) -10.8%
------ ------ -------                ------ ------ ---- ----  ------  -----
$1,257 $1,250 $ 1,277 Total Revenue  $1,240 $1,387  100% 100% $ (147) -10.6%
====== ====== =======                ====== ====== ==== ====  ======  =====

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 GAAP, including adjusted EBITDA, Non-GAAP gross margin and Non-GAAP operating income.

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 permitted in calculating covenant compliance under our debt agreements as further described in our SEC filings.

We believe that including supplementary information concerning adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our debt agreements and because it serves as a basis for determining management 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, namely the company's pricing strategies, volume, costs and expenses of the organization.

Adjusted EBITDA has limitations as an analytical tool. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While adjusted EBITDA and similar 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 does not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, based on our debt agreements the definition of adjusted EBITDA allows us to add back certain non-cash charges that are deducted in calculating net income (loss). Our debt agreements also allow us to add back restructuring charges, certain fees payable to our private equity sponsors and other specific cash costs and expenses as defined in the agreements and that portion of our pension costs, other post-employment benefits costs, and non-retirement post-employment benefits costs representing the amortization of pension service costs and actuarial gain or loss associated with these employment benefits. However, these are expenses that may recur, may vary and are difficult to predict. Further, our debt agreements require that adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

Non-GAAP gross margin excludes the amortization of technology intangible assets, impairment of long lived assets, transition services agreement costs incurred in connection with the acquisition of Nortel's enterprise solutions business, share based compensation 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 technology intangible assets, restructuring and impairment charges, acquisition and integration related costs, share based compensation, 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 principals and have limitations as analytical tools in that they do not reflect all of the amounts associated with Avaya's results of operations as determined in accordance with GAAP. As such, these measures should only be used to evaluate Avaya's results of operations in conjunction with the corresponding GAAP measures.

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


                                 Avaya Inc.
             Supplemental Schedule of Non-GAAP Adjusted EBITDA
                          (Unaudited; in millions)

                                                     For the three months
                                                      ended December 31,
                                                   ------------------------
                                                       2012         2011
                                                   -----------  -----------
Net loss                                           $       (85) $       (26)
  Interest expense                                         108          109
  Interest income                                           (1)          (1)
  Benefit from income taxes                                 (9)          (2)
  Depreciation and amortization                            114          143
                                                   -----------  -----------
EBITDA                                                     127          223
  Restructuring charges, net                                84           21
  Sponsors' fees                                             2            2
  Acquisition-related costs                                  -            1
  Integration-related costs                                  4            5
  Loss on extinguishment of debt                             3            -
  Third-party fees expensed in connection with the
   debt modification                                         4            -
  Non-cash share-based compensation                          2            3
  Loss on investments and sale of long-lived
   assets, net                                               -            1
  Loss on foreign currency transactions                      2            1
  Pension/OPEB/nonretirement postemployment
   benefits and long-term disability costs                  23           22
                                                   -----------  -----------
Adjusted EBITDA                                    $       251  $       279
                                                   ===========  ===========


                                 Avaya Inc.
             Supplemental Schedules of Non-GAAP Reconciliations
                          (Unaudited; in millions)

                                   For the Three Months Ended
                      -----------------------------------------------------
                       Dec. 31    Mar. 31,   June 30   Sept. 30,   Dec. 31
                         2011       2012       2012       2012       2012
                      ---------  ---------  ---------  ---------  ---------

Reconciliation of
 Non-GAAP Gross
 Profit and Non-GAAP
 Gross Margin
  GAAP Gross Profit   $     704  $     613  $     623  $     646  $     666
  GAAP Gross Margin        50.8%      48.8%      49.8%      50.6%      53.7%

  Items excluded:
    Amortization of
     technology
     intangible
     assets                  50         49         47         46         22
    Impairment of
     capitalized
     software
     development
     costs                    -          -          2          4          -
    Share-based
     compensation             1          1          1          1          1
    Purchase
     accounting
     adjustments              -          1          1          1          -
                      ---------  ---------  ---------  ---------  ---------
    Non-GAAP Gross
     Profit           $     755  $     664  $     674  $     698  $     689
                      =========  =========  =========  =========  =========

  Non-GAAP Gross
   Margin                  54.4%      52.8%      53.9%      54.7%      55.6%
                      =========  =========  =========  =========  =========


Reconciliation of
 Non-GAAP Operating
 Income
  GAAP Operating
   Income (Loss)      $      82  $     (66) $      23  $      76  $      23
    Percentage of
     Revenue                  6%        -5%         2%         6%         2%

  Items excluded:
    Amortization of
     acquired assets        106        105        104        103         79
    Restructuring and
     impairment
     charges, net            21         90         21         15         84
    Acquisition/integ
     ration-related
     costs                    6          6          6          6          5
    Share-based
     compensation             3          2          2          1          2
    Impairment of
     capitalized
     software
     development
     costs                    -          -          2          4          -
    Purchase
     accounting
     adjustments              -          1          1          1          -

                      ---------  ---------  ---------  ---------  ---------
  Non-GAAP Operating
   Income             $     218  $     138  $     159  $     206  $     193
                      =========  =========  =========  =========  =========

  Percentage of
   Revenue                 15.7%      11.0%      12.7%      16.1%      15.6%
                      =========  =========  =========  =========  =========

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