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Avaya Reports Selected Additional Preliminary Third Quarter Fiscal 2022 Financial Results and Provides Business Updates

·13 min read

RALEIGH-DURHAM, N.C., August 09, 2022--(BUSINESS WIRE)--Avaya Holdings Corp. (NYSE: AVYA) ("Avaya" or "the Company") today reported selected additional preliminary financial results for the third quarter of fiscal 2022 ended June 30, 2022. All financial results for the third quarter ended June 30, 2022 and related comparisons to prior periods included in this release are preliminary, have not been reviewed or audited, are based on the Company's estimates and were prepared prior to the completion of the Company's financial statement close process.

Preliminary Third Quarter Financial Results Highlights

  • Revenues of $577 million, down 20% year over year in constant currency

  • OneCloud ARR (Annualized Recurring Revenue) was approximately $838 million, up 12% sequentially and 97% from a year ago

  • CAPS (Cloud, Alliance Partner and Subscription) was 53% of revenue, up from 40% a year ago

  • Software and Services were 88% of revenue; Software was 62% of revenue

  • Recurring revenue was 70% of revenue, up from 64% a year ago

  • GAAP Operating loss was $1,353 million and Non-GAAP Operating income was $20 million

  • GAAP Net loss was $1,408 million and Non-GAAP Net loss was $20 million, which excludes a non-cash impairment charges of $1,272 million1

  • Adjusted EBITDA was $54 million, 9% of revenue, versus 24% a year ago

  • GAAP Diluted Loss Per Share of $16.27 and Non-GAAP Diluted Loss Per Share of $0.24

  • Ending cash and cash equivalents were $217 million. If adjusted for the net proceeds of the July 2022 financings and the partial use of proceeds therefrom to repurchase approximately $129 million of convertible notes, cash and cash equivalents would be $404 million with an additional $221 million of restricted cash held in escrow.

1 The Company's interim impairment tests as of June 30, 2022 indicated that the carrying amount of the Company’s indefinite-lived intangible asset, the Avaya Trade Name, and its Services reporting unit exceeded their respective estimated fair values. As a result, the preliminary financial statements reflect impairment charges of $1,272 million and the Company expects to record impairment charges between $1,272 million to $1,804 million related to the Company’s indefinite-lived intangible asset and goodwill during the three months ended June 30, 2022.

Alan Masarek, President and CEO of Avaya, said, "Our preliminary financial results for the quarter reflect operational and executional shortcomings, amplified against the backdrop of a volatile economic environment. We are taking aggressive actions to right-size Avaya’s cost structure to align with our contractual, recurring revenue business model. We have already begun operationalizing our recently announced savings initiatives and expect to identify additional areas as our work continues. At the same time, we will focus our investments on driving innovation and advancing product development for the benefit of our customers. The July 2022 financings, together with our cost-cutting initiatives, are important steps towards maintaining our financial and operating flexibility to continue to invest in our business and to sustain our business model transition. Although we have a lot of work to do, we have a tremendous foundation to build on as we become a stronger, leaner, more agile, and innovative organization."

GAAP

Non-GAAP (1)

(In millions, except percentages)

3Q22

2Q22

3Q21

3Q22

2Q22

3Q21

Revenue

$

577

$

716

$

732

$

577

$

716

$

732

Gross margin

44.9

%

51.8

%

55.6

%

51.0

%

56.7

%

61.5

%

Operating (loss) income

$

(1,353

)

$

23

$

41

$

20

$

115

$

146

Net (loss) income

$

(1,408

)

$

(1

)

$

43

$

(20

)

$

51

$

73

(Loss) earnings per share - Diluted

$

(16.27

)

$

(0.02

)

$

0.43

$

(0.24

)

$

0.53

$

0.75

(In millions, except percentages)

3Q22

2Q22

3Q21

Adjusted EBITDA(1)

$

54

$

145

$

173

Adjusted EBITDA margin(1)

9.4

%

20.3

%

23.6

%

Cash (used for) provided by operations

$

(85

)

$

(2

)

$

11

Cash and cash equivalents

$

217

$

324

$

562

Additional Preliminary Third Quarter Fiscal 2022 Expected Highlights

  • Remaining Performance Obligations ("RPO") or revenue backlog of $2,259 million

  • Added ~1,300 new logos

  • Significant large deal activity with 92 deals over $1 million TCV, 11 over $5 million TCV, 7 over $10 million TCV and 2 over $25 million TCV

  • ~30% of OneCloud ARR came from customers generating $5 million or more in annual recurring revenue

  • ~60% of OneCloud ARR came from customers generating $1 million or more in annual recurring revenue

  • ~95% of OneCloud ARR came from customers generating $100,000 or more in annual recurring revenue

  • ~60% of OneCloud ARR came from Contact Center customers

As Avaya’s CAPS metric reflects revenue that is already recognized, management believes it is helpful to provide investors with a better view into the performance of the Company’s broader-based OneCloud software solutions that are driving the Company’s recurring revenue growth by also providing a forward-looking metric, Annualized Recurring Revenue, or OneCloud ARR.

OneCloud ARR represents the Company's estimate of the annualized revenue run-rate of certain components from active term OneCloud contracts (whether or not terminable) at the end of the reporting period. More specifically, OneCloud ARR includes OneCloud subscription revenue, ACO recurring revenue and revenue from CCaaS, Spaces, CPaaS, DaaS and private cloud, and excludes maintenance, managed services revenue and ACO one-time payments. The One Cloud ARR metric, combined with the Company’s CAPS metric, provides investors enhanced visibility into Avaya’s transformational Cloud journey. Per period OneCloud ARR figures are provided in the slides published on Avaya’s website at http://www.avaya.com on the Investor Relations page.

(1) Non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP earnings per share and constant currency are not measures calculated in accordance with generally accepted accounting principles in the U.S. ("GAAP"). Refer to the "Use of non-GAAP (Adjusted) Financial Measures" below and the Supplemental Financial Information accompanying this press release for more information on the calculation of constant currency and a reconciliation of the non-GAAP measures included in this release to their most closely comparable measure calculated in accordance with GAAP.

Other Highlights

  • On July 12, 2022, Avaya completed a $250 million exchangeable notes offering and raised an additional $350 million through a term loan add-on.

  • Among other things, these financings help support the Company’s transition from its historical Cap-Ex licensing model to a Subscription and Cloud model, and also extend the duration of its capital structure maturity profile. Other than the 2023 convertible notes, Avaya does not have any material funded debt maturity until calendar 2027 and 2028. Avaya is currently engaging with advisors to assess its options to address the 2023 convertible notes.

  • Avaya announced cost-cutting measures of $225 million to $250 million on July 28, 2022. Net of estimated restructuring costs, these cost-cutting measures are expected to provide net savings of over $200 million. The Company has already commenced operationalizing these savings and expects them to yield quantifiable savings beginning in the first quarter of fiscal 2023.

Going Concern, Audit Committee Internal Investigations and Filing Extension for Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2022

As noted above, the Company completed a series of financing transactions in July 2022, intended in part to provide financing to fund the repurchase or repayment of the convertible notes, which mature in June 2023 and accordingly are classified as a current liability on June 30, 2022. The Company is currently engaging with its advisors to assess its options with respect to addressing the 2023 convertible notes, but there can be no assurance as to the certainty of the outcome of that assessment. As a result of the foregoing, in addition to the Company’s decline in revenues during the third quarter, which represented substantially lower revenues than previous Company expectations, and the negative impact of significant operating losses on the Company's cash balance in the year to date, as of the date of this release, the Company has determined that there is substantial doubt about the Company's ability to continue as a going concern.

The Audit Committee of the Company's Board of Directors has commenced an internal investigation to review the circumstances surrounding the Company's financial results for the quarter ended June 30, 2022.

Furthermore, and separately, the Audit Committee has also commenced an internal investigation to review matters related to a whistleblower letter.

The Audit Committee has engaged outside counsel to assist in the investigations and has notified the Securities and Exchange Commission (the "SEC") and the Company’s external auditor, PricewaterhouseCoopers LLP, of its investigations. As the investigations are not complete, the Audit Committee requires additional time to complete its initial assessments. As a result, the Company requires additional time to complete its review of its financial statements and finalize its disclosures in the Form 10-Q. Accordingly, the Company will be unable to file its Form 10-Q on or prior to the required filing date and has filed a Form 12b-25 Notification of Late Filing for its Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2022.

Video Conference and Webcast

Avaya will host a live webcast and video conference to discuss its preliminary financial results at 8:30 AM Eastern Time on August 9, 2022. To access the live conference call by phone, listeners should dial +1-888-660-6347 toll free or +1-929-201-6594, and use the conference ID: 6784722. 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.

About Avaya

Businesses are built by the experiences they provide, and everyday millions of those experiences are delivered by Avaya Holdings Corp. (NYSE: AVYA). Avaya is shaping what's next for the future of work, with innovation and partnerships that deliver game-changing business benefits. Our cloud communications solutions and multi-cloud application ecosystem power personalized, intelligent, and effortless customer and employee experiences to help achieve strategic ambitions and desired outcomes. Together, we are committed to help grow your business by delivering Experiences that Matter. Learn more at http://www.avaya.com.

Cautionary Note Regarding Preliminary Financial Information

All financial results for the third quarter ended June 30, 2022 and related comparisons to prior periods included in this release are preliminary, have not been reviewed or audited, are based upon the Company's estimates, and were prepared prior to the completion of the Company's financial statement close process. These selected preliminary financial results should not be viewed as a substitute for the Company's full third quarter results and do not present all information necessary for an understanding of the Company's financial performance as of June 30, 2022, and should not be considered final until the Company files its Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. During the course of the preparation of the Company's financial statements as of and for the three and nine months ended June 30, 2022, the Company may identify items that could cause its final reported results to be materially different from the preliminary financial information set forth in this release. Accordingly, undue reliance should not be placed on this preliminary data.

Cautionary Note Regarding Forward-Looking Statements

This release contains certain "forward-looking statements." All statements other than statements of historical fact are "forward-looking" statements for purposes of the U.S. federal and state securities laws. 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 comparable terminology. The Company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. These statements, including the Company’s outlook, do not include the potential impact of any business combinations, asset acquisitions, divestitures, strategic investments or other strategic transactions completed after the date hereof. While the Company believes 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 its control. Risks and uncertainties that may cause these forward-looking statements to be inaccurate include, among others: the finalization of the Company's third quarter financial statements; the findings of the Audit Committee’s investigations; the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures, and the potential for a material weaknesses in the Company’s internal controls over financial reporting or other potential weaknesses of which the Company is not currently aware or which have not been detected; the Company’s ability to continue as a going concern; the impact of litigation and regulatory proceedings; the impact and timing of any cost-savings measures; the termination or modification of current contracts which could impair attainment of our OneCloud ARR metric; the duration, severity and impact of the coronavirus pandemic ("COVID-19"); the impact of the Russia/Ukraine conflict on the global economy and our business, including impacts from related sanctions and export controls imposed by the U.S., UK and the EU on certain industries and Russian parties as a result of the conflict, as well as responses by the governments of Russia or other jurisdictions; and other factors discussed in the Company's Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission (the "SEC"). These risks and uncertainties may cause the Company’s actual results, performance, liquidity or achievements to differ materially from any future results, performance, liquidity or achievements expressed or implied by these forward-looking statements. For a further list and description of such risks and uncertainties, please refer to the Company’s filings with the SEC that are available at www.sec.gov. The Company cautions you that the list of important factors included in the Company’s 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 report may not in fact occur. The Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Avaya Holdings Corp.

Preliminary Condensed Consolidated Statements of Operations (Unaudited)

(In millions, except per share amounts)

Three months ended
June 30,

Nine months ended
June 30,

2022

2021

2022

2021

REVENUE

Products

$

169

$

254

$

623

$

746

Services

408

478

1,383

1,467

577

732

2,006

2,213

COSTS

Products:

Costs

95

98

325

295

Amortization of technology intangible assets

35

43

112

129

Services

188

184

570

554

318

325

1,007

978

GROSS PROFIT

259

407

999

1,235

OPERATING EXPENSES

Selling, general and administrative

236

266

743

785

Research and development

53

55

174

167

Amortization of intangible assets

39

40

119

119

Impairment charges(1)

1,272

1,272

Restructuring charges, net

12

5

22

17

1,612

366

2,330

1,088

OPERATING (LOSS) INCOME

(1,353

)

41

(1,331

)

147

Interest expense

(54

)

(54

)

(162

)

(169

)

Other income, net

13

10

37

11

LOSS BEFORE INCOME TAXES

(1,394

)

(3

)

(1,456

)

(11

)

(Provision for) benefit from income taxes(2)

(14

)

46

(19

)

(8

)

NET (LOSS) INCOME

$

(1,408

)

$

43

$

(1,475

)

$

(19

)

(LOSS) EARNINGS PER SHARE

Basic

$

(16.27

)

$

0.45

$

(17.27

)

$

(0.26

)

Diluted

$

(16.27

)

$

0.43

$

(17.27

)

$

(0.26

)

Weighted average shares outstanding

Basic

86.6

84.9

85.6

84.4

Diluted

86.6

88.0

85.6

84.4

  1. The Company’s interim impairment tests as of June 30, 2022 indicated that the carrying amount of the Company’s indefinite-lived intangible asset, the Avaya Trade Name, and its Services reporting unit exceeded their respective estimated fair values. As a result, the preliminary financial statements reflect impairment charges of $1,272 million and the Company expects to record impairment charges between $1,272 million to $1,804 million related to the Company's indefinite-lived intangible asset and goodwill during the three and nine months ended June 30, 2022.

  2. During the three months ended June 30, 2022, the Company recorded an increase to (Provision for) benefit from income taxes of $(9) million on the Condensed Consolidated Statements of Operations and an increase in Other liabilities of $8 million and a reduction of Deferred income taxes, net of $1 million on the Condensed Consolidated Balance Sheets to correct an understatement of its tax liability in previous periods. The Company concluded that the error was not material to any prior period financial statements and the correction of the error was not material to the current period financial statements.

Avaya Holdings Corp.

Preliminary Condensed Consolidated Balance Sheets (Unaudited)

(In millions, except per share and shares amounts)

June 30, 2022

September 30, 2021

ASSETS

Current assets:

Cash and cash equivalents

$

217

$

498

Accounts receivable, net

305

307

Inventory

50

51

Contract assets, net

639

518

Contract costs

118

117

Other current assets

111

100

TOTAL CURRENT ASSETS

1,440

1,591

Property, plant and equipment, net

300

295

Deferred income taxes, net

30

40

Intangible assets, net

1,903

2,235

Goodwill

296

1,480

Operating lease right-of-use assets

104

135

Other assets

264

209

TOTAL ASSETS

$

4,337

$

5,985

LIABILITIES

Current liabilities:

Debt maturing within one year

$

327

$

Accounts payable

313

295

Payroll and benefit obligations

121

193

Contract liabilities

264

360

Operating lease liabilities

41

49

Business restructuring reserves

14

19

Other current liabilities

139

181

TOTAL CURRENT LIABILITIES

1,219

1,097

Non-current liabilities:

Long-term debt

2,507

2,813

Pension obligations

570

648

Other post-retirement obligations

149

153

Deferred income taxes, net

45

53

Contract liabilities

315

305

Operating lease liabilities

78

102

Business restructuring reserves

16

25

Other liabilities

234

267

TOTAL NON-CURRENT LIABILITIES

3,914

4,366

TOTAL LIABILITIES

5,133

5,463

Commitments and contingencies

Preferred stock, $0.01 par value; 55,000,000 shares authorized at June 30, 2022 and September 30, 2021

Convertible series A preferred stock; 125,000 shares issued and outstanding at June 30, 2022 and September 30, 2021

132

130

STOCKHOLDERS' (DEFICIT) EQUITY

Common stock, $0.01 par value; 550,000,000 shares authorized; 86,846,958 shares issued and outstanding at June 30, 2022; and 84,115,602 shares issued and outstanding at September 30, 2021

1

1

Additional paid-in capital

1,502

1,467

Accumulated deficit

(2,460

)

(985

)

Accumulated other comprehensive income (loss)

29

(91

)

TOTAL STOCKHOLDERS' (DEFICIT) EQUITY

(928

)

392

TOTAL LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY

$

4,337

$

5,985

Avaya Holdings Corp.

Preliminary Condensed Statements of Cash Flows

(Unaudited; in millions)

Nine months ended
June 30,

(In millions)

2022

2021

Net cash (used for) provided by:

Operating activities

$

(198

)

$

35

Investing activities

(80

)

(78

)

Financing activities

2

(126

)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

(5

)

4

Net decrease in cash, cash equivalents, and restricted cash

(281

)

(165

)

Cash, cash equivalents, and restricted cash at beginning of period

502

731

Cash, cash equivalents, and restricted cash at end of period

$

221

$

566

Avaya Holdings Corp.

Preliminary Supplemental Schedule of Revenue by Segment and Geography

(Unaudited; in millions)

Three months ended
June 30,

Change

Three months ended
March 31, 2022

2022

2021

Amount

Pct.

Pct., net of
fx impact

Revenue by Segment

Products & Solutions

$

169

$

254

$

(85

)

(33

) %

(32

) %

$

223

Services

408

478

(70

)

(15

) %

(13

) %