AVYA - Avaya Holdings Corp. (AVYA) CEO Alan Masarek on Q3 2022 Results - Earnings Call Transcript

Avaya Holdings Corp. (AVYA)

Q3 2022 Earnings Conference Call

August 9, 2022 8:30 AM ET

Company Participants

Alan Masarek - President and Chief Executive Officer

Kieran McGrath - Executive Vice President and Chief Financial Officer

Presentation

Alan Masarek

I'll now turn the call over to Kieran for his CFO commentary. Thank you, Kieran.

Kieran McGrath

Thanks, Alan, and welcome to Avaya. We're happy to have you here.

Alan Masarek

Thank you.

Kieran McGrath

Good morning, everyone. As a reminder, all figures mentioned on this call are as reported rates unless otherwise indicated in constant currency. I also want to note that all of the third quarter of fiscal 2022 results that we are discussing here this morning, including any related comparisons to prior period, are preliminary financial results that have not been reviewed or audited; are based on our good faith estimates; and more importantly, are prepared prior to the completion of our financial statement closing process. So these preliminary results should not be considered final until we file our Form 10-Q for the quarter.

For the third quarter of our fiscal 2022, revenue was $577 million. This was down 21% as reported and 20% in constant currency against the $732 million as reported in the year ago period and versus $716 million reported in Q2 of fiscal 2022. Our OneCloud Annual Recurring Revenue, or ARR, grew this quarter, adding $88 million to end the quarter at $838 million. Sequential growth was 12% and 97% growth year-over-year. Revenue contribution from CAPS, Cloud, Alliance Partner and Subscription, represented 53% of total revenue versus 40% a year ago, but in absolute dollars was down approximately $85 million sequentially primarily due to the reduction in Subscription point in time revenue that you heard Alan discuss.

For our third fiscal quarter, recurring revenue accounted for 70% of total revenue and Software and Services revenue represented 88% of total revenue. Software revenue alone totaled 62% of our revenue.

Now let me turn over to profitability. Non-GAAP gross margin was 51% in the third quarter, compared to 61.5% in the year ago period and 56.7% sequentially. Our product margins of 43.8% were down 3 percentage points sequentially primarily due to lower hardware gross margins. Year to year, gross margin is down 17 percentage points primarily due to the decline in high margin CapEx license software revenue. Services margin was at 53.9%, down 7 points sequentially and 8 points year-on-year. The sequential decline is due to lower Q3 subscription revenue. As it relates to the year-on-year decline, while Subscription revenue grew, the growth was not sufficient to offset the declines in the high margin maintenance revenue over the same period. Third quarter non-GAAP operating income was $20 million, representing a non-GAAP operating margin of 3% versus 20% in the year ago period.

Adjusted EBITDA was $54 million, representing an adjusted EBITDA margin of 9%, down from 24% last year due to the aforementioned revenue reductions, partially mitigated by the expense reductions previously announced in Q2. Non-GAAP was negative $0.24 in the third quarter compared to positive $0.75 in the year ago period and positive $0.53 sequentially. Here you will note in the accompanying preliminary financial statements, contained within our Q3 press release, that we expect to record a $1.272 billion non-cash impairment charge against the carrying value of our tradename and goodwill intangible assets. This charge is a preliminary estimate and our analysis is still ongoing.

Now, finally, on cash. Cash flow from operations was negative $85 million contributing to a third quarter ending cash balance of $217 million. Adjusting our third quarter ending cash balance for net proceeds of the incremental term loan and exchangeable notes financing, which was completed on July 12th, Avaya’s cash on hand would be composed of $404 million of cash and cash equivalents and $221 million of restricted cash held in escrow.

Let me conclude by reinforcing what Alan has noted. We are not standing still. We are taking an aggressive set of actions to reset our run rate of cost and expense. We expect to generate between $225 million and $250 million of annual cost and expense reductions and have already begun to operationalize these plans. As Alan stated, as we finalize these plans, we may increase the size of the cost initiatives. We are intently focused on liquidity and maintaining our financial and operating flexibility so as to continue to invest in our business and sustain the transition of our business model.

With that, let me hand it back to Alan.

Alan Masarek

Thanks, Kieran, and thank you all again. I understand very clearly that there is disappointment, there's worry, there's concern out there across effectively all of Avaya's stakeholders. I get it. But I think it would be a mistake to look at sort of the Q3 results and extrapolate that out and say, this is the future of the company. I don't believe that at all.

As I mentioned, transformations are tough, but I came here eyes wide open, because I fundamentally believe that we can fundamentally improve the performance going forward. If I didn't believe that, I wouldn't have come here as CEO. So I spoke to what I see are assets that are just completely irreplaceable, far, far in excess of what any other competitor has. Now, we got lots of work to do. Make no mistake. But I think the way in which transformations happen -- and obviously, I've got very specific experience about this, is you got to be very resolute about it. And that's what I intend to do. That's what I intend to be.

So as I said at the end of my prepared comments, I want to thank you for your support, and I'm going to thank you in advance for your patience. Give us some time to demonstrate a better future. As I said to my colleagues throughout Avaya, prepare to win, prepare to win.

So thank you all very much, and we look forward to getting back in touch just as soon as our plans firm. And again, we appreciate your support. Thank you.

Question-and-Answer Session

End of Q&A

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