Avaya Holdings Corp Breaks Through Resistance Level, Soars on Strong Q3 Results

Avaya Stock Up 168% Since March Lows

Some investors may see a big disconnect between the state of the U.S. economy and the soaring stock market, but some of the stock valuations are more justified than others. Avaya Holdings Corp (NYSE:AVYA) has seen its share price rise approximately 35% since the start of 2020 and nearly 170% since its March lows.

Some of that initial growth came from investor optimism and a fear of missing out. But those Hail Mary investments took legitimate flight in May and August when the company reported record back-to-back results that exceeded expectations. The company also reported a strong outlook for the fourth quarter and fiscal 2020.

This helped propel AVYA stock significantly higher. On August 10, Avaya stock hit a new 52-week high of $16.46, blowing through previous resistance near $15.50 and trading at its highest level since May 2019. 
 
Chart courtesy of StockCharts.com

AVYA Stock Overview

Through its subsidiaries, Avaya Holdings provides business collaboration and communication software. This includes contract centers and real-time video. (Source: “Investor Presentation, February 2020,” Avaya Holdings Corp, last accessed August 11, 2020.)

Demand for these products and services have soared in the coronavirus pandemic environment, and they are expected to remain robust in the post-pandemic economy.

The Santa Clara, California-based company’s “Products & Solutions” segment develops communications and contact center solutions that are provided on premise, in the cloud, or a combination of both.

The “Services” segment develops services that help its customers evaluate, plan, design, implement, monitor, manage, and optimize enterprise communications networks.

The company’s “Unified Communications” solutions include voice, e-mail, chat, video, social media, and performance management.

Back in October, Avaya Holdings announced a strategic collaboration with RingCentral Inc (NYSE:RNG) to accelerate the company’s transition to the cloud. (Source: “Avaya Announces Strategic Partnership with RingCentral to Accelerate Transformation to the Cloud,” Avaya Holdings Corp, October 3, 2019.)

This includes expanding the company’s portfolio of products and services to a larger customer base (not that Avaya didn’t already have one of the most enviable list of clients).

The company’s customer base includes more than 120,000 customers in more than 180 countries. That includes:

• More than 90% of the United States’ largest companies
• 93 of the top 100 Brands on Forbes 2018 World’s Most Valuable Brands list
• The top 10 banks
• The top 10 insurance companies
• The top 10 passenger airlines
• Nine out of the world’s top 10 largest automobile manufacturers
• Nine of the world’s top 10 healthcare institutions
• Nine of the world’s top 10 hotel chains
• Eight of the top 10 investment services firms
• Eight of the top 10 colleges in the U.S.

(Source: “Welcome to Avaya,” Avaya Holdings Corp, last accessed August 10, 2020.)

Avaya Tops Q3 Revenue Estimates, Provides Strong Guidance

On August 10, Avaya announced that its revenue for the third quarter ended June 30 increased by less than one percent year-over-year and 5.7% sequentially to $721.0 million. (Source: “Avaya Reports Third Quarter Fiscal 2020 Financial Results,” Avaya Holdings Corp, August 10, 2020.)

Wall Street was only expecting the company to report revenue of $686.7 million.

Avaya said its software and services products accounted for 89% of revenue, beating the record set in March. Recurring revenue accounted for 64% of revenue, up five points year-over-year. Meanwhile, “Cloud, Alliance Partner, and Subscription” revenue increased from 23% to 30% of revenue.

The company reported third-quarter net income of $9.0 million, or $0.08 per share, compared to a third-quarter 2019 net loss of $633.0 million and a second-quarter 2020 net loss of $672.0 million.

During the third quarter, Avaya Holdings Corp added 900 new logos, with a total contract value (TCV) of $2.2 billion. Of those new deals, 104 had TCV of over $1.0 million, 14 had TCV of over $5.0 million, and seven had TCV of over $10.0 million.

Jim Chirico, president and CEO, commented, “We delivered strong quarterly results exceeding our guidance across all metrics. The company grew sequentially and year over year, which marks a major milestone for Avaya.” (Source: Ibid.)

Business Outlook

For the fourth quarter, Avaya expects to report revenue of $719.0 to $739.0 million, operating income of $51.0 to $71.0 million, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $170.0 to $190.0 million

For fiscal 2020, the company expects to report revenue of $2.84 billion to $2.86 billion, an operating loss of $478.0 to $458.0 million, and adjusted EBITDA of $680.0 to $700.0 million.

Analyst Take

As the world’s leading pure-play unified communications and contact center company, Avaya Holdings Corp has the largest installed base in the industry. It is also a highly profitable company.

Furthermore, Avaya is in the midst of transitioning to a subscription-based revenue model, and that strategy has been paying off.