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    Despite Broad Sell-off & Poor Q1 Performance, Avaya Holdings Corp. (AVYA) Popular with Hedge Fund Holders

    By Gule Rukhsar

    May 31,2022

    2:20 AM UTC

    Whenever a broad sell-off is instigated in the stock market due to some prevalent reason, active long-term investors often find the best buys amid the dip. Similarly, the current situation with the wider geopolitical and economic turmoil has the stock market plunging down. Nasdaq, the tech-heavy composite is in the bear market territory while the S&P 500 after its recent brush down is trading just above it. This broad downfall of equities has sparked the interest of many investors including billionaires and hedge funds to compile battered stocks with great values. Even market analysts and experts suggest investors make the most of the current steep decline in prices and buy the dip. However, the wide interest of hedge funds and billionaires like Paul Tudor Jones in Avaya Holdings Corp. (AVYA) is a bit questionable.

    The digital communications solutions provider while does have a severely beaten-down price, it has raised certain red flags recently. After a huge sell-off in recent days with worst-than-expected earnings and a poor outlook, AVYA has been downgraded by many. The recent price target downgrades have left very little upside potential for the stock. Moreover, a concern also comes from the limited diversification of its business, and an expected decline in earnings over the next three years.

    AVYA Stock & Recent Downgrades

    The North Carolina-based company’s stock has suffered an immense sell-off in 2022 with year to date loss above 81%. Having lost nearly 60% in the past month, the stock currently trades at a price of $3.96 per share (May 27-day end).

    Last week, the stock was downgraded by a number of analysts including one from Cowen and one from Barclays. Lance Vitanza at Cowen downgraded the stock to a Market Perform from an Outperform. The analyst also reduced the price target of the stock to a mere $6 from $26 which leaves a very minuscule upside. Furthermore, the stock was downgraded by Barclays’ Ryan MacWilliams from an Equal-weight to Underweight. The firm cut down its price target from $8 to $5. Playing a role in these downgrades was the company’s latest earnings and weak guidance. The analysts now see an increase in uncertainty about the company’s ability to switch to a recurring revenue model. Its near-term debt maturity only added to the wider concerns regarding the near-term future of the company.

    Additionally, BWS financial and JP Morgan also downgraded the stock recently after the company’s Q2 earnings.

    AVYA’s Q1 Performance

    On May 10, 2022, the company posted its financial results for the fiscal second quarter of 2022 which ended on March 31.

    For the March quarter, the company’s revenue was $716 million, far below the consensus estimate of $737.9 million. The quarterly revenue also showed a YOY decline of 2% against $738 million in the comparable period. Product sales decreased 1.3% YOY and Services sales went down by 3.7% YOY. However, the OneCloud Annualized Recurring Revenue (ARR) surged by 118% YOY and 21% sequentially at $750 million for the quarter.

    AVYA’s adjusted quarterly earnings of $0.53 a share also missed the analysts’ expectations of $0.61 per share. The earnings declined from $0.74 per share in the year-ago quarter. The adjusted net income was $51 million in the quarter while the GAAP net loss was $1 million.

    The company’s adjusted EBITDA declined by 370 basis points YOY to $145 million in the quarter which was 20% of revenue.

    At the end of the quarter, the cash and cash equivalents totaled $324 million for the company.

    Future Outlook

    For the ongoing quarter, the company expects revenue of $685-$700 million with non-GAAP diluted earnings of $0.48-$0.56 per share. This guidance falls well below the consensus EPS of $0.82 on revenues of $756.46 million for the quarter. AVYA also provided guidance of $140-$150 million in adjusted EBITDA for the fiscal Q3 2022.

    For the full year, the company is looking ahead to revenues of $2.815 billion to $2.855 billion. The adjusted earnings expectations of the company are pegged between $2.09 and $2.25 per share for the fiscal year. On the other hand, analysts had their expectations pegged at earnings of $2.80 per share on revenues of $3 billion for the year. The company management is also expecting adjusted EBITDA of $580 million to $600 million with a margin of roughly 21% for the year.

    Anyways, the company CEO Jim Chirico shed some light on the positives of the report including the fact that AVYA is well on track to hit $1 billion annual recurring revenue by the end of 2022 for its OneCloud. The company’s Q2 presentation further highlighted the OneCloud growth:

    Source: Q2 Presentation

    75% of new bookings came from the OneCloud product but in spite of the solid OneCloud adoption, the quarterly revenues still decreased. This is because of the lower percentage of revenue recognized from subscription bookings.

    AVYA’s Popularity Among Hedge Funds

    AVYA’s year-to-date decline has outperformed its peers with its share tumbling 62% against the Zacks Computer & Technology sector’s downfall of 26%. But despite this steep decline, the stock is still famous among hedge funds and investors like Paul Tudor. Tudor Investment Corp. recently added the company to its portfolio with the purchase of 141,656 shares worth $1.7 million. As per the Q1 data, 24 hedge funds are bullish on AVYA with Alkeon Capital Management having the largest stake in the company worth $57.7 million.

    Conclusion

    The severely beaten-down tech stock AVYA has been getting downgrades and price cutdowns from analysts lately. Largely contributing to the bearish sentiment were its disappointing Q2 fiscal 2022 earnings and a weak forecast. However, certain hedge funds and billionaires are still bullish on the company as they probably see the possibility of great returns in the longer run. Investing in the stock at the moment is not free of risks as its near-term outlook is not so good and its debt maturity is also looming overhead.

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