We're now about a month into our chapter 11 financial restructuring. To date I've had discussions with more than 100 Avaya customers and partners about the process. These conversations have been encouraging, as customers and partners express support for Avaya and confidence in our future.
Every chapter 11 process is unique. In the case of Avaya, we have a healthy operating business that has been generating positive cash flow and setting records for operating profitability, as our product mix has shifted to 75% software and services. The reason for the court process is that we had over $6 billion of debt and as a result of the terms of our debt obligations and the upcoming debt maturities, we determined it was appropriate to recapitalize the company.
While it's difficult to predict when we will emerge from this process, we are committed to maintaining an open dialogue with our stakeholders. In that vein, below are some of the recurring questions I've received in discussions with customers and partners, and my responses.
Is Avaya going out of business?
No. We are restructuring our balance sheet and operating in the ordinary course while we do so. We obtained court approvals required to enable us to fund our operations, pay employees, stabilize our supply chain, and meet our obligations to customers and partners. The creditor groups that are parties to the case have been supportive of this process, as it is not in anyone's interest to disrupt the business. Our restructuring is supported by a $725 million debtor-in-possession, or DIP, financing, which provides substantial liquidity to support ongoing business operations.
Has Avaya cut R&D spend as a result of chapter 11?
Avaya's R&D spend has historically been above industry averages, and it is our intent to continue that trend. There has been no impact on R&D budgets as a result of our restructuring. Our senior management team is keenly aware that as a technology company, maintaining our technology leadership is critical to future success. That said, our vision is to emerge from this process with a stronger balance sheet and increased financial flexibility to invest even more aggressively in advancing the technology through both R&D and acquisitions of technologies that are complementary to our product portfolio.
Is Avaya losing key employees?
Our employees are Avaya's greatest asset, and our management team is highly focused on employee engagement and retention. We are fortunate that employee turnover related to the financial restructuring has been minimal and we continue to have a strong, dedicated team committed to advancing our technology and exceeding customer expectations.
What are the next steps in the process?
We expect to file a plan of reorganization in March. We will also be engaging creditor groups to build support for the plan to enable us to complete our balance sheet restructuring as soon as possible.
What is the likely outcome of the process?
The plan of reorganization will likely include an exchange of debt for equity that will significantly reduce the amount of debt outstanding and associated interest expense, and result in a change in ownership. The reduction in debt will enable Avaya to emerge a stronger, healthier company with lower interest expense, improved credit ratings, and more financial flexibility.
How long before Avaya emerges?
It is difficult to estimate when we will emerge from chapter 11. If things go well, the court process could be completed a few months after the plan of reorganization is filed and we could emerge as early as the summer of 2017. If the process takes longer, that timing could shift. Meanwhile we are doing everything we can to move forward with our restructuring and emerge as soon as possible.
