Avaya Ends Speculation, Files for Bankruptcy Protection
Looks to Chapter 11 restructuring as the way to position all businesses for future success, CEO says.
Not so unexpectedly, following months of speculation, Avaya today announced that it has filed for Chapter 11 bankruptcy protection. The filing is an indication of Avaya's unsuccessful attempt to sell off assets, a debt-reducing strategy the company laid out in May 2016 (see related No Jitter post, "Avaya Considers Asset Sale").
Avaya executives were not available to speak as of press time, but CEO Kevin Kennedy summarized the company's decision in a prepared statement: "We have conducted an extensive review of alternatives to address Avaya's capital structure, and we believe pursuing a restructuring through chapter 11 is the best path forward at this time. Reducing the Company's current debt through the chapter 11 process will best position all of Avaya's businesses for future success."
The bankruptcy filing ends Avaya's shopping around of the contact center business, but apparently other assets may still be available. The Avaya board determined that selling off the contact center business "at this time would not maximize value for Avaya's customers and all of its stakeholders," the company stated in its press announcement. "Avaya remains in ongoing negotiations to monetize certain other assets, as appropriate, to maximize value for all stakeholders."
Avaya's goal is continued "transformation into a successful software and services business," Kennedy's statement continued, citing the 10-year-old capital structure put in place when the company, like the IT business at large, had a hardware orientation. Regarding that capital structure, Avaya faces $600 million in debt due in October 2017, with an additional $5.3 billion in debt maturing in the 2018-2021 timeframe. By selling off assets, Avaya had been hoping to raise the funds necessary to pay off the debt, or at least the first chunk of it.
Avaya today also announced financial results for the fourth fiscal quarter and fiscal year ended Sept. 30, 2016. Total revenue for Q4 amounted to $958 million, up $76 million compared to Q3 revenue, Avaya stated. Year over year, however, the Q4 figure reflects a $50 million drop. Dropping demand for UC hardware -- a common plight among legacy equipment vendors as they realign around cloud software -- led to the downturn, Avaya stated.
Fiscal year-end revenue came in at $3.7 billion, down 9% from the year prior.
Reflecting the shift from hardware to software, Avaya noted a fiscal-year revenue increase of 5% and 6% in cloud and managed services and contact center product, respectively, compared to fiscal-year 2015, in constant currency. Additionally, it said software and services accounted for 75% of total revenue in fiscal-year 2016, up from 71% for fiscal-year 2015, and that recurring revenue represented 52% of total revenue for fiscal-year 2016, up from 49% of revenue for fiscal-year 2015, in constant currency.
Despite these being troubling times for Avaya, the company noted that its book-to-bill ratio was greater than one, with total Q4 bookings increasing by 13% from Q3, and "7% below the prior year in constant currency." Customer satisfaction remains solid, indicative in a Net Promoter Score of 58, and preliminary Q1 2017 findings, for the period ended Dec. 31, 2016, show revenue in the range of $870 million to $875 million, the company reported.
In his prepared statement, Kennedy expressed optimism for the company going forward:
"Our business is performing well, and we are confident that we can emerge from this process stronger than ever, as this path is a reflection of our debt structure, not the strength of our operations or business model. Pursuing restructuring through chapter 11 will enable us to reduce Avaya's debt and interest expense, while providing increased financial flexibility to further invest in innovation and growth to enhance our market-leading competitive position."
Although taking the company into bankruptcy may not be what some had hoped for this industry stalwart, the move may help relieve some of the angst that had been building up since the May asset sale announcement. Of course, uncertainties do remain as to how the Chapter 11 restructuring will play out.