Dear Avaya Shareholder,
During our 2006 fiscal year, we have identified several key goals as part of our plan to build shareholder value. These include: growing product sales in all major regions, particularly the U.S.; maintaining our services revenue base and transitioning to higher value added IP offerings; effectively managing costs and expenses; increasing operating income and continuing to generate a significant level of operating cash flow.
On January 23rd, we announced our 2006 first quarter results: revenues grew 8.8% year over year, reflecting the impact of acquisitions. Product sales in the U.S. rose 5%. Service revenues in the U.S., and in particular U.S. maintenance revenue, were flat sequentially and have been fairly steady for the past four quarters.
Operating income for the quarter was $107 million, which included a $21 million benefit from a change in the company’s vacation policy. Operating cash flow was $106 million. Our balance sheet remained strong, with cash of $726 million and debt of $30 million. Our financial strength enables us to continue to invest in our business and to fund share repurchases. During the quarter we repurchased 7.9 million shares and since the beginning of the program last year, we have repurchased a total of 19.5 million shares.
Worldwide IP line shipments rose 16% overall in the quarter and increased by 21% in the U.S. Several leading market research firms confirmed our leadership position in the enterprise telephony market. And in an independent review of large IP deployments, Avaya ranked number one, receiving the highest score ever awarded in the seven years the test had been conducted.
As we move forward in fiscal year 2006, we will remain focused on achieving our key goals. Due to our strengths, in terms of our vision and road map for intelligent communications, our global size and scale, our technology and applications leadership, and the scope and breadth of our solutions and services portfolio, we are well positioned around the world as enterprises continue their evolution to IP telephony.
Our first quarter earnings and accompanying presentation are posted in the Investor Events section. I encourage you to review them in more detail and I look forward to updating you on our progress during our next quarterly conference call.
Donald K. Peterson
Chairman and Chief Executive Officer
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