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Avaya Reports First Fiscal Quarter 2003 Results

01-21-2003
  • Cash Balance Increases to $651 Million, Up More Than $50 MillionFrom Fourth Fiscal Quarter; Company Generates Positive Cash FlowFrom Operations Of $48 Million In Quarter; Improved Gross Margin,Lower Selling, General And Administrative Expenses Result FromRestructuring

Avaya Inc., a leading global provider of communications networks tobusinesses, today said revenues from ongoing operations in thefirst fiscal quarter of 2003 were $1.067 billion compared torevenues in the fourth fiscal quarter of 2002 of $1.152 billion, adecline of 7.4 percent.

Avaya Inc., a leading global provider of communications networksto businesses, today said revenues from ongoing operations in thefirst fiscal quarter of 2003 were $1.067 billion compared torevenues in the fourth fiscal quarter of 2002 of $1.152 billion, adecline of 7.4 percent.

Compared to first fiscal quarter 2002 revenues of $1.306billion, the revenue decline was 18.3 percent.

The company said it had a net loss from ongoing operations of$33.4 million or a loss of nine cents per diluted share in thefirst fiscal quarter of 2003. This is an improvement from thefourth fiscal quarter of 2002, when the company had a net loss fromongoing operations of $72.8 million or a loss of 20 cents perdiluted share.

The net loss from ongoing operations in the first fiscal quarterof 2003 compares to a net loss of $16.2 million or a loss of eightcents per diluted share* in the first fiscal quarter of 2002.

Avaya said a sequential improvement in gross margin percentage,as well as lower spending for selling, general and administrativeexpenses in the first fiscal quarter of 2003 as a result of thecompany's restructuring initiatives, contributed to a smallersequential loss per diluted share.

The company's cash balance increased by $54 million sequentiallyfrom the fourth fiscal quarter to $651 million at the end of thefirst fiscal quarter of 2003 due primarily to continuedimprovements in the management of accounts receivable.

"Avaya's long-term goal remains profitable revenue growth," saidDon Peterson, chairman and CEO, Avaya. "We intend to accomplishthis by helping our customers provide superior service to theircustomers with communications-driven solutions and services. Sincethe last quarter, we've taken steps toward this goal, most notably,an intensive effort to build awareness of Avaya in key markets. Acornerstone of this effort is a new advertising campaign launchedthis month in the United States. Early customer response has beenpositive.

"Through our restructuring initiatives we continue todemonstrate our ability to manage expenses. And the disciplinewe've instilled in operations, particularly in accounts receivablemanagement, contributed to our increased cash balance thisquarter."

Review Of Quarter And Business Update
Avaya said the sequential decline in revenues in the quarter wasoffset by improved gross margin percentage and lower expenses.These improvements allowed the company to narrow its operating lossfrom ongoing operations to $14.3 million from $15.8 millionsequentially from the fourth fiscal quarter of 2002. Revenues fromoutside the United States rose slightly and represented 27 percentof total revenues for the quarter. The company's IP Office system,targeted to the important small and medium business market andfirst introduced outside the United States, continues to bewell-positioned in the marketplace.

The company noted it is making gains in market share despite achallenging marketplace and customers are showing their interest inspending for IP and IP-enabled networks. According to the latestinformation from InfoTech (third calendar quarter 2002), Avaya isthe number one vendor in the U.S. enterprise telephony market,which includes IP-PBX, IP-enabled PBX, PBX and key/hybrid systemsas measured by total port shipments. Avaya's 27 percent share ofthe overall U.S. enterprise telephony market is a full sixpercentage points more than its next competitor. Synergy Research,in its latest report on Worldwide Local Area network telephony andIP-enabled/Converged Systems (November 2002) ranks Avaya number twoglobally with 22 percent market share as measured by total portsshipped.

Reported Results For First Fiscal Quarter, IncludingCharges
Including $4.2 million of one-time expenses associated with itsfourth fiscal quarter 2002 restructuring initiative, Avaya reporteda net loss of $37.6 million or a loss of 10 cents per dilutedshare, in the first fiscal quarter of 2003. This compares to a netloss of $19.5 million or a loss of nine cents per diluted share inthe first fiscal quarter of 2002, which included $3.3 million inone-time expenses (net of tax) primarily associated withoutsourcing certain of the company's manufacturing operations.

Breakeven Outlook
Avaya previously stated it intended to achieve a cost structure bythe third fiscal quarter of 2003 that would allow it to break evenif the revenue level were $1.075 billion. The company believes thatthrough the positive impact of its restructuring program andplanned actions to reduce information technology (IT) expenses, bythe third fiscal quarter it will be able to reduce the revenuelevel required to break even to about the revenue level achieved inthe first fiscal quarter of 2003. The company would expect to takea modest charge in the second fiscal quarter in connection with theplanned actions to reduce IT expenses.

Pension Payments
The company estimated the funded status of its pension plans as ofJan. 1, 2003, in accordance with Employee Retirement IncomeSecurity Act rules, to determine the required cash contribution toits pension plans in fiscal 2004. As a result of this review, Avayaconfirms its previously forecasted required cash contributions ofapproximately $53 million in fiscal 2004. The required cash paymentAvaya will make to its pension plans in fiscal 2003 remains at thepreviously released amount of $45 million.

About Avaya
Avaya Inc. designs, builds and manages communications networks formore than 1 million businesses worldwide, including 90 percent ofthe FORTUNE 500®. Focused on businesses large to small,Avaya is a world leader in secure and reliable Internet Protocol(IP) telephony systems and communications software applications andservices.

Driving the convergence of voice and data communications withbusiness applications — and distinguished bycomprehensive worldwide services — Avaya helps customersleverage existing and new networks to achieve superior businessresults. For more information visit the Avaya Web site: http://www.avaya.com

This news release contains forward-looking statements regardingthe company's outlook for operating results and future cash needsbased on current expectations, forecasts and assumptions thatinvolve risks and uncertainties that could cause actual outcomesand results to differ materially. These risks and uncertaintiesinclude, but are not limited to, general industry market conditionsand growth rates and general domestic and international economicconditions including interest rate and currency exchange ratefluctuations and the economic, political, and other risksassociated with international sales and operations, U.S. andforeign government regulation, price and product competition, rapidtechnological development, dependence on new product development,the successful introduction of new products, the mix of ourproducts and services, customer demand for our products andservices, the ability to successfully integrate acquired companies,control of costs and expenses, the ability to implement in a timelymanner our restructuring plans, and the ability to form andimplement alliances. For a further list and description of suchrisks and uncertainties, see the reports filed by Avaya with theSecurities and Exchange Commission. Avaya disclaims any intentionor obligation to update or revise any forward-looking statements,whether as a result of new information, future events orotherwise.

* For the three months ended December 31, 2001, the loss perdiluted share on an ongoing basis reflects two cents, orapproximately $6.9 million, attributable to the Series Bconvertible participating preferred stock. Excluding the accretionof preferred stock, the loss per diluted share from ongoingoperations would have been six cents per share on a dilutedbasis.

NOTE: Avaya will host a conference call with alisten-only Q&A session to discuss these results at 5:00 p.m.EST on Tuesday, Jan. 21, 2003. To ensure you are on the call fromthe start, we suggest you access the call 10-15 minutes early bydialing:

Within and outside the United States: 706-634-2454


For those unable to participate, there will be a playbackavailable from 9:00 p.m. EST, Jan. 21, through Jan. 28, 2003. Forthe replay, if you are calling from within the United States,please dial 800-642-1687. If you are calling from outside theUnited States, please dial 706-645-9291. The passcode for thereplay is 7302112.

WEBCAST Information: Avaya will Webcast this conferencecall live, with a listen-only Q&A session. To ensure that youare on the Webcast, we suggest that you access our Web site (http://www.avaya.com/investors/)10-15 minutes prior to the start. Following the live Webcast, areplay will be available on our archives at the same Webaddress.

Click here for earnings statement.

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