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Avaya Reports Fourth Fiscal Quarter and Fiscal 2004 Results

  • Avaya Earns 21 Cents Per Diluted Share in Fourth Fiscal Quarter; Revenues Increase 11 Percent From Year Ago Quarter To $1.076 Billion; Operating Income Rises to $119 Million From $70 Million A Year Ago

Avaya Inc. reported net income of $100 million or earnings of 21 cents per diluted share in the fourth fiscal quarter.

Avaya Inc. (NYSE:AV), a leading global provider of business communications software, systems and services, reported net income of $100 million or earnings of 21 cents per diluted share in the fourth fiscal quarter.

In the same quarter last year, Avaya reported income from continuing operations of $55 million or 13 cents per diluted share, and, including income from discontinued operations*, the company reported net income in the year ago quarter of $66 million or 15 cents per diluted share.

Fourth fiscal quarter 2004 revenues increased 11 percent to $1.076 billion from revenues of $971 million in the same period last year.

The company said product sales increased 14 percent in the fourth quarter compared to the year ago period and all three business segments were profitable for the second consecutive quarter. Increased sales, as well as favorable channel and product mix contributed to gross margin of 50 percent, an increase from 48 percent in the third fiscal quarter. Selling, general and administrative expenses remained flat sequentially as a percentage of sales. For the seventh quarter in a row, operating income increased, rising to $119 million compared to $70 million in the same period last year.

Avaya said the fourth fiscal quarter revenues of $1.076 billion include $14 million resulting from a reversal of reserves for sales returns and allowances. The company reversed the reserve as a result of operational improvements over the past year. Fourth quarter operating income of $119 million includes $12 million as a result of the reversal. The reversal had a favorable impact of two cents per diluted share in the fourth fiscal quarter.

"Avaya's results this quarter cap a year of substantial accomplishment and progress," said Don Peterson, chairman and CEO, Avaya. "We capitalized on our market leadership in IP telephony and delivered accelerating product sales growth through the year. The U.S. continues to lead the transition to IP telephony and in the fourth quarter we had double-digit product growth in this key market, both sequentially and compared to last year.

"Our international product sales grew at a double-digit rate compared to last year and we took major steps to continue this momentum. Our announcement earlier this month of the planned acquisition of Tenovis will greatly enhance our presence in Europe, making us number three in market share in the region. This move closely follows the addition of Tata Telecom, now Avaya GlobalConnect, which expands our market opportunity in Asia."

Full Fiscal Year 2004 Results
Revenues for fiscal year 2004 were $4.069 billion, an increase of seven percent compared to revenues of $3.796 billion for fiscal year 2003. Avaya earned $291 million or 63 cents per diluted share from continuing operations for fiscal 2004, compared to a loss from continuing operations of $128 million or a loss of 34 cents per diluted share in fiscal 2003.

Avaya noted, including results from discontinued operations, it earned $296 million or 64 cents per diluted share in fiscal 2004 compared to a net loss of $88 million or a net loss of 23 cents per diluted share in fiscal 2003.

"Avaya completed the fiscal year having delivered on commitments in several key areas," said Garry K. McGuire, chief financial officer and senior vice president, corporate development, Avaya. "All three business segments were profitable for the year and contributed to the seven percent increase in year-over-year revenues. We generated $479 million in operating cash flow for the year. Our cash increased by $425 million or 36 percent to $1.6 billion compared to last year. Net cash** increased to $1.024 billion at the end of the fiscal year. We reduced debt from $953 million to $593 million, a decrease of 38 percent from last year. Our results this year also are reflected in improved credit ratings. We have entered the new year well positioned to translate our ongoing success in the marketplace into enhanced shareholder value."

Highlights from Year
Since the end of the last quarter, Avaya made a number of corporate and product portfolio announcements:

The company signed a definitive agreement to acquire Tenovis GmbH & Co. KG, a major European provider of enterprise communications systems and services, from affiliates of Kohlberg Kravis Roberts & Co. After the acquisition is completed, Avaya expects its European revenues would nearly triple, growing from about 12 percent to about 30 percent of Avaya's global business. When fully integrated, Avaya expects Tenovis will add about one billion dollars to its annual revenues.

Avaya completed the purchase of Spectel, a world leader in audio and web conferencing solutions. Avaya is combining its previous conferencing offers with Spectel's on-premise and service provider conferencing solutions and marketing these offers under a new portfolio name: Avaya Meeting Exchange.

Avaya and IBM announced they will jointly deliver speech-enabled self-service solutions that allow easier, more cost-effective deployment of customized speech applications throughout a business. The solutions - which are the result of an expanded alliance between the two companies - will combine Avaya's Internet protocol-based contact center software for self-service with IBM's WebSphere® infrastructure software and speech technology, enabling enterprises to incorporate speech easily into a range of business processes, such as account management, customer purchasing and inventory management.

Avaya announced the availability of new communications solutions that service providers will be able to sell to business customers. Avaya Service Provider-Delivered Solutions will enable service providers to offer their business customers IP telephony and contact center applications through a new, usage-based monthly fee. As a result, mid-sized companies will have easier access to the same leading communications solutions used by many of the world's largest companies with no upfront capital investment. Service providers in turn will be able to create a new, recurring revenue stream and drive additional traffic onto their IP network.

The company launched Avaya Contact Center Express, its first complete multimedia contact center solution designed solely for medium-sized businesses. The solution extends the advanced customer service capabilities of large enterprises to any medium-sized organization, including complete multimedia interaction - via voice, Web chat and e-mail - and the ability to route interactions and customer data to the appropriately skilled agent.

About Avaya
Avaya Inc. designs, builds and manages communications networks for more than one million businesses worldwide, including over 90 percent of the FORTUNE 500®. Focused on businesses large to small, Avaya is a world leader in secure and reliable Internet Protocol telephony systems and communications software applications and services.

Driving the convergence of voice and data communications with business applications - and distinguished by comprehensive worldwide services - Avaya helps customers leverage existing and new networks to achieve superior business results. For more information visit the Avaya Web site:

This news release contains forward-looking statements regarding the company's outlook for operating results based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include, but are not limited to, general industry market conditions and growth rates and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations and the economic, political, and other risks associated with international sales and operations, U.S. and foreign government regulation, price and product competition, rapid technological development, dependence on new product development, the successful introduction of new products, the mix of our products and services, customer demand for our products and services, the ability to successfully integrate acquired companies, control of costs and expenses, the ability to implement in a timely manner our restructuring plans, and the ability to form and implement alliances.

For a further list and description of such risks and uncertainties, see the reports filed by Avaya with the Securities and Exchange Commission. Avaya disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

* Avaya said discontinued operations includes its former Connectivity Solutions segment, substantially all of which had been completely pested as of Sept. 30, 2004, and the segments of the Expanets business it had pested.

**Net cash is defined as cash and cash equivalents less total debt outstanding. At September 30 2004, this amount is calculated as cash and cash equivalents of $1.617 billion less total debt of $593 million. At June 30, 2004, this amount was calculated as cash and cash equivalents of $1.523 billion less total debt of $584 million. Management believes that the presentation of net cash provides useful information to investors about the company's ability to satisfy its debt obligation with currently available funds.

NOTE: Avaya will host a conference call with a listen-only Q&A session to discuss these results at 5:00 p.m. EDT on Tuesday, Oct. 26, 2004. To ensure you are on the call from the start, we suggest you access the call 10-15 minutes early by dialing:

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

For those unable to participate, there will be a playback available from 8:00 p.m. EDT, Oct. 26, through Nov. 2, 2004. For the replay, if you are calling from within the United States, please dial 800-642-1687. If you are calling from outside the United States, please dial 706-645-9291. The passcode for the replay is 1070386.

WEBCAST Information: Avaya will Webcast this conference call live, with a listen-only Q&A session. To ensure that you are on the Webcast, we suggest that you access our Web site ( 10-15 minutes prior to the start. Slides accompanying the conference call are available at the same location. Following the live Webcast, a replay will be available on our archives at the same Web address.

View the earnings statement.

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