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Avaya Reports Increased Revenues, Operating Income and OperatingCash Flow from Continuing Operations in Third Fiscal Quarter of2004

  • Revenues Increased Nine Percent Year-Over-Year To $1.016 Billion; Operating Income and Cash Flow Show Strong Improvements

Avaya reported income from continuing operations of $58 million or earnings of 12 cents per diluted share in the third fiscal quarter.

Avaya Inc., (NYSE:AV) a leading global provider of business communications software, systems and services, reported income from continuing operations of $58 million or earnings of 12 cents per diluted share in the third fiscal quarter. Included in the 12 cents was a four cents per diluted share charge for the repurchase of senior secured notes in the third fiscal quarter. The company reported its sixth straight year-over-year increase in quarterly operating income, an increase driven by profitable results from all three business segments.

In the same quarter last year, the company said it reported a loss from continuing operations of $3 million or a loss of one cent per diluted share. Included in those results was a three cent per diluted share gain from the extinguishment of debt and a gain on an asset sale.

Third fiscal quarter 2004 revenues increased nine percent to $1.016 billion compared to $929 million in the same period last year.

The company noted higher revenues and gross margin, coupled with lower selling general and administrative (SG&A) expenses, contributed to a 53 percent sequential increase to $92 million in operating income, bringing operating margin to nine percent of sales. This is up from breakeven operating income a year ago. Operating cash flow from continuing operations in the quarter was $215 million. Gross margin increased year-over-year to 48 percent from 43 percent, and SG&A expenses were 30 percent of sales, down two percentage points from the second fiscal quarter of 2004.

The company said including results from discontinued operations, net income for the third fiscal quarter of 2004 was $61 million or 13 cents per diluted share compared to net income of $8 million or two cents per diluted share in the third fiscal quarter of 2003.

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

CEO Comments
"Avaya's performance this quarter demonstrates our ability to execute against our strategy," said Don Peterson, chairman and CEO, Avaya. "Our revenues grew significantly over last year, and we're seeing increasing signs that customers are migrating to IP telephony to help them improve their business processes. Product sales rose 11 percent year-over-year, driven by rising demand for gateways and IP Office."

Year-To-Date Results
Revenues for the first nine months of fiscal 2004 were $2.993 billion, an increase of six percent compared to revenues of $2.825 billion for the first nine months of fiscal 2003. Avaya earned $191 million or 42 cents per diluted share from continuing operations in the first nine months of fiscal 2004, compared to a loss from continuing operations of $183 million or a loss of 49 cents per diluted share in the first nine months of fiscal 2003.

Avaya noted, including results from discontinued operations, it earned $196 million or 43 cents per diluted share in the first nine months of fiscal 2004 compared to a net loss of $154 million or a net loss of 41 cents per diluted share in the same period of fiscal 2003.

CFO Comments
"We continue to transform Avaya to drive profitable growth and position the company to take advantage of opportunities in the marketplace," said Garry K. McGuire, chief financial officer and senior vice president, corporate development, Avaya. "We generated $215 million in operating cash flow this quarter, our cash increased by 81 percent year-over-year to $1.5 billion, and net cash** rose 19 percent sequentially to $939 million. We made a voluntary contribution to our pension plan this quarter increasing our financial flexibility going forward, and we have reduced debt year-over-year by 41 percent to $584 million. We continue to make substantial progress in our efforts to deleverage the balance sheet and further improve our financial strength."

The company noted its fourth fiscal quarter is typically its strongest quarter of the year in terms of revenue and operating income. Even though there remain many uncertainties in the marketplace, along with concerns around economic growth and inflation, total employment levels, a key indicator historically for the company's growth prospects, remain strong. Therefore, the company remains cautiously optimistic that its fourth fiscal quarter will be consistent with historical patterns. The company believes its gross margin improvements are largely sustainable, although gross margin may fluctuate from quarter to quarter depending on the mix of overall revenue, the mix of products sold, and direct and indirect channel mix. Avaya said it is committed to controlling costs and improving its expense profile and will maintain this approach going forward. It expects, however, to see higher sales expenses in the fourth fiscal quarter resulting from normal year-end increases in sales commission payments and a modest increase in marketing expenses as it drives to increase market share and strengthen brand positioning.

Highlights From The Quarter
Avaya made several announcements since the last quarter which highlight how the company helps its customers use IP telephony to improve their business processes:

  • Earlier today, Avaya introduced new converged mobility products that extend IP telephony to wireless networks and deliver the benefits of desktop communications to employees wherever they are in a building. These products, the Avaya W310 Gateway and Avaya W110 WLAN Access Points, make wireless calls on a company's network more secure with better sound quality, and have less chance of fading as workers move about a building. The products play a critical role in the converged Wi-Fi and cellular solution architecture the company is developing with Motorola and Proxim.
  • Toshiba Corporation chose Avaya to deploy a 12,000-person SIP (Session Initiation Protocol)-enabled IP telephony system for its Tokyo headquarters. When completed in early 2005, Toshiba will host one of the largest SIP-enabled IP telephony implementations in the world. SIP is an industry standard that enables users to conduct multimedia communications sessions that can incorporate voice, video and chat, or more. Key factors for Toshiba in selecting Avaya are the high voice quality and scalability that Avaya IP telephony solutions can deliver.
  • Lund University in Sweden also chose Avaya to provide converged infrastructure, communications applications and services. Lund University is one of Northern Europe's largest educational institutions with 38,000 students. When complete in 2005, the system will be one of the largest SIP-enabled IP telephony implementations in Northern Europe. The new Avaya network will provide telephony services for its 7,000 employees, each with their own IP extension, allowing them to easily transfer calls around the university's 230 locations across four cities.
  • MetLife Mexico, with more than five million customers, is the largest financial services life insurance company in Mexico. After a 2003 merger, Avaya helped MetLife Mexico integrate the communications networks of two companies into one converged voice and data network that help the company reduce costs while improving customer service. More than 1,500 employees are connected to the network. Users in MetLife's headquarters can connect to the company's network from anywhere in the building without the need of calling technical support. Employees can also work remotely with the same features and functionalities that they have at the office.
  • Avaya implemented a multimedia contact center system for ebookers plc, a leading pan-European online travel agency. The new contact center system links 1,000 agents located in 38 sites in 11 countries across the UK, mainland Europe and India, to create one of the world's largest 'virtual' contact centers. The Avaya system enables agents to seamlessly handle all Web, phone, fax and e-mail-based customer communications. Agents are provided with a single integrated-view of previous customer contact across all channels, allowing them to complete transactions and resolve enquiries faster and more effectively.
  • The company announced an agreement with Microsoft enabling it to license Microsoft® Business Solutions CRM (Microsoft CRM) and develop an "all in one" application suite by embedding it with the Avaya IP Office family. With the suite, Avaya enables small and medium businesses to use service and support applications to manage and improve their customer contact functions. The agreement also includes co-marketing and lead generation to enable Microsoft Partners and Avaya BusinessPartners to sell the solution.

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 (IP) 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.

**Net cash is defined as cash and cash equivalents less total debt outstanding. At June 30, 2004, this amount is calculated as cash and cash equivalents of $1.523 billion less total debt of $584 million. Net debt is defined as total debt outstanding less cash and cash equivalents. At June 30, 2003, this amount is calculated as total debt of $993 million less cash and cash equivalents of $843 million. Management believes that the presentation of net cash and net debt 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, July 27, 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, July 27, through August 5, 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 8354879.

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.

Click here for the earnings statement.

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