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Avaya Reports Fourth Fiscal Quarter and Fiscal Year 2005 Results


Avaya reported income from continuing operations of $660 million or $1.36 per diluted share in the fourth fiscal quarter of 2005.

Avaya Inc. (NYSE:AV), a leading global provider of business communications applications, systems and services, today reported income from continuing operations of $660 million or $1.36 per diluted share in the fourth fiscal quarter of 2005.


These results reflect a net favorable impact on earnings of $565 million, which includes a net income tax benefit of $590 million related to the reversal of a portion of a valuation allowance for deferred tax assets, a $22 million restructuring charge for headcount reductions and lease terminations, and $3 million of in-process research and development costs related to the company's acquisition of Nimcat Networks. Excluding these items, the company would have had income from continuing operations of $95 million and earnings per diluted share of 20 cents in the fourth fiscal quarter. (See table for details.)


In the same quarter last year the company reported income from continuing operations of $100 million or 21 cents per diluted share. Those results reflected a reversal of reserves for sales returns and allowances which had a $12 million favorable impact on operating income. Excluding that item, earnings per diluted share in the year ago quarter would have been 19 cents. (See table for details.)


Avaya's fourth fiscal quarter 2005 revenues increased to $1.296 billion, due to acquisitions, compared to revenue of $1.076 billion in the fourth fiscal quarter of 2004. The company noted that fourth fiscal quarter 2004 revenues also included $14 million related to the reversal of reserves discussed above.


"We ended our fifth year as an independent company with a solid performance in the fourth quarter," said Don Peterson, chairman and CEO, Avaya. "Revenue grew sequentially in all regions, particularly in the United States. We maintained our cost and expense discipline, and as a result, we improved profitability and increased operating cash flow sequentially. We've broadened our portfolio of offers and strengthened our market position."


Avaya said total revenues increased sequentially by 4.9 percent and U.S. revenues rose 7.1 percent sequentially. Sales of products rose 11.5 percent sequentially. Increases in both direct and indirect channel sales contributed to the U.S. performance. The company's operating income was $82 million on an as-reported basis and was $107 million, excluding certain items (see table for details). Avaya also generated $148 million in operating cash flow in the quarter.


Deferred Tax Asset

In accordance with Statement of Financial Accounting Standard No. 109, the Company reversed a portion of its deferred tax asset valuation allowance. As a result, the Company received a $590 million net tax benefit from this reversal in the fourth fiscal quarter of 2005.


The company said it does not expect to pay cash taxes on U.S. federal taxable income until it has used its approximately $1 billion of available U.S. federal net operating loss carry forwards. As a result of the reversal, however, the company will begin to reflect a provision for U.S. income tax expense in its financial statements.


Avaya will continue to make cash tax payments for required alternative minimum taxes, and certain state, local and international taxes.


Share Repurchases

Avaya said it repurchased six million shares of its common stock during the fourth fiscal quarter at an average price of $10.08. In the two quarters since the company instituted the program it has repurchased 11.5 million shares of its common stock.


Fiscal Year 2005 Results

Revenues for fiscal year 2005 were $4.902 billion compared to $4.069 billion for fiscal year 2004. Operating income for fiscal year 2005 was $298 million compared to $323 million in the previous fiscal year. Operating income for fiscal 2005, excluding certain items, was $333 million compared to $311 million in the previous fiscal year, excluding certain items.


Avaya earned income from continuing operations of $923 million or $1.89 per diluted share in fiscal 2005, compared to income from continuing operations of $291 million or 63 cents per diluted share in fiscal 2004. Excluding certain items, as detailed in the attached chart, income from continuing operations in 2005 was $286 million or 58 cents per diluted share, compared to $237 million, or 51 cents per diluted share in fiscal 2004.


Fourth Fiscal Quarter Highlights

Avaya acquired Nimcat Networks, a leading developer of embedded, peer-to-peer IP communications applications software. Nimcat Networks' IP communications software, called nimX, is designed to be embedded within enterprise IP phones.


The company announced the shipment of its seven millionth IP telephony line, and is positioned in the Leaders Quadrant of the Gartner Enterprise Telephony Magic Quadrant for both North America and EMEA.


During the last quarter, the first of the Avaya fixed mobile convergence applications became globally available: a downloadable solution jointly developed with Nokia that puts Avaya Communications Manager features and functions on Series 60 platform mobile devices. Customers for the product include CNIPA and BAR Honda.


Avaya introduced new IP-based self service solutions, including the Avaya Voice Portal, a software platform for faster, easier speech-enabling of Web services across highly distributed enterprises; and a new speech application development tool for designers, Avaya Dialog Designer.


Avaya gained momentum in its Hosted Solutions, including the introduction of a new efficient and cost-effective platform that securely partitions IBM eServer BladeCenter systems to provide multiple instances of business communications applications to multiple customers on a single blade. In addition, we announced hosted relationships with:

  • Sprint - in a joint agreement for development and delivery of hosted VoIP telephony wireline and wireless services for the North American marketplace, including IP Telephony, Wireless Integration and Messaging.
  • Equant - in a global strategic alliance to jointly deliver solutions that provide customers with advanced IP communications for telephony and contact centers.
  • Telecom Italia - Avaya IP telephony services will be offered by Telecom Italia both in a fully hosted mode, on Telecom Italia's network platforms, as well as in a service managed mode on the customer's premises, with management and maintenance carried out by the Italian operator.


Significant customer wins included:

  • Allstate Insurance Company, which deployed Avaya IP telephony solutions to new locations in North America.
  • A five-year global contract with ABN AMRO to support the international bank's migration to IP telephony across 14 countries. The technology update delivers Avaya mobility, messaging and contact center applications, supported by Avaya managed services.
  • Nextel Mexico, a leader in work group communications solutions and wireless business-oriented products and services, has implemented contact center solutions from Avaya that have enabled the company to improve the quality of service to more than 900,000 customers throughout Mexico.
  • A $4 million call center solution to Advanced Info Service PC, Thailand's leading provider of mobile network systems.
  • PricewaterhouseCoopers, one of the world's largest professional services organizations, deployed Avaya voice and data converged communications systems in its new office in Beijing.


Forward Looking Statements

Certain statements made in the earnings conference call are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements regarding Avaya's expected performance and outlook for operating results are 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:

  • price and product competition;
  • rapid or disruptive technological development, including the effects of the technology shift from traditional TDM to IP Telephony;
  • dependence on new product development;
  • the mix of our products and services;
  • customer demand for our products and services, including risks specifically associated with the services business and, in particular, the maintenance and rental and managed services lines of business, primarily due to renegotiations of customer contracts and changes in scope, pricing pressures and cancellations;
  • general industry and market conditions and growth rates and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations;
  • disruption associated with the re-alignment of our sales and marketing efforts;
  • risks related to inventory, including warranty costs, obsolescence charges, excess capacity, material and labor costs, and our distributors' decisions regarding their own inventory levels;
  • the economic, political and other risks associated with international sales and operations, including increased exposure to currency fluctuations and to European economies as a result of our acquisition of Tenovis;
  • the ability to successfully integrate acquired companies, including Tenovis, which has required significant management time and attention;
  • the ability to attract and retain qualified employees;
  • control of costs and expenses;
  • U.S. and non-U.S. government regulation; 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 SEC, which are available at, particularly the information contained in Part II, Item 7, entitled "Forward Looking Statements," of our fiscal 2004 Form 10-K and the information contained in Part I, Item 2, entitled "Forward Looking Statements," of our Form 10-Q for the fiscal quarter ended June 30, 2005. 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.


Presentation of Information in this Press Release

In an effort to provide investors with additional information regarding the company's results as determined by accounting principles generally accepted in the United States (GAAP), the company has also disclosed in this press release, and will disclose in its conference call discussing fourth quarter earnings results and the accompanying supplementary materials, adjusted earnings per share, adjusted operating income and net cash, non-GAAP financial measures which management believes provides useful information to investors.


The rationale for managements' use of non-GAAP measures is included as part of the Form 8-K furnished to the SEC today. The reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures is included in this release and as part of the supplementary materials presented with the fourth quarter earnings materials. The supplementary materials are available on the Avaya investor relations Web site at and will be included in a subsequent filing of a Form 8-K with the SEC.


Conference Call and Webcast

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. 25, 2005. 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. 25, through Nov 1, 2005. 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 9953594.


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. Supplementary materials 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.


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:

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