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Avaya Reports Third Fiscal Quarter 2006 Results

  • U.S. Product Sales Increase 15 Percent Year-Over-Year; Worldwide Product Sales Grow 12 Percent Year-Over-Year; Operating Cash Flow Was $181Million in the Quarter

Avaya reported net income of $44 million or 10 cents per diluted share in the third fiscal quarter of 2006.

BASKING RIDGE, N. J. – Avaya Inc., (NYSE:AV) a leading global provider of business communications applications, systems and services, today reported net income of $44 million or 10 cents per diluted share in the third fiscal quarter of 2006.

The company's third quarter results were affected by $22 million in restructuring charges primarily in its EMEA region and a $29 million asset impairment charge partially offset by a $22 million benefit resulting from a favorable non-income tax settlement. The net negative pre-tax impact of these items was $29 million. The company also received a tax benefit totaling $21 million as a result of a transfer pricing adjustment and non-U.S. audit settlement.

In the same quarter last year the company reported net income of $194 million or 40 cents per diluted share. These results include the net favorable impact of $123 million related to the settlement of certain tax matters and other deferred tax adjustments.

The company's third fiscal quarter 2006 revenues increased 4.9 percent to $1.297 billion compared to $1.236 billion in the same period last year. Product sales worldwide rose 12 percent over the same period, with U.S. product sales rising 15 percent. The company’s operating income for the quarter was $28 million. Avaya generated $181 million in operating cash flow and had $822 million in cash at the end of the quarter.

"We delivered another solid quarter of product sales growth. Driven by a 23 percent increase in IP line shipments, overall product sales rose 12 percent, U.S. product sales increased 15 percent, and we shipped our 10 millionth IP line," said Garry K. McGuire, chief financial officer, Avaya. "While we are encouraged by these positive trends, higher costs and expenses during the quarter affected operating results. We remain focused on improving our cost and expense profile across geographies and businesses, particularly in Europe."

Year-To-Date Results
For the first nine months of fiscal 2006, Avaya reported net income of
$153 million or 32 cents per diluted share compared to net income of $261 million or 54 cents per diluted share for the first nine months of 2005. Revenues for the first nine months of fiscal 2006 were $3.784 billion compared to $3.606 billion last year. The company generated operating cash flow of $456 million in the first nine months of fiscal 2006 compared to $186 million in the year ago period.


Third Fiscal Quarter Highlights
Since the end of the last quarter, Avaya has announced several customer wins, market leadership updates, alliance partnerships and new solution offers.


2006 FIFA World Cup Network

Avaya powered the world’s biggest converged voice and data network for the 2006 FIFA World Cup in Germany. More than 21 terabytes of voice and data traffic traveled over the network during the six weeks it was operating and the network achieved 99.999 percent availability without a single major outage and free of errors. During that time, people logged onto the network approximately 640,000 times for a total of nearly 790,000 minutes of calling.


Customer Update

Kimberly-Clark selected Avaya as its provider of global telephony applications and communications network services. Kimberly-Clark will use Avaya MultiVantage® Communications Applications, a suite of Internet Protocol (IP) telephony, contact center, messaging and mobility applications, to connect more than 57,000 employees worldwide to deliver cost-savings and economies of scale.   


Avaya was named one of 10 companies selected to participate in a $4 billion U.S. Army project that will overhaul voice and data communications infrastructures of U.S. Army bases worldwide. The Infrastructure Modernization contract will support the Army's Installation Information Infrastructure Modernization Program with a single integrated communications system.


ING Mexico, a leader in providing insurance, pension benefits and financial services, centralized its customer care operations to improve efficiency and customer service. The company chose an Avaya contact center solution, and established a contact center in Mexico City with 305 employees who handle an average of 220,000 calls each month.  The Avaya solution, which includes Avaya Customer Interaction suites, also reduced from eight percent to two percent, the call drop-out levels.


Vanguard, the second largest mutual fund firm in the U.S., selected Avaya for IP telephony networking, applications and more than 18,000 endpoints around the world. The contract also includes project design, implementation and management, plus five years of maintenance services provided by Avaya Global Services.


New Solution Offers

Avaya introduced a comprehensive portfolio of solutions targeted to companies with between 100-500 employees, including:


  • Avaya MultiVantage® Express – delivers the most robust set of communications applications in the industry in a single-server solution, including IP telephony, messaging, contact center and mobility applications.
  • Avaya S8400 Media Server – provides a migration path to the expanded power of Avaya Communication Manager IP telephony for existing DEFINITY® ProLogix, IP600 or S8100 server customers.
  • Avaya-On-Demand -  provides Avaya’s marketing-leading, intelligent communications as a service, including IP Telephony, contact center and messaging, in a low-risk, highly-flexible  per-seat, per-month subscription model.


Avaya unveiled its next generation of IP phones, which deliver unparalleled simplicity and faster access to a vast array of advanced applications, transforming the way people think about, use and hear voice communications. The new Avaya one-X™ Deskphone Edition is designed to enhance user experiences through more intelligent access to intelligent communications. The advanced business phones are more functional and flexible, and as easy to navigate as a cell phone, providing a better way for enterprise users to communicate, get information and be more productive in their work.


The new Avaya Mobile Communications System (MCS) enables businesses and public sector organizations to quickly set up command centers with complete, secure voice and data communications to support business continuity, disaster response and recovery, or short-term events. The system brings together a wide range of voice and data capabilities in a fully configured package that can be up and running in less than an hour. The MCS provides IP telephony, basic voice messaging, data networking, and connectivity to a variety of networks.


Market Leadership

Avaya was named the leader in U.S. Enterprise Telephony for the first quarter of 2006 according to InfoTech’s InfoTrack for Enterprise Communications, First Quarter 2006 Report. Avaya captured 19.8 percent of the U.S. Enterprise Telephony market in the first quarter, giving the company a four-point lead over the nearest competitor. This is third consecutive quarter Avaya has been named the leader in this measure.


Avaya finished 5.5 points ahead of the nearest competitor in global Enterprise Telephony market share for the first quarter, according to Dell 'Oro Group's IP Telephony Enterprise Report, 1Q06. Avaya completed its sixth consecutive quarter of leadership in this market according to Dell 'Oro, with 20.3 percent of market revenues, exceeding overall market growth.


In the first quarter of 2006, Avaya extended its lead in global Enterprise Internet Protocol Telephony Port Shipments and global Enterprise IP Telephony Revenue, leading both measurements for the tenth consecutive quarter, according to Synergy Research Group’s 1Q 2006 Enterprise Voice Market Shares Report. The report had Avaya leading in IP Port Shipments as defined by Synergy with 22 percent of the global market for the first quarter of 2006, 2.5 points ahead of the nearest competitor.

Frost & Sullivan recognized Avaya in three areas this quarter. The company received the 2006 Frost & Sullivan Growth Strategy Leadership Award in North America for Avaya one-X Quick Edition, a peer-to-peer IP telephony system for small businesses and branch offices with up to 20 users per location. In North America, Avaya received two 2006 Frost & Sullivan Market Leadership Awards. Leading in the categories of Enterprise Telephony, which encompasses both IP and traditional telephony, and Automatic Call Distribution for contact centers the Award for Market Leadership the company that has exhibited market share leadership through the effective implementation of market strategy.


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:


• supply issues related to our outsourced manufacturing operations;
• 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;
• 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 I, Item 1, entitled "Forward Looking Statements," of our fiscal 2006 Form 10-Q for the second quarter. 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 "net cash" and "adjusted effective tax" rate in the supplementary materials accompanying the conference call discussing third quarter earnings results. These are non-GAAP financial measures which management believes provides useful information to investors.


The rationale for managements’ use of these 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 their most directly comparable GAAP financial measures is included as part of the supplementary materials presented with the third quarter earnings materials. The supplementary materials are available on the Avaya investor relations website 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 Monday, July 24, 2006. 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 24, through July 31, 2006. 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 2009163.


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 website ( 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.

About Avaya
Avaya Inc. designs, builds and manages communications networks for more than one million businesses worldwide, including more than 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 website:


View the earnings statement.

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