Exhibit 99.1
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[LOGO]
[GRAPHIC]
Q2 FY2006
Earnings Conference Call
April 26, 2006
© 2006 Avaya Inc. All rights reserved.
1
Forward Looking Statements
This presentation contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Actual future results may vary materially. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed and you are cautioned not to place undue reliance on these forward-looking statements.
The risks and uncertainties referred to above 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 level; 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 www.sec.gov, particularly the information contained in Part I, Item 1, entitled “Forward Looking Statements”, of our fiscal 2005 Form 10-K and in Part I, Item 2, entitled “Forward Looking Statements” of our Form 10-Q for the first quarter of fiscal 2006 . 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: Unless indicated otherwise, all results are presented in accordance with accounting principles generally accepted in the United States (GAAP).
2
Q2 FY2006 Results
• IP line shipments up in mid 30% range and sales of products rose 9% year over year
• U.S. sales of products grew 14%
• Product supply issues, erosion in rental and maintenance businesses had negative impact
• Gross margin rose to 46.7% compared with 46.1% a year ago
• Operating income was $53 million
• Includes restructuring charge of $20 million
• Net income was $38 million or 8 cents per diluted share
• Includes $13 million after-tax or 3 cents per diluted share impact of the restructuring charge
• Cash flow from operations was $169 million up $73 million year over year
3
Revenue Summary
Year over Year Change
|
| As Reported |
| Constant |
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|
Revenue |
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Sales of products |
| 9.2 | % | 11.2 | % |
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Services |
| - 2.2 | % | - 1.0 | % |
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|
Rental and managed services |
| - 12.7 | % | - 7.5 | % |
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Total |
| 1.3 | % | 3.4 | % |
4
Revenue
Quarterly Trend
[CHART]
5
Revenue by Geography
Dollars in millions |
| Q2 FY06 |
| Q2 FY05 |
| YoY |
| YoY |
| ||
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U.S. |
| $ | 719 |
| $ | 689 |
| 4.4 | % | 4.3 | % |
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| ||
Outside the U.S.: |
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EMEA - Europe/Middle East/Africa |
| 356 |
| 387 |
| -8.0 | % | -1.0 | % | ||
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APAC - Asia Pacific |
| 99 |
| 89 |
| 11.2 | % | 14.1 | % | ||
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Americas, non-U.S. |
| 64 |
| 57 |
| 12.3 | % | 5.9 | % | ||
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| ||
Total outside the U.S. |
| 519 |
| 533 |
| -2.6 | % | 2.3 | % | ||
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Total revenue |
| $ | 1,238 |
| $ | 1,222 |
| 1.3 | % | 3.4 | % |
6
Revenue by Channel
Dollars in millions |
| Q2 FY06 |
| Q2 FY05 |
| YoY |
| ||
|
|
|
|
|
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| ||
Direct |
| $ | 250 |
| $ | 265 |
| -5.7 | % |
|
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| ||
Indirect |
| 340 |
| 278 |
| 23.4 | % | ||
|
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Total sales of products |
| $ | 593 |
| $ | 543 |
| 9.2 | % |
Revenue mix |
| Q2 FY06 |
| Q2 FY05 |
|
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Direct |
| 42 | % | 49 | % |
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Indirect |
| 58 | % | 51 | % |
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Total sales of products |
| 100 | % | 100 | % |
7
Gross Margin and Operating Expenses
Dollars in millions |
| Q2 FY06 |
| Q2 FY05 |
| YoY |
| ||
|
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|
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| ||
Revenue |
|
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|
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| ||
|
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Sales of products |
| $ | 593 |
| $ | 543 |
| 9.2 | % |
|
|
|
|
|
|
|
| ||
Services |
| 487 |
| 498 |
| -2.2 | % | ||
|
|
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|
|
|
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Rental and managed services |
| 158 |
| 181 |
| -12.7 | % | ||
|
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|
|
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| ||
|
| $ | 1,238 |
| $ | 1,222 |
| 1.3 | % |
|
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Gross Margin % |
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Sales of products |
| 53.6 | % | 54.9 | % | -1.3 | % | ||
|
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Services |
| 34.9 | % | 31.9 | % | 3.0 | % | ||
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Rental and managed services |
| 57.0 | % | 58.6 | % | -1.6 | % | ||
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|
| 46.7 | % | 46.1 | % | 0.6 | % | ||
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Operating Expenses |
|
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Selling, general and administrative |
| 399 |
| 406 |
| -1.7 | % | ||
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Research and development |
| 106 |
| 105 |
| 1.0 | % | ||
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Restructuring charge |
| 20 |
| — |
| 100.0 | % | ||
|
|
|
|
|
|
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| ||
|
| 525 |
| 511 |
| 2.7 | % |
8
Operating and Net Income
Dollars in millions |
| Q2 FY06 |
| Q2 FY05 |
| YoY |
| ||
|
|
|
|
|
|
|
| ||
Operating Income |
| 53 |
| 52 |
| 1.9 | % | ||
|
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Other income (expense), net |
| 6 |
| — |
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Interest expense |
| (2 | ) | (5 | ) |
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Income from Continuing Operations |
| 57 |
| 47 |
| 21.3 | % | ||
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Provision for income taxes |
| 19 |
| 11 |
|
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| ||
|
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Income from Continuing Operations |
| 38 |
| 36 |
|
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| ||
|
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Loss from Discontinued Operations |
| — |
| — |
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Net Income |
| $ | 38 |
| $ | 36 |
|
|
|
• Operating income for Q2 FY06 includes $20 restructuring charge
• Net income for Q2 FY06 includes effective tax rate of 33.3%
9
Gross and Operating Margins
Gross Margin ($M)
[CHART]
Operating Income ($M)
[CHART]
10
Segment Results
Global Communications Solutions
Dollars in millions |
| Q2 FY06 |
| Q2 FY05 |
| YoY |
| ||
|
|
|
|
|
|
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| ||
Large Communications Systems |
| $ | 414 |
| $ | 393 |
| 5.3 | % |
|
|
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|
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Small Communications Systems |
| 94 |
| 78 |
| 20.5 | % | ||
|
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| ||
Converged Voice Applications |
| 141 |
| 145 |
| -2.8 | % | ||
|
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Other |
| 12 |
| 9 |
| 33.3 | % | ||
|
|
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|
|
|
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Total revenue - GCS |
| $ | 661 |
| $ | 625 |
| 5.8 | % |
11
Revenue ($M)
[CHART]
Operating Income (Loss) ($M)
[CHART]
12
Segment Results
Avaya Global Services
Dollars in millions |
| Q2 FY06 |
| Q2 FY05 |
| YoY |
| ||
|
|
|
|
|
|
|
| ||
Maintenance |
| $ | 366 |
| $ | 377 |
| -2.9 | % |
|
|
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|
|
|
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| ||
Implementation and integration services |
| 120 |
| 123 |
| -2.4 | % | ||
|
|
|
|
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| ||
Managed services |
| 90 |
| 96 |
| -6.3 | % | ||
|
|
|
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|
|
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| ||
Other |
| 1 |
| 1 |
| 0.0 | % | ||
|
|
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|
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| ||
Total revenue - AGS |
| $ | 577 |
| $ | 597 |
| -3.4 | % |
13
Revenue ($M)
[CHART]
Operating Income ($M)
[CHART]
14
Cash Flows
Operating Cash Flow of $275 million
($ in millions) |
| Six Months |
| |
|
|
|
| |
Net Cash Provided by Operating Activities |
| $ | 275 |
|
|
|
|
| |
Net Cash Used in Investing Activities |
| (99 | ) | |
|
|
|
| |
Net Cash Used in Financing Activities |
| (179 | ) | |
|
|
|
| |
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
| (2 | ) | |
|
|
|
| |
Net Decrease in Cash and Cash Equivalents |
| (5 | ) | |
|
|
|
| |
Cash and Cash Equivalents at beginning of fiscal year |
| 750 |
| |
|
|
|
| |
Cash and Cash Equivalents at end of period |
| $ | 745 |
|
15
Balance Sheet
Cash
|
| Cash outlays in Q2: |
|
| • $47M for capex & capitalized software |
|
| • $103M share repurchases |
[CHART]
16
Balance Sheet
Debt
[CHART]
17
Balance Sheet
Net Cash*
[CHART]
* Net Cash is defined as cash and cash equivalents less total debt. At 3/31/06 this amount is calculated as cash and cash equivalents of $745M less total debt of $29M. Net cash is a non GAAP financial measure.
18
Share Repurchase Program
Shares Repurchased (in millions)
[CHART]
• Share repurchase program approved by the board during Q3 FY05
• Authorization to repurchase shares up to $500 million over a two-year time period ending in Q3 FY07
• As of Q2 FY06, $300 million used for share repurchases
19
Key Areas of Focus
• Continue to generate product sales growth
• Sales of products for the first half of the year is up 8% year over year
• Resolving product supply issue is a top priority
• Stabilize our maintenance and rental businesses
• Effectively manage and maintain the value of our traditional base
• Roll out and gain traction with new offers
• Expand managed service offerings
• Continue to improve closure rate
• Beginning to gain traction, but more room for improvement
• Continue to manage our cost and expense structure
• Planning additional actions in Europe
• Generate significant cash flow
20
[GRAPHIC]
Q2 FY2006
Earnings Conference Call
April 26, 2006
21