Avaya — Investor Day (December 2005)

109 slides from Avaya's investor day presentation, Dec 1, 2005

Slide 2: Forward Looking Statements
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
Slide 4: September 30, 2000: A Challenging Beginning
The First 5 Years September 30, 2000: A Challenging Beginning • Conceived in a bubble…but – Global economic meltdown on the horizon – Y2K spend cycle over • Positioned as “slow-growth” “weight” on Lucent Technologies. “Viking funeral” • $780 million in debt and undercapitalized • Traditional telepho
Slide 5: But With Assets to Build On
The First 5 Years But With Assets to Build On • Unmatched customer base – 90% of Fortune 500®® • World-class technology – Avaya Labs (former (former Bell Bell Labs) Labs) – Services “feet on the the street” street” • Opportunity for unique culture – A multi-billion dollar start-up start-up • Industr
Slide 6: The Road To Intelligent Communications
The First 5 Years The Road To Intelligent Communications •• Financial Financial stability stability •• Right Right people, people, right right investment investment •• Global Global reach reach •• Market Market leadership leadership •• New New name, name, brand brand awareness awareness •• Vision Vi
Slide 8: Reinvested in Our Portfolio
The First 5 Years Reinvested in Our Portfolio • Early commitment to IP Telephony • Software focus –– Open, Open, flexible, flexible, interoperable, interoperable, secure secure –– Avaya Avaya Labs Labs –– ongoing ongoing investment investment in in R&D R&D • Portfolio renewal –– DEFINITY DEFINITY Æ
Slide 9: Expanding Our Portfolio & Footprint Through Acquisitions
The First 5 Years Expanding Our Portfolio & Footprint Through Acquisitions • Tenovis quadrupled footprint in Europe –– Avaya Avaya #2 #2 in in Germany, Germany, #3 #3 in in Europe Europe VPNet Technologies Tata Telecom Cyber IQ Systems Spectel Quintus Corporation Tenovis Expanets Route Science Vista
Slide 10: Expansion Through Partnerships
The First 5 Years Expansion Through Partnerships • Partner with industry leaders • ‘DevConnect’ Program: >1,300, 34% outside U.S, grew 5x since 2004 FY2001 FY2002 FY2003 FY2004 FY2005 © 2005 Avaya Inc. All rights reserved. - 10 10-
Slide 11: Restructured Go-To-Market Model
The First 5 Years Restructured Go-To-Market Model Direct • Aligned by industry • Global deployment Strategic • CXO relationships Accounts • Solution selling • High-touch on regional accounts Named Accounts • Strong Partner participation • Geo alignment, vertical specialization • Partner-led Mid Mark
Slide 12: And We Delivered Competitive Value To Our Customers
The First 5 Years And We Delivered Competitive Value To Our Customers • Flexible • Modular Applications • Ubiquitous …customer path, pace Avaya Customer and choice Value Systems Services • Single-point • Open accountability • Available • Global • Evolutionary • Secure © 2005 Avaya Inc. All rights re
Slide 13: Avaya Today
The First 5 Years Avaya Today Delivering How? • #1 in IP telephony, contact center, messaging Leadership and other key business communications applications in the market • Leadership in vision: Intelligent Communications • Holistic mobility approach, many deliverables • Industry leading communicatio
Slide 15: Financial Progress Report
The First 5 Years Financial Progress Report • Generated positive cash flow & operating income • Built strong balance sheet • Instilled financial discipline • Created performance based culture © 2005 Avaya Inc. All rights reserved. - 15 15-
Slide 17: Financial and Operational Review
Avaya Financial Analyst Conference Financial and Operational Review Garry K. McGuire CFO and SVP, Corporate Development © 2005 Avaya Inc. All rights reserved. - 17 -
Slide 18: Discussion Points – FY 2005
Discussion Points – FY 2005 • 2005 Year in Review • Key Performance Drivers • Asset Management and Liquidity • Capital Structure © 2005 Avaya Inc. All rights reserved. - 18 18-
Slide 19: 2005 Year in Review
2005 Year in Review • A year of challenges… – Go-to-market model adjustments – European integration – Pressure in services maintenance revenues • But also a year of progress in key areas: – Larger, broader, more diversified global presence – Strengthened technology & solutions portfolio – Maintained
Slide 20: Larger, Broader, More Diverse Global Presence
Larger, Broader, More Diverse Global Presence FY2004 Americas FY2005 non-U.S. APAC Americas 4.8% 5.6% non-U.S. U.S. 5.3% APAC 59.3% 6.9% EMEA 13.2% U.S. EMEA 75.9% 29.0% Total Revenue of $4,069M Total Revenue of $4,902M Avaya International Increases from 24% to 41% © 2005 Avaya Inc. All rights reser
Slide 21: European Integration
European Integration Progress to Date • Reduced headcount by 8% or approximately 530 positions • Consolidated operations, offices, systems and legal entities • Achieved approximately $38M in annualized cost savings • Retired assumed debt of $265M – Foregone annual interest expense of $16M © 2005 Ava
Slide 22: Strengthened Technology & Solutions Portfolio
Strengthened Technology & Solutions Portfolio Software upgrades • Communication Manager 3.0 • IP Office 3.0 © 2005 Avaya Inc. All rights reserved. - 22 22-
Slide 23: Maintained IP Telephony Market Leadership
Maintained IP Telephony Market Leadership Challengers Leaders The Avaya Gartner Magic Cisco Systems NEC Nortel Networks Quadrant Ability to Inter-Tel Siemens North American Execute Toshiba Mitel Networks Corporate ShoreTel Alcatel Telephony, 3Com August 2005 Vertical Communications Niche Players Vis
Slide 25: Continued Trend of Strong Cash Flow
Continued Trend of Strong Cash Flow 600 Cash flow from operations 400 479 200 334 169 86 ($M) 0 (200) (655) (400) (600) (800) FY01 FY02 FY03 FY04 FY05 © 2005 Avaya Inc. All rights reserved. - 25 25-
Slide 26: Eliminated All But $30M in Debt
Eliminated All But $30M in Debt 1,200 Debt Net Cash (Debt) 1,000 800 1,024 600 953 933 ($M) 400 645 720 593 200 239 30 0 (200) (395) (336) (400) FY01 FY02 FY03 FY04 FY05 Eliminated approximately $850 million during FY05, including about $265 million of debt assumed upon the Tenovis acquisition © 200
Slide 27: Sustained Profitability
Sustained Profitability Operating Income (Loss) As Reported 400 200 323 298 63 0 (200) (354) ($M) (400) (967) (600) (800) (1,000) FY01 FY02 FY03 FY04 FY05 © 2005 Avaya Inc. All rights reserved. - 27 27-
Slide 28: Sustained Profitability (as adjusted)
Sustained Profitability 350 Operating Income (Loss), 300 as adjusted* 250 200 311 333 150 ($M) 100 50 17 0 (98) (74) (50) (100) FY01 FY02 FY03 FY04 FY05 * This is a non-GAAP financial measure. Reconciliation to reported result can be found in “Certain Items” chart in Appendix © 2005 Avaya Inc. All r
Slide 30: Revenue
Revenue FY04 to FY05 Increase of 20.5% ($M) 5,473 4,902 4,387 4,069 3,796 FY01* FY02* FY03* FY04 FY05 Organic growth in EMEA, APAC & CALA in FY2005 * Restated for the sale of Connectivity © 2005 Avaya Inc. All rights reserved. - 30 30-
Slide 31: Revenue: International Growth Driven by Acquisitions & Organic Growth
Revenue International Growth Driven by Acquisitions & Organic Growth 1420 3,089 2,908 538 FY04 FY05 EMEA 216 238 336 226 FY04 FY05 United States FY04 FY05 FY04 FY05 America Non-U.S. APAC • US performance impacted by Go To Market channel disruption • Growth in CALA/Canada 100% organic • EMEA reflects
Slide 32: Revenue US Indirect Channel
Revenue US Indirect Channel Total Sales IN-Sales OUT - Compared with Inventory 175% Sales OUT 150% Sales IN Inventory $ 125% 100% 75% 50% 25% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY04 FY05 Q1 FY04 Indexed = 100% © 2005 Avaya Inc. All rights reserved. - 32 32-
Slide 33: Revenue US Direct GCS
Revenue US Direct GCS Indexed Performance Since Q1 FY04 175% Q1 FY04 Indexed = 100% 150% 125% 100% 75% 50% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY2004 FY2005 © 2005 Avaya Inc. All rights reserved. - 33 33-
Slide 34: Sale of Products
Sale of Products Growth of 12% ($M) Factors 2,500 • Positive impact from 2,000 acquisitions 1,500 • Organic growth in EMEA, 2,294 APAC and CALA 1,000 2,048 • Go-to-market changes 500 caused disruption in U.S 0 FY04 FY05 © 2005 Avaya Inc. All rights reserved. - 34 34-
Slide 35: Services Revenue Increased 12%
Services Revenue Increased 12% ($M) Factors 2,500 • Positive impact from acquisitions 2,000 • U.S. services revenues 1,500 – Scope and price changes pressured maintenance 1,000 revenue 1,971 1,761 – Maintenance revenue stable 500 in the second half – Implementation & integration 0 services increased
Slide 36: Rental & Managed Services Revenue Growth
Rental & Managed Services Revenue Growth ($M) Factors 1,000 • Positive impact from Tenovis rental base • Erosion in NA, but flat for 500 second half of 2005 637 • EMEA represents 260 approximately two-thirds of the FY05 total 0 FY04 FY05 © 2005 Avaya Inc. All rights reserved. - 36 36-
Slide 37: Stable Product Gross Margin
Stable Product Gross Margin ($M) GM% Factors 1,250 60% • YoY price declines declines 55% relatively stable 1,200 54.7% 54.3% • Benefit from lower employee 1,150 50% incentive plan expenses 1,245 45% • Cost reductions 1,100 40% • Improved Improved inventory inventory 1,120 management 1,050 35% • Lowe
Slide 38: Decline in Services Gross Margin
Decline in Services Gross Margin ($M) GM% Factors 1,000 45% 39.6% 800 40% 34.2% • Size and scope changes 600 35% contribute to lower 400 30% 697 674 utilization rates 200 25% 0 20% • European service FY04 FY05 600 41% business has lower 34.7% margins 33.6% 400 34% • Cost management 200 328 346 27% c
Slide 39: Rental & Managed Services Gross Margin Growth
Rental & Managed Services Gross Margin Growth Factors ($M) GM% 600 65% 59.3% 60% • Tenovis rental base 500 49.2% 55% • Headcount reductions 400 50% in U.S. 300 45% • Rental base mix 40% improves overall 200 35% margin rate 378 30% 100 128 25% 0 20% FY04 FY05 © 2005 Avaya Inc. All rights reserved. -
Slide 40: Research and Development Spending
Research and Development Spending ($M) R&D (% Rev) Factors 500 8.6% 9.0% 7.9% • Lower R&D spending 400 8.0% rate at Tenovis and AGC 7.0% 300 • Higher R&D investment 6.0% from technology 200 387 acquisitions 348 5.0% 100 • Lower employee 4.0% incentive plan expenses 0 3.0% FY04 FY05* * This is a non-
Slide 41: SG&A Spending
SG&A Spending ($M) SG&A Factors ($M) (% Rev) • SG&A increase from 1,600 40% 38% 36% Tenovis and AGC 1,400 32.3% 34% acquisitions 31.3% 32% 30% • Increase in intangibles 1,200 1,577 28% amortization 26% 1,274 24% 22% • Lower employee 1,000 20% incentive plan expenses FY04 FY05 © 2005 Avaya Inc. All r
Slide 42: Operating Income Increased 7% in 2005
Operating Income Increased 7% in 2005 ($M) (%) ($M) (%) 350 7% 9% 350 9% 300 300 7.2% 250 6.8% 250 7.7% 6.3% 200 200 311* 333* 6% 6% 150 150 100 100 183* 150* 50 50 0 3% 0 3% FY04 FY05 1st Half 2nd Half FY05 FY05 Higher volume and lower services costs in the second half of FY05 improved operating ma
Slide 44: Segment Review: Revenue
Segment Review Revenue Global Communications Solutions Avaya Global Services ($M) ($M) 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 2,044 2,572 2,021 2,330 1,000 1,000 500 500 0 0 FY04 FY05 FY04 FY05 © 2005 Avaya Inc. All rights reserved. - 44 44-
Slide 45: Segment Review: Operating Income
Segment Review Operating Income Global Communications Avaya Global Services 200 300 Solutions 250 150 200 ($M) 100 ($M) 150 249 100 50 71 166 57 50 0 0 FY04 FY05 FY04 FY05 200 Corporate 150 ($M) 100 50 3 75 0 FY04 FY05 © 2005 Avaya Inc. All rights reserved. - 45 45-
Slide 47: Working Capital Management
Working Capital Management DSO and Inventory Turnover Days Turns 100 DSO Inventory Turns 12.0 11.0 90 10.0 80 9.0 8.0 70 7.0 60 6.0 5.0 50 4.0 40 3.0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY02 FY03 FY04 FY05 © 2005 Avaya Inc. All rights reserved. - 47 47-
Slide 48: Improved Capital Structure and Liquidity
Improved Capital Structure and Liquidity ($ in millions) 9/30/02 9/30/03 9/30/04 9/30/05 Total Debt $933 $953 $593 $30 Total Shareholders Equity - 200 794 1,961 Total Capitalization 933 1,153 1,387 1,991 Cash And Equivalents 597 1,192 1,617 750 Net Cash (Debt) (336) 239 1,024 720 Debt-to-Capital Rat
Slide 49: Capital Structure and Liquidity
Capital Structure and Liquidity Beginning Cash Balance FY05 $1,617M Sources Uses Cash from Operations Acquisitions Other Financing Activities Capital Expenditures Tender on Senior Notes Tenovis Debt Retirement Stock Repurchases Ending Cash Balance FY05 $750M © 2005 Avaya Inc. All rights reserved. -
Slide 50: Share Repurchase Program
Share Repurchase Program Building Shareholder Value 500 400 318 Remaining 300 ($M) 200 FY06 Repurchases 75 100 Repurchases 107 through Q4 FY05 0 • Share repurchase program approved in Q3 FY05 • Approval for $500 million over two years • Through November 30th, 18.1 million shares repurchased © 2005 A
Slide 51: Summary
Summary • Addressed operational challenges faced in FY2005 – Strengthened sales channels • Continued to maintain financial discipline company wide • Performance improved during the second half of the year • Sustained profitability • We are a stronger, more competitive company today – Extended geogra
Slide 53: Avaya Strategy to Build Shareholder Value
Avaya Strategy to Build Shareholder Value Leverage Incumbency and Technology Global Enterprise Telephony Installed Base Total Lines (M) 463M 423M hony p Tele 47% IP GR CA 35% IP 8% IP 2004 2008 Source: Avaya analysis based on independent industry analyst reports Technology Transition Drives Growth O
Slide 54: Global Opportunity
Global Opportunity IP Growth & Market Penetration North America EMEA Telephony Telephony Base Base 182M 109M 113M 170M 49% APAC Telephony 13% Base 37% 129M 2004 2008 112M Growth CAGR = 40% 7% 2004 2008 CALA Telephony Growth CAGR = 52% Base 39M 32M 5% 27% 3% 12% 2004 2008 Growth CAGR = 54% 2004 2008
Slide 56: Corporate Strategy: Growth Opportunity in Applications
Corporate Strategy Growth Opportunity Contact Center Applications Unified communications Voicemail Services Telephony Infrastructure 0 10 250 400 WW enterprise telephony lines Contact center Large enterprise lines SMB lines Millions; 2004 lines © 2005 Avaya Inc. All rights reserved. - 56 56-
Slide 57: Enhanced Systems, Applications & Services Deliver Customer Value
Enhanced Systems, Applications & Services Deliver Customer Value • Flexible • Modular • Ubiquitous …customer Applications path, pace Avaya and choice Customer Value Systems Services • Open • Single-point • Available accountability • Evolutionary • Global • Secure © 2005 Avaya Inc. All rights reserve
Slide 58: Competitive Advantages
Competitive Advantages • Global size and scale • Technology and applications leadership • Vision and roadmap for the future of enterprise telephony – Current customers – New customers • Unmatched portfolio of products and services offerings © 2005 Avaya Inc. All rights reserved. - 58 58-
Slide 59: Global Communications Solutions
Avaya Financial Analyst Conference Global Communications Solutions Michael Thurk SVP and President, Global Communications Solutions © 2005 Avaya Inc. All rights reserved. - 59 -
Slide 60: Market and Technology Trends
Market and Technology Trends Evolution to Intelligent Communications • IP Telephony • Solutions –– New New alternative alternative technologies technologies –– Systems Systems integrators integrators playing playing –– Service Service Provider Provider Opportunity Opportunity increased increased rol
Slide 61: Avaya Product Directions
Avaya Product Directions • Continue to enhance current offerings in IPtel, Applications, Appliances and Mobility • Continue to invest in security and management • Invest in low end offers for SMB, branch and peer to peer • Services Oriented Architecture (SOA) to allow for easier integration of commu
Slide 62: Intelligent Communications
Intelligent Communications Embedded into the Fabric of Business Modular Components Become Building Blocks for Enterprise Applications and Processes © 2005 Avaya Inc. All rights reserved. - 62 62-
Slide 64: CY06 Roadmap Highlights
CY06 Roadmap Highlights • Nimcat Networks (building peer-to-peer communications systems) - Products in CY06 • Assured Networks (real time network performance) • Applications Enhancements – Voice Portal V3.0 shipping on Websphere Websphere – New Releases Releases in in Messaging, Messaging, Assisted
Slide 66: Longer Term Directions
Longer Term Directions • Creation of Intelligent Enterprise – Mobility – Standards (SIP) – Services Oriented Architecture – Solutions Orientation • Critical Ingredients – Security – Scalability – Highest Reliability – Value Added Applications and ISVs – Partnerships © 2005 Avaya Inc. All rights rese
Slide 68: Avaya Global Services Strategy Overview
Avaya Global Services Strategy Overview To become the premier end-to-end enabler of intelligent communications in an IP world The Future • Services leads our product The Present – Network and Security Assessments • Services differentiating • Services encapsulates our products our product – TDM produ
Slide 70: We Are Building Professional Services Capabilities Globally
We Are Building Professional Services Capabilities Globally FY04/05 Focus • IP Migration • Program Management FY06/07 Focus • Business Communications Consulting • Applications Consulting ≡ integrating applications in contact center space – Call center – Computer Computer // Telephony Telephony Inter
Slide 71: Transforming Product Support Services To Sustain Revenues And Reduce Cost
We Are Transforming Product Support Services To Sustain Revenues And Reduce Cost IP Characteristic Product Support Services Action Increasing software content • Create offers to explicitly recognize value of software • Deliver higher proportion of service remotely Application on data network • Monit
Slide 72: Complex Environments Create Opportunity For IP-based Managed Services
Complex Environments Create Opportunity For IP-based Managed Services Fully Manage Complex Managing our Deliver Avaya and Migrating Customer’s Contact Applications Over Infrastructures to Client Center & Conferencing the Network Specifications Applications Avaya On IP Converged Managed Demand Soluti
Slide 73: IP Allows Migration To Higher Value Services
Summary: IP Allows Migration To Higher Value Services Stages of Company IT Services Culture and Positioning AGS Examples… Services is the Product BCC, Cost Mngt, Contact Center Re-engineering, Hosted Solutions V A L Services Encapsulates the Product Managed Services CS&I / U GMS E IPT Migration, Net
Slide 74: Global Sales and Marketing
Avaya Financial Analyst Conference Global Sales and Marketing Lou D’Ambrosio SVP and President, Global Sales and Marketing © 2005 Avaya Inc. All rights reserved. - 74 -
Slide 75: Avaya Go-to-Market Model Key Initiatives
Avaya Go-to-Market Model Key Initiatives Direct • Aligned by industry • Global deployment Strategic • CXO relationships Accounts • Solution selling • High-touch on regional accounts Named Accounts • Strong Partner participation • Geo alignment, vertical specialization • Partner-led Mid Market • Offe
Slide 77: Real Customer; Real Differentiation
Real Customer; Real Differentiation • Home Depot – Create "store of the future" – Migrate Migrate 2,000+ 2,000+ stores stores to to IP IP Telephony Telephony – Fully integrated IP Telephony solution • ABN AMRO – Global deployment of over 100,000 ports in 14 countries – Replace multiple incumbent ven
Slide 78: Real Customer; Real Differentiation
Real Customer; Real Differentiation • Boston Red Sox – IP Telephony solution to build customer loyalty – Differentiate between scalpers and loyal fans – Virtual Virtual offices offices during during Spring Spring Training Training and and Recruiting Recruiting • Palm Beach County Schools – District
Slide 81: Forward Looking Statements
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
Slide 82: Discussion Points
Discussion Points • Key Financial Themes for FY’06 and Beyond • Economic and Market Environment • Major Drivers of Performance in FY’06 • Balance Sheet Goals • Corporate Development Framework © 2005 Avaya Inc. All rights reserved. - 82 82-
Slide 83: Key Financial Themes for FY’06 and Beyond
Key Financial Themes for FY’06 and Beyond • Drive toward double-digit operating margins • Generate significant operating cash flow • Continued investment in software to strengthen applications leadership • Maintain strong balance sheet • Continue share repurchases to deliver shareholder value © 2005
Slide 85: Regional GDP Growth Trends
Regional GDP Growth Trends 6 2004 2005E 2006E 5 4 (%) 3 2 1 0 North EMEA Asia Pacific Latin America America GDP Growth Source: EIU, Avaya market analysis © 2005 Avaya Inc. All rights reserved. - 85 85-
Slide 86: Regional IT Spending Growth Trends
Regional IT Spending Growth Trends 12 2005E 2006E 10 8 (%) 6 4 2 0 North EMEA Asia Pacific Latin Global America America IT Spending Growth Source: EIU, Avaya market analysis © 2005 Avaya Inc. All rights reserved. - 86 86-
Slide 87: CIO Priorities
CIO Priorities • Out of more than 30 IT spending alternatives, VoIP ranked 6thth, up from 9thth, in a survey of CIOs • 74% of enterprises in North America and 60% in Europe have deployed, are deploying or are evaluating plans to deploy IP Telephony • Once IP Telephony deployed, companies expect to i
Slide 89: FY06 Trends: Revenue
FY06 Trends: Revenue • Targeting increased product sales in all regions – Resumption of growth in US – Growth in Europe, even with the adjustment for the pre-acquisition stub period – Higher growth rates in APAC and CALA • Services revenue flat, with international maintenance growth partially offset
Slide 90: Items Impacting YoY Cost Structure
Items Impacting YoY Cost Structure Added Cost and Expense Offsetting Cost Savings Previously Discussed: Previously Discussed: Employee Incentive Plan $80M European Cost Reductions $38M Increased R&D Investment 20M AV Global Services FY05 Actions 50M Q2 12M Q3 13M Q4 25M Total $100M Total $88M Additi
Slide 91: FY06 Trends: Gross Margin
FY06 Trends: Gross Margin Targeting improvement in overall Gross Margins Product Services Rental & Managed Services + Volume + Cost Reductions + Volume + Product Mix - Maintenance and + Cost Reductions + Manufacturing Portfolio Mix + Geographic Mix Cost Improvement - Benefit Expenses - Pressure on -
Slide 92: FY’06 Trends: SG&A
FY’06 Trends: SG&A Expect SG&A as a % of Revenue to Decline Tenovis Acquisition SG&A as a % of Revenue FY06 • Drive international SG&A towards U.S. levels • Spending impacted by employee benefits and incentive plan © 2005 Avaya Inc. All rights reserved. - 92 92-
Slide 93: FY’06 Trends: R&D as % of Revenue
FY’06 Trends: R&D as % of Revenue • Targeted increase in R&D spending to support applications leadership and software development 15% 12% 9% 6% 9.0% 8.9% 8.6% 8.0% 3% 0% FY03 FY04 FY05 FY06E © 2005 Avaya Inc. All rights reserved. - 93 93-
Slide 94: FY06 Trends: FX Impact
FY06 Trends: FX Impact Revenue: Currency mix US$ – Euro Exchange Rate U.S. 59% Intl. 41% 1.400 Euro, 20% 1.350 1.300 FY05 Avg. 1.265 Other, 10% 1.250 US$ – Euro 1.200 Exchange Rate US $, 11% 1.150 1.100 US$ 70% FX 30% Q1 Q2 Q3 Q4 11/30 FY05 Spot Rate 1% movement in exchange rates for current basket
Slide 96: Balance Sheet Goals
Balance Sheet Goals • Maintain a strong net cash position • Improve credit rating – ultimate goal is investment grade • Call remaining senior notes • Improve DSO • Improve inventory turnover © 2005 Avaya Inc. All rights reserved. - 96 96-
Slide 97: Maintain Strong Net Cash Position
Maintain Strong Net Cash Position 1,200 Debt Net Cash (Debt) 1,000 800 1,024 600 953 933 ($M) 400 645 720 593 200 239 30 0 (200) (395) (336) (400) FY01 FY02 FY03 FY04 FY05 * Net Cash is a non-GAAP financial measure. © 2005 Avaya Inc. All rights reserved. - 97 97-
Slide 98: Major Sources & Uses of Cash
Major Sources & Uses of Cash Beginning Cash Balance FY06 $750M Sources Improvements in Profitability and Working Capital Uses Stock Repurchases Call of Senior Notes Capital Expenditures Restructuring Costs © 2005 Avaya Inc. All rights reserved. - 98 98-
Slide 99: Operating Cash Flow
Operating Cash Flow FY06 OCF Expected to Improve FY2006 + Increased profitability + Improvements to working capital $479M + Employee incentive $334M compensation - Restructuring costs FY04 FY05 Overall Expectation: ++ © 2005 Avaya Inc. All rights reserved. - 99 99-
Slide 100: Tax
Tax • Reversed valuation allowance in FY05 on a portion of deferred tax assets related U.S. Federal net operating losses. Tax provision for FY06 will be recorded on financial statements • Effective tax rate for FY 06 in 36% to 38% range – Higher rate in the first half, improving during the year • As
Slide 101: Depreciation & Amortization
Depreciation & Amortization ($M) 300 272 264 Depreciation of Rental Assets 250 54 59 Amortization of Intangibles 200 59 147 62 Depreciation & 150 6 Software Amort 100 141 159 143 50 0 FY04 FY05 FY06E © 2005 Avaya Inc. All rights reserved. - 101 101 -
Slide 102: Corporate Development
Corporate Development • M&A Strategy to date – Focus primarily on “tuck-in” acquisitions that can be quickly and seamlessly integrated – Strengthen / complement applications portfolio – Support development of professional services capabilities – Extend / strengthen footprint – Goal of minimal diluti
Slide 104: Drive Toward Double-Digit Operating Margins
Drive Toward Double-Digit Operating Margins Revenue Goals • Solid growth in sales of products – Continue to capitalize on technology transition – Migrate Europe telephony base to IP – Growth in applications software – Accelerate SMB sales (IP Office, Nimcat) • Growth in rental and managed services –
Slide 105: Continuing Shift Towards Software
Drive Toward Double-Digit Operating Margins Continuing Shift Towards Software HW - SW Mix as a % of GCS Net Revenues 100% 90% Hardware % 80% 73% 72% 69% 67% 70% 60% 50% 40% 30% 31% 33% 20% 27% 28% Software % 10% 0% FY02 FY03 FY04 FY05 © 2005 Avaya Inc. All rights reserved. - 105 105 -
Slide 106: Drive Toward Double-Digit Operating Margins: Key Areas of Opportunity
Drive Toward Double-Digit Operating Margins Key Areas of Opportunity Gross Operating Margin Margin • Drive additional operational improvements in EMEA • Improve product cost through design and sourcing • Maintain focus on services utilization to improve margins • Adopt one unified ERP system globall
Slide 107: Summary
Summary • Technology transition provides global market opportunity • Clear strategy, strong positioning & competitive advantages • Applications are a key driver & differentiator • Drive toward double-digit operating margins • Generate significant operating cash flow • Maintain strong balance sheet •
Slide 109: Certain Items Included in Results That May Affect Comparability
Certain Items Included in Results That May Affect Comparability Year Ended 2001 2002 2003 2004 2005 ($ in millions) Operating Income $(967) $(354) $63 $323 $298 Certain Items Included in Operating Income: Reversal of reserves for sales returns and allowances - - - 12 - Business restructuring charges

Avaya — Investor Day (December 2005) on 6ix

Avaya — Investor Day (December 2005)

Slide 1: Avaya Financial Analyst Conference

Slide 2: Forward Looking Statements

Slide 3: The First 5 Years

Slide 4: September 30, 2000: A Challenging Beginning

Slide 5: But With Assets to Build On

Slide 6: The Road To Intelligent Communications

Slide 7: The Road to Intelligent Communications

Slide 8: Reinvested in Our Portfolio

Slide 9: Expanding Our Portfolio & Footprint Through Acquisitions

Slide 10: Expansion Through Partnerships

Slide 11: Restructured Go-To-Market Model

Slide 12: And We Delivered Competitive Value To Our Customers

Slide 13: Avaya Today

Slide 14: A Leader in Business Communications

Slide 15: Financial Progress Report

Slide 16: With Customers All Over the World

Slide 17: Financial and Operational Review

Slide 18: Discussion Points – FY 2005

Slide 19: 2005 Year in Review

Slide 20: Larger, Broader, More Diverse Global Presence

Slide 21: European Integration

Slide 22: Strengthened Technology & Solutions Portfolio

Slide 23: Maintained IP Telephony Market Leadership

Slide 24: Maintained IP Telephony Market Leadership

Slide 25: Continued Trend of Strong Cash Flow

Slide 26: Eliminated All But $30M in Debt

Slide 27: Sustained Profitability

Slide 28: Sustained Profitability (as adjusted)

Slide 29: Key Performance Drivers

Slide 30: Revenue

Slide 31: Revenue: International Growth Driven by Acquisitions & Organic Growth

Slide 32: Revenue US Indirect Channel

Slide 33: Revenue US Direct GCS

Slide 34: Sale of Products

Slide 35: Services Revenue Increased 12%

Slide 36: Rental & Managed Services Revenue Growth

Slide 37: Stable Product Gross Margin

Slide 38: Decline in Services Gross Margin

Slide 39: Rental & Managed Services Gross Margin Growth

Slide 40: Research and Development Spending

Slide 41: SG&A Spending

Slide 42: Operating Income Increased 7% in 2005

Slide 43: Segment Results

Slide 44: Segment Review: Revenue

Slide 45: Segment Review: Operating Income

Slide 46: Asset Management and Liquidity

Slide 47: Working Capital Management

Slide 48: Improved Capital Structure and Liquidity

Slide 49: Capital Structure and Liquidity

Slide 50: Share Repurchase Program

Slide 51: Summary

Slide 52: Corporate Strategy

Slide 53: Avaya Strategy to Build Shareholder Value

Slide 54: Global Opportunity

Slide 55: Avaya Road to Intelligent Communications

Slide 56: Corporate Strategy: Growth Opportunity in Applications

Slide 57: Enhanced Systems, Applications & Services Deliver Customer Value

Slide 58: Competitive Advantages

Slide 59: Global Communications Solutions

Slide 60: Market and Technology Trends

Slide 61: Avaya Product Directions

Slide 62: Intelligent Communications

Slide 63: Communication Services

Slide 64: CY06 Roadmap Highlights

Slide 65: Partnerships

Slide 66: Longer Term Directions

Slide 67: Avaya Global Services

Slide 68: Avaya Global Services Strategy Overview

Slide 69: An IP World Has Broader Service Needs

Slide 70: We Are Building Professional Services Capabilities Globally

Slide 71: Transforming Product Support Services To Sustain Revenues And Reduce Cost

Slide 72: Complex Environments Create Opportunity For IP-based Managed Services

Slide 73: IP Allows Migration To Higher Value Services

Slide 74: Global Sales and Marketing

Slide 75: Avaya Go-to-Market Model Key Initiatives

Slide 76: Winning with Avaya Communications

Slide 77: Real Customer; Real Differentiation

Slide 78: Real Customer; Real Differentiation

Slide 79: FIFA World Cup Sponsor