Avaya Inc

Avaya — Investor Day (December 2005)

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

  1. Slide 1: Avaya Financial Analyst Conference

    Avaya Financial Analyst Conference December 1, 2005 © 2005 Avaya Inc. All rights reserved. -1-

  2. 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

  3. Slide 3: Financial Strategy and Goals

    Avaya Financial Analyst Conference Financial Strategy and Goals Garry K. McGuire CFO and SVP, Corporate Development © 2005 Avaya Inc. All rights reserved. -3-

  4. Slide 4: 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. -4-4

  5. Slide 5: 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

  6. Slide 6: Economic & Market Environment

    Economic & Market Environment © 2005 Avaya Inc. All rights reserved. -6-6

  7. Slide 7: 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. -7-7

  8. Slide 8: 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. -8-8

  9. Slide 9: 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

  10. Slide 10: Major Drivers of Performance in FY'06

    Major Drivers of Performance in FY’06 © 2005 Avaya Inc. All rights reserved. - 10 10-

  11. Slide 11: 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

  12. Slide 12: 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

  13. Slide 13: 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 -

  14. Slide 14: 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. - 14 14-

  15. Slide 15: 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. - 15 15-

  16. Slide 16: 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

  17. Slide 17: Balance Sheet Goals

    Balance Sheet Goals © 2005 Avaya Inc. All rights reserved. - 17 17-

  18. Slide 18: 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. - 18 18-

  19. Slide 19: 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. - 19 19-

  20. Slide 20: 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. - 20 20-

  21. Slide 21: 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. - 21 21-

  22. Slide 22: 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

  23. Slide 23: 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. - 23 23-

  24. Slide 24: 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

  25. Slide 25: Key Financial Themes: FY'06 and Beyond

    Key Financial Themes: FY’06 and Beyond © 2005 Avaya Inc. All rights reserved. - 25 25-

  26. Slide 26: 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 –

  27. Slide 27: 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. - 27 27-

  28. Slide 28: Drive Toward Double-Digit Operating Margins

    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

  29. Slide 29: 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 •

  30. Slide 30: Avaya Financial Analyst Conference Appendix

    Avaya Financial Analyst Conference Appendix © 2005 Avaya Inc. All rights reserved. - 30 -

  31. Slide 31: 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