Avaya Inc

Avaya — Investor Day (December 2005)

38 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 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. -3-

  4. Slide 4: 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. -4-4

  5. Slide 5: 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

  6. Slide 6: 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

  7. Slide 7: 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

  8. Slide 8: Strengthened Technology & Solutions Portfolio

    Strengthened Technology & Solutions Portfolio Software upgrades • Communication Manager 3.0 • IP Office 3.0 © 2005 Avaya Inc. All rights reserved. -8-8

  9. Slide 9: 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

  10. Slide 10: Maintained IP Telephony Market Leadership

    Maintained IP Telephony Market Leadership Shipped 7M+ Lines © 2005 Avaya Inc. All rights reserved. - 10 10-

  11. Slide 11: 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. - 11 11-

  12. Slide 12: 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

  13. Slide 13: 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. - 13 13-

  14. Slide 14: 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

  15. Slide 15: Key Performance Drivers

    Key Performance Drivers © 2005 Avaya Inc. All rights reserved. - 15 15-

  16. Slide 16: 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. - 16 16-

  17. Slide 17: 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

  18. Slide 18: 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. - 18 18-

  19. Slide 19: 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. - 19 19-

  20. Slide 20: 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. - 20 20-

  21. Slide 21: 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

  22. Slide 22: 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. - 22 22-

  23. Slide 23: 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 50% 1,150 incentive plan expenses 1,245 45% • Cost reductions 1,100 40% • Improved Improved inventory inventory 1,120 management 1,050 35% • Lowe

  24. Slide 24: 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

  25. Slide 25: Rental & Managed Services Gross Margin Growth

    Rental & Managed Services Gross Margin Growth Factors ($M) GM% 600 65% 59.3% • Tenovis rental base 60% 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. -

  26. Slide 26: Research and Development Spending

    Research and Development Spending ($M) R&D (% Rev) Factors 500 8.6% 9.0% 7.9% • Lower R&D spending 8.0% 400 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-

  27. Slide 27: SG&A Spending

    SG&A Spending ($M) SG&A Factors ($M) (% Rev) 1,600 40% • SG&A increase from 38% 36% Tenovis and AGC 1,400 32.3% 34% acquisitions 31.3% 32% 30% • Increase in intangibles 1,577 28% 1,200 amortization 26% 1,274 24% 22% • Lower employee 1,000 20% incentive plan expenses FY04 FY05 © 2005 Avaya Inc. All r

  28. Slide 28: 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% 200 200 333* 6% 6% 150 311* 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

  29. Slide 29: Segment Results

    Segment Results © 2005 Avaya Inc. All rights reserved. - 29 29-

  30. Slide 30: 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. - 30 30-

  31. Slide 31: 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. - 31 31-

  32. Slide 32: Asset Management and Liquidity

    Asset Management and Liquidity © 2005 Avaya Inc. All rights reserved. - 32 32-

  33. Slide 33: 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. - 33 33-

  34. Slide 34: 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

  35. Slide 35: 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

  36. Slide 36: 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

  37. Slide 37: Avaya Financial Analyst Conference Appendix

    Avaya Financial Analyst Conference Appendix © 2005 Avaya Inc. All rights reserved. - 37 -

  38. Slide 38: 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

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