Avaya — 2003 Investment Community Conference
42 slides from Avaya's conference presentation, Nov 6, 2003
Slide 1: 2003 Investment Community Conference
2003 Investment Community Conference November 6, 2003 Copyright© 2002 Avaya Inc. All rights reserved
Slide 2: Garry K. McGuire, Sr., CFO and SVP Corporate Development
Garry K. McGuire, Sr. CFO and SVP Corporate Development
Slide 3: Agenda
Agenda • FY03 Review • Recent Transactions and FY04/05 Goals • Key Performance Drivers • Balance Sheet and Cash Flow 3
Slide 4: FY03 Review
FY03 Review
Slide 5: FY03 Goals and Results
FY03 Goals and Results GOALS RESULTS Maintain and strengthen Net cash position of financial position $239M at end of FY03 Breakeven model by Q3 Generated net income FY03 in Q3 & Q4 FY03 Growth in IP telephony Stabilize and grow offset decline in TDM revenue revenue; Services revenue stabilized 5
Slide 6: FY03 Results: Cash
FY03 Results: Cash Strengthened Financial Position 1,200 Cash 1,000 800 ($M) 600 1,192 400 843 651 724 597 200 0 9/30/02 12/31/02 3/31/03 6/30/03 9/30/03 300 200 Net Cash* 100 239 0 ($M) -100 -162 -150 -336 -283 -200 * Net cash is defined as cash and cash equivalents less total debt. At 9/30/03 this
Slide 7: FY03 Results: Earnings
FY03 Results: Earnings Improved Profitability Net Income (Loss) 100 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 50 66 - 8 ($M) (41) (50) (121) (100) (150) 0.20 EPS (Diluted) 0.10 0.15 - 0.02 (0.11) ($) (0.10) (0.33) (0.20) (0.30) (0.40) Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 7
Slide 8: FY03 Results: Growth
FY03 Results: Growth 1,600 Revenue 1,400 1,200 1,000 ($M) 800 1,306 1,279 1,219 600 1,152 1,118 1,067 1,081 1,072 400 200 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY02 FY02 FY02 FY02 FY03 FY03 FY03 FY03 8
Slide 9: Core Avaya
Core Avaya 1,200 Revenue ($M) 1,000 800 600 400 200 0 Q1 FY02 Q2 FY02 Q3 FY02 Q4 FY02 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Revenue 1,170 1,136 1,055 1,023 946 950 929 971 100 Operating Income (Loss) ($M) 50 0 8.4% -50 0.9% 2.6% 1.5% -2.3% -1.1% -100 -6.7% -18.2% -150 As reported -200 Q1 FY02 Q2 FY02 Q3 F
Slide 10: Segment Results: ECG
Segment Results: ECG 600 Revenue ($M) 500 400 300 200 100 0 Q1 FY02 Q2 FY02 Q3 FY02 Q4 FY02 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Revenue 563 547 492 478 428 437 416 457 10 Operating Income (Loss) ($M) 0 -10 -20 -30 -40 0.2% -3.7% -3.1% -50 -5.9% -7.9% -9.8% -9.6% -14.9% -60 -70 As reported -80 Q1 FY02 Q2
Slide 11: Segment Results: Services
Segment Results: Services 600 Revenue ($M) 500 400 300 200 100 0 Q1 FY02 Q2 FY02 Q3 FY02 Q4 FY02 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Revenue 548 530 505 485 462 458 458 455 80 Operating Income ($M) 70 60 14.2% 15.9% 12.1% 9.4% 7.6% 8.7% 8.6% 50 10.3% 40 30 20 10 As reported 0 Q1 FY02 Q2 FY02 Q3 FY02 Q4
Slide 12: Segment Results: SMBS
Segment Results: SMBS 65 Revenue ($M) 60 55 50 45 40 Q1 FY02 Q2 FY02 Q3 FY02 Q4 FY02 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Revenue 59 59 58 60 56 55 55 59 4 Operating Income (Loss) ($M) 2 0 -2 5.1% -4 0.0% -1.8% -1.8% -8.3% -7.3% -6 -15.3% -17.2% -8 As reported -10 Q1 FY02 Q2 FY02 Q3 FY02 Q4 FY02 Q1 FY03
Slide 13: Revenue: Geographic Mix (%)
Revenue: Geographic Mix (%) Q4 FY02 Total Avaya Q4 FY03 International International 24.7% 26.1% U.S. U.S. 75.3% 73.9% Q4 FY02 Core Avaya Q4 FY03 International International 22.7% 23.0% U.S. U.S. 77.3% 77.0% 13
Slide 14: FY03 Key Transactions
FY03 Key Transactions 1/29/03: Completed LYONs exchange offer 4/30/03: Amended bank credit facility for financial flexibility 5/6/03: Issued $200M of senior secured notes 9/8/03: Sold 34.5M common shares 10/2/03: Purchased assets from Vista Throughout FY03: Retired 10/27/03: Announced $395M in face
Slide 15: Working Capital Management: Inventory Turnover
Working Capital Management Inventory Turnover 10 8.5 7.8 8 7.2 7.1 7.3 6.2 Average Turns 5.7 5.7 6 6.4 6.4 6.1 6.0 6.1 5.6 5.3 5.0 4 2 Total Avaya Core Avaya 0 Q1 FY02 Q2 FY02 Q3 FY02 Q4 FY02 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 15
Slide 16: Working Capital Management: Days Sales Outstanding
Working Capital Management Days Sales Outstanding* 100 92 91 89 90 88 80 85 Average DSO 82 73 69 70 65 64 69 60 60 63 61 59 57 50 Total Avaya Core Avaya 40 Q1 FY02 Q2 FY02 Q3 FY02 Q4 FY02 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 *Q1 FY02 and Q2 FY02 accounts receivable have been normalized to exclude the imp
Slide 17: Cash Flow
Cash Flow Seven consecutive quarters of From Operations positive cash flow from operations 250 200 150 100 201 50 86 85 14 * * ($M) 58 50 39 48 50 0 -50 (79) (92) -100 (198) -150 -200 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY01 FY01 FY01 FY01 FY02 FY02 FY02 FY02 FY03 FY03 FY03 FY03 180 160 138 161 Busi
Slide 18: Capital Structure and Liquidity
Capital Structure and Liquidity ($M) 9/30/01 9/30/02 9/30/03 Commercial paper $432 $- $- Credit facilities 200 - - LYONs convertible bond - 476 287 Senior secured notes - 457 666 Other 13 - - TOTAL DEBT 645 933 953 SERIES B PREFERRED 395 - - TOTAL SHAREHOLDERS EQUITY 481 - 200 TOTAL CAPITALIZATION $
Slide 19: Operating Leverage
Operating Leverage Fixed Cost Reduction (Core Avaya) 1,500 39% R educ 1,000 tion* ($M) 500 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY01 FY01 FY01 FY01 FY02 FY02 FY02 FY02 FY03 FY03 FY03 FY03 Fixed costs are defined as fixed portion of COGS plus SG&A expenses and R&D expenses * Reduction is from Q1 FY0
Slide 20: Recent Transactions and FY04/05 Goals
Recent Transactions and FY04/05 Goals
Slide 21: Recent Transactions: Connectivity
Recent Transactions Connectivity • Sale of Connectivity – Non-strategic segment – limited synergy with core business – Increases focus on core business segments – Improves working capital and cost structure flexibility 21
Slide 22: Recent Transactions: Connectivity Sale Terms
Recent Transactions Connectivity • Sale represents 0.6x revenue, based on total deal consideration of $338M • $263M sale price – $210M cash – $18M convertible note – $35M of CommScope common stock (CTV), subject to a collar • Buyer assumes $75M of certain liabilities • Expect to report a tax and boo
Slide 23: Recent Transactions: Expanets
Recent Transactions Expanets • An opportunistic and defensive acquisition – Gain control of important channel and revenue base – Strengthen multi-vendor services presence – Continuity and direct focus for customers • Business generated $600M in revenue per annum – Significant distributor for Avaya –
Slide 24: Recent Transactions: Expanets Purchase Price
Recent Transactions Expanets • Purchase price of $152M – Purchased at auction with 3 financial buyers – Subject to working capital adjustment (~ $20M to $30M) – Expected cash outlay – no more than $120M • Closing and restructuring charge expected in Q1 FY04 24
Slide 25: Quarterly Run Rate
Quarterly Run Rate Expanets Deal 4Q 03 Announced Incremental Incremental 4Q 03 Pension / Pro Savings Savings Core Maintenance Margin on Quarterly ($M) Actuals Other Forma Connectivity Initiatives Initiatives Avaya Left Behind Sales Run Rate Revenue 1,118 1,118 (147) 971 10 981 Total Cost 654 5 658 (
Slide 26: Income Statement Goals
Income Statement Goals Targeted Metrics In Q4 FY04 In 2H FY05 Gross Margin 43% to 45% 45% to 47% SG&A 27% to 29% 25% to 27% R&D 8% to 10% 8% to 10% Operating Margin 6% to 7% 10% to 12% Achieving the Goal • PSO shift $78M • Revenue growth • Allocation refinement across cost and • Operating leverage o
Slide 27: Key Performance Drivers
Key Performance Drivers
Slide 28: Key Performance Drivers: ECG & SMBS Revenue vs. Employment
Key Performance Drivers ECG & SMBS Revenue vs. U.S. Non-Farm Employment U.S. Non-Farm ECG & SMBS Employment Revenue ($M) 133,000 1,000 132,500 900 132,000 800 700 131,500 600 131,000 500 130,500 400 130,000 300 129,500 U.S. Non-Farm Employment 200 ECG & SMBS Revenue 129,000 100 128,500 0 Q1 Q2 Q3 Q4
Slide 29: Key Performance Drivers: Pricing Environment
Key Performance Drivers Pricing Environment • Environment – Pricing pressure continues to be a factor in key markets – High levels of promotional activity from vendors – Year-end sales push • Management actions – Increased focus on the value proposition • Value-based sales approach • ROI tools – Inc
Slide 30: Key Performance Drivers: Business Transformation
Key Performance Drivers Business Transformation • Standardize/simplify systems and processes • Significantly improve interaction with customers – Simplify quoting and ordering processes – Migrate to customer-centric sales methodology – Implement self-service tools • Be a better, more predictable par
Slide 31: Key Performance Drivers: Real Estate Expense Reduction
Key Performance Drivers Real Estate Expense Reduction Opportunity • Core Avaya 7M square feet – ~ 40% is vacant space • With economy improving, increase in sub-leasing potential • Potential opportunity to reduce costs related to vacant space (Current cost = ~ $39M per annum). 31
Slide 32: Corporate Development
Corporate Development An Opportunistic Approach • Build out core business: – Enhance distribution in existing markets – Capture global services and channel opportunities – Extend presence in key growth markets • Support growth through targeted acquisitions • Goal of minimal dilution in first year; n
Slide 33: Balance Sheet and Cash Flow
Balance Sheet and Cash Flow
Slide 34: Balance Sheet Goals
Balance Sheet Goals • Improve credit rating – ultimate goal is investment grade • Opportunistically de-lever the balance sheet • Maintain net cash position • FY04 core working capital goals – Inventory turnover goal from 8.5x at Q4 FY03 to 9x – Days sales outstanding goal from 60 days at Q4 FY03 to
Slide 35: Cash Flow: Potential Uses of Cash in FY04
Cash Flow Potential Uses of Cash in FY04 (Core Avaya) Q1 Q2 Q3 Q4 Total ($M) FY04 FY04 FY04 FY04 FY04 BRR $9 $7 $6 $8 $30 Interest payments 36 - 36 - 72 Capital expenditures 23 28 32 17 100 Total $68 $35 $74 $25 $202 Excludes cash impact of the Expanets purchase 35
Slide 36: Cash Flow: Pension Plan Projected Cash Contribution
Cash Flow Pension Plan Projected Cash Contribution Fiscal Year Ended September 30, Investment Return 2004 2005 2006 11.0% $0 $0 $101M 9.0% $0 $0 $104M 7.5% $0 $0 $107M 5.0% $0 $0 $110M Note: Based on assets as of September 30, 2003 and assumes 0% return to December 2003. Investment return above assu
Slide 37: Tax Considerations
Tax Considerations Core Avaya – FY04 • Expect no federal income tax payments due to net operating loss carryforwards • Expect to pay income taxes in certain foreign and state jurisdictions • Estimated tax provision of $6M to $8M per quarter 37
Slide 38: Summary
Summary • A more focused business • Well positioned in key markets • Significant potential operating leverage • Key transactions add value • Poised to achieve key goals in FY04 and FY05 38
Slide 39: Investment Thesis
Investment Thesis Strategic Leverageable Differentiation Business Avaya Model Cash Earnings Shareholder Value Growth Technology Transition 39
Slide 40: Q&A
Q&A
Slide 41: Lunch & Product Tours
Lunch & Product Tours
Slide 42: 2003 Investment Community Conference
2003 Investment Community Conference November 6, 2003