Avaya — Investor Day (October 2004)
107 slides from Avaya's investor day presentation, Oct 29, 2004
Slide 1: 2004 Financial Analyst Conference
2004 Financial Analyst Conference October 29, 2004 © 2004 Avaya Inc. All rights reserved
Slide 2: Matt Booher, Vice President - Investor Relations
Matt Booher Vice President - Investor Relations
Slide 3: Forward Looking Statement
Forward Looking Statement The use of words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “intends,” “future,” “potential,” or “continue,” the negative of these terms and other comparable terminology are intended to identify forward-looking stat
Slide 4: Agenda
Agenda • Introduction Matt Booher • Review of FY 2004 Garry McGuire • Corporate & Business Strategy Donald Peterson • FY 2005 Goals Garry McGuire • Q&A • Lunch & Product Demonstrations 4
Slide 5: Garry K. McGuire, Sr.
Garry K. McGuire, Sr. CFO and SVP Corporate Development
Slide 6: Building Profitable Shareholder Value
Building Profitable Shareholder Growth Value 6
Slide 7: Delivering on Key Goals
2004 Delivering on Key Goals
Slide 8: Maintain Cash Position
Delivering on Key Goals Maintain Cash Position 1,800 1,500 1,200 900 1,617 600 1,192 300 597 0 9/30/02 9/30/03 9/30/04 Cash increased by 35.7% or $425 million for the year 8
Slide 9: Maintain Net Cash Position
Delivering on Key Goals Maintain Net Cash Position 1,200 1,000 800 600 1,024 ($M) 400 200 239 0 -200 (336) -400 9/30/02 9/30/03 9/30/04 Net cash (cash less debt) increased by $785 million for the year 9
Slide 10: Opportunistically De-lever the Balance Sheet
Delivering on Key Goals Opportunistically de-lever the Balance Sheet $953 1,000 Primarily 800 Senior secured notes retired LYONs $372M $593 accretion 600 $12M ($M) 400 200 0 9/30/03 9/30/04 Debt reduced by 37.8% or $360 million 10
Slide 11: Working Capital Management
Delivering on Key Goals Working Capital Management 9/30/02 9/30/03 9/30/04 Past Due Receivables as a % of Total A/R 41.0% 17.8% 13.3% DSO 73 60 58 Inventory Turnover 7.2x 8.3x 9.0x 11
Slide 12: Operating Cash Flow of $479 Million
Delivering on Key Goals Operating Cash Flow of $479 Million 600 500 400 ($M) 300 479 200 100 169 86 0 FY 2002 FY 2003 FY 2004 12
Slide 13: Improve Credit Rating
Delivering on Key Goals Improve Credit Rating Moody’s upgraded Agency 9/30/03 9/30/04 debt ratings and Moody’s both ratings agencies changed Long term senior outlooks to positive unsecured debt B3 B2 Senior secured notes B2 B1 Issuer rating B3 B2 Outlook Stable Positive S&P Corporate credit rating B
Slide 14: FY04 Income Statement Targets and Results
Delivering on Key Goals FY04 Income Statement Targets and Results Actual Targeted Metrics In Q4 FY04 Q4 FY04* Gross Margin 43% to 45% 49.5% SG&A 27% to 29% 30.7% R&D 8% to 10% 8.8% Operating Margin 6% to 7% 10.1% Achieved Profitability in all Segments * Q4 FY04 excludes Reversal of $14M of reserve f
Slide 15: FY 2004 Highlights
Delivering on Key Goals Growth, Leverage and Profitability (in $ millions) FY03 FY04 FY 2004 Highlights • Revenue growth Total Revenue 3,796 4,069 – Year over year Gross Margin % 43.2% 47.8% improvement of 7.2% Operating Expenses 1,576 1,622 – Product sales growth of 8.9% Operating Income 63 323 • I
Slide 16: Strengthened Competitive Position
Delivering on Key Goals Strengthened Competitive Position Expand Portfolio of Rich Communications Applications • Spectel • Polycom/Extreme/Motorola Building a Global Avaya Integrated Value Technology Competitor Proposition Whole Greater than Customer Sum of the Parts • Tenovis* • Expanets • Tata Ava
Slide 17: Key Performance Drivers
Key Performance Drivers
Slide 18: Total Revenue
Total Revenue Year over Year Revenue Growth Full Year Quarterly* 4,200 1,200 4,000 7.2% 1,100 9.4% 3,800 1,000 3,600 4,069 900 3,796 1,062 3,400 800 971 3,200 700 3,000 600 FY03 FY04 FY03 FY04 * Q4 FY04 excludes reversal of $14M of reserve for sales returns and allowances 18
Slide 19: Accelerating Product Sales Growth
Accelerating Product Sales Growth Rate of Growth Increased Every Quarter • Product revenue increased 8.9% for FY04 • Majority of the growth is organic 14.0% 12.0% 10.0% 8.0% 6.0% 12.5% 11.2% 4.0% 5.0% 5.1% 2.0% 0.0% Q1 Q2 Q3 Q4 * FY 2004 * Q4 FY04 excludes reversal of $8M of reserve for sales return
Slide 20: Product Revenue and Direct Revenue Becoming Larger Part of Business
Product Revenue and Direct Revenue Becoming Larger Part of Business (in $ millions) FY2003 FY2004 Q4 FY03 Q4 FY04* Total Revenue 3,796 4,069 971 1,062 Product Revenue 1,880 2,048 495 557 % of Total Revenue 49.5% 50.3% 51.0% 52.4% Direct Revenue 2,440 2,700 637 717 % of Total Revenue 64.3% 66.4% 65.6
Slide 21: Services Revenue
Services Revenue Year over Year Revenue Growth Full Year Quarterly* 2,200 700 5.5% 2,000 600 6.1% 1,800 500 1,600 1,916 2,021 400 476 1,400 300 505 1,200 200 1,000 100 FY03 FY04 FY03 FY04 *Q4 FY04 excludes reversal of $6M of reserve for sales returns and allowances 21
Slide 22: Services Revenue/Margin Challenges & Opportunities
Services Revenue/Margin Challenges & Opportunities Challenges Opportunities Outsourcing • Fluctuations result from • Retain service contracts change in direction of • Pipeline of outsourcing deals a few customers is increasing Maintenance • Changes in scope • Ports under warranty are • Cancellations
Slide 23: Growth in Ports Under Warranty
Services Growth in Ports Under Warranty 150% • Higher product sales 140% drives increase in 130% ports under warranty 120% • 90% average monthly 110% maintenance take rate 100% over past 2 years 90% Ports • Increased 37% from 80% Q1 to Q4 70% 60% 50% Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY04 Indexed Ports und
Slide 24: Changing Mix of Service Revenue
Changing Mix of Service Revenue IP Telephony Opportunity Legacy PBX IP Telephony Network Consulting Implementation Implementation Maintenance Maintenance Remote Monitoring Security Services Network Management 24
Slide 25: Deferred Revenue
Deferred Revenue • Includes pre-paid revenue which is recognized ratably over contract term • Primarily service related • Fluctuates with large annual and quarterly advance payments • Not a proxy for funnel or backlog 200 180 160 140 120 100 190 183 178 80 161 60 40 20 0 Q1 FY04 Q2 FY04 Q3 FY04 Q4 F
Slide 26: Improved Gross Margin
Improved Gross Margin 60.0% 57.6% 55.0% 53.9% 54.0% 52.3% 51.2% 50.3% 49.5% 50.0% 48.1% 48.0% 49.5% 46.8% 46.1% 44.0% 45.0% 43.5% 43.4% 41.9% 42.2% 41.5% 40.6% 40.0% 38.4% 37.0% 36.9% 37.0% 35.9% 35.0% 30.0% Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY04* Total Gross Margin Product
Slide 27: Sustainable Gross Margin
Sustainable Gross Margin From 43.2% in FY03 to 47.8% in FY04 Contributing Factors Degree of Impact Permanent • Volume • Large Improvement • Manufacturing costs • Large Variable • Product/Service mix • Moderate Improvement • Hardware/Software mix • Large • Hardware mix • Modest • Discounts • Moderate
Slide 28: Managing Operating Expenses
Managing Operating Expenses Revenue growth of $273 million only required a $10 million increase in operating expenses in FY04 45.0% 40.0% 35.0% 30.0% 25.0% 44.4% 42.6% 43.0% 20.0% 39.9% 40.8% 40.9% 39.0% 39.5% 15.0% 10.0% 5.0% 0.0% Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03* Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY04** *
Slide 29: Operating Income and Margin
Operating Income and Margin Strong Operating Leverage 130 12.5 Operating Income (Loss) ($M) 10.1% 110 9.1% 10.0 Operating Margin (%) 90 7.5 6.0% 5.4% 70 5.0 50 2.8% 107 92 1.4% 2.5 30 60 52 0.4% 27 0.0 10 (2.5%) 13 4 -10 -2.5 (24) -30 -5.0 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03* Q1 FY04 Q2 FY04 Q3 FY04 Q4
Slide 30: Improved Profitability
Improved Profitability EPS (Diluted)* 0.25 0.22 0.21 0.20 0.16 0.19 0.15 0.10 0.07 0.12 0.09 As reported 0.05 0.07 Adjusted for certain items in Q2, Q3 & Q4 - Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY04 Weighted Avg Diluted Shares Outstanding (M) 459 473 483 488 *Represents diluted EPS from continuing operation
Slide 31: Certain Items Included in Reported Results
Certain Items Included in Reported Results Dec. 31, March 31, June 30, Sept. 30, (in $ millions, except per share amounts) 2003 2003 2003 2004 Certain Items Included in Income (Loss) from Continuing Operations Before Income Taxes: Loss on sale of CommScope common shares - (5) - - Loss on Senior Secu
Slide 32: Segment Results
Segment Results
Slide 33: Enterprise Communications Group
Enterprise Communications Group Operating Income (Loss) ($M) 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY04* ($) (53) (31) (24) (13) (4) (8) 11 45 %** -13.2% -7.5% -6.1% -3.0% -1.0% -1.9% 2.5% 9.2% * Q4 FY04 excludes release of $8M for res
Slide 34: Services
Services Operating Income ($M) 70 60 50 40 30 20 10 0 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY04* ($) 40 41 42 40 53 63 68 60 %** 8.2% 8.6% 8.9% 8.4% 10.8% 12.3% 13.3% 11.9% * Q4 FY04 excludes release of $6M for reserve for sales returns and allowances and $1M of associated cost
Slide 35: Small and Medium Business Solutions
Small and Medium Business Solutions Operating Income (Loss) ($M) 7 6 5 4 3 2 1 0 -1 -2 -3 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY04 ($) (1) (2) 0 4 6 5 6 3 %* -1.8% -3.4% 0.0% 6.5% 9.5% 7.6% 9.0% 4.4% *Represents operating income (loss) as a percentage of segment revenue. 35
Slide 36: Asset Management & Liquidity
Asset Management & Liquidity
Slide 37: EBITDA / Revenue Trend
EBITDA / Revenue Trend EBITDA / Revenue 15.00% 10.00% 13.4% 14.1% 11.6% 5.00% 10.3% 8.2% 7.8% 2.4% 1.7% 0.00% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4* FY 2003 FY 2004 * Q4 FY04 excludes reversal of $14M of reserve for sales returns and allowances and $2M of associated costs 37
Slide 38: Capital Structure and Liquidity
Capital Structure and Liquidity (in $ millions) 9/30/02 9/30/03 9/30/04 LYONs convertible bond 476 287 299 Senior secured notes 457 666 294 Total Debt 933 953 593 Total Shareholders Equity - 200 794 Total Capitalization $933 $1,153 $1,387 Cash And Equivalents 597 1,192 1,617 Net Cash/(Debt) (336) 23
Slide 39: Working Capital Management: DSO and Inventory Turnover
Working Capital Management DSO and Inventory Turnover 100 10 DSO ITO 90 9 80 8 Turns Days 70 7 60 6 50 5 40 4 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY02 FY02 FY03 FY03 FY03 FY03 FY04 FY04 FY04 FY04 39
Slide 40: Improving Receivables Collection
Improving Receivables Collection Drives Lower Receivables Returns & Allowances 39.4% 40.0% 115 120 108 105 32.4% 96 93 100 86 30.0% 25.3% 24.2% 72 80 19.7% ($M) 20.0% 17.8% 60 48 14.5% 13.3% 40 10.0% 20 0.0% 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY 2003 FY 2004 Past Due Receivables as a % Total A/R Receivable A
Slide 41: FY04: A Year of Substantial Accomplishments
FY04: A Year of Substantial Accomplishments Committed to Delivering on Our Goals • Further strengthened balance sheet and liquidity • Accelerating product sales drove revenue growth • Captured operating leverage through continued financial discipline • Improved operating income and margin • Well pos
Slide 42: Donald K. Peterson
Donald K. Peterson Chairman & CEO © 2002 Avaya Inc. All rights reserved
Slide 43: Building Shareholder Value
Building Shareholder Value Profitable Growth 43
Slide 44: Leverage Incumbency and Technology
Avaya Strategy to Build Shareholder Value Leverage Incumbency and Technology 440M 408M hony p Tele 69% IP GR CA 30% IP 4% IP 2003 2007 Global Enterprise Telephony Installed Base Total Lines (M) Technology Transition Drives Growth Opportunity Source: Avaya analysis based on independent industry analy
Slide 45: Growth in North America & EMEA
Avaya Strategy to Build Shareholder Value Growth in North America & EMEA North America Telephony Base EMEA Telephony Base 110M 169M 120 108M 180 160M 160 100 140 80 120 IP 100 60 Telephony IP CAGR 80 Telephony 40 57% 60 CAGR 44% IP 74% 31% IP 8% 40 4% 20 IP IP 20 0 0 2003 2007 2003 2007 Source: Avay
Slide 46: Growth in APAC & CALA
Avaya Strategy to Build Shareholder Value Growth in APAC & CALA APAC Telephony Base CALA Telephony Base 37M 140 124M 40 110M 35 30M 120 100 30 25 80 20 60 IP 15 IP Telephony 40 CAGR 10 Telephony 2% 84% 20% IP 1% CAGR 20 9% IP IP 5 IP 67% 0 0 2003 2007 2003 2007 Source: Avaya analysis based on indepe
Slide 47: IP Telephony Expansion
IP Telephony Expansion… 39.6 40 Worldwide 32.7 IP Telephony 30 Lines Shipped (Millions) 24.6 20 17.0 8.8 10 5.0 2.0 0.7 0 2000 2004 2007 Source: Avaya analysis based on independent industry analyst reports 47
Slide 48: IP Telephony Shipments by Region
IP Telephony Shipments by Region 2003 - 2007 39.6 40 % 35 45. 8 R C AG 30 Lines 25 (in Millions) 20 15 8.8 10 5 0 2003 2004 2005 2006 2007 North America EMEA Asia/Pacific CALA Source: Avaya analysis based on independent industry analyst reports 48
Slide 49: Evolution To Converged Communications
Evolution To Converged Communications Federated Converged Converged Services Communications Communications •• Rich Rich multimodal multimodal user experience user experience •• Dynamic Dynamic Converged Converged applications applications Networks Networks •• Comm-Enabled Comm-Enabled •• Integrated
Slide 50: The Conversation Is Changing: Communication Is Strategic
The Conversation Is Changing: Communication Is Strategic Anyone, anywhere, anytime, any way The right person, in the right place, at the right time, in the right ways Emerging Integrated, intelligent communications Operations and processes in real time figure out who, where, when, how 50
Slide 51: META Group Ranks Avaya as the Leader
Enterprise IP Telephony META Group Ranks Avaya as the Leader Enterprise IP Telephony METAspectrumSM Evaluation 51
Slide 52: Strategic Positioning
Strategic Positioning
Slide 53: Strategic Differentiation
Strategic Differentiation Integrated Value Proposition • Clear focus on the enterprise • Voice experience and expertise • Significant installed base • Global services organization • Customer ROI • Comprehensive applications portfolio • Migration Choices 53
Slide 54: Strategy Delivering Compelling Value
Strategy Delivering Compelling Value Solution Strategy Services Strategy • Open platforms, software • Support Avaya offers centric model end-to-end • Upgrade base (direct and indirect) • Capitalize on assets – Single point of accountability • ROI and investment extension – Plan, design, implement, m
Slide 55: Open Architecture Fundamental To Transformational Communications
Open Architecture Fundamental To Transformational Communications Unified Access Business Applications From Full and Processes Planning Lifecycle to Services Communications Maintenance Applications Converged Infrastructure 55
Slide 56: Positioned for Technology Transformation
Positioned for Technology Transformation World-Class IP Telephony Technology Value Proposition Scalability Security & Reliability • Migration choices • 12K IP endpoints • Hardened Linux servers • Over 700 features per server • Advanced encryption • Investment • 300K busy hour • IP and TDM redundancy
Slide 57: Strategic Initiatives
Strategic Initiatives
Slide 58: FY2004 Highlights: Strategic Initiatives
FY2004 Highlights Strategic Initiatives Expand Portfolio of Rich Communications Applications • Spectel • Polycom/Extreme/Motorola Building a Global Avaya Integrated Value Technology Competitor Proposition Whole Greater than Customer Sum of the Parts • Tenovis* • Expanets • Tata Avaya y Avaya • Tenov
Slide 59: Tenovis Fills a Strategic Need for Avaya
Tenovis Fills a Strategic Need for Avaya • Long operating history in Europe – Headquartered in Germany – Formerly part of Bosch, acquired in 2000 by KKR – Operating in 9 countries • Leading incumbent vendor with significant size, scale and footprint – Approximately $1 billion in annual revenue – 5,4
Slide 60: Tenovis Significantly Expands Avaya's Market Share
Tenovis Significantly Expands Avaya’s Market Share Combined Share, Revenues & Footprint in Key Markets Market Share Avaya Avaya/Tenovis EMEA* #6 #3 Western Europe* #7 #3 UK/Ireland** #2 #2 More than triples European revenues and sales force * InfoTech (Q2’04) ** MZA (2003) 60
Slide 61: Tenovis Significantly Diversifies Avaya's Revenues
Tenovis Significantly Diversifies Avaya’s Revenues Avaya Avaya/Tenovis Total Revenues Total Revenues European 30% European 12% International International Revenues – 25% Revenues – 40% 61
Slide 62: Leveraging Strategic Alliances
Leveraging Strategic Alliances FY2001 FY2002 FY2003 FY2004 62
Slide 63: Customer Transition to IP
Customer Transition to IP
Slide 64: What Do They Have in Common?
What Do They Have in Common? AOL Apollo Group De Lotto Cedar Rapids Dutch Ministry of Community Schools VROM Cerner eBookers.com Convergys Ernst & Young Dept. of Veterans’ Affairs Delta Air Lines France Telecom Toshiba GE Healthcare Grupo Santander LG Electronics Merrill Lynch Lund University The Au
Slide 65: Promise of IP: Transforming Business Processes
Promise of IP: Transforming Business Processes IP Telephony is more than savings on telephone calls between offices and simplified network management… Its value is summed up by one word: TRANSFORMATION. Voice, deeply embedded into the heart of a business process, has potential to redefine the way we
Slide 66: What We Hear Every Day: Help Me Grow My Business Efficiently
What We Hear Every Day: “Help Me Grow My Business Efficiently” CMO CEO Grow Revenue “Our main priority is on winning business back and growing our top line.” 1 Reduce Costs “Even in growth markets, cost reduction is a top-of-mind issue. We have to reduce overhead while maximizing efficiency” 2 CIO L
Slide 67: Communications Transform A Business Process
Communications Transform A Business Process Superior Execution for Deeper Customer Relationships Voicemail or email for agent 3 dispatched to scene accessed through speech while mobile 2 Call redirected to contact Collaboration 4 center for with experts; immediate • 2 hour claim settlement fast link
Slide 68: Product Strategy
Product Strategy
Slide 69: Progress To Our Goal
Progress To Our Goal The Journey Future • Communication-enabled Present business processes and applications • IP telephony market leader • IP communications • SIP/Presence leadership • All in one solutions • Next generation appliances Past for small business • More modular choices • Modular, integra
Slide 70: Systems: Security, Ubiquity, Availability
Systems: Security, Ubiquity, Availability Real-Time Communications Infrastructure for Premises or Service Provider Standard hardware and software platforms, Application integration, SIP based Common Avaya platforms, enabling convergence of voice, data, conferencing, collaboration, video Integrated v
Slide 71: Appliances: Dynamic, Mobile Environments
Appliances: Dynamic, Mobile Environments Optimizing User Experience on Business Communications Devices Next generation mobility devices Added value phone applications Unified access to all applications; Unified Access User preferences, Smart Devices User Agents History synchronization Adaptable user
Slide 72: Applications – Integration, Extensibility
Applications – Integration, Extensibility Evolving to Converged Communications Applications Integrated on Diverse Networks Maximizing APIs, standardizing SCEs Designed for Business Process Integration Managed Services Product Support & Network Management 20,000 Mailboxes on a Security & Business Con
Slide 73: Applications Commonality: SMB, Small-Mid & Large
SMB’s: Small-Mid & Large Applications Commonality Open, Flexible Platform for SMB, Small Or Large • Common APIs, • Partner friendly Microsoft • Attractive phones applications platform • Attractively priced • Broad support for ACM sets Channel friendly management • SNMP / LDAP Unified Access • SMB wi
Slide 74: Preview Announcements: Next Few Months
Preview Announcements: Next Few Months Contact Center Express IP Video Solution Enterprise Class at Mid-market Delivering on Converged Video simplicity and price IP Video Conferencing Solution Mid-sized IP Contact Center Solution developed with Polycom Seamless IP Office 3.0 Communications Solution
Slide 75: Services Strategy
Services Strategy
Slide 76: Progress To Our Goal
Progress To Our Goal The Journey The Future • Services solving business problems The Present – Services leads engagements • Services differentiating our products – Services involvement The Past on ongoing basis – TDM products • Services sold to – Hosted services – IP products support TDM product • S
Slide 77: Role Of Avaya Global Services
Role Of Avaya Global Services Our role is to provide end-to-end support to Avaya customers • In a TDM world, this means designing in, implementing, monitoring and maintaining Avaya products • In an IP world, this means architecting solutions, implementing, maintaining Avaya products and continuously
Slide 78: The Environment In Which We Operate
The Environment In Which We Operate TDM World IP World PBX App Servers / Adjuncts Expansion Port Networks For “five 9s” reliability for For “five 9s” reliability for voice in an voice, we must monitor and IP World, we must architect, monitor maintain the PBX and manage the entire domain 78
Slide 79: Service Requirements In An IP World
Service Requirements In An IP World IP Telephony operates in an open environment To meet customer expectations, we must: 1. Understand each customer’s business problem Professional 2. Architect a solution that works in that customer’s Services environment 3. Implement the solution Implementation & M
Slide 80: Go-to-Market Strategy
Go-to-Market Strategy
Slide 81: Progress To Our Goal: The Go-to-Market Journey
Progress To Our Goal The Go-to-Market Journey The Future • Vertical specialization • Expanded SI / SP alliances • Deep customer partnerships The Present • Unparalleled convergence • Integrated go-to-market skills • Growth in both direct • Avaya as preferred partner and indirect channels • Solutions
Slide 82: Building The Avaya Go-to-Market Strategy
Building The Avaya Go-to-Market Strategy Go-to-Market Objectives Key Objectives Specific Go-To-Market Strategies • Impact of IP on Business Processes Changing • New influencers (CXO’s, SIs) Customer • Integrated solutions Buying • Understand IP impact on business processes Behavior • Develop channel
Slide 83: Aligning Around the Customer
Aligning Around the Customer Key Go-to-Market Initiatives 1 5 6 Expand and Intensify Strategic 2 Coverage Focus Integrate on Strategic Accounts Develop Marketing Accounts on Sales and and Marketing Deploy Demand Named Hybrid coverage Generation Teams TeleWeb Accounts 3 on Mid-Tier capability and Nam
Slide 84: Summary
Summary • Technology transition drives growth opportunity • Strategic differentiation builds market leadership • Solutions & services strategy deliver compelling value • Strategic initiatives expand capabilities & reach • Commitment to deliver on our goals drives profitability and shareholder value
Slide 85: Break
Break
Slide 86: Garry K. McGuire, Sr.
Garry K. McGuire, Sr. CFO and SVP Corporate Development © 2002 Avaya Inc. All rights reserved
Slide 87: Avaya FY2005 & FY2006
Avaya FY2005 & FY2006 • Reporting Format • Impact of Acquisitions • Income Statement Goals • Balance Sheet Goals 87
Slide 88: New Reporting Format
New Reporting Format FY2005 Product & Services Corporate Applications Revenue X X X Gross Margin % X X X Operating Expense % X X X Operating Income X X X Operating Margin % X X X 88
Slide 89: FY2005 Allocation Changes
FY2005 Allocation Changes $36M Allocated from Operating Expenses to COGS Actual Adj With Allocation (in $ millions) FY04 FY04 Changes Total Revenue 4,069 4,055 4,055 Gross Margin % 47.8% 47.7% 46.8% Operating Expense 1,622 1,622 1,586 Operating Exp % 39.9% 40.0% 39.1% Operating Income 323 311 311 Op
Slide 90: Impact of Acquisitions
Impact of Acquisitions
Slide 91: Impact of Acquisitions
Impact of Acquisitions Avaya Global Connect (Formerly Tata Telecom) Spectel Tenovis • Adds $48M to $60M • Adds about $45M • Adds slightly less in annual revenue in annual revenue than $1 billion in annual revenue on • Full flow through of • Full flow through of a full year basis revenue beginning re
Slide 92: Income Statement Goals
Income Statement Goals
Slide 93: Avaya FY05 Key Performance Drivers
Avaya FY05 Key Performance Drivers With Allocation Organic AGC*/Spectel Tenovis FY05 Changes Total 4,055 Higher product sales Full year impact 9 months of revenue Growth of Revenue Service sales slightly approximately (assuming close Dec. approximately down to stable in 1st $93-$105M – early Jan.),
Slide 94: FY06 Key Performance Drivers
FY06 Key Performance Drivers Key Drivers • Organic revenue FY05 Goal growth fueled by FY06 Goal higher margin product growth Operating • Continued financial Operating Margin: discipline and Margin: 8.5% - 9.0% operating leverage 10.0% - 12.0% • Full year impact from Tenovis • Operating synergies 94
Slide 95: FY05 and FY06 Operating Margin Goals
FY05 and FY06 Operating Margin Goals FY04* FY05 FY06 7.7% 8.5% - 9.0% 10.0% - 12.0% *Q4 FY04 excludes the reversal of $14M of reserve for sales returns and allowances and $2M of associated costs 95
Slide 96: Tenovis Impact
Tenovis Impact $0.08 Dilution in FY05 to $0.07 Accretion in FY06 (0.08) +0.05 Removal of non-recurring start-up expenses +0.03 Tenovis Q4 CY 2005 impact +0.01 Flow through of existing operational actions Improvements of interest expenses +0.02 and amortization of intangibles $20 million of cost +0.0
Slide 97: Deferred Tax Assets
Deferred Tax Assets Governed by FAS109 • Significance is placed on objective facts (historical cumulative losses) and not on subjective information (future taxable income) • $800 + million • Majority with 15+ year useful life • FY05 Tax Rates scenarios: – 11.0% pre-valuation allowance reversal and w
Slide 98: Balance Sheet Goals
Balance Sheet Goals Short Term Goals • Maintain a strong net cash position • Keep debt at level no higher than the level prior to Tenovis acquisition Long Term Goals • Improve credit rating – ultimate goal is investment grade • Opportunistically de-lever the balance sheet • Maintain cash position of
Slide 99: Capital Structure and Liquidity: Uses and Sources
Capital Structure and Liquidity Uses Sources Beginning Cash Balance FY05 $1.6B Sources - Avaya Operations 500M Uses Business Restructuring Reserve 16M Interest Payments 32M Capital Expenditures 110M Capitalized Software Costs 40M Spectel Acquisition 97M * Tenovis Acquisition 255M ** Tenovis Transact
Slide 100: Interest Expense
Interest Expense FY FY FY Current FY05 2002 2003 2004 Run Rate Avaya Interest Expense 51 78 66 44 LYONs 11 Senior Secured 33 Tenovis Interest Expenses 12 100
Slide 101: Pension Plan Funding
Pension Plan Funding FY04 Actions: Voluntary Stock Contribution $111 million No Contributions Required Until 2008 101
Slide 102: Corporate Development
Corporate Development • 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; neutral or positive on earn
Slide 103: FY05: A Year of Continued Progress
FY05: A Year of Continued Progress Committed to Delivering on Our Goals • Technology transition drives growth opportunity • Strategic differentiation builds market leadership • Solutions & services strategy deliver compelling value • Strategic initiatives expand capabilities & reach • Substantial in
Slide 104: Building Shareholder Value
Building Shareholder Value Profitable Growth 104
Slide 105: Q&A
Q&A
Slide 106: Lunch & Product Demos
C oe = REDE TTR eS AE LT REAM ERE RY etd THETFORD ESE TONG OUNCE RTE MRP ETRY SER ERASERS SAC ARORA PREPARE TORSO RE REN es TSR SET Lunch & Product Demos
Slide 107: 2004 Financial Analyst Conference
2004 Financial Analyst Conference October 29, 2004 © 2004 Avaya Inc. All rights reserved