Avaya FAQ

by Dave Michels

Earlier this year Avaya filed for chapter 11 protection to reorganize its debt structure. In April, Avaya submitted it reorganization plan. Revisions on 8/8, shown in red.

Today Avaya made several important announcements. Most surprising, Avaya reached a voluntary and binding agreement with more than 50% of its first lien debt holders regarding debt-to-equity arrangements. This is a significant milestone, which creates a likelihood that Avaya will exit chapter 11 later this year, possibly as early as the fall. To exit Chapter 11 two things must happen:  First the bankruptcy court must confirm a plan, and this can go quickly if the parties agree. Secondly, Avaya needs to go public. The end goal is to be public on the NYSE or NASDAQ – a process that the company started in 2011 but stopped in January 2017 after filing for bankruptcy. Avaya could speed things up by going public on an over the counter exchange such as OTCQX or OTCQB as an intermediary step.

Avaya also announced that Jim Chirico will replace Kevin Kennedy as CEO on October 1, 2017 which coincides with the company’s fiscal year 2018 start. Chirico joined Avaya in 2008, and is currently serving as the Chief Operating Officer and Global Sales Leader.

How has Chapter 11 Impacted Avaya?

It is difficult to ascertain as there is no non-chapter 11 Avaya to compare with. In May, the company reported a YoY decline of 11% in revenue attributed to longer procurement cycles, chapter 11, and its continued shift from hardware. Software and services accounted for 79% of revenue in its 2Q17. More positively, it also reported 1,100 customer contracts since filing for chapter 11 in January.

Avaya previewed third quarter results today with estimated revenue of $803 million, down about 9% YoY. Formal results will be issued on August 17.


Why the Change in Leadership?

Officially, Kennedy is announcing his retirement. He has been the CEO of Avaya for nine years. CEOs serve at the pleasure of their board, and the Avaya board is undergoing significant changes in conjunction with new ownership. As Avaya announced both Kennedy’s departure and the agreement with first lien holders at the same time, it is possible they are related.


Has Avaya Lost Many Employees in Chapter 11?

Avaya has seen some turnover, possibly associated with Chapter 11, but turnover has not been significant. There’s been several changes within sales including the departures of Steve Biondi, Derrell James, Bret Harrison, and Rejean Bourgault. Another notable recent departure is Amy Fliegelman Olli, Avaya’s VP and General Counsel who went to VMware. The executive and engineering teams have not seen a significant increase in turnover.


How does Chapter 11 Improve Avaya’s Financial Strength?

Avaya has a considerable amount of debt largely associated with its acquisition of Nortel and going private in 2008. Although the company has been servicing its debt obligations, it could not cover all of its upcoming debt maturities. Instead, it voluntarily filed for chapter 11 with the intent of converting debt to equity. The intended and expected impact will be to convert debt holders into shareholders. TPG and Silver Lake, the majority owners pre-chapter 11, have lost their shares. Converting shares to equity is more complex than a simple dollar to share conversion due to multiple interest rates, maturities, and seniorities.

When Avaya emerges from Chapter 11, it will have a new ownership structure and relatively little debt. The result could be a highly profitable company as it previously maintained a positive cash flow while managing its debt.


Does the Change in Ownership Mean Anything to Customers?

Maybe. A change in ownership and leadership could change the company’s strategic objectives. Additionally, as it’s likely not all of the new shareholders want to be shareholders, it’s reasonable to expect some short term changes soon-after shares are distributed. The new owners and leaders may change or revise the company’s long term strategy. We are still months away from a settled board and leadership team.


How is Avaya Different Today?

The biggest difference is Avaya has sold its networking business to Extreme Networks. Avaya clearly communicated to customers and analysts that this was not its intention earlier this year. Extreme, the only bidder, acquired customers, personnel and technical assets. The total transaction was approximately $100 million. Two of the division’s more visible employees remain at Avaya: Marc Randall, the Avaya Networking SVP and GM, and Jean Turgeon (JT) its Chief Technologist.


What’s this about Blackberry?

Blackberry claims that Avaya is infringing on its patents and intellectual property. Blackberry went after several vendors including Avaya and Cisco in 2015. It reached an agreement with Cisco as well as a few other companies. The situation with Avaya has been delayed in part due to its chapter 11 timing. However, last April the court lifted a stay on the case allowing it to continue. This suit is in its preliminary stages and could take years to resolve.