host posted on August 24, 2010 09:17
Continuation of series posted by Laura Kleekamp at VITEC, Inc. www.vitecinc.com
In July I published a 3-part series on Avaya’s purchase of the Nortel PBX line of business, and some potential implications for Nortel and Avaya users. In the second part of the series, I shared my observations on Avaya’s financial situation.
I am not a financial analyst; and my observations are made from the point of view of someone trying to assess operational risk as a result of Avaya’s ongoing financial health.
On the surface, the results on the income statement look good, with year-over-year revenue and margin growth posted.
Avaya Income Statement (Millions)
| |
Three Months Ended |
|
|
|
| |
6/30/2010 |
6/30/2009 |
Change |
% Change |
|
| Revenue |
$1,322 |
$986 |
$346 |
35% |
|
| Costs |
$777 |
$547 |
$230 |
42% |
|
| Gross Margin |
$555 |
$439 |
$116 |
26% |
|
| Operating Expenses |
$660 |
$548 |
$112 |
20% |
|
| Operating Loss |
$(105) |
$(109) |
$4 |
-4% |
|
| Interest Expense |
$(127) |
$(101) |
$(26) |
26% |
|
| Other Income (expense) |
$1 |
$(3) |
$4 |
133% |
|
| Loss Before Income Taxes |
$(231) |
$(213) |
$(18) |
8% |
|
| Provision for Income Taxes |
$9 |
$11 |
$(2) |
-18% |
|
| Net Loss |
$(240) |
$(224) |
$(16) |
7% |
|
| GM as % of Revenue |
42% |
45% |
|
|
|
This growth, however, is solely attributed to the addition of Nortel revenue and margin in 2010 that are not reflected in Avaya’s 2009 results. Overall, Avaya’s gross margin % has eroded 3 points with the addition of the Nortel line of business, and net loss has grown with the increased borrowing expense.
I read further down into the 10-Q statement, and was able to find pro-forma results for 2009 and 2010 that reflect the combined companies’ results. While revenue for that period continued to drop, Avaya has managed to begin closing the gap on their overall Net Loss.
Pro Forma - Combined Avaya/Nortel Financial Results(Millions)
| |
Six Months Ended
|
|
|
|
| |
June 2010 |
June 2009 |
YoY Change |
% Change |
|
| Revenue |
$4,128 |
$4,725 |
$(597) |
-13% |
|
| Net Loss |
$(790) |
$(1,541) |
$751 |
49% |
|
Avaya has made some progress in the short-term, posting modest revenue increases and cost decreases since March. While these improvements are encouraging, I don’t believe Avaya is out of the woods yet. Their balance sheet and cash flow are still areas of concern.
Balance Sheet
- Available cash declined $53M since their fiscal year-end September 2009, to $514M (9%)
- Goodwill and Intangible Assets remained about the same and still make up over 72% of Avaya’s assets. This continues to be concerning.
- Short-term liabilities increased $361M, reflecting the Nortel purchase, net of some corresponding conversion of short-term debt to longer-term liabilities.
- Long-term debt increased from $5.1B to $5.9B
- Avaya’s debt load continues to be the top risk they list in their 10-Q statement, with further borrowing a concern.
- Total shareholder deficiency increased $235M to $886M, a 36% increase. (Note: seems to indicate losses over an extended period.)
Cash Flow Statement
- Most items impacting quarterly cash flow remained relatively stable as compared to the nine-month trend.
- There are a couple of notable items that accounted for the majority of the cash flow change since June, 2009
- $805M for purchase of Nortel assets, and off-setting cash from financing activities
- Unrealized losses on foreign currency exchange rates – this was noted in Avaya’s summary. An issue for any company selling outside the U.S.
- Increase in the business restructuring reserve, presumably to cover additional costs associated with assimilation of Nortel
- At their current rate of cash usage, if Avaya does not begin to generate positive cash flow from ongoing operations or borrow further, they will consume their available cash in less than two years.
While Avaya has made some progress in the past quarter, they still have a lot of ground to cover to become financially strong. My opinion based on last quarter’s results still stands – Nortel and Avaya users should complete technology risk assessments, and have alternatives and migration plans in place so they can be in the driver’s seat if and when circumstances change.