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Avaya revenue dips as company entertains potential buyout

Avaya revenue missed the mark in the second quarter amid operational missteps and rumors of a private buyout. The company said it was considering financial maneuvers as significant as selling itself.

Operational stumbles and reports of a proposed private buyout cost Avaya tens of millions of dollars in the second quarter, company executives said on Thursday. Meanwhile, Avaya has hired an investment bank to explore a sale of the company, among other potential financial maneuvers.

Avaya revenue dipped to $709 million in the fiscal quarter that ended March 31, a 3.9% decrease from the previous reporting period. In February, the company had told investors it would generate between $730 million and $760 million in the quarter.

"This was not the way we wanted to begin the calendar year," Avaya CEO Jim Chirico told investors on a conference call. "While I'm disappointed in our results last quarter, overall, I remain confident of our path forward."

Avaya blamed its poor performance partially on a story published by Reuters on March 24 -- one week before the quarter's close -- that said a private equity firm had proposed a $5 billion leveraged buyout of the company. The rumors "created uncertainty among our customers and partners," Chirico said.

April brought more speculation about Avaya going private. Bloomberg reported the company was planning an auction after fielding unsolicited offers from potential buyers. Later, The Wall Street Journal said longtime rival Mitel was in talks to acquire Avaya -- a merger that would unite two of the unified communications market's largest vendors.

Avaya finally went public with its intentions on Thursday, announcing it had hired JPMorgan Chase to explore "strategic alternatives" to maximize shareholder value. That could include selling the company or less drastic steps, such as a refresh of its investment portfolio. 

"The board has not set a timetable for the process, nor has it made any decisions related to strategic alternatives at this time," Chirico said.

Avaya entered the public stock market in January 2018 after emerging from Chapter 11 bankruptcy. The company had previously spent almost a dozen years under private ownership after an $8.2 billion buyout by two private equity firms.

Going private would relieve Avaya from the pressure of answering to Wall Street investors every quarter, said Hamed Khorsand, analyst at BWS Financial Inc., based in Woodland Hills, Calif. But the company's recent earnings shortfalls could hamper its efforts to secure a lucrative deal.

"To me, it makes sense for them to be private," Khorsand said. "But the problem you're going to face is, when you're putting up low revenue numbers and low cash flow numbers, the potential takeout prices become much less."

Avaya revenue projections downgraded

This was not the way we wanted to begin the calendar year.
Jim ChiricoCEO, Avaya

The company downgraded its revenue projections for fiscal 2019 by roughly $50 million to $100 million on Thursday. After initially projecting annual revenue between $3.01 billion and $3.12 billion, Avaya now expects to make only $2.9 billion to $2.95 billion.

In the second quarter, Avaya revenue suffered because the company missed a deadline related to a new partner offering in the contact center market and mismanaged its distribution of desk phones to channel partners in the unified communications market, Chirico said.

Demand for Avaya's new J Series desk phones was strong, but the company had not provided enough of them to channel partners -- rather, it had oversaturated the channel with the older 9600 Series desk phones.

Chirico said that misstep would continue to hamper sales through the third quarter and possibly into the early part of the fourth quarter.

Avaya cloud revenue steady at 11%

Avaya initially projected that cloud revenue would comprise 12% to 14% of overall revenue in fiscal 2019. However, cloud revenue has accounted for roughly 11% of the total for each of the past four quarters. The company said it would no longer make projections about the breakdown of revenue by segment.

Despite adding 60,000 seats in the public cloud, Avaya reported its combined total of public and private cloud UC and contact center seats at roughly 3.7 million -- the same as last quarter. Fewer than 300,000 of those seats are public, while 3.4 million are private.

Although Avaya has been dominant in the market for premise-based telephony, the company is now trying to penetrate a cloud market crowded with pure-cloud upstarts, such as RingCentral, 8x8 and Five9, as well as established rivals Microsoft, Cisco and Genesys.

"I think it's still a company in transition," said Zeus Kerravala, founder of ZK Research, based in Westminster, Mass. "The private cloud deals that large enterprises want are more complicated and take a lot longer to get deployed."

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