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Avaya earnings: Company in advanced talks with multiple bidders
Avaya will decide within 30 days whether to pursue a sale or other 'strategic transaction' to compensate shareholders. The company is in advanced talks with multiple parties.
Telecommunications company Avaya could ink a deal to sell itself or a portion of its assets within a month, after reportedly fielding offers from private equity firms and rival Mitel.
"At this time, we are in advanced discussions with multiple parties on a range of strategic transactions to maximize shareholder value," CEO Jim Chirico said on a quarterly earnings call with investors Tuesday. "We expect to bring this process to a conclusion within the next 30 days."
The move comes as the longtime telephone equipment-maker struggles to transform into a provider of cloud services. The number of active licenses for Avaya's cloud communications products has remained roughly flat over the past three quarters, and annual revenue is on track to decline for another straight year.
"They are holding their head above water, but they are not growing," said Steve Blood, analyst at Gartner. "We really haven't seen anything innovative from Avaya."
Avaya's stock was up 14.8% Tuesday following the disclosure that the company was in advanced talks for a potential sale. Share prices had been steadily declining since May when the company first confirmed it had hired J.P. Morgan to review the offers on the table.
A takeover by a private equity firm would give Avaya more leeway to pivot to cloud without having to report earnings to Wall Street every quarter. But there is cause for caution: The overwhelming majority of the debt load that forced Avaya into bankruptcy in 2017 came from a leveraged buyout by two private equity firms.
Avaya went public in January 2018 as a way to compensate creditors as part of a Chapter 11 bankruptcy deal that reduced the debt it owed to those parties from roughly $6 billion to less than $3 billion.
Avaya received unsolicited acquisition offers from multiple private equity firms earlier this year, according to a report by Bloomberg and another by Reuters. The company was also said to be in merger talks with Mitel, The Wall Street Journal reported in April.
Another "strategic alternative" that could be under consideration is the sale of a business unit. Leading up to its 2017 bankruptcy, Avaya considered spinning off its contact center and networking divisions. (It eventually sold the latter to Extreme Networks.)
Avaya reports third-quarter financial results
The company hit its revenue target for the quarter ended June 30, reporting receipts of $717 million.
After projecting revenue of $3.01 billion to $3.12 billion at the outset of fiscal 2019, Avaya now expects to bring in just $2.9 billion to $2.92 billion. Investors should no longer rely on the long-term guidance provided at an annual meeting in December, the company said.
The company said it had 3.6 million cloud seats, down from the 3.7 million seats reported in each of the previous two quarters. The slight dip comes despite Avaya highlighting the growth of its public cloud offerings, which added 70,000 users in the third quarter to reach 360,000 total seats. Public cloud is a broad term that refers to services delivered over the internet using infrastructure shared by multiple customers.
Avaya initially said cloud would comprise 12% to 14% of total revenue in fiscal 2019, but the segment's contribution has remained flat at 11% for three straight quarters. The company has said it will no longer make public its targets for cloud revenue growth.
A sustained decline in Avaya's stock price during the quarter prompted the company to review the value of its assets. Avaya concluded it had overvalued its contact center division by $657 million based on projected future revenues.
An accounting adjustment related to those calculations, known as a non-cash goodwill impairment charge, contributed to a significant net loss for the quarter on paper.
Avaya highlights government contracts
Avaya won two significant contracts with the U.S. government in the third quarter -- deals that Chirico said were among the biggest in the company's history.
The Social Security Administration agreed to pay Avaya for 100,000 phone lines and 12,000 contact center seats. The deal could be worth up to $400 million over 10 years, although federal agencies typically reevaluate such contracts on an annual basis.
The company provided few details on the other deal. It's a multiyear contract to provide cloud services to several agencies that could be worth up to several hundred million dollars.
During the quarter, Avaya announced an expansion of its partnership with government-focused reseller Collab9, including plans to seek more rigorous security certification for Avaya cloud products that would allow the company to sell to a broader range of agencies.
The company has also revived its federal lobbying efforts after a two-year hiatus. Avaya's government solutions division has paid the consulting firm Envision Strategy roughly $50,000 this year to lobby U.S. lawmakers on issues related to emergency communications, cybersecurity and government spending, according to public disclosures.