Avaya Files Chapter 11: What Now?

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Avaya Files Chapter 11: What Now?

By Paula Bernier, Executive Editor, TMC  |  May 05, 2017

This year started out with a bang. That’s not just because it marked the inauguration of a new and, many believe, controversial president. There was also lots of noise around Avaya’s (News - Alert) Chapter 11 bankruptcy protection filing in January.

The Chapter 11 news is driving a lot of debate and discussion not so much because it came as a surprise. It didn’t. In fact, the potential for this move had been rumored for months.

What made, and makes, this development such a hot topic is the fact that Avaya has long been a top player in the business communications arena. And it has folks wondering if the company’s Chapter 11 experience will be more like that of Aspect Software or of Nortel (News - Alert).

“It’s sad to see such an iconic name having to file for protection via Chapter 11,” Nicolas De Kouchkovsky, founder and principal of CaCube Consulting and a former Genesys executive, commented during a recent podcast.

Avaya last year occupied the leader box in both the worldwide Contact Center Infrastructure, and Unified Communications Gartner Magic Quadrant reports. Gartner placed Avaya alongside Cisco (News - Alert), Genesys, and Interactive Intelligence in its Magic Quadrant for Contact Center Infrastructure, Worldwide report. Meanwhile, Avaya joined Cisco, Microsoft, and Mitel (News - Alert) in the leaders quadrant of Gartner’s UC report.

Analysts generally consider Avaya’s cloud communications portfolio to be solid. The company is profitable. And most sources indicate the company has strong leadership.

Yet Avaya has clearly been struggling under a heavy debt load. Something had to give.

Avaya had $400 million to $600 million in interest payments annually, according to Joseph Williams, an analyst and consultant with Unified Communications (News - Alert) Strategies.

The company was faced with $6 billion in debt and $1.7 billion in unfunded pension liabilities, added Phil Edholm, who writes a standing column for INTERNET TELEPHONY. As a result, it had to generate $900 million of EBITDA just to cover its debt payments, pension payments, and other costs.

At the same time, the company’s revenues have been decreasing at about 8 percent each year for the past 4 years, continued Edholm. Avaya considered selling off its contact center business early on to improve its position, he added, but ultimately decided that wasn’t the way to go. However, in early March the company announced plans to sell its networking business to Extreme Networks Inc. for about $100 million. That, Avaya said, would enable it to focus on its core unified communications and contact center solutions.

In announcing the Chapter 11 move, Avaya CEO Kevin Kennedy commented it is “a critical step in our ongoing transformation to a successful software and services business.... Now, as a result of the terms of Avaya’s debt obligations and the upcoming debt maturities, we need to recapitalize the company.”

Avaya was spun off from Lucent Technologies in 2000. Seven years later it became a private company through a $8.2 billion arrangement with Silver Lake and TPG Capital. And about two years after that, Avaya acquired Nortel Enterprise Solutions.

The current capital structure at Avaya is more than a decade old, Kennedy noted, and was put in place to support its business model when the company was a hardware-focused entity. He added that Avaya’s “business is performing well” and it hopes to emerge from Chapter 11 as a stronger and more flexible entity.

That’s essentially what happened following Aspect’s Chapter 11 process, which began last year.

However, Nortel’s 2008 Chapter 11 filing ended up quite differently. It resulted in a seven-year ordeal at the end of which Nortel was sold off piece by piece, with some of those assets going at fire sale prices.

But many analysts believe that was a unique situation, and that Avaya will emerge from Chapter 11 as a stronger company. However, even if that’s the case, it could hurt.

News of Avaya’s Chapter 11 filing could prompt partners, new prospects, or existing customers who are looking for a refresh to abandon the vendor for more financially grounded suppliers. In fact, some analysts say that some Avaya partners and prospects already have jumped ship, or have at least begun diversifying.

For example, JR Simmons, president and principal consultant for COMgroup Inc., said he had a client that recently decided not to do a $20 million deal with Avaya. That client told Simmons he felt like he “dodged a bullet” by not “pulling the trigger” on the deal with Avaya.

However, an Avaya spokesman tells INTERNET TELEPHONY that since the company filed for Chapter 11 it has added 300 net new partners to its roster and closed 700 deals, including some multimillion dollar ones.

In any case, competitors like RingCentral are implying Avaya missed the cloud in an effort to win over its customers. RingCentral recently ran an ad in The Wall Street Journal in the form of an open letter to Avaya customers inviting them to contact RingCentral.

Avaya’s Chapter 11 filing is about its debt situation not about its transition to the cloud. Still, analyst Jon Arnold said the company has been slower to go down the cloud path than its competitors.

Avaya now has its online collaboration platform Breeze, its Zang business, and its other next-generation things, Arnold added. (And in mid-February at Avaya ENGAGE the company introduced a customizable cloud phone service called Zang Office and a meetings-as-a-service offering called Zang Space.) 

“Avaya has a palette of cloud offerings that include private cloud, public cloud, and a hybrid offering that combines on-premise[s] and cloud and continues to focus on cloud innovation,” says an Avaya spokesman. “In fact, in addition to the announcements that took place during Avaya Engage, the company also announced Avaya Enterprise Cloud for BPO,  a cloud offering that launched with 40,000 agents already using it. During a keynote at Engage, Avaya partner HPE Services launched the HPES Customer Experience on Demand, the first true cloud delivery method for environments powered by Avaya Contact Center technology to fully enable enterprises to move to the cloud.”

Still, Arnold said Avaya is about two to three years behind where the others in this space are. A complicating factor, he added, is that Avaya is saddled with a lot of legacy customers. And many of those customers may not be ready to move to the cloud. “Their customer base is as traditional as they come,” Arnold said.

However, Avaya indicates it’s made great progress with its cloud strategy, more so than some of its competitors have. During Avaya’s first quarter, which was October through December of 2016, 76 percent of the company’s worldwide revenue came from software and services.

Edited by Alicia Young


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