Does Avaya Have a Post-Chapter 11 Prayer?

Is Avaya on the road to financial recovery? What will happen to business partners and customers if it is not?

The company last month filed for Chapter 11 protection for itself and some of its United States subsidiaries — a move that makes it “the first major established technology company that’s dying as a direct result of the cloud,” according to Ian Campbell, CEO of Nucleus Research.

However, the move actually is a strategic and tactical restructuring that’s meant to retire a heavy debt burden, according to John Sullivan, Avaya’s treasurer.

Customers have switched from a CapEx to OpEx approach, he noted. As a result, revenue is recognized over a longer period. In the meantime, tech spending has been curtailed, and the commoditization of traditional unified communications has led to increased competition.

Avaya has transformed from its original hardware-based business model to a software and services approach, Sullivan said. It is a leading player in its markets, and it had US$3 billion of estimated future revenue under contract at the end of the 2016 fiscal year.

However, Avaya “did not pivot quickly enough to cloud services,” Nucleus’ Campbell told CRM Buyer.

Shareholders’ Fate

Avaya has obtained $725 million in debtor-in-possession financing underwritten by Citibank. Together with cash from its operations, those funds should let it support continuing business operations, Sullivan said.

Still, the firm’s business partners won’t have an easy time of it.

“With ever-cheaper VoIP solutions, the market for on-premises communications systems is collapsing and on the verge of disappearing altogether,” Campbell noted.

Avaya’s strength lies in telephony technology, but “firms figure their aging and ever less frequently used telephony systems are either good enough or redundant,” said Rob Enderle, principal analyst at the Enderle Group.

Avaya’s strength “isn’t doing them much competitive good outside of call centers, which are a fraction of their old market,” he told CRM Buyer.

Shareholders are about to get nailed. Avaya has warned that some or all of its currently outstanding securities may be canceled and extinguished when the Bankruptcy Court confirms a restructuring plan.

A Glimmer of Hope

Foreign affiliates aren’t included in the filing, and Avaya has declined to sell its contact center business for now, but it is negotiating in order to monetize certain other assets, as appropriate.

The company “seems to be focusing on protecting their contact center business,” Campbell observed. “Do they honestly think the cloud won’t decimate that market too? We don’t see them recovering from this. It’s a race to the bottom with all of the focus on the software.”

Avaya is one of the key vendors in the global contact center market, which will post a compound annual growth rate of almost 11 percent by 2020, according to Technavio. That growth will depend strongly on the cloud.

The company needs to pick up its pace for transiting to a software-based system, and “execute sharply,” Enderle warned, “or Chapter 11 could become Chapter 7 and the end of the firm.”

Avaya needs “time, money and acquisitions to survive,” said Terrel Bird, CEO of TCN.

“Some of those they don’t currently have. They should consider purchasing a leading cloud provider or developing a strategy to ditch on-premises equipment,” he told CRM Buyer.

The Impact of Chapter 11

The filing “will let competitors FUD the heck out of Avaya,” Enderle said. “No one wants to invest in a technology or solution from a firm that can’t pay its bills and may go out of business.”

Avaya’s possible failure “will be good for cloud-based competitors,” TCN’s Bird suggested. “Organizations that are dabbling in cloud tech now have a reason to look more closely at cloud call center tech.”