Avaya is a leader in business collaboration and communications, with leading market share in worldwide telephony systems, contact center infrastructure, voice maintenance services and enterprise messaging. Some of the company’s products are:
Avaya Aura Contact Center - lets customers connect with a company in ways beyond phone calls, including via text, IM, email, and chat.
Avaya Aura Call Center Elite allows a business to determine if its customers should be served by the least busy agent, the first available agent, or the agent with skills that best match the customer’s needs. Calls can be routed across a pool of agents regardless of physical location.
The company also boasts a leading position as a provider of cloud and managed services, which in fiscal year 2014, posted 19 per cent YoY growth.
The parent company was formed by two private equity companies, Silver Lake Partners and TPG Capital which acquired Avaya in October 2007. However, the company has a long history, having its roots in Bell Laboratories, which was part of AT&T. It later evolved as a unit of Lucent Technologies, a 1996
As regards the customer portfolio, the company commented: ”Through September 30, 2014, we had over 300,000 customers, including over 95% of the Fortune 500 with installations in over one million customer locations worldwide. Our customers operate in a broad range of industries, including financial services, manufacturing, retail, transportation, energy, media and communications, health care, education and government. They represent leading companies from the Forbes Global 2000”.
In December 2014, Avaya announced a partnership with Google for developing innovative contact canters; for instance, the two companies look to enable customer service agents to access the Avaya contact centre desktop from any location with their Chromebook. Another collaboration announced last year was relating to HP although in this case Avaya outsourced some of its activity to HP.
The company has been posting declining revenues as a result of the shift in demand trends, with new products and services emerging as flagship but others becoming legacy and declining products/services. For Q2 ending March 2015, the decline in revenues reflects as well base effects as Q2 2014 was comparatively strong given a contract for Sochi Olympics. Turnover was also impacted by FX movements as roughly half of the revenue comes from non-US customers. However, FX changes have a low impact on EBITDA as some of the expenses are incurred in local currency.
On another, albeit important note, the change in revenue mix came with a pickup in margins. This reflects the 10 pp divergence in margins between the legacy products and the new ones. Indeed, gross margin was very strong in Q2 (ending March 15) for yet another quarter, reaching a record for this time of the year.
The company has been working to implement a cost savings programme consisting in reducing headcount, relocating certain jobs to lower cost locations, reducing real-estate costs etc. As such, the company has been booking restructuring costs (eg. severance payments) for several years now as the workforce was cut from 17k in 2012 to 13k in 2014 and some rental/leasing agreements were discontinued. These efforts, together with the ongoing adaptation of the product portfolio, led to steady improvements in margins and to stable gross profit and EBITDA despite the falling turnover.
There appears to be room for further margin expansion as the reshuffling of the sales team should lead to greater volumes. More specifically, the move towards services and software has reportedly prompted the company to recruit people who have experience in this area rather than in hardware. Against this backdrop, Avaya disclosed that as much as 20 per cent of the frontline sales personnel were reportedly recruited over the last 12 months.
While liquidity remains comfortable, the leverage has been broadly unchanged since 2010 given weak cash flow generation. The company could look to raise cash through asset sales (as it did in 2014) or even an IPO; the latter was first announced in 2011 when the value of the possible transaction was estimated to be USD1 billion. Should this take place “the proceeds of the proposed offering are expected to be used, among other things, to repay a portion of the long term indebtedness”. There were also rumours some time ago that it might be acquired by Oracle.
To conclude, I like the company’s steady progress on margins, continuous adaptation of the products/services and the recognition it enjoys from large companies such as Google or HP with whom it has collaboration partnerships in place. Investors could thus consider building exposure to this name via the seven per cent 2019 notes, which given its seniority also comes with lower leverage (4.6x EBITDA).
Disclaimer:
This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.