Avaya IPO deep dive: Competition, debt are big worries

Avaya filed for an initial public offering of $1 billion in stock, but there are numerous items that could give investors some pause.

Avaya filed for an initial public offering of $1 billion in stock, but there are numerous items that could give investors some pause.

The company is a telecom equipment and unified communications giant and now it's a data center player via the acquisition of Nortel's enterprise assets. As a private company---TPG Capital and Silver Lake are offering about 20 percent via the IPO---Avaya has launched about 60 products. The big coup for Avaya was Nortel's data center assets such as switches and routers and a big installed base, but that business is a fixer upper after years of turmoil.

Avaya was acquired in 2007 by TPG and Silver Lake for $8.2 billion.

Among the key data points about Avaya:

  • The company reported a net loss of $871 million for the fiscal year ending Sept. 30, 2010 on revenue of $5.06 billion.
  • For the six months ended March 31, Avaya reported a net loss of $612 million on revenue of $2.76 billion.
  • Cash and equivalents were $468 million as of March 31, down from $591 million for the prior year.
  • And total debt excluding capital lease obligations were $6.17 billion. Debt levels are up almost $1 billion from the fiscal year ending Sept. 30, 2009.

The big problem with Avaya's debt levels is that it lives in a unified communications and network neighborhood that features much stronger balance sheets. Avaya cites Alcatel-Lucent, Brocade, Cisco, Juniper, Microsoft, Shortel, Polycom and others as rivals. Generally speaking, that competition represents a well-heeled bunch.

For instance, Juniper had $2.94 billion in cash and equivalents as of March 31 with long-term debt of $998 million. Cisco had $6.63 billion in cash and equivalents with another $36.7 billion in investments. Long-term debt for Cisco was $16.17 billion. Brocade has $466 million in cash, equivalents and investments and $836 million in total debt. Even a much smaller player like Polycom has $362.5 million in cash and equivalents as of March 31.

Given the competition Avaya is facing and its debt levels, the company's plan going forward needs to be scrutinized.

According to Avaya, the plan going forward---it has enough cash flow to fund operations---revolves around unified communications, collaboration and leveraging acquired Nortel customers. Avaya will double down on R&D, license or acquire technologies and bolster its sales efforts. The company has launched 60 products since the start of fiscal year 2010 and has rolled out Avaya Flare, a collaboration tool, as well as Avaya Aura, a session initiation protocol architecture, and a bevy of other products.

On the networking side, Avaya's plan for the Nortel base is simple: Keep existing customers and then upsell them.

In its regulatory filing, Avaya cited consumerization, call centers and collaboration on mobile devices as key trends. Avaya's plan is to offer a product suite that allows customers to customize to meet the demands of those trends.

With 5,700 patents and key platforms, there's little question that Avaya is a juggernaut. The biggest worry spot for Avaya is its leverage and balance sheet.

Related: Avaya steps up its play for data center gear via former Nortel enterprise unit