Category Archives: IPOs

Avaya Questions Mount

Those of you following the tortuous (some might call it torturous) saga of Avaya Inc. might wish to visit the investor-relations section of Avaya’s website or peruse Avaya’s latest Form-10Q filing on the SEC website.

Yes, Avaya’s numbers for its third fiscal quarter of 2012, which ended on June 30, are available for review. I have given the results a cursory look, and I’ve concluded that the story hasn’t changed appreciably since I last wrote about Avaya’s travails. There’s still no prospect of significant revenue growth, quarterly losses continue to accrue, channel sales are edging lower across the company’s product portfolio, and the long-term debt overhang remains formidable.

Goodwill Impairment? 

And there’s something else, which I neglected to mention previously: a persistently high amount of goodwill on the asset side of the ledger, at least some of which might have to be written down before long. The company’s goodwill assumptions seem willfully optimistic, and even Avaya concedes that “it may be necessary to record impairment charges in the future” if “market conditions continue to deteriorate, or if the company is unable to execute on its cost-reduction efforts.” While I believe the company will persist with its cost-reduction efforts, I don’t see a meaningful near-term turnaround in macroeconomic conditions or in the growth profile of the company’s product portfolio. Ergo, impairment charges seem inevitable.

In this regard, what you need to know is that Avaya is carrying goodwill of about $4.2 billion on its books as of June 30, up from nearly $4.1 billion as of September 30, 2011. The company’s total assets are about $8.24 billion, which means goodwill accounts for more than half that total.

For those desirous of a quick summary of revenue and net loss for the year, I can report that total revenue, including sales of products and services, amounted to $1.25 billion in the quarter, down from $1.37 billion in the corresponding quarter last year, a year-on-year decrease of $122 million or about 9 percent. Product sales were down across the board, except in networking, where sales edged up modestly to $74 million in the quarter this year from $71 million last year. Service revenue also was down. For the nine-month period ended on June 30, revenues also were down compared to the same period the previous year, dropping from $4.13 billion last year to about $3.9 billion this year.

Mulling the Options

Avaya’s net loss in the quarter was $166 million, up from $152 million last year.

The critical challenge for Avaya will be growth. The books show that the company is maintaining level spending on research and development, but one wonders whether its acquisition strategy or its R&D efforts will be sufficient to identify a new source of meaningful revenue growth, especially as it finds itself under mounting pressure to contain costs and expunge ongoing losses. Meanwhile, a foreboding long-term debt looms, kicked down the road but still a notable concern.

With the road to IPO effectively blocked — I really can’t see a way for Avaya to get back on that track now — Avaya’s private-equity sponsors, Silver Lake Partners and TPG Capital, must consider their options. Is there a potential strategic acquirer out there? Can the company be sold in whole, or will it have to be sold in parts? Or will the sponsors just hang on, hoping continued cost cutting and a strategic overhaul, perhaps including a change in executive leadership, might get the company back on course?

Avaya’s Struggles Slip Under Industry Radar

As public companies, Nokia and Research In Motion have drawn considerable press coverage relating to their ongoing struggles. Nary a day passes without a barrage of articles on the latest setbacks and travails affecting both companies.  Some of the coverage is decidedly morbid, even ghoulish, with death-watch speculation on how soon one company or the other might be sold off or otherwise expire. 

Perhaps because it is private, Avaya has escaped such macabre notice from the mainstream business media and the industry trade press.  Nonetheless, speculation has arisen as to whether the company, richly backed by private-equity sponsors Silver Lake Partners and TPG Capital, has a future any brighter than the dim prospects attributed to RIM and Nokia. 

Abandoned IPO Hope  

At this particular juncture, the prospect of an IPO, which once seemed tantalizingly close for Avaya, seems a remote and forlorn hope.  As I’ve noted on a couple occasions before now, Avaya’s IPO was scuppered not only by its wan growth profile, but also by industry and macroeconomic headwinds that show no sign of abating. 

If no IPO is in the cards, what happens to the company? While at least one blogger has speculated that bankruptcy could be an option, I suspect the deep-pocketed private-equity sponsors might have no choice but to prop up Avaya until a buyer can be found. Given Avaya’s tepid growth prospects, its daunting long-term debt overhang, a recent weakening of channel sales, and stiffening competition across its product portfolio, the company is unlikely to find itself in the driver’s seat in any negotiations with a prospective buyer, presuming one can be found.  

Stranded in Purgatory 

Meanwhile, Avaya stakeholders, including the company’s employees, are mired in a purgatory. Sources have suggested the company will consolidate facilities and further reduce headcount, but no major announcements have been made on either front.

With an IPO seemingly off the table as an exit alternative, all eyes turn to the company’s private-equity sponsors. One potential delaying tactic, which we could see before the end of this calendar year, is the potential departure of president and CEO Kevin Kennedy, who has served in that dual capacity since January 2009. We’ve already seen revolving doors in the executive suites along Avaya’s mahogany row, and “new blood” in the CEO office would buy time for the company’s financial backers to devise and articulate a compelling narrative for customers, channel employees, employees, and potential strategic acquirers. 

We’ll have more insight into Avaya’s circumstances soon. The company is due to report its latest quarterly results within the next month or so.   

Tidbits: Oracle-Arista Rumor, Controller Complexity, More Cisco SDN

This Week’s Rumor

Rumors that Oracle is considering an acquisition of Arista Networks have circulated this week. They’re likely nothing more than idle chatter. Arista has rejected takeover overtures previously, and it seems determined to go the IPO route.

Controller Complexity

Lori MacVittie provides consistently excellent blogging at F5 Networks’ DevCentral. In a post earlier this week, she examined the challenges and opportunities facing OpenFlow-based SDN controllers. Commenting on the code complexity of controllers, she writes the following:

This likely means unless there are some guarantees regarding the quality and thoroughness of testing (and thus reliability) of OpenFlow controllers, network operators are likely to put up a fight at the suggestion said controllers be put into the network. Which may mean that the actual use of OpenFlow will be limited to an ecosystem of partners offering “certified” (aka guaranteed by the vendor) controllers.

It’s a thought-provoking read, raising valid questions, especially in the context of enterprise customers.

Cisco SDN

Last week, Cisco and Morgan Stanley hosted a conference call on Cisco’s SDN strategy. (To the best of my knowledge, Morgan Stanley doesn’t have one — yet.)  Cisco was represented on the call by David Ward, VP and chief architect of the company’s Service Provider Division; and by Shashi Kiran, senior director of market management for Data Center/Virtualization and Enterprise Switching Group.

The presentation is available online. It doesn’t contain any startling revelations, and it functions partly as a teaser for forthcoming product announcements at CiscoLive in San Diego. Still, it’s worth a perusal for those of you seeking clues on where Cisco is going with its SDN plans. If you do check it out, you’ll notice on side three that a number of headlines are featured attesting to the industry buzz surrounding SDN.  Two bloggers are cited in that slide: Greg Ferro (EtherealMind) and, yes, yours truly, who gets cited for a recent interpretation of Cisco’s SDN maneuverings.

Avaya’s Latest Results Portend Hard Choices

Those of you following the Avaya saga might want to check out the company’s latest quarterly financial results, which are available in a Form 10-Q filed with the Securities and Exchange Commission.

For Avaya backers hoping to see an IPO this year or in 2013, the results are not encouraging. In the three-month period that ended on March 31, Avaya generated revenue of $1.257 billion, with $637 million coming from product sales and $620 million from services. Those numbers were down from the correspondence quarter the previous year, when the company produced $1.39 billion in revenue, with product sales generating $757 million and services contributing $633 million. Basically, product sales were down sharply and services down slightly.

No Growth in Sight

Avaya also is seeing a weakening in channel sales. Moreover, growth from its networking products, on which the company had once pinned considerable hope, is stagnating. In the six-month period ending March 31, the company generated just $146 million from Avaya Network sales, down from $154 million in the preceding year. For the latest three-month period, concluding on the same date, networking sales were down to $64 million from $76 million last year. It is not projecting the profile of a growth engine.

Things are not much better in Avaya’s Global Communications Solutions (GCS) and Enterprise Collaboration Solutions (ECS) groups, which together account for the vast majority of the company’s product revenue. At this point, Avaya does not have a business unit on its balance sheet showing growth over the six- or three-month periods for which it filed its latest results.

Meanwhile, losses continue to mount and long-term debt remains distressingly high. Losses were down for both the three- and six-month periods reported by Avaya, but those mitigated losses were derived from persistent cost containment and cuts, which, if continued indefinitely, eventually (as in maybe now) hinder a company’s capacity to generate growth.

Interestingly, Avaya’s costs and operating expenses are down across the board, except for those attributable to “restructuring charges,” which are up markedly Avaya’s net loss for the six months ended on March 31 were $188 million as compared with $612 million last year. For the three-month period, the net loss was $162 million as compared with $432 million the previous year.

IPO Increasingly Unlikely

Although Avaya is not a public, and — company aspirations notwithstanding — does not appear to be on a trajectory to an IPO, markets reacted adversely to the financial results. Avaya bonds dropped to their lowest level in fourth months in response to the revenue decline, according to a Bloomberg report.

Avaya’s official message to stakeholders is that it will stay the course, but these results and market trends suggest a different outcome. Look for the company to explore its strategic options, perhaps considering a sale of itself in whole or in part. A sale of the floundering networking unit could buy time, but that, in and of itself, wouldn’t restore a growth profile to the company’s outlook.

Difficult choices loom for a company that has witnessed significant executive churn recently.

Departures from Avaya’s Mahogany Row Thicken IPO Plot

My plan was to continue writing posts about software defined networking (SDN). And why not?

SDN is controversial (at least in some quarters), innovative, intriguing, and potentially  disruptive to network-infrastructure economics and to the industry’s status quo. What’s more, the Open Networking Summit (ONS) took place this week in Santa Clara, California, serving a veritable gushing geyser of news, commentary, and vigorous debate.

But before I dive back into the overflowing SDN pool, I feel compelled to revisit Avaya. Ahh, yes, Avaya. Whenever I think I’m finished writing about that company, somebody or something pulls me back in.

Executive Tumult

I have written about Avaya’s long-pending IPO, which might not happen at all, and about the challenges the company faces to navigate shifting technological seas and changing industry dynamics. Avaya’s heavy debt load, its uncertain growth prospects, its seemingly shattered strategic compass, and its occasionally complicated relationship with its channel parters are all factors that mitigate against a successful IPO. Some believe the company might be forced into selling itself, in whole or in part, if not into possible bankruptcy.

I will not make a prediction here, but I have some news to report that suggests that something is afoot (executives, mainly) on Avaya’s mahogany row.  Sources with knowledge of the situation report a sequence of executive departures at the company, many of which can and have been confirmed.

On April 12, for example, Avaya disclosed in a regulatory filing with the SEC that “Mohamad S. Ali will step down as Senior Vice President and President, Avaya Client Services, to pursue other opportunities.” Ali’s departure was effective April 13.  Sources also inform me that a vice president who worked for Ali also left Avaya recently. Sure enough, if you check the LinkedIn profile of Martin Ingram, you will find that he left his role as vice president of global services this month after spending more than six years with the company. He has found employment SVP and CIO at Arise Virtual Solutions Inc.

As they say in infomercials, that’s not all.

Change Only Constant

Sources say Alan Baratz, who came to Avaya from Cisco Systems nearly four years ago, has left the company. Baratz, formerly SVP and president of Avaya’s Global Communications Solutions, had taken the role of SVP for  corporate development and strategy amid another in a long line of Avaya executive shuffles that had channel partners concerned about the stability of the company’s executive team.

Sources also report that Dan Berg, Avaya’s VP for R&D, who served as Skype’s CTO from January 2009 until joining Avaya in February 2011, will leave the company at the end of this month.

Furthermore, sources also say that David Downing, VP of worldwide technical operations, apparently has left the company this week. Downing was said to have reported to Joel Hackney, Avaya’s SVP for global sales and marketing and the president of field operations.

On the other side of the pond, it was reported yesterday in TechTarget’s MicroScope that Andrew Shepperd, Avaya’s managing director for the UK, left after just eight months on the job. Shepperd’s departure was preceded by other executive leave-takings earlier this year.

Vanishing IPO?

So, what does all this tumult mean, if anything? It’s possible that all these executives, perhaps like those before them, simply decided individually and separately that it was time for a change. Maybe this cluster of departures and defections is random. That’s one interpretation.

Another interpretation is that these departures are related to the dimming prospects for an IPO this year or next year. With no remunerative payoff above and beyond salary and bonuses on the horizon, these executives, or at least some of them, might have decided that the time was right to seek greener pastures. The company is facing a range of daunting challenges, some beyond its immediate control, and it wouldn’t be surprising to find that many executives have chosen to leave.

Fortunately, we won’t have to wait much longer for clarity from Avaya on where it is going and how it will get there. Sources tell me that Kevin Kennedy, president and CEO, has called an “all-hands meeting” on May 18.

For you SDN aficionados, fret not. We will now return to regularly scheduled programming.

Avaya IPO? Don’t Count On It

Reports now suggest that Avaya’s pending IPO, which once was mooted to occur this month, might not take place until 2013.

Sources who claim to be familiar with the matter told Reuters and Bloomberg that Avaya has deferred its IPO because of tepid demand amid competition for investment dollars from Facebook, the Carlyle Group, and Palo Alto Networks, among others.

Reconsidering the “Nortel Option

Well, if you are generously disposed, you might believe that particular interpretation of events. However, if you are more skeptical, you might wonder whether an Avaya IPO will ever materialize. If I were making book on the matter — and I’m not, because that sort of thing is illegal in many jurisdictions — I would probably skew the morning-line odds against Avaya bringing its long-deferred IPO to fruition.

Some of you found it amusing when I mooted the possibility of Avaya pursuing the “Nortel option” — that is, selling its assets piecemeal to various buyers — but I can easily envision it happening. Whether that occurs as part of bankruptcy proceedings is another question, though Avaya’s long-term debt remains disconcertingly and stubbornly high.

Despite recent acquisitions, including that of Radvision for $230 million earlier this month, I don’t see the prospect of compelling and sustained revenue growth that would allow Avaya to position itself as an attractive IPO vehicle.

Unconvincing Narrative

No matter where one looks, Avaya’s long-term prospects seem unimpressive if not inauspicious. In its core business of “global communications solutions” — comprising its unified-communications and contact-center product portfolios — it is facing strong rivals (Cisco, a Skype-fortified Microsoft) as well as market and technology trends that significantly inhibit meaningful growth. In networking, its next-biggest business, the company’s progress has been stalled by competition from entrenched market leaders (Cisco, Juniper, HP, etc.), the rise of aggressive enterprise-networking newcomers (Huawei), and a chronic inability to meaningful differentiate itself from the pack.

According to a quarterly financial report that Avaya filed with the Securities and Exchange Commission (SEC) last month, the company generated overall revenue of $1.387 billion during the three months ending on December 31, 2011. That was marginally better than the $1.366 billion in revenue Avaya derived during the corresponding quarter in the previous year. In the fourth quarter of 2011, products accounted for $749 million of revenue and services contributed $638 million, compared to product revenue of $722 million and services revenue of $644 million during the fourth quarter of 2010.

If we parse that product revenue, Avaya’s story doesn’t get any better. The aforementioned “global communications solutions” produced $667 million in revenue during the fourth quarter of 2011, up slightly over revenue of $645 million in the fourth quarter of 2010. Those growth numbers aren’t exactly eye popping, and the picture becomes less vibrant as we turn our attention to Avaya Networking. That business generated revenue of $82 million in the fourth quarter of 2011, a very slight improvement on the $78 million in revenue recorded during the fourth quarter of 2010.

Lofty Aspirations

Avaya can point to seasonality and other factors as extenuating circumstances, but, all things considered, most neutral parties would conclude that Avaya has a mountain to climb in networking. Unfortunately, it seems to be climbing that mountain without sensible footwear and with the questionable guidance of vertiginous  sherpas. I just don’t see Avaya scaling networking’s heights, especially as it pares its R&D spending and offloads sales costs to its channel partners.

True, Marc Randall, who now heads Avaya Networking, has lofty aspirations for the business unit he runs, but analysts and observers (including this one) are doubtful that Avaya can realize its objective of becoming a top-three vendor. Hard numbers validate that skepticism: Dell’Oro Group figures, as reported by Network World’s Jim Duffy, indicate that Avaya has lost half of its revenue share in the Ethernet switching market since taking ownership of Nortel’s enterprise business nearly three years ago. Furthermore, as we have seen, Avaya’s own numbers from its networking business confirm a pronounced lack of market momentum.

Avaya’s networking bullishness is predicated on a plan to align sales of network infrastructure with key applications in five target markets: campus, data center, branch, edge, and mobility. The applications with which it will align its networking gear include Avaya’s own unified communications and contact center solutions, its Web Alive collaboration software, and popular business applications that it neither owns nor controls.

Essentially, Avaya’s networking group is piling a lot of weight on the back of a core business that is more beast of burden than Triple Crown thoroughbred.

Growth by Acquisition?

Perhaps that explains why Avaya is searching for growth through acquisitions. In addition to the acquisition of Radvision this year, Avaya last year acquired Konftel (for $15 million), a vendor of collaboration and conferencing technologies; and Sipera, a purveyor of session-border controllers (SBCs). The Radvision acquisition extended Avaya’s product reach into video, but it probably will not do enough to make Avaya a leader in either videoconferencing or video-based collaboration. It seems like a long-term technology play rather than something that will pay immediate dividends in the market.

So the discussion comes full circle as we wonder just where and how Avaya will manage to produce a growth profile that will make it an attractive IPO prospect for investors. I’m not a soothsayer, but I am willing to predict that Avaya will sell off at least some assets well before it consummates an IPO.

Avaya IPO? Magic 8-ball says: Don’t count on it.

Arista’s Adaptable Approach to SDN

In an earlier post regarding Arista Networks’ march toward an IPO, I wrote that I would provide an overview of the company’s positioning on software-defined networking (SDN), which now follows. I think the subject is worth exploring given the buzz generated both by the IPO-bound Arista, with its notable market successes in high-frequency trading and other application environments requiring low-latency switching, and by SDN itself.

Last fall, when OpenFlow fever reached a boiling point, Arista Networks’ CEO Jayshree Ullal pointed out that it was just one mechanism of many that could be leveraged in the service of SDN. Among the others, she opined, were existing command-line interfaces (CLIs), Simple Network Management Protocol (SNMP), Extensible Messaging and Presence Protocol (XMPP), Network Configuration Protocol (NETCONF), OpenStack (with its Quantum project), as well as APIs in VMware’s vSphere virtualization software.

The Four Pillars

On the larger SDN canvas, Arista has propounded its “four pillars” of software-defined cloud networking (SDCN). You can read about Arista’s “four pillars” in a blog post written late last year by Ullal or in a white paper that can be found on Arista’s website. In both, the four pillars are identified as follows:

Pillar 1. Single Point of Management, which Arista believes can be achieved through layering atop the traditional control plane and data path of a cloud network and through coordinating configurations across multiple otherwise-independent switches. Arista says no fabric technology is required, and it says its CloudVision is up to the challenge.

Pillar 2: Single-image L2/3 Control Plane.  Here, Arista believes “standards-based L2/L3 IETF control-plane specifications plus OpenFlow options (without hype) can be a promising open augmentation for providing single image control planes in the future.”

Pillar 3. Multi-path Active-Active Data Path. The company prescribes scaling cloud networking across multiple chassis with Multi-Chassis Link Aggregation Group (MLAG) at L2 Equal Cost Multi-pathing (ECMP) at L3.

Pillar 4. Network-Wide Virtualization. Regarding this last pillar, the company says it makes sense to provision the entire network to handle any application seamlessly and so that the economics of virtualization can be properly leveraged “using controllers from VMware and their new paradigm for VMWare’s VXLANS or Open Virtualization Switching (OVS) controllers in the future.”

Best of Both Worlds?

As has been above (and in earlier posts), software-defined networking can be implemented in more than one fashion. Some networking vendors — typically industry mainstays with large installed bases of customers and firmly established business models predicated on hardware ASICs, proprietary protocols, and relatively high margins — will opt for an SDN vision that features a distributed control plane. Not for them the dramatic shift to logically centralized server-based controllers, designed to subsume networking within a computing paradigm. To the traditional networking vendor, that road looks treacherous and leads to a diminution of the status and margins associated with the beloved switch.

As neither a raw SDN startup nor a legacy networking company, Arista takes a flexible position on how SDNs can be realized. The company says customers can implement SDNs by using controllers or by using distributed-control mechanisms. Ideally, according to Arista, both means should be employed for comprehensive SDN capabilities. A presentation available online explains the company’s position on this best-of-both-worlds approach to the control plane.

Finally, it probably comes as no surprise that Arista prescribes its own Linux-based Extensible Operating System (EOS) as the appropriate software foundation for its four pillars and for cloud networking in general. It also believes that “good old fashioned Ethernet scaling from 10 gigabits to 40 gigabits to 100 Gigabits and even terabits with well-defined standards and protocols for L2/L3 is the optimal approach.”

In view of the media blitz undertaken by Arista founders Andreas Bechtolsheim and David Cheriton late last year, we should expect the company’s next generation of switches to deliver as much bandwidth as Ethernet and merchant silicon will allow.