Avaya CEO talks competition, debt, innovation

Kevin Kennedy says managed unified communications services are more attractive

The most significant thing is that if your gross margins and EBITDA are strong enough to be able to pay off your debt. We have always had that be the case and it continues to be. The second most important - I think I mentioned this morning that we just hit a record gross margin in the earnings call so that's a very good thing. The second piece is we just went through a major restructuring of our debt which means that maturities have been moved out to someplace between 2017 and 2022. That is a very important thing because you don't have a liquidity crunch at any point in time. And third I would simply - I think it's obvious that at the root of that question is a concern over the efficacy of product continuity. That's a very interesting question. If you think about the Nortel products we're still developing Nortel products. We have a release on our CS 1000 [communications server] coming up I think next month so despite Nortel's challenges you can still buy the product. Chrysler and General Motors both went through debt restructurings. Interestingly enough companies that go through restructuring of debt actually hold very close and dear product continuity and support because that is the face of commerce the face of value. Large companies that have larger portfolios can exit one product, exit another sometimes a third or exit a fourth and they will just do that because it's convenient for them. I would argue that through public information it is very clear that debt restructuring does not translate to an issue in product continuity in fact it's quite the opposite because that's the only value to be protected. That being said, gross margin, the ability to service debt has improved over the last five years and the liquidity timing is moved out to 2017 and beyond.

It was always the anticipation that 2013 would be the year that we would try to go out [and file an IPO]. We filed earlier in an effort to - the market had gotten frothy and the owners had asked for us to file so we did. By the time that had happened the markets began to close on us.

— Kevin Kennedy

Is IPO in the future?

It was always the anticipation that 2013 would be the year that we would try to go out. We filed earlier in an effort to - the market had gotten frothy and the owners had asked for us to file so we did. By the time that had happened the markets began to close on us. At the end of the day that's the call of the owners. My job is to make sure that we're continuing to improve the company so that [IPO] becomes a possibility, and I'm here every day to try to make that a possibility. To be successful your numbers have to work and the market has to be receptive to an IPO. In that particular period we filed in June and by August it had become a very dubious market and it was not optimum for us to go out. Again, owners will make those decisions. They're very clear for me to stay focused on improving the products, and that's what I do.

In 2012 Avaya lost some market share in terms of endpoint support to Cisco. What's going on there?

This year we have recently reengaged the mid-market. After we did the Nortel acquisition on both the contact center and the unified communications side our low-end and mid-market offerings became stale, and we were more focused on the high end. It is true that we have lost share in the mid-market. On the other hand the good news is we're on a new product cycle and the product you just asked me about that is so competitive is one of the reasons that we're winning again. You'll continue through 2013 to see us focused on both the contact center side as well as the unified communications side in the mid-market.

The analysis was that what Avaya had lost had gone pretty much directly to Cisco.

There were multiple beneficiaries of it. I don't think they were alone.

Microsoft's Lync is coming up as a less expensive way to get into unified communications. What do you say to customers who are considering it?

We've made it very clear - in effect many of our customers have made it very clear that there are certain things that Lync is ready for and certain things that they are not. Are they a full replacement for a phone system as you think about a phone system in the past? The answer is no.

What are the shortcomings?

There are feature deficits. Are they a full replacement of room-based videoconferencing system today? The answer would be no. Are there many things that you would have to add to integrate with it to make it a full system? The answer is yes. Perhaps one of the most important points is it's highly bandwidth consumptive. Our focus on low-bandwidth, high-def is a focus that irrespective of the top two competitors you may choose you'll find us to be 50% less consumptive of bandwidth and 50% less expensive. Part of that is an architectural issue - one being more a peering architecture vs. a cascading architecture. It's not something you can simply throw a new codex at and change. The real reality is customers and employees will decide what tools they want to use, and it won't be just one tool. IT organizations will decide where they will want Lync to be, and they'll decide where they want bandwidth efficiency in their communications network. I personally believe you will see the coexistence of multiple technologies, not a single technology that is the only answer. That's actually one of the reasons we were very clear today on this notion of an open collaboration platform, a sort of collaboration environment because we believe all of the answers are unlikely to come from any one company. If you want an application that can distribute an SMS to every device that you own vs. just one, well a company may want that and a company may get that from someone else other than Avaya - Microsoft, Cisco - and may want to implement it. That notion of openness is something that we're going to continue to foster. We think the computer industry evolved in that way. That's why WebSphere and WebLogic became what they became in that industry and it's a very different philosophy than you'll see from others.

Microsoft has deep pockets so they can hammer away forever with Lync. How do you evaluate Lync over time as a threat?

Microsoft and frankly Cisco are very strong companies. Both are headed down a very proprietary path. We're trying to run down a road less traveled. We're declaring our space to be open and very bandwidth efficient. Being one of three is a great thing. In some sense that's organizing for an industry and as I further stated it will not be a single-vendor or a single-application, winner-take-all type of environment. As long as we continue to innovate and offer a proposition that is fundamentally different there will be a healthy place for us. In many cases with many customers we will end up being a complement to Microsoft and Lync. They are a strong company and when I was in a prior life they were in the business of trying to commoditize Cisco out of the business in software routers that was an experiment that lasted from 1996 to 2000. It's the ability to be attentive to what the enterprise market wants and in some cases they've been strong and in some cases time was their enemy.

Cisco and Microsoft have their fingers in a lot of other pies - more pies than you do. Is that an advantage at all?

Time will tell us. For us there's no doubt that staying focused is the right thing to do. Having a high level of differentiation is a critical thing to do. I would say that one of the interesting observations when you look at a Microsoft and say others that have gone very, very broad if you look at their market multiples their market multiples are far less than those who have stayed very focused. I look at Oracle as a company that has gone into the apps world with the value of the stack underneath, and it trades at a multiple that is probably 50% or better than some of the companies that have gone horizontally. I don't think you can ever underestimate a big company, but there's always an advantage to being focused.

Earlier we talked some about Nortel. How does being able to offer infrastructure play into your attractiveness to customers?

We're beginning to see a new wave of import with Nortel. No.1 we are emerging to be the last expert standing in the voice world. We have resources that can debug networks that other people do not have. Where we're seeing a further benefit from is that as we talk about these managed services environment where people have multiple networks one of which might be a Nortel environment and they basically say I'd like to outsource the evolution of that network to its next generation and we'll have you do it and you manage the SLAs as we do that. It turns out a very significant percentage of these managed services deals do indeed involve a Nortel base. That's a recurring revenue stream that we probably did not have before that we begin to pick up for the first time. That's an enterprise customer with a Nortel infrastructure. We're taking over the management of their infrastructure directly. That's a recurring revenue stream that becomes new to us as we take those contracts.

Are there inherent advantages in having the former Nortel gear in terms of performance of Avaya applications running on the infrastructure?

No. Number 1 we did not buy Nortel for the product portfolio although there were aspects of the product portfolio that helped us accelerate the Avaya road map. There are cases where Nortel customers benefit. So for example we've embedded a special silicon in things like our IP Office so that we can support either a Nortel phone or an Avaya phone of the past. We are somewhat differentiated in being able to take any one of those bases, upgrade the switching technology and it's very seamless. But in the end probably the most compelling thing is that we have the specialists that can migrate people from an old Nortel release to a new Nortel release that's SIP enabled and now that take that to an Aura or an Avaya. That migration is easiest done by ourselves.

What does Avaya have to offer in terms of UC apps that can support BYOD devices?

The RADVISION products basically take and put onto your iPad, your iPhone, your Android devices, whatever's going on in conference rooms. You download the app off of iTunes, it takes less than about a minute and a half and you can be up and running. A great example: we're taking a corporate enterprise activity and you're putting it into a BYOD environment. Our Flare and one-X products are all products that run on Macs on Windows and on pads and phones. Just about all of our unified communication or video applications run in a bring-your-own-device world. Notwithstanding the fact that I mentioned this morning that roughly for every hard phone that we sell we activate two software clients on a mobile device. So we are very much in the BYOD, from a numerical standpoint, mode. Four to five years ago this was primarily a hard phone environment. Our hard phones continue to grow in terms of sales but we now are ending up selling or activating these client software devices to go on your mobile devices. That's a significant shift. Where there was none there's many. There's another layer of the architecture that is very BYOD centric which is this identity engine. This is a policy-based management tool that allows you to segregate your LAN and VLAN infrastructure. Segregate it and then have policies and filters associated with specific devices and specific people. The ability for you to walk in as a guest, self-register, have access to the Internet but not have access to anything the enterprise would not want you to have access to is something that gets facilitated by this. My real point is BYOD is not just a video or a unified communications client story it is also married into the ease with which we can help people do BYOD as an overlay into your networking environment.

Do you have any sense of whether customers are activating soft clients for the same people who they buy hard phones for?

I don't have numbers. I can only tell you anecdotally that I have been in many customer environments and there are many environments where people have the soft phone for their mobile use but they have a hard phone on their desk. Can I think of clients that are soft client only? I can't think of too many. But in the case of the video apps, the RADVISION, there probably are folks that simply have the soft client on that. For the telephony I can't think of too many but on the video side... Part of that is the room is the centralized room and the iPad is the inexpensive aperture into that.

What are your corporate customers clamoring for? What's on their wish list from you?

No.1 I'd say this topic of capex to opex is something that every corporate customer is struggling with and defining in their own terms. I would say bring your own device video or low-bandwidth hi-def video is high on their list to window shop and certainly captures their attention. That being said it's sort of a one-by-one. Some buy very quickly and some take a bit of time. Virtualization is something that is important. Some are ready to, some have already been down that road with other applications, some are right at the forefront and beginning to test. It's less about what works with unified communications as it's been virtualized. It's what is my net benefit in a VMware environment? Is it a one plus one is two and a half or one plus one equals three, and how do I quantify that? Virtualization is an important stepping stone. At the end of the day this is an industry where connectedness on one hand and just enabling people to do things at a far lower price point is seen as very positive. I'll give you just a rough figure of merit. If you have your own company and you have 50 employees and you just want to bring in this RADVISION mobile video to that it's about $8 per month per person for 10 years. That's about $1,000 over a 10-year period. Relative to all the things you buy relative to saving a plane ticket here and there it becomes actually amazingly affordable. And the fact that you can roll it out in days. We rolled out I think 5,500 employees in the first week after we closed the deal. The overhead to deployment is much, much less than you would associate with unified communications. It's really like an app as opposed to a multi-quarter deployment, and from a price perspective, $8 per month. An order of magnitude. The wow factor is gee I have an underutilized asset in my conference room and boy I really think it would be nice to get it out to my employees. The question is how much risk and how much time do they take in a priority way to go deal with it? The more that you can remove the barriers of cost effort to deploy, having it to deploy off of iTunes is a real positive. This is far easier than you might have expected from video of the past. All of a sudden you move people from window shoppers to deployers.

What products do your top customers want that you don't have yet?

We spent the majority of our most recent executive advisory council meeting bringing people up to speed with what we do have. The second is people are clamoring for use cases so I tried to walk through a number of use cases. I gave the example of you could have a virtualized UC deployment but if you add shortest-path bridging you don't have to have a planned outage. You can move the application that keeps the calls up and running while you change that hardware. Use cases that help people understand how to deploy and benefit from the technologies that are already in place is probably the No.1 request.

So it's not a technology thing, it's an explain-the-benefits thing.

That's correct.

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