Avaya Engage - Loud on Cloud and the Bright Side of Chapter 11

Las Vegas was the right place for this event, as Avaya needed to relay a strong message to a large and diverse audience. I was one of a few UC Experts included in the analyst/consultant/media track, and they did a great job with a full program of sessions tailored for us. The good news is they had us as a captive audience, so the content was both broad and deep. Conversely, with some 2,300 attendees, we had minimal opportunity to interact with the masses, and it sure would have been nice to take their temperature on Avaya's prospects going forward.

Of course, we're all wondering about that, and I'd say most of us came away with a positive, optimistic impression. In short, it's clear that Avaya has a first-class product portfolio and a healthy book of business, with strong financials upon which a Chapter 11 plan will emerge that should keep the company largely intact. Bigger questions loom around finding growth via net new business, and whether the Avaya brand has a strong enough mojo to be the partner of choice as businesses go down the path of digital transformation. This is much bigger than UC, and there's a lot to digest from what we heard, and for this post, I'm just going to touch on two big themes.

Theme #1 - Avaya's Portfolio - Who's on First?

While the Loud on Cloud mantra needs no further explanation, there were many times I felt like asking Who's on First? I admire the many Avaya speakers who, for the most part, seamlessly walked us through an extensive array of solutions, platforms and products, supported by some very busy slideware. To be fair, I'm not fully conversant with their total lineup, but there is a lot of ground to cover here. While this won't be problematic for existing customers, I think Avaya will need to simplify their messaging for new customers, especially when bringing them into the cloud. Thankfully, they provided loads of presentations for reference, and there's quite a mix of the familiar and the new in their portfolio.

The likes of Aura and IP Office continue to evolve, but the main storylines are cloud, workflows, seamless collaboration, IoT, analytics, customer experience and digital transformation - as it should be. To that end, we have the many flavors of Zang - which looks like a gem in the rough - along with the underlying platforms that drive all of this - Breeze, Oceana and Equinox.

On a product-level, there was also some cool innovation on display. Avaya is certainly Loud on Cloud, but hardware and endpoints are still very much in the mix, and I'm sure the channel is happy about that. Their new Vantage desktop endpoint looks great - GA in May - and I was glad to hear them talk about how businesses still like to have endpoints on the desk. While it's often said we're in a post-PBX world, there's an interesting psychology going on there, but that's for another time.

Another big splash was Surge, an SDN-based IoT solution leveraging an Open Network Adapter as a device proxy. I'm not a network security expert, but this looks like a fresh approach to a big problem, especially for older networks that weren't built for security in an IP world. It's also worth noting that Surge is network-agnostic, so any customer can use it.

My takeaway from all this is that if you have a problem - any problem - Avaya has a solution for it. I should add that what Avaya doesn't have in-house, they complement via partnerships with industry leaders. We heard about several, namely Salesforce, Oracle, HP Enterprise, AWS and Arrow SI. During Engage, the updates came thick and fast, and if you blinked, you would have missed a few things. I'm sure this is all first nature to the partners, but as an analyst, my sense is that Avaya may come across as trying to be all things to all people.

That's certainly not their intention, as that would make it difficult for the market to tell what Avaya is really, really good at. Instead, what the market needs to see is how their portfolio reflects Avaya's massive and highly diverse installed base. While the portfolio seems overly broad at a high level, each solution does address a well-defined set of needs to help customers transition smoothly to the cloud.

Articulating that message isn't easy, and one way to do that is by showing and telling. To that end, we got lots of demos and success stories across a wide range of customers. Mark Castleman, VP of Corporate Strategy, walked us through the great fan experience Avaya enables for the San Jose Quake, and wowed us with the massive scale of MGM Resorts and how Avaya helps make the "guest experience" so seamless across 20 properties worldwide. We also got some great vertical market use cases where Avaya provides continuous engagement to connect a lot of dots for all kinds of problem sets - auto insurance, public safety, healthcare, smart cities, hospitality and finance.

To sum up this theme, it's clear that Avaya has great technology and an exhaustive range of solutions to make any vertical or size of business truly productive. Understanding it all is a tall order, and for CMO Morag Lucey, getting the messaging right has got to be a big challenge. With enough focus, our community can follow the story, but as a segue to my next theme, the bigger question is whether the investment community - and the businesses Avaya is trying to generate new sales from - will reach the same conclusion.

Theme #2 - Going Deeper on Chapter 11

Naturally, this was the big matzah ball hanging out there, and our hosts were very supportive in sharing updates with us. Aside from a session with Morag Lucey on the messaging and another one with customers talking about the impact on them, we also had a video session with Avaya's Corporate Treasurer, John Sullivan.

Overall, these sessions went a long way to clearing up speculation and uncertainty about what the future holds. Of course, it's too early for definitive conclusions, but here are the perspectives and insights that stood out for me. Transparency alert - none of this is under NDA, so I'm not sharing anything that's off limits for public discussion.

From the Customers and Partners

Among the customers we heard from - carefully chosen of course - the news is good. Chapter 11 provides some relief for a way forward, and they feel Avaya is better off with the debt being removed. They've seen this scenario before from other vendors, often with far worse results. There's a sense of confidence here, and it's business as usual for them. Now, these IT decision makers need to convince executive management that this is a good plan, so their work isn't done yet. An interesting sidebar is all the annoying pressure they're getting from competitors to take on the business. One panelist noted that an upside once the dust settles for Avaya is that these competitors will soon back away and stop wasting their time.
Another concern was the prospect of splitting up the company as part of the restructuring. An example was cited of a customer looking at Oceana and Breeze, and once it was clear this was not the outcome, not only did they sign the deal, but they added 2,000 seats to the original design. We also heard that Avaya's strong balance sheet was another factor that made customers confident to move forward knowing they had a financially viable technology partner.

From the CMO

Morag Lucey added several updates that also reflect optimism for getting through this. She outlined all the preparation leading up to the Chapter 11 announcement in terms of messaging to the market. There's a lot to consider, including taking space in the business press on the day of the news to state their position, communicating with partners, and having the right messaging ready to go across the various digital channels used to reach customers and influencers. Sounds like they've done a great job on this front.
She also noted that 120 deals were signed within hours of the news, so the initial response was a strong vote of confidence. While the anti-Avaya crowd will focus on the negative connotations around the term "bankruptcy", many Avaya customers are clearly comfortable doing business under Chapter 11. They see this as a welcome development that removes a lot of risk for moving forward with pending deals. To whatever extent these deals include new business, I would hope Avaya amplifies that message, as new revenues from beyond the installed base will be key to their long-term success.

One more thing from Morag's Chapter 11 session stood out for me, and it's subtle but telling. She seemed a bit exasperated in telling us that the mainstream business press still refers to them as "Avaya, the phone company" - ouch. Of course, that's not the case in the tech trade media, but in terms of branding and reputation, that's the kiss of death for a company fighting for its life in this space, where innovation and digital transformation are the value drivers.
Given that Avaya isn't publicly traded and not followed as closely by the mainstream press, this perception isn't surprising, and goes hand in hand with their focus on the dire side of Chapter 11 rather than the steps being taken to come out of this as a stronger company - much like GM did a few years back. As a marketing guy, I feel Morag's pain, and clearly, Avaya has work to do in terms of getting mainstream media to see the bigger picture. This isn't quite Trump vs. the "failing NY Times", but there's a challenge here that's all about messaging rather than technology.

From the Corporate Treasurer

Ok, best for last - our session with John Sullivan. He reiterated some public metrics stressing their strong financial performance, so no argument there. Things got a bit more interesting when talking about what Avaya's core businesses really are. We all agree that contact center and UC are the core pillars, but we heard here and in other sessions that networking was the third core pillar. There were plenty of skeptics in the room, and John did indicate the possibility of Avaya being open to offers for that business. Am not sure I'd read too much into that, but I think it's fair to say that's a weaker pillar than the other two, at least in terms of public perception.

John also walked us through some financial scenarios, coming to the basic conclusion that their optimal debt structure would be in the range of $2.5-3.0 billion. He also explained with the equity cost of capital being high, it's not fiscally sound to pay all the debt, and at their targeted level of debt, the expected interest costs would be manageable without holding back growth and continued investment in R&D. John added some insights about why Chapter 11 was the way to go, especially with the alternative being a court-imposed solution.

This way, they have more control over their future, and when their plan emerges, the pool of equity owners will be broad with no dominant players - which a marked contrast to the current scenario where there are two primary debt holders, Silver Lake and TPG Capital. Individually, this broad mix of equity owners won't be able to exert that much control over Avaya, so management will have more autonomy for executing on their plan, and that's a good thing. Furthermore, this paves the way for an IPO down the road, a scenario that will allow the equity holders to realize a fair return on their investment, and Avaya to finally return to a state of grace as a fully independent entity.