Avaya CEO Kevin Kennedy: Bringing Transitions to FruitionAvaya CEO Kevin Kennedy: Bringing Transitions to Fruition

In advance of his Enterprise Connect keynote, Kennedy discussed working with customers, competing with Microsoft and Cisco, and the question of financials.

When Kevin Kennedy takes the keynote stage at Enterprise Connect Orlando 2013 next Tuesday morning, he'll talk about how enterprises operationalize the industry transitions that have been in the works for some time, but are just now coming to fruition, he told me in an interview this week. Our conversation also extended to topics that included Avaya's financial situation, the battle between Microsoft and Cisco, and Avaya's move from New Jersey to Silicon Valley. His plan for the keynote reflects a realistic assessment of where much of the market seems to be, and how strategic vendors like Avaya can be expected to work with customers on the road forward.

It's certainly no surprise that people are talking about Avaya's financial situation; the company carries a heavy load of debt as a result of the 2007 private equity buyout by Silver Lake Partners and TPG (more than $6 billion in long-term debt, according to Avaya's 1Q2013 financials). Many in the industry--especially competitors of course--are quick to point to the company's debt load as a potential dark cloud. But, as recently as late last year, company officials have been pretty open about discussing the concerns and why they believe these concerns are overstated and basically constitute FUD (fear, uncertainty and doubt).

Since that November conference, there's been more financial news worth noting: The fiscal 1Q2013 results showed a quarter-over-quarter decline in revenue and EBITDA, though an increase in gross margins. The company attributed the decline in revenues to the challenging economic climate in many regions of the world. And Avaya followed up the quarterly financial report with the announcement of an exchange or refinancing of debt, pushing out the due date on some $1.38 billion in notes from 2015 to 2021.

In our interview, Kennedy stressed that Avaya's EBITA is 20% of revenue and its gross margin, at 55.6%, was at a record for the company. "The key thing is, does your business model generate the level of EBITDA and therefore cash to service your debt?" he said "We've demonstrated to customers that that is the case." The debt refinancing will ensure that Avaya won't "have any significant liquidity situation until 2017 or beyond," Kennedy said.

Kennedy then got in a bit of a dig at a competitor. He said the real issue behind financial concerns is and should be one of product continuity, and he noted that companies that go through balance sheet restructuring--whether they're automotive companies like GM or Chrysler, or communications firms like Nortel, which Avaya acquired out of bankruptcy--protect their products because that's the one thing they have with certain value. In contrast, he said, companies with less risk may be inclined to "disengage with products and therefore let go of product." Specifically, he said, "If you think about companies that are perceived healthy---some that are perceived healthy bought consumer video devices that were sold off. They had consumer wireless LAN devices that were sold off." Though he didn't name Cisco, he was clearly referencing the divestiture of the Flip video camera and the Linksys wireless router businesses.

Next Page: So what about the competition?

So what about the competition? I asked Kennedy how Avaya will compete against its two gigantic opponents, Cisco and Microsoft, both of whom enjoy strong positioning within the enterprise beyond just the boundaries of the communications environment. His answer: "When we roll out a UC and video deployment, our technology will require 70% less bandwidth at a 60 to 70% lower cost."

He added that Avaya will stress to customers that they're not as wedded to single-vendor solutions as their chief competitors: "Our play is to say we're not proprietary. We have an end-to-end play, but we have an open stack."

One reason why bandwidth is important has to do with the future that Kennedy sees for one of Avaya's most significant market moves: Its acquisition, almost exactly one year ago, of video vendor Radvision. He said sales of Radvision systems have been growing 17%-20% quarter-over-quarter since the deal closed last June. And Kennedy made it clear that the big growth area he sees for video is in mobility, an area where efficient bandwidth usage is a must.

So video will be a focus of Kennedy's Enterprise Connect keynote, along with consumerization of IT, virtualization, and cloud. He'll talk about how the process of operationalizing these trends has to take into account both the risks that enterprises will run in selecting and implementing the new technologies, as well as the opportunities around increased productivity and extending the communications environment as new technologies develop.

One point he said he'll make is that these transitions are going to play out over a fairly long period of time, so that one of Avaya's key roles will be to help enterprises navigate the transitions. Kennedy said that, while none of these technologies are particularly new anymore, most of them, like virtualization and cloud, are actually just in the beginning of their adoption ramp-up phase. He'll also present use cases as a validation of Avaya's successes in this area.

My final question had to do with the dateline on Avaya's most recent press releases: Santa Clara, CA. Given its heritage as a spinoff from the original AT&T, a relocation out of New Jersey represents a major symbolic statement, as well as a significant refocusing. It was well known that much of the company's center of gravity has been shifting to its California offices, but Kennedy told me it's now official that the company is headquartered in Silicon Valley.

The move makes sense, he said, since most of Avaya's customers come through the Valley to meet with competitors, or with other strategic vendors like Oracle, so it's, "more practical to intercept where our customers are already coming." It's also "easier to recruit a new generation of R&D leadership and subsequent software specializations in Silicon Valley."

And while 8 of the company's 12 executive committees are now based in Silicon Valley, Basking Ridge, NJ remains one of seven "primary campuses," and will continue to be the hub of "core corporate" functions such as legal. Kennedy also noted that a continued significant New Jersey presence is important to serve the company's extensive customer base in the New York-based financial vertical.

Kennedy said that not "in a numerical way" did large numbers of employees have to relocate from New Jersey to California or leave the company rather than relocate (though Avaya's financial trimming has taken its toll on the overall employee head count, which has been reduced from over 18,000 a year ago to 16,393 at the end of fiscal 1Q2013).

Despite all the challenges, Kennedy noted that Avaya is advancing into a world where 65-70% of its products are software and services. "It's an exciting time for Avaya," he said.

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