If Avaya Inc. succeeds in leaving Chapter 11 bankruptcy in the fall, then the UC vendor will re-enter a highly...
competitive market, where businesses are moving away from the company's core on-premises products to the cloud -- an area in which Avaya will play catch-up with much larger rivals, notably Cisco and Microsoft.
Business challenges stemming from the Avaya bankruptcy were reflected in the fiscal third-quarter earnings report the vendor released this week. The report confirmed a 9% drop in revenue year over year that the vendor forecasted Aug. 7. The decline lowered revenue to $803 million and contributed to a net loss of $105 million for the period ended June 30.
The company said the revenue drop stemmed from "lower demand for products and services primarily due to extended procurement cycles resulting from the Chapter 11 filing." In other words, companies were not buying Avaya products while it restructured its debt in federal bankruptcy court.
Since filing for Chapter 11 in January, Avaya has recently filed a plan with the court to cut in half the roughly $6 billion it owed. Also, the company has reached an agreement with government regulators to significantly reduce its employee pension obligations. Those two developments led the company to predict it would emerge from bankruptcy in the fall.
When Avaya finishes its restructuring, it will re-enter the market with substantially less debt and will have a new leader. Last week, Avaya appointed COO Jim Chirico to take over for CEO Kevin Kennedy when he retires Oct. 1.
Obstacles post-Avaya bankruptcy
Chirico will steer a smaller company that has lost stature in the industry. Gartner dropped Avaya from the group of leaders in the analyst firm's 2017 Magic Quadrant for Unified Communications, leaving only Cisco, Microsoft and Mitel. The research firm demoted Avaya because its weaknesses eclipsed its strengths.
Gartner found that during the Avaya bankruptcy proceedings, the vendor struggled with after-sales support across its portfolio. "This is likely to hamper the introduction of new services," the report said.
Elka Popovaanalyst at Frost & Sullivan
Also, Avaya's primary focus was in addressing customer's on-premises needs, which could "limit its ability" to meet the broader market's shift to unified communications as a service (UCaaS) and communications platform as a service (CPaaS).
From a technology standpoint, Avaya will exit the oversight of bankruptcy court with access to the products that address those two high-growth areas. Competitive UCaaS and CPaaS technologies are available through Avaya's wholly owned subsidiary, Zang, analysts said.
"How effectively they [Avaya] compete against Cisco and Microsoft will depend on their ability to execute in terms of product development, [reseller] channels, marketing and so on," said Elka Popova, an analyst at business consulting firm Frost & Sullivan, based in San Antonio.
At best, Avaya can compete effectively, "but not as the dominant player it once was," said Richard Costello, analyst at IDC. "Both Cisco and Microsoft have clearly put some space between themselves and the rest of the market, based on their strengths in networking and the desktop, respectively, which has been hard for competitors to overcome."
Avaya will tap its large customer base for future sales. Most of those companies are using Avaya's on-premises telephony and contact-center products. Through Zang, Avaya can provide those organizations a path to cloud-based communications.
To do that, however, it will need resellers, systems integrators and software developers. "The challenge is establishing a robust partner ecosystem," said Alan Lepofsky, an analyst at Constellation Research Inc., based in Cupertino, Calif. "Avaya will need to show their existing partners the benefits of building on their platform."
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